Monthly Archives: June 2011

Channeling Holden


-"...I was trying to feel some kind of good-by. I mean I've left schools and places I didn't even know I was leaving them. I hate that. I don't even care if it's a sad good-by or a bad good-by, but when I leave a place I like to know I'm leaving it. If you don't, you feel even worse."  Holden Caulfield.

I feel even worse. As one of the great nations and peoples of history voted themselves into violence and indentured servitude, I learned the President's kids do their homework ahead of time. The emptiness is enormous. An abundance of notional products oscillating with every tossed tear gas can and vote cast. Spinning wheels of fortune blinking to the frenzied hype of their phony fans.

People debate politics and monetary policy holding onto to some quaint memory that all "this" is for some grand purpose. In fact, its obviously just a "poorly run casino." (Quote from an anonymous friend/mentor) Governments and men are being crucified at the Alter of Stability. Stability being the one thing that surely will not occur. In a monetary regime, prices move. Movement is the mandatory characteristic of a notional economic system.

As we wrote last week, the topic must become loss recognition. Until that time, abandon you desire to attach meaning to the markets gyrations. There's not more to it than you think, there's less. But Sasha got her homework done.

"The mark of the immature man is that he wants to die nobly for a cause, while the mark of the mature man is that he wants to live humbly for one. " You're not crazy Holden - we are.


Alas, Babylon



--Standing afar off for the fear of her treatment, saying alas, alas the great city Babylon, that mighty city, for in one hour thy judgment comes.   REV 18:10


Our post-apocalyptic anarchy reading list continues today. Yesterday, In Watermelon Sugar by Richard Brautigan. Today, Alas, Babylon by Pat Frank

The saying is a way for characters to warn each other of impending crisis. Just keep repeating it. I found it encouraging that few if any were willing to extrapolate positive macro mojo from today's market momo. The Euro-Wizards continue to huff and puff even though the curtain is now completely pulled back. Click your heels Greece, you are going home to the dust bowl.

Ridiculous capital market swings bolster the concept of greater and greater meddling. Somewhere in Club Med a staffer is rejoicing, "Hey Mikey, they like it!"  Alas, Babylon.

I can't walk you out in the morning dew, my honey

I can't walk you out in the morning dew, today.

I  guess it doesn't matter anyway. (Bonnie Dobson)

Stop the madness. Take the hit. Let's move on already.

In Watermelon Sugar

The US is not going to default. I doubt we will even miss a microscopic T-Bill payment. At negative nominal rates, does a "missed payment" mean the holders send more money to Treasury? Elvis has left the building.

The ECB feels it should raise the finance rate as the actual default of one of its members takes place. I studied at a different school. Derivative products designed to "hedge" such an event will, of course, not be enabled. The whole thing is just sad.

The debt market is going to embark on a discussion about price. Too long in the fantasy of QE, its time to see what Mr. Market thinks. As Martha Stewart says, "It's a good thing." Oh, its the title you are wondering about? One of my faves.

Enter Sandman

In early June, stories began to circulate that Barclays and Standard Chartered had removed "billions" from the interbank (unsecuritized/uncollateralized) lending market. Since that time, a collateral squeeze has made shorting Treasuries virtually impossible. The Eurodollar market has tightened from 99.68 to 99.54 in the September futures contract. Not exactly a move to tell your grandchildren about. Interbank is the giant offspring of a "faith based" financial system. Unfortunately, faith is a poor risk management tool.

The sad aspect of this story is even a 10bp homage in the direction of reality is portrayed as a crisis. Markets, and analysis of them, are now binary events. Healthy markets are deep, wide and resilient. The Eurodollar market is the best example of those characteristics. Amazingly, because of those involved, it is perceived as weak. A discussion about price is not a crisis. The Shock Doctrine is being applied by all parties, everywhere, everyday. The bull market in "selling the fear" has gone parabolic. As Metalica said, "Exit light, Enter night. Take my hand, we're off to never never-land."

Into the Gloaming

The take away from the Fed meeting is not QE3 or Exit. The take away is brace yourselves, we are into the gloaming. The Fed balance sheet is now a monetary flying buttress to a magnificent but structurally flawed beauty called America. 2% growth and 8% unemployment would still be considered "improvement." Countries faced with similar problems tend to exhibit slower growth AND stickier inflation. The gloaming is the phase when comparisons to cycles past are finally abandoned for the newer, harsher reality. The gloaming is the time after sunset before the dark.

I keep coming back to The Great Gatsby.

"Gatsby believed in the green light, the orgastic future that year by year recedes before us. It eluded us then, but that's no matter - tomorrow we will run faster, stretch our arms further...And one fine morning -"

"So we beat on, boats against the current, borne back ceaselessly into the past."   F.Scott Fitzgerald

Is this what I read between the quivering lines of The Chairman's presser? Does anyone still believe in the "orgastic future?" Is the "green light" just the flashing laser pen of another angry austerity spanked protester? We have become very good at accepting the gloaming as inevitable.

Rage, Rage America, against the dying of the light. (D.T.)


Loss Recognition

The term "kicking the can down the road" is no longer accepted phraseology to describe the European situation. The issue is loss recognition.  Funding measures in the extreme (CCC- collateral) and re-profiling are ways to hold off that recognition until - presumably - financial institutions are better able to absorb the loss. Losses that make things go boom, like Lehman, scare people. We outlined last week why we don't see a system breakdown repeat but the example is now held out as a fear stick.

The 1 week MRO was a significant 187B Euros 51B over the maturing amount. This puts both dollar and Euro liquidity measures at recent highs. EONIA movement of the last 2 weeks should ease off some. Institutions have done everything possible on the liquidity front. Structurally, little has changed. Even here at home, debate is heated about what "should" be done in the near future.  Meanwhile, nothing has actually occurred. On the bright side, significant losses have been adjusted for while accounting standards have been relaxed.

Loss recognition is an event that will allow markets to return to forward looking metrics and get out of the rear view mirror. The ambling, catatonic, crisis to crisis state we are living in is a result of loss avoidance. Burden Sharing. Voluntary. Group Hug. Clusterfuck. Pick any euphemism you like, let's just move on already.