Reality

The Fed's blatant "Flip That Bond" criminal reality show, funded entirely by you, dear taxpayer, continues, and is in fact accelerating. Over the weekend we provided a list of the 10 cheapest bonds that the Fed should monetize based on their relative position on the spline, in terms of cheapness/richness (link) and implied that should the Fed veer away from this list, it would be engaging in what is certainly non-fiduciary activity, by merely facilitating taxpayer rape on behalf of the Primary Dealers who "put" to Sack Frost whatever issue they want, and certainly not the cheapest ones to be monetized by the US taxpayers (i.e., an act that would at least pretend to save some money). Specifically, we said: "The just auctioned off 2.75% of 12/31/2017  is not even among the top 10 cheapest bonds, which means that if on Monday the PN4 makes up for a material percentage of the $7-9 billion buyback, then something is very, very wrong." Well, one look at the final completion list of Today's POMO indicates that it is preciseley the just auctioned off PN4 due 12/31/2017 that made up over half of the entire bloody operation! At 4.551 billion (out of a total $8.869 billion in bonds monetized), the Fed actively conspired with PDs to defraud taxpayers by engaging in monetization not of bonds that were cheapest and thus bonds the Fed should have been buying, but merely was taking the other side of the trade in today's version of "Flip That Bond." And so the criminality continues unabated.

Unfortunately, the Ministry of Disinformation and Data Revision will not be able to blame the latest major economic data point revision on dyslexia. After as we previously noted, the Chicago PMI was revised lower from 68.6 to 66.8 just three short days ago, today that other standout number, the Philly Fed, which had originally printed at the better than expected level of 24.3, has just been revised much lower to 20.8. Since this number means the Philly Fed actually declined from the November print of 22.5, one can see why even the Chinese are seeing their jaws drop at the ceaseless "adjustment" of what has now become an unrepentantly upwardly economic data stream. Specifically, the December Employment Index has been lowered to 4.3 from 5.1, the December New Orders Index has swooned to 10.6 from 14.6, the December Current Inventories was lowered from -2 to -5.9, the Current Number of Employees dropped from 5.1 to 4.3, and the Current Average Employee Workweek contracted from 19.3 to 16.8. The silver lining: the December Prices Paid Index to 47.9 from 51.2. Also, virtually all the future indices improved. Then again, as today's PPI indicated, and as surging commodity costs validate, nobody doubts the margin collapse any longer. We can't wait to find out just how many more of the melt up inducing December economic indicators will continue to be revised lower (even as the BLS continues to backward revise jobless numbers higher).

We have already broadly discussed the recent euphoria in the market which especially in the Nasdaq has hit 5 year+ extremes. And as always in times of such irrational exuberance, the disconnect between perception and reality is truly astounding. David Rosenberg presents his views on the latest developments in the market's ongoing fight with manic-depressive disorder.

Given that interest rates are already quite depressed, Bernanke seems to be grasping at straws in justifying QE2 on the basis further slight reductions in yields. As for Bernanke's case for creating wealth effects via the stock market, one might look at this logic and conclude that while it may or may not be valid, the argument is at least the subject of reasonable debate. But that would not be true. Rather, these are undoubtedly among the most ignorant remarks ever made by a central banker. - John Hussman

I think what the Fed does will be irrelevant in terms of economic impact, and the more I talk to people about it the more I realize most share this view. The market is solely focused on the Fed and not the election as it is relatively understood that politicians are useless even though the list of tasks to fix our economy should in theory provide them an opportunity to make themselves useful. Given they will not rise to the challenge and will keep failing to deliver any concrete measures that could lead to progress, and that rates are at 0, as Bill Gross said the only thing for the Fed to do (OR NOT) is QE. I see no value but since they have made it their mandate to target inflation and now GDP I suppose Mr. Bernanke is at least consistent within his delusion. It is interesting however that even Bill Gross has joined the bandwagon. The ECB has also said the Fed is going in the wrong direction even though I bet they would be hard pressed to explain who is buying all these Spanish, Portuguese, Irish, Greek bonds and other turds they are trying to keep afloat. In that sense their only saving grace is that they sterilize their purchases, but they too are engaged in asset price fixing aiming at controlling GDP. Fighting a structural deficit and unemployment printing money is a bit like taking a leak in the ocean to warm it up, and you have to be careful because if the wind comes at you it can backfire. - Nic Lenoir

Unfortunately, this is a perfect summary of our daily financial lives.

Having worked for a big box retailer for 14 years, I understand the dynamics of a high growth rollout of stores as a key to increasing market share and profits. Some of the best retail names in the US have practiced the identical strategy of concentrating many stores in each market to drive the small competitors out of business. This strategy worked wonders for Lowes, Wal-Mart, Target and Kohl’s during the early part of this decade. The combination of solid same store sales and opening new stores is a fantastic combination during good times. The results actually make the CEOs of these companies think they are brilliant. Their store expansion models based on rosy assumptions are followed like they can’t go wrong. What these CEOs didn’t realize was that their expansion plans were based on lies and frauds. If they had advisors who could give them a reality check, they could have avoided the massive downsizing that awaits them. Their hubris didn’t leave room for a reality check. The population of the US has grown from 281 million in 2000 to approximately 308 million today. We’ve had a 10% population increase in 10 years. Consumer expenditures have grown from $6.7 trillion in 2000 to $10.3 trillion today. This is a 54% increase over the course of the decade. Amazingly, real average weekly earnings have only gone up by 6% in the last decade.

As we pointed out earlier today, today's latest deterioration in yet another overoptimistic assumption by the BEA, in the form of the balance of trade, means that the next GDP revision will likely be sub 1%, and may ostensibly drop to negative, confirming that the double dip, at least for NBER purposes, started sometime between April and June. Confirming our skepticism is JPM's Michael Feroli who now believes that real Q2 GDP is trending at a 1.1% rate, less than half the official 2.4%, which, as readers will recall was expected by a battery of Ph.D.-clad optimists to come out to 2.7%. Less than two weeks after the announcement, it becomes clear that the world's "smartest" economists were off by 60%. And we are confident this is not the end of the downward revisions.

Jim Quinn's has penned a good post on the "mother of all bubbles" in which he analyzes the impact of cheap credit and surging money supply on Chinese real estate, hot on the heels of recent Zero Hedge disclosure that nearly 65 million homes in China lie vacant. Using data from The Casey Report depicting the explosion in monetary aggregates, it is rather easy to see just where all the "excess" credit and easy money has gone. In many, if not all ways, the experience China is about to undergo with respect to its real estate bubble is comparable to that of the US, and simply the lack of an overlap of bubble peaks in 2007/8 is what helped China experience an all out economic rout, which due to how its socio-political structure is intertwined, may have well led to a domestic revolution and/or civil war. Yet the longer China avoids looking in the mirror, and continues to "feed the monkey" the worse off it will be when no amount of incremental cheap money can forestall the collapse. Which in itself is a very comparable predicament faced by our own administration and central bank. But before we present the Quinn article, we will take a brief detour into Michael Pettis' recent observations on the pitfalls association with a monetary heroin addiction.

Stocks continue to represent all the reality contained within the confines of the Byron Wien twilight zone. The decoupling between stocks and everything else is getting even more laughable than before (and it was damn funny then). A simple weekly chart shows that the divergence between stocks and bonds is worth about 35 ES points alone. Extend this three months back, and stocks are about 100 points rich. Throw in the carry trade (cause with no money from mutual funds, stock buyers would at least need the benefits of currency funding arbitrage, as otherwise the whole all too relevant question of just where the money comes from to buy up all these stocks may be asked by someone) and the EOD ramp, in turn, becomes painfully obvious. All in all, if one is trading stocks at this point, one deserves to lose it all. We reiterate our advice from last summer when the market went batshit for the first time: take your money, and go to Vegas. You have much better odds, you won't be frontrun by an Atari 2600 while playing craps, and if you lose it all at least your stay will be comped.

In a rare dose of realism, Reuters reports that the BOE's Monetary Policy Committee member Adam Posen said there is a distinct chance the UK economy could slip back into a recession. Not surprisingly, the BOE member said eurozone public sector cuts would add as a drag on the UK economy. He also added that he hopes the recovery would continue but it can not be guaranteed. As the BOE has demonstrated no problems in the past with activating money printing QE episodes, is this merely a preamble to yet another round of English quantitative easing? As was pointed out on Zero Hedge over the weekend, recent changes in excess reserves in the US have provided the implicit benefit of nearly $200 billion in new Fed money entering the pursuit of risky assets, and everyone knows that the ECB is now on crash course with Germany over its own most recent monetization regime. It should thus come as no surprise that the UK feels alone and will likely do all it can to pursue the same currency devaluation techniques that seem to be prevalent across the globe, and not be left too far behind.

The latest market trampoline action on horrendous consumer credit news should be sufficient to get every last sane person out of this illegal, yet fully government endorsed, backdoor gambling operation, or at least those that are stupid enough not to be trading with other people's money. Today marks the most recent long white candlestick on almost record low volume for a ramp day. Note the straight line higher immediately following the consumer credit collapse and the leak that QE2 is coming any minute. Our only question is how bad is the news coming this weekend for the primary dealers to need to surge the market so high on nothing. Well, that, and also we wonder if after the circus rang the closing bell on the Nasdaq two days ago, whether today the Sicilian mafia will be at the NYSE close.

House Democrat leader Steny Hoyer will today announce that the US will not pass a budget in 2010 as “It isn’t possible to debate and pass a realistic, long-term budget until we’ve considered the bipartisan commission’s deficit-reduction plan, which is expected in December." Yet "the House has never failed to pass an annual budget resolution since the current budget rules were put into place in 1974." The real reason of course is that the budget would indicate new and unprecedented trillions in deficits, which would wreak havoc on Democrat chances to contain their upcoming mid-term election loss to just "landslide" status, instead of what is increasingly shaping up as being more in the "apocalyptic" category. Those whose memory spans longer than 24 hours, will recall that Peter Orszag resigned yesterday. Something tells us these two events may be correlated. In the meantime, we are now convinced that realizing the hopelessness of its political situation, the administration and the Fed will now create the most ridiculous, unprecedented, destructive and historic market melt up in history to preserve any chances of demonstrating just how "effective" their market manipulation, pardon, economic resurgence efforts are. If you are short, be ready to have all your shares forcibly called in over the next 4 months. At least the humor of the situation is not lost on one person: House Republican leader John Boehner has taken out a page on his website to lampoon the tragicomedy that US economic and fiscal reality has become.

Some terrific insight from Rosie on the future:

• Deflation: own income-generating securities, which include dividend yield and dividend growth.
• Corporate balance sheet strength and liquidity: own corporate bonds with liquidity, marginal refinancing needs and stable cash flows.
• Intense volatility: invest in classic hedge funds — true long-short strategies that preserve capital and minimize fluctuations in the portfolio.
• Ongoing sovereign credit concerns and recurring rounds of currency depreciation: ensure the portfolio has a core holding in precious metals (gold and silver). These are effective hedges against lingering concerns over the stability of the global monetary system.