Quote:Federal Reserve pledges to keep interest rates low for two years

America's central bank pledged to peg interest rates at their ultra-low level for a further two years to boost growth in the world's biggest economy.

The US Federal Reserve said it was prepared to use a range of policy tools should growth and unemployment continue to weaken over the coming months.

But the US Federal Reserve made no commitment to begin a third round of quantitative easing, the process of electronic money creation that has pumped $2tn (£1.2tn) into the US banking system over the past two and a half years.

(snip)

In a statement, the Fed said it expected "a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting" and anticipated that a jobless rate of about 9% would decline only gradually towards the level judged by the central bank to be consistent with keeping inflation low and employment high.

It added that economic conditions were "likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013", and had looked at a range of policy tools to promote a stronger low-inflation recovery. These would be employed "as appropriate" in the light of fresh information on the economy.

Previously, the Fed had said it would keep borrowing costs low for an "extended period" but the commitment to maintain them at an exceptionally low level led to three members of the policymaking open market committee dissenting from the decision, the first time this has happened for almost 20 years.

The Dow Jones industrial average of US blue chip stocks had been up 100 points before the Fed's statement but was 150 points lower half an hour later.

Cary Leahey, managing director and senior economist at Decision Economics in New York, said: "This is a lame way for the Fed to try to help the marketplace. They redefined extended period to mean at least mid-2013. But to today's marketplace, what difference does it make if they tighten in 2012 or 2013?"

Quote:Bernanke Calls Deflationary Depression

The bond market figured it out immediately, pricing it in.

(chart)

That's the 10 year Treasury on a weekly chart. It is now back to effectively where it was in the depths of the crash.

(chart)

The 5-year yield is below that of the crash.

And the 2-year has basically been turned into a T-bill.

The bond market is telling you that there will be no material economic growth for the next two years and that a deflationary depression is the economic path that will be followed.

This is effectively what happened in Japan, although the worst of the economic impacts have been muted as they had tremendous internal surpluses to expend (those, incidentally, are now pretty-much "used up" - two decades later.) We do not have those internal surpluses - to the contrary.

The stock market has been doing plenty of "up and down" and it will probably rally for a bit yet, as stock traders tend to be the short bus riders. But make no mistake - the bond market's response to the FOMC announcement is entirely rational and consistent with only one outcome - a sustained economic slowdown coupled with deflation, not inflation.

What will cause this? The debt bubble collapsing. Maybe kicked off by Congress failing to reach agreement or doing a "nothing" with the so-called "commission." Maybe kicked off by collapsing net interest spreads for the banks and then their collapse from the weight of their bad loans and inability to earn their way out of the box they've painted themselves into. Or maybe Unicredit blows up and the tsunami comes from Europe. There are plenty of things ticking out there, and it only takes one big one that goes off to set the next move in motion.

The bottom line is that either the bond market is wrong or stocks are wrong. Given that Bernanke just provided you his pronouncement and expectations, I wouldn't bet against the bond market, and if the bond market is right then the modest "mini-crash" we just saw is a warning and not a buying opportunity, just as Pompeii's Vesuvius rumbled many times before it blew its stack.

When this is priced into the equity markets - and others - it is likely to be in the form of a nasty dislocation. This also fits with the technical picture; assuming the low today of 1103 holds for the moment and is a localized low then the most-likely retrace is up around 1220, all in the S&P 500.

The next move down, unfortunately, should comprise almost four hundred S&P points and close to four thousand DOW points, and is likely to be more violent than what we just experienced. It could be worse too - it's possible that we see an S&P decline of more than six hundred points, basically cutting the indices in half, more-or-less "all at once."

Enjoy the rally today (and likely for a bit yet on a forward basis) but beware - if I have to choose between the stock market and bond market as to who's right the bond market is almost always both the leader and the correct choice

Quote:Cue Panic As Fed Resumes Liquidity Swap Lines, Lends $200 Million To Swiss National Bank, Most Since October 2010

Submitted by Tyler Durden on 08/18/2011

If yesterday's news broken by ZH that one bank was in dire need of US dollars and ended up borrowing $500 million from the ECB was enough to send the market down almost 5% today, then the follow up news that the FRBNY just reactivated FX swap lines with Europe will likely send ES limit down at tomorrow's open. The FRBNY has just announced that in the week ended August 17, it lent out $200 million to not the ECB, not the BOE, but the "most stable" of all banks: the SNB. This is the first use of the Fed's Swap Lines since March, and the most transacted under this "last ditch global bailout swap line" (see more on how the Fed bailed out the world using swap lines here) since October 2010. This event also gives us a hint that the European bank in question in dire need of cash is Swiss, which in turn means that it is not some usual PIIGS suspect, but one of the two "big ones." If true, this means that the European insolvency, liquidity and what have you crisis is about to take an exponential step function higher

Quote:Is The Next Domino To Fall.... Canada?

Submitted by Tyler Durden on 08/18/2011

While two short months ago, "nobody" had any idea that Italy's banks were on the verge of insolvency, despite that the information was staring them in the face (or was being explicitly cautioned at by Zero Hedge days before Italian CDS blew out and Intesa became the whipping boy of the evil shorts), by now this is common knowledge and is the direct reason for why the FTSE MIB has two choices on a daily basis: break... or halt constituent stocks indefinitely. That this weakness is now spreading to France and other European countries is also all too clear.After all, if one were to be told that a bank has a Tangible Common Equity ratio of under 2%, the logical response would be that said bank is a goner. Yet both Credit Agricole and Deutsche Bank are precisely there (1.41% and 1.92% respectively), and both happen to have total "assets" which amount to roughly the size of their host country GDPs, ergo why Europe can not allow its insolvent banks to face reality or the world would end (at least in the immortal stuttered words of one Hank Paulson). So yes, we know that both French and soon German CDS will be far, far wider as the idiotic market finally grasps what we have been saying for two years: that you can't have your cake and eat it, or said otherwise, that when you onboard corporate risk to the sovereign, someone has to pay the piper. Yet there is one place where that has not happened so far; there is one place that has been very much insulated from the whipping of the market, and one place where banks are potentially in just as bad a shape as anywhere else in Europe. That place is.... Canada.

As the chart below shows, which is a ranking of global banks by tangible common equity, lowest first, of the banks with a TCE ratio of under ~4% a whopping 30% are those situated in Canada, the same place where nobody thinks anything can go wrong, and which has been completely spared from the retribution of the bond vigilantes. Something tells us Canadian sovereign CDS, not to mention Canadian bank CDS, are both about to go quite a bit wider...

Quote:BIG PIS: The CEO Of Europe's Most Troubled Bank, Dexia, Quits As Contagion Tsunami Sweeps Over Belgium

Submitted by Tyler Durden on 09/05/2011

Just when we thought the world was running out of headlines, here come something that will send futures scurrying for even more safety. According to Belgian Nieuwsblad, the CEO of Belgium's biggest bank has just resigned. As a reminder, Dexia is the one European bank that in the 2008-2009 period borrowed more money from the Fed than anyone else, and which we have discussed on several occasions in the past few months as being rumored to be on the receiving end of a variety of liquidity "complications" and countreparty concerns. Typically rumors of that nature, coupled with the sudden departure of the CEO, end up being proven as fact shortly to quite shortly. In other news, we are happy to announce the expansion of the PIIGS to BIG PIS following the arrival of the latest country to join the sovereign and bank funding crisis.

Google Translated

Quote:Stefaan Decraene, the chief executive of Dexia Bank Belgium, leave the company. That tells the time and is confirmed by Dexia. He is succeeded by Jos Clijsters.

Dexia's departure Decraene tonight confirmed in a press release. The bank also announced that it Jos Clijsters by the board of directors was appointed new CEO of Dexia Bank Belgium. "The experience of Jos Clijsters in the financial sector and his knowledge of Dexia guarantee the continuity and development of the bank to serve its customers," it sounds.

The new vice chairman of the executive Marc Lauwers, the board member responsible for the Belgian retail bank.


According to Time, there are "strong indications" that Decraene (46) will switch to the French financial giant BNP Paribas, the parent of Dexia's rival Fortis. Confirmation has not yet.

Not the first

The departure comes at a time when Dexia's very difficult, and the financial markets to deal with a growing crisis of confidence in investors and creditors. The departure of Decraene may be the result of tensions between the Belgian and French arm within the group. It's no secret that it was difficult to find Decraene the Frenchman Pierre Mariani, Dexia's CEO of the entire group.

Earlier this year already got several other executives of Dexia, including Xavier de Walque, financial director of Dexia Bank Belgium, and Wim Vermeir, an asset to the ancien Dexia Asset Management.

Quote:It's Over

Put a fork in it folks.

As I write this the DAX is down well over 5% and there are multiple banks that are lock-limit down and have been suspended over in Europe.

Greek 1 and 2 year bonds are trading over 50% on yield. That's not a yield, it's an implied recovery on a default which the market now says is inevitable.

The fraud has finally caught up with the scammers and taking on more and more debt to cover up unpayable debt has run its course. Nobody believes it will work any longer, essentially. The market has called on the scams and frauds and is now serially demanding proof that the banks can fund their liabilities. It is doing so by driving down equity prices, forcing the institutions into a corner where their cash flow inadequacy is exposed.

Banks in the US and Europe have covered this up for the last three years. I pointed out the scams in 2007 and used as an example Washington Mutual when I caught them paying dividends with money they did not have.

That was all that honest regulators (call them "cops" if you wish) needed to step in and demand that crap stop immediately, and to close the institution if they couldn't or wouldn't cease and desist.

But that was not done.

Then 2008 happened, exactly as I predicted it would. Why? Because while you can lie about balance sheets for a long time, I've never seen a bank anywhere in the world that will let you lie about a deposit ticket. That is, cash flow always wins.

The solution? Borrow more money! Look Ma, I can't be broke - I still have checks!

That was good for two years. But now that scam has run out of gas as well, as the ability to continue to roll over paper one instrument after another finally hit the wall and people said "wait a second, this is a scam - you can't pay the original note and are trying to con me!"

Well, yes. They were. This is a surprise when we've spent 30 years running the same scam? Exactly how dumb are you to continue to buy into the same scheme that you know blew up in your face in 2008?

In 2007 and early 08 I counseled "ring-fencing" the government in the United States and pulling the supports, forcing the over-levered to default. Yes, I know, that would be disruptive. Very disruptive. But the government would go on and in the places where there was too much leverage, those people would go bankrupt on both sides of the transaction. Instead of blowing $4.5 trillion on "stimulus" programs we could have spent $200 billion providing three hots and cot to a quarter of the population for a year. "Creative destruction" would have taken care of the rest - the bad institutions would have gone under, bankruptcy would have been rampant, but from the ashes there would have been a massive rebound in the economy and the clouds would lift - with about half the debt in the nation gone.

But now the $4.5 trillion is gone and it did nothing other than make the problem worse! We propped up the insolvent and let them play games for two more years, but we solved nothing and there has been no recovery. There was no recovery in jobs, no recovery in anything - except stock prices that sucked people back in after having sold at or near the bottom. Now they're being hammered a second time within three years by the same fraud that got them the last time, egged on by a Federal Reserve ChairSatan who has publicly taken credit for the stock market's rise, implicitly stating he would continue to make sure it didn't collapse again.

The problem is that neither he or anyone else can continue to cover up fraud forever.

The market has declared that it does not believe claims of solvency and capital adequacy of financial institutions and is now demanding strict proof. There is no proof available as the claims of solvency are lies.

Therefore, we're seeing the DAX down more than 5% and many banks over in Europe falling 5 or even 10% a day. Our own markets were down 2.5% Friday and the futures at present are down another 2%, so we're right behind them. Many European markets are just 15 - 20% above the 2009 lows and it appears they're headed straight for them.

We won't be far behind.

This is not an academic exercise. Many institutions - especially insurance companies and pension funds - are heavily dependent on that not happening. They will detonate if the market trades there and remains there for any length of time.

Congress has ignored the warnings from myself and a handful of others who have been in front of this for years. The government simply doesn't give a damn - either Republicans or Democrats. Both sides of the aisle are too busy blowing the banksters under the desk and protecting their frauds.

Oh sure, there will be bounces and there will be moves higher in the market, and there will be further attempts to "save" the market and "save" the economy.

They will fail, because none of the proposals on the table are intended to do anything about the fraud and until that is cleared from the system there can be no actual and durable recovery.

Unfortunately there are so many possible detonations approaching at high speed that there is no option but to move the lights.

Quote:Swiss Central Bank Detonates FX Traders

In what may well be the single largest one-day move in the FX markets ever (I can't find a larger one among "major" currencies with material representation in FX) the Swiss National Bank decided to "peg" (via printing) the CHF to 1.2 Euro.

The result was an essentially-instantaneous move in the CHF against everything of almost 10%.

(Chart at url)

For the uninitiated FX trades are often done with rather extreme amounts of leverage. This sort of move has a very high probability of utterly destroying many traders - anyone on the wrong side of it, basically.

But what's worse is that it also effectively steals about 10% of the purchasing power of everyone holding Swiss Francs all at once!

Sure, if you're a manufacturer and exporter in Switzerland you just became "more competitive." But you got more competitive by stealing the value from everyone else in the economy who just lost the same 10% change you enjoy.

How will this play with the Swiss populace? That's a good question, considering that most of them are consumers and not exporters......