Ben Bernanke

Another nail in the coffin for residential real estate. Ben Bernanke can cut interest rates all he likes, but can’t raise personal credit scores, and that is a big problem. Some one third of Americans now have credit scores under 620 and are unable to obtain loans under any circumstances. This won’t change until banks return to risk accumulation mode, which is at least five years off.

Some more observations on what will be the most contested capital markets topic through November 3. Goldman's Sven Jari Stehn has attempted to do quantify the response to the question that most equity and bond investors are banging their heads over: namely, how much of QE2 is already priced in. Goldman's findings: "a purchase program of about $1tr may now be reflected in 10-year Treasury yields, the three-month Libor rate and the dollar." Of course, there is a qualification: "This finding, however, is sensitive to when we think the market started pricing in QE2; equity price gains since Bernanke’s Jackson Hole speech have been more pronounced." Then again, there are those who will say that using QE1 as a framework for any comparative efforts is useless, as QE1 had little to no effect. While that may be true for the general economy (read Main Street), it certainly helped liquidity conditions on Wall Street: "our estimates suggest that “QE1” eased financial conditions significantly through lower long-term yields, higher equity prices and a weaker dollar." In other words Wall Street and Corporate America 1, Everyone else 0. But we knew that long ago. So here are Stehn's full findings, which may disappoint all those who are hoping for the absence of a sell the news event at 2:15 pm on November 3 (and will certainly disappoint all those who are hoping there will be no broad flash crash if there is no news): in a nutshell double the upcoming $1TR QE2 is already priced in in bonds, and half of it: in equities. Using the law of averages and Gaussian distribution, which backs every flawed economic theory, means QE2 is now fully discounted.

As the U.S. prepares to embark on a new round of Federal Reserve quantitative easing, there are plenty of reasons to doubt that it is the right course for the economy and job creation. Here’s another: The voyage might have to be aborted — or at least diverted — soon after QE2 leaves the dock because the Fed may be sailing into a political hurricane. Even before the anticipated launch of the next round of Treasury purchases — it’s expected to be made official on Nov. 3 — the Fed’s unmistakable signals have fueled commodity price gains as the dollar has sagged. Since the Fed’s Sept. 21 policy statement, crude oil had surged more than 9% to above $83 a barrel on Wednesday, approaching its highest levels since October 2008. (Oil prices did retreat on Thursday.) The risk for the Fed is that such price increases will be felt in the economy long before any modest positive impact from lower interest rates.

Alan Grayson is back on the scene, having sent a letter to Financial Stability Oversight Council which includes pretty much all of Wall Street's pawns, including Bernanke, Geithner, Bair, Gensler, Walsh, and DeMarco, in which he asks the FSOC to "suspend foreclosures until this problem is understood and its ramifications dealt with." And the ramifications, per Grayson, Zero Hedge and everyone else, will be dire for the banking sector: "So far, banks are claiming that the many forged documents uncovered by courts and attorneys represent a simple 'technical problem' with foreclosure processes.  This is not true.  What is happening is fraud to cover up fraud... The banks didn't keep good records, and there is good reason to believe in many if not virtually all cases during this period, failed to transfer the notes, which is the borrower IOUs in accordance with the requirements of their own pooling and servicing agreements. As a result, the notes may be put out of eligibility for the trust under New York law, which governs these securitizations. Potential cures for the note may, according to certain legal experts, be contrary to IRS rules governing REMICs. As a result, loan servicers and trusts simply lack standing to foreclose. The remedy has been foreclosure fraud, including the widespread fabrication of documents.  There are now trillions of dollars of securitizations of these loans in the hands of investors. The trusts holding these loans are in a legal gray area, as the mortgage titles were never officially transferred to the trusts... The liability here for the major banks is potentially enormous, and can lead to a systemic risk."

Harley Bassman, who used to run Merrill's successful RateLab and is now a prop trader, has sent the following note to clients. Note the bolded text: "The market has become dispeptic about the Payroll event. It is unclear if the FOMC is the BIG event (irrelevant of the data) or do the core inputs matter more. In a nutshell, will tomorrow's data shed any light on the next FOMC ? Last week the options market did now know what to think about QE2. That has all changed....or at least a few large customers have changed our collective minds. Massive option selling has reduced the cost of risk by over 12% in in two days. At least a few customers "know the number" of the FED." Our question: when, if ever, will the market become a level playing field, where everyone acts on the same information? How long will such wholesale approved and encouraged insider trading be permitted for the select few? And, lastly, when will the world rid itself of the Fed once and for all?

Cold feet? Yes, but I am taking money off the table.

Underrepresented jobless claims, which just like last week and now 23 out of 24 weeks prior, will be revised notably higher next week, came at 445K, on expectations of 455K, after last week was revised from 453K to 456K. Continuing claims, on the other hand, increased from 4,45K to 4,462K, while last week was revised, surprise, upward from 4,457K to 4,51K. At this point, however, good news is bad news, as any economic data that shows even the slightest positive inflection point weakens the QE2 argument. And if November 3 does not see Bernanke announce further easing, stocks will plunge. As for the tail end, those on extended claims and EUCs continue to seesaw, this time jumping by 255K in the week ended September 18, with extended claimants once again passing 1 million and those on EUCs over 4.1 million.

Remembering Crazy Eddie Antar...

It was a strange day in the market as gold reached a record $1,350 an ounce (making it the 4th most expensive material per ounce in world after unicorn tears, Brooklyn Decker's vagina, and of course the rarest of materials, John Edwards' credibility) which continued the biggest rise in hard assets since the Houston 500.

A few weeks ago we pointed out that the unfortunate but inevitable conclusion of the Fed's embarking on the second round of QE would be that the total treasury purchases between $1.2 and $1.5 trillion, and possible more, would require nothing less than direct purchases from the Treasury. Today, Morgan Stanley's David Greenlaw has confirmed that QE2, launching in less than one month, will mean outright monetization of US debt, even in its gentle and gradual, $100 million a month format: "This pace of buying would be roughly in line with our estimated budget deficit ($1.15 trillion) for fiscal 2011. So, the Fed would be absorbing virtually all of the net new Treasury issuance as long as they maintained this pace of purchases." What is scarier, is that pretty soon the Fed will be the only holder left of Treasuries with a maturity over 10 years: "There are only about $550 billion of Treasuries outstanding with a remaining maturity of greater than 10 years. So, if the Fed were instead to concentrate their buying in this sector, it could have a powerful impact on long-term yields." The great benefit of monetizing it all, is that the Treasury will be paying all remnant high coupons to the Fed. Which also means that in the future, any retiring individual on fixed income will be forced to buy if not equities in risky companies as a retirement asset, then certainly high yield debt.

I really dislike sounding inflammatory. Saying that things are going to go terribly wrong runs a risk of being classed with those who think the world will end in December 2012 because of something Nostradamus or the Bible says, or because that’s what the Mayan calendar predicts. This is different. In the real world, cause has effect. Nobody has a crystal ball, but a good economist (there are some, though very few, in existence) can definitely pinpoint causes and estimate not only what their immediate and direct effects are likely to be (that’s not hard; a smart kid can usually do that) but the indirect and delayed effects. In the first half of this year, people were looking at the U.S. economy and seeing that some things were better. Auto sales were up – because of the wasteful Cash for Clunkers program. Home sales were up – because of the $8,000 credit and distressed pricing. Employment was up – partly because of Census hiring, and partly because hundreds of billions have been thrown at the economy. The recovery impresses me as a charade. Let’s get beyond what the popular media parrots are telling us and attempt to derive some reasonable assumptions about how things really are and where they’re headed.

Since everyone has now given up on the dollar, and since nominal values expressed in a reserve currency on its deathbed are irrelevant, here is the finally tally for the day: S&P in nominal terms, expressed in dollars: down 0.07%; S&P in real terms, expressed in gold: down 0.5%. Just a slight difference there. Also, since Friday, stocks are up 1.26% in nominal terms, and down -1.05% in real terms. Soon stocks will be up a few million percent nominally, while the dollar will be sold in double or triple ply version. With nobody daring to step in front of the Marriner Eccles madmen, the natural shorts are now expressing their bias via gold. Sorry Bernanke - you lose.

The Fed is very worried about the economy and deflation. You can tell by all the recent speeches from Fed chiefs about the need for quantitative easing. They will do it soon. And they get the inflation they want, but it won't be modest. This policy will make things much worse. It confirms my belief that they don't know what they are doing. This article explains why.

A couple trillion here, a couple trillion there adds up to real money ...

Today is absolutely key if the market is to turn anytime soon. Let me first summarize the global macro economic picture before we get into technical considerations. The economic cycle has turned as the effects of stimulus wane and the boost of inventory rebuilding abates. Regarding inventories in fact the expected contribution to GDP is expected to be negative in the next 2/3 quarters and Mr. Ore who runs ISM said that if recent inventory building was not fully voluntary we might have a very serious problem. ISM has rolled in the US, following Japan and Australia where it last printed 47. Sovereign credit spreads are hovering around the recent highs they made in peripheral Europe were default is pretty much a given at this point. Central banks are pretty much all with the notable exception of the ECB (which hiked in June 2008... no further questions your honor) intervening in the FX markets or launching additional/fresh quantitative easing programs in a devaluation race as demand is insufficient and exporters fight for a competitive advantage. Congress is voting laws to tax Chinese imports, and public relations between Japan and China are at rock bottom. Recently the entire mortgage foreclosure process in the US has come to a halt as it has come to light that most foreclosures were not backed by any documentation of ownership of the mortgage loans. There are talks about a potential moratorium on foreclosures. US states' CSD keep trading very wide and default is almost a given for a few states, including Illinois or California. - Nic Lenoir