Main Street

Which do you think costs more to subsidize, TBTF Wall Street or Sesame Street?

Liar, Liar, Fed-Stoked Bubble Assets on Fire!!!!

The yield on MBS has been crushed over the last few weeks (front-running from before QEternity and then afterwards as every manager with a balance sheet warehoused as much as possible to sell back to the Fed). This rally has reduced the spread between 'risky' MBS and supposedly risk-free US Treasuries to practically nothing as the Current Coupon 30Y MBS trades around 1.67%. However, where the real differential has occurred is in the spread between the risky wholesale rate that Main Street is charged on their mortgage and the government-sponsored wholesale rate they finance this debt at. The spread between wholesale and retail mortgage rates has never been higher (in absolute and ratio terms) providing a new ATM for all those banks and mortgage originators trying so hard to scrape by these days. We just assume the Fed's policy transmission-channel had modeled this trickle-down of mortgage banker bonuses (and taxes) into local Ferrari dealerships and Lafite wholesalers.

A few days ago, our report on the discovery of a single 10 oz Tungsten-filled gold bar in Manhattan's jewelry district promptly went viral, as it meant that a tungsten-based, gold-counterfeiting operation, previously isolated solely to the UK and Europe, had crossed the Atlantic. The good news was that the counterfeiting case was isolated to just one 10 oz bar. This morning, the NYPost reports that as had been expected, in the aftermath of the realization that the sanctity of the gold inventory on 47th Street just off Fifth Avenue has been polluted, and dealers promptly check the purity of their gold, at least ten more fake 10-ounce "gold bars" filled with Tungsten has been discovered.

Ouch ...

The old 'new normal' bond guru succinctly sums up Bernanke's failed logic with QEternity in 80 characters...

Gross: Fed buys Mtges but banks fail to pass through lower yields to future home buyers.

— PIMCO (@PIMCO) September 21, 2012

Curious why nearly 4 years ago to the day Ben Bernanke and Hank Paulson told Ken Lewis to purchase Merrill Lynch "or else" (but to make sure everyone gets paid their bonuses bright and early with no cuts)? It certainly had to do with the stock price and preserving the wealth of the shareholders. It had little to do with making the company viable in the long run, unfortunately, as the just announced news of a massive tsunami of 16,000 imminent terminations at the company confirms. All BofA did then was to take on dead weight at gunpoint, which it now has to shed. It also shows that despite rumors to the contrary the US economy is not getting better, the US financial system is not getting stronger, faith in capital markets is not returning (based on future staffing needs at banks), US tax revenues by the highest earners will go down, and the closed loop that is a procyclical economic move will just get worse as there are fewer service providers providing financial services, in the process taking out less consumer debt to keep the GDP "growing." What will also happen by January 1, 2013 is that BofA will no longer be America's largest employer, with the total headcount of 260,000 at year end being the lowest since 2008, and smaller than JPM, Citi and Wells.

• Anti-Japan demonstrators protest in New York City (China Daily) ...and the propaganda: Younger generation feels wave of emotions (CD)
• And the retaliation: Obama to launch auto trade case against China (Reuters)
• Spanish Banks Bleeding Cash Cloud Bailout Debate (Bloomberg)
• Chicago teachers extend strike (Reuters); Emanuel Promises He’ll Sue to End Chicago Teacher Strike (Bloomberg)
• China hurts own credibility with Xi's vanishing act (Reuters)
• European Squabbling on Euro Crisis Solution May Test Rally (Bloomberg)
• Two South Africa mines reopen, most don't (Reuters)
• Finance Industry Warns of ‘Cliff Effect’ in ECB’s Bond Plan (Bloomberg)
• China struggles to cure the violent ills of health system (Reuters)
• QE3 is for Main Street, except... it isn't: QE3 hit by mortgage processing delays (FT)
• Probe focuses on JPMorgan's monitoring of suspect transactions (Reuters)
• As explained here before: Spanish Bonds Decline as EU Policy Makers Clash on Bank Plan (Bloomberg)

Well, my fellow Slope-a Dopes, your favorite intrepid seafaring Frenchman got blown out of the water by Benjamin Moby-Dick Bernanke once again.  I have to hand it to captain grey beard, for a guy with a curiously quivering lower lip, who seems so utterly unsure of himself every time he opens his moronic mouth, he sure does have some pair of ballistic brass balls.  Not only did he delivered on his QE3 promise, but he actually turbo charged it into a terrifying trifecta!  Boatswain BDI was left for dead, desperately drowning in a sea of red DOOMs (Deep Options Out of the Money).  So now that Moby Dick has breached and surged the equity waves to new highs, where do we sail from here?  

Despite a last minute surge (as stock indices lurched from their day-session open to closing VWAP levels), US equity markets extended gains but basically slid lower once Europe had closed. The day session opened gap higher as Europe extended (though Spanish debt slumped) and rushed out of the gate to new multi-year highs only to stumble on high volume and large block size into the European close. Also notable that VIX - which had tracked stocks from the QE3 announcement, began to push higher as stocks 'capitulated' up in the high 1460s and then stocks rolled back downhill for the rest of the day. VIX ended the day up 0.5vol at 14.5% while ES closed up 8pts. Equity sectors have split into 3 groups from the FOMC statement - Materials/Energy/Financials +~3.5%, Industrials/Discretionary/Tech +~2%, and Healthcare/Staples/Utilities +~0.5%. The USD lost 1.65% on the week (EUR +2.3% and JPY -0.18%) as Treasuries saw some vol but were basically one-way street with the long-bond +26bps, 10Y +20bps, and 5Y +6bps. Commodities outperformed USD-implied moves with Oil/Silver/Gold all up around 2-3% on the week - while Copper surged overnight to gain just under 5% on the week. Credit markets were less exuberant than their tracking stocks yesterday with HYG ended the day red.

If there was one absolutely must see moment exposing everything that is broken with the Fed's brand new policy of QE-nfinity, it was this exchange between Reuters' Pedro da Costa and the Chairman. It explains, beyond a reasonable doubt, that the only goal the Fed now has is to reflate the stock market bubble to previously unseen levels, to focus on generating jobs although not for everyone but only for Wall Street, consequences be damned, because by the time the consequences arrive, and they will (just recall that subprime is contained) they will be some other Fed chairman's problem. Bernake's term mercifully runs out in January 2014.

Lock Up Your Sacred Cows Before We Find and Slaughter Them!

It will come as no surprise to many but everyone's favorite enemy #1, the US banker, decided to give himself a well-earned pay-rise in 2011 - according to data from Moody's Analytics (via Crain's). What is perhaps a little more surprising is the sheer gall of it given that the financial industry profits plunged over 70% from $27.6bn in 2010 to a mere $7.7bn in 2011. While the rise in salaries is not large, and the average man on the street actually saw a bigger rise, the critical point is that for two years in a row - from 2009 to 2010, and now from 2010 to 2011 - banking industry profits have dropped like a stone but the average salary of those oh-so-deserving 'Wall-Street'ers has risen.

With only days until the great unveiling and back-slapping that is the GOP's 'convention without walls', we humbly suggest they erect some - and buy some umbrellas. In NOAA's most recent update, Hurricane Isaac is forecast to pass right down the middle of main street Tampa amid Romney-and-Ryan's great moment so far. Of course, TOTUS will be riley smiling, noting that God didn't build this storm, his government did. Somewhat ironically, Tampa mayor Bob Buckhorn added, for once, "Safety is going to trump politics" - perhaps he should tell Bernanke.

Many finance-oriented critiques start from the position that our problems largely stem from the financial/political dominance of Elitist cartels and cabals. Clearly, the malinvestment, exploitation, predation and disregard for the law that characterizes the rule of political-financial Elites in both developed and developing nations have wreaked havoc on societies and economies around the globe. Implicit in this critique is a dangerously naive assumption: if all our problems can be traced back to Elitist cabals such as the Federal Reserve and the European Central Bank, then it follows that the subjugation or eradication of these concentrations of self-serving power would remove the cause of our problems. Alas, that would be a welcome step in the right direction, but that alone would not resolve the structural causes of our devolution. Freeing ourselves of self-serving Elites would certainly create an opening for structural transformation that is currently impossible, but the transformation will require changing much of what the average citizen takes for granted as a "given" or even "right."