Taylor Rule Founder Warns US Debt Could "Explode"
The other other John
Taylor (not the FX trader, nor the guitar player, but the "Taylor
Rule" discoverer, which is at the base of all Fed monetary decisions),
spoke on Bloomberg TV, and his message was certainly a far less
optimistic one than that conveyed by the man charged with putting his
rule into practice. "We could get into a situation like Greece, quite
frankly. People have to realize it is a precarious situation. The debt is going to explode if we don't make some changes."
What changes does Taylor recommend? Why the same that Bill Gross
warned about yesterday - that ZIRP4EVA means a liquidity trap pure and
simple, and the Fed needs to start rising rates: "the Fed has bought so
much of the debt that people don't know how they're going to undo
that. They pledged to have interest rates at zero until 2014, but
people are saying how can they possibly do that when the economy picks
up. This uncertainty had lead people to sit on all this cash. I think
if the Fed gets back to the policy that worked pretty well in the '80s
and '90s, we would be in much better shape." Ah yes, but the one thing,
and only one thing that matters, and that is not mentioned at all, is what happens to the stock market when the Fed officially sets off on a tightening path.
Actually make that question even simpler - will the drop in the
S&P will be 30%, 40%, or any other greater mulitple of 10% thereof,
considering that as we noted previously, the Fed and the other two
central banks alone have injected over $2 trillion in just over a year.
And about $10 trillion in the past 5. Calculate what the removal of
this liquifity would do to stocks...As Falls Sarkozy, So Falls Europe: The Full Story Behind The Upcoming French Election
Just a week ago we brought readers' attention
to the fact that Francois Hollande, the Socialist Party candidate who
is leading most opinion polls in the French presidential election, was
extending his lead; well the lead is growing, to now 58-42 in the second round. In a must-read discussion this evening, George Magnus of UBS points to the significance of the French elections and how Hollande's
victory could unleash 'a new wave of instability and uncertainty, and
that the relative calm or optimism in financials markets since the turn
of the year would prove short-lived'. Specifically Magnus
highlights how the politics of Europe could well trump the liquidity of
the ECB as the main determinant of the Euro Area's prospects. While not
playing down the role of the initial (and forthcoming second) LTRO,
the UBS senior economic adviser has grave concerns of the much bigger
and less tangible issues of sovereignty and national self-determination
that will not only impact Greece (very shortly) but also Germany,
France, and the Euro-zone itself. The French election could be a
catalyst for Franco-German (Merkande? Hollel?) divisions which 'would not sit comfortably inside the ECB or in the minds and actions of investors' and is evidently an unpriced and under-appreciated risk in global markets currently.
Over the past week we have repeatedly exposed the BLS' shennanigans to both keep the headline unemployment rate suppressed and to generate an upward bias in the market courtesy of a "bigger than expected beat" of expectations. Granted, various semantics experts continue to scratch their heads in attempting to explain a collapsing labor force when even Goldman's Sven Jari Stehn just predicted that it will drop to 63.1% by the end of 2012 (and 62.5% by the end of 2015). Funny then that the US will have no unemployment left when the participation rate drops to 58.5%. And no, the "population soared argument based on revised data" doesn't quite cut it when the bulk of said surge not only did not get a job, but was not even counted toward the labor force. Yet what the biggest flaw with all these arguments that vainly (and veinly) attempt to defend the US economy as if it is growing, is that they focus exclusively on the quantity of jobs, doctored or not, and completely ignore the quality. We have decided to step in and fill this void.
Election Year: The Economy Is Going To Look Better Than It Does Normally
Every time there's an election, the government spends as much money as it
can to get votes. and the central bank prints as much money. so this year,
the economy is going to look better than it does normally. - *in a recent
CNBC video interview*
*Related, SPDR S&P 500 Index (SPY)*
*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.*
2012 US Elections
"Ron Paul would be a very good president." - in Bloomberg TV
*Marc Faber is an international investor known for his uncanny predictions
of the stock market and futures markets around the world.*
Creating Bag Holders In Copper
Copper prices jump on improving labor market and factory orders? The
largely “manufactured” labor report was good and copper prices rose.
Therefore, the labor report must have caused copper prices to rise. I love
the simplicity of one-dimensional thinking and the trading opportunities it
creates. “Cause and effect” headlines are often used to transfer ownership
from commercial traders (the...
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MF Global Collapsed in the Face of a $310 Million Margin Call Made by 'Undisclosed Party'
Fed's Record Setting Money Supply Splurge Spurs Gold's Rally
The surge in the U.S. money supply in recent years has sent gold into a series of new record nominal highs. Money supply surged again in 2011 sending gold to new record nominal highs. Money supply has grown again, by more than 35% on an annualized basis, and this is contributing to gold’s consolidation and strong gains in January. The Federal Reserve's latest weekly money supply report from last Thursday shows seasonally adjusted M1 rose $13.2 billion to $2.233 trillion, while M2 rose $4.5 billion to $9.768 trillion.
UBS On LTRO: 'One More Is Not Enough'
Since
the start of the year, global markets have been apparently buoyed by
the understanding that Draghi's shift of the ECB to
lender-of-last-and-first-resort via the LTRO has removed a significant
tail on the risk spectrum with regard to Euro-banks and slowed the
potential for contagious transmission of any further sovereign stress.
In fact the rally started earlier on the backs of improved perceptions
of US growth (decoupling), better tone in global PMIs, and potential for
easing in China and the EMs but it does seem that for now the ECB's
liquidity spigot rules markets as even in the face of Greek uncertainty,
as George Magnus of UBS notes, 'financial markets are most likely to defer to the ECB's monetary policy largesse' as a solution. Both Magnus and his firm's banking team, however, are unequivocal in their view that the next LTRO will unlikely be the last (how many temporary exceptions are still in place around the world?) and as we noted earlier this morning,
banks' managements may indeed not be so quick to gorge on the pipe of
freshly collateralized loans this time (as markets will eventually
reprice a bank that holds huge size carry trades at an inappropriate
risk-weighting) leaving the stigma of LTRO borrowing
(for carry trades, substitution for private-sector funding, or buying
liquidity insurance) as a mark of differentiable concern as opposed to a
rising tide lifts all boats as valuations reach extremes relative to
'broken' business models, falling deposits, and declining earnings
power.They expect a EUR300bn take up of the next LTRO, somewhat larger than the previous EUR200bn add-on - but not hugely so - as the banks face a far different picture (in terms of carry profitability) and yet-to-be-proven transmission to real-economy credit-creation that will make any efforts at a fiscal compact harder and harder to implement as its self-defeating austerity leave debtor countries out in the cold. The critical point is that unless the market believes there will be an endless number of future LTROs, covering the very forward-looking private funding markets for banks, then macro- and event-risk will reappear and volatility will flare.
China Bail Out Europe? Quite The Opposite Actualy, As Chinese Banks Cut European Exposure
Hardly a week passes without some washed out, discredited legacy media outfit bringing up the "China will bail out Europe" rumor from the dead if only for a few minutes, just so the robots which have now shifted from stocks to the EURUSD, ramp the currency higher and stop out the weak housewife hands. So while we know what the wishful thinking within the status quo (and those who wish to receive its advertising dollars) is, here is the reality. From Reuters which translates China's Financial News: "Chinese banks and companies in the northern port city of Tianjin have cut their exposure to Europe as the euro zone debt crisis festers. In a recent survey of 53 banks and 15 firms done by the local foreign exchange regulator, 11 banks said they had cut or stopped trade finance for European countries with high debt risk, suspended derivatives business with European banks, cut or stopped lending to foreign peers, particularly those from Europe, the newspaper said." Isn't this a little contrary to an atmosphere of mutual goodwill if not mutual bail outs? "They also reduced the issuance of euro-denominated wealth management products as a weakening euro resulted in negative earnings last year. The pullback by Chinese companies comes as European leaders have appealed to the Chinese government to support debt bailout funds. Although Chinese leaders have expressed confidence in European nations, they have also refrained from making firm financial commitments, urging Europe first to take further steps on its own." But why is Tianjin important: "Europe is Tianjin's second-largest exporting destination only after the United States. But local exporters are trying to sell more domestically or venture into emerging markets to cut their reliance on the euro zone, the newspaper said." Great work Europe: by slowly going broke, you are implicitly promoting the development of the Chinese middle class. And for that general act of goodness for humanity, well Chinese humanity, we salute you.Ben "CTRL+P" Bernanke's Open Mouth Is (Still) A Goldbug's Best Friend
Five
days ago, when Ben, or as he is also known, "CTRL+P", was talking
before congress, gold soared as soon as the Chairman opened his mouth, hitting +$15 in minutes.
Sure enough, Ben's open mouth is once again a gold bug's best friend,
with gold jumping by a nearly identical $14 in the 30 minutes since the
Senate version of Bernanke's testimony started today. Keep talking
Ben, keep talking... And just wait until Ben starts printing again, to
match the ECB's imminent second LTRO.Here Is Why David Tepper Will Not Make A Repeat "Balls To The Wall" Appearance Any Time Soon
Remember when back in September 2010,
David Tepper moved the market by nearly 2% when he told a stunned
world that he is "balls to the wall" stocks because no matter what
happens, stocks can only go higher (a ludicrous proposition in any
other universe except perhaps for this one where the "Greenspan Put"
has since been replaced with the "Bernanke Guarantee").
He did out perform the market that year. The next year he lost over
3%. Why? Was it because the Fed did not go through with promises of
LSAP (even though it did engage in QE3 curve shifting by ZIRPing the
short end in perpetuity, and buying 91% of long-end issuance).
Or because the master can only create alpha when the puppet is
flooding the market with liquidity. Whatever the reason, the Pavlovian
creature known as the market, has been salivating for LSAP version 2012
since the beginning of January, courtesy of bearish remarks by the
Chairman. And yet Tepper has yet to make a guest appearance on CNBC to
discuss why the "balls" may make a repeat appearance next to the
"wall." Because, as Morgan Stanley's Mike Wilson explains, instead of
focusing on the means, investors should consider the end: "I think QE3 will end just as badly as QE2" and "I would feel better if earnings and economic growth were accelerating like during QE2. But they aren’t."
Sure enough, one glance at the chart below explains not only why this
time QE will be different actually applies, but also why when it comes
to comparisons to Japan, the US may be lucky if ends up in the same
condition as Japan, when the probability is one of a far worse
outcome...Greek Protests Turn Violent (Update - Not Just Yet)
Update: it appears that the Guardian clip is from June when tempratures were a little warmer. That said, today's developments will likely not end in a very different fashion. For today's "riot" developments, follow kathimerini.
In a sad but entirely unsurprising turn of events, the people of Greece are indeed beginning to realize the dead end of their situation and what the politicians are about to do to them (sadly they also are not frontrunning the latest bevy of BS rumors out of Greece which have lifted the EURUSD by 110 pips on the same rumor rerun we have seen over and over and over and over and over and over and... so on ad inf). As the entire country strikes, the UK's Guardian notes that protesters in Athens are once again clashing with police as violence erupts outside the Greek parliament. After 30 years of Keynesian imbalance, is it any surprise that social unrest would once again erupt as austerity impositions are force-fed to a nation who recognizes the almost entire lack of benefits accruing to them from another Troika bailout.
Bernanke Testimony To Senate Live Webcast
While Bernanke's prepared remarks to the Senate today will be identical to those given to Congress last week,
the Q&A session will be different. One notable difference will be
Bernanke's take on the "huge jobs number" which was not public last
week. He will likely be put to task to answer if and why he still
expects QE when the economy is supposedly improving (on the back of a
collapsing labor force, yes it makes no sense, don't ask us). We wonder
what his non-answer answer will be to that one. Also we wonder if like
last week, when answering Congressman Flores, he admits that the ECB
collateral certification process is much better than that of the Fed
when it comes to issuing cash under the discount window.Frank-Dodd In A Box
As
US financials continue to surge, the far-reaching impacts of the
simple-sounding-yet-inordinately-complex Dodd-Frank bill are perhaps
still not appreciated by all. BusinessWeek have
done us all a favor by creating the One Chart that explains it all
(with a tongue-in-cheek overlay). Whether you are a B.S.D. prop desk, a
homeowner, a filthy rich CEO, a bank, or a mortgage provider, there is a
little 'shared sacrifice' here for everyone in the easiest-to-grasp graphic on the lengthy bill we have seen yet.In The Meantime, Greece Is Under Strike Lockdown Protesting Austerity
Not
like it will make much of a difference, since whether striking or
not, nobody actually pays taxes, but the symbolism of all of Greece
being on strike lock down to protest austerity in a day when the latest
Troika austerity ushering deal is due in "hours" is not lost on us.
Here is Kathimerini (local translated edition) summarizing today's
festivities: "According to data from the GSEE, participation in
refineries, shipyards, and transport ships, reached 100%, banks, PPC,
OTE and EYDAP, 80%, ports and construction 70% while 60% moved to
participate in metal workers. About 15,000 workers and members
of leftist organizations took part in the strike gathering held at 11
am in Syntagma Square. Despite the constant rain, the protesters
staged a symbolic encirclement of Parliament until late afternoon." "One
in two people and one in three women are unemployed, 12% of our
citizens living with zero income and 50% below the poverty line,"
he stressed in his speech to the concentration of SHIFT and given the
President of the SHIFT Panagiotis Tsarampoulidis , expressing the
opposition of the unions' betrayal of the public property, "layoffs,
cutting salaries and pensions and" policies that lead to poverty and
misery." More details below.Greece Working on Final Draft for Leaders Meeting
EURUSD jumps 80pips on the Bloomberg headlines.
So, what are the steps here? Approve it. Handholding press
conference. Lots of "defining moment" and "mission accomplished"
speeches. Then what? Rumors that 20 billion or more of bonds won't agree to the PSI
(that is only 10%). Rioting in the streets? Then we wait to see the
reforms fail? If the PSI works and the people accept their fate, at
least we bought a few months in Greece because it takes some time to
see the plans actually fail. It will be interesting to see if they try
and jam in a retroactive collective action clause and what other
details come out of this plan.Brent WTI Back To $20 - Some Thoughts On What's Next From Goldman
After the announcement of the Seaway reversal back in November 2011, a development which some say was oddly anticipated by the market, the Brent-WTI spread collapse from a near record $30 to just $7 in the span of three months. Further alleviating tensions was the fact that Italy is now once again back firmly in control of Libyan Brent production. Yet recent developments in the Persian Gulf, and elsewhere, have led to the Brent-WTI spread trade becoming an energy trader's widowmaker yet again, as it has doubled from $10 to $20 as of early this morning in less than a month. What happens next, and what are the implications for the energy market as a result of the violent move wider? Here is Goldman's David Greely with some observations and some suggestions.
European Nash Equilibrium Collapses - Bank Bailout Stigma Is Back At The Worst Possible Time
In
all the excitement over the December 21 LTRO, Europe forgot one small
thing: since it is the functional equivalent of banks using the
Discount Window (and at 3 years at that, not overnight), it implies that
a recipient bank is in a near-death condition. As
such, the incentive for good banks to dump on bad ones is huge, which
means that everyone must agree to be stigmatized equally, or else a
split occurs whereby the market praises the "good banks" and punishes
the "bad ones" (think Lehman). As a reminder, this is what Hank Paulson
did back in 2008 when he forced all recently converted Bank Holding
Companies to accept bail outs, whether they needed them or not,
something that Jamie Dimon takes every opportunity to remind us of
nowadays saying he never needed the money but that it was shoved down
his throat. Be that as it may, the reason why there has been no
borrowings on the Fed's discount window in years, in addition to the
$1.6 trillion in excess fungible reserves floating in the system, is
that banks know that even the faintest hint they are resorting to Fed
largesse is equivalent to signing one's death sentence, and in
many ways is the reason why the Fed keeps pumping cash into the system
via QE instead of overnight borrowings. Yet what happened in Europe,
when a few hundred banks borrowed just shy of €500 billion is in no way
different than a mass bailout via a discount window. Still, over the
past month, Europe which was on the edge equally and ratably, and in
which every bank was known to be insolvent, has managed to stage a
modest recovery, and now we are back to that most precarious of states -
where there is explicit stigma associated with bailout fund usage.
And unfortunately, it could not have come at a worse time for the
struggling continent: with a new "firewall" LTRO on deck in three weeks,
one which may be trillions of euros in size, ostensibly merely to
shore up bank capital ahead of a Greek default, suddenly the
question of who is solvent and who is insolvent is back with a
vengeance, as the precarious Nash equilibrium of the past month
collapses, and suddenly a two-tier banking system forms - the banks
which the market will not short, and those which it will go after with a
vengeance.
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