Friday, May 29, 2009
Are Banks Already Nationalized?
But the burning questions to ask are the following:
If a previously "private" commercial bank has sold equity to the US government (TARP) and, more important, relies upon government guarantees (TLGP) to issue debt and deposits, is that bank already nationalized?
Are all banks that participate in the TARP now really just government sponsored entities like Fannie Mae and Freddie Mac and the other GSE's?
The Answer to both questions is YES. With JP Morgan and Goldman Sachs issuing debt the past month that is backed but not guaranteed by the government, both of these institutions are indeed nationalized. Technically they are considered GSE's.
They were able to issue debt at cheaper levels then taking money from TARP.
A few nuggets from accross the pond:
There is intelligent life forms on this planet...somewhere.
"The United States is solely to be blamed for the financial crisis. They are the cause for the crisis, and it is not Europe and it is not the Federal Republic of Germany."
Peer Steinbrück
German Finance Minister
September 25, 2008
"Excessively cheap money in the U.S. was a driver of today's crisis… "I am deeply concerned about whether we are now reinforcing this trend through measures being adopted in the U.S. and elsewhere and whether we could find ourselves in five years facing the exact same crisis."
Angela Merkel
German Chancellor
November 27, 2008
FASB Redux
The FASB this past Monday announced that they will soon crackdown on SPV (Special Purpose Vehicles) and OBS (Off-Balance Sheet Transactions). SPV/OBS's are used by financial institutions and banks to place riskier assets in quasi/pseudo independent spin offs to keep them off corporate balance sheets.
The ruling has 2 basic parts:
1- It requires firms to bring most OBS and activities back onto their balance sheets.
2-Greater disclosure of remaining OBS issues.
OBS/SPV were great devices that became popular with financial institutions over the last decade. In theory, they work great because they offer a low risk way to launch a suite of financial products outside of their normal core business without forcing investors to take losses on them. These are partially funded by outside investors, and are not governed or dependent on the parent company. Like I said...In theory they work great.
In reality, it was totally different, especially in the financial industry. Last year's swift fall and hard landing of the major players made the FASB suspect that OBS's were being used more for their loopholes than to expand the scope of the business. When regulators and auditors started looking at how so many supposedly robust banks could lose so much money so fast, they realized that these theoretically independent OBS entities were really joined at the hip to their parent banks, and their fall had dragged down the larger enterprises. Banks liked OBS vehicles because they could package their own loans into securities and then sell them to the OBS entity, unloading the risk from the corporate bottom line and making a profit at the same time. These OBS entities were often little more than places for banks to park their own loans, holding bundles of mortgages or other consumer debt.
Funny thing is that OBS activities while they're not on the balance sheet, are generally tucked into the footnotes of financial filings, so they dont get sued.....So only the most sophisticated investors and or analysts know about them. It's still a harder task, though and puts the onus on ratings agencies (Frauds) and auditors (Jokes) to figure out whether the firm has adequately transferred its exposure to avoid getting burned, or if the OBS vehicle will eventually blow up.
The FASB ruling could lead to another capital deficit for the big banks, which could spark a scramble for more money to shore up their reserve bases when the FASB ruling kicks in at the start of next year.
Financial Institutions like State Street and Citigroup had to bring back SPV/OBS back onto their consolidated balance sheets, their stocks got hammered on the days they announced that. Currently Wells Fargo has the largest OBS exposure at a mind numbing $1 Trillion!
The main question to ask bank executives is:
What is the plan to repatriate SPV/OBS transactions by Year end 2009? In the case of Wells Fargo, this would mean increasing the assets on the balance sheet by 80%.
Answer: We have no plan.
The main question to ask the FDIC/TREASURY/GOV is:
Did the government Stress Tests for the banks take into account this SPV/OBV potential fiasco?
Answer: NOPE
The main question to ask investors is:
Were you told about potential FASB crackdown on SPV/OBS before you invested in the secondary offerings from WFC and BAC?
Answer: Probably not, did you read the prospectus?
I am constantly amazed how normally smart educated people on Wall Street continue to follow the herd to slaughter. They truly have learned nothing from falling off the cliff.
How can we believe in rational markets when so many investors are sticking their heads in the sand? Anybody who buys a bank stock based on "value" falls into this category.
Crude Oil Trade Back in Business.
That trade was:
SHORT DOLLAR
SHORT FINANCIALS
LONG CRUDE OIL
LONG CDS PAPER
OPEC has stated that Crude is not trading on Fundamentals, to which I say: Does anything trade on Fundamentals? But what cant be ignored is the fact that the Wall Street Money Machine is back in business on the Crude Trade. Wall Street firms were the biggest net buyers of Crude, Nat Gas, RBOB, & Heating Oil Futures in March and April. Its quite absurd that Goldman/Morgan/BOFA/JP all took TARP Money and issued debt (TLGP) guaranteed by the government, not to lend or stimulate capital flow, but to pad and finance their own internal trading ledgers. Why would they want to pay back TARP, when they are doing a great job of inserting the rod in us?
Yes...America...we are the fools once again. They take tax payer money and run up commodity prices financed by us. Get ready for $4 gas at the pumps by labor day. When did the powers that be forget that Wall Street is Soulless? Crooked and fraudulent to the core.
At least BUSH/CHENEY/PAULSON told us and did what ever they wanted to do. They didn't try to placate the masses with spin. What is Savior OBAMA/BIDEN/GEITHNER's excuse?
Thursday, May 28, 2009
Gold Trade in Effect
The Gold Bugs will have to thank Bernanke/Geithner for their shiny new Red Ferrari's. Yes the cheap dollar is great for the Japanese and the ECB, but I certainly don't like it when I make my annual trip to Amsterdam.
Even More Mortgage/Housing/Depressing Stuff-
Mortgage delinquencies and foreclosures rose to records in the first quarter and home-loan rates jumped to the highest since March
Prime fixed-rate home loans to the most creditworthy borrowers accounted for the biggest share of new foreclosures at 29%
One in every eight Americans is now late on a payment or already in foreclosure.
New home sales fell 34 percent in April from the year earlier period, the Commerce Department said today
The unemployment rate increased to 8.1 percent in the first quarter, the highest since the end of 1983.
SCARY STUFF.
Prime adjustable-rate mortgages accounted for 24 percent of new foreclosures. These figures show that the mortgage crisis has shifted from subprime to borrowers holding the safest type of mortgages.
After digesting all of this, we have CNBC, Lazlo "Chicken" Biryani, and other morons predicting a new Bull Market?
There is a Bull Market.....for Short Sellers.
More Mortgage Problems
Investors are very concerned that mortgage services and desks are selling Treasuries to help hedge the declining value in their Mortgage Backed Securities as rates continue to rise.
The Mortgage Market got hammered yesterday as investors have started to realize the above referenced scenario. The losses were truly stunning as spread and swap spreads were blown out.
This combined with another round of housing price roll overs is not good for primary mortgage origination. Forget for the moment the Bernanke/Geithner REFI RUSE they are trying to portray, this sets up for a very interesting (Painful) summer.
Fixed Income Follies
Why you say? Here goes...
1- The Treasury Yield Curve has just collapsed, with the 10 Year Treasury Yield at a Benanke/Geithner stomach turning 3.62%. The spread between 2YR/10YR hit a record level for steepness. The 2s10s just broke the previous wide of 260 bps and at last check was trading at 268 bps. The last time the spread was this wide was when we were in the midst of the Lehman/AIG Fiasco.
2-Negative Convexity (2ND Derivative of Duration) is in full effect in the Treasury Markets. People do not want anything to do with long-dated Treasuries.
3-Even though $35 Billion of 5 Year notes were successfully auctioned off to mostly foreign investors, the far end of the yield curve keeps bleeding red.
4-Questionable demand in 10-30YR maturities.
Most Importantly-
5-All that talk of cheap refinancing is now officially over, and all the recent mortgage refi activity which has been the primary catalyst for banks benefiting from the above mentioned 2-10 spread will cease shortly, absent another Quantitative Easing.
6-How much more can the Fed Balance Sheet grow? Its currently at $3.2 Trillion.
7- Stocks are inching up on no volume, totally oblivious to whats happening in the CDS/Treasury Mkt.
8-Money out of Treasury Mkt into Equities is on the surface a bad thing, as Mortgage Rates will rise killing the Refi Mkt.
Wednesday, May 27, 2009
TANK..TANK..TANK
Today's sell wave comes off the Treasury Auction which basically sucked.
Right after 1pm, the long end of the curve took it on the chin, as more and more sophisticated bond investors have figured out the Feds Game.
Geithner and Bernanke had this grand plan to bloat up the Fed and Treasuries balance sheets by buying Agency and Treasury paper, but alas, they are the only ones buying. What is going to happen when the rosy plan of lower mortgage rates goes in the toilet?
Note to Geithner and Bernanke-
GAME OVER.
Thursday, May 21, 2009
Repeat Occurrence
I see the following pairs trades happening:
SHORT DOLLAR - LONG CRUDE OIL
SHORT BANKS - LONG CDS PAPER
SHORT AGENCY/TREASURY PAPER - LONG CDS - This is the major exception, last year the entire planet plowed into US Treasuries, as it was considered a safe haven, not any more, even with massive government buying, foreigners cant stomach the current US bank policy. The safe haven trade was to be in Treasuries, even at the lowest yields.....
......This was before the US started to print money. Equities have had a strong bid because markets are always dominated by liquidity. But excess liquidity always leads to higher asset prices that are unsustainable. It looks to me that the USA has an unlimited balance sheet and open check book, this spells doom for the US Dollar.
The problem always has been that what ever policy the US has, its always the wrong policy. Foreign Policy is wrong, Terror Policy is wrong, IRAQ Policy is wrong, Energy Policy is wrong, and most catastrophic is the Banking/Financial Policy. Every one of these policies is based on big business/PACS/Special Interests.
Markets are weak today off of weakness in European Markets. I still see 880 on the SPX as support, but if that breaks, the uptrend we have been enjoying is over. I see immediate pressure to 850-86o level. The banks have already corrected some 20% since last week, today they are mixed off of a corrupt bogus Goldman upgrade. If the market cant hold 880, you will see more investors put in the short banks...long cds trade.
Going back to the Banking Sector upgrade at Goldman, I shouldn't be surprised that just one day after BOFA prices over a BILLION shares in a secondary offering, that we magically get an upgrade in BOFA. Hmmmm...somebody doesn't want BOFA to break the secondary offering price.
Wednesday, May 20, 2009
Bipolar Market Continues
A slew of banks (BOFA, State Street, Wells Fargo) have raised cash via secondary offerings. This is smart move, to dump overvalued stock to unsuspecting greedy investors at triple/quadruple values. This is no different from Dubai Investment or Singapore PE pumping billions into the banks last year. Ultimately, all of that money was lost, these secondary offerings will have similar fates.
But what truly infuriates me are the ones who manage money (what ever is left of it anyway), for others. Pension fund managers, hedge fund managers, and portfolio managers are back to what they do best. Go for returns (Alpha) over risk (Beta).
Let me explain.
The market has become phenomenally bipolar, because of how aggressively asset managers are chasing after risky assets in order to make up for 2008 losses. Again, nobody has learned any lessons from the credit bubble where fast, slow, dumb and smart money was all chasing the riskiest assets, all of which ended in ruins for far too many people. The result so far for 2009 is exactly the same pattern.
The highest activity in both in number of transactions and in total cost, is in the riskiest asset class which is equities. People are chasing the stocks in sectors with the worst fundamentals. Equity issuance in the form of secondary offerings in the Real Estate sector and banks have dominated syndicate desks. Real Estate secondary offerings already have dwarfed 2008 deal levels.
Eventually the bad news will filter back in, and downgrades will occur. All of that new money in these banks and real estate sectors will feel the pain. The liquidation that will subsequently happen will be stomach turning.
The market is always focused on the ultimate shell game of greater fool theory.
Monday, May 18, 2009
The Song Remains The Same
Tim Geithner has no business talking about the economy regardless of his position when he and the Treasury are in total denial over the severity of the crisis. The Treasury is completely out of its depth and seems to be trying to put off painful drastic action by pretending that the banking system is still viable.
Its a total sham, a ruse, and a joke because the Government is down to its last $100 Billion of the original $700 Billion in TARP Funds. They know for certain, they cant go to congress and ask for any more money without serious political fallout. So they come up with bogus stress tests and the such to placate the masses. They think they are doing this for the greater good for society.
Why cant the US just bite the bullet like the British have done? Why not accept that the crippled lenders need be nationalized? Why keep putting a band aid on a surgical wound? At least the British are not hiding the bail out.
The Treasury, Government, and Federal Reserve Board, along with Private Equity and Hedge Funds are totally deluding themselves in hoping to go back to business as usual after the trauma we have gone through the last 18 months or so.
This is not a normal recession and there will be no V-shaped recovery. There will be a long U-shaped recovery. The credit crisis destroyed anything that had to do with leverage. Leveraged companies in any sector was taken apart. Any type of Hedge Fund/LBO Fund/Private Equity Fund/ARB Fund that had any leverage was destroyed. Also there are many leveraged LBO Funds that are going into default because they cant refinance their existing debt. Alpha/ARB Hedge Funds have been making money by gambling on excess leverage, they too will get blistered.
The US Government has thrown 30% of GDP at this crisis, with little or no real effect. This is compared to 8% in 1930. The Fed's balance sheet has swelled from $900 Billion to $2.7 Trillion. All that has happened is the banks have transferred some of their toxic crap onto the Feds balance sheet. But currently, absence of a total take down of the banking system, America has to do it because the only way out of this is to debase, marginalize and wreck our own currency.
Thursday, May 14, 2009
Geithner Doesn't Get It.
Here is the exchange:
Rose: "Looking back, what are the mistakes and what should you have done more of? Where were your instincts right, but you didn't go far enough?"Two Points To Make:
Geithner: "...I would say there were three types of broad errors of policy and policy both here and around the world. One was that monetary policy around the world was too loose too long. And that created this just huge boom in asset prices, money chasing risk. People trying to get a higher return. That was just overwhelmingly powerful."
Rose: "It was too easy."
Geithner: "It was too easy, yes....
1- I am still trying to figure out why Charlie Rose didn't come up with this follow up question - "Why Will This Time Be Any Different"?
2- Does Geithner have the slightest bit of a clue that his current policy is more of the same, but exponentially more ludicrous and disastrous then Greenspan's?
The major flaw in Geithner's policy is that at the height of the crisis there was too much cheap money chasing higher returns with obscene leverage. He basically makes the point to state that this wasn't his or Obama's crisis, but heck I am out of ideas!
A huge side effect was that investors seeking meaningful returns inflated the bubble taking flyer's on overpriced, risky securities. Toxic structured products are the obvious example. Credit rating agencies get lots of blame as enablers, rating trash "AAA." But fixed-income investors wanted an excuse to invest in riskier stuff that carried slightly higher yields.
Truly low risk securities like Treasury's and money market instruments were yielding so little, they were of no use to portfolio managers trying to match assets with liabilities.
But what happens when low-risk fixed-income securities yield 0% or close to that? Asset managers are more or less forced to seek higher interest rates through riskier investments.
Remember Managers were chasing ALPHA...Screw the BETA.
So what are the results of the latest experiment with rock-bottom rates?
Investors are piling back into risky investments across the board as the high yield debt market is exploding.
Geithner admits such a policy was a disaster before, that the "overwhelmingly powerful" force of low rates inflated the bubble. So how can he and Bernanke justify the same approach this time around?
No doubt they will argue that they have no other choice, as they have to continue with feeding the Wall Street Machine.
Just enable the same Ponzi Scheme System that relies on credit and needs credit to flow or else it will collapse. It doesn't occur to these guys that the system itself is flawed and corrupt, and that we need a total gut wrenching renovation, not just another coat of paint.
No doubt de-leveraging would be quite violent and unbelievably painfull if the Federal Reserve Board left rates higher. But de-leveraging is the only solution to the crisis. God forbid Bernanke's easy money policy actually works. God forbid he actually rescues the economy by reflating the credit bubble. This was Greenspan's magic trick thru-out the 90's. De-leveraging came out of no where. It happened quickly and violently whether we want it to or not. There is much more de-leveraging in store globally.
Better to rip the band-aid off quickly, before they start tagging toes.
Leverage Decay Within Ultra ETFS/ETNS
Why the vicious drops in 2x/3x leveraged short ETFS/ETNS?
Why have the 2x/3x leveraged long vehicles not rallied as much?
The Answer is Three Part:
PART 1 - Leverage Decay-
These Exchange Traded Notes/Funds are levered vehicles, which itself is extremely risky. Have we not figured out that leveraging something that we don't understand is a dangerous thing? Also within the leverage is massive risk modeling via quantitative measures, again...we know what this entails. These trading vehicles only perform the way they do when markets are extremely volatile. When markets are volatile (Dropping) people tend to pay more for portfolio insurance, most favorably put options. Put premiums are priced off of many things, most importantly implied volatility. When the whole world is going to hell, we need insurance correct? But going back to volatility which is generally based off of the CBOE VIX/VXN, people tend to look at higher VIX/VXN prices when markets take a tumble, consequently when markets rally, the VIX/VXN falls as people are not to worried about FEAR, because GREED is dominating. The best place to be when markets get hammered is obviously the short side, but remember when buying these vehicles that a corresponding spike in the VIX or implied volatility is needed, and even then they might drastically underperform because over time we have leverage decay.
On the other hand, you don't want to be in these leveraged short vehicles when markets rally, as they get totally blasted.
PART 2 - Total Return Swap-
When we speak about 2x/3x leveraged vehicles, are we talking about a fund that shorts 2x/3x the amount of stock the corresponding long vehicle owns? Of course not, remember to properly get short, one must actually borrow stock, then short it. Many times stock is just not borrowable, so how does this work? All of these funds/notes get involved in something called a Total Return Swap that will emulate 2x/3x virtual/synthetic short exposure. Swap prices are based on what the market thinks volatility and our interest rates are headed in the future, thus when markets drop or rally precipitously the market has a notion on what type of premium should be allocated to swap prices. Higher Swap Prices generally favor people on the short side of the market because they inherently have higher premiums and or volatility attached to them. When markets rally after a severe drop, you will notice not only leverage decay but sharply lower swap rates/prices/yields as investors tend to unwind their negative exposure.
PART 3 - Supply/Demand Dynamics-
As we know, these vehicles are traded on an exchange where there are buyers and sellers, thus they get pushed around quite furiously mostly around the close.
I don't know why people trade these, other then fear and greed obviously, but they were created only to make Investment Bankers and Structured Finance Traders very rich, as the expense structure is higher then normal ETFS.
Front Running, More ARB...Then Hammer Time.
If these allegations are true, its just one more black eye the public has with regards to the soft underbelly (Hedge Funds) of the financial markets. I have for years knows this was an acceptable practice alas the SEC doesn't really get involved in frivolous things like rules and regulations.
After digesting the roughly 35% rally in the markets as well as watching the Banking Index more then double, I have come to even more of a conclusion that it was just a severe bear market rally.
I have come to this very conclusion that the bear market rally in equities was the result of an extended short squeeze by quants and other institutional traders trying to achieve massive arbitrage trades in the most fundamentally weak sectors.
There are many variations of the arbitrage trade but the basic principle seems to consist of
the following:
1- Buying bonds on the company in question (at a substantial discount to par) with CDS insurance.
2- Shorting the Common Equity.
3- Buying the Preferred Equity.
This type of trade rang the register quite frequently during the credit crisis, but of late, the painful unwinding of short positions directly led to a huge market rally.
You will notice that the equity rally has been led by the companies with the WEAKEST fundamentals:
-Casinos
-Financials
-Commercial Real Estate
-Luxury Retailers
This action suggests that one of two things is happening:
1- The Long/Short Arbitrage trade is getting crowded from everyone short covering at the same time to take profits or limit losses.
OR.....
-2 Other quants are running short squeeze plays of their own on the most heavily shorted issues by going opposite to the prevailing hedge herd, buying the common equity or more likely taking substantial intra-day futures positions to move the market.
But...all good things come to an end.
The market may in fact try to rally to SPX 900 which is resistance.
Then its HAMMER TIME!
Wednesday, May 13, 2009
Structural Problem In Mortgage Land
The Obama Administration has thus thrown billions of dollars at the crisis, with programmes to modify troubled mortgages and others to help homeowners refinance into new loans even if their homes are worth less than they owe.
But as the economy deteriorates and job losses mount, more and more prime borrowers will be pushed into trouble.
In general, loan-modification programmes have been designed to modify subprime adjustable rate mortgages or tackle interest rate resets for other exotic home loans, but the growth in problem loans is now migrating to prime borrowers and ordinary loans with 30-year terms and fixed interest rates. The rate of late payment on prime loans jumped 72 basis points to 5.06 per cent in the fourth quarter of last year, according to the MBA, while prime loans in foreclosure rose 30bps to 1.88 per cent. These are much more difficult situations to modify, because the problem is not the structure of the mortgage. The borrower is falling behind because of a job loss and too much debt.
I do remember the good old days when banks actually owned mortgages, when they actually had loan standards, but now mortgages are securitized, which in turn makes loan modifications very difficult. The problem is that loan modifications only work if the principal balances are modified, and even after that how are people going to pay their mortgages with no job?
Does the Obama Administration have a program for these people?
So Much For Green Shoots....OOPS!
Analyst consensus was 0.1% gain.
Alan Greenspan Please Shut Up and Go Away.
Here goes.
“We are finally beginning to see the seeds of a bottoming in the housing industry. The U.S. is at the edge of a major liquidation in the stock of unsold properties, which may help to stabilize prices".
-Alan Greenspan on May 12, 2009.
I cant figure out for the life of me why the press, media, and the public constantly seek out opinions of brighter days and reassurances from the very people who put us in this grand mess in the first place.
Alan Greenspan has made continued speeches and interviews proclaiming the worst might be over time and again, and every time CNBC is on the story.
The only ones with a worse track record then Greenspan with regards to housing is the group he was speaking to yesterday:
The National Association Of Realtors.
This coming from the same guys who are in denial that a crisis ever existed.
They paid Greenspan 100k to spew his crap. What he had no book to promote?
Rotation And Arbitrage
If there was a silver lining in the Credit Crisis/Market Meltdown last year it was...US Treasury Securities as well as Dollar based currency's held up and rallied as Bonds and Dollar based assets were considered "Safe Havens". This along with Government Intervention helped stabilize the system and counteract the massive wealth loss that had happened over in equity land. As the US Dollar became stronger, Crude Oil and most commodities (Denominated in $$), became weaker as arbitrage trades had to be unraveled. This helped mitigate wealth loss as people didn't have to pay $4 a gallon for gas.
Also assisting was the US Government making a market for the following:
-US Treasuries.
-Mortgage Backed Securities on the non existent secondary market.
-Purchasing Preferred equity in lousy insolvent banks.
All of this was done via the printing of Trillion upon Trillions of US Dollars.
There was huge rotation globally out of any risky asset class and into secure assets like Treasuries, as investors knew politically (Cave in to PAC Pressure) what the US was going to do.
Crude Oil was a hedge market (Sub Prime/US $$$) for 2007-2008. Sub prime was the catalyst for more gains in crude oil, but what was also lost was that the banks were the ones putting in the hedges. As the financials (GS, MS, LEH, UBS, JP) became weaker and were in survival mode, they had to liquidate/unwind all of their commodities holdings. These trades were put in as arbitrage (Long Commodities/Short US Dollar) trades.
What ensued was the bottom dropping out on Crude, Natural Gas, Corn, Wheat, and a rally in the Dollar. Most arbitrage hedge funds globally were destroyed.
As the equity markets rallied, Treasury rates rose as again, Arb/Safe Haven Trades had to be unwinded. The yield on 10 and 30 year US Treasuries have rallied 130 and 160 basis points respectively this year alone, until recently when the Government was back in trying to push rates down.
Globally the confidence in the US Government/Market was very high, as both Administrations stated they would "Do everything in their power to stabilize the system". Money poured into US Backed/Secured Paper.
This was the situation until recently.
The Treasury has already exhausted almost every possible solution (Except the Obvious), with little or no "real results". They made the US Treasury Market the last resort for investors.
The questions to ask are the following:
1- What happens when foreigners especially China start to sell our US Bonds?
2- What happens when the Treasury can no longer print money to keep rates down?
3- Does the US Government really have an unlimited check book?
4- How large and bloated can the US Balance Sheet become?
5- Why is Goldman Sachs re-leveraging back up to a 20-1 ratio?
I have been predicting lower equity prices for the last month or so based on the fact that the Banks/Financials used one time accounting tricks to over state profits, despite the fact that financial credit spreads barely relaxed during the roughly 80% rally in that sector.
If what I predict comes to fruition, equity prices will again spiral down, but this time there will be no hiding place for investors to park their money, as Treasuries and the US Dollar will plummet as confidence dwindles.
Tuesday, May 12, 2009
Bury the Dead....
In short their influence is over.
Keynes noted that governments should spend to combat unemployment and lower economic output, exactly what central banks and governments are doing currently.
Bury the dead.....They stink up the joint.
Monday, May 11, 2009
Who is Buying Treasuries?
Are they not just paying for Treasuries with the good old fashioned printing press? It seems that the only ones who think inflation, growing deficits, debt ceilings, and an out of control monetary policy is not a problem is Ben Bernanke and Tim Geithner themselves.
Listen- Bond Yields have moved up drastically this year for many reasons, not withstanding money moving to equities and the unwinding of the "Safe" trade. But what we have not seen so far this year is serious selling from foreigners who own our debt. How long can we go before the likes of China start to dump US Sovereign Debt?
The Treasury has done everything possible to keep rates low so they can achieve mortgage refinancing, mortgage cram-downs, lower borrowing costs, etc. They have achieved to some what stabilize the secondary mortgage market and lower short term borrowing costs, but there is a serious divergence between long rates which have sky-rocketed this year.
All of this time, we have heard the following during the credit crisis:
"At least interest rates are low"
Not any longer as rates have clearly broken out to the upside. Many bond market participants have seen what is quite evident, that what ever the Treasury and Government has done to fix the credit crisis will not work in the Intermediate/Long term. Short term equity prices are event driven, bond prices are economically driven. What the bond market is telling you is that Inflation is going to be a problem, which will kill any pick up in the economy short term. If the economy can manage to claw back towards the end of 2009, the recovery will be at best a jobless recovery with much higher energy prices and inflation.
Bond rates have dropped over the last few days as again the US Treasury is back trying to support the market, but how much can they actually buy? Where is this money coming from? And who in their right mind can figure out what they are up to?
Again- I was early on my prediction of lower equity prices, but if the only ones who think our debt is considered desirable are the ones who issue them, I will stick to my thesis of much much lower equity prices and drastically higher bond yields.
Wednesday, May 6, 2009
Greed Has Replaced Fear.
So less bad news is the new good news?
Random Food For Thought-
1 in 5 homeowners are at least 30 days past due on their mortgage.
The markets are strong, as people who feel the train is leaving the station bid up shares.
Any excuse will do to take the markets higher.
Good News - Markets rally 5%
Bad News - Markets rally 3%
The markets were in total free fall mode at the end of 2008, and at the start of 2009, for very GOOD reasons, as FEAR dominated.
Now, GREED is entering the equation, as people are putting their faith into a economic/financial recovery.
REASON always trumps FAITH!