TraderSutra

On Europe & The Euro

2011-11-28T12:41:00.000-05:00

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.

More on MF GLOBAL

2011-10-28T09:50:00.004-04:00

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.

Thoughts On Europe & Magical Thinking

2011-10-27T09:59:00.000-04:00

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.

MF GLOBAL

2011-10-26T09:51:00.002-04:00

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.

Not Mincing Words On Greece

2011-09-19T10:01:00.000-04:00

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.

Left/Right = Wrong

2011-09-04T15:59:00.000-04:00

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.

Pain Avoidance

2011-08-21T14:35:00.000-04:00

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.

Mkt Weakness & The VIX

2011-08-19T12:13:00.001-04:00

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?

Does Mr. Market Have A Glass Jaw?

2011-08-18T19:00:00.000-04:00

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.

Musings on QE, Money Supply, & The USD

2011-08-17T12:42:00.000-04:00

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.

The US Economy is Japan 2.0

2011-08-16T14:16:00.008-04:00

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.

http://tradersutra.blogspot.com/2009/06/why-we-look-lot-like-japan-in-90s.html

Then I stated a few months later:

No Sex In The Champagne Room.

http://tradersutra.blogspot.com/2010/08/bizarro-market-nikkei-redux.html

http://tradersutra.blogspot.com/2010/08/more-nikkei-redux-lack-of-savings.html

http://tradersutra.blogspot.com/2009/08/potential-melt-up-coming-for-sp-500.html

Then again in October 2009

http://tradersutra.blogspot.com/2009/10/japanese-as-second-language.html

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.....

2011-08-16T09:18:00.005-04:00

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.

http://tradersutra.blogspot.com/2009/11/obama-is-more-bush-then-bush.html

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.

Eurobonds or Bust

2011-08-15T12:08:00.000-04:00

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.

Risk On Risk Off - Correlate This!

2011-08-12T11:33:00.012-04:00

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.

Analysts! Who Needs Them!

2011-08-09T08:33:00.002-04:00

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.

http://tradersutra.blogspot.com/2011/01/why-have-stock-research-analysts.html

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.

http://blogs.forbes.com/ericsavitz/2011/08/09/clearwire-merrill-now-sees-going-concern-risk-target-50-cents/

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."

Small Props Only - Bravo S&P!

2011-08-08T21:39:00.002-04:00

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.

How ZIRP Is Killing Us All.

2011-08-04T14:27:00.001-04:00

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

http://online.wsj.com/article/SB10001424053111903366504576488123965468018.html?mod=googlenews_wsj

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.

Fed Policy = Global Slowdown

2011-08-02T08:59:00.000-04:00

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.

Why No Jobs?

2011-07-24T14:39:00.000-04:00

Why No Jobs?

Other than structural problems I offer you this:

Just 6 months into the Great Recession in Mid 2008, the typical American Family earning less than $90K a year spend on the average of $105 bucks a day. One year later they are spending only $60 bucks.

What did they spend in May 2010? $60 Bucks.
How about May 2011? Say it again....$60 Bucks.

We are in the midst of a balance sheet recession. Yes! This is the problem. Too much household debt not enough aggregate demand. Monetary policy is completely impotent in this economic scenario.

Its not a supply side story as there is no demand. Tax cuts across the board would help only pay down household debt basically shrinking the economy further.

So whats the frequency Kenneth?

One Word.....TIME!

Time to pay down household debt.
Time to work through excess housing inventory.
That's it.

QE2 Ends

2011-07-06T13:48:00.001-04:00

OK!
QE2 is in the books as of June 30th. Its pretty obvious that this whole experiment didn't generate any growth in the economy, assist in adding jobs, or help alleviate the housing pain. The only thing it did was succeed in ushering in animal spirits within speculators who then bid up and piled into risk assets. Bernanke and his acolytes wanted risk assets to get a bid and wanted to stoke the speculative juices of traders everywhere. In that case QE2 worked brilliantly. In essence QE2 really is not money printing nor is it monetizing the debt of the Treasury. What it ultimately ended up was an asset swap. The Federal Reserve took out interest baring securities from the banking sector and replaced it with money funds that are depreciating on a daily basis. How in the world this was to jump start the economy I don't know. Its the reverse Robin Hood way of conducting monetary policy. Steal from the poor and give it to the Wall Street speculators. The grand scheme of QE2 was for the banks to take the money from the Fed and lend it out. Basically conduct the same absurd lending policy that got us in this mess in the first place. Bubbles Bubbles Bubbles. The Fed wanted to re inflate the housing bubble with a serial influx of cheap dollars. What they re inflated was every risk asset most importantly commodities.They couldn't stop the bleeding in the housing market as that is in a long term secular bear market. There is too much excess supply, not enough worthy homeowners, and not enough jobs being filled to justify 15-30 year housing commitments.

Fortunately for the banks and their shareholders and unfortunately for the Fed and poor home owners, the banks have kept the excess reserves in house. Why? Not even the banks are that stupid. They need the excess reserves in house to soak up potential losses in their MBS portfolios. Granted that all of their loans (1st and 2nd lien) have not been properly market down and that a gutted FASB has allowed then to mark to their imagination, this is still a serious problem that will ultimately pose billions more in capital raises and future mark downs. The excess reserves proved to be a great boon for the banks as those reserves padded the books as well as give the banks another added subsidy via Interest On Excess Reserves. The banks would borrow money overnight at the General Collateral rate and park them at the Fed gaining an easy profit. This trade is no longer a feasible option however since the FDIC has instituted a higher deposit insurance rate. The banks got away with ripping off the tax payer for a good two years as they had cheap financing and a built in arbitrage profit center. They still have cheap financing but the arbitrage trade is gone. What will they do? So far we have seen some loan growth this year but FNM/FRE/GNM have all greatly made getting approved for a mortgage loan very difficult.

What does this mean for housing?

We won't see increasing home prices until we get higher wages and much lower unemployment. Which at the moment have their own structural problems. The Obama administration has so far been totally clueless in the jobs area. Given the Obama governing style which is Talk Big - Then Fold Early & Often, I don't think we will see any type of real job creation. You need to spend money on job programs most notably the crumbling infrastructure of our country, but Obama has no stomach to deal with this fight in Congress. It always seems like Obama looks at these fights as major nuisance. Instead of spending trillions on wars and defense build up why don't we actually try to fix the roads, bridges, and tunnels? This will put people to work. But Alas Barack doesn't want to fight the good fight for the general public. Not withstanding last months surprising rise in the Case Shiller Home Price Index, housing is still in despair. Foreclosures are still abnormally high and don't get me started on employment.

Back To QE2 for the moment. The media keeps getting this wrong when they all say that QE2 was a failure. This is just not understanding the current monetary plight of America. America is in a balance sheet recession. No matter how much free money is out there people will not take it as many are still trying to deleverage and pay off debt. This was the primary problem in Japan during the 90's. No matter how expansionary the monetary policy is for a sovereign nation if the private sector is over leveraged with debt its not going to make a difference. We end up with a liquidity trap. It happened in Japan and its happening here. The debt and obligations are being put on to the backs of the public sector from the private sector. 20 Years later Japanese public sector debt is reaching 200% of GDP and the USA is already at 90% of GDP.

As I said QE2 wasn't money printing in the classic sense. It was an asset swap. No net money was added to the banking sector. QE2 wasn't monetizing the debt either. This would actually be good for the economy and or national deficit. Think of it this way. The Fed reports to the Treasury. The Treasury pays interest on Treasuries to the Fed. The accounting cancels out. Why doesn't the Fed/Treasury just monetize the debt? In this way some $2 Trillion in US Government Debt gets retired right off the bat, this alleviates the current debt ceiling problems as the national debt gets reduced by that nominal $2Trillion. The Treasury can just credit the Fed electronically or just retire the treasuries as they already been paid for in the open market.

A Simple Thought On European Debt

2011-07-05T11:07:00.000-04:00

I will have a more thorough analysis of my thinking on the sovereign debt crisis in Europe but over the weekend kicking around some ideas with some friends, I had this one thought which pretty much encapsulates the environment.

I am under the assumption that European Power Brokers and Policy Makers just want to kick the can down the road just a little more. To buy some more time as to say that time is in infinite supply. This just reminds me of Wile E Coyote in suspended animation running off the cliff. They (The Audience) all know that poor Wile E is going to crash to the bottom of the canyon but if he can just stop time maybe he doesn't crash after all? We all know how this ends for the lovable Coyote.

The point of all this is that policy makers in Europe which basically are from the French & German persuasion want to just pile all of this bad debt which can't and won't ever be paid off unto the backs of the taxpayers from the banks books. The meme will be that they need to recapitalize bank balance sheets so that any future crisis can be contained. The real meme here is we need to maintain the current elitist banker status quo. Any bailout of any sovereign nation to maintain banker status quo will only be achieved if the peripheral economies actually grow. The taxpayers will stupidly support this only if they see growth in the economies. But how to get growth when it looks like austerity is the current peripheral business plan?

Its a total scam.

XERXES Bernanke Strikes!

2011-06-27T14:41:00.001-04:00

Cash is definitely trash

Negative yields on 1 Month Treasuries.

Bid Yield = 0.015
Ask Yield = -0.015

If you want to park your money in US Treasuries for the next month, you would have to pay Tim Geithner for the pleasure.

This is what happens when you have a centrally planned economy.

Basel Speaks And Its Not Non Sense....

2011-06-27T10:27:00.002-04:00

Over the weekend global banking regulators came to an agreement on a proposal to hit bigger TBTF financial institutions with an extra capital surcharge. What does this mean? Will this be a panacea to stop all of the banker shenanigans? Of course not! But its a strong first step. Let me tell you why. We all know that there are many forces in play when we talk about systemic risk and economic catastrophe. There is not just one policy decision that can make every one feel warm and fuzzy inside, thinking as such is just short sighted, but this decision is very important as it sets up future policy recommendations. Basel has proposed a surcharge (extra) that will range from 1% to 3.5% the amount of capital a TBTF bank has to hold on top of their normal capital requirements. This was in line with the current expectations, this is no surprise, but what was a surprise was the quality of capital the surcharge has to be comprised of. Banks can't use contingent capital. The sliding scale is also an important factor as this will take away the incentive for these institutions to get bigger.

Again, this wont end TBTF and its not a magic bullet, its a strong first step. Capital surcharges and levels will not prevent forest fires like Smokey says. Basel needs to institute toothy leverage caps and hammer down on off balance sheet/SIVS, with the eventual idea of having all of these banks properly price their inventory to proper marks. Once this is established:

1-Leverage Caps
2-OBS/SIVS take down
3-Hard Capital Requirements
4-Proper Marks on Inventory
5-Hard and Clear liquidity rules.

We can be on our way to having a more robust banking sector. Remember this. Capitalism needs to go back to being capitalism. Failure has to be dealt with. We are not going to have a financial world that is going to be an less safe for failure. This is not happening. What we need to do is - punish stupid behavior. Failure needs to be acknowledged and yes it will come. What we can is once failure does happen its not catastrophic in nature. Markets are always pro cyclical, changing this changes the very nature of capitalism and human behavior.

Instead of incentivizing TBTF, we need to dissuade these type of actions. In short we need to make getting bigger less profitable.

The advantage of getting too big is that everyone knows that Joe Taxpayer will bail out ludicrous financial dealings all through the world, but now there is a major price to be paid in terms of these surcharges. In short a very strong first step of reigning in TBTF. Banking Institutions are like people because they are run by people. They can't be changed just like you can't change people's actions and behaviors. They need to change themselves and only within changes in themselves will there be true change everywhere else.

Watch The Transports

2011-02-03T08:41:00.000-05:00

One of the main beliefs and principles of the Dow Theory is that major stock market indices when powering higher need to confirm with each other.

So far we have seen more of the same in the Dow, SP, and NASDAQ. All moving higher and making new highs. BUY THE DIP!

But one of the most widely used and followed tenets of the Dow Theory states that when the Dow moves higher and is hitting new highs It should be confirmed with a higher Transportation average.

What we have been seeing of late is that the Transports have been lagging the major indices. This can be for many reasons such as higher energy prices or I can be that we have a major divergence.

So when the SP is ramping and hitting new highs the Transports should also be powering higher and we have not seen that as of yet, in fact the Transports are now below its 50DMA. This to me is disconcerting.

What to make of this? We an go obviously two ways here. Either this is a temporary blip for the Transports due to the ramp up in Oil because of whats going on in North Africa and the Middle East or this will just lead to a general breakdown for the SP.

Also of note, going back to last Fridays sell off. That day was one of the first real distribution days in the market for some time. There was almost 90% more selling going to the down stocks then up, this also needs to be monitored because generally after a distribution day, the averages tend to rally for a few more days until they don't.

Clueless Leaders

2011-01-26T15:37:00.003-05:00

I tell you somewhere Alicia Silverstone is smiling because if you back out all of the pomp, circumstance, rhetoric, and emotion from last night’s State Of The Union Address, what we have is basic governmental incompetence on how the economy really works.

Between Obama's fear mongering over the deficit and Paul Ryan comparing us to Greece, we can confirm that our elected leaders are completely and heart breakingly clueless as the day is long. Both of these guys have zero idea of how the US monetary system and importantly the economy works.

Why in the world is Obama comparing the government with households is beyond me? The US Government is not revenue constrained. It never was and never will be. Consumers, State & Municipal governments are revenue constrained. Why is this? Simply, sovereign governments with a monopoly power over its supply of currency never ever needs to save or raise funds for spending. We can go all day long about the intricacies of Treasury auctions and the such and I will get into that in an upcoming post, but let’s be clear the government of the USA doesn't fund itself via Treasury auctions.

Lets recap:

Households have a revenue problem.
Municipalities have a revenue problem.
State governments have a revenue problem.
US Government has NO revenue problem

To this end Dick Cheney is correct when he said "deficits don't matter", but what they do portend is much higher borrowing costs for profligate spending. So far China, Japan, and most importantly the Fed, is buying Treasury debt and trying to keep rates down. Let’s be honest, I would rather have lower rates than higher ones to this end the cost of financing will rise if others believe you don't have a handle of your finances. Again, it’s a psychological situation we are dealing with here, its ultimately a confidence thing. That's all.

Obama also made this point:

"So tonight, I am proposing that starting this year, we freeze annual domestic spending for the next five years. This would reduce the deficit by more than $400 billion over the next decade, and will bring discretionary spending to the lowest share of our economy since Dwight Eisenhower was president."

Bam is the man! But is he serious here?

Does Obama know that Eisenhower presided over three recessions in his 8 years? How did he do it? Yes! He promoted two budget surpluses that immediately sent the country into recessions in the late 50's. This country can't afford austerity, because it needs to grow because there is far too much private sector debt on consumer and business balance sheets.

Now we get to Representative Paul Ryan.
He states in his retort....

“Just take a look at what’s happening to Greece, Ireland, the United Kingdom and other nations in Europe. They didn’t act soon enough; and now their governments have been forced to impose painful austerity measures: large benefit cuts to seniors and huge tax increases on everybody. Their day of reckoning has arrived. Ours is around the corner. That is why we must act now."

How many times do I have to say it. The USA is not Ireland or Greece! Ireland and Greece have no monetary sovereignty .They can't print up Euro's. The US can print up greenbacks.

Lets recap again.

Greece can't print up Euro's to fix their problems.
Surprise! Germany and France can't either.

The UK can print up British Pounds, but they for some reason are in fiscal austerity mode and soon will be driving off of a cliff because when you comingle huge debts and austerity the results are at the bottom of the Grand Canyon.

If Paul Ryan is the best that the GOP can do then the GOP is already dead.

Gee Really?

2011-01-25T13:28:00.000-05:00

NY Times DealBook Is running this story this afternoon.

Merrill Lynch Settles S.E.C. Fraud Case

http://dealbook.nytimes.com/2011/01/25/merrill-settles-s-e-c-fraud-case/

First of all, if there is a Chinese Wall between traders, bankers, and analysts on Wall Street then one must believe in the Easter Bunny and the Lochness Monster as well.

Take it form me. Coming from a former trader who used to work for three huge investment banks.

Wall Street investment houses and banks routinely front run client orders. This is not new and is quite honestly the cost of doing business on Wall Street. This is pure market making at its finest.

I find this one quote so fascinating and emblematic of the Wall Street culture.

"Merrill has since adopted “a number of policy changes,” Bill Halldin, a Bank of America spokesman, said in a statement. Mr. Halldin added that the policy changes, which include enhanced training and supervision, “address the S.E.C.’s concerns.”

You telling me that this wasn't a policy before?

Case Shiller Tells Us What We Already Know

2011-01-25T12:03:00.000-05:00

The November SP Case Shiller 20 city home price index fell to the lowest level since March 2010. It fell 1.6% YOY, which was within expectations. Home prices now have fallen for five straight months.

The biggest declines were in Atlanta, Chicago, and Detroit.
The biggest gainers were in SF, LA, San Diego, and DC.

Las Vegas which is the benchmark for housing excess saw prices drop 3.4% YOY.

Yada...Yada...Yada...Net. Net, the headline index is now just 3.5% above the April 2009 lows. This is after all that has been done via trying to stabilize housing. We are talking about housing tax credits, HAMP, and the MBS/toxic sludge buying program that the Fed instituted in 2009. What do we have? This shows the absolute horrible condition of housing finance in this country.

BTW...Housing prices as a whole are down 30% from July 2006 highs.

What this means is just more of the same government policies going forward. The Fed will look at the state of housing and keep stepping up the liquidity.

The lack of governmental involvement in housing has caused continued declines throughout much of the country. This is because the consumer is tapped out and the private sector is dead.

The tax credits have stopped. HAMP was a tool for Treasury to temporally stop foreclosures not for homeowners to refinance. Most importantly, the Fed is not bidding for MBS. The MBS purchasing plan ended on 4/1/2010, and we have seen what housing prices have done since then.

I still see some 5-10% further housing declines across the country, suite simply because housing is overvalued and employment has not picked up. If the economy weakens then all bets are off.

This is why the Fed will keep QE2 in place. This is why liquidity will continue to flow. This is why ZIRP will be the official monetary policy going forward. The Fed knows what happened to housing when they tried to disengage, they can't afford to disengage from the broader economy.

Quite simply the private sector is dead. It can't support a 14T economy. It never could. There is no free market. That is a myth. The private sector needs to deleverage just as much as consmers do. There is currently $8T of debt on corporate balance sheets, roughly $2T of cash. WOOPTI DAM DO!

The government is the economy. Better get used to it.

Got Stagflation?

2011-01-25T09:15:00.000-05:00

Every economy's best friend is back. Yes! That is right. Our good old buddy from the 80's, Stagflation is back, at least in the UK it is. If you remember last week UK DEC CPI came in YOY of 3.6%, today the UK economy unexpectedly contracted by .5% Q to Q vs. an expected gain of .5%. So you have higher inflation and a contracting stock market. Which is perfect for the banking elite as monetary policy will be accommodative and fiscal policy constrained. The liquidity will flow like fine wine and the brutal austerity on the rest of the idiots that support the banking elite will continue for the foreseeable future. The Pound Sterling is dropping vs the USD like a stone this morning which is portending more money printing from Mr. Osborn. So what we have basically is more of the same.

The US economy which has been patched up by ludicrous spending, tax payer bailouts, and the Fed is showing much better resilience. The FOMC starts their central planning meeting today and we should hear from them tomorrow that they have the banking elite's back once again for the 75th straight month. What the FOMC should do is not to ignore the inflation pressures in food and energy, but then again why focus on these non core items?

The FOMC should lay out a plan to exit this monetary play land called ZIRP. They have to let the economy stand on its own two feet or even try to make an attempt. The US economy is getting better and recovering modestly, how much of that is directly attributed to the FED? That was a trick question! What is clear is this, The FED has engineered an increase in asset prices directly via QE, we need to have a clue when this policy will end and we need help from Benny and the Ink Jets.

It's All Good At Intel Except For The Stock Price

2011-01-20T14:53:00.000-05:00

Intel started the tech earnings season with a serious bang, blowing away estimates last week. INTC reported revenue of $11.5B above estimates of $11.37B. They posted earnings of .59 cents per share vs the estimates of .53 cents per share. If you back out some $300MM in tax gains, INTC still beat the street. Like Apple, Intel gave stronger guidance going forward. They are now guiding revenue at $11.5B which is sequentially even with 4th Quarter, this is impressive as 4th quarter is seasonally very strong.

OK. NOW. One would expect INTC stock to rally on these results, and the stock did rally but very modestly the next day and the stock has since drifted lower over the last week or so.

The question is WHY?

Very simply, it cant get any better than this for the Semi King! Intel is already running at full capacity and is running on all cylinders - gross margin wise. This was the thought after Intel blew past estimates last quarter when many were pointing to a cyclical peak in gross margins. When you are at the peak or on top of Mount Everest the only way to go is down unless you are able to cut costs aggressively or sell more into your sales channel. Intel's growth story is in tact and that PC's are not going away anytime soon. The product pipeline is strong on the low and high end. They are seeing growth in emerging markets and the business refresh cycle will drive the PC business through 2011 and into 2012. Tablet, mobile computing, and smart phones will assist INTC as more and more servers will be needed to run cloud based computers.

I ask you again WHY can't the stock rally?

I think the big question is revolving around Intel's plan for capital spending for 2011. INTC announced significant increases in their capital spend through 2011, up to $9B from $5.1B in 2010, this will benefit Applied Materials, KLAC, Lam, and others but many are now worried about over spending and over capacity. Let me be clear. The semiconductor business is a boom bust business, where the down periods are brutal and typically the down periods are followed by periods of over capacity. When more and more fab plants are added to meet demand, once that demand starts to tapper off this industry has problems. Also a problem was the increase in inventory. The Days of Inventory increased from 83 to 94 days.

All an all Intel had a fine report but thoughts and concerns of over capacity in the semiconductor industry have grounded the stock for the last few months.

Why Have Stock Research Analysts?

2011-01-19T12:20:00.001-05:00

Apple Computer crushed earnings estimates last night. Was this ever in doubt? We all knew that Apple's numbers would be way above what the mutton head analysts on Wall Street had expected them to make. The estimates were for Apple to hit $5.38 on earnings and $24.3B in revenues. Apple safely beat those numbers and even beat the dreaded whisper numbers.

In short, Apple crushed it. They came in at $6.43 per share on revenues of $26.7B. If you remember last quarter, Apple gave very very conservative guidance of $23B and EPS of $4.80, and the stock sold off pretty nicely.

In the quarter, they sold:

4.13M MACS - up 23%
16.24M IPHONES - up 86%
19.45M IPODS - down 7%
7.33M IPADS

They surprisingly gave better guidance for the upcoming quarter. They now see revenue of $22B vs expectations of $20.9B and eps of $4.90 vs expectations of $4.47. The stock which at one point was down to 326 or so in the morning, rocketed all the way to 357 or so in the after hours before settling in at around 345. Now! We all know that Apple at the rate they are executing will easily beat their own raised expectations, not unless the world blows up in the next few months, but do you actually think the minions on Wall Street will suddenly get it right on Apple? Absolutely not! You see its a game on Wall Street to keep the feed bag going. Understand that the high paid analysts who are tasked with following Apple on a day in and day out manner have a job to do. Their job is to keep the estimated low enough so that when Apple does beat them, they can go out and sell the hell out of it to their sales force. Now of course, every analyst will raise their estimated to where Apple's management has guided to, but not a penny more. You will have a few independent analysts who will aggressively model but by and large the big wire houses will model what management is forecasting. This is again because the wire houses need to keep their best clients which happen to be the biggest hedge and mutual funds in the world happy. Always under estimate and over deliver, or not do your job and rig the game in your favor. This is not shocking behavior and it shouldn't be shocking to anyone who has followed Wall Street for the last 25 years. The small retail investor believes the game is rigged and the Apple earnings announcement is no better example of the shenanigans that occur every day.

What typically happens is this. Apple management typically low balls analyst expectations. They do this for one simple reason. Pressure to perform! They low ball fully knowing that they will beat expectations comfortably. This keeps the analysts and shareholders inline. The analysts will always follow managements lead because after all why upset management by being the lone wolf? The analyst community needs to be in the good graces of management for any type of future investment banking fees. What is also important is that the analyst community is a bridge for Apple to their shareholder base which is every single large mutual and hedge fund in the world. So what we have here is an analyst community that is incentivize to keep Apple moving in the right direction which is currently vertical. The incentive here is to under estimate so that management looks like they are hitting the ball out of the ball park. All the while the wire houses are collecting commissions from the same shareholder base.

What the Apple earnings announcement basically tells us that:

-Apple is HITTING IT OUT OF THE BALLPARK
-The Shareholders are happy
-The Analyst community continues to add zero value to almost anything.

All you have to do is read the blogs to find out how Apple is doing. Why read MS, GS, or Citigroup's version? There is no better way to read an honest and reliable account of a company's worth then going to a random blog on the subject.

The only reason Wall Street research exists is to feed the supply chain.

Back Door Bailouts Continues & Confirmation

2011-01-04T09:01:00.000-05:00

Yesterday Bank Of America settled numerous MBS push back claims with both Fannie and Freddie.

The travesty of the settlement has been my on going complaint that every single government program to help homeowners is really a back door bailout for the banks. The GSE's are front and center a continuous backdoor bailout mechanism for Wall Street's absurd toxic pipeline machine that fed the credit beast for the past 15 years.

http://noir.bloomberg.com/apps/news?pid=conewsstory&tkr=BAC:US&sid=aRboobH0Ekv4

What the settlement did for BOFA is basically settle all future claims from Freddie Mac for $1.28B. This settlement will cover some $127B in loans that Countrywide made and packaged to Freddie. Do the math. This comes out to exactly 1 penny on the dollar. Freddie Mac should be ashamed of themselves over this tax payer heist.

Fannie Mae settled for $1.52, but BOFA still has liability for future claims. What this shows is that Wall Street along with the government is 100% firmly entrenched in a permanent bailout mechanism with the tax payer as the sucker.

What do we have to look forward to with a GOP Congress in 2011? More of the same as Congressional Republicans are looking to roll back many parts of Dodd-Frank as inhumanly possible. Dodd-Frank was a joke to begin with, rolling it back only brings us back to the days of handing out mortgages to parrots and pets. Why not? When the sucker tax payer is on the hook.

The Only Graph That Matters

2011-01-03T16:49:00.002-05:00

If we as a society don't attempt to figure out what is wrong with our society we will never come back to being a real society that puts people back to work. There has been far to much emphasis on re-liquefying the banking sector that the powers that be don't even realize the massive amounts of malinvestment that is inherent in our economy.

Chart courtesy of Calculated Risk.

We have to prosecute fraud, I know that means putting half of the banking sector in jail but we at least can pretend that we have a legal system by at least indicting one person - Can't we?

Broken Narratives - Happy New Year!

2011-01-02T15:48:00.001-05:00

As Fridays trading day excruciatingly came to a close, the most incredible thing dawned on me. The market is completely dead. The trading in the month of December has been so boring compared to what was happening during the late spring and summer periods that watching the markets grind higher in December was like watching Jackson Pollack painting a canvas. There was no rhyme or reason for any of it. There was no starting place, no middle and no end. Even market participants were so clueless to the basic movements of the markets. They can only say its a low volume grind higher. That was the extent of the experts reasoning.

From a purely quantitative viewpoint, the trading in December has been so one sided that one has to make the case that January will be super volatile as the market will have to stand on its own two feet as there will be a two sided market in January. The sellers and offer side will be there and be there in more of a bigger role. Many market participants will have to come back and justify the December ramps ups. Will they continue to ramp up NFLX, GOOG, BIDU, AMZN, and the like?

It is quite obvious that no one was trading at all in the month of December. It was a free trade for the bulls to run up stocks, and they did just that. The sellers didn't force the action once in the whole month of December. What will happen in January is any ones guess, but one thing is for certain, what ever direction the market goes will be same direction that the machines and primary dealers want the market to go in. I heard this past week that it was a momentum market and we are just living in it. So be happy and shut up. This is clearly bullshit! This is so "NASDAQ 5000." So "SUBPRIME." So "you can buy a 1MM house with no money down."

The basic meme of the charlatans for the longest time has been:

Don't you know that the markets are rational?
That they are finely efficient?
That markets are always right?
That you can't fight the Fed.
Shorting America is unpatriotic?

This is a narrative to keep the public poor and stupid. The powers that be want more of the same business as usual to keep the power and profits flowing into their Swiss Bank Accounts. They want everyone to believe that markets are rational, efficient, and that markets without regulation and oversight are truly the way to go. Why break a good thing? The markets are up some 93% from the lows. Why screw it up now? These charlatans in government, media, and industry will paint an economic picture that fits their busted narrative because its that busted and broken narrative that has made them so rich at the expense of the morons who actually believe in the broken narratives in the first place. Americans do not want to admit that their country has seen its best days. They do not want to admit that their are structural problem in credit, housing, and most importantly jobs. They will do what ever it takes not to take responsibility. Government seems to want to Blame China for all of the US economic problems and the electorate seems to want to blame Obama for everything else. No one wants to admit that America has lost its marbles. They seem to think that America is still an exceptional country, forget for a moment that you can't wake up in the morning and be exceptional. You actually have do exceptional things. Most think America is like a Super Model. Wake up and look the part. Its Morning in America like Reagan said.

America is long past the point of living of its looks. America used to look like Cindy Crawford. Even super models get old and gray. We may think we look like Cindy Crawford, but at what age? I prefer to say we are an aging super model trying to live off of our looks.

I believe that this is a machine led market that we are forced to live in. I keep hearing the same old broken sayings.

-Corporate profits and margins are at record levels. Well DUH! Of course when the government keeps printing money and handing it over to big business and the banks, what do you expect? Another big reason is that US Corporations get a huge chunk of their profits oversees and oversees is kicking on all cylinders. Again DUH!!!! When the Fed prints money we are in effect exporting asset price inflation oversees. Asian markets and economies have a huge inflation problem and many are in tightening cycles as we speak. The Chinese are furiously trying to curb the rampant real estate speculation and have increased bank reserves rates multiple times this year. The Chinese stock market was down 12% last year. Sooner or later the great Asian global revaluation/FED bubble trade will pop. You don't want to own equities in this scenario.

Again, the one thing I keep hearing is the same thing I kept hearing during the NASDAQ bubble and Credit Bubble years. It was....

You cant fight the Fed
Go with the trend.
Don't short a dull market.
Valuations don't matter.
The Internet will change everything.
Don't Sell America Short
The American Dream is Home Ownership
Free Markets
You cant beat em - Join em!

The only way to fight the power is to join the crowd. We all know its a giant money grab from the kleptocracy but its all good if we can join in and grab a little loot while there is some table scraps left on the counter. This is the new major narrative I have been hearing from the bullish charlatans. Forget whats right, wrong, or indifferent. How can I profit from the kleptocracy is the new meme. They have no other leg to stand on except it is what it is and its your right as an American to get yours by any means necessary.

Yes folks this is America in 2011. Happy New Year!

Reversals Reversals Reversals

2010-12-08T11:29:00.000-05:00

Was yesterdays market action a sign of a Top in the equity markets?
After all the markets should have been flying the whole day after Obama gave us another huge stimulus bill via his extension of the Bush Tax Cuts.

Yesterday, I posted on Copper which is an excellent predictor of economic growth.

http://tradersutra.blogspot.com/2010/12/watch-copper.html

Copper is at a major resistance point. Copper has been on a tear of late greatly helped by global liquidity flows. Can it get thru this level and make multi year highs even in the face of China which is desperately trying to slow their economy?

Today lets take a look at the SP Futures.
IS this a little too perfect? Is this even the Kiss Of Death?

As you can see the SP Continuous Futures kissed exactly off its 61.8% Fibonacci retracement of the sell off from 2007. This point was at 1235 on the Futures yesterday. This is what we call a bearish hammer candle at the highs of the day. This is considered a huge divergence. Nasdaq futures posted similar technicals as well yesterday.

Gold, Silver, and Copper futures all had huge run ups mid day but were all faded towards the close. Gold and Silver are both referendums on Fiat currencies but also on global liquidity as well. These are momentum commodities. Are the turn arounds saying something about crowded trades?

Did I happen to state that long term interest rates have surged the last 3 months? Wasn't QE2 supposed to lower rates further?

Yesterday was a huge day for the risk trade. It was risk reversal day. We need to figure out of this continues today and the rest of the week. POMO is ramping up with a smaller monetization today followed up by bigger POMO's the rest of the week.

What also should be watched is the German Bunds Market. There was a failed bond auction in Germany today and the DAX couldn't close above 7000.

The thing that the market has going for it of course is free money from the Fed, but seasonality. Its year end and mark ups seem to happen this time of year.

BTW.....Netflix CFO resigned right after he sold $52MM worth of stock.

Bet Against Bernanke? Surely!

2010-12-07T16:55:00.003-05:00

If you want a good tax loss then just buy shares in Ben Bernanke.
Want to lose everything you have? Bet on Ben Bernanke.

The markets were propped up again by a kick save by who else last week? The Federal Reserve AKA PPT. The markets were about to roll over last Tuesday afternoon when all of a sudden unbelievable manufacturing numbers out of China saved global equities. I don't know how this could be considering that the Chinese have basically telegraphed much higher interest rates in China over the last few months. Much better manufacturing data out of China is not necessarily good news as it portends the Jack Nicholson saying - "Its as good as its going to get." There are rumors of a very imminent rate increase in China as early as this weekend. If we see a 50BP rise in short rates global equities will fall.

In his 60 minutes interview:

http://www.cbsnews.com/video/watch/?id=7120553n

Ben Bernanke preposterously believes that Inflation is low. That is like saying my kid is doing great in school. He gets A's in Gym and Lunch, totally forgetting about the F's in Math, English, and Chemistry. This is because Bernanke and his band of thieves selectively forget the most important part of inflation which is food and energy. Just like the most important subjects in school or math and science, why worry about failing them when you are being graded on doing push ups and eating?

When Bernanke stated that he was 100% sure that he can prevent higher levels of inflation this was a sign that he had completely lost it. Only psychopaths can make this type of prediction. Let me state for the record that I am not in the hyperinflation camp, I am in the much higher inflation camp. The fact is we are beyond any type of real fix to heal or rebuild our economy. QE2 basically put this country over the cliff. Yesterdays announcement of extending the Bush era tax cuts only adds to the immense debt levels the country currently has. Adding new debt to the country is going to prolong unemployment not reduce it. Let me also say that the country is not bankrupt. We are not revenue constrained. We can always print more money but are we going to enjoy these low long term rates forever? Bonds have sold off ever since QE2 was announced. If rates spiral upwards then the jig may already be up for Bernanke. Taxes regulate our economy and balance out the reserves in the banking sector. There is simply not enough to balance and regulate. This is why the Treasury has to balance out the reserves to make up for the lost revenues via taxation.

Bernanke just doesn't get it. He either is an economic imbecile or a complete elitist psychopath. Take your pick?

His desperate attempt to have stock prices at these elevated levels is simply beyond belief. Quite simply his 60 Minutes attempt to explain himself to soft ball questions really gives us a quick look into this mans head. Guess what? There is nothing there! I am still stunned by his assertion that he can control inflation 100%. Paul Volcker must be rolling over in his grave and the mans not dead yet! The only 100% assertion in regards to Bernanke is his track record. He has been wrong 100% of the time! Why break a good losing streak? It is beyond stunning to me why people still take this guy seriously?

Lets review:

Bernanke didn't see the 2008 credit crisis coming.

Bernanke has no clue what systemic risk is.

So when he says that he is 100% sure he can control inflation, we all should sell Treasuries hand over fist and buy Gold/Silver with the proceeds. If Bernanke thinks he can control inflation then inflation is right around the corner.

In fact from the above graphic is that inflation in terms of food and energy is already here.

Wheat

Soybeans

Corn

Bernanke seems to think that there is no problem putting/keeping Barbara Eden back in the bottle but Barbara is already out of the bottle and not going back in.

So this guy has made these statements over the last five years.

1-Subprime is contained.

2-We are not going into a recession.

3-No housing bubble that is evident.

4-After housing blew up - Housing is bottoming.

5-The economy is recovering.

6-Labor market is getting better.

7-The banking sector is fundamentally sound.

8-I am 100% sure I can control inflation.

How in the world does this guy still have a job?

This guy is the ultimate MUSH!

A bet against Ben Bernanke is money in the bank.

Watch Copper

2010-12-07T13:59:00.001-05:00

Watching High Grade Copper over the last few years have given great clues to what direction the broader markets are headed.

The metal is considered the standard bearer for the general health of the world economy. Copper has an excellent correlation to economic growth. This is because copper is used by many industries like the electronics and telecom industries. Copper usually rallies when there is greater visibility into global growth because its a bell weather for capital spending.

A 94% correlation is something that cant be ignored.

Copper coming up to another major point.

Can it get through this important level? A multi year double top?

This Time Is Different?

2010-12-07T10:54:00.001-05:00

I am currently reading the Reinhart and Rogoff book "This Time Is Different."
An excellent read.

Please go out and buy this at AMAZON.COM

http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691142165/ref=sr_1_1?ie=UTF8&qid=1291732006&sr=8-1

If you happen to buy it from this link I get a few shekels, not enough to live on let me tell you.

Well! The Futures are screaming higher this morning. Up some 12 points from last nights close. If they hold these levels it will be a new high for 2010. Yippee!

Looks like risk assets are getting a big bid as extend and pretend and TTID (This Time Is Different) is winning over Fraudclosure, European Sov Debt, Housing, and that small thing called jobs. The markets are also strong in the face of an impending Chinese Interest Rate Hike as soon as this weekend. But I digress, who cares when lower taxes, tax cuts and free money for not working trumps trivial stuff like reality, jobs, and commodity inflation?

Did I just say lower taxes? Tax Cuts? Oh Yes! I did! The markets are also stumbling over themselves like a drunken sailor on shore leave. In case you missed it our President- Barack Obama bent over to the GOP on taxes. This is not a surprise coming from #44. Should we call him Mr. December?

This is the deal on taxes:

Obama is extending ALL of the Bush tax cuts for two years. Which means after he loses the election the tax cuts will be made permanent. These are the same Bush Tax cuts that he swore would be reversed if he got elected.This is why Independents voted for him. This is why the ccultural/pprofessional Left voted for him.

Reduce the worker payroll tax for one year. From 6.2% to 4.2%.

Temporary reinstatement of the estate tax at 35%, which means again after he loses the election, the estate tax will be eliminated permanently across the board.

Extension of UI for the long term unemployed.

All of this of course is completely unfunded. I have stated before that Barack Obama is more like George W. Bush then George W. Bush himself.

http://tradersutra.blogspot.com/2009/11/obama-is-more-bush-then-bush.html

This is no longer a discussion.

Double down in Afghanistan? Check!
Keep GITMO open? Check
Keep Extraordinary Rendition? Check!
Do not prosecute banksters? Check!
Keep State Secrets? Check!
Keep Defense Budget near $700B? Check!
ObamaCare like Bush Medicare Part B? Check!
Have Lobbyists and PACS dominate? Check!
Extend & Pretend into oblivion? Check
Reappoint Bernanke after Bush mistake? Check!
Keep Bush Tax Cuts? Check!

There are hundreds of examples of the Obama policy that is lock step with the Bush policies, this is just a taste of the massive betrayal of #44.

I have never seen a President in my life or in modern times betray the country that elected him as much as Barack Obama. Bush may have been a dolt but he at least catered to his base. Where is Obama? Massive loss of respect and trust will lead Independents and the Left to abandon Obama. The Democrats would be stupid to renominate him in 2012.

What this means to the market short term is more Alice In Wonderland. What it means mid/long term is Alice In Chains.

I keep hearing This Time Is Different. Don't Fight The Fed. Don't Fight Big Money. Don't Fight The Tape. How did this work for everyone in 2000? 2007? 2008?

In the short term, investors have a long memory. Its like putting your hand on a hot oven. But in the mid and long term the memories are very short and the same idiots that were buying Ariba and Commerce One at $500 are buying Chipolte, Bidu, Priceline, and Netflix at the same valuations. Remember! This Time Is Different.

I would like to leave you with two links that tell me that nothing really ever changes.

http://www.thereformedbroker.com/2010/12/07/the-stocktwits-ascendancy-now-on-yahoo-finance/

We now need to hear the missives of total idiots when getting quotes on Yahoo?
Is this anything different than the Silicon Investor and Clearstation? What about Meritocracy.com?

http://www.thereformedbroker.com/2010/12/05/three-ideas-for-the-under-invested/

I can say one thing regarding human nature. Its never different anytime. Doing the same thing over and over is insanity. You cant fix a debt and leverage crisis with more debt and leverage.

This little end of year market melt up will end badly in tears.

Bernanke Pulling No Punches.

2010-11-22T14:45:00.000-05:00

I must admit, that Ben Bernanke's speech on Friday in Frankfurt, Germany was an excellent speech. Bernanke was clear, thoughtful, and insightful in his remarks. I have been very harsh on Chopper Ben, but I have to give the man his due.

He basically made a passionate point in regards to unemployment stating that millions more on the breadlines was unacceptable. Well of course it is. What Bernanke said on the state of the labor markets and the unemployment rate is open for debate. It is refreshing that he at least for the first time he is openly being empathic to Main Street. For this one point he needs to be given props.

His pointed comments about China and the general state of world trade is something I believe that is not open for debate. I believe that this particular speech basically says to the rest of the world that the USA is not going to be able to grow everyone out of slump they are in. He is making and taking a stance that the whole world if they want to decouple away from the US, he is all in favor of it. His speech on re balancing the world economy is the first salvo being fired stating that the US has surrendered unquestioned financial and economic leadership. Bernanke along with Geithner have started to let the entire world know that you guys are on your own if you don't start to fix the imbalances inherent in your economic systems.

Look at it this way. We have massive current account imbalances all over the world. The number one reason is CHINA. China is pegging their currency to our dollar. They print up Renmimbi, use it to buy more USD, then use that to buy US Treasuries. This lowers our long term interest rates but massively distorts trade and current accounts here and around the world. The low long term rates were one of the reasons that we had a housing bubble here in the USA. The Fed leaving short rates very low is the biggest reason as all excess savings, leverage, and asset price inflation was exported to emerging markets. Emerging markets then took all of their savings and investment and plowed it back into the US. The credit markets were massively obese from all of the money that was being repatriated back to the states. This is what is commonly called the Global Savings Glut. Money has to go somewhere and it flowed into commodities and credit.

What the result is China has some $1.6T in USD reserves sloshing around in their economy. Normally, the CNY would be a lot stronger, but the Chinese is pegging their currency within a band, so they are manipulating their currency by not allowing it appreciate vs the dollar. This is unquestionably preposterous behavior by the Chinese. Let me first say, its not anything that the US has not tried or even succeeded in doing over the years, but China is really postponing the inevitable free floating of their currency. When that happens, the export party that China has been enjoying is over. This will be very good for Chinese citizens as their purchasing power goes up, but devastating for the Chinese economy as their imports are a lot less attractive at the higher CNY rate.

So what are developed countries and societies to do? The US as well as Europe are stuck in a slow growth high unemployment situation while EM societies struggle with high inflation and huge capital inflows. In essence the developed world is exporting not only jobs but capital and inflation as well. Bernanke is warning China and other Asian Tiger countries to let their currencies appreciate or face another global slow down. A global slowdown that the USA will not be be able to fix by themselves or subsidize. Bernanke is making the point that if Asian societies don't start to de peg from the dollar, the USA will not ease the burden when shocks hit the system. Bernanke in essence is admitting that US policy makers could and would no longer determine policy based on domestic conditions and force the rest of the world to tow the line.

What Bernanke and Geithner have discovered is that after the US housing market collapsed, the economy was severely weakened. We have a trade deficit, high unemployment, and federal deficit that are all structural in nature. US Policy makers have belatedly discovered an inconvenient truth about the virtues of globalism.

Is this Bernanke's version of Paulson's bazooka? Is he stating that the US is no longer going to take this type of brazen currency manipulations for much longer? That there is a direct consequence for Chinese currency manipulations and that the US will allow the pain to spread much further the next time. You won't have the US cleaning up the mess or trying to re balance the pain the next time.

Bernanke is stating that a "two step" recovery may not be sustainable, that millions in unemployed US workers will have to be dealt with. He has made these similar points to the US Congress as well. Stating that a proper fiscal policy needs to be implemented to reduce structural unemployment and get growth going again.

Bernanke is letting everyone know that he is getting tired of printing money. He is printing money to sustain the US economy because heck no one else seems to care.

Bernanke is acknowledging that globalization has made it impossible for one to conduct efficient monetary policy in one country without global assistance and participation.

The speech that Bernanke made Friday is a very important speech that basically is a pointed threat that states that everyone has to start pulling their own weight and water.

Will History Repeat Itself?

2010-11-19T16:10:00.000-05:00

The more things change the more they stay the same.
History repeats itself.
This time its different.
Blah....Blah...Blah....
Yada...Yada...Yada...

Here is a chart of the SPX as of today's close.

As you can see, the action in the SPX today is very similar to what was happening earlier this year. The market had a serious breakdown in early February over the Greek Debt problems. It completely forgot about those problems and marched exponentially higher for the next 2 months. It then had a serious break of its vertical uptrend in late April, it tried to fill that down gap back to its uptrend line, but that failed and the ensuing pain was felt culminating with the Flash Crash on May 6th.

Today, we have something very similar. The markets on the backs of QE2 have had a vertically exponential run up since late August. This sharp run up was broken this past week when the Irish Debt problems became a huge global focus. The last few days the market has been trying to get back above that trend line or fill the gap.

What happens next?

Requim For Bernanke Cont...

2010-11-19T13:51:00.000-05:00

In my previous post I was giving Chopper Ben some props for his the speech he gave in Germany. It was a clever, well scripted, thoughtful, and well prepared speech. Chopper Ben just went up 1 notch in my book. He has a long way to go but this was a strong first step in actually talking about Main Streets problems.

One thing caught my attention. It was his feelings about Inflation.

"Low rates of resource utilization in the United States are creating disinflationary pressures. As shown in figure 5, various measures of underlying inflation have been trending downward and are currently around 1 percent, which is below the rate of 2 percent or a bit less that most Federal Open Market Committee (FOMC) participants judge as being most consistent with the Federal Reserve's policy objectives in the long run. With inflation expectations stable, and with levels of resource slack expected to remain high, inflation trends are expected to be quite subdued for some time."

"Importantly, the Committee remains unwaveringly committed to price stability and does not seek inflation above the level of 2 percent or a bit less that most FOMC participants see as consistent with the Federal Reserve's mandate. In that regard, it bears emphasizing that the Federal Reserve has worked hard to ensure that it will not have any problems exiting from this program at the appropriate time. The Fed's power to pay interest on banks' reserves held at the Federal Reserve will allow it to manage short-term interest rates effectively and thus to tighten policy when needed, even if bank reserves remain high. Moreover, the Fed has invested considerable effort in developing tools that will allow it to drain or immobilize bank reserves as needed to facilitate the smooth withdrawal of policy accommodation when conditions warrant. If necessary, the Committee could also tighten policy by redeeming or selling securities."

This last part is interesting in the sense that he is stating that the Fed has a mandate to keep inflation in check to the tune of 2%. Now, if CPI prints a little higher in one particular month say .4 or .5 which comes out to way above 2% annualized, does this mean that the Fed will act and stop their QE program? Is he stating that inflation is very tame at the moment so its a good time to try this particular scheme, but if we see upward pressure on the CPI, all bets are off?

My personal opinion is that deflation is much more of a problem then inflation. This is at the moment. The countries biggest asset which are homes are losing value every month. Debt Deflation is the biggest worry. This obviously is the biggest worry that Bernanke has. My plan would be to let housing go through what it needs to go through. Restructure the debt and let bad firms go bust. Capitalism without failure can't exist in our country. Homeowners who don't pay their mortgages should be kicked out of their homes and put in rentals. None of this staying in your home for free for years garbage. Once the banks cleanse their balance sheets, they will start to make prudent lending decisions.

We will see some higher CPI prints in the coming months, the Fed will be worried about this. Who knows if they curtail their POMO's and QE, but one thing is certain, the Fed and Bernanke are letting everyone know the pressure they are under in terms of inflation. Bernanke has made his point about fiscal and trade policies.

Will the market call his bluff about inflation?

A Requim For Chopper Ben

2010-11-19T11:34:00.000-05:00

Helicopter Ben is speaking in Germany today. He basically makes the point that millions of unemployed workers are unacceptable and that another round of QE was justifiable under current conditions. Its nice that he has come to this conclusion after all the Obama Administration thinks getting a gutted FINREG bill passed and enacting a useless Health Care Bill that is only another giveaway to the industry lobbyists was and is more important than jobs.

I have to give Benny Inkjets some props here. He is subtlety making the point that Congress is useless and that fiscal policy is more useful in creating jobs. We all know this is true. QE doesn't create jobs or increase aggregate demand. Fiscal policy, stimulus, and targeted tax cuts can increase AD and create jobs. Throw in some real foreign policy and a reasonable trade policy that protects Americans from jobs from fleeing to Manila, Bangalore, and China, and we may have something here. In the absence of competence, Bernanke is forced to use unconventional monetary policy to tackle mismanaged fiscal/trade policies. With the GOP reclaiming the House and gaining ground in the Senate, the emphasis is going to be away from further stimulus and spending but tax cuts for the wealthy is back on. The gutless Democrats will go along with it which means perpetual double digit unemployment for the foreseeable future. This means Bernanke will ratchet up more unconventional monetary policy, which means a perpetual ponzy scheme between Treasury and the NY FED will continue on. This leads to both FINREG and ObamaCare partially defeated or even outright killed. The two big issues that Obama was obsessed about in his first two years totally down the drain.

...And they tell me I am too pessimistic!

I get his reasoning for QE, I think its stupid and misguided. My problem is why doesn't Chopper Ben come out and say it like it really is?

He should say the economy is bad. It can quickly unravel because the banking sector is in a zombie like state. The thing that most Americans look to in terms of the economy is the stock market. If we can prop up the stock market short term we can hope that the economy can come back. If w can create another bubble, hopefully this bigger bubble can close the gaps from the last one. When this current bubble bursts I can just blame Congress for not balancing the budget and fixing the trade policy. I can blame Obama for continuing to fight two ludicrous wars. I can blame Congress for extending the Bush tax cuts across the board which will increase the deficit which means I have to print more money to cover Treasury's borrowing needs, because China won't be as aggressive in buying our debt because by god they already own $800T. We can't keep hoping that the Japanese can fund their deficits thru our Treasury Bonds via the interest rate differential. Those Japanese women are not fertile enough to expand their population, and the closed Japanese society wont open their borders to new entrants. All of this leads to the fact that Japan is quickly aging and an aging society is not a saving society. All those JGB's will soon not be rolled over but just cashed in to pay for the care of the Japanese elderly. When this happens, we can suggest that JGB rates will be higher. When JGB rates go higher, Japan's borrowing costs also go higher. When that happens its game over in the land of the rising sun. Bernanke would also be right in letting Congress know that their immigration stance should also be looked into. This country needs immigration, "legal" immigration is needed because for what ever reason Toll Brothers and their band of thieves keep building houses that no one wants. Probably because they are incentivized to do so by the government via our tax dollars.We need to expand the population and lower the average age in the USA. This is structural in nature. Congress doesn't seem to care about structural problems like unemployment or the deficit. They care more about cyclical issues like tax cuts.

Why can't Mr. Chopper come out and say the reason I am enacting QE2 is because our banking sector is in serious trouble, soon it will be toast. What degree of burnt do you want? The recent fraud closure problems the banks have been conducting only leads Bernanke to believe that the entire system is surprisingly rotten to the core. The basic rule of law doesn't apply to the banking sector and it never did. The Obama Administration along with Treasury and the Fed have moved mountains in favor of Wall Street and the banking sector, they have moved rates to permanent zero so that the banks can rebuild their Net Interest Margins. They have instituted HAMP and other tax payer giveaways so that the banks can pile on fees to homeowners without fixing the underlying problem regarding housing finance which is a severely overvalued housing market that needs principle mortgage reduction. They have instituted accounting fraud via FASB rollbacks so that toxic garbage loans can be priced way above fair value. They have made Fannie/Freddie the new AIG. This is the dumping ground for all of the bad mortgages that Wall Street doesn't want. Yet after all of the bailouts. All of the handouts. All of the giveaways. The banking sector is insolvent! Why you ask? Its quite simple! Its the debt stupid! Debt needs to restructured and in many cases defaulted on. If we don't get these bad loans of the books this economy can't recover. If we don't prosecute fraud and miss dealings in the banking sector the economy can't recover because there is no confidence in anything.

Ben Bernanke and the Fed can't fix these structural issues. He can only make monetary policy accommodative so that the banks can try to right their ships, but the banks are run by traders and most traders on Wall Street are psychopaths. They have no clue that their bacon was saved by the tax payer. These guys walk around like they are stars on a porn set. Instead of doing the right thing, they have paid lobbyists hundreds on millions of dollars to make the system more complex and more accomodative to their needs. They continue to pay themselves billions in compensation because they can. The CEO's and trader supply chain are richer than ever, but the taxpayers and shareholders will be left holding the bag. Bernanke knows all of this, the country doesnt have the stomach for another bailout of Wall Street and the banking sector. QE2 is 100% another shadow bailout for the psychopaths on Wall Street.

Stupidity At UCLA

2010-11-17T14:51:00.000-05:00

Man I tell ya!
You live long enough and you will never be surprised how stupid people really are. Its not that stupidity is not prevalent in our society, we have huge copious amounts of it. But when supposedly smart people start talking like dolts is really when I would have to say enough is enough.

The Chair of The UCLA Economics Department Roger Farmer has this beaut of a piece in the blog section of FT.

http://blogs.ft.com/economistsforum/2010/11/how-to-restore-confidence-in-the-us-economy-without-inflating-a-new-asset-market-bubble/

Few things right off the bat.

1- How in the world can FT publish this drivle?
2- Now I know why California is in such trouble
3- What type of hash is this dude smoking?
4- Mr. Farmer must be long a lot of stocks or himself directly involved in a Ponzy Scheme

He can single handily solve all of our deficit problems if he can just give us the formula for the mind altering drug he was taking when he was penning this article.

Mr. Farmer doesn't want the Fed to indirectly prop up the market, as they are currently doing, but to directly prop up the market.

He wants the Fed to not buy Treasury debt but stocks. In his own words.

"I have argued in this Forum that more QE can create jobs and prevent a second Great Depression. But it matters how the policy is implemented. The Fed should buy stocks not bonds. And rather than commit to a fixed programme of stock purchases, the Fed should use its market power to stabilize swings in the stock market and smooth out bubbles and crashes."

I can't even begin to address the flaws in his logic.

There is more....

"If the Fed were to announce that the Dow would not be allowed to drop below 11,000 over the next three months, for example, it would provide the confidence to private investors to move back into the market and spend some of the $1,000bn in excess reserves that are sitting in the banking system. But guaranteeing no downside to stocks is not, on its own, a good idea. The Fed must also limit swings on the upside. If QE simply fuels another unsustainable asset market bubble it will have made the problem worse, not better. Just as conventional monetary policy stabilizes swings in interest rates, so unconventional monetary policy must stabilize swings in asset prices."
UNREAL! UNBELIEVABLE!

Mr. Farmer wants the stock market to trade with in bands. The Fed should sell stocks if they get to expensive and buy them if they get to cheap.

This guy heads the Econ Dept at UCLA!

The only reason the market exists is for allocation of capital to private hands and price discovery. Why have any Risk Management via Futures and Options?

The Federal Reserve with their meddling have only increased the dislocations and distortions in the capital markets. What you are seeing at the moment in the stock market is that the QE reflation trade is collapsing. When you create distortions from meddling, the only thing you really increase is volatility. When you create dislocations, volatility, uncertainty, and certain collapse in prices are whats in store.

Is there any reason why the Fed wanted higher stock prices leading to GM's IPO tomorrow?

Mr. Farmer's missive is so preposterous that I can't believe FT would publish it.
With Goldman Sachs and the 40 Thieves already owning DC, they would be able to free front run every single trade from no one to the end of man kind. This is socialism for the rich and busted capitalism for the rest of us.

Why in the world do we still believe in Free Markets?
Why do feel free to say the words Free Market anymore?

Mr. Farmer should be carefull - Ben Bernanke I hear reads the FT every morning when he wakes up.

Warren Buffet's OpEd in NYT.

2010-11-17T14:12:00.001-05:00

I have posted before about Warren Buffett.

http://tradersutra.blogspot.com/2010/05/enabler-from-omaha-speaks.html

http://tradersutra.blogspot.com/2009/11/warren-buffett-is-not-good-guy.html

Today's OpEd in the NY Times doesn't change my opinion. It only fortifies it.

http://www.nytimes.com/2010/11/17/opinion/17buffett.html?_r=1

He should can the phoniness and just start out with.............

Thanks Morons.

Thanks Morons for bailing out Goldman Sachs.

Thanks Morons for bailing out Wells Fargo

Thanks Morons for not coming down hard on Moody's.

Thanks Morons for allowing the Banks to leverage up and take ludicrous risks without supervision and regulation.

Thanks Morons for giving us a impotent FinReg bill that will only further enable GS and Wall Street to take even more out sized risks that will sink the economy but not me.

Warren Buffett had no clue about the factors that led up to the financial crisis. He talked a good game about derivatives but allowed Berkshire to be knee deep in them. He personally enabled Moody's to conjure up phony ratings for hundreds of billions of CDO's. CDO's that GS packaged and sold all over the world.

He talks a good game about taxes and the such but somehow I must believe he is in the ear of Obama pleading with him to extend the tax cuts across the board.

In short, I don't believe anything this bum says. He has conveniently told the truth when it has served Berkshire's purpose. He is no different than Bernanke and Geithner.

Warren Buffett is a bad guy. I can't say it any clearly than that.

Mini Flash Crash & HFT

2010-11-09T14:44:00.000-05:00

NY Times has a piece about a mini flash crash in Progress Energy.

http://www.nytimes.com/2010/11/09/business/09flash.html?_r=1&ref=business

I will say this about HFT.

When High Frequency Trading is moving or energizing the engine of the stock market it does add liquidity. The Problem I have is when High Frequency Trading itself becomes the engine. This is a problem when a sudden shock hits the engine and the liquidity disappears. This is what happened on May 6th more or less.

Every one says circuit breakers can do the trick. I doubt it. These rarely work in the sense that what ever needs to happen will happen eventually. You can't stop a market from going to a point where it deems is fair value.

More On Ireland's Housing Market.

2010-11-09T10:08:00.001-05:00

Yesterday I posted on the absurd Ireland Housing Market Policy.

http://tradersutra.blogspot.com/2010/11/luck-of-irish-try-stupidity.html

The WSJ also had an article on Ireland.

http://online.wsj.com/article/SB10001424052748703514904575602650960629366.html

The WSJ piece has some real sobering and interesting facts.

-36000 borrowers or 4.6% of Irish mortgages are at least 90 days delinquent.
-200K Irish mortgages are expected to be underwater by the end of the year. This is 1 in 4 mortgages.

In the US.

-4.3% of US Mortgages are delinquent.
-11MM or 4.3% of all mortgages are underwater.

A few big differences.

US 10 Year yields are at 2.56%
Irish Yields are nearing 8%

This may be oversimplification, but stay with me.

So the US is effectively financing mortgages between 3.5%-4% with 10 Year Treasuries at 2.56%. This is not great but its better than financing 5% mortgages when your 10 Year T-Bond Rate is approaching 8%.
If GAZOO ever came down to Earth from outer space, he would be shaking his head along with Yogi Berra and the Aflac Duck.

Bernanke's Lies

2010-11-09T09:07:00.002-05:00

Wasn't it just some 17 months ago that Ben Bernanke told all of us that the "Federal Reserve Will Not Monetize Debt."

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=agmj05AcqWHo

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Bernanke said in testimony to lawmakers today. “Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.” He said the Fed won’t finance government spending over the long term, while warning that the financial industry remains under stress and the credit crunch continues to limit spending. “Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation,” Bernanke said in response to a question. “The Federal Reserve will not monetize the debt.”

Well! We all know that was BullSh&*^T!

Just like TARP, FASB, TLGP, HAMP, ZIRP, and the latest round of QE, what Wall Street demands! Wall Street gets.

The last bastions of Democracy is a free press and yesterday we had Dallas Fed Head Richard Fisher basically calling out Bernanke's lies.

http://dallasfed.org/news/speeches/fisher/2010/fs101108.cfm

"The Federal Reserve will buy $110 billion a month in Treasuries, an amount that, annualized, represents the projected deficit of the federal government for next year. For the next eight months, the nation’s central bank will be monetizing the federal debt."

“The remedy for what ails the economy is, in my view, in the hands of the fiscal and regulatory authorities, not the Fed. I could not state with conviction that purchasing another several hundred billion dollars of Treasuries—on top of the amount we were already committed to buy in order to compensate for the run-off in our $1.25 trillion portfolio of mortgage-backed securities—would lead to job creation and final-demand-spurring behavior. But I could envision such action would lead to a declining dollar, encourage further speculation, provoke commodity hoarding, accelerate the transfer of wealth from the deliberate saver and the unfortunate, and possibly place at risk the stature and independence of the Fed.”

Richard Fisher hits it right on the nose. SWISH!

QE is just a continuation of failed polices enacted by the Fed for the benefit of the Banking Sector. The Banking Sector pushed by Wall Street wants an economy that is 100% finanialized, an economy that is not regulated, where perverse incentives are created. They want to create an environment where dangerous financial products that cause market distortions can breed and live. After everything blows up they have the Fed and the Taxpayer to clean it all up. This type of policy only emboldens the imprudent and miss allocates resources to unproductive parts of the economy.

Richard Fisher along with Tom Hoenig are one of the few Fed officials who have any clue about risk management and monetary policy. Fisher is not a voting member but Hoenig is.

Mr. Fisher speech is full of accurate information. Although he is quite idealistic when he states this:

"Otherwise, the effect of quantitative easing will, in my view, simply result in financial speculation, further investment in more welcoming quarters abroad and, ultimately, in “super ordinary” inflation. The FOMC is taking a calculated risk. If the Congress and the Executive fail to deliver, I believe the FOMC will have to consider changing course. Here is the message: The Fed is going out of its way to be a good citizen. It is time for the Congress to do the same."

Congress is owned by the financial sector. Case closed!

Back to Bernanke. This is further evidence that Bernanke can't be trusted to lead monetary policy. He should , if he has any self respect left resign immediately for his lies and treason against the American public. If this traitor keeps perpetuating this Wall Street created farcical ponzy scheme he should be impeached from his post and tried for treason.

This next point I am not overstating.
He is no different than Timothy McVeigh.

Where Is Market Liquidity?

2010-11-08T14:49:00.001-05:00

This market has gone up for one simple single reason - LIQUIDITY!

http://tradersutra.blogspot.com/2010/08/l-i-q-u-i-d-i-t-y.html

The Economy even though is not technically going into a double dip recession is still very weak. For many the first recession never ended. They are still fighting their first depression.

Housing is a complete disaster and the foreclosure problems will only add to the malaise.

Private sector payrolls added some 150K in the month of October yet the unemployment rate didn't budge. This is politically a major problem for Obama.

Consumer credit last month did nudge higher but that was non revolving credit. Revolving credit took it on the chin once again.

This chart of the Highbridge Stat MKT NEUTRAL Index has been making the rounds today. From this market liquidity has crashed the last few days.

Were the last few days of gains in the averages just window dressing to get individual investors in on the ponzy?

Is an impending correction upon us?

via StockCharts.com

Luck Of The Irish? Try Stupidity!

2010-11-08T13:42:00.002-05:00

Whats worse? Notre Dame Football? Or the Irish Economy?

Why do we have to read foreign newspapers to get the straight story?
You thought US Policy Makers were stupid?

If you thought the bank bailout was bad, wait until the mortgage defaults hit home
http://www.irishtimes.com/newspaper/opinion/2010/1108/1224282865400.html

Its getting worse in Ireland.

Please remember that home prices are driven by the size of the mortgages that banks lend out.
I don't have to embellish this fact. Long term interest rates in Ireland are nearing 8%, yet the Leprechauns are still issuing 5% mortgages. Please! Someone tell me this is not so?

The Irish housing market makes Florida Real Estate look healthy. To keep an artificial floor on Irish home prices, the banks with of course help from the Government are keeping rates lower than they otherwise would be.....Sound familiar? This keeps home prices higher than they would otherwise be...does this sound familiar?

Without this absurd behavior, home prices would completely collapse which would lead to banks going into bankruptcy.

One problem here and this is why Ireland will assuredly need a bailout from the IMF and the Euro Stability fund is that next year all Irish Banks will come under the control of the ECB. This is devastating for the Irish Banking Sector, Irish Housing Market, and Irish Economy. By that time ECB rates will be higher. The ECB will force the Irish Banks to stop lending and to deleverage and reduce their balance sheets. This means the ponzy ends. No new inflated mortgages propping up inflated homes will lead to a massive housing correction.

The current extend and pretend policies of the Irish banks will meet face on with the ECB. The ECB wins.

Clueless As The Day Is Long

2010-11-07T14:20:00.003-05:00

The master central planner in charge Ben "Benny InkJets" Bernanke gave this absurd speech on Friday afternoon in of all places Jekyll Island at Jacksonville University.

http://www.c-spanvideo.org/program/296446-1

The money printing Wall Street sycophant went through in step by step fashion the systematic destruction of the US Economy. He was pretty dead on explaining the crisis and the Fed's role during the crisis. Remember, Bernanke is an academic. Bubbles don't exist in his world. He can only print money and hand over to Wall Street so they can clean it up.

The whole discussion is about 45 minutes long and honestly I had to restrain myself from throwing my PC out of the window on multiple occasions.

This guy is 100% unfit for his current position. He makes Greenspan seem competent.

Bernanke should have been thrown out on his ass when he stated during the discussion that QE is not inflationary and that it is merely an asset swap. I am sure Lloyd Blankfein's intern wrote that for him. This claim by Bernanke is an academic claim that only belongs in the halls of Princeton University. In Bernanke's world he is correct in that assumption, but in the real world, all of the money on the other side of the swap is being used to run up equities and commodities. Its asset price inflation. It is a weapon to make asset prices trade at higher prices than they normally would. Guess what? QE is an asset swap, but it is 100% inflationary and in all of the wrong places. Bernanke seems to believe that because commodities are being run up because of speculators that it doesn't count as inflation because corporations can't pass that cost onto consumers. They cant? Have you gone to the pump lately? Bought a carton of eggs? Buy a gallon of milk? Ludicrous! Even if corporations can't pass the costs onto consumers they will suffer from margin compression that leads them not to hire anybody. Its a vicious cycle.

Again Ben Bernanke is an academic. He doesn't live in the real world. Just because he has written a book about the Great Depression doesn't give him the right to print $600B on any given weekday.

Bottom line. Ben Bernanke is an incompetent fool who totally missed the economic crisis. He minimized the Fed's role leading up to the crisis and embellished the Fed's actions during and after. The Federal Reserve can't lead the country's economy if the economy is not in a bubble. They need easy money and bubbles to justify their jobs and to further their ambitions on Wall Street after they leave the Fed.

All I hear is that Bernanke is a smart guy. He is highly respected. BLAH BLAH BLAH.

Degrees don't make you smart. They make you marketable.
Money doesn't make you smart. It makes you powerful.
Being well read doesn't make you smart. It makes you aware of the issues.
Experiences don't make you smart. They build and toughen your resolve and character.
What makes you smart? Very simply! The decisions you make.

If Ben Bernanke has any self respect left, he would tender his resignation as soon as possible.

Let Them Eat Cake

2010-11-05T01:19:00.008-04:00

This dude here just had his best day ever in the stock market. Watch him brag about it on Fast Money today about how he's been riding Bernanke's money printing wave.

Way to go Bernanke! You are robbing from the hard working middle class and transferring their hard-earned cash to thieves like this.

But if you want to survive in this world, this schmuck Brian Kelly ought to be your role model. The Fed has an inflation targeting mandate. The Fed, an anti-free market secret society that is not democratically elected but rather appointed by a consortium of international thugs and yet they are more powerful than the government. This clandestine banking cartel is turning us into a nation of gamblers. You better own gold if you want any chance of survival. Yet gold is so speculative, what if it corrects 30% after you buy it! Well, that's the risk you are going to have to take.

So quit your jobs, working for an honest living is just not going to cut it. The value of the dollar is collapsing and with that all your precious time and labor is worth nothing. The gambling stocks by the way are on a tear! Look at LVS for one. How telling is that!

The Fed allowed the stock market to crash for 6 months in the fall of 2008 and early 2009 until most people lost their savings and were forced out of the market at the bottom. Market participation by the public was at its highest until that. Where was the Fed to save the market then? Yet now when most of the public are out of stocks and it's only PD's, their machines, and hedge funds in the market, now the Fed will not allow the free market to determine prices, no now the Fed will not let the market go down, they will drive asset prices all the way up until they can lure the public back in at lofty prices again. Meanwhile the speculators would've already made hundreds of millions. QE is just a direct transfer of your tax money to their pockets, keeping the price of real estate in the Hamptons from ever depreciating. It's very clear who the Fed works for, and this mafia wants to force everyone into gambling and prostitution for survival.

Inflation is great for speculators but terrible for the middle class. For average people in america or what the press and elites often referred to as the proverbial "little guy", food is the largest component of their spending. That the price of a half gallon of milk goes up from $2.50 to $5 hits them really hard. But for the speculative elite, they're laughing if you bring that up, after all the prices of big ticket items like mansions and yachts are falling in price. People in our government as well as Bernanke and Fast Money etc live in a completely different reality from the commoners.

When our politicians refer to The American People, what they are really saying is gullible suckers!

On another note, I perused a number of articles about George Soros the other day where he was angry at Germany for their austerity, he actually said germany caused the great depression with their austerity! My goodness, everyone knows it was just the opposite, it was their monetary easing that led to hyperinflation which resulted in Weimar depression. But Soros, the man who was hailed a hero by the financial community for breaking the british pound in 1992 and making a billion dollars overnight at the expense of hundreds of thousands of ordinary people's livelihoods, this singular man who bets against the masses, has been stating over and over again that SDR's will be the new reserve currency, that it will be backed by a basket of gold, other precious metals, commodities and select strong currencies. So Soros has every reason to want the US dollar to crash, he is betting on SDR's and the only way for the dollar to be dropped from reserve currency status is for it to crash. And though he doesn't openly state it, this is the reason why he has been pushing for a massive QE2 and chastising Germany for pushing austerity.

Capitalism Without Failure Can't Exist

2010-11-02T12:29:00.001-04:00

I have posted before that Capitalism's Kryptonite is and will always be bailing out failure. TBTF or Too Big To Fail must be eliminated from our Financial System.

http://tradersutra.blogspot.com/2010/05/capitalisms-kryptonite.html

For Capitalism to function properly we need creative destruction. For us to get to this point we at least have to agree that there are many stresses to our economy. Housing and housing finance at the moment is a huge barrier to any sustainable recovery. Why in the world Fannie and Freddie are still around after all we have seen is simply mind boggling. Economics is the study of supply and demand. Financial markets were only created so that investors can have some idea of what price discovery is. As long as Fannie and Freddie are allowed to exist, the study of economics and finance is a waste of time.

http://tradersutra.blogspot.com/2010/08/price-discovery-in-housing-is-soarly.html

The simple reason these toxic twins are still around is to perpetuate Too Big To Fail. Who else can the TBTF institutions sell their toxic debt paper to? There is no other dumping ground for Wall Streets credit excess. We all know that the real economy won't get its groove back until housing stops going down and stabilizes. This only happens when the private sector starts to add real jobs. This is not new. You don't need to be an intellectual to figure this out. Even the ignorant can figure that job loss and the subsequent housing collapse got us in this mess and the only way out is? SURPRISE! Jobs and housing.

That is why the following article by Tobias Levkovich in Bloomberg is absolutely infuriating.

Housing Matters Little to U.S. Consumers' Wealth
http://www.bloomberg.com/news/2010-11-01/housing-matters-little-to-u-s-consumers-wealth-chart-of-the-day.html

HUH!
WHAT!

The Citigroup chief strategist incredibly believes that housing matters very little? Of course! EUREKA! We were imagining all of the hard luck and bad times. It was all a mirage. Total household destruction and all of the wealth loss was in our minds. It never happened.

Its kind of funny that his employer (My Former) Citigroup who were loaded to the gills in MBS paper had this feeling as well? Reading this article has me convinced that a majority of people employed by Wall Street and the financial economy think that no crisis ever took place.

How in the world can the chief strategist at Citi have this opinion? Does he have a clue? Housing and owners equivalent rent make up almost 1/2 of CPI! The average American spends most of his discretionary income on either rent or mortgage.

I am still stunned that this clown thinks real asset values don't matter. The whole idea that QE is going to restart animal spirits and from this a wealth effect will be born is totally non sensible when not looking at where the economy came from and where its going. The financial system has too much debt. Consumers are not in the mood to add debt when they are balance sheet constrained.

As I have noted before, The Fed has only one playbook. The playbook never changes. It has been handed down from Greenspan to Bernanke.

It basically says:
Monetary Policy Will and Always Will Be Accomodative To Wall Street Institutions.

What I think ultimately is happening is that many on Wall Street are trying to justify the financialization of the economy. This has been the trend since the 80's. They are trying to justify a Ponzy Financial Model. Its this same model that was created out of deregulation sponsored by and large by the GOP and powerful lobbyists. The DNC didn't want to be left out so they made it a mandate that everyone should have the opportunity to own a home. Financial alchemy and derivative finance became the over whelming petrol that fueled the US Housing markets since the 80's. The economy took its cue from that. Where steel and big industrials left off in the 70's, housing took the slack. Housing and Finance are one and the same. Thus the financialization of the economy and keeping the status quo are government policy. What the real alchemy was how a dream became a nightmare, not CDO's and or ARM mortgages. When the whole thing blew up the government just papered over the problem, bailed out all of the failures, and tried to re inflate old bubbles and create new mania's.

These morons in government still don't get it. You can't sustain an economy on fumes let alone no petrol. The idea that by keeping asset prices above where they would be normally will lead to a wealth effect is completely preposterous. The idea that if we can just keep prices up we will all be rich again is borderline asinine.

Its very frustrating and bottom line infuriating to keep hearing this line of thinking from policy makers. Here we are almost 2 years past one of the worst economic crisis in the history of the world and we still don't have one original idea to fix our rotten to the core system. These guys have not learned their lesson. Its an upside down world, a Bizarro world in fact. Where savers are punished and speculators are rewarded. Where failure is not punished but rewarded with bailouts and promises of future millions. Where fraud is not prosecuted but institutionally encouraged via control fraud.

One of the founding themes of economics is the idea of incentives. What is the incentive to continue to pay your bills or mortgage? What is the incentive to go to school? What is the incentive of savings and acting prudently? What are the incentives of working hard? What is the incentive not to speculate if you are working on Wall Street? Traders and speculators who happen to be employed by TBTF institutions have all of the incentives in the world to take out sized risks in this perverse financial system that has been created.

When they take failure which is a big part of life not withstanding the financial system out of the equation you are basically saying that its every person for himself. This is why our financial system is broken and broken beyond repair.

Disconnected Street

2010-11-02T09:50:00.001-04:00

I must tell you that every day I walk into work and turn my quotes on I get a little more flabbergasted and a lot more stunned. This was the feeling I got when I used to walk into work in early 2000 watching the NASDAQ go berserk day after day. We all know how that ended up and this time will be no different. I remember many traders just resigned to the fact of massive green opens that any and all information good or bad was used to run up global equities.

They all walked in and bought. Mindless buying without any thought. Buying because you had to buy. The Fed was on your side remember. Never fight the tape or the Fed EVER! Why wouldn't anybody take this advise? After all the Fed had opened up the liquidity tap because god forbid the Y2K would level the economy. You just had to own Telecom Infrastructure, Semiconductors, and any Internet Stock that had .COM at the end of it. Sprinkle some human genome names and you had an all out cluster^&%k of ignorance. What many investors don't remember was that the broader markets stopped going up a month before the NASDAQ imploded. The internals of the market had already turned, what we heard from the monkeys on Bloomberg and CNBC was that the economy was changing. This was an new era.

What we saw was indiscriminate buying of all NASAQ names.

They bought Ariba. They bought Infospace. They bought Yahoo. They bought Commerce One. They bought VerticleNet. They bought PMC Sierra and KLA Tencor. They bought Celera. They bought MicroStrategy. On and on it went. Money was flowing out of slow industrial names and into fast tech. The NASDAQ finally ran up to 5132.50 on March 10th 2000 dropped to below 4500 real quick then ran back up over 5000 on March 24th. That was an incredible two weeks of trading trying to figure out who the inmates were in the asylum. As the old women so aptly stated in Titanic, that was the "Last time the NASDAQ ever saw daylight." The tech heavy NASDAQ crashed from over 5000 on the 24th all the way to 3265 on April 14th. It finally bottomed in October 2002 near 1100.

What we saw was how liquidity in its simplest form can not only create bubbles, but also sustain them. As Rick James has stated - "Cocaine is a powerful Drug." Liquidity is the drug of choice on Wall Street. Back in 2000 there was far too much liquidity chasing too few tech names. It was a vulgar display of market power that took the NASDAQ to over 5100, but it was even more vulgar the correction to 1100. What goes up must always come down. Liquidity is like leverage. When its in your favor, all is good. When leverage and liquidity go against you like LTCM in 1998, the power of unmitigated selling pressure hits you in the grill. When their is no more booze left the party is over. The party ended for LTCM in 1998. The Halcyon days for the NASDAQ ended in 2000. Both of these bubbles were fed by speculation backed by liquidity and leverage. The Fed policy leading up to those epic collapses was in one single word - ACCOMMODATIVE

The "Quant Quake" we had in August 2007 was primarily a liquidity driven Algo/Program trading phenomena. It was a very narrow market that was leading the averages. Statistical arbitrage programs were controlling the market. These Stat Arb programs have a mean reversion strategy that tends to dampen market volatility. Stat Arb made the market more safe than it was. It was masking major problems. When a narrow market leads the averages its a recipe for a crash. When the Stat Arb programs needed to unwind the entire market unwound with it. Just like in 1997 and 1998 with the Asian and Russian currency crisis, liquidity and leverage led a narrow market. Obviously the nitwits who were buying Commerce One and running it up to 500 bucks had not learned their lesson in NASDAQ ville in 2000. Why learn the lessons when the ponzy scheme gets new buyers? Every single market correction and crisis has its brand new entrants but the characteristics are the same. Too much liquidity supplied by the Fed, too much speculation fed by leverage, and to narrow a market to implement the strategies. It all works as long as the candy is still in supply by the Fed. The Fed is single handily the most destructive and perverse institution in the history of the world.

http://tradersutra.blogspot.com/2009/07/markets-evolve-uncoilget-used-to-it.html

What we come back to inevitably is this. The Federal Reserve has never had a plan to grow and sustain a financial system other than printing money to feed speculative behavior. NEVER! They have no answer other than to print money. Its no different when the GOP says "If lowering taxes doesn't do the trick, then we are all out of ideas." If drunken money printing doesn't work you are on your own is the Fed's only mandate and creed. They will print money and then print some more. After they have printed some more they will print even more. This will go on until toilet paper and the USD are one and the same. Ben Bernanke is fully capable of this ludicrous behavior because the Banks are pulling his strings. The banks are the inmates in this asylum and they are 100% dead set on taking this economy over the cliff at any cost. Look at the way they have handled the foreclosure crisis. Look at the way they have fought tooth and nail over any type of financial regulation. Look at the way they killed mortgage finance in this country. They simply don't care. Wall Street doesn't care about anybody except Wall Street. Calling these guys Psychopaths is an insult to Jack Nicholson.

What we have today is a disconnected stock market. It is disconnected form the broader economy on such a large scale that even for someone like me who has lived through past bubbles can't wrap his thoughts around it. It's like the stock market wants a housing double dip. It wants more unemployed workers. It wants more gridlock in DC. It wants more people on food stamps. It wants the to see the economy go into the tank. It wants more personal bankruptcies. It wants this because as long as the real economy is in the tank and the country is falling off the cliff, the Fed will keep rates at zero and keep printing. As long as tens of millions of Americans are jobless and even homeless, the Fed will keep supplying Wall Street with its drug of choice. This will keep Wall Street and the financial economy in charge. This will keep the wide disparity in incomes and wealth. This will keep the elites in charge. This is really the grand plan. The total destruction of lower and middle class America to the benefit of the Financial and Industrial elite. As soon as this economy starts creating jobs and real growth, the stock market will start to head south. The powers that be want to totally gut and loot the country. They have the toxic people, platform, and the policy to do it.

I have totally given up on DC to figure out and solve problems in our once great country.
They should throw all of our elected officials into the dumpster.

There are only three ways this country figures out problems.

1-Lower Taxes
2-Print Money
3-Wars

This is the sorry state of the union on election day. Again, we all should vote to throw every one of these bums out on their carcass. It won't happen today, 2012, or even in my life time.

A man can dream.

What will happen on that solemn occasion?
I figure another massive green open because at the end of the day when Rome Is Burning Wall Street is churning. When the real economy is dying Wall Street is crying YIPPEE!
Of course when there is no government or anything left to loot and rape, the Fed has to keep rates at zero and continue to print correct?

Whats A Ponzy Scheme?

2010-11-01T19:43:00.000-04:00

If you ever wanted to know what exactly a ponzy scheme is?

Check this out.....

U.S. Treasury to borrow $362 bln in Oct-Dec quarter
http://in.reuters.com/article/idINWAL1ME6QU20101101

We all know that the Fed is starting there new asset swap scheme with Wall Street Institutions on Wednesday November 3rd.

This has been aptly named QE2.
So....The Treasury issues/auctions bonds to raise cash to level/even out the reserves in the system. They primarily auction this debt to Wall Street institutions and foreign central banks. The Fed then buys the same Treasury Debt form the Wall Street institutions.

To which I say....

Why in the world is the Treasury going through the trouble of auctioning these securities to Wall Street Institutions when they should just swap them to the Fed in exchange for cash? We all know direct bidding by Wall Street PD's is at record levels, they are really the only ones buying.

The reason is quite simple. Treasury can auction these to the Fed, but the Wall Street Institutions who run the Fed and Treasury combined want it their way so that they can take newly printed Fed Money so they can feed their HFT machines with more candy. This is the only reason why are stock markets are not making new lows.

For example...In Todays POMO, the Fed monetized $2.5B from PD's, $85MM of the amount was part of an auction two weeks ago!. So stay with me. Treasury auctions to PD's, the PD's hold them for two weeks, then they sell the bonds they bought from Tax Cheat Timmy to Benny & The Ink Jets. They get the newly minted dollars from the Fed and automatically buy in this order:

1-SPY
2-QQQQ
3-Apple Computer
4-Google
5-NetFlix
6-Bidu
7-Priceline.com
8-SalesForce.com
9-F5 Networks

Sometimes you truly can't make things up.

QE = Another Banker Bailout

2010-11-01T09:32:00.000-04:00

Now that QE2 is officially 2 days away, I am pondering and scratching my head trying to figure out why the Fed is implementing such a policy when all of the evidence points to the fact that QE does nothing for the Real Economy and Main Street?

We all know that QE doesn't lower interest rates. Just look at the UK, where bond yields are up since QE was put into effect there. Our bond yields went up after QE1 was announced. In fact, the whole point of QE is for investors to flee safe assets and park money in risk assets, isn't it? The Fed will come out and lie because that is what they do, apart from printing money. They tell the ignorant that QE lowers long term interest rates. This is a blatant lie that goes against the whole point of QE in the first place. If long term interest rates going down is the desired effect, then one can't be invested in risk assets. When long term interest rates go down it is a omen of slower growth and a non inflationary environment. This is the opposite of what the Fed wants. When rates head down, people hunker down and move out of risk assets into safe liquid assets that can be liquidated at a moments notice. This is why ultra short rates are near zero, in fact the Treasury auctioned off ultra short term securities with negative real yields.

On top of all this, QE failed in Japan. The BOJ even admits this.Rates in Japan plummeted not because of QE, even though many started to front run the BOJ, but investors lost all hope and confidence in Japanese risk assets. Millions lost everything and they did not want to hear the words Nikkei 225 ever again. What you saw in Japan was a massive real estate bubble that popped. The ensuing bank crisis quickly spread through out the Japanese corporate sector. This slowed down the entire Japanese economy. Long term rates went lower as the printing presses started to churn out trillions upon trillions of Yen. Japanese investors, public pension plans, Japanese corporate sector, and most importantly individual investors fled equity risk assets for the relative safeness of JGB's. QE came after rates had already gone lower. Rates went even lower as all investors started to front run the BOJ. This is normal human behavior. Read and React. Fear and Greed. Rinse and Repeat. The BOJ have been trying to reignite inflation for 20 years and have failed to do so at every turn.

The Nikkei has had some major up moves over the last 20 years, but it currently stands at or near 9000, which is almost 80% off its peak.

http://tradersutra.blogspot.com/2010/08/bizarro-market-nikkei-redux.html

This always gets the media excited but if the BOJ follies have any merit, this is what the US has to look to forward to for the next 15 years. Huge cyclical bull markets within a giant secular bear market. Some money will be made but most money will be lost.

QE did manage to ease the strains in the credit markets and did improve bank balance sheets. I give props to the Fed for there quick action, but another round of QE is just another bank bailout.

The US has a demand side economic problem. QE is a supply side solution. QE thus cant increase aggregate demand. There is no wealth effect in regards to QE, as any and all attempts to keep risk asset prices above where they normally would be always fail.

QE has no long term value for the real economy because it doesn't create jobs or increase demand. There is zero economic rationale for higher stock prices.

This leaves me to my original question. Why is the Fed implementing this policy? QUITE SIMPLY! They are owned by the banks, run by the banks, and every policy implemented by the Fed only benefits the banks.

QE doesn't add any financial assets to the system. It just moves them around. Its an asset swap scheme. Its just rearranging the deck chairs on the Titanic. The Fed has expanded their balance sheet and the monetary base without actually adding any new net money to the system. This is evidence by the roughly trillion dollars sitting with the banks in excess reserve mode. This money is not going back into the real economy. It sloshing around the banking sector running up risk assets and equities all around the world via High Frequency Trading.

The Fed, Treasury, and ultimately the Obama Administrations prime motive for QE is to get the Banking Sector re-liquefied. They want to rebuild bank balance sheets. An asset swap and massive transfer of risk from private to the public sector. This was the primary goal of the government. It worked brilliantly! One problem, politically 9.6% unemployment is problematic for the Obama Administration. Even though Bernanke and Geithner were successful in clearing toxic sludge from bank balance sheets so they can sleep a fine death at the hands of the taxpayer, they made two mistakes.

1- The Banks even in a slightly better financial position were in no financial shape to re lend to stimulate the economy. This is two fold. The banks like Fed and Treasury, lie for a living. Even as they have transferred trillions of bad mortgage paper, they still have trillions they need to offload. This is why we are having another round of QE. Secondly, most importantly, the US consumer is tapped out. We are in a balance sheet recession just like Japan. Housing prices are still over valued, bankruptcies are still rising, and the economy is stuck in quick sand because employment is going through structural changes.

2-Both the Treasury and Fed were caught off guard with regards to Foreclosure gate. One of the reasons why we are getting another round of QE is that the banks are a lot worse off than even the banks know. We have heard many lurid stories of flat out fraud being conducted by the banks. One big problem for the banks is that we still live in some sort of Democracy where the rule of law still stands. The banks are going to have to raise hundreds of billions of fresh capital just buying back all of the bad loan paper they stuffed into CDO's and the such.

As the real economy suffers, the financial economy gets more bloated. I can't figure out how and why the banks would re lend after this next round of QE? They didn't do it after QE1! Bernanke added $1T to bank balance sheets and the economy ex inventory build up went no where. You don't need a Nobel Prize to figure out where this is headed. Demand side problems aren't fixed with supply side solutions. Tax cuts won't fix our economy. QE won't fix our economy. We need demand side solutions. We need to clear excess housing inventory. We need trillions in private sector bad loans to be restructured. We need to get home owners out of houses they cant afford. We need to get Fannie and Freddie out of the housing finance industry.

http://tradersutra.blogspot.com/2010/08/price-discovery-in-housing-is-soarly.html

Somehow I already know how this is going to end. Bernanke also knows all of this. What is Ben going to say? What is Ben seeing at this moment? A weak economy, a weaker job market, a housing market that is already rolling over, and a fraudulent banking sector all wrapped up into one giant SH&^&T sandwich. But as long as extend and pretend and money printing are the official US policy responses, a zombie economy will just trance along making Wall Street bankers more wealthier at Main Street's expense.

What we are seeing at the moment is another bank bailout. Another TARP. There is no way Congress would ever vote yes for another bank bailout, but with the Wall Street owned Fed, we don't need Congressional support. We have Ben Bernanke who is overtly creating his own version of TARP.

The Fed has already embarrassingly failed in its mandate of full employment, they have only partially been successful in their other mandate.

The MSM along with the Fed and Treasury has tried to sell this QE policy as a main street solution. What a farce. These are the same guys who are fighting a demand problem with supply side solutions.

What do they say?
Don't bring a knife to a gun fight. The Fed thinks it has guns, but they are wrong.

I think what we will see on Wednesday is a measured QE over the next few months. The Fed will start off small, kind of like what the hucksters do on the corner with their shell games. Bernanke doesn't want to go all in even though he is already there. He has already taken the country over the cliff but he doesn't know it. Wednesday will be a solemn day for Main Street, but of course if you are a banker. Its all good in the hood.

QE & The Monetary End Game

2010-10-29T13:59:00.001-04:00

Now that we are only a few days away from the Nov 3rd announcement of the Fed's Monetary Debasement Policy, which is affectionately being called QE2 by the media, what does this mean for the markets? Have the markets run their course? Are they going to sell on the news? Will QE2 just ignite more buying by SkyNet? Your guess is as good as mine. I have my opinions dangerous as they are, but I will say this, a few months back I posted just before the August Fed Meeting that what the Fed intends to do with more monetary stimulus was the beginning of the start of the End Game.

http://tradersutra.blogspot.com/2010/08/expect-deflation-as-deleveraging-is.html

http://tradersutra.blogspot.com/2010/08/qe-20-we-can-hope-that-fed-waits.html

Before that meeting there were many at the Fed who believed that deflation was the biggest problem that the Fed had to deal with and that monetary policy should be used at any and all costs to break the back of deflation. I agree that deflation is a bigger worry than inflation at the moment, I also believe that inflation as well as its evil step brother hyperinflation is not such a worry at the moment. So why am I so up in arms about the Fed's QE plan? Quite simply, because it doesn't work. It won't work. It has never worked. The Fed knows this. Why do they do it? Even more simply put, the Fed is owned by the Financial Sector. Why else would the Fed ask the financial sector what the expectations for QE would be?

http://www.bloomberg.com/news/2010-10-28/fed-asks-dealers-to-estimate-size-impact-of-debt-purchases.html

This is truly appalling behavior from our Central Bank. This overtly shows who is running monetary policy in our country. I have always known who really pulls the strings but it is truly staggering the in your grill mentality of both the financial sector and the Fed. The lies are not even credible anymore. Everyone knows that both the US Financial Sector as well as the global economy is a giant ponzy scheme. What's even worse is that this giant ponzy scheme is being built on a house of cards. This house of cards is stuffed to the rim with bad loans and debt paper. These bad loans and debt paper are vastly over valued and primarily denominated in over valued currencies. What we have is a house of cards that is termite riddled. This is the current sorry state of global finance. This is the system that central banks and governments all around the world are propping up. This is the rotten to the core system that tax payers all around the world are subsidizing.

We are truly facing an impending Monetary End Game. I capitalize this only because it really is a game for central bankers and financial elite's. It's a game and normal citizens are the pawns.

http://tradersutra.blogspot.com/2010/08/keynesian-end-game-fooled-by-stimulus.html

The Federal Reserve I am sure will conduct another round of QE when this round fails. It will become a movie franchise on its own, kind of like the SAW franchise. The Fed can start QE37 in 3D and it won't work. To bad or even thank our lucky stars it won't really matter because by that time Hiroshima would be the theme. The only thing the Fed can do is print. That is the primary and only monetary policy choice that they have. They are not any real problem solvers working at the Fed. What we really have in place of central bankers are Bennie and the Inkjets. This policy can only make things worse. If the elite rich like it then that means its bad policy for the rest of us. How long can this go on is really anybody's best guess. What we have finally figured out over the last few years is that the Fed has no idea what they are doing, they they defer to the Financial Oligarchy for any type of policy recommendations, and that the Fed Institutions are all dying. The later something that is greatly welcomed.

2008 Redux....A Walk In The Park

2010-10-14T08:46:00.001-04:00

The more things change the more they stay the same.

Step into my Time Machine and lets transport us back to 2008.

In 2008

The Dollar was very weak. It had dropped from 92 at the end of 2005 all the way down to 72 in Mid 2008.
The Euro was rallying from 1.20 all the way to 1.60.
Asia was decoupling from the rest of the world.
The US was in a massive easing cycle
The Euro was in a tightening cycle.
Bank Issues were being put on the back burner because the Fed was accommodating.

Lets take it to the present in 2010

The Dollar is extremely weak. A 15 year low vs the Yen.
The Euro has rallied from 1.18 to over 1.40
Asian markets ex Japan are all hitting highs. Can we say decoupling?
The US is in the middle of a massive easing cycle (QE2)
Euro overnight rates are rising as many in Europe are anticipating higher rates.
Foreclosure gate is not in the minds of equity investors as the Fed is accommodating.

We all know how 2008 ended up.
2010-2011 will make the events of 2008 seem like a walk in the park.

Too Many Bulls

2010-09-16T11:23:00.002-04:00

The more the markets rally's the more bulls we have. The more the market drops the more bears we have. Its the way of the investing world and why the most money is always made when markets abruptly turn. I think we are close to a major market turn.

http://tradersutra.blogspot.com/2010/09/top-turn.html

There is a general lack of conviction in this market. The weekly Bull/Bear survey from the AAII is still surprising. According to the survey, bullish sentiment increased to 50.89% which is the second highest reading in two years. Just a few weeks ago when the Dow was below 10K and the SPX was hugging major support at 1040, the number of bulls was near 20%. They hated the market 7% ago yet they love it today. Its really amazing what market sentiment does to people's imagination.

On August 26th when the SPX was between 1040-1050, the number of bulls was near the March 9, 2009 low. This is why I loved the market at the moment. To much fear.

http://tradersutra.blogspot.com/2010/08/l-i-q-u-i-d-i-t-y.html

Today with the index above 1120, a full 7-8% higher, we have the most bulls in two years. not enough fear and too much greed. The number of bears has moved from 49% a few weeks ago to 24.3% today. This is huge!

Gold keeps moving higher as the dollar drops. The Euro, Yen, & Aussie Dollar are all moving higher pressuring the USD.

Back to gold for a moment. The SPX return for the year based on Gold is a negative 14%. That's all you need to know about FIAT currencies.

The Chinese Yuan is higher again vs the dollar. Yesterday, the US filed with the WTO against China and their vast currency manipulation scheme. This sows the seeds for a trade war with China. Another word of caution, the 1987 Crash followed Secretary Backer starting a trade war with Japan. I am just saying.

India raised interest rates again. So we have the two biggest emerging market economies in tightening mode. i am just saying.

Did I mention the European Sovereign Debt Crisis?

The Top & The Turn

2010-09-13T08:50:00.001-04:00

To me there are always facts, figures, correlations, charts, and indicators that tell me a change in market direction is upon us. Today may or may not be that day. I err on the side that it is or we are very very close to a market top and an imminent turn to the downside is here. We all point to bull/bear figures, sky high correlations, fund flows, options implied volatility, and even the might VIX.

Today the one thing that leads and drives equity market values is liquidity. I simply stated this a few weeks ago when the markets were below 10K.
http://tradersutra.blogspot.com/2010/08/l-i-q-u-i-d-i-t-y.html

That liquidity was the most important factor driving the market and that the Fed will always supply via POMA and other open market operations ample liquidity to goose the market. We have seen M2 rise since late August. We have seen that Bernanke is all in in terms of helping out Wall Street. We have seen what POMA can do to goose equities.
The market has so far been able to sidestep massive problems in European debt markets, a clearly overheated China construction market, wide spread speculation in the Indian Stock Market, lingering housing problems, and a pending double dip in the US Economy. Anyone who states that this economy is not sinking is just too busy drinking the Kool-Aid. When 2/3rd's of the US Economy is consumer spending, and its these very same consumers who are still trying to dig themselves out of a debt hole and desperately trying to just pay the mortgage, we can't point to an economic recovery. The recession or even depression for most Americans never ended. They still live in overvalued homes. They still have revolving debt to pay off. They are still looking for jobs. Even after the stock market has raced some 70% off the lows, jobs are no where to be seen. The US Economy is a credit economy backed by housing. Credit like the economy will only expand when people have a reasonable assumption of paying back their debts. With real job growth no where to be seen, many Americans have no confidence in spending let alone in Government.

As I walk in this morning I see a massive disconnect in global equities to what is actually happening in the real world. The financial economy just like in 2007 is completely living a fairy tale. The Traders In Wonderland are ramping up equity prices all over the world. There reasons? Lets see.

1-China Industrial Production higher then expectations.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aXln_sNf72Ro
2-Resolution to Basel Banking Guidelines.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a_btvou4l_wI

For the life of me I can't figure it out. These two stories are reasons to sell the market hand over fist, but just like 2007 in the face of impending credit doom many were just closing their eyes and buying. Why? They just trusted the ECB and Fed to keep the Kool Aid running. Today its the same mentality. Buy Buy Buy until the Fed takes the punch bowl away. Well, in 2007, the Fed didn't take the punch bowl away. The expectations today just like they were in 2007 too aggressive and too disconnected from reality. The leverage in the system coupled with ludicrous expectations caused massive liquidations in stocks. Today one can say that the Fed has learned from their mistakes. That Wall Street has learned form their sordid ventures. That institutional and retail investors have learned. They are kidding themselves. Firstly, the Fed only knows how to print, Wall Street only knows predatory behavior, institutions have to be fully invested at all times, and that retail investors are sheep. This is all true except that retail investors have already been slaughtered. They are not in this market. After the 2008 economic collapse and May 6t Flash Crash, trillions have flowed out of equity mutual funds. The stock market is a house of cards built on High Frequency Trading. We saw what the machines were all about on May 6th. The next correction we will have will be quick and devastating and we can point to faulty market structure not leverage for the prime culprit. You cant blame sheep when they have already been slaughtered.

For today I am thinking that the markets will top out some time during the afternoon. I came across these charts that frankly scare me.

Mutual funds are all in. The cash on the sidelines analogy is a giant myth.

The % of liquid assets was 3.4% in July. I am thinking this figure is even mower today in September. This is the lowest % cash level and is near the levels that accompanied the 2007 equity market peak. This is also tells me that equity mutual fund managers who are the most stupid of all investors are quite bullish. The last two times we witnessed cash levels near these levels were directly before the 1999 market implosion and the 2008 market debacle. You cant look at one indicator but this is one macro indicator is well worth noting.

Volatility stripped out of the market but future volatility still elevated.

The time to buy the VIX or be long Volatility which is effectively short the market is when the VIX hugs or crossed the lower Bollinger Band.

As you can see this has happened today. On other occasions this has conveyed a market drop.

So to for the SPX 500.

Sell the SPX when it it is hugging the upper Bollinger Band.

So there you have it.

L-I-Q-U-I-D-I-T-Y

2010-08-27T14:27:00.000-04:00

Say it with me!

LIQUIDITY!

L-I-Q-U-I-D-T-Y!

This is the current market structure and dynamic.

http://tradersutra.blogspot.com/2010/08/everything-you-need-to-know-about.html

If you ever ever wanted to know why liquidity is the most powerful dynamic to lead markets, you need to only watch what is happening in the markets today.

OK, This blind squirrel found a nut this morning when the GDP print was benign for the markets. The print came in at 1.6% revision from 2.4%. Better than what the estimates (1.4%) that people were looking for. There were rumors that this print would be below 1%. This is was not going to happen. The final revision will be closer to 1%, but for the time being the market escaped. Futures rallied some 7-8 handles after the announcement.

Then the fireworks began. Nasdaq futures started to tumble when Intel pre-announced a weaker quarter around 9:45am or so. I found this to be very unusual. Why couldn't they announce this before the mkt open? Anyway, this was not a surprise if you have followed INTC the past few months. Ever since INTC blew out earnings in July, the stock has down ticked? Why? Intel's blowout 2nd quarter was as good as it gets. You simply had to sell this stock based on gross margins surging to all time highs. Typically you sell INTC when their GM's reach 68% as they will not be able to expand anymore after that. Stock index futures dropped all the way to the Wednesday lows of 1037 and some loose change. I have stated before that the market needed to hold 1040, and it did do that. This was a victory for the bulls.

I am left to believe that the market simply got way oversold and negativity was building up. There have been rumors that INTC would cut guidance ever since Cisco cooled off investors with their report a week ago. This was purely buy the news and sell the rumor.

How can I forget? Premier Bernanke's opening statements at J-Hole? He basically told the market. Hey! I am there for you! He clearly stated that deflation was not a problem and that the Fed was standing its ground of assisting the economy if the economy gets weak or weaker. The market which had the belief that the Fed can do more acknowledged such by rallying the futures way off the lows. Bernanke continued by saying that the Fed is prepared for more accommodation if needed but he finally publicly acknowledges that "central bankers alone cannot solve the world’s economic problems." Really? This means that if we need to print trillions to save Wall Street - I can help, otherwise the real economy is screwed! He gave some additional color on what the Fed can do as well as the drawbacks.

To bottom line this. It was an expected speech. It was a lot like what Chopper Ben said on FOMC day a few weeks ago. The only difference is the market sentiment. It was bullish then and bearish now. The only bullet left for the Fed is the printing press, and they expect to use it big time. In my earlier post, I stated that this would be the official start of QE2. There was nothing said to make me believe that that was put on the back burner. In fact Bernanke is paving the way for QE2 later on this year. The market trades off of liquidity and sentiment. The sentiment was very negative coming into today and most probably will get extreme bullish some time next week.

Its really incredible the market still has faith in this Bernanke. Consider this:

-Bernanke sees no double dip...But he also saw no housing bubble.
-Bernanke sees no deflation...Has he seen long term bond yields?
-States that QE2 will be effective in further easing....Why? QE1 didn't work.
-Fed easing has done nothing for real economy while it continues to subsidize financial economy.
-Only the Printing Press remains in his arsenal.

I also stated that we had to watch the Aussie Dollar Crosses. SURPRISE! SURPRISE! They all rallied feverishly after Bernanke's statements. AUDJPY, AUD, AUDEUR all gapped higher which enables the carry trade. These crosses were all weighing in on risk assets.

It looks like to me that risk assets have temporarily caught a bid and are all moving up in the same direction. This is not good for anybody accept the bulls. We will have to figure out how this plays out going into next week. I expect a rally back to 1090-1100 on the SP Futures primarily because the sentiment is so negative and the rash of horrible macro data has already printed. Next week we have fresh industrial production data and NFM.

Long term we are still dead but short term its Zombie time.

GDP & Negativity

2010-08-27T08:05:00.024-04:00

The 2nd guesstimate for 2nd quarter GDP is expected this morning at 8:30am. The market has been awaiting this report for what it seems like a months. Ever since the trade figure's came out a few weeks ago, many have grave worries to the revision. The original 1st guesstimate was the economy grew 2.4% in the 2nd quarter, after the disastrous trade figures this was a fallacy. The market expects this figure to come in around 1.4%, a full 1% below the original guess. The market fears that this figure will come in at around 1%. My feeling is that its all about nothing. Who cares what the figure is. I personally think that the figure will come in between 1.4% and 1.7%, but that means nothing today in the bigger picture. Its all about stimulus and how the Fed is going to find another way to try and get this economy going. Bernanke speaks today from Jackson Hole, Wyoming, and I personally believe he will announce the official start of QE2. We will have to figure out how QE2 will help the two biggest economic headwinds which happen to be jobs and housing. QE1 didn't help but slowed down the progression. QE1 was a massive extend and pretend scheme, no doubt QE2 will be the same. The market gets its petrol from liquidity and this is mainly supplied by Bernanke. As I have stated, any notion of additional stimulus will have the USD move lower freeing up liquidity. The Aussie Dollar crosses which have been the primary carry trade that has propelled global equities will almost assuredly rally if Chopper Ben does what his name suggests. Bernanke is running out of bullets and is desperate. Desperate people do desperate things. Another interesting topic has been the Yen. The Yen is at 15 year lows and eyes are also focused on the BOJ. Will they intervene to stop the appreciation? They tried and failed badly earlier this decade so they are gun shy. My feeling is that the BOJ will intervene but not before the Yen moves to 80 or so vs the USD. The BOJ before they officially start any forex intervention will most assuredly start their own massive stimulus program. This is because last night Japan released these figures regarding the islands economy.

Japan's jobless rate falls, but deflation persists
http://finance.yahoo.com/news/Japans-jobless-rate-falls-but-apf-3816646867.html?x=0&sec=topStories&pos=7&asset=&ccode=

The Nikkei dropped over 1% to its lowest level in 14 months immediately on its open, but was able to claw all the back up 1%. This is was good news for the bulls. Maybe that's a short term bottom for the Nikkei? Maybe the Nikkei trys to rally back to 10K on the backs of further stimulus and Yen intervention? Maybe JGB yields move higher just a tad? They moved up above 1% last night. This is needed for risk assets to get a bid.

The angst that the market has at the moment is quite negative. Its not absurdly negative but still negative. If we do get a GDP print above the consensus of 1.4%, this market most probably gets a bid. The risk off trades then need to be unwound. I am also thinking that the Euro which has gotten smoked from 1.34 down to 1.26 should rally back to 1.30 or so if risk assets get a bid.

Let me be clear. I still think this market represented by the SPX will hit 900 by late November and test the March 2009 lows of 666 by the 1st quarter of 2011, but the market never goes down in a straight line and rallies in bear markets tend to be sharp. We have seen this the past few months.

The economy has huge headwinds in the name of jobs and housing. Despite yesterdays surprise decrease in initial claims to 473K, jobs are in structural decline and a new jobs model must be created by the Obama Administration. Housing looks to be further correcting at the moment. All of this leads me to believe as the real economy slumps the Obama Administration will pump in more money. Where is the question. So far every stimulus plan has been announced to directly prop up the financial sector. This stupid and misdirected strategy has bought the knives on both sides of the political spectrum. The problem with stimulus was not the size but where it was directed to. Trillions of tax payer dollars directed at unproductive areas of the economy is not going to solve the underlying issues. My feeling is that the next batch of stimulus will again be directed at the banking sector, and gain that will fail. The stock market may find some footing here and get a bid in the meantime. Of course until the real economy rears its head and takes stocks down again. When the Obama Administration finally wakes up in the 1st quarter of 2011 after they have lost the House of Representatives, they will announce another round of stimulus, this time it will be directed at the root problems which are jobs and housing. The banks have to take losses on their mortgage portfolios. The bad debt needs to be expunged from the system. Only after we have a clear sense of what the bad loans look like and the plan to deal with them will the economy finally make some real headway towards growth. It won't happen overnight but it is at least a plan. Again, any stimulus needs to be directed at the real economy. This is where the multiplier effect is the greatest. The stimulus that was directed at the credit markets also worked in that it brought down rates and narrowed spreads. This made billions on Wall Street benefiting the financial fiefdoms while accomplishing nothing for the broader economy.

Ireland is currently undergoing serious issues, but they have a plan to deal with their bad loans. They created NAMA, a vehicle that takes the bad loans out of the Irish banking system. Ireland smartly went this route fully knowing that immense pain will be inflicted on their citizens and government. It was the right thing to do going out into the future. In 5 years time we will look back on Ireland and say "These guys did the right thing."

Back To Negativity.

I will leave you with this:

Investor sentiment has taken a turn for the worse. Its at an extreme bearish reading. This is a contra indicator.

http://www.aaii.com/

The Investor’s Intelligence Survey showed a drop in bullish sentiment to just 33.3% while the AAII Survey showed a decline to 20.7%. Both surveys have now decline to historically low levels. The bearish sentiment is at 50%, which is not as bad as it was in March 2009 when 70% were bearish.

The AAII states:

"Bullish sentiment fell 9.4 percentage points to 20.7% in the latest AAII Sentiment Survey. This is the lowest that expectations for stock prices to rise over the next six months have been since March 5, 2009. The historical average is 39%."

"Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, rose 2.4 percentage points to 29.8%. The historical average is 31%."

"Bearish sentiment, expectations that stock prices will fall over the next six months, rose 7.0 percentage points to 49.5%. This is a seven-week high for pessimism. The historical average is 30%."

"As stated above, bullish sentiment is at its lowest level since March 5, 2009, the approximate bottom of the last bear market. Short-term market bottoms also occurred when bullish sentiment fell to 22.2% on November 5, 2009, and 20.9% on July 8, 2010. However, bearish sentiment was above 55% on all three of those dates, versus its current reading of 49.5%."

My feeling is that if we get a GDP print above the consensus, this market will rally nicely. If Bernanke gives the market any indication of QE2, we will see a big rally.

Europe's Long Summer Gets Longer

2010-08-24T12:22:00.000-04:00

We have some two weeks to go before I stop wearing all white. I know that its rude to wear white after labor day but will European markets get the message? Will European markets start to wear black?

We are headed into the fall with zero clarity on the EU. There is little evidence that progress has been made on the issues that threathen the currency union. The EU is just waiting and hoping for better times. Hope is not a plan. Europe needs to restructure its sovereign debt. Its this failure to restructure that will upend the global economy.

Trichet and his 40 thieves were able to buy some time with the fraudulent EU Stress Tests in late June. They waived their magic wand over their banks and poof the sector all rallied some 20%, this allowed European credit spreads to narrow and equity markets to rally. Unfortunately, the same problems remain. Poof happened to change the sentiment, but the overvalued sovereign debt still remains. What remains are the same problems in the EU. Other than Germany and France, the EU can't compete and cant pay back its debts. Its this one metric that will bring down European banks. The US Stress tests were bogus, but at least they pretended to be somewhat realistic. US Banks were forced to raise some $75B, while EU Banks were forced to raise only 3B Euro. This is absurd and downright fraudulent.

The German economy is kicking on all cylinders. France is doing somewhat better. But the PIIGS countries are already sick and getting terminal. Greece and Ireland bond spreads are at historic highs. Austerity is not working in Gyro Land. The unemployment rate nationally is over 12% and is reaching 70% in certain areas. Ireland has far too much public and private debt which is about to overthrow their banking system.

After the 1T Euro Bailout and the Euro Stress Tests, we still have investors trading away from PIIGS debt. 10Y Greek Bond yields have exploded some 850 basis points higher than German Bunds. Irish bonds have also taken it on the chin. At least the Greeks tried austerity, the Irish haven't even done that.

The ECB, EU, and Trichet all seem to be living and forecasting off of German exports. This can't continue. The Euro has been weak for the last 2 weeks crashing from 1.34 to 1.26. German Finance Minister Axel Webber who is normally a policy hawk is talking dovish, this is alerting to everyone that the European banking sector is in deep distress. On top of this Anglo Irish Bank just dumped another batch of loans onto NANA at just 38.1% of their face value. Even this is optimistic pricing. This is just Ireland we are talking about. Spanish bank debt probably is valued at the same. Spain has been able to auction off more government debt, but looking at the finer points, only a few banks (BBVA/Santander) are in their buying. These banks just immediately REPO the Spanish Debt back to the ECB. Its a colossal pyramid scheme.

The underlying problem is this.

European Banks can't support their debt. Europe can't support their banking institutions, honor all of the bank debt, increase its competitiveness of the weaker countries, and hold on to one single common currency all at once. Sentiment and market confidence will not fix this problem. European policy makers have made the statement that European banks will not be allowed to fail. Even a modest restructuring is at the moment out of the question. The banks and financial sector - Surprise! Surprise! - run the continent. The prevailing policy is debts over the taxpayer. This is a strategy that generally leads to the gallows.

Expect Existing Home Sales Will Be A Nasty Print

2010-08-24T09:01:00.001-04:00

Today we have the existing home sales for the month of July at 10am. Stock index futures are already off some 12 handles from last nights close.

Economists have guessed that existing home sales dropped only 12% from June's -5% loss. I am expecting this figure to be a lot worse. The consensus is for 4.730MM million homes sold in July, this is wildly optimistic. I am looking for a print closer to 4MM or even below.

I for the life of me can't figure out how economists got to this figure of 4.7330MM? Where are they looking? What are their metrics? Who are they talking to? From the looks of this estimates they may just be talking to realtor's as nobody expects a strong print. Housing is a grand delusion within an illusory banking environment. Many in the business/economic community are too optimistic on the state of housing. The MSM is too optimistic on the economy and stock market. So what do we have? DELUSION! These guys and gals are not listening to the American consumer. Its the debt stupid! Its the leverage stupid! Its about capital preservation stupid!

I keep hearing many economists and financial journalists keep harping on the state of the bond markets.

http://tradersutra.blogspot.com/2010/08/bubbleshumble.html

The incomprehensible ranting is getting old and tiresome. Many millions of Americans are stuck in houses that they cant sell or REFI. Its like a bad marriage with kids. There is no way out. Their biggest expenditure is a black hole money pit. The stock market is a giant scam controlled by HFT. The economy is double dipping. Inflation is no where in sight even as the monetary base has roughly doubled in 2 years! Deflation of all risk assets is at the top of the menu. Every day Americans do have a choice with regards to their investment decisions, and they are making it hand over fist. Remember there is a choice to be made when u have two likely outcomes.

Americans have become very smart to the fallacy of the equity markets. They would rather park what ever money they have left in what they consider a safe investment which is US Treasuries. The US will never default! If you buy a 10Y UST today at a yield of 2.52%, you are locking in a 2.625% coupon for the next 10 years. In a deflationary environment you are clearing close to or over 4% in real terms risk free. Who cares if yields go to 3% or 4%? when no one trusts the equity markets? I personally don't trust the Treasury either but at least they won't default on their own citizens. If in the slimmest of cases the US Treasury defaults do you really want to be in equities or any asset class for that matter?

Back to the home sales figures. This figure will be closely watched when it comes out at 10am. The futures need to desperately hold 1050, if not selling will beget further selling.

HAMP & The Financial Sector Are WIDE RIGHT.

2010-08-23T10:56:00.000-04:00

You know what? Scott Norwood is a hero. The Buffalo Bills really did beat the Giants in the Super Bowl. Wide Right is a miss statement. Don't you know that the officials moved the goalposts wider and the 47 yard field goal easily split the posts? Yes. History has been retold, edited, and changed.

This may sound ridiculous to many but its pretty much status quo for the Treasury Departments HAMP program. This program was originally spun to keep homeowners in their homes via mortgage modifications. But the HAMP program is not doing its mandate.

http://ftalphaville.ft.com/blog/2010/08/11/312151/hamp-its-worse-than-we-thought/

So what do you do when the stated objective hasn't been achieved? Change the rules mid game and re spin it. If at first you don't succeed, just move the goalposts.

HAMP should be called "The Great Stimulus Game Gone Wrong". HAMP from the beginning was a backdoor bailout for the banks. They spun it by saying that it was a way for homeowners to stay in their homes. After this failed for the homeowner they have changed the narrative to extending foreclosure. What is consistent is that the backdoor bailout continues. This is simply unacceptable that the Treasury first of all is still nefariously bailing out insolvent financial institutions, that they are using taxpayer dollars now to smooth out the foreclosure process is more infuriating.

This was the original narrative:

Relief for Responsible Homeowners One Step Closer Under New Treasury Guidelines
http://www.treas.gov/press/releases/tg48.htm

That HAMP was for responsible homeowners who are in financial distress. What it really states is that its a plan to aid banks. This is the unofficial policy of HAMP. Its a taxpayer funded giveaway to every one on on the banking totem pole. After this failed as many trial modifications are failing and new modifications are not even being processed, is lets now actually figure that foreclosures are a problem and that the best way to manage them is to just spread them out. If this sounds like extend and pretend, you win a scoobie snack. The banks do not want any more foreclosed inventory on their books, this is the reason that foreclosure activity is lagging delinquencies.

The time from the 1st missed mortgage payment to liquidation used to be about 14M for loans liquidated in mid-2008. It’s now about 20 months. This is extend and pretend in action. So you can effectively not pay your mortgage for almost 2 years and still stay in your house. The banks don't care because they are skimming taxpayer money on bogus HAMP modifications and riding the Yield Curve because rates are near zero.

But the curve is getting flatter as yields are plummeting. ZIRP and stimulus are at the Keynesian end game. Treasury as well as the banking sector thought they can just ignite animal spirits and have home prices bubble up again. This is failing as foreclosures are ramping up. This will cause another down led for banks which lead the economy into another recession. The banks are not ready for this. REPEAT! The banks are not ready for this. They waited and expected things to get better because of course expanding the money supply always stokes inflation and animal spirits. All of the major banks have lowered their loan loss reserve figures expecting the economy and housing to rebound. This was the primary earnings driver for the banks last quarter. The banks were bleeding back loan loss reserves back on to their net income statements and ponyng it off as great banking execution. The analysts ate it up like Vegas Hookers at a free buffet. As the economy and housing do a Greg Louganis over the cliff, the banks are exposed to more devastating losses. The earnings estimates are too high, they have to come down. The loan loss provisions are too low, they have to go up. Roughly 75% of the earnings growth for the SP 500 the last year has been from the financial sector and this is largely government sponsored.

All in all I am amused that many think the market is cheap. Yes it is. Cheap like a Vegas Hooker.

Bubble...Shumble!

2010-08-22T19:54:00.002-04:00

The great debate this week in finance/economics land centered around the topic of the US Treasury Bond Market. Is it a bubble? The narrative has been excruciatingly painful. The WSJ had this drivel piece this week.

The Great American Bond Bubble
http://online.wsj.com/article/SB10001424052748704407804575425384002846058.html?mod=WSJ_latestheadlines

Now, we all must consider the source of this article, Jeremy Siegel. This is the same author who alerted everyone in the early to mid 90's that equities should be bought hand over fist for the long term. Heck! He even wrote a book on the subject.

http://www.amazon.com/Stocks-Long-Run-4th-Definitive/dp/0071494707/ref=sr_1_1?ie=UTF8&s=books&qid=1282517330&sr=8-1-spell

The whole idea is that over the long run say 20-30 years stocks are better than bonds and have to be bought on any and all pullbacks. Valuations don't matter as much as owning great stocks run by great managers. His blind premise is that if you just buy and hold stocks during an extended period, you will always make money. This was exactly what parasitic Wall Street financial firms as well as mutual fund companies wanted to hear. They pounded this message into the brains of every American in their advertising campaigns, literature and propaganda. The problem is it was all a huge lie. Valuations do matter and guess what? The only great stocks are the ones you buy that go up. "Great" CEO's are often conflicted by their own personal gain via stock options that they will resort to cooking the books by managing and massaging earnings.

Roger Lowenstein has a better book.

http://www.amazon.com/Origins-Crash-Great-Bubble-Undoing/dp/B000BNPG8M/ref=sr_1_5?ie=UTF8&s=books&qid=1282518090&sr=8-5

One will have a better opinion of GE's Jack Welch after reading this account of Wall Street excess.

Back to the Bond bubble talk. Its all talk. What is happening at the moment is a tectonic shift in American investing. Many Americans have simply had it with equities that have done nothing for 12 years. I am not saying that equities are done forever, but the current equity market structure leaves a lot to be desired. High Frequency trading is some 70% of all trading on the NYSE and most are still clueless to actually what happened on the Flash Crash Day.

Most are looking at where bond yields were and where are they now and just saying its a bubble. Most of these charlatans are just stock promoters and Wall Street hacks. Most are saying that bonds are in a 30 year bull market. This is true and some sort of shakeout will happen over the next few weeks as loose longs will sell and cause yields to rise, but this is temporary because at the end of the day most everyday Americans have lost respect, patience, and most of all trust in the equity markets. The bond bears point out to the fact that Treasuries are trading like .COMS back in 1999-2000. This is absurd. There was nothing backing lousy Internet stocks, most didn't have revenue, Treasuries are backed by the full faith of the US Government, the USA will never default. NEVER! If in the 1 in a quadrillion chance the USA does default, owning anything is a problem, its the least of our worries. Long term Treasuries only weaken if inflation gets to be a problem, deflation is the current theme as economic growth will stay weak. Treasury yields are very low and will get even lower if trend line CPI reaches even -1% to -2%. Many traders and investors are fighting the deflation trend, they simply believe that expanding the money supply will stoke inflation. Many traders are still in fact short treasuries like they were in Japan the last 20 years. The BOJ actually has had an easier time in JGB Bond auctions because there is so much demand on the buy side from all of the traders who are short JGB's. But the bigger trend is that most young Japanese citizens and almost all of the Japanese elderly are simply buying JGB's instead of equities because they are worried about their futures. This is fast becoming the trend in the US as well, as many are growing smarter by the day. Many Americans (Surprise) have lost money being invested in equities. They want the safety of Treasury Bonds no matter how low the yields are. They know that eventually the bond will mature at full face value. The even bigger trend here are the outflows from equity funds into bond funds, for example, from January 2008 through June 2010, outflows from equity funds totalled $233B while bond funds have seen a massive $559B of inflows. This makes selling bonds by the US very easy and compelling. This is not a fly by night rush into bonds. Its a major shift by Americans. Also, its a profitable shift. Treasury bonds have generated a total return of 13% over that time frame versus -21% for equities. In fact, both the absolute and risk adjusted return on Treasury bonds have been spectacularly superior to equities for the last 10 years. Americans have become very smart out of survival.

The NY Times has this.
Small Investors Flee Stock Market Even As Companies Recover.
http://www.nytimes.com/2010/08/22/business/22invest.html

Bottom line is this. Who cares where yields are! If you buy Treasuries today for what ever maturity you will get your money back at maturity. Can you honestly say that with stocks?

At the moment 10Y Treasuries are yielding some 2.7%. If deflation runs say 1.5%, your total return is 4.2% in real terms. Can anyone say they can get 4.2% risk free return in a deflationary no growth environment in stocks? Not even Madoff can promise you that. This is the reason why everyone is invested in 10Y JGB's.

Bonds are like equities in the sense they get overbought and oversold. Bonds currently are overbought, and they will trade off as weak owners get rung out of the market, but just look at the demographics changes that are happening in the USA. Look at the continued outflows from equity funds into bond funds. Liquidity runs markets, its the fuel that stokes the fire. Equities are running out of fuel and bonds are gaining it.

I am sure there will be more Treasuries are a bubble talk over the next few months and even years. Each time yields and equity prices will be lower. There is a huge graveyard of traders and investors who shorted JGB's all through out the last twenty years in Japan. They should have shorted the Nikkei and went used the proceeds to buy JGB's. Silly little fools they were.

It will be no different here.

Price Discovery In Housing Is Sorely Missing

2010-08-22T18:27:00.004-04:00

This past week we had more of the same from Tim Geithner and Treasury about the state of Fannie & Freddie. We were told that what would be Fannie & Freddie's role with regards to housing finance. What we found out was Crony Capitalism along with government sponsored policies will not only prop up housing but the entire rotten to the core financial system for the foreseeable future. The main theme I was able to decipher was that both Fannie & Freddie are being enabled by the government, that these two government agencies are holding back the natural forces of supply and demand. For any market to work properly, proper risk management needs to be executed, you can only manage risk if there is proper price discovery. At the moment many are trying to figure out what are the true prices for houses? Guess what? They are still too high because these two agencies along with FHA seem to be the only game in town. They are artificially keeping prices high because that is in fact the government policy. Government policy from the beginning has been extend and pretend. Prop up the financial sector at the behest of the real economy. Keep insolvent zombie financial institutions around long enough so they can keep the casino open and running. We have seen nothing so far but handouts and bailouts with regards to the financial sector. From TARP, TLGP, HAMP, and now the unlimited checkbook for Fannie and Freddie. All of these various government programs only amount to back door bailouts for the banking sector.

The unwinding of the great credit bubble that fueled housing excess started in 2007, here we are a full 3 years later, with the SPX down over 40%, some 8MM jobs are gone, and we are no closer to actually finding a suitable solution to the housing situation. We keep hearing that if it wasn't for the government that housing would fall off of a cliff, that the economy will double dip. This is just the same old dumb rhetoric. Its counter factual. It is true that housing would plunge and take the economy with it. SO BE IT! Its already happening in front of our own eyes at the moment. Residential construction and housing became a bigger part of the economy than it ever should have, it needs to correct this excess.

Let me state this for the record. I DO NOT blame Fannie and Freddie for the credit/housing crisis. I DO NOT blame the Community Reinvestment ACT (CRA). They did not cause the economy to run off of a cliff. They were not even the primary reasons we had a credit bubble. There are so many reports, white papers, and essays from real smart (Non Partisan) level headed intellectuals that defend the CRA, and it should be defended. Its very easy to blame the poor as they don't have representation. Fannie and Freddie on the other hand didn't cause the crisis, but they did add fuel to the fire and will be the major predominate reason we have another relapse down leg in housing.

There are a many reasons we had a credit bubble. There are many reasons NOT TO BLAME FNE/FRE and CRA. I can name a few:

-Total and complete abdication of lending standards
-Lend to securitize loan distribution model
-Total lack of regulation of non bank financial institutions
-The perversely absurd incentives given to every one up the loan supply chain
-The ultra low short rates set by the Federal Reserve Board
-Increase leverage by financial institutions
-Complex financial products that became toxic financial products
-Where was prudent risk management?
-Faith in unenlightened and busted financial theories and formula's
-Portfolio managers reaching and looking for yield enhancement
-Global savings glut as low rates were exporting inflation to Asia
-Credit Ratings Agencies selling AAA Ratings

OK. I am finished defending Fannie and Freddie. They were not the overwhelming reason for our economic ills, but they are currently the biggest impediment to a bottoming in housing and a sustainable recovery. The Treasury just seems to think that giving these two an open checkbook to continue to guarantee and originate loans is a plan to stabilize housing. This is just wrong. This only leads to further confusion. This only is an extend and pretend tactic by the government to buy the financial sector time. I am not stating that government sponsored housing should be stopped tomorrow, but a plan to eliminate them should be put into effect immediately. The more time, energy, and most importantly money is showered on these agencies, it just prolongs the inevitable. Housing is going to correct. Its a mathematical certainty when looking at the foreclosure and delinquency rates. Nobody cares about how low mortgage rates are when housing is still some 25% overvalued, so we needed a plan from Treasury not the same old business as usual rhetoric.

This plan will allow the normal forces of supply and demand to take force. This will certainly lead to lower housing prices because there is far too much supply. One of the reasons most are not buying in spite of generationally low mortgage rates is most have no clue of what price discovery is. They know that housing is a black hole and that the government can't prop it up forever, so they are waiting for much lower prices. I am also not forgetting that loan standards have gotten tougher and of course the job picture is brutal at the moment. For the many who are fortunately employed, its a wait and see game. Many simply don't trust the government for good reason.

Last week we had this missive from PIMCO, the worlds largest bond manager.

Pimco's Gross Urges `Full Nationalization' of Housing Finance
http://www.bloomberg.com/news/2010-08-17/geithner-says-fannie-mae-freddie-mac-need-overhaul-to-reduce-u-s-role.html

Now, quite obviously PIMCO has some skin in this game. They must own tens of billions on mortgages. They only own these mortgages because they are 100% backstopped by the taxpayer. So what ever they say about this subject should be taken accordingly.

This is undeniably front running of housing public policy. That the US Economy can be saved only through "full nationalization" of the mortgage finance system is so out of whack with reality that its stunning. Its blatantly self serving. PIMCO is just another crony capitalist firm holding the entire economy hostage. These are the types of firms that have the ear of Treasury Secretary Tim Geithner.

The entire housing market at the moment is a mass delusion. Just 4 years ago all we heard was you have to be a homeowner. Home ownership is the American Dream. It is if you are employed by the financial sector as this puts the borrower in debt slavery. Home prices always go up. We know that all of this is false. The American Dream is getting a job not owning a home and making payments for the next 30 years. Fast forward to the present and we are no where close to fixing housing at the real economy level. The financial sector has used Fannie and Freddie as their personal dumping ground for crappy mortgages. Just like Goldman Sachs used AIG as their dumping ground for sub prime. In both cases it was a toxic dumping ground. Who do you think is picking up the tab? We can move a little more closer to ending these types of practices but guess what? We need a plan and the only plan that Tim Geithner has is business as usual. Stay the course.

Where have we heard that before?

Keynesian End Game – Fooled By Stimulus.

2010-08-20T14:12:00.002-04:00

Nassim Nicholas Taleb wrote a fabulous book called Fooled By Randomness. It’s a treasured part of my library and will stay so to the day I die. Everyone should read it and then read it again. I won’t go into too much specifics, but it’s all about how investors as well as humans in general often are unaware of the existence of randomness. We tend to explain random events as non-random. Often from this we over analyze and over estimate causality. We tend to make the simple complicated and the complicated simple. When in fact the random happens all of the time and that most are unprepared for it because our belief systems are so out of whack. We have years of ingrown cognitive biases that distort our view of the world and its surroundings.
My point here is not to talk about randomness per say but to talk about being fooled. World markets are currently being fooled into thinking that Keynesianism is going to save us all. In fact, it’s the opposite. Keynesianism will be the hammer to the nail to the coffin to what Neo Classical Economics started. Policy makers and central bankers around the world have been indeed “Fooled By Stimulus.” The idea that exponential increases in debt and leverage will eliminate debt and leverage is at the foremost zeitgeist of Central Bank circles. This one single toxic theme has permeated almost all policy circles. Cheap debt begets more cheap debt. Bankers get drunk off of cheap debt because they can always invest somewhere to gain the spread.

Most central bankers call the Keynesian Theory of Economics the “Beautiful Theory.” This was the most influential economic theory of the early 20th Century. It saved us from the depths of the Great Depression. It is also currently the preeminent theory that is housed today. Keynes was an exceptional thinker who alerted all that financial markets are inherently unstable, Hyman Minsky said similar things in greater detail decades later but it was Keynes who mentioned it first. Keynes also had this Gem, “In the long run we are all dead.” Western democracies needed an approach to balance free market capitalism with government initiatives. Keynesianism was the approach. But all “beautiful” things inherently hide some ugly truths. Like the super model who has an eating disorder, and the gorgeous porn star who comes from a broken home. At the end of the day it all comes out on the wash.

I believe that the Keynesian miracle is dead. The game is over. The stimulus programs have not reduced unemployment and not spurred the real economy. America is currently running two economies and it’s the financial economy that Keynesianism has greatly helped at the expense of the real economy. This is the great divide in our country. It’s not Democrats V. Republicans. That’s too easy. It’s the Have V. Have Not’s. The debt costs used to prop up the financial economy has a direct consequence to the real economy for generations to come.

http://tradersutra.blogspot.com/2010/08/dual-economies-busted-financial-system.html
Keynesian economics was born with the publishing of John Maynard Keynes’ "The General Theory of Employment, Interest and Money.” This theory states or advocates a mixed economy, predominantly driven by the private sector, but with significant intervention by government and the public sector. Keynes argued that private sector decisions often lead to inefficient macroeconomic outcomes, and advocated active public sector policy responses to stabilize output according to the business cycle. Keynesian economics served as the primary economic model from its birth to 1973. It lost some of its luster during the high inflation and subsequent stagflation in the 70’s, but made a comeback during the credit crisis of 2007-2008.

This crisis rejuvenated Keynesian policy and we then received the following from government:
-TARP
-TALF
-American Recovery/Reinvestment Act
-QE
-ZIRP
-Cash For Clunkers
-HAMP

Most of these programs were indeed geared to bailout the financial economy. It had very little effect on stabilizing the real economy but the financial economy just reloaded on the cheap debt.

This type of policy basically makes the point that we can have debt and credit expansion if the economy also grows with it. A rising tide lifts all boats. The rising tide really is a debt tsunami that is going to drown us all. Deflation will be the prevailing theme for developed economies for the foreseeable future. This is why the Fed is obsessed with a busted QE policy. Deflation is poisonous to levered risk assets. What typically happens after we have deflation is mass monetization of bad debt which undoubtedly leads to hyper inflation or general destruction of all Fiat currencies. Hyper inflation is not prices spiraling upwardly out of control, it’s the loss of confidence in ones currency. The Keynesian End Game is total and complete debt monetization which will lead most investors to give up on fiat paper currencies. Any wonder that gold and silver are all in rally mode? What should be happening is debt restructuring and outright default. This would cleanse economies and make lending much more responsible.

The prevailing wisdom of ever expanding debt loads being offset with stronger economies have been around for a long time. It worked all through the 1960’s. The debt loads were high but world economies were just getting in line and economies were able to grow. This made the debt load manageable. Many were worried about corporate debt loads, deficits, and personal debt burdens, but world economies powered higher. The critics were all wrong and looked like idiots.

Statistics on almost all types of debt showed a high correlation between their increases and increases in measures of economic health like the GDP, average personal net worth, and the country’s standard of living. This marched on for decades, but underneath the beauty was a sleeping slug. Over the years, the dollar increase in debt necessary to generate a dollar increase in GDP kept growing. In the late 1940’s and 1950’s, it took about a one dollar increase in debt to generate a one dollar increase in growth, but in each succeeding decade the amount of debt necessary to generate a dollar increase in GDP kept growing. Through the most recent decade, it seems to have taken more than five dollars of debt to produce one dollar of growth, and over the last few years the numbers might have gone into reverse, or perhaps only toward infinity, as all the increase in debt does not seem to create any growth.

Debt used to be the answer but it is increasingly becoming the wrong answer for our current ills. What are the alternatives? Painful ones I presume, that is why that they still alternatives. The easy thing to do is print and monetize debt. The world has not seen a reduction in debt levels since the Great Depression and it is painful obvious that debt reduction is what is needed but will not be implemented until all is lost.

Going back to the correlations of debt and GDP. We see that global GDP especially US Economic growth was 100% credit generated. The 2000-2007 boom was all about residential construction and homeowners using their homes as ATM machines. When the credit boom collapsed, we saw both economic and credit contract. From this policy makers instituted a ZIRP to try and reinflate past bubbles via animal spirits. In the past this worked but presently most Americans are experiencing a balance sheet recession, and no matter where short rates are most are in secular deleveraging mode. Expansionary monetary policy is failing because the debt levels are enormous, as an expansion of credit has lost its power to stimulate growth. As such a reduction in debt levels coupled via restructuring and outright default of debt will have a devastating effect on economic output. What we are experiencing and seeing before our own eyes is the Keynesian End Game. A dead end for Risk Markets .

Just from this logic I can deduce: Forget a double dip recession. The vast amount of Americans never fully recovered from the 2007-2008 credit crisis. A new depression has begun. There will be massive amounts of new debt issued around the world by Central Bankers, this only delays the process of recovery as new debt will not stimulate growth but only keep alive zombie financial institutions. Eventually there is no other option than to restructure/default the debt load. Global debt loads need to shrink and shrink fast. Only after this catharsis where the debt is purged can we can realistically think of growth via reflation.

Why Deflation?

2010-08-20T10:05:00.000-04:00

This is why!

REFI BOOM
http://www.cnbc.com/id/38755321?__source=yahoo|related|story|text|&par=yahoo

Refi's of existing mortgages are deflationary.

The reason the Fed is ape crazy over deflation is that they own $1.25T in mortgages, mostly of the higher coupon variety. Most of these are trading well above par. As many complete refi's, the underlying mortgages get paid off, which in turn erodes the PV of the MBS.

Many MBS investors will be hurt two ways.

1-Capital loss on existing MBS that is trading above par
2-They are forced to reinvest at much lower coupon levels.

Most of the mortgage activity has been the refi variety.

From the article:

"To summarize, refinance applications are way up, up 17 percent, while purchase applications are on life support, down 3.4 percent from the previous week and down nearly 39 percent from a year ago. Refis now make up a full 81.4 percent of all mortgage applications, up from 78.1 percent the previous week, and at their highest level since January of 2009."

Why are consumers not signing on the bottom line for a new home? Let's see:

1-Housing is artificially being propped up by the government in favor of the financial sector, thus there is zero price discovery. Many are simply worried and or confused to where home prices are headed. The direction is clearly down when looking at foreclosure rates.

2-The labor markets are dreadful. People who are fortunate to even have employment are in no mood to add to their indebtedness.

3-Existing homeowners who are already below the water level on their homes will be forced to sit on then probably for the next 5-10 years. Why buy a new home that is overpriced more than the one they live in?

4-Many consumers have tattered balance sheets. They can't qualify for a mortgage or doing so they will have to pay a higher rate.

5-Many have stopped "Living" the "American Dream". They are more worried about the real purpose of America, which is to find gainful employment. Many are worried that they don't have enough money for retirement, why would they put a considerable amount of money into an obvious money pit?

Again, housing needs to further correct some 20-25% across the board. This will allow normal everyday Americans to purchase a home that is not going to bury them. Who cares if interest rates are low? Housing is still 20-25% overvalued in many markets.

Ask yourself this:

Would you rather buy a home for say 400K when rates are at 4.5% or buy the same home for 300K at 7%?

With the government meddling in the housing market, rates are artificially low. I suggest anyone who is in the money on their homes to refinance immediately to a 15Y mortgage. These rates won't last forever and one should always take advantage of stupidity.

What is happening at the moment is the government is propping up the housing market. They are not allowing the natural forces of supply and demand to do what they do. The market has no clue what price discovery is at the moment. Fannie, Freddie and FHA need to be completely wound down. This will cause great strain to bank balance sheets and cause our economy to contract but there really is no other logical or reasonable way to fix the 2nd biggest strain on our economy. The biggest strain obviously is jobs and that is a structural secular problem that will take some time to figure out. Its ludicrous that renters are subsidizing irresponsible homeowners. Its preposterous that the taxpayer is subsidizing the financial sector.

How do you not expect deflation with all of these headwinds? The government will always understate deflation as well as inflation. Have you heard of the Boskin Commission? You can't judge these simple metrics from what the government tells you. We are going thru the 2nd decade of Japanese policy makers lies about what is going on in that island. The official deflation numbers were -1.5%, the real figures were closer to -4% a year. In this realm, the best investment in Japan was Surprise! Surprise! 10Y JGB's. So the best investment in the US in a deflationary environment? Surprise! Surprise! 10Y US Treasuries.

Going back to government intervention:
This is what they do. Government policy makers and central bankers, all do what people who cheat on their spouses do...They LIE! After they get caught? They LIE some more. When LIE's are not feasible and you are caught with the goods? They rationalize. What generally leads up to all of this is that when the truth becomes unpalatable, it seeks being the truth. Lies only remain.

The big lie at the moment is Fannie and Freddie and the lack of price discovery in the housing market.

Channeling Mr. T

2010-08-19T21:15:00.000-04:00

If I can just transport myself back 25 years past, I can just see this exchange between Murdoch and Mr. T from the A-TEAM. Hopefully you can figure out who is Helicopter Ben in this exchange.

MURDOCH: BA, We have to spend our way out of this mess.

MR.T: Murdoch! You're a crazy fool!

MURDOCH: But BA, We have to keep spending money that we don't have. Its the only way to keep a rotten to the core financial system solvent. Why can't you understand?

MR.T: Murdoch! You're a crazy fool!

MURDOCH: But BA, Don't you understand that more targeted debt and leverage will fix an inherent debt and leverage problem?

MR. T: Murdoch! You're a crazy fool!

MURDOCH: BA! We have to keep printing stimulus even though it only helps the ultra wealthy. We have to bury the middle class! They won't even notice BA.

MR. T: Murdoch! You're a crazy fool!

MURDOCH! BA! Don't you understand! We can control the rate of inflation by effectively expanding the monetary base. This has been proven by Milton Friedman. He won the Nobel Prize.

MR.T: You and that Friedman dude are crazy fool's! Those Japanese Fools tried the same thing and it never worked.

MURDOCH: BA, The reason it didn't work is, per Mr. Bullard, that their QE wasn't enough. We won't make that mistake. We have 5 or 6 levels of QE before we fail. What do think?

Mr.T: You know what I think? I think your a mentally unstable nut job who needs a Prozac the size of a beach ball. That is what I think. BTW...You are one crazy fool to think that QE is the answer to our debt problems.

MURDOCH: We also have this ZIRP Policy.

Mr. T: Did that work for the Japanese? No FOOL! You see we like the Japanese are experiencing something called a balance sheet recession. No matter what ZIRP policy is instituted, it's not going to work.

MURDOCH: So what do you suggest?

Mr. T: I suggest you stop acting and carrying on like a damn fool! Its the debt stupid! It needs to be either restructured or defaulted on. Until this occurs, stupid fools like you will continue to ruin our once proud country.

As Long As We Keep Holding On.....

2010-08-19T17:17:00.005-04:00

....to busted theories, we will never move on to bigger and better things as a complete nation.

I happened to see this article on Yahoo a few days a ago.

Harvard once again tops U.S. News' best colleges rankings.
http://finance.yahoo.com/college-education/article/110356/best-colleges-2011?mod=edu-collegeprep

I know that US News has a job to do and they will do it, but does US News actually read the papers? Or even there own publication perhaps?

Hello! The economy sucks! The FINREG Bill will only lead to a greater economic collapse in the future. Why are we operating as a nation like nothing happened. Housing never corrected. Lehman and Bear never went out of business. AIGFP is still underwriting Abacus S-CDO's. The Dow is 14250. Why can't US News have a real story talking about the structural problems that are eating away America? As long as unemployment stays at these escalated levels, the more many millions of Americans become permanently unemployable.

Going back to the article, I have two points.

Firstly-
1- Who can afford to go to these so called "Best" Colleges? The cost of higher education is simply absurd. That is the only thing that climbs every year regardless of recessions and depressions. The only ones who can afford to go are the kids of the crony capitalist elite. These mostly include bankers, politicians, and industrialists. All insanely wealthy BTW. Forget about the money for a moment, you honestly think Obama's, Jamie Dimon's, or Tim Geithner's kids regardless of merit are going to Rutgers or City College? The middles class has been gutted by years of transfer payments above and below. If you are not in the crony circle or independently rich, your kids are not going to these upscale schools. Why? There is simply not enough college credit/loan programs that are available for normal Americans. The USA is a country that was built on credit growth, but this dynamic is in secular decline. Many loans and mortgages will either be restructured or flat out defaulted on. The government can't forever subsidize every industry and the student loan industry is going to implode in the very near future. The private sector just won't be able to offer the same programs at attractive rates. The average cost at this moment for one of these top schools is some $150K minimum for a four year ride.

Many are going a separate route. The for-profit/on-line college theme have exploded. This is a total scam.

I have written in the past about the for-profit college scams.

http://tradersutra.blogspot.com/2010/05/unmasking-for-profit-online-schools.html

If in the event that you are smart enough to get a scholarship.....

Secondly-
What is the value of an education anyway? Why go to Harvard, Yale, or even City College to learn busted and blatantly wrong theories? This is such the case if you happen to study economics and finance. God knows you won't be stupid enough to study computer science or manufacturing because by that time all of those jobs will be in Israel, India, Russia, and China. You got to love free trade.

The American educational system is a Stalinist regime that suppresses dissent. It is a microcosm of what the basic theme of the country is. Business as usual. There has never been a serious discussion of any type of alternative theories to the ruling sentiment. They spend more time burying dissent instead of fostering discussion. As long as they keep teaching efficient/rational markets, Black Scholes, CAPM, normal distributions, and other drivel, your education will be useless. So what you have is basically learning things in a cognitive nature that bares no resemblance to common sense. Just focusing on Economics/Finance programs, the party line has been free markets, deregulation, efficiency, and the neo classical school of thought. This is precisely what brought our economy to the bring of collapse. After the collapse, what do we have? Keynesianism! Just keep printing money to avoid the unpleasantness of the business cycle. Its just one flawed and busted theory after another. Everything is based upon what went wrong in the last cycle. Remember that free Markets, efficient market hypothesis, monetarism, and the idea of deregulation all came from the frustrations of FDR's New Deal. What we are seeing today is a blow back effort by the Keynesian's to back up Neo Classical Economics. After Keynesianism blows up they will say we are starting a new discussion, a new regime. Nope! It will be the same old broken and busted theories, just refreshed and remodeled.

Even today the elites love to hold unto their theories. Its these same theories that have made them insanely rich while raping the rest of society.

For example....

The preposterous argument that the tax cuts for the wealthiest few will stimulate future economic growth. This is what we call "SUPPLY SIDE ECONOMICS" or by its street name - The Trickle Down Theory. This one single argument needs to be brutally buried alive alongside other principle beliefs of Voodoo Economics. Its not only a problem that the banking system is hiding trillions in toxic/poisonous debt that is holding back any meaningful recovery, its also coupled with these same toxic theories that have been constantly argued by our elected officials. These toxic theories have brought a once great nation to the brink of collapse. Our elected officials have pulled the wool over most of America for a better part of two generations.The giant/debt ponzy scheme is running on fumes, but many are still unaware because its been Bread & Circus for two generations.

The Dubya Tax cuts were sheer lunacy. They were beyond irresponsible. Both of then were unfunded. What made them worse was that Dubya just happened to start not one but two wars. Why don't we also add the Medicare Prescription Drug Program which was an election year giveaway as well?

Both Democrats and Republicans have to share in the ever increasing financialization of the economy. Every one on both sides of the political fence was drunk on free markets and deregulation. From this unabated fraud, greed, and crony capitalism all came together to undermine the entire economy.

What do we see today? The same. Business as usual. Stay the course. Obama is more Bush than Bush himself. This at the end of the day is the big joke on the electorate.

http://tradersutra.blogspot.com/2009/11/obama-is-more-bush-then-bush.html

http://tradersutra.blogspot.com/2009/07/real-obama-plan.html

http://tradersutra.blogspot.com/2009/08/obama-does-what-obama-does.html

I will say it again.

The TBTF institutions must be broken up. The shadow banking system must be brought into the open. The toxic debt on TBTF institutions must be restructured and properly marked to market. FASB rollbacks have been a disgrace not only to capitalism but it reeks havoc on the central tenants of democracy. The financial system has to be gutted and properly regulated. The payola bonus schemes which are at the heart of what makes Wall Street parasitic in nature needs to be done away with. Reform and proper regulation needs to be achieved for us to get our economy back in balance.

There is simply too much debt out there. Some $180T in total worldwide. Some $60T denominated in USD. Most of this debt sits outside of normal banking circles, meaning totally unregulated. This debt is being carried at or near par. The World simply is not going to grow its way out of this. Austerity is an answer, but its a small piece of a bigger structural problem. The debt inevitably will need to be restructured and or defaulted on. This will leave most if not all financial institutions insolvent. It is what it is. The sooner this happens the sooner the real recovery can take place. What we have seen so far is a pseudo crony capitalist recovery.

The Fed, Policy Makers, and Treasury thinks that extend and pretend, expansionary monetary policy, FASB rollbacks all lead us out of this mess. Basically they are making the point that business as usual is the order that will save us all.

I get tired of saying this but here goes..."YOU CANT EXPECT MORE DEBT AND LEVERAGE TO GET YOU OUT OF A MESS THAT WAS CREATED BY DEBT AND LEVERAGE."

Policy makers around the world want a recovery on their terms. The terms are an even bigger more powerful banking sector, less regulation, and a larger gap between wealthy and poor.

Can the USA along with the ECB continue the Debt Parade? When does it end? Keynesianism has an end game and we are seeing the limits before our own eyes.

How in the world does Obama think we as a nation can continue to fight/finance two losing wars, an eroding middle class, ever shrinking tax base, and an enormous defense budget?

Why the wars?
Why is the defense budget $700B annually?
Why do we have 800 overseas military bases?

After all of this we are actually debating a lousy 3% increase to the nominal tax rate for the super wealthy? All at a time when when the tax base is eroding because of transfer payments up stream to the parasites on Wall Street. We as a country have allowed our elected officials to gauge the middle class in favor of speculation and greed centered around the financial sector.

What this country needs is serious political and financial reform. We need to cut the defense budget down to where it was pre 9/11. We need to exit wars from 3rd world countries. We need to start defending the USD and our trade policy. We can't allow other countries to pull the strings in the future because we never figured out that the busted theories that got us in this mess will magically get us out.

Initial Claims At 500K....Good Times Not To Ensue

2010-08-19T10:14:00.001-04:00

In previous posts I have stated that the Equity Markets are not prepared and ready for a 500K print on Initial Claims, that this would be devastating for the Obama Administration and the labor markets.

http://tradersutra.blogspot.com/2010/08/housing-and-jobs-are-key.html

http://tradersutra.blogspot.com/2010/08/waiting-on-nfp.html

http://tradersutra.blogspot.com/2010/07/this-rally-likely-over.html

Well today those very mentioned initial claims did in fact print right at 500K. We will see if markets can hold up in the face of these depressing figures. My thinking is that the machines will try their best to keep the market at or near recent highs but we should see some institutional selling across the board later today. What I have seen of late is that the Algo HFT systems bids are finally being hit by institutions. We have seen nothing but distribution like selling since late April.

Jobless claims at 9-month high
http://www.reuters.com/article/idUSTRE67I2A020100819

Housing and Jobs Are The Key

2010-08-18T10:11:00.000-04:00

....which means that the economy is dead.

Usually building permits which lead to housing starts and residential construction employment lead the economy out of a recession.

But its not happening this time around.

Too many homes were built. Easy/fraudulent credit boosted this figure. Millions of these homes sit idle.

Building permits are a leading indicator of future housing starts and doesn't look good.

Now many are stating that both of these charts are in "OVERSOLD" territory. This is simply preposterous. Housing starts and building permits are not like stocks. They don't just bounce because they are oversold. although they do crash like an Internet stock when the booze (CREDIT/LIQUIDITY) runs out.

What these two charts explain to me is that there was a huge irrational credit bubble that started right after the IInternet/Telecom/NASDAQ implosion occurred. It ran right through into the go go CDO's days of early 2006. It is just absurd that the equity markets led by the financials ran up for another year.

So what happens from here? Quite simply as I pointed out above. There are far too many homes that were built during the credit craze that are sitting empty. The housing market needs to stop building new ones because existing inventory cant be sold. This is even in the face of generationally low interest rates.

I have posted before that ever increasing housing starts is poisonous to the recovery.

http://tradersutra.blogspot.com/2009/06/more-housing-starts-is-bad.html

http://tradersutra.blogspot.com/2009/07/more-housing-starts-not-good-for.html

What ever they are telling you about foreclosures is flat out wrong. Foreclosure activities are volatile and come in spurts. You have to look at delinquencies and that figure is still extremely worrisome. Every single plan by Treasury and the Obama Administration has been a backdoor bailout for the banks. Every scheme hatched out of DC is a grand extend and pretend experiment to keep an insolvent rotten to the core financial system intact.

The housing starts number is not going to reverse course and head higher partly because of existing inventory of new unsold homes and unabated foreclosures. A meaningful decline in the unemployment rate is also extremely unlikely until 2nd quarter of 2011 at the earliest.

I have also stated that the US Economy is suffering structural problems.

http://tradersutra.blogspot.com/2009/09/labor-day-not-good-times.html

Initial claims have reversed course and are headed towards the 500K area. Equity markets are not prepared to see a +500K print. We will see tomorrow with the weekly claims. At this point of the "Recovery", we should be printing well below 400K on initial claims. Usually near the end of a recession, residential employment picks up as the Fed lowers rates, this generally leads to job growth, this leads to housing starts. Its a pro-cyclical, positive feedback loop virtuous cycle. But we are currently in a negative feedback loop cycle as the jobs are just not there.

We have a vicious trap of less job creation, less household formation, and less demand for housing.

Household Debt Down As Deleveraging Will Continue

2010-08-18T09:09:00.000-04:00

The New York Fed is out with their quarterly report on Household Credit Conditions in the US.

http://www.newyorkfed.org/newsevents/news/regional_outreach/2010/an100817.html

I have posted before on the deleveraging theme.

http://tradersutra.blogspot.com/2010/08/expect-deflation-as-deleveraging-is.html

http://tradersutra.blogspot.com/2009/08/deleveraging-unemployment.html

http://tradersutra.blogspot.com/2009/08/more-on-trends-and-effect-on.html

The NY Fed's report shows that households steadily reduced aggregate consumer indebtedness over the past 7 quarters. In the second quarter of 2010, they owed 6.4% less than they did in 2008, the peak year for indebtedness. More importantly, for the first time since early 2006, the share of total household debt in some stage of delinquency declined, from 11.9% to 11.2%. The number of people with a new bankruptcy noted on their credit reports rose 34% during the 2nd quarter, this is considerably higher than the 20% increase typical of the 2nd quarter in recent years.

Roughly 2/3rd's of GDP is consumer spending. Walmart yesterday continued its trend of negative same store sales for the fifth quarter in a row and warned that current quarter trends are also negative. Home Depot as well as Walmart cut their sales forecasts but raised their profit forecasts, thus rallying the stocks. This is 100% cost cutting, a trend that is getting gray in the tooth. Where is the demand? Where is the consumer?

So Much For All That!

2010-08-11T16:30:00.000-04:00

Yesterday I stated that the SPX was still in bull hands as the up trend from the early July rally was still in place. That any break off the uptrend will see significant selling.

http://tradersutra.blogspot.com/2010/08/they-say-technicals-dont-matter.html

Yesterdays action.

Well today is a different story. Futures were weak coming into today's action. They tried to rally this market a few times but those rallies were very feeble. The sellers just reloaded every time the bulls got traction.
What happens tomorrow? Don't have the faintest of clues, but I wouldn't be surprised of a big move either way.

This clearly looks a break of the uptrend but we have to be cognizant of the fact that after huge moves like this we have seen buying the next day. Tomorrow brings the weekly unemployment claims and if that figure prints above 480K, it could be a tough day for the bulls. Many will talks about the Fed today but I believe the weakness is more of an issue with the trade balance figure which was an unmitigated disaster. This will lower 2nd QTR GDP down close to 1%, which is devastating for the Obama Administration.

It doesn't help that the Dollar was flying today gaining almost 2% across the board as again Treasuries rallied and yields hit new lows. The Euro got clobbered because the ECB executed swap lines with the Fed today. They have not done that in over a month. This caught the market by surprise. There are some rumors going around that GS is being a little prickly towards their prime brokerage accounts. Hedge funds send over letters to wire out money from GS, but it seems GS has asked them not to. HMMMMM.

We have to watch how the Nikkei fares tonight. The index is below 9300 and any sell off nearing 9100 has to be watched as that is currently support. You would think the BOJ would come in here soon to stabilize the Yen as it moves towards multi generational highs vs the USD. If they don't come in to stem the Yen's strength the Nikkei will be on the verge of seriously breaking towards 8500.

I am pretty sure Asian markets will get throttled across the board tonight.

Candidly Speaking.....

2010-08-11T11:29:00.002-04:00

At least they are honest.

Bloomberg is running this story this morning.

http://www.bloomberg.com/news/2010-08-11/pimco-says-fed-policies-good-for-risk-assets-won-t-reduce-unemployment.html

"The Federal Reserve’s decision to buy Treasuries and keep interest rates low will support “risk assets” without bringing down unemployment, said Anthony Crescenzi at Pacific Investment Management Co.

“Low volatility tends to be good for the interest-rate climate,” said Crescenzi, who is based in Newport Beach, California at Pimco, manager of the world’s biggest bond fund. “It does push investors out the risk spectrum generally. That tends to be good for risk assets.”

This shocking dose of reality courtesy of PIMCO only perpetuates the total farce our economic is.

Every one knows that the Fed, Treasury, and the Obama Administration are in it for the wealthy class. The official party line is we have to keep the economy stimulated for the benefit of society as a whole. The unofficial official policy favors the elite class at the expense of the population as a whole. If you want or need a job look someone where else. If you are a large commercial bank that is trouble? Please walk this way.

I don't know how PIMCO can think this is good? I am thinking that PIMCO will be big sellers of Treasuries and risk assets over the next few weeks.

These guys at PIMCO have been on the deflation bandwagen from the beginning. The Fed listens to them. I thought PIMCO was the 5th branch of government behind Goldman Sachs? They obviously think deflation is a problem, after all Bill Gross and Mohamed El-Erian are on BBG and CNBC everyday talking about it. Yet we have Tony Crescenzi saying risk assets look good here? Risk Assets take it in the grill when deflation is the theme. Maybe their correlations are all out of whack? Maybe all assets should always be =1 correlation going forward?

Maybe PIMCO wants out of risk assets and needs to create a bid from everyone else?

Where Are We?

2010-08-11T10:55:00.001-04:00

Yesterday I for some foolish reason thought the Fed would do the right thing by doing nothing with regards to using MBS pay downs which are in itself inherently deflationary to buy treasuries which are in fact more deflationary. How stupid I was. Shame on me. The Fed yesterday just continued the same flawed policy that has done nothing to improve the general economic climate. More of the same. Extend and pretend that more debt and leverage is the cure for existing debt and leverage. It’s like the Fed has the magic cure for Lindsey Lohan’s substance abuse problems. I know! Lets help Lindsey by liquoring her up some more. By god! Let’s buy her a liquor store. For the average rational person this would sound asinine, but in the Fed’s world, supported by fancy charts and graphs by PhD’s, it’s the logical thing to do. As one gains more advanced degrees one gets to be more disconnected from reality and rational thought. They get lost in their own sordid ideologies.

The Fed’s incessant obsession over anecdotal evidence of deflation will at the end of the day bring devastating spiraling empirical deflation via fear as investors will totally lose confidence in markets. When this happens, forced selling will lead to liquidations at any price. We will have another uneven asymmetrical deleveraging of financial assets. The tragedy of Lehman was not its bankruptcy but how haphazardly it was handled. It was a Chinese Fire drill that Monday morning in September 2008. Everyone and their mother had this ludicrous idea that magically Lehman’s debts would go away over the weekend via a tax payer funded bailout. Lehman was a gone case, it needed to die, but it could have been handled a lot better. The financial system needs to restructure and deleverage. This can be accomplished in an orderly fashion if we have competent policy makers with competent realistic policies. Again, most of the policy makers have advanced degrees and incredible wealth that has distorted their thinking of what’s rational and real. If Sarah Palin had any brains she would use this to her advantage, but she is not interested in making sensible policy but furthering her own unrealistic ideological policies.

The questions remains. Who is winning the steel cage death match between deflation and inflation? I say at the moment its deflation, but deflation isn’t standing over inflation with a folding chair or have inflation in the figure four leg lock. Inflation is not tapping out at the moment. My feeling is that deflation is winning and that there is nothing wrong with that. The rational good guys are winning over the bubblicious guys. Over the long haul, no matter what the Fed does, deflationary forces will counteract any expansion of monetary policy. This has been the theme in Japan and will be the theme here. There is too much debt that needs to either restructured or defaulted on. There are too many homes that are overpriced relative to income. These are too many homeowners who are underwater on their mortgages. This problem will have a major effect on the economy for the next 10 years. What we have seen is a massive increase in government obligations to the point that the government has lost control of policy. It’s this policy that continues to reward bankers and traders with free money to speculate. Money and wealth on Wall Street are never won or lost. It’s simply transferred. This is what has happened in our society as a whole. Money from the middle class is being transferred to the elite class at breathtaking speeds. The middle class has been effectively wiped out.

Here we are 2.5 years after the recession began with underemployment in the high teens, record foreclosures, contracting credit, a slowing economy with fears of a double dip. What has this expansionary monetary policy gotten us? It’s made the income inequality more perverse than ever. The wealthy are totally disconnected from the rest of society. After raping the country blind they don’t even want to go back to a roughly 3% increase in their own taxes. This has left many people simply fed up. They want to stop the spending and make the government start an austerity program. This will tank an already weak economy because the economy runs on spending and credit, so say policy makers.

Deflationary forces are winning because they are siding with society just as inflationary forces are losing because they are siding with the Fed and Wall Street. The Fed wants inflation in the worst possible way because the value of debt is crushing during a period of deleveraging. This is what society needs to go through and the Fed is delaying it.

The country is simply overdosing over bailout fatigue. Obama has over promised and undelivered. It’s as simple as that. The Obama rhetoric and narrative are getting old by the day. The only saving grace for Obama was that at least the stock market had recovered, but this looks to be only temporary.
What we have currently is crony capitalism on the side of bailouts and still record bonuses all around for bankers. Conversely, we have massive budget deficits, a weak economy, and a weaker labor market for the rest.

Obama has to realize that no one with a brain is going to double down on this type of strategy, but this is exactly what Bernanke did yesterday. The entire policy is a fiasco not because the stimulus was not enough but that it was targeted improperly from the word go. The stimulus went directly into the black hole, directly into the most unproductive areas of the economy. Area’s that needed to restructure, regulate, and deleverage. The banking sector didn’t restructure and we got incomplete regulation via FINREG that basically ensures another banking catastrophe. The financial sector just used the crisis to reload back to business as usual.
I am always in favor of stimulus if it’s used for productive purposes. I can’t support stimulus if the goal is to prop up a rotten to the core financial system. How in the world can you create jobs by propping up the housing sector? This is another shadow bailout for the financial sector. How are new jobs going to be created if credit availability is weak? The government keeps and abets the banks in hiding their loan losses via FASB rollbacks? Trying to prop up malinvestment only lengthens the downturn.

Let’s all picture this for a moment…..

Bernanke and the Fed have bought up some $2T in MBS . The administration has extended unemployment benefits too many times to count, Treasury along with the Fed have kept long and short rates low so that again the financial sector can ride the yield curve, and we have effectively nationalized the entire housing sector. All of this has rallied credit and equity markets worldwide.

Now Fast Forward to say today or early 2011.

-What do housing prices look like?

-Are we creating jobs?

-What are real bank balance sheets looking like?

-Do we still have systemic risk?

-Is credit coming back on line?

-Are consumers spending again?

The answers are easy. NO!

We have more than doubled the Fed’s balance sheet not to keep interest rates low which is the party line, but to keep Wall Street liquid so they can play extend and pretend.

We have increased the national debt load to obscene levels and still the country and economy are in weak shape.

How are we any better off?

They Say Technicals Don't Matter?

2010-08-10T15:39:00.000-04:00

Someone out there is supporting this market.

The Bulls are still in control until this uptrend is broken. They have tried to break this uptrend a few times, but the bulls have seem to always have some extra ammo to soak up the sellers right at support...Hmmmmm.

I am thinking once this uptrend has been broken we should see some selling down to 1090 and then down to 1060.

QE 2.0? We Can Hope That Fed Waits

2010-08-10T14:23:00.001-04:00

Its Noon time in New York City and every market participant is waiting on the Fed announcement that should come out sometime after 2pm.

Market expectations are for the Fed to start an asset buying program. I think if this is announced it will be a total disaster not only for the Fed but for all markets around the world.

The rational is that the US Economy is going into deflation. This is true but its not a total disaster. So far its been an orderly deflation. Every time the Fed/Govt/Treasury overreact, it becomes a disaster and then prices spiral out of control. Again, deflation is a problem. Its hitting the US Economy right in the grill at the moment, but it’s yet to be proven that these deflationary conditions have twisted itself into a self-reinforcing and perpetuating vicious cycle. A little bit of deflation is not bad after the asset bubble we have encountered. This economy needs to deleverage and a little bit of deflation is needed. The bottom line is this. Bernanke is a classical academic who believes that asset prices have to be always rising, they can't be allowed to drop. This is ludicrous thinking and policy. One does not need a little or a lot of deflation because Bernanke and his 40 thieves believe its a huge enough potential danger, and they will do whatever to avoid it, even if this pain needs to be felt for the economy to move on for further future expansion. Instead we get extend and pretend. We get more stimulus, more useless QE.

So how did we get here? When the Fed started the first version of QE last year, many considered that the Fed needed a bigger boat. That the stimulus and asset buying the Fed was doing was not going to spur aggregate demand. Many of the monetarists wanted more juice to goose inflation, as of course in the words of Chief Neo-Classical Charlatan Milton Friedman "Inflation is a monetary phenomena." Give the Fed some credit. The Fed more than doubled its balance sheet, in order to carry out QE Version 1.

http://blogs.wsj.com/economics/2010/08/03/a-look-inside-the-feds-balance-sheet-3/tab/interactive/

From less than a trillion dollars to over $2.2T in 60 days! Forget about the balance sheet expansion, Bernanke more than doubled the entire money supply in less than 2 years. The big problem here of course is that what gets put into the economy needs to come out. So far all that is happening is more stimulus, more QE, more expansionary policies, but no aggregate demand nor loan growth. Loan growth is having a problem because there is no loan demand and banks don't want to lend. The banks are better off rebuilding their balance sheets by parking their money at the Fed gaining 25 basis points and riding the risk less yield curve. The banks are hoarding the liquidity provided by the Fed. In fact, financial institutions are financing the Treasury's stealth monetization program via open market purchases of treasuries at auction. So real asset prices are falling while treasury prices are rising. The monetarists are all freaking out over the current state of affairs and the Fed is dominated by these monetarists. Thus we have Bullard's paper last week. They want the QE2 to leave the shores. Another massive monetary expansion, to both prop up asset prices, and prevent a supposed deflationary death spiral. The scary part is the Fed has lots of room to print and not afraid to do so. My guess is that when we are all said and done, the Fed balance sheet will be bloated to at least $4.5T.

For what ever reason for today anyway, I think the Fed will pass on the idea of an asset buying program. They need to keep bullets in their holster. The balance sheet is going markedly up, but not today I am hoping.

The Fed would be stupid to buy treasuries when they have already rallied by a huge amount. Why not wait till treasury yields go higher? My big fear is that the Fed announces a program today, this will put a floor in treasury prices even at these levels. The market will drop but not as much as if they don't do nothing. The market will slowly figure out over the next few weeks that the Fed thinks the economy is a lot worse than imagined and that deflation is a huge spiraling disaster. Both of these themes will self perpetuate. They wanted to stop deflation but just lit the fuse to do so.

China is the big factor hear. There economy is slowing down. Export figures last night doesn't give confidence for global growth as growth imbalances are preposterously on the Chinese side. The Chinese may or may not revalue their currency. its doesn't matter. With elections coming up in November, protectionist policies will creep up and we may see the makings of a trade war with China. The October 1987 on Monday the 19th, was preceded by Treasury Sec. Baker's comments about the dollar that very weekend. This time, Treasury Sec. Geithner has already hinted at such when speaking about the Chinese Reminbi.

The Chinese have a massive housing/construction bubble. Its really a credit bubble disguised as a super global growth story. The spark I am thinking will be when the Chinese economy slows down taking down the construction industry. China is long a ton of treasuries and will need to create liquidity to pay for the deflated bubble, and they will sell the most liquid asset available - US Treasuries. This will likely cause long term rates to soar. Why would the Fed buy up Treasuries now when they can buy them up later from the Chinese? They can keep our interest rates low and also help out the Chinese in the process. What it comes down to is, that the Fed is the lender and buyer of last resort. They bought up trillions of crappy MBS from the TBTF banks, this kept mortgage rates low, housing in check and the banks alive. The Banks in turn took the money and invested it in treasuries, keeping long term rates low. Its a giant ponzy scheme wrapped in a circle jerk, but its all we have at the moment. The Treasury/Fed can't afford the debt markets to go into the tank, this will be a national defense issue. That's why its very important that the Fed sits tight today. They need to keep their powder dry. If the Fed does what the market wants at this moment, we are all in trouble.

Eventually this will lead to some sort of USD revolt. Hyperinflation is just not a monetary issue, its an issue with regards to what investors think about a countries currency. The Fed is so worried about deflation they will have unwittingly stoke the fire for hyper inflation. Who knows when? All I can say is that if QE1 failed, then QE2 is the answer. When QE2 fails, QE3 will be the answer. Its a never ending story that will end in tears. St. Louis Fed official Bullard is on record stating that Japan was not successful because there was not enough QE, so the Fed is not going to take no for an answer until everyone is dead. I have stated in the past that all the Fed knows how to do is to print and they will do so until the country is sunk. The Fed is irrationally worried about deflation because its Wall Street that keeps pulling the strings. They are 100% committed to fighting falling asset prices and their only weapon is monetary expansion. They won't stop until they have broken the backs of deflation which will in turn break this economy into pieces.

Expect Deflation As Deleveraging Is The Primary Theme

2010-08-10T10:24:00.000-04:00

The 8:30am 2nd Quarter Non-Farm Productivity numbers came out and they were far weaker than expected. Productivity came in at -0.9% against the consensus estimates of a gain of 0.3%. Unit labor came in at 0.2% vs the consensus of 0.5%. Unit labor cost figures are closely watched by the Fed for clues for inflation. The higher the figure the higher levels of expected inflation. The grand plan that was laid out for the sheep was that stimulus was going to re inflate prices and ignite animal spirits. That clearly has failed as these figures show deflation which only really means deleveraging.

What all this means for the Fed and their actions today is anybody's guess. Does the Fed admit their gross negligence and incompetence and resume for QE? This is what the market has anticipated for the last week, all along just ignoring negative data points about the economy. Friday's claw back from steep losses on the backs of a brutal NFP report and yesterdays continued rally were built on the hopes that the Fed would do the all or some of the following:

1- Resume buying assets via investments in Treasuries.
2 -Reduce interest rates on excess reserves
3- Further signal that ZIRP would be the benchmark Fed Policy for the foreseeable future.
4- Coordinated effort with Treasury on Mortgage Refinance Program

WOW...That is a lot for the Fed to do. Will they do any of this? Some? I personally think they will NOT start buying Treasuries from the MBS proceeds that are carried on their balance sheet. There will be no interest rate reduction on excess reserves. ZIRP is the benchmark policy for the next 10 years, and any mortgage refi program is not happening at this moment. This is a politically charged issue and will be unveiled near the mid term elections.

All in all its going to be a non event and a non event is going to be disastrous for risk assets, as any non action by the Fed will have the USD rallying. When the USD rallies, liquidity is taken out of the system, thus risk assets are sold. Treasury prices most probably just go sideways as most are buying Treasuries because they fear deflation and risk aversion, not because the Fed is rumored to buy.

There are many on Wall Street that think the economic outlook has not deteriorated enough to warrant more action, but many on Wall Street are dolts who never predicted the recession so they cant be taken seriously. The economy is headed into a double dip, housing is about to roll over, labor market momentum has slowed, and consumer confidence continues to be weak. The economy is in the crapper but the stock market has been very strong because surprise! its disconnected from the realities of the economy. The HFT machines know that there is a Bernanke "PUT" and a Plunge Protection Team ready to stoke the fires and soak up the sellers.

Given that the Fed has limited options now that short term interest rates are already close to zero, I am thinking the fed probably will want to keep the little ammunition that they have left. What the Fed should have done late last year or early this year when the economy was clearly in better shape was to raise interest rates ever so slightly. This would have given the Fed some room to ease policy. At the moment the Fed is a turbo charged political entity that is walking on egg shells. I can assume that if the Fed raised interest rates and the economy sank, they would have been blamed for the economy sinking. Again, its the job of the Fed to be completely independent and be indifferent to politics. The Fed is now rendered impotent to their own policies. Taking any additional stimulus measures would make the Fed lose whatever credibility that they have because it would signal a loss in confidence in its most recent forecasts. Wasn't a week ago that Bernanke sounded optimistic about the economy spurring markets? It was also three weeks ago that Bernanke during his semi annual report to Congress that the Fed is "not prepared to take any specific steps in the near term particularly since we're still also evaluating the recovery and the strength of the recovery."

What ever the policy actions we get today will be just noise. The market has already rallied. The economy is weak and the Fed is limited in what they can do, all of this leads me to believe we get a significant sell off if the Fed does nothing and a smaller sell off if they in fact start a Treasury buying program.

Central Planning Or Capitalism?

2010-08-09T14:13:00.001-04:00

My blog most probably shuts down after this post as there will be too much light shed on cockroaches.

Per Wikipedia

Capitalism:

Is an economic system in which the means of production are privately owned, supply, demand, price, distribution, and investments are determined mainly by private decisions in the free market, rather than by the state through central economic planning or through democratic planning, profit is distributed to owners who invest in businesses, and wages are paid to workers employed by businesses. Capitalism also refers to the process of capital accumulation.

Central Planning:

Refers to any directing or planning of economic activity by the state, in an attempt to achieve specific economic or social outcomes. Planning is an economic mechanism for resource allocation and decision-making in contrast with the market mechanism. Most economies are mixed economies, incorporating elements of market mechanisms and planning for distributing inputs and outputs. An economy primarily based on centralized planning is a planned economy, where resource allocation and quantity of goods to be produced is determined by a comprehensive plan of production specifying mandatory output requirements.

Now what kind of system do you think the United States Of America currently has and has had for the last 100 years?

If you guessed Capitalism, please go and hang yourself while watching Big Brother on TV.

Does anyone think that the energy and defense industries would exist today if the Federal Government wasn't extending subsidies?

Does anyone think we would have a banking system if it wasn't for Treasury or the Fed?

The whole idea of the Federal Reserve Board is 100% Central Planning! What we have is a plutocracy on steroids.

We need to bury this idea of Free Market Capitalism. We have never had free markets and its a long way from what capitalism really is. Its just another way for big business and kleptocrats to keep stealing money from the rest of us.

More Nikkei Redux & Lack Of Savings

2010-08-09T12:31:00.002-04:00

Chris Rock Once said that there was "NO SEX IN THE CHAMPAGNE ROOM".

http://www.youtube.com/watch?v=HBdVpNc9BZ0

It seems that the Federal Reserve Board seems to not agree with Mr. Rock. Sex in the champagne infers that someones is going to get lucky. It infers that we want to bring back the go-go halcyon days of yesteryear. It also infers that we can just throw more money at the problem hoping to ignite inflation. It didn't work in Japan over the last 20 years and it will be a fabulous disaster here. I have said since day one that you cant fix a debt and leverage problem with more debt and leverage. The Japanese tried and failed on a consumer level. It obviously made many in the financial sector more wealthy, just like it had done here. This in the end is really the plan for the Fed as well as Treasury. Re inflate asset bubbles so that the uber wealthy can sleep at night. If the uber wealthy are feeling comfortable, they who own all of the corporations will then reinvigorate the economy via jobs. This is the grand plan from the onset of the economic crisis. Congress along with the administration has done everything possible to re inflate asset prices. For that they have been very successful. The financial economy has not only stabilized but is in a secular bull market following the lead of ZIRP and an never ending wave of QE. This lifts the fortunes of the wealthy class but kills everyone else.

The elite have most of their net worth invested in the stock market, thus its all paper net worth. When Wall Street was going out of business following the days of Lehman and AIG's demise, Congress which is mostly made up of wealthy citizens sprung into action. The sky is falling. The end of the world is here. We have to save the system for everyone is all we heard. This is a blatant lie. The rich are truly different. They have more money than the rest of society. This is how they think. They don't think in how much money they have, but how much money they have lost. They simply don't look at it like - I have 50MM. No, its more like - I just lost 100MM! HELP! When Wall Street gets bailed out, its we saved the system. We did it for everyone in America. If the inner city ever gets bailed out, its welfare economics. If the middle class gets a bone thrown at them, its socialism. You can see this so vividly in regards to the Bush tax cuts. You have to make permanent the tax cuts because its for the good of the country and the economy. Everyone will be hurt if Bill Gates, Jamie Dimon, Lloyd Blankfein, and Warren Buffet have to pay a measly 3% more. The wealthy along with the MSM has the country living in delusion and denial. We would never have this discussion if the tax cuts were just for the middle class. Congress would just let the cuts expire because we can't talk about extending tax cuts for the middle class when the deficit is so out of control. Its infuriating but this is life in America.

Nikkie Redux Wont Work.

The Bank Of Japan started Quantitative Easing in March 2001. This was an attempt to stem deflationary pressures and try to re inflate prices, for all practical purposes it was an attempt to get animal spirits back into the NIKKEI. For all intensive purposes it didn't work, but for practical purposes it did as it did stabilize the Japanese economy enough for the BOJ to sell more Yen denominated debt. To me that was the intended purpose. The BOJ knew the economy was awful. The economy coming off the dot com implosion never recovered form the late 80's euphoria. The Kobe Earthquake didnt help either. The Japanese economy was about to keel over. They couldn't just watch the zombie die after all they had kept the zombie banking system alive for over 11 years. QE just reinvigorated the Zombie, the Nikkei rallied for a few months and then promptly collapsed over the summer and into the fall. This has been the recipe the last 20 years in Japan. All this has accomplished is a massive liquidity trap living in a fiscal nightmare. It was never a demand issue in Japan, it was too much leverage and bad loans. The corporate/private sector needed to deleverage, not take on more debts. No matter how low rates got, it never stimulated the economy. Japan was experiencing a balance sheet recession, where ZIRP and traditional monetary polices are useless. The US is also experiencing a balance sheet recession, but its more of a consumer leverage issue. No matter how low rates go, consumers are digging themselves out of debt not taking on more. Low rates have stimulated the financial sector (wealthy) as its Christmas Day every day. Borrow at zero and invest at 3%. You don't need to be a genius to do this trade.

http://tradersutra.blogspot.com/2010/08/bizarro-market-nikkei-redux.html

The BOJ is not stupid, in fact they are crazy like a fox. Japan's fiscal situation is dire, its been dire for almost 15 years. Japan has a demographic problem that for the average person would seem catastrophic. They have a serious problem with their retired citizens. As people get older, they save less and demand more social services. Couple this with the fact that the fertility rate in Japan is one of the worst on Earth. Population shrinkage is a major theme. How are you going to pay for all of the retired and aging? Where is the incremental spending going to come from? Japan was able to finance their debt explosion via exports and a huge household savings rate all through out the last 20 years. To this day they have a comfortable trade balance. Japan's auto companies and consumer electronics are still churning out products even with the Yen appreciating, but the savings rate is almost at zero and with the Yen gaining, exports are poised to drop. We haven't even gotten into where the global economy is going. Who is going to buy products from Japan irregardless of its own fiscal difficulties? But Japan will trudge along, issuing more JGB's. The Nikkei will rally 20-30 even 40% on any given quarter getting investors excited. This is is what ZIRP and QE do at the end of the day. Just delay the inevitable. Japan simply doesn't have the horses going out into the future, but if you can dress up the dead horse on its way to the glue factory maybe it buys them time. It's like the Titanic when it struck the iceberg, it had some finite time frame before it sank. Having all of the deck hands out shoveling sea water is not going to help you as that only buys you minutes. Japan has been buying minutes for 20 years. How much do they have left?

Ben Bernanke and Tim Geithner seem to be following Japan's lead. Lets just do more QE while keeping the official ZIRP. This will make sure the banks get recapitalized. The banks will recapitalize but the bad debts and loans will still be in the system. These loans need to be properly priced and in many instances written off. Our banks are no different than their Japanese counterparts and are zombie institutions more or less.

The scary thing here for the US, is that unlike Japan, we are not an export economy. Even as we have murdered the dollar since the Fed was established, exports keep going down. We currently have a $350B trade deficit. Japan on the other hand today has a $50B surplus. We don't have the savings level to bleed back into our economy. Our auto companies are losing tens of billions of dollars and we don't manufacture consumer electronics like the Japanese.

The following Youtube clip is vey scary, even though I don't agree with the hyperinflation thesis. Not yet anyway.

The lack of savings in the US is troubling. Why would people care? Countries with high savings rates tend to have strong economies and great stock markets, since there is plenty of excess cash available to pour into investments. Those with low savings rates suffer from weak economies and poor stock markets, because of a shortage of available capital. When the US savings dropped below zero this past decade that was a warning sign that their was no more petrol left. The Nikkei has dropped from near 39,000 to 9500 since 1990, its not by accident that the savings rate as also dropped from 16% to almost 2%. There is simply not enough gas to propel stock prices higher. In the states there has been some 16 straight weeks of money pouring out of stock equity funds, but stocks keep going higher for many reasons (HFT, QE, ZIRP).

You cant expect a bull market to develop when savings rates are collapsing.