POSTS: WEEKEND 07-17/18-10
GEO-POLITICAL TENSIONS - ISRAEL / KOREA / IRAN
SOVEREIGN DEBT & CREDIT CRISIS
Its official, we are pumping again!
|After allowing liquidity to subside forces in power have
addressed the problem and world liquidity is flying towards new
highs. There is:
- European QE involved,
- talks of
additional stimulus in Japan,
- research stating that due to
securitization Chinese loans in H1 2010 were 30% higher than
officially acknowledged, and
- FOMC minutes indicating that
the Federal Reserve's board is cosily discussing further
securities purchase if warranted.
So while the tone was
around the end of Q1 that of austerity, letting liquidity
facilities expire, and withdrawing "exceptional" accomodation, it
appears monetary policy doesn't match fiscal rhetoric .
SPAIN / PORTUGAL
Crisis forces Berlusconi to cancel summer holiday
University Of Michigan Consumer Sentiment Plunges ZH
|The UMichigan consumer confidence index dropped from from 76,
the best number since January 2008, to 66.5, the
lowest since August 2009, on expectation of 74.5.
The expectations component came in at 60.6 versus expectations of
68.5, the lowest since March 2009, while the conditions index
showed a reading of 75.5 versus expectations of 84.0, lowest since
November 2009. The 1 Year inflation expectation rose modestly from
2.8 to 2.9. Altogether another economic data disaster.
ECRI Plunges At 9.8% Rate, Double Dip Recession Virtually Assured
|The ECRI Leading Economic Index just dropped to a fresh
reading of 120.6 (flat from a previously revised 121.5 as the
Columbia profs scramble to create at least a neutral inflection
point): this is now a -9.8 drop, and based on empirical evidence
presented previously by David Rosenberg, and also confirming all
the macro economic data seen in the past two months, virtually
assures that the US economy is now fully in a double dip recession
scenario."It is one thing to slip to or fractionally below the
zero line, but a -3.5% reading has only sent off two head-fakes in
the past, while accurately foreshadowing seven recessions — with a
three month lag. Keep your eye on the -10 threshold, for
at that level, the economy has gone into recession … only 100% of
the time (42 years of data)." We are there.
Weekly Leading Index Almost A Lock For Double Dip Territory
EURIBAR Going Parabolic??
Chinese Treasury Dump of US Bonds Brings Its Total Holdings To One
|We are a rather surprised that this morning's stunning
International Capital report has not gotten far more
prominent attention. The reason: in it we read that in May 2010,
China dumped $33 billion in Treasuries, bringing its total
to the lowest since June 2009. Furthermore, Japan also
offloaded $8.8 billion in bonds, as did the Oil Exporters. Yet
total foreign Treasury holdings increased from $3,957 billion to
$3,964 billion almost exclusively as a result of ongoing
exponential UK accumulation.
It is time someone in the
mainstream media asked just who is doing all this "UK-based"
buying? It is not hedge funds, which operate out of Caribbean
Banking Centers, and which saw an increase in holdings from $151.8
billion to $165.5 billion as risk went completely off in the month
of May courtesy of the Flash Crash, Greece, and the general
insolvency of Europe. It is also not China due to a diverging
pattern in Bills accumulation versus disposition. Additionally,
May saw a dramatic decline in total foreign purchases of total US
assets, dropping from $110.3 billion to just $33 billion, with
Corporate Bonds and Corporate Stocks seeing a rare monthly sell
off ($9 billion and $432 million).
Yet in what is (and continues to be) the most perverse
observation, that proceeds without any questions from the
mainstream media, the otherwise broke UK, once "bought: a stunning
amount of Bonds, or just over $28 billion in the month of May,
consisting of $27 billion in Bonds, and $1.3 billion in Bills.
The "UK" accumulation patterns continues growing in an
exponential pattern, and the country which owned "just" $180
billion in USTs in December, has doubled its holdings to $350
billion in less than half a year.
And here is the most imporbably chart we have seen in a long
This is not hedge fund accumulation, as Caribbean Banking
Centers, traditionally the locus of HF accumulation saw a $14
billion increase in May, and if it is China, as is widely rumored,
why was there an increase in Bill holdings? This is
increasingly appearing as shadow Fed debt monetization operation,
operating out of the United Kingdom.
US bank results worry investors FT
BofA profits hit by weak mortgage revenues FT
It's about the Level of Leverage BI
Worries are expanding over whether or not the global
economic recovery is going to be able to persist with
banks not lending to
consumers. That lack of lending is a result of
individuals, corporations, and banks preferring to pay off old
debts rather than take on new debt or provide new loans.
Christopher Laird explains this chart as follows:
The point of emphasizing it's from the end of WW2 is
that we are not talking merely about a banking crisis, or
whatever. We are talking about the deleveraging of the
greatest economic/finance bubble in history. Once the level of
leverage reached 60 to 1, it becomes impossible to stay ahead
of the deleveraging, even for central banks. The implications
are staggering. Every major economy in the world is involved.
The outcomes of deleveraging this monster bubble, represented
by the green oval, will be what I term Credit Crisis II. At 60
to 1 leverage, a loss of 1 to 2% wipes out the capital.
Laird does not specify what that leverage amounts to, but
from our understanding it means total leverage within the
world financial system. That means everything from
individuals, to corporations, to banks and governments. That
means, in this scenario, that the world currently stands at 60
to 1, where we are leveraged 60 to the 1 of real reserves we
DODD FRANK ACT
Finreg heralds a Great Escape for bankers
Failures of the Dodd-Frank Act FT
The financial reform bill FT
The Truth About Financial Reform: It's A Big Fat Failure
Harvey Pitt a former chairman
of the SEC
Dodd-Frank is a ponderous beast. If Congress were paid
by the word or the page, this verbiage might be
understandable. But neither of those conditions exists,
meaning all we can be certain of is that no one in
Congress or the administration has actually read the
• Who actually knows what’s in the bill? Passing
legislation without understanding its contents is akin to
allowing inmates to run the asylum. Only congressional
staffers and paid lobbyists know what’s in the bill, and
perhaps only specific provisions. In a bill this large,
dealing with subjects this complex, all the rest of us
know are the sound bites prepared by the shepherding
• The legislation teems with unintended consequences. A
case in point is the provision requiring the SEC to
establish an investor advocate. Putting to one side the
fact that this is the SEC’s mandate, this provision
unleashes an SEC adversary—someone who must express
unfiltered judgments on the job performance of everyone
else at the agency, including the five commissioners,
giving this person an unlimited budget and allowing this
person to hire outside counsel to sue the SEC or FINRA, if
he or she disagrees with their actions!
• The bill sets the SEC up for failure. The SEC is
given more rule-making, more studies and more onerous
responsibilities than any other financial regulatory body.
SEC must now regulate 10,000 hedge funds and several
thousand private-equity firms, but was denied what many
other financial regulators have—the ability to self-fund
its operations. The SEC presumably was denied this
authority because the members of its Appropriations
Committees don’t want to jeopardize campaign contributions
from those the SEC regulates. In particular, the SEC won’t
be able to inspect tens of thousands of new firms it will
oversee—or pay to get the kind of expertise to compete
with the private sector.
• The bill doesn’t do what it set out to accomplish.
The most important goal of this bill was to fix the
regulatory regime that permitted—and even fostered—the
last crisis. Viewed from that prism, the ugly truth is
this bill will make our system more vulnerable, not less.
What was, and is still needed, is a regulatory regime with
better flexibility that is more nimble, and able to spot
potentially damaging trends before those trends become
Instead, what we have is a bill that makes government
less nimble, and more ponderous. The systemic
regulator—the FSOC—can override decisions of individual
regulators. The Consumer Financial Protection Agency can
bog down any other agency by encumbering agency rules or
policies. And worst of all, the bill doesn’t provide the
transparency so desperately needed for new products, new
services, and new activities. In short, the bill addresses
last year’s crisis, but does nothing to prevent the next
crisis we’ll surely confront in short order.
In other words: Congress has labored mightily, and
brought forth a mouse!
US consumer regulation faces seismic shifts FT
All eyes on Warren as possible watchdog chief
RRESIDENTIAL REAL ESTATE - PHASE II
Why Do The Rich Default on Their Mortgages- Because In California and
Arizona, They Can ZH
Of America’s 11 million homeowners with negative equity, a
majority live in the four sand states where the real estate
bubble was concentrated--California, Florida, Arizona and
Nevada. Over three million live in California and Arizona,
where a borrower can hand over the keys to the lender and walk
away. These are two antideficiency states, where the lender
has no recourse beyond the collateral property. So of
course it makes sense that wealthy homeowners would default on
their mortgage loans. They live where in places home prices
were the highest and the fell the steepest, and where the
consequences of default are the least onerous.
wealthy are also less dependent on consumer credit. They can
buy cars for cash; and charge expenses on their debit cards.
So for them, it’s easy to make a fresh start. But the mortgage
debt doesn’t go away. It’s simply pushed off to the banks
insured by the Federal government. The rest of us pick up the
EXPIRATION FINANCIAL CRISIS PROGRAM/font>
PENSION & ENTITLEMENTS CRISIS
The White House is claiming that the so-called stimulus created
between 2.5 million and 3.6 million jobs even though total
employment has dropped by more than 2.3 million since Obama took
office. The Administration justifies this legerdemain by asserting
that the economy actually would have lost about 5 million jobs
without the new government spending.
GOVERNMENT BACKSTOP INSURANCE
BBP - British
Cameron to fight BP’s corner in US FT
political attacks on BP in the US Congress have continued this
week, with allegations over the company’s role in the release of
Abdel Basset al-Megrahi, the convicted Lockerbie bomber, and a
threat to stop it securing any more offshore exploration leases.
BP is concerned that the pressure from US
politicians could cripple the company, leaving it vulnerable to a
ExxonMobil, the largest US oil group.
Carl-Henric Svanberg, BP’s chairman, met
Mr Cameron on Friday to urge him to help counter the attacks being
directed against BP from Capitol Hill.
Mr Cameron told Mr Svanberg that he did
not want to inflame the row but that he would deliver a firm
reminder to Barack Obama, US president, and congressional leaders
of the importance of BP to the UK economy.
“The prime minister will be keen to make
clear how important the company is as a UK employer and how
important it is for pension funds,” one official said, speaking
after the 45-minute meeting with Mr Svanberg.
Cameron admits ‘special relationship’ unequal FT
OTHER TIPPING POINT CATEGORIES NOT LISTED ABOVE
Why US savers remain the ‘silent majority’ FT
FLASH CRASH - HFT - DARK POOLS
Decoding the psychology of trading FT
Finance wakes up to the power of behavioural study
Goldman- "As In Mid-June The S&P Looks Very Overvalued Relative To Yields"
"As in mid-June, the S&P looks very overvalued relative to
yields. Yields are also beginning to decline again as equities
stall." Sure enough the reverse is also true, and bonds may be
rich to stocks, but either way, we reiterate our observation that
the short stocks-short bonds trade will eventually converge
(luckily with the yield on the 10 Y so low, the carry is marginal
and the repo rate will likely be a greater burden until the spread
Here are some additional observations from Noyce.
- This is an update on a correlation chart we’ve looked at a
number of times over the last few weeks.
- It shows U.S. 10-year yields in green overlaid with the
S&P in blue.
- The correlation between the two has turned increasingly
positive over the last couple of months.
- At this point a similar setup appears to be developing to
that which came together during the second half of June (the
numbering below refers to the stages highlighted on the chart
The rise in equities stalls and yields
again begin to turn lower
Yields continue to drop, and eventually
equities also turn down, re-coupling with yields
- Overall, the S&P now sits just below significant
resistance centred on 1,093-1,112, and a similar yield/equity
divergence is developing to that seen during mid-June. We
should begin to watch very closely for signs of equities
peaking and again turning lower.
Noyce also has some bearish non-correlated technical
observations on the S&P. Specifically, he sees the 1,093-1,112
level as a major resistance in a Right Shoulder formation. Also, a
comparable bounce off lows into the 55/200 DMA was last seen in
November 2000, when the market proceeded to subsequently drop
notably as the tech bubble burst.
- There are two main points to make with regard to the price
action seen on the S&P over the last week;
- The market has recovered sharply from the lows of
early-July close to 1,000. The bounce has been similar to
that seen following the comparable negative 55-/200-dma
cross-over in November ’00, as a structural top was in the
process of forming. 1,093-1,112 should now act as strong
resistance and the easy part of the bounce could well have
run its course. An update on the historic comparison chart
is shown on the following slide
- Assuming the market is currently forming the right
shoulder of an H&S topping pattern and that the time
period taken to form the two shoulders should be similar,
the current consolidation could run until mid-August, and
likely remain within an approximate 1,100-1,000 range.
- In conclusion, a deep and sharp recovery over the last
couple of weeks, but one which is currently within the
constraints of what can be considered as part of a larger
structural top forming. The topping process could be
considered to have another 1 to 1.5 months to run given how
long the left-shoulder took to form. The historic comparison
with November ‘00 does however argue we should be near the top
of the range, with 1,093-1,112 good resistance.
- The last time a –ve 55/200-dma cross over took place
(55-dma falling through an already declining 200-dma) was in
- It was an important signal from a LT (multi-month)
perspective, however, the averages were re-tested as
resistance before the market again fell away.
- So far things are playing out similarly this time around.
The negative 55-/200-dma cross over is in place and the market
has come back to test the moving averages as resistance (the
downtrend from the April highs and 55-/200-dmas being
converged 1,093-1,112). While the market need not fall away
again immediately, the similarity of the current setup to
November ‘00 is quite striking. Another eventual down move
does still appear the most likely outcome.
Market Loses Nearly Half Of Short Covering Relief Rally In A Few Hours On
High Volume ZH
Once again the actual value of accumulation volume can be seen
today: after a 10 days short covering rally on fumes pushed the
market higher by nearly 7%, one day alone was sufficient to cut
the rally almost in half. The bounce is now back to the half way
point of the most recent decline, and just above the half way
point of the bounce, at just under 1,060. It appears Goldman's
technical charting on the 55/200 DMA cross was spot on.
Note that this chart is just a little date, as stocks closed at
|WE ARE CONSISTENTLY SEEING LOWER
HIGHS & LOWER LOWS
LOW VOLUMES ON RISE, HIGH
VOLUMES ON DROPS (ABOVE)
VIDEOVIDEO TO WATCH
QUOTE OF THE WEEK
"In a market, the cumulative
expenditure of the modestly endowed easily trumps the expenditure
of the rick. And even the rich are ultimately answerable to the
market: They became rich by satisfying customers, and will remain
rich only so long as they (or their investments) continue to
satisfy consumers. Consumer sovereignty is far more powerful a
constraint on the rich than political sovereignty. Indeed, even
the erosion of the rich by democracy is ultimately self-defeating,
for it eliminates that class of men and women in public life who
are under no financial pressure to remain at their posts, pursuing
policies in which they no longer believe. It is no coincidence
that the democratization of politics has been accompanied by a
decline in resignations on points of principle or of honor. The
vast majority of modern politicians simply needs the money.
rong>But even the restoration of a rentier political class
would not be enough to restore the blessings of good government.
As long as politicians must compete for votes, they cannot govern
honestly, or even disinterestedly. They cannot reverse decisions or
policies that have proved unworkable. They must persist, even in
intellectual error, and cannot escape a certain narrowness of
vision. To release politicians from this predicament, a
revolution is required. That revolution must be one not
of blood, but of constitutional and political ideas. It must put
an end to democracy without limits, before the prosperity of the
species is destroyed and liberty extinguished...The only lasting
solution to the plague of unlimited democracy is to attack
democracy at its moral foundation: the political equality of the
ZH - Zero Hedge - Business Insider,
WSJ - Wall Street Journal, BL -
Bloomberg, FT - Financial Times