Economic Data

We'll start with the Empire Manufacturing Index, this was a HUGE miss. This month it was nearly cut in half coming in at 11.9 from a previous 21.7 with consensus coming in at 19.55.  While everything pretty much came in disappointing, from new orders to rising inventories and declining business conditions, the real problem (which is part of a long standing trend) was the prices paid input costs which climbed to the 2nd highest ever reading. Prices received remained unchanged.

This is the Bernanke Finger Trap with inflation soaring. I was a bit surprised that prices received hadn't seen price hikes passed onto consumers, but it can't be far behind.

While we could consider the above data "Bernanke's left finger caught in the trap", the Treasuries TIC data released this morning might be called "Bernanke's right finger caught in the Chinese Finger Trap" which is appropriately named since Chinese holdings of US debt have fallen for the 5th consecutive month, a drop of approximately -2.6%. This may not seem like a huge drop, but when you consider the amount we are talking about, it may equate to a drop of hundreds of billions of dollars. This is China alone, I'd be interested to see what Japan's holdings look like as the BOJ and insurance agencies have been selling USTs to finance rebuilding.

If Bernanke is going to end his path of monetizing debt, (the Fed is now the second largest holder of US debt) as he has suggested, their going to need to find a buyer for these auctions pretty quick. The fastest way to achieve that would be an interest rate hike, which is interesting as the Fed's Kocherlakota has twice floated the idea of a 50 basis point hike in the last week.

The NAHB Home Builder Confidence came in unchanged, which is a miss as consensus was looking for a more positive outlook-just waiting for that SRS trade to set up...

As a corollary to the conditions in China that have FXP (Ultrashort FTSE/China 25) on our long trade list, 2 short term Chinese bond auctions failed today. The problem is the yield on the bonds is not seen as worthwhile considering the rate of inflation in China. China is seeing wage inflation, of course the same rising input costs and a housing bubble much like our own in 2007 in addition to consumer inflation.

On the very bizarre weekend news concerning Dominique Strauss Kahn's arrest in NYC for rape allegations, we have another woman stepping forward in France claiming to also have been abused at DSK's hands. So effectively, DSK has nowhere to hide, not in the Washington based IMF, nor his homeland of France. Although that doesn't seem to matter much at this point as bail has been denied. Other then being a curious news story (you'd think he could pay for his sexual misconduct or at least abuse his position of power), this may have serious consequences for debt structuring/restructuring for Ireland, Portugal and most importantly, Greece as the clock is ticking. DSK had a more tolerant disposition toward Greek debt restructuring. Whether his predecessor will or not remains to be seen. However perhaps more importantly in the Greek situation is the ticking clock.

And finally, the Treasury Department confirms that today, the debt ceiling will be breached, which will certainly not help those UST auctions. In reality once you got past the creative accounting, the debt ceiling was actually breached last Monday. The Treasuries answer to this, as Congress certainly hasn't provided one, to dip into the Federal Pension Fund. So not only is Social Security insolvent, along with most state pension funds as well as corporate pension funds, now the Treasury will start to inflict damage on Federal Pension funds.

It's absolutely amazing that the US is still able to sell treasuries (even with monetization), and what will happen once the Fed curbs quantitative easing? I'd expect to see rising rates. Take rising rates and add them to an inflation trend that has proven to be more then "transitory" and the US starts to look amazingly like Greece, except Greece has actually implemented austerity measures!

None of this bodes well for the market and most likely explains the following charts...

 The current negative divergence in which Wall Street has had plenty of warning and an environment in which to sell into thanks to the Fed's POMO operations.

The above chart looks a little like the 2007 top. OF course the more drawn out nature of the current divergence is due to the Fed's extraordinary loose monetary policy, giving Wall Street plenty of time to prepare.