Update: the Senate has failed to reject a bid to stop the debt ceiling hike with a simple 52 vote majority all of it along party lines. The US now has $16.4 trillion in debt capacity as of Friday. Since roughly $100 billion was plundered from Pension Funds in the past month, The US will have about $15.4 trillion in debt with the Monday DTS. The question then is how long will the $1 trillion in debt capacity last: at $125 billion/month it won't be enough to carry the US past the election without another massive debt ceiling spectacle.
While Congress recently voted down the increase in the US debt ceiling, that vote was largely irrelevant. And all that matters is how the Senate will vote. Watch it live in progress below. It is virtually unlikely that the process of debt ceiling increase will be overturned so within minutes the US should have a brand spaking new debt ceiling of $16.4 trillion.
The headlines are crowing of the magnificent CAT earnings (channel stuffing?) which in turn is helping the Dow reach its highest point since May 2008 (CAT is responsible for 27 of the Dow's 30 point gain today alone). This must be the signal that we-the-consuming-people need to borrow-and-spend again right? Well, no. Unfortunately, as many already know, the process of indexing is implicitly flawed in many ways - most importantly survivorship bias. If we compare the performance of the components of the Dow at the start of 2008 to the actual Dow index performance, there is a very significant divergence of around 7% (or around 900 points). This is actually understating the difference (as it is an average) as we note that 5 of the 30 names from 2008 have lost more than 70% of their value (GM, AIG, C, BAC, and AA) since January 2008 (averaging -88% among those). Three names have risen by more than 70% (MCD, HD, and IBM - thank you Warren) as 18 of the 2008 Dow 30 names are lower (on average -36.5%) with the remaining 12 Dow 2008 names up on average 33%. What is worse is the realization of the dramatic loss in real purchasing power as Gold has risen by more than 100% since the start of January 2008 as the Fed continues to realize it can abuse the lemming-like focus on nominal returns.
Looks like the earlier analysis that the US is slowly morphing into a second Japan just got even more confirmation. According to the Census Bureau (not NAR data, which we will hence ignore completely due to its consistent bias, error and overall worthlessness) December New Home Sales declined from 321K to a seasonally adjusted annualized rate of 307K in December, on expectations of a rise to 321K from last month's revised 315K. On a non-seasonally adjusted basis the US sold a whopping 21K homes, the lowest since January 2011, and on par with the lowest on record. What is more troubling is that according to Bloomberg, the 2011 number of 302K sales is the lowest on record. Of these 21K, 5K were not even started. So much for that housing recovery. And also confirming that there is not even a glimmer of hope for the US housing market is that the Median Price for new homes just dropped from $215,700 to $210,300, which is the lowest median price since October 2010. The chart below of pricing trends indicates all that is needed to know which way the housing market is going.
¥1,086,000,000,000,000 (Quadrillion) In Debt And Rising, And WhyThe ¥ Will Soon Be A $: "A Lost Decade... Or Two"Submitted by Tyler Durden on 01/26/2012 10:31 -0400
Yesterday the Japanese Finance Ministry made a whopper of an announcement: in the year ending March 2013, total Japanese debt will surpass one quadrillion yen, or ¥1,086,000,000,000,000. This is roughly in line with the Zero Hedge expectations that by this March total Japanese debt would surpass one quadrillion yen. In USD terms, at today's exchange rate, this is precisely $14 trillion. And while smaller than America's $15.4 trillion (net of all post debt ceiling breach auctions), which was $14 trillion about a year ago, the GDP backing this notional amount of debt, which just so happens is greater than the GDP of the entire Euro area, is a modest ¥481 trillion, so by the end of the next fiscal year, Japan will have a Debt to GDP ratio of 225%. And that's not counting all the household and financial debt. So prepare to add quadrillion to the vernacular. At this exponential rate of increase quintillion will appear some time in 2015 and so on. Yet the scariest conclusion is that as Bloomberg economist Joseph Brusuelas points out, America is not only next, it already is Japan. Actually scratch that, America is worse than Japan, which at least generated a real housing bubble in the years just preceding the onset of its multi-decade credit crunch, something not even America could do in comparable terms. More importantly, "the debt-to-GDP ratio of the U.S. recently surpassed 100 percent, and it did so in the four years after the onset of the recession, compared with the six years it took the Japanese debt-to-GDP ratio to do so." The Japanese may be better than America in most things, but when it comes to destroying its economy, the US has no equal. Brusuelas' conclusion: "If below trend growth is the most probable scenario in the U.S., the most likely alternative is that the U.S. economy is headed for a lost decade… or two." So... go all in?
Even as Goldman's economists have been bashing the Fed for not proceeding with a full blown LSAP QE, and have been warning repeatedly that the economy is due for a significant leg lower, here is Goldman once again doing all it can to trade (i.e. dump) its own inventory first and foremost, with a just released trade reco which in our opinion marks a market top far better than any squiggle on a DeMark chart. From Goldman: "We are recommending long positions in the Russell 2000 with a target of 860 (c+8%) and a stop of 765 (c-3%), marked relative to today’s open." As a reminder, for every client who is buying from Goldman, Goldman is selling. That is all.
Whether it is an over-abundance of ships (mis-allocation of capital) or a slowing global growth story (aggregate demand), the crash in the Baltic Dry Index has been significant to say the least. Seasonals are prevalent (and Chinese New Year impacts) but to try and clean up that perspective, we find that so far this year the Baltic Dry has fallen 42% more than its seasonal normal and is down by more than 50% since 12/30/11. Nothing to see here move along.
And so the volatility continues: initial claims go from 402K to an upward revised 356K, to 377K, on expectations of 370K. The swings in this data series are getting as big as those in the stock market on those rare occasions when reality sets in. The miss is in line with the Fed perceived weakness in the economy. Continuing claims also missed coming at 3554K up from an upward revised 3466K, higher than expectations of 3500K. A whopping 146K dropped out of extended claims: in fact, in the past year the unemployed collecting post 6 month benefits either EUCs or Extended Benefits have plunged from 4.6 million to 3.4 million. As for last week's massive drop of nearly 50K initial claims, we learn that somehow it was New York to thank for this, with 27.7K less claims than the week before due to "Fewer layoffs in the transportation, educational, and construction industries." How about layoffs in the financial services industry, and also how much do those jobs pay vs "transportation, educational and construction" jobs? What however does not justify the Fed's ZIRP through 2015 or so, is the Durable Goods number which came at 3.0%, on expectations of 2.0%, down from an upward revised 4.3%. The bulk of this was in airplane orders thanks to Boeing as noted previously. However what was surprising is that Durable Goods ex transportation came in at a blistering 2.1% on Exp of 0.9%, and Capital Goods Orders ex Non-Def and Aircraft which rose 2.9% on expectations of 1.0%. However since the Fed has made it clear it will boost its balance sheet, and as of today the implied increase is over $800 billion, at the smallest whiff of trouble, the risk bubble is in full on mode as bad news is good news, and good news is better news.
Riskier assets advanced today, as market participants reacted to yesterday’s FOMC statement, as well as reports that Greece is making progress in talks for a debt-swap deal. However despite a solid performance by EU stocks, German Bunds remain in positive territory on the back of reports that the ECB has ruled out taking voluntary losses on its Greek bond holdings but is now debating how it would handle any forced losses and whether to explore legal options to avoid such a hit according to sources. As such, should talks between private creditors and other governing bodies stall again, there is a risk that Greece may not be able to meet its looming financial obligations. Of note, Portuguese/German government bond yield spreads continued to widen today, especially in the shorter end of the curve.
Today's key economic data comes early in the day. The rest will be punctuated by ongoing rumors out of Europe and Iran.
As the world awaits resolution out of Greece and the debt exchange offer which even if passed today would have to cram 6 months of actual work into 54 days, the global bond vigilantes are not sticking around, and continue to attack the next weakest link - Portugal, whose 10 Year bonds just passed 15% in yield, and were trading well below 50 cents of par with CDS hitting a new record of 1350 bps. Naturally this has brought out the ECB's crack bond buying team (only at a central bank does a "trader" need only know how to buy, selling skills are optional) which tried to put the genie back in the bottle but now it is too late. After all, vigilantes are just wondering what form the Portuguese restructuring will take place considering that unlike Greece the bulk of its bonds have strong protections. So if one does use Greece as a benchmark how long does Portugal have? As the third chart shows, the last time 10 year GGBs passed 15% was back in August. So Portugal has 6 months. Give or take.
- BOJ Should Be Allowed $643 Billion Fund to Buy Foreign Bonds, Iwata Says (Bloomberg)
- Banks Hoarding ECB Cash May Double Company Defaults (Bloomberg)
- China Police Open Fire on Tibetans as Protests Spread (Bloomberg)
- Sarkozy Presidential Rival Hollande Would Lower Retirement Age, Lift Taxes (Bloomberg)
- IMF takes tougher stance over Greek debt (FT)
- Iran threatens to act first on EU embargo (FT)
- PM says ‘no complacency’ on economy (FT)
- George Soros: How to pull Italy and Spain back from the edge (FT)
- Japan's NEC to slash 10,000 jobs (Reuters)
- Obama Planning Corporate Tax Overhaul (Bloomberg)
Gold rose 2.5% yesterday and broke $1,700/oz to $1,712.80, its biggest one-day gain in the past 4 months, as the US Federal Reserve’s 11 out of 17 members voted that interest rates would likely remain near zero into late 2014. Investors sought safe haven refuge into gold fearing their portfolios would lose value as Central Banks flood the markets with loose monetary policies and more cash for governments that can't seem to manage their balance sheets. A group of 7 major economies now have interest rates that average .5%. Silver also rallied up 4%. Today's Comex February gold option expirations will show more activity in the gold markets. One trader stated that gold's gains on Wednesday could be due to a huge cover on a short position before today's option expiration.
Rumors Start Early: Greek Creditors "Ready To Accept" 3.75% Cash Coupon But With Untenable ConditionsSubmitted by Tyler Durden on 01/26/2012 08:07 -0400
As a reminder, the primary reason why the Greek PSI deal "officially" broke down last week, is because the European Fin Mins balked at the creditor group proposal of a 4%+ cash coupon. So now that creditor talks, which incidentally don't have a soft deadline so they can continue indefinitely, or until the money runs out on March 20, whichever comes first, have resumed we already are getting the first totally unsubstantiated "leaks" that negotiations are on the right path. As various US wires reported overnight, including DJ, BBG and Reuters, citing completely "unbiased" and "unconflicted" local Greek media, "Greece's private creditors are willing to improve their "final offer" of a four percent interest rate on new Greek bonds in order to clinch a deal in time to avert a messy default, Greek media said on Thursday without quoting any sources. With time running short ahead of a major bond redemption in March, private creditors are now considering an average coupon of around 3.75 percent on bonds they will receive in exchange for their existing investments, the newspapers wrote." All is good then: the hedge funds will make the proposal to Europe and Europe will accept, right? Wrong. "Another daily, Kerdos said participation of public sector creditors including the ECB in the swap deal was a pre-condition for that offer, which it said could bring the average interest rate to about 3.8 percent." And that as was reported yesterday is a non-starter. So in other words, the latest levitation in the EURUSD started at about 4am Eastern is nothing but yet another rumor-based attempt to ramp up risk. Only this time the rumor is actually quite senseless, which probably explains why even the market which has been completely irrational lately, has seen the EURUSD drop from overnight highs. That said, expect this rumor to be recirculated at least 5 more times before end of trading.
As we have pointed out previously, the primary if not only driver of relative risk returns (because in a world of relative fiat value destruction, it is all relative, except for gold which is revalued relative to all on a pro rata basis), will be who of the big two - the Fed and the ECB - can print more. And up until now, at least since the end of December when the market "suddenly" realized that the ECB's balance sheet has soared to unseen records, the consensus was that it was the ECB that would be the primary source of easing. Especially when considering that there is another ~€500 billion LTRO due on February 29. Yet today's rapid reversal in the EURUSD, driven by Bernanke's uber-dovish comments suggest that something has changed and that the Fed is now expected to ease substantially. How much? For that we look to the latest balance sheet cross-correlation, where if we go by simple correlation, the market is now pricing in (based on the EURUSD cross ratio) that the relationship of the two balance sheets will rise from a multi year low of 1.08 as of a few days ago to 1.15, at least based on the rapid move in the EURUSD higher as can be seen in the chart below. Indicatively, the actual value of the two balance sheets is €2.706 trillion for the ECB and $2.92 trillion for the Fed (or a 1.08 ratio). So now that the EURUSD has risen as high as it has, it implies that the pro forma "priced in" ratio is about 1.15. But wait: one should also factor in the fact that the ECB's balance sheet will rise by at least another €500 billion in just over a month, which will bring the ECB's balance sheet to €3.2 trillion. Which means that to retain the 1.15 cross balance sheet relationship, the Fed's own balance sheet will have to rise to $3,687 billion, or a whopping $767 billion increase!