Presenting... The Heidelberg: Mainstream 80, Web-fed Rotary Printer
Goldman, Which Has Been Snubbed For The Second Time In A Row By FOMC, Shares Its Take On The Fed StatementFirst Goldman does not get its IOER cut, so desired back in September; now the Nominal GDP targetting which was the firm insinuated was coming, (and was insanity pure and simple) was not even mentioned. Jan Hatzius must be sweating: he is losing his monetary policy grip. In the meantime, as he sweats, here is his take on the FOMC statement.
Following this morning's busted issuance, it seems appropriate to take a deeper dive into the first-loss insurance that EFSF issuance may provide. There are still a lot of details to be worked out, but the €250 - €275 billion EFSF first loss insurance facility is starting to take shape. The amount of exposure that the EFSF can take in any form and retain the AAA rating is capped at €452 billion Euro – the amount of guarantees provided by the AAA entities. It looks more and more like the EFSF guarantees will be used in 3 different ways. A portion will be used to raise money to meet commitments already made to Greece, Ireland, and Portugal. Another portion will be allocated to provide additional capital to banks. Finally, a portion will be used to back first-loss insurance and we note that the EFSF First-Loss Insurance Program is like Nothing We Have Ever Seen Before. Why we have wound up at the stage that issuing binary options on sovereign debt is a good solution, I don’t know, but since we are there, it might as well be done as well as possible.
While expectations were for massive LSAPs and ZIRP to the moon, headlines from the FOMC statement so far appear to be disappointing:
- FED REITERATES `SIGNIFICANT DOWNSIDE RISKS' TO ECONOMIC OUTLOOK
- FED TO KEEP REINVESTING HOUSING DEBT INTO MORTGAGE SECURITIES
- FED SAYS IT'S PREPARED TO EMPLOY TOOLS TO BOOST RECOVERY
- EVANS DISSENTS FROM FOMC DECISION, WANTS MORE ACCOMMODATION
- FED SAYS UNEMPLOYMENT RATE TO DECLINE `ONLY GRADUALLY'
- Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.
We have discussed the 'field-of-dreams'-like dreamscape that manufacturers have been living in for the last year at length as 'if-we-build-it' inventories are stacked to the ceiling relative to sales. Today's Global PMI data from Markit Economics provides confirming evidence that the miracle of self-fulfilling exporting is rapidly coming to an end. From their report:
"Conditions in the global manufacturing sector remain broadly stagnant in October. Levels of production & new orders fell slightly over the month, while new export orders declined at the quickest pace for almost two-and-a-half years."
With less than an hour until the 12:30 pm FOMC announcement, the time to place your bets is here. The market, up almost 2% already has, and has ignored some truly horrible news out of Europe, betting that the Fed will do something, anything, to boost the global recovery. We are skeptical. Which troubles us because so is everyone else. Below we present the opinion of JPM's Michael Feroli who is also in the same boat: expects no action, yet in that case he anticipates the first Dovish dissent since the GFC (everyone knows the three Hawks on the FOMC are very much mute and will continue to dissent until the Fed actually hikes rates). As a result one thing the Chairsatan may relent to, is an extension in the ZIRP rate guidance from mid-2013 to late 2013. Regardless, we will cover the announcement, we hope the FOMC site does not crash, and as always fade the first through fifth kneejerk market responses to the statement.
We wrote about this over the weekend, now here is the official "explanation"
- German Finance Minister Wolfgang Schaeuble said EU55.5b ($76.7b) accounting error at FMS Wertmanagement, so-called bad bank for Hypo Real Estate Holding, due to balancing glitch that doesn’t require personal consequences from anybody.
- Finance Ministry knew “with certainty” on Oct. 13 that accounting error had occurred after receiving notifications on Oct. 4, Schaeuble said at press conference in Berlin
- Error is “annoying” because its magnitude can unsettle public
As G-Pap faces the wrath of every long-only-manager, European leader, and sell-side equity strategist, by giving 'we-the-people' their say, we thought it potentially instructive to look at what the Greeks face over the next three months. As with every bankrupt company, we outline the 13-week forecast for cash-flows, specifically focused on what interest and principal payments are due to the end of January. Greece faces almost EUR20bn in interest and principal payments through the end of Jan2012, dominated by EUR12.2bn in payments in December alone with the last week of the year a huge EUR8.9bn!! It does make us wonder just how much leeway the Troika is willing to give if they don't follow the rules.
The chart below indicates that should the Fed launch on the latest harebrained idea proposed by Goldman, namely to target nominal GDP, it will most likely blow up everything, as the US economy is now about 14.7% below the trendline average, and assuming a catch up to the bubble years through 2016, would mean an 8.6% annualized increase in economic growth, about double where growth has been in the past. How this is possible absent the issuance of an incremental ~10% in annual debt each year (keep in mind we are dealing with Keynesians, where debt = growth) we don't know. Neither does the Fed. So if indeed the Fed wants to revert to trendline, it means that by 2016, US Debt will be greater by an additional $10 trillion over an on top of the $10 trillion increase already forecast by the GAO over the next decade, or, numerically, by 2021, the US would have about $35 trillion in debt, and most likely, well over that amount. Brilliant.