Archive - Aug 5, 2011 - Story

Presenting the joint statement by The Fed, the FDIC, NCUA, OCC. In essence: the Fed tells S&P to go fornicate itself. And for your corresponding pleasure, below are the media contact of note: Federal Reserve Susan Stawick (202) 452-2955;  FDIC David Barr (202) 898-6992; NCUA David Small (703) 518-6336; OCC Bryan Hubbard (202) 874-5307

Peter Barnes “Is there a risk that the United States could lose its AAA credit rating? Yes or no?”

Geithner’s response: “No risk of that.”

“No risk?” Barnes asked.

“No risk,” Geithner said.

Well, so much for the conspiracies. S&P has just released a scathing critique of the total chaos that this country's government has become. "The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective,  and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year's wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability." What to expect on Monday: " it is possible that interest rates could rise if investors re-price relative risks. As a result, our alternate scenario factors in a 50 basis point (bp)-75 bp rise in 10-year bond yields relative to the base and upside cases from 2013 onwards. In this scenario, we project the net public debt burden would rise from 74% of GDP in 2011 to 90% in 2015 and to 101% by 2021." And why all those who have said the downgrade will have no impact on markets will be tested as soon as Monday: "On Monday, we will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors." Translation: unpredictable consequences: you are welcome!

McGraw-Hill: meet Chicago-style negotiations. And there, in one sentence, is all that is broken with this country. The reason for the beyond ridiculous horse trade, according to CNN: S&P analysis of U.S. revenue, deficit picture was questioned. Presumably S&P ignored to add the $10 quintillion dollars that were saved by America not declaring war on Tatooine and its most infamous Hutt resident: Larry Summers. Indeed, again according to CNN, S&P acknowledged some errors in its analysis. Isn't it amazing what being threatened with having your NRSRO license can do for motivation to double check your work, eh you pathetic sellouts? Who would have thought that last week's farce debt ceiling would continue and develop into a national pastime. Below, for the sake of S&P's non-existent conscience and incompetence, are their own guidelines for what constitutes an AAA-rated credit. Readers can decide if the US is one. In other news, in USSAAA, government downgrade rating agency.

With a last-minute debt deal reached, I’m reminded of two holy words in Washington: “compromise” and “bipartisanship.” It’s amazing that the political elite have so twisted the English language as to lend virtue to these terms. In Washington, these words hold intrinsic value… similar to how “truth” and “honesty” do outside D.C. Unfortunately for the American public, Washington compromises have been and will continue to be the death knell of the U.S. economy – and particularly the free market.

Think you were the only one who could not get within 100 feet of any liquidity in today's market which bounced up and down by 5 points on any chatic whim? Think again. The day after the market saw 844 stocks trigger short-sale restrictions (meaning they dropped more than 10% in one day), not even the robots were able to pull a rabbit out of a hat and at least 21 stocks ended up flash crashing for a millisecond or much longer during today's trading session. Below are the charts of the 21 identified victims of overzealous ask-side algos, as usual courtesy of Nanex.

Your one stop summary of all the bullish and bearish events of the past week.

Eric Sprott, Chairman of Sprott Asset Management, and James Turk, Director of the GoldMoney Foundation, talk about how there isn't enough silver in the silver market to back existing "paper silver" commitments. While there is much in the attached interview, the bottom line is that Sprott thinks that "silver will be the investment of this decade". And with 3 out of 5 central banks having just embarked on monetization, and two more imminents, he will almost certainly be right.

Juvenal makes reference to the Roman practice of providing free wheat to Roman citizens as well as costly circus games and other forms of entertainment as a means of gaining political power through populism. Roman politicians devised a plan in 140 B.C. to win the votes of the poor: giving out cheap food and entertainment, “bread and circuses”. The Roman politicians realized this would be the most effective way to rise to power and stay in power. With the revolting display of political theater in the last few weeks, I couldn’t help but consider the parallels between the Roman Empire and the American Empire. The entire debt ceiling farce was a circus on an epic scale – The Greatest Show on Earth. The American public was treated to high wire acts of near debt experiences, Senators putting their heads into the mouths of lions, and hundreds of clowns riding tiny bikes with squeaking horns. In the end, American politicians did what they do best - pretended to solve a spending problem without cutting spending. Only in America could politicians put the country on course to increase its national debt from $14.5 trillion to $23 trillion by 2021 and declare they are cutting spending. For those that need to visualize the lies of politicians, take a gander at this chart and try to find the cuts in spending.

The question of what the Fed will do next week in response to what effectively amounts to quantiative easing by the SNB, the BOJ and, as of today, the SNB, is preoccupying everything with a passing interest in finance. Here is the answer of JPM's Michael Feroli, who has recently surged to the league tables of least worst Wall Street economist (even if, for whatever reason, his Goldman competition still sets policy with merely one recommendation).

If: quote stuffing spike = true; then: market plunge. Over and over and over and over.

It was over two months ago that Zero Hedge first described why we though QE3 would ultimately appear in the form a reincarnation of Operation Twist first utilized by the Fed in the 1960s to prevent the gold exodus from the US into Europe (read more here and here), also known as Operation Twist 2. In essence what the Fed would do would be a curve patterning exercise in which the Fed would lower long-term rates by changing the average maturity of Fed holdings, in the process removing substantial duration from the markets, once again pushing investors into far more risky assets such as stocks (but certainly not gold: the CME will see to that). Today, Morgan Stanley's Jim Caron (who has yet to be right about one thing in his prior 3 year forecasts so take this with a grain of salt) explains why Morgan Stanley is a big supporter (read lobbying heavily on behalf of) of Operation Twist 2. Quote Caron: "As outlined in the recent congressional testimony, the Fed could consider several ways to ease financial conditions further. One of the options mentioned by Fed Chairman Bernanke was to provide explicit language to keep the fed funds rate and the Fed’s balance sheet unchanged for an extended period. Another approach would be to keep the balance sheet unchanged but increase the average maturity of its holdings. If this path is chosen, we believe that a significant amount of duration could be removed from the markets – to the effect of $90-150bn 10y equivalents which could lower 10y yields by 20-35bps. Let us explain." Explain away Jim.

RANsquawk Weekly Wrap - we answer questions that have come to the desk, and we highlight some of next weeks important news and data to look out for.

Not surprisingly, following the earlier downgrade of the US economy by Jan Hatzius, the firm's FX team has just released its complete list of updated FX projections based on the premise of a slowing economy, i.e., RIP Reverse Decoupling, or the key trope that drive the global economy in H1. As Thomas Stolper says, "The gist of our forecasts implies that the US will experience the largest amount of a slowdown relative to the rest of the world. And this ongoing US underperformance, partly a result of a deep protracted fiscal adjustment, will likely also warrant a prolonged divergence in monetary policy between the US and the rest of the world. These dynamics... underpin our a strong Dollar-bearish view." And here is why Goldman is about to really piss of the BOJ and the SNB, already heavily involved in FX market intervention: "The two main changes we have introduced to our FX forecasts come in response to significant appreciation pressure in the JPY and CHF. For the former, we are revising our $/JPY forecast to 77, 76, 74 in 3, 6 and 12 months, down from 82, 82, 86 previously. For the EUR/CHF, we change the path to 1.10, 1.15 and 1.20 in 3, 6 and 12 months, from 1.23, 1.23 and 1.25 previously. Overall, these changes mean that we forecast that our broad USD TWI will fall by -5.1% over the next 12 months, from –4.3% previously." Alas, it is now fireman hat time as we all prepare for an escalation in the global central banking wars as soon as Monday.

It finally feels safe to get long some stocks and high yield. The move into noon was scary. The move since then has been equally scary. S&P moving around 30 points in half an hour seems wrong, but it does feel that weak longs got culled with these moves, once, if not twice. IG seemed to get used as a hedge because people couldn't believe how far HY had dropped and didn't want to pay up, so for the first time, investors seem to have gotten themselves hedged and wedged. That should help on any move upward. I have to believe that some Eurpean investors shorted S&P into their close as the move so big and fast. They are stuck now hedged and wedged and are likely to want to close out rather than keep.