fixed

Isn’t it meaningless to look at the inverse floaters in isolation? To assess risk, shouldn’t we look at the entire portfolio held by Freddie Mac?

Not only is the large bank-GSE cartel preventing millions of Americans from refinancing, but these same cartel players are also thwarting Fed monetary policy and hurting all our economic prospects.

James Dines has been in the business of making bold calls for over 50 years. In this deep-diving interview, he minces no words about the dire risks the US economy - and the world at large - faces at this juncture. Simply put, he sees the excessive credit in the financial system as having placed the global economy on a collision-course with hyperinflation. Unlike past periods of turmoil, there are no truly 'safe' places for investment capital to hide. Geographic markets and almost all asset classes are positively correlated these days. They share many of the same risks and if a systemic crash occurs, they will crash together. At this point, says Mr Dines, you want to invest in assets that can not be printed away by government desperation. You want to hold hard assets; "wealth in the ground" as Dines says (physical commodities, mining companies, etc). They're your best best to make money faster at a rate faster than inflation is going to happen.

While “Rates low thru ’14? was the gist of the headline – over 1/3 of the participants see ’15 and beyond as appropriate.  The implications are severe from multiple fronts - a few to think about:

Was the Chapter 11 Petition of MF Global Holdings filed fraudulently?

Following the LTRO and the recent spate of successful bond auctions (until today's tailing Spanish issues that is) European liquidity was supposed to be fixed, with 3M Libor dropping for weeks in a row, right? So perhaps someone can explain to us why the ECB's FX swaps with the New York Fed (reported by the European central bank 9 days in advance of confirmation by the Fed) just rose to a post-crisis flare up high of $89.3 billion, up from last week's $84.5 billion (the increase a function of new 7 and 84 Day swaps, each getting 10 and 17 participating banks, respectively), more than any other time in 2011, 2011, when the liquidity crisis was rampaging, and in fact the highest since July 2009. So: what is fixed again?

European Indices are sliding following comments from EU’s Juncker that Greek PSI talks remain “ultra-difficult”, despite earlier gains following comments from the Chinese Premier considering further contributions to the EFSF and the ESM. The Basic Materials sector is outperforming others amid news of a possible merger between Glencore and Xstrata, causing shares in both companies to trade in strong positive territory ahead of the North American open Oil & Gas are one of the worst performing sectors in Europe today, with Royal Dutch Shell shares showing the biggest losses following disappointing corporate earnings. Elsewhere, S&P released a report suggesting Eurozone recession could end in late 2012, forecasting 1% GDP growth for the Eurozone in 2013, however these comments were not followed by significant European index movements. In terms of fixed income securities, Spain held a well received bond auction earlier in the session, with all three lines showing falling yields and strong bid/cover ratios.

One of the laments of the uberdoves in the world over the past several years has naturally been the fact that interest rates are bound by Zero on the lower side, and that the lowest possible rate on new paper is, by definition, 0.000%. Which is what led to the advent of QE in the first place: in lieu of negative rates, the Fed was forced to actively purchase securities to catch up to a negative Taylor implied rate. This may be about to change, because as the just released letter from the Treasury Borrowing Advisory Committee, or as we affectionately called the JPMorgan/ Goldman Sachs Chaired committee, the "Supercommittee That Runs America", simply because it alone makes up Tim Geithner's mind on what America needs to do funding wise, demand, "It was broadly agreed that flooring interest rates at zero, or capping issuance proceeds at par, was prohibiting proper market function. The Committee unanimously recommended that the Treasury Department allow for negative yield auction results as soon as logistically practical." And what JP Morgan and Goldman Sachs want, JP Morgan and Goldman Sachs get. And once we get the green light on negative yields at auction, next up will be the push for the Fed to impose negative rates on all standing securities, which means that coming soon savers will be literally paying to hold cash. And that will be the final straw.

What do the NAR, Consumer Confidence and CBO forecasts have in common? If you said, "they are all completely worthless" you are absolutely correct. Alas, the market needs to "trade" off numbers, which is why the just released CBO numbers apparently are important... And the fact that the CBO predicted negative $2.5 trillion in net debt by 2011 back in 2011 is largely ignored. Anyway, here are some of the highlights, but here is the kicker: "Had that portion of the decline in the labor force participation rate since 2007 that is attributable to neither the aging of the baby boomers nor the downturn in the business cycle (on the basis of the experience in previous downturns) not occurred, the unemployment rate in the fourth quarter of 2011 would have been about 1¼ percentage points higher than the actual rate of 8.7 percent"- translation: CBO just admitted that the BLS numbers are bogus and real unemployment is 10%. Thank you.

Surging Greek and Portuguese bond yields? Plunging Italian bank stocks? The projected GDP of the Eurozone? In the grand scheme of things, while certainly disturbing, none of these data points actually tell us much about the secular shift within European society, and certainly are nothing that couldn't be fixed if the ECB were to gamble with hyperinflation and print an inordinate amount of fiat units diluting the capital base even further. No: the one chart that truly captures the latent fear behind the scenes in Europe is that showing youth unemployment in the continent's troubled countries (and frankly everywhere else). Because the last thing Europe needs is a discontented, disenfranchised, and devoid of hope youth roving the streets with nothing to do, easily susceptible to extremist and xenophobic tendencies: after all, it must be "someone's" fault that there are no job opportunities for anyone. Below we present the youth (16-24) unemployment in three select European countries (and the general Eurozone as a reference point). Some may be surprised to learn that while Portugal, and Greece, are quite bad, at 30.7% and 46.6% respectively, it is Spain where the youth unemployment pain is most acute: at 51.4%, more than half of the youth eligible for work does not have a job! Because the real question is if there is no hope for tomorrow, what is the opportunity cost of doing something stupid and quite irrational today?

The week has started with a general risk averse tone as market participants remain somewhat disappointed in the progression of the Greek bond swap talks in spite of Venizelos, the Greek finance minister, suggesting that a compromise can be struck this week. The latest article writes that Troika believes Greece will need EUR 145bln of public money from the Eurozone bailout rather than the EUR 130bln originally planned. This however, has been swiftly dismissed by German lawmakers. In terms of the European equity market it is the banking stocks which have taken the brunt of the selling pressure which in turn has remained a supporting factor for higher prices in European fixed income futures. Meanwhile in the short end, Euribor, is trading higher following the release of the daily fixes which resumed a trend of sizeable declines in the 3-month fix. In other news, Italy came to market and raised EUR 7.5bln across four different BTP lines with decent demand and a fall in average yields paid. As such the Italian10yr spread over bunds has tightened from the morning’s highs with unconfirmed market talk suggesting that the ECB were also checking rates being noted by several desks. Looking ahead the main focus will likely remain on any updates regarding Greece as various European officials meet once again in Brussels. Aside from that, highlights come in the form of US personal income and spending for December with PCE data released at the same time.

When commenting earlier on the GDP number we noted that the sellside brigade is about to start coming out with Q1 GDP "warnings" now that inventories will likely subtract between 0.5% and 1% from growth in the current quarter. Sure enough here is Goldman with the first warning saying that "The composition of growth was slightly negative for the Q1 outlook, in our view." That's not surprising. What is is that also according to Goldman, the auto sector contributed 0.3% to the overall GDP number. Which means that ex inventories and autos (sold courtesy of NINJA loans provided by Uncle Sam as discussed extensively every month with the release of the Fed's Consumer Credit number), the US economy grew a meaningless 0.5%! And this in the quarter when the US economy was supposed to be on a tear. We are now fairly concerned that there is an outright chance of economic contraction in Q1.

Today we get the first look at where GDP closed 2011.

Over the past month, much has been said about the recent 3 year LTRO, and its function in stabilizing the European bond market. Certainly it has succeeded in causing an unprecedented steepening in European sovereign 2s10s curves across the periphery (well, except for Greece, and recently, Portugal) as by implication the ECB has made it clear that debt with a sub-3 year maturity is virtually risk free, inasmuch at least as the ECB is a credible central bank (and if it is perceived as no longer being one, there will be far bigger issues), along the lines of what the Fed's promise to keep ZIRP through the end of 2013, and today's likely extension announcement through 2014. Yet does filling a much needed for European stability fixed income "black hole" equate to a catalyst for Risk On? Hardly, because as in a new note today Brockhouse Cooper analysts Pierre Lapointe and Alex Bellefleur explains, the LTRO is "not a catalyst for a risk-on rally as the central bank is substituting itself for funding sources that have “dried up.” Sure enough - all the ECB is doing is preserving existing leverage (especially in light of ongoing bank deleveraging), not providing incremental debt, something which could only be done in the context of unsterilized bond monetization ala QE in the US. So just over a month in, what does the LTRO really mean for Europe (especially as we approach the next 3 Year LTRO issuance on February 29)? Here is Brockhouse's explanation.

SOTU Post Mortem:

The best news possible: "Nothing will get done this year, or next year, or maybe even the year after that." Barack Hussein Obama
The worst news: Everything else.

Here is the text of President Barack Obama’s State of the Union Address as prepared for delivery at 9 p.m. ET. "Jobs" 33 vs. "Fat Cats" 0, Rich 3 vs Poor 1, Hope 2 vs Unicorns 0, Change 9 vs Tooth-Fairy 0, Mortgages 5 vs Apple 0, Main Street 1 vs Wall Street 3, China 4 vs Europe 1; DEBT CEILING 0