Wednesday, June 3, 2009

Reality Sucks!

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.

Quick Take:

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.

Citigroup

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."

Quick Take:

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."

Quick Take:

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.

Bottom Line:

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!

Stay Tuned!

16 comments:

Anonymous said...

When you have a large number of ignorant and often clueless sheeple, the leaders can pull any stunts. No problem there! Until the American public wake up with a pitch fork, it will just be the same old raping of the middle class.

It is expensive to run for a political seat in DC. Therefore the majority if not all of the DC congressmen/women are rich and have connection with rich people. And you know that money is the root of all the evil. That is why DC politicians are a bunch of dirty scoundrel. As long as they get their share of the loot, who care about the moral hazard of their peer actions.

One day ROME will burn!

Anonymous said...

The bad asset plan (PPIP) is coming!!!!!!

http://www.thestreet.com/_yahoo/story/10509190/1/banks-investors-to-hear-toxic-asset-plan.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

The market is going to shoot to the moon. Bend over taxpayers!

Jeff said...

Anon

I hear ya!

just look at Romney and John edwards. Both were worth over $200million each.

The elite are all tied in with one another. They really screwed themselves this time though. The losses are too large to sweep under a rug.

This time they went too far.

Jeff said...

I can't wait too see the details of this heist.

I am sure it will once again result in another pillaging of the taxpayer like you said.

I can hardly wait to see this this monstrosity.

The world's gone mad!

Anonymous said...

good posts, thanks for your hard work!

Jeff said...

Thanks!

EDC said...

Jeff,

FYI, quant easing is not monetizing debt. The purchases that the fed have engaged in comes from EXCESS deposits cycled back into the FED. If they were truly monetizing debt the dollar would have fallen off of a cliff (it hasn't, because it already has over the past 7 years). The excess deposits that the FED pays interest on, is the monies that they are using to buy Fannie/Freddie and treasuries. The bond market knows this but mainstream media does not quite get it.
Since BEN said they will not monetize debt, hyperinflation is now off of the table. Actually it was never on the table because the herd believed that was the effect from the causes. Fischer's Debt Deflation theory is now a more likely scenario. Yes you will be correct as in 1931/32 when both bonds and stocks crashed. Once liquidity is pulled (the fed doesn't even have to do that) by the speculators burning through the liquidity we are going to experience severe problems.
Insolvency is still the problem but since there has been soooo much liquidity pumped in the engine, it creates a great masking effect which has fueled the rhetoric for recovery, asset inflation and all the other shenanigans of everyone screaming death to dollar and inflation. Eventually the banks who are leasing floating tankers for storage of oil and distillates will get burned. Lehman had over 500 pounds of Yellow Cake Uranium in their vault (just as much that was found in Iraq that Cameo bought last year) from speculation. What does an investment bank need uranium for?
why are banks buying tanker storage and energy prices are going up?
Not because of inflation, follow the bread trail folks.
There is no substitute for the USD unfortunately and it WOULD be in OUR (USA) best interest to end the hegemony so we can stop being the empire and actually earn a living.

/rant off

Great blog, I enjoy reading your points of view.

Jeff said...

ECB

Great rant

Thanks for the QE info. I gotta think that pool of excess deposits that the Fed is QE'ing with is limited which means they can't play this game very long without printing.

I hope you are right. I much prefer deflation, andI still believe this is how it all plays out as well.

I am still concerned around the Fed panicking and Ben not backing up his words on saying he will not monetize the debt. He has lied to us several times so lets hope he means this when he says it.

I will still hold some metals as inflation protection in case the print button is pushed.

However, CASH is definately still king and the best way to protect yourself from a deflationary collapse.

Lets see how this all plays out

I appreciate your insight's!

Anonymous said...

"Its too coincidental that we heard all of this obloviating around fiscal responsibility today from multiple sources."

This was a big show in support of Hiestner's China visit. Let's see if the Chinese fall for in next weeks long end auctions.

Blankfiend

Jeff said...

"heistner's"

LOL...I love it.

I bet China says "no thanks" on the long end bonds. If they do its "lights out".

The moment of truth will be those long end bond sales next week. Its going to be fascinating to see what happens.

This game can't last much longer without it blowing up!

Minton Mckarkquey said...

Not much to say other than great post and interesting comments. I've pretty much given up on understanding the markets in these situations. The level of total-f***edness is really amazing to me....

As for the Fed, these guys should be arrested for Treason against the State.

Anonymous said...

Some think Gold would do well in a deflation too.

http://www.gold-prices.biz/what-if-deflation-wins/

Mining company went up during the Great Depression. But I believe Gold and mining stocks are greatly manipulated (GATA), which is why it's going to be a tough fight to get over $1000 and STAY there.

Jeff said...

Minton

Thanks

YEah I get pretty dumbfounded as well as I watch this stuff.

We had another 600,000 plus jobless claims number today and the market jumped higher because it was down 4000 from the previous week.

It was only a 4 day week because of Memorial Day! This number is horroble.

We should be seeing 400k prints by now after the amount of jobs we have lost.

The fact we are still seeing claims at 600k is awful.

Sigh. We are so screwed.

Jeff said...

Anon

Yup

GOld can win in either scenario. I expect further volatility. As I said before the CB's hate gold because it threatens their currencies.

The gold/oil/reflation trade is back on today after Goldman came out with a research report saying oil should reach $90.

I will continue to hold metals here as part of my diversification. I don't think anyone really knows how this all plays out.

GL!

Anonymous said...

seen this? http://www.youtube.com/watch?v=7d3IUU-GXb8

this guy's sources tell him there will be dollar crash in july/aug

Jeff said...

Anon

Just watched it.

I'll believe it when I see it. The whole world has a vested interest in avoiding a dollar crash.

I wouldn't rule it out, but I think its doubtful. I can however see the dollar significantly dropping in value if we don't stop spending.

This is all coming to a head. I think the Fed will blink and pull its liquidity before they let the dollar crash.

Either scenario is ugly for the economy.

Thanks for sharing!