Bernanke, Obama, and Pelosi are in a box: Long volatility again

For the last year the government and the Federal Reserve has pulled out the stops for financial stability. They have performed every feasible measure to make the system stable and the market secure. Mohammed El-Erian, a voice of the bond vigilante, has expressed that monetary policy will have a neglible effect going future. These measures have only delayed inevitable deleveraging.


As the Q3 starts and stimulus begins to have a negative effect on growth, there will need to be a change in expectations to experience the anemic economic situation that we are currently experiencing. This change in expectations will make the current stock prices look expensive and unsustainable.

Any additional measures will come from fiscal stimulus. But the Republicans think they can take Congress back in November and thus will hamstring any Obama or Peloisi initiative between now and then. Thus if any issues appear, there is significant political risk to any solution. This will create a significant possibility large volatility between now and then.

Why not take advantage of that?

The author is long VXX at $19.

ECB sends out more propaganda

The recent news regarding the sovereign debt crisis is not passing the smell test. It seems that the ECB bought right up to their spending limit ($60B euros) and then called the damage control a success. It has been mentioned that Greece has possibly met most of their funding needs for this year. But it is wreeks of a PR campaign to claim victory and hope no one looks as the medicine starts to really take hold and show if it works. Growth is fleeting across the Euro zone, deposits are fleeing Greek private banks. The real test has not even started.

Buy VXX any time it falls below $24. Sell the next time one of the PIIGS needs to refinance when the VXX is above $30 again.

"ECB Signals an End to Aid Program

FRANKFURT—European Central Bank President Jean-Claude Trichet said strains in European financial markets are starting to ease, suggesting the ECB will continue to pare a program to help the region's most-vulnerable countries get back on their financial feet.

The ECB left its key rate unchanged, but all eyes remained fixed on Trichet's press briefing, where the central bank president is expected to soothe concerns over bank liquidity. Dave Kansas, David Weidner and Bob Davis discuss. Also, Ianthe Jeanne Dugan discusses the pain that impacted many hospitals after their derivative bets went bad.
Under the program, which was designed to jump-start dysfunctional segments of the financial markets, the ECB began purchasing government debt in May.
"What is needed in terms of interventions [in government-bond markets] has been progressively diminishing," Mr. Trichet said Thursday after the ECB's monthly meeting.
He rejected concerns that a weaker global economy, and fiscal belt-tightening in Europe, might push the region into another recession, saying investors have been too pessimistic on the currency bloc's economic prospects.

ECB President Trichet dismissed the chances of a double-dip recession.

Mr. Trichet said he is happy with the central bank's monetary stance, suggesting the ECB may keep its main lending rate at a low of 1% for many more months. He said that markets are showing increasing confidence in European officials' ability to manage the crisis.
The ECB has purchased nearly €60 billion ($75.6 billion) in government debt of Greece and other vulnerable countries such as Portugal since the program started on May 10. But the amounts have dwindled after a brisk start, averaging only about €4 billion a week since mid-June. The ECB bought more than €16 billion in bonds in the first week of the program.
"He sort of showed his hand a little bit that they are in the exit" phase, said Erik Nielsen, chief European economist at Goldman Sachs.
Government-debt purchases by central banks had been taboo in Europe, particularly Germany, where the practice stokes fears of a loss of central-bank independence and increases in the money supply, which could lead to inflation. Germany's central-bank chief Axel Weber, a member of the ECB's governing council, has been a vocal opponent of the plan, exposing a rift between the ECB and its largest member country.
Mr. Trichet declined to offer an end date for the program or to specify conditions in markets under which officials would terminate it, suggesting the ECB will continue to buy bonds in small installments for at least a few more weeks, analysts said.


"They may be trying to buy some time" until a €750 billion EU-IMF stabilization fund is operational, said Nick Matthews, an economist at Royal Bank of Scotland. European leaders agreed to set up the fund on May 10,the same day the ECB started buying bonds, in order to prevent Greece's debt crisis from spreading to other countries in Europe's periphery such as Portugal and Spain.
Also Thursday, the Bank of England's Monetary Policy Committee left its key interest rate unchanged at a low of 0.5% to help cushion the economy against the effect of deep cuts in government spending.
The decision was broadly expected, with many economists also predicting the Monetary Policy Committee would maintain its bond purchases, made through its quantitative easing policy, at £200 billion ($303 billion).
Mr. Trichet declined to provide fresh details on bank stress tests, but gave the exercise a nod of support, saying, "We expect that the tests will be confidence-building." The Committee of European Banking Supervision, a London-based body that groups national authorities, said Wednesday that 91 European banks will undergo stress teststo see how their balance sheets would withstand shocks including a double-dip recession and a sovereign shock that generates losses on government bond portfolios.
The ECB president on Thursday continued to warn, as he has for manymonths, that the region's economic recovery will be "uneven." Europe's recovery from the worst recession in decades has been modest so far in comparison with stronger rebounds in the U.S. and in developing countries like China and India.

Rate changes since 2004 in dozens of countries.

Still, after expanding less than 1%, at an annualized rate, in the first quarter, the euro-zone economy should grow around 3% in the April-June period, said Greg Fuzesi, economist at JPMorgan Chase. That's due in large part to a strong pickup in Germany, which accounts for about 30% of the region's gross domestic product. Reports Thursday on exports and factory output point to second-quarter growth of around 6%, at an annualized rate, says Ralph Solveen, economist at Commerzbank.
In a departure from his practice of speaking of the euro zone only in its totality, Mr. Trichet specifically highlighted the German figures Thursday. For the euro zone as a whole, "the second quarter is likely to be much better than the first quarter," Mr. Trichet said. He dismissed the chances of renewed stagnation or a double-dip recession.
Write to Brian Blackstone at brian.blackstone@dowjones.com"

Stimulus, Strikes, Restructuring and Stability? - Go Long Volatility

This looks like an absolute no brainer.

We are at the top of the stimulus, 70% of the money will have been spent by September. Stimulus programs are fading out all over the world (except maybe China).

On the other hand, Spain, Portugal, and Greece have all been downgraded and face further market pressures on their debt this year. According to NakedCapitalism, Greece is going to face the most stringent economic constraints ever placed on a sovereign nation to receive their IMF alottment. That will just delay the problem for six months to a year. Once they blow through the first set of conditions, the market will be bigger questions to address.

I don't care if the IMF (a.k.a. US) and it's european friends bailout all of these PIIGS. They won't do it until it is the final option. That guarantees volatility before we get there.

Long VXX at 20.06.

Deleveraging is in effect and it is ugly.