Guest Post: The 0% BLT Economy

Two years ago when I told everyone I knew that the United States was bankrupt and would ultimately default of its debt one way or the other (by inflation or restructuring) I was called crazy and dismissed by 95%+ of the people I met. These days many of the same people still think I am crazy when I say that a political, financial and intelligence elite which has now teamed up with large corporations is attempting to create a global currency and world government (with them at the helm of course), but the notion that the U.S. is bankrupt is now more or less mainstream. Even the corporatist/socialists in power are now unable to merely dismiss questions about the deficit. The public has woken up from its slumber of consciousness and is now starting to see things as they are. This is an extremely positive development and is why as I have said before I think the elite are in their last days as the freight train of consciousness runs them and their twisted illusions of grandeur into the sea. The weakest link in this sick and corrupt financial system that was forced upon many of us before we were even born with its mechanics purposely hidden in the shadows so that we remained ignorant of its preposterousness, is the commodity market. However, within the commodity market the weakest link is gold. - Mike Krieger

Gold Surges As Curve Butterfly Funds Stocks Higher

Earlier rumors of a liquidation-based selling have proven to be false, as gold has surged by over $12 from the day's lows to its highest level in months. Elsewhere, the new carry correlation trade confirms it is truly the 2s10s30s butterfly that is the new source of funding for stocks, and for spiking HFT momentum. And the big institutions who have now gamed the latest funding pair, continue to sell into the HFT bid, as stocks rise purely as a side effect of a normalization in the butterfly wings, and never on any actual fundamentals, which as David Rosenberg once again demonstrated earlier, continue to get worse and worse. But remember: GM has to IPO today, and Geithner can't possibly do it on a downtick, let alone a red close. Also, we have another POMO tomorrow as the Fed once again prepares to give a blank check to the PDs to ramp the S&P another 3% higher. All in all, another day in Central Planning.

Since June, Banks Have Bought $83 Billion In Government And Agency Bonds

It is good to know banks are doing something with that $1 trillion + in excess reserves. And yes, "reinvestment" is technically considered doing something. David Rosenberg explains that since American citizens are now broadly considered unworthy of crediting (and since those same consumers would rather have a steady income and/or a job before taking out a loan), banks are now merely riding on the increasingly flattening treasury wave.

Frontrunning: August 16

  • China Overtakes Japan as World's Second-Biggest Economy (Bloomberg)
  • US banks get securities buy-back window - $118bn of high-cost ‘Trups’ can be redeemed over 90 days (FT)
  • Yield Curve as Harbinger (WSJ)
  • It Takes a Tea Party to Start a Tax Revolution (Bloomberg)
  • Evans-Pritchard: Ireland can withstand the euro's ordeal by fire, but can Southern Europe? (Telegraph)
  • Workers Let Go by China’s Banks Putting Up Fight (NYT)
  • Goldman Undercuts Rivals in GM IPO as It Loses Top Role (Bloomberg)
  • Is This Normal? The uncertainty of our economic uncertainty (NYMag)
  • Mark Zandi oped: The Tax Cut We Can Afford (NYT)

Weekly Chartology; Goldman Introduces Its Own Version Of Rosenberg's SIRP For A Low GDP Growth Environment

In a surprising act of lucidity, David Kostin recently reduced his 2010 S&P target from 1,250 to 1,200. Now, the Goldman strategist has penned his own version of David Rosenberg's SIRP (Safety and Income at A Reasonable Price), by introducing two strategies for a low GDP environment: Low Operating Leverage And Dividend Growth (LOL-DG - yes, we prefer Rosenberg's acronym).Hopefully, this means that the GARP abortion is finally dead and buried.

Rosenberg Interview: "If You Don't Believe In A Double Dip, It's Because The First Recession Never Ended"

Sick and tired of CNBC "interviews" in which the speaker is given 15 seconds inbetween commercials to explain why the economy is in the toilet, before another talking head from the dodecabox appears and starts spouting painfully ridiculous things? So are we. Which is why we refuse to link to David Rosenberg's earlier presence on CNBC, and instead we present Rosie's following 26 minute interview with the WSJ which is a must watch for all who want to listen to exiled Merrill Lyncher express a coherent realistic thought before some CNBC associate producer screams "cut to commercial for incontinence pills." And, true to form, Rosie starts off in style: "If you don't believe there's going to be a double dip, it's because the first recession never ended. If there is going to be a double dip, the odds are certainly higher than 50-50." For those who follow Rosie's daily letters via Gluskin Sheff (which would be all of our readers), the insights won't be particularly new, but it is always great to hear a rational and sensible human discuss things as he sees them, not as his trading book demands he sees them.

Is A Market Crash Coming? The WSJ Ponders...

In a unorthodox piece by the WSJ, which goes direct to discussing some of the less than pleasant possible outcomes of central planning, Brett Arends asks "could Wall Street be about to crash again? This week's bone-rattlers may be making you wonder" and says: "way too many people are way too complacent this summer. Here are 10 reasons to watch out." And without further ado...

David Rosenberg Vindicated

...And proud of it. He also provides his latest investment basket recommendation: "So, while I continue to advocate underweight positions in equities, a bar bell between basic materials and defensive dividend stocks is a prudent strategy, with the overall emphasis in the asset mix tilted towards bonds, especially the BB sliver or that part of the higher quality non-investment grade space that currently has the greatest unexploited potential for spread compression and capital gains."

Fed's Total 2-10 Year UST Monetization Over Next 12 Months: $340 Billion

BofA's Jeffrey Rosenberg provides the breakdown of the total amount of securities that roll off (MBS, Agency and USTs) over the next 12 months: the total is $340 billion, including the $230 billion (and possibly more) in MBS. Alas, this means that on a straight line monthly basis (and the finally outcome will likely be far more jagged), there will be on average just under $30 billion a month in incremental 2-10 Year Treasury Purchases. As Joseph Abate said earlier, this is not nearly enough to be considered a new stimulus, and at best seeks to retain the status quo. What is notable is that BofA believes today's action should have been priced into the market. Judging by the kneejerk reaction in stocks and bonds, the reality is anything but.

Here Is The Simple Reason Why QE Is Unnecessary

As the following chart from David Rosenberg demonstrates, consumers are retrenching, and "just saying no" to both residential and consumer loans. Earlier, we also showed that Small Businesses also contracted, demonstrating that credit demand is collapsing at every vertical of US society. As such, QE, or ever cheaper money, has and always will be a "push" phenomenon, for which there is simply no demand, in a society that has trillions more of deleveraging to undergo. And banks realize that with retail investors not participating in the stock market, and thus having nobody to offload risky exposure to, using reserves to bid up risky assets will merely result in more pain down the road once profit taking time comes and everything goes bidless. As such, as debate over the utility of QE is moot. The only question is what the Fed's persistent desire to debase the dollar will do the perception of monetary aggregates (i.e., the stability of the dollar) and whether the demand for alternatives (such as gold) will offset the need to liquidate said alternatives as a last-ditch source of capital to cover margin calls in a deflationary vortex. Everything else is smoke and mirrors.

Shock And Yawn: BofA's David Bianco Proves He Is "Smarter" Than Goldman By Raising His S&P EPS Estimates

Jan Hatzius' recent downgrade of the US economy, and the subsequent downgrade of the S&P by such formerly gruntled optimists as Goldman's David Kostin, has completely failed to register with permabullnut gallery. Case in point: the Bank of America strategist who was supposed to replace David Rosenberg, yet has become his own satirist caricature, David Bianco, has decided to go completely the other way, by actually rising not only his 2010 S&P estimates, but also 2011, and even, hilariously, 2012, this despite other such landed economist Ph.D's (from reputable institutions) as the San Fran Fed warning that there is a "significant" risk of a double dip in 2 years (yes, that's the Fed warning about a re-recession, not some rational, realistic, coherent human being), thus once again proving that his true worth is whatever CNBC pays him for his daily appearances in the Cheerleader Session block (which has now dropped out of Nielsen tracking due to complete lack of public interest in vapid propaganda). And for those who claim idiocy can not be captures in words, we disagree. To wit "Some dismiss our target because a deflationary shock could collapse current EPS. Others argue that EPS will be flat for years. We disagree; we think exceptionally low interest rates support real estate values and EPS will grow through foreign investment. The S&P has the best of the DM and EM world, low rates and healthy growth." Speechlessness ensues. What follows is propaganda so scary, it is good. If Bianco really believes this, we hope BofA provides free psychiatric sessions for its employees.

Rosenberg Slams "Doubly Pathetic" Non Farm Payroll Report

We already noted that last Friday's NFP number was a major disappointment for everyone objective enough to acknowledge it for what is was. Here is David Rosenberg's even more aggressive condemnation of the continuous lack of economic recovery in this country, whose only impact it appears is to drive futures higher (not regular hours trading mind you - it is far easier to push the market in a desired direction when there are ten people and a few computers trading).

The Contrarian Market And The Liquidity Glut Dissected

BofA's credit strategist Jeffrey Rosenberg has shared some interesting insights with his clients. In a letter from August 2, Rosenberg explains everything one needs to know why the stock market continues to rise in the face of increasing adversity and ever more negative news:

“I can’t think of a reason to be I guess that is the reason to be bullish.” That quote from a client at our June 30th credit roundtable dinner in our view best summarized investor sentiment at the beginning of July. It also highlighted a key technical reason to have been bullish in July as negative investor sentiment reached a peak at the beginning of the month."

Couple that with the sudden buzz that QE X.X is imminent, and a surge in market liquidity, and once can see how the market is now completely disconnected from fund flows, as contrarian animal spirits, and a rising liquidity tide have once again become the dominant, and only, factors in market tactics, if not strategy. And speaking of liquidity, here is an analysis of the key source and uses of liquidity in the market currently.

Vacation Thoughts From David Rosenberg

It appears those truly concerned with the proper functioning of the market can never truly sit still (especially when, as today confirms, it merely keeps on breaking little by little until it goes poof once again as not even one quadrillion of fake stuffed quotes can keep the market up any longer). Case in point: David Rosenberg, who should be on vacation, yet posted this typically delightful breakdown of the bullshit action in stocks when juxtaposed with the ever deteriorating reality.