Archive - Jul 11, 2012 - Story

Just because Bernanke did not explain everything in the post-FOMC conference, here is more:

• A FEW FOMC MEMBERS SAID MORE STIMULUS WOULD PROBABLY BE NEEDED
• SEVERAL ON FOMC SAID FED SHOULD STUDY `NEW TOOLS' FOR EASING - C5 Galaxy??
• FOMC PARTICIPANTS SAW MODERATE GROWTH LIKELY IN COMING QUARTERS
• FOMC AGREED `IT WAS PREPARED' FOR FURTHER ACTION AS APPROPRIATE
• FOMC SAW `UNUSUALLY HIGH' UNCERTAINTY FOR JOBLESS, GROWTH
• SEVERAL OTHER FOMC MEMBERS SAW ACTION NEED IF ECONOMY WORSENS

Well, more stimulus was needed, and we got it in the form of Operation Twist 2. Nothing new, but algos need their flashing read headlines.

It appears that while some will argue that all is well and all we need are some animal spirits to bring us out of the doldrums, it would appear that governments and central banks disagree. Having recently discussed Argentina's forced bank-lending (and of course the BoE's wink at Barclays), we now hear a German think-tank (DIW) is strawman-ing an idea to force the wealthy to buy government debt (or lend "transfer" up to 10 per cent of their net worth). As the Germans come under more and more pressure to save their friendly neighbors the compulsory loans from anyone with a net worth above EUR250k would provide around 9% of annual GDP (or EUR230 billion) that could be mobilized to support the Euro-rescue efforts. As FAZ, Handelsblatt, and Die Welt note, this is not being well-received as the ZEW (Center For European Economic Research) reacted critically that this "would be a huge intrusion into property rights, and probably not possible under German law" running the major risk that "with enforcement action it will probably not be able to regain market confidence," and while a similar system had been installed after the Great Depression in the 1920s (as well as after WW2), these previous loans encumbered real estate properties and not directly to cash.

We discussed this three months ago (not as policy recommendations but as expectations that all wealth will be extracted to prevent what 'they' think is pending social collapse), and while it will not be popular, it seems either directly through this route or indirectly through banking repression, the forced financial tax that we wrote of back in September is exactly what is occurring - as there are only painful ways out of this miasma.

Only one word to explain the just completed 10 year reopening auction. WTF!!! While the 10 year When Issued was trading at 1.516% at 1pm, when the release hit of the final High Yield on the bond, jaws dropped, as it came at a shocking 1.459%, nearly 6 bps inside of the WI, a record, a yield which also was a record, a Bid To Cover of 3.61 which was the second highest ever, second only to the 3.72 in April 2010, but it was the internals that were the most jarring of all. Unlike all recent auctions in the past 4 years, the Primary Dealer take down was only 14% a record low in recent years, and a hit rate of 6.8%, another record low. The offset: Directs, which took down a whopping 45.4%, another record, after tendering a record $16.9 billion in bids. All in all there was no definitive reason to explain why this auction was so very, very off the charts, and so mispriced by the secondary market, suffice to say WTF, and that this is what happens when there continues to be just one game in town: frontrun the Fed! Three possibilities: i) either someone was caught massively wrong-footed going into the auction and covered a massive short into the primary market, ii) capital reallocation from European money market funds which as we explained last week are now all dead, or iii) some "Direct" entity somewhere, has a gaping need for good collateral and would literally pay anything for US paper ahead of an even bigger margin call. The reason we say this is that only 51.7% of the auction priced at the high yield (remember: Dutch Auction): and the low yield was 1.36% - someone, supposedly a Direct Bidder, was in a furious rush to get any paper, at any price. If the latter, we will find out very soon.

It’s been said that the definition of insanity is to do the same thing over and over again but to expect a different result. On that basis, the western world’s economic policymakers are clearly certifiable. They cut rates. It does nothing. So they cut rates again. And again. They in debt future generations to ‘stimulate’ the economy. It does nothing. So they stimulate again. And again. Nothing that central banksters or politicians have done since the 2008 global financial crisis has fundamentally changed economic conditions. Yet they keep applying the same remedies, drawn from the same old Keynesian playbook. The false premise which guides their decisions is that we can all grow wealthy by borrowing and consuming, instead of by producing and saving. People have been sold this lie for more than a generation. It is embedded in social DNA. In the current western economic system, you are rewarded for going into debt with all sorts of tax deductions. Save money, on the other hand, and you are punished through taxation and inflation. The incentives are all wrong; it’s no wonder that people have over-borrowed and overspent given that the system is so blatantly slanted to promote such behavior.

Erste Group's Ronald Stoeferle, author of the critical "In gold we trust" report (2011 edition here) has just released the 6th annual edition of this all encompassing report which covers every aspect of the gold space. What follows are 120 pages of fundamental information which are a must read for anyone interested in the yellow metal. From the report:  "The foundation for new all-time-highs is in place. As far as sentiment is concerned, we definitely see no euphoria with respect to gold. Skepticism, fear, and panic are never the final stop of a bull market. In the short run, seasonality seems to argue in favor of a continued sideways movement, but from August onwards gold should enter its seasonally best phase. USD 2,000 is our next 12M price target. We believe that the parabolic trend phase is still ahead of us, and that our long-term price target of USD 2,300/ounce could be on the conservative side."

The last forty years have seen five distinct regimes in the relationship between gold prices and Treasury yields. It would appear that the current regime (from 2006 to Present) is 'different' indeed as the Keynesian end-point seems to have arrived.

As many observers have noted, you can expand the money supply but if that money ends up stashed as bank reserves, it never enters the real economy, nor does it flow into household earnings. The velocity of that "dead money" is near-zero. M2 declined in the housing bubble as the velocity of money skyrocketed: everyone was pulling money out of housing equity via HELOCs (home equity lines of credit) and spending the "free money" on cruises, furniture, big-screen TVs, boats, fine dining, etc. The recipients of that spending also borrowed and spent as if the "free money" would never end. If M2 expansion is the only thing propping up an artificial market, what happens to the stock market rally as M2 rolls over?

This one is tough: Krugman or CNBC... Krugman or CNBC... Hmmm.

Today's release of the FOMC's minutes should be helpful in gauging the near-term monetary policy outlook. Goldman's Jan Hatzius (who just cut his Q2 GDP outlook to a way below consensus +1.3%) believes they will confirm his expectations, for the July 31-August 1 meeting, of an extension of forward rates guidance to 'mid-2015', but no move to further asset purchases yet (not expecting NEW QE until late 2012/early 2013). In the minutes, Hatzius notes four specific issues to focus on: how many FOMC members expect further eventual easing, and in what form; how close the committee was to either doing more or less than Twist 2 at the June meeting; how much discussion there was of qualitative changes in the forward guidance; and how much more negative the Fed staff has become about the economic outlook. In other words, the minutes may provide more information about whether the weak data that have arrived since June 20 - another subpar payroll gain of just 80,000 and sharp declines in high-profile business surveys such as the manufacturing ISM and the Philly Fed - are likely to be sufficient to trigger additional moves.

First Goldman released this just after the trade data came out:

The trade deficit improves broadly as expected to $48.7bn in May, as nominal exports rise (+0.2%) and imports fall (-0.7%) on the month. (The April trade deficit was revised up slightly from $50.1bn to $50.6bn). The improvement in the trade deficit, however, was driven by a decline in petroleum imports (and thus an improvement in the petroleum deficit) while the real ex-petroleum trade deficit actually widened from $40.3bn in April to $41.4bn in May. The trade report is a slight negative for our Q2 GDP growth tracking estimate which we lowered from 1.5% to 1.4%.

And, moments ago after the wholesale Inventories was released, Goldman came out with this:

Wholesale inventories rose in line with the consensus expectation in May (up 0.3%), but from a downward revised April level. As a result, we revised down our Q2 US GDP tracking estimate to +1.3% from +1.4%.

Luckily there aren't another 13 releases today or we may be in recession right now.

First thing this morning when discussing the upcoming festivities in Europe in the aftermath of Spain's decision to hike sales tax from 18% to 21%, while making sure it is the common people who get hurt in the upcoming bank nationalization in which sub notes and hybrid debt is impaired, largely held by retail investors as the FT showed yesterday, we said that "Spain promised to crush its middle class even more by impairing retail held sub debt and hybrids, while forcing them to pay more taxes, a move which will lead to some spectacular Syntagma Square riotcam moments." Three hours later and the riotcam is now live.

Wholesales inventories were revised lower for the previous month but met current expectations with a modest 0.3% rise. However, under the surface (as ever) things are not quite as muddle-through-like. Wholesale 'sales' plunged by their most since March 2009 with Lumber (but but what about the housing recovery) dropping the most MoM in durables and Farm Products dropping the most YoY among non-durables. This plunge in sales pushed the relatively stable Inventory-to-Sales indicator up to its highest in 19 months.

We believe that we are in the early stages of what will happen with LIBOR.  As we wrote yesterday, we believe there are two distinct phases the pre-crisis phase which saw potential manipulation of small amounts in both directions, and the crisis phase where LIBOR was allegedly much lower than the rate at which banks would realistically lend to each other.  Much of this is supported by the FSA case against Barclays. If lawsuits start, banks have a few hopes, including "The 'central bank' made me do it" but banks will have to do everything they can to prevent being sued by 3rd parties.  If they cannot prevent that, this could get very ugly in a hurry for some banks.

While virtually every European risk indicator is now being gamed to underreport the true nature of the capital flow panic on the continent, one remains steadfast: Swiss nominal yields, which as we pointed out a month ago, have become the only true indicator of liquidity stress. And as noted this morning, Swiss 2 Year bond just hit a record nominal -0.37% (which coupled with record low yields in German yields explains everything about where money is sprinting to in Europe, and just how much "confidence" in the system is left). And while the SNB continues to suffer massive losses on its EURCHF peg, the reality is that it continues to offer a free put to all those who wish to move away from EUR exposure and into the relative safety of the CHF (the risk of cantonal disintegration is still relatively low). Which is why the only recourse authorities have in dealing with the now record flight to Swiss safety is brute force. Sure enough, as Reuters reports, clients of the two largest Swiss banks: Credit Suisse and UBS was raided in two independent, but likely linked, operations in Germany and France, respectively, in a show of force that moves beyond mere tax-evasion and has a goal of scaring anyone who still thinks of keeping their money in the relative safety of Geneva and Zurich bank vaults.

Anticipating another leg-down in commodities (and mining stocks) before sufficient stress emerges in markets to force a decisive policy response - which will create an attractive buying opportunity - UBS joins our ranks of the anti-reflexive NEW QE front-running 'small-crowd'. Laying out five clear signals that keep them cautious: Equity valuations remain well above the October 2011 lows; Positioning is short in base metals and less long in oil and gold – improving this contrarian signal; China’s policy stance is not sufficiently stimulative to trigger restocking, and we see structural declines in commodity intensity there; and, Europe and emerging markets are in the early stages of destocking, with no stocking due in the US; UBS believes that investors will buy gold and gold equities early this cycle - correctly suggesting that it is right to move just ahead of the broader investor community, and buy gold and gold equities now. Clearly, buying gold early into a downturn carries greater risks and will be volatile – consequently, they advise investors wishing to go long gold and gold equities to hold a short or underweight copper and copper equity position against it. Interestingly within industrial commodities, they also like being long oil and short copper on a 3-year view.