The Market Is Expecting $850 Billion NEW QE

Last week we discussed what the expectations were for Draghi's OMT - approximately EUR250bn - which coincidentally provided cover for the rest of the year (conditionally) for the entire new issuance of the European Union. Based on EURUSD's recent exuberance - something we saw ahead of QE1 and QE2 - the market is now more than primed for some serious USD debasement. The current EURUSD of 1.2850 implies a Fed-to-ECB balance sheet ratio around 1.11x. If we assume the ECB wil not have to fire its conditional bazooka (of which is priced in 100% likelihood of EUR250bn), then the Fed is expected to conjure a monetization scheme of around USD580bn - anything less would be a disappointment to the market. However, if we assume the ECB will be doing it's bond-buying monetization thing  - as per the equity market's expectations - then the Fed will need to come to the table with a bag of swag around USD850bn in order to debase the USD just enough to regain some hope. It seems like the market has priced in a great deal of monetary policy exuberance  - especially considering how 'confident' consumers appear to be.

Main Event Dramatic Preview: Boehner Says "Not Confident Congress Can Reach Budget Deal"

To all who miss the highly volatile days of August 2011, when as a result of the congressional deadlock on the debt ceiling, and the S&P downgrade of the US, the DJIA swung by 400 points every day for 4 days in a row just to get Congress to come to the "compromise" exposed in painful detail by Bob Woodward a few days ago, fear not: they are coming back, and with a vengeance. Because while last year only the debt ceiling was under discussion, now we get the double whammy of the debt ceiling and the Fiscal cliff. And just so the suspense meter is pushed off the charts early, and the performance gets maximum billing for theatrics if not execution, House Speaker John Boehner has just said he's not confident Congress can reach a budget deal and avoid a downgrading of the U.S. debt rating. Let us paraphrase: there will be no deal until the 11th hour, 59th minute, 59th second, and 999th millisecond, at which point the market will plunge and get Congress to do what it always does: Wall Street's bidding, which now and always, is a smooth and seamless continuation of the status quo.

Jailed UBS Employee Gets $104 Million From IRS For Exposing Swiss Bank Account Holders

Just in case there wasn't enough excitement and fury directed at Swiss bank account holders, which continue to dominate the presidential election "debate" above such mundane topics as the economy, or, say, reality, here comes the IRS, which as we noted yesterday collected $192 billion less than the government spent in the month of August alone, and have awarded Bradely Birkenfeld, a former UBS employee who in 2008 pleaded guilty to conspiracy to defraud the United States and was sentenced in 2009 to 40 months in prison, but received preferential whistleblower status after a prior arrangement to expose numerous Americans with Swiss bank accounts, has just been awarded $104 million.

Raising Taxes Has Never Been Good For Any Economy

Admin at Jim Rogers Blog - 29 minutes ago

Raising taxes has never been good for any economy anywhere in the world. - *in CNBC* *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.* 

 

'Great Uncertainty' About All Sovereign Exists Today

Eric De Groot at Eric De Groot - 1 hour ago

There's great uncertainty about all sovereign debt. Nations spend beyond their means and alter tax policies with little to no regard for its effect on international competitiveness. The economic instability that arises from this environment has sent companies overseas, cash holdings to record levels, and interest rates failing to historic lows. Small businesses, a huge engine for job creation in... [[ This is a content summary only. Visit my website for full links, other content, and more! ]] 

 

I Want To Find The Opportunities Which I Haven’t Thought Of

Admin at Jim Rogers Blog - 2 hours ago

I want to find the opportunities which I haven’t thought of, which CNBC hasn’t reported yet. That’s where there would be opportunities if there are opportunities, and it may just be the ruble. - *in CNBC* * *Related: Market Vector Russia ETF Trust (RSX) * * *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.* 

 

Reality Lies Within The Eye of The Beholder

Eric De Groot at Eric De Groot - 3 hours ago

Unfortunately for most, reality lies within the eye of the beholder. When that reality is skewed by the invisible hand through misdirection, the weak inevitable sell fear and buy greed during secular bull markets. This tendency minimizes profit potential for many within the investment and gold community. The retest of the 2010 breakout zone, a normal technical occurrence,... [[ This is a content summary only. Visit my website for full links, other content, and more! ]] 

 

A Very Dangerous Trend

Admin at Marc Faber Blog - 4 hours ago

This is a very dangerous trend, and I will always, always fight governments on every level I can because the larger the government is, the larger the abuse is in a system. - *in Business Insider* *Marc Faber is an international investor known for his uncanny predictions of the stock market and futures markets around the world.* 

 

I Suspect The Euro, As We Know It, Will Not Survive

Admin at Jim Rogers Blog - 4 hours ago

This is not solving the problem. All they are doing is pushing the problem out into the future, hoping that the problem will go way. I suspect the Euro, as we know it, will not survive. - *in Reuters* *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.* 

 

The Way To Protect Yourself Is To Own Real Assets

Admin at Jim Rogers Blog - 4 hours ago

Commodities have been correcting for a while. Now everybody knows they're throwing money into the market, and history tells you that when they do this the way to protect yourself is to own real assets whether it's silver or rice. If the world economy gets better, I own commodities because there's shortages developing. If it doesn't they're (central banks) all going to print money. It's the wrong thing to do, but it's all they know to do. - *in Yahoo Finance* *Jim Rogers is an author, financial commentator and successful international investor. He has been frequently featured in Tim... more » 

Chart Of The Day: Five Years Of Jobs Versus Entitlements

The Second Great Depression officially started in December 2007. The NBER tells us that the recession that started at the same time ended some time in the summer of 2009. The Second Great Depression continues. The chart below shows the cumulative increase in Americans receiving foodstamps and disability benefits since December 2007 on the positive Y-Axis, and the jobs lost on the negative Y-axis. No additional explanation is necessary.

Democratic Convention Trumps Economic Reality As Consumer Confidence Surges

Gallup's US economic confidence index surged 11 points last week (more than the 10 points when Bin Laden was killed) and has reached levels comparable to the pre-crisis highs from January 2008. As Gallup notes, it appears that the spark for the dramatic rise in Americans' economic confidence last week was the Democratic National Convention. A review of Gallup's nightly tracking results shows that the index was consistently near or below -25 each night in late August and early September, but then sharply improved on Sept. 4, the first night of the convention, to -18. Confidence then held at or near -18 through Sunday, despite the dismal August unemployment report Friday morning showing continued weak jobs growth. More specifically, the convention appears to have given Democrats and, to a lesser degree, independents, fresh optimism about the economy. We can only assume that the cognitive dissonance of the hope-holding believers-in-change will not carry through to real economic growth or all those other 'hopers' - the 'this-time-QE-is-different' crowd - will be sadly disappointed.

Art Cashin Remembers 9/11

"...the only smiles you see in Wall Street are on the photocopied photos of the missing that family and friends have taped to walls, mailboxes and lampposts. It may take a long time for smiles to naturally return to Wall Street. It may take a long while to find those criminals who took our smiles and our friends. But, we will have patience. As our President said – "We will not tire. We will not falter. We will not fail!"
 

No Dead Cat Bounce In Spanish Home Price Which Collapse 12% In August

Despite the exuberance in Spanish equity and bond markets (which in the US managed to create a quadruple-dip bounce), home prices just can't get a break in the troubled bailout-less nation. According to TINSA, the general home price in Spain fell 11.6% YoY, and has recent reaccelerated with a 2.8% drop sequentially as hope for a third-time's-the-charm bounce now faded for the forelorn real estate market. The Mediterranean Coast suffered the most, -14.7% YoY (and are down a cumulative 39.5% from the highs). Overall, Spanish house prices are down a cumulative 32.4% from the December 2007 highs (back to 2003 levels). This re-acceleration of the downturn in home prices is hardly what the Dreme is made of as bank balance sheets come under further pressure; deposit outflows will simply not stop until there is underlying improvement in bank collateral, i.e. mortgages and housing values; and so in effect, all this news indicates is that bank balance sheets are even more impaired than previously believed (tourniquet or amputation?).

Donations help maintain and defray the operational costs. Paypal, a leading provider of secure online money transfers, will handle the donations. Thank you for your contribution.

I'm PayPal Verified

 

$648 Trillion Derivatives Market Faces New Collateral Concentration Risks

In a sad case of deja vu all over again, the over-reliance on 'shaky' collateral and concentration of risk is building once more - this time in the $648 trillion derivatives market. New Clearing House rules (a la Dodd-Frank) mean derivatives counterparties are required to pledge high quality collateral with the clearing houses (or exchanges) in a more formalized manner to cover potential losses. However, the safety bid combined with Central Banks monetization of every sovereign risk asset onto their balance sheet has reduced the amount of quality collateral available; this scarcity of quality collateral creates liquidity problems. The dealers, ever willing to create fee-based business, have created a repo-like program to meet the needs of the desperate derivative counterparties - to enable them to transform lower-quality collateral into high quality collateral - which can then be posted to the clearing house or exchange. This collateral transformation, while meeting a need, runs the risk of concentrating illiquid low quality assets on bank balance sheets. In essence the next blow up risk is the eureka moment when all banks are forced to look at the cross-posted collateral. Last time it was the 'fair-value' of housing, now it is the 'fair-value' of 'transformed' collateral that is pledged at par and is really worth nickels on the dollar - "The dealers look after their own interests, and they won’t necessarily look after the systemic risks that are associated with this."

Moody's Warns Of 1 Notch Downgrade If A Bitterly Divided Congress Does Not Begin To Cooperate

13 months ago, in the aftermath of the debt ceiling fiasco, which we now know was a last minute compromise achieved almost entirely thanks to the market plunging to 2011 lows, S&P had the guts to downgrade the US. Moody's did not. Now, it is Moody's turn to fire up the threat cannon with a release in which it says that should the inevitable come to pass, i.e. should congressional negotiations not "lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term" then "Moody's would expect to lower the rating, probably to Aa1" or a one notch cut. Moody's also warns that should a repeat of last year's debt ceiling fiasco occur, it will also most likely cut the US. Of course, that the US/GDP has risen by about 8% since the last August fiasco has now been apparently forgotten by both S&P and Moodys. Sadly, continued deterioration in the US credit profile is inevitable, as every single aspect of modern day lives that is "better than its was 4 years ago" has been borrowed from the future. More importantly, with the S&P at multi year highs courtesy of Bernanke using monetary policy to replace the need for fiscal policy, Congress will see no need to act, and Moody's warning will be completely ignored. This will continue until it no longer can.

July Trade Deficit Comes In Less Than Expected As Global Trade Slows Down

America's July trade deficit came in slightly better than expected, printing at $42 billion, compared to expectations of $44.4 billion, on exports of $183.3 billion and imports of $225.3 billion, which was to be expected in light of the ongoing drop in Chinese net trade surplus. After all global trade is a zero sum game. The better than expected number was an increase from the revised July deficit of -$41.9 billion, revised lower from $42.9 billion in June. And while GDP beancounter calculations will generate slightly higher Q3 GDP forecasts as a result of the number and revision, the reason for the "improvement" is an ongoing contraction in global trade, which is anything but favorable for the world's economies for which any diversion from a status quo M.O. means longer-term pain.

Chinese Crude Imports Plunge To Mid-2010 Levels

By now everyone knows about the collapse in Chinese iron ore consumption, electricity production and luxury good demand (see Burberry), as well as the record copper stockpiling, all of which point to the arrival of the long-deferred Chinese hard landing. Rumors, subsequential denials notwithstanding, that Chinese Hu Jintao successor Xi Jinping may or may not be missing, are not helping. Below we present yet another data point which had, for the longest time managed to diverge from the underlying Chinese economic reality, only for it too now to recouple with gravity with a bang: Chinese crude imports. Coming in at 18.4 million barrels, this was a 16% plunge from July's total imported energy needs, and is the lowest print since mid-2010 swoon, first crossed to the upside back in early 2009. Which likely is where the general Chinese economy is as well, at least in terms of actual demand. Only this time instead of going from the lower left to the upper right, to quote Dennis Gartman, it is doing the inverse.

Iran Gold Imports From Turkey Surge To $8 Billion YTD As Gold Increasingly Used As Currency

Central bank demand internationally continues and demand for gold in the increasingly volatile Middle East remains robust as seen in data from the Istanbul Gold Exchange. It showed that Turkey’s gold imports were 11.3 metric tons last month alone. Silver imports were 6.7 tons, the data show. Much of these imports may be destined for Iran where imports have surged an astonishing 2,700% in just one year – from $21 million to $6.2 billion. In the first seven months of this year, Turkey's exports to Iran have also skyrocketed to $8 billion, up from $2 billion in the same period last year. And it is widely believed that the major portion of the increase, which is $6 billion, stems from the export of gold. There is speculation that the Iranian central bank is buying gold and that they may be accepting gold in payment for oil and gas in order to bypass western sanctions.  Turkey is paying for the oil and natural gas it is importing from Iran in gold, Turkish opposition deputies have claimed, drawing attention to the enormous increase in Turkey's gold exports to Iran in 2012.  “Gold is being used as an instrument for payment. Under the guise of exportation, gold is being sent to Iran in exchange for oil,” Sinan Aygün, a deputy from the Republican People's Party (CHP), has told Turkish daily Today's Zaman.

Daily US Opening News And Market Re-Cap: September 11

Equities traded lower in Europe today as market participants continued to book profits after a rally to 13-month highs on growing concerns that even though the Constitutional Court in Germany will dismiss the injunction, it may enforce certain conditions. In addition to that, yesterday’s comments from Spain’s Rajoy who said that the new ECB backstop makes a bailout for his country less urgent. As a result, there is a risk that markets may scale back their expectations of an imminent full-scale bailout and in turn lead to another speculative attack on Spanish bonds. This, together with touted profit taking, saw the short-end in Spain and Italy come under pressure (2y Spanish yield up 8bps and 2y Italian yield up 7bps). In turn, this supported duration assets throughout the session. Looking elsewhere, the looming elections failed to deter investors from the latest DSL tap, which drew a record low yield. Going forward, the second half of the session will see the release of the latest Trade Balance data from the US, as well as the weekly API report. In addition to that, the US Treasury will sell USD 32bln in 3y notes.

Frontrunning: September 11

• Germany says U.S. debt levels "much too high" (Reuters)
• Netanyahu ramps up Iran attack threat (Reuters)
• Burberry plummets by most ever, slashes guidance, rattles Luxury-Goods Industry as Revenue Growth (Bloomberg)
• FoxConn Again Faces Labor Issue on iPhones (NYT)
• Southern whites troubled by Romney's wealth, religion (Reuters)
• China's Xi not seen in public because of ailment (Reuters)
• Another California muni default: Oakdale, Calif., Restructuring Debt, Planning Rate Raise After Default (Bond Buyer)
• Spain's PM expects "reasonable" terms for any new aid (Reuters)
• Bernanke Proves Like No Other Fed Chairman on Joblessness (Bloomberg) - Ineffective like no other?
• John Lennon’s Island Goes on Sale as Irish Unpick Property Boom (Bloomberg)

 

Overnight Summary: The Karlsruhe Konstitutional Knights Don't Say Ni(en) Yet

The key event overnight was the German constitutional court's announcement shortly after 8 am CET in which the Krimson Kardinals announced that, as largely expected by everyone except the EURUSD trading algos, there would be no delay in the September 12, 10 am CET injunction decision, as a result of the last minute bid by Peter Gauweiler. As Bloomberg reported, “It’s no surprise the court won’t change its plan,” said Christoph Ohler, a professor of European law at Jena University. “You cannot directly sue over the acts of European institutions in a German court, so it’s difficult to introduce these arguments in this case." The decision to press ahead with the ruling will probably bolster the German government’s faith that the bailout facility will get the court’s backing. German Finance Minister Wolfgang Schaeuble told students last week he was confident the ESM would be approved. “Europe won’t collapse on Sept. 12,” Franz Mayer, a law professor at Bielefeld University, said in an interview last week. “In the end, the court will allow Germany to ratify the ESM, but there will probably be some strings attached. The bigger issue than the actual ruling is what extra language the court will add to the reasoning on where the limits are in the future,” said Mayer. “The markets seem to be quite afraid the judges may spoil certain options for the future, like collectivization of debt within the euro zone." Which leads us to the quote of the morning when even Schauble it appears is channeling Clinton after he said that interpretations on the word "unlimited" can vary. No they can't, and this is precisely the issue that the judges will take offense with, if anything.

Donations help maintain and defray the operational costs. Paypal, a leading provider of secure online money transfers, will handle the donations. Thank you for your contribution.

I'm PayPal Verified