For some, especially Bruins fans, it appears hockey is better than porn, but only until you lose the Cup... According to the people at pornhub.com, when the game ended around 11 p.m. ET, something funny happened. The people in Chicago were busy celebrating their second Stanley Cup in four years, so traffic stayed down. But in Boston? Obviously, it skyrocketed from people looking for a... relief.
The venerable UBS floorman asks (and answers) an interesting question. With the re-institution of the payroll tax and higher level rates and with spending lowered by sequestration, will the Treasury need to offer fewer bonds? And if so, will the Fed remain steadfast in its purchasing 'size' (good for bond bulls since secondary demand will increase) or reduce its 'size' to meet the lower monetization needs of the Treasury (bad for equity bulls since flow is all that matters.) Thoughts below...
The underlying question in Bill Gross' latest monthly letter, built around Jeremy Stein's (in)famous speech earlier this month, is the following: "How do we know when irrational exuberance has unduly escalated asset values?" He then proceeds to provide a very politically correct answer, which is to be expected for the manager of the world's largest bond fund. Our answer is simpler: We know there is an irrational exuberance asset bubble, because the Fed is still in existence. Far simpler.
Critical of the market's reaction to the 'no new QE' news, Biderman and Bianco wholeheartedly believe yesterday's plunge was entirely due to the fact that the 'Bernanke Put' - that we have become so conditioned to expect - did not appear at the levels many expected. Despite a federal deficit of $100 billion per month, it seems the Fed is now in agreement with Biancerman that US growth is limping along at best but notably Jim Bianco believes the fiscal cliff will end up more of a bump in the road as he sees politicians being forced to agree to extend or roll-back (maybe at the very last minute) offsetting the abyss. However, with the debt ceiling looking like it will be hit before the election, it will be interesting to see what political parlance is used if-and-or-when Geithner borrows from the trust funds to keep the government going this time (or not). Positive on Gold longer-term, Bianco sees it like other markets: "Gold is a junky that has not got its money fix" and the only reason to believe Gold is a sell is if you think CBs are done - they are not! Finally the two discuss the fact that 'nobody wants to be bearish anymore' when looking at sentiment surveys - setting up a 'trap-door' for the market.
Digging into the details of the Fed's balance sheet can sometimes be a thankless task but Charles Biderman and Jim Bianco have some fascinating insights into where the real money is being hidden. The stability of the Fed's balance sheet post-QE2, given we are borrowing-and-spending over $100bn per month is all down to Operation Twist and the Fed's creation of demand at the short-end (via telling banks that rates will be low forever and 'guaranteeing' positive carry returns on rolling overnight repo) and using this 'cash' to almost entirely fund longer-term borrowing. In a simple primer of the Fed's implicit risk-free carry trade, the two chaps note that the only downside is too much growth or inflation which would cause a massive unwind of these positions (leading only to further bailouts). Critically though, they explain the fact that Operation Twist (and its implicit off-balance-sheet funding of this risk-free carry trade) is nothing more than the Fed's version of the ECB's LTRO - as the banks are 'encouraged' to buy short-term government debt with risk-free-carry expectations - implying the Fed's balance sheet could in fact be considerably larger than it appears. Yet more ponzinomics explained in a simple way - that surely eventually will trickle down to the masses who will question the emperor's clothing.
Only time will tell if ECRI or Wall Street has the brighter crystal ball.
Over the past several months, I have been debating with my good friend and mentor David Kotok of Cumberland Advisers over the impact of the new FDIC insurance assessments on the money markets. David as well as another friend, Jim Bianco, insist that the imposition of the new deposit insurance assessment on all bank liabilities net of capital is blocking Fed monetary policy. I totally disagree.
Confirming that the Fed's Weimar monetization practices are entirely dependent on the market, and that POMO can only proceed if the Plunge Protection Team does its job, the earlier cancelled POMO has been rescheduled for 12:05 pm now that the PPT-Citadel team is on the line and grinding ES like it is the new chick at Hustler Club. In other news, going forward, the terrorist will win if and when the bond market crashes at 10:59 am, which sends the entire Sack-Frost monetization model out of line. Next up: Article 15 to be implement in the US between the POMO hours of 10:15 am and 11:00 am, where any headline on Reuters or Bloomberg has to be precleared by an FRBNY NYU intern. Once again we get confirmation that when it comes to decisions on who really runs the country, the Primary Dealers who cancelled their entire POMO order book, come on top.
For those who need a good laugh this Saturday evening, we turn our attention to the man who singlehandely made frontrunning the Fed a (somehow legal) artform: Macroeconomic Advisors' Larry Meyer. This so-called pundit, who recently was caught in a debate with David Einhorn (if one may call the complete and utter mauling of someone for his absolute lack of comprehension of anything finance related, a debate), exposing him for the hollow chatterbox he is, and who only receives consultancy fees due to his close relationship with the Fed, which allows him to leak privileged Fed information to the likes of Bill Gross, Larry Fink and others who deem his services relevant, was on CNBC telling the heptabox panel that an oil shock is disinflationary, and that the way to deal with surging oil prices is to CUT interest rates. That's right: cut rates, which at last check were at 0-0.25% (6 minutes into the clip below). While we feel embarrassed for anyone who shares the same perspective as Meyer, who confirms that monetary groupthink is the deadliest form of contagion possible, what stuns us is how anyone could possibly pay to get this person's input on anything aside from what the Fed will do at any point in the future (an arrangement which should be made illegal as of yesterday). Which in itself begs the question: are the Feds finally bugging Macroeconomic Advisors' phone conversations with their clients? After all Gerson Lehrman et al are getting crushed as no hedge fund wants to get their inside information from the "expert networks" any more. Why should Larry Meyer's firm fare any different? Please somebody at the SEC or the DA office: explain that one to us...
One of the more peculiar observations we noted in our analysis of the Fed's balance sheet yesterday, was that in the week just ended, reserves held by banks with the Federal Reserve dropped by a very material $64.2 billion even as the Fed ended up buying a net of $4 billion in securities: a $68 billion mismatch between an increase in reserves and Fed asset increases. A quick look at how this mismatch has progressed since the announcement of QE Lite (and QE 2) demonstrates this phenomenon very distinctly: while during the QE Lite phase, net holdings of the Fed were flat, bank reserves, which should have followed suit in fact declined notably, by almost $40 billion. Yet it is during the POMO phase of QE 2 that this difference become glaring. During a period when the Fed added a total of $88 billion (net of MBS paydowns) in securities, reserves increased by only $14 billion. This does not include the cumulative differential since QE Lite. And all this came to a head in the just ended week, when the difference between cumulative asset purchases and reserve changes hit a whopping $138 billion. This is very disturbing for a variety of reasons, the number of which is that, as Jim Bianco points out, banks are rapidly exchange securities with higher reserve requirements for those with lower: the net result is a far slower increase in reserves held with the Fed. It also means that banks ever since QE Lite have been stealthily offloading lower quality fixed income products to the market and replacing these with Treasuries (motivation being unclear but likely having to do with presenting a better capitalized state). If true, this would mean that during the entire orchestrated HY bond rally sine August, those who have been buying are in fact the greatest suckers, and have been buying hundreds of billions worth of lower quality paper from none other than the allegedly smart money banks. Alternatively, what this means, is that instead of opening up capacity for banks to bid up riskier corporates and thus stimulate the economy, banks are forced to gobble up the toxic treasuries, that the Treasury puts upon them each and every week. Should this divergent trend persist, we would be very mindful of obtaining verification of either of these two hypotheses.
It's not just a Canadian problem...but hold on, bubbles are on their way!
Last night the New York Federal Reserve reported its custody account holdings of agencies (red line, bottom panel) dropped $45.972 billion, or -5.8%, in the week ending Wednesday, September 22. Both measures are a weekly record decline. At the same time, custody holdings of Treasuries (blue line, top panel) increased by $49.657 billion, or 2.06%. This is a nominal record and the largest percentage increase in two years (since Oct 8, 2008). We have heard/read no explanation or color about this decline. So we cannot say whether this massive shift out of agencies and into Treasuries means foreigners are “running scared” from agencies or if this is simply some kind of technical adjustment.
Matt Simmons Tells Bloomberg Only Way To Contain Oil Leak Is With Small Nuclear Bombs, "Top Kill" Is Just A DistractionSubmitted by Tyler Durden on 05/29/2010 12:40 -0400
In his May 28th interview with Bloomberg's Mark Crumpton and Lori Rothman, Matt Simmons of energy investment bank Simmons & Company, provides some stunning revelations on what is really occurring in the Gulf of Mexico, and proposes that the only effective way to contain the leak is to relieve BP, bring in the military, and do what the Russians have done on comparable occasions, namely explode nuclear weapons within the wellbore. Simmons knows what he is talking about. As Jim Bianco points out: "Matt Simmons gained fame with his book 2005 Twilight in the Desert where he claimed that the Saudis were overstating their oil output because they hit “peak oil.” Right or wrong Simmons claimed the price of oil was going to skyrocket and three years after the book’s release the crude oil hit $147/Barrel. In January 2009 the WSJ called Simmons one of the five most important voices in the oil industry. Simmons has been wrong in the past and his views are non-conventional and often correct. Simmons is also highly connected within the oil industry so he knows who to talk to verify his claims." In addition to his radical solution, Simmons also points out that "Top Kill" is a sideshow and the real problem is 5 to 7 miles away, where a second fissure is "releasing a plume the size of Delaware and Maryland combined." If Simmons is indeed right, and the only recourse left to Obama is to nuke the seabed, the repercussions for his already shaky political situation will be tremendous.
Did the SEC just take away Wall Street’s punch bowl with this suit? "They might have," says Jim Bianco, President of Bianco Research in Chicago. If the SEC wins the Goldman case, "this would have far-reaching effects," he says. With all due respect to Jim, I say let the witch hunts continue. Besides, it's just another circus show and nothing will change on Wall Street. The sleazebags will concoct new ways to satisfy their insatiable greed.