Having managed to survive 2009 (or so we hope- there are still a few hours left to go) we thought we might invite you to join us (virtually) for Studio Zero's annual end-of-year blow-out this evening. (Actually, Studio Zero was called something else before Zero Hedge came around, but that's not important right now). We generally get started around 9 eastern and pound out the tunes until well after 5 eastern but who knows?
It was only fitting that a year marked by irrational and erratic trading, saw a substantial volume selloff in the last 15 minutes of trading after there was absolutely no volume done all day. What sparked it? Only a few momentum chasing quants know, even as the bid seemed dangerously close to getting unglued. Suddenly all the big-cap liquidity provisioning seemed just a tad tenuous. Another way of looking at it: a cheap appetizer of things to come. Is the January 4 rush for the exits entre next?
One of the great paradoxes of life is that the smarter one is, the better one realizes just how little one knows. The same thing is true with forecasts: one can hypothesize and conjecture, but if one is unlucky, one is screwed: no matter how thought out, error-proof or logical the narrative - it is the unpredictable events that ultimately shape events, not the "priced in" obvious factors. The Heisenberg Uncertainty Principle applies in a perverse fashion not only to the wave-particle duality in the quantum realm, but to the very underpinning of economics: by predicting the future we implicitly change it. The futility of forecasts is well known to all those, who with the exception of a several few, whose very existence is an economy of scale "strange attractor" (think Warren Buffett and Goldman Sachs), have tried to repeat a winning performance, be it based on fundamentals, technicals, or kangaroo entrails. It is also sufficiently useless to the point where we will spare you a Zero Hedge set of observations of what to expect: if you have been reading this blog, you know what we believe is relevant as we enter 2010. How it will all pan out, however, is a totally different story. It is therefore not too ironic, and somewhat fitting, that Goldman Sachs' chief economists do not leave 2009 with a dogmatic set of forecasts, which, just like every other year would have the success rate of a coin toss, but with 10 key questions addressed exactly one year into the future. Here are Goldman's 10 Questions for December 31, 2010.
As you may or may not know, Zero Hedge is in the process of developing a number of premium offerings for 2010. One of these is "Cf., The Journal of Irreverent Attacks on Conventional Wisdom, Entrenched Dogma and Sacred Cows." For your reading pleasure, and to act as a preview of premium things to come, we attach Volume I, Issue I entitled "The Dionysian Rites of Henry Kissinger's CIA and the Iranian Revolution of 2010."
With every deep-thinking pundit looking out at 2010 and predicting this and that, the irony is that virtually all investment decisions will be derivatives of one simple outcome: do we have inflation or deflation. Numerous opinions have been set forth recently, each of which presenting more convincing and detailed theses on why [stag/hyper] [deflation/inflation] will be the dominant theme in the year to come, accompanied by pretty charts and convoluted diagrams. And while one can write books on all the political, economic and financial aspects that will determine either outcome, we have decided to avoid that, and instead would like to remind readers of a little noticed paper by Brait Capital Management, published in August of 2009, which conceptualizes all the key themes in the inflation vs deflation debate.
A week ago Zero Hedge discussed the spread between the Freddie 1 Year ARM and the 30 Year fixed, concluding that the recent record spread is indicative that the Fed will do all it can to become the new subprime lender of any resort, even if it means creating exponentially more roll risk, as it seeks to lend money regardless of the probability of ultimate payback. Today Bloomberg points out that the Freddie 30 Year has just hit a 4 month high of 5.14%, a level last seen at the end of August. What is notable is that in less than two weeks the 30 Year Freddie Fixed has jumped by 20 bps. At this rate we will overtake the 2009 high of 5.59% within a month. However, our original observation is that even as the 30 Year Fixed has finally started to move in line with the 10 Year Treasury, which just can't find a floor in the past week, the 30 Year Fixed - 1 Year ARM spread has simply exploded: when we looked at its last it was 60 bps, a week later, it is now at 81 bps. The Fed is now literally throwing money away in the form of Adjustable Rate Mortgages.
Are Federal Reserve and U.S. Government Rigging Stock Market? We Have No Evidence They Are, but They Could Be. We Do Not Know Source of Money That Pushed Market Cap Up $6+ Trillion since Mid-March. - TrimTabs
The fabulous news of the day undoubtedly will be the latest release from the Dept of Labor: Initial Claims for the week ended December 26 came in at 432,000, a 22,000 decline from the prior week, and below consensus. The number was sufficient to prompt Bloomberg's Courtney Schlisserman to come up with the following observation, "Fewer Americans than anticipated filed claims for unemployment benefits last week, pointing to an improvement in the labor market that will help sustain economic growth next year." Perhaps Courtney and Steve Liesman should sit down in a corner and finally figure out what this whole EUC (Emergency Unemployment Compensation) business is - trust us, it is not that difficult. And for the week ended Dec. 12 it surged by 191,669 to almost 4.5 million, another all time record. Three weeks ago we were shocked when this number hit the all time high of 4.2 million: in a mere 21 days it has added a whopping 8% to the total. Unfortunately, at this point we have gotten a little desensitized to new EUC records. We ask Ms. Schlisserman what happens to the "sustainable economic growth" when there are 0 Initial Claims (hurray!!) and a million EUC claims weekly (uhh)? Again, a simple question. Luckily for Bloomberg, the DOL and the BLS there is no consensus number for EUC, as the downside surprises there would have been staggering, if anyone actually cared to report those on the front pages of the even impartial mainstream media.