In his latest letter Van Hoisington cuts through the bullshit and asks the number one question (rhetorically): why are bank excess reserves (aka the ugly, liability side of Quantitative Easing) still so high. He answers: "Either the banks: 1) are not in a position to put additional capital at risk because their balance sheets are shaky; 2) are continuing to experience large write-downs on commercial and residential mortgages, as well as on a wide variety of other loans; or 3) customers may not have the balance sheet capacity or the need to take on additional debt. They could also see no expansionary prospects, or fear an uncertain regulatory future. In other words, no viable outlets exist for banks to loan funds." Which leads him to conclude quite simply that while risk assets may hit all time highs courtesy of free liquidity, the economy, also known as the middle class, will be stuck exactly where it was before QE2... and QE1. Van also looks at that other critical variable: velocity of money - "Velocity is primarily determined by the following: 1) financial innovation; 2) leverage, provided that the debt is for worthwhile projects and the borrowing is not of the Ponzi finance variety; and 3) numerous volatile short-term considerations." As an uptick in velocity is critical for any wholesale reflation (as opposed to merely hyperinflation) plan to work, this is one metric Van is unhappy with. Lastly, Hoisington also looks at the fiscal headwinds facing the country (which more so than anything terrify the Goldman economics team), and presents his vision on the bond-bubble argument.
Fed Frontrunning Update: The 5-7 Year Space Gives Best Returns As The Fed Prepares To Run Out Of Treasurys To BuySubmitted by Tyler Durden on 10/11/2010 12:48 -0400
It is time to once again consider the options for the only trade that make sense: frontrunning the Fed. Last week we did an analysis on how much, in Goldman's opinion, the had market priced in in terms of QE. The result was not surprising, as it appears that double the anticipated $1 trillion in QE is already priced into bonds, and half of it in stocks. Yet at the end of the day, all of this is irrelevant: as long as there is even one basis point in 30 Years to be picked, the Fed will pursue it. And when the curve is as flat as a pancake, and all rates are at zero, that is when the Fed's last ditch desperation move will be to do what the BOJ did and buy REITSs, ETFs, stocks, hops, malt, grains, sugar, coffee and pretty much anything not nailed down. But we probably have at least 12 months before we get there. So what to do in the meantime? Morgan Stanley's Igor Cashyn, whose track record of predicting what the Fed and the FRBNY do is second only to Bill Gross' (wink wink), has posted an update on where investors will get the most bang for their buck once $1-1.5 trillion in QE2 is announced. As we speculated first several weeks ago, Cashyn takes into account the prepayments of MBS put to the Fed, and realizes that the lower rates drop, the greater the negative convexity to prepay even more, forcing the Fed to purchase even more bonds. Which is why unlike others, like Barclays for example which has a $100-120 billion a month monetization bogey, Cashyn has a more modest expectation of "only" $70 billion in USTs bought back monthly. However, that $70 billion also adds another $30 billion in MBS prepays, adding up to pretty much the same number. Of course, when all is said and done, the Fed could easily end up announcing $1.5 trillion in UST monetizations, which would effectively mean a total of $3 trillion in Treasurys to be bought as we speculated much earlier. The problem, as we also concluded, is that there are simply not enough Treasurys across the entire curve, in existing or projected issuance, to satisfy the Fed's possible total monetization needs! And this is precisely the same conclusion that MS reaches, however courtesy of their less dramatic total Fed demand number (for now), Cashyn is mostly concerned about bonds in the 5-7 year sector, which he thus finds most attractive for Fed frontrunning purposes.
Rick Santelli was on King World News today, discussing the distinction between deflation and deleveraging, or what some have dubbed the phenomenon of surging prices in things that one can buy without leverage (Friday's limit up open in various commodities being one example), and plunging prices in everything that requires debt (i.e., one's house). And while the Fed can game the CPI as much as it wants, once middle America see the cost of basic foodstuffs double (and it will once producers hit negative profit margins and are forced to pass input cost inflation to end consumers) they will realize just how serious this problem will be. Of course, the only way to offset this localized inflation is by returning to the time when America could use its houses as piggybanks in the form of taking out equity lines of credit. The problem with that, of course, is that the Fed will be forced to increase home prices at all costs, even as speculators take basic commodity prices up in anticipation of the coming hyperinflation. Which means that the Fed will be behind the ball, and will be forced to increasingly devalue the dollar as it is now obvious that no matter how cheap credit becomes, and how pervasive free money is, the last thing to go up are home prices which make up the bulk of US consumer "wealth." As such, today's collapse in the ceasefire in monetary talk is no surprise: every central bank is fully aware that with the monetary component to intervention, via cheap credit, now priced in, but priced in in terms of equities and commodities, the only way to create equity value in housing (of which per some estimates, 25% of all homes (and rapidly rising) are underwater to the underlying mortgage) is to broadly debase the currency. This is now a virtual certainty, and the higher gold (and soybeans, and corn, and what) goes, the faster the Fed will need to destroy the dollar, making the vicious loop of hyperinflation spin faster and faster...
This horrifying fact comes courtesy of Morgan Stanley analyst David Greenlaw. And it confirms what I’ve been saying since the end of 2009, that the US has entered a debt spiral: a time in which fewer and fewer investors are willing to lend to us for any long period of time… at the exact same time that we must roll over trillions in old debt and issue an additional $100-150 billion in NEW debt per month in order to finance our massive deficit.
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.
"The number one performing stock market in the last ten years has been Zimbabwe - in nominal terms" - that is the most memorable soundbite of Kyle Bass' presentation to David Faber at the Bearfoot Summit, because unfortunately, in real terms investors have lost all their money. In this series of key presentations in which Bass recaps not only all his previous positions on hyperinflation, but pretty much everything previously noted on the topic on Zero Hedge, Bass focuses on what is the most "convex" product to imminent hyperinflation. Spoiler alert: it is not stocks. In fact, Bass says to shun stocks by and large, as in real terms (note not nominal), stocks will underperform a hyperinflationary system. This confirms what we have been observing for the past months ever since the latest FOMC regime, when gold has benefited far more from "money deluge" expectations that risk assets. In other words, those who are betting on a rising tide emanating from the inkjets' liquidity spigot, will do far better to buy gold than stocks.
While nobody gives a rat ass what assorted Stuxnet-infected vacuum tubes are doing with equities any more, the real drama is in the 2s10s30s, where the butterfly has just plunged by over 10% in this morning alone! This is a massive move, driven by the collapse in the 10 year, which at last check was trading at 2.37%, as the only trade is and continues to be the frontrunning of Benny and the Inkjets. The last time we had a move as dramatic and rapid as this was in the November 2008 equity plunge, and the March 2009 decade low. In other words, the bond market is now trading only based on what Pimco says the Fed will do, while stocks are pricing in mild to quite mild hyperinflation, as some administration idiot has floated the idea of $7 trillion in QE. To quote W, make no mistake - $7 trillion in QE would be the proverbial Shazam moment, where D.C. can officially change its name to Harare.
While developing my outlook on the US dollar, Bob Farrell’s rule number 9 comes to mind- “When all the experts and forecasts agree––something else is going to happen”. The number of dollar bears is disturbing. I find my own forecast moving inversely from the growing consensus; while I am not officially bullish on the currency yet, the time may come in short order.
I am starting to hear this mantra parroted through 'internet rumor' that because there is no inflation, gold has hit its high, and you're better off selling now while you still can, and certainly not buying any.
There have been a lot of articles about the coming hyperinflation in America. Many of the commentators with whom I agree most of the time say hyperinflation is inevitable here. The problem is that it is an easy thing to say but more difficult to prove. If one does a careful analysis of the hows and whys of hyperinflation, it is highly unlikely to happen here.
Here Is How The World's Biggest Bond Funds (And Others, Just Not You) Get Advance Notice Of What The Fed Is About To DoSubmitted by Tyler Durden on 09/30/2010 14:10 -0400
Reuters has just released a stunning special report detailing how the Fed leaks all important, non-public, and ever so material, information to private parties. From the report: "On August 19, just nine days after the U.S. central bank surprised financial markets by deciding to buy more bonds to support a flagging economy, former Fed governor Larry Meyer sent a note to clients of his consulting firm with a breakdown of the policy-setting meeting. The minutes from that same gathering of the powerful Federal Open Market Committee, or FOMC, are made available to the public -- but only after a three-week lag. So Meyer's clients were provided with a glimpse into what the Fed was thinking well ahead of other investors."
"Ok, so all of this action in the market is ancient history and the bigger question is what happens next? What I find so interesting about sentiment right now is that it has done an complete 180 from just a month ago. Those that have bought significant out of the money protection on stocks are suffering big losses on their insurance due to the rally and the action in the VIX. From a sentiment and positioning standpoint, this was where the pain trade was into September and therefore it has happened. Bears are terrified to short and this notion that the soon to be extinguished Federal Reserve can prop up stocks forever has entered the psychology of investors and traders everywhere. This is DEAD wrong...What I find so hilarious is that no one seems to ask themselves why a big money manager might come on CNBC and tell everyone stocks can’t go down. Perhaps in a market with little to no liquidity someone needs liquidity to dump their garbage on some unsuspecting sucker. Based on the volumes in the market I shudder to think what happens if someone actually tries to sell positions in size." - Mike Krieger
Hugh Hendry Interview With King World News: "If Inflation Is A Monetary Phenomenon, Hyperinflation Is A Political Phenomenon"Submitted by Tyler Durden on 09/28/2010 15:27 -0400
In which we learn that that outspoken iconoclast has now taken on a $2 billion short position in Japanese credit, although presumably not cash-based as Ecclectica is well under that in AUM. For those who wish to recreate this position synthetically, we refer you to Dylan Grice's ATM swaption in the 10Y10Y forward which is the cheapest way to follow in Hugh's footsteps, and, ahem, may we remind you of Takefuji's recent bankruptcy...). His bet is in essence a gamble against the "China will never fail" bandwagon: "I am just intrigued as to the optionality, as to the profits that could be made, should that revert. And because it's deemed to be impossible, the trade is actually asymmetric. By golly if I am right, I can make a lot of money." Another topic is the already much discussed malinvestment in China, which was the centerpiece of the argument between Hendry and Faber from some time ago (link for clip). But back to what actual things Hugh is doing, he gives the following specifics: "I am shorting 10 year industrial corporate debt with 1% yield. Should this ricochet, which began in America, should the west be grappling with fears of recession, it goes to Asia, it goes to China, and I do not believe they have the vitality and consumption to pull the global economy out." And just in case there is any doubt how Hendry view the endgame, here it is:"At these immense levels of yen strength, Japan is bankrupt. And when it's bankrupt it has given up hope, and there is huge political legitimacy to then do quantitative easing, which leads to the debauchery of the system." In other words: the nuclear response of monetary debasement is certainly coming. We won't spoil what Hendry says on gold (suffice to add the following quote: "We will see a joint meltup in US Treasrys and gold") - for his insights on where the metal will go, for a shoutout to all Zero Hedge Hugh Hendry fans, and for much more, listen to the whole interview.
Bullard Confirms QE Over $1 Trillion Would Result In Outright Debt Monetization, Which Geithner Said Would Never Be AllowedSubmitted by Tyler Durden on 09/27/2010 17:58 -0400
The Fed's preferred voicebox, WSJ's Jon Hilsenrath is out with another article discussing what the imminent QE2 may look like. The summary is that contrary to expectations for a "big bang" intervention, the Fed will instead do $100 billion in QE a month until such time as it deems fit. A few observations on this article.
It is certainly no secret that we live in volatile times. It is also no secret that the global economy is as far from equilibrium as it has ever been courtesy of historic direct monetary infusions from global central banks, which keeps world markets propped up at levels that according to some, are between 75% and 150% higher than fair values. What has recently become obvious is that nobody dares to take on the central banks, and specifically the Fed, as there is now a wholescale effort to destroy all bearish mindsets, whether it is by perpetuating the blatantly illegal HFT infested upward-bias broken market structure, encouraging custodian house wholesale short squeezes, or outright fraud, such as the recently disclosed illegal cash transfers to mortgage servicers, and fake fundamental data disclosure of such accounting monsters as Repo 105, and FASB mark-to-market redundancies. Should all these measures to keep the market rangebound, and hopefully cause an even greater short squeeze, fail, we have little doubt that selling of any assets, together with non-naked shorting, may soon be deemed illegal in the current system's last ditch attempt to keep the broken ponzi regime working. Yet what is certain, is that all of these measure will sooner or later fail. Which means that the most industrious investors are currently looking for ultra cheap ABX-like insurance trades, which have little cost of carry, and which promise Pellegrini-like returns when one or all elements of the Ponzi once again begin collapsing. To that end, we present the most recent "cheap insurance" ideas from SocGen's Dylan Grice, who has compiled what may be the cheaper ways to bet against the central banks in such items as inflation, deflation, bond market blow-ups and instability in the oil market. Here are the suggested trades.