Archive - Nov 14, 2013 - Story

Today the FSB was kind enough to explain in two short paragraphs and one even simpler chart, just how the aggregate leverage for the participants in even the simplest repo chain promptly becomes exponential, far above the "sum of the parts", and approaches infinity in virtually no time.

There was a lot of competition for Quote of the Day today. Between President Obama's double-speak, a rationally exuberant Janet Yellen, and overnight idiocy from Suga and Abe, choices were numerous. But the following from Gary Gensler - still chair of the CFTC - took the provberial biscuit:

*GENSLER: 'I THINK MARKETS WORK BEST WHEN THEY'RE TRANSPARENT' (but)
*GENSLER SAYS HE 'BENFITED FROM DARKNESS' IN WALL STREET CAREER

Well that sums it all up.. The question is - will Massad have a CFTC-shaped floodlight fixed to the roof of the agencies' building?

"Unfortunately, today’s administrative state gives so much power to unelected bureaucrats—who are protected against any meaningful control by voters—that they can alter, manipulate, and change the law almost at will. The result is a breakdown in the rule of law and an arbitrary system in which the government operates, not according to predictable standards and meaningful rules, but according to political whim and in arbitrary, day-to-day, ad hoc manner."

Once again, the flood of momentum-chasing hot-money provided by the world's central banks' printfest is leading investors to push up European equities markets to the highest level since 2011 amid optimism that the region is recovering (top-down GDP dashed that hope this morning). Furthermore, since earnings are apparently the mother's milk of stocks, investors are entirely ignoring the fact that earnings expectations for the European region are collapsing to their lowest since September 2009. As Bloomberg notes, "investors in Europe continue to buy hope for an upcoming earnings recovery," but as Tristan Abet of Louis Capital warns, "there is a limit to that rationale... the risk is that the market loses patience."

In response to questions from members of the Senate Banking Committee at her confirmation hearing, Janet Yellen emphasized the need to maintain a highly accommodative stance of monetary policy in light of the disappointing economic recovery. Her comments were broadly in line with what Goldman would have expected, and by-and-large were very similar to statements made by Chairman Bernanke in the past; confirming moar of the same blindness to bubbles, lots of tools, and over-optimism.

The NY Fed disclosed moments ago, that federal student loans officially crossed the $1 trillion level for the first time ever. Notably: the quarterly student loan balance has increased every quarter without fail for the past 10 years!

If yesterday's 10 Year auction was a success, today's $16 billion issue of 30 Year paper was poorly received by the market, with the 3.810% yield tailing the 3.796% When Issued, accentuated by a tumble in the Bid To Cover from 2.64 to 2.16, the third lowest in the past 4 years, excluding just the auctions from August of 2011 and 2013 when there was led indicated demand. The internals were less remarkable, with Directs taking down a stronger than average 18.3%, Indirects holding 35.3% of the auction and Dealers left with 46.5% of the auction. Overall, hardly the ringing endorsement in the long-end the Treasury needs.

Discussion of a market bubble (in stocks, credit, bonds, Farm-land, residential real estate, or art) have dominated headlines in recent weeks. However, QEeen Yellen gave us the all-clear this morning that there was "no bubble." Are we currently witnessing a market bubble? It is very possible; however, as STA's Lance Roberts notes, if we are, it will be the first market bubble in history to be seen in advance (despite Bullard's comments in opposition to that "fact"). From a contrarian investment view point, there is simply "too much bubble talk" currently which means that there is likely more irrational excess to come. The lack of "economic success" will likely mean that the Fed remains engaged in its ongoing QE programs for much longer than currently expected - and perhaps Hussman's pre-crash bubble anatomy is dead on...

The soon-to-be-confirmed Mr. Chairwoman had plenty to say - none of which came as a great surprise. Overall we scored her comments 32 Dovish to 18 Hawkish (which fits with all pre-conceved ideas about the size of her index-finger in relation to the 'print' button). A few cherubs include:

• *YELLEN SAYS BENEFITS OF QE STILL EXCEED THE COSTS
• *YELLEN SAYS QE `CANNOT CONTINUE FOREVER'
• *YELLEN DOESN'T SEE ASSET BUBBLE IN HOUSING PRICES
• *YELLEN SAYS QE IS NOT AIMED AT HELPING TO FINANCE U.S. DEFICIT
• *YELLEN: NO ONE HAS A GOOD MODEL ON WHAT INFLUENCES GOLD PRICES

She covered fiscal policy, regulation, gold, income inequality, and bubbles; but it was her admission late in the Q&A that "real" unemployment is around 10%  that perhaps leaves the most room for moar...

Many observers believe the U.S. dollar (USD) will lose its status as the world's reserve currency sooner rather than later. Proponents of this view often mention China's agreements with various trading partners to settle trade in their own currencies rather than the dollar as evidence of this trend. More substantial evidence can be found in the diversification of reserves held by many nations. One set of observers has long held that the ideal replacement for the dollar is a hybrid currency issued by the IMF called SDRs. However, since the SDR is just an aggregate of fiat currencies, it cannot really change the fundamentals of the current status quo. Boiled down to its essence, the SDR is presented as a shortcut solution to deeply seated problems. The reserve currency problem cannot be fixed by a basket of fiat currencies, as fiat currencies (and the trade imbalances they generate) are the problem.

Every day in the New Normal, it is either a mass shooting or an explosion in some pipeline or crude-carrying train. Moments ago, a pipeline in Texas exploded in a massive fireball and has prompted the evacuation of the nearby town of Milford.

Between last night's dismal reality of enrollees in Obamacare, the collapse to record lows of Obama's approval rating, and the growing disillusionment among the President's own party have forced the administration to "fix" Obamacare. As Politico reports, the president’s proposal would allow insurers to offer plans in 2014 that were previously slated to sunset this year, but require the companies to let consumers know how — if at all — their policies don’t comply with the minimum benefits of the Affordable Care Act, according to a source briefed on the proposal. Insurance companies are not amused as risk pools will need to be adjusted. We leave to our policy-changer-in-chief to explain the nuances of this fiasco and why this is not a "fold", not an admission that the law is FUBAR, and not in any way similar to the Tea-Party's suggestion that Obamacare be delayed by one year...

1. The Fed now owns 32.47% of all 10 Year equivalents, up 32.22% from the prior week, and rising at a pace of 0.3% per week.

2. The Fed is now monetizing a record 70% of all net US 10 Year equivalent issuance.

For the benefit of the revisionist media (if there is any media left) once the final asset bubble has popped in a few years time, and which like now will try - incorrectly - to make Yellen appear Oracular in her prophetic "bubble warnings", we would just like to "timestamp" what she just said:

• YELLEN SAYS FED DOESN'T SEE BUILDUP OF FINANCIAL RISKS
• YELLEN SEES LIMITED EVIDENCE OF ‘REACH FOR YIELD’
• YELLEN SAYS FED LOOKS OUT FOR ANY POTENTIAL ASSET PRICE BUBBLES
• YELLEN DOESN'T SEE `MISALIGNMENTS' IN ASSET PRICES

So there you have it: No risks, no bubbles, and on the record. Thank you Mr. Chairwoman. And now, you may continue BTFATH.

UPDATE: Gold is slipping back as Yellen notes:

*YELLEN SAYS QE `CANNOT CONTINUE FOREVER'
*YELLEN SAYS FED TAKES RISKS OF QE `VERY SERIOUSLY'

Yesterday was equity markets turn to get all exuberant over Yellen's promises. Today, it is the reality that she will do whatever it takes and her mention of data-dependence and ongoing use of Fed tools that is sending gold (and silver) higher.