Testimony

On this leap day, we have a busy schedule which includes the second Q4 GDP revision, Chicago PMI (expect another massive beat courtesy of consumers confident that they can have Apple apps, if not so much food, since they still don't pay their mortgages), various Fed speakers, of which most important will be Ben Bernanke who takes the podium in Congress at 10 am for his semi-annual monetary policy report.

The results for the second European 3 year discount window operation, pardon LTRO are in, and the winner is...

• ECB ALLOTS EU 529.5BLN IN 1,092 DAY REFINANCING TENDER
• ECB SAYS 800 BANKS ASKED FOR THREE-YEAR LOANS

Since the expected range was €200 billion - €1 trillion, and just above the median €500 billion, this is clearly within expectations, however notably less than what the Goldman investor survey expected at €680 billion. What is certainly scary is that the number of banks demanding a hand out was a whopping 800, well above the 523 from the first LTRO: clearly many banks are capital deprived.

For a while there it seemed that together with the LTRO and the Bernanke testimony, tomorrow's event trifecta would be joined by ISDA, which it had previously been rumored would make a decision on whether a credit event (read CDS trigger) had occurred in the context of Greece, and specifically following the ECB's stripping of its own bonds under some arcane exchange offer that only the ECB was privy to (this is not a determination whether a credit event has taken place related to the PSI - that will take place in late March). According to a just released PR, this won't happen, and instead ISDA will hold the meeting at 11 GMT on Thursday, March 1, the day after the LTRO, and announce everything was voluntary and by the books, just to avoid overloading the algos with bullish news at the same time (recall that the LTRO announcement will take place at 11:15 CET). In this way, the upside love will be spread over two days, which should hopefully result in another 30 ES point, as the headline scanning aglos no longer care what the headlines actually say, as long as there are headlines. Remember: when dealing with a bipolar Atari 2600 - quantity trumps quality any time, especially when coming off the biggest short-term central bank liquidity infusion in markets in history.

For a February 29, tomorrow will be even more remarkable, because while all eyes will be on the LTRO, just waiting for their chance to start fading the expansion of the ECB's balance sheet (which will hit a record €3 trillion+ as of market close tomorrow, or well higher than the Fed's $3 billion), some may be forgetting that across the pond, our own Bernanke will be holding the first of his biannual Humphrey Hawkins presentations to Congress hours after the LTRO news has printed. Expectations are high that despite $2 trillion in liquidity flooding capital markets in the past 6 months, that Bernanke will not dare to remove the punchbowl. Here is Citi's Steven Englander with a preview of what (not) to expect.

So it starts - the ECB has just announced its request for bids for the next all important 3 year (1092 Day) Discount Window, pardon, LTRO operation, which is fully priced in now (and following which the market will look toward the Fed for future easing - enter Bernanke and his Humphrey Hawkins testimony tomorrow), and which will create even more negative carry for Euro banks, as the insolvent hedge fund formerly known as the ECB lends out cash at 1% (in exchange for what can generously be described as used candy bar wrappers) and pays back 0.25% on the same cash redeposited back at the ECB. For the results of operation tune in at 11:15 am tomorrow local time or 5:15 Eastern. The only practical result of this operation will be the expansion of the ECB's deposit facility to the mid €700 billions. As for what the final size of the LTRO will be, just ask your hotdog vendor: he has as much guidance as anyone else. Regardless of the size outcome, one thing is certain - the banks that are found to use the ECB's Discount Window should prepare for major stock pain, as the market, devoid of easy targets, focuses on them next as the European stigma trade becomes the hedge fund divergence trade du jour. After all there is a reason why the Fed's Discount Window expansion lasted for all of 3 months, and ended up hurting the participating banks (ahem Dexia) more than any other Fed concoction during the early stages of the Depression.

And so the transition to the QE3 "economic disappointment" regime begins. Because after the ECB is done with the LTRO it's over for global QEasing, and the Fed is next. Remember- Bernanke's semiannual testimony to Congress is tomorrow. Whatever will he say....

• Headline Durable Goods plunges from +3.2 to -4% on expectations of -1%
• More painfully, Durable goods non-defense ex aircraft down a whopping -4.5% on Exp of -1.3%, down from +3.4%.

Visually, this is the lowest Durable Goods number since January 2009

Last week saw dramatic dispersion among the major FX pairs as global and local influences caused significant moves in most of the key crosses. Goldman takes a look back at the key drivers of that volatility and then focuses on the week ahead as the EU Summit at the latter end is the main event risk while ongoing macro developments will be focused on the incessant rise in Crude oil prices and whether we start seeing knock-on impacts in the real economy.

There are those who remember that back in February 2010, before the world realized just how broke Greece was, the public's deplorably short attention span was briefly focused on none other than Goldman Sachs, which as so often happens, was at the heart of the scheme enabling Greece to skirt by Maastricht regulations and mask the fact that its debt and deficits were both far worse than represented publicly. There are also some who remember that back in February 2010, it was none other than the Federal Reserve that tasked itself with uncovering whether Goldman did anything "illegal" by engaging in currency swaps to make the Greek economy appear rosier than it was: "We are looking into a number of questions related to Goldman Sachs and other companies and their derivatives arrangements with Greece," Bernanke said in testimony before the Senate Banking Committee.... Greece in 2001 borrowed billions, with the aid of Goldman Sachs in a deal hidden from public view because it was treated as a currency trade rather than a loan....Goldman Sachs spokesman Michael DuVally declined to comment on the Fed's probe. "As a matter of policy we don't comment on legal or regulatory matters," DuVally said. Goldman Sachs had defended the transactions in a statement posted on its Website Sunday. The firm said they had a "minimal effect" on Greece's overall fiscal situation." Maybe, just maybe it is time, two years later, for the world to hear something, anything, from the Fed as to what its seemingly quite extensive investigation into Goldman's has yielded.

The surreal keeps getting surrealer. One could probably think that after being forced to pay for the privilege of having a job, to fund European bank solvency out of their pocket as part of the Greek "bailout", and finally to hand over their gold, the Greeks would have at least put up a fight. One would be wrong: instead of doing anything else than the occasional store front looting by marauding gangs, what Greeks are doing instead... is lining up for German lessons. Well, if you can't beat them, may as well learn their language. Athens News reports: "Ruediger Bolz has 350 students coming through the doors of his German language institute in central Athens each day - 20 percent up on a year ago. The rush among Greeks to learn German may seem odd after the war of words between the two countries, with Greeks fuming at German accusations of financial mismanagement and some media playing on Nazi caricatures of Berlin politicians. Yet for Bolz, who has run the Goethe Institute for the last six years, there is no mystery: his pupils are happy to side-step politics and face up to harsh economic realities by acquiring new skills." So years of debt slavery induced misery may be in store, and the sheep are delighted to get the electric cattle prod, but at least they get to beg their employers to take their money with the proper umlaut usage.

The week ahead is fairly light on big ticket data releases, but what is released will provide more evidence of the strength of global activity. The most important of these will be the flash PMIs for China and the Euro area and the German IFO reading . There is no consensus expectation for the China print, however the Euro area indices are both expected to rise slightly, as is the German IFO. In terms of cyclical hard data, Taiwan export orders and IP for Singapore and Taiwan, Euro area industrial orders and trade data from Japan and Thailand will be notable. Admittedly the data from Asia is likely to be complicated by Chinese New Year which fell in the third week of January, and presumably this is why the consensus expects such a sharp drop in Taiwan IP, however the data are still worth watching for indications of the strength in global activity. Generally, consensus expectations for these prints are not particularly encouraging and any 'beats' would be a positive surprise. It goes without saying that ongoing negotiations towards signing off on Greece's second package will also remain on the radar screen. As we write, Reuters has posted suggestions that the debt swap will be open by March 8 and complete by March 11.

He's in the process of ruining the country. 

If you listened to Ben Bernanke's testimony between last week and this week, you were told repeatedly that he is not worried about inflation.

Here are some charts that his analysts must have missed - Perhaps they're spending their time hanging out with the SEC boys surfing the web, but either way they should probably bring these to Ben's attention sooner rather than later.

Not Money's Reaction to Ben Today

Five days ago, when Ben, or as he is also known, "CTRL+P", was talking before congress, gold soared as soon as the Chairman opened his mouth, hitting +$15 in minutes. Sure enough, Ben's open mouth is once again a gold bug's best friend, with gold jumping by a nearly identical $14 in the 30 minutes since the Senate version of Bernanke's testimony started today. Keep talking Ben, keep talking... And just wait until Ben starts printing again, to match the ECB's imminent second LTRO.

During my tenure as Fannie Mae’s senior vice president for marketing, I warned NPA that any effort by Fannie Mae to launch a massive national affordable housing program would be as disastrous for homebuyers and neighborhoods as FHA’s failed efforts were in the 1960s and 1970s. 

While Bernanke's prepared remarks to the Senate today will be identical to those given to Congress last week, the Q&A session will be different. One notable difference will be Bernanke's take on the "huge jobs number" which was not public last week. He will likely be put to task to answer if and why he still expects QE when the economy is supposedly improving (on the back of a collapsing labor force, yes it makes no sense, don't ask us). We wonder what his non-answer answer will be to that one. Also we wonder if like last week, when answering Congressman Flores, he admits that the ECB collateral certification process is much better than that of the Fed when it comes to issuing cash under the discount window.