Friday, August 27, 2010


Say it with me!



This is the current market structure and dynamic.

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

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

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.

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.

Tuesday, August 24, 2010

Europe's Long Summer Gets Longer

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

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.

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.

Monday, August 23, 2010

HAMP & The Financial Sector Are WIDE RIGHT.

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.

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

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.

Sunday, August 22, 2010


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

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.

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.

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.

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

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

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?

Friday, August 20, 2010

Keynesian End Game – Fooled By Stimulus.

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.
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:
-American Recovery/Reinvestment Act
-Cash For Clunkers

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?

This is why!

REFI BOOM|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.

Thursday, August 19, 2010

Channeling Mr. T

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..... 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.

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.

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.

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

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.

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.


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

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.

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

Wednesday, August 18, 2010

Housing and Jobs Are The Key

....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.

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.

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

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

I have posted before on the deleveraging theme.

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?

Wednesday, August 11, 2010

So Much For All That!

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.

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.....

At least they are honest.

Bloomberg is running this story this morning.

"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?

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?

Tuesday, August 10, 2010

They Say Technicals Don't Matter?

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

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.

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

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.