The Market Ticker

Talk about misdirection...

WASHINGTON (MarketWatch) -- Rising yields on long-term Treasury debt is a signal that the Federal Reserve should being raising interest rates, said Thomas Hoenig, the president of the Kansas City Federal Reserve district bank on Wednesday. The higher yields are a signal that the market is concerned with the inflationary pressure from the high federal budget deficit and "very" accommodative monetary policy, Hoenig said in a speech in Wyoming. "I suggest strongly that we need to be alert to the markets' message and begin in earnest to bring monetary policy into better balance before inflation forces get out of hand," Hoenig said.

I'll believe it when I see the excess liquidity withdrawn.

Indeed, after the command performance by Bernanke this morning, in which he denied that which was not only blatantly obvious (monetizing debt) but which he had previously admitted to in the FOMC statement, the easiest thing to do whenever you hear anyone from The Fed speak is simply to repeat to their face one word: LIAR

Speaking of excess liquidity.....

June 3 (Bloomberg) -- JPMorgan Chase & Co., the second- largest U.S. bank by deposits, hired a newly built supertanker to store heating oil off Malta, shipbrokers reported, in the company’s first such booking in at least five years.

The bank hired the Front Queen for nine months, according to daily reports from Oslo-based SeaLeague A/S and Athens-based Optima Shipbrokers Ltd. David Wells, a spokesman for JPMorgan in London, declined to comment.

So let me see if I get this right.

The Taxpayer hands JP Morgan billions of dollars to bail them out and keep them from potentially being declared insolvent.

In return for this JP Morgan spends that money speculating on the price of oil, and in fact does one better - they take physical delivery and lease a ship to store it in, thereby withholding the oil from the market and propping up the price, hoping to be able to sell that oil at a higher price later.

In the meantime, however, they are partially responsible for the rise in gas prices, meaning that not only did they collect taxpayer money once, but they are effectively partly responsible for you the consumer paying a second tax, this time through higher fuel prices at the gas pump.

Then, when the time is right (for them) they will sell the oil and profit a second time.

You, the taxpayer, will pay for all three of these actions.

And we, the idiots in America, along with a bribed and purchased Congress, will allow them to get away with it.

Disclosure: No positions in JPM or Oil at the present time.

The NY Times, the supposed "newspaper of record" in NYC is running the following line of crap in their Business Section:

(Credit "muscleknight" on the forum)

What the hell is this nonsense?

The increases in spending and reductions in taxes associated with the fiscal package and the financial stabilization program, along with the losses in revenues and increases in income-support payments associated with the weak economy, will widen the federal budget deficit substantially this year. The Administration recently submitted a proposed budget that projects the federal deficit to reach about $1.8 trillion this fiscal year before declining to $1.3 trillion in 2010 and roughly $900 billion in 2011. As a consequence of this elevated level of borrowing, the ratio of federal debt held by the public to nominal GDP is likely to move up from about 40 percent before the onset of the financial crisis to about 70 percent in 2011. These developments would leave the debt-to-GDP ratio at its highest level since the early 1950s, the years following the massive debt buildup during World War II.

Certainly, our economy and financial markets face extraordinary near-term challenges, and strong and timely actions to respond to those challenges are necessary and appropriate. Nevertheless, even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs. The recent projections from the Social Security and Medicare trustees show that, in the absence of programmatic changes, Social Security and Medicare outlays will together increase from about 8-1/2 percent of GDP today to 10 percent by 2020 and 12-1/2 percent by 2030. With the ratio of debt to GDP already elevated, we will not be able to continue borrowing indefinitely to meet these demands.

Addressing the country's fiscal problems will require a willingness to make difficult choices. In the end, the fundamental decision that the Congress, the Administration, and the American people must confront is how large a share of the nation's economic resources to devote to federal government programs, including entitlement programs. Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run. In particular, over the longer term, achieving fiscal sustainability--defined, for example, as a situation in which the ratios of government debt and interest payments to GDP are stable or declining, and tax rates are not so high as to impede economic growth--requires that spending and budget deficits be well controlled.

The problem is that Bernanke is enabling these sky-high deficits by intervening in the Capital Markets - that is, by buying both agency and Treasury bonds!

IF Bernanke was a true independent central banker, and IF he believed the first word that he was speaking, he would force fiscal restraint by refusing to buy any more MBS or Treasury debt.

Rates would move up, but this would put a 1990s-style bond market slam-hold on President Obama's and Congressional "drunken-sailor style" spending binge.

I only look at what people do - a good part of the time what people say is in fact exactly the opposite of what they're doing, because they are trying to goad you into doing something stupid so they can say "Sold To You!", sticking you with the bag.

I will buy that Bernanke is serious about his so-called "urgings" when he withdraws the idiotic attempt to support both MBS and Treasury issuance.

Perhaps - just perhaps - this speech is a warning - Ben has been reading some Tickers and listening to some Chinese folks, and is starting to get concerned that a bond market implosion may be in the offing - and he has no intention of being the one caught holding the bag when it blows up.

Funny how it only took Ben two years beyond when I started screaming about this in public to figure it out!

Are we finally seeing the potential for sanity in response to Obama's arm-twisting?

June 2 (Bloomberg) -- A bankruptcy judge who approved the sale of most of Chrysler LLC’s assets to a group led by Fiat SpA said the carmaker may take a creditors’ appeal of his decision directly to a federal appeals court to save time.

The appeal was made by a group of Indiana pension funds. The request to skip a usual stop at U.S. District Court in New York was made by Chrysler and Fiat. Turin-based Fiat can walk away from the sale if it isn’t completed by June 15, not counting a one-month extension for any antitrust approvals.

So what?  Expediency is usually a code-word for "we're going to screw somebody, and we want to make sure this is all wrapped up before you figure it out."

The problem in the original opinion denying the petitioner's motion is here:

The U.S. and Canada “have made the determination that it is in their respective national interests to save the automobile industry, in the same way that the U.S. Treasury concluded that it was in the national interest to protect financial institutions,” Gonzalez said in a 47-page opinion.

It doesn't matter what The US and Canada have determined is in their national interest if that national interest requires violating black-letter law, and it certainly appears that it does in more than one area.

If Congress wants to change the law they're free to do so, but absent a specific law that changes preference in bankruptcy this move is a problem.

Hopefully, with the appeal now going into a court where the judges have a lifetime appointment and thus cannot be retaliated against by The Administration, we will see this thing called "justice" show up!

Another Bloomberg article laid forth part of the problem - bondholder "sacrifice":

The government’s approach to the bankruptcies of General Motors Corp. and Chrysler LLC illustrates how this new, unstated policy works: Bondholders are told to give up legal rights, and cash, as part of a government-mandated tradeoff that favors a politically connected special-interest group.

The big threat is that this policy will extend to all bonds, including Treasury and municipal debt, not just corporate obligations.

That's part of the problem - but only part.

Another is what appears to be a rank violation of ERISA, the black-letter Federal Law that prohibits companies from dipping into employee pension funds - except when The Obama Administration wants to re-write that law to favor certain constituencies from the executive office!

The ERISA problem ought to scare everyone; it was put into effect as a direct consequence of prior abuses where pensioners had their retirement funds withheld from their paychecks literally stolen by their employers.  ERISA put a stop to that with black-letter law making clear that once pension or other retirement funds are withheld they are segregated and belong to the employee, with the employer having a fiduciary duty.  Now that's under attack as well - not through Congressional action in the form of a new law, but rather by a lawless taking orchestrated by the executive!

Think about this possibility, as raised by David Einhorn:

“When teachers and firefighters are losing jobs and benefits, will municipal bondholders be asked to share in the collective sacrifice?” he asked. “Might the shared-sacrifice theory eventually extend into the U.S. Treasury market during a crisis?”

Yep.

One of the reasons that I bailed off on municipal investments over a year ago was not just the default risk.  It was the risk that the government would meddle with preference if there was a default so as to peddle favor to certain constituencies.  My fear was that such preference would of course be extended to municipal employees with overly-fat employment agreements that are grossly out of line with private industry and which would be reviewed or even canceled in a review that came out of a municipal insolvency.

But with the government willing to ignore black-letter preference rules and in fact the rule of law when it comes to creditors, who knows what could happen?

Municipal "GO", or general-obligation, debt is widely thought of as nearly completely-safe, even without a coveted "AAA" rating or "bond insurance."  Why?  Because it is backed by the taxing authority of a state or other government arm, and that's about as good as it gets.

But if the government can (and will) re-write the priority rules from the executive office then there's a problem - I can no longer count on the black-letter rule of law that has (and should) protect me from capricious actions, and my investment is no longer safe.

As I have repeatedly noted this is a new risk that nobody had agreed to take when they bought these investments:

“The UAW gets a recovery of five times the bondholders’ under reasonably upbeat scenarios,” CreditSights Inc. analyst Glenn Reynolds wrote in a research note. “This is just the fact.”

So bondholders now know how the Obama administration’s “shared-sacrifice” policy will work out for them. After GM, they can’t say they weren’t warned.

Yep.

So you want to buy some bonds eh?  Better think again.

Disclosure: No positions material to the issues within.

Almost-buried in the news flow yesterday was this ditty: