These days the Fed is blamed for everything: from liberating the world from oppressive regimes, to the resultant genocide that accompanies such a process, not to mention to reflating record bubbles that guarantee to wipe out another generaton's wealth as soon as this latest and greatest episode of central planning fails. Yet one thing the Fed can not be blamed for (yet) is the weather. And unfortunately for the Chairsatan, storm clouds are (literally) building up for the next five years. While some have blamed the recent surge in food prices on inclement weather, including floods here, droughts there, and massive conflagrations in Russia, the case is, as UBS points out, that weather over the next five years will likely be very unpredictable, and result in increasingly supply shocks and commodity price imbalances (at least for those commodities that are harvested; that the Fed's liquidity is at base reason for the surge in everything not nailed down, just look at the price action in items that do not need watering, or direct sunlight). Enter the Pacific Decadal Oscillator, and if UBS is right, things will continue to be ugly at least until 2016.
While over the past week we finally got confirmation that while the Swiss franc reserved its place at the top of the foreign exchange pantheon as the last flight to safety currency (with dollar concerns expressing themselves in the form of accelerating DXY selloffs predicated by fears of QE3 should oil continue rising higher or the world economy deteriorating), the one surprising discovery has been the stunning resilience of the Euro in light of relentless bad news. We have already noted our concern that March is rapidly coming, and brings with it a vicious calendar of European political upheaval and debt maturities, which should only be ignored at the peril of other people's money. Confirming our Euro-skepticism is Citi's Steven Englander who has released an extended note earlier titled "EURUSD - why so strong" which seeks to explain why the EURUSD is not trading a few hundred pips lower. Englander's conclusion: "we still find it hard to sweep away sovereign issues, especially if private sector positions continue to creep up. Under a benign global outcome, we continue to see better currencies to buy than the EUR, and under a not-so-benign outcome, we expect that the run-up in risk aversion will be a significant EUR negative. At these prices we are not buyers." Yet someone is...
RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 25/02/11
After we presented a micro-themed, static primer on the impact of the price of oil on the US consumer earlier, here is a macro picture perspective from Reuters, which correlates the change of oil prices to the corresponding change in world GDP (indicatively every $10 change in in crude results in an estimated range of 0.5-1.0% inverse change in global GDP).
As Conference Board/UMichigan Find Confidence At 3 Year High, Rasmussen Says Investor Confidence Plunges To 2011 LowsSubmitted by Tyler Durden on 02/25/2011 12:42 -0400
Is it about the time that everyone agreed that all "consumer confidence" is politicized, circular, irrelevant, and just as credible as the next lie to come out of Larry Yun's mouth? While a few days Thomson Reuters/University of Michigan "found" that Consumer Confidence had surged to a According to Rasmussen, "investor confidence sinks to another 2011 low." Ok, enough. It is more than obvious to anyone with half a brain that "confidence" is nothing more than a gamed, goal seeked indicator, which is a function purely and entirely of the political agenda of the entity collecting the data. Another great example: while the Consumer Comfort index was managed by ABC until last week, it was scraping all time lows. Then the week it starts being managed by Bloomberg, and, lo and behold: "Consumer Comfort Increases to Highest Level Since 2008." A surge in confidence? Really? On gasoline passing $4? Luckily even Bloomberg admits the credibility of this latest propaganda index is suggest to say the least: "The four-point gain last week follows a five-point increase
in early January. The gauge dropped five points in the week
ended Feb. 6, the biggest setback since January 2010. Movements of that magnitude are unusual because the index
is based on a four-week average, Langer said. Nonetheless, the
gauge is mimicking the shifts seen in a 10-week span in mid-
1993, when the economy was also recovering from a recession." Ah, the good old Bloomberg "assumption taken as fact" Jedi mind trick. Last time we checked the only "recovery" was that in the debt ceiling, er, target, assuming its achievement of $100 trillion in under 10 years is considered "recovery." Was the "also recovery" driven by the biggest global deficit spend in the history of the world, and the first outright debt monetization episode since the advent of Weimar? Guess we won't read that in the Bloomberg piece.
There are two reasons why I think the Fed will be loathe to remove QE. The first is the huge benefit (from the government’s perspective) of creating an inflation problem for China which will eventually force the Chinese to strengthen the Yuan. Congress has been pressing for harsher measures to force the Chinese to strengthen the Yuan (link here) for years and QE2 is turning out to be exactly the kind of pressure that just might work. I’ve long argued that this is a case of be careful what you wish for because the second the Chinese allow the Yuan to strengthen materially, the prices for everything that we buy from China (which is basically every single item on Walmart’s shelves) will rise an attendant amount. The other reason why QE is going to be with us for a long time is the ongoing need to support the massive size of monthly Treasury issuance. With the US expected to run a $1tr - $1.5tr deficit this year and another $2.5tr in maturing bonds to roll, there is very little chance that the US could continue to issue bonds at the current low rates without huge support from Mr. Bernanke’s POMO operations. Our total new borrowing and refunding needs will be greater than $300bn per month which is simply astronomical. Even bond investing legend Bill Gross is calling the US Treasury a ponzi scheme. If Bill Gross isn’t buying Treasuries who is?
Japan has found out the perils of a long term zero interest rate policy means the banks have no incentive to assume credit risk and lend to each other or anyone else, so they trade their own book. The performance of the FTSE 100 and S&P500 suggest the true extent of the banks continuing to use cheap government money to trade bonds and equities. Japan knows what happens when the “extend and pretend” gravy train stops rolling. Equities should continue to rise while government stimulus money can find no other home. This is why politicians are irked at bankers bonuses, because they wouldn’t be making fat profits without cheap government money raised at the expense of the tax payers. All tangible assets, commodities (metals, energy, agricultural) and rare artifacts are likely continue rising until growth is undermined. The threat of rampant inflation and civil unrest will eventually cause the US, UK, Eurozone, Japan and China to rethink stimulus packages.
As we reported yesterday, Saudi Arabia which following its latest recreation of Helicopter Ben's money parachuting experiment to buy its people's love, suddenly has found itself in a fiscal crunch, has no choice but to increase general oil sales revenues. Which is why as Reuters reports the kingdom, which many speculate may be next to see a spike in protests in early March, has just hiked its oil output by 8% to over 9 million barrels per day. The move, in addition to yesterday's margin hikes by both the CME and ICE, has forced oil prices to decline modestly, bringing some stability to an otherwise extremely jittery market, which would also further exacerbate geopolitical tensions. "The Saudi move follows reassurances from Riyadh earlier in the week that it was prepared to act to prevent shortages as a result of the rebellion in Libya against leader Muammar Gaddafi that has sharply reduced the fellow OPEC producer's 1.3 million bpd of exports." What is unclear is how Iran, an OPEC member, will respond to this unilateral action out of an otherwise "collective" oil cartel. We continue to expect that as a result of a widening political schism between the OPEC member nations, and the ongoing turbulence in Libya, that OPEC will be soon "restructured" materially.
And so the sunset of the QE2 inspired Golden Age begins: From JPM's Michael Ferolli: "We are revising down our projection for the annual growth rate of real GDP in Q1 from 4.0% to 3.5%. Prior to this week, first quarter growth had already been tracking a little soft relative to our forecast. In particular, consumers stumbled a bit to start the year, and while we expect them to pick up the pace some in coming months, the recent rise in energy prices poses a notable headwind. Most cyclical indicators remain quite favorable, and the unwind of adverse weather effects could support next quarter growth; for these reasons we are maintaining our second quarter growth forecast of 4%. If energy prices remain at their elevated level, however, this would pose a challenge to our outlook for next quarter. Another downside risk to Q2 GDP growth comes from the federal government sector, which could see a faster move to austerity than is in our current forecast. We've also revised our headline CPI forecast, particularly in Q1 where we now see the CPI increasing at a 4% annual rate. Below is our updated forecast spreadsheet."
David Rosenberg shares his updated list of the now 6 (formerly 4) drivers of stock performance: "Well, we use to say there were four key drivers: 1. Fundamentals; 2. Fund flows; 3. Technicals; 4. Valuation. Then we introduced another one last week: 5. The Fed’s balance sheet; And now there is a sixth: 6. Corporate earnings surprises. No wonder St. Louis Federal Reserve Bank President Bullard is opting for QE3 — he’s probably long the market!"
After having surged for 6 days starting with a major jump on February 16, from €1.2 billion to €15.8 billion, borrowings under the ECB's 1.75% Marginal Borrowing Facility plunged overnight from €14.9 billion to €2.2 billion. As was reported previously, the supposedly responsible banks for this surge in borrowings were Ireland's two most insolvent financial entities: "The FT reports that "Anglo Irish Bank and the Irish Nationwide Building Society, Ireland’s two most troubled lenders, were behind a spike in overnight borrowings this week from the European Central Bank, according to people familiar with the transactions." A senior figure familiar with the transaction said it was “to facilitate” the sale of deposits by Anglo Irish and Irish Nationwide under the restructuring plan. Under the ECB’s normal refinancing operations, the collateral is locked up for a week. Tapping the ECB’s overnight or “marginal lending” facility, although more expensive “gives the banks the freedom to have the assets at their disposal immediately if there is a quick sale" he said." So does this mean that AIB and the INBS have completed their asset sales and the collateral has been unwound from overnight activity? That would be the logical explanation, especially as today is an important day for Ireland with Enda Kenny expected to become Taoiseach imminently. What will be curious is if the MLP borrowings surge once again in the coming days: at that point the "Irish" excuse will no longer be applicable.
There are two key datapoints to present in this week's Fed balance sheet update: the surge in excess reserves, and the comparative Treasury holdings between the Fed and other foreign countries. But first the basics: the total Fed balance sheet hit a new all time record of $2.5 trillion. The increase was primarily driven by a $23 billion increase in Treasury holdings as of the week ended February 23 (so add another $5 billion for yesterday's POMO) to $1.214 trillion. With rates surging, QE Lite has been put on hibernation and there were no mortgage buybacks by the Fed in the past week: total MBS were $958 billion and Agency debt was also unchanged at $144 billion. The higher rates go, the less the QE Lite mandate of monetization meaning that the Fed will be continuously behind schedule in its combined QE2 expectation to buy up to $900 billion by the end of June. Yet most notably, as we touched upon yesterday, the Fed's reserves with banks surged by $73 billion in the past week, as more capital was reallocated from the unwinding SFP program. As noted previously, we expect the total bank reserves held with the Fed to jump from the current record $1.29 trillion to at least $1.7 trillion by June.
As we had been expecting, Q4 data once again continues to take downward revisions. Second revision of Q4 GDP prints at 2.8%, widely missing of 3.3% widely, compared to a 3.2% reading previously. US Personal Consumption came at 4.1% on expectation of 4.2% (Prev. 4.4%). Core PCE was 0.5%, on expectation of 0.4%. The attempt at getting the consumer to releverage, at least according to the BEA, is working: personal outlays increased from $10,736.3 to $10,883.2 resulting in a decline to savings of $55 billion. And still the economy refuses to either generate jobs to keep up with the rate of population growth, or to grow at the required rate of 4-5% nearly 2 years following the "end" of a recession. Make room for QE3.
As recent developments out of Libya have demonstrated, when geopolitics and oil production mix, the resultant product is quite explosive. And as more protests are sure to spread to other countries in the region (with Saudi of course being the key domino whose potential fall would send crude well over $200), below we present a summary atlas of the key production capacities in both crude and gas, as well as proven reserves of all the countries in the MENA region. At this point, with Libya largely priced in, all attention should once again shift to developments in Bahrain, which contrary to the media black out, have not been put under control even remotely. The rumored fact that Al Jazeera may have allegedly received a "request" from Saudi Arabia to not cover recent events is a different story altogether.
- Irish Voters Set to Take Revenge on Ruling Party (FT, Bloomberg)
- Saudi youth call for protest in solidarity with Libyan uprising (Monsters and Critics)
- Wisconsin Assembly approves plan to curb unions (Reuters)
- Special report on Glencore: The biggest company you never heard of (Reuters)... actually that would be the DTCC
- US Warns Extreme Food Prices Will Stay (FT)
- Gotta love Bloomberg headlines: Fannie Mae, Freddie Mac Seek $3.1 Billion Amid Improved Earnings (Bloomberg)
- More completely expected criminal fraud out of Citigroup: What Vikram Pandit Knew, and When He Knew It (Bloomberg)
- CFTC, SEC halt criminal investigations, blame lack of money (WSJ)
- Sentance Says BOE Must Tighten Now to Prevent Tough Moves Later (Bloomberg)
- House Republicans Move to End U.S. Foreclosure Aid Criticized as Harmful (Bloomberg)