Archive - Sep 13, 2012 - Story

This is the last Bernanke conference that people will actually pay attention to, as we now know going forward everything that the FOMC will do. He better make it count.

There is one big problem with the Fed's announcement of Open-Ended QE moments ago: it effectively removes all future suspense from FOMC announcements. Why? Because the Fed has as of this moment exposed its cards for all to see from here until the moment it has to start tightening the money supply (which may or may not happen; frankly we don't think the Fed tightens until hyperinflation sets in at which point what the Fed does is meaningless). It means easing is now effectively priced into infinity. Now rewind back to that one certain paper by the New York Fed, which laid it out clear for all to see, that if it wasn't for the expectation of easing in the 24 hour period ahead of the FOMC meeting, the market would be 50% or lower than where it is now, and would have been effectively in negative territory in the aftermath of the Lehman collapse. What Bernanke did is take away this key drive to stock upside over the past 18 years, because going forward there is no surprise factor to any and all future FOMC decisions, as easing the default assumption. It also means that Bernanke may have well fired his last bullet, and it, sadly, is all downhill from here, as soaring input costs crush margins, regardless of what revenues do, and send corporate cash flow to zero. Unfortunately, not even in the New Normal can companies operate without cash flow.

So far, the Fed's QuEnfinity has lifted cross asset-class correlation back up to near 1.00 and while stocks look marginally rich to their credit, rate, vol, precious metal, FX, and commodity cousins, its barely notable. The inexorable draw of 'risk-on' has once again dominated the smartest-guys-in-the-room's minds - and while calling a turn here is foolish, this level of systemic move often ends badly/quickly as one leg of the multi-factor correlation breaks down (keep an eye on 2s10s30s).

There was one thing, ONE THING only that Bernanke could do, to become a gold bug's best friend today, than merely announcing QE 3/4. It was to announce open-ended QE. This means this is the Fed's final shot and there is no way to frontrun the Fed any more by definition. It means the terminal start of currency debasement is now here. It also means that the path to all time nominal (and inflation adjusted) highs in gold, which is now just $160 away, silver, platinum, and all other metals, as well as all other hard assets is now clear. It also means that very soon stocks are about to realize what soaring "input costs" mean for the bottom line.

Thank you Chairsatan: you are truly a gold bug's bestest friend!

From financial pundit extraordinare Brian Wesbury, as of March 1, 2012: "The bottom line is that even though Bernanke wants to make the case for QE3, he can’t. In fact, better news on the economy has cut the Fed off from doing more massive easing projects. In the end, we believe the Fed has finally run out of justification for its excessively easy monetary policy. As the quarters ahead unfold, the prospects of more ease will continue to wane. This is good news for stocks – which do not do well with accelerating inflation – but, it is bad news for gold. Gold is done….and so is the Fed." Oops.

So far it is Gold and Silver that are being bought, Treasuries sold and steepening (as mortgage spreads collapse further). Stocks spiked, fell back to unchanged, have new respiked to new highs, and are leaking back now... Notably, equities are the most knee-jerky whip-sawy - Gold and Silver seems consistent as do Treasury yields. USD is down a little, Oil up a little, and AAPL underperforming the S&P for now...

Bernanke has acquiesced - and all is well in the world:

• *FED TO KEEP POLICY STIMULATIVE FOR `CONSIDERABLE TIME'
• *FED WILL ADD TO PURCHASES IF LABOR MARKET DOESN'T IMPROVE
• *FED DOES NOT SAY WHEN MBS PURCHASE PROGRAM TO END
• *FED TO BUY $40B MBS MONTHLY, CONTINUE `OPERATION TWIST'
• *FED TO BUY MBS, EXTENDS ZERO-RATE POLICY INTO 2015

With 20 minutes to go, we thought it timely to see the script (perhaps) for the frivolity to come. It seems like the fate of the known world is predicated on the words of a bearded academic this afternoon and whether you believe he must or must not LSAP us to Dow 20,000 (and Gold $2,000) in the next few weeks - even as the economy and jobs tail-spin - there are many questions, which Goldman provides a platform for understanding, that remain unanswered (and more than likely will remain vague even after he has finished his statement). Their expectations are for a return to QE and an extension of rate guidance into mid-2015 (and everyone gets a pony) but no cut in IOER.

And so it is written; thou shalt not drink big soda upon the veritable streets of New York City. As the Village Voice reports, the NY Board of Health just passed Bloomberg's soda ban proposal banning sugary drinks in more than 16-ounce cups. Of course, none of this should come as a surprise as repression swings from financial to social - what next? No more 8-year-old chimney-sweeps? No more untested drugs on the market? Free-speech suppression on YouTube? As WSJ notes: During the first three months after the ban takes effect, the city will inspect and inform sellers when they are not in compliance with the law. The city will allow a three-month grace period before it begins issuing notice of violations that are subject to fines. Will there be soda hoarding? 'I Drink 17-ounces-at-a-time' T-Shirts?

The mood from yesterday's boring 10 year auction was carried over into today's earlier 30 year auction (not at the usual 1 PM time due to Bernanke's press conference). Moment ago Tim Geithner auctioned off another $13 billion in 30 year bonds, all of which will be promptly purchased by the Fed (as a reminder, the Fed already monetizes all monthly 10-30 year issuance courtesy of Twsit), at a yield of 2.896%, the highest since May's 3.06%. Unlike yesterday's 10 Year, the Bid To Cover rose modestly to 2.68 from 2.41, in line with the TTM average. The internals were boring as well: Directs: 12.4%, Indirects: 38.7%, Dealers: 48.9%. All quite meaningless, because as noted, all of these bonds will eventually be gobbled up by Simon Potter's open market monetization desk. And with this last auction for the week, US debt is now $16,081 billion in debt (current $16,054 billion plus this week's net new money of $27,918 billion), an increase of $80 billion in the few short days since the Democratic National Convention, when the US broke $16 trillion in debt. And rising.

Back in November 2010, the robosigning scandal hit in which it was made clear that when it comes to keeping track of mortgage titles, nobody really knows what belongs to whom, except maybe for Linda Green. The immediate result of this was a complete collapse in the foreclosure process as banks no longer had leverage to evict those who don't pay their monthly mortgage bills, since the banks couldn't confirm they actually had rights to the underlying mortgage, and the total monthly foreclosure total dropped from a ~330,000 average houses/month to roughly 250,000. Then in February, to much administration fanfare, the banks, and the attorneys general, signed what we dubbed the Robo-settlement: an event which was supposed to be the "resolution" to the robosigning scandal, and which should once again unclog the foreclosure pipeline. This did not happen. Instead, as RealtyTrac has been diligently reporting month after month, the monthly foreclosure total has continued to decline, and in August hit a level of 193,508 total foreclosures. The immediately spin is that this was a 1% improvement from July's 191,925. The reality is that it was a drop of 15.1% from a year earlier. As the chart below shows, ever since the advent of fraudclosure, the average monthly foreclosure total has dropped from a 330K/month average to just 219K. And declining. So why did the robosettlement not undo the robosigning foreclosure crunch? Simple - foreclosure stuffing.

As expected: 

• GREEK FINANCE MINISTER DENIES REPORT THAT GREECE NEEDS A THIRD BAILOUT
• COUNTRY'S POSITIONS ARE FORMULATED ONLY BY HIMSELF AND PRIME MINISTER SAMARAS

Alas, the cat is now out of the bag, and any further denials out of Greece merely bring the moment of departure closer. Not even the EURUSD algos are buying it.

You could be forgiven for believing that the ECB's talk/plans have indeed solved the European problems. The market's reaction appears to confirm all anchoring bias and thanks to overly bearish positioning (and thin summer markets) has sent all but the long-term-est bears scurrying for their rabbit-holes - as once again 'tail-risk has been removed' - just like LTRO, the SGP, and The Grand Plan before it. However, as BofAML notes in this must read note, we do not believe the ECB move will necessarily lead to a permanent stable equilibrium for the euro area for two reasons: 1) a stable equilibrium would require certainty about the ability of countries to restore debt sustainability, i.e. that they will respect an agenda of economic policy reforms and/or; 2) certainty about the ECB course of action, i.e. that the ECB will purchase bonds in such a way that we will not observe renewed financial market stress as we did this summer. Such certainty would require both Spain and Italy to put their faith in the Troika’s hands and the ECB to pre-commit in return, which seems to us very unlikey at this time. The ECB’s conditional backstop is some way from the “bazooka” that many were expecting

A funny thing happened on the way to Bernanke's wealth-creation strategy program. The unintended consequence of flooding the world with USDs, as we have pounded the table again and again on, has been 'spillover' into hard assets (or assets with relatively fixed supplies). To wit, oil prices are surging once again. Critically, as the chart below shows, each time this energy price hangover has trickled down to the consumer via $4 gas prices, it has marked a turning point in the US equity market. Of course, this time is different, but nevertheless one has to wonder how stock prices rise by any measurable amount with stagnant wage growth and price inflation in everything we buy and use (and now even the hedonically-tamped PPI is starting to show signs of instability).

Fresh out of the flashing red headline-a-tron:

• IMF OFFICIALS SAY GREECE WILL NEED A THIRD BAILOUT
• IMF SAYS GREECE CAN'T FILL FUNDING GAP ON ITS OWN, UP TO EUROZONE AND ECB TO FIND MONEY FOR GREECE
• GREECE MET ONLY 22% OF PROGRAM TARGETS FOR 2011
• EURO EXIT WOULD SET GREECE BACK BY MANY DECADES

Nobody, NOBODY, could have anticipated that fighting record debt with recorder debt, could possibly fail. And cue Germany telling Greece the party is now over, which, is what (a sliding EURUSD for those confused) it has wanted all along.