Bill Gross released a very troubling tweet earlier:
Why is it odd? Because as David Rosenberg predicted two weeks ago when he expected that Operation Twist could be coming back with the Fed "capping" the 10 Year, Bill Gross, who has Larry "Fed Expert Network" Meyer in his ear and thus knows better than most what is coming, is predicting some "Twisting" though not at the 10 Year mark, but at the very short end. This is very disturbing. Because as we suggested at the end of May, QE3 will in reality be Operation Twist 2...
We know our readers are excited to watch a speech headlining the Chairsatan and moderated by Steve Liesman. Which is precisely what will happen at 2:30pm at the Committee for a Responsible Federal Budget ("bipartisan group of budget experts concerned about this nation's fiscal future."). You can watch the webcast live below. The full chairsatanic speech can be found here.
Japan's attempt to restimulate the economy through consumer spending (something that has so far failed in the US and everywhere else courtesy of a third consecutive year of global household sector deleveraging) appears to be going horribly wrong. Exhibit A: "Japanese safe maker Eiko Co. says sales jumped more than 40 percent after the March earthquake and tsunami, a sign that consumers will hoard more cash at home and restrain an economic rebound...“The television footage of the tsunami destroying everything in its path must have served as a warning for cash- rich people,” said Tsutomu Ishii, head of sales for the Tokyo- based company. “They have cash at home and they don’t want to leave it without any protection anymore."" If economic recovery is based on spending for cash hoarding devices that the BOJ has done an amazing job. Alas, we are fairly confident not even Keynes has a footnote in any of his theories suggesting that consumers buying up safes, mattresses, socks or other cash storage devices is in any way stimulative of GDP. Alas, the bottom line (and as we have been claiming since the beginning of May) is that the BOJ will have no choice but to step in yet again to take the place of Japan's consumers who are not only disenchanted with stock returns, but now have to worry about natural disasters. "Households aren’t ready to help the economy by spending" said Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co. in Tokyo.
For the last few days, we’ve been having an important discussion about the magnitude of the economic challenges in the west; if you didn’t read yesterday’s letter, I really encourage you to do so before proceeding because it’s important to understand why the west has truly passed the point of no return. Simply put, the United States and much of Europe are borrowing an extraordinary amount of money now just to pay interest on the money they’ve already borrowed. They cannot even self-fund their mandatory entitlement programs without going into the hole, and their options are limited.
Today's POMO had two curious characteristics. The first was that the Dealers tried to put a whopping $28.4 billion in 2-3 year bonds back to the Fed, as ever more are doing all they can to offload existing positions. The deluge in reverse tenders resulted in the highest Submitted to Accepted ratio for all of QE2, after the Fed accepted only $3.2 billion for buybacks, bringing the S/A ratio to a whopping 8.9x. This was the highest Submitted to Accepted ratio since April 13, when the Fed monetized $5.01 billion in bonds following dealer tender interest for $42.9 billion, or an 8.6x S/A ratio. Not surprisingly, that POMO was also one focusing on bonds maturing 2012-2013, confirming that the PDs have far too much exposure in the short end. The second curiosity was that of the just auctioned off QZ6 (or the On The Run 2 year) not a single dollar was bought back by Brian Sack's minions. Since the 2 Year rallied substantially since the May 24 auction date, there is something oddly disturbing about this complete lack of action in what has traditionally been the most actively repurchased security. Alas, we have no explanation for part 2, while for part 1 it indicates that following the end of QE2 we may see some very substantial flattening of the curve if and when the dealer community finds itself short of cash in under 3 weeks. And speaking of the end of QE2, below is a chart showing the countdown to D-Day: $8 billion down (in the last POMO schedule), and just $51 billion to go. There are now just 11 POMO days, and 12 total POMO operations, including the double POMO on June 20. What happens next is all priced in according to Blackrock and CNBC.
Some thoughts by David Schawel at Economic Musings who follows up on our observations from a week earlier regarding the possibility for a major Treasury collateral scramble if and when Basel III is ever implemented, and the implications for US Treasury demand. "In my opinion, the implications of this are crystal clear: banks will obviously need to dramatically ramp up their holdings of these securities (mainly treasuries) in order to comply with the LCR ratio. This could provide a significant tailwind to treasury demand over the near to intermediate term. S&P says it best, “We believe there is a risk that this standard is too conservative- to the point where it could create a shortage of liquid assets…"
Muddy Waters has just distriubuted the following release with its take home notes on the just completed Sino-Forest conference call, the stock of which as of this moment is the single biggest loser ever held by Paulson & Co. As can be expected, MW's commentary is not pretty...
It appears that the "guaranteed" political consensus required to pass the Troica's mid-term fiscal proposal, also known as the "bailout #2" vote, which will soon be voted upon in Parliament, may not be all that guaranteed. Reuters reports that a "Greek deputy says will leave ruling PASOK parliamentary group over new austerity plan." Could the government shake up discussed earlier be coming far sooner than G-Pap wanted, and should PASOK lose more deputies in the next several days, that will make the vote passage just a tad problematic.
One year after the passage of Dodd-Frank's provisions on swap regulation absolutely nothing has been implemented. And judging by the just announced yet another 6 month delay of rule implementation, it now appears pretty much certain that the $600 billion derivatives market will never be actually regulated, courtesy of conflicted interests at the CFTC. "The U.S. Commodity Futures Trading Commission proposed delaying rules for the huge derivatives market that had been automatically set to go into effect on July 16. One year after the passage of the Dodd-Frank financial overhaul that ordered a crack-down on the $600 trillion derivatives market, regulators have not been able to meet the deadline for translating the legislation into specific provisions. That prompted the CFTC on Tuesday to propose delaying some of the so-called "self-executing" rules until as late as the end of the year." After all, it is the CFTC's sworn duty to do anything to help the poor OTC traders who may experience a modest drop to their multi-million year end bonuses if profit margins are cut into by regulatory intervention: "Traders had feared that billions of dollars in transactions might suddenly fall into legal limbo. Without relief from the CFTC, a delay could have caused those contracts to lose the legal protection afforded them by a clause in the Commodity Futures Modernization Act of 2000 that created a framework that stated they were not illegal off-exchange futures." But lest someone suspect the fine upstanding gentlemen at the CFTC led by former Goldman Sachs employee Gary Gensler who has absolutely no interest in seeing his old firm continue along the confines of the status quo (very much like that other form Goldmanite Hank Paulson), the CFTC did provide this brilliant clarification: "The temporary relief proposals have "nothing to do with any outside pressure one way or the other to extend the rule-making or the effective date," a CFTC staff member said." Well, if they say so, it must be true.
Was The Iraq War Merely A Smokescreen For "The Largest Theft Of [Taxpayer] Funds In National History"?Submitted by Tyler Durden on 06/14/2011 - 10:59
Back in 2004, following the disastrous Iraq war, started on false Weapons of Mass Destruction pretenses, and which was nothing but a backdoor subsidy to various energy contractors close to the Bush administration, the US government decided to impose a mini Marshall Plan and literally flood the country with billions in crisp $100 bills. The LA Times reports: "Pentagon officials determined that one giant C-130 Hercules cargo plane could carry $2.4 billion in shrink-wrapped bricks of $100 bills. They sent an initial full planeload of cash, followed by 20 other flights to Iraq by May 2004 in a $12-billion haul that U.S. officials believe to be the biggest international cash airlift of all time." And here we are making fun of the Chairsatan and his puny helicopter. Yet where the story gets very disturbing is that it now seems that more than half of this "reconstruction" funding was blatantly stolen! "Despite years of audits and investigations, U.S. Defense officials still cannot say what happened to $6.6 billion in cash — enough to run the Los Angeles Unified School District or the Chicago Public Schools for a year, among many other things. For the first time, federal auditors are suggesting that some or all of the cash may have been stolen, not just mislaid in an accounting error. Stuart Bowen, special inspector general for Iraq reconstruction, an office created by Congress, said the missing $6.6 billion may be "the largest theft of funds in national history."" Is another huge political embarrassment in store for the current US administration (even if on this occasion it can legitimately be blamed on the predecessor?): it appears so: "The mystery is a growing embarrassment to the Pentagon, and an irritant to Washington's relations with Baghdad. Iraqi officials are threatening to go to court to reclaim the money, which came from Iraqi oil sales, seized Iraqi assets and surplus funds from the United Nations' oil-for-food program." Prepare for many more hearings involving Halliburton et al. As for where the money is - why, it has long been spent.
It appears that "Goldman employee of the decade", Greek Finance Minister Giorgos Papaconstantinou's days in parliament may be numbered. According to Greek daily Kathimerini, following the commencing of the Troica's midterm fiscal plan review by the parliament tomorrow, there could be a substantial reshuffling in the Greek cabinet: "Prime Minister George Papandreou will soon conduct a Cabinet
reshuffle but has not yet decided if it will be before or after the
government’s medium-term fiscal plan is voted through Parliament,
sources told Kathimerini. From the website: "The two options being discussed by
Papandreou and his closest advisers are either to shakeup his team of
ministers as soon as possible, possibly even as early as this week, or
to make changes to his Cabinet after the government’s economic proposals
have been debated and voted on in Parliament. This would mean that the
reshuffle would happen in early July." While there are risks that the vote on the IMF-imposed fiscal plan may fail, this appears to not be a big concern in Greece currently: "Papandreou and his aides
appear confident that PASOK MPs will not scupper the midterm fiscal plan
in Parliament. The government has a six-seat majority and while it is
expected that one or two deputies might vote against the proposals,
which include further cuts to public spending and more tax hikes, there
will not be a large rebellion." Yet, several high profile pink slips are expected: "It
is expected that one of the casualties of the reshuffle will be Finance
Minister Giorgos Papaconstantinou, who has been severely criticized by
PASOK deputies in recent weeks, both because of the measures he has
adopted and due to claims that he has failed to consult with them." Of course, all of this ignores the popular mood which so far has been peaceful, although it may all come to a head during tomorrow's major strike and Parliament blockade. We hope to webcast from Athens as soon as practical.
Goldman Presents Three Scenarios For Where The WTI-Brent Spread Is Headed (And Why The Firm Has Been Wrong So Far)Submitted by Tyler Durden on 06/14/2011 - 10:04
Back in January, when collapsing the Brent-WTI trade was all the rage after the spread had hit all time wides, we cited a JPM report which contrary to Goldman (which 6 months ago had seen WTI higher than Brent) warned that the spread was likely to persist and even widen, and for once, agreed with Jamie Dimon's firm, cautioning: "those who believe that a compression trade between the spot curves is a slam dunk: be very careful." Sure enough, some decided to be brave and sell Brent while buying WTI. Considering today the spread just hit a new all time record of over $23, those brave souls have now been wiped out. Yet that does not explain why the spread continues to diverge, and has recently taken a sharp $7 jump in just the past few days. Below we present David Greely's latest thoughts on what the reason for this unprecedented divergence is, on why he has been dead wrong, and why he believes, eventually, he may be proven right, even as Goldman's prop desk has almost certainly milked this move for its entire duration.
Following less than parabolic moves higher in the precious metals complex over the past several weeks has extinguished some of the fervor in the space, which of course is welcome: a slow, gradual increase which does not provoke the CME's attention is far better for the boiling free than a sudden surge in prices. Yet the recent period of stability may soon be over. Standard Chartered has just released a report which looks at actual gold breakeven prices, production bottlenecks, central bank interest, and Chinese and Indian buying, and comes to the conclusion that $5,000 gold may just be a matter of time. To wit: "The limited supply comes at a time when central banks have completely changed their tune on selling down their gold stocks and now appear likely to accelerate their net buying programmes. China is way behind the curve. Currently, only 1.8% of China’s foreign exchange reserves is in gold; if the country were to bring this proportion in line with the global average of 11%, it would have to buy 6,000 more tonnes of gold, equivalent to more than 2 years of gold production. We believe that these factors – limited gold production, buying by central banks and increasing demand from India and China – can potentially drive the gold price to US$5,000/oz, as highlighted in our commodity team’s earlier report." And what according to Std. Chartered is the best way to capitalize on this undervaluation: "We believe the best ways to invest in the gold cycle are buying physical gold (a safe asset) or investing in junior gold miners (highest leverage to the gold price) that are 1-2 years away from production." Perhaps the current price 66% lower is therefore not a bad entry point...
May PPI Comes In At 0.2%, Higher Than Expected 0.1%, Eleventh Consecutive Increase; Retail Sales Slightly Better Than ExpectedSubmitted by Tyler Durden on 06/14/2011 - 08:47
US May PPI came in at 0.2% sequentially, on expectations of 0.1%, and down from 0.8% previously. This was the 11th consecutive increase in PPI. The 12 month change in PPI came at a multi year high 7.3%, much higher than the 6.8% expected, which supposedly is a good thing: inflation is back. PPI ex food and energy was in ling with expectations at 2.1%. Elsewhere, the May Advance Monthly Sales came at -0.2%, on expectations of -0.5%, down from a lower revised 0.3%. Retail sales ex auto and gas came at 0.3% on expectations of 0.2%, with the previous revised lower to 0.2% from 0.3%. Stocks appear to enjoy the increasing inflation on declining economic output.