What Caused This Rally?

"Consumer Confidence" came in higher than expected based on numbers from The Conference Board. The market started rising well ahead of the release of this 'news' which is no surprise as the source is a somewhat leaky bucket.

This despite the housing data in the Case-Shiller Index which was much worse than expected.

Our take is always that those who look for fundamental reasons for short term market moves are often on a fool's errand.

The reason for this rally today is best captured by an old stock market adage.

"Never short a dull market."

Bernanke's Wager With the US Bond and Dollar

Bernanke's wager is on a virtual free lunch by printing money.

"Fed chair Ben Bernanke has long argued that central banks can bring down long-term borrowing rates by purchasing bonds "at essentially no cost". His frequent writings rarely ask whether foreigner investors – from a different cultural universe – will tolerate such conduct. Mr Bernanke is betting that under a floating currency regime there is no risk of repeating the disaster of October 1931, when the Fed had to raise rates twice to stem foreign gold withdrawals, with catastrophic consequences."

"There isn't enough capital in the world to buy the new sovereign issuance required to finance the giant fiscal deficits that countries are so intent on running. There is simply not enough money out there... If the US loses control of long rates, they will not be able to arrest asset price declines. If they print too much money, they will debase the dollar and cause stagflation."

There is enough money if the Fed can run the printing presses fast enough. That is the whole point. The bet is that people will continue to accept it in return for real goods and services, pretending that it has the same marginal value without regard to how much the Fed creates.

The method is to look good by attempting to make most of the competing forms of currency and stores of wealth look equally bad.

UK Telegraph
US bonds sale faces market resistance
By Ambrose Evans-Pritchard
9:19PM BST 24 May 2009

The US Treasury is facing an ordeal by fire this week as it tries to sell $100bn (£62bn) of bonds to a deeply sceptical market amid growing fears of a sovereign bond crisis in the Anglo-Saxon world.

The interest yield on 10-year US Treasuries – the benchmark price of long-term credit for the global system – jumped 33 basis points last week to 3.45pc week on contagion effects after Standard & Poor's issued a warning on Britain's "AAA" credit rating.

The yield has risen over 90 basis points since March when the US Federal Reserve first announced its controversial plan to buy Treasury bonds directly, a move designed to force down the borrowing costs and help stabilise the housing market.

The yield-spike may be nearing the point where it threatens to short-circuit economic recovery. While lower spreads on mortgage rates have kept a lid on home loan costs so far, mortgage rates have nevertheless crept back up to 5pc.

The Obama administration needs to raise $2 trillion this year to cover the fiscal stimulus plan and the bank bail-outs. It has to fund $900bn by September.

"The dynamic is just getting overwhelming," said RBC Capital Markets.

The US Treasury is selling $40bn of two-year notes on Tuesday, $35bn of five-year bonds on Wednesday, and $25bn of seven-year debt on Thursday. While the US has not yet suffered the indignity of a failed auction – unlike Britain and Germany – traders are watching closely to see what share is being purchased by US government itself in pure "monetisation" of the deficit...

The US is not alone in facing a deficit crisis. Governments worldwide have to raise some $6 trillion in debt this year, with huge demands in Japan and Europe. Kyle Bass from the US fund Hayman Advisors said the markets were choking on debt.

"There isn't enough capital in the world to buy the new sovereign issuance required to finance the giant fiscal deficits that countries are so intent on running. There is simply not enough money out there," he said. "If the US loses control of long rates, they will not be able to arrest asset price declines. If they print too much money, they will debase the dollar and cause stagflation.

"The bottom line is that there is no global 'get out of jail free' card for anyone", he said.

The US is acutely vulnerable because it relies heavily on foreign goodwill. China and Japan alone hold 23pc of America's $6,369bn federal debt. Suspicions that Washington is trying to engineer a stealth default by letting the dollar slide could cause patience to snap, even if Asian exporters would themselves suffer if they harmed their chief market.

The dollar has fallen 11pc against a basket of currencies since early March. Mutterings of a "dollar crisis" may now constrain the Fed as it tries to shore up the bond market. It has so far bought $116bn of Treasuries as part of its "credit easing" blitz, out of a $300bn pool.

When the Fed first said it was going to buy Treasuries in March the 10-year yield to dropped instantly from 3pc to near 2.5pc, but shock effect has since worn off. Any effort to step up purchases might backfire in the current jittery mood.

In the late 1940s the Fed was able to cap the 10-year yield at around 2pc, but that was a different world. The US commanded half global GDP and had a colossal trade surplus. The Fed could carry out its experiment without worrying about foreign dissent.

Fed chair Ben Bernanke has long argued that central banks can bring down long-term borrowing rates by purchasing bonds "at essentially no cost". His frequent writings rarely ask whether foreigner investors – from a different cultural universe – will tolerate such conduct.

Mr Bernanke is betting that under a floating currency regime there is no risk of repeating the disaster of October 1931, when the Fed had to raise rates twice to stem foreign gold withdrawals, with catastrophic consequences. This assumption may be tested.

It is not clear where the capital will come from to cover global bond issues. Asian central banks and Mid-East oil exporters have cut back on their purchases of US and European bonds as reserve accumulation slows. Russia has slashed its holding by a third to support growth at home. Even Japan's state pension fund has become a net seller of bonds for the first time this year the country's population ages.

Japan's public debt will reach 200pc of GDP next year. Warnings by the Japan's DPJ opposition party that, if elected this autumn, it would not purchase any more US debt unless issued in yen, is a sign that the political mood in Asia is turning hostile to US policy.

There is no evidence yet that foreigners are in the process of dumping US Treasuries. Brad Setser from the US Council on Foreign Relations said global central banks added $60bn to their US holdings in the first three weeks of May.

This is bitter-sweet for Washington. It suggests that private buyers are pulling out, leaving foreign powers as buyer-of-last resort.

We just have to hope that G20 creditors agree to put a clothes peg on their nose and keep buying Western debt until the crisis passes, for the sake of the world.

Ladies and Gentlemen: the United States Is Insolvent

"We are out of money." Barack Obama May 23, 2009

Obama openly says what anyone with common sense has known for quite some time: the US is broke, and will not be able to honor its financial and fiduciary obligations.

The question remains how the US restructures that debt and how big a haircut the debt holders will take.

20%? 30%? More like upwards of 50% at least in real terms.

And who are these debt holders?

Anyone who hold Treasury debt obligations and financial assets, from the Long Bond to the US Dollar, and assets guaranteed by the Federal Reserve and the Treasury.

Technically the debt will be serviced and the interest paid according to the terms of the agreements, with devalued US dollars.

The process will continue until the debt is restructured and the dollar is replaced with a new dollar. This may take some years.

The Incontrovertible Truth About Debt, Deleveraging, Devaluation and Recovery

Why the US Has Gone Broke: Chalmers Johnson

Marc Faber Sees Bankruptcy for the US

In 2009 the US Will Be Forced to Selectively Default and Devalue Its Debt

A Credit Bubble of Historic Proportion

Shhhhhh.... Here is a Secret Worth Remembering

Didn't you just know they would spill it over a long holiday weekend?

Don't be too concerned, there will be more spin and denials after this trial balloon has been floated, and life will go on.

"Oh, that's not what Obama meant. He means we have a problem but there are the means and the time to address and repair it before it becomes too great."

People have an enormous capacity for delusion bordering on selective amnesia. Go back and read the posts on this blog starting in September 2008. Then reflect on what has been said recently on Wall Street and you will see what we mean.

We are now in the endgame of an historic credit bubble that will result in a currency crisis of epic proportions.


DrudgeReport
'WE'RE OUT OF MONEY'
Sat May 23 2009 10:32:18 ET

In a sobering holiday interview with C-SPAN, President Obama boldly told Americans: "We are out of money."

C-SPAN host Steve Scully broke from a meek Washington press corps with probing questions for the new president.

SCULLY: You know the numbers, $1.7 trillion debt, a national deficit of $11 trillion. At what point do we run out of money?

OBAMA: Well, we are out of money now. We are operating in deep deficits, not caused by any decisions we've made on health care so far. This is a consequence of the crisis that we've seen and in fact our failure to make some good decisions on health care over the last several decades.

So we've got a short-term problem, which is we had to spend a lot of money to salvage our financial system, we had to deal with the auto companies, a huge recession which drains tax revenue at the same time it's putting more pressure on governments to provide unemployment insurance or make sure that food stamps are available for people who have been laid off.

So we have a short-term problem and we also have a long-term problem. The short-term problem is dwarfed by the long-term problem. And the long-term problem is Medicaid and Medicare. If we don't reduce long-term health care inflation substantially, we can't get control of the deficit.

So, one option is just to do nothing. We say, well, it's too expensive for us to make some short-term investments in health care. We can't afford it. We've got this big deficit. Let's just keep the health care system that we've got now.

Along that trajectory, we will see health care cost as an overall share of our federal spending grow and grow and grow and grow until essentially it consumes everything"...

Update on the Political Continuum: Obama Moves Sharply Towards Nationalizaton

Obama is moving slowly but surely towards more overt state socialism.

There is an interesting twist of crony capitalism in his Administration especially from his economics team. It will be interesting to see how that develops. Will it become something akin to the post-Soviet Russian oligarchs with official state ties?

Regional Federal Reserve Banks Think the Geithner-Bernanke-Summers Plan Is Failing the Real Economy

Torches on the right, and pitchforks on the left.

Have a happy Memorial Day weekend to all our readers in the States. US markets will be closed on Monday.

Perhaps a reminder that the freedom won by those who came before us at so dear a price should not be dealt away so easily out of fear and greed.

"But, in a larger sense, we can not dedicate - we can not consecrate - we can not hallow - this ground. The brave men, living and dead, who struggled here, have consecrated it, far above our poor power to add or detract. The world will little note, nor long remember what we say here, but it can never forget what they did here. It is for us the living, rather, to be dedicated here to the unfinished work which they who fought here have thus far so nobly advanced. It is rather for us to be here dedicated to the great task remaining before us - that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion - that we here highly resolve that these dead shall not have died in vain - that this nation, under God, shall have a new birth of freedom - and that government of the people, by the people, for the people, shall not perish from the earth."

CentralBankNews.com
Why the regional feds are up in arms
22 May 2009

A number of presidents of regional Federal Reserve banks and senior staff have recently expressed dissent from the official line taken by the US authorities in managing the banking crisis.

This development may surprise central bankers in other countries, used as they are to enforcing conformity among officials of their organisation to the official line. It would be astonishing, for example, if several governors of euro-area central banks were to suddenly challenge Jean-Claude Trichet's handling of the crisis or the crisis management policies of governments of euro member states. Collective responsibility and cover-ups are the watchwords in Europe.

The heads of the district fed banks are particularly concerned with the inequities and inefficiencies arising from official protection of banks deemed too big to fail.

Hoenig speaks out -

In April, Tom Hoenig, president of the Kansas City Fed, said that actions that had been taken in an attempt to protect the largest US institutions from failure risked "prolonging the crisis and increasing its cost."

Support for firms considered too big to fail had provided them with a competitive advantage and subsidised their growth with taxpayer funds. They were, he said, not only too big but also "too complex and too politically influential to supervise on a sustained basis without a clear set of rules constraining their actions."

To those who might be surprised at such forthright criticism from a senior official, he reminded his listeners that the 12 regional banks were set up by Congress "specifically to address the populist outcry against concentrated power on Wall Street." He added: "Its structure reflects the system of checks and balances that serves us well at all levels of government, and it is the reason I am here today able to express an alternative view."

- Lacker protests

A few weeks later another senior Federal Reserve official also asserted that the implicit guarantee that the government would step in and save those institutions deemed too big to fail was a key cause of the current economic malaise.

Speaking at the Asian Banker Summit in Beijing on 11 May, Jeffrey Lacker, president of the Richmond Fed, said that the existence of the financial safety net created incentives for too-big-to-fail institutions to pay little attention to some of the biggest risks.

"Their tendency to underprice such risk exposures reduces market participants' incentive to prepare against and prevent the liquidity disruptions that are financial crises, thus increasing the likelihood of crises."

It was, Lacker said, "worth noting that some large firms that appear to have benefited from implicit safety-net support were heavily involved in the securitisation of risky mortgages."

Lacker said that the implicit belief that some institutions were too big to fail had built up over the years in response to a series of events and government actions involving large financial institutions.

- and Stern maintains his criticism

Gary Stern, the president of the Minneapolis Federal Reserve has also been a vociferous critic of the Fed's bank bailouts. Writing with Ron Feldman, the senior vice president for supervision, regulation and credit at the Minneapolis Fed, for a book entitled Towards a New Framework for Financial Stability (published by Central Banking Publications), Stern said that the Fed was right to come to Bear's rescue, but criticised the decision to expand its safety net as "not subtle or implied." "Uninsured creditors of other large financial firms may now have heightened expectations of receiving government support if these firms get into trouble," he said.

More recently, in a statement to the Committee on Banking, Housing and Urban affairs on 6 May, Stern returned to the subject: "If policymakers do not address TBTF [too big to fail], the United States will likely endure an inefficient financial system, slower economic growth, and lower living standards than otherwise would be the case."

Gary Stern is retiring as he turns 65 in a few months, the mandatory retirement age for senior officials in the reserve banks.

Contrary to public perception, the 12 regional Fed banks are not government agencies. Nor are they private banks. Each is owned by member commercial banks.

The US Dollar and a Paradigm Shift in the Markets

From Warren Pollock:

A simple grid shows how the USD and the Stock Market have moved together in different ways during different economic times. Today we saw the USD down in a huge way with the Stock Market Weak.. Are we seeing the pendulum shift once again as the stress of derivatives and Insolvent municipalities hatch out. Are we a bailout nation? And Will the world bail us out?

British Economy Founders, Standard and Poor's Dictates Terms

This is certainly the big news for the day, although the markets are trying to slough it off, and spin the bright side of nearly anything.

What particularly strikes one is the almost ominous warning from US-based Standard and Poor's that the downgrade may be contingent on the outcome of the next British elections.

"Give me control over a nation's currency, and I care not who makes its laws"

And these days a credit rating for a debtor is as good as currency.

While we are working the math, it should be apparent to even an economist that the debt side of the American consumer balance sheet is not sustainable, and that future income will be used to pay down that debt to manageable levels.

The implications for this are enormous. But its good to have the world's sovereign currency, to be the king of finance.

AFP
S&P issues warning on UK economy credit rating

LONDON (AFP) — Standard and Poor's warned Thursday that the British economy's top-level 'AAA' credit rating was under threat and revised down its outlook due to soaring public debt, sending financial markets reeling.

The international ratings agency said it downgraded the outlook to "negative" from "stable" because of the country's "deteriorating public finances" amid a deep recession in Britain and elsewhere.

S&P also warned in a statement that the change may lead to a downgrade of Britain's cherished 'AAA' sovereign credit rating -- a mark of its financial standing in the world and a major concern in any move to raise funds.

"This is the first major country to get a negative outlook, and that's significant," said Bilal Hafeez, global head of currencies research at Deutsche Bank in London.

In reaction to the news, London's FTSE 100 index of leading shares dived by more than 3.0 percent in late afternoon trade.

And on the foreign exchange market, the British pound fell back sharply to 1.55 to the dollar, as traders hedged themselves against the chance of a damaging ratings downgrade....

However, the agency also forecast that the government debt burden could reach nearly 100 percent of Gross Domestic Product (GDP) by 2013.

"A government debt burden of that level, if sustained, would in Standard & Poor's view be incompatible with an 'AAA' rating," warned the agency.

Official data released Thursday showed Britain's public deficit ballooned to a record 8.5 billion pounds (9.6 billion euros, 13.22 billion dollars) in April as the government bailed out banks and the recession slashed tax revenues.

At the same time, public debt as a proportion of GDP surged to 53.2 percent in April, compared with 42.9 percent at the end of the same month last year.

S&P warned that the ratings could be downgraded following Britain's next general election that must be held by mid-2010.

"The rating could be lowered if we conclude that, following the election, the next government's fiscal consolidation plans are unlikely to put the UK debt burden on a secure downward trajectory over the medium term," S&P credit analyst David Beers said.

"Conversely, the outlook could be revised back to stable if comprehensive measures are implemented to place the public finances on a sustainable footing."

A spokesman for the British Treasury said the government was planning to halve the public deficit within five years.

A downgrade of a credit rating can have significant consequences for a country, pushing up the interest rates demanded by investors to buy new debt which is increasingly being issued to help cover soaring budget deficits.

Britain's economy is shrinking at its fastest pace in almost 30 years. GDP contracted by 1.9 percent during the first three months of 2009 after a slump of 1.6 percent in the last quarter of 2008.

US Dollar Weekly Chart

Bailing On Britain

The survey reported below indicates that many Britains are taking serious steps to leave their country because of the economic conditions and political considerations.

A bit overstated perhaps, and talking their book, but certainly a trend worth watching.

We cannot help but wonder if and when a similar emigration will take place in the US. Typically the movement has been within the United States, as in the great movement of people from the center of the country to the coasts in the 1930's.

Have you seriously considered leaving the US within the next four years, seriously enough to actually do some preliminary planning? If so, for what destination?

Online Surveys & Market Research

TheMoveChannel
Mass exodus from UK
Catherine Deshayes
Friday, May 15, 2009

New research has found that a whopping 11 million Brits are thinking of taking a job overseas within the next two years - a significant dent in the population - and a fifth of those would choose a new life down under...

Britain is experiencing the greatest exodus of its own nationals in recent history while immigration is at unprecedented levels, new figures show.

In 2007, 207,000 British citizens - one every three minutes - left the country and currency specialist Foreign Currency Direct has revealed that one in four working Brits are now looking to leave the country for sunnier climes and better job opportunities.

More British live abroad than any other nationality and the levels of emigration are now the same as those seen in the late-1950s when the £10 Poms left for Australia.

An increase in tax levelled at high wage earners coupled with rising UK unemployment is thought to be partly behind the mass exodus.

The research found that men are almost twice as likely as women to opt for a job overseas and moving abroad was most popular with Brits aged between 18 and 30 and also those in the 51 to 60 age bracket, perhaps seeking a better lifestyle for their retirement.

With the number of unemployed in Birmingham higher than in any other major UK city, people living in the Midlands are subsequently the most likely to look for a job overseas - 17 per cent of them compared to just 13 per cent in Wales and the South West.

The majority of people planned to head for a country with a warmer climate, more days of sunshine and those that were English speaking. A fifth of people named Australia as their top choice; one in six selected the USA and one in ten chose New Zealand. Canada was also a popular choice.

Peter S. Ellis, Chief Executive of Foreign Currency Direct, said, "As people struggle to find jobs, it is no wonder that Brits are considering bailing out the UK.

"In the last year, Foreign Currency Direct has seen an 37 per cent increase in the number of clients transferring funds to Australia and the USA as Britons look overseas for a better quality of life."