Archive - Sep 2013 - Story

It appears there is just a little excess liquidity sloshing around out there. Moments ago the Fed announced that as part of its most recent overnight reverse repo "liquidity withdrawal preparedness test", some 87 entities provided the Fed with a whopping $58.2 billion in overnight liquidity in exchange for Treasury collateral at a 0.01% stop out rate. This was the largest amount in liquidity soaked up (or, alternatively, collateral provided) by the Fed in its recent history of Temporary Open Market operations going back to 2012.

The irresponsibility of Congress and the rest of the political class cannot be understated. Underwriting this behavior is equivalent to the Fed providing a teenager with a bottle of whiskey and the keys to an automobile. In a context where the Fed could have done no harm by tapering, they instead created a huge moral hazard that will be exploited by politicians of all stripes.

According to the latest data compiled by the Agency for Healthcare Research and Quality, in 2010, just 1% of the population accounted for a whopping 21.4% of total health care expenditures with an annual mean expenditure of $87,570. Just below them, 5% of the population accounted for nearly 50% of all healthcare spending. Just as stunning is the "other" side: the lower 50 percent of the population ranked by their expenditures accounted for only 2.8% of the total for 2009 and 2010 respectively. Perhaps in addition to bashing the "1%" of wealth holders, a relatively straightforward and justified exercise in the current political climate, it is time for public attention to also turn to the chronic 1% (and 5%)-ers who are the primary issue when it comes to the debt-funding needed to preserve the US welfare state.

It seems the earlier rumors that the Bank of France may be selling its gold - which had weighed on the price of precious metals this morning in the face of increasing uncertainty among the most indebted nations on the world - have been officially denied. As Bloomberg reports:

*BANK OF FRANCE HAS NO PLANS TO SELL GOLD, GAUTIER SAYS

And sure enough, Gold and Silver prices just screamed higher.

At 12.8, the Dallas Fed manufacturing survey printed at its highest since Feb 2012 - handily beating the 5.6 expectation. Driven by a surge in production and Capacity Utilization, the headline - as they all seem to do - shows some worrying sub-index movements. New Orders expanded at a slower pace for the 3rd month in a row, volume of shipments fell to a 4 month low, and employment-related indices were all weak (wages fell, number of employees fell, and average workweek fell). Even the outlook (six months ahead) fell back from last month's level.

Structural declines in miles driven, middle and working-class income and rising competition from dollar stores may be leading to Peak Walmart. Walmart's model of superstores built on the edge of town with an inventory/distribution system based on high turnover may have reached the point of diminishing returns. Peak Walmart may also presage Peak Mall Shopping and Peak Retail in general. The poaching of competitors' customers appears to be replacing real growth, and perhaps the impending demise of JC Penney is simply the first of many such victims of the retail shark pool.

For the first time in 4 months, Chicago PMI printed better than expected with its highest level since May. Production and New Orders rose but in keeping with the new normal, the employment sub index fell for the 3rd month in a row to 5 month lows. It seems the good news that was "expected" as the market ramped higher into the release has been stymied by good news is bad news reality as all the opening ramp gains have faded.

"We are in the middle of an epic credit bubble, in my opinion, the likes of which I haven’t seen in my career in private equity."

- Joseph Baratta, Global Head of Private Equity at the Blackstone Group

UPDATE: Reuters reports that 20 senators from Berlusconi's party are preparing to create new party if Berlusconi does not soften stance against PM Letta - EUR and Italian Bonds are ramping.

*AS MANY AS 20 BERLUSCONI SENATORS MAY LEAVE PDL: REUTERS

As Deutsche Bank notes below in the brief but complete summary of where we go next, the various scenarios that are possible, and market reactions, the actions represent the acceleration of an end to a very fragile environment. It seems, in Italy, Sentaors resign first - and ask questions later...

A full summary about the only event the market is focused on today.

Across asset classes, BofAML warns that financial markets suggest that this week will see a continuation of the risk off theme from last week. The breakout in the VIX says that investor anxiety wiil remain elevated, particularly as the S&P500 remains on track to test 10 month trendline support at 1657. In such an environment, safe havens such as US Treasuries should benefit with a target 2.544%/2.459% resistance.

In the upcoming week markets will continue to focus on these fiscal issues in the US, now that a temporary Government shutdown past Tuesday is assured. Still on the fiscal side but outside the US, look forward to Prime Minister Abe announcing his final decision on the VAT hike as well as unveiling a widely anticipated economic stimulus package. Finally, fiscal policy also played a role in the Italian political instability with four ministers resigning from the coalition Government. The backdrop to these events is a rapid deterioration of the political climate after former PM Berlusconi was convicted of tax evasion by a High Court.

• Government Heads Toward Shutdown (WSJ), First U.S. Shutdown in 17 Years at Midnight Seen Probable (BBG), Congress in game of chicken (RTRS)
• Italian Premier Pursues Last-Ditch Rescue of Government (WSJ)
• Election risk rattles Italian government bonds (RTRS)
• Obama and Ryan Stay on Sidelines on Budget (WSJ)
• Volcker Rule Costs Tallied as U.S. Regulators Press Deadline (BBG)
• Faltering Chinese Factory Growth Adds to Rebound Fears (FT)
• Health Law Hits Late Snags as Rollout Approaches (WSJ)
• Apple Overtakes Coca-Cola as Most Valuable Brand, Study Finds (BBG)
• Euro-Area September Inflation Slows More Than Forecast on Energy (BBG) - Puting will fix that shortly

Trust Goldman to have keen, cutting-edge advice after the fact. Like now, a day after the collapse of the Italian government, when in a note, Goldman's Francesco Garzarelli who had been quite bullish on Italy, both in absolute and relative terms, flip-flops, and is now saying to no longer buy (i.e., sell) Italian bonds. To wit: 'The resignation of the PdL ministers will clearly increase volatility in the government bond market, similar to what happened between February and April, before the current government was formed. The spread between 10-year BTPs and German Bunds closed at around 260bp on Friday. At the end of April, we recommended going long Italian 10-yr BTPs against their French counterparts at spread of 221bp. We would be looking to close this position at Monday's levels."