Friday, September 4, 2009

Headed for Fiscal Crisis

from the Committee For A Responsible Federal Budget Project:

This situation is economically impossible; at some point, U.S. debt would reach a level so high that creditors would stop lending us money. The question, though, is how the situation will be resolved. Will politicians confront the policy choices or delay them to the point where they will be forced upon us due to a fiscal crisis? The longer we wait to take on these issues, the worse they will get and the more painful it will be to change course.
US Budget Watch has constructed its own “current policy” baseline by assuming select policies do not conform to current law (see for details).2 Over the next decade, keeping certain policies in place would result in roughly $3 trillion less in revenues than is scheduled under law and close to $2.5 trillion more in spending, including interest. Complying with current policies without offsetting the costs would result in drastically larger deficits between 2010 and 2019 and would cause the ten-year deficit total to grow from an already dangerously high $7.1 trillion to $12.6 trillion. Debt held by the public would rise to over 90 percent of GDP by 2019, as opposed to 68 percent without those changes.

With public debt accumulating on a compounding basis, extending current policies would create an even more dire long-run picture. CBO’s Alternative Fiscal Scenario, which generally assumes current policy (although it has not been updated to reflect CBO’s latest economic and technical assumptions), projects deficits will rise to 10 percent of GDP by 2027 (rather than 3.6 percent under current law), exceed 20 percent by 2045 (as opposed to 7 percent), and reach 42 percent by 2080 (rather than 18 percent).

Though not technically “current law,” the CBO baseline makes assumptions regarding the growth of discretionary spending that are probably unrealistically low. As a matter of convention, CBO assumes that discretionary spending (including supplemental spending for overseas operations) will grow roughly with inflation. In reality, the discretionary spending level is set annually by Congress, and absent any caps it can grow at any rate. Historically, the growth rate has been much higher than inflation— often closer to the pace of GDP growth.

At the same time, the cost of continuing the current policy of annually increasing discretionary spending is quite high. If regular discretionary spending is allowed to grow with GDP as opposed to inflation, it would add $1.7 trillion to the deficit over the next ten years (excluding interest). Even after assuming a gradual phase-down in spending for the war in Iraq, discretionary spending would still be $1 trillion higher than in CBO’s baseline.
The mounting debt under such a scenario would likely crowd out private investment to a significant degree, resulting in stunted economic growth. At the same time, it would ensure that government interest payments would consume a large and rising share of the budget, leaving little room for anything else. And, at some point, our rising debt would make continued borrowing prohibitive, as our lenders and investors cease their large-scale purchasing of U.S. Treasury bonds. If it came to this, the result would likely be a serious fiscal and economic crisis, followed by steep and perhaps crippling tax increases and spending cuts.

Unemployment Under Obama

Dollar Devastated Following Jobs Report

Dollar Decline in History

Only Wall Street Would See Unemployment Blood in the Streets As a Good Sign!

Creamed Corn

All the grains have collapsed today, despite a much weaker Dollar. Crop-supportive good weather continues to abound.

Arlan Suderman tweeted:
Big private production estimates removed need for pre-holiday short-covering today. Traders figure crops could afford to lose bushels.

Unemployment Rises to 9.7%!

WASHINGTON (MarketWatch) - The U.S. unemployment rate jumped to a 26-year high of 9.7% in August as nonfarm payrolls fell by 216,000, the 20th consecutive monthly decline, the Labor Department estimated Friday.
U.S. payrolls have dropped by 6.9 million to 131.2 million since the recession began in December 2007, the government data showed. Unemployment has increased by 7.4 million during the recession to 14.9 million.
The 216,000 decline in payrolls was close to market expectations of a 233,000 drop, but the unemployment rate rose higher than the 9.5% level expected. The unemployment rate was 9.4% in July.
It was the smallest decline in payrolls since August 2008.
Payroll losses have moderated in most industries in the past two months. Payrolls declined an upwardly revised 276,000 in July. In June and July, payroll losses were revised up by 49,000.
Details of the report were generally weak. Payrolls fell in most sectors of the economy except for health care. Total hours worked in the economy fell by 0.3%. Long-term unemployment worsened, and the number of people working part-time who want full-time work rose by 278,000 to 9.1 million.
An alternative measure of unemployment that includes discouraged workers and those forced to work part-time rose to 16.8% from 16.3%, the highest on record dating back to 1995.
Average hourly earnings rose 6 cents, or 0.3%, to $18.65 an hour. In the past year, average hourly earnings are up 2.6%.

Thursday, September 3, 2009

New 2009 Record Low for Wheat

Grains are very bearish, but I'm still buying because eventually, bad weather is going to cause prices to rocket higher. So far, the crop is looking good for 2009 for all three of the major grains. Last year we had an Indian summer too, and it helped keep prices low.

Natural Gas Continues Freefall

This is beginning to feel heavily oversold to me, especially with cold winter months just ahead.
Link to natural gas daily.

Grains Continue Recent Weakness

Good weather and stock malaise are keeping grains weak across the board.

Gold Continues Rapid Rise Toward $1,000/oz.

Note the rising wedge and the break-out!

Apparently China is pushing the idea of buying gold and silver for investment purposes to the general population in the way that Western television sells soap powder.  If 1.3 billion Chinese citizens start buying gold and silver, even in tiny quantities, imagine what that will do to the market!
The report notes that China's Central Television, the main state-owned television company, has run a news programme letting the public know how easy it is to buy precious metals as an investment.  On silver investment the announcer is quoted as saying " China has introduced its first ever investment opportunity for silver bullion. The bars are available in 500g, 1kg, 2kg and 5kg with a purity of 99.9%. Figures show that gold was fifty times more expensive than silver in 2007, but now that figure has reached over seventy times. Analysts say that silver has been undervalued in recent years. They add that the metal is the right investment for individual investors and could be a good way to cash in."
What appears to have happened in China is a total relaxation of strictures on holding precious metals by the individual with the government pushing gold and silver as an investment option, seemingly at every opportunity.  This is a far cry from the situation only a few years ago where the distribution of gold and silver was strictly controlled.  Now, the Thunder Road Report notes that every bank will sell gold and silver bullion bars in four different sizes to individuals and gold related investments are said to be soaring in popularity.

Wednesday, September 2, 2009

Tuesday, September 1, 2009

Sinking Stocks

New Natural Gas Low

With the collapse of equity markets today, natural gas has plunged to a fresh 2009 low price. Amazing!

Crude Crash

Stock Rocket Fizzles

Grains tumble again!

This genuinely surprised me!

How the Monetary Shell Game Works

from the Chris Martenson blog:

Executive Summary

  • The Federal Reserve and the federal government are attempting to "plug the gap" caused by a slowdown of private credit/debt creation.
  • Non-US demand for the dollar must remain high, or the dollar will fall.
  • Demand for US assets is in negative territory for 2009
  • The TIC report and Federal Reserve Custody Account are reviewed and compared
  • The Federal Reserve has effectively been monetizing US government debt by cleverly enabling foreign central banks to swap their Agency debt for Treasury debt.
  • The shell game that the Fed is currently playing obscures the fact that money is being printed out of thin air and used to buy US government debt.
The Federal Reserve is monetizing US Treasury debt and is doing so openly, both through its $300 billion commitment to buy Treasuries and by engaging in a sleight of hand maneuver that would make a street hustler from Brooklyn blush.
This report will wade through some technical details in order to illuminate a complicated issue, but you should take the time to learn about this because it is essential to understanding what the future may hold.
One of the most important questions of the day concerns how the dollar will fare in the coming months and years. If you are working for a wage, it is essential to know whether you should save or spend that money.  If you have assets to protect, where you place those monies is vitally important and could make the difference between a relatively pleasant future and a difficult one.  If you have any interest at all in where interest rates are headed, you'll want to understand this story.
There are three major tripwires strung across our landscape, any of which could rather suddenly change the game, if triggered.  One is a sudden rush into material goods and commodities, that might occur if (or when) the truly wealthy ever catch on that paper wealth is a doomed concept.  A second would occur if (or when) the largest and most dangerous bubble of them all, government debt, finally bursts.  And the third concerns the dollar itself.
In this report, we will explore the relationship between those last two tripwires, government debt and the dollar.

Replacing private credit with public credit

Our entire monetary system, and by extension our economy, is a Ponzi economy in the sense that it really only operates well when in expansion mode.  Even a slight regression triggers massive panics and disruptions that seem wholly inconsistent with the relative change, unless one understands that expansion is more or less a requirement of our type of monetary and economic system.  Without expansion, the system first labors and then destroys wealth far our of proportion to the decline itself.
What fuels expansion in a debt-based money system?  Why, new debt (or credit), of course!   So one of the things we keep a very close eye on over here at Martenson Central, as they do at the Federal Reserve, is the rate of debt creation.
One of the big themes in the current credit bubble collapse is the extent to which private credit has been collapsing and the corresponding degree to which the Federal Reserve has been purchasing debt and the federal government has stepped up its borrowing.  In essence, public debt purchases and new borrowing has attempted to plug the gap left by a shortfall in private debt purchases and borrowing.
That's the scheme right now - the Federal Reserve is creating new money out of thin air to buy debt, while the US government is creating new debt at the most fantastic pace ever seen.  The attempt here is to keep aggregate debt growing fast enough to prevent the system from completely seizing up.
How are they doing?

The debt gap

One of the great perks of living in a relatively open society is that we generally get access to pretty good information. The Federal Reserve routinely publishes a document called "Monetary Trends," where they collapse all their points of interest into a nice, tidy collection, and then make it available for all to see.
Here's what caught my eye in the most recent one:

What we see here is federal debt (bottom chart) exploding at a nearly 30% yr/yr rate of change in response to a collapse in corporate and consumer borrowing (top charts).
This raises a most interesting question:  "Who is lending the money to accommodate all that federal borrowing?"
Here's where the story gets interesting.

Treasury International Capital (TIC) flows

Lately, a number of observers have made note of a troubling decline in foreign demand for US paper assets, notably bonds.  Worse, it's even turned into outright selling which will ultimately translate into dollar weakness.
The relative demand for the dollar "out there" in the international Foreign Exchange (or "Forex") market directly impacts the dollar's strength.  If there are more sellers then its value will fall; if there are more buyers, then its value will rise.  One way to assess this delicate balance is to ask, "In total, are foreigners buying or selling US assets and what are they doing with those proceeds?"
Luckily for us, the exact answer to this very question is released in a monthly report put out by the Treasury Department, called the Treasury International Capital Flows report, or TIC report for short.
The recent TIC reports have been quite alarming, because they not only reveal the most sudden deceleration in flows in history, but also that they have been negative for some time now. This chart is from the Federal Reserve:

What we see here is that from the early 1990's onward until 2007, foreigners bought progressively more and more US assets and did so by bringing their money to the US and leaving it there.  It is only over the past seven months, out of decades, where that process has reversed and become negative.  This is a significant event, to say the least.
On the surface, the above chart hints at a potential disaster for a country that is embarking on the largest-ever federal debt binge in history.
After all, if US assets are being shunned by foreigners, how will we find enough buyers? And what will happen to the dollar?
The answers are:  "We won't" and "Nothing good."

Digging in

If we dig into deeper into the detail of the report, we find something even more interesting. While the overall flows have been negative, there is an enormous difference between the behaviors of foreign central banks and private investors.  Fortunately the TIC report distinguishes between these two broad classes of buyers.
Since the start of 2009 and continuing through the month of May, private investors sold $364 billion dollars worth of US assets, while central banks purchased  $50 billion dollars worth (source is a .csv file available here from the Treasury).  Added up, some $314 billion dollars of foreign money has left the country since the start of the year.
What this demonstrates is the utter reliance of the entire house of cards upon the continued purchase of US financial assets by foreign central banks. Without the continued cooperation of the foreign central banks in accumulating US assets, suffice it to say that the dollar will fall a lot lower than it already has.

The dollar

Not surprisingly, the dollar recently put in a new closing low for the year (YTD 2009) and is approaching a major area of support and resistance. If it breaks through, we could be looking at a rapid game-changer here.

Of course, I've said all this before, and every time we seem to get close, there's been an upside surprise in store.  The forces aligned to prevent a dollar collapse are numerous.
But the same risk remains, and the fundamental picture concerning the dollar has not changed since I first became wary of its fortunes in 2002.  In fact, it's grown worse.  Federal deficits are higher than I ever imagined possible (13% of GDP!), and now the TIC flows are negative.  The only somewhat bright(er) spot is that the trade deficit has shrunk quite a bit.  However, it, too, remains solidly in negative territory, meaning it continues to apply pressure to the value of the dollar by increasing the total number of dollars that need to find a quiet resting place outside of the country.

Treasury auctions

During this past business week (July 27th - 31st, 2009), the US Treasury auctioned off more than $243 billion worth of various Treasury bills and bonds. "Indirect bidders," assumed to be mainly central banks, took an astonishing 39% of the total, or nearly $95 billion worth.

With the exception of the 5-year auction, which mysteriously stank up the joint with a worrisome bid-to-cover ratio well below 2.0 (the bond market behaved poorly upon the release of that news item), the story here is that foreign central banks are buying up vast quantities of Treasury offerings.
Wait a minute, hold on there…I thought we just talked about how the TIC report said that foreign central banks have only bought $50 billion in total US paper assets through May - and now they are said to be buying $95 billion during a single week in July alone?
Something is not adding up here.
To understand what, and to get to the essence of the shell game, we need to visit one more source of information - something called the Federal Reserve Custody Account.

The Federal Reserve Custody Account

It turns out that when China's central bank (or any other foreign central bank) decides to buy either US agency or Treasury bonds, they do not walk up to some window somewhere, hand over a pile of cash, and then take some nice looking bonds home with them in a suitcase.
Instead, what happens is that the Federal Reserve actually holds the bonds (or rather an electronic entry representing the bonds) in a special account for these various central banks.  This is called the "Custody Account" and it holds US debt 'in custody' for various central banks. Think of it as a magnificently vast brokerage/checking account, run by the Federal Reserve for central banks, and you'll have the right image.
Although the TIC report shows flows of capital into and out of the country, it does not show you what is going on with those funds that are already in the country.  If you look again at the first chart in this report, and behold the vast flows of money that came into the US between 1995 and 2008, you can get a sense of how much money got sent to the US and mostly remains parked there.
The custody account currently stands at $2.787 trillion (with a "t") dollars.  It has increased by over $430 billion the past 12 months and by more than $275 billion in 2009 alone (through July 29).  These are truly shocking numbers, and they tell us that foreign central banks have been accumulating US debt instruments throughout the crisis.
As we can see in the chart below, there has been absolutely no deflection in the growth of the custody account as a consequence of the financial crisis, bottoming trade, or the local needs of the countries involved.  It's almost as if the custody account is completely disconnected from the world around it.  If you can spot the credit bubble crisis on this chart, you have sharper eyes than me.

What does such a chart imply?  We might wonder what sorts of distortions are created by having such a massive monetary spigot aimed from several central banks towards a single country.  We also might question just how sustainable such an arrangement really is.  It is a complete mystery how such a chart can display nary a wiggle, despite all that has recently transpired.
This next table showing the yearly changes in the custody account actually surprises me quite a bit.

Despite everything that's been going on, the custody account is on track to grow by the largest dollar amount on record this year, nearly $500 billion dollars (if the current pace continues).  Where is all this money coming from and for how much longer?

Understanding the gap between the TIC and the Custody numbers

One thing you might have noticed is that the TIC report only shows $50 billion in foreign bank inflows for 2009, while the custody account grew by $277 billion.
How is it possible for the TIC report to show smaller inflows than growth in the custody account?  We can see that clearly in this table, which compares the two.  (Note: These are 12 monthly yr/yr changes, so the numbers will be different than the YTD numbers I just cited):

One explanation is that the custody account, at some $2.7 trillion dollars, is accumulating a lot of interest. If those interest payments are not "sent home" and remain in the account, then the account will grow by enough to more or less explain the difference. For example, the $135 billion difference shown above could be generated by a 5% return to the custody account, which is not an unthinkable rate of interest for that account.

International check kiting

Some people view the custody account as nothing more than an elaborate version of check kiting, played at the central banking level.
Check kiting
An illegal scheme whereby a false line of credit is established by the exchanging of worthless checks between two banks. For instance, a "check kiter" might have empty checking accounts at two different banks, A and B. The kiter writes a check for $50,000 on the Bank A account and deposits it in the Bank B account. If the kiter has good credit at Bank B, he will be able to draw funds against the deposited check before it clears, i.e., is forwarded to Bank A for payment and paid by Bank A. Since the clearing process usually takes a few days, the kiter can use the $50,000 for a few days, and then deposit it in the Bank A account before the $50,000 check drawn on that account clears.

In this game, Central Bank A prints up a bunch of money and buys the debt of Country B. Then the central bank of Country B prints up a bunch of money and buys the debt of Country A.
Both enjoy the appearance of strong demand for their debt, both governments get money to use, and nobody is the wiser.  Except that the world's total stock of central bank reserves keep on growing and growing and growing, as reflected in the custody account, which will someday result in thoroughly unserviceable amounts of debt, an unmanageable flood of money, or both.
If this strikes you as a scam, congratulations; you get it.
If that was all there was to the story, then it would be far less interesting than it actually is. When we dig into the custody account data, we find that the total picture is hiding something quite extraordinary. Even as the total custody account has been growing steadily and faithfully, the composition of that account has been changing dramatically.

Here we note that agency bonds peaked in October of 2008 at nearly a trillion dollars but have declined by $178 billion since then.  Treasuries, on the other hand, have increased by over $500 billion over that same span of time.  A half a trillion dollars!  If you were wondering how the US bond auctions have managed to go so smoothly, here's part of your answer.
What is going on here?  How is it possible that central banks are buying so many Treasury bonds, at the fastest rate of accumulation on record?
It would appear that foreign central banks have been swapping agency bonds for Treasury bonds, but that's not how the markets work.  First, they would have to sell those bonds, before they could use the proceeds to buy government debt. So to whom did they sell those Agency bonds in order to afford the Treasury bonds?
Here we might recall that the Federal Reserve has been buying agency bonds by the hundreds of billions.

The shell game

Have you ever seen a sidewalk magician run the shell game, where a pea under a shell is magically shuffled around - now you see it under this shell, now you see it under that shell, now it disappears completely - or does it?  The more it moves around, the more confused you get.  If you can only figure out which shell the pea is hidden under, you win!   But where is the pea?  The point of the game, from the perspective of the street hustler, is to use complexity of motion to confuse the mark.
These are the three critical points to remember as you read further:
  1. The US government has record amounts of Treasuries to sell.
  2. Foreign central banks, which have a big pile of agency bonds in their custody account, would like to help but want to keep things somewhat under the radar to avoid scaring the debt markets.
  3. The Federal Reserve does not want to be seen directly buying US government debt at auctions (and in fact is not permitted to, but many rules have been 'bent' worse during this crisis), because that could upset the whole illusion that there is unlimited demand for US government paper, but it also desperately wants to avoid a failed auction.
For various reasons, the Federal Reserve cannot just up and start buying all the Treasury paper that becomes available in record amounts, week after week, month after month.
Instead, it uses this three-step shell game to hide what it is doing under a layer of complexity:
Shell #1:  Foreign central banks sell agency debt out of the custody account.
Shell #2:  The Federal Reserve buys those agency bonds with money created out of thin air.
Shell #3:  Foreign central banks use that very same money to buy Treasuries at the next government auction.

Shuffle, shuffle, shuffle, shuffle, shuffle, SHUFFLE, shuffle! Confused yet?
Don't be.  If we remove the extraneous motion from this strange act, we find that the Federal Reserve is effectively buying government debt at auction.  This is exactly, precisely what Zimbabwe did, but with one more step involved, introducing just enough complexity to keep the entire game mostly, but not completely, hidden from sight.  They can scramble the shells all they want, but the pea is still there somewhere - the pea being the fact that the Fed is creating money to fund the purchase of US debt.

At the time, the Federal Reserve program to purchase agency bonds was described like this:
Fed to Pump $1.2 Trillion Into Markets
Greatly Expanded Purchases Are Designed to Lower Interest Rates, Stimulate Borrowing
The Federal Reserve yesterday escalated its massive campaign to stabilize the economy, saying it would flood the financial system with an additional $1.2 trillion.
In its statement yesterday, the Fed said it will increase its purchases of mortgage-backed securities by $750 billion, on top of $500 billion previously announced, and double, to $200 billion, its purchases of [Agency] debt in housing-finance firms such as Fannie Mae and Freddie Mac.
While "stimulating borrowing," "stabilizing the economy," and "lowering interest rates" are laudable goals, the primary goal of the program seems to have been something else entirely - to assure plentiful funds for the massive US Treasury auctions coming due.  I saw nothing in any article I read about this program that even suggested that one of the goals was to allow foreign central banks to effectively swap their agency debt for US government debt using money printed from thin air.  But that's clearly one of the outcomes.
The Federal Reserve, for its part, has been quite open about these purchases of Agency debt. It even provides an excellent website with nice graphics, allowing us to track the purchase program.

However, this openness only extends to the amounts themselves, not the source(s) of those Agency bonds.  This is, in my mind, yet another reason the Fed desperately wishes to avoid an audit. The results would expose the game for what it is.
As we can see in the above chart, the Fed has purchased more than $640 billion of Agency bonds, and has promised to buy more in the near future.
As we now know, at least some of that money has been recycled into US government debt, where "indirect bidders" have been snapping up an unusually high proportion of the recent offerings.  (Note: The way Indirect bidders  are calculated has recently changed, and I am not entirely clear on how much this influences the numbers we now see….I'm working on it).
A fair question to ask here is, "If there are green shoots everywhere and the stock market is racing off to new yearly highs, why is the Fed continuing to pump money into the system at these mind-boggling rates?"  One answer could be, "Because things might not be as rosy as they seem."


The Federal Reserve has effectively been monetizing far more US government debt than has openly been revealed, by cleverly enabling foreign central banks to swap their agency debt for Treasury debt.  This is not a sign of strength and reveals a pattern of trading temporary relief for future difficulties.
This is very nearly the same path that Zimbabwe took, resulting in the complete abandonment of the Zimbabwe dollar as a unit of currency.  The difference is in the complexity of the game being played, not the substance of the actions themselves.
When the full scope of this program is more widely recognized, ever more pressure will fall upon the dollar, as more and more private investors shun the dollar and all dollar-denominated instruments as stores of value and wealth. This will further burden the efforts of the various central banks around the world as they endeavor to meet the vast borrowing desires of the US government.
One possible result of the abandonment of these efforts is a wholesale flight out of the dollar and into other assets.  To US residents, this will be experienced as rapidly rising import costs and increasing costs for all internationally-traded basic commodities, especially food items.  For the rest of the world, the results will range from discomforting to disastrous, depending on their degree of dollar linkage.
Under these circumstances, "inflation vs. deflation" is not the right frame of reference for understanding the potential impacts.  For example, it would be possible for most of the world to experience falling prices, even as the US experiences rapidly rising prices (and hikes in interest rates) as a consequence of a falling dollar.  Is this inflation or deflation?  Both, or neither?  Instead, we might properly view it as a currency crisis, with prices along for the ride.
Further, all efforts to supplant private debt creation with public debts should be met with skepticism, because gigantic programs are no substitute for the collective decisions of tens of millions of individuals and cannot realistically meet millions of individual needs in a timely or appropriate manner.
The shell game that the Fed is currently playing does not change the basic equation: Money is being printed out of thin air so that it can be used to buy US government debt.
My advice is to keep these potential issues and insights in sharp focus, make what moves you can to diversify out of dollars, and be ready to move rapidly with the rest.  This game is far from over.

Your faithful information scout,
Chris Martenson
Original article.

Demand for Dollar Assets Plunging!

It's a Stock Rocket

Equities have rocketed higher out of the starting gate. This is such a common occurrence that I have begun to wonder if the Fed or other government agency is manipulating the market. I have read several stories over the past few weeks that suggest that this is probably happening. The government is attempting to manufacture prosperity, but it will only lead to monster manias and bursting bubbles.

Macro Hedge Fund Betting Against Recovery; A Ski-Jump Recession

from Bloomberg:
Sept. 1 (Bloomberg) -- Paul Tudor Jones, the billionaire hedge-fund manager who outperformed peers last year, is wagering that Goldman Sachs Group Inc. and Morgan Stanley got it wrong in declaring the start of an economic recovery.
Jones’s Tudor Investment Corp., Clarium Capital Management LLC and Horseman Capital Management Ltd. are taking a bearish stand as U.S. stock and bond prices rise, saying that record government spending may be forestalling another slowdown and market selloff. The firms oversee a combined $15 billion in so- called macro funds, which seek to profit from economic trends by trading stocks, bonds, currencies and commodities.
“If we have a recovery at all, it isn’t sustainable,” Kevin Harrington, managing director at Clarium, said in an interview at the firm’s New York offices. “This is more likely a ski-jump recession, with short-term stimulus creating a bump that will ultimately lead to a more precipitous decline later.”
Equity and credit markets have rallied on hopes that government intervention is pulling the U.S. out of the deepest economic slump since the Great Depression. The Standard & Poor’s 500 Index jumped 51 percent from its 12-year low in March through yesterday.
The economy will expand at an annualized rate of 2 percent or more in four straight quarters through June 2010, the first such streak in more than four years, according to the median estimate of at least 53 forecasters in a Bloomberg survey.
Tudor, the Greenwich, Connecticut-based firm started by Jones in the early 1980s, told clients in an Aug. 3 letter that the stock market’s climb was a “bear-market rally.” Weak growth in household income was among the reasons to be dubious about the rebound’s chances of survival, Tudor said.
Yields Drop
Yields on corporate bonds relative to U.S. Treasury benchmarks have sunk to levels unseen since before the collapse of Lehman Brothers Holdings Inc. in September, a positive sign for credit markets. Spreads on junk bonds fell in July to within 10 percentage points of Treasuries, lifting them out of the distressed category for the first time in almost a year.
“We think the recession is ending right now,” Abby Joseph Cohen, senior investment strategist at Goldman Sachs, said in a Bloomberg Radio interview Aug. 17. The New York-based bank forecasts 2 percent growth in U.S. gross domestic product in 2010.
Economists at New York-based Morgan Stanley in the past month have incrementally raised their GDP growth estimate for the current quarter to 4.8 percent annualized from 3.5 percent.
President Barack Obama said a decline in July’s unemployment rate signaled “the worst may be behind us.” GDP shrank 6.4 percent in the first quarter and 1 percent in the second, after a 4 percent contraction in the second half of 2008.
Different Jobless Rate
A focus on misleading indicators is driving markets, macro managers say.
Clarium watches the unemployment rate that accounts for discouraged job applicants and those working part-time because they can’t find full-time positions, Harrington said. July joblessness with those adjustments was 16 percent, according to the Department of Labor, rather than the more widely reported 9.4 percent.
The housing data isn’t as rosy as some see it, Harrington said. As existing U.S. home sales rose 7.2 percent in July from the previous month, distressed deals including foreclosures accounted for 31 percent of transactions, according to the National Association of Realtors, a Chicago-based trade group.
A report by the Mortgage Bankers Association, based in Washington, showed the share of home loans with one or more payments overdue rose to a seasonally adjusted 9.24 percent in the second quarter, an all-time high.
Loaded for Bear
Clarium, which oversees about $2 billion, is positioned for an equity bear market through investments in the U.S. dollar, Harrington said. Falling stock prices will strengthen the currency by forcing leveraged investors to sell equities to pay down the dollar-denominated debt they used to finance those trades, he said.
High unemployment, lower wages and potential missteps by policymakers around the globe may stifle economic growth in 2010, Tudor said. The firm, which manages $10.8 billion, is at odds with 55 economists projecting an average of 2.3 percent growth next year, according to the Bloomberg survey.
Macro managers’ pessimism is fueled in part by the U.S. government’s response to last year’s financial crisis, which they say fails to address the root cause. Banks still hold hard- to-sell assets on their balance sheets, the managers said.
Subdued Credit Growth
“Some critical initiatives have been cut short,” Tudor said. “As a result, toxic assets remain on balance sheets and credit growth is likely to be subdued for a long period.”
Some firms, including Brevan Howard Asset Management LLP, see the recession at its end while dismissing the likelihood of robust growth.
Brevan Howard, Europe’s largest hedge-fund manager with $24 billion in assets, told clients the U.S. could stumble when stimulus spending fades after the current quarter. The London- based firm, whose macro fund gained 20 percent last year, said consumer wealth erosion, scant bank lending and troubled world economies may result in a lackluster recovery.
The U.S. Federal Reserve and other policy makers took unprecedented steps in the past year to stave off financial disaster. The Fed’s Board of Governors used emergency powers to rescue markets for commercial paper, housing bonds and asset- backed securities. The Fed’s balance sheet swelled to $2.08 trillion last week, more than doubling from a year earlier.
Accounting Effect
The Financial Accounting Standards Board voted in April to relax fair-value accounting rules. The change to mark-to-market accounting allowed companies to use “significant” judgment in gauging prices of some investments on their books, including mortgage-backed securities that plunged with the housing market.
Banks are reporting better earnings because they haven’t been forced to account for their losses yet, Clarium’s Harrington said.
“We haven’t fixed the problem,” he said. “We’ve just slowed down the official recognition of it.”
Hedge funds rose in July for the fifth consecutive month, returning an average of 2.4 percent as stocks advanced, according to data compiled by Hedge Fund Research Inc. Bearish stances prevented some macro funds from joining the rally. The category lagged behind the industry average in July, rising 0.6 percent.
Fund Performance
Clarium, whose assets were mostly in fixed income, dropped 6 percent this year through June. Horseman’s fund slid 16.3 percent. Tudor’s BVI Global Fund Ltd. returned 11 percent.
The funds held up in 2008 amid the industry’s record 19 percent loss. Horseman’s Global Fund USD, which focuses on stocks, made HSBC’s private bank list of top 20 performers by gaining 31 percent. Tudor’s and Clarium’s funds fell 4.5 percent.
Macro managers are examining China for hints on how to place currency and commodities bets. Tudor said the country’s spending spree on raw materials inflated commodity prices and weakened the U.S. dollar.
A government mandate forcing banks to make about $1 trillion in loans during this year’s first half is spurring short-term growth that may not last, according to Clarium. China’s banking regulator drafted capital requirements Aug. 19 that may lead banks to rein in lending.
Horseman, with $4.1 billion under management out of London, was investing in long-term U.S. Treasury bonds. The firm believes interest rates will stay low for longer than the market expects, benefiting the asset class.
“Despite every effort by government in North America and Europe to avoid deflation,” Horseman wrote, “the current numbers suggest they are losing the battle.”

Good Weather + Weak Stocks = Cheap Grains

Grains are weak across the board on sparse volume this morning. Stocks are also modestly weak overnight, but anything could happen at the open just minutes away.

Monday, August 31, 2009

Fed Governor Lets Slip That They ARE Monetizing the Debt!

Steve Liesman with Tim Geithner on June 2: "The Fed is absolutely not monetizing debt" (9 mins, 9 seconds into the clip)

Steve Liesman with Bill Dudley of the New York Fed, "I don't think [the Fed] is monetizing debt to any meaningful degree." (2 mins, 16 seconds into the clip)
At least Steve could could have had the courtesy of telling Bill what the Treasury Secretary said on the topic 3 months prior so the two could have kept the story straight. Either way, this will finally put the semantic debate over monetization to rest.
Bonus material: Dudley admits that the Fed is using excess reserves to buy Treasuries. Bill, duration mismatch is the last thing you will have to worry about come "unwind" time.
"Excess reserves are funding the purchases of Treasuries and Agencies" (3 mins, 10 seconds into the clip)

And there you have it folks. The Fed's pyramid scheme is now confirmed.

Original link.

Similar Story About Staggering Volume Concentrated In Few Stocks

from Zero Hedge blog:
Since the beginning of July, the most prominent feature of the market has been the divergence in volume between financials and "all other" stocks. While overall stock market volume has been flat if not down over the past two months, and a continuation of a long-term downward trend since the March ramp up, the volume in financial stocks has staged an unprecedented pick up.
First, note the volume drift of the SPY since March, the best proxy of overall volume participation via key money managers:

As the chart below demonstrates, five primary names have been responsible for the bulk of the volume in not just financials but across the entire market. The five stocks are Citi, AIG, CIT, Fannie Mae and Freddie Mac.

A summation of the individual volumes since March reveals an unprecedented dominance of the total market volume represented by just these five stocks, hitting nearly 2 billion shares on Friday, August 21.

As a reminder, roughly 6 billion shares trade on average on the NYSE daily, and 10 billion in the domestic markets combined. This means that on Friday, 5 stocks accounted for nearly roughly 30% of the entire NYSE volume, while a stock like AIG traded its entire float in a narrow price range.

The fact that more than the entire float of AIG has traded daily on several occasions, should be a bright red light for the regulators to analyze whether this abnormal activity is due to i) massive forced recalls of stock, forcing indiscriminate short covering, of if ii) a stock trading algorithm has essentially taken over all the trading in financial stocks, and is churning volume for the pure reason of consistently painting the tape, or collecting rebates, while the overall market drifts higher on low volume. Furthermore, if the SEC considers 5 stocks accounting 30% of all NYSE volume as a normal phenomenon, one wonders just what would cause their computerized alerts to actually go off. Well, aside from a market crash, of course, which would prompt the uptick rule to be implemented within minutes of any sudden price drop, as well as the prohibition of shorting of all financial stocks, at least if one tries to determine their pro-cyclical response MO based on empirical evidence. 

Market Manipulation of Staggering Scope

Is it possible that the government is intervening into the financial markets to a degree that has never been before imagined even by the most devoted conspiracy devotee?

by Dr. Brett Steenbarger on Ritholtz blog:

I just wanted to add some color to my recent post regarding why the NYSE TRIN indicator might be broken
Reader Brian adds a very interesting perspective, indicating that he’s watched TRIN and C side by side and has seen a very strong correlation. When C flips from up to down (or vice versa), there is a corresponding huge move in TRIN. This could only be the case if a stock like C comprised a large share of total NYSE volume, which indeed seems to be the case, as noted by The Big Picture blog.
Above I took C, FNM, and FRE and expressed their *composite* volumes (e.g., the volumes transacted across all exchanges) as a fraction of NYSE volume. What we see is that, early in 2007, those three stocks accounted for only 1-3% of NYSE volume. During the financial crisis of late 2008 and again as the market was bottoming in early 2009, that ratio skyrocked to well over 50%.

Recently, however, the volume in these three stocks has hit astronomical levels relative to total NYSE trading, as all three have made phenomenal percentage gains during August. Indeed, the composite volume of these three stocks alone has recently doubled total NYSE volume. If we look at just the NYSE trading of these firms, they are accounting for about 40% of NYSE volume. It is not surprising that Brian would notice TRIN flipping up and down as these stocks change direction.
Again, the question is what all this means. There is no way that mom and pop trader and investor are involved in any meaningful way in generating these kind of daily trading volumes. Nor are proprietary trading shops capable of generating volumes that exceed those of the entire New York Stock Exchange. While I have no doubt that the algorithmic trade close to the market is participating in this movement, the directionality of the involvement suggests that large financial institutions are systematically buying the beaten-up shares of the poster children for TARP: C, FNM, FRE, AIG, and the like.
It is worth noting in this regard that other major (healthy) financial firms, such as GS and JPM, have seen no such surge in their volume or their trading prices.
My best guess? We’re seeing a massive infusion of capital into very troubled financial institutions, no doubt aided by short covering and the participation of program traders and proprietary daytrading firms. Where is the capital coming from? Why has it poured in so suddenly (the really large infusions began in early August)? Why is it coming in at such a pace that it is dominating NYSE volume? Zero Hedge rightly wonders why this hasn’t triggered alarms at the exchange. And why is it happening with only the weakest financial institutions?
If you were the government and you saw that these institutions were on the verge of a major fail, with billions of taxpayer dollars at risk, I’m not sure you’d announce that to the world. Nor, at this point politically, could you ask for yet another bailout package. But you would only pour money into those stocks at a frantic pace (capable of detection) if you perceived a dire need for the capital.
I’m not inclined toward conspiracy theories, but it’s difficult to imagine a scenario in which this is not a (frighteningly necessary) coordinated capital infusion, with taxpayer dollars ultimately at work in financial markets.

Posted by
Brett Steenbarger, Ph.D.
original link

Wheat Drops to New 2009 Low, Then Rebounds

Corn has also recovered, but soybean prices remain under pressure.

Natural Gas Dips Below $3

The natural gas bear market continues. Natural gas is the one form of energy in the United States that is abundant and clean!

Grains Dip to Lows of Recent Ranges

Weakness in global equity markets are pressuring grains this morning too.




Looming Commercial Real Estate Crisis

from WSJ:

Federal Reserve and Treasury officials are scrambling to prevent the commercial-real-estate sector from delivering a roundhouse punch to the U.S. economy just as it struggles to get up off the mat.
Their efforts could be undermined by a surge in foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds. Similar mortgage-backed securities created out of home loans played a big role in undoing that sector and triggering the global economic recession. Now the $700 billion of commercial-mortgage-backed securities outstanding are being tested for the first time by a massive downturn, and the outcome so far hasn't been pretty.

The CMBS sector is suffering two kinds of pain, which, according to credit rater Realpoint LLC, sent its delinquency rate to 3.14% in July, more than six times the level a year earlier. One is simply the result of bad underwriting. In the era of looser credit, Wall Street's CMBS machine lent owners money on the assumption that occupancy and rents of their office buildings, hotels, stores or other commercial property would keep rising. In fact, the opposite has happened. The result is that a growing number of properties aren't generating enough cash to make principal and interest payments.
The other kind of hurt is coming from the inability of property owners to refinance loans bundled into CMBS when these loans mature. By the end of 2012, some $153 billion in loans that make up CMBS are coming due, and close to $100 billion of that will face difficulty getting refinanced, according to Deutsche Bank. Even though the cash flows of these properties are enough to pay interest and principal on the debt, their values have fallen so far that borrowers won't be able to extend existing mortgages or replace them with new debt. That means losses not only to the property owners but also to those who bought CMBS -- including hedge funds, pension funds, mutual funds and other financial institutions -- thus exacerbating the economic downturn.
A typical CMBS is stuffed with mortgages on a diverse group of properties, often fewer than 100, with loans ranging from a couple of million dollars to more than $100 million. A CMBS servicer, usually a big financial institution like Wachovia and Wells Fargo, collects monthly payments from the borrowers and passes the money on to the institutional investors that buy the securities.
CMBS, of course, aren't the only kind of commercial-real-estate debt suffering higher defaults. Banks hold $1.7 trillion of commercial mortgages and construction loans, and delinquencies on this debt already have played a role in the increase in bank failures this year.
But banks' losses from commercial mortgages have the potential to mount sharply, and the high foreclosure rate in the CMBS market could play a role in this. Until now, banks have been able to keep a lid on commercial-real-estate losses by extending debt when it has matured as long as the underlying properties are generating enough cash to pay debt service. Banks have had a strong incentive to refinance because relaxed accounting standards have enabled them to avoid marking the value of the loans down.
"There is no incentive for banks to realize losses" on their commercial-real-estate loans, says Jack Foster, head of real estate at Franklin Templeton Real Estate Advisors.
CMBS are held by scores of investors, and the servicers of CMBS loans have limited flexibility to extend or restructure troubled loans like banks do. Earlier this month, it was no coincidence that CMBS mortgages accounted for the debt on six of the seven Southern California office buildings that Maguire Properties Inc. said it was giving up. "During most of the evolution [of CMBS] no one ever thought all these loans would go into default," says Nelson Rising, Maguire's chief executive.
Indeed, many property developers and investors complain there is no way to identify the investors that hold their debt and that it is difficult to negotiate with CMBS servicers. In light of the complaints, the Treasury is considering guidance that would allow servicers to start talking about ways to avoid defaults and foreclosures sooner, according to people familiar with the matter. But investors in CMBS bonds argue that the servicers are ultimately bound contractually to the bondholders.
So Maguire will soon have a lot of company. In a study for The Wall Street Journal, Realpoint found that 281 CMBS loans valued at $6.3 billion weren't able to refinance when they matured in the past three month, even though 173 such loans worth $5.1 billion were throwing off more than enough cash to service their debt.
Mounting foreclosures in the CMBS sector would likely depress values even further as property is dumped on the market. And this would put pressure on banks to write down loans. "What's going on in the CMBS world is a precursor for what might be seen in banks' books," predicts Frank Innaurato, managing director at Realpoint.
The commercial-real-estate market could yet be salvaged by an improving economy and bailout programs coming out of Washington. In addition, capital markets are starting to ease for publicly traded real-estate investment trusts. Since March, more than two dozen REITs have managed to raise more than $13 billion by selling shares.
Still, most of the $6.7 trillion in commercial real estate is privately owned. Also, it is unlikely commercial real estate will benefit much from an early stage of an economic recovery. What landlords need is occupancy and rents to rise, and that means employers have to start hiring and consumers need to shop more. So far, there are few signs this is happening.

Global Stocks Take A Dip Toward the Dark Side

Global stock markets from Shanghai to Berlin have taken a dip to the downside overnight. Apparently, commodity-related stocks are taking the brunt of it, with oil taking a tumble also.

Bond Market Doesn't Believe Good News

The bond market has historically been a better predictor of economic growth than the stock market.

from Bloomberg:
Aug. 31 (Bloomberg) -- The bond market isn’t buying all the optimism over the end of the global recession.
While the International Monetary Fund said last week the economic recovery will be faster than it forecast in July, investors pushed yields on government debt to the lowest level since April, according to the Merrill Lynch & Co. Global Sovereign Broad Market Plus Index. The gauge, which tracks $15.4 trillion of bonds worldwide, gained 0.73 percent this month, the most since 1.02 percent in March.
Debt investors can’t see a recovery strong enough to spur central bank interest rates anytime soon, especially with the Obama administration forecasting that unemployment in the U.S. - - the world’s largest economy -- will rise above 10 percent in the first quarter. After stripping out the effects of the U.S. government’s “cash for clunkers” program to buy new cars, consumer spending was unchanged in July, according to Commerce Department data released on Aug. 28.
“The bond market does not believe we will see rapid robust rates of growth,” said Jeffrey Caughron, an associate partner in Oklahoma City at The Baker Group Ltd., which advises community banks investing $20 billion. “The deleveraging of the consumer will act as a drag on growth, which will keep inflation to a minimum and interest rates relatively low.”
‘Bumpy Road’
Bond yields are lower now than when Federal Reserve Chairman Ben S. Bernanke said in an Aug. 21 speech at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming, that “prospects for a return to growth in the near term appear good.” European Central Bank President Jean-Claude Trichet said that while the economy is no longer in “freefall,” it faces “a very bumpy road ahead.”

also from Bloomberg:
Aug. 31 (Bloomberg) -- Treasuries rose, heading for their first two-month gain this year, as Chinese stocks fell and investors added to bets the global financial crisis will slow the pace of inflation.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, narrowed for a sixth day, reaching 1.70 percentage points, from this month’s high of 2.05 points on Aug. 10. The spread has averaged 2.20 percentage points for the past five years.
“Low bond yields have become an international phenomenon, and one important element of this is subdued inflation,” said Don Smith, fixed-income strategist at ICAP Plc, the world biggest broker of trades between banks. “We are still in that twilight zone between recession and recovery.”

Sunday, August 30, 2009

Calendar for 8/30 to 9/5

    July Actual: 43.4 UP 3.5
    August Consensus: 46.0
    July Actual:  (25.5) DOWN 5.1
    No August Consensus
    July Actual: 3,295,000 UP 700
    No August Consensus
    June Actual: UP 0.3%
    July Consensus: UP 0.1%
    June Actual: 94.6 UP 3.3
    July Consensus: 94.1
    July Actual: 48.9 UP 4.1
    August Consensus: 50.1
    July Actual: 11.24 Million UP 1.54 Million units, 15.9%
    August Consensus: 11.9 Million
WEDNESDAY September 02 MBA APPLICATION INDEX (Week ended: August 28)
    Total Index:
    Week Ended August 21: 556.4, UP 7.5%
    Four-week moving average: 513.2, UP 0.6%
    Purchase Index:
    Week Ended August 21: 280.4, UP 1.0%
    Four-week moving average: 268.7, UP 1.5%
    Refi Index:
    Week Ended August 21: 2,233.5, UP 12.7%
    Four-week moving average: 1,942.5 DOWN 0.1%
    No August 28 consensus 
    July Actual: 97,373, UP 22,980, 30.9%
    No August consensus
    July actual: DOWN 371,000 [BLS Private Sector Actual DOWN 254,000]
    August consensus: DOWN 210,000
    1Q Actual: UP 0.3%
    2Q Preliminary Actual: UP 6.4%
    2Q Final Consensus: UP 5.9%
    Unit Labor Costs
    1Q Actual: DOWN 2.8%
    2Q Preliminary Actual: DOWN 5.8%
    2Q Final Consensus: DOWN 5.3%
    June Actual: UP 0.4%
    July consensus: UP 1.0%
    June actual: UP 2.3%
    No July consensus:
    FOMC Minutes August 11-12 Meeting
    Atlanta Fed President James Lockhart speaks on lessons of the financial crisis
    Initial Claims:
    August 22 Actual: 570,000 DOWN 10,000
    August 29 Consensus: 560,000
    Four-week moving average: 566,250 DOWN 4,750
    No August 29 consensus
    Continuing Claims (Wk ended August 22)
    Week Ended August 15 Actual: 6,133,000 DOWN 119,000
    August 22 Consensus:  
    July Actual:  46.1 DOWN 3.7
    August Consensus: 48.0
    Payroll Employment (M-M Change)
    July actual: DOWN 247,000
    August consensus:  DOWN 223,000
    Unemployment Rate
    July actual: 9.4% DOWN 0.1
    August consensus: 9.5%
    Average Hourly Earnings
    July actual: $18.59 UP 3¢, 0.2%
    August consensus: $18.63 UP 4¢, 0.2%
    Average Weekly Hours
    July actual: 33.1 UP 0.1
    August consensus: 33.1