Yesterday, Standard and Poor’s rated the UK’s outlook negative. UK debt and US Treasuries promptly dropped substantially. Today, Moody’s goes on record:
Moody’s Investors Service said Thursday it is comfortable with the triple-A sovereign rating on the United States, but the rating is not guaranteed forever.
Swamp Report speculates that S&P received a phone call from the Treasury yesterday asking something along the lines of: “What the hell do you think you are doing?; perhaps along with assurances like: “If you dare rate US debt down, you’ll never rate another instrument in the US…” We expect Moody’s is getting similar messages. However, the ratings agencies could also be sending messages back at the Treasury. Congress wants to limit the power of the rating agencies after they blindly rated toxic securities as triple A. Messages to the Treasury might read along the lines of: “If our rating monopoly is tampered with, we may never rate another instrument, but we’ll cause Treasuries to implode before we go”. So Detent must prevail between the Ratings agencies and the government in the face of the threat of Mutually Assured Destruction (MAD).
Rep. Alan Grayson asked House Dems to co-sponsor the Federal Reserve Transparency Act (HR1207). The bill calls for the GAO to audit the Federal Reserve. Ron Paul was the original author. Zero Hedge has the link where readers can lend their support to this bill.
It’s been obvious to anyone who bothered paying attention that the Fed is increasingly acting as an extension of the Administration, without the oversight and disclosure to which the Executive Branch is subject. For instance, only the Federal Reserve Board of Governors appears to be obligated to honor to Freedom of Information Act requests (the Board of Governors has a FOIA office). The New York Fed, which is the where the alphabet of new programs is domiciled, argues that it is a private organization and has made only limited. voluntary disclosures.
It truly is time to limit the FED. Go to the link and support the bill! Also, be aware that the fight is just beginning in the Senate, where true persuasion will need to be accomplished (later)…only one senator is sponsoring the effort…Swamp Report suspects that the FED and it’s minions, like Goldman Sacks, Rapes and Pillages, have substantially more control over the Senate than they do of the House.
Reuters reports:
Federal Reserve purchases of U.S. Treasuries have not produced a lasting drop in long-term yields, according to a study by the St Louis Federal Reserve…
The Fed shocked markets on March 18 with a $300 billion purchase program of longer dated U.S. Treasury bonds, which quickly reduced longer bond yields by about 50 basis points.
Here’s the funny part:
“The marked flattening of the yield curve associated with the (Fed’s) announcement has vanished. Instead, the yield curve has become more steeply sloped,” the study noted. It said it was not possible to single out what was driving up yields.
Duh, yields are going up because the purchasing power of the dollar is expected to fall with the FED’s announced monetization, er “quantitative easing”. But it’s not possible for the St. Louis FED to figure this out…
China has certainly figured it out. They are staying in the short end of the yield curve… From China Daily:
Shen Minggao, chief economist with the business and financial magazine Caijing:
I doubt the US government’s ability to ensure the safety of China’s investment in Treasuries. At least for the present, Washington has nothing to assure us on.
What the US government can guarantee is avoiding credit risk – it will not default on its debt. But that cannot provide any shelter for investors to avoid inflation, the depreciation of the dollar or risks in liquidity. These pose major threats to China’s holdings of Treasuries with maturities longer than a year.
The Pragmatic Capitalist has a great post about the recent behavior of the VIX:
“The VIX is currently 34% from its 50 day moving average. In the last two years since the recession began we have seen three other instances where the VIX traded 30% from its 50 day moving average on the downside. The first occurred in late September and early October of 2007. The second occurred in May of 2008. And the third occurred in mid-December 2008. All three moves foreshadowed large equity sell-offs. The first one in September of 2007 marked the top of the market. The second market an intermediate top in the market after Bear Stearns went down and the third occurred just before the market sell-off in early 2009.
Clearly, three data points is not a comfortable amount of data with which to form a trading strategy, but there is no doubt that the sharp decline in the VIX represents a high level of complacency and comfort in high risk assets. Considering the quick rise in the equity markets and the questionable underlying fundamentals and we might just be staring at a market that is ripe for a sharp decline.”
Bill Luby in VIX: How Low Can It Go? at SeekingAlpha (5/8/09) ventures that the VIX would not fall below 25-27:
For the record, the lowest 10, 20 or 100 day historical volatility level recorded in the past six months was a 10 day HV of 20.38, which translates into a VIX of 26.69. For anyone looking for the lowest possible extreme in the VIX in the near future, 26 would be a good bet. This is also consistent with my earlier prediction that the VIX is not likely to breach a floor of 25-27.
As of 11:55 Eastern on Wednesday, VIX was trading at 27.75 ish with a low for the day so far of 26.57. If TPC and Luby are right, we will see a market top just around the corner…how big the correction may be is another question…
Bloomberg reports that RBC is calling China’s stockpiling of commodities its “new sovereign wealth strategy”:
“It’s part of an overall desire to decrease its exposure to dollar assets,” said Brian Jackson, senior strategist at Royal Bank of Canada in Hong Kong, in an interview today. China fears the hundreds of billions of dollars the U.S. is spending on bank bailouts and stimulus will cause “higher inflation and a weaker dollar,” he said.
“Increased spending on commodities represents a reallocation of China’s sovereign wealth away from the accumulation of financial assets,” Jackson said in a May 15 research note.
China, the world’s biggest consumer of iron ore, boosted imports of the material to a record 57 million metric tons in April. China’s purchases of copper and copper products reached a record 399,833 metric tons last month, compared with 374,957 tons in March.
…China, the world’s second-biggest energy-consuming country, increased crude imports by 14 percent in April.
As the FED engages in at least $300B of QE (probably much more before they are through), it’s buying Treasuries from the market that China can sell into the market (or at least not buy) without prices changing substantially. The big fact in this article is this:
Without this stockpiling of strategic commodities, China’s trade balance likely would have risen in the first quarter instead of falling $51.8 billion to $62.51 billion…
That’s $50 or $60B per quarter of commodity stockpiling…in another 4 or 5 quarters, China will have up to $300B in commodity reserves… So what else are the Chinese buying? Ambrose Evans-Pritchard reports:
“There is a significant shift taking place in China. They are concerned about the stability of the global financial system so they are not going to sell US bonds they already have. But they are still accumulating $40bn of fresh reserves each month, and they are going to be much more careful where they invest it,” he said.
Hans Redeker, head of currencies at BNP Paribas, said China is switching into hard assets. “They want to buy production rights to raw materials and gain access to resources such as oil, water, and metals. They know they can’t keep buying bonds,” he said
So…in addition to stockpiling commodities, China is scarfing up real assets that produce these commodities: coal, copper, iron and gold mines, oil fields, timber lands… In another 4 or 5 quarters they will have as much in hard assets as they have in dollar denominated financial assets. Then, if the dollar falls in value by (say) 50%, their hard assets will rise by a like amount, leaving them insulated from the dollar’s decline. Will the decline wait for China to get into position…or does China control this timing?
John Hussman makes two excellent points…whether you are a bull or a bear, you have to accept the cold facts and see the forest as well as the trees:
1. “So where does the money come from to buy [all] these new Treasury securities? Clearly, the sale of those securities must absorb the savings of someone in the economy whose savings have not already been claimed. Alternatively, the Fed can directly purchase those Treasury securities and literally print money. In practice, we have a third option. The Fed can acquire $1 trillion of commercial mortgage-backed securities and other assets from banks and create an equivalent amount of “reserves” (which is essentially printing money) at the same time that the Treasury issues the $1 trillion in new Treasury securities. In this case, which is in fact exactly what has happened, the banks that previously held $1 trillion in commercial debt securities can now use their newly acquired reserves to buy the $1 trillion in newly issued Treasuries. Having done this, they have no more money to lend than they had before. There is no more “liquidity” in the system than there was previously, except that the “quality” of the bank balance sheets has improved.”
2. “It is an error to view outstanding debt securities as if they are “liquidity” poised to “flow back into the stock market.” The faith in that myth may very well spur some speculation in stocks, but it is a belief that is utterly detached from reality. The mountain of outstanding money market securities is the result of government debt issuance that must be held by somebody until those securities are retired. It is not spendable “liquidity” – it is a pile of IOUs printed up as evidence of money that has already been squandered.”
Zero Hedge ran a post this weekend revisiting Friedrich Hayek’s seminal Prices and Production, in which the professor recognized that when total debt outstanding rises, whether through conventional banking or shadow banking, that increased credit has been used to bid up consumer goods and investment asset prices:
“There can be no doubt that besides the regular types of the circulating medium, such as coin, notes and bank deposits, which are generally recognised to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do the service of money. Now while for certain practical purposes we are accustomed to distinguish these forms of media of exchange from money proper as being mere substitutes for money, it is clear that, other things equal, any increase or decrease of these money substitutes will have exactly the same effects as an increase or decrease of the quantity of money proper, and should therefore, for the purposes of theoretical analysis, be counted as money.
…but once they have come into existence their convertibility into other forms of money must be possible if a collapse of credit is to be avoided.”
In point 2, above, Hussman is emphasizing this point: when debt is created, it is simultaneously “attached” to some consumer good or investment asset, it is not sitting “idle” on the sidelines in liquid form…waiting to be attached to (say) stocks. To be attached to stocks, bonds, consumer goods or whatever it was previously attached to, must be sold down first. In point 1, above Hussman, is emphasizing that the recent FED activities has provided no new credit to the banks…only the opportuntity to “swap” a toxic asset for a US Treasury security. Currently, if the banks decide to sell the Treasuries to raise cash to lend or to invest in stocks (like Goldman)…the price of Treasuries goes down and the yields go up. If yields go up, the “recovery” is jeopardized.
Like Yogi, David Tice, founder of the Prudent Bear Fund, may be smarter than the average bear. He talks with Deirdre Bolton at Bloomberg about his outlook for stocks, calling a low for the S&P 500 at 400 later this year. (ht Truveo.com)
According to Gasparino’s blog at the Daily Beast, Goldman will repay its Tarp money next week:
According to sources, Goldman appears to be furthest along in getting final approval to repay the $10 billion loan; JP Morgan would have to repay $25 billion. These people, speaking on the condition of anonymity, say one obstacle JP Morgan may be facing is that unlike Goldman, which recently converted from a securities firm into a more traditional bank, JP Morgan has been a commercial bank from the beginning and thus it has large exposure to credit-card debt and other consumer loans that may go sour depending on the length and breadth of the recession.
Another person close to the situation says people at JP Morgan feel comfortable they have convinced both the Treasury and Fed that they should be allowed to repay the money along with the first group of banks that will be allowed to do so; that announcement, these people say, could be made as early as next week.
JP Morgan CEO Jamie Dimon has made no secret of his desire to repay the TARP money, and according to people close to JP Morgan, he’s likely “to go batshit if Goldman is able to repay before he does.”
Dimon just does not have the power over the administration that Goldman has, so it looks like he will be second whether he likes it or not…
Chart of the Day (ht UnBiased Trading) has an interesting chart of inflation adjusted earnings for the S&P back to the 1930′s. It shows earnings have dropped more after inflation than ever before. pretty spooky…
While the stock market is up sharply since early March, the economy as well as corporate earnings continue to suffer. Today’s chart helps provide some perspective as to the magnitude of the current economic decline. Today’s chart illustrates that 12-month, as-reported S&P 500 earnings have declined over 90% over the past 20 months (with over 90% of S&P 500 companies having reported for Q1 2009), making this by far the largest decline on record (the data goes back to 1936). In fact, real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the first 12-month period during which S&P 500 earnings are negative.
Webmasters, journalists, and bloggers may post an occasional free Chart of the Day on their website as long as the chart is unedited and full credit is given with a live link to Chart of the Day at http://www.chartoftheday.com.
From Tech Ticker (ht Rolfe Winkler)…
“…the whole concept of the economy finding its footing was “preposterous” to begin with, says Howard Davidowitz, chairman of Davidowitz & Associates.”
“We’re in a complete mess and the consumer is smart enough to know it,” says Davidowitz, whose firm does consulting for the retail industry. “If the consumer isn’t petrified, he or she is a damn fool.”
Davidowitz, who is nothing if not opinionated (and colorful), paints a very grim picture: “The worst is yet to come with consumers and banks,” he says. “This country is going into a 10-year decline. Living standards will never be the same.”
