Monday, January 18, 2010

Friday's Fantasy of Dollar Strength Revealed

Friday's rise in the Dollar, and subsequent fall in every other asset class, can only be attributed to "the invisible hand" that purports to guide our markets. That is to say, "market rigging is to blame for Friday's market actions".

With options expiration on stocks Friday [the third Friday of the month] it was imperative that the equity markets be brought down so most of these options would expire worthless. In order to guarantee that, a phony bid in the US Dollar was created to force selling in the Market Indexes. The selling was exacerbated by the impending three day weekend as the markets are closed today in observation Martin Luther King's Birthday.

Of course the Dollar's bid was the result of yet another contrived Consumer Price Index report as the government claimed that U.S. consumer prices rose more slowly than expected in December from November on modest gains in food and energy costs. This allowed the government to claim once again that "inflation remains subdued". Somehow my checking account fails to confirm this claim.

The government also boasted that industrial production and capacity utilization were up in November and that manufacturing was up in the New York region in December. If B.S. were quantifiable, I would give the government the benefit of the doubt here, but there were too many economic data points ignored by the financial media that should have driven the Dollar lower on Friday.

How did news that the Fed's balance sheet liabilities hit a new record?

US Fed's balance sheet liabilities hit record
NEW YORK, Jan 14 (Reuters) - The U.S. Federal Reserve's balance sheet rose to a record in the latest week, boosted by its ongoing efforts to support the mortgage market, Fed data released on Thursday showed.

The Fed's balance sheet -- a broad gauge of its lending to the financial system -- rose to $2.274 trillion in the week ended Jan. 13 from 2.216 trillion in the prior week.

After declining early last year, the balance sheet generally has been accumulating mass amid the Fed's asset-buying program, in which the central bank's holdings of agency debt and mortgage-backed securities have grown to more than $1 trillion.

The latest rise in the balance sheet came on the back of a jump in its holdings of agency mortgage-backed securities, which rose to $968.59 billion in the week ended Jan. 13 from $908.74 billion in the previous week.

The Fed's holdings of agency debt totaled $160.83 billion in the week ended Jan. 13 versus $159.88 billion the previous week.

By the end of March, the Fed plans to have bought $1.25 trillion worth of mortgage-backed securities and about $175 billion worth of agency debt.

This should news should be more than alarming and should have sent Dollar Bulls running for cover. How can the Fed continue to talk out of one side of their mouth about "draining liquidity", and then continue to buy up this garbage and put the American taxpayer on the hook for it?

And of course our Dollars Bulls must be absolutely giddy that this weeks bond auctions were once again so highly successful in the face of so much doubt about the continued demand for them. But is there really a demand for them? Or is there just the "appearance" of a demand for this growing mountain of debt?

Big mystery buyer for Treasuries; are his initials B.B.?
NEW YORK -- Auctions of US Treasury notes this week have attracted extremely strong buying from domestic institutional investors, fuelling speculation that "one big bidder" has decided to defy the conventional wisdom on Wall Street that US government debt is due for a fall.

The surprising demand for Treasury notes has come in the form of "direct bids," the term used for US institutional investors who bypass the so-called primary dealers that underwrite government bond sales.

On Wednesday, direct bids accounted for 17 per cent of the sales of $21 billion in 10-year Treasury notes, far higher than the recent average of 7.4 per cent. It was the highest percentage of direct bids in a 10-year Treasury auction since May 2005.

On Tuesday, direct bids accounted for a record 23.4 per cent of the bidding for $40 billion in three-year notes, up from an average direct bid of 6 per cent.

Market participants say the unusually high level of direct bidding suggests that a large investor is looking to accumulate Treasuries without alerting the primary dealers on Wall Street to its intentions.

"It appears to us that someone is trying to hide their apparent interest in owning these auctions from the rest of the market," said David Ader, strategist at CRT Capital.

Rick Klingman, managing director at BNP Paribas, said: "It is unusual to see such a spike in the direct bid and I would imagine it is one big bidder. There is no way we will find out who it is, not now, or ever."

The surge in direct bidding is particularly notable because it comes after predictions that the record levels of Treasury debt issuance would exhaust investor demand, driving yields higher.

Among the most high-profile warnings came from Pimco, manager of the largest bond fund, which raised concerns about the escalating supply of US Treasury debt.

And if there is such a great demand for the Tresury's debt, why are htere voices in the government suggesting that all 401ks and IRAs be turned into fixed income annuities loaded with US Treasury obligations?

401k/IRA Screw Job Coming?
By Karl Denninger
Now this is a guaranteed rape job.

In a short conversation this noontime that CNBC apparently has omitted from their archives (Why's that folks?) Rick Santelli was talking about a potential to effectively force money into the Treasury market.

Where would they get this?

From your 401k and IRA accounts!

From Businessweek:

The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort.

Let me tell you what this is - it is an attempt to prevent the collapse of the Treasury market!

Of course news Friday that JP Morgan's revenues may be slipping due to loan losses surely helped kick the legs out from under a teetering stock market Friday, but news that the third largest credit card issuer Capital One's US credit card charge-offs hit 10 pct was unfortunately overlooked by much of the financial media. After all, how can they tout an economic recovery when the source of 70% of the country's GDP is drying up.

Capital One US credit card charge-offs hit 10 pct
NEW YORK, Jan 15 (Reuters) - Capital One Financial Corp's (COF.N) U.S. credit-card charge-offs rose to double digits in December, showing consumers became increasingly stressed in the holiday shopping month.

In a regulatory filing on Friday, Capital One said the annualized net charge-off rate -- debts the company believes it will never collect -- for U.S. credit cards rose to 10.14 percent in December from 9.60 percent in November.

This news hardly bodes well for an increase in consumer purchases going forward. This news also lends more truth to the fact that what economic recovery the government claims we have is solely the result of government spending. Take away the government spending, and the Fed's "quantitative easing" and one would quickly ask, "what economic recovery"?

I see little last Friday that supports a bid in the US Dollar, do you? What I see is several more reasons to suspect that sovereign debt default may be in our future, not an economic recovery. That could also be read as a hyperinflationary depression is more likely in our future than any economic recovery.

Is a U.S. Default Inevitable?
By Patrick J. Buchanan
The warnings come from the Committee on the Fiscal Future of the United States, chaired by Rudolph Penner, former head of the Congressional Budget Office, and David Walker, former head of the Government Accountability Office and author of Comeback America: Turning the Country Around and Restoring Fiscal Responsibility.

With that share of the U.S. national debt held by individuals, corporations, pension funds and foreign governments having risen in 2009 from 41 percent to 53 percent of GDP, Penner and Walker believe it imperative to get the deficit under control. Unfortunately, it is not possible to see how, politically, this can be done.

Consider. The five largest elements in the budget are Social Security, Medicare, Medicaid, defense and interest on the debt.

With interest rates near record lows, and certain to rise, and back-to-back $1.4 trillion deficits, this budget item has to grow and has to be paid if the U.S. government is to continue to borrow.

Second, with seniors on fire against Medicare cuts in health care reform, it would be fatal for the Obama Democrats to curtail Social Security or Medicare benefits any further this year. Next year, they will not only lack the congressional strength but any desire to do so, after their anticipated shellacking this fall.

The same holds true for Medicaid. The Party of Government is not going to cut health benefits for its most loyal supporters. Indeed, federal costs may rise as state governments, constitutionally required to balance their budgets, cut social benefits and beg the feds to pick up the slack.

This leaves defense. But the president is deepening the U.S. involvement in Afghanistan to 100,000 troops, and the military needs to replace weaponry and machines depreciated in a decade of war.

Where, then, are the spending cuts to come from?

U.S. Postponed the Great Depression, Not Prevented It, Says Trend Forecaster Celente
Celente, the director of the Trends Research Institute, who's been tracking trends for 30 years, thinks 2010 brings with it the Great Depression we narrowly avoided last year. Celente's been making this prediction for several years, and as we know was nearly proved right.

Extraordinary government intervention helped prove him wrong, something he didn't anticipate. "We never thought we'd be buying companies like AIG, we never thought we'd own parts of General Motors," he tells Aaron in the accompanying clip. "The government's never done these things before."

Celente believes the bailouts have just postponed a depression -- not prevented one: "The hand may change but the game doesn't change."

Celente says the recent signs of economic recovery are nothing more than a boost based on "a stimulus economy." Once those measures are pulled back and interest rates rise, the economy will once again tank.;_ylt=Aot0woLDr5ihodnXGfPUQs27YWsA;_ylu=X3oDMTE2ZDA3cGdwBHBvcwMxMQRzZWMDdG9wU3RvcmllcwRzbGsDdXNwb3N0cG9uZWR0?tickers=AIG,%5EGSPC,C,FRE,FNM,MTLQQ.PK,%5EDJI&sec=topStories&pos=9&asset=&ccode=

For an even more sobering and insightful look at what may lie ahead in 2010 please check out this interview with Mr. Celente at this link:

A, B, C — Profit!
by Larry Edelson
My reasons for remaining so bearish on the dollar have not changed …

A. There’s simply no way the world will recover from the financial crisis without a weaker dollar.

It is the only way Washington will ever get out from under the $134 trillion and growing debt mountain it’s created. By defaulting on those debts, on the sly, via devaluing the dollar.

Fed Chief Ben Bernanke knows this. So no matter what he says in public about supporting a strong dollar, take it with a grain of salt. The truth is he wants the dollar to decline in value. Period.

B. We are the world’s biggest debtor, with the world’s worst budget deficit to boot. That may sound similar to the problem above, but we need to put it in context.

Reason: Way too many analysts compare today’s U.S. economy to the 1930s, claiming we’re on the precipice of a great recession, at best, and a great depression, at worst.

There’s no disputing those last two points. But understand this: In the 1930s …

The U.S. was a creditor nation.

Washington had a balanced budget.

The dollar was backed by gold.

Exactly the opposite core fiscal conditions that we have today. A great recession now? Absolutely. A great depression? Entirely possible, and I would even argue that we’re already in one.

But whatever your view is of our economy today, how the economy can slide into a severe deflationary environment is illogical when the fiscal conditions underpinning our economy today are the polar opposite of what they were in the early 1930s.

Think it through and the only valid, logical conclusion is that we’re headed into the opposite of what we experienced in the 30s: A hyperinflationary depression.

It’s like fire and ice. An economy can destroy itself through severe deflation (ice), or severe inflation (fire). Both extremes end up in the same place.

It’s a matter of how you get there. In the 30s, the economy took the deflationary path to ruin.

Now, in the early 21st century, because the core fiscal conditions — not to mention monetary policy — are exactly the opposite of the 1930s — the economy will take the hyperinflationary path to ruin.

It’s simply a matter of time, not if, but when.

C. Because the U.S. is the world’s largest-ever debtor … because Washington has the world’s largest budget deficit … because there’s no gold standard … and because Bernanke will stop at nothing to devalue the dollar and inflate away debts …

There is simply NO WAY the dollar
can be a safe haven in this crisis.

That’s why it irks me when I see so many analysts and investors running toward the dollar when there’s some bad economic news elsewhere in the world.

They’re simply jumping away from a fire — but plunging headlong into the frying pan.

In other words, the theory that the dollar is one of the world’s safest havens in this financial crisis is dead wrong for today’s economic environment. For all the reasons I cite above.

Sure, there will be short-term rallies in the greenback, like the one we just experienced. But each and every one of them remains destined to fail, and the dollar set for much lower levels in the months and years ahead, wiping out the savings of most investors.

Except those that understand how the process works, and who take defensive action.

One of the ways you can do that is by owning a good chunk of the only true international currency: Gold.

So, be sure your gold holdings are up to snuff.

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