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It’s Coming Folks (From Europe)
November 15th, 2011 | 
Author: 
Italian 10-Year Bond Yield
It’s happening folks…
Italian bond yields continue up.
That’s not particularly news.
But now yields are going up in France, Spain and Belgium.
One downgrade to France and it all goes up in smoke for the EFSF.
Political movement no longer works. You need fiscal resolution and you can’t get there from here. Don’t believe for a minute that this isn’t going to blow up in people’s faces, because it both can and will.
“It’s a confidence crisis,” said Elwin de Groot, a senior market economist at Rabobank Nederland in Utrecht, Netherlands. “Investors have no confidence that the euro zone can solve its problems. They will look for the most safe place they can store their money, which is Germany. Everything else is suffering.”
This is not going to end well and so far there is nobody talking about what has to actually happen either here or there — that is, whatever services people want from government they must be willing to pay for them with current tax revenues.
That’s the beginning and end of it and the time to take this action is quickly coming to a close. The market is going to enforce prudence whether the wonks in The Fed, in the ECB and in all of the governments involved like it or not.
Eurostat says that GDP in the Eurozone was 0.2% for the third quarter. This means that the Euro zone as a whole cannot run any fiscal deficit whatsoever without continuing an attempt to build the Ponzi.
I repeat: NOBODY is yet speaking to the truth of the matter. Not central bankers, not governments, not politicians in either party here and nobody over in Europe.
The market is calling “BS!” on the games; the banksters and governments, having gotten away with bailing out the crooks in 2008 and then refusing to put a stop to the abuses, smugly thinking they could just go on their way and leave everything alone (including the asset-stripping and lying schemes of the banksters) are discovering that the market is refusing to play along and is going to force the truth into the open.
I have warned of this for four and a half years and have been ignored. To date while there are people using a lot of “if” words, including Evans who is single-handedly destroying the credibility of The Fed right now on CNBC, and Liesman, rather than calling him on it, is (again) being an enabler.
Again folks, the bottom line is simple: You cannot continually borrow and spend more than you make, yet this is the game that governments have continually played for 30 years, and private businesses have attempted to “lever up” to “take advantage” of this without regard to the mathematical inevitability of this strategy’s failure.
Posted in Banks, bonds, Central Banks, Confidence, Corruption, Criminals, crooks, Debt, Economic Crisis, Economy, Financial System, Government, Italy, Liars, Lies, Money, sovereign debt crisis, Sovereign Risk | 
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Chart of the Day: Apparently US Default Is Not So Unlikely
Spike in US CDS (credit default swaps):
It certainly looks like the chatter about a US “Technical Default” is making some folks nervous.
While yields remain at rock-bottom prices, there’s been a noticeable uptick in 1-year CDS on US debt, notes Markit. As evidence that there’s something unique to the US going on, that spike is not mirrored in the UK. Not only that, volumes on the US have surged as well. Politicians would be wise to pay attention.
Source: Business Insider
Meanwhile…..
Treasury Prices Rise After Strongest-Bid 5-Year Auction Ever
The auction was heavily bid, with a cover of 3.20 that is the largest ever, according to CRT Capital. There was especially strong interest from indirect bidders, who took down 47.1% of the sale, compared to 40.4% over the last four auctions . . .. . . Those strong results followed Tuesday’s similarly impressive sale of $35 billion in 2-year notes. The auction was well oversubscribed and offered at the lowest yield since November.
Posted in bonds, Credit Default Swaps, Debt, Economic Crisis, Economy, Government, Sovereign CDS, Sovereign Default, Sovereign Risk, United States, US Treasury | 
Tags: Treasury Auctions |
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Jeff Gundlach: Subprime Part 2
Jeff talks about:
Recovery rates on defaulted properties running at about 20% of outstanding balance.
Bank of America has about $200 BILLION in non-performing loans.
GM is getting back into subprime auto loans (with YOUR tax money).
Posted in bonds, Debt, Economic Crisis, Economy, Financial System, Money, Subprime |
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And The Bond "Fraud" Continues
I put “Fraud” in quotation marks because, legally, it’s not – even though it should be:
By acquiring about a quarter of home-loan bonds with government-backed guarantees to bolster housing prices and the U.S. economy, the Fed helped make some securities so hard to find that Wall Street has been unable to complete an unprecedented amount of trades. Failures to deliver or receive mortgage debt totaled $1.34 trillion in the week ended July 21, compared with a weekly average of $150 billion in the five years through 2009, according to Fed data.
Note that the total amount of Fannie and Freddie paper outstanding is about $5 trillion – so we’ve got what – about a quarter of it that’s currently subject to a fail-to-deliver?
Gee, that’s nice. Isn’t that kinda like a naked short? Selling that which you don’t own, eh?
Now the bond dealers will tell you that this sort of thing is “normal’ and “happens all the time.” And they’re right, after a fashion – kinda.
When traders don’t deliver bonds to their counterparties, they don’t receive cash they could be earning interest on. With the federal funds target rate in a range of zero to 0.25 percent since December 2008, the amount of foregone earnings is almost nothing.
Yeah, the bigger issue isn’t there. The bigger issue is this:
“What they’re doing is after-the-fact saying, ‘We bought more than existed, so we’re going to try to alleviate those problems,’” said Scott Buchta, head of investment strategy at New York-based Braver Stern Securities LLC.
Let me restate that in English: Someone sold us more than existed – that is, they naked shorted the bonds to us.
Now naked shorting is supposed to be illegal. Especially when it’s intentional naked shorting – not an “accident.”
One can hardly argue that 25% of the float being sold naked short is an “accident.” Rather, it sure looks like an intentional act of selling that which you do not own and cannot (reasonably) acquire, fueled by the fact that failing to deliver is, at present, “reasonably cheap.”
But it’s only reasonably cheap because we have this special class of people in NY that can sell things they don’t have, with no reasonable expectation of being able to deliver within the agreed terms. In the “real world” of commerce such an act is called “fraud” when practiced intentionally and on a grand scale.
Oh sure, occasionally every businessman sells something he is unable to deliver on the original agreed terms. We accept this, and while there is occasionally some sort of penalty or sanction, it’s part of business. You say you’re going to deliver 10,000 Widgets on June 1st, and come June 1st you only have 9,500, because you were a bit too optimistic in terms of how quickly you could manufacture them. Perhaps you pay a penalty for that, perhaps not, but it’s not an intentional act.
That argument – that it’s all an “accident” – is darn hard to sustain when the amount of product that is sold short without the ability to deliver is some twenty five percent of the total float outstanding.
Where are the cops?
Posted in Banks, bonds, Corruption, Debt, failure to deliver, Federal Reserve, Financial System, Fraud, Government, Money |
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The Reliable Can't Be Relied Upon
The new law (financial reform) will make ratings firms liable for the quality of their ratings decisions, effective immediately. The companies say that, until they get a better understanding of their legal exposure, they are refusing to let bond issuers use their ratings.
So let me see if I get this right.
The Ratings Agencies get “privileged” access to deal information. Individual loan data, aggregates, all sorts of stuff that is not released to the potential buyers of a particular issue.
They then issue a rating based on both the known-to-all and the known-to-only-them data.
But they refuse to take responsibility for that rating.
Well now isn’t that special. The issuers, of course, are unhappy:
Several companies are shelving their bond offerings “indefinitely,” according to Tom Deutsch, executive director of the American Securitization Forum, which represents the market for bonds backed by assets such as auto loans and credit cards. He said he knew of three offerings scheduled for coming weeks that are now on hold.
So these issues are unmarketable without a rating, but the rating has no meaning because the agencies won’t stand behind it – particularly, if it is found that they were negligent in some fashion down the road.
If you think this is the worst bit of circular logic you’ve heard in a while, you’re not alone. A thing that is only marketable with a rating is obviously only marketable if the rating actually means something.
If nobody will stand behind their “rating” then in fact there is no rating at all and the issue is unmarketable in the first instance.
I offer my congratulations to the ratings agencies for finally bringing this little inconvenient fact into full public view, and defining themselves not as “ratings agencies” but rather as advertising departments for the major banks, puffery and all.
May they rest in peace.
Posted in Banks, bonds, Corruption, Economic Crisis, Economy, Financial System, Fraud, Government, Moody's, Rating Agencies, Standard & Poor’s |
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Getting a Grip on Reality – Reflation Dead in the Water
Economist Dave Rosenberg warns investors to Get a Grip on Reality.
Double-dip risks in the U.S. have risen substantially in the past two months. While the “back end” of the economy is still performing well, as we saw in the May industrial production report, this lags the cycle. The “front end” leads the cycle and by that we mean the key guts of final sales — the consumer and housing.
We have already endured two soft retail sales reports in a row and now the weekly chain-store data for June are pointing to sub-par activity. The housing sector is going back into the tank – there is no question about it. Bank credit is back in freefall. The recovery in consumer sentiment leaves it at levels that in the past were consistent with outright recessions. Last year’s improvement in initial jobless claims not only stalled out completely, but at over 470k is consistent with stagnant to negative jobs growth. And exports, which had been a lynchpin in the past year, will feel the double-whammy from the strength in the U.S. dollar and the spreading problems overseas.
Spanish banks cannot get funding and another Chinese bank regulator has warned in the past 24 hours of the growing risks from the country’s credit excesses. A disorderly unwinding of China’s credit and property bubble may well be the principal global macro risk for the remainder of the year. Indeed, perhaps the equity market finally realized yesterday that allowing China more control to defuse an internal property and credit bubble may well be a classic case of “be careful of what you wish for.”
The Bond Cycle and Deflation
I was at an event recently where I was able to see two legends among others – Louise Yamada and Gary Shilling. Louise made the point that while secular phases in the stock market generally last between 12 and 16 years, interest rate cycles tend to be much longer – anywhere from 22 to 37 years; and she has a chart back to 1790 to prove the point! So while all we ever hear is that this secular bull market in bonds is getting long in the tooth, having started in late 1981, it may not yet be over. After all, the deleveraging part of this cycle has really only just begun and if history is any guide, it has a good 5-6 years to go – at a time when practically every measure of underlying inflation is running south of 1%.
Double Dip, Anyone?
The data suggests that we are now seeing the consumer sputter with what looks like a very weak handoff into the third quarter. The housing sector is collapsing again. The export-import data are pointing to a sudden deceleration in two-way trade flows. Commercial real estate is dead in the water. Bank credit is in freefall right now.
There is still something left in the tank as far as capex and inventory investment is concerned, but by the fourth quarter, we could well be looking at a flat or even negative GDP print.Even if we don’t get a double-dip recession, economic growth will probably be insufficient to absorb the still-large amount of excess capacity in the system. What that means is that the U.S. unemployment rate will remain high for as far as the eye can see. It also means that inflation and interest rates will remain low for a sustained period of time, and that a stock market priced for peak earnings in 2011 could be in for some disappointment.
Yield Curve as of 2010-06-22
click on chart for sharper image
The above chart shows Weekly Closing Yields.
The chart does not reflect inflation, inflation expectations, reflation, or an improving economy. It does reflect what one would see after a reflation effort that has failed.
Yet, equities are priced not only for reflation, but for a strong reflation at that. Either stocks or the yield curve is wrong. I suggest you pay attention to the yield curve.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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