Considering how suddenly it has once again become fashionable to talk the Treasury curve (as expected, the halflife of the contagion conversations was 2 weeks), after conveniently ignoring it for about 6 months when it continued to show deteriorating profitability for banks, we think it is useful to provide a reminder of what the curve looks like currently.
One of the funniest lines in Bernanke's speech last 60 Minutes speech is when he said that the currency in circulation has not increased despite his monetary easing - ergo there is no inflation. Of course, as even doorknobs know by now currency is merely one component of physical and binary money out there. But trust a pathological liar to expect 60 Minutes' viewers to be dumb as a bag of hammers. Of course, a far more important metric of the moneyness of the system, is the M2 aggregate (technically M3 is far more important, but as per the Fed's March 23, 2006 decision, M3 was discontinued as "M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits." Ah yes, the Fed is worried about costs...) Anyway, the M2 has just risen to a fresh all time record: in the week ended November 29, Seasonally Adjusted M2 was $8,812.2 billion, which is the 19th week of the last 21 in which this metric has increased. Is inflation about to prove just how much of a monetary phenomenon it really is? But not to worry - the Chairman is well ahead of everyone in withdrawing all of this excess money already percolating through the economy.
Regular Markets at a Glance readers may have wondered why we remained so silent on the subject of silver over the last several months. Considering the significant exposure we have to silver as a firm, we can assure you that it wasn’t for lack of desire to share our views, but rather due to strict solicitation restrictions imposed on us by the cross-border listing of Sprott Physical Silver Trust (PSLV) this past October. It therefore gives us great pleasure to finally share our views on silver with you. We have included two separate articles in this issue of Markets at a Glance: the first was written back in June 2010, and contains the information we used in the prospectus for the PSLV. The second is an update article written this past month that discusses new developments in the silver market and confirms our views on the metal. We urge you to read them both in order to understand our investment thesis for silver, and we hope they compel you to take a much closer look at silver as a long-term investment. Silver’s dramatic rise over the last two months is no fluke - it’s the result of a compelling supply/demand dynamic within a unique market structure. We hope the following articles convey our enthusiasm for "the other shiny metal" as an exceptional investment opportunity.
PIMCO Loads Up On Even More Mortgage Backed Securities In November As El-Erian Boosts Economic ForecastSubmitted by Tyler Durden on 12/09/2010 - 15:55
First the bad news: in November the AUM of Pimco's flagship TRF fund did something it hasn't done since the Lehman collapse: it declined. After hitting an all time high of $255.9 billion in October, the fund's net assets dropped by $6 billion to "just" quarter of a trillion. Now the good news: Bill Gross is long ever longer duration positions, with his holdings of sub-3 Year paper the lowest since November 2008. The fund raised its Treasury holdings from 28% to 30%, and continues to accumulate ever more paper in the belly of the curve- between 3 and 10 years, which this month amounted to a total of 67% of all exposure. This is also the area that over the past month has gotten hit the worst, and is one part of the reason why the various publicly traded PIMCO indices have gotten whacked. But another far more important reason is that for the 6th month in a row the TRF's MBS holdings continue to scream higher, and have now are at 43% (with 10% margin cash): the highest since July 2009 when PIMCO was actively selling its MBS holdings to the Fed in anticipation of the end of QE1. With such a jump in duration, PIMCO better hope that inflation concerns don't pick up, as their part of curve exposure will be the first to be impacted.
Any interview that starts off with John Williams saying "Eventually it is going to be a hyperinflationary great depression" is sure to be controversial. While not necessarily news to those who subscribe to the Shadowstats.com editor's newsletter, sometime we wish that Blackhawk Ben was among them, because despite his 100% confidence that rates will never do the kind of move that they exhibited in the past two days, they, well, did. To quote Williams, who actually keeps track of the US economy as if it were a GAAP audited corporation: "The annual deficit is running $4-5 trillion a year, that includes the Y/Y change in the NPV of unfunded liabilities... There is no political will to deal with this." The catalyst is well-known: "When you see panic selling of the US dollar, that's when you have to be really careful. But what's already been done with the dollar has spiked oil prices, and other commodity prices." On the question of why Bernanke would not be able to pull off what Volcker did in the early 1980s, Williams' explanation for why this time it is different, mostly focuses on the size of the US trade and budget deficits, which are not even remotely comparable on both an absolute and relative basis. Most specifically what consumers should do in the post-apocalypse world, Williams is not too optimistic. Ironically, he notes that Zimbabwe in its hyperinflation may have been lucky in that it had the dollar to fall back on in the black market, and now every market. However the US does not have that facility, and this "will get very difficult when food starts disappearing from shelves." Having goods for storage and barter would be critical. However, there may be a snag...
And now for something amusing: austerity it seems bites back - while driving on Regent Street, Prince Charles, with Camilla in tow, have been attacked by angry student protesters on their way to the London Palladium for a show. The story is being covered on Sky News. In the meantime, the protests are getting increasingly more violent.
Household Net Worth Jumps By $1.2 Trillion In Q3, All Due To Stock Market Gains As Deleveraging Continues For 10th Straight QuarterSubmitted by Tyler Durden on 12/09/2010 - 13:27
With today's release of the Fed's Z1 statement, we once again see why Ben Bernanke's only "wealth effect" focus is on the stock market. In Q3 of 2010, household net worth jumped by $1.2 trillion from $53.7 to $54.9 trillion, the vast majority of which was due exclusively to a change in the value of "corporate equities" held by the public, which rose from $6.9 trillion to $7.8 trillion. Still, this level is only back to the $7.7 trillion as of Q1 2010, and is roughly 30% off the all time high of $10.3 trillion seen in Q2 and Q3 of 2007, aka the peak of the bubble. What is also notable is that consumer deleveraging, as everyone knows, is continuing: total household debt declined for the tenth consecutive quarter, and was down by $58 billion to $13,429.4 billion. The peak was $13,923 billion in Q1 2008, so just about half a trillion higher. Elsewhere, some may be surprised to learn that business debt increased to an all time record high of $7,351 billion, an $82 billion increase in the quarter. So even as all those continue to note the $1.2 trillion in non-financial cash built up by banks, of which at least half is offshore, at the very same time Corporations have grown their total debt by the same amount since Q1 2007. So net, it is not only a wash, but is domestically leveraging as companies don't have free access to the foreign cash even as all their debt is domestic. Hopefully that will finally end the "cash on the sidelines" farce. Yet the one chart which needs no introduction, or explanation is that of the Federal and State and Local Government debt. That grew by $350 billion in the last quarter as the government continues to attempt to offset the drop in household leverage.
Today's 30 Year auction came very strong, pretty much as we have been expecting, courtesy of the ongoing flattening in the 10s30s as those who had been short the long-end continue to be squeezed out. The auction priced at a 4.41% high yield, 5 bps inside the when issued, and 9 bps higher than the November auction, a much smaller jump compared to recent shorter-dated auctions, and especially the 3 Year from a very days back which jumped by 50% in its yield. The Bid To Cover of 2.74 was the strongest since August, but the biggest surprise was the Indirect Participation which at 49.5% was the highest since July 2009: almost as if foreign bidders received marching orders to buy the long end today.
Update: The tuition hike passes by margin of 21 votes.
The English parliament is supposed to vote any minute on whether to pass the tuition vote hike. The results may be unpleasant as the riots will surely escalate should an affirmative vote pass. Watch the results live here.
Keiser’s campaign has been accepting videos from members of its audience that support the campaign and he has then been posting the best one’s on the website. This takes the focus away from any one particular individual and puts it in the hands of the people that are participating. This is extremely empowering just as youtube and the internet in general are extraordinarily empowering. Someone that has never reached more than ten or twenty people in their lives with their views are now reaching thousands through the internet. The establishment “filter” on news and ideas is gone. The internet is the Guttenberg printing press on steroids. Let’s not forget that the Guttenberg press was key in sparking the Renaissance. This is why I am completely convinced that the current system will collapse. It has run its course and is no longer helpful to humanity’s progress in the 21st century. The people do not want things to stay the way they are and in fact the means of ending it are very simple. Much more simple than voting at the polls for politicians that know nothing and can be bought off within a week. Vote with your money. Buy silver.
Per Ben Smith of Politico, the House Democratic caucus has just voted to reject the tax deal. Posturing or the real deal? Since the passage of this vote was re-priced into the market in the past three weeks pretty much every day, we expect the failure of the vote will now be priced in even more, sending the Dow (as usual the government has still to discover the S&P) to fresh 2010 highs, now that the market flips the "bad news is good news" switch.
What The Rout In MBS Means For Pimco And Broader MBS Investor Alternatives, As The Market Wakes Up To RiskSubmitted by Tyler Durden on 12/09/2010 - 11:16
Wonder why various PIMCO funds are getting hammered over the past week? Simple: the fund's recent push into mortgages, especially on margin, has backfired, and courtesy of the surge in mortgage rates which we highlighted yesterday, has left the world's biggest bond fund, second only the Federal Reserve, hoping for a last minute Hail Mary (Pimco can't print money unlike the former). As a reminder, while Pimco's TRF is positioned well to benefit from the steepening in the 2s10s courtesy of its 4.86 effective duration, we are unsure how the massive flattening of the 10s30s is impacting the firm. What we are absolutely sure of, is that the plunge in MBS prices in the recent week has left the fund gasping for air. Recall that the TRF has increased its MBS holdings by $50 billion in the prior two months (and likely continued in November), which is why the entire rates complex must prevent the ongoing rout in 10s and 30s as otherwise the negative convexity threatens to force an avalanche of selling first by the PIMCOs of the world, then everyone else. We present some very relevant commentary out of CRT on the MBS crunch conundrum.
If anyone was concerned that someone may be stupid enough to believe the vomitorium of lies and deceit coming out of Europe on a millisecondly basis, we are hereby happy to assuage your fears. Courtesy of a very spot on trading desk comment, we can confirm that nobody but the ECB is buying Greek, Portuguese, and Irish bonds.