Finally serious economists are considering a position I have been maintaining and writing about since the 2008 financial meltdown. Whatever its name— erasure, repudiation, abolishment, cancellation, jubilee—debt forgiveness, will have to eventually emerge forefront in global efforts to solve an ongoing systemic financial crisis. Debt forgiveness, therefore, accomplishes two important things. It eliminates the increasing and outsized portion of productive enterprise to pay off unproductive obligations, and it clears the ground for new opportunities, new thinking, invention, and entrepreneurialism. This is why the ability to declare bankruptcy is so essential in the pursuit of both happiness and innovation.
Forget The Twist, Here Comes Operation Torque: Presenting Morgan Stanley's Complete Moral Hazard Profit GuideSubmitted by Tyler Durden on 09/01/2011 - 10:57
While we often pick on Morgan Stanley's Jim Caron (the same guy who year after year after year keeps predicting the yield on the 10 year will soar, and not just soar, but soar for all the wrong reasons, such as bull steepening and what not), has just diametrically changed his tune, by bringing us, drumroll please, Operation Torque. To wit: "Policy makers in both the US and Europe get back to work in September, and this month will be rife with deliberations on stimulus and market support policies. In our view, a duration extension to the Fed's SOMA portfolio is an optimal policy tool to engender easing. This can initially be done through extending the duration of reinvestments from MBS and agency holdings but may ultimately culminate in selling shorter-duration USTs in its SOMA portfolio in exchange for buying longer duration assets (‘Operation Torque’, as we at Morgan Stanley have dubbed it)." Why 2 Years? Because as per the August 9 FOMC statement, we know that there will no rate hike for the next 2 Years, and hence no duration risk. Which means that the Fed can sell an infinite amount of paper into a mid-2013 horizon without worrying about demand destruction. And by doing so it will, as we have been predicting since May, expand the duration of its portfolio, in the process pushing investors into risky assets for the third time in as many years. But there is a twist...
Straight from the horse's mouth, in this case Goldman, which agrees with Zero Hedge that the ISM was weaker than perceived below the surface, and also provides an NFP goose egg for tomorrow: "ISM stronger than expected in August, although details of the report are softer than the headline suggests...We are lowering our forecast for tomorrow's nonfarm payroll report to +25k, from +50k previously. The main reason is the accumulation of evidence of weak hiring in late July and August: a sharp deterioration in perceptions of job availability in the latest Conference Board survey, a drop in today's ISM manufacturing employment index, another drop in job advertising, and a soft ADP report. Layoffs seem to have remained low, given steady jobless claims in the 410,000 range, although even here the recent pickup in layoff announcements is a concern." As everyone knows all too well, the difference of 25K people when you are dealing with a sample of over 100 million has just one name: policy.
And so the baffling them with schizophrenic BS modus operandi continues. After virtually the entire world confirmed it was contracting overnight, the US once again pulls the rabbit out of the hat, and the ISM comes at a slightly better than expected 50.6, a modest decline from July's 50.6, but better than a consensus of 48.5: even Joe Lavorgna was looking for 49. The problem is that the beat was once again on purely artificial data, with Inventories and Customer Inventories posting the largest increase in the month, or basically the two most hollow economic series. Far more important - Production, dropped to 48.6, the lowest since May 2009. Another Pyrrhic victory was the increase in imports and decrease in exports: we all know what that means for GDP. Lastly employment also fell. The only saving grace was that prices declined too. That said, this response does not make the QE3 case easier, and now this report will have to be offset with a much weaker NFP number tomorrow, in order to keep the speculators guessing as to what is really going on with the economy. One final note: according to the ISM, all responses were received before Hurricane Irene, which means that if next month we see the long overdue sub 50 print, it will be all due to the wind.
Even the most die-hard bear or those who simply believe QE2 did more harm than good, have to resign themselves to the fact that this Fed will enact QE3 at its earliest possible convenience. While I remain convinced that some current 5th grader will eventually be awarded a PhD in economics (not from Princeton) for their work on the folly of the QE programs, it is time to prepare for QE3. Those of us who had hoped the dissent from the August FOMC meeting was a sign that the Fed was wavering on its “print and print some more” philosophy, have seen those hopes dashed against the rocks. The doves have come out in full force. The minutes show that some members think we should have already started QE3 and now one of the dissenters has backtracked.
Another Upward Revision As Strike Factors Are Removed Leaves Initial Claims Posts Above 400k For The 20th Time Of Last 21Submitted by Tyler Durden on 09/01/2011 - 07:52
Following last week's somewhat twilight zone-like Verizon-strike-driven confusion, today's initial claims report (once again revised upwards) makes for 20 of the last 21 weeks above 400k and its highest (yet to be revised upwards) since 7/15.
- Obama to address Congress on September 8 (Reuters)
- China Says Fighting Inflation Is Priority (WSJ)
- Katia a hurricane; another storm likely in Gulf (Reuters)
- IMF and eurozone clash over estimates (FT)
- Japan’s New Leader Oversaw Biggest Intervention Since 2004 (WaPo)
- Asia feels impact of global slowdown (FT)
- Germany's Resiliency Buoys Europe (WSJ)
- EU Reaches Deal to Expand Syria Sanctions (WSJ)
- Goldman Takes Dark View in Private Note (WSJ) or is the European bailout really $1 trillion?
- Worse than expected manufacturing PMI figures from core Eurozone countries dented risk-appetite
- Equities came under further pressure following news that Credit Agricole is removed from EuroSTOXX 50 Index, whereas Societe Generale, Intesa Sanpaolo and Unicredit are removed from STOXX Europe 50 Index
- Risk-aversion was enhanced following a lack-lustre 5-year bond auction from Spain
- The French/German spread continued to widen throughout the session partly on the back of weaker manufacturing PMI from France
- According to an article in FT, citing European source, the IMF has estimated European banks could face a capital shortfall of EUR 200bln. However, Eurozone officials strongly disagreed with the IMF’s analysis.
Today's economic data: the much anticipated ISM, claims (ex striking Verizonites collecting benefits), and C-grade data like construction outlays and productiviity and costs. Car makers announce August sales: look for repeat indications of dealer channel stuffing by you know how.
Yesterday Bruce Krasting proposed a thesis, which despite some notable complications and substantial political challenges, does have its merits: namely that in pursuing a mass "beneficial" refi of agency mortgages to some threshold interest rate level, say 4%, accompanied by a surge in Fed MBS prepayments (recall that this component of QE Lite has stalled massively and now accounts for about $15 billion in POMO each month - a sad reminder of the $100 billion + beast it was in its QE2 heyday), the administration and the Fed would effectively enact a GSE-funded version of Operation MBS Twist, in which the Fed reduces its agency holdings while extending Treasury duration. Alas, Bruce may not have made it clear that this version of Twist with a Twist has an annual cost of about $85 billion invoiced to US taxpayers each year. And while we believe that plain vanilla QE (either LSAP or Chubby Checker) has a chance of passing, especially if stocks do plunge by another 20%+, QE that has to be indirectly funded by taxpayers (in the form of quarterly capital make wholes for the GSEs from the Treasury), has virtually no chance of passing. But we have been wrong before. Regardless, here is Dick Bove, whose opinion for some inexplicable reason is still relevant (and yes, we are guilty in spreading it), who takes the refi stimulus thesis and presents his views on its feasibility. And while we are the first to mock Bove, his conclusion does have some merit: "Until [the administration] figures out that more production is what is required we will continue to take money out of one pocket to put it into another and assume that we have accomplished something."
August was a very turbulent month for markets with equities falling sharply and commodities mixed on Eurozone and US sovereign debt concerns and concerns about the health of the US and global economy. For many markets, Augusts’ savage sell-off has been the worst since the October following Lehman Brothers’ implosion and investors diversified into havens such as high credit government bonds and gold. Gold again proved its safe haven status recording strong gains in the face of turbulent markets globally.
Below is a summary of the leading news out of Europe which once again is at the forefront of the action, send risk far lower following the latest reminder that the continent is not only insolvent, but that its economy needs far more debt to even stay unchanged.
Following last night's latest sub 50 Chinese PMI reading (August HSBC PMI at 49.9 following 49.3 in July), it was Europe's turn to spook the market after the Eurozone PMI printed at 49.0- the lowest in two years, versus an estimate of 49.7 and a prior reading of 50.4, with the global recession accelerating regardless of what a few factories in Chicago have to say. Spanish and Italian PMI tumbled from 45.6 to 45.3, and from 50.1 to 49 respectively, coupled with a surprising drop in German PMI which dropped to 50.9, from 52.0. As Bloomberg's David Powell said, revised final manufacturing PMI for August shows that economic weakness has spread from the periphery to the monetary union as a whole and may contribute to a widening of intra-European sovereign debt spreads, especially those of Italy and Spain. Sure enough just as he said that, Spain auctioned off a miserable 5 year bond in which it sold just E3.62 billion out of a maximum target E4 billion, with a stunning plunge in the Bid To Cover which came at 1.76 down from 2.85 despite implicit promises of ECB purchases. This led to the EURUSD dropping to under 1.43, Spanish CDS blowing out by 10 bps, and, sure enough, the ECB intervening promptly by buying up Spanish bonds in the secondary market to prevent a market collapse. All in all, we have all the makings of another 10 point no volume levitating melt up in the S&P, as global recessionary news promises more easing from the cartel.
Earlier today, we were delighted to see that after years of ridicule and provocations, the SPDR GLD ETF finally cracked and decided to do a wholesale PR campaign to comfort the investing public it actually does own its gold, by inviting none other than Bob Pisani in its secret warehouse which allegedly contains 40 million ounces of gold, of which HSBC is custodian and the Bank of England (the same Bank of England which will soon be about 99 tons lighter in gold content once it satisfies Hugo Chavez' physical delivery request) and London Bullion Market Association (“LBMA”) are subcustodians. While the 4 minute PR campaign is enjoyable and we invite readers to watch it, what is amusing is that it is sure to set off another set of conspiracy theories. Here's the reason: amusingly the very gold bar that Pisani demonstrates so eagerly for the camera, Rand Refineries ZJ6752, is somehow, at last check, missing from the full barlist as posted daily by the GLD.Whose is it? Where did it go? When was this clip shot? Inquiring minds want to know...
US companies' outlooks have been taking a turn for the worst since the end of QE2 as management are guiding (still overly rosy sell-side) analyst expectations down in a hurry. Seems it's not just the banks that are hoping for salvation in September...