Archive - Jun 24, 2013 - Story

Since January, under pressure from the Fed, the Education Department has flagged 126,000 applicants attempting to pocket federal loans and grants without any intent of going to school. As the WSJ reports, officials are cracking down on fraud in student-aid programs after evidence of recipients - acting alone or as part of organized crime rings - misusing funds. "What we find are very poor students academically that are borrowing to the max, getting the maximum in their Pell grant and just going from school to school," noted one director of financial aid, with roughly $829 million in Pell grants as "improper payments," in the last year. Rather stunningly, more than 34,000 participants in crime rings improperly received federal student aid last year, up 82% from 2009. "We started seeing student borrowing that was just over the top with no explanation for why," another director noted, adding "it's not so much about the education, it's the money." Most federal student aid requires no credit check and comes with few restrictions on how the money is spent and Federal officials say the Internet has helped fuel student aid fraud.

A week ago, we provided a simple, irrefutable analysis of "What The Recent Surge In Rates Means For Your Home Purchasing Power" in which we demonstrated how the average home affordability goes down (due to the declining marginal purchasing power in a rising rate environment) as interest rates (for mortgages and all rate-sensitive products) go up. What this means is that all else equal, absent a massive increase in disposable income (especially when the opposite is happening to disposable income), the average home affordability plunges as rates go up. So here is the benchmark price-rate curve updated for a reality, in which the national average 30 Year fixed has exploded from 3.40% on May 1 to a whopping (for the New Normal) 4.875% as of today for Wells Fargo customers. The matching affordability collapse: from $450K to $378K, or a stunning 16% equilibrium price drop in under two months!

It has seemed that the Fed's liquidity back stop has provided excuse after excuse for whatever macro-, micro-, or event-risk driven problems that market has faced. But now, as Morgan Stanley's Adam Parker notes, the big outcome from the earlier-than-expected start of tapering is that going forward, "bad economic news will be bad for markets." The market knows and most Fed governors know there are diminishing returns to QE’s efficacy, and we have shown it here. So, something new and massive would be required in order for poor economic news - should it surface - to be rewarded the way it has been for much of the past year."  What is more concerning to Parker is that diminishing returns to the existing QE are already an implicit form of tapering and if the Fed wanted to maintain its impact on the market, it would have to expand QE - i.e. Fed tapering already underway.

Tired of having your easily-earned (thanks to Benny and the Inkjets) wealth effect go straight to fund the pressure cooking terrorist operations of ole' evil Osama (because that's how stock market investing apparently works)? Have no fear: because Uncle Sam wants you to invest in The Patriot Fund. "The Patriot Fund, www.patriotfund.com, was launched to meet the previously unmet need of a terror-free investment option."  So... there is an unmet need of terror-free investing? It appears so. And while Uncle Sam doesn't actually demand you invest your "money on the sidelines" in this latest carnival attraction of the ever more ridiculous US stock market circus, we give it a few months before it becomes a choice: put your money here or get an IRS audit. Because what is more important than "terror-free" investing?...

The Fed is clearly in 'oh-$hit' mode. Their traditional anonymously sourced mouthpiece has seen his impact faded rapidly - The Hilsen-Ramp is gone; and so, they wheel out the big guns to talk back every words of it once again. Fed's Kocherlakota just explained to a patient audience that "there is a mis-perception in markets that the Fed has turned more hawkish." Of course that was good for a 5 point vertical ramp in the S&P 500 but even that is fading now as the implicit tapering has begun. But have no fear:

*KOCHERLAKOTA SAYS FOMC LACKS EXPERIENCE WITH QE and

*KOCHERLAKOTA: MARKET REACTION TO FOMC `NOT A CAUSE FOR CONCERN'

Wondering why the money world got its knickers in a twist last week? The answer is simple: the global economy is breaking apart and its constituent major players are doing face-plants on the downhill slope of a no-longer-cheap-oil way of life.  Let’s look at them case by case.

The narrow EuroStoxx 50 index is now at its lowest in over seven months (-5.4% year-to-date and -12.5% from its highs in May) and the broader EuroStoxx 600 is also flailing lower. The European bank stocks pushed down to their lowest in almost 10 months and are now in bear market territory - down 22.5% from their highs. Spain and Italy are now testing their lowest level in 9 months. While the sovereign bond market had been relatively quiet last week, it started to catch down to stocks today with Portugal, Spain, Italy, and Belgium all giving up significant parts of their Draghi-promise gains. Europe's VIX broke above 26% for the first time in almost 10 months. Think that there should be a flight-to-safety? Think again - Swiss 2Y rates spiked to 10.1bps (remember it was -44.5bps in August 2012) - their highest in 22 months. EURUSD smashed lower in the pre-open US and then oscillated higher in the most mechanically odd manner for the rest of the EU day...

While appeals will be quick to come, the 'Ruby' trial has resulted in former PM Silvio Berlusconi being convicted in the 'sex-with-minor' case:

• *MILAN COURT RULES ON BERLUSCONI'S SEX-WITH-MINOR TRIAL
• *ITALY'S BERLUSCONI CONVICTED IN RUBY TRIAL
• *BERLUSCONI CONVICTED ON ABUSE OF POWER IN MILAN TRIAL
• *BERLUSCONI SENTENCED TO 7 YRS IN JAIL
• *BERLUSCONI BARRED FROM PUBLIC OFFICE FOREVER: MILAN COURT
• *ITALY'S BERLUSCONI CAN APPEAL CONVICTION

With the central bank backstop seemingly being removed, the impact on Italian politics is unclear (aside from increased uncertainty as his own party may splinter its support for the colaition) but for now his empire - MediaSet is halted down 5.2%...

Maybe, just maybe, those pesky plunging lumber prices were on to something after all...

To say there are haves and have-nots and two major political camps does not distinguish this era from any other. But despite this surface similarity to previous eras, there is a palpable zeitgeist that the nation is bifurcating into two camps which no longer overlap or communicate using the same cultural signifiers and symbology. There is also a growing awareness that the divide between very wealthy and the middle income households has widened into an enormous canyon of inequality

You know the U.S. has hit rock bottom not so much when the official mouthpiece of the Chinese politburo accuses America of being the "biggest villain in our age", but when more and more Americans think it may be 100% correct.

Simply put, despite the euphoric sentiment from business media, if you had sold on any day during May (stocks or bonds intriguingly) then you are currently making money...

UPDATE: The pre-open ramp has been totally flushed in stocks and VIX has exploded

Much as the world of business media would like the world to work in a 'great rotation' like way; in reality the markets - all of them - ebb and flow on the back of leverage, repo, and liquidity. At no time in the recent past has that been more evident than in the last few days as every asset class in almost every ragion of the world is rediced in price by a market of angry liquidity-addicted carry traders demanding moar as their dealer wonders off into retirement. Overnight saw an early rise in Japan (and China) evaporate into a collapse, that spilled over further into Europe, and now the US. Despite a sudden rampaplooza across FX and equity markets in the pre-open, things do not look pretty as the great rotation is replaced by the great unwind.

The Irish people, who sacrificed their sovereignty and billions of Euros, are waking this morning to a stunning revelation that the bailout to save Anglo-Irish was engineered by the Bank's leadership to game as much money as possible from the central bank. The Irish Independent has secret recordings from the period in 2008 - below - that show senior management luring the State into giving it billions as they admit the EUR 7 billion number was "picked out of my arse." The bottom-line is that the bank knew they were in trouble and so decided to game the Central Bank and their regulators knowing that once the State began the flow of money, it would be unable to stop: "If they (Central Bank) saw the enormity of it up front, they might decide they have a choice. You know what I mean? They might say the cost to the taxpayer is too high . . . if it doesn't look too big at the outset... if it looks big, big enough to be important, but not too big that it kind of spoils everything, then, then I think you have a chance. So I think it can creep up... [once] they have skin in the game." Will there be an Irish Spring as the conspiracy theory of the banking bailout now become conspiracy fact?

Words, once spoken, are no longer your own. Words, strung together, may be the most powerful spells in our kingdom. Two speeches, one in America and one in Europe buoyed the world. One speech made in America has now ended the experiment. No magic wand was needed. The world had deluded itself that it would never come to pass; but, the real pain of induced withdrawal from the central banks' monetary creation is upon us. The words cannot be taken back. The meat is minced!