Fitting End To 2009 Trading: Big Volume Sell Off

It was only fitting that a year marked by irrational and erratic trading, saw a substantial volume selloff in the last 15 minutes of trading after there was absolutely no volume done all day. What sparked it? Only a few momentum chasing quants know, even as the bid seemed dangerously close to getting unglued. Suddenly all the big-cap liquidity provisioning seemed just a tad tenuous. Another way of looking at it: a cheap appetizer of things to come. Is the January 4 rush for the exits entre next?

2010: The Year of the Bond Market

Hello Folks!

Before I start I hope everyone has a safe and Happy New Year! I wanted to hop on here and talk a little about the year ahead as 2009 comes to a close.

IMO, 2010 will be the year of the bond market. The US government plans on borrowing over $2.5 trillion in 2010 after borrowing a record $1.5 trillion(give or take) in 2009.

Somehow the banksters and the US government found a way to get their treasuries sold in this year. They achieved their goals in 2009 in a couple of different ways:

First they kept borrowing rates at 0 which allowed the primary dealers to make a fortune buying treasuries. this allowed the primary dealers to make billions by borrowing at zero and then investing in higher yielding assets like the 30 year bond.

As I have explained before, the banks pocket a sweet spread when you borrow at 0% and then buy the long bond at 4.7%.

Secondly, they also found a way to talk the FCB's into going along with this charade(probably through threats) as the world continued to buy treasuries.

This zero interest rate environment allowed Wall St to make more money this year than any other year in their history including the housing bubble years of 2004-2006!

In a nutshell: The Fed's games allowed the Street to gorge on profits at the expense of the taxpayer. Meanwhile, Rome continues to burn as the average American continues to suffer from unemployment and low wages as this country remains mired in worst economy since the 1930's .

If you are a banker you are sitting on top of the world right now! On the flipside, if you are one of the "peasants" in the USA as the greatest fraud in the history of this country continues to roll on, your lives have probably never been so tough.

I know I am personally feeling it. I went home during Christmas and saw the toll that this recession/depression has taken on my family. I am sure many of you have seen the same thing within your own families.

Folks, we are being screwed more ways than a $5 hooker on a busy Saturday night by the oligarchs of this country.

For Example: If you were responsible over your lifetime and saved money, the Fed is now rewarding your responsibility with CD's that basically pay nothing. Gee thanks Mr. Bernanke! NOT!

Meanwhile the bankers continue to gorge on profits as they take advantage of historically steep yield spreads. I continue to be amazed that there are no torches and pitchforks in DC yet.

What is it going to take to make people rise up? There are reports out of Detroit that unemployment is nearing 50% and yet no one says a thing! How bad does it have to get before you wake up and do something? Where is the anger folks????

If you want to take action I suggest you follow the Huffington Post's advice and begin starving the "too big to fail banks" by yanking your money out of them and placing your funds into a community bank.

The Post has created a safe way in which you can find a solvent community bank by starting up the website Move your Money. This site allows you to find a safe community bank in your area by simply plugging in your zip code.

It's time that we "starve the beast" and take away the liquidity that allows the TBTF banks to manipulate the market, buy and sell unregulated derivatives, and then pay themselves ridiculous bonuses at the end of the year.

Remember folks, without taxpayer funds via the TARP, NONE of these banks would exist! The fact that their enourmous profits are going into the bankers pockets instead of the taxpayers is simply disgusting. Do you need any more proof that you are being blatantly robbed? I hope you all take action and move your money like I have.

The "Bondzilla" 2010 Bond Market

IMO, the banks have had their day in the sun when it comes to low interest rates and big profits. Moving forward, the bond market is increasing getting very agitated over the huge spending programs that have been announced in the past few weeks.

Take a look at the ten year(TNX) over the last 20 days:

My Take:

Yikes! That is one ugly chart! Yields hit 3.9% at one point today on the 10 year before pulling back as stocks began to fall. This is a monster move thatwe have seen over the past three weeks. Some would call it parabolic.

Remember, if rates soar to 6% housing is toast. You think the drop in housing prices is bad now? HA! You ain't seen anything yet if the 10 year continues to soar. As we all know, mortgage rates are set based on the ten year bond.

So why are bonds selling off(resulting in higher yields)? The real question you should ask yourself is why wouldn't they?

I mean the spending programs that have been announced over the past couple weeks are mind boggling.

The Senate passed a healthcare bill that is going to cost us over $1 trillion dollars(I believe it will be much more than that when its all said and done). This will be accompanied by massive tax increases and if you think its only the rich that will be taxed you are nuts.

The Fed/Treasury then added to our woes on Christmas eve when helicopter Ben and his pals announced that Fannie and Freddie's losses over the next 3 years will covered by the Treasury no matter what the cost.

I find it funny how they Fed/treasury conveniently annouced this right before the holiday hoping no one would notice. As you can see above, the bond market sure noticed!

How much money are we talking here? Who knows? It will depend on how bad the economy gets. We are talking at least $400 billion from what I have read. If the economy worsens and homeowners continue to walk away in droves from underwater mortgages the tab could be much higher. Could it be $1 trillion or more? Perhaps. Time will tell.

The Bottom Line:

Higher rates are inevitable in my view. There are some deflationists that are convinced that we headed back to 2% yields ala Japan in the 1990's. I just don't see it with the $2.5 trillion in treasury issuance's that are scheduled for 2010.

One thing is for sure in my view: The bond market will be the story of 2010. If interest rates soar on treasuries as the world begins to question our ability to pay the money back, the economy is TOAST.

The Fed may be forced to raise rates faster then they expected if the bond market goes berserk. Ironically, if the economy recovers, the Fed will be under even more pressure to raise rates because fears of inflation will arise.

I am afraid that 2010 will be a year where we transition from a low rate/high growth environment into high interest rate/low growth one.

This does not bode well for the stock market. An even bigger risk to the stock market is the bond market. Ben won't hesitate to pull liquidity and crash the stock market if he can't sell his treasuries. He knows that investors will run to bonds if the market falls apart.

2010 will be another year of caution for investors. "Buy and hold" worked this year. I don't see anyway possible that we see a repeat this next year. The road we are travelling heading into 2010 is filled with potholes and landmines.

Buyer beware.

Disclosure: No new positions at the time of publishing. Short treasuries via TBT in longer term accounts.

2010 Bespoke Report

This afternoon we released our 2010 Bespoke Report to Bespoke Premium subscribers. The Bespoke Report is one of our most popular publications that covers anything and everything that investors need to know heading into the new year. Below is the table of contents from this year's piece. To view the report, simply subscribe to Bespoke Premium today! Happy New Year...

Goldman’s Ten Questions For 2010

One of the great paradoxes of life is that the smarter one is, the better one realizes just how little one knows. The same thing is  true with forecasts: one can hypothesize and conjecture, but if one is unlucky, one is screwed: no matter how thought out, error-proof or logical the narrative - it is the unpredictable events that ultimately shape events, not the "priced in" obvious factors. The Heisenberg Uncertainty Principle applies in a perverse fashion not only to the wave-particle duality in the quantum realm, but to the very underpinning of economics: by predicting the future we implicitly change it. The futility of forecasts is well known to all those, who with the exception of a several few, whose very existence is an economy of scale "strange attractor" (think Warren Buffett and Goldman Sachs), have tried to repeat a winning performance, be it based on fundamentals, technicals, or kangaroo entrails. It is also sufficiently useless to the point where we will spare you a Zero Hedge set of observations of what to expect: if you have been reading this blog, you know what we believe is relevant as we enter 2010. How it will all pan out, however, is a totally different story. It is therefore not too ironic, and somewhat fitting, that Goldman Sachs' chief economists do not leave 2009 with a dogmatic set of forecasts, which, just like every other year would have the success rate of a coin toss, but with 10 key questions addressed exactly one year into the future. Here are Goldman's 10 Questions for December 31, 2010.


Our forecast for 2010 features sluggish GDP growth, employment gains that are too slow to prevent a further modest increase in the unemployment rate, low (and probably falling) core inflation, and a Federal Reserve that “exits” from some unconventional monetary policies but keeps the funds rate at its current near-zero level.  For the last US Economics Analyst of the year, we try to answer what we think are the 10 most important questions for 2010.

1. Have house prices bottomed?

Probably not yet, but we are quite uncertain.  Although US homes are no longer significantly overvalued, we believe that much of the increase in prices over the past six months has been due to three temporary factors: a) the homebuyer tax credit, which has been extended into 2010 but is likely to be less powerful in boosting demand than it was when first introduced in 2009; b) the Fed’s purchases of mortgage-backed securities, which have pushed down mortgage rates but are slated to end in early 2010; and c) the temporary mortgage modifications through the Obama administration’s Home Affordable Mortgage Program (HAMP), only a relatively small portion of which seem to be turning into permanent modifications.  These factors suggest that home prices are at risk of declining anew, and our working assumption is a renewed 5%-10% cumulative drop in the national Case-Shiller index through 2010.

Indeed, there are some early signs that home prices are starting to fall again.  In particular, the Loan Performance home price index fell more than ½% in both September and October.  The S&P/Case-Shiller index, which is based on three-month moving averages, remained positive in these months but the gains were smaller—averaging just over ¼% versus more than ¾% in the preceding three months—suggesting that spot observations are turning negative.

2. Will banks become more willing to lend?

Probably yes, but at a pace that is only consistent with subdued spending growth.  In thinking about banks’ willingness to lend, it is important to distinguish between levels and rates of change.  Conceptually, it is the change in lending standards that should affect the change in consumption, capital spending, or GDP.  Exhibit 1 shows this is what we observe in the data.

The concern in the current recovery is that the very sharp tightening of lending standards during the recession is giving way only very gradually to an easing during the recovery.  As of the fourth quarter of 2009, standards for both consumer and business loans are still being tightened modestly.

The combination of sharp tightening followed by gradual normalization puts the current cycle in a category of its own.  Exhibit 2 illustrates this by plotting the net percentage of banks professing greater willingness to lend to consumers through each business cycle since 1966.   On the one hand, it shows that the recession phase of the current cycle was similar to those of 1969-70, 1973-75, and 1980-82.  Each featured a large cumulative decline in willingness to lend before and/or during the recession (the dark line, like the shaded area, is consistently below the horizontal axis).  On the other hand, the current recovery so far looks much more similar to the recoveries from the 1990-91 and 2001 recessions, in which banks tightened credit standards modestly after not having tightened them much at all during the preceding downturns.  If this persists, it would be one important reason to believe that the frequently noted correlation between deep recessions and vigorous recoveries may break down in the current cycle.

One reason to expect this credit restraint to persist is that there is an important structural difference between the credit crunches of the 1970s and early 1980s and that of 2007-09.  The 1970s/early 1980s crunches were primarily due to very tight Fed policy that was aimed at bringing inflation down from high levels in the late stage of the preceding expansion.  Once inflation had started to come down, the Fed cut interest rates, the pressure on the banking system abated, and banks quickly normalized their lending standards.  In contrast, the 2007-09 crunch was due to large-scale credit losses rather than tight Fed policy.  It takes much longer for banks to recognize and absorb these losses than it takes for the Fed to normalize interest rates.  This is an important reason why the recovery from the deep 2007-09 recession is likely to be substantially weaker than the recoveries from the deep 1973-75 and 1981-82 recessions.

3. Will small business activity pick up?

It should, but so far we are not seeing it.  We have been quite concerned about the implications of the weakness in the small business sector.  Since small firms aren’t as well captured in the economic statistics as larger firms, their weak performance may mean that standard economic indicators currently overestimate growth in economic activity.

Assuming that the relative weakness of small firms reflects the difficulty of obtaining credit from banks compared with capital markets, rising willingness to lend should lead at least to a gradual pickup in small business growth.  But so far, we have seen even less improvement than one would expect based on the declining pace of credit tightening.  This is illustrated in Exhibit 3, which plots the change in banks’ credit standards for small business loans against the small business optimism index compiled by the National Federation of Independent Business (NFIB).  Although standards are now being tightened much more slowly than before, the NFIB is still mired in deeply recessionary territory.

4. Will hiring revive?

Yes, but we expect the rate of job creation to reach only about 100,000 per month by the second quarter, not enough to push the unemployment rate down in a meaningful way.
Some analysts argue that US businesses cut jobs more aggressively during the recession than was warranted by the decline in output out of fear that the downturn would be even more severe.  If this were true, it might suggest that employment would rebound more sharply than suggested by the cumulative growth of real GDP from the business cycle trough.

But the evidence for the “excess layoffs” hypothesis is weak.  The simplest way to see this is to look at Exhibit 4, which plots nonfarm payrolls against real GDP.  (The payroll data are adjusted to incorporate the preliminary benchmark revision of -824,000 for March 2009, announced in October 2009.)  Visually, the relationship looks similar to the prior two cycles, although both series have of course dropped more sharply in the current cycle.  Indeed, a slightly more sophisticated analysis that looks at the relationship between GDP and either the unemployment rate or nonfarm payrolls comes to the same conclusion.

Indeed, it seems more likely that companies will hire fewer workers per dollar of additional GDP than in the average recovery of the postwar period.  This would be in keeping with our Brave New Business Cycle research, which says that greater competitive pressures since the 1980s have made companies more cautious in their hiring, capital spending, and inventory management.  In the two “jobless” recoveries since then, it took significantly more GDP growth to achieve the same amount of payroll growth than in prior recoveries.  Moreover, Exhibit 5 shows that the same is true for the current recovery, at least so far.

5. Does the saving rate have further to rise?

Yes, we think so.  The current saving rate of just over 4% remains below the 6%-10% range that we estimate is needed to stabilize the ratio of household net worth to disposable income in a “normal” environment for capital gains on existing assets.  This is admittedly a very long-term perspective.  But in addition, the current level of household net worth also seems to imply an increase in the saving rate on simple short-term “wealth effect” grounds.  Hence, we project a gradual increase to around 6% by the end of 2011.

 The main reason why we see only a very slow increase is the weakness in household income growth.  Household debt is already contracting sharply, so an increase in saving would need to reflect a pickup in gross saving—i.e. purchases of financial and physical assets—from its current, depressed level.  This will be difficult for households to accomplish if income growth remains anemic.

6. Will inflation fall further?

Very likely yes, at least as far as the “core” indexes are concerned.  As we demonstrated in a comprehensive study recently, “slack” is the best predictor of inflation both at the aggregate level and in individual sectors of the economy.   Moreover, Exhibit 6 shows that slack is pervasive throughout the economy, not just in the well known data on unemployment and industrial capacity utilization.

 One particular area in which slack could put significant further downward pressure on inflation is actual and imputed rents.  There is a clear inverse relationship between the rental vacancy rate and the pace of rent inflation.  With rental vacancies at a record, we expect further significant declines in year-on-year rent inflation into negative territory.

7. Does the dollar pose an inflation risk?

Only to a very limited degree.  For one thing, the dollar just isn’t that weak—and that was even true prior to the most recent round of risk reduction.  It has certainly depreciated substantially over the past nine months, but we view this as the flip side of the normalization that has taken place in global financial markets.  Indeed, according to the Fed’s broad trade-weighted index, the dollar currently is slightly stronger than the average of the past two years.

Moreover, the currency is less important to inflation in the United States than elsewhere given the relatively small size of the trade sector.  Thus, while Fed officials certainly take account of its impact on financial conditions, the impact of currency changes on inflation, in particular, is quite minor.  A common rule of thumb is that a 10% depreciation in the trade-weighted dollar raises the level of the CPI by just ¼%.  So it would take a very large depreciation indeed to start ringing alarm bells about imported inflation.

8. Will Congress pass more fiscal stimulus?

Yes.  Beyond the extension of the homebuyer tax credit (and other tax relief measures) enacted in early November, the Congress has passed and the president has signed a two-month extension of unemployment benefits.  More is coming as the House has passed a much larger bill providing additional unemployment insurance (four more months) as well as more aid to states, and more infrastructure spending.  The Senate is likely to follow suit early next year, and the ultimate legislation may well include provisions such as a hiring tax credit and/or extended bonus depreciation for companies.

But even with these likely measures, the boost from fiscal policy to real GDP growth is likely to decline in the first half and vanish (or even reverse) in the second half of 2010.  This is because it is the change in spending and taxes that governs the impact of fiscal policy on real GDP growth.  Even with the latest round of packages—worth about $200bn altogether—the change will not be nearly as positive as it was in the wake of the $787bn package enacted almost a year ago.  Indeed, Exhibit 7 illustrates that the longer-term perspective is one of gradual fiscal restraint, though this is mostly an issue for 2011 and beyond.

9. How will the Fed “sequence the exit”?

In theory, Fed officials have four choices for “exiting” from their current, highly accommodative stance: (1) terminating the current program of asset purchases, (2) draining excess bank reserves via reverse repos and/or term deposit facilities, (3) hiking short-term rates via parallel increases in the federal funds rate and the interest rate on reserves (IOR), and (4) selling assets outright.

In 2010, the main form of “exit” is likely to be an end to asset purchases.  In addition, Fed officials will probably drain some excess reserves, mainly in order to prove to market participants that they are capable of doing so.   In contrast, we expect neither a hike in the funds rate nor outright sales of assets on the Fed’s balance sheet in 2010 (or for that matter in 2011).

10. Will the end to the asset purchases tighten financial conditions?

Possibly, although the degree is highly uncertain.  Over the past 12 months, the Fed has bought a net $1.3 trillion in Treasury coupon debt, agency debt, and agency mortgage-backed securities, about three-quarters of the total amount of net issuance in these markets.  These purchases are already diminishing and will likely stop by the end of the first quarter, while net issuance is likely to remain at levels similar to the recent pace through 2010.  This means that non-Fed buyers will need to absorb a far greater amount of “flow supply” of securities.

This could put upward pressure on long-term interest rates.  But two points are worth noting.  First, our bond strategists’ models do not find any misvaluation of US Treasury yields at present.  If this means that the asset purchases didn’t have a dramatic impact on the level of yields, it would suggest that end of the purchases might also not have a significant effect. Second, and presumably related to this, the policy shift away from asset purchases has been very well flagged and there are plenty of market participants who have a much darker view of the outlook for federal solvency than we do.  For this reason, a sizable short base in the rates markets has been established in anticipation of the end to the Fed’s purchases.  This means that much of the impact may already be discounted in the current level of interest rates.

TrimTabs Has Competition

The Daily Jobs Update is now up and running and competing head-to-head with TrimTabs in reporting on trends in the withholding-tax data. The flagship chart shown here depicts the
business cycle of the US economy by plotting the second derivative of growth in the paychecks of American workers. Such advanced charts are not available anywhere else. (Click the chart to go to the live version which will update every business day at 4pm EST.)

In March of 2008, as the economy was poised to take one of its steepest dives in history, TrimTabs proclaimed the recession to be over, citing “growth” in the withholding data. Preposterous! At the same time, I posted “Withholding Craters!” here on the blog.

TrimTabs charges thousands of dollars for their research. And not only do I charge a tiny fraction of that on, but I provide awesome charts that update as soon as the Treasury Department releases the data each day.

Note to financial media: There’s a new sheriff in Withholding Town. Check with me before publishing something to make sure that you have the straight story.

Take that TrimTabs!

And since Goldman Sachs owns a stake in TrimTabs, take that Goldman Sachs!

Note: You will be pleased to know that the Alexa rating of is, already, far above that of

Note: the chart above is delayed by 90 days. So, it is current through 3Q09. Only subscribers can see the real-time charts, though both sets of charts update every day.

A Zero Hedge Premium Preview: The Dionysian Rites of Henry Kissinger’s CIA and the Iranian Revolution of 2010

As you may or may not know, Zero Hedge is in the process of developing a number of premium offerings for 2010.  One of these is "Cf., The Journal of Irreverent Attacks on Conventional Wisdom, Entrenched Dogma and Sacred Cows."  For your reading pleasure, and to act as a preview of premium things to come, we attach Volume I, Issue I entitled "The Dionysian Rites of Henry Kissinger's CIA and the Iranian Revolution of 2010."


Failing to foresee the Iranian Revolution of 1979 is, rightly or wrongly, often cited as one of the most significant and dramatic of Western intelligence failures. After enduring a superlatively ignominious electoral defeat in the history of the United States (Ronald Reagan defeated Jimmy Carter with 89.7% of votes in the Electoral College in 1980) and in what may have been the record holder for rapidly published post-presidential memoirs up to that point, Jimmy Carter's 1982 book "Keeping Faith: Memoirs of a President" pointed an accusing finger at the Intelligence Community's Iranian performance.  His recollections lamented the work of the Central Intelligence Agency in particular, citing an analyst report on Iran from August of 1978 indicating that the country "…is not in a revolutionary or even a pre-revolutionary situation."  By January of 1979 the Shah had fled. As might be imagined, what followed was a full court press, prompted by constant policy-maker pressure as well as the personal intervention of Henry Kissinger, who was badly embarrassed by the failure, to develop an organic revolution early warning system capability within the various appendages of United States intelligence.  We review one such system outlined in the Central Intelligence Agency report "Warnings of Revolution," dated March 1980 and apply the methodology to present-day Iran.  We find generally that the methodology's results are consistent with a finding of probable revolution (as it is defined in the report) in present-day Iran. Our open source version of this tool with general application to a wide span of national targets is available for public use courtesy of Zero Hedge.


- Marla Singer and Geoffrey Batt

You can read the entire piece here.

Original source material is available here: on Revolutionary Indicators.pdf on Revolutionary Indicators II.pdf

The first version of the online tool developed as part of this work can be accessed here.


CIA on Revolutionary Indicators.pdf677.56 KB
CIA on Revolutionary Indicators II.pdf42.63 KB
cf_jan_2010.pdf138.34 KB

Statistics: Scientific Consensus on Climate Change?

One of the memes I’ve heard recently in the climate debate is that there is no scientific consensus — that there is actually strong disagreement.

The main basis of this argument is that 31,486 dissenting scientists have signed a petition against the belief that Global Warming is man made at the

I don’t want to debate climate change; rather, I want to look at that argument to see if there are any statistical flaws in it.

My problem is whenever anyone uses a single, out of context, data point. What does this number actually mean? Is 31,486 alot or a little? How many scientists are there in the US? etc.

I heard this argument the other day, and went hunting down a visual way to express it, and found this via Information is Beautiful:



This does not resolve the debate — there are more variations (Climate Change: A Consensus Among Scientists?) — at but it demonstrates an obvious flaw in the “dissenting scientist” argument.

Here is the breakdown of skeptics, by field:

Interesting stuff . . .

Reader Poll Results: Economic Outlook for 2010

Here are the results of the reader poll. Thanks to the 4,518 people who participated!

Poll Results GDP Growth in 2010 Click on graph for larger image in new window.

The first question was the outlook for GDP growth in 2010. Readers who participated in the poll tend to be pessimistic, with 57% expecting a double dip recession, and another 30% expecting real GDP growth to be below 2% in 2010.

Usually the economy grows very quickly after a severe recession. As an example, following the '48/'49 recession, the economy grew at a double digit growth rate for the first three quarters of the recovery. In the 2nd half of 1959, the economy grew at a 9.7% rate, and in the year following the '73/'75 recession, GDP increased 6.2%.

Since this was the most severe recession since the Great Depression, a normal recovery would probably be 8%+ real GDP growth for a year or so. That isn't going to happen. Even a 4% growth rate would have to be considered sluggish by historical standards.

I'll post more on the reasons for my outlook, but I think the U.S. will avoid a double dip recession, and 2010 GDP growth will be in the 2% to 3% range.

Unemployment Rate Poll Results The second question concerned the unemployment rate at the end of 2010 (December 2010).

Most poll participants (70%) are expecting the unemployment rate to be at or above 10% at the end of 2010. I think it might be close, but I agree with the majority on the unemployment rate (still double digits in Dec 2010). There will be a temporary positive impact from the 2010 Census, and I expect another stimulus package (labeled a "jobs package") to be announced in the next few months - and maybe that will push the rate down below double digits.

I'll have more in the next few days. Thanks again for participating! I hope most of us are too pessimistic.
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