A few short weeks ago we described the transition of America from a government "on behalf of the people" to one "in control of the people" catalyzed, as Bill Buckler, put it simply, by one simple event: the confiscation of America's gold, and the ushering in of the welfare (or "promise") state, the same welfare state that now is supported by a system that no matter how hard one denies, is nothing but a ponzi scheme. Today, we follow up that article, with a very thought-provoking observations by BMO's Don Coxe, in which he describes that just like in the time of FDR, for whom the creation of a "mild" inflation was a prime prerogative to offset the depressionary deflation gripping the land, the moment for a brazen gold revaluation by none other than the US government has arrived. Unfortunately, it likely also means that any scheme in which the government opens a buy/sell gold window at a substantially higher price point, will mean that very soon, either by guile or by force, the US government will once again be the prime and sole owner of all the gold. As Coxe says, "The gold bugs have long proclaimed their own version of the Golden Rule: “He who has the gold makes the rules." By that standard, Barack Obama could become the leader of the world overnight." And while it is described in much more succinct detail below, in summary, Coxe's point is that the time for a government "LBO" of the gold market, one in which every last ounce is extracted from the skittish public, in exchange for pseudo-equivalent assets such as gold-backed bonds, has arrived. The only question is what the acquisition price of the risk-free alternative to fiat would be, and hence how much higher will investors push the price in anticipation of the inevitable 25% take out premium. Once the public realizes that this is the endgame, and that the buyer of only resort will be none other than Uncle Sam... then look out above.
After spending the last few weeks 'helping' the Fed with its agenda, Goldman Sachs' Andrew Tilton seems a little disappointed by the market's reaction - reasoning that the FX and equity-investing plebeians will take longer to comprehend the less familiar 'twist' operation that has already been wholly discounted into the TSY curve. While he did not get all he wanted from this meeting (even though the 'twist' was larger than expected), Hilton wastes no time in looking to the future and the chance of further economic weakness leading to more dramatic Fed actions. As we post 30Y is now -27bps!!
We suspect the world was placing a little more 'hope' in Bernanke's willingness to print-and-save-us-all as the IMF just announced the activation of its "New Arrangements to Borrow" for a further six months. Obviously, given the quota subscriptions and the nature of the NAB, we suspect the rest-of-the-world will get pound of flesh (or USD bailout) implicitly. This is not completely unexpected as we have been discussing the rise in borrowing arrangements/facilities at the IMF for a while - what is notable is the timing - given constant chatter out of Europe that all is 'satisfactory'.
In an amazing story by the WSJ Blog - Real-Time Economics, the mysterious world of the Fed-embargoed statement production is revealed. For all those worried HP or Xerox in the tough global economy (or for that mind any printer-ink/copier provider), fear not, for the Fed will keep their revenues flowing as we can't help but envision the movie 'Office Space' when we read this: Why Was Fed Statement Late? 20th Century Technology.
Luckily the US has everything else in order, which is why it can afford to shut down the government... Again
- HOUSE REJECTS BILL CONTAINING DISASTER RELIEF AID
- REPUBLICAN DEFECTIONS LEAD TO DEFEAT OF BUDGET BILL
- SPENDING BILL NEEDED TO FUND GOVERNMENT PAST SEPT. 30
- REPUBLICANS OBJECTED TO OVERALL COST OF SPENDING BILL
Hey Ben, when we said we can't wait for an inverted 2s30s, we were only kidding. Please don't destroy the country to satsify our wish. In other news, 3 month Libor will soon be trading wide of the 30 year.
What was already a relatively volatile morning as we lead up to the European close, paused for an hour or two until the FOMC statement was released. Immediately, stocks ripped and dipped, the TSY curve started to flatten - pivoting around the 7-10Y, the USD took off, commodities and PMs dropped, and credit cracked wider. Somewhat interestingly, while all this chaos was occurring, ES remained relatively well behaved with regard a broad basket of risk assets - which while not a positive per se, did indicate that this was a very broad de-risking and not simply an overly excitable US equity market prone to vicious dips, rallies, and retracements. It seems very obvious now, and fit with our indications of an exuberant equity market relative to the 2s10s30s fly, credit, and risk in general, that the rally in equities (which baffled anyone with common sense given the background of worsening macro data) was on pure hope and perhaps the sell-off's harshness today will have burned a few fingers as it seems the Bernanke Put strike just moved a lot further out-of-the-money.
UPDATE: Appended some equity-credit relative-value perspective.
RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 21/09/11
And so the Twist spin (pun and all that) begins after Morgan Stanley's Jim Caron tells clients that OpTwist will remove "more duration risk than expected." He says that the operation will remove more than $500 billion in 10 Year equivalents of duration risk from the market, which is far higher than the firm's expectations, and adds that he was "most aggressive on the street" saying the consensus was for $300 billion in 10 Yr equivalents, especially with QE2 removing $490 billion in 10 Yr equivalents. Well, Jim, the problem is that you are right about bonds - when it comes to Twist a lot of it was priced in, but judging by the 30 year reaction, not all. However, when it comes to stocks, the robots had been expecting not just Twist but a significant LSAP component, potentially up to $1 trillion. Which explains the unwind. And as for the opportunity cost of Twist, it is shown in the chart below. As SMRA just predicted, the average maturity on the Fed's balance sheet is about to soar by 33%, from 75 months to an all time record 100 months. This means the Fed goes all in on being able to control rates. Should the Fed have to print, and it will before long, at that time the Fed's interest rate risk will be unprecedented, and should it lose control, it will lose not only that, but all credibility it is capable of keeping something, anything, be it inflation, unemployment or price stability, under control. Then, it will be truly time to panic.
As Diapason's Sean Corrigan demonstrates, the Fed has failed at not only every single explicit mandate, such as keepin inflation and unemployment under control, but in its most important implicit one as well, that of preserving price stability, following an 8 week 2s30s curve shift which has been the greatest such move in 30 years, and a nearly 3 sigma event. 3 SIGMA... In boring government bonds...
There are lots of things out there that once they have been done, can never be undone. Ben just disappointed the market for the first time. Whether he knew it or not he failed to beat expectations. He has been so good at managing expectations and using that as a policy tool he lost sight of how far ahead of itself the market had gotten. Everyone expected twist and seriously, what's a 100 billion in size between friends in this crazy market.
Wonder why the Fed's DV 01 is about to surpass $2 billion in a few short months? Because the downward sloping line below, which shows the average maturity of Fed holdings, is about to go up, up, up. And yes, that means that every 0.01% change in interest rates will mean a $2 billion capital loss for the Fed. But, oh yes, the Fed can always print money so no risk there...
BOTTOM LINE: Fed "does the twist", announcing plans to sell short-term securities and buy longer-term Treasury securities through mid-2012. Though IOER remains unchanged, overall the move is more aggressive than expected given a) a relatively large share of purchases at the long end of the yield curve, b) plans to reinvest prepayments of agency debt and MBS back into agency MBS, rather than in Treasuries.
Here is the summary kneejerk response out of a panel of Wall Streeters, all of whom perfectly anticipated just this announcement. How else...
Congratulations Ben: you succeeded in getting the 30s to a near record low level (and by far the lowest for 2011) , which also means that the entire curve will soon be flat as a pancake, killing Net Interest Margin, aka curve carry for the banks, momentarily. Good bye Bank of America. Have fun riding that bear market rally with no financial leadership for the next several years.