Notes From Underground

No real surprises on the data releases yesterday. The U.S. inflation numbers were much as expected but all the DEBT futures markets rallied as it seems the shorts in the markets are nervous about new uncertainties in the Middle East. One would think that the equities would have been sold and the DOLLAR bought for safe-haven purposes, but this was not to be the case. The  DOLLAR safe-haven status is breaking down on a correlative basis, throwing all the “talking heads” into a confused state. As I continually warn the readers of NOTES, markets are dynamic in data usage and always in flux and for those who stay static in thought, I merely offer a shoulder on which to cry. What is bothering the markets?

We know that the equities are giddy about the steepening yield curve in the U.S. and as I analyze the other major economies, I find that every countries’ curve is steepening now except for the Aussies [not certain about Sweden but will check] and this is making global equity  markets the recipient of risk capital in search of higher returns. The dividend strategy has worked well since that August 27 Jackson Hole speech. With Bernanke enthralled with the” wealth effect,” there appears to be no stopping the equity rally. Even turmoil in the GULF STATES does little to deter the search for return as Bahrain is facing the similar populist forces that disrupted the Egyptian autocracy.

Of greater interest was a story today on REUTERS,”China Flexes Its Muscles Using U.S.Treasuries.” In data released by WIKILEAKS, it was revealed that the Chinese were very concerned about the Fannie and Freddie paper they held and Geithner and other high level Treasury officials were sent to China to assure SAFE and other investment higher-ups that the U.S. was committed to safeguarding the MORTGAGE-BACKED SECURITIES issued by the two giant GSEs.

It leaves no doubt that the Chinese will use their large BOND holdings to gain leverage with the U.S. Earlier this week, the WSJ had run an article, “Chinese Express Faith in Fannie and Freddie Debt.” I didn’t believe that this article was credible but rather some figment of a KUDLOWESQUE delusional market cheerleader. There have been numerous articles that the Chinese and Russians have been liquidating some of their vast holdings of U.S. Treasuries. The FED has provided a premium BID to the U.S. DEBT market and smart global investors seem to be taking full advantage of the FED‘s beneficence.

Wednesday morning CNBC had Andy Stern discussing the unfunded pension problems that are playing havoc with the budgets of so many states. The former SEIU head stated that the pensions were not a money problem but a math and actuarial problem. Unfunded pensions are merely the result of markets failing to deliver the 8 percent guaranteed annual returns that the actuaries had built into the benefits that were promised. If pensions were underfunded just redo the math of state revenues to ensure that the monies would be available. See, it isn’t a problem at well as it is all in the math.

I am so happy for being a citizen of Illinois I didn’t get a tax increase, I got a math adjustment. The benefits that were overpromised are not underfunded but just an actuarial miscalculation. It is interesting that the demostrations taking place in Madison, Wisconsin could be easily resolved by just rejiggering the numbers. Wisconsin’s budgetary problems are not being resolved as easily as the municipal bond holders would appreciate. The tax hike in Illinois was a one-time easy solution that will not be easily replicated in states that have a government with some integrity. Public unions are not going to renegotiate generous contracts so the political battle lines are being drawn at the state and local level just as the budget process is heating up in Washington. Madison takes on added importance as the backdrop for the 2012 presidential season. I guess that Andy Stern believes that 2+2=5 for far different reasons.

Adding to the backdrop of the municipal bond problem was a Financial Times article yesterday announcing that FITCH plans to downgrade states and cities as the ratings agency analyzes the pension shortfalls. To be adequately funded, FITCH considers the assets to be 70 percent of liabilities. Under 60 percent is considered weak. The Illinois State Retirement System is the weakest coming in at 37 percent using a measure of 7 percent annualized return and 44 percent if it uses the State’s measure of 8.5 percent. Wow, underfunded pensions sure can use a boost from the FED’s PORTFOLIO BALANCE CHANNEL or WEALTH EFFECT. It is any wonder why the FED is continuing to boost equity assets.

Tags: Andy Stern, bid, Bond, Debt, Dollar, Fannie Mae, Fed, Fitch, Freddie Mac, GSEs, gulf states, mortgage-backed securities, portfolio balance channel, reuters, SEIU, U.S. debt, wealth effect, Wikileaks

This entry was posted on February 18, 2011 at 5:07 am and is filed under Debt Market, Federal Reserve, United States. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.