Thursday, June 11, 2009

Taking a Look from a Better Angle

Another dreary day here in Massachusetts. Tomorrow it is supposed to get a bit better. Get your requests in for Friday night entertainment. Judging by the soporific site hit numbers and the lack of comments maybe everyone is asleep!

Softball Question
In a blog post today the fine site The Baseline Scenario asks:
"Does the Administration Care About Executive Compensation?"

As I am always glad to help a fellow blogger, here is the answer:

Elucidation Required Immediately
Both Zero Hedge and Clusterstock were all over this story about
$135 BILLION in US bearer bonds being seized in Italy
US government securities seized from Japanese nationals, not clear whether real or fake
Bonds worth US$ 134.5 billion are seized. This is the largest financial smuggling case in history. But are they real? Concern over ‘funny money’ or counterfeit securities is spreading in Asia. The international press is silent.

The specifics are not known right now, but there is plenty to mull over here.

First up, what is a bearer bond? The first thing I thought of was the film "Die Hard" with Bruce Willis where the "terrorists" were actually thieves trying to steal a mere $600 Million in "negotiable bearer bonds". Also in the film "Heat" bearer bond theft is featured. As I followed this story all day, most input seemed to imply that these bonds are easily traced. Not sure then why stealing them would be such a hot topic then?

From Wikipedia:
A bearer bond is a debt security issued by a business entity, such as a corporation, or by a government. It differs from the more common types of investment securities in that it is unregistered – no records are kept of the owner, or the transactions involving ownership. Whoever physically holds the paper on which the bond is issued owns the instrument. This is useful for investors who wish to retain anonymity. The downside is that in the event of loss or theft, bearer bonds are extremely difficult to recover.

I am no expert, but it seems these items are truly like gold, liquid and very hard to track.

Consensus opinion, which is always correct, at this point says that the bonds are forgeries, counterfeits. Of course this tale has yet to make any splash here in US press. Assuming they are fake, these counterfeiters are the most inept in history.

The immense size of the bills, 135 BILLION total, makes selling them in smallish blocks of say 100 million almost a lifetime worth of effort. These were captured all together, so a small sale was not the plan. If these are fakes, some fool was about to drop 135 billion.

This story demands an explanation on a few fronts:
-Are the bonds real?
-Do bonds like this exist, if these are fake?
-How many?
-How are they used?
-How might this impact bond markets?
This bears watching.

Bond Auction Final Word
After yesterday's 10 year sale was called a draw by Economic Disconnect regarding my "great auction" call, the 30 year was the tiebreaker. Of course nothing is that simple!

To refresh, the details of the 10 year sale were:
"The bid-to-cover ratio, which gauges demand by comparing the number of bids with the amount of securities sold was 2.62. It was 2.47 last month and has averaged 2.40 at the past 10 scheduled sales."
"Indirect bidders, the class of investors that includes foreign central banks, bought 34.2 percent of the notes, up from 31.9 percent in May. The average at the past 10 scheduled auctions is 25.8 percent."
"The notes auctioned today drew a yield of 3.99 percent, compared with the 3.975 percent forecast (0.015 miss higher) by seven bond-trading firms surveyed by Bloomberg News." Which drew this from Accrued Interest:
"The 10-year auction was horrible. Non-fixed income people don't realize how big a miss 3bps is on a 10-year auction."

And headlines proclaimed the auction "poor" to "terrible"

The 30 year sale direct comparison via Bloomberg:
"The bid-to-cover ratio, which gauges demand by comparing the number of bids with the amount of securities sold, was 2.68. It was 2.14 last month and has averaged 2.21 at the past 10 scheduled sales."
"Indirect bidders bought 49 percent of the bonds, up from 33 percent in May. That class of investors bought 65.4 percent at the February 2006 sale, when the Treasury brought back the bond after a five-year hiatus."
"The bonds sold today drew a yield of 4.72 percent, the highest since August 2007. The average forecast by eight bond- trading firms surveyed by Bloomberg News was 4.80 percent." (a miss 0.8 lower). As of writing Accrued Interest has no additional take.

Headlines were screaming "good" to "very strong' auction.

I am going to declare victory! I was right that no way, no how was this auction going to go poorly. Identical numbers, and the miss on yield estimates was 53X better to the downside! I win, right?

Karl Denninger has a rather bleak take on the sale and what it implies:
30 Year Bond Results: Beware
The auction results make absolutely no sense! under "conventional wisdom."
Median yield down, primary dealers took about half and indirect bidders took the other half, basically.

What? 50% take for foreign central banks on 30y debt at a 4.6ish coupon?

That makes no sense given what we're being told is coming: massive inflation, maybe even hyperinflation, commodities ramping to the moon, the stock market going to the moon in a hyper-inflationary printing explosion.
The stock market rocketed on the release. I couldn't make sense out of the initial FX moves, especially in the DX and Yen. Someone was front-running in the financials bigtime as well, with a big ramp for an hour or so prior to the results.
Folks, if you think hyperinflation is coming, or even serious inflation, you're going to get your head cut off on a 4.6% 30y bond. In fact you could easily lose half or more of your investment, should you need to sell, and your coupon will be half or less of what it should be.

So how does this make any sense?

There is only one reason for the FCBs to want this sort of exposure:
They expect a ramp in the dollar and crushing DEFLATION, as this is the only way that bet will pay off.
If you're on the other side of this trade in any way, I hope you are putting on some sort of hedge.
Remember, foreign central banks can FORCE a pull in liquidity and make their desires a self-fulfilling prophecy.

Care to bet against someone who can make their bet pay off?

That's what I thought.....
Oh guess what - the primary dealers would like this outcome too......
PS: If this analysis is correct then we're in for some really NASTY trouble, quite soon. If you're short Ts, short dollars or long equities, your neck is in the guillotine. Better move before the blade falls!

I have no desire to disagree with Mr. Denninger, he will forget more about the markets (by a factor of 100) then I will EVER know. I really hate to quibble, but his line:
"They expect a ramp in the dollar and crushing DEFLATION"
Just hits me as wrong as can be. If the dollar gets stronger, people can buy more useless cheap China crap and it will hurt them less. So a general contraction is spending to wait for "lower prices", deflation, will not happen. Not that Chinese products could get much cheaper. I do not want to start a big fracas, and this will not because I doubt very much that Karl will ever see this blog, but we are at one of those deflation vs. inflation points where any 100 observers will define both so differently that you simply cannot have a discussion about it.

All in all, I proclaim my bond sale prediction correct and I invite any and all to offer alternate takes in the comments.

Taking a Look from a Better Angle
Usually when I am going to write a post, I single out 2 or maybe 3 items that really caught my attention and focus on those. Lately I feel that I have been pulled in many directions and the general noise level has risen to distracting decibels. I mean, I never mention bond auctions unless they fail, and fail in the real sense. I think that all the cross currents of information and conflicting reports have caused me to be too focused on small things.

Taking a step back and getting a better view from a more distant angle is a good idea at this point, and I would like to thank the fine author of Capitalist Preservation for inspiring me on this. In response to inquiries why she does not post frequently, the author offered this explanation:
This was only a test. If this had been a real emergency, our government would have said so. Ok, they did. But, that was then, this is now. Everything is all right and we may return to our regularly scheduled programs.
I've been asked why I'm not posting more about the market. Well, there's not much reason to right now. The story has been the same for months: the charts are broken, the government is lying and the market is in a holding pattern based on hope. Here are a few tidbits floating around the financial news world that have not changed in freaking weeks, with a few other absurdities. Believe what you will:

the list following this intro is compelling, so you should take a look.

It is like when you stare at a dot on a piece of paper too long, eventually you see two of them. Reality has not changed, there is only one dot, but your perception has.

So I would like to get a bit of distance and see the one dot.

Stepping back, here is what I see:
-Unemployment looms large. Today's number of 600k initial, almost 7 MILLION ongoing claims IS a disaster. It is only in the small window world we have right now that this is seen as "good". Consider that even if initials dropped to 0 in the next report (dream on) and then the next month 300k jobs were created, it would take almost 2 YEARS of 300k monthly job creation to recover just the jobs lost, not even accounting for new workers. Stick that green shoot in your pipe and smoke it!

-Just because something has not happened in a long time does not make it impossible. For year the scientific community refused to believe bacteria existed. The possibility of their being real could only be proved indirectly by various old school porcelain filters and hard to prove experiments. The possibility of viruses was even harder to imprint on the best minds of the time.

Keep that in mind when you read this passage featured on Zero Hedge (by JPM's Michael Cembalest) and note this section:
As for the dollar, we can put off a discussion on its status as the world's reserve currency for another day. We don't think it’s disappearing, but the Portuguese, Spanish, Dutch, French and British probably didn't see the end coming either. Joseph Yam, the storied head of the Hong Kong Monetary Authority, refers to the eras of reserve currencies as Portugal (1450-1530), Spain (1530-1640), the Netherlands (1640-1720), France (1720-1815) and Britain (1815-1920). 100 years looks like a long time.
The notion that the Chinese yuan could replace the US dollar as the world's reserve currency may strike some as odd, or at least very premature. But in 1920, only 7 years after the creation of the U.S. Federal Reserve, the notion that the dollar would replace the British pound probably sounded even more bizarre, given the recent memory of US defaults on Civil War debts, a major depression in 1893 and the Panic of 1907. I thought it was notable that the Chairman of the state-owned China Construction Bank called on the United States and the World Bank to begin issuing yuan-denominated bonds, after several other steps taken this year to increase the yuan's convertibility.

Remember today's idiot is tomorrow's best economist, which leads me to the final point...

-The top economists of any era are those that have been proven to "understand" past failures. Ben Bernanke is an expert on the Great Depression. Paul Krugman, the Nobel prize winner, is renowned for his expertise on the Great Depression and the Japan Deflation. I say let me now when the exact circumstances of today's episode occurs, in a separate universe so it can be studied endlessly and models made of them so that things "fit", and then can be used in real time today. Oh, no time travel machine or super string theorem to make that happen? Then those clowns are just guessing.

As am I.

I have been too focused on the micro, when the macro is all that matters. I have stated many times that the problem with economics is the glacial pace at which it moves. By next January we will know if "green shoots" were true or if they were second derivative baloney. Next week we will not.

Have a good night.


Anonymous said...


Here's what I see coming down the pipe by say September.

U3 unemployment 11%+

Gas prices $3.5 - $4
They raised the price here again Tuesday for the third increase in the last three weeks or 12%

Food prices exploding higher

Home prices still falling

The same commodity price inflation that caused the fall the last time around (thanks, making sure deflation doesn't happen here Benny) will kick an even weaker consumer who's credit line has been pulled down another flight of stairs which will give us a double dip.


getyourselfconnected said...

I agree with all of your estimates. How those numbers, higher mortgage rates, and cheaper Ipods make a V shaped recovery is beyond me.
Good to see you my friend.

watchtower said...

Cool, Kevin is posting again.

getyourselfconnected said...

See, we all missed you Kevin!

Anonymous said...


I had an old friend who I haven't seen in years come up from Arizona and spend a few days with us this week. He is in search of a port from the coming storm. He may be moving up here in the not to distant future.

One of my other daughters and here family moved back out here from CA with 3 of my grandkids a month ago so between all of that and the gardens along with this cold weather which is really screwing things up I've been kind of busy.


getyourselfconnected said...

No problem Kevin,
we just miss your solid take on things. Maybe we took you for granted, but Lisa got me back to what is important, and you have plenty to offer.

you are a valued contributor as well. Lets keep things going for tomorrow night!
Bed time, 5am wake up.
Be good.!

Anonymous said...


How about this for tomorrow: Ten Years After - I'd Love To Change The World


Anonymous said...

A record number of Chinese urban residents want to save, not spend, as they have turned increasingly gloomy about their incomes, according to a central bank survey released on Friday.
The survey of urban residents conducted by the People's Bank of China in late May showed that 47 percent would like to save more hit 47 percent, up 9.5 percent on the first quarter, and the highest since the survey began in 1999.

Alrighty then.


Anonymous said...

Thanks for the Denninger snip, he summed up the inevitability of deflation nicely, but his reasoning is perhaps more entertainment than reality. The reality is anathema to those that don't understand what the Fed is actually doing. Reality is this: dollars are getting scarcer, thereby becoming more valuable. Defaulted debts are dollars destroyed and hoarded dollars are dollars unspent. I'm sure you've seen the projections regarding commercial defaults...they are significantly higher than those that occurred during the GD. Sheila Bair now has bodyguards due to threats from persons whose savings exceeded FDIC insurance limits. All those dollars, totally vaporized. And that with what has thus far been a trivial number of bank/business failures.

What about Bernanke's Air Cav mission? Accrued Interest had this to say: "if the Fed mints a quadrillion new Sacagaweas and just sticks them in a vault at Ft. Knox, there is no inflationary impact."

Food prices? Only one way for a farmer to make more money: increase production. Of course, when increased supply meets decreased demand, the result is inevitable. Think of all the food that FDR destroyed in a vain effort to jack up prices.

As for facebook, someone described it as a "privacy raping machine". I believe it.

GawainsGhost said...

There was an interesting discussion last night on two shows on the Fox Business Channel, American Scorecard and Happy Hour (which is rapidly becoming my favorite late night show, and not because of the totally hot brunette, Rebecca Diamond, but because of Cody Willard, who speaks my language).

Judge Napolitano was the guest on American Scorecard, and he was calling for indictments against Lewis, Paulson, Bernanke, Geithner, and Blair. He also said that Ron Paul's bill to audit the Fed now has majority support in the House, that it will pass overwhelmingly, and that the Senate will be under tremendous pressure to pass it as well. Now, whether or not the President will sign it is another question, but hope springs eternal.

Indict them all, I say, and let God sort them out.

Another guest was the owner of Fitzgerald's Auto Mart, who has been working and pressuring Congress about the closing of dealerships in the Chrysler and GM debacles. As to the UAW taking majority stakes in Chrysler, he said, "How much is 55% of nothing worth?" I had to laugh.

But what I found most amusing was this post by Prof. Hamilton.

Texas Hold 'Em. This little old bank in Texas holds an MBS worth $29M, most of which is on sub-prime mortgages in California, 60% of which are delinquent. So it sells CDS, bets on default, to the big boys on Wall Street, JPM, BoA, RBS, and takes in $130M. Then it buys the security at par, makes the bondholders whole, and pockets $70M, leaving the big boys out $100M.

I love it. Never play poker with a Texas banker. When you go all in, he'll flip the cards to show that he flopped a nut straight, and take all of your money.

Lisa said...

Thanks for the mention, GYSC! Great post. Gawains, have I told you lately that you are incredible? I really love your comments, your writing is that of a professional. Come on, 'fess up, you are a writer, aren't you?

GawainsGhost said...

Well, to confess, Lisa, my first degree was a BS in Biology. I thought I wanted to be an explorer or something. But I soon became disenamored with science, went back to school and got a BA in composition and rhetoric with a minor in philosophy. Then I went to graduate school and got an MA in British Romantic poetry with a dual minor in medieval literature and the Humanities.

So, yeah, I gues you could say I am a writer of sorts. I do have a knack for it. But right now I'm merely a Realtor, selling repossessed homes.

Howbeit, the bottom line is this. I'd rather have the money than the acclaim.

That said, I love you too.

Anonymous said...

WASHINGTON, June 12 (Reuters) - Chief White House Economic Adviser Lawrence Summers said on Friday that government aid to banks and auto companies was driven by necessity and not by any wish to unduly intrude in business.

Every damn market in the US is being manipulated by these guys and thier Wall Street pimps and this clown comes out with this line of bull.

I majored in beer drinking, with a minor in pot smoking and skirt chasing so I see I'm way out of my league here:-)


GawainsGhost said...

Oh, and by the way, this is interesting.

Anonymous said...

WASHINGTON, June 12 (Reuters) - The U.S. debt burden must be on a "declining path" as officials begin to conceive a costly overhaul of the health system, President Barack Obama's top economic advisor said on Friday.

Poor old Larry had better go over to Japan and learn a few lessons about zombie banks and companies. Hate to be the one to tell him this but government spending and deficits as far as the eye can see is the economy now.


Lisa said...

Kevin, you crack me up!