Thursday, February 11, 2010

Confusion Reigns

I'm not sure which way is up anymore. As global turmoil and confusion reigns down on all of us, you have to wonder how they will wiggle their way out of this mess and find some reason to pump the markets full of eternal optimism that the reflation trade will work, the recession is over and all is well. You knew we'd be the ones on the white horse to save the day with the Greece issue (American taxpayer via the IMF). I guess we'll be financing the other PIIGS in the months to come. All is well. You should be superoverallocated in equities. Have no fear the great backstop is here.

Looking behind the curtain you will notice that our 30 year auctions are not doing so hot. Even Santelli said it failed although you would not know this by looking at the numbers. It all sold right? Not so fast my friend. In Putting Today's Record 30 Year Direct Take Down In Perspective ZH points out that, "Today, we saw a record explosion in the Direct take down for the longest bond purchasable. Just who are the Direct bidders? Whose orders are they executing? Are these merely a proxy for China or the Fed? What happens when that "mysterious" demand disappears? Nobody knows. Which is why Rick Santelli called this a failed auction." Funding our own debt is like a drug dealer dipping into his own stash. This is not a good combination, especially when the rate of the take down is increasing. Monetization is bad. Denninger echoes the sentiment in 30 Year Auction: A Solid "F".

Mish brings the swift changes to corporate bond yields to the table in Corporate Bond Yields Offer Hint Party Is Over. "I do not think that treasury yields break to the upside. However, they could. And if they do alongside corporate bond yields, there is a distinct possibility, and one that I have pointed out before, that there may be no places to hide in 2010 other than perhaps the much despised US dollar." You see they held rates artificially low as long as they could to make the market the only game in town. When the mass exit from the bond market commences, look out below. (I will take this moment to warn you about the possibilities of what I see as the many dangers in the muni markets as well.)

Denninger continues harping on the MTM issues for a good reason in Whistling Past The Graveyard We Be....., no one is listening or seems to care that assets held on balance sheets are marked to the most bogus amounts they can imagine. You would know why this is legal (cause the O allows it) if you read Yes, America is Still in an Official State of Emergency from my post the other night. Karl has, "Even companies that are allegedly "Strong" and have "No material exposure" are doing tricky things - witness CISCO's recent disclosure that it is funding customer financing at below-market interest rates (zero!) with off-balance sheet vehicles." This is the first I heard of CISCO's fiasco and am quite pleased to hear the sham has spread beyond the financials. 

Ed Harrison with Credit Writedowns has penned Chandler: Uncertainty and contagion at work with Greece. Ed comes at the crisis from a good angle allowing you to see the full contagion that exists no matter how you try to fix the issue. "Now, if you were a Greek resident, you have to feel a bit panicky about the safety of your hard-earned savings given this scenario (see Guardian article).  So, we could easily see the sovereign debt crisis spill over into bank runs. And if Greek banks implode, there is going to be a knock-on effect for other weak banking sectors like the Austrian or Irish. This is how contagion works." The maggots will consume the body from inside out and you will not see the damage till it is to late.

Investor psychology has been rapidly gaining ground as a scientific way to predict market moves. We are predictable and like to herd. ZH has a lengthly read on this subject that is well worth the read. In Just How Ugly Is The Sovereign Default Truth? How Self Delusions Prevent Recognition Of Reality you get "At that point the financial oligarchy will very much wish the Methadone had been administered sooner (roughly about March 2009, when we first suggested it). It will however be far too late, and the decades of self delusion will finally end." It is truly only a matter of time.

Sorry for missing this mornings post. 

GL out there and have a great evening.