Replies to post #304516 on $Stock*Shop*Charts*News*Option$

[Tuff-Stuff]

jesse's>CFR: When the Fed Stops Monetizing US Sovereign Debt...


05 February 2010

The people at the Council on Foreign Relations speculate that US interest rates on Treasury debt will be increasing around the end of the first quarter if the Fed discountinues its monetization of mortgage debt.

As the Fed has essentially purchased ALL new US Treasury issuance since 2009, that seems to be a reasonable bet.

"The Federal Reserve plans to stop buying securities issued by government housing loan agencies Fannie Mae and Freddie Mac by the end of the first quarter.

This is not only likely to push up mortgage rates; Treasury rates should rise as well. Throughout 2009, the private sector sold a portion of their agency holdings to the Fed and used those funds to buy Treasurys.

Once the Fed’s agency purchases stop, this private sector portfolio shift will end, removing a major source of demand in the Treasury market.

As the chart shows, since the start of 2009 the Fed has bought or financed the entire increase in Treasury issuance. As Fed purchases slow and Treasury issuance continues at a high level, interest rates will have to move up to attract new buyers."


Posted by Jesse at 5:19 PM
Category: monetization, US Treasury Debt
Non Farm Payrolls Benchmark Revision and the Unemployment Rate as Cruel Farce


Well, we forecast the headline number exactly, with a loss of 20,000 jobs. No credit taken, it was as much a judgement call (aka SWAG) as any product of careful measurement.

As you may have heard, the Bureau of Labor Statistics did a benchmark revision. This is Washington speak for 'revised the numbers as far back as anyone might care to remember to give ourselves more wiggle room.'

The benchmark is a product of the Bernays Factor, that measure of public gullibility which permits obviously contrived government statistics to be taken seriously.

Did you react to the positive jobs trend initially announced in September - October 2009? Oops, it was really a greater loss than expected, and not a gain at all. One can only suspect that in a few years this whole recovery could be revised away without so much as a bureaucratic blush.

Here is a picture comparing the old and new headline numbers.



The change is pervasive. One item of note is the taking of more job losses in the earlier years, setting up a stable base for potential job gains in the present, without embarrassing oneself by getting out of synchronization with the actual growth of the civilian population. There will be more 'truing up' of the numbers in the future.


Unemployment Rate as Cruel Farce

Regarding that 'surprise drop' in unemployment to 9.7%, this is the result of people falling off the unemployment benefits radar, and becoming discouraged. It is essentially meaningless, if not downright misleading.

One may as well solve an unemployment problem by shipping people to Australia. Well, that does have some historical precedent. Hard to tell who has gotten the better deal on that one, at least over the long run.

A better measure of unemployment is the Labor Force Participation Rate, which provides information about the total number of people employed as a percent of the population, without benefit of official banishment.



That number continued to drop again in January, from 64.9% to 64.6%.

Here is a chart from the good folks at Calculated Risk that shows the employment situation in context with other post World War II recessions.



"Recession" hardly does it justice, does it?

Posted by Jesse at 10:39 AM
Category: Govenment statistics, labor participation rate, Non-farm Payrolls
04 February 2010
Proprietary Trading and Credit Default Swaps - Mission (Not) Accomplished


Here's why the Volcker Rule ran into a brick wall of Senatorial gravitas and pusillanimous punditry.

Give up prop trading AND banking status? The mutant Zombie Banks would not allow it.

Who needs insured deposits? What a bother. Its the Treasury guaranteed bonds and Discount Window access that count. When you are levering up Other People's Money you want it in bulk and wholesale, not retail.

Goldman is no surprise, because they are nothing but a hedge fund with the right connections and a rolodex full of Senators. But JPM bears watching, since they are at least nominally a bank, and Too Big Not To Leave a Mark (TBNTLM).

Prop trading - why lend when you can play at the tables?



Well, at least we have the Credit Default Swaps situation covered with the bailout of AIG, right?

Well, maybe not.... Two trillion down, but thirteen trillion to go.

I can see why the Fed completely failed to notice this little trend change in its banking oversight.



If the markets turn significantly lower, and the banks' balance sheets start wobbling again, and threaten to crash the system, or else, perhaps Obama can send young Tim up to the Congress with another scribbled request for a trillion dollar bailout. I can hear the sound of knives being drawn as he walks in the door...

Posted by Jesse at 6:33 PM
Category: Credit Default Swaps, Proprietary Trading
Taleb: US Treasuries a 'No-Brainer' Short


"Investors should bet on a rise in long-term U.S. Treasury yields, which move inversely to prices, as long as Bernanke and White House economic adviser Lawrence Summers are in office..."


Directionally correct we would say, but it is certainly a contrarian view today, with Treasuries and the dollar acting again as the safe havens of choice as fears of US jobs losses and Eurozone sovereign defaults frighten the markets.

Keep in mind that his time frame is '2 to 3 years.' Most punters do not realize that funds and specs hold record long positions in the dollar according to the latest Commitments of Traders Reports. Treasuries were a strong performer last year, and may be overbought relative to underlying fundamentals. But one repeatedly hears the meme "Everyone is short the dollar." And dollar debt is not a short, if one has the option of default.

But it will take the appearance of the effects of the ongoing monetization of debt by the Fed and the government agencies and Treasury programs that Taleb cites to trigger the declines in the bond and the dollar. And the euro and the pound may go first, to cushion the blow. Everything is relative, and the US banks will throw their relatives, their European cousins, under the bus if it is required to save their bonuses. The saying "he would sell his mother for an eighth" is a Wall Street proverb.

With a fiat currency regime, one always has to say, "it depends..."

And China is looking a bit bubbly as well, although the Chinese bank is acting to try and stem the speculation. It may not be enough.

Bloomberg
Taleb Says ‘Every Human’ Should Short U.S. Treasuries
February 04, 2010, 11:01 AM EST
By Michael Patterson and Cordell Eddings

Feb. 4 (Bloomberg) -- Nassim Nicholas Taleb, author of “The Black Swan,” said “every single human being” should bet U.S. Treasury bonds will decline, citing the policies of Federal Reserve Chairman Ben S. Bernanke and the Obama administration.

It’s “a no brainer” to sell short Treasuries, Taleb, a principal at Universa Investments LP in Santa Monica, California, said at a conference in Moscow today. “Every single human being should have that trade.”

Taleb said investors should bet on a rise in long-term U.S. Treasury yields, which move inversely to prices, as long as Bernanke and White House economic adviser Lawrence Summers are in office, without being more specific. Nouriel Roubini, the New York University professor who predicted the credit crisis, also said at the conference that the U.S. dollar will weaken against Asian and “commodity” currencies such as the Brazilian real over the next two or three years.

The Fed and U.S. agencies have lent, spent or guaranteed $9.66 trillion to lift the economy from the worst recession since the Great Depression, according to data compiled by Bloomberg. Bernanke, who in December 2008 slashed the central bank’s target rate for overnight loans between banks to virtually zero, flooded the economy with more than $1 trillion in the largest monetary expansion in U.S. history.

In a short sale, an investor borrows a security and sells it, expecting to profit from a decline by repurchasing it later at a lower price.

“Dynamite in the Hands of Children”

President Barack Obama has increased the U.S. marketable debt to a record $7.27 trillion as he tries to sustain the recovery from last year’s recession. The Obama administration projects the U.S. budget deficit will rise to a record $1.6 trillion in the 2011 fiscal year.

“Deficits are like putting dynamite in the hands of children,” Taleb said in an interview with Bloomberg Television. “They can get out of control very quickly.”

Taleb argued in “The Black Swan: The Impact of the Highly Improbable” that history is littered with rare events that can’t be predicted by trends. The best-selling book came out in 2007 before the global credit crisis sparked an economic slump and $1.7 trillion of losses at banks and financial institutions.

“The problem we have in the United States, the level of debt is still very high and being converted to government debt,” Taleb said in an interview with Bloomberg Television. “We are worse-off today than we were last year. In the United States and in Europe, you have fewer people employed and a larger amount of debt.”

Credit Outlook

Moody’s Investors Service Inc. said on Feb. 2 that the U.S. government’s Aaa bond rating will come under pressure in the future unless additional measures are taken to reduce budget deficits projected for the next decade.

Treasuries soared during the financial crisis, gaining 14 percent in 2008, as investors sought the relative safety of U.S. government debt. They fell 3.7 percent last year, according to Bank of America Corp.’s Merrill Lynch Unit, as risk aversion eased and the Standard & Poor’s 500 Index rallied 23 percent. So far this year U.S. government debt has gained 1.17 percent.

Yields fell today on concern European countries including Greece, Portugal and Spain face difficulty financing budget deficits. The yield on the benchmark 10-year note fell 6 basis points, or 0.06 percentage point, to 3.64 percent at 10:54 a.m. in New York, according to BGCantor Market Data.

“Democracies can’t handle austerity measures very well,” Taleb added. “We’re going to have a severe problem.”

Posted by Jesse at 12:51 PM
Category: black swan, contrarian, treasuries, US Treasury Debt
Bank Of America to Pay $150 Million Fine to Settle SEC Case


Breaking news...

Bank of America has agreed to pay a $150 million fine to settle a case with the SEC that it failed to disclose bonuses and other relevant information regarding the acquisition of Merrill Lynch.

Apparently there will be charges under the Martin Act against Mr. Ken Lewis, compliments of Mr. Andrew Cuomo.

The Martin Act, New York General Business Law article 23-A, sections 352-353, is a 1921 piece of legislation in New York that gives extraordinary powers and discretion to an attorney general fighting financial fraud. People called in for questioning during Martin Act investigations do not have a right to counsel or a right against self-incrimination. The act's powers exceed those given any regulator in any other U.S. state.

With a couple of his lieutenants, Mr. Blankfein could cover that bank fine suggested by the SEC with out of pocket money. But some banks are more equal than others, and GS would probably not condescend to subject itself to an SEC inquiry in the first place.

Mr. Lewis is an outsider, a non-NY banker. He could be food for the wolves, or the career of an ambitious AG.

If the Martin Act carries such power to safeguard the system, as Senator Bob Corker referenced yesterday in his critique of the Volker Rule, why don't they use it to probe the AIG scandal?

Posted by Jesse at 11:07 AM
Category: regulatory capture, Regulatory Reform, SEC, wristslap fines
Non-Farm Payrolls Report Preview for January 2010


The markets breathlessly await the latest Non-Farm Payrolls Report for the US, which will be released tomorrow morning. January is the month in this report that contains the largest seasonal adjustments by far.

Here is a projection of what tomorrow's numbers may look like, and their historical context. The raw number unadjusted for seasonality may be a loss of around 4,000,000 jobs.



It is no accident that the BLS does the major adjustment to its Birth-Death Model in January. Keep in mind that the Birth-Death adjustment is applied BEFORE seasonal adjustment, that is, to the raw, unadjusted number.

Given that the expected raw number will probably be around 3.5 million jobs lost, and then adjusted to a headline number much closer to zero, adding even 380,000 or so job losses to that does not result in such an enormous adjustment in January.

In other words, the adjustment is largely adjusted away by the seasonality. Nonsense, hardly connected to the real world, but quite clever bureaucratic sleight of hand really.



Saying all this, it seems almost needless to stress that any projection of the headline number is a tough call in January, because the seasonality has such enormous latitude. More in the nature of a SWAG than a proper forecast.

Then there is also the matter of the revisions to the prior two months at least, and the possibility of a revision to the whole series going back two years, which sometimes occurs.

So, we'll look for a 'headline number' closer to zero than not, with a shade to the negative, maybe a loss of 20,000 or so. But we are very prepared to be surprised to the upside to a positive number, and downside to a loss of around 80,000. That speaks less to our inability to forecast, we hope, and more so to the arbitrary nature of the government's willingness and ability to fiddle with the numbers.



With pretty colors, it may look more like a sideways chop than a plunge, especially in light of a greater negative from December which will be adjusted but not higher.



And as for the reaction of US equity markets in anticipation today?

As I have stated before, the banks and their prop trading desks are always and everywhere screwing you, and frontrunning their better insights into the markets, even if only by a few milliseconds.

Watch the sovereign debt situation. This may place a heavy weight on the equity markets. But perhaps not just yet.



http://jessescrossroadscafe.blogspot.com/

[Tuff-Stuff]

~~>No Holds Barred

By GAIL COLLINS
Published: February 5, 2010

Washington was immobilized by snow on Friday. This is highly unusual. Normally, Washington is immobilized by senators.

This time storm warnings came just as the Senate had hit a point of uncommon productivity. In a single week, it managed to not only confirm two U.S. marshals, but also to approve a couple of nominations to the Obama administration. Finally, we can sleep easy in the knowledge that the Labor Department has a No. 3 person.

Then Senator Richard Shelby of Alabama put a hold on the 70-odd other administration nominations that are still pending. Everything came to whatever you call a screeching halt when the vehicle in question was moving at the speed of the Senate.

This was a dramatic gesture, one Shelby must have felt was so important that he took time out from his normal duties blocking all progress on creating a consumer protection agency for financial products.

Normally, a senator who’s feeling testy will just put a hold on one presidential nomination as Jim Bunning of Kentucky did last year when he stopped action on the confirmation of a deputy U.S. trade representative because he was upset that the Canadian Parliament was considering a bill to ban the sale of cigarettes with candy flavorings.

I am not making that up.

Senator Christopher Bond of Missouri had a hold on the nomination of Martha Johnson to be the leader of the General Services Administration since last summer because he was ticked off with the G.S.A. over construction of a new federal building in Kansas City.

The agency kept saying it had responded to Bond’s questions, although perhaps the staff was slow in getting back to him since there was nobody in charge. But Bond held firm until the Democrats forced a vote this week. That naturally involved a great many delays, postponements, overrides and a passionate if incomprehensible speech by Bond, the highlight of which was: “Please bear with me. I know this is confusing.”

Then after many, many months of waiting and several days of total gridlock, Johnson was approved, 96 to 0.

That was a normal Senate procedure. Now Shelby has upped the ante with a blanket hold on everybody. His incredibly grave reasons were the desire to see that a defense contract for a new tanker is awarded to a bidder who will do the assembly work in Alabama. Also, he feels that a new F.B.I. facility for testing explosive devices should be conveniently located in Huntsville.

“If this administration were as worried about hunting down terrorists as it is about the confirmation of low-level political nominations, America would be a safer place,” said a spokesman for the senator.

Yes, indeedy. We’re talking terrorism here, folks. A threat to the American way of life, which guarantees the right of every American senator, no matter how humble or dimwitted, to bring the democratic process to a standstill whenever he or she feels the mood.

O.K., getting a little testy here.

People, can’t we have a citizen revolt over this? It’s all about the filibuster rule. The Obama administration is hamstrung because the Senate now requires 60 votes to get anything done, from health care reform to the confirmation of the woman who’s going to oversee building maintenance. And, of course, in the one piece of business on which the minority party demanded swift action this week, Scott Brown was sworn in as the 41st Republican vote, making it highly unlikely that, in the near-future, even a General Services Administration official is ever going to see the light of day.

“It’s beyond the breaking point,” said Senator Tom Harkin of Iowa, who plans to introduce a bill to eliminate the filibuster next week.

There is a stupendous lack of real enthusiasm in the Senate for doing anything as dramatic as eliminating the senators’ right to stop things. Some experts think Joe Biden, as presiding officer, could get rid of the filibuster by issuing a ruling when a new Congress assembles next January. The vice president’s office indicated that Biden would be happy to get going on that project the very second hell freezes over.

Which is about the same time the Senate is going to take up Harkin’s bill.

“But I’m hoping we can get enough people interested in this that it becomes an election issue. In Senate races this year, people ought to be asked,” Harkin said.

Harkin has been introducing the same bill since 1995, through lean years and fat for his own party. When his fellow Democrats were in the minority during the Bush years, they were, of course, a lot fonder of the filibuster than they are now.

Back then, it was Republicans who demanded change. “Far too many of the president’s nominees were never afforded an up or down vote because several Democrats chose to block the process for political gain,” complained — um — Richard Shelby.

[Tuff-Stuff]

~~>Time Is Running Out

By BOB HERBERT
Published: February 5, 2010

Palo Alto, Calif.

>>>>We’ve now lost 8.4 million jobs in this recession, and a vast majority of them are gone for good. The politicians are clambering aboard the jobs bandwagon, belatedly, but very few are telling the truth about the structural employment problems in the U.S. and the extremely heavy lift that is necessary to halt our declining living standards and get us back to an economy that is self-sustaining.

We don’t hear a lot that is serious about the sorry state of the nation’s infrastructure or the trade policies that crippled so many American industries or our inability (or unwillingness) to compete effectively with China when it comes to the new world of energy for the 21st century or our abject failure to provide a quality public education for the next generation of American workers, scientists, artists and entrepreneurs.

Speaking at a conference here on Wednesday, Gov. Ed Rendell of Pennsylvania said that if we don’t act quickly in developing long-term solutions to these and other problems, the United States will be a second-rate economic power by the end of this decade. A failure to act boldly, he said, will result in the U.S. becoming “a cooked goose.”

Neither the politicians nor much of the mainstream media are spelling out the severity of these enormous structural problems or the sense of urgency needed to address them. Living standards are sinking in the United States, and there is no coherent vision or plan for reversing that ominous trend over the long term.

The conference was titled, “The Next American Economy: Transforming Energy and Infrastructure Investment.” It was put together by the Brookings Institution and Lazard, the investment banking advisory firm.

When Governor Rendell addressed the conference on Wednesday, he used words like “stunning” and “unbelievable” to describe what has happened to the nation’s infrastructure. His words echoed the warnings we’ve been hearing for years from the American Society of Civil Engineers, which tells us: “The broken water mains, gridlocked streets, crumbling dams and levees, and delayed flights that come from failing infrastructure have a negative impact on the checkbook and on the quality of life of each and every American.”

The conference was sparked by a sense of dismay over what has happened to the U.S. economy over the past several years and a feeling that constructive ideas about solutions were being smothered by an obsessive focus on the short-term in this society, and by the chronic dysfunction and hyperpartisanship in much of the government.

I was struck by the absence of grousing and finger-pointing at the conference and the emphasis on trying to develop new ways to establish an economy that is not based on financial flimflammery, that enhances America’s competitive position in the world, and that relieves us of the terrible burden of reliance on foreign energy sources.

I was also struck by the pervasive sense that if we don’t get our act together then the glory days of the go-go American economic empire will fade like the triumphs of an aging Hollywood star. One of the participants raised the very real possibility of Americans having to get used to living in an economy “that won’t be number one,” an economy that perhaps is more like Germany’s.

Rescuing the U.S. economy will require a commitment, and undoubtedly sacrifices, that need to start now. And it will require leadership that pulls together the best talents from all sectors of the society — not just business, not just government, but from everywhere.

Bruce Katz, the director of Brookings’ Metropolitan Policy Program, discussed some of the steps that need to be taken to remake an economy that has been thrown completely out of whack by frantic, debt-driven consumption, speculative bubbles, exotic financial instruments, and so on.

A new, saner, more sustainable economy will have to be more export-oriented, powered by cleaner fuels, bolstered by innovation that comes from a renewed focus on research and development, and committed to delivering a better-educated, more highly skilled work force.

Mr. Katz believes this is doable, but by no means easy. The nation’s infrastructure, he said, will have to “shift from 20th-century models of transport and energy transmission to rapid bus, ubiquitous broadband, congestion pricing, smart grid, high-speed rail and intelligent transport.”

New ways of financing such transformative changes will have to be developed, linking public and private capital, preferably through the creation of a national infrastructure bank, among other things. The nation’s political leaders and the public at large will have to grasp the difference between wasteful spending and crucial investments in the future.

It’s time for serious people to step forward and help lead on these critically important issues. Time is short.