Archive - Sep 20, 2011 - Story

Tonight's feel-good story of our time is a desperate stroll through the reality of the US housing market for millions of individuals (as opposed to the hope-driven must-say-something-positive spin the home-builder CEOs have been spewing recently). Notices-of-default jumped 33% in August, a nine-month high and largest month-over-month increase since August 2007 and it is becoming increasingly acceptable to walk away from contractual agreements as strategic default becomes the New American Dream.

We are sick and tired of speculating what Benny and the Inkjets will decide tomorrow. The truth is nobody knows, probably not even Benny (unlike that other guy who got a haircut at the Marriner Eccles building today and who speaks in tongues). So here is a quick and dirty cheat sheet from SocGen giving the probability to each of the six possible options that the FOMC can pick out of Bernanke's magic hat. With over four hours from open until the "Rien ne Vas Plus" is called, compulsive gamblers should be able to put some good money down on the trifecta.

Tune into CNBC or click onto any of the dozens of mainstream financial news sites, and you’ll find an endless array of opinions on the latest wiggle in equity, bond and commodities markets. As often as not, you'll find those opinions nestled side by side with authoritative analysis on the outlook for the economy, complete with the author’s carefully studied judgment on the best way forward. Lost in all the noise, however, is any recognition that the US monetary system – and by extension, that of much of the developed world – may very well be on the verge of collapse. Falling back on metaphor, while the world’s many financial experts and economists sit around arguing about the direction of the ship of state, most are missing the point that the ship has already hit an iceberg and is taking on water fast. Yet if you were to raise your hand to ask 99% of the financial intelligentsia whether we might be on the verge of a failure of the dollar-based world monetary system, the response would be thinly veiled derision. Because, as we all know, such a thing is unimaginable!

Think again.

Following up his earlier note laying out expectations (translated as: "you better or else") for the outcome of the FOMC meeting tomorrow, Goldman's chief economist Jan Hatzius produces another 'concerning' research note tonight providing just enough evidence for  a growing downside risk to the firm's 2% GDP growth estimate for 2012. We assume the failure of the market to hold onto dramatic losses (easier to justify more easing) or dramatic gains (can't disappoint a Pavlovian public waiting for the FOMC bell to ring) in the last few days prompted the 'nudge' from the policy-makers-elect. It appears weak stocks, a strengthening dollar, and the European crisis were not what the doctor ordered.

Nine months after the very same quartet of republicans, headed by John Boehner, sent a letter to Bernanke protesting the launch of QE2, this time the GOP has waited until a mere 24 hours before the actual announcement with an identical, if preemptive, message, namely: don't print, or stated differently, "we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people." And while the political undertone of the letter is all too obvious: i.e. prevent any additional Obama-benefiting stimulus in the economy through the only conduit Obama has left, courtesy of Fiscal stimulus being snarled for good due to the republican majority in the House, Boehner et al bring up a valid point, which is that the Fed policy now accentuates market uncertainty and promotes trade wars: precisely the topics discussed in an earlier article today. As stated by Boehner: "Our long-term growth depends on restoring confidence and certainty in our fiscal, regulatory, and trade policies -- and not on government’s willingness to engage in additional stimulative measures. When asset prices increase due to anticipated Federal Reserve policy rather than economic fundamentals, it increases the potential for speculative action and erodes confidence in the economic outlook, making it more difficult to generate sustainable growth." Regardless of its actual merit, one thing is without doubt: QE3, and the Fed, just become once again critically politicized, and as such, even more market uncertainty is imminent. All that said, the theatrical optics of this action are quite glaring.

One of the recurring themes on Zero Hedge in the past several months has been the continued mockery of the seemingly global conventional idiocy that China can bail out the world, when it itself is on the verge of a huge credit bubble popping and requiring the rescue of China itself by the rest of the global pyramid scheme (which however will be far too busy monetizing its own debt by then). Why, we vividly recall this quote from July 4, "So let's get this straight: a country which has 10% of its GDP in the form of bad debt, is somehow expected to be credible enough to buy not only Greek debt, but the EURUSD each and every day? Mmmmk. In the meantime, Dagong downgrades the US to junk status in 5, 4, 3..." Well, Dagong did since downgrade the US (as did S&P), although not to junk just yet, and somehow the world still continues to labor under the illusion that China (whose shadow banking system we also covered most recently here), is somehow healthy because it is far better than Europe (and the US) in hiding the true severity of its problems. Naturally, as long as that persists, the global ponzi will always have the benefit of pulling out a "white knight" whenever needed, regardless of just how ludicrous such an presumption has become. Today, famous China bear Jim Chanos appeared on Bloomberg TV and recapped his thesis which summarizes the bulk of these points, further extrapolating based on the Andy Lees analysis posted yesterday which estimates what a true economic growth rate is when one factors for bad debt and loss severities. His conclusion: "If we assume that China will grow total credit this year between 30% to 40% of GDP, and half of that debt will go bad, that is 15% to 20%.  Say the recoveries on that are 50%. That means that China, on an after write off basis, may not be growing at all. It may be having to simply write off some of this stuff in the future so its 9% growth may be zero." And this stagnant, overlevered behemoth is somehow supposed to be... the world's white knight?

After Greece realized that it is not America, which can pretend it will do an infinite does of austerity... just not today... and not tomorrow...and really everything will be back-end loaded to some point 9 year from now (when it is some "other administration's problem") and the IMF made it clear that cuts have to happen immediately if not sooner, the country has released a statement that in exchange for getting the latest round of Troika funding (which it needs desperately: recall that it has another €2 billion debt paydown this Friday), it will front-load some of those mythical austerity measures that otherwise would have never really occurred. Which means that strikes (most notably by the tax collectors), riots and all around fun is about to become the prime time TV highlight from Syntagma square all over again, as tens of thousands of more government workers are fired or furloughed, or just generally lose their pension benefits, courtesy of living in an insolvent country. In the meantime, the European banks can pretend the contagion from a Greek fall out will be contained and the Fed's infinite swap lines will mask any and all completely unexpected black swans. Best of luck with that.

Another day, another roller-coaster ride in US equities as every other asset class was relatively well-behaved. We lurched from headline to headline all day long - up on some hope of a 'deal', down on news that nothing was achieved, up on 'progress', down on a revisit in October - but the lurches were much more evident in US equities than in FX, credit, TSYs, PMs, and commodities. These other markets were not dull by any means but did not exhibit the absolute schizophrenic paranoia that equities did and this was critical in getting a handle on trading today as with 30 minutes to go, equities tore back down from Friday's highs to reconnect with several fair-value models across broad risk assets and the credit markets (highlighted in our earlier European close snapshot).

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 20/09/11

Lately it is hard to avoid talk about the Lehman "Moment".  It almost makes you think that the world fell apart the weekend Lehman filed for bankruptcy protection.  But that's not the case at all.  Stocks sold off that first day, bounced the second, had another sell off, but by the Thursday, they actually closed higher than the Friday before Lehman filed.  From there they generally went down. Often painfully swiftly, though the rallies were just as sharp.  It wasn't until March of the following year that we hit the lows - a full 6 months after Lehman.

And now the political rags will really tear the American Jobs Act, ARRA and the administration, apart, because the Venn diagrams of Enron and Watergate just crossed and the point of intersection is called Solyndra. According to Reuters: "Solyndra LLC's chief executive and chief financial officer will invoke their Fifth Amendment rights and decline to answer any questions put to them at a Congressional hearing on Friday, according to letters from their attorneys obtained by Reuters." But, but, what do they have to hide? And how many times in the past has pleading the fifth not led to a prison sentence for someone? And, implicitly, and potentially, the commencement of impeachment hearings?

It seems that Greece has managed to scrape together left-over medals from the Olympics and sell some fish in order to meet the interest payments so far but a closer look at the debt distributions - both interest and principal sends a worrying message. No wonder the Troika will be back in October!! Across all the PIIGS, there are dramatic amounts of principal and interest due over the next month or two and perhaps bond market deterioration today in the face of rising/hoping equities was the message not heard around the world.

That Tim Geithner is either incomponent or a pathological liar is by now irrelevant: anything that comes out of his mouth traditionally ends up being completely wrong, either on purpose or otherwise. What is always entertaining is putting Tiny Tim through a lie detector test of some sort, which is what the good former spies from Behavioral Intelligence Research (for previous iterations of their work see here) done with their just released report "Tim Geithner at II/Delivering Alpha Conference." Which is why, while hardly telling us anything new, BIA's "body language" interpretation of what was said, and unsaid, is quite interesting now that the Treasury Secretary has decided to put upon himself to become more cryptic than the maestro and less credible than Baron Munchausen. To wit: "[Geithner's] responses to questions on the U.S. economy frequently reflect efforts to aggressively garner bipartisan support. From a behavioral perspective, however, his responses to questions about the European crisis are more significant. Mr. Geithner is asked a number of questions aimed at gaining insight into the situation and how the crisis will impact the United States. However, he consistently sidesteps specific questions and attempts to minimize the severity of certain factors suggesting he has more significant concerns than he implies about the depth of the risk in the region and the potential impact it has for the U.S. Below are our observations."

With the FOMC meeting currently in full swing, speculation is rampant what will be announced tomorrow at 2:15 pm, with the market exhibiting its now traditional schizophrenic mood swings of either pricing in QE 6.66, or, alternatively, the apocalypse, with furious speed. And while many are convinced that at least the "Twist" is already guaranteed, as is an IOER cut, per Goldman's "predictions" and possibly something bigger, as per David Rosenberg who thinks that an effective announcement would have to truly shock the market to the upside, the truth is that the Chairman's hands are very much tied. Because, all rhetoric and political posturing aside, at the very bottom it is and has always been a money problem. Specifically, one of "credit money." Which brings us to the topic of this post. When the Fed released its quarterly Z.1 statement last week, the headlines predictably, as they always do, focused primarily on the fluctuations in household net worth (which is nothing but a proxy for the stock market now that housing is a constant drag to net worth) and to a lesser extent, household credit. Yet the one item that is always ignored, is what is by and far the most important data in the Z.1, and what the Fed apparatchiks spend days poring over, namely the update on the liabilities held in the all important shadow banking system. And with the data confirming that the shadow banking system declined by $278 billion in Q2, the most since Q2 2010, it is pretty clear that Bernanke's choice has already been made for him. Because with D.C. in total fiscal stimulus hiatus, in order to offset the continuing collapse in credit at the financial level, the Fed will have no choice but to proceed with not only curve flattening (to the detriment of America's TBTF banks whose stock prices certainly reflect what a complete Twist-induced flattening of the 2s10s implies) but offsetting the ongoing implosion in the all too critical, yet increasingly smaller, shadow banking system. And without credit growth, at either the commercial bank, the shadow bank or the sovereign level, one can kiss GDP growth, and hence employment, and Obama's second term goodbye.

The European Union failed to approve a law or plan to bank naked shorts on sovereign CDS.  Their focus on CDS trading started over 18 months ago when the Greek Finance Minister said that all the short sellers would lose their shirts. There have been a multitude of rumors that it would be banned, but there are many better ways to control the CDS market. In all likelihood, the politicians will remain intent on banning CDS.  I think they will be disappointed with the impact and realize that CDS is not the root of all evil and Europe will still have a sovereign debt crisis, without the benefit now of some short covering and additional price discovery.