And it's not even November 5th yet...
The New Abnormal: Two Years Into The "Recovery", And The GDP Is Underperforming The Average By Over 50%Submitted by Tyler Durden on 11/02/2010 11:04 -0400
One of the most idiotic decisions of 2010 will be the NBER's choice to pick the summer of 2009 as the end of the recession. As every upcoming quarter will confirm, GDP will decline more and more, and previous GDP numbers will be revised lower and lower, until it is confirmed that not only was the Q3 GDP substantially lower than expected (as the inventory boost is revised markedly lower), but that future periods will see flat if not negative economic growth. But even if one does believe the GDP number (which most do not, and certainly not David Rosenberg... who, nonetheless, does give credit to the PCE deflator...hmmm), the reality is that even at that growth rate, the current "recovery" which should now be 1.5 years in, is underperforming the average 2nd year recovery by over 50%. In other words, we continue to exist in a no-man's land of economic development, in which an outright collapse is solely prevented by the $3 trillion in monetary and fiscal stimuli to date, which tomorrow will grow to over $4TR. The second this Keynesian heroin is taken away, it is guaranteed that the economy will crash and burn, and the true GDP will manifest itself as it promptly catches up to where it should be: roughly 5-10% lower... and if the contraction in the shadow banking system persists, all the way up to 30%. Watch out below.
While traditionally wrong conventional wisdom expects that tomorrow's QE2 will be great for stocks, and the more the better, that may well not be the case. In fact as BofA's Hans Mikkelsen points out, while a "High Case" announcement, or one in which a $1 trillion program is disclosed, will certainly wreak havoc on the dollar, it is this case that will likely have an adverse effect on risk assets: "A less positive reaction than the base case as it would make equity investors worry if things are worse below the surface, "what does the Fed know that we don't know"." The honest answer is, of course, nothing - the Fed is so clueless, it takes its cues from the PDs. But we already discussed that. What is important, is that the Fed likely knows this feedback loop as well, and since it wants to avoid breaking the dollar-risk assets inverse correlation, it is almost certain that any massive QE amounts will be avoided (which is not to say that the final outcome won't be the Goldman estimated $2 trillion - it will be). It does, however, mean that the Fed will seek to achieve a goldilocks outcome: not too low ($100 billion incremental program), or the high case: something "inbetween." Below is a handy matrix for all to use and program into their HFT algos in advance of tomorrow's 2:15pm decision, together with some broad observations on why getting the QE2 number just right is so critical for Bernanke.
The one best thing about tomorrow, is that 29 hours from now, there will be no more speculation about what QE2 may look like, how big it will be, what the impact on stocks will be, why it will even take place considering the ISM and other economic metrics have turned up recently (and the Fed is an independent, objective force after all) and all the other topics that have clogged the pages of mainstream and alternative media for months. So as we all prepare to relegate this topic to the dustbin of history where it belongs (soon, alongside the current reserve currency), here is the definitive walkthru of what to expect tomorrow from Goldman's Ed McKelvey.
The entire world is preparing to bury the dollar in advance of tomorrow's QE2 currency suicide by the chairman. Exhibit A: the OZ dollar which is now trading north of parity for the first time in 28 years, as Australia decidedly puts its in chips in China's basket, believing that no matter how high the OZ, China will have no problem with importing its exports. A quick look at the FX heatmaps shows that while the dollar is getting shorted across the board and the EUR is surging, and making Merkel livid once again, the Yen, at least so far, is benefiting as it has again become the short currency of choice against the AUD, in the one pair that correlation traders use to determine broad market risk more than anything. Yet with a near record number of dollar shorts in existence, will the be the proverbial cover on the news day? Or, if Bill Gross is right, are we going to see a 20% plunge in the dollar beginning tomorrow? Of course, if Gross is right, he would be buying stocks on margin, not MBS. So take notice.
- Democracy’s Rich Pageant (The Awl)
- Democratic power at risk (Reuters)
- US Federal Reserve's latest bubble threatens mayhem: The prospect of more quantitative easing (QE) is driving government bond yields to levels that price in a depression (Telegraph)
- Fed easing may mean 20 percent dollar drop: Gross (Reuters)
- US Shifts G20 Currency Focus To Trade Deficits (FT)
- Robert Rubin dares to show his face with an FT oped: How America can withstand the headwinds (FT) - here's how, go back in time, and make sure Robert Rubin was never in position of power. Does that work?
- Lessons From a Lost Decade (Hussman)
- China's Hu Jintao Says Country's Yuan Policy Is Responsible, Figaro Says (Bloomberg)
- Fed likely to announce $500B of securities purchases: Bloomberg survey.
- India's central bank raised interest rates by 25 bps - for a sixth time this year.
- Yen declines against Euro as Asian recovery signs reduce demand for refuge.
- Alberto-Culver's Q4 net rises 31% on 12% jump in sales.
- Altra Hldgs sees FY10 EPS of $0.95-1.00 (cons $0.88); revs at $512-517M.
- Anadarko Petroleum reported Q3 EPS of $0.21, 28% below the average analyst estimate.
- Archer-Daniels-Midland's Sept. net income declined from $496M to $345M.
Earlier today, another member of the rapidly expanding European "periphery" (at least in terms of troubled states), Belgium, sold €3 billion in T-Bills at rates that were materially worse than the prior auction, even as the Bid To Cover remained flat or declined. This is happening even as Euribor fixings continue to surge and have hit year highs, with the 3 Month now at 1.047% (and 6 Month Euribor at 1.269%). As for the Belgium auction, here are the results. Hopefully little monetary damage occurred to the ECB as part of this latest apparent monetization.
After German blog "All is Smoke and Mirrors" floated an idea of an organized bank run (something attempted previously in the US without much success) in France in response to French austerity protests which resulted in absolutely nothing, the effort has since expanded to a pan-European organized bank run day, and has metastasized to Italy, Germany, the Netherlands, United Kingdom and Greece. We are confident that very soon the rest of Europe, which is currently gripped in a climate of extremely unpopular austerity, will join in this symbolic protest against banking, which unlike the US, may just succeed, considering the European banking system is in total shambles, and in far worse shape than its American counterpart. Since virtually all actions in 2010 by the global central banking cartel have been geared toward stabilizing the European banking system which continues to wobble on the edge of a systemic collapse precipice, perhaps the marginal withdrawal of a few billion in deposits could be just the straw that forces a reset first in Europe and shortly thereafter, in the rest of the globalized developed (and shortly thereafter, developing, proving what a joke the whole concept of decoupling is) world. As America has demonstrated so very well, 25 weeks of consistent withdrawals from domestic funds (sorry CNBC, there have not been inflows yet) have resulted in a quarter in which bank earnings were simply said crushed. Had Americans followed through and withdrawn their deposits from banks it would have been the final straw. Luckily, the lack of organization among the US population gave the US banking system a reprieve. In Europe things are different: banks are not as reliant on trading, however, they are far more reliant on a stable deposit base. Therefore, even a partially successful withdrawal campaign could have far more dire consequences on the continent's banking, and bring the financial system to its knees.
RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 02/11/10
Alan Grayson Demands Capital Buffer At TBTFs To Absorb Title Insurance Liabilities, Asks For New Stress TestSubmitted by Tyler Durden on 11/02/2010 00:16 -0400
When two weeks ago we highlighted the news that key title insurers such as Fidelity National are demanding indemnity and warranty from banks, we asked "what happens if the bank is once again caught to be, gulp, lying?
Who foots the bill then? Why the buyer of course. All this does is to
remove the liability from companies like Fidelity National and puts it
back to BofA, which is already so much underwater it has no chance of
really getting out without TARP, contrarian Goldman propaganda
notwithstanding." And while our speculation provided amusement to some of the more (vastly so) polemic elements in the blogosphere, it appears that Alan Grayson took this development seriously, and sent a letter to Geithner demand that a special capital buffer be established at the TBTFs, to absorb any and all losses that will arise from foreclosuregate (especially since earlier today it was made clear that certain banks such as First Horizon don't have any provision for putbacks). In Grayson's words: "Recently, Bank of America struck a deal with Fidelity National Title Insurance to indemnify the title insurer should legal problems with foreclosures create unanticipated title liability. Title insurers are clearly worried that they may face higher legal and policy costs if foreclosures are reversed, or should legal ambiguity cloud titles they already have insured...Since title insurers have in some cases just refused to insure this market, someone must pay for the liability these insurers have refused to incur. Both banks and regulators are claiming that the problems are simply process-oriented document errors that aren't really causing harm to the public at large. I suspect that no one really knows the extent of the problem, or the potential liability.With that in mind, it would seem prudent to require additional capital buffers for systemically significant institutions until the extent of the foreclosure fraud crisis is understood." We wholeheartedly agree with Grayson.
RBA Rises Policy Rate By 0.25% Bps To 4.75%, With Consensus Calling For Unchanged, AUD Surges Across The Board, Futures FollowSubmitted by Tyler Durden on 11/01/2010 23:45 -0400
The Reserve Bank of Australia has raised rates to 4.75%, more than the consensus expected, and the result is a surge in all AUD, crosses, especially the critical AUDJPY which is the primary recipient of the USD funding largese, and is the primary correlation to the ES, meaning futures are likely to follow suit, especially since there will be no monetary tightening in the dollar in this lifetime under the current Fed syndicate. It appears the RBA has bought the decoupling theory hook, line and sinker, and with China refusing to combat inflationary forces domestically, it is up to its derivative economies (AUD, BRL, etc) to do so. Nonetheless, one must respect the RBA's concern about what inflation may do to its economy: "the economy is now subject to a large expansionary shock from the high terms of trade and has relatively modest amounts of spare capacity. Looking ahead, notwithstanding recent good results on inflation, the risk of inflation rising again over the medium term remains. At today's meeting, the Board concluded that the balance of risks had shifted to the point where an early, modest tightening of monetary policy was prudent."
Nicholas Colas On Why The "Keith Richards" Stock Market May Presage A Return To Old School InvestingSubmitted by Tyler Durden on 11/01/2010 23:35 -0400
BNY's always informative and entertaining Nicholas Colas has a habit of seeing the silver lining, when others only see a putrid and radioactive mushroom cloud. And in this case, we do tend to agree with him... somewhat: when looking at the transformation currently gripping stock markets, instead of taking either extreme, Colas takes the Keith Richards path: adapt and survive (instead of fading away). And in surviving, the market may just return to that “old school” model of stock picking, and thus, fundamentally based stock trading, something which all investors and market participants lament and remember fondly as a bygone era before the Fed decided to take control of the entire capital market. However, where we are far less sanguine, is that for Colas' prediction to come true, it would necessarily (and sufficiently) require the removal of the Fed and its tentacular influence on stocks. And thus the question: can the existing stock market model survive an overhaul in which the underlying economic model reverts back from a central banking primed fiat system, to some "other" form of sound monetary decision making. That, we do not know.
SEIU or not, here is a status update from Where's The Note, as the recently launched campaign to request proof of mortgage note existence approaches the 20 day limit by law within which banks have to respond to all properly-submitted verification claims.