Foreign Central Banks
Next week’s calendar is light, with another paydown on Thursday and plenty of POMO, so if ever stocks had an excuse to rally, this would be it.
The global economy is so rattled by price inflation, unemployment, natural disasters and global financial and political instability that it doesn’t know if it’s been “shot, f@*#ed, powder-burned or snakebit,”...
Not only are the PDs treating Treasury paper like last week’s garbage, banks in general are also dumping the stuff.
Update: Hearing has been delayed until 3 pm.
While we await to find and bring to our readers the channel that will carry today's hearing between the House Financial Services Committee on the topic of "Federal Reserve Lending Disclosure: FOIA, Dodd-Frank, and the Data Dump" chaired by Ron Paul and Fed and NY Fed General Counsels, Thomas C. Baxter, Jr., and Scott G. Alvarez, below we present their prepared testimony that was just released by the New York Fed. The key section from the testimony: "We remain concerned that a more rapid release of information about borrowers accessing the discount window and emergency lending facilities could impair the ability of the Federal Reserve to provide the liquidity needed to ensure the smooth working of the financial system. If institutions believe that publication of their use of Federal Reserve lending facilities will impair public confidence in the institution, then institutions may choose not to participate in these facilities. Experience has shown that banks’ unwillingness to use the discount window can result in more volatile short-term interest rates and reduced financial market liquidity that, in turn, can contribute to declining asset prices and reduced lending to consumers and small businesses." Luckily, courtesy of $1.6 trillion in excess reserves, and the stigma now associated with Discount Window borrowings, for everyone except for Dexia, we doubt the Fed will ever have to worry about the discount window before the banking kleptoracy blows itself up once again.
A rehash of an old story. Answer this question and you seal the fate of the Fed.
$35 Billion In 2 Year Treasurys Price As Primary Dealers Take Down Half, More Retirement Funds Squeezed To Make Room Under CeilingSubmitted by Tyler Durden on 05/24/2011 13:15 -0400
The fact that the US is at the debt ceiling, and every incremental dollar of debt issued has to be met with a comparable underfunding in retirement funds is not bothering the SecTres (at least until August 2 at which point all mechanisms to delay the ceiling breach expire). Which is why today's auction of 2 Year paper passed with barely a glitch: $35 billion (CUSIP QZ6) priced at 0.56% (89.7% allotted at high), the lowest yield since December 2010. The Bid To Cover was a sizable jump to recent auctions, coming at 3.46, nearly half a turn higher than last auction's 3.06, and higher than the LTM average of 3.38. Not surprisingly, at 31.29% Indirect interest was the lowest since January, as foreign central banks and investors are dealing with tightening concerns of their own, meaning the bulk of the auction went to Primary Dealers (half) and the balance to Direct Dealers, who took down a 2011 high of 19.15%. The direct bidder hit rate was a surprisingly solid 32.22%. Nonetheless, with the WI trading almost on top of the auction High Yield, there were no surprise in the short-end of the bond market, where investors once again are forced to look ever further right for any yield, as short-term rates have plunged to lows last seen just when the equity market was about to flip over (not to mention the quirks currently in the money market funds which has snagged the shadow economy rather bad since the FDIC fee assessment was imposed).
"The market now sits right on a major trendline. If it is decisively broken, a bigger decline could lie ahead after the end of POMO."
And just as everyone was starting to bet on the great USD renaissance, here comes Thomas Stolper to spoil the party, by not only refusing to close out his EURUSD trade reco after losing 800 pips in two weeks (and still being profitable), but by actually doubling down: "We have changed our forecasts to project more Dollar weakness."The reason is that the US apparently has a thing called a massive trade deficit that has to be normalized: "Since the last revisions to our forecasts, the Dollar decline has roughly tracked the expected path. Large structural imbalances in the US are highlighted by weakness in the tradable goods sector.The outlook for monetary policy differentials and BBoP trends remains USD-negative. Dollar weakness is common during periods with slowing GLI momentum." The bottom line: "We now see EUR/$ at 1.45, 1.50 and 1.55 in 3, 6 and 12 months, and $/JPY at 82, 82 and 86". Oddly enough, there is no mention of the real reason to position for a USD plunge. (Hint: Hewlett Packard). On the other hand, this may be the time to go balls to the wall long the USD, as it appears that Goldman is doing another USD fundraising campaign courtesy of its clients. Oh, and speaking of Goldman's clients, it's best to baffle them with bullshit. Here is Goldman's Jim O'Neill with a blurb from his Sunday note on why China is going down (among other things): "it seems to me that a bigger risk premia is still necessary for the Euro. I can’t see how it can remain at about 1.40." Yes. From Sunday. If your head didn't go boom yet, that's ok. It will soon enough. And way to cover your bases there Goldman...
At 9 am, Treasury released its March TIC data. While the headline number of $116 billion in total net TIC flows was slightly higher than February at $116.0 billion compared to $97.7 previously, the net number (offset by US transactions in foreign securities) missed expectations of $33 billion, printing at $24 billion. Notably, of the $116 billion in foreign flows into US securities, foreign central banks were ($10) billion (and privates were $126 billion), indicating that the central banker cartel may be in need of some additional funding soon. Net foreign purchases of long-term U.S. securities were $54.7 billion. Of this, net purchases by private foreign investors were $44.9 billion, and net purchases by foreign official institutions were $9.9 billion. Foreign holdings of dollar-denominated short-term U.S. securities, including U.S. Treasury bills and other custody liabilities, decreased $18.3 billion. Foreign holdings of U.S. Treasury bills decreased $21.9 billion. And while we will provide a full breakdown later in the day, the key trend in US paper holdings continues to be China, whose total US debt holdings dropped for the 5th consecutive month in a row at $1144.9 billion, and the largest one month decline since November 2010.
The Real Inflationary Threat - Decreasing Foreign Reserves: Why the US Should Expect 8% Inflation For The Next Three YearsSubmitted by Tyler Durden on 04/29/2011 15:04 -0400
There is some money which is printed, but does not make it into the money supply. Consider the scenario that the Fed prints a dollar that is then either lost or destroyed. It then cannot be used to buy goods, or be lent out and thus does not create inflation. There is something else which can happen to our money which has the same net effect. Foreign central banks can take cash printed from the Fed and place it on their balance sheet. US dollars on foreign banks balance sheets gives investors confidence that their own currency will not be debased. In other words, the real threat of inflation is not the current printing of money which Bernanke et al have been doing. It is the previous printing of money which has been taken out of circulation. The threat is as great as its ever been. The amount of money in foreign reserves is about one third or more of M2, or every dollar which is held by US bank account (business or retail), and all currency combined.
Over the past few years, mainstream analysts have shown a tenacious blind faith in the U.S. economy and the dollar that goes far beyond religion to the point of mindless cultism, so, when even they begin to question the future of American finance (as has been occurring more and more everyday), you know its time to worry. For those that have been following my work since 2007, the events of the past few months have not been a surprise at all, however, for those just waking up to the ongoing implosion of our fiscal infrastructure, the bubbling inflationary meltdown just over the horizon and the nightmare unfolding around our national debt is rather shocking. Living through a full spectrum catastrophe is, to say the least, confusing, especially when you have no idea where the whole thing began. Until now, the mainstream media has provided nothing but economic fantasy for the masses. They have satiated the public with what amounts to financial toddler talk for helpless preschool minds averse to any research beyond their daily 15 minute sippy cup of New York Times, CNN, MSNBC or FOX cable news sound bites. I mean, have you ever actually stopped and read a Paul Krugman article more than once? Or listened carefully to an MSNBC economic piece? It’s like being violently accosted by a band of slobbering mental deficients with securitized ARM mortgages stuffed in their pants. Of course, fewer and fewer people are now buying what these hucksters are selling. With gasoline nearing $5 a gallon, grain prices doubling, and shelf prices beginning to skyrocket, it’s hard for even the most ignorant suburban schlep to remain oblivious to the problem anymore. We are no longer on the edge of the abyss; we have fallen into it head first…
Live blogging the S&P conference call. The Q&A session will be critical. A rather interesting one: "Did the Federal Reserve Board's program of quantitative easing contribute to your decision to revise the outlook to negative? Answer - No. We find that risks of deflation in the U.S. have lessened and that there are few indications that inflation expectations have become untethered. Although it will be challenging to sequence the unwinding of these operations while raising policy interest rates once the recovery has become firmly rooted, we believe that the credibility of monetary policy will continue to be a credit strength for the U.S."
If the objectives of Quantitative Easing 2 (QE2) were to: a) raise interest rates; b) slow economic growth; c) encourage speculation, and d) eviscerate the standard of living of the average American family, then it has been enormously successful. Clearly, with the benefit of 20/20 hindsight these results represent the Federal Reserve’s impact on the U.S. economy, regardless of their claims to the contrary...Why the Fed would believe the economy could benefit from the addition of $600 billion (the QE2 target) in reserves to a banking system that already had over $1.1 trillion in unused, idle, but potentially inflationary reserves on hand nearly defies understanding. The action, however, was not lost on holders of the $8 trillion Treasury securities outstanding. This increase in the level of interest rates occurred, not only during QE2, but in QE1 as well. Thus the Federal Reserve engineered a rate increase, and the injection of excess reserves had several other deleterious ramifications for the U.S. economy.
If the Fed desists or scales down its Treasury buying, the stark trillion dollar question becomes who will buy them?”
Intragovernmental debt holdings have been one of the more underreported topics during the last few economic cycles. This isn’t surprising. We’ve turned the federal debt argument into a legal, rather than financial or moral, debate where the fairness doctrine of universal applicability means any inconsistency of logic on the part renders the whole invalid. The result of this is the public grossly misunderstands the burden of proof to be the lack of controvertible evidence, and with it any hope of meaningful discourse is lost in the chicanes of grandiose political gestures. Arguments get boiled down into easy-to-swallow pills ready for mass consumption. We rally against illegal immigration without questioning who built our houses, and condemn illegal drug use while washing down an oxycodone with a highball of scotch. National debt is now far too high and government spending and waste far too pervasive. We must stop at nothing to rid ourselves of this indentured servitude... Oh, dear Faust, if it were only that easy.