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.
Abe's honeymoon is over. Read why.
With little on the event calendar in the overnight session, the main news many were looking forward to was Italy's auction of €2.5 billion in 5 and €4 billion in 10 year paper, to see just how big the fallout from the Hung Parliament election was in the primary market. As SocGen explained ahead of the auction: "The target of Italy's 2017 and 2023 BTP auction today is a maximum EUR6.5bn, but in order to get to that tidy amount the Tesoro may be forced to offer a hefty mark-up in yield to compensate investors for the extra risk. Note that Italian 6-month bills were marked up at yesterday's sale from 0.731% to 1.237%. Who knows what premium investors will be asking for today for paper with the kind of duration that is not covered by the ECB OMT (should that be activated)? Will Italian institutions, already long BTPs relative to overall asset size, be forced to hoover up most of the supply?" The outcome was a successful auction which, however, as expected saw yields spike with the 4 year paper pricing at 3.59% compared to 2.95% before, while the 10 Year paper priced some 60 bps wider to the 4.17% in January, yielding 4.83%. The result was a brief dip in Italian OTR BTP yield, which have since retraced all gains and are once again trading in the 4.90% range on their way to 5%+ as JPM forecast yesterday. And as expected, talk promptly emerged that the auction was carried by "two large domestic buyers" in other words, the two big local banks merely levered up on Italian paper hoping furiously that they are not the next MF Global.
By 1789, a lot of French people were starving. Their economy had long since deteriorated into a weak, pitiful shell. Decades of unsustainable spending had left the French treasury depleted. The currency was being rapidly debased. Food was scarce, and expensive. Perhaps most famously, though, the French monarchy was dangerously out of touch with reality, historically enshrined with the quip, “Let them eat cake.” Along the way, the government tried an experiment: issuing a form of paper money. It didn’t matter to the French politicians that every previous experiment with paper money in history had been an absolute disaster. The Bourbon monarchy paid the price for it, eventually losing their heads in a 1793 execution. History shows there are always consequences to entrusting a paper money supply to a tiny handful of men. The French experiment is but one example. Our modern fiat experiment will be another.
Ben was in congress campaigning er, testifying mostly about the effectiveness of all things ZIRP and QE. He was grilled about possible risks with QE especially if interest rates should rise. The Bernank saying that interest rates would rise was unlikely but he then cavalierly stated if rates rise, the Fed would just “hold back on payments” er, stiff the Treasury. That’s no big deal for him since by then he’ll be down the road writing his memoirs, making speeches and joining some big Wall Street firm as a well-paid consultant. The Bernank was also asked if he noted any bubbles or market excess and said he saw none.
Bernanke's Tools: "Belts, Suspenders... Two Pairs Of Suspenders" And Other Senate Testimony HighlightsSubmitted by Tyler Durden on 02/26/2013 21:20 -0400
Ben Bernanke: "In terms of exiting from our balance sheet, we have put out -- a couple of years ago we put out a plan; we have a set of tools. I think we have belts, suspenders -- two pairs of suspenders. We have different ways that we can do it."
What could go wrong with the housing 'recovery' in 2013? To answer this question, we need to understand that housing is the key component a middle class squeezed by historically high debt loads, stagnant incomes, and a net worth largely dependent on their home. In response, Central Planners have pulled out all the stops to reflate housing as the only available means to spark a broad-based “wealth effect” that would support higher spending and an expansion of household debt. This returns us to the key question: Are all these Central Planning interventions sustainable, or might they falter in 2013? Once markets become dependent on intervention and support to price risk and assets, they are intrinsically vulnerable to any reduction in that support. Should these supports diminish or lose their effectiveness, it will be sink-or-swim for housing. Either organic demand rises without subsidies and lenders originate mortgages without agency guarantees, or the market could resume the fall in valuations Central Planning halted in 2009.
Here's Bernanke's list of the costs/risks associated with further asset purchases, and his assessment about the severity of those risks:
- Italy Political Vacuum to Extend for Weeks as Bargaining Begins (BBG)
- Italian impasse rekindles eurozone jitters (FT)
- On Spending Cuts, the Focus Shifts to How, Not If (WSJ)
- Obama spending cuts strategy focused on waiting game (Reuters)
- BOE’s Tucker Says He’s Open to Expanding Asset-Purchase Program (BBG)
- Fed Faces Explaining Billion-Dollar Losses in Stress of QE3 Exit (BBG)
- Carney warns over lack of trust in banks (FT) - here's a solution: moar bank bailouts!
- Bundesbank tells France to stick to budget (FT)
- China to tighten shadow banking rules (FT)
- Saudis Step Up Help for Rebels in Syria With Croatian Arms (NYT)
- After election win, Anastasiades faces Cyprus bailout quagmire (Reuters)
- Just for the headline: Singapore’s Darwinian Budget Sparks Employer Ire (BBG)
Italy is driving the markets. Japanese developments means the market is closer to give Abenomics its first test. Bernanke to set the record straight after many gave the regional non-voting Fed presidents too much weight in understanding trajectory of Fed policy.
Whenever I endeavor to explain America’s current economic situation to a person who likely receives most of his information from skewed mainstream news sources, I try to use two comparisons; the Great Depression, and Weimar Germany, because what we are experiencing is actually a combination of elements from both events. In the end, the madness of debt spending is going to annihilate this country anyway. Fiat printing and infinite QE will eventually result in the dumping of our currency as the world reserve, causing devaluation and hyperstagflation. Stimulus and the monetization of government liabilities are crippling us. The problem is, this nation is irrevocably dependent on such measures. Cuts will result in almost similar catastrophe, but on a faster time frame and perhaps a slightly shorter duration (depending on who runs the show in the aftermath). I’ve been saying it since 2008 – there is no easy way out of this situation. There is no silver bullet solution. There will be struggle, and there will be consequence. It is unavoidable. All we have to decide now is how we will respond when the inevitable disaster comes.
Waste and Fraud Are the Real Causes of the Deficit
The prevalence of counter-factuals or 'coulda-shoulda-woulda's in mainstream economics is stunningly biased to explaining "why we're still in the doldrums outside of course of the stock market." As CNBC's Rick Santelli exclaims, we are told at every turn that if we just do more - more stimulus, more monetization, more bailouts - then the recovery would have been better by now and will be in the future. In his typically calm and stoic fashion, the igneous Illinoisan asks, rhetorically, "What if the Fed had done less?" His answer - rather obviously - is that everything would have been different (but not necessarily worse). In a little under 3 minutes, Rick explains why "the Federal Reserve has done nothing but keep politicians from having to do anything."
I really need to stop being so pessimistic. I’m getting richer by the day. My home value is rising at a rate of 1% per month according to the National Association of Realtors. At that rate, my house will be worth $1 million in less than 10 years. Every mainstream media newspaper, magazine, and news channel is telling me the “strong” housing recovery is propelling the economy and creating millions of new jobs. Keynesian economists, Wall Street bankers, government apparatchiks and housing trade organizations are all in agreement that the wealth effect from rising home prices will be the jumpstart our economy needs to get back to the glory days of 2005. Who am I to argue with such honorable men with degrees from Ivy League schools and a track record of unquestioned accuracy as we can see in the chart below? These are the facts. But why trust facts when you can believe Baghdad Ben and the NAR? It’s always the best time to buy.