U.S. violent crimes jump in first half of 2006: FBI

Interesting article on violent crime. The article underscores my belief that wealth bifurcation is surging in the US. How can the wage of a first year policeman in NYC be 23,000 dollars when there are people making a 100 million? Anyone with a brain will realize that eventually this is going to lead to some serious backlash and violence.

Another good credit article

Everything looks great, but somehow you get that uneasy feeling. When this happens it is always good to check your premises. I think we can all agree that the markets, from stocks to bonds to art work, are riding on a sea of liquidity. So let’s begin checking our premises. First, liquidity can come from two sources: income or borrowing. Real disposable income has actually fallen over the last five years. It is no secret with a negative savings rate and gigantic trade deficit that U.S. consumers are borrowing to consume. A total credit to GDP of 3.6 times (the next highest was 2.9 in 1929 and has averaged maybe 1.5 time over the last decades) the lowest equity levels in homes ever, the highest percentage of disposable income going to service debt ever, government budget deficits of over $300 billion and a public debt figure approaching $9 trillion (not even counting the war costs of $500 billion so far not added in and forgetting about $45 trillion in unfunded liabilities from Medicare and Social Security) etc., all confirm this fact. Few people really understand the ramifications of this or the process by which the bureaucrats in Washington accomplish the harm all this debt will eventually do by creating more of it. A $1 billion REPO by the Fed doesn’t seem like much until you check your premise. The Fed just did a $1.3 billion dollar coupon pass, which is like a permanent REPO. The Fed calls up JP Morgan (JPM) and purchases its bonds with credit, credit created from nothing. They just tell JP Morgan, "we owe you money."JP Morgan now has funds (credit) it can lend out. But because of margin requirements it can lend out much more than $1.3 billion. In fact it lends out about twenty times that amount. So let’s say they call up 20 regional banks and let them borrow $1 billion each. In turn, each regional bank then lends out $5 billion to various mortgage borrowers. These borrowers refinance their house and spend the extra cash while the equity in their home drops. The original $1.3 billion of credit the Fed created yesterday will in a few days turn into $100 billion of money borrowed by consumers. In fact these numbers are born out by the Fed’s activity over the last year. The Fed’s balance sheet has grown by about $30 billion over that time, while total credit market instruments outstanding grew by $3.5 trillion. But that is just traditional pyramiding. Today we have the derivatives markets where JP Morgan can take some of that credit and lever it 100 to one by underwriting derivatives (I don’t mean to pick on JP Morgan, although it is by far the largest derivatives dealer in the world; others like AIG or other large Broker Dealers are doing the same). So of the $1.3 billion, let’s say JP Morgan keeps $300 million and then sells options to customers. It uses that credit as capital to support the trade; the trade itself is $150 billion in notional contingent liabilities. The notional amount of derivatives over the same period of time has grown by a scary $88 trillion. Derivatives are lending on steroids. All this liquidity is driving nominal asset prices higher and higher. And ironically they must in order to keep the borrowing bubble bubbling. But risk is increasing exponentially and threatens our very country’s solvency. The only reason things seem great is because other central banks around the world are willing to keep creating credit themselves and lending it to us. Todd calls this the elasticity of debt: how much debt will the market accept before it can’t take anymore. I don’t know the answer to that, but when it occurs there will be no escape. We are really, really good at creating credit. Are we good at paying it back?

Freeport -PD Update

In response to the Freeport- PD merger, SAC Capital has opposed the takeover. Can copper stay as high as it is now? Only time will tell, but I believe it is a dollar issue more than a demand issue.

Fed Day

As usual the fed did nothing because the global financial system if probably going to collapse so why bother hastening that day. It looks to me like oil and metals will get a bid again and perhaps foreign equities. Here a chart that has me interested and watching.

The markets opened up strong. Its the last week for HF managers and other financial professionals to try and justify the gigantic fees the keep charging. Information arbitrage had a good take on the subject. DE Shaw is struggling and heading into Private Equity. At this point the HF private equity is running on hype and marketing. I dont blame them. I would try and keep the current fee structure in place as long as I could. Nevertheless, investors are going to have some questions to ponder after this year. How can Citadel employ 1000 people and spend 5.5 bln in trading costs and it be a longterm strategy for the future?

EOD Thoughts

The Vix signal I pointed out earlier proved to be false, although volatility did seem to pick up. The dollar was pounded higher because every CB in the entire world is buying US securities still. I'm convinced Asia knows capitalism about as well as they know frech fries. They aren't going to prevent the inevitable from happening as George Soros has said and proved over and over again. Nevertheless, there intervention is making imbalances even worse and regrettably we have passed the point of no return for the global system. At some point cracks will show and risk will be repriced. I don't know this will play out, but they will cause pain for some.

JC recommended BLWD last night and it shot up. I guess this is a pretty big indicator of the kind of speculation going on. Its not that great of a company, but the rumor mill seems to be driving everything.

Bonds moved down for god knows reason why.

VIX update

I've been watching the vix today and it could be a fale alarm, but it looks like a sea change is coming.

I've Figured it Out

I've done a lot of souls searching and have come to the conclusion that central banks around are literally duck taping this entire global financial system together.

1. In the long run how can central banks attempt to out print each other and there be anything other than a financial crisis?

2. If the fed lower rates and the rest of the world keeps accumulating treasuries where will the new bubble form? Faber says possibly grains or asian equities. Good ideas.

3. Keynes says in the long run we are all dead. True.

4. I dont think in the long run you can wrong with metals or farmland. They will test stand the test of time.

5. Janzen, Faber figured out the current monetary system years ago and are ahead of everyone even some of the best HF guys.

6 What is going to hapen to the mortgage market?

Yen on the move

Swiss Franc and the yen are on the move and the dollar is weakening. I think the whole financial system is so overlevered and opaque that no one has idea what the weak link is. John Succo at Minyanville once again had a good blurb about credit and the business cycle. This isn't the American economy of ten years ago. This is a global economy with uneconomic players seeking a mild form of central planning. If you can't realize what is going on then you can't plan for potential problems. got Gold??

Yen on the move

Its a quiet day where the mo mo idiots are all trying to outdue themselves for the end of the year. Stocks are widly stretched. The yen advanced on a report that the trade deficit has narrowed. Contrary Investor has a good article this month about the Trade deficit is responsible for a never ending credit cycle. Consumption is waning in the US.

Thoughts of the day

Not much in the way of news today. The capital markets are determined to pump certain issues as high as posssible into year end. There seems to be complete belief that nothing can derail the market into year end. I am skeptical of government intervention. My best guess is that nothing has derailed the markets in the way of geopolitical news so therefore it never will.

More importantly, I think a lot people in America are struggling. The market continues to paint a rosy picture most likely because of the 2/20 HF situation that is really driving everything. A lot of longer term issues seem to creeping up among the general population. Lack of income growth, too high student debt, and massive wealth disparity are the most important ones. I just think the capital markets are too short term driven to realize that these are the issues that are going to have profound effects on the country in the next 30 years. Sadly, I don't think my generation is going to enjoy the same things as my parents and I'm not the only one. Everyone my age is drowning in debt and finding wages completely eroding. Wall Street can keep dressing this crap up for a bonus, but its all bullshit. A consumer led recession is going to take place and with it the realization that the country is losing power and the wealthy are abandoning people. I hope Dr. Faber is wrong and we don't see a revolution, but it will grow more likely with time.

Freeport buys Phelp Dodge

Big news is another silly buyout in the mining sector. The markets do not seem this feverish since the heady days of 2000. More LBO's and MA than even then. World markets are booming and hubris is a live and well. Volatility is at record lows in virtually every asset class.

EOW Thoughts

Sheesh. An awful lot of data came out this week and a concensus on things is even more muddled. The obvious winners include global stock markets. The mo mo players in the nasdaq are back even though all data points to softening domestic housing markets and growth. The yield curve is no longer a curve. Its a line. Hopefully someday we will figure out why there poeople scooping up 30 years bonds below the rate of six month t bills. The carry trade in yen swiss francs seems to be getting more problematic. When they blow up people will be forced to delever.

Has anyone noticed that the global financial system is a bigger bubble than in 2000? Everything that happened 5 years ago in the US is now taking place on a gloabl scale. Private equity is now doing deals at 9.5 times cash flow versus 3.5 a few years ago. Leverage buyouts, leveraged consumers. What happens when everyone has to delever? Central Banks should be concerned because at some point they are going to watch the biggest credit debacle in the history of the world. When risky assets get repriced as risky assets things will go wild.

Hedge Fund Blow Up Rumors

Apparently a major hedge fund is blowing out of energy trades and having to liquidate a bunch of high yield currency trades like yen and swiss franc. Hopefully the yen will sky rocket sometime soon.

Global markets seem to be a peak euphoria. The nymex has doubled making it a thirteen billion dollar oil exchange and markets like the BRICS look massively stretched. Something is going to blow up before the year is over.

Chineese Reserve Diversification

China has decided that its going to deversify its reserves out of dollars and into other assets. I think it has directly to do with the fact that the dems are in the house and senate. Trade protection is going to be ratched up because a lot of jobs are being sucked away from the US. Gold is getting a solid bid. Risks seem to be rising in the real world, of course the financial system believes it is bullet proof and nothing can wrong.

As much as the Chineese want to modernize there society is impossible for them to employ a billion people. They know it, but they dont want violence and revolution to break out.

Closing Time

Markets are just about too close. 30 year bond has come off about 10 basis points from the highs. Word is the Japan is going to buy bonds until the end of time. I guess this is the market that we work with. Its really a combination of capitalism and price fixing. Apparently Japan thinks there is infinite demand to consume in the US, even though the data seems to be saying otherwise. Quite frankly, I think Asia is clueless about how to run there economies. You can't suck away all the US manufacturing jobs and expect people to keep buying things forever. Duh! Where is Andy Xie? Does anyone know if has been rehired by another firm?

Conditions Worsening

Sotcks continue to tick lower. At some point we are going to hit some stops. The dow hit a new high as did the Nasduck, small caps, and spoos topped out at or before there highs. The stakes certainly seem very high right now. Everyone wants a bonus, but everyone cant be long.

In other news. The writers of credit insurance will be the recipients of the largest bonuses on wall street. I'm going to go out on a limb and say that this is the peak for CDS writers. It really cant get much better. S&P has reported that credit quality has deteriorated for 25 years with all most all issues in junk status. Hey, just leverage yourself to the hilt its OPM.

MISES

Central-bank monetary inflation and credit expansion cause a boom-bust cycle by distorting prices and profitability. They incite entrepreneurs across the economy to malinvestments and misallocations. With- out artificial credit-expansion, cronyism would result in higher profits for the cronies at the expense of lower profits or greater losses for the non-cronies. But it would not produce a business cycle.

I think it is important to keep in mind how fast credit can expand and then contract. Japan had numerous periods in the 90's where credit would expand and the economy would briefly recover, but it never was really able to get things back on track. The US is vulernable to any contraction in credit. It is impossible for credit to be extended at over ten percent a year forever. It will contract and there will be a very unpleasant credit event with consequences that no one can predict. Financial participants are still searching for profits via lending. Thats all we can do in a 70 percent gdp consumption economy. Keep people spending at all costs. The problem is that demand is softening for the largest loans. Residential and auto loans. A new source of lending must be found.

An Admission of Error by the Fed

Good article in the back of the WSJ about the error in fed policy. It only took them 3 years to figure it out. Honestly, what a complete bunch of morons. Where they all living in a cave the last couple of years. How can the markets have any faith in the fed at all? There is going to be a massive capital markets collapse sometime and no one is ever going to figure it out. How about 1 million FNM's around the world. Its clear the fed is braindead and has lost its usefullness.

Some bozo keeps talking about the CPI as the main measure of inflation. I think paying to attention to CPI is a complete joke. Money or credit expanding far above the economy's real level of gdp will generate some kind of inflation. Our society has decided that inflation in certain things is permitable while others are not. Instead of bitching about oil being high, I want to bitch about houses being high. Oh wait, we cant borrow against oil in order to fuel consumption. The fed blows bubbles and then watches them deflate leaving behind a wrecked financial system.

All the market cares about is the rate to borrow money

I have to continually remind myself that we are the midst of credit and finance boom unlike anything the world has ever seen. As soon as rates bottom markets move higher. MA, LBO, Mortgages are the things that drive our economy in the new century. Therefore when rates head higher markets shit themselves. Its a ponzi scheme and it will end badly.

NFP came in at 90,000 jobs and 4.4 percent. Of course prior months were revised higher. Nothing seems to add up. Are we living in George Orwell's 1984. I dont know how gdp is close to zero, but over a million jobs have been added. Bernake is living on some other planet. Way to go Ben.

CDS are at new lows

I dont know how much the fed pays attention to markets in its analysis, but they cannot be comforted the fact that spread are at record lows. According to the markets there simply not enough risk out there. As AG said risk premiums dont stay low forever and in a very fast electronic market place things could get ugly very fast.

After hours up- TMTA, JDS, BRLC,
down- PWAV, WMFI,

Stocks are in a grinding low vol consolidation. Gold continues to look strong and oil is in a range. More chatter is taking place about slowing consumer demand. At this point the economy is ok and credit is widely available. Therefore how much is are lower interest rates really going to stimulate demand. Doug Kass on realmoney.com thinks the consumer is lent, not pent up. I agree. We are running out of asset classes to inflate.

No post yesterday. Went out for Halloween with a couple of good friends and was not in the condition to trade. I have a couple of the 1350 jans puts in the spoos and long 7 yen futures around 8450. I continue to remain long short in the cash account. Gradually moving into more shorts. Last night on The News Hour there was an interview with a milatary historian who painted a rather bleak situation on the war in Iraq. More troops are needed and if we decide to pull out the country would fall apart rapidly.

Dr. Brett had a good article on out of control trading. I've been there.

Macro shift underway

Looks like a large macro shift is underway. The long end of the curve continues to rally and the dollar is weakening. Im watching the yen closely for what I believe is a long overdue short squeeze.

Sell off is once again denied. AD line is mixed. The long end of the yield curve is once again rallying because of economic weakness. So far credit and stock markets have not been rattled.

Is anyone paying attention to the fact the the US power could be diminishing because of the failed policy in Iraq? The world is ignoring us and several rogue regimes are running around doing whatever they want. It all traces back to oil and our refusal to change our lifestyles. Therefore the world is becming a more risky place

Stephen Roach had a pretty good article today on MS global economic forum. He believes that investors are overestimating consumption outside of the US. He is probably correct. If the rest of the world was confident that the domestic demand existed then the CA deficit wouldnt be getting nearly 1 trillion dollars and there wouldn't exist a reason for on going massive support for the dollar. Former MS economist Andy Xie had a got article about the isssue of domestic demand outside the US a couple of months ago. It was his belief that Asia wouldnt decouple from the US led growth model until there was protracted downturn in consumption in the US. This is the conclusion Roach reaches as well. If there hypothesis turn out to be correct what are the ramifications for the capital markets? Demand for large purchases like cars and houses are clearly sliding. Real Estate is a very long, slow cycle that could take years to bottom. Does the rest of the world continue to purchase our debt or do they decide to stop buying and concrete efforts to encourage more consumption? I dont know the answers, but it is a problem staring everybody in the face. I dont think another stock market bubble is likely because the market is too savy to let markets run up another 20 percent from current levels.

Really slow day. Market was jam jobed higher around midday. Volume was light. Apparently risj appetite is alive and well because credit spreads do not widen ever. There is so much leverage and liquidity floating around that the market is looking past all of the housing weakness. Tomorrow may be the final blow off top.

I am really starting to wonder how much longer this entire system can keep going. How many more credit outlets are there? The fed is so out gunned its hilarious. Bernake keeps acting like everything is normal out in the financial world. He really thinks that bubbles are a good idea. A couple of years from now I think we are going to wonder if the fed should be abolished. Its an institution that has outlived its usefulness. The aysmetrical policy of driving rates super low and then gradually raising them has led to a massively inflated global financial system. At least the ECB recognizes it.

The markets are being pretty well propped up because the end of the month is in two days. The AD is evenly split on both exchanges. Semi's are getting a bid even after goldman said motherboard demand is falling off a cliff. Oil is down is gold oddly enough is holding its own. up around 10 bucks.

Back to flickering pack as they like to say on Minyanville. World markets were mostly lower last night. The dollar is mixed and interest rates unchanged. Getting closer to the elections. Death toll in Iraq passed 100 people this month. I wonder if anyone has a picture of me in my halloween costume?

Midday update.

Action seems to be really slowing down. Robotrader continues to by all the dips in the indexes. Hey, if nobody has to sell we can all be rich!

I guess I should be happier because in an asset based ecomy its good to see assets rising! As Hank Paulsen noted earlier in the week he hopes people are happy that stocks are going up even though real estate isn't. If I had a crystal ball I would gaze into it and figure out how much longer we can inflate asset prices, borrow against them, and then use the money to fuel consumption.

Apparently spy vol is going to zero.

No posts yesterday. I was too busy driving my self made trading index futures. No trading today. A couple of thoughts for today.

1. The dollar is falling in response to slow gdp growth. The stock markets around the world keep acting as if the number is a lie. Its seems just a matter of time before people start heading to the exits again.

2. I'm coming back to the same points as yesterday. How does a failing war in Iraq affect the global macro environment? If the war makes US look weak couldnt that undermine peoples faith in our bonds and the dollar?

3. If our superpower status begins to look questionable does that mean a risk reduction trade could take place? However, a trade out of dollars and into something else? Metals, oil, other curruncies?

4. How long are the macro imbalances going to build? Is the current account deficit and the trade deficit double every year? What is china going to with its dollars? California is nice. Maybe they are going to buy it!

If you look closely. You might notice someone. Thats right its Ben Bernake! Stuck in the Great Depression

Well surprise, surpise! The fed did nothing. Which gives the green light for the weak dollar high oil, gas trade to go back on. I seriously wonder what planet Ben Bernake is from. Oh wait. He's stuck in the great depression.

Bonds tick up, stocks up, crude up, gold up, dollar down.

President Bush is speaking about Iraq and economy. Elections are less than two weeks away and seem to be more important than prior years. Nancy Pelosi(D) is favored by many to take over as speaker of the house. There seems to be very little positive news out of iraq. Kind of a damned if we do damned if we dont situation. The President seems to think it his divine mission to succeed in Iraq. I dont disagree with him, however changes need to be made.

How would a defeat or a earely withdrawl affect our debt and currency markets? Sadly, I think it would seriously undermine our credibility as the worlds only superpower. The dollar and bonds could really take a beating. Has this occured to the markets? Of course not.

Markets open up slightly stronger. This seems like the strongest mania since 2000 in the US. Due to program trading and reliance on the futures the market just grinds up like at 45 angle with buying come in at key points in the futures. I just looked at a chart that says the dow is the most overbought since 99. The great paper momentum chase continues. If its not energy its tech. The liquidity is seemingly neverending. Semi's continue to report average earnings.

A couple of thoughts before tomorrows FOMC meeting.

1. Does the fed really have a handle on financial conditions? Over the past couple of meetings the chatter seems to be really conflicting. Prosser, Lacker want a hike. Bernake doesn't want to hike because he is convinced that housing is going to drag down growth and inflation. I dont know who is going to be correct, but there is scant evidence from the markets that anyone is worried about anything. However, just like in 2000 market participants can rapidly change there opinion.

2. Is the real estate bust going go to last a lot longer than everyone thinks? I say yes. Ancedontly, prices seem too high in the face of falling demand and still expanding supply. Not to mention that toxic mortgages and fraud are rampant. The problems are not going away anytime soon.

3. Where is job growth expected to come from? The entire country is based on consumption. Problems in real estate are certainly going to have an impact on Americans ability to consume

4. What the fuck is the US going to do about Iraq? I certainly support the was on terror. We have a right to defend our way of life and I have no sympathy for evil islamic fundamentalists. That being said, the war isnt going well. Changes need to made. If we leave how to do we appear to the rest of the world? I dont think we can leave without a serious blow to our credibilty. Radical islam would surely gain strength.

Markets continue to drift modestly lowerled by the nasdaq The tick seems to be drifting lower throughout the day and the +1000 level has only been crossed a few times.

The dollar did an abrupt turnaround and subsequently gold and oil rallied.

I am anticipating the ndx touching 1705 today.

Ouch. RIMM rallied around 1015 am and is in my face. Got up to 16 and is now down to 114.50

The yen continues to be weak and interest rates are unchanged. The AD line does seem to be weakening.

I'm starting to feel like I felt in May. Very frustrated and tired to no movement.

RIMM moves off its intraday highs. Interest rates continue to move higher. Maybe FCBs and Bill Gross are selling?

I'm getting excited for Villanova University basketball again. I had more fun than expected at homecoming. Has it really been 5 years since I graduated?

The markets surge higher in sympathy with the dax and other overseas markets. Bonds are lower across the board with the 30 year almost at 5 percent. The AD isnt somewhat mixed. The russell is lagging behind the nasdaq.

And the final kick in the pants is another vlo chart. Left ten bucks on the downside. Oh well. There are two months left and there should be money to be made somewhere

The markets liked goog, rmbs, xlnx, vrsn, altr. sndk and flash were dumped hard.

The dollar was weak today and this was the second month of a decline in the philly fed.

Tomorrow is options expiration which is ususally boring.

SPX implied vol is now back to record low. Apparently spreads are never going to widen.

Wow. Its been a longtime since I have posted. I think its time to update my thoughts.
Markets-

1. I nailed energy before the majority of the market and made great money. In retrospect I got out too early. I guess those are the best trades. Getting in before the smart money realizes the trend change and not holding out for the bottom.

2. The bond market and stock market bottomed at the sametime in july. In a finance based economy this makes perfect sense. The market cares about only about what it is going to cost them to borrow and leverage.

3. As long as the rest of the world continues to provide cheap credit to the US this game can continue. As Randall Foresyth pointed out in Barrons, the world economy is like the US and USSR during the cold war. Mutual assured destruction.

Market Comments:

The market seems to want to push higher. There was aggresive buying in the first 5 minutes of the day. Market Delta registered a reading above 7000 in the ES. However late comments by Fed Head Moscow? on inflation started a sell off. Buyers defended the bottom of the NDX range at 1561 and ES 1297. Volume was very light.

This is part of Doug Nolands article at the prudentbear.com this week. I think his analysis is accurate.

It appears that the current housing slowdown, which we first saw in September ‘05, is somewhat unique: It is the first downturn in forty years – in the forty years since we entered the business that was not precipitated by high interest rates, a weak economy, job losses or other macroeconomic factors. Instead, it seems to be the result of an oversupply of inventory and a decline in confidence. Speculative buyers who spurred demand in ‘04 and ‘05 are now sellers; builders who built speculative homes must now move their specs; and nervous buyers are canceling contracts for homes already under construction.” Robert Toll, Chairman & CEO Toll Brothers

In a predictable replay of the Technology Bubble, the U.S. homebuilding industry now faces the inevitable consequences from a period of spectacular over-finance and over-speculation (including massive industry overcapacity, collapsing profit margins and acute price uncertainty and instability). Industry executives have not previously experienced similar dynamics to this downturn specifically because there has never been a Financial Structure so capable of completely inundating the entire housing and mortgage arenas with cheap finance for such an extended period – never. As we witnessed with tech, destabilizing speculative flows appear seductively miraculous until they don’t.

Ultra-easy finance incited and then fed a speculative Bubble in home buying. At the same time, the nature of the Financial Structure saw to it that the homebuilders were also overwhelmed with finance, ensuring an enormous, destabilizing and self-reinforcing building boom. And the higher homebuilder stock prices ran and the cheaper their debt financings became, the greater the incentive to ignore the warning signs and race to develop more properties – to keep the dream alive and the liquidity spigot wide open. Moreover, the greater the boom the more the various segments of the ballooning U.S. Financial Sphere that wanted their piece of the action. And the resulting creative financing arrangements and instruments – and greater Credit Availability generally – the easier it became to finance ballooning transactions at higher prices (yet with lower individual mortgage payments!). Households inevitably succumbed to panic buying.

I have a strange feeling that commodities are weakening and there could be a significant decline. I have several reasons why

1. Weakening housing prices could be causing demand to contract

2. Consumers are not accepting higher prices for finished goods.

3. Its been four freaking years for a significant decline!


Bernake could be right about deflation, but credit hasnt contracted significantly. The fly in the ointment is the dollar. What does the dollar due in the face of a rapidly weakening economy? Cutting rates is much more difficult than wallstreet wants to admit.

Just got back from a weekend of golf in Galena, IL. Hope to due some stuff tomorrow for the blog.

This is the second time the CRB has tagged the 200ma average. The bull market is long in the tooth for CRB and stocks.

Interesting day in the markets. Even though it is August I believe a fundamental change in the macro environment is getting underway. The CRB is testing critical support and the dollar continues to hold up.

Its time to get the ball rolling.