Archive - Jun 2013 - Story

Why did the U.S. government spend 2.6 million dollars to train Chinese prostitutes to drink responsibly?  Why did the U.S. government spend $175,587 "to determine if cocaine makes Japanese quail engage in sexually risky behavior"?  Why did the U.S. government spend nearly a million dollars on a new soccer field for detainees being held at Guantanamo Bay?  This week when we saw that the IRS was about to pay out 70 million dollars in bonuses to their employees and that the U.S. government was going to be leaving 7 billion dollars worth of military equipment behind in Afghanistan, it caused us to reflect on all of the other crazy ways that the government has been wasting our money in recent years.  So we decided to go back through my previous articles and put together a list.  We call it "The Waste List".

The United States has asked Hong Kong to detain Edward Snowden on a provisional arrest warrant after filing a sealed criminal complaint alleging espionage, theft, and conversion of government property. As The Washington Post reports, the complaint was filed in the Eastern District of Virginia - where Snowden's former employer Booz Allen is headquartered:

• *U.S. CHARGES SNOWDEN IN SEALED COMPLAINT IN NSA LEAK, POST SAYS
• *U.S. SAID TO CHARGE SNOWDEN IN NSA SURVEILLANCE DISCLOSURES

While there was really little doubt that the Justice Department would seek to prosecute Snowden over the leaks, the district chosen, according to WaPo, has a long track-record of prosecuting cases with national security implications; and while Honk Kong does have an extradition treaty with the US, there are exceptions for political offenses.

The mere mention that tapering was even possible, combined with the Chairman's fairly sunny disposition (perhaps caused by the realization that the real mess will likely be his successor's problem to clean up) was enough to convince the market that the post-QE world was at hand. This conclusion is wrong. Although many haven't yet realized it, the financial markets are stuck in a "Waiting for Godot" era in which the change in policy that all are straining to see, will never in fact arrive. Most fail to grasp the degree to which the "recovery" will stall without the $85 billion per month that the Fed is currently pumping into the economy.  Of course, when the Fed is forced to make this concession, it should be obvious to a critical mass that the recovery is a sham.

Buybacks, dividends, and M&A all depend on firms' abilities to borrow cheap. With leverage ratios rising (and micro fundamentals weakening) as we noted here, macro fundamentals deteriorating, and the visible hand of the Fed now lifting off the repressed neck of risk managers, we have a simple question - What Happens Next? Simply put, your glowing stocks cannot rally in a world of surging debt finance costs.

Paul Krugman meets Hannibal Lecter, Barack Obama stymies E.T., Ben Bernanke advises H.I. McDunnough, and more...

That pesky marketplace (Bernanke vs Obama) - a political fable...

Moral: When the financial markets no longer reflect the human condition, authorities must answer to true power – the marketplace.

Succinctly summarizing the positive and negative news, data, and market events of the week...

5Y yields rose a stunning 37% this week - the most in the 50 year record of Bloomberg data. The 38bps increase in yields is also among the worst absolute shifts over that period but off such low levels it is quite a shock. Credit markets saw hedge protection bought early on in the week and then covered as real money started to sell their bonds on the back of redemptions in the last two days. The high-yield bond ETF had its biggest weekly loss in 13 months (notably clinging to the Lehman ledge levels). Equity markets suffered too (down 3.5 to 4.0% from the FOMC) with the S&P's worst week of the year (even as it bounced off its 100DMA). Most sectors hung around the 3-4% drop but homebuilders are down over 8% since the FOMC. The USD surged over 2.1% on the week with JPY's worst week in 43 months. VIX ended the day down 1.7 vols at 18.8% but beware as OPEX and hedge unwinds into underlying covers seems prevalent. Gold's worst week in 21 months left it back under $1300.

Until the great-and-powerful Ben pronounced the Taper, US Treasury bonds had tracked the deteriorating macro fundamentals of this 'recovery' rather well. In the few weeks since, the squeeze has hit and yields have played catch up to equity's exuberance. However, now that the two asset classes have recoupled in the less-supported world, the question is, which of the three legs of reality - equities, bonds, or fundamentals - will move next?

Presented with little comment (as we said it all here 2 months ago):

• *SKILLING SENTENCE REDUCED TO 14 YEARS BY JUDGE
• *SKILLING TO GET OUT OF PRISON IN 2017

It seems 14 is the new 24 - more accounting gimmicks, we presume?

It's funny 'coz it's true...

It appears the Federal Reserve's has not had enough time to figure out just who to blame or how to wriggle out of the situation that the March minutes were prematurely released to pretty much everyone that matters in the TPTB. As Reuters reports, the Fed's Office of Inspector General said it would miss the deadline on the investigation - offering no reason why the deadline will be pushed back three months.

Recent market actions have left many staunch gold advocates uncertain about what's ahead... not to mention how to invest wisely for both the short and long term. What gold assets are the best to buy? Should investors be buying today or holding for further drops? There is bad news and good news...

Bond markets were slow to react to the Hilsenramp - forced by equities it seems in the short-range - but have now reversed their gains. Credit markets stopped believing about 30 minutes ago. Are equity markets, having trod water around VWAP for a while, now ready to revert back to a world absent the WSJ reporter... or primed for a melt-up into OPEX?

With the confusion over Bernanke's comments - "have no fear as the economy is bad enough that the Taper will never come" confused with "the economy is picking-up and that's great so we don't need the Fed anymore" - one has to ask, as we have numerous times, is there another reason for the Fed to start the ball rolling on the Taper talk? In the last few weeks, the Treasury market's yields have risen notably but much more critically, the fails-to-deliver has surged. This critical indicator of both collateral shortages and technical carry trade unwinds is a little-discussed indicator of just how broken the market is thanks to the overwhelming ownership of the Fed. It's getting worse - as Barclays warns, the weakness in bonds is feeding on itself as more people want to short and so the need to borrow from the Fed (as dealer inventory is so low) increases and raises the cost (special-ness) of that short. Simply put, the main reason the Fed is tapering has nothing to do with the economy and everything to do with the TBAC presentation (rehypothecation and collateral shortages) and that the US is now running smaller deficits!!!