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Russ Winter

Member Since 01 Mar 2009
Offline Last Active Mar 10 2011 12:28 PM
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Topics I've Started

QE3

25 July 2012 - 09:17 AM

“The Fed is running out of balance sheet,” – St. Louis Fed President BullardThe expectations are high that the Fed delivers more mucky muck and QE.   I have serious doubts about this, as creditworthy borrowers can already borrow at almost nothing, and dropping short rates to zero would bankrupt the entire money market world,  screw up the insurance and pension industries beyond repair.   The cost of money has long since passed the point where it is a constraint on otherwise sensible economic behavior in the real economy. Even the manipulated US Treasury break-even rates  the Fed uses doesn’t call for it.  I doubt if it even has value to the Fed’s cronies in scalping more basis points flipping bonds. Taking the reserve rate to zero, may in my view literally drive money out of banks, and money markets and into vaults and mattresses.Posted ImageIf QE comes I think it will drive food and energy commodities even higher, which would be disastrous.  Even the USDA is calling for 3-4% food inflation from this drought. Oil is coming up on a strong seasonal pattern anyway,  and geopolitical are extra high. It would suicidal to throw more gasoline on the fire.Posted ImagePosted Image

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Corn Pone Move by the CME?

23 July 2012 - 11:13 PM

“There is only one difference between a bad economist and a good one: The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen. Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa.” — Frederic Bastiat

Whenever there’s a big  commodity run threatening national security,  the Masters of the Universe try to take expedient measures for short-term benefit. In this case, the toadie CME stepped in after the close on Friday and raised margin levels on corn, soybeans and wheat by a whopping 37 percent.In eyeballing spec positions, one can see that because the trade is lopsided, this should be effective in taking the sail out of soybeans, and wheat.  However in corn’s case,  the small specs were actually already slightly short, and the commercials only moderately short.  Indeed the Monday after the margin move, corn is barely down.Posted ImageBarring the sudden appearance of significant rain,  corn doesn’t look like a market that will be liquidated to any great degree.  Keep in mind that many corn farmers are short at $5 a corn bushel, and have little if any crop to deliver. Therefore, raising margin requirements on these farmers when they are already financially stressed, has the “unintended consequence” of forcing them to buy back their futures contracts. That may explain the firmness in price, even after a big run.The crop report on Monday was another disaster, with 45% of the corn crop graded very poor or poor, up from 38% last week.   If the ultimate crop checks in at 13o bushel per acre, given current demand (use for ethanol) that means 2012/2013 ending stocks will be negative 500 million bushels. If the drought continues two more weeks into August, then the Iowa and Nebraska crop gets scorched and we could be talking about the need to ration a billion bushels!  The Iowa crop at 40% very poor and poor now looks largely scorched, and Nebraska is at 33%.corn:Posted ImageIowa July 3Posted ImagePosted ImageIowa July 17, no rain and high temperatures since;Posted ImageThat means it is a good bet that the EPA will need to lower the additive mandate for gasoline.  Even $5.50 prices were wrecking havoc on ethanol production and margins.Posted ImageRather than corn, the best trade on the drought should be RBOB (gasoline) if we saw a retracement of the recent rally.  Here I would key on the October futures, and enter if it retraced 38% of the recent move back to the early July 2.42- 2.46 price pennant. Gasoline is in an unstable place, with little room for shocks, and that would include geopolitical developments (Iran, Syria), as well as large scale corn (ethanol) rationing.Posted ImageNatural gas prices have staged a recovery almost exclusively on the back of the very hot summer. Gas on hand is still 470 bcf about the five year average. However dry production is still running 4% ahead of last year, which will tilt the supply-demand angle back upwards once weather normalizes.  Sure we could get two more months of extreme heat, but I am not that impressed with the fundamentals here (although it is not really shortable).Posted Image

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The Bogus AAA Sovereign Stupidity Arbitrage

23 July 2012 - 01:03 AM

Negative real sovereign yields and now negative nominal yields (NIRP) prevail across the world because central banks are acting as buyers (or funders of buyers) of last resort of sovereign debt.  Central banks are synthesizing demand for the so-called highest quality sovereign debt by: 1) outright purchases; 2) giving leveraged banks and hedge funds incentive to own it as one leg of an arbitrage (and in the process create a massive bubble); and 3) withholding credit to competing sovereigns in distress, in turn forcing dedicated sovereign allocators into the (so called) for the moment highest quality debt. The market signal that low or negative real sovereign yields would ordinarily send is deflationary. However, central bank maneuverings are greatly distorting default-free rates and sending a false signal. Thus, unleveraged investors seeking true preservation of purchasing power are being fooled as to what constitutes safety and risk.  Borrowing a term from Max Keiser this can only be called the bogus AAA sovereign stupidity arbitrage.France is probably the prime example of this.  The IMF has debt projections around three scenarios.  The top line is the trajectory without any actions by the individual governments. The middle dotted line is what the debt trajectory would look like with mild reforms to entitlements, and the bottom line is the debt trajectory if very draconian measures are taken.  With the election of Hollande, France has embarked on the top line trajectory,  lowering the retirement age from the 62  back to 60.  Indeed, in all three scenarios, France’s trajectory is even worse than Greece.  A case could be made in fact that Greece will be forced into the lower trajectory, while France drives off the track with the higher one.Posted ImageJust like with the US, the rating agencies have maintained France’s phony AAA credit rating. As a result the French two year Treasury (and other so called core European sovereigns, see chart) have gotten caught up in the “flight to stupidity arbitrage”, and rates have fallen to 0.14%.  Netherlands is no safe haven [See Netherlands, Thumb in the Dyke], nor is Belgium.Contrast this to Italy, which seems more likely to conduct at least moderate reforms, and get its trajectory under control and has a two years yield of 3.95%. This is not to say 3.95% is a bargain, but both France and Italy are exposed to Spain, and have nearly equal potential liabilities to the ECB, EFSF, and ESM’s toxic portfolios.  But in the Alice in Wonderland world of stupid arbitrage both Germany and especially France get a total pass, so far. The only plausible and dysfunctional explanation is that France’s too big save banks, and by extension France itself,  will saved by what exactly, aliens from outer space?Posted ImagePosted ImageNowhere does the stupidity arbitrage get more perverse than in the US. At this point I do not buy the canard that European flows will be the principal driver of Treasury yields. Instead I see the US suffering more and more from its own financial insolvency ranging from municipalities to the Federal level,  and that will shatter the US safe haven myth.The stupidity flight trade is building to a crescendo. Recently, commercial hedgers have gotten aggressively short the 30 year Treasury bond, as well as the two year, five year and Eurodollar.  Commercial hedgers have been long 30 yr since 2007, until now. Lee Adler describes huge month end Treasury supply.  I don’t know if this is just a trade or something secular, but I am always on the look out for clues that this risk off, safe haven scam is running out of stem.  I am now shorting the two year Treasuries at the 0.20% level, and will add more incrementally at 0.19, 0.18, etc.My preferred trade to short the 30 years, is the actively traded TBT double inverse.  I will post this trade in comments when I execute it. There are active options with about a 30 implied volatility.  The tracking on this is good, and this article describes it. The key is not to get caught in a multiple week non-stop run against you, as this compounds. There is also an interest and expense draw-down effect that I calculate at 0.5% a month.  With 2.5% a month for the option premium, that leaves 2.0% a month for the writer if expires worthless.  I have been tracking TBT and notice a 50 cent move in the underlying for every 10 basis point move in the 30 year yield.Posted ImagePosted ImagePosted Image

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The Bogus AAA Sovereign Stupidity Arbitrage

23 July 2012 - 01:03 AM

Negative real sovereign yields and now negative nominal yields (NIRP) prevail across the world because central banks are acting as buyers (or funders of buyers) of last resort of sovereign debt.  Central banks are synthesizing demand for the so-called highest quality sovereign debt by: 1) outright purchases; 2) giving leveraged banks and hedge funds incentive to own it as one leg of an arbitrage (and in the process create a massive bubble); and 3) withholding credit to competing sovereigns in distress, in turn forcing dedicated sovereign allocators into the (so called) for the moment highest quality debt. The market signal that low or negative real sovereign yields would ordinarily send is deflationary. However, central bank maneuverings are greatly distorting default-free rates and sending a false signal. Thus, unleveraged investors seeking true preservation of purchasing power are being fooled as to what constitutes safety and risk.  Borrowing a term from Max Keiser this can only be called the bogus AAA sovereign stupidity arbitrage.France is probably the prime example of this.  The IMF has debt projections around three scenarios.  The top line is the trajectory without any actions by the individual governments. The middle dotted line is what the debt trajectory would look like with mild reforms to entitlements, and the bottom line is the debt trajectory if very draconian measures are taken.  With the election of Hollande, France has embarked on the top line trajectory,  lowering the retirement age from the 62  back to 60.  Indeed, in all three scenarios, France’s trajectory is even worse than Greece.  A case could be made in fact that Greece will be forced into the lower trajectory, while France drives off the track with the higher one.Posted ImageJust like with the US, the rating agencies have maintained France’s phony AAA credit rating. As a result the French two year Treasury (and other so called core European sovereigns, see chart) have gotten caught up in the “flight to stupidity arbitrage”, and rates have fallen to 0.14%.  Netherlands is no safe haven [See Netherlands, Thumb in the Dyke], nor is Belgium.Contrast this to Italy, which seems more likely to conduct at least moderate reforms, and get its trajectory under control and has a two years yield of 3.95%. This is not to say 3.95% is a bargain, but both France and Italy are exposed to Spain, and have nearly equal potential liabilities to the ECB, EFSF, and ESM’s toxic portfolios.  But in the Alice in Wonderland world of stupid arbitrage both Germany and especially France get a total pass, so far. The only plausible and dysfunctional explanation is that France’s too big save banks, and by extension France itself,  will saved by what exactly, aliens from outer space?Posted ImagePosted Image>Nowhere does the stupidity arbitrage get more perverse than in the US. At this point I do not buy the canard that European flows will be the principal driver of Treasury yields. Instead I see the US suffering more and more from its own financial insolvency ranging from municipalities to the Federal level,  and that will shatter the US safe haven myth.The stupidity flight trade is building to a crescendo. Recently, commercial hedgers have gotten aggressively short the 30 year Treasury bond, as well as the two year, five year and Eurodollar.  Commercial hedgers have been long 30 yr since 2007, until now. Lee Adler describes huge month end Treasury supply.-more at ActionablePosted ImagePosted ImagePosted Image

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Safely stashing cash in a near-zero rate, high-risk environment

20 July 2012 - 01:14 AM

The euro-denominated sector gets stranger and stranger as banks scramble for debt to pawn off as ECB collateral. In the you-can’t-make-this-stuff-up realm, investors are paying Germany six basis points (negative 0.06%) for two year bunds.Even non-eurozone debt is treading perilously close to the zero mark. Bulgarian debt maturing in January is trading at zero yield, the Czech Republic two years at 0.60% and Polish rates are scrapping bottom. The Danish Central Bank cut its key interest rate by 25 basis points to a negative 0.20 percent following a rate reduction by the European Central Bank, which means that banks are in the unusual situation of paying to deposit their money with the central bank. Savers there can now lend banks their cash and pay them to take it. Central bank masters of the universe have managed to push the Swiss yield curve in the 2-year yields to -0.39% (negative 39 basis points). Out 5 years, the rate is zero. Yields on U.S. Treasury two years are 0.20 percent (20 basis points). Three-month bills yield 0.07% (seven basis points).Crazy as it seems and taking the ongoing financial repression to new levels, the Treasury Advisory Committee (a group of Wall Street bankster types) has been toying with the idea of creating a scam to have savers also pay negative interest rates to the U.S. Treasury for the “privilege” of loaning them money (New York Times: Treasury Ponders Negative Interest Rates). All it would take to set this travesty up would be for the Fed to reduce the interest paid on reserve deposit to zero (just like the ECB), and the last little vestiges of yield paid by banks and money markets would completely disappear. Aunt Millie and her ilk might face paying her bank for the mere privilege of loaning many as well.Outlandish, you ask? You’ve been forewarned. Even before adding this risk to zero rates, money-market mutual-fund assets were in gradual draw-down mode. The ICI reports a $107.6 billion drop to $2.539 trillion from March 7 to July 18.Money-market fund withdrawals should be limited in the event of a “run,” according to a report by the FRBNY “strongly” endorsed by bank president Bill Dudley. The authors suggest a “minimum balance at risk” that would not be available for withdraw for 30 days, forcing depositors to think twice about where to place funds.The criminality, the bending of rules, the zero and negative interest rates paid to hold insolvent sovereign debt and the questionable standing of banks all beg the question: Why shouldn’t holders of money collectively withdraw hundreds of billions out of the banking system and just store it in a custodian bank vault? There may be some sign this is happening already at the margin. Currency has increased $39.5 billion to a total of $1.113.1 trillion in circulation since year end, or 7 percent annually.Important distinction: Custodian banks don’t take deposits; they hold cash for safekeeping. This is not a recommendation or endorsement, but the list below are of banks offering custodian services (Custodian bank defined on Wiki). There are too many too-big-to-saves out there for my taste.Wiki: A custodian bank, or simply custodian, is a specialized financial institution responsible for safeguarding a firm’s or individual’s financial assets and is not likely to engage in “traditional” commercial or consumer/retail banking, such as mortgage or personal lending, branch banking, personal accounts, ATMs and so forth. The role of a custodian in such a case would be to:
  • Hold in safekeeping assets/securities, such as stocks, bonds, commodities such as precious metals and currency (cash), domestic and foreign
In fact, you will probably find that no banks near you offer this service unless you live near a major financial center. I live in Honolulu where banks only offer safe deposit boxes, which is not recommended for the purpose of storing large amounts of cash. Filling suit cases with large quantities of cash and heading off to Hong Kong or Singapore is an invitation for trouble from the U.S., which is becoming a police state. Stashing it in your home might cost you both your money and your life.The following companies offer custodian bank services:
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