Good Afternoon Folks!
I wanted to share a few articles followed by a few comments today.
It appears reality slapped Ben right in the face after hearing his comments today during his meeting in front of Congress. Perhaps the Chinese whispered a little warning to Geithner during his trip to Beijing?:
"June 3 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said large U.S. budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate to finance the shortfall.
“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Bernanke said in testimony to lawmakers today. “Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.”
“Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation,” Bernanke said in response to a question. “The Federal Reserve will not monetize the debt.”
The nerve of this guy eh? What on earth gives him the right to talk about fiscal discipline? This clown just blatantly lied today in front of Congress by saying the Fed will not monetize the debt. What in the hell is quantitative easing Ben? I'll tell you what it is: Its monetizing debt! What in the hell else can you call it when you print money to buy your own treasuries that finance your debt?
The fact that this clown gets away with this stuff is unbelievable to me. How does this guy have nerve to come out and say such things after spending nearly $2 trillion? Unbelievable!
This all being said, if he begins to follow through on this plan its a good thing. I think this is why you saw a little treasury rally today.
This is going to leave a mark:
"June 3 (Bloomberg) -- Citigroup Inc., the third-largest U.S. bank by assets, will seek authorization from investors to increase its outstanding common shares to as much as 60 billion, from a current limit of 15 billion.
The new amount was disclosed today by the New York-based company in a filing with the Securities and Exchange Commission. Citigroup said in March it would seek an authorization of between 40 billion and 60 billion shares.
The bank needs investors to approve the share-count increase to convert as much as $58 billion of preferred stock into common, part of Chief Executive Officer Vikram Pandit’s effort to bolster equity following the Federal Reserve’s “stress tests” last month.
Shares outstanding, at 5.39 billion now, would increase to as much as 22.8 billion under the conversion plan."
Ummmm.....A 4 fold increase in outstanding shares? Dilution anyone? This is absolutely ugly. Whats crazy here is C is actually trading higher after hours after this news was released. Citigroup will probably jump into double digits the way this goofy market has been trading.
The reality here is this should be a crushing blow to Citigroup. How it trades is another story.
Fed's Hoenig: We must raise interest rates!
"June 3 (Bloomberg) -- Federal Reserve Bank of Kansas City President Thomas Hoenig said policy makers should lift the benchmark U.S. interest rate before “inflation forces our hand,” resisting public pressure to keep it low.
“If we fail to bring policy into balance, we will have significant inflationary pressure,” Hoenig said in a speech today in Sheridan, Wyoming. Policy makers also need to heed rising Treasury yields, which are signaling the market’s concern that prices will rise, he said.
“Market participants realize that a period of high deficits and accommodative monetary policy are an invitation to increased inflation pressure,” Hoenig said during a luncheon hosted by the bank. “I suspect we are experiencing the first signs of the markets’ concerns in the rising rates and increased volatility in longer-term Treasury markets.”
“Starting from where we are today, it is clear that interest rates must rise,” Hoenig said. The trick will be to remove monetary accommodation before actual signs of inflation appear, even as the job market continues to struggle, he said."
Hoenig gets it. The cheap money days are over folks. I have been saying this for months now. If we don't take the appropriate actions needed in order to control inflation then we are in deep deep trouble. He knows the gig is up unless we start acting more fiscally responsible.
Is the Fed having a serious reality check? I sure hope so. All these are just words for now so I will believe when I see it. I have this feeling that China told Geithner to get his house in order or else.
Its too coincidental that we heard all of this obloviating around fiscal responsibility today from multiple sources.
Of course if the Fed is serious, it means they will be forced to pull liquidity out of the economy and cut back the bailouts as they cutback spending. The fallout of this will be catastrophic for both the economy and the stock market. The Fed's balance sheet is the only thing that's giving the economy a pulse right now folks.
If they rip it away, all of these floundering companies will be left naked laying on the side of a highway.
The Fed's hand is basically being forced here. They realize the inflationary risks in continuing this asinine spending are simply too high. Inflation can destroy an economy and take down a government. The fat cats have no desire to see this happen.
I think the earthquake we had in the bond market with rising rates last week really spooked a lot of people in DC and on Wall St. What we are now seeing now is the aftershocks of such events.
Word is the primary dealers are absolutely overwhelmed with the amount of treasuries they need to sell.
They are used to selling $5 to $10 billion in treasuries a week. Today they are being asked to sell close to $100 billion a week! The primary dealers are failing to see where in the hell the money is going to come from in order to satisfy this enormous demand.
Some(including myself) believe there is only one way to get this supply sold: Crash the stock market and scare investor's into the bond market. The Fed can pretty easily do this by pulling its liquidity from the economy.
Remember, the politicians are all about staying in office. The only way this country can run right now is through selling treasuries. If they must step on the stock market's throat in order to fund the country they won't hesitate to do so.
What's scary to me is even if they do take down stocks, I still don't believe there will be enough demand for the trillions in treasuries we must sell. If this turns out to be true we could see a 1932 event where both treasuries and bonds both sell off at once.
If this happens it will be time to fill the mattress.
Reality sucks folks!