Archive - Aug 9, 2011 - Story

All three Keynesian policies have been tried, and all three have failed completely. The massive "shovel-ready" fiscal stimulus caused a minor blip up in activity, but it did not spark any regeneration of borrowing and spending. All it did was enable further deleveraging as consumers and businesses struggled to pay down their crushing debt loads. As for devaluing the currency, the Fed's policies devalued the U.S. dollar 32% from the early 2000s, and 17% from 2008. Rather than spark a boom of spending and investment, this massive devaluation sparked a dramatic loss of purchasing power which households experience as high inflation. No nation ever prospered in the long-term by devaluing its currency. Devaluation is just another Keynesian "quick fix." Borroing 40% of Federal spending didn't "fix" what's wrong with the economy? Then borrow 50%. That devaluation wasn't enough? Then takes the dollar down another 10%. These are the policies of debt-junkies, not legitimate long-term growth based on capital formation and productive investment.

What a difference a quarter makes. Back in Q1, Goldman reported one (1) day in which it had a trading loss out of 62. It also reported 32 days on which it made over $100 million. Oh how the times have changed. According to the just released 10-Q, Lloyd Blankfein's firm suffered an epic implosion, recording 15 trading day losses out of 63, or a stunning 24% loss rate. And far worse: only 4 days in which Goldman recorded profits of $100 million. And that's why the stock is floundering. The only question is whether this was premeditated to shift the public anger away from Goldman which back in 2010 barely had any trading day losses in the entire year. And if not, what is the systemic change that caused this worst quarterly performance for Goldman in years?

The only economic data point of the day is a disappointment as non-farm productivity drops 0.3% on consensus of -0.9%, although we once again get an unprecedented revision from the BLS whose data can no longer be trust for anything, as Q1 productivity was cut by whopping 2.4% from 1.8% to -0.6%! This is the first consecutive quarterly drop since 3Q, 4Q 2008. Net, this is very disappointing data and means that the economic slow down is far more broad than previously expected. And, not at all surprisingly, we get the same thing with labor costs rising 2.2% on consensus of 2.4%. The kicker yet again is in the revision, which speaks for itself: from 4.8% to 0.7% in Q1. US economic reporting is rapidly becoming a bigger joke than the Chinese Department of Truth.

Asking almost any credit trader how their market is trading, and the most common answer is broken.  Yesterday, a few people would have said bidless, or ugly, but today, its just broken.  Liquidity is extremely low.  Every trade resets the market. Trades are being driven by fear and fear alone.  Fear of a further sell-off.  Fear of whipsaw.  Sovereign debt trading was the first to be hit, and it has now hit all the credit markets.  Even equities seem to have seen a complete breakdown, with big air pockets.  For the S&P, 5 points seems to be just a little noise every few minutes waiting for the next big move.  S&P futures have already traded in a 70 point range, not too big for a month, but a lot for 12 hours.

This may be a sign that the current sharp rally may have reached its zenith as neither bank has a great track record regarding short term trading calls on commodity markets. In the short term there is the risk of a correction as gold’s rise is now becoming front page (on front page of FT today) and headline news. The fact that silver has fallen in recent days and remains below $40/oz and the fact that gold mining equities have also not risen may also be a warning signal. Gold has risen from below $1,500/oz to nearly $1,800/oz in 5 weeks (since the start of July) and is up nearly 18% in dollar terms.  Therefore, in conventional terms gold is most certainly overbought.  However, we are not living in conventional or normal times and the ongoing global market crash and global currency debasement means that there is a chance that gold will go parabolic as it did in the 1970’s.

• Rogoff: Fed Will Embark on QE3, Act ‘Decisively’ (Bloomberg)
• China Inflation Quickens to 6.5%, Limits Policy Response to Global Crisis (Bloomberg)
• ECB Puts Pressure on Italy (WSJ)
• Chinese Fault Beijing Over Foreign Reserves (NYT)
• Senate to probe S&P downgrade (FT)
• Cameron Back to U.K. for Emergency Meeting on Riots (Bloomberg)
• Trichet Turns ‘President of Europe’ as Debt Crisis Stuns Political Leaders (Bloomberg)
• Hong Kong Sells Land 33% Below Surveyors’ Estimates Amid Market Turmoil (Bloomberg)

Markets witnessed a mood of risk-aversion today on the back of growing concerns about a global economic slowdown on the back of a recent US sovereign downgrade, together with ongoing contagion fears in the Eurozone. European equities traded lower during the session, following lower closes to the US and Asian bourses, which triggered market talk of a Euro-wide ban on short selling. The FTSE-100 index breached the key 5000 level to the downside, and registered a 20% drop since Feb’10, as it entered a bear market. Meanwhile, Spot Gold printed a record high at USD 1780.10 per ounce as investors opted for safety of a more tangible asset. Elsewhere, the USD-Index weakened ahead of the FOMC rate-decision later in the session, weighed upon by prospects for further monetary easing by the central bank. Fresh all time lows were observed in USD/CHF and EUR/CHF at 0.7383 and 1.0480, respectively, whereas USD/JPY tested a key level of 76.96, which saw the previous intervention by the BoJ. Weakness in the USD-Index helped EUR/USD and GBP/USD to print session highs, however GBP/USD came under pressure following weaker than expected industrial/manufacturing production data from the UK. In fixed income, the Eurozone 10-year government bond yield spreads observed tightening across the board on renewed market talk of the ECB buying in the Italian and Spanish bonds, which also weighed on Bunds. Moving into the North American open, the focus remains on the FOMC rate-decision to see if the Fed delivers a verdict of further monetary easing owing to the recent S&P rating action on the US, together with low growth prospects in the country. In fixed income, USD 32bln 3-year Note auction is also scheduled for later in the session.

BAC default risk at 265-270 bps as of this morning. About 30 tighter from yesterday's epic rout which saw the final bid/asl around 290/310, or well over 100 wider on the day. The longer BAC keeps mum, the worse this will get, and we expect the bleed wider to resume shortly, slowly at first, then very fast if no curve steepening QE3 Operation Twist is announced.

Bloomberg has come out with the most succinct and descriptive chart summarizing the "Central Bankers' dilemma" in which everyone is currently caught in either of four states: inflation, stagflation, recession and debt trap. Nobody wants to be in the lower left or the top right. Unfortunately, America's future is precisely one of the two, and anything the Fed does will only accelerate America's adverse transition appropriately.

European CDS rerack:

• MAIN  141.25/142.5   +.75   XOVER 590/593  +10.5
• ITALY  -4
• SPAIN -13
• PORT -5
• IRELAND    -
• GREECE     -
• BELG  -2
• FRANCE +2
• AUSTRIA  -1
• UK  +5
• GERM  +4
• SOVX  245/250   -

The much awaited cut by S&P of thousands of municipal bonds following its August 5 downgrade of the US has arrived. Per Bloomberg: "The rating company assigned AA+ scores to securities in the $2.9 trillion municipal bond market including school- construction bonds in Irving, Texas; debt backed by a federal lease in Miami; and a bond series for multifamily housing in Oceanside, California. Olayinka Fadahunsi, an S&P spokesman, said he couldn’t provide a dollar figure on the affected debt. “It’s expected, but nobody is happy about it,” Bud Byrnes, chief executive officer of Encino, California-based RH Investment Corp., said in a telephone interview. “No one that I know thinks it was justified to cut the U.S. bonds to AA+. Once that happened, you knew that any prerefunded bonds or escrowed bonds would be downgraded too. It’s a domino effect.”" Well, Bud, if you really have so few acquaintances, we suggest you go out more. There are some fun bars on Ventura: give us a call for the low down. As for people who do go out more, here's one: "Chris Mier, a managing director at Loop Capital Markets LLC in Chicago who follows the municipal bond market, said the downgrades made sense, given the federal rating cut. “In order to keep the system logical and coherent, there are going to be a lot of downgrades,” Mier said in a conference call with reporters and clients." Matt Fabian, a managing director of Concord, Massachusetts- based Municipal Market Advisors, a financial research company, said in a telephone interview that he expected “hundreds and hundreds of municipal downgrades,” which may hurt investor confidence. “Treasuries may be able to shake off a real impact from the downgrade,” he said. “Munis, I’m less sure about." That's ok, while nobody has any idea what is coming, that won't stop 99.9% of those on Comcast's financial comedy channel from opining anyway.

For today's preview of the FOMC rate decision (which should really be called a QE3 decision), we go to RanSquawk which highlights the push and pull mechanics of today's events, and to Goldman which once again makes the explicit clarification that it needs QE3 with the statement that "A bit more easing might be needed in the near term." Yes Goldie, we know you want another year of record bonuses.

Yesterday Greece, today Korea, tomorrow the world. The traditionally last ditch attempt by a regulator losing control of events: making short selling illegal, is starting to appear in random places, first showing up in Greece, and now in South Korea, where the capital markets commissioner just said no most shorting for 3 months. South Korea’s Financial Services Commission will also temporarily ease daily limit on amount of shares companies can buy back. This latest short selling ban has put many on edge, and following Italy's move to ban naked short selling several weeks ago it is now expected that at least several more European countries will follow in these footsteps, further eliminating price discovery and destabilizing market confidence and more.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

Anyone just waking up and noticing futures trading just barely below the closing print may get the impression that things are fine. They are not. Here is what has happened overnight as the global central planning cartel does everything in its power to prevent the global market rout, which has so far wiped out $7.8 trillion in market value around the world, from morphing into the catalyst that ends the status quo. To wit: ECB resumes buying Italian and Spanish bonds (UniCredit says the bank is losing a “game of chicken” with lawmakers by not holding out for budget cuts and higher taxes, and may eventually need to print money), the G-20 is prepared to take joint measures to stem a global crisis, Brazilian Finance Minister Guido Mantega said. Greece’s securities regulator banned all short-selling on the Athens exchange for two months starting today. Taiwan’s government bought stocks yesterday and this morning through four funds it controls. South Korea’s regulator asked pension funds, brokerages and asset-management companies to step up efforts to stabilize the market. South Korea also bans short selling for three months starting August 10. And lastly, rumors of an emergency Fed announcement are ripe. So... after all this global cartel intervention, is it any wonder that futures staged a near vertical move up overnight?