Monday, November 28, 2011

On Europe & The Euro

Futures are screaming higher this morning because....Surprise! Another Bailout...This time its Italy. Also The Federal Reserve will commence a half trillion $$ mortgage purchase plan which is the unofficial start of QE3. You got love backstops, backdoor bailouts, front door bailouts, overt in your face asset price manipulation, ZIRP, and Central Planning.

Somewhere in the afterlife (If It Exists) Engels and Marx are high fiving and chest bumping.

Who knows if this stems the vicious downdraft the markets had the last few weeks, for the time being its Risk On!

Keep in mind that the bailouts and Fed Mortgage buying are all rumors but looking at the 3% mark up this morning - does it really matter? I would actually choose to fade this rally once the actual news comes out.

As I have said the Italy bailouts are just another way of kicking the can down off the cliff. The Euro and the EU can not survive in its current state. Its inherently flawed and needs to be totally restructured.

As I have previously stated...

http://tradersutra.blogspot.com/2011/10/thoughts-on-europe-magical-thinking.html

http://tradersutra.blogspot.com/2011/09/not-mincing-words-on-greece.html

http://tradersutra.blogspot.com/2011/08/does-mr-market-have-glass-jaw.html

If Italy gets its bailout it still doesn't fix the Euro's problems. It's a temporary respite. I figure without this bit of news coming out of Europe over the weekend, Europe was headed towards a death "Lehman" like spiral.

Europe needs to do the following immediately:

1-The ECB needs to provide unlimited funding repo or otherwise. An unlimited backstop is needed.
2-The EFSF needs to expanded.
3-A definite time table for a Eurobond mechanism
4-Some sort of framework for fiscal union.

If German policy makers continue this "hyperinflation" talk I am sure that Italy/Greece will be printing out Lira's and Drachma's real soon.





Friday, October 28, 2011

More on MF GLOBAL

Well!
Now we know what MF stands for!

MF Global’s debt rating was cut last night by both Fitch & Moody’s. This begs a few questions:

Do we still listen to the ratings agencies?

The better question to ask is Why do we still listen to the ratings agencies?

I would think the only reason is because most investors just sit around all day with their hands in their pants waiting for someone else to do all of the hard analysis. The stock analysts do the same thing waiting and hoping that some other poor schmuck has done the work for them. Its an incredible circle jerk of idiocy.

What happened from the time MF Global blew up Tuesday till last night made Fitch & Moody’s wake up?

Does the fact that MF is an out of control debt and leverage machine just dawn on them while watching that riveting Game 6 of the World Series last night?

Does anybody on this planet actually do any credit analysis other than skim the headlines on Twitter?
One only has to look at MF Globals financials and filings to show the incredibly stupid 33 to 1 leverage that MF and Corzine built up since his hiring.

All of the analysts had this puppy wrong. Every one of them even after Tuesday’s implosion had this wrong. The simple fact that counterparty risk was more of an issue then the European Sovereign Debt per the analyst community was ludicrous. The idea that $6.3B in ESD was not an issue in the implosion is bottomline lazy analysis. Its easy to say counterparty and ratings risk. Its not easy to analize. It takes hard work running the figures.

One of the reasons counterparties today are not trading with MF is the fact that they were downgraded last night. The other reason is that they are tapped out via the REPO Market.

When companies catch a ratings downgrade they immediately have higher cost of capital. Counterparties demand more capital via collateral calls and demand larger haircuts/funding in the REPO market. Both of these are major MF Global problems at the moment. This was exactly what happened to AIG.

Back to the downgrades.

Why the downgrade from Fitch & Moody’s?

EUROPEAN SOVEREIGN DEBT Exposure! This was and is the problem but listening to the analyst community it wasn’t a factor in MF’s problems. MF Global owned $6.3B in face value ESD. Most of this debt was probably held on margin - leveraged to the hilt via the over night Repo Market.

I can here it now. MF Global and Dexia are isolated cases Its not a big deal. Buy the banks! Buy the financials!

This is just one of many implosions we will likely see over the coming months as obviously the lessens from Lehman/Bear/AIG/Wamu/Wachovia were never learned. Why learn from mistakes when Socialism and bailouts are public policy in market circles?

First Rule: Dont listen to sell side analysts.

Second Rule: It’s always the debt that matters.

Third Rule:   Leverage is like sex. When its good its great. When its bad lets get out of town.

Fourth Rule: Lose Repo Funding - Call the undertaker.

Fifith Rule:   If you are stupid enough to forget/break the first four rules make sure you drag enough people into the abyss with you.

Thursday, October 27, 2011

Thoughts On Europe & Magical Thinking

As I read the news flow coming out of Europe this morning I see GREEN. Futures are up a whopping 34 handles from yesterdays Globex Session close. The markets tend to trade to the path of least resistance and of course we all know that resistance is futile when markets are dominated by government policy intervention.

Screw Diamonds! Socialism and tax payer flush funds are a traders/speculators/bankers best friend.

Look for this market to trade to at least 1280-1300 level  on the futures before reality sets in. What is that reality you may ask? Like my old man always says reality is not what you see in the mirror but how the next guy sees you looking in the mirror. Its really circular farcical logic, but that's what investors want and that is what they will get. Its Western Culture at its finest. The avoidance of pain is paramount to living in a Western Culture.

http://tradersutra.blogspot.com/2011/08/pain-avoidance.html

Kick the can down the road.
Buy some more time.
Extend and Pretend.

Yada...Yada...Yada

A few days ago European Policymakers couldn't even schedule a meeting to discuss the crisis. They actually were kicking the meeting down the road. Markets reacted violently by sending the SPX down by 2%. Silly Rabbits - Tricks/Bad Debts are for Kids but Socialism/Bailouts are for the elites.

Back on the subject of Rabbits. Did the Europeans pull one out of the hat? One would think they have when looking at the DAX which is flying up 5.35%. Like the CARS singing oh oh It's Magic, one would think by looking at the sea of green on the screen that all has been magically fixed. Maybe Joan Didion was right after all when she wrote the "The Year Of Magical Thinking." Magical thinking works until reality sets in. Steve Jobs thought he can beat Cancer by magically thinking it doesn't exist. I am pretty sure the Europeans have the same thinking pattern as the Apple founder.

Lets review.
The only agreement that was reached was what we were all aware of. 50% haircuts for Greek Debt was already figured. Bank Recapitalization was already needed. The agreement basically buys time for the banks to posture their governments for continued bailouts.

My questions are:

-Does Austerity continue for the weaker periphery nations?
-Are the inherent flaws within the single currency Euro still intact?
-Will trade deficit nations continue to consolidate their budgets?
-Will growth worsen for trade deficit nations?

As Marv Albert  says.....The answers are all a resounding YES!

What European policy makers achieved was an offering to the German Banks and citizens. They wanted bailouts and austerity and that is what was delivered.

Bottomline. THE ECB will use the EFSF to put a bid and floor under sovereign debt until it cant any longer. What was averted I must admit was a system wide bank panic - Lehman 2.0 doesn't look like its in the cards.
Substantial capital (Tax Payer Funds) has been set aside (Bonus Pool) in the case of widespread bank failures or recapitalization needs.

Markets are reacting for good reason as the short term looks good. The Europeans were able to remove the absolute worst case debt crisis scenario, but what we have is just a muddle through scenario. This is not as plan. Markets need to grow out of this debt mess. My thinking is that austerity will continue to put pressure on budgets which will lead to massive protest movements across Europe.

If budgets worsen on the periphery we should expect to revisit this issue in the coming quarters and the crisis will once again ripple through the market forcing Euro leaders into greater action.

Magical thinking helped Joan Didion out of her deep depression. Good for her. It didn't work for Steve Jobs and it won't work for Europe.

Wednesday, October 26, 2011

MF GLOBAL

We all saw the effects of poor risk management and excessive leverage in full force in the plunge of MF Global Holdings. The stock lost 47% in yesterday’s trading.

Do we really need to go over the results?
Can’t we just look at the facts?
Do we really need to spin the same broken record day after day?

The words excessive leverage, inadequate capital requirements, poor risk talking and management, and potential ratings downgrades should not be new to anyone who lived through the 2008 credit crisis.

Yet….

People are still shocked that companies are run into the ground following the above meme.  I am truly shocked to find out there is gambling going on at the World Series Of Poker.

Just reading the research reports describing MF Global is downright tiring. How many times do we need to read the same thing over and over again

Let’s see.

1- Excessive Leverage – CHECK!

2- Not Enough Capital – CHECK!

3- Zero Risk Managment – CHECK!

4- Counterparty Risk - CHECK!

5- Potential Ratings Downgrade – CHECK!

What is truly troubling here is that MF Global’s European Sovereign Debt exposure is totally being discounted. The company has exposure to $6.3B in ESD, which is being supported by $1.2B in shareholder equity as of yesterdays close.

Why do you think most analysts and investors are pushing this to the side? Well of course – Bailouts! Tax Payer Funded Slush Funds. The thinking here is that this is non issue. Doesn’t matter if they have $1 or $100B in exposure as long as the EFSF/IMF/ECB are backstopping the losses. If this is not moral hazard I don’t know what is.

I am not saying that MF Global will be bailed out. They probably will be forced into a miserable death just because Jon Corzine didn't leverage the company enough. If Jon Corzine wants to save his company he should get on the horn with the guys at GS and be on the other side of say a couple trillion in derivatives.

Doing the same thing over and over again in the real world leads to insanity, but in the financial services world it just leads to more bailouts.

Monday, September 19, 2011

Not Mincing Words On Greece

I have long since stated that Greece will default.

http://tradersutra.blogspot.com/2010/04/greece-will-default.html

I didn't mince words back then and I am not mincing them now.

Greece has really three options to cut their debt.

1-Pay it off
2-The Kramer Method - Write It Off
3-The British/US Method - Inflate it away

Option 1 would be the best method for autocrats/technocrats/policymakers everywhere. The Cubs would win the World Series before this happens however. This on the surface looks to be the most healthiest form of paying it off for market participants. But its not happening for Greece as the debt load plus austerity is crushing.

Option 2 would be to write it off. This looks to be the most efficient plan for the Greeks. This is a default. Pure and simple. We will have to figure how the market reacts to this. How would bilateral CDS contracts be settled, etc. This would be incredibly painful but would be a cathartic revelation. How they handle the haircuts and what that amounts to will be important.

Option 3 would be in my opinion the most dangerous. The Greeks would have to exit the Euro and then reissue Drachmas. The currency would immediately drop, this would allow the Greeks to export more Gyro's but inflation and falling output would create problems.

All things aside, the markets are weak again this morning. Its become a broken record. The failure of European Policymakers to deal with this issue is flabbergasting. They will continue to muddle through this crisis, making the crisis more and more of a problem. Bailouts, USD Swaps, EFSF talks are all about kicking the can down the road. The current policy is extend and pretend till Wile E. Coyote stays in suspended animation. If and only when the Euro is about to totally collapse and it threatens the entire European Continent will the European Autocrats do the right things and demand 50-60% haircuts and fiscal consolidation.

Yes. Eurobonds. It wont be pretty and it wont be easy. Europe needs a common treasury. This needs to be done first. I understand that Eurobonds have some inherent problems, most notably the lack of a political union but a Brady Bond mechanism needs to be installed.

The markets are again weak coming off additional negative news flow out of Greece, but I fully expect the EU, ECB, and IMF to come up with the money for Greece. I might as well toss in the Fed as well. I fully expect Greece will get her money in a few weeks. The EFSF will then be passed by all European parliaments. Markets will cheer leading into these actions, but then I also expect an orderly Greek restructuring in the area of 50% haircuts which in the grander scheme of things is not enough.


Sunday, September 4, 2011

Left/Right = Wrong

For the longest time American politics has been about Democrats Vs. Republicans. The Left Vs. the Right. Liberals Vs. Conservatives. The major economic, social, political, and economical issues have all been defined by these paradigms. For the last hand full of generations this has been the prevailing structural dynamic of how the major issues of the day were discussed not just in this country but on planet Earth.  Look at every industry and you can point to this idea of which side of the fence you would reside on.  This has changed.  Let me tell you that its not a Left/Right issue anymore and it stopped being an issue some 20-25 years ago. The joke is on the electorate who are fighting over these ancient arguments. Its like throwing stones when machine guns are the weapon of choice. 


There is a huge structural shift that has happened over the last 25 years or so that is changed the underlying dynamic. Again while most Americans continue to argue over abortion, welfare, taxes, war policy, education, immigration, etc,  the country is being taken/stolen away from them. Both leftists and right wingers can't see through their mutual hatred for one another. This is what policymakers and politicians want as they give the country away to Wall Street and big business. The media and talk radio continue to make every issue a Left/Right debate because guess who owns them? This is why Rush Limbaugh, Ann Coulter, Laura Ingraham, Ed Shultz, and Olbermann are extremely well paid by the media machine. They specifically come on line and make their constituencies think that it is us against them as in Democrats/Left/Liberals Vs. GOP/Right/Conservatives. This is on every issue. Whilst the country gets taken away from them and handed to the corporations. 


Turn on the TV, listen to CSPAN, read the papers and its always about the following: 


1-Pro Choice Vs. Pro Life
2-Pro Union Vs. Anti Union 
3-Free Markets Vs. Regulation
4-Pro War Vs. Anti War
5-Pro Immigration Vs. Fence Builders
6-Gay Marriage Vs. Family Values
7-Public Schools Vs. School Choice


I can go on forever. On and On.


What we have seen since the near collapse of the global economy is how the Corporation has swayed the argument into actions that screw the taxpayer for the benefit of Big Business. The increase of Corporate influence over the last 25 years is the biggest geopolitical event that no one is talking about. Why would they? Rush Limbaugh and Olbermann are not talking about it so why fight over it? Its not the fall of Communism or the rise of Islamic fundamentalism, or even the rise of China and India to the global economic landscape but the rise, power, and influence of Corporations over  the individual. It is the taxpayer/individual Vs. Big Business/Wall Street/Corporations and we the Taxpayer/Individual is getting slaughtered. 


This is not new ground for the well informed. Its been simmering since the Reagan Revolution. Over the last 25 years the disintegration of tax payer rights was slow and measured. It took on a Tsunami like existence when the US Government bailed out Wall Street. The power and influence that Banks have over the electorate is absurd. Banks have lots of money and power and they spread it around policy circles which filter into the policy making areas.This is why we continue to have bailouts. When we have such a vulgar concentration of power, influence, and money we are assured to have an abuse of that power. 


Money has supplanted tax payer rights. The political process has been twisted and perversed by lobbyists and now the Supreme Court has made it that Corporations are just like individuals. 


Again, the tax payer is losing. The individual is losing out to Big Business. You have to consider that every single piece of legislation that policy makers make is on behalf of corporations. 


So the next time you have a conversation about abortion or taxes or even immigration, remember you are missing the bigger picture. When the bailouts  via TARP was rolled out, it was a Republican Right Winger (Paulson) that started that but today the bailouts continue with a Democratic Liberal (Obama). They are all in on it. They smell the money. There is no left/right function in politics. Its all about PAC's, Lobbyists, and Corporate influence. We had Bush Jr, push through two unfunded tax cuts, Medicare Part B, and two wars. We have Obama who pushed through Obamacare, extended the tax cuts and continues to fight two wars. Two guys who are at separate ends of the political divide but both are acting to the benefit of Big Business. Wall Street got bailed out under a GOP administration and to every one's surprise is getting bailed out daily under Obama, yet we continue to argue about gay marriage? 


There is some light at the end of the tunnel. Many have stopped reading print newspapers. Many have stopped watching the MSM. They go like myself to blogs and other user generated content sites like YouTube to get a proper idea of what is going on in the world. 


Just today I was having a conversation with someone at the coffee shop about Keynes Vs. Hayek and it suddenly dawned on me that its not about Keynes Vs. Hayek, but Goldman Sachs Vs. Me and I am losing. If Americans continue to travel down this road Serfdom is the final destination. 





Sunday, August 21, 2011

Pain Avoidance

A new week is coming. This week is all about Ben Bernanke and he will say at his annual pain avoidance conference in Jackson Hole Wyoming.

Almost everything I have read this past weekend is how Bernanke can stop the stock slide with a simple statement. "I am embarking on QE3." The hope here is that Bernanke opens the door and embarks on another campaign to save speculators, stock traders, and insure that hedge fund honchos can justify 2 and 20. All of these guys are just hoping that more QE will save them from another round of margin liquidation. I can see and hear it now,  John Paulson and David Tepper working the phones to their prime brokers. "Don't Sell Me Out! Don't you know that Bernanke is going to reliquify the markets?" This may be even a Carl Quintenia CNBC Special - "Inside The Beggars Pit." Maybe Rowdy Roddy Piper can co host?

The idea that another round of stimulus will stop the summer retreat in stocks is the current hope in financial circles. There is no hope in the stock market. Can someone please alert the financial elites?

I am sure that stocks will take it on the chin this week if no QE/further stimulus is announced. Why? Because at the moment that is the path of least resistance. In the current macro environment, which is a slowing economy, non existent job market, weak housing, and cascading consumer sentiment, stocks will have a difficult time finding bids. The economy is soft and we have an even softer President who is extremely disappointing. Obama has not figured out what is wrong with the economy a full 30 months into his Presidency.

In my opinion, Bernanke is going to have a difficult time selling another round of QE3 just a year after QE2 massively failed. Markets will be disappointed as Bernanke, Geithner, and Obama have few political bullets left. The higher CPI figures this past week will most likely pause any talk of QE. But then again, QE2 never really rallied commodity prices higher although Brian Sack (NYFED) seems to think that keeping "prices higher than they normally will be" is good policy.

My hope is that no QE3 is announced. We need to make sure the market can stand on its own weight. The Fed since Greenspan has been delaying the pain for too long. We need to stop this dynamic Put insurance policy that protects asset prices. I am tired of the Greenspan/Bernanke Put. This is the root cause of all that is wrong with our financial system. We need to top putting band aids on wounds that need surgical procedures. We should have forced restructuring on the banks. We should have taken BOFA and Citigroup into pre packaged bankruptcy protection. We should have never allowed BOFA to buy Merrill Lynch. ML was insolvent the day BOFA plucked down tens of billions for that failed institution. It was bad/toxic money chasing insolvent money. We should not have allowed Wells to but Wachovia. Wachovia like Merrill should have been orderly liquidated thru bankruptcy. All of these failed institutions, Bear, Wamu, CountryWide, Wachovia, Merrill, and even Morgan Stanley should have been dismantled and put thru a pre packaged bankruptcy so that toxic assets were written down and cleansed from the banking sector. A fresh clean company then could have been floated. The only smart responsible thing that the Obama Administration has done so far were the Auto Bailouts. They would have been an excellent blueprint to deal with the banks. They would have saved the banking system and the economy if they would have just let these fraudulent and corrupt institutions die. Obama, Geithner, and Larry Summers should have gone Swedish instead of Japanese. Sweden cleansed their economy of failed institutions. Created good banks and toxic banks. Their economy took it on the chin for a few years but was growing soon after. We followed the Japanese method of pain avoidance.

Pain avoidance. Two words in the financial lexicon that needs to be purged. The Dow bottomed at 6500 when it became apparent that socialism would save the day. They should have instituted the Austrian School of policy. The markets would have gone to below 5K, but who cares. We would be much better off today. We would have taught these crooks a lesson. Instead we are back to square one. The same old problems. What we got in the form of policy was pain avoidance in September 2008, more of the same in 2009, and 2010 when QE2 was announced. The Obama Administration is so scared of the financial sector. So scared of getting Jamie Dimon upset.

What we have seen form Obama is an utter lack of understanding of how the economy works. As soon as Paul Volcker started talking about firing bank CEO's, Obama marginalized him. Why has Obama not listened to anyone who seems to know what they are doing? Volcker and Bill Black have been pleading with this ingrate over policy and the lack of prosecutions in the banking sector.

The reason we should not have any more stimulus is not because it is politically unfeasible or that it will stoke inflation, rather than that it doesn't work. Can it be that QE is a crappy policy that just sucks?

No amount of further QE will stabilize housing. No amount of further stimulus to prop up asset prices will get Americans off the unemployment line. QE1 and QE2 only temporally raised equity prices. Higher equity prices resulted in zero hiring and zero housing stabilization.

There is only one reason for Ben Bernanke to say no to QE3. It doesn't work.I doubt we will hear this from the mouth of Bernanke. If he actually utters these words then he is simply admitting that he knows what he is doing and that he has learned from his past mistakes. To bad that he has no clue what he is doing and has learned nothing from his past actions. The same can be said for Geithner and Obama.

Friday, August 19, 2011

Mkt Weakness & The VIX

Everyone is talking about the VIX. The VIX this. The VIX that. What is the VIX telling us? What is the VIX?

The VIX is often misunderstood and wrongly classified as the ultimate fear gauge. It is an indication of market fear or investor angst but its just one piece of the puzzle. The VIX simply represents one measure of the market's expectation of stock market volatility over the next 30 day period. There has been money to be made playing market volatility over the last few weeks.

The move we have seen the last few weeks is different than what we saw last year.

In 2010 it took a good 2 plus months for the market to lose near 20%.

S&P 500 Down Move In 2010. Down 18%

S&P 500 Down Move in 2011. Down 18%

This down move was 2 weeks in duration. Like Justice in Texas. Swift and quick.

Many can make the point that S&P's downgrade lit the fire but this is wrong. The deficit ceiling freak show really alerted investors to how overtly reckless our Congressional leaders are. Cutting the deficit and shrinking government when the economy is clearly contracting and the consumer is in balance sheet hell is completely irresponsible. We are sowing the seeds of deflation. The market is taking its cue from the utter dysfunctional nature of DC. Couple this with the general flight to liquidity in Europe and what do you expect? There is also a flight to liquidity here as well as 10 Year Treasury bond yields are plunging.  A lot like 2008 right? Not really. In 2008 there was a general lack of certainty over what the government and policy makers can and would do. We saw markets crater and the VIX explode out. What we saw in the aftermath was bailouts galore and an opening of the liquidity tap. Now in the face of another round of economic malaise, investors are sure that policy makers will again bailout bankers and that liquidity will be ample. 

This can clearly be seen in the VIX Futures Curve.

The general fear of a full blown economic market catastrophe is largely being discounted if you look at the VIX Futures Curve.

VIX FUTURES CURVE 

Looking back at the longer dated VIX Futures curve. In 2008 the VIX spiked to almost 90 but the longest dated future VIX Contract spiked to only about 45. In 2010 we saw the VIX at 45 again the longer dated VIX Future spiked to about 35. Now we have the VIX at 43 and the longest dated VIX Future is at 29. So the fear going out is subsiding at each market interval. This is basically the market being more concerned short term rather than well into the future.

The Volatility markets are telling you or suggesting that markets are not going to see a precipitous drop like we saw in 2008. 

Is this not moral hazard on steroids? 

Now one can make excuses for the market weakness. S&P's downgrade, debt problems, earnings, jobs, slowing economy, Europe, China slowing down their economy, and housing. Guess what all of these are problems and have something to do with the general market malaise, but what I think the underlying cause is just the general failure of policymakers to make hard choices. This patch up the rotten to the core system is not getting it done. QE2 was and is a failure. This market downdraft in the US is the direct consequence of the Fed's distortion of risk markets. This idea of creating a wealth effect channel was a bailout for traders and speculators. It did nothing for the general economy. Nothing for the middle class. Nothing to fix the housing mess. Nothing to take on unemployment. When will this countries policymakers stop following the Neo Classical School for Economics? Supply Side is dead! Tax Cuts don't filter/trickle down. Markets are not free nor are they efficient. We have massive malinvestment into unproductive areas of the economy, mostly in the banking sector. Why are we surprised that the economy is getting soft right after QE2 ended?

When will the Fed, The ECB, and other Klepto Policymakers finally admit to the fact that their policies have mostly contributed not only to the weakness in risk markets but the general economy?

Thursday, August 18, 2011

Does Mr. Market Have A Glass Jaw?

Mr. Market Took on the chin today. He has been taking quite a few shoots the last few weeks.
Whether Mr. Market has a glass jaw like he had in 2008 is to be seen. The major average were down anywhere from 3.69% for the DOW to a down 5.22% for the NASDAQ. The SPX was down 4.46%. This market got off easy today. Europe is a total mess and I just don't understand European Policymakers. The ECB is so afraid of inflation that they have sworn off expanding their balance sheet to tighten EZ Spreads. Merkel and Sarkozy are Elitist politicians just looking out for the rich and affluent in their respective countries.

http://tradersutra.blogspot.com/2011/07/simple-thought-on-european-debt.html

http://tradersutra.blogspot.com/2011/08/eurobonds-or-bust.html

So what we have here in Europe is a total abdication of governing power. Its kick the can down and over the cliff time in Europe. It is an absolute disgrace for Trichet to claim that the European Economy is in better shape than the US Economy. This guy has some serious balls. French & German banks are so knee deep in EZ Periphery debt that even a 50% haircut would render them insolvent. The US also has a major governing vortex as well but the US Banking Sector is structurally in much better shape than Europe's.

A Euro Bond program is the only feasible way to save the Euro and grand European Dream of unity. It still can be done but I fear that Europe just like the US is in a policy and administrative death spiral. They need to purge Trichet, Weber, Merkel, and Sarkozy just like we need to purge Geithner, Bernanke, Obama, and most of Congress. They will get to that proper policy choice but not before much more economic pain is administered.

The market correction we have seen over the last few weeks is just a massive failure by policymakers and politicians in Europe and the US. Central Bankers from both continents have failed the public while making sure their rich/elitist constituencies are taken care of. The programs that they have created have failed and meant nothing to the greater economies as a whole while putting the finances of the regions in greater peril. In short, they have cost us greatly while accomplishing nothing.

What this means is that the we will just bump around the bottom here in the US for the next several years. 1% or best case 2% growth, while Europe does their charade pretending to have a currency union with no fiscal policy. The global economy is grinding to a halt and these guys in Europe and US have their hands in their pants. All of this could and should have been avoided with proper policies to clean up the rotten to the core financial system, but Obama failed us all. He appointed the same arsonists who set the fire for the credit crisis to high ranking positions in his cabinet. Why are we all surprised at the results?

10 Year Treasury yields briefly saw a 1 handle today. That alone should alert people to where the US Economy is headed. The US government can borrow money at 2% annually over 10 Years and investors all around the world are still buying hand over fist. This is no longer the safety trade but the smart trade.

The question remains. Are we going into a recession? The answer is we are already in it. That doesn't mean it has to be a bad recession or like the one we were in 2 years ago. It can be just a run of the mill recession. Who knows? I believe housing has one more serious down leg, maybe 10-15% further correction. The banks have to get serious about taking losses and marking to reality. US Financial Institutions are not going out of business although they are all insolvent. They will be zombie institutions for a generation. The next time they all have a death spiral swoon will Obama & Geithner put the wood to them? Will they force restructuring? Will they force the banks to take proper marks? Will the banks purge their bad assets? These are all important questions that need to be answered. At the moment the US Banks are in better shape relative to European financials. European financials will all have to be nationalized when the haircuts and Eurobond proposals are dolled out. US Financials will then have a major competitive advantage and it is prime opportunity for our policy makers to fix our banking sector. If we take the pain now we can dominate later.

Wednesday, August 17, 2011

Musings on QE, Money Supply, & The USD


We have heard countless times over the past few years how badly Bernanke has debased the US Dollar. In certain terms he has done this. The claim that the USD would be higher in the absence of QE is counter factual at best. Who knows where the USD would be if the Fed never expanded its balance sheet. One can claim that the USD would be higher on a trade weighted basis because of the Euro's woes. This would equal out the Yen's rise in the same period. My guess is that the USD would have remained weak. The USD was a weak currency before QE and the credit crisis and its certainly a weak one now. This is so because the USD has massive structural problems and headwinds. We have an uneven trade policy on top of a non existent fiscal policy that renders the Dollar to be go no where but down. We run huge trade deficits that need to be financed through deficit spending. Now deficit spending is an accounting term yet it is still a figure. We simply don't have enough revenue coming in to make up for entitlement spending, defense spending, bailouts, and lack of taxes.

The Fed has tried to make up for the lost output by starting up speculation via Animal Spirits. The Fed's QE and ZIRP programs have only succeeded in creating more confusion in the way monetary policy actually functions. Monetary policy in the midst of a balance sheet recession is completely impotent and useless. The Japanese know this. It doesn't matter how low rates are if the banks/private sector can't find profitable investments to sink them in to. The ZIRP the Fed has instituted is basically a sinking fund for Wall Street speculation. We have seen commodity prices sky rocket. We have seen equity prices also rise. In fact all risk assets are rising in the same direction. This is a dangerous correlation. What goes up during QE has to come down when the policy ends. This is what we have seen.

What the Fed is doing is technically not money printing as much of it is an asset swap. The Fed can't print money. It has no authorization to do such a thing. Its the Treasury that does the printing if any printing is actually done. The Fed sits under the Treasury and what the Fed does is simply credit bank accounts electronically. This is how they manage the monetary base and the reserves in the banking system. Through Open Market Operations they add or subtract via Repo's / Reverse Repo's, monied reserves. Through the interest rate channel they set the discount rate and put a target on the Fed Fund's Rate. This is all they do. My problem is a ZIRP policy is destroying savings at a time when the country needs to have some sort of return for their fixed rate investments. Its stoking speculation into risk assets when the private sector most notably consumers need to deleverage and pay off debts. Super low rates gave us a credit crisis as many used their homes as ATM's. We need to move to a more normalized interest rate policy.

What the Fed tried to accomplish through QE was just an asset swap of taking out interest bearing assets from the capital markets and parking them inside the Fed. The Fed basically is taking out higher interest bearing coupons and making investors invest in lower coupon. As the Fed pushes the curve down while keeping rates at zero, effectively controlling the entire curve. If this is not central planning I don't know what is. The entire market is captured by  short term zero bound rates while long term rates are pushed down by a weak economy and other deflationary forces. Its this dynamic I have stated previously that is killing savers while enriching speculators. Its this Reverse Robin Hood policy instituted by Bernanke that has become the 1 Million pound elephant in the room. This is the monster that he has created and the monster gets bigger and more difficult to manage as time goes by. Now the Fed not only owns Treasuries but a Trillion dollars worth of high coupon MBS. What they wanted to do was take the high coupon MBS out of the market, push rates down so that refinance activity picks up. Which is a noble idea except rates are going down but so is general housing prices. Rates are down not because the Fed is buying but by a general lack of interest and demand for housing. No one can get approved and many are stuck in under water homes that can't be refinanced. Oh! did I mention 9% unemployment? Even if refinance activity picks up and higher coupon MBS that the Fed owns are paid down, this by itself is deflationary. Deflation is the bogeyman for the Fed. They instituted QE2 because of it. They are sowing the seeds for more deflation with their policies.

Along with the fact that Bernanke had zero clue about where the economy was going in 2008 and his subsequent Housing is contained speech on CNBC. They all say that you can't fight the Fed but you can pretty much bet against Ben at every turn.

http://tradersutra.blogspot.com/2010/12/bet-against-bernanke-surely.html

Of late Ron Paul and now Texas Gov. Rick Perry are on Bernanke's case about the Dollar. This is the same Rick Perry who takes credit for the Sun coming up in Texas every morning. He has no clue about monetary policy or the drivers of the general economy, all of which probably makes him a better candidate for President. Both Paul and Perry have been hammering Bernanke over the Dollar. They should be hammering him about ZIRP. What ever Bernanke is doing to the Dollar is nothing compared to what Congress has already done. Again, the Fed doesn't set Trade or Fiscal Policy. That is done by Congress and the White House Administration. Both of these branches of government has sold out the country to big business which wants a lower dollar to export out.

The Fed's QE and expansionary balance sheet maneuvers are asset swaps only. The Fed's balance sheet has gone from less than $900B to over $3T since 2008. Many have mistakenly stated that he has greatly expanded the money supply. Which after closer examination really is not the case.

The following charts from from ShadowStats.com;

http://www.shadowstats.com/charts/monetary-base-money-supply

The more important charts are these longer term money supply charts.



Courtesy Of Shadow Stats.

Bernanke has expanded the money supply, but not as much as people have previously (Myself included) have thought. Long term money supply growth is around 5%. Bernanke has expanded that over the last few years to 5.5%. Not a big deal compared with the Chinese who have expanded their funny money by 17% a year for the last 10 Years. They also peg their funny money to the USD to keep it undervalued, which they have to as they are an export led economy. They recycle the dollars from their trade surplus back into our economy via the Treasury Market. This is the global savings glut argument that many are making for the credit crisis. It has some logic to it but most of it is bogus rhetoric. The Chinese bought Treasuries hand over fist pushing long term rates down which enabled the housing credit crisis. This is the meme that many supply siders, deregulators, bank lobbyists, and Wall Street apologists are making. Sprinkle in some its all the poor's fault, the CRE did it, deadbeat homeowners, government housing policy, Yada Yada Yada,  you get the picture. Zero accountability for elitist bankers, supply siders, deregulators, and bank lobbyists.

If it was all that simple and easy.

The primary reason we had a credit crisis was a total abdication of lending standards and total misplaced incentives by the banking sector. It was a hot potato credit fiasco created by Wall Street institutions. I still don't understand how in the world the CRE made AIG make all those bad CDS bets? How did the CRE make Lehman make all those bad RMBS and CMBS loans? Can someone please explain this to me?

Back to the USD. As you can see, The USD was lower in 2008 when the Fed's balance sheet was 1/3 the size.  You can't blame the Fed entirely for the Dollars decline, you have to blame other government policy makers for that. You have to blame Congress for fiscal and trade policies and the White House for a total lack of attention to global economic affairs.


Tuesday, August 16, 2011

The US Economy is Japan 2.0

In the past I have commented on the similarities between Japan's economy the last 20 years and the current malaise in the US Economy.

Like Peterman says.....Quick Elaine!....To the archives!

I said all the way back in June 2009 that US policy makers were making the same policy mistakes that the Japanese were making by not liquidating failing financial institutions and keeping a ZIRP in the midst of a balance sheet recession. Mind you the Japanese didn't immediately go to a ZIRP policy until a full 5 years after the implosion of the Nikkei. It was really policymakers that were worried about too much spending by the public sector that added to the problems with the Japanese economy. Also please note everyone says deflation when it comes to Japan but that really is a misnomer. Japan I believe only had one year when headline CPI was negative.  It was just a balance sheet recession brought upon a massive credit bubble that needed to be extinguished. After they tried keeping the foot off the accelerator and curb stimulus spending is when the Japanese economy took the nose dive. We are headed in the same direction as Obama for whatever reason is in deficit reduction mode while the economy is still contracting. Pure lunacy.

Then I stated a few months later:
No Sex In The Champagne Room.




Then again in October 2009


There have been a lot of charts going around the Blogesphere talking about something I have been talking about for 2 years.

Lets go to the charts as Warner Wolf would say.

Courtesy - PragCap

This is a chart of JGB Yields and US 10 Year Yields time overlapped. This wasn't pretty for the broader Japanese Economy and it doesn't bode well for ours.

At this rate 10 Year UST's will be between 1% & 1.5% in the very near future and staying down at those levels for quite some time. I think 10Y yields will be even lower because the US Economy is 2/3rds consumer driven which are only 10% through deleveraging. Also UST's are the most liquid investments in the world and the USD is the reserve currency. It is the global safe haven trade.

Both economies at the respective times were undergoing massive deleveraging. The Japanese economy was more of a corporate shrinking than ours where as its a consumer deleveraging.

What we have at the moment is a massive debt bubble that needs to unravel. This causes the economy to contract. We need government to make up for the contraction via spending to fill in the gaps. Unfortunately the country is run by the wholly trinity of idiots (Obama, Tea Party, and GOP), and I fear another long deep recession brought upon by this ill timed austerity. This means deflation and selling of risk assets into safe haven assets. Screw the ones who say stocks are cheap. They don't see the macro picture. The economy is weakening and stocks will look cheap looking in the rear view mirror.

I hope I am wrong but as long as Geithner,Bernake and Obama are running policy we are doomed.

This is also a gem of a chart.



Courtesy - Big Picture and Bloomberg Chart Of The Day

Causation doesn't mean correlation, but anyone who dismisses this chart better wear a helmet on the way down.

There are some differences in policy. US Central Bankers flooded the banking sector with free money while the Japanese waited a full five years but other than that I find many similarities.
And lastly this:

Courtesy - Angry Bear

Japan for all of their problems and issues are better off 20 years after their economy blew up. They at the time already had a very weak currency. The Yen was at 165 to the USD in 1990 when the Nikkei was at its highs. Their currency has appreciated from 165 all the way to 77 to the USD. This has greatly improved the Japanese way of life and increased their buying spending/buying power. In short the Japanese make stuff well and sell it better. They have a tremendous manufacturing base to which they can export out. The US economy which is owned and operated through the Corporate Kleptocracy has sold out its manufacturing base to the outside world. The only thing we export is inflation via QE and ZIRP and bad financial engineering. The USD will progressively get weaker which will hurt US Consumer spending/buying power.

Thus US Economy has to move to a strong dollar policy and do it quick or we face an extremely demoralizing economic future.

A Bag Of Lemons.....

I have posted on a few times that we are headed for a generation of economic pain if our policymakers don't "COWBOY UP". What we have seen from Obama is the same we saw from George W. Bush. In fact Obama is more Bush than Bush himself.


Obama has taken almost every lousy Bush Era policy and made it his own lousy policy.

He has continued in the same destructive policy to eliminate the middle class that W started 11 years ago. His appointments of Geithner, Bernanke, Summers, & Sperling are an indication that this President is completely clueless when it comes to understanding the needs and concerns of ordinary Americans. This type of behavior is emblematic of the Conservative Right in this country but now that Obama has made it his own policy it really reeks. In short if there ever was a time and reason for a 3rd party candidate to take this country in a different direction its now. The Democrats should really think of nominating someone else in the upcoming election. I pretty much will support the next candidate who will have an adulterous and incestuous relationships with the American Public.

The biggest backer of the Tea Party is living right there in the White House. Funny thing is that both Obama and the Tea Party dolts have not figured this out yet. What we have seen is bad policy after bad policy. Its just the degree of absurdity that is different each time Obama opens his mouth.

Lets just review:

1-Appointments of Wall Street/Corporate insiders to major cabinet positions in the administration.

2-Continuing the bank bailouts. TBTF is an official policy of this administration.

3-Clueless re-regulation and gutless new regulations.

4-Creating TBTF Bailout Mechanism. Again. Official Overt Policy recommendations.

5-HAMP. Not only bailouts for the elites but bailouts for squatters and deadbeats.

6-Obamacare. Its not socialism but another Big Business throw away. Lets just make Medicare/Medicaid more bloated, less efficient, and more prone for fraud, and its unconstitutional.

7-Where are convictions for the malfeasance on Wall Street?

8-Why are the Ratings Agencies still in business?

9-Dodd Frank is a joke. No rules for leverage/capital requirements.

10- Continuing to fight the two Bush era Wars.

11-Reloading unemployment benefits

12-Why is GITMO still open for business?

13- What about extraordinary rendition?

14-Whistle blowers are prosecuted but not Wall Street thief's?

15-Stimulus was a giveaway to the rich and big business. Did little to fix infrastructure problems and put people back to work.

16- No backbone when dealing with Congress over Taxes.

17-Keeping and honing  the Kleptocratic machine that has become big business in this country.

18-No real idea of what is wrong with employment picture.

19-Zero Interest Rate Policy is a reverse Robin Hood mechanism.

20-No respect for the rule of law in dealing with mortgage fraudclosure.

The list can go on and on and on.

The only thing Obama has done right so far are the auto bailouts. This is what should have been done to the banks and firms on Wall Street. Liquidate! Liquidate! Liquidate! I guess GM and Chrysler didn't have checks in the mail to K Street.

We have not even come to the deficit and debt ceiling. In the midst of an economic downturn and balance sheet recession, the government has to pick up the slack for the lack of demand in the private sector. Austerity is not going to work. There is no Free Market because the private sector is dead. Dead as a door nail. Big Business especially Wall Street has parasitically eaten away at what ever wood is left in this country and Obama has stood there and let it happen.

We need the government to assist the private sector in profitable and enlightened rent seeking. Not to screw us up again. That is what they are doing when they cut spending and put us on a path to deficit reduction via austerity. 

Its not about big government vs small government. Its about efficient government. Its about a government that assists the private sector. That leaves a policy that benefits the private sector. The private sector today is as damaged as it ever was during the credit meltdown. We have spend tens of trillions of dollars covering up for the criminals on Wall Street. Spend foolishly tens of trillions more in propping up a rotten to the core banking sector. Trillion more in fighting two absurd wars. This country is being eaten alive by the Kletocratic Corporatocracy.

Barack Obama is at this point the most deeply disappointing President we have ever had. He has systematically destroyed all of the confidence (what little that was left) that this country ever had in politicians.

We all understand that he was given a bag of lemons. We understand that lemonade may or may not have been on the menu. We as Americans were not expecting miracles. What we didn't expect was taking a bag of lemons and putting them on a flatbed truck filled with a million more lemons. That is what Obama has accomplished in his first term. He has institutionalized Corporate Kleptocracy.

I have always said that Democrats are inept and incompetent but compared to the lunatics on the GOP, they look presentable.

Unfortunately, Obama is looking presentable to the nation in 2012.

Monday, August 15, 2011

Eurobonds or Bust

There are really only a few options for Europe. All of them suck. All of them will gravely inflict damage to the elite status quo.

http://tradersutra.blogspot.com/2011/07/simple-thought-on-european-debt.html

What are these options?
One of them is the Eurobond Idea. This sounds like the only idea I have heard the last year or so that is actually sane. Which is to say it won't happen until its far too late.

Look. Europe is a mess. A total mess. They have a few choices. Let the Euro collapse (Not Happening). There is too much political will and capital put into the Euro. They can structure a two tier Euro Currency structure. (Not Happening) This is quite complex and Germany/France would never approve this as their economies love the current Euro structure. When you have a monetary union, the strongest countries will always prey on the weaker ones. The weaker countries will always be beholden to the stronger ones. Survival of the fittest. The big problem in Europe is the absence of a fiscal union. The absence of a single unifying bond market. This is the only choice that is feasible for the current Euro structure and for the future of both the core and periphery.

This is the major flaw in the Euro. The lack of a fiscal union. Europe needs to unify and do it quickly.

Fiscal unification wont be easy to accomplish financially or politically. There are many moving parts and entrenched interests but just like the Latin American debt crisis, at the heart of it all is HAIRCUTS. Europe needs a Brady Bond Plan like the one that was implemented in Latin America 20 years ago. German & French Banks need to come to grips with the periphery problems. They need to come to to grips with the inherent flaws in the Euro currency itself. After the haircuts have been administered, the plans to move to a common fiscal union with one major bond market would be a lot easier.

The Euro is not going to die. Its not going away. The banker elites will likely see the Euro at way below par (Vs USD) before any type of real plan ever gets floated. So far the Eurobond idea has been shot down simply because the pain that would be inflicted on the bankers would be too great. This is ridiculous. In the absence of the ECB greatly expanding their balance sheet to Fed like proportions, I don't see periphery spreads tightening greatly.




Friday, August 12, 2011

Risk On Risk Off - Correlate This!

Aha!

Is it Risk On Again to end the week? Wasn't it Risk Off to start the week? Who knows Grasshopper.

Daniel Son is getting awfully confused.

Risk On - Risk Off has rarely been apt  We saw this type of action last summer as well until Chopper Ben put it all in total Risk On Mode at his Jackson Hole speech starting the roadshow for QE2.

Will this year's annual swoon down under make Chopper Ben limber up the fingers to do some electronic printing? Who knows. I personally think that QE3 is not going to happen until well into 1st QTR 2012. My guy feeling is QE2 was 100% unnecessary. Chopper Ben was so obsessed with asset price deflation that he had it in his mind he wanted to keep asset prices higher than they normally would be. The economy had already turned up from its summer slumber last year when QE2 was announced.

We had a few rocky months in the economy starting in April going through July last year. This of course was caused by Tiger Woods escapades (Just Kidding), Yes, why not blame Eldrick for everything. No, it was Greece's first round of Sovereign debt problems that caused the havoc. Plus the ensuing contagion to Portugal, Italy, Ireland, and Spain. It was last summers edition of as Europe Burns that caused the temporary economic slowdown in the US. Also the Fed's hard date of March 31, 2010 to stop supporting/buying mortgages was a tailwind on Housing which just happen to be the entire US Economy at the moment. Isn't it funny that the PHLX Banking Sector rolled over a short few weeks later?

Take a look at this graphic of the PHLX Banking Index.


Bernanke started a whole new round of bond buying when the economy was already turning upwards. This basically was a stealth bailout of the banking sector and all stock traders/speculators in general. It was a massive Risk On announcement to Wall Street to take the Casino to another level. Commodities exploded higher causing massive problems once again not only at the pump but in foods in general. Retail gas prices as measured by the RBOB contract on the Nymex went from $1.80 in August 2010 to $3.40 in May 2011.

But of course, this is all emerging market demand from India, China and the rest of Asia. It was all demand related. Even in the face of Asian Central Bankers tightening credit all through out 2011. This was the Wall Street Meme. Its not us speculating but Asian demand. QE2 was all about creating a wealth effect channel. To keep asset prices higher than they would normally be. This is exactly the words of Brian Sack of the NYFED. Now we have the end of QE2 and Asia still in tightening mode and still remarkably the Wall Street Casino Meme is commodities are breaking down because of global growth worries. DUH! When the only three economies (AUSSIE/CHINA/INDIA) that are growing are desperately trying to slow their economies via the interest rate channel- what do you expect?


Everything else was cooling, except for financial/commodity asset prices. These were spurred on by QE2 speculation. My goodness! the ECB even raised rates a few times in the 2nd quarter of 2011, probably causing spreads in the periphery to expand even further. Global growth was slowing in a drastic pace just about the time QE2 ended. It was a perfect storm for commodity and financial asset prices. All the while Wall Street is alerting to us that its not their fault that commodity prices are going higher. It was never a global growth story that kept commodity prices higher. It was all about QE.


The Fed simply has to wait this economic slowdown out. Is this just a temporary slowdown? Is deflation a major problem going forward the rest of the year? We simply don't know. If QE3 is announced today the market I am sure would start to fly once again. Commodities even in the face of more China/India/Emerging Mkt tightening would rally higher. This by itself will hurt global growth even further. As the US starts another round of QE it only exports more inflation and speculation. This easy money policy only weakens the USD and makes Asian Central Bankers more vigilant to fight asset bubbles.

Bernanke has to wait this out. If the economy gets weaker and all odds are that it does its better to weigh on the side of caution and wait till first quarter 2012 to do so. Maybe by this time China/India/Australia will exit the tightening policy and move to neutral or easing policy? Maybe they do the work for you? Starting QE3 now would be the worst policy choice since well QE2.

On top of this we have Asset Correlations at a 2 year high.

Asset Price correlations among asset classes are at the highest levels in 2 years. The 10 industry sectors of the S&P 500 have been 97% correlated over the last month, This is higher than the 87% average over the last year, high yield bonds are at a 95% correlation to stocks, and currencies like the Aussie Dollar and Yen are at the upper ends of their historical price relationship to US financial assets. This needs to be taken seriously. If the USD strongly rallies - equities have a problem.

Tuesday, August 9, 2011

Analysts! Who Needs Them!

A few months back I blogged about how analysts are so wrong most of the time. Even when they are right they are tragically wrong.


These guys are nothing but snake oil salesmen, in fact calling them as such is an insult to snake oil salesmen.

S&P, Fitch, and Moody's all got credit wrong. Bottom line! After the fact they went out of their way stating that everyone else was doing it so we just got caught up in it. Not withstanding yesterdays gutsy call by S&P, they all should be shot point blank. No judge..No Jury..No Wake..No Funeral..No Proper Burial..Into a potters grave they deserve to rest in pieces.

Analysts on Wall Street are completely useless. Their worthless analysis has caused trillions in losses. All the way these guys were laughing to the bank.

These guys wait to find out which direction the wind is blowing then and only then do they change their opinions. Of course this is after the public has taken it squarely in the ass.

Today's edition of worthless analysis comes from BOFA Merrill Lynch. Yes the same corrupt outfit that infected the global economy with CDO's packed with trashy mortgages. The same corrupt outfit that was A#1 in fleecing institutional investors and pension funds out of their hard earned money when they knowingly sold toxic structured products. At least Goldman Sachs had the brains to hedge their toxic bets, these idiots didn't even do that. They then cried and limped to BOFA, another corrupt toxic banking institution.

Today Merrill Lynch has thrown in the towel on ClearWire Communications. Yes. The good fight is over. We were wrong all the long.


We loved it $9 when they needed to raise capital for a dying crappy business. We loved it 8 when they needed institutional support. We loved it at $5 and $6 when they needed again to raise cash. But....When the stock is clearly going out of business and is trading at $1.52, we no longer like it. Why? Very simply..A dying crappy business that is going bankrupt cant fleece investors anymore, thus there is no need to have a buy rating on a company that can't raise capital and garner fees for Mother Merrill.

What Elaine Bennis' father says is correct! ANALYSTS! THOSE BASTARDS!

Or another wise man missive..."Analysts! They are useless in bull markets and worthless in bear markets."

Or was it Confucius? "You don't need them in a bull market and don't want them in a bear market."

Monday, August 8, 2011

Small Props Only - Bravo S&P!

I have been no fan of the ratings agencies. You can do a simple search for "Ratings Agencies" on this blog and read what I think of them. They are the single biggest reason we had the economic calamity that we had. 


http://tradersutra.blogspot.com/2010/05/enabler-from-omaha-speaks.html
http://tradersutra.blogspot.com/2010/02/glass-steagall-was-early-warning-sign.html
http://tradersutra.blogspot.com/2010/02/here-comes-volcker.html


These are just a few of the choice words I have for them. 


But......


I give them props (albeit small) for their ballsy call on US Debt. I believe its not a referendum on the ability of the US to pay its debts but a stab at the rotten to the core Political System that has parasitically eaten into the fabric and soul of the country. America pure and simple has become a Kleptocracy wrapped within a Corporatocracy. It is way beyond toxic. Pay Option and ARM Mortgages wrapped in CDO squareds have nothing on Washington DC. 


The great irony of the whole situation is that the ratings agencies like I previously stated are the biggest reason we had an economic crisis in the first place. All these guys had to do was say no to Wall Street. But they didn't. All they had to do was their jobs. They didn't. All they had to do was sound credit analysis. They didn't.They happily took the money from the banks in exchange for AAA ratings on crap mortgages. All of these ratings agencies are corrupt to the bone. They should all have been thrown to the wolves AKA bankruptcy court. They should have received the same penalty as Arthur Anderson. AA enabled Enron to commit shenanigans that cost shareholders and citizens billions. 


For these reasons no matter what S&P, Fitch, and Moody's do from now on it doesn't matter. They completely wrecked the country. The reason we have huge deficits is because of them and their utter cowardly  indifference to any type of ethical behavior. 


But I offer them small props for their debt downgrade. Only small props. My reasoning goes like this. They still should get the death penalty and I will gladly flip the switch. 


As I previously stated this is more of a downgrade of the political system not the US Treasury. The US Treasury can always pay their debts. Its fundamentally impossible for the government not to pay. The only reason they wouldn't pay is purely technical via hyperinflation, money supply expansion (Money Printing), and basic stupidity of not raising the debt ceiling. The debt ceiling argument was about paying the debts that are already on the books and Congressionally agreed to not about future expenditures. It is Congress that legislated two wars, two tax cuts, one massive bailout, and one absurd Medicare prescription program. All of these actions were to the benefit of the status quo aka business elite. 


Then to make matters worse, the idiots in Congress just spend the last two months threatening to technically default on the debt unless a minority of the minority party passed a measure to balance the budget in a balance sheet recession. You simply can't make these things up. We have the holy trinity of nitwits here:


1-Congress
2-Tea Party
3-Obama


Let me be clear. We have a subprime political system in our country and these economic terrorists must be shown the door. 


We can hope that S&P's downgrade forces these morons in Congress especially the GOP to take a stand against the Tea Party/Ant Tax Fanatics. We can hope that Democrats who are inept but seem to be competent only compared to Republicans see that entitlement and immigration reform is badly needed and the keystone of any type of long term deficit reduction. The Obama Administration states that S&P had a $2T mistake in their calculation, but the real math mistake is to think that Medicare, SS, and Tax Reform are not central to the argument. When I say tax reform I don't necessarily mean tax increases but more closing tax loopholes. 


As we saw today, S&P's downgrade on US Debt is meaningless. Agencies are not the final arbiter of financial asset prices. Its the market that does that. 10 and 30 Year Bonds were flying today because in the midst of a balance sheet recession where there is no aggregate demand the final outcome will always be deflation. It’s clear that the bond market right now is focused on the prospects for global growth and its deteriorating outlook. In terms of the pressure now on DC to step up and address the country’s balance sheet, no amount of taxes will solve our excessive and growing debt obligations, it will only be dealt with thru a change in the trajectory of medicare, medicaid and social security spending. Politicians will have to put aside their constant desire to get reelected and be honest with the American people and the promises that were made and cannot be kept.


Many people just seem to think that Ben Bernanke won't let this market drop further. I say that the reason we are in this mess is because of Ben Bernanke's absurd policy choices. The Fed is almost out of tricks. They cant stimulate demand and credit expansion at zero rates? Yes this is true to anyone who understands what a balance sheet recession is.


It looks to me in the short run that Congress and Obama have no appetite for further debt. The government cannot tax an economy that is so precarious. Cutting federal programs will never occur with our form of tenured elected officials. We have to admit to ourselves that our economy has been hijacked by a kleptocracy. The ills in our economic system will only be addressed if the markets punish the system to force change. I have no faith that our elected officials and government employees can fix the system unless the market incurs punishment first. For this reason only I give props to S&P on their ballsy move. 


Now that I have given them props....Please go get your shine box S&P. 



Thursday, August 4, 2011

How ZIRP Is Killing Us All.

I have stated in the past that the Federal Reserve Board needs to move to a more normalized short rate policy. Its no good and suits no one except the financial elites. ZIRP only robs the poor and pays the elites. Its the ultimate RRH (Reverse Robin Hood).

I have also stated that this is not good for the banks as well. Their net interest margins are collapsing at an alarming rate.

Now we have this.

BNY Mellon to Slap Fees on Some Big Deposits Amid Global Race to Cash


Having a ZIRP is ruinous and completely impotent in a balance sheet recession.
It was just a matter of time before the unintended consequences of the Feds actions reared its ugly head.
Now the banks are charging customers who hoard bank deposits. Granted its only for extreme high net worth individuals but this needs to be taken seriously. When the whole planet sells risk assets and goes to cash and short rates are almost negative, something has to give. The Banks pay the FDIC 10 basis points for deposit insurance and short rates grow at 13 basis points. Its just not worth it for the banks as you can see.

So technically the banks cant make money at zero rates. This is truly the Frankenstein monster that Ben Bernanke has created.

Yes People! This is our banking sector and economy.

Tuesday, August 2, 2011

Fed Policy = Global Slowdown

Yesterdays US PMI was a disaster. This is a key manufacturing index that was supposed to rise this past month. If you remember last month this unexpectedly rose triggering a nice market rally. The figure came in at 50.9 vs expectations of 54.6 and is a drop from a strong 55.3 in June.

What we have seen over the past 24 hours are CHINA, US, and the EZ all reporting respective July PMI's near the magic 50 level. Anything below 50 and manufacturing is considered contracting. The UK PMI came below 50 - How is Austerity going?

Is this directly related to the ZIRP policy by the Fed? Does QE have anything to do with this?

You can look at it a few ways. The US has had an easy short rate policy since the end of 2008. This basically exports our inflation to emerging markets. Hard US Financial assets are in deflation mode. Housing is bleeding, short term deposits are yielding nothing. Most Americans are trying to dig themselves out of debt after years of binging on cheap credit. The US Economy is going through a classic balance sheet recession. No matter how low interest rates are it wont stimulate aggregate demand. The financial system is in a liquidity trap as trillions of dollars are sloshing around in the banking sector. Does this sound familiar - Japan?

Monetary policy in a balance sheet/liquidity trap environment is completely impotent. A ZIRP just exports inflation to emerging markets.

What have we seen in China and India? Explosive asset price inflation. Rising commodity prices. These are real serious problems for the Chinese and Indians. So much that India and China are in massive tightening mode to stop the flow of cheap dollars into their economies.

ZIRP and QE has created a massive USD carry trade bubble. As Asia has been the driver of global growth for the last few years any slowdown will be felt globally most likely in the US and EZ economies. The Asian economies got way to hot and now need to cool down.

What we have seen for the better part of this year and last are Asian economies drastically trying to slow their economies via the interest rate channel. In China they have gone one step further by increasing bank reserve requirements. In short the entire Asian continent is in tightening mode. Asian currencies are pegged to the dollar creating massive trade imbalances. European and US export markets were all strong because of this. All good things need to come to an end, and from the global PMI prints this is happening. Where are we in the Asian tightening cycle? 4th inning? 7th inning? bottom of the ninth? I would venture a guess that we are n the late innings but it all depends on what type of economic policy comes out of developed nations. We have seen what austerity has done to the EZ peripheral nations and what it has done to the UK. It now looks like the US is moving into that mode. Its an ass backwards policy. The only way to get out of this mess is to grow your way out of it not by raising taxes and cutting spending. We need to have normalized monetary policy that fosters job growth not that fosters speculation.

 Asian currencies are way overvalued compared to the Euro and USD. These structural imbalances are causing massive headwinds for policy makers globally.

What I see happening is a global slowdown which means more QE from the Fed as of course its a supply problem ain't it? We will see another reflation starting with the Asian economies going into easing mode later this year. Its the hamster running around the wheel.

So what we have are overheated Asian economies being the fuel for global growth via a ZIRP/QE policy. What goes up has to come down. Those economies are slowing down because they have to. All of this is happening as QE ends? Funny ain't it. So the Fed will see this as we are the only ones who can actually reflate anything so lets do one more round of QE.

When the reasons and cure are the same we all need to duck for cover.