Wednesday, August 31, 2011

Faustian bargain...

Why Germany insists on the appearance of the only adult supervision left in the EU area escapes me. The entire EU
Project has always appeared to me as the product of French intellectuals and their eternal effort to affix manacles to their more powerful neighbor. And yet Germany insists upon the role of villain in this charade.

I won't comment further in lite of the obvious reply to that line of thought...

Tuesday, August 30, 2011

Piling on... the themes discussed (far too early, it must be said) here.

“Gold is now a bubble compared with U.S. blue-chip stocks,” Wadle said in an e-mail in response to questions from Bloomberg. U.S. equities are “massively undervalued” based on future dividend yields of more than 3 percent, compared with no investment yields and storage costs associated with gold, he said in a report. Billionaire George Soros cut his holdings in the SPDR Gold Trust this year as prices rallied, while Paulson & Co., the hedge fund run by John Paulson, remained the largest holder, according to regulatory filings this month.

Monday, August 29, 2011

Beat goes on...

...Income and expeditures slightly higher (good news) for July, previous month's figures revised down somewhat.

Grinding "L" attrition.

Germany's gambit

AEP presenting the issues (granted, from his perma-EUskeptic position) facing Europe's lynchpin.

Full article here.

Mrs Merkel has cancelled a high-profile trip to Russia on September 7,
the crucial day when the package goes to the Bundestag and the
country's constitutional court rules on the legality of the EU's
bail-out machinery.

If the court rules that the €440bn rescue fund (EFSF) breaches Treaty
law or undermines German fiscal sovereignty, it risks setting off an
instant brushfire across monetary union.
The seething discontent in Germany over Europe's debt crisis has
spread to all the key institutions of the state. "Hysteria is sweeping
Germany " said Klaus Regling, the EFSF's director.

Friday, August 26, 2011

Fed statement...

...did not say much...

In light of its current outlook, the Committee recently decided to provide more specific forward guidance about its expectations for the future path of the federal funds rate. In particular, in the statement following our meeting earlier this month, we indicated that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. That is, in what the Committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low levels for at least two more years.

Change the rules...

...has always been THE greatest power of government.

From the FT:

Short-selling bans on selected European bank stocks have been extended by regulators until the end of September in an unprecedented degree of regulatory co-ordination.

French, Spanish, Italian and Belgian regulators said the bans, which cover nearly 60 companies and were first introduced two weeks ago, were still necessary to calm excessive market volatility.

Thursday, August 25, 2011

While the world looks to Europe...

...Russia making its ambitions obvious to those who care to look.

Russia's lower house, the Sate Duma, is set to ratify agreements with
South Ossetia and Abkhazia on Russian military bases in the Caucasian
republics during its autumn session.

The State Duma Speaker, Boris Gryzlov, said on Thursday that the
parliament has already ratified a wide range of agreements with the
two newly independent states.

On August 8 – which marked the third anniversary since the beginning
of the war in the South Ossetia – President Dmitry Medvedev submitted
agreements on the unified Russian military bases to the lower house.
The legislators intend to consider the documents at the upcoming
parliamentary session.

This way, the deputies will be able to take part in “the process of
building up civilized interstate relations between Russia and the two
independent republics,” Gryzlov said, reports Interfax.

“I have repeatedly said that peace and security in the region is a
priority for us,” the official noted. He added that in many ways, it
was thanks to Russia’s efforts that both peace and security have been

Wednesday, August 24, 2011

Modest green shoots...

...very modest and full of caveats, but the issue remains: Loan demand must recover and help re-capitalize the same banks that suffered such mind bending losses.

WASHINGTON — On the surface, the industry turned a corner last quarter. Loans actually grew, the Federal Deposit Insurance Corp. returned to black and the official watch list for failure-prone banks shrank for the first time in five years.

But a closer look at the FDIC's Quarterly Banking Profile reveals a familiar theme: banks are still tiptoeing to recovery. Loans rose for the first time since 2008, but lower loss provisions yet again drove earnings, and lower revenue was a sign that institutions remain risk-averse as the economy continues to struggle.

"We are mindful that earnings growth cannot be sustained indefinitely only by reducing loss provisions," Martin Gruenberg, the FDIC's acting chairman, said at the release of the second-quarter report.

Overall, banks and thrifts reported earnings of $28.8 billion for the quarter, down 0.3% from the first quarter but up by nearly 38% from a year earlier. It was the eighth straight quarter with year-over-year earnings growth.

Once again, profits were attributable mostly to the fact banks stored away fewer reserves for loan losses. Loss provisions have dropped for six straight quarters. Compared with the second quarter of 2010, provisions fell 53%, to $19 billion, the seventh consecutive such decline.

Nearly 60% of all institutions had better quarterly earnings than a year earlier, and the 15% of unprofitable institutions was the lowest level since the first quarter of 2008.

After three whole years of declining loan balances, the industry finally reversed the trend in the second quarter, increasing loans by 0.9% during the quarter, to $7.3 trillion. (Loans had technically risen in early 2010, but that was a result of new accounting rules.)

But further detail shows the growth was modest. While commercial and industrial loans increased for the fourth straight quarter, by 2.8%, to $1.24 trillion, other indicators were less encouraging.

Real estate construction loans fell for the 13th straight quarter, by 7%, to $275 billion. Also declining were one-to-four-family mortgages, by 0.3%, to $1.83 trillion.

Tuesday, August 23, 2011



The problems of "holding" and "exchanging" the metal are actually being considered.

Felix Salmon

How to get $12 billion of gold to Venezuela

AUG 22, 2011 21:59 EDT

Ever since the news broke last week that Hugo Chávez wanted to transport 211 tons of physical gold from Europe to Caracas, I’ve been wondering how on earth he possibly intends to do such a thing.

There are 99 tons already being held at the Bank of England; according to the FT, the plan is to transfer other gold to the Bank of England from custodians such as Barclays, HSBC, and Standard Chartered; then, once it’s all in one place, um, well, nobody has a clue what might happen. Here’s the best guess from the FT:

Venezuela would need to transport the gold in several trips, traders said, since the high value of gold means it would be impossible to insure a single aircraft carrying 211 tonnes. It could take about 40 shipments to move the gold back to Caracas, traders estimated.

“It’s going to be quite a task. Logistically, I’m not sure if the central bank realises the magnitude of the task ahead of them,” said one senior gold banker.

I put the ever-resourceful Nick Rizzo on the task, but he came up with little more: the market in physical gold is tiny, and largely comprised of nutcases. The last (and only) known case of this kind of quantity of gold being transported across state lines took place almost exactly 75 years ago, in 1936, when the government of Spain removed 560 tons of gold from Madrid to Moscow as the armies of Francisco Franco approached. Most of the gold was exchanged for Russian weaponry, with the Soviet Union keeping 2.1% of the funds in the form of commissions and brokerage, and an additional 1.2% in the form of transport, deposit, melting, and refining expenses.

It’s not much of a precedent, but it’s the only precedent we’ve got; my gut feeling is that Venezuela would be do well to get away with paying 3.3% of the total value of the gold in total expenses. Given that the gold is worth some $12.3 billion, the cost of Chávez’s gesture politics might reasonably be put at $400 million or so.

...And Devil...

...take the hindmost.



...a continuing series.

Yes, the last death throws of this particularly troublesome critter are (finally) being recorded, as the absurdity now appears obvious to all. We have passed the "greater fool" stage and are now entering the final run and eventual decline.

Breaking news yesterday was centered around the gold market (GLD) which continued its meteoric, some say, parabolic rise, to more than $1900/oz. and the predominant gold exchange traded fund, (GLD) passed the S&P 500 ETF (SPY) to become the largest ETF by market cap; truly a milestone and most reflective of our current environment.

Monday, August 22, 2011

North Korea

I detailed the risk of China invading North Korea in the past. The situation has not improved with Russia meddling in the area. This is clearly a move against the Chinese.

Tight secrecy surrounded the travel plans of North Korean leader Kim Jong Il Monday, as his armored train carried him toward a summit this week with Russian President Dmitry Medvedev.
South Korea's Yonhap news agency quoted unnamed intelligence sources as saying Mr. Kim would likely stop in the Siberian city of Skovorodino before continuing on to meet Mr. Medvedev on Wednesday. But China's Xinhua news agency said Mr. Kim had already arrived in Ulan-Ude, where the leaders are expected to discuss energy cooperation and other issues.

Watch closely.

India and Turkey.

Saturday, August 20, 2011

Regulatory Capture... a well-known phenomenon.

A former senior analyst at Moody's has gone public with his story of
how one of the country's most important rating agencies is corrupted
to the core.

The analyst, William J. Harrington, worked for Moody's for 11 years,
from 1999 until his resignation last year.

From 2006 to 2010, Harrington was a Senior Vice President in the
derivative products group, which was responsible for producing many of
the disastrous ratings Moody's issued during the housing bubble.

Harrington has made his story public in the form of a 78-page
"comment" to the SEC's proposed rules about rating agency reform,
which he submitted to the agency on August 8th. The comment is a
scathing indictment of Moody's processes, conflicts of interests, and
management, and it will likely make Harrington a star witness at any
future litigation or hearings on this topic.

The primary conflict of interest at Moody's is well known: The company
is paid by the same "issuers" (banks and companies) whose securities
it is supposed to objectively rate. This conflict pervades every
aspect of Moody's operations, Harrington says. It incentivizes
everyone at the company, including analysts, to give Moody's clients
the ratings they want, lest the clients fire Moody's and take their
business to other ratings agencies.

The Russian Bear... out of hibernation and testing its abilities. Putin likely sees that his position is very strong in Europe and can do what he wishes. After the election is over he will likely be evenmore aggressive, especially if the commodity price bubble is partially burst.

For Russian Prime Minister Vladimir Putin, the U.S. is a “parasite” because its rising debt weighs on the global economy. For his government, the same debt is the safest possible investment.

Russia, the world’s largest energy producer, has boosted its holdings of U.S. debt by more than 1,600 percent since September 2006, according to U.S. Treasury Department data. Russia used surging commodity prices to build the world’s third- largest reserves pile, boosted in part by return on Treasuries.

Putin, 58, who oversaw the largest buildup of U.S. debt holdings in Russia’s history as president from 2000 to 2008, may return to the post after elections next year. The country is now one of the world’s 10 largest holders of the securities with $110 billion at the end of June, about 70 percent more than when Putin left the Kremlin.

Friday, August 19, 2011


...a continuing series...first a quote:

"The chief danger to our philosophy, apart from laziness and woolliness, is scholasticism...which is treating what is vague as if it were precise...

-E.P. Ramsey

Most here already know my feelings for (and arguments against) "technical analysis", but this column does nothing to dissuade me from thinking its so much useless nonsense.


When I was an institutional broker in a former life, I was a believer in the merits of using technical analysis. I found that it was a very useful tool that complemented the much more mainstream tools generically referred to as fundamental analysis.

Many don’t put much stock in technical analysis. I understand that. A former institutional client of mine once said: “At the bottom of the ocean are many sunken vessels, and in each one there is a chart room filled with charts.” But there is another perspective. The markets represent the aggregate interaction of many investors. Their attitudes, philosophies, and behavioral patterns on many levels are predictable….and repetitive.


...I have written about the power of accepted history in the past. The below is a reminder that popular and conventional wisdom around all historical events is generally wrong and is designed to guide perception away from reality.

The below is from this article.

On Aug. 6, the American bomber Enola Gay dropped its payload on
Hiroshima, leaving the signature mushroom cloud and devastation on the
ground, including something on the order of 100,000 killed. (The
figures remain disputed, and depend on how the fatalities are

As Hasegawa writes in his book “Racing the Enemy,” the Japanese
leadership reacted with concern, but not panic. On Aug. 7, Foreign
Minister Shigenori Togo sent an urgent coded telegram to his
ambassador in Moscow, asking him to press for a response to the
Japanese request for mediation, which the Soviets had yet to provide.
The bombing added a “sense of urgency,” Hasegawa says, but the plan
remained the same.

Very late the next night, however, something happened that did change
the plan. The Soviet Union declared war and launched a broad surprise
attack on Japanese forces in Manchuria. In that instant, Japan’s
strategy was ruined. Stalin would not be extracting concessions from
the Americans. And the approaching Red Army brought new concerns: The
military position was more dire, and it was hard to imagine occupying
communists allowing Japan’s traditional imperial system to continue.
Better to surrender to Washington than to Moscow.

Return of the Fed Swaps...

Fed opening dollar swap lines to Central Banks in Europe. These have the same risks that I have outlined previously. Severe funding difficulties in Europe gives the Fed enormous expedient power to open the spigots, with massive attendant risks.

Chavez: Gold Speculator

Chavez is pulling his gold holding from global banks. The mania of gold speculation has now infected quasi-pseudo communists. The theater of the absurd continues in what is a very crowded trade.

Its not if, its when the crash in Gold begins. The tide will go out and a very many swimmers (to paraphrase the Sage of Omaha) will be quite embarrassed at the lack of attire.

Repetition... the key to learning. I have been warning about the Euro area problems for four years now and the rest of the world has caught up. Now the critical investment decisions need to be levied. A coordinated effort to shore up banking capital in Europe and the U.S. in order to facilitate the export markets of China and Japan (to say nothing of assisting in Middle East stability as an oil crash would be most unwelcome during the summer of Arab Revolution) may allow the global economy to "muddle though" until conditions normalize.

I doubt this will be successful. More likely that conditions worsen and capital floods to U.S. assets.

More ominously, Russia stands well-armed and in perfect condition to assert itself should united Europe fracture.

Dangerous times indeed.

(National Post) -- It's possible that President
Barack Obama will soon face the toughest economic question
since his original stimulus decision: Whether or not to join a
global bailout of the European periphery countries.
In 2008, President George W. Bush moved to rescue U.S.
banks deemed too big to fail. The really scary possibility in a
European banking crisis is that the hardest-pressed European
banks may be too big to save by the European Union acting
alone. American and Japanese help may be needed. China may play
a role as well.

Thursday, August 18, 2011

Legal Infrastructure

The below is taken from a Bloomberg article regarding various nefarious securities practices and the lack of enforcement or action at law for retail Chinese citizens.

“The Chinese government hasn’t bothered to create real financial markets, where you have the infrastructure that rewards good behavior and punishes bad behavior,” said Arthur Kroeber, managing director of Beijing-based GaveKal Dragonomics Research, a financial advisory firm. “In a country where legal institutions are weak, there are lots of opportunities for retail investors to get ripped off.”

Tuesday, August 16, 2011


Who would have ever predicted such a set of outcomes?

Aug 16 (Reuters) - China's long-term plan to cut reliance on investment as a growth engine is clashing with its short-term need for protection against a worsening global outlook.

Beijing has made it clear that consumption, not investment, must eventually do more of the work to drive the world's No. 2 economy.

But with debt troubles in the United States and Europe casting doubt on worldwide demand, it's likely China will keep investing by the billions for now, even if that takes Beijing further from its ultimate goal.
Chinese consumers are a long way from becoming big spenders, so massive investment is still the fastest and easiest way for China to prop up its economy if push comes to shove.

"China's investment carriage continues to race along," the China Securities Journal, an official Chinese paper, said in a front-page story on Monday. "Our investment-led growth model will not falter in the short term."

Data published on Tuesday underscored expectations that China's investment will keep growing at a healthy clip in months ahead. It showed that China pulled in $69.2 billion of foreign investment direct in the first seven months of this year, which is 19 percent above a year ago, and putting the country on track for another year of record foreign direct investment.

Without doubt, having heavy investment carries a price. Analysts say it generates waste and excess capacity, fuels inflation and produces diminishing economic returns. State investment is like an unsustainable life-support system that China needs to wean itself off.

In 2009 -- the last year for which figures are available -- investment made up 65 percent of China's gross domestic product, a far higher share than in other major or Asian economies. Household consumption, however, accounted for just 35 percent, compared with 70 percent in the United States.

In the words of China Premier Wen Jiabao, the Chinese growth model is on all counts unstable, unbalanced, uncoordinated and ultimately unsustainable.

Some of the more bearish economists argue that wasteful investment is inflating a property price bubble and saddling banks with bad loans, sowing the seeds of a future crisis.

Thursday, August 11, 2011


...dusting off some pages from the history books...

From The Guardian.
Silvio Berlusconi is facing growing resistance to the implementation of new austerity measures demanded by the European Central Bank.

In perhaps the most strident protest yet by a European politician at the ECB's growing power, the Italian prime minister's coalition partner, Umberto Bossi, on Thursday accused the bank of trying to oust the government. And in an equally unusual move, some of Berlusconi's own, normally docile, MPs warned the prime minister he could not count on their support for the approval of the measures.

As Italy's borrowing costs soared and its stock markets plummeted, last week the ECB's president, Jean-Claude Trichet, and his designated successor, the Italian central bank governor Mario Draghi, wrote to Berlusconi listing the demands he would have to meet if the bank were to intervene and buy Italy's embattled bonds. According to one report, the ECB's demands were set out in humiliating detail.

Pre-emptive measures

An interesting trial balloon that these officials hope won't turn reflexive on them.

(Bloomberg) South American finance officials are considering creating a $10 billion to $20 billion emergency fund to assist nations that experience capital flight should the global economic crisis deepen, two government officials involved in the talks said.
The proposed fund, a regional alternative to the International Monetary Fund, will be discussed by central bank presidents and finance ministers from the 12-member Union of South America Nations at a meeting tomorrow in Buenos Aires, said the officials, who serve in separate governments and who declined to be named because talks are ongoing.
The fund would be modeled on the Bogota-based Fondo Latinoamericano de Reservas, they said. Known as FLAR, the $4 billion fund pools foreign currency reserves from five Andean nation plus Costa Rica and Uruguay to help member nations that run into balance of payment problems during times of crisis.
Regional finance ministers met Aug. 5 in Lima at the urging of Colombian President Juan Manuel Santos to discuss ways to protect their economies and the value of their record $700 billion in foreign currency reserves from a deteriorating U.S. and European economic outlook.
Among the options debated at that meeting, which was attended by Brazilian Finance Minister Guido Mantega and his counterparts from Argentina and Colombia, was a strengthening of the FLAR by boosting its membership and raising new capital, Peruvian Finance Minister Luis Miguel Castilla told reporters.

Wednesday, August 10, 2011

What can one say...

...about Europe that I have not already said hundreds of times on this blog?

For all those...

...who, for the past couple of years have been championing the idea that rates must explode upward, given QE and the resultant "money printing", et al...and especially for those who thought the S&P decision was the final nail in the proverbial coffin, the above chart gives the verdict from the markets.

Tuesday, August 09, 2011

Comic relief...

...a funny comic that highlight one of the problems with stocking gold:

Preparing for the worst but missing a key variable.

Thank goodness...

(/start sarcasm)

...that we have academics to show us these very counter-intuitive results.

From this paper we get the following deep connection of the dots:

(/end sarcasm)

This paper suggests one possible reason why austerity measures are
often avoided – fear of instability and unrest.14 Expenditure cuts carry a
significant risk of increasing the frequency of riots, anti-government
demonstrations, general strikes, political assassinations, and attempts at
revolutionary overthrow of the established order. While these are lowprobability
events in normal years, they become much more common as
austerity measures are implemented. This may act as a potent brake on
governments. In line with our results on expenditure, Woo (2003) showed that
countries with higher levels of unrest are more indebted. High levels of
instability show a particularly clear connection with fiscal consolidation.

Monday, August 08, 2011

With the ECB writing checks...

...China has no room to raise rates, lest the yuan appreciate too much against the Euro.

(From Bloomber)
China’s inflation accelerated to the fastest pace in three years in July, limiting the scope for monetary easing to support growth as plunging stock markets signal the global recovery is weakening.

Consumer prices climbed 6.5 percent from a year earlier as food costs surged, reports from the Beijing-based National Bureau of Statistics showed today. That was more than the 6.4 percent median estimate in a Bloomberg News survey of 26 economists. In June, inflation was 6.4 percent.

Shanghai stocks extended losses after tumbling into a bear market yesterday on a widening European debt crisis and Standard & Poor’s downgrade of the U.S. debt rating. Elevated inflation shows that China is still dealing with the after-effects of an unprecedented monetary expansion during the last global slump and may have limited room for more stimulus.

This effect on equities...

...while massive, appears to be transitory. My comments regarding today regarding same did not come to fruition, but I remain convinced that equities will be fine going forward (but of course my record here reflects my general inability to predict equity market movements, while generally getting the bond markets correctly)

People are paid to take risk, and right now is a good opportunity to take some risk in equity land.

As Sun Tzu said...

..."The Supreme Art of war is to subdue your enemy without fighting".

BEIJING, Aug 8 (Reuters) - Chinese state media on Monday blamed Washington's huge military spending and global footprint for the crisis that led to the U.S. debt rating downgrade, calling for an end to the foreign "domineering" dragging down its economy.

Sharpening their rhetoric over the economic crisis that has sent markets into a tailspin, the Chinese state-run media lambasted both Europe and the United States for the dysfunctions of their democracies and their unsustainable appetite for spending.
The Xinhua news agency also warned the United States against trying to boost exports and growth by letting the dollar weaken, which would have a dramatic impact on China as about 70 percent of its massive reserves stockpile is invested in dollar assets.
One analyst, Yuan Peng, said the unusually blunt attack on the West probably reflected concern among Chinese leaders, facing pressure from popular opinion and the media, to deflect blame for any negative fall-out of the crisis on the country's holdings of U.S. assets.

"Since the collapse of the Soviet Union, the United States, as the world's sole superpower, has relied on its powerful military to meddle everywhere in international affairs, advancing hegemony, and paying no heed to whether the economy can support this," said a commentary issued by China's Xinhua news agency, which noted the heavy bills for America's wars in Iraq and Afghanistan.

"Now is the right time for the United States, trapped in economic hardship, to reflect on its domineering thinking and deeds," said Xinhua, urging Washington to "change its policies of interference abroad".

China is spending heavily on its 2.3-million-strong armed forces, returning to a double-digit increase this year. That has stirred unease among its neighbours and the United States, which has long had a presence in the Asia-Pacific region.
At about $93.5 billion for 2011, China's defence budget is still dwarfed by that of the United States. In February the Pentagon rolled out a record base budget for fiscal year 2012 of $553 billion, though the Obama administration is now looking to trim military spending.

Sunday, August 07, 2011

Blackrock to S&P:


BlackRock Inc. (BLK), the world’s largest asset manager, issued a statement saying it has been preparing for the downgrade for a month and will not need to do any “forced selling of securities.” The OCC, which clears and settles all trades on U.S. options exchanges, said in a statement it has “no current plans” to adjust valuations for Treasuries used as collateral.

The ECB is dead...

...long live the ECB. They are now irrelevant puppets of the Euro project.

(from the EU press release regarding emergency backstop measures to fund Italy and...well...everyone else that is underfunded in the Euro area. Take your pick.)

Now, dear readers, I ask again, if the U.S. is now AA in the eyes of S&P, what is all of Europe given these massive guarantees?

5. It equally considers fundamental that governments stand ready to
activate the European Financial Stability Facility (EFSF) in the
secondary market, on the basis of an ECB analysis recognising the
existence of exceptional financial market circumstances and risks to
financial stability, once the EFSF is operational.

6. It is on the basis of the above assessments that the ECB will
actively implement its Securities Markets Programme. This programme
has been designed to help restoring a better transmission of our
monetary policy decisions – taking account of dysfunctional market
segments – and therefore to ensure price stability in the euro area.

Saturday, August 06, 2011

S&P Downgrade

my comments:

S&P and Market Commentary August 6, 2011

To the Master's honor all must turn, each in its track, without a sound, forever tracing Newton's ground.

-Albert Einstein (regarding Isaac Newton)

Standard & Poors has downgraded U.S. debt due to “uncertainty” regarding the political process and looming budget deficit discussions. Market pundits have already begun to wax poetically about the decline of U.S. influence and the inevitability of rate rises in the U.S. because of the downgrades.
The opinion of S&P is to be respected, but just as Einstein respected Isaac Newton’s contributions to physics, he was certainly not afraid to point out limitations and errors in Newtonian physics. We must do the same here. What follows below begins with some theoretical point, and then drills down to the specific case here.

The U.S. cannot default in debt in its own currency. Its ability to make payments on Securities Accounts at the Fed held by foreigners and domestic firms is a simple matter of changing spreadsheet entries. There are obvious inflation ramifications from making payments without regard to price stability, but that is another, separate, issue. Let me repeat: The ability to make payments denominated in U.S. dollars should never be in question.

S&P cites governance and policymaking concerns as reasons for the downgrade. This is remarkable given the travails of the rest of the world. It is also notable that by all quantitative measures, the U.S. is in excellent position with Debt/GDP levels rising (given transitory economic conditions) but manageable. It appears to me that S&P simply felt cornered and that their credibility was threatened if they did not do "something". The other rating agencies have taken this opportunity to step away from S&P and distinguish themselves by appearing calm and sensible.

What This Means For Monday and beyond:

I expect financial assets in the U.S. to rise. Stocks may experience a slight decline for the opening hour, but after this initial period we should experience gains. Going forward, The term structure of rates will likely compress (yields FALLING) as the market ignores S&P’s decision. One only has to recall the downgrades (again, by S&P) of Japan in January and the resulting reaction of the markets to see this decision will be ignored.

FED to S&P....


For risk-based capital purposes, the risk weights for Treasury
securities and other securities issued or guaranteed by the U.S.
government, government agencies, and government-sponsored entities
will not change. The treatment of Treasury securities and other
securities issued or guaranteed by the U.S. government, government
agencies, and government-sponsored entities under other federal
banking agency regulations, including, for example, the Federal
Reserve Board's Regulation W, will also be unaffected.

Friday, August 05, 2011


This is a wonderful opportunity for Fitch, et al., to distinguish themselves and keep their ratings AAA (or equivalent). This is fundamental error on the part of S&P, and they simply cannot be oblivious to the implications for collateral markets world-wide. It confounds me that they have not taken similar action on the entire G20, since that is what is required given current collateral and institutional arrangements.

This is a colossal error and will be remembered ex-post as evidence of the irrelevance of ratings agencies as a whole.

– We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.

– We have also removed both the short- and long-term ratings from CreditWatch negative.

– The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.

– More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

– Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.

– The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.

Thursday, August 04, 2011


Ratings agencies are only useful if they never downgrade debt it seems.

Aug 4 (Reuters) - Italian prosecutors have seized documents at the offices of rating agencies Moody's and Standard & Poor's in a probe over suspected "anomalous" fluctuations in Italian share prices, a prosecutor said on Thursday.

The measure is aimed at "verifying whether these agencies respect regulations as they carry out their work," Carlo Maria Capistro, who heads the prosecutors' office in the southern town of Trani which is leading the probe, told Reuters.

The documents were seized at the Milan offices of the two agencies on Wednesday, he said, adding that prosecutors had also asked Italian market regulator Consob to provide documents relating to their registration in Italy.

S&P in Italy said in a statement it believed the probe was "groundless."

The Port, part 2

It seems the world has realized the value of safety once again...and all the talk about the U.S. losing "reserve currency" status looks like so much nonsense.

Readers here are not surprised by this rate structure at all.

Wednesday, August 03, 2011

Roach loves China...

This article focuses on China's success, citing the main factors as the design and strategy of the Chinese Communist Party. It cites 10 reasons, the following being the most important (and the most quantifiable on his list)

Foreign direct investment. Modern China has long been a magnet for global multinational corporations seeking both efficiency and a toehold in the world’s most populous market. Such investments provide China with access to modern technologies and management systems – a catalyst to economic development. China’s upcoming pro-consumption rebalancing implies a potential shift in FDI – away from manufacturing toward services – that could propel growth further.

This is also the biggest danger, and one in which the Chinese seem determined to sabotage. The world is now aware of the liquid concept of "law" in China and is positioning accordingly. The decline in FDI should be gradual, as none of the players wish to yell "fire" in the crowded theater.

Tuesday, August 02, 2011

The Port.

Media echoing what I have been saying for years now, and have been especially keen on reminding readers here in the past few months regarding the unique position U.S. assets have relative to the rest of the world.

For all the anxiety among politicians and their constituents over playing chicken with the debt ceiling and the prospect of the first-ever downgrade of U.S. debt, the people with the most at stake made more money buying Treasury securities in July than any month this year. Actually, they made a fortune, or $183,000 for every $10 million invested.
While commentators bemoaned America's lost respect around the world, investors from Argentina to New Zealand snapped up Uncle Sam's bonds in the $9.34 trillion market, driving yields on 10-year notes -- a benchmark for everything from mortgage rates to corporate debt -- to the lowest levels since November. U.S. government debt returned 1.83 percent in July, about three times more than the rest of the global sovereign bond market, Bank of America Merrill Lynch index data show.

“The bond market saw through the debate and saw that it would have to be resolved,” said Mark MacQueen, a partner and money manager at Austin, Texas-based Sage Advisory Services, which oversees $9.5 billion. “The market expected a resolution, which is less spending, hitting future growth, which is not good for stocks but is good for bonds.”

The Senate voted today to raise the nation's debt ceiling, currently $14.3 trillion, for the 79th time since 1960, before missing a payment. As a bonus to bond investors, the government will reduce spending by $2.4 trillion or more.

One week ago...

...I sent the following to market participants:

Time is the major variable here, but since this is a 401(k) I am assuming that we are investing over a multi-year period, and that we are discussing U.S. assets only. (we have discussed before regarding the U.S.'s unique position as "only port in the storm" given global imbalances)

I expect government bonds to increase in value (with corresponding yields decreasing) no matter the outcome of the Debt Ceiling discussions as Bernanke realizes that another round of Quantitative Easing is inevitable. Thus, the supply of government bonds will be lowered (through Fed purchases) and the cash that is injected into the system will need a home. Up until now, that "home" has been stocks. Bernanke knows that combating deflation is easier than fighting inflation, so he is willing to continue these programs in order to keep yields low. I completely disagree with his strategy, but that is neither here nor there.

Thus, moving assets from equities to fixed income is not advisable.

As an aside, "fixed income" is not inherently less risky. If Bernanke defeats deflation (and currently, only commodity prices and energy are seeing inflationary pressure - there is NO pressure on wages) he sews the seeds for inflation down the road (3+ years away). The Fed will have to aggressively raise rates to combat this threat. Holding Bonds in a period of high and rising interest rates is VERY painful.

And today, The King of Newport Beach agrees:

By Murray Coleman

The Federal Reserve is likely to start laying the groundwork for a new round of quantitative easing later this month, Pimco’s Bill Gross said on CNBC today.

The manager of the world’s biggest bond fund, the Pimco Total Return (PTTRX), is also predicting that a third Fed stimulus program will take a different path than past rounds.

Such a QE3 plan will probably involve a range of other assets besides Treasuries, Gross noted. He said the Fed could publicly vow to keep rates at a maximum 0.25% as long as inflation remains at 2.5% or less, for example, to provide more room for Treasuries to rally.

Tremors in the East...

...a continuing series.

Jabs and feints. The U.S. passes a resolution followed by this declaration from Putin...with elections on the way.

How else to distract in the midst of an economic downturn?

SELIGER, Russia — Russian Prime Minister Vladimir Putin said Monday he was in favour of Russia and its neighbour Belarus reuniting into a single state as in Soviet days, and would also be open to South Ossetia joining the fold.
"This is possible and very desirable," said Putin, when asked at a pro-Kremlin youth camp on Russia's Lake Seliger if Russia and Belarus could merge into one entity.
"It depends completely on the will of the Belarussian people," he added.
Putin's surprise remarks come as Belarus battles a massive economic crisis which has seen Russia extend a bailout loan to its western neighbour and eye some of its most prized economic assets.
Economists have blamed Belarus President Alexander Lukashenko for doing little to reform an outdated economic model which has seen the country develop one of the biggest current account deficits in the world.
But Putin lavished praise on the man who has ruled for the last 17 years and was once dubbed Europe's last dictator by the United States.
"Despite the problems that spring up from time to time -- like the economy, energy, the rows with gas -- you need to give respect to the leadership of the country and Alexander Grigoryevich Lukashenko, who has consistently followed a path of integration with Russia," Putin said.