Archive - Aug 2011 - Story

Several B-grade economic developments on the docket, as well as the first post-downgrade 10 Year bond issuance. Latest monthly QE Lite POMO schedule released today.

Remember how the Troika said Greece has its "budget situation" under control, and as such is a worthy recipient of the second €120 billion bailout tranche? Then perhaps they can explain to us how the following makes sense: according to Bloomberg, Greece’s state budget deficit widened to €15.5 billion in the January to end-July period from €12.5 billion euros in the year earlier period, according to an e-mailed statement from the Athens-based Finance Ministry today. So.... after praising the Greek deficit cutting progress, the country comes out and tells everyone it was really only kidding, it kinda sort lied, about its deficit but was more than happy to take European and US capital, and as for collecting taxes, well, they can try it, or at least promise to do so, after bailout #3.

Risk update: today everyone is more blowy upy, both core and periphery

• MAIN -1    
• XO -10     
• SOVX 283/287 +8  
• SOVX CEEMEA 245/249  
• IT +16                                   
• SP  +12
• PORT +9
• IRE +5
• BELG +6
• FR +5
• UK +1
• DEUTSCHE  +.5

And a special bonus: Intesa Sanpaolo -4.6%, Societe Generale - 4%, Unicredit -3.8%.

In a letter sent out by Olli Rehn to the European parliament on August 9, Rehn, in attempting to defend the fact that the ECB has now become Europe's "bad bank" and is thus nothing but a political vehicle to be used and abused by Germany which is the only one that can fund the ECB's non-existent equity capital, said that this ongoing intervention is critical in "dysfunctional" markets. He also completely fabricated the claim that the bond buying program is compatible with the EU Treaty. Supposedly he was envisioning the no bailout clause in the EU treaty. And to punctuate his point, the ECB proceeded to buy Italian and Spanish bonds for the third day this week, earlier today. Yet all that is boring, bureaucratic rhetoric. Where you should prepare to have your frontal lobe turn to jelly is the following: in defending why the expanded SMP program, which may soon hit hundreds of billions in onboarded toxic bonds, Rehn said the central bank’s investments are safe because “the bonds are purchased in the secondary market at market price -- i.e. the credit risk is already factored in,” according to a response dated yesterday to a query by an EU lawmaker. We will repeat this.... because it bears repeating: there is no risk of loss to the ECB's loan portfolio because they are purchased in the open market. In other words, if you, or a central bank, or an alien from Uranus, buys something in the open market, it is a risk free transaction....

....

Yes, that thing gushing out of your nose is blood.

As expected, after the USDCHF and EURCHF has been reaching new all time lows again and again, day after day, the SNB, a week after its latest doomed intervention, intervened again, by doing more of the same, this time increasing banks’ sight deposits at the SNB from currently CHF 80 billion to CHF 120 billion. End result: a 150 pip spike... which was fully retraced in one hour. The trend is unmissable - every single intervention (that of the Fed included) has progressively little impact as these desperate measures, traditionally reserved for life or death situations, and which are supposed to bring the element of surprise with them, are now not only not surprising, but demanded every single day, and if absent, cause asset sell offs. Pretty soon the battlefield will be central planners vs HFTs, with the money printers issuing money at first on a monthly, then weekly, daily, hourly, then lastly millisecond-ly, and ultimately constant basis, at which point it will truly be too late to buy gold.

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

While there is speculation whether today's historic announcement by the Fed in which it dated the beginning of the end of ZIRP, and in reality just the beginning of the beginning, is some form of shadow QE3, what is certain is that there is no Large Scale Asset Purchasing component to it yet. As such while the market immediately discounted the impact of 2 years of duration risk elimination (roughly 70 ES point equivalent), this has now been priced in, and the market must now look to mechanisms by which the it will have to absorb ~ $2.0 trillion in debt issuance over the next year without Fed help (and to those sticking to some modified version of MMT, keep in mind there is only $1.6 trillion in excess reserves so even a full recycling thereof would be insufficient to match demand of funds). Enter Goldman Sachs which puts the argument to bed: "We now see a greater-than-even chance that the FOMC will resume quantitative easing later this year or in early 2012." Why? Because what was lost in the noise today is that the US economy is contracting and the unemployment rate is rising: i.e., we are reentering a recession. And what the Fed did today is absolutely powerless to change this even from the Fed's point of view. Quote Hatzius: "This would probably mean more QE if their forecast converged to our own modal view of a flat-to-higher unemployment rate through the end of 2012, let alone our downside risk case of a renewed recession." But what about the historic dissent? Ah, therein lies the rub: "We view Chairman Bernanke's willingness to live with the dissents as a strong signal that he and the rest of the Fed leadership view the need for renewed easing as more important than the institutional norm of consensus decisionmaking." So there you go. The market will wake up tomorrow with a hangover, and say the one word it always does: "More." Absent that, the slide will, as predicted, resume, and it is none other than Goldman Sachs who has once again, just like back in 2010, set the strawman up for the Fed doing simply more of the same which does nothing to actually fix the economy, but bring us all closer to that epic meltdown discussed by Andy Lees earlier, and by Zero Hedge over the past two and a half years.

In a Bloomberg TV interview following today's quixotic "QE3/non-QE3 announcement, which is Operation Twist 2, but not LSAP, and ushers in economic recession, even as it sends risk assets soaring, and somehow pushes the 2 Year a whopping 20 bps tighter so buy,buy, buy" and is really very much ado about nothing, the always outspoken Marc Faber had some very choice words about life, the universe and especially the residents of the Marriner Eccles building. While there still appears to be some confusions as to whether today's Fed decision to peg rates at zero for 2 years is QE3 or not, Faber believes that the decision to not enact more Large Scale Asset Purchases is "the right thing" although when it comes to the market, it "is more likely to move still lower. We are very oversold. We can have a rebound like we did today, maybe we'll have a rebound next week or so, but in general I think we will test the July lows of last year, the S&P at 1,010.  After that, probably we'll get probably a QE3 announcement." Naturally, Faber does not think gold is in a bubble, and as to what one can do with gold, his response is that "you give your girlfriend copper rings and I give them gold rings and I keep them longer." Indeed, no bubble there. Last but not least is his suggestion what the Fed should do: "The best [the Fed] could do for markets would be to collectively resign." Precisely, which is why it will never happen.

It's all about supply and demand. Increased demand for the Swiss franc coupled with expanded supply of dollars and euros has caused the franc to surge over the last weeks and months. It wasn't too long ago that it would take 1.20 francs to buy a US dollar. Now it takes $1.40 to buy a single franc. I can think of a lot of words to describe the performance of the US dollar. Farce. Joke. Lunacy. Embarrassment. Disgusting. But it's more clearly summed up like this: the price of a Big Mac is in Zurich is now so high (at $17.19) that a minimum wage employee in Minneapolis, Minnesota, would have to work for nearly 4-hours in order to afford it. This is what stability looks like to Ben Bernanke.

"With all the mess going on at the moment, I thought it was worth while stepping back a little and trying to look at the bigger picture." So begins Andy Lees' latest must read letter to clients whch explains succinctly virtually the entire story of where we were, how we got to where are now, how the current trajectory is unsustainable, why due to decades of capital misallocation anything that the Fed does now is essentially irrelevant, why our untenable debt pile does nothing but perpetuate an unsustainable ponzi scheme which will result in an unseen explosion in the true cost of capital: gold, and why the bond market will eventually, and inevitably, force an epic repricing in the cost of non-gold capital absent the arrival of the deux ex machina of real, actionable innovation that the Fed, and all global central planners, keep hoping for. Because the longer we keep plugging away with that worthless substitute, financial innovation, which is anything but, the greater the final collapse. Andy's conclusion: "Until the debt is cleared and capital starts to be properly allocated, economic growth per unit of additional debt will continue to sour. Until we get some real breakthrough technology, requiring large amounts of capital to both innovate and then roll out, we have no chance of supporting the economy." Too bad than that this absolutely spot on observation reflects precisely the opposite of what the Fed is pursuing. Which is why, all else equal, and it will be unless the Fed is finally eliminated from existence, America, and the entire western way of life, is doomed... But don't take our word for it. Here is Andy.

Even as the Fed continues to pretend that keeping interest rates at zero for what is now becoming apparent will be an infinite amount of time is an appropriate substitute for the absence for the elimination of actual cash flows, we once again get a reminder that life in the real economy, there were people can not just print their way out of trouble, practical issues such as reality still matter. One such example comes to us by way of California which just announced that state tax revenue plunged in July, falling more than 10% below expectations, and as the LA Times blog says, "making it more likely that deeper cuts to public schools built into the state budget in case of a stalled economic recovery will occur." It adds: "Gov. Jerry Brown and state lawmakers patched up the final $4 billion of California’s budget shortfall this year by hoping for a windfall economic recovery. Those hopes are now fading fast. Tax collections in July were $538.8 million below budget forecasts, according to state Controller John Chiang." And just like the proposed Deficit Reduction Plan will crash and burn courtesy of the completely unknown trillions in yet undisclosed savings, so California is now waking up to a bad hangover after realizing that the deus ex machina in unidentified billions of "revenues" forgot to make an appearance.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 09/08/11

Following a 600 point plunge in the DJIA yesterday, today we see a 400 point surge following the presentation of the weak case of the expected Bernanke Put. And completing the amazement, the 10 Year bond, moved to almost record lows, and then retraced virtually the entire move, as nobody knows what central planning has in store for America any longer. Additionally, after being up 50%, VIX is now down 22%. Congratulations Ben: in taking central planning to n^th double-down levels, you have now broken not only the stock, but the bond market as well.

The Fed just basically announced “recession” and has consequently lowered rates REAL TIME and even set parameters for negative rates.  There was some empirical analysis PRIOR to S&P downgrade which suggested historical tendency (not tendency forecasts) of rates to be 50 bps to 70 bps lower after an industrial sovereign downgrade like Japan, Canada, Australia and others.  We were surprised at all the news conferences harping on the political save egg on face conclusions of lower rates yesterday.  Many, not all, were looking for it.  We are humble given volatility as no one has the answers...The equity response is positive as the Fed is FORCING grandmas and anyone who relies on a fixed income into alternative higher yielding asset classes.  Dividend paying stocks look delicious.  Convertibles, OMG, as you get a higher yielding fixed income instrument with a free equity option?  EQUITIES and other perpetual assets that are being discounted by these rates.  Pension funds use the lower rates to discount valuations.   

It was just 4 days ago that the BOJ purchased Y4.5 trillion (or $58 billion) worth of dollars in the open market to lower the Yen against the dollar. Well, that intervention last not even a full 4 days. As the chart below shows it is time for Shirakawa and Noda to start watching... watching... watching... the yen as it once again approaches all time highs against the dollar. But at least the equity market is confused enough to believe that 2 years of projected deflation is good for risk. Ben wins.... if only for a few hours. The irony is that everyone expected that a fixed inflation (or in this deflation) calendar language is the weakest of the Fed's options. Now that this is precisely what has been utilized, a soft form of Operation Twist 2 which locks in the rates on the 2 Years as explained previously, the market is cheering it deliriously. Once the market has slept on it, it will likely realize why it was so skeptical as recently as 2 hours ago on the viability of this approach.