Bond Market is Saying Something; Nobody Knows Just What
As I have explained before, I am not as astute concerning the bond markets as I would like to be. Hence, it can be hard for me to offer commentary regarding these instruments. Sometimes however I am not alone, and today seems to be one of those days!
Zero Hedge is a very observant fellow, and he was all over the wild action in the short term paper today:
The chart below demonstrates the 1 year forward level on the 1 Year treasury. Someone really just went all in on Bernanke's bluff. 2Y/1Y flatteners anyone? Wait, what's that? Every prop desk had a steepener on and was highly levered into it? Basis trade blow up deja vu anyone? Wait for opportunistic hedge funds to be ramping into the flattener and killing who knows how many props on the wrong side of the trade:
So what gives?
Again, the debate centers around the line of thinking that the economy is not only not getting worse less quickly, but a rebound is at hand. Consider:
-My favorite Keynesian Clown Paul Krugman thinks the recession is over this summer. This is quite the fast turnaround by Krugman as he was just bemoaning the "smallish" size of the stimulus plan and worried it would not be enough....to end the recession.
-Somehow someway many think that the FED will get into a tightening cycle this year! I dismiss this totally, but the blog Bubble Meter has the goods from the betting site InTrade that is showing growth expectations for the fourth quarter:
I think the idea that the FED would raise rates this year is lunacy. First off the economic "recovery", which has only been a stock market phenomena up to now, is facing higher gas prices, higher unemployment, and now the specter of higher loan rates. Second, for the FED to go from "quantitative easing" to artificially lower rates and then pull a total flip flop and raise rates makes them look pretty mentally deficient.
Somebody is going to be right, and somebody is going to be dead regarding the bond market. With dislocation a serious risk, the situation will have to resolve itself soon. Should be interesting.
Automotive Spotlight
It seems today that everywhere I looked there was automotive news! Being a headline chaser, I Will highlight what caught my attention.
Ford Feeling Left Out
The good thing about being a total basket case is that this proactive government will run to your rescue. Ford Motor Company, while far from free of troubles, is miles away from both GM and Chrysler. Of course this will put them at a disadvatge with no handouts and cheap money! (from Dealbreaker):
Ford Getting a Little Tired of Being Peed on by the Government
According to Ford, it is better to be in bankruptcy than out of it. Ford alleges that the government's support for GMAC allows it to access cheaper financing than Ford can get through the TALF. In advance of a June 10th hearing before the Senate Banking Committee, Michigan Republican Mike Rogers voiced some concerns about just how perverted the General Motors rescue has become:
"Ford is the healthiest company in the intensive-care unit right now, and you don't want to push them over the edge. I don't want the third company to go into bankruptcy because the government put them there by making them artificially uncompetitive."
The notion of the government's hand leading to artificial conditions in the auto industry is not restricted to Rogers alone. Texas Republican Jeb Hensarling has apparently thought about this issue before and may have come up with some slightly nefarious solutions for Ford.
"It's very difficult to compete with somebody who can print money"
Ford's problem is that they are not sick enough. They are at a material disadvantage to GM (if they come out of this mess alive) due to government intervention. Maybe Ford can hire the GM executives for a few quarters so they too can be bailed out.
Supreme Court Baited into Chrysler Lawsuit
Late breaking news was out that the US Supreme Court (SCOTUS) had issued a stay on the Chrysler sale to Fiat so that the court may consider whether to consider the lawsuit filed by the Indiana State Pension fund. Many observer's were glad to see the possibility that debt holders may still have some rights by the law in the new United States. While the legal merits of such a proceeding ar far beyond my limited legal understanding, I can say the following with confidence:
There is NO WAY the SCOTUS is going to get involved in this case. There is too much political pressure and also any intervention will screw up the GM bankruptcy to follow.
So why issue the stay? I think I have an idea.
Authority holders never like to be told what they can and cannot do. As the highest court in the land the SCOTUS rightly feels that they have substantial say on matters of legal consequence. So what do you think the members of the court were feeling when presented with this (via the SCOTUS blog):
U.S says TARP Issue Out of Court's Reach
The Obama Administration argued Monday that no court, including the Supreme Court, has the authority to hear a challenge by Indiana benefit plans to the role the U.S. Treasury played in the Chrysler rescue, including the use of “bailout” (TARP) funds. The Indiana debt holders, U.S. Solicitor General Elena Kagan wrote, simply have no right to raise that issue, thus putting it out of the reach of the courts.
Although arguing that the courts may not rule on the validity of Treasury’s decision to shore up a new Chrysler company with funds from the Troubled Assets Relief Program, the Solicitor General did argue that those funds may go to a troubled auto company, and not just to banks or other regular financial institutions, and the Indiana benefit funds had contended.
“The Treasury has determined that TARP funds may be used to purchase assets from automobile companies when necessary to prevent those companies’ failure or major disruption from disrupting the stability of the Nation’s economy and financial markets.”
Total blow-off!!
I mean, the language and summary dismissal of any use of authority to question the actions of the Treasury regarding TARP is obscene. Also remember the neat clause where no one from the Treasury can be prosecuted for any actions they took during application of TARP. Nice move, that.
I think the SCOTUS was baited into a stay based on the dismissal their participation by the Administration. That said, they will not get in the was of the Chrysler sale, but I think they did want to send a message.
Fusion of US Automakers with Defense Industry
When I try and think of what kind of growth will pull the US out of this economic mess, I am stumped for an answer. With many on the watch for any new "bubble" it seems there will have to be an actual manufacturing based growth for America to grow again.
Americans love cars. They just cannot build them competitively. What the US can build is weapons. You name it jets, tanks, guns, bombs, we make the best in class. So it seems to me that a fusion of the defense and automotive industries could make sense.
The always fun blog Geekologie is on the case and digs up some possible entries for such a marriage:
The Dodge Challenger Vapor
Description;
"The Challenger Vapor features radar-absorbing stealth-black paint, not unlike what is used to mask stealth bombers. The Vapor is set to run almost silently, thanks to "stealth exhaust" - whatever that means. Reminds us of when KITT used to go "Silent Mode" on Knight Rider. You need biometric verification to enter the cockpit via gull wing doors. The driver can view night/thermal vision projections on the windshield while sitting in a compartment that looks like something out of Crimson Tide."
No word on armaments, but interesting!
Obscure movie quote:
"Dad, will ,the maverick fire if we're still on the ground?
"I don't know I never tried it!"
The second entry for the weapons grade automotive sector is the Mustang X-1:
Complete with jet cockpit:
So maybe there is a future for the US automakers after all?
Have a good night.
7 comments:
I love checks and balances, separation of powers, limitations on government. That's why I love America.
If you think Ginsburg's stay of the Chrysler deal was a bitchslap, and it was, wait till Scalia and Thomas get into the act. I have no idea how the court will rule in this case, but I would hazard a guess that preserving 150 years of bankruptcy law and secured creditors rights is pretty high on the list.
I read an interesting article the other day that ranked all the automotive companies from best to worst in terms of customer satisfaction. You know who was No. 2, as in second worse? Yep, Chrysler. Know who was No. 1? Fiat.
So this deal never made any sense to me. Naked Capitalism and Zero Hedge have been all over this story from the very beginning. And I'm glad the Supreme Court stepped in. Bankrupting companies to buy union votes is fundamentally unAmerican.
As to the faux recovery, you're right, GYC, but you left out one very important factor. The rising delinquencies in prime mortgages. Very interesting article in the new BusinessWeek, which just came today, about the housing market and the oncoming flood of foreclosures.
The subprime crisis is pretty much over. Now we're moving in to alt-A, option ARM and prime territory. I suspect I will be very busy over the coming months, if not years.
There will be no economic recovery until and unless the housing market stabilizes. That will be when prices are more in line with incomes. And since there is an awful lot of inventory on the market, prices have a long way to fall.
I have tried to remain optimistic, you know that, but if the SC does not give this a real hearing, then the US is facing a Constitutional crisis unlike any seen before. This is no trivial matter. Without the possibility of justice in a court of law, this country will come unglued at a speed NO ONE is expecting. Without the branch of justice, all we have is a corrupt congress and executive branch. In other words, royalty. And that's if we're lucky. Long live the king...
Gawains,
the fiat deal was a head scratcher for me as well. Your housing points are spot on as well. At least 50% of the housing activity during the boom was due to 1st time buyers and move up buyers..both gone due to real lending standards and loss of equity. See The Automatic Earth this evening for detials.
Lisa,
So glad to see you again!
That said, you are dreaming if you think the SC will actually play this out! I agree things are going south fast, maybe that is what the bond market is telling us??
PS any charting magic you may still do I would gladly post here so you are not bothered with maintaning a blog; its a ton of work I know!
"Second, for the FED to go from "quantitative easing" to artificially lower rates and then pull a total flip flop and raise rates makes them look pretty mentally deficient."
Yes but remember how we got here. The argument is/was, during the 01 downturn, Greenspan didnt back off the throttle quick enough, leading to the credit bubble we saw for the last few years. In light of that, the fed may not want to make the same mistake twice.
As to housing, here's an interesting discussion over at the OC Register.
http://mortgage.freedomblogging.com/2009/06/09/foreclosure-is-the-cure/11685/
Roberts is exactly correct. This is not a foreclosure crisis. It's a debt crisis.
Oh, and not to get all political on you guys, but speaking of Star Trek, here is an excellent video by Bill Whittle over at pjtv.com
http://www.pjtv.com/video/Afterburner_/__The_Dowd_Conundrum%3A_Why_Vulcans_and_Other_Intellectuals_Don%27t_Belong_in_the_Big_Chair/1995/
Great special effects, really. And I did not know that the premise of the show was based on Horatio Hornblower.
If things go "Mad Max" I'm going to have to go with the Dodge Challenger Vapor, the flat black paint job will be the new black for the fall season at the Thunderdome.
As I have said before I am a novice when it comes to finance so I'm not really sure if the U.S. can correctly be compared to Japan but I read an interesting article over at Financial Sense yesterday titled:
Myth Busting
by Adam Brochert
(here is an excerpt)
“The government is printing money and this will stop deflation and cause heavy inflation or hyperinflation”
(responds)
"You want heavy “money printing” and heavy government debt loads? Try Japan!
How many Gold bugs are calling for pending hyperinflation in Japan? If any are, when did they start calling for it? Quantitative easing was begun in Japan in 2001 and went on for 5 years before they took a break..."
"...Or how about those bond vigilantes stopping the Japanese government in its tracks and pushing government bond yields to astronomical highs..." (not happening according to the chart Mr. Brochert has up in this article)
http://tinyurl.com/l8g9zq
The guy is still pro gold even though he makes a convincing argument against hyperinflation (which I admit I sometimes wonder if that's not the road the U.S. is going down).
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