Archive - Jan 2012 - Story

Our discussions (here, here, and here) of the dispersion of deleveraging efforts across developed nations, from the McKinsey report last week, raised a number of questions on the timeliness of the deflationary deleveraging process. David Rosenberg, of Gluskin Sheff, notes that the multi-decade debt boom will take years to mean revert and agrees with our views that we are still in the early stages of the global deleveraging cycle. He adds that while many believe last year's extreme volatility was an aberration, he wonders if in fact the opposite is true and that what we saw in 2009-2010 - a double in the S&P 500 from the low to nearby high - was the aberration and market's demands for more and more QE/easing becomes the volatility-inducing swings of dysphoric reality mixed with euphoric money printing salvation. In his words, perhaps the entire three years of angst turned to euphoria turned to angst (and back to euphoria in the first three weeks of 2012?) is the new normal. After all we had angst from 1929 to 1932 then ebullience from 1933 to 1936 and then back to despair in 1937-1938. Without the central banks of the world constantly teasing markets with more and more liquidity, the new baseline normal is dramatically lower than many believe and as such the former's impacts will need to be greater and greater to maintain the mirage of the old normal.

The one we have all been waiting for. Stolper about to be 9 out of 9 with a 0.000 hit rate.

Because live is better than dead. And just in case he lets one slip just what his price target for the Russell 2000 (aka the US GDP) is and how much gold the Fed will secretly lease. As a reminder, from Alan Greenspan testimony to Congress in July 1998: "Central banks stand ready to lease gold in increasing quantities should the price rise."

This is just getting better and better:

• FOMC: 2012 GROWTH AT 2.2%-2.7% VS 2.5%-2.9% IN NOV. FORECAST
• ELEVEN OF 17 FED OFFICIALS SEE MAIN RATE ABOVE 0.25% IN 2014
• SIX OF 17 FED OFFICIALS SEE NO RATE INCREASE BEFORE 2015
• FOMC DOESN'T SET SPECIFIC LONG-RUN GOAL FOR EMPLOYMENT LEVEL

Japan is now seriously blushing. As for the reality of the Fed's forecasts, they are absolutely worthless, so no point in even spending one minute on them.

Goldman does it again. Whereas the exploits of one Tom Stolper are well known, and frankly much expected by the general community due to his infallible advice and 100% inverse track record, we did not realize just how pervasive his M.O. was within the broader firm. Now we do. As a reminder, on Monday Goldman came out with a recommendation to sell the 10 Year. "We are now of the view that a break to the upside, to 2.25-2.50%, is likely and recommend going tactically short. Using Mar-12 futures contracts, which closed on Friday at 130-08, we would aim for a target of 126-00 and stops on a close above 132-00."" This naturally generated a healthy dose of skepticism by Zero Hedge: " As a reminder, don't do what Goldman says, do what it does, especially when one looks the firm's Top 6 trades for 2012, of which 5 are losing money, and 2 have been stopped out less than a month into the year." Sure enough, anyone who did the opposite, i.e. buying the 10 year, has now returned +1.48% in three days. Goldman: always working for the client.

It was only yesterday that we noted that Spain (and its 23% unemployment) had tipped its cards to expose its utter desperation, when its PM basically begged for a Euroepan bailout. As a reminder, his words: "We support a rescue mechanism, the bigger the better, for it to act as a dissuading element for certain things that we've been going through lately," Rajoy told reporters after meeting his Portuguese counterpart, Pedro Passos Coelho." Certain things such as... a collapsing economy and the threat that neighbor Portugal may soon be in freefall bankruptcy? That said, we have no clue how to describe the escalation that just took place as Spain has once again indicated it is not only on the ledge, but one foot now off it. It probably is a gramophone (it's like an iPod only not made by children). Just not sure if Broken or Broke is the right adjective.

• Rajoy Says Spain Wants Europe Rescue Fund to be Bigger

Update: $1700

Presented with little comment, Gold is now at $1693, about to take out $1700 and the best performing asset class of the year: YTD: Gold +8.2%, S&P +4.9%, 30Y TSY price -1.44%. Furthermore, since this FOMC statement implies more easing imminent, it simply delays full blown LSAP so its "effectiveness", read max Russell 2000, peaks with Obama's reelection campaign.

UPDATE: Stocks leaking back now, Financials lagging, Utes leading

TSYs are 5-10bps lower in yield (aside from 30Y), ES (and credit) rallying but underperforming on a beta basis to TSY/EUR, EUR stronger at 1.3050 now (USD weaker), and precious metals jumping (Gold back up to $1685).

Little of note in the statement: no QE3 explicitly in the form of LSAP, which an S&P over 1300 and crude at $100 made prohibitive. Instead the Fed is extending ZIRP through 2014, from 2013, which as commentarors, primarily Goldman had expected, and which means sub-3 year rates will never be above zero again. Our prediction for a €100 trillion 1 week MRO is not looking quite as insane anymore. Since this is incremental easing, the reaction in gold says it all.

Summary:

• FED EXPECTS TO MAINTAIN `HIGHLY ACCOMMODATIVE' MONETARY POLICY
• FED SEES `EXCEPTIONALLY LOW' RATES THROUGH AT LEAST LATE 2014
• FED TO KEEP REINVESTING HOUSING DEBT INTO MORTGAGE SECURITIES
• FED SAYS INFLATION `SUBDUED'
• FED SAYS HOUSING `REMAINS DEPRESSED'
• FED REITERATES `SIGNIFICANT DOWNSIDE RISKS'

Lacker objects as he "preferred to omit the description of the time period over which economic conditions are likely to warrant exceptionally low levels of the federal funds rate." Complete redline comparison attached.

As European bank deleveraging continues, Middle East tensions rise, and oil prices (Brent and Crude alike) oscillate from headline to headline, we thought it intriguing that the entities with net notional outstandings in CDS markets at or near their largest in history are China (and Chinese banks), LatAm Oil companies, Abu Dhabi, and Israel. Quite a crop of potential risk bombs that at least credit traders appear to demand protection on more than others.

Formal central bank independence is increasingly under pressure as societal preferences for a lender of last resort savior grow ever stronger (and more priced into nominal risk markets) as do demands for politicizing the monetary authorities under the pretext that they should more politically independent. Morgan Stanley takes on the question of constitutionality among the G3 Central Banks and rather unsurprisingly finds the mandates, targets, and prohibition treaties to be 'flexible' at best and 'practically meaningless' at worst. We-the-people appear to have little if any remit to constrain - even if our collective call for more printing leads to 'be careful what you wish for' reactions, as Michael Cembalest noted yesterday, "first prize in the Central Bank balance sheet expansion race is not necessarily one you want to win".

Today's early (due to the FOMC statement and press conference) $35 billion in 5 year bonds auction was another uneventful issue of debt. Pricing at 0.899%, or well inside of the 0.915% When Issued, today's latest addition to the US $15.3 trillion in debt came at a 3.17 Bid To Cover, the highest since May 2011. The fact that BTCs continue to rise consistently even as yields decline makes lots of sense in some parallel universe, or in this one, when one considers that the bulk of the paper promptly makes its way to the repo market where it is quickly swapped for cash. The reason for the jump in implied demand was primarily the Direct Bid which took down 15.1% of the final allotment, the most since November 2010. The Indirect Bid was in line at 43.4%, compared to the TTM average of 43%, while Dealers saw a modest drop in their take down, coming below the average of 45.8% at 41.5%. This leave just tomorrow's $29 billion in 7 Year bonds in the weekly issuance docket, even without a formal debt ceiling raise. Net of all auctions that have taken place while the debt ceiling has not been increased, total US debt is now well in the $15.3 trillion bucket.

The Davos theater, where the only thing that matters is to see and be seen, while wontonly spending someone else's money to hobnob with a status quo elite which is rapidly becoming irrelevant and obsolete, is opening. Watch the Annual Meeting 2012 opening webcast. Most importantly, the guest of honor, Angela Merkel, is here.