State Street

To summarize: European stocks are little changed although Spanish shares rise. Spain 10-yr bond yields fall to the lowest level in more than 6 months. S&P futures are now higher on the trading session, driven by correlation engines as the euro is up vs the dollar, despite major disappointments by IBM and Intel. In other news Germany formally shut down the debt redemption fund proposal, ending one more rescue avenue for when the recent baseless euphoria ends, even as Spanish La Vanguardia reports that Germany is pressuring Italy to request European aid alongside Spain so that the government of Prime Minister Mario Monti doesn’t reap the benefit of lower borrowing costs without being tied to tougher economic reforms. Needless to say, Italy is said to resist the proposal: after all in Europe one just wants the upside from being bailed out, as opposed to actually being bailed out...

• Hillary Clinton Accepts Blame for Benghazi (WSJ)
• In Reversal, Cash Leaks Out of China (WSJ)
• Spain Considers EU Credit Line (WSJ)
• China criticizes new EU sanctions on Iran, calls for talks (Reuters)
• Portugal sees third year of recession in 2013 budget (Reuters)
• Greek PM says confident Athens will secure aid tranche (Reuters)
• Fears over US mortgages dominance (FT)
• Fed officials offer divergent views on inflation risks (Reuters)
• China Credit Card Romney Assails Gives Way to Japan (Bloomberg)
• Fed's Williams: Fed Actions Will Improve Growth (WSJ)
• Rothschild Quits Bumi to Fight Bakries’ $1.2 Billion Offer (Bloomberg)

One place where the S&P level still does have a modest influence is the number of shorts in the market, which are strategically used by repo desks and custodians (State Street and BoNY), to force wholesale short squeezes at given inflection points, usually just when the bottom is about to drop out. The problem is that even short squeezes are increasingly becoming fewer and far between, for the simple reason that the Fed has managed to nearly anihilate shorters as a trading class with its policy of Dow 36,000 uber alles. This was demonstrated with the latest NYSE Group short interest data, which tumbled to 13.6 billion shares short as of the end of September, or the lowest since early May, just as the market was swooning to its lowest level of 2012 to date.

Economists, market analysts, journalists and investors alike are all talking about it quite openly, generally in a calm and reserved tone that suggests that -  to borrow a phrase from Bill Gross – it represents the 'new normal'. Something that simply needs to be acknowledged and analyzed in the same way we e.g. analyze the supply/demand balance of the copper market. It is the new buzzword du jour: 'Financial Repression'. The term certainly sounds ominous, but it is always mentioned in an off-hand manner that seems to say: 'yes, it is bad, but what can you do? We've got to live with it.' But what does it actually mean? The simplest, most encompassing explanation is this: it describes various insidious and underhanded methods by which the State intends to rob its citizens of their wealth and income over the coming  years (and perhaps even decades) above and beyond the already onerous burden of taxation and regulatory costs that is crushing them at present. One cannot possibly "print one's way to prosperity". The exact opposite is in fact true: the policy diminishes the economy's ability to generate true wealth. If anything, “we” are printing ourselves into the poorhouse.

• Rajoy’s Deepening Budget Black Hole Outpaces Spain’s Cuts (Bloomberg)
• ECB May Need to Cut Rates Given Deflation Risk, IMF Says (Bloomberg)
• Global Recession Risk Rises (WSJ)
• Romney Leads Obama in Pew Likely Voter Poll After Debate (Bloomberg)
• IMF Sees Global Risk in China-Japan Spat (WSJ)
• Republicans shift tone on taxing the rich (FT)
• Romney casts Obama's foreign policy as weak, dangerous (Reuters)
• Europe Salutes Greek Budget-Cutting Will, Raising Aid Prospects (Bloomberg)
• U.S. Downgrade Seen as Upgrade as U.S. Debt Dissolved (Bloomberg)
• IMF Says Most Advanced Nations Making Progress Reducing Deficits (Bloomberg)
• Eurozone launches €500bn rescue fund (FT)

• China carrier a show of force as Japan tension festers (Reuters)
• Draghi Rally Lets Skeptics Dump Spain for Bunds (Bloomberg)
• China’s Central Bank Injects Record Funds to Ease Cash Crunch (Bloomberg)
• Obama warns Iran on nuclear bid, containment 'no option' (Reuters)
• When Would Bernanke’s Successor Raise Rates? (WSJ) that's easy - never
• Italy's Monti Downplays Sovereignty Risk (WSJ)
• Portugal swaps pay cuts for tax rises (FT)
• Madrid faces regional funding backlash (FT)
• Berlin Seeks to Push Back New Euro-Crisis Aid Requests (WSJ)
• Race Focuses on Foreign Policy (WSJ)
• China Speeds Up Approvals of Foreigners’ Stock Investment (Bloomberg)

When Ben Bernanke launched QE 2 in 2010 he outlined a third mandate for the Federal Reserve - the boosting of consumer confidence. He stated that the goal of QE 2 was to boost asset prices in order to spur consumer confidence through the "wealth effect" which should translate into economic growth. In 2010 he was right, and QE 2 not only boosted asset prices sharply, but kept the economy from slipping into a recessionary spat. As Friday's speech from the economic summit in "Jackson Hole" draws near - Bernanke should be taking a clue from today's release of consumer confidence in considering his next move. 

... and Regulators Have Become “Cops On the Take”

For all those who have long been curious what the precious metals "queen" thinks about allegations involving her and her fimr in gold and silver manipulation, how JPMorgan is positioned in the precious metals market, and how she views the fringe elements of media, as well as JPMorgan's ethical limitations to engaging in 'wrong' behavior, the answers are all here.

In advance of ever louder demands for more, more, more NEWER QE-LTROs (as BofA's Michael Hanson says "If our forecast of a one-handle on H2 growth is realized, then we would expect the Fed to step in with additional easing, in the form of QE3") , it is an opportune time to demonstrate just what the traditional monetary "plumbing" mechanisms at the discretion of the Fed are, and more importantly, just how completely plugged they are. So without any further ado...

• BHP Billiton sees China iron ore demand flattening (Reuters)
• Australia Passes 30% Tax on Iron-Ore, Coal Mining Profits (Bloomberg)
• State Capitalism in China Will Fade: Zhang (Bloomberg)
• Venizelos quits to start election campaign (FT)
• Fed’s Dudley Says U.S. Isn’t ‘Out of the Woods’ (Bloomberg)
• China Is Leading Foreign Investor in Germany (WSJ)
• Fed undecided on more easing: Dudley (Reuters)
• Martin Wolf: What is the real rate of interest telling us? (FT)

And the real lesson, dear friends, is that the good old USA is a subprime nation

Since at this point US society is irrevocably split into two camps, on one hand those who believe Keynesian propaganda, where the only cure for unsustainable debt is more debt, and on the other those who believe that a return to a gold standard is the only way to prevent an epic socio-political collapse, also known in official US circles as "extremists", and since we know that the status quo will never let the latter get their way without a fight (quite literally and quite violently), it is only logical that 'if you can't beat them you have to join them'. In which case we believe that instead of breaking windows, or starting wars, or even expecting a growth boosting alien invasion that would lead to a surge in GDP that may or may not come, one should not only go for broke, but do so in style. As such we propose that the US, already the world's most expansionist and aggressive foreign policy power, not like there is anything wrong with that of course - it is all for the sake of liberating oppressed foreign oil, should one up itself and build the true symbol of its contemporary socio-historical status: the Imperial Death Star. Yet the real benefit in addition to blowing up various alien world that refuse to bail out the world's central bank confederacy, is that the cost of construction of said Keynesian masterpiece, would be an epic $852 quadrillion, which in turn would go straight to US GDP.

Little to note about today's unremarkable bond auction of $35 billion in 5 Year bonds. Hot on the heels of yesterday's just as unremarkable  2 year bond auction, which saw total US debt/GDP surpass 101% two weeks after total debt/GDP rose over 100% for the first time, the details surrounding today's issuance were more or less as expected: the closing yield of 0.90% was inside the When Issued of 0.905%. The Bid To Cover was 2.89, weaker than January's 3.17, but right inline with the TMM BTC of 2.89. The Indirects took down 41.8%, Directs 12.9%, and the Dealers held at 45.3%, all in line with TTM average, so nothing to write home about. Overall an auction that just added a few pips to the total US debt/GDP, with the proceeds, especially by the Dealers, promptly to be pledged back into the repo market with the blessings of BoNY and State Street, where it is never heard from again.

Today, without much fanfare, US debt to GDP hit 101% with the latest issuance of $32 billion in 2 Year Bonds. If the moment when this ratio went from double to triple digits is still fresh in readers minds, is because it is: total debt hit and surpassed the most recently revised Q4 GDP on January 30, or just three weeks ago. Said otherwise, it has taken the US 21 days to add a full percentage point to this most critical of debt sustainability ratios: but fear not, with just under $1 trillion in new debt issuance on deck in the next 9 months, we will be at 110% in no time. Still, this trend made us curious to see who has been buying (and selling) US debt over the past year. The results are somewhat surprising. As the chart below, which highlights some of the biggest and most notable holders of US paper, shows, in the period December 31, 2010 to December 31, 2011, there have been two very distinct shifts: those who are going all in on the ponzi, and those who are gradually shifting away from the greenback, and just as quietly, and without much fanfare of their own, reinvesting their trade surplus in something distinctly other than US paper. The latter two: China and Russia, as we have noted in the past. Yet these are more than offset by... well, we'll let the readers look at the chart and figure out it.