Mexican Central Bank Takes FX Warfare Into The 21st Century: Writes $600 Million Worth Of Dollar Options

The FX war recently launched by every central bank in the world, just entered its modern warfare stage: we have learned that the Mexican Central Bank has just sold $600 million worth of USD options. That's right - the central bank of our southern neighbor has moved beyond merely pedestrian cash interventions and has entered the derivatives game, in their attempt to raise the US peso and lower its Mexican equivalent. While there is no immediate indication of how the NAFTA treaty reacts to such outright open aggression between member states, it will likely be modestly to quite modestly frowned upon by the central banks of Canada, and most certainly, our own Fed. What we would love to find out, however, is who it was that was on the other side of the transaction, and bought $600 million worth of USD options. It would be supremely ironic if it it is discovered that it was the FRBNY that was taking the other side of the trade, as it would confirm that central banks have now gone AIG on betting on the outcome of currency wars.

Either way, the incremental systemic complexity introduced by this action will make plain vanilla interventions increasingly more unpredictable, and it is a likely validation that many other central banks also engage in this kind of synthetic trading. Also, who is to stop the counterparty on such trades to suddenly ramp up colletaral requests, very much in the fashion that Goldman and JPM destroyed AIG and Lehman, respectively? Should the Fed need to really pounce on the dollar, all it needs is to get the bank that did the deal (or itself) to make a few calls, and increase margin requirements from 5% to 100%+, forcing an immediate unwind of the transaction, and causing who knows how much havoc to both the synthetic and cash scenes.

Guest Post: 10% Savings Rate + Consumer Spending At 65% Of GDP = Retail Disaster

Submitted by Jim Quinn of The Burning Platform

10% Savings Rate + Consumer Spending At 65% Of GDP = Retail Disaster

Now that the Wall Street Journal, New York Times, CNBC and every other mainstream media outlet have figured out what some financial blogs had figured out months ago, everyone knows that the American consumers have not yet begun to deleverage. Consumer credit outstanding peaked at $2.58 trillion in July 2008. It has plummeted all the way to $2.42 trillion today, a 6% reduction over two years. The full $160 billion reduction can be attributed to write-offs by the Wall Street, Ivy League MBA run, banks.   

American consumers do not want the Age of Mammon to end. They will need to be dragged kicking and screaming into the Age of Austerity. Consumer expenditures peaked at $10.2 trillion in the 3rd Quarter of 2008. They reduced spending for two quarters, but when Big Daddy Government handed them billions and told them to spend it on cars, appliances, and homes, they dutifully obeyed. Today, consumer expenditures stand at an all-time high of $10.3 trillion, still accounting for 70.5% of GDP. There really has been no hint of austerity by Americans. It is a false storyline. The major reductions in consumption still loom in the future.

The myopic financial “experts” have no sense of history or the concept of reversion to the mean. They didn’t get it with home prices and they don’t get it with consumer expenditures. The country has been on a 30 year drunken binge of debauchery, debt accumulation and delusions of never ending 10% annual home price gains funding a glorious 30 years of retirement on an island in the Caribbean. These visions of a sugar plumb life of leisure are slowly giving way to the nightmare scenario of eating cat food in your very own cardboard box McMansion. The bombastic Boomers are turning 50 years old at a rate of 10,000 per day.   A staggering 38% of workers between the ages of 45-54 have less than $10,000 of retirement savings and a mind boggling 29% of workers over 55 have less than ten grand in their retirement savings, according to the Employee Benefit Research Institute. It is no longer a matter of people deciding whether to save, it is a matter of saving or else living in abject poverty in their old age.

In the good old days, before the advent of the credit card in 1969, Americans saved up to buy a house, a car, or an appliance. Consumer expenditures as a percentage of GDP stayed in a range of 61% to 64% from 1960 until 1980. This range was reflective of a balanced economy that provided good paying wages to blue collar workers who produced products that were sold in the US and in foreign countries. What a concept. America ran a trade surplus. The financial industry did not drive the economy, they provided financing for businesses that wanted to grow and produce. Sounds quaint. As the Boomers entered their 30s in the early 1980s the easy credit delusion, promoted by Wall Street and the mainstream marketing machine, convinced the spoiled materialistic Boomers that wealth was measured in cool stuff rather than accumulated savings invested over time. Consumer spending as a percentage of GDP surged from 62% to 70% over the next two decades.

Real wages have been stagnant since the early 1970s. With moribund wage growth there was only one way for Boomers to live the faux American Dream – Borrow to the hilt. And borrow they did. The personal savings rate fell from 12% in the early 1980s to below 2% in 2007. The concept of deferred satisfaction was cast aside by the “no worries” Boomers. Saving and frugality was for the Depression era old fogies. The old timers didn’t understand modern finance. Why wait until tomorrow when you can have it today by just whipping out a plastic card? The delusion of debt based “wealth” grew for 25 years, encouraged and stimulated by Alan Greenspan and his bubble blowing machine.  

The debt party reached its apex between 2005 and 2007. Boomers willfully ignored or chose to not comprehend the concept of reversion to the mean. They believed with all their hearts that their homes would appreciate at 10% per year for all eternity. To prove their faith in this belief, they used their homes like an ATM and withdrew $1.9 trillion of “equity” between 2005 and 2007 and spent it on 2nd homes, cars, boats, flatscreens, vacations, home theaters, and other assorted must have doo dads. They borrowed against their homes at the absolute peak in home prices. Prices have fallen 30% from the peak, with some markets down 50%. This has left millions up to their eyeballs in debt. The home ATM flashes “INSUFFICIENT FUNDS” when they attempt a withdrawal today. 

So here we stand, two years after the financial system collapsed. Government stimulus has provided an artificial boost to GDP. They have tried every trick in the book to convince Americans to keep consuming at a rate higher than they are earning. It is failing because consumers have been shaken from their materialistic stupor. They are slowly coming to the realization that they must save or they will suffer greatly in the next 30 years. The savings rate has been moving erratically higher and is now in the range of 5% to 6%. Ideally, it would need to reach 14% in order for Americans to save enough to cover their retirement. This will never happen. Americans will cut back but they will not revert to the frugal ways of their grandparents.

The GDP of the country is $14.5 trillion. Over the next decade consumer expenditures as a percentage of GDP will fall from 70% to 65% because it must. With stocks destined to return 5%, bonds yielding 2.5% and no equity left in their houses, consumers have no choice. The annual reduction in consumer expenditures will be north of $700 billion. The annual disposable personal income of Americans is $11.3 trillion. The savings rate is 6%. It will rise to 10% over the next few years. This would be $450 billion more savings and $450 billion less spending. This will not happen overnight. It will take at least a decade. Mass delusion wears off slowly and one person at a time. Charles McKay summed up the last 30 years in two quotes from his book Extraordinary Delusions and the Madness of Crowds, written in 1841.

“Money, again, has often been a cause of the delusion of the multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper.”

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

Does this paint a picture of an economy roaring ahead? We have at least a decade of low or no growth ahead. Deleveraging after the biggest debt party in history is really a bitch. The industry which is about to be dealt a mortal blow is the retail industry.

Retail Death Knell 

Our entire consumer society has been built upon a foundation of lies. The biggest being you could get wealthy without saving. The other being that you were wealthy if you owned stuff that made you look wealthy. There are 1.5 million retailers in America. There will not be 1.5 million retailers in 2020. The winnowing of the chaff from the wheat has begun, but will accelerate over the next decade. The mom and pops are already closing up shop in record numbers. The shocking revelation that major mega retailers such as a Target or a Kohl’s might not exist in ten years will not be believed today. Ever hear of Montgomery Ward?

What most people don’t understand is that the mega-retailers’ strategic plans were based upon never ending store growth, 5% comparable store growth for all eternity, a continuous flow of increasing easy credit, the American population staying frozen between the ages of 30 and 50 years old, and a delusional materialistic greed embraced by the masses. Mega retailers without growing comp store sales are like sharks that can’t swim. They will die. The comp store sales growth is essential to overcome the effects of cannibalization from new stores. The CEOs of these companies have never modeled a decade of declining sales. They still believe it can’t happen, even though it must happen. Delusions die hard, especially for CEOs.

I’ll use Target as an example. Almost everyone would agree they have been one of the best run retailers of the last two decades. They have over 1,700 stores in the US, with annual sales exceeding $65 billion and profits of $2.5 billion. How could a retailer this large and successful ever go bankrupt? They have $16.5 billion of debt and $15.3 billion of equity on their balance sheet for a 52% debt to equity level. This is not a dangerous level, but it is a heavy debt load. The deterioration always begins on the sales side. Comp store sales have been deteriorating since 2005 and were negative in 2008 and 2009.  

Target - Annual Sales Growth

The impact of this sales deterioration can be seen in their net income over the last five years. It is at the same level as it was in 2005 and $361 million lower than 2007. Target opened 343 new stores between 2005 and 2009 and its net income is the same. Net income per store has dropped from $1.72 million in 2005 to $1.43 million in 2009, a 17% drop per store. In their peak profit year of 2007, they generated $1.79 million profit per store.

What most people don’t know is that Target goosed their profits using the same method that Americans used to get “rich”. EASY CREDIT. When you’ve run out of ideas to grow your business, offer easy credit to your customers. It worked like a charm for Target until it didn’t. They issued millions of credit cards to the delusional masses. Who needed to sell stuff, when you could make so much lending money? In 2007, the Target credit card accounted for $1.06 billion of their $2.85 billion profit, or 37% of total profits. This was up from 22% of their profits in 2004. They’ve been learning a difficult lesson as credit card profits plunged to $400 million in 2009 as they desperately tried to sell their rapidly deteriorating portfolio with no takers to be found.

Annual Earnings Data
  2009 2008 2007 2006 2005
Net Income (1,000′s) $ 2,488,000 $ 2,214,000 $ 2,849,000 $ 2,787,000 $ 2,408,000
YoY % Chg 12.4% -22.3% 2.2% 15.7% 27.7%
Diluted EPS $ 3.30 $ 2.86 $ 3.33 $ 3.21 $ 2.71
YoY % Chg 15.4% -14.1% 3.7% 18.5% 30.9%
Annual Store Operating Data
  2009 2008 2007 2006 2005
Store Count 1,740 1,682 1,591 1,488 1,397
Store Sq Ft (1,000s) 231,941 222,588 207,945 192,064 178,260
Employees 351,000 351,000 366,000 352,000 338,000
Net Sales per Store (1,000′s) $ 37,075 $ 38,426 $ 39,929 $ 40,123 $ 37,908
Net Sales per Sq Ft $ 290 $ 301 $ 318 $ 316 $ 307
Net Sales per Employee $ 180,726 $ 175,409 $ 171,228 $ 167,762 $ 162,765


The beautifully constructed staircase of store growth seen in the chart below has reached the top floor. If Target foolishly continues to build new stores while Americans ratchet up their savings and ratcheting down their spending, they will end up taking an elevator straight to the basement. The credit card fountain of profits is gone. Same store sales growth is gone. New market growth is gone. It’s time to get real. The upper management of every retailer in America better pull out their little models and plug in declining consumer spending for the next decade. This will reveal the stores that won’t cut it. They will need to close them based on profitability. Will this be done? Absolutely not. The hotshot CEOs will think a better advertising campaign will do the trick. Delusions die slowly.

Target - Annual Store Count Growth

Many might think I’m being overly pessimistic. I would contend that I’ve presented a best case scenario. I’ve completely ignored the implications of peak oil and $5 per gallon gas on mega retailers that require you to drive miles to shop at their stores and source all of their goods from thousands of miles away. Combine that with an ever declining USD that drives the prices of imported good higher and you have a perfect storm for retailers in America. I’m sure the scenarios I’ve presented will do wonders for commercial real estate and the banks that are on the hook for those loans.

In the immortal words of David Byrne, “the future is certain”.


We’re on a road to nowhere
Come on inside
Takin’ that ride to nowhere
We’ll take that ride

Feelin’ okay this mornin’
And you know,
We’re on the road to paradise
Here we go, here we go

Restaurant Index shows contraction in August

This is one of several industry specific indexes I track each month.

Restaurant Performance Index Click on graph for larger image in new window.

Same store sales and customer traffic both declined again in August (on a year-over-year basis). Unfortunately the data for this index only goes back to 2002.

Note: Any reading above 100 shows expansion for this index.

From the National Restaurant Association (NRA): Restaurant Industry Outlook Remained Cautious as Restaurant Performance Index Was Essentially Flat in August
As a result of continued soft sales and traffic levels, the National Restaurant Association’s comprehensive index of restaurant activity remained below 100 for the fourth consecutive month in August. The Association’s Restaurant Performance Index (RPI) – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 99.5 in August, essentially unchanged from the previous three months. In addition, the RPI stood below 100 for the fourth consecutive month, which signifies contraction in the index of key industry indicators.
Restaurant operators reported a net decline in same-store sales for the fifth consecutive month in August ... Restaurant operators also continued to report a net decline in customer traffic levels in August..
emphasis added
Restaurants are a discretionary expense, and this contraction could be because of the sluggish recovery or might suggest further weakness in consumer spending in the months ahead.

The Market Ticker – Al Franken Gets Into The Act

Now here's a sentiment I can agree with....


Ally Financial Letter 09292010

The salient part?

(Thanks to Alan Grayson's office for forwarding this to us)

There you go folks.  A call for an active criminal investigation.  This, along with the call coming out of Ohio, now needs to turn into a flood.


In short, as I have said for three years:


The Market Ticker – Again: You Allow This WHY?

One of the principles of a fair capital market is that everyone gets the same information at the same time.  Thus, you have honest price discovery - the bids and offers reflect honest disagreement about price, and one person is right (who profits) and the other is wrong (who loses.)

But is that true, or is it an illusion?  And does The Fed, which has tremendous power, especially now when it's doing its "special programs", hand that information to certain favored people first?

This has been charged by many (including me) for a long time.  But now we're seeing proof:

On August 19, just nine days after the U.S. central bank surprised financial markets by deciding to buy more bonds to support a flagging economy, former Fed governor Larry Meyer sent a note to clients of his consulting firm with a breakdown of the policy-setting meeting.


The inside scoop, which explained how rising mortgage prepayments had prompted renewed central bank action, was simply too detailed to have come from anywhere but the Fed.


A respected economist, Meyer charges clients around $75,000 for his product, which includes a popular forecasting service. He frequently shares his research with reporters, though he kept this note out of the public eye. Reuters obtained a copy from a market source. Meyer declined to comment for this story, as did the Federal Reserve.

This isn't illegal, by the way.  Unlike the stock market and public companies, where trading on material inside information is strictly prohibited (at least in theory), there is no such stricture for members of Government - or Congress, for that matter, which often does trade on inside information on their legislative deliberations.

But that's not the correct question, is it?

The question ought to be whether it should be legal to give certain "privileged few" knowledge ahead of time what The Fed - or any other Federal or regulatory body - information that they can act on to profit before the general marketplace learns it.

The revolving door, of course, helps.  Fed people often both come and go to and from commercial and investment banks, and when it comes to the NY Fed, their board is largely comprised of same.  Is it any surprise that some people have "superior information"?

Well, no. 

But having it and using it to profit as one of the behemoth institutions is unjust.

Before the repeal of Glass-Steagall, you couldn't profit from it, since commercial banks couldn't trade.  This provided some important separation between what The Fed might be doing, and what the (at least alleged) Free Market might be doing.

This "Chinese Wall", such as it was (and it was imperfect of course) no longer exists.  Now the commercial banks not only trade in the bond market where The Fed is most influential, they trade in the derivative market where one can leverage those moves at 10:1 or more with ease.

With superior information it is rare to lose, and this, perhaps, explains the "superior" trading results of banks like Goldman over the last few years.

The policy decision is whether we as Americans are going to permit this obvious imbalance - and the effective theft it enables - to continue.

Chart on GLD (Mike Paulenoff)

So far today, the weakness in the SPDR Gold Shares (NYSE: GLD) has not inflicted significant technical damage to the Aug-Sept uptrend. To do that, the GLD must break back beneath today's low at 126.61-- and follow through to violate the prior significant pivot low at 125.58.

A breach of 125.58 will inflict meaningful damage to the dominant uptrend, which should trigger additional selling pressure that drives the GLD to test and likely break its Aug-Sept up trendline, now at 124.80 within a developing correction of the the two month, 12% advance. Barring a break of today's initial low intraday low at 126.61, however, the bulls will remain in directional control.

Originally published on

Bernanke’s Evil Peruvian Clone Gets Serious About FX Intervention, As Country Shuts Down Border With Revolutionary Ecuador

After buying $200 million in the last two days, tiny little Peru is starting to show some serious resolve: over the past three days the small country has bought almost $400 million in USD. Considering that Japan's vaunted intervention was only 5 times larger, perhaps Peru does mean business after all. And adding to the overall confusion in Peru, is that the fact that it has just closed off its border with Latin American neighbor, which just had a military coup. After recent news about the Fed's criminal activity, one wonders how much it would cost to import some Ecuadorians in America: apparently this country's citizens' natural response to endless rape is just asking for more of the same.

Clip from tourist-friendly Honduras below. One wonders how much worse it would be if it that country's Central Bank was pulling the same crap ours does on a daily basis.

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