Baltic dry at low for the year & S&P on the high...

Baltic Dry Index: http://goo.gl/qkTOp

Seekingalpha:  Baltic Dry Index and indicator for economy / S&P

This link is excellent analysis of dry vs S&P (I think he is slightly missing the point as the index to measure against should be Shanghai as China is the biggest driver of the index, but never the less, the divergence is significant in size and time, this does not mean too much but in 2008 this was early warning, but do read this extensive link as the author seems to have good control of the statistical and research aspect.

Happy New Year,

--

10 Truly Outrageous Market Predictions for 2011

Dear Friends,

Final blog before XMAS,. Enjoy.



My Miyanville 10 out-of-the-box ideas for 2011

If you only do one thing today - make sure it is to watch this 15 min segment from 60 minutes

The Muni Crisis - 60 min.

For the few who does not know 60 minutes reputation:  http://en.wikipedia.org/wiki/60_Minutes

Model update - momentum

Dear All,

Small overall update on momentum model (70% weight in allocation norm)

EURCHF: Short 2 units @ 1.3234 + 1.2937 - stop: 1.3170

EURNOK: Short 1 unit @ 8.0425 - adding @ 7.8725 - stop: 7.9940

EURSEK: Short 1 unit @ 9.0878 - stop: 9.1620

EURUSD: Sell 1.3170 - stop: 1.3410

USDJPY: Long 84.40 - stop: 82.57

GBPUSD: Sell (March future) @ 1.5478 - stop: 1.5900

CAD(March Future): Buy 0,9917 - stop: .9781

Crude(March) buy 0.9147 - stop: 0,8785

Cotton - Long 1.3513 - stop: 1,2700

Bunds: Short 3 units @ 128,54+127,04+v1124,23 - stop: 125,02

ZN (10 yr US): Short 2 units @ 124'11+123+015 - stop: 121'09

Coffee: Long 2,1180 - stop: 2,0129

Silver: Buy 30,75 - stop: 28,383

Soyabeans: Long 1306,00 - stop: 1242,96

Three charts enclosed:

Short bunds - note small divergence.

GBPUSD - new signal - UK QE coming in 2011?

Coffee - continues up?

Enclosed also EU time table...

Must Watch: Stockman Explains To Ratigan How In Thirty Years America Spent Enough Debt To LBO Itself, And Ended Up Bankrupt | zero hedge

http://www.zerohedge.com/article/must-watch-stockman-explain-ratigan-how-thirty-years-america-spent-enough-debt-lbo-itself-an

--
David Stockman, former OMB Director.......   Dylan Ratigan...

The Circular world continues towards the endgame.

Dear Friends,

This Friday' posting is a mixture of an article of Economist and related thoughts from me. Three-way split - The Economist Link

This is the best Outlook for 2011 I have seen and it's not even trying to be an outlook!

The Economist draws up the conclusion that the three global drivers: US, Europe and EMG will work against each other and that it's all circular, which indicates market/investors over hyping output and "more of the same" relative to the needed "circuit breaker".

Domestic agendas has changed in Europe and in the US, but to opposite positions... as they state elegantly: ' The US (with tax bill) is gettimng another dose of stimulus steroids just when Europe is checking into rehab and enduring a Cold Turkey'.

Meanwhile in trading-land the ever higher US yield stopped yday, but high enough to invalidate any hope of false breaks. Market now betting on Treasuries being oversold, but my friends in the real-money world keep telling me, more selling is incoming post December 31st, 2010. 

Short Treasuries has been my main position for last two month but I have to admit I'm down to less than 10% of the original position, enjoying the profit on what my old uncle (FX trader extraordinaire) called "Amateur Friday" .... Chinese numbers and action this week-end will tell us more than anything where to from here, but the picture is bleak....

1. Our leading Growth model turned cold and down
2. Congress in the US in stalemate, and looking extremely silly.....
3. End of year manipulation running into opposite risk being taken of by investment banks and prop. traders overall.
4. Stock market is slowly wakening up the conclusion in the Economist article above: "Worries about bubbles has been replaced with a broader fear of overheating in EMG. 
5. An add on to point 4 - the new law of markets reads:  (US loose monetary policy)  + (Sovereign default risk Europe) = (Speculative inflow into EMG), which again creates burdensome need for EMG countries to embark on restrictive tightening in 2011.... and then lower growth from Asia feeds negatively into the same law.........

S&P can still see 1240/1255 on year-end manipulation, but reality will bite in Q1-2011. where I see a move down to 1000.00.

On this positive note....I wish you a great week-end. Enjoy.

Still Digging & why we are final phase of this S&P manipulation

Going through my morning Google Flip I found this article by Thomas Friedman: Still digging

I particular loves this quote:  More than ever, America today reminds me of a working couple where the husband has just lost his job, they have two kids in junior high school, a mortgage and they're maxed out on their credit cards. On top of it all, they recently agreed to take in their troubled cousin, Kabul, who just can't get his act together and keeps bouncing from relative to relative. Meanwhile, their Indian nanny, who traded room and board for baby-sitting, just got accepted to M.I.T. on a full scholarship and will be leaving them in a few months. What to do?'

Do read the whole thing.....

Otherwise this is key day as 10 year rates again makes new high in this cycle and meanwhile our semi-leading index from Citibank (measuring expected vs actual economic data) is coming down as hard as it did in Q1-2010 - It's at year low in our model so far, but market has little time for facts as the Kool-Aid stock market makes it final test into 1240/1250 on.... strong unemployment numbers from Australia (Indeed, indeed I don't get it either!).

Tomorrow is the day for the Chinese rate hike - market is hoping for more RRR hikes rather than actual discount rate higher. I have no opinion except this bull run is running into headwind from here:

1. Higher US yield - not only in 10 year govies, but mainly in 30yr and 10yr mortgage rates...
2. Chinese CPI / RRR hike incoming Friday or over the week-end
3. Tax deal still looks likely to go through - raising market growth forecast (although as per usual the actual effect will be much smaller - rule of thumb divide by 5 the growth hikes from Investment Banks)
4. Technical level extended beyond 1250.00
5. Manipulation of higher stock market values through POMO and long only market players running into XMAS/ Year-end
6. Banks needs to bring "order" in their risk and prop.trading volumes will go down - the very mean which is used in manipulation of market..

But wait for the confirmation - which I see if 1195/1200 is broken - meanwhile let the market run amok and enjoy the final phase -

I see Q1 S&P down to 1000.00 as austerity, California bankrupt, EU process stalling, and ever higher interest stops the market. Bottom line: The Fed and the banks needs a high stock market valuation into year-end as it is the ONLY 'success' of their failed QE1 and QE2, but come January 1st everyone will be dumping RISK left-right-and-centre.

Good luck

Silver - im concerned..

ST risk here in Silver .... I'm as surprised as anyone but with 10 year auction today (where the higher damage was biggest last 24 hrs) and tech. support about to break we could have big move down, however, there are good support in stocks which these days are close substitutes for 'tangible assets'.

Nice eve,

--

There is only one headline worth my time this morning: 10 year yield in 3.25! Up a stunning 30 bps in one trading session

Market and in particular Investment Banks are caught long 7-10 y. US Treasury fixed income - the IB in their naivety buys everything Ben Bernanke says and I mean everything... its like being at a party with Bono and everyone thinking he is God.... .......and this despite Bernanke NEVER has been right about anything and I mean anything.

Furthermore the investment banks have two reasons for expanding their balance sheets going into year-end (Hat tip: JR)...:

1. Expanding the balance sheet to hide their loss'  (Bigger balance sheet means ratio of trouble issues becomes smaller)
2. The Free ride from FED and Treasury.........Funding @ zero - and now buying 320 bps with put option from Bernanke (or it seemed to be a free lunch.......!!!)

Come January 1st  -ALL of the investment banks will be busy selling the same "stock" of fixed income to get balance sheet down and capital ratios up to meet new regulatory requirement.

Bernanke even admitted in the 60 min he has no clue! No clue!  He even issues 100 pct certainties!!!!!!! (BB the tosser' quote on 100 pct control of inflation) - Let me remind him there is only two certainties in life: Tax and death.

This tax-break have ZERO IMPACT on economy despite everyone busy upgrading their growth forecasts as 2 pc of all Americans owns 45% of all assets! There is NO WEALTH EFFECT as the rich and famous are busy leaving the country or at the very least buying Gold, Silver and tangible assets - I do not know Blackstones Scwartzman personally but bite me if this "wife asking him to move to Paris for six month of the year move" is not related to tax and being fed up with the incoming massive tax increases in the US? :-)

I am not naive enough to believe that the market and investors are finally waking up but.... it seems people are starting to realise that the gains in the stock markets are not enough to pay for increase in inputs costs and devaluing purchasing power........Clock is ticking ..... Q1 will see the market down 20 pc to bare minimum 1000.00. Stay long this market at your own peril.

I'm fed up and has been for a long time, now it seems I am no longer alone, this is good news for you, your family and the world - maybe finally we will do something structurally? ......

Outlook 2011 Macro

What do Santa Claus have in store for us in 2011?

2010 was a year where everyone got something for their money: We had two major crises in the EU in May and again in November / December which gave pessimists a good starting point for more crisis predictions in 2011.

Optimists also had reason to be happy as the stock markets had a good performance especially under the circumstances and the only 'issue'  is the ever increasing interest rate, which rallied past the magic 3.00% line yesterday on the 10-year U.S. interest rate.

What should  we expect for 2011? Predicting the future or even just a few hours ahead is impossible as this quote explains:

"Legends of prediction er common throughout the whole Household of Man. Gods speak, spirits speak, computer speak. Oracular Ambiguity or statistical probability giver loopholes, and discrepancies er expunged by Faith."
Ursula K. Le Guin

A better less rigid method is to put the odds on different possible outcomes. The world we are in today has historically low interest rates, historically high intervention from policy makers (central banks and politicians).

Scenario 1: Sweet-spot. Odds: 50%

More of the same (as in 2010). Every crisis is met with the printing of more money, however, there will probably be less demand for help than in 2009 and 2010.

The policy makers will maintain the subsidities to the banks through low interest financing and liberal rules for what kind of securiy can be used for colleteral. This gives banks another year with big revenues paid and financed by taxpayers' money.

Bying time. The economy is coming back, but still too weak to create enough jobs, why a rising unemployment rate will keep rates at historically low levels.

Businesses, especially large ones, will use the low yield to expand further in Asia and there will be increased Merger & Acquisition activity and increased consolidation in most industries, which in turn will drive the Price / Earning values up, while top line growth will have peaked in 2010. The shares are up 10-15% end of 2011.

Interest rates are still at the same level as in 2010: 3-4% for the 10-year yields since as there is still too much global capacity.

More and more countries will face demand for higher yields from the bond market. In Europe, because Germany will not or can not increase their support for the EU project, why the trend from 2010 will continue with more and more support from the ECB and other quasi-public enterprises.

In Asia, China will drive interest rates higher through the tightening of monetary policy as necessary after the sharp inflation increase in 2009/2010

Both commodities and metals will continue to grow as the market will be latently skeptical about the lack of structural change in the economies. Everything is seen as "kicking the can further down the road"

Goldman Sachs latest Outlook 2012 is such a sweet-spot forecast.

Risk: Not enough growth to reduce the large structural deficit on the budget and current account balances. The global imbalance is amplified. It's all a matter of buying and getting a little more time to have things work itself out.

Scenario 2: Strong growth. Odds: 20%

The world is ok! Everything is ok. Increased intervention by policymakers is working. It creates greater trust, which again will get the bank lending again, velociteten of money rises, deflation will be averted and the unemployment curve is broken and we're back in what looks like 2006/2007.

Policy makers will make the right combination of fiscal tightening, while they implement the structural changes that is needed for the long-term problems such as demography, lost productivity and government deficits.

EU implements a common fiscal policy anchored in Germany, so we create another round of lower interest rates for PIIGS countries (Portugal, Italy, Ireland, Greece, Spain). These countries are turning their economies from negative growth to 4-5%, almost in defiance.

The stock market rises 30-40%, since the perfect combination of falling unemployment and rising growth expands the Price / Earning ratio, but also the top line growth.

Interest rates are driven up, slowly, but we see interest rates of 5-6% or even 7% in Europe.

There will be exit from many of the stimulus programs that was implemented in 2008-2010, and the private sector is more or less able to take over again from the public intervention.

Risk? A soaring inflation. The combination of loose monetary policy plus rising input prices by commodities and food brings inflation above 3 per cent p.a and get the central banks to tighten monetary policy and the new buzz-word is hyper-inflation. (The stock market will cope with this inflation increase through increased sales volumes, cost control and higher productivity)

Scenario 3: Crisis 2.0. Odds: 30%

We are moving slowly but surely from one crisis to the next. The lack of long-term solutions will be expensive for everyone. The end of 2010 was a precursor for 2011. This is now emergency planning at all times . We may move close to REAL strutural changes in the economy due to the depth of the crisis. (Why is it never possible to make good decisions when you have success?)

This is now full blown crisis of confidence. Both politicians and central banks have lost confidence among investors, corporations and citizens. All public elections are protest elections (as in the 1970s). People want changes without pain, but get pain with new initiatives instead.

This becomes a breeding ground for rising social unrest because the austerity adopted in 2010 will in 2011 be implemented. Unemployment starts to rise sharply, growth collapses again.

The stock market begins a decline that which at the worst point takes it down 40-50%. 'Cash is King'. The gold goes to 3000 U.S. Dollar, USD vs JPY hits 65.00, The Chinese stock market falls 25% in a week, as the Chinese Politburo must change policies to remedy the great social unrest created by higher food prices and no jobs. Again, the rebirth of the new super power has to be stopped prematurely.

The housing market collapses at rates which is fair value, both in relation to purchasing power, but and long-term values. That means 25-50% down from current rates.

There are two interest rates levels. One for those with credit standing which is given relatively cheap funding while PIIGS, none-investment grade and small companies will pay and ever higher and higher interest rates. There are now two societies:  One for those who have, one for those who have not. (Think: banks vs. small companies (as in 2009), the Joe Blow blue collar worker vs. high income wage earners with low borrowing). Overall, the interest levels creeps due to the confidence crisis (the marginal cost of capital has reached saturaton point): 7-10% for 10 year yields.

Viewed from 10,000 feet 2011 will be the year where we get  "destruction of capital" but also where we finally begin to restore our society.

When we go into 2012/13 it will be with lower leverage  in our society, higher equity to foreign capital, better resource allocation, a more balanced society, with less "I". We come back to basic. 2.0 The crisis may be the best in the long run, but who want to undergo the above disorders if it can be avoided?


Predicting from one year to another implies a lot of information bias and linear thoughts, but this Outlook value, if any, is to have thought outside the box.

All three scenarios have realistic chances, and maybe we can even experience all three within a year.

One prediction for 2011, however, I will make, and with strong conviction: In 2011 will be extremely volatile. Don't forget the true defintion of volatility: "... Uncertainty of path '.

Europe’s leaders at odds over bond plan

http://www.ft.com/cms/s/0/d60d40c8-00bd-11e0-aa29-00144feab49a.html#axzz17KmMnk1L

--
Very open and "frank" interview w. Schäuble - worth 8:55 min.

Ben Bernanke on drugs... he has lost it!

I am totally stunned that BB can be this ignorant. We are now back in 2000 - the bubble getting bigger, and he feels vindicated. BB is now more on TV than Obama - neither earning any credit for their performances. This is GOOD news. The policy makers is now on heavy doses of drugs - I look so much forward to 2011 when this manipulation game is over. (Everyone needs 2010 to be a good year!)

Watch three things...

1. 10 yrs US rates - touched 3.05 Friday.......came down again... but let's talk Friday!
2. Irish budget vote tomorrow: Majority of two in Ireland at risk
   
3. E-bonds would end crisis: Juncker & Monti on E-bonds.  This is key, key, key........

Bring on 2001 revival......  Listen to a VERY desperate man: Ben Bernanke.....: 60 Minutes interview

Report: China to tighten monetary policy in 2011

http://www.star-telegram.com/2010/12/03/2676419/report-china-to-tighten-monetary.html

This is the clearest statement yet from Politburo!  No one seems to have noticed this, but its key change in policy and underlines the need for tighter monetary policy in China.

Note the text: The ruling Communist Party's top body, the Politburo, ordered the switch in monetary policy "from relatively loose to prudent," the government's Xinhua News Agency said.

US 10 years takes out 3.00 now critical 3.15 pc the final barrier. My model is short, but today's Non-farm payroll will decide this week range, overall I expect break of 3.15. (note also how higher mortgage rates already having negative impact: http://goo.gl/r37L0

Trichet is reduced to "sneak in from behind" and do big tranches of support buying. His problem: Limited capital & Bundesbank in control ECB push to gain control

Full text China story

port: China to tighten monetary policy in 2011

The Associated Press

BEIJING — China's leadership called Friday for tighter control over bank lending andother spending next year, a shift in economic policy as Beijing tries to cool inflation and guide rapid growth to a sustainable level.

The ruling Communist Party's top body, the Politburo, ordered the switch in monetary policy "from relatively loose to prudent," the government's Xinhua News Agency said.

The announcement continues a change in direction charted this year of modest tightening after the government and banks flooded the economy with easy money to ward off the global economic crisis in 2009.

Beijing raised interest rates Oct. 19, highlighting its divergence from the United States and other major economies, which still are focused on shoring up growth.

Analysts expect more rate hikes in coming months as Beijing restores normal financial conditions and clamps down on a building and credit boom. Chinese stock markets have fallen in recent weeks as investors watch for a rate hike, worried it might slow growth or choke off credit that is helping to support stock prices.

Chinese regulators also have tried to rein in credit by forcing banks to hold back more money as reserves and tighten lending standards.

Economic growth eased to 9.6 percent in the three months ended September after hitting a post-crisis peak of 11.9 percent in the first quarter of this year. Private sector analysts expect full-year growth up to 10 percent.

Inflation spiked to 4.4 percent in October, driven by a 10.1 percent jump in food costs, and some analysts say it could rise still further in November.

The government has launched efforts to increase supplies of vegetables and other basic goods and is cracking down on hoarding and speculation that it says are partly to blame for the price rises.

Bundesbank still sit at the head of the table?

Below the BTP vs Bunds December Futures spread pre- and post Trichet press conference started.

Dear Friends,

Market not yet getting what the wanted from Trichet - seems the Bundesbank still holds the key to the monetary kingdom - the reaction is relatively muted and market still in risk-on mode, probably somewhat by virtue of Trichet before entering market less than 24 hours later than denying doing anything (May), but this time he has no backing it seems for his risky escalation of QE..

http://goo.gl/Z8O6A    

We are clearly still in market where people want risk on and are looking for Q4 to perform better. Market will point to GS upgrade of growth, the earnings, the seasonality to counterbalance the escalating costs of capital. (10 year broke 3.00 ahead of Trichet today only to come back:  Bloomberg 10 year yield US

Now next chapter: The higher than expected Non-farm payroll for tomorrow for temp. hire should increase and seasonal manipulation will secure Prez O a nice comfortable XMAS.

S

The Blame game is on: Germany vs PIIGS

Dear Friends,

Spain and increasingly larger part of Europe feels, correctly, that Germany benefited from the growth of the PIIGS through exports now in time of crisis its not time to go 'alleingang'.

Hardly no news but its interesting for the set-up for next step/level in the EU crisis. We remain fully convinced the EU needs to:

• Get Germany to do debt-swap for PIIGS which is unlikely both in context of German politics and law, but also from practical stand point, never the less it would be the best solution.....
• Get ECB involved, but their capital is stretched so a maximum of 30-50 bln. more at best will not convince market, so new "measures" needs to be created!  Which ?

Contagion May Force EU to Expand Arsenal to Fight Debt Crisis  http://goo.gl/IPgjE 

The usual German suspects is out fast denying any gifts coming from Santa Germany....:

German CDU's Dautzenberg Rules Out Eurobonds, Stocking EFSF
2010-12-01 08:43:07.486 GMT
By Rainer Buergin
    Dec. 1 (Bloomberg) -- Germany rejects an extension of the
750 billion-euro European rescue fund or joint bond sales by
euro members to stem contagion spreading across the euro region,
said a senior member of Chancellor Angela Merkel's Christian
Democratic Union.
    "We have to withstand markets testing out" the
preparedness of European governments to take additional steps,
Leo Dautzenberg, CDU parliamentary finance spokesman, said in an
interview in Berlin today.
    "We won't accept a transfer union" in which Germany has
to foot the bill for overspending governments elsewhere in the
euro region, Dautzenberg said.

Blame the Germans Torreblanca of European Council of Foreign relations in Madrid: Blame the Krauts  Torreblance CV

Chart updates:

10 year yield has been coming off, but this morning back in higher channel... Fridays Non-farm of essence: http://goo.gl/TZaDh

VIX is slowly but steadily going higher despite one big fat range in S&P (1070-1120)... May need Friday Non-farm to get resolution http://goo.gl/vfFxv

Baltic Freight - shipping - the happy days are long gone.... http://goo.gl/yTDqs

EMG Bonds - Can you spell:  C.H.I.N.A monetary tightening?  http://goo.gl/Zx1uo

Gold / GLD - getting close to entry LONG again.. watch MFI confirmation  http://goo.gl/IKDgU

Spanish 10 years - not good...  10 year Spain chart

Good luck

European 10 yr rates - free chart service from Bloomberg

Some practical links these days......

Spain:

http://www.bloomberg.com/apps/quote?ticker=GSPG10YR:IND

Portugal:

http://www.bloomberg.com/apps/quote?ticker=GSPT10YR:IND

Italy:

http://www.bloomberg.com/apps/quote?ticker=GBTPGR10:IND

Germany:

http://www.bloomberg.com/apps/quote?ticker=GDBR10:IND

Spain may be on the edge of bankruptcy...but.... BARCELONA!

This morning blog will be a tribute to Barcelona - I watched the best 90 min of soccer EVER last night - Barcelona was humiliating one of the best teams in the world: Real Madrid - enjoy this.........may the spreads be with them :-)   Barcelona vs Real Madrid the goals and if there is/was a football God, then Messi would be the football -jesus!!!



--

EU with its life on the line needs to do debt-swap or in our version: debt-swap for EU survival.....

A key premise for all our predictions in Limus Capital is to look at reaction functions for present consensus:

This is my partner Jesper Christiansen and I discussion from this morning - we do not claim to know or have inside knowledge, but the reaction function will dictate whether EU survives both in the short-and long-term.

The EU is facing it's biggest test in its history and so much so that an inability to secure a 'deal' up to or at the coming summit in December will mean major consequences....

There is vested interest by EU, lobbyist, and bureaucrats around Europe to maintain status quo - who does not want tax-free, high paid simple jobs, so there will be move to save the EU certainly, but increasingly the simple truth is dawning on investors:

There are now several countries in the EU for whom being outside EU would be a benefit. When the PIIGS lose their "cheap funding" by proxy of Germany it also loses its ability to maintain excess spending - next step becomes the market gets saturated for bond issuance for this smaller Quasi-Germany's(PIIGS), and here lies central premise to our thinking: You can continue to print money only to the point by which the marginal cost of capital increases above and beyond the FAIR PRICE as seen by the individual countries....We see 5.00% nominal rates as this point....Printing money is fun while it lasts but ultimately the bill arrives.....

The reaction function of the EU in the time ahead of December 15/16 Council Meeting.....

Clearly the EU and policy makers have continued to underestimate the reaction function of both investors and market in general. QE2 rates are continuing up despite theory would dictate differently...

Game Theory dictates that Germany will need to not only move on its stance but also provide debt relief, but how will they be "paid".....

Germany debt to GDP is a reasonable 75% to GDP, it's current account 7% of GDP, and its size of the GDP 3,3 trl. USD vs EU's total of 17 trillion (19%)

We think the ONLY real solution to this issue is to GIVE money from Germany to the PIIGS - a debt swap (A debt for Euro existence swap :-)) - and before you fall of your chair laughing...hang on...:


ECB is running out of capital (Cap. reserves: 78 bln. EUR -balance sheet 1.9 bln hence leverage 1-to-27 in ECB already)... to buy and support the PIIGS bond market. They are now long 70 bln. EURO plus and about 50 bln. EURO covered debt...hence ECB needs new-buyer of last resort. 

This could be EFSF, but if EFSF in the present situation starts buying PIIGS bonds it will deplete its ability to be a stand-by emergency fund... so there will be a need for further contributions to EFSF. We do not think this is likely. Germany and more to the point the Constitutional Court in Karlsruhe will come into play...

Turning EFSF into the European version of TARP is relatively elegant short-term solution as it will safe-guard and be an offer to Merkel (German banks owns the biggest chunk of PIIGS debt) to 'save' the EU but also get capital injections to the overall bank sector. It will fly best politically in our estimation but...it will not solve the solvency issue of governments - and here we come full circle as ONLY forgiveness of debt will help. It's not use to pay for your 'cousins overdraft' for the next year or two years, if he is unemployed, faces higher and higher charges from the bank, and is down with stress!

A debt swap from PIIGS to Germany would increase solvency in PIIGS and slightly deteriorate Germany solvency - however we estimate a swap for the 250 bln. EUR worth of debt in PIIGS system would take Germany's debt to GDP from 73 pc to 85 ish.... still inside range of overall G-7 but clearly at a point where credit rating and forward looking growth would be impaired.

Whether the Germans feels this is unjust or not is not really the point. The EU is now in its worse crisis and SOMEONE needs to save it - the only person in the room is GERMANY.......what German does next will tell us where EU goes...

  We remain with our scenario of the EU disintegrating before 2013 - as the most likely solution and reaction function will be a mini-max solution where EFSF gets more funding, gets expanded mandate but will fail to secure solvency both at the bank and a sovereign levels, and do not forget we are probably on a riot-point for many citizens around Europe.... so 2011 will be final test of EU, social tensions, and with increase likelihood a move towards the dramatic Crisis 2.0

Nice week-end despite all

The window on historic low rates may be closing

The move which seems to hurt the most people is the ever higher yield across all markets. Unlike the crisis in 2008 when yields collapsed in expectations of accommodative policy the rates are now testing top side recent range seen.

What is behind this?  As always there are several factors in play but here a few:

• The main driver to me has been the 'failed' QE2 - where all the benefits  (lower rates) was created ahead of the actual event - and by moving to a panic QE2 (at least relative to stable macro picture) meant market lost faith in FOMC.
• Add to this the impossible political stalemate in Congress (with no incentive for anyone to structurally change the US economy) and market is getting feeling the next two years are LOST in terms of addressing crisis
• Reaction function: By going ahead with QE2 the US, almost as per usual, decided to operate without any consideration to its partners. Bottom line: QE2 will force China to hike rates even more due to commodity prices exploding......
• Euro Debt crisis: EU is again at it, Germany trying to maintain its AAA status with credit market, but ultimately by bailing out country after country even Germany will have to pay higher rates on their debt as they dilute themselves....
• Market positioning - clearly everyone and his dog was long 10 years US awaiting the 'free gift' from FED and Treasury.

I'm concerned as the fixed income does not seem to back down, even the North Korea skirmish only managed to move bonds up to technical correction levels, which to me indicate, like it or not, we are on the edge on Crisis 2.0 - many will claim I'm an idiot but market never lies....

We need two or three confirmation for this:

1. USDJPY needs to break recent range - and break to downside (82.80 my level)
2. S&P needs to break 1150.00 (1195 now)
3. 10 years breaking the tough resistance 3.00/3.03

Stock market is benefiting from exit in fixed income as investor reverse out of bonds into stocks, but if rates break the resistance levels in the charts above we need to get prepared for November having been the macro turning event for this move post March 2009 - but it's still early days and the resistance in rates is formidable with no less than three key levels around here 2.90 to 3.15, so maybe yet again we will do nothing except for delaying the ultimate pain.

Happy Thanks Giving to all my friends in the US.

Steen

Crisis 2.0 coming ? US$ funding hard to get...

Bank of England today offered unlimited US$ funding:

24-nov-2010

BOE: The Bank Of England said Wednesday it was offering an unlimited
supply of U.S. dollars in a 6-day repo operation, settlement date 26
 November maturing Dec 2 2010. The Bank said the repo would be at a
fixed-rate, with the rate to be set at 1.19%.

• This is key as... it indicates serious issues getting funding in US dollar similar to 2008.
• The interbank market is B+S EUR vs USD to create US dollar funding .....in 9-12 month tenor.... 1y up 8-10 basis point last two days
• The coming IMM DEC roll can also create funding issue... plus ..
• MRO will also be under pressure..(ECB Monetary policy instruments)
• ECB continues to talk exit strategy
• Year-end Funding...

In other words keep keen eye on FX fwds - banking going into the FX FWDS to create US funding is serious risk indicator...

Excellent paper on funding crisis and fx fwds: Financial crisis, global conditions, and regime changes

What good is Wall Street? The New Yorker..& FOMC Minutes (another PR disaster by FED)

Say and mean what you like but this is an issue for the politics of banking and regulation. These types of stories are growing and growing - part of reason irrational but a lot of it is true - there is only one God in Wall Street and its green! (sorry if offending anyone of any religion) ----- 

http://www.newyorker.com/reporting/2010/11/29/101129fa_fact_cassidy

Also Fed Minutes - which an exercise in show-casing how lost FOMC is internally, externally and how they managed their communication. I offer my service for almost free to help them out:  Hint: Shut up for the next 3 years, and start abolishing yourself: FOMC Minutes

Annals of Economics

What Good Is Wall Street?

Much of what investment bankers do is socially worthless.

by John Cassidy November 29, 2010

For years, the most profitable industry in America has been one that doesn't design, build, or sell a single tangible thing.

A few months ago, I came across an announcement that Citigroup, the parent company of Citibank, was to be honored, along with its chief executive, Vikram Pandit, for "Advancing the Field of Asset Building in America." This seemed akin to, say, saluting BP for services to the environment or praising Facebook for its commitment to privacy. During the past decade, Citi has become synonymous with financial misjudgment, reckless lending, and gargantuan losses: what might be termed asset denuding rather than asset building. In late 2008, the sprawling firm might well have collapsed but for a government bailout. Even today the U.S. taxpayer is Citigroup's largest shareholder.

The award ceremony took place on September 23rd in Washington, D.C., where the Corporation for Enterprise Development, a not-for-profit organization dedicated to expanding economic opportunities for low-income families and communities, was holding its biennial conference. A ballroom at the Marriott Wardman Park was full of government officials, lawyers, tax experts, and community workers, two of whom were busy at my table lamenting the impact of budget cuts on financial-education programs in Vermont.

Read more http://www.newyorker.com/reporting/2010/11/29/101129fa_fact_cassidy#ixzz168hD8isQ

BOK's Kim Calls for Moves to Counter U.S. Quantitative Easing

Read my lips: there are NO currency war.......   :-)

BOK's Kim Calls for Moves to Counter U.S. Quantitative Easing

By Eunkyung Seo

   Nov. 22 (Bloomberg) -- Bank of Korea Governor Kim Choong Soo will
tomorrow call on central banks to act to counter the impact of the
U.S.'s expanded monetary stimulus.

   "The changes in global macroeconomic conditions after the U.S.
Federal Reserve's recent additional quantitative easing are looming as
new challenges for central banks' monetary policy,"

Kim will tell central bank officials from Asia and Europe in a speech in
Seoul, according to prepared remarks. "We will need to devise necessary
countermeasures to deal with the possible changes in the monetary policy
transmission channels and the limitations on policy effectiveness."

   South Korea raised interest rates last week and plans to revive a
bond tax on foreign investors to curb fund inflows driving up its
currency. The finance ministry said it will back legislation reinstating
a 14 percent tax on interest income from treasury and central bank bonds
and a 20 percent capital gains levy on their sale.

   The leaders of the Group of 20 on Nov. 12 gave emerging- market
economies more room to counter funds surging into their higher-yielding
markets due to weaker growth in developed countries and the U.S. Federal
Reserve's plan to buy $600 billion of Treasuries. Countries from Latin
America to Asia have already taken steps to slow inflows and restrain
their currencies to protect exporters and prevent asset bubbles.

   Kim will also urge governments and central banks around the world
to enhance "policy coordination" to prevent another crisis or deal with
its aftermath, according to comments from his speech released by the
central bank today.

   The Bank of Korea raised the seven-day repurchase rate by

0.25 percentage point to 2.5 percent on Nov. 16 after inflation surged
past the bank's ceiling. The won, which has appreciated 3 percent this
year, was up 0.6 percent at 1,126.80 per dollar as of 11:26 a.m. local
time.

   The Bank of Korea is hosting a four-day seminar starting tomorrow
to discuss the role and policies of central banks in maintaining
financial stability. Central bank officials are attending from Japan,
China, Indonesia, Malaysia, India, Thailand, Australia, Belgium, Russia,
Poland, Denmark, Finland, Spain, Saudi Arabia, Israel, and South Africa.

Breaking News: Ireland will make press conference now on deal...

http://www.ft.com/cms/s/0/9338047c-f5a0-11df-99d6-00144feab49a.html#axzz15wvo712c

Looks like very weak "deal" - clearly as per usual market is trying to buy time and hide the disagreement while wanting to give the markets something - IF this is true I think EURO issue will escelate as markets is looking for answer to debt-crisis from more than Ireland.. (portugal, spain, belgium, latvia...)

Friday Macro update on major markets.

Going into the week-end long RISK-OFF optionality. Model is only involved in two major themes right now:

1. Short Fixed Income - but like this for a while... market is too long QE2 risk, banks loaded w. POMO and liquidity is starting to lose on the core positions - Stop/loss city close by? I do not know, but if 3.00 pct goes in 10 yr we will see fast and furious move to 3.50. Bottom line: 60 year down cycle(60 yrs rates cycle) in rates is coming to an end in 2010 and maybe early 2011, but prepare yourselfs for higher rates now!
2. Short JPY  - Model is short JPY vs both USD and EUR. We remain with USD long vs JPY due to the first macro view.......the risk being the weaker JPY is counterintuitive to our main scenario which is a slow move towards crisis 2.0

Then we have a sell signals in other major markets:  Gold, model sells 1330-00 close on daily and Crude, model sell at 80.00 on daily close. 

Chart update speaks for themselves:

S&P: Warning signal triggered last week. 1150.00 line in the sand. Close tonight also of importance, post the Bernanke speech et al. Failure to take out 1200.00 on close very disappointing, and overall as long as below 1220.00 we can not be long

10 yr rates: Break of channel. Next level is 3.00 pc - critical. Market very long FI here.....

Gold: Sell signal as stated. Meaning: Out of gold and neutral - break will take us further down.

Nice weekend

Andy Kessler:What's Really Behind Bernanke's Easing?

One of favourite people Andy Kessler (Andy Kessler website) written nice piece - he is one the smartest people around - READ HIM  (and his books)

Wiki Andy Kessler: WIKI Andy Kessler

Nice weekend

Steen