Goldman's Francesco Garzarelli throws some numbers at its Bond Sudoku model, spins around its Wavefront Growth equity basket, and the magic firm's 8-ball spits out the following: "we presently show a 3.25% level in US 10-yr rates at the end of Q1:11. In light of the strength of the data, this now looks too low, and we would now lift the forecast to 3.5%. Our end-2011 and end-2012 projections are 3.8% and 4.3%, respectively, and we stick to these." In other words, if the market moves, we will adjust our "forecasts" accordingly. If China hike 3 more times as is expected and the 10 Year falls off a cliff, well then, we will no longer "stick to those."
The attempts to fight Bernanke's inflation resume in Asia, where not even fully recovered from recent New Year celebration partying, the PBoC decided to hike rates for the second time in over a month. The reason: January inflation could be as high as 6% which means trouble for the various members of politburo. Benchmark one-year deposit rates will be lifted by 25 basis points to 3 percent, while one-year lending rates will also be raised by 25 basis points to 6.06 percent, the People's Bank of China said. The rises take effect from February 9. For the time being markets are orderly, even though the announcement did send the EURUSD to the highs of the day.
For over a year now, Zero Hedge has been predicting that in its foolhardy attempt of "inflation or bust", the Fed's actions would sooner or later lead to mass rioting and possible revolutions as a result of surging and out of control food prices (which are just the peak of the alternative investment pyramid - yes, stunningly free money can go into other things besides stocks). There have been those who have claimed that deflation is still a far greater force, despite that the all important shadow banking system made a positive inflection point in ending deleveraging in Q3 (and on March 10 we will know whether the Q3 strength persisted into Q4) as was discussed previously, and today's first time in over two years increase in revolving credit merely confirms this view. Alas, to all who believe that deflation or deleveraging is a greater threat: you have our sympathies, as fundamentally your are correct, and were the business cycle have the benefit of playing out in normal course, all the world's banks would become insolvent and yes, deflation would be rampaging. The problem is that these same people do not realize that to Bernanke (whom we have referred Genocide Ben for precisely this reason) there is no other alternative, and inflation must be achieved no matter how terrible the social cost, or the damage to the monetary system. Regardless, the actions in North Africa are just the start. Commodities will run up far higher, and discontent will sooner or later reach to Asia, and possibly to countries which have nuclear arsenals at their disposal. What happens then is anyone guess. Yet for anyone who is still confused about the ultimate Fed agenda, Dylan Ratigan and Bill Fleckenstein sat down late last week to make it so clear that virtually anyone and everyone can understand what the Bernanke endgame is.
Ever wanted to run a Sid Meyer Civilization end of game recap scenario on the world and see which country, region or continent had built up the most debt the fastest? Or, far simpler, just to watch a time lapse video of total debt/GDP by country or by region? The IMF now allows you to do both. The international monetary organization has released a Data Mapper tool which not only shows a snapshot map chart of instantaneous sovereign leverage at any given moment, but also shows just how global debt levels have changed through the ages. Of particular note is total debt/GDP at advanced countries in the post-WW1, Great Depression and WW2 period. And while back then the result was either hyperinflation (Weimar) or various stages of removal of the gold standard (until all currencies became freely floating under Nixon), we now no longer have the option of a relative devaluation, and the only chance left for a world levered to its gills is either absolute revaluation of a brick of gold, accelerating, rampant inflation or outright default. Have fun playing with the drilldown function.
While it is well-known by now that Bernanke is slowly but surely losing control of the long-end of the curve, and increasingly more so the 10 Year (3.66%) and the belly itself, little has been said about the short end, which is where the bond vigilantes get to say a thing or two about future QE. And just like last year, when the 2 Year surged to over 1% in Q1 and early Q2 before it was made clear that the Fed's first attempt at pulling out of the central planning business was a failure and required the gradual reintroduction of yet another quantitative easing episode, so now the 2 Year is starting to slide rapidly higher in what is becoming an identical replica of last year's episode. If that is indeed the case look for the 2 Year to close March just wide of 1% and to peak at 1.2% in April before the wheels fall off in the latest attempt to extricate the Fed from the US economy, and we get a QE3 announcement some time in May. Yet what is even more important than spot levels, are 2Yr10Yr forwards. As the chart below shows, the spread has just jumped to 3.70%, taking out previous recent early 2010 highs (yes, when the 2 Year spot was trading north of 1%), and is all the way back to levels last seen in 2004, when the Fed was actively in the process of deliquifying markets. Is the forward curve telling us it is high time for the Chairsatan to finally do the right thing? And if not the case, is it time to put on a convergence trade between the spot and the 10 Yr forward?
Call it the no volume melt up, edition XYZ. Total NYSE volume 8 minutes before close is 662.15 compared to an average of 1133. In other words today's latest market upswing is due to market participation that is 40% below average. Don't look for any bank to make money on commissions with days like today. Which unfortunately is increasingly more what the typical daily volume is starting to look like. And with the curve starting to flatten, soon none of the banks "adjusted" drivers of top line strength will be much of a factor. Let's hope that M&A activity picks up or else Q1 financial earnings will be, just like in Q4, only up to par due to another multi-billion "reserve and NPL reduction" accounting scam.
After it was already confirmed that December was a subpar month for US retailers (whether snow can be blamed or not is irrelevant), and less money than expected was spent (it's ok, we no longer need the US consumer to lead the economy - the Fed is buying all the debt, it can also buy everything else), we finally get our first glimpse as to how even the week consumer performance in December was funded. Two words: "Charge it." Total US Consumer Debt in December rose by $6.09 billion December, on expectations of a $2.4 billion increase (and $4 billion higher than November's revised $2.022 billion). Yet what is most notable is that while Non-revolving loans increased by $3.8 billion (the lowest in the past 4 months), revolving loans posted their first increase since August 2008, increasing by $2.3 billion. Is the US consumer so tapped out that it is time to go to the credit card once again? And if so, does this mean that the drop off in excess reserves by over $180 billion compared to where they should be has been due to consumer lending. If that is the case, we may be far closer to Bernanke losing control of the trillions in excess reserves (and a surge in "velocity" or however one calls this archaic construct) than we had expected previously.
As of the end of December, total NYSE margin debt of $276.6 billion hit a fresh post-Lehman high, as increasingly more investors continue to purchase securities on margin (i.e., debt). The $2.5 billion rise from November margin levels is the highest since September 2008, and $103 billion from the market lows of March 2009. That said, margin fever still has a way to go and it could easily reach the June 2007 all time high of $381 billion, a little over $100 billion from here. Notable is that while investors had a negative net worth for the sixth month in a row, the differential declined modestly primarily due to a jump in credit balances in margin accounts which hit $148 billion: the highest since February 2009. As historically there is a decline in credit margin balances into the new year, we expect total free credit less margin debt to increase materially in January, especially as the expected January correction (in parallel with the market activity of early 2010) has not materialized, and bullish bets have to be increasingly funded on margin. More relevantly, should short-term interest rates continue to jump (we will have more to say on the recent move in 2 Years), margin interest may soon be forced higher, making life for those who use nothing but debt to fund stock purchases a little more problematic.
A carbon-free United States in 2050 seems to be one of Secretary Chu's more abstract notions. Interestingly, a recent large energy meeting in Berlin was on the same wave length, where the emphasis was on solar and wind's place on the German energy scene in the same year. As far as I am concerned, the German intentions are strictly off-the-wall, and in 2050 the German nuclear intensity will match or overmatch that in France. The nuclear equipment will be breeders, and I sincerely hope that the security problems associated with those reactors are solved the way that they should be solved, because if not somebody could be in a world of hurt.
Ignoring real estate, most people invest their hard earned money in paper things. Stocks, bonds, annuities, insurance - it’s all paper, and it sits nicely in our bank accounts and shows up on our computer screens. Halfway across the world, investors in China and India have never trusted paper investments as a store of value - and they’re converting their hard earned paper money into gold and silver bullion. Not that this is anything new. It isn’t. But the scale and speed with which they are accumulating precious metals IS new, and it’s driving the fundamentals that we believe will lead to higher prices in 2011. - Sprott Asset Management
"Most Preposterous Chinese Reverse Merger Yet" Follow up: The Forensic Factor Responds To AUTC Management's "All Clear"...Submitted by Tyler Durden on 02/07/2011 - 14:49
Last week Zero Hedge presented The Forensic Factor's latest report focusing on a company which TFF claimed was "The Most Preposterous Chinese Reverse Merger Yet" discussing the shadier dealings of Chinese reverse merger AutoChina (AUTC). Following a prompt crash in the stock, the company was forced to reply immediately or else risk being seen as merely another RINO in waiting. Today, the soap opera continues with TFF responding to the management's own response. And sure enough, the response has all the makings of a successful second season for what is rapidly becoming one of the most popular soap operas in the market: "Name That Chinese Fraud." Management team: the podium is yours.
Dallas Fed's Richard Fisher, who despite his recent quite vocal disagreement with Fed policies (Dallas Fed's Fisher Stunner: Admits Worries Fed Has Created Nothing But Bubbles), yet who conveniently forgot to dissent with the decision to continue the status quo at the latest FOMC committee, thereby making the current batch of hawks even more useless than the previous one (at least back then Hoenig had the guts to put his dissent where his mouth was) is once more on the tape, and following last week's announcement by the Dallas Fed president, was once again caught stating that he will not support further Fed accommodation and he will dissent with further QE decisions. At this point it is mostly theatrics. Should there truly be more QE, as Ben Bernanke implied may be the case during last week's Press meeting, then watch oil, commodities and those pesky precious metals quickly ground any such ambitions.
A modest pick up in insider buying this week as 16 insider purchases for $1.7 million worth of stock put recent non-existence insider purchasing to shame. The biggest buying was seen in GE and Caterpillar, which two cumulative purchases for $800k accounted for nearly half of the buying in the week ended February 4. On the other side, it is relentless selling as usual: 126 insider sales amounted to $749 million worth of holding dispositions, with the core of the selling as usual focused on the usual suspects: MSFT ($154 million), QCOM ($73 million), Google ($69 million), GameStop ($60 million) and FCX ($30 million). This is a major pick up in the rate of selling compared to January, and represents a double from the last tracked number of $373 million for the week of January 22.
One chart as usual does more to convey a simple message than all the Fed speeches equating the economy with the Russell 2000 ever could. Below we demonstrate the performance of three key market data points since the August Woods Hole speech: the performance of the S&P (via the ES), the price change in the 10 Year bond (TY1 inverse scale), and of course the change in non-farm payrolls (remember that old-school Fed mandate about full employment something something). Bottom line: the S&P is up over 30%, the 10 Year has plunged from over 126 to 118, while NFPs have added 392k, or 78.4 per month, nowhere near enough to even keep up with the natural growth of the labor force. So has QE been a success? We leave it up to you.