Gordon T Long

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COMMENTARY for all articles by Gordon T Long

 

PRESERVE & PROTECT: The Jaws of Death

 

The United States is facing both a structural and demand problem - it is not the cyclical recessionary business cycle or the fallout of a credit supply crisis which the Washington spin would have you believe.

 

It is my opinion that the Washington political machine is being forced to take this position, because it simply does not know what to do about the real dilemma associated with the implications of the massive structural debt and deficits facing the US.  This is a politically dangerous predicament because the reality is we are on the cusp of an imminent and significant collapse in the standard of living for most Americans.

 

The politicos’ proven tool of stimulus spending, which has been the silver bullet solution for decades to everything that has even hinted of being a problem, is clearly no longer working. Monetary and Fiscal policy are presently no match for the collapse of the Shadow Banking System. A $2.1 Trillion YTD drop in Shadow Banking Liabilities has become an insurmountable problem for the Federal Reserve without a further and dramatic increase in Quantitative Easing. The fallout from this action will be an intractable problem which we will face for the next five to eight years, resulting in the “Jaws of Death” for the American public.  READ MORE

 

 

   

 

PRESERVE & PROTECT: Mapping the Tipping Points

The economic news has turned decidedly negative globally and a sense of ‘quiet before the storm’ permeates the financial headlines. Arcane subjects such as a Hindenburg Omen now make mainline news. The retail investor continues to flee the equity markets and in concert with the institutional players relentlessly pile into the perceived safety of yield instruments, though they are outrageously expensive by any proven measure. Like trying to buy a pump during a storm flood, people are apparently willing to pay any price.  As a sailor it feels like the ominous period where the crew is fastening down the hatches and preparing for the squall that is clearly on the horizon. Few crew mates are talking as everyone is checking preparations for any eventuality. Are you prepared?

 

What if this is not a squall but a tropical storm, or even a hurricane? Unlike sailors the financial markets do not have the forecasting technology to protect it from such a possibility. Good sailors before today’s technology advancements avoided this possibility through the use of almanacs, shrewd observation of the climate and common sense. It appears to this old salt that all three are missing in today’s financial community.

 

Looking through the misty haze though, I can see the following clearly looming on the horizon.

Since President Nixon took the US off the Gold standard in 1971 the increase in global fiat currency has been nothing short of breath taking. It has grown unchecked and inevitably became unhinged from world industrial production and the historical creators of real tangible wealth.  READ MORE


READER ROADMAP -  2010 TIPPING POINTS aid to positioning COMMENTARY

 

 

 

POSTS:  MONDAY 09-27-10

Last Update: 09/28/2010 03:31 AM

SCHEDULE: 1st Pass: 5:30AM EST, 2nd Pass: 8:00 AM, 3rd Pass 10:30 AM. Last Pass 5:30 PM

ARTICLE SOURCE 1 2 3 4 5 6 7 8 9 10
                       
Iran 'attacked' by computer worm Al-Jazeera (English)                    
Virus hits Iran nuclear programme FT                    
                       
Germany backs tough EU deficit rules FT X                  
Central Bank 'told Anglo' it had only €4bn to save banks Irish Times X                  
Irish Government Loses Another Supporter, Collapse Imminent BI X                  
Ireland to Outline Anglo Irish Costs to Calm Markets Bloomberg X                  
Japan looks at $55bn stimulus package FT X                  
                       
EU Set Secret Group to Save Euro WSJ                  
B_of_A Securitization Weekly-1 B of A     X              
Budget Gap Means Extending Tax Cuts a Bad Idea, Greenspan Says Bloomberg     X              
Hungarians Unwind Mortgages as Swiss Franc Reaches Record High Bloomberg         X          
Banks Keep Failing, No End in Sight WSJ           X        
Financial crisis far from over Xinhua           X        
U.S. Bails Out Major Credit Unions WSJ           X        
Credit Union Cleanup in U.S. to Cost as Much as $9.2 Billion Bloomberg           X        
Taleb Says Unawareness of Deficit Risk Has Him `Extremely Bearish' on U.S. Bloomberg             X      
                       
ARTICLE SOURCE 11 12 13 14 15 16 17 18 19 20
                       
Goldman- Unemployment Will Remain Sky-High For A Very Long Time BI   X                
Job Loss Looms as Part of Stimulus Act Expires NY Times   X                
QE Lite" -The Monetary Endgame ZH     X              
Global value of buy-outs doubles to $144bn FT       X            
China targeted in bill on currency manipulation AP             X      
No One Wins In Trade War With Chinese Samuelson             X      
Here's Where All That Government Spending Is REALLY Going BI                 X  
                       
                       
BP OIL                      
New Theory on BP Well Blowout WSJ                    
CENTRAL BANKING & MONETARY POLICY                      
Why QE2 + QE Lite Mean The Fed Will Purchase Almost $3 Trillion In Treasurys And Set The Stage For The Monetary Endgame ZH                    
Q2 2010 Flow of Funds Noland                    
GENERAL INTEREST                      
                       
FLASH CRASH                      
Further Confirmation On The Irrelevance Of Stock Markets ZH                    
MARKET WARNINGS                      
Signs Point to Swing and Miss on Earnings WSJ                    
Lack Of Capitulation By Shorts, As NYSE Short Interest Remains Near Record, Explains Parabolic September "Flush" Ramp ZH                    
B_of_A Securitization Weekly-2 B of A                    
Wall Street Sentiment Decision Point                    
MARKET & GOLD MANIPULATION                      
Europe’s central banks halt gold sales FT                    
                       
VIDEO TO WATCH                      
$10 Oil- Mike Maloney Schools Bankers on Deflation, Gold and Silver Wealth Cycles                    
                       

Complete Legend to the Right, Top Items below.
Articles with highlights, graphics and any pertinent analysis found below.

1

         

1-SOVEREIGN DEBT

2-EU BANKING CRISIS
3-BOND BUBBLE

4-STATE & LOCAL GOVERNMENT

5-CENTRAL & EASTERN EUROPE
6-BANKING CRISIS II
7-RISK REVERSAL

8-COMMERCIAL REAL ESTATE

9-RESIDENTIAL REAL ESTATE - PHASE II
10-EXPIRATION FINANCIAL CRISIS PROGRAM
11-PENSION CRISIS

12-CHRONIC UNEMPLOYMENT

13-GOVERNMENT BACKSTOP INSUR.
14-CORPORATE BANKRUPTCY

TODAY'S TIPPING POINTS UPDATE

RED ALERT

AMBER ALERT

ACTIVITY

MONITOR

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09-27-10

 

GEO-POLITICAL TENSIONS - ISRAEL / KOREA / IRAN

 

IRAN

Iran 'attacked' by computer worm  Al Jazeera (English)

 

Iran's nuclear agency is trying to combat a complex computer worm that has affected industrial sites throughout the country and is capable of taking over the control systems of power plants, Iranian media reports have said.

Experts from the Atomic Energy Organisation of Iran met this week to discuss how to remove the malicious computer code, or worm, the semi-official Isna news agency reported on Friday.

Isna said the malware had spread throughout Iran, but did not name specific sites affected.

Foreign media reports have speculated the worm was aimed at disrupting Iran's first nuclear power plant, which is to go online in October in the southern port city of Bushehr.

Speaking to Al Jazeera, Rik Ferguson, a senior security adviser at the computer security company Trend Micro, described the worm as "very sophisticated".

"It is designed both for information theft, looking for design documents and sending that information back to the controllers, and for disruptive purposes," he said.

"It can issue new commands or change commands used in manufacturing.

"It's difficult to say with any certainty who is behind it. There are multiple theories, and in all honesty, any of of them could be correct."

Virus hits Iran nuclear programme  FT

 

1- SOVEREIGN DEBT & CREDIT CRISIS

 

SOVEREIGNS

 

 

GERMANY

Germany backs tough EU deficit rules  FT

Finance minister sets up showdown with European counterparts

FRANCE

 

UK

 

IRELAND

Central Bank 'told Anglo' it had only €4bn to save banks Irish Times

Irish Government Loses Another Supporter, Collapse Imminent  BI

 
The ruling coalition has lost another supporter (via Lorcan Roche Kelly), MP Mattie McGrath of Tipperary South, bringing the coalition's majority to a razor thin 82-80. Once again, as with when it lost a supporter on Friday, it comes down to spending decisions. A collapse of the government seems imminent, which is exactly what the country (and all of Europe) doesn't need right now.

Ireland to Outline Anglo Irish Costs to Calm Markets  FT


JAPAN

Japan looks at $55bn stimulus package  FT

Tokyo seeks to combat rising yen and flagging

 

 

USA

 

 

 

2- EU BANKING CRISIS

   

EU Set Secret Group to Save Euro  WSJ

 

3- BOND BUBBLE

 

B_of_A Securitization Weekly-1  BofA

 

Offerless Bonds?

One of the main problems facing the Fed in indirectly monetizing US Treasurys (keep in mind the proper definition of monetization is the Fed buying bonds directly from the Treasury, as opposed to using Primary Dealer middlemen, which is how it operates currently), is that there simply are not enough bonds in circulation to be bid, under its current regime of operation! Readers will recall that as part of existing SOMA guidelines, the Fed is limited to holding at most 35% of any specific marketable CUSIP. Furthermore, applying the SOMA limit to the $2 trillion in upcoming next twelve month issuance, means that in the interplay of the prepayment feedback loop coupled with collapsing rates, the Fed will need to either change the cap on the SOMA 35% limit, or the Treasury will need to issue far more debt to keep up with the sudden expansion in the Fed's outright, and not just marginal, capacity for incremental debt. Priya Misra summarizes this conundrum facing the Fed best

We examine the Treasury market to analyze which part of the curve might benefit the most from Fed buying if it embarks on QE2. The constraints will come in term of the 35% SOMA limit as well as current outstandings and issuance profile. Table 5 provides the breakdown of average SOMA holdings and eligible dollar amount outstanding by sector. We estimate that in the nominal coupon universe, there is currently $1.3trillion in outstanding eligible issues for the Fed to buy. We compute eligible number of issues as the amount the Fed can buy without breaching its SOMA limit of owning 35% of the issue size. Considering that the Fed has not purchased 0-2 year securities in either QE1 or the reinvestment program so far, the eligible universe reduces to $935billion. Interestingly, $560bn of this is in the less than 7 year sector.

While the total eligible securities may seem like a low number in the context of QE2, we expect $2.1tn in gross issuance over the next year. Adding 35% of this gross issuance to the total, the Fed will have $1.67tn in eligible nominal outstanding to purchase without breaching the 35% limit. However, depending on the total size of QE2, much of the buying might have to be concentrated in the 2-7 year sector. To the extent that the Fed wants to keep long end rates low, it might have to increase the 35% SOMA limit, or the Treasury could change issuance.

We believe that the resolution to the limited supply question will be found promptly, as the last thing the US government and Treasury need is to be told that they need to issue more debt. We are confident they will obligly handily. From a purely structural perspective, suddenly the entire UST curve, and not just the "belly", will be offerless, as the Fed will now have a mandate of buying up virtually every single bond available in the open market, and then some! What this means is that rates will promptly plunge, and while many have noted the possibility that the 10 Year drops below 1% upon the formal announcement of QE2, we believe there is a very high probability that even the long-end can see rates drop substantially below 1%, while the 10 Year approaches 0%. Keep in mind that this move will not be predicated upon inflation expectations whatsoever (and in fact we believe this is merely the first step to an outright monetary collapse also known in some textbooks as hyperinflation), but merely as a means of frontrunning Ben Bernanke, as the entire bond market goes offerless, knowing full well that the Fed will buy any bond below its theoretical minimum price of 0% implied yield (we leave it to our readers to determine what this means price-wise on the curve). It also means that the Fed will finally cross the boundary into outright monetization, as Bernanke will be forced to directly bid for any new paper emitted by the US Treasury, to maintain the tempo of its purchases.

Asset Implications

As we have noted above, the immediate implication of the vicious (or virtuous if you are Ben Bernanke) feedback loop of collapsing rates, prepayments, and accelerating UST purchases, is that mid-and long-term rates will likely promptly approach zero, as every UST holder realizes they are now the marginal price setter in a market in which there is a bid for any price. The Fed will merely render the traditional supply/demand curve meaningless, and any bonds offered for sale at any price will be bid up by Brian Sack. The implication on stock prices is comparably obvious: to readers who have been confounded by the impact on stocks when there is $10 billion worth of POMOs in a week, we leave to their imagination what the impact on 4x beta stocks will be once the Fed floods the market with $90 billion worth of weekly liquidity, which is what we calculate to be the peak repurchase activity between the months of January and March, as QE2 ramps up to its full potential. In this vein, analysts such as Deutsche's Joe LaVorgna who this Friday came out with a note advising clients not to "Fight the Fed" (link) may take the message to heart. After all, if this last attempt by the Fed to spur asset price inflation, in which Bernanke is effectively telling the consumer that a house can be had for no money down, and for no interest ever, thereby eliminating the risk of price deprecitation, fails, it is game over.

 

Budget Gap Means Extending Tax Cuts a Bad Idea, Greenspan Says BL Newshour
“Interest rates are down for a number of technical reasons, which I won't get into. But, assuredly they're not going to stay here...”

 

4- STATE & LOCAL GOVERNMENT

 


5- CENTRAL & EASTERN EUROPE

 

Hungarians Unwind Mortgages as Swiss Franc Reaches Record High  FT

6-BANKING CRISIS II


Banks Keep Failing, No End in Sight  FT
The largest number of bank failures in nearly 20 years has eliminated jobs, accelerated a drought in lending and left the industry's survivors with more power to squeeze customers.
- Some 279 banks have collapsed since Sept. 25, 2008,
- In the second quarter of this year, the Federal Deposit Insurance Corp. increased its number of problem banks by 6% to 829
- The number of U.S. banks could fall to 5,000 over the next decade from the current 7,932
- Bank assets more than doubling to $13.8 trillion in the decade that ended in 2008.
- "When we step back and look at this financial disaster 10 years from now, the destruction of capital in our economy as a result of what we've endured will be the single greatest lasting impact on recovery and how the economy performs in the future,"
- cut bank-industry employment by 188,000 jobs, or 8.5%, since 2007
- FDIC is burdened with $38 billion of remnants it is trying to sell
- 94% of bank failures since 2008 had either residential or commercial real-estate as their largest category of delinquent loans.
- Surviving banks have raised more than $500 billion in new capital
- Bank of America, J.P. Morgan Chase & Co. and Wells Fargo hold 33% of all U.S. deposits, up from 21% in 2006
- "Absolutely unfair—the big boys have the clout," says Mr. Squires. "Community banks are in jeopardy all over the country."

Financial crisis far from over Xinhua

U.S. Bails Out Major Credit Unions  WSJ
Regulators announced Friday a rescue and revamping of the nation's wholesale credit union system, underpinned by a federal guarantee valued at $30 billion or more. Wholesale credit unions don't deal with the general public but provide essential back-office services to thousands of other credit unions across the U.S. The majority of retail credit unions are sound, but they will have to shoulder the losses through special assessments over the next decade. Friday's moves include the seizure of three wholesale credit unions, plus an unusual plan by government officials to manage $50 billion of troubled assets inherited from failed institutions. To help fund the rescue, the National Credit Union Administration plans to issue $30 billion to $35 billion in government-guaranteed bonds, backed by the shaky mortgage-related assets.


Credit Union Cleanup in U.S. to Cost as Much as $9.2 Billion BL
MW: $50 billion of toxic securities to be resold with government backing

7- RISK REVERSAL

 

Taleb Says Unawareness of Deficit Risk Has Him `Extremely Bearish' on U.S. BL

 

8- COMMERCIAL REAL ESTATE

 

 

9-RESIDENTIAL REAL ESTATE - PHASE II

 

 

10- EXPIRATION FINANCIAL CRISIS PROGRAM

 

 

11- PENSION & ENTITLEMENTS CRISIS



12- CHRONIC UNEMPLOYMENT


Goldman- Unemployment Will Remain Sky-High For A Very Long Time  BI

Goldman Sachs' Jim O'Neill:

Most importantly, the rebound in growth tends to be more subdued than normal (Chart 6) and it can take many years before unemployment rates fall (Chart 7). In essence, the pressure from the private- sector adjustment and deleveraging tends to make it difficult to deliver the kind of strong growth that is needed to eat into spare capacity. Updating our work here and plotting the US experience so far—together with our latest forecasts—shows that the US recovery, although slower than most normal recoveries, is not particularly unusual relative to the experience of the more serious housing busts.

Even in terms of U.S. GDP growth, the path so far has been pretty standard for a housing crisis:

Investors tend to have a short memory, and it's hard to keep blaming the housing crisis for problems that seem to persist well after wards. We try and find a new scapegoat since the old one seems tired, but maybe we're forgetting that unemployment remains very high and GDP growth prospects are sluggish simply because that's how recoveries from major housing crises tend to play out. It takes a very long time for unemployment to recover completely.

(Via Goldman Sachs, Global Economics Weekly, Jim O'Neill, 22 September 2010


Job Loss Looms as Part of Stimulus Act Expires  NY Times
Tens of thousands of people will lose their jobs within weeks unless Congress extends one of the more effective job-creating programs in the $787 billion stimulus act: a $1 billion New Deal-style program that directly paid the salaries of unemployed people so they could get jobs in government, at nonprofit organizations and at many small businesses.


13- GOVERNMENT BACKSTOP INSURANCE

 "QE Lite" -The Monetary Endgame  ZH

A Question of Composition

Probably the most important fact that economists and investors are ignoring is that QE2 will be accompanied by the prerogatives of QE Lite, namely the constant rebalancing the Fed's balance sheet for ongoing and accelerating prepayments of the MBS/Agency portfolio. This is a critical fact, because once it becomes clear that the Fed is indeed commencing on another round of monetization, rates will collapse even more beyond recent all time records (and if we are correct, could plunge all the way to zero). What is very important to note, is that as Bank of America's Jeffrey Rosenberg highlights, a material drop in rates, which is now practically inevitable, is certain to cause a surge in mortgage prepayments of agency securities: "Our mortgage team highlights a 100 basis point decline in rates would raise the agency universe of mortgages refinanciability from currently about half to over 90%." (full report link

The fact that declining rates creates a feedback loop on prepayments, which in turn results in more security purchases and even lower rates, is most certainly not lost on the Fed, and is the primary reason for the formulation of QE Lite as it currently exists. Indeed, those who follow the Fed's balance sheet, are aware that the MBS/Agency book has declined from a peak of $1.3 trillion on June 23, to $1.246 trillion most recently, a decline of $53 billion, which has been accompanied by $25 billion in Bond purchases, resulting in such direct FRBNY market involvements as $10 billion weekly POMOs. These, in turn, are nothing less than a daily pump of liquidity into the Primary Dealers (who exchange bonds boughts at auction for outright cash) by the Fed's Open Market Desk, which then liquidity is used to the PD community to bid up risk assets.

 

14- CORPORATE BANKRUPTCIES

 

Global value of buy-outs doubles to $144bn  FT

 

17- CHINA BUBBLE


China targeted in bill on currency manipulation AP

No One Wins In Trade War With Chinese Samuelson

19- PUBLIC POLICY MISCUES

Here's Where All That Government Spending Is REALLY Going  BI
The Congressional Budget Office is basically projecting $1-trillion dollar annual Federal budget deficits for as far as the eye can see.This will require the country to pile another $1 trillion of debt on top of our existing $13.5 trillion debt load each year, which will quickly drive our national debt-to-GDP ratio over 100% (Greece-like).So, naturally, people are concerned about all that government spending.So where's it going, really?Well, when you dig into the CBO's 10-year estimates for the growth in Federal spending over the period, you find that Federal government spending is expected to increase by about $2 Trillion a year over the next 10 years.Where's that money going?It's basically going to three things:

1. Entitlement programs (Social Security, Medicare, Medicaid) -- +~$1.2 Trillion, or 60% of the increase

2. Interest on our debt -- +~$750 billion, or 37.5% of the increase

3. Everything else -- $50 billion, or 2.5% of the increase

Here's a chart that shows this, from Paul Kasriel at Northern Trust:

Image: Northern Trust
What everyone's fighting about right now, by the way, is that little green bar--"everything else"--the 2.5%. Maybe it's time we turned our attention to the other 97.5%?

Paul Kasriel has more:  As the chart shows, the largest projected increase in spending by an order of magnitude over these years is for mandatory or entitlement programs - Social Security, Medicare and Medicaid. Demographics is the primary factor driving up these entitlement expenditures. Millions of baby boomers will become eligible for Social Security and Medicare benefits during the period covered in these projections. The second largest projected increase in federal expenditures is interest on the debt. On a percentage basis, this is the fastest growing category of federal outlays. Why is interest on the public debt growing so rapidly over this period? Partly because of the interest on all of the public debt piled up as a result of the federal budget deficits being incurred in each of the past fiscal years starting in 2002. That relatively small (green) bar in the chart represents the projected increase in all other federal outlays besides entitlement programs and interest on the public debt. The upshot of all this is that if one is serious about slowing the rate of increase in federal government outlays in the "out years," reduce entitlements for baby boomers. Good luck with all that.

Read the whole thing >

 



 


OTHER TIPPING POINT CATEGORIES NOT LISTED ABOVE

 

19-US PUBLIC POLICY MISCUES

 

 

24-RETAIL SALES

 

 

26-GLOBAL OUTPUT GAP

 

 

31-FOOD PRICE PRESSURES

 

 

32-US STOCK MARKET VALUATIONS

 




BP - British Petroleum

SULTANS OF SWAP: BP Potentially More Devastating then Lehman!

------------


New Theory on BP Well Blowout  WSJ
A new theory about the origin of the blowout of a BP oil well emerged when an outside investigator said the problem could potentially be traced to cracks that formed in an underwater formation.

   

CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES

------------

 

Why QE2 + QE Lite Mean The Fed Will Purchase Almost $3 Trillion In Treasurys And Set The Stage For The Monetary Endgame  ZH
Whether or not the Fed will decide to engage in QE2 on its November 3 meeting, or as others have suggested December 14, and maybe even as far out as January 25, the actual event is now a certainty. And while many have discussed this topic in big picture terms, most notably David Tepper, who on Friday stated that no matter what, stocks will benefit from QE2, few if any have actually considered what the impact of QE2 will be on the Fed's balance sheet, and how the change in composition in Fed assets will impact all marketable asset classes. We have conducted a rough analysis on how QE2 will reshape the Fed's balance sheet. We were stunned to realize that over the next 6 months the Fed may be the net buyer of nearly $3 trillion in Treasurys, an action which will likely set off a chain of events which could result in rates dropping all the way to zero, stocks surging, and gold (and other precious metals) going from current price levels to well in the 5 digit range.

A Question of Size

One of the main open questions on QE2, is how large the Fed's next monetization episode will be. This year's most prescient economist, Jan Hatzius, has predicted that the minimum floor of Bernanke's next intervention will be around $1 trillion, which of course means that he likely expects a materially greater final outcome from a Fed that is known for "forceful" action. Others, such as Bank of America's Priya Misra, have loftier expectations: "We expect the size of QE2 to be at least as much as QE1 in terms of duration demand." As a reminder, QE1, when completed, resulted in the repurchase of roughly $1.7 trillion in Treasury and MBS/Agency securities. It is thus safe to assume that the Fed's QE2 will likely amount to roughly $1.5 trillion in outright security purchases. However, as we will demonstrate, this is far from the whole story, and the actual marginal purchasing impact will be substantially greater.

If we are correct in our assumption that on November 3, the Fed will announce a $1.5 trillion new asset purchase program, the implications of the previous observation will be dramatic. We additionally believe, that unlike QE1, the Fed will be far less specific as to the composition of purchases this time around, specifically for the aforementioned resion. As the Fed adds an additional $1.5 trillion in total assets, and as 10 Year rates, and thus 30 year cash mortgage rates, drop, the prepayment frequency of the Fed's existing MBS/agency book will surge, until it approaches and surpasses BofA's estimated 90% in a very short period of time. And courtesy of its QE Lite mandate, the Fed will purchase not only $1.5 trillion of US Treasurys as part of its new QE2 mandate, but will actively be rolling those MBS and Agencies put to it by the general public. As a result, it is our belief that over the six months beginning on November 3, the Fed will end up purchasing almost $3 trillion in US Treasurys in total. This can be summarized visually as follows:

As the chart shows, while the Fed's balance sheet grows from its current level of $2.3 trillion to $3.8 trillion, it is what happens to the Treasurys held outright by the Fed that is most disturbing: from $800 billion, we expect this number to surge to nearly $3.6 trillion in just over half a year, a massive increase of almost $3 trillion. The implications of this asset "transformation" on the Fed's balance sheet, not to mention those of US retail and foreign investors, and capital markets in general, will be dramatic


Q2 2010 Flow of Funds Noland

How much of an impact would $2 trillion in QE give us? Not much, according to former Fed governor Larry Meyer, who, according to Morgan Stanley, "...maintains a large-scale macro-econometric model of the US economy that is widely used in the private sector and in public policy-making circles. These types of models are good for running 'what if?' simulations. Meyer estimates that a $2 trillion asset purchase program would: 1) lower Treasury yields by 50bp; 2) increase GDP growth by 0.3pp in 2011 and 0.4pp in 2012; and 3) lower the unemployment rate by 0.3pp by the end of 2011 and 0.5pp by the end of 2012. However, Meyer admits that these may be 'high-end estimates'.

"Some probability of a resumption of asset purchases is already priced in, and thus a full 50bp response in Treasuries is unlikely. Moreover, a model such as Meyer's is based on normal historical relationships and therefore assumes that the typical transmission mechanisms are working. For example, a drop in Treasury yields would lower borrowing costs for consumers and businesses, helping to stimulate consumption, business investment and housing. But there is good reason to believe that the transmission mechanism is at least partially broken at present, and thus the pass-through benefit to the economy associated with a small decline in Treasury yields (relative to current levels) would likely be infinitesimal." (Morgan Stanley)


 

 GENERAL INTEREST

 

 

FLASH CRASH - HFT - DARK POOLS

 

Further Confirmation On The Irrelevance Of Stock Markets  ZH

 
Last week we pointed out that Jefferies group, one of the last few remaining non-BHC broker-dealers, has just experienced its single most disastrous drop in trading volumes, as its principal trading revenues plunged by 80% QoQ. This is merely confirmation of what we have been warning ever since we started highlighting the series of 20 consecutive outflows from domestic equity funds: banks will soon be forced to lay off thousands of people as the primary revenue driver for the bulk of Wall Street firms - stock volumes - is now gone.  BofA and RBS have already confirmed they are letting people go. Next up: the electronic trading giants such as ITG, Knight and Schwab. And it will only get worse. As the FT reports, September trading volumes are already 8% below August's, which in turn was the lowest in 3 years! Of course, the Fed is fully confident that if the DJIA ends September at 11,000, investor confidence in stocks will return. We have one word for that - LOL.

 

 

MARKET WARNINGS

 

Signs Point to Swing and Miss on Earnings  WSJ
Already, 77 S&P 500 companies have said third-quarter earnings per share will fall short of analysts' estimates. The 2.3 ratio of negative to positive "preannouncements" for the third quarter is up sharply from 1.1 in the second quarter. That doesn't bode well for earnings season, which unofficially kicks off with Alcoa Inc.'s results on Oct. 7.

S&P 500 companies are expected to post year-to-year earnings growth of 24% in the third quarter. That compares with 39% growth in the second quarter, which was helped by most companies' dismal prior-year results. For 2011, analysts are forecasting a 14% gain, which would bring S&P earnings to $95.37 a share, a record.

 

Lack Of Capitulation By Shorts, As NYSE Short Interest Remains Near Record, Explains Parabolic September "Flush" Ramp ZH

 
It appears that just as retail investors refuse to allocate capital to stocks regardless of how artificially high the market goes, so shorts completely ignored the ramp in the market from ~ 1050 On August 30 to around 1125 on September 15: short remained dead even at 14.4 billion. So what happens? State Street/BoNY gets the daily short report, passes it on the the repo desks, and tells them to pull the borrow in the most shorted stocks, as apparently the message to the shorts just isn't getting through. And what better way to force a short ramp than to keep shorts massively squeezed. But because the stubborn shorts don't buy the ramp in stocks, they keep putting on new replacement shorts, which has led the market to keep recycling the weakest hands, endless retail outflows be damned. Which means that the squeeze could easily continue for so long as the State Streets of the world believe that the shorts will finally capitulate, and make the rally self-sustaining. So far it is not working.

 

 

B_of_A Securitization Weekly-2  BofA

 
The Fed will do this action (QE II) regardless of what happens on that other fateful event scheduled to take place on November 3. If it does not, asset prices will collapse leading America into a deflationary vortex of deleveraging, and Bernanke is fully aware of this. The only reason the market has found some validation to the September risk asset surge, is the "certainty" of QE2. Were this to be taken away, stocks would plunge, as would all other assets. And since the Fed is uncontrollable, and unaccountable to anyone, it is now impossible to prevent this line of action, whose outcome is what some may be tempted to call, appropriately so, hyperinflation. The direct outcome will be an explosion in all asset prices, although we continue to believe that of all assets, gold will continue to outperform both stocks and bonds, as recently demonstrated. Those who are wishing to front-run the Fed in its latest and probably last action, may be wise to establish a portfolio which has a 2:1:1 (or 3:1:1) distribution between gold, stocks and bonds, as all are now very likely to surge. We would emphasize an overweight position in gold, because if hyperinflation does take hold, and the existing currency system is, to put it mildly, put into question, gold will promptly revert to currency status, and assets denominated in fiat, such as stocks and bonds, will become meaningless.

We dread to look at a chart of the DXY in early 2011. The dollar will plunge, pure and simple, as the Fed makes it clear that it will not tolerate currency appreciation. Also, don't forget that as a side effect of QE2, another component that will surge in addition to Fed Treasury holdings, will be excess reserves held by the banks. If we are correct in estimating that the Fed's assets will explode to $3.8 trillion, then bank excess reserves will skyrocket by a factor of 150% from the current $1 trillion to well over $2.5 trillion. The immediate casualty of this will be the US Dollar: one needs to look no further than 2009 to see what happened to the DXY when excess reserves increased by $1 trillion, in order to extrapolate what happens when it becomes clear that Bernanke is prepared to put any amount of liabilities on the Fed's balance sheet in its latest reflation attempt. And if anyone had doubts about the Fed being able to successfully absorb $1 trillion in excess reserves accumulated through QE1, all those concerns will be put to rest once the number hits $2.5 trillion, or more.

Which brings us to gold. Needless to say, once the full "all in" realization of just what QE2 means for risk assets and capital markets sets in, gold (and other physical commodities) will promptly go from its current price of $1,300 to a number well in the five-digit range. We leave it up to our readers to provide the actual digits.

In summary, David Tepper may well be right that stocks will benefit from QE2, as will Bonds and as will commodities. In fact, every asset class will explode in a supernova of endless liquidity. To be sure, all of this will be very short lived. Very soon, all those assets denominated in fiat paper, will promptly collapse in the great black hole of reserve currency devaluation, as it becomes clear that the Fed will stop at nothing to win the race of global currency debasemenet. And of course, none of this is to be confused for an actual improvement in the economy, as QE2 will result in a dramatic and irreversible deterioration in the US, and thus global, economy, which, once the initial euphoria from QE2 recedes, will promptly progress to isolationism, protectionism, currency wars and exponentially accelerating monetization of each and every asset class, thereby rendering price discovery irrelevant, as central banks around the world stampede into irrelevant capital market, each buying up as much of everything as their printing presses will allow them, until the ink runs dry.

 

 

Courtesy of Hays Advisory

 

 

 

 

Wall Street Sentiment  Decision Point

 
"Wall Street Sentiment is one of many sentiment indicators we chart.  Wall Street Sentiment Survey data are provided courtesy of Mark Young of Equity Guardian Group. Data are complied from the results of a weekly survey of a group of experienced traders and technically oriented market analysts with a diverse set of analytical disciplines from Mark's message board at traders-Talk.com. Polling is conducted after the market close on Friday, and the results are normally published late Saturday. You can find more information on Mark Young's sentiment work at WallStreetSentiment.com.

What makes this sentiment survey unique is that the poll is taken after the close on Friday, and those polled are asked only to predict where the market will close as of the end of the following week -- up, down, or neutral (no opinion). In other words, everyone is on the same page, and only short-term projections are solicited.

Something I noticed when posting last weeks poll results was that bearish readings of greater than 65% often preceded price tops by a week or two. Reliability seems to be enhanced if a high percentage of bears occurs during an advance. I think this is unusual because, when sentiment indicators show strong bearish readings, a price advance usually follows."

 

 
The most recent reading of 75% bears has occurred during a modest advance, so it is probably a good idea to curb bullish enthusiasm.  Below is a longer-term chart to give you a better idea of the range of these sentiment readings.

 

 

MARKET & GOLD MANIPULATION

Europe’s central banks halt gold sales  FT

Run of large disposals ends

 

 

AUDIO / VIDEO

 

$10 Oil- Mike Maloney Schools Bankers on Deflation, Gold and Silver Wealth Cycles

 

 

 

 

QUOTE OF THE WEEK

 

“No country in the world can hold the dollar”

Brazilian central bank President Henrique Meirelles


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Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.ont>

 

© Copyright 2010 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.

 

         

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TIPPING POINTS

1-SOVEREIGN DEBT & CREDIT CRISIS

2-EU BANKING CRISIS
3-BOND BUBBLE

4-STATE & LOCAL GOVERNMENT

5-CENTRAL & EASTERN EUROPE
6-BANKING CRISIS II
7-RISK REVERSAL

8-COMMERCIAL REAL ESTATE

9-RESIDENTIAL REAL ESTATE - PHASE II
10-EXPIRATION FINANCIAL CRISIS PROGRAM
11-PENSION CRISIS

12-CHRONIC UNEMPLOYMENT

13-GOVERNMENT BACKSTOP INSUR.
14-CORPORATE BANKRUPTCY
 

15-CREDIT CONTRACTION II

16-US FISCAL IMBALANCES
17-CHINA BUBBLE
18-INTEREST PAYMENTS
19-US PUBLIC POLICY MISCUES
20-JAPAN DEBT DEFLATION SPIRAL
21-US RESERVE CURRENCY.
22-SHRINKING REVENUE GROWTH RATE
23-FINANCE & INSURANCE WRITE-DOWNS
24-RETAIL SALES
25-US DOLLAR WEAKNESS
26-GLOBAL OUTPUT GAP
27-CONFIDENCE - SOCIAL UNREST
28-ENTITLEMENT CRISIS
29-IRAN NUCLEAR THREAT
30-OIL PRICE PRESSURES
31-FOOD PRICE PRESSURES
32-US STOCK MARKET VALUATIONS
33-PANDEMIC
34-S$ RESERVE CURRENCY
35-TERRORIST EVENT
36-NATURAL DISASTER

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Book Review- Five Thumbs Up for Steve Greenhut's Plunder!  Mish

 

 

   

 

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Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

Copyright and Disclaimer

© Copyright 2010, Gordon T Long. The information herein was obtained from sources which the Gordon T Long. believes reliable, but we do not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that the Gordon T Long. or its principals may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Gordon T Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from us.