Monetization

Confirming that the Fed's Weimar monetization practices are entirely dependent on the market, and that POMO can only proceed if the Plunge Protection Team does its job, the earlier cancelled POMO has been rescheduled for 12:05 pm now that the PPT-Citadel team is on the line and grinding ES like it is the new chick at Hustler Club. In other news, going forward, the terrorist will win if and when the bond market crashes at 10:59 am, which sends the entire Sack-Frost monetization model out of line. Next up: Article 15 to be implement in the US between the POMO hours of 10:15 am and 11:00 am, where any headline on Reuters or Bloomberg has to be precleared by an FRBNY NYU intern. Once again we get confirmation that when it comes to decisions on who really runs the country, the Primary Dealers who cancelled their entire POMO order book, come on top.

While we have presented the below charts in the past in some form or another on various occasions, since everyone's memory is at most 1 trading day strong these days, we are happy to recycle content while continuing to "surprise" our readers. Below, we present the chart showing European maturities over the next three years. It should be sufficient to convince anyone that while the US needs ongoing QE to not only to keep stocks rising past May/June (Fed's 3rd and only mandate) but to monetize trillions in gross debt issuance (without rates needing to surge to make up for demand shortfall as Bill Gross pointed out so well on Wednesday), Europe is in an even worse predicament. Among the Eurozone's banks, there is roughly $2.4 trillion in funding requirements until 2014. And as our disclosure yesterday on the massive Irish capital shortfall notes, nobody has yet answered the question where all this funding will come from, short of the ECB pulling a Fed, and starting to monetize everything from the bottom of the capital structure upward in the primary markets instead of only through secondary market interventions. Keep in mind this excludes actual sovereign funding needs. Which is not to say the US is immune from the same problem. It isn't. But looking at the problem globally confirms everyone's greatest nightmare: where, in the absence of ongoing central bank monetizations (with or without the assistance of major financial black holes like Europe's EFSF), will the world be able to find buyers for roughly $4-5 trillion in debt to keep the self-funded Ponzi going?

If after years of explanations, and cartoons with bears, readers still have not quite gotten the grasp of how QE should work in theory (in practice the only thing about QE is how dramatically its intended and realized goals have diverged) perhaps this animation from the AP will finally put all doubts to rest. So for those still confused by terms such as "money printing", "open market operations", "outright monetization", and "Weimar hyperinflation", this brief and concise clip is for you. And once you see it, forget everything, because what QE2 has done has been precisely the opposite: rates have gone up, but the Fed does not care - as everyone now knows, the Fed's only true goal was to provide Primary Dealers with the capital to bid up stocks. End of story. Lastly, keep in mind, that the Fed is now implicitly funding the US deficit: as it purchases more and more bonds, the interest that is owed to the Fed is subsequently remitted to the Treasury as an actual revenue item, completing the world's most unprecedented Ponzi scheme constructed since the days of Rudolf von Havenstein.

Readers know our fascination with pointing out the relentless "flip that bond" game that the FRBNY's team of Sack Frost and the 18 Primary Dealers enjoy playing with each other, which just happens to be funded to the tune of millions of dollars each day when there is a POMO (which would be everyday). Two days ago we pointed out the most blatant case of documented taxpayer rape to date, when Brian Sack monetized 71% the just issued 2.125% of 12/15, even though it was not anywhere among the 10 cheapest bonds. We had nothing to add to that - at this point only Congress, and perhaps Rand Paul, can do something about this shovelling of taxpayer money into the banker hole on a recurring daily basis. All we can do is continue to monitor. Which is why we present today's cheapest bonds that the Fed should be buying. These are the bonds that the Fed should be buying as they represent the best IRR to taxpayers. This is at least the theory. What will happen, is Sack Frost will instead most likely end up buying either the PW4s issued in December: the 0.625% of 12/31, or and this would be just stunningly daring, the PR5: the 0.5% of 1/13, auctioned off two days ago, which has not even settled yet.

Today's $35 billion 5 Year auction closed at a 2.97 Bid to Cover, the second highest following the 3.06 in July of 2010. The bond priced 2 bps inside of the When Issued indicating a substantial interest. The high yield dropped marginally from the last auction which came at 2.041% (29.85% allotted at high), with Indirect Bidders taking down a substantial portion of the auction or 45.0% a major jump from the prior 35.6%. Still there was a little change in the hit rate on the Indirect bid which was 76.6% compared to 80% last time. Altogether just another auction: there are many more to go. We are confident primary dealers will monetize roughly 30% of their allocation at the first opportunity, which will be on the February 9 02/15/2015 – 07/31/2016 POMO.

And meanwhile the charade in Europe continues, after the ECB purchases a whopping €2,313 million in the week ended January 17, bringing total purchases under the SMP program (a/k/a toxic crap monetization) to €76.5 billion. This is roughly 20 times higher than the pathetic €113 million monetized in the week before, when deluded holders of PIIGS debt were not selling hand over fist on the inane assumption that Europe will actually survive the imminent implosion. Last week's total purchases were the second highest weekly amount since July 2010, only topped by the €2,667 million purchased in the week ending December 13 when Ireland went tits up, and peacefully and very gracefully presented the key to its sovereignty to ubercrat Olli Rehn.

After last week the ECB experienced a rare event: a failed SMP sterilization tender, when only E60.8 billion of bids from 41 banks appeared to compete for E73.5 billion in recycle monetized peripheral bonds, this week it is back to smooth sailing, after JC Trichet mobilized the infantry and got every single bank to submit a bid: the number of banks participating in today's "liquidity absorbing" operation surged from 41 to 68, and the total amount of bids increased by a whopping 50% from E60 to E92 billion, a 1.4x bid to cover. And lastly while the marginal rate in the last auction of 2010 was 1% with full allotment, this time it was cut by more than half, at 0.45%, with 93.04% of the bids allotted at the marginal rate. Just what changed so drastically in the past week to justify such a huge surge in liquidity and confidence is just slightly baffling.

Today, to little fanfare, the ECB managed to obtain just E60.8 billion in tender interest for its most recent 7 Day SMP "peripheral bond monetization" operation, whereby it needed at least E73.5 billion to be able to offload all of its cumulative acquired sovereign bonds to other financial institutions: a de facto sterilization, which is why the ECB has so far been claiming it is not monetizing debt (as it constantly rolls the held balance on other bank balance sheets). That is no more: following today, the ECB is left with just under E13 billion in sovereign holdings and thus are not sterilized. This development follows Monday's announcement, which was reported first on Zero Hedge, that the ECB acquired 100% more in peripheral bonds in the prior week compared to two weeks ago. Another notable development: the number of bidding banks participating in the tender operation dropped to just 41- the lowest since the inception of the program in May when Greece went tits up and all of Europe was supposed to bail each other out in perpetuity. And what is most disturbing is that this complete lack of interest (or telegraphed lack of bank liquidity) happened even as the marginal rate jumped by over 50%, from 0.6% to 1%- the same as the maximum rate allowed on an auction. Should banks not come back with tender takedown interest next week, this could very well be the catalyst for the next leg down in the European crisis. Because despite what ING economist Martin Van Vliet told Reuters, "It has happened before but I wouldn't make too much of a big deal out of it", we would make a big deal out of it, as this has actually not happened before. For confirmation that ING economists may want to take an Excel 101 chart, below is the buffer shortfall in every auction since the program's inception. As is all too obvious, this was the first one that missed by a mile.

After in the last two POMOs Brian Sack put the most recently issued bond on the exclusion list, today, as part of today's micro $2.044 billion long-end (2028-2040) POMO, the PPT head tried to sneak a fast one, after the second most monetized issue ended up being the QL5 of 11/15/2040, which just happens to be the bond auctioned off less than a month ago (November 10). This amounts to 2.6% of the entire $16 billion auction. We are confident that before all is said and done, not only will the 35% SOMA limit be raised on this 30 year CUSIP, but the Fed will be the proud owner of well over half of any and all recently issued long-end bonds.

Today's $8.3 billion QE has closed and the Fed has monetized 13 bonds of various CUSIPs between 2/15/2018 and 8/15/2020. The Submitted to Accepted ratio was a very low 3.3x, once again confirming that PDs had excess cash, did not need to rely on the Fed's generosity and as a result are now ramping stocks with aplomb. What is most curious is that after we have disclosed that in the last 2 POMOs the most monetized bond was the just auctioned off issue, today Brian Sack put CUSIP PC8, the 10 Year auctioned off on November 9 on the exclusion list (see bolded below), meaning PD were forbidden from flipping the most recent issue. We wonder if the New York Fed no longer enjoys being under the microscope in that it openly and flagrantly allows almost instantaneous monetization of "just issued" cusips? Of course, that QE2 continues to funnel billions of taxpayer money to Primary Dealers is not threatened one bit. After all millionaire bankers have to become billionaires through ongoing perfectly legal theft from the middle class in some way or another.

The long-end of the curve has recently suffered a major whammy: first, contrary to expectations, the FRBNY announced that it would do just 6% of the total buybacks in the 10-17/17-30 Year area; and second, the overall size of the announced monthly monetizations ($75 billion excluding MBS reinvestments) ended up being far less than the $100 billion hoped for (again excluding reinvestments), although the market has conveniently so far ignored this major surprise. Yet what is interesting is that despite the presumed disappointment focusing on the long-end of the curve, the chart below from Morgan Stanley shows just why the long-end is about to experience a fresh surge in buying interest, undoing all the positive work the Fed has done on behalf of the banks by steepening the curve, and leading to yet more flattening. Another observation is that, as we have said many time before, the Fed's existing plan leaves just under $250 billion in the form of a demand gap that has to be closed by foreign central banks - and once QE 2.1 or greater is announced, America's will become completely independent of foreign monetary retaliation: even if foreigners go on strike, and like US stock investors, refuse to touch the market, the Fed will still monetize every single cent of deficit spend funding. In one brilliant stroke, Bernanke made America completely impervious to international retaliation.

Freddie Mac updated its weekly mortgage survey and notes that for the week just ended, the 30 Year FRM has risen for the second week in a row from an all time low of 4.19%, now at 4.23%. This is a direct impact of the recent rise in yields in the 10 year UST. And since the White House's primary goal through the end of its administration is to get mortgage rates to unsustainably low rates, it is now obvious why Bill Gross is bypassing the purchase of Treasuries and going straight into MBS. Will the Fed surprise by buying not just Treasurys but mortgage backed securities yet again, to get the best bang for the mortgage rate buck?

Today's POMO eligible CUSIP list has been released: 28 different securities means a solid $3-5 billion in tender interest, although judging by last week's paltry notional submission in the long-end POMO, we wouldn't be surprised if more and more PD opt to hang on to whatever is providing any yield in this market. On the other hand, why wait a year to collect 1% when you can just buy Netflix and collect that in one 4 hour flip. The full results and the traditional fade begins at the usual 11:00 am time slot. What is distrubring is that ever more CUSIPs make the exclusion list: today 11 bonds are ineligible for repurchase, because, we assume, 35% SOMA holding limits and cheapest to deliver thresholds have been breached. Little by little the Fed will have increasingly less open market optionatlity and will be forced to monetize directly at auction.

The Fed's preferred voicebox, WSJ's Jon Hilsenrath is out with another article discussing what the imminent QE2 may look like. The summary is that contrary to expectations for a "big bang" intervention, the Fed will instead do $100 billion in QE a month until such time as it deems fit. A few observations on this article.

Insofar as money is concerned, governments and central banks should be kept as far away from one another as a pedophile from Dakota Fanning. If ever the twain should meet, very bad things would happen. However, now, in the good ol’ U.S. of A., monetization is taking place—and it is happening right before our eyes, even though no one is realizing it. This monetization is invisible to sophisticated analyses, but obvious to anyone looking at the situation. It's what I call stealth monetization. —Gonzalo Lira.