As The Shadow Banking System Imploded In Q2, Bernanke's Choice Tomorrow Has Been Made For Him

With the FOMC meeting currently in full swing, speculation is rampant what will be announced tomorrow at 2:15 pm, with the market exhibiting its now traditional schizophrenic mood swings of either pricing in QE 6.66, or, alternatively, the apocalypse, with furious speed. And while many are convinced that at least the "Twist" is already guaranteed, as is an IOER cut, per Goldman's "predictions" and possibly something bigger, as per David Rosenberg who thinks that an effective announcement would have to truly shock the market to the upside, the truth is that the Chairman's hands are very much tied. Because, all rhetoric and political posturing aside, at the very bottom it is and has always been a money problem. And specifically, one of "credit money." Which brings us to the topic of this post. When the Fed released its quarterly Z.1 statement last week, the headlines predictably, as they always do, focused primarily on the fluctuations in household net worth (which is nothing but a proxy for the stock market now that housing is a constant drag to net worth) and to a lesser extent, household credit. Yet the one item that is always ignored, is what is by and far the most important data in the Z.1, and what the Fed apparatchiks spend days poring over, namely the update on the liabilities held in the all important shadow banking system. And with the data confirming that the shadow banking system declined by $278 billion in Q2, the most since Q2 2010, it is pretty clear that Bernanke's choice has already been made for him. Because with D.C. in total fiscal stimulus hiatus, in order to offset the continuing collapse in credit at the financial level, the Fed will have no choice but to proceed with not only curve flattening (to the detriment of America's TBTF banks whose stock prices certainly reflect what a complete Twist-induced flattening of the 2s10s implies) but offsetting the ongoing implosion in the all too critical, yet increasingly smaller, shadow banking system. And without credit growth, at either the commercial bank, the shadow bank or the sovereign level, one can kiss GDP growth, and hence employment, and Obama's second term goodbye.

 

S&P Options Making Room For Possible Downside

The weird and wonderful world of options markets and models can sometimes provide useful insights on a reflexive/contrarian basis if we know where to look. Everyone is used to reading/hearing about VIX (Pisani's Fear Index) which tracks a near-the-money relatively short-dated implied volatility (note upside and downside volatility not just downside - though volatility and price do tend to co-depend quite highly). There are many other 'implied' distributional measures one can glean from the broad array of liquid options prices. When all of these indications are at extremes, there is little chance of an extended downside move since broad swathes of investors are hedged and hence not feeling all the pain - however, with current levels having normalized modestly, any downside shock (no QE3 for example) could easily be exaggerated by unhedged forced selling.

CDS Traders Haven't Lost Their Shirts, But They Can Be Naked

The European Union failed to approve a law or plan to bank naked shorts on sovereign CDS.  Their focus on CDS trading started over 18 months ago when the Greek Finance Minister said that all the short sellers would lose their shirts. There have been a multitude of rumors that it would be banned, but there are many better ways to control the CDS market. In all likelihood, the politicians will remain intent on banning CDS.  I think they will be disappointed with the impact and realize that CDS is not the root of all evil and Europe will still have a sovereign debt crisis, without the benefit now of some short covering and additional price discovery.





Depression By The Numbers - A Poverty Bulletin
As was already discussed last week, the number of Americans living in poverty is now at an all time high, even as the real income of the average American male worker adjusted for inflation is back to 1968 levels. But that is only the beginning. ProPublica has compiled an exhaustive bulletin summarizing the sad state of America's depressionary reality in "Our Sputtering Economy by the Numbers: Poverty Edition." For anyone wondering how we are doing now compared to "before", this is the only list needed. The results are not pretty and confirm that Bernanke is now trapped in a corner, where every incremental attempt to reflate the stock market will make ever more people on the other side of the social spectrum even poorer until finally the Arab Spring makes its lone overdue appearance in America.

Market Snapshot: Equities Odd One Out Again

Shrugging off Italy's rating downgrade (somewhat expected but continued negative outlook), funding stress in Europe (Libor levitating and Swiss/French banks divergent), cuts in global growth expectations (IMF and World Bank), concerns over systemic risk contagion (ESRB and World Bank), and escalating rhetoric in Sino-US trade wars, US equities have managed to reach up to Friday's highs as rumors of AAPL being added to the Dow seemed enough for hapless traders. But, like a broken record, we note that the new highs in ES are being accompanied by new lows in 2s10s30s, near day's low yields in TSYs, day's highs in gold and silver, and multi-day lows in copper - all seems to make perfect sense...

Venezuela Decrees Nationalization of Nation’s Gold Industry

Eric De Groot at Eric De Groot - 1 minute ago

Nationalization of the gold and oil industry means a severe reduction in capital flowing into Venezuela and lower standard of livings for Venezuelans. Headline: Venezuela Decrees Nationalization of Nation’s Gold Industry Sept. 19 (Bloomberg) -- Venezuelan President Hugo Chavez ordered the nationalization of the gold industry and gave companies 90 days to form joint ventures with the state as... [[ This is a content summary only. Visit my website for full links, other content, and more! ]] 

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This Is Why We LOVE Mining Stocks

Dave in Denver at The Golden Truth - 1 hour ago

Especially the ones that are really well-managed: Hecla Mining announced today that it is going to set its quarterly dividend payout policy based on the average price of silver realized by the Company during the quarter. Here's the formula they will use: LINK This is a huge statement about Hecla's confidence in their ability to continue growing their business (find new resources) AND their ability to manage their operations efficiently. Further, yesterday Newmont announced that it will link its dividend payout to the price of gold AND the CEO said he thought the price of gold w... more » 

 

Gold Miners Becoming Land Bank Cash Machines

Eric De Groot at Eric De Groot - 2 hours ago

The miners will do a lot better than this in time. Soon the public will come to realize the miners as land bank cash machines. While the gold train has clearly left the station, it's hesistant on the tracks in recent weeks has booted even more passengers. Many investors will jump on the gold train late and close to the final destination, thereby, ensuring their place as the ultimate bag holders... [[ This is a content summary only. Visit my website for full links, other content, and more! ]] 

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Behind the poverty numbers: real lives, real pain

Eric De Groot at Eric De Groot - 4 hours ago

Standard of livings continue to fall across America as many simply do not have the resources to cope with rising unemployment and falling purchasing power created by currency devaluation. A record 46.2 million live in poverty. Unfortunately, it will get worse before it gets better because easy solutions to the growing problem of public debt failure do not exist. Headline: Behind the poverty... [[ This is a content summary only. Visit my website for full links, other content, and more! ]] 

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Downside Volatility Offers Opportunity To Acquire Assets At Distressed Prices

Admin at Marc Faber Blog - 6 hours ago

I should add that for the investor, who has a well-diversified portfolio of assets and has high cash flow (personal income and income from investments), downside volatility offers an opportunity to acquire assets at distressed prices or add to his positions at a more favorable entry point. However, for the investor without any free cash flow, downside volatility can be extremely problematic because the option to increase positions at distressed prices is not available to him. *Marc Faber is an international investor known for his uncanny predictions of the stock market and futures m... more » 

 

Debt Crisis: The Scandinavian Example In The Early 90`s

Admin at Jim Rogers Blog - 6 hours ago

The same thing happened in Scandinavia in the early 90`s. Everybody went bankrupt they had a horrible time but they wrote everything off, they started over and Scandinavia has boomed for the past 15 or 20 years. This solution we are trying in the US and in Europe is not going to work. It never has. *Jim Rogers is an author, financial commentator and successful international investor. He has been frequently featured in Time, The New York Times, Barron’s, Forbes, Fortune, The Wall Street Journal, The Financial Times and is a regular guest on Bloomberg and CNBC.*

Guest Post: Is This A “Jobs” Super Committee?

Earlier this month, some economic luminaries in the United States Congress introduced a new bill, H.R. 2835. The bill intends to “establish a joint select committee of Congress to report findings and propose legislation to restore the Nation’s workforce to full employment…” Great idea, fellas. After failing to ignore your way out of recession, spend your way out of recession, lie your way out of recession, and print your way out of recession, you now intend to legislate your way out of recession. This bill exemplifies how completely clueless the leadership is, and highlights the common demeanor of the political class.  By definition, people are in government because they believe that government is the solution, not the problem. Legislating your way to full employment is as fantastical as prancing unicorns and the Tooth Fairy. It’s impossible. The only employment created by legislation are government jobs to staff all those new agencies and bureaus. And naturally, those jobs must come with some task, some responsibility.

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