The monoline “resolution” and PPI

Producer price inflation has advanced 7.8 percent in the past twelve months, including 1 percent in January alone (compared to January a year earlier). And as usual, professional economists were the only ones who were surprised.

Feb. 26 (Bloomberg) — U.S. stocks fell for the first time in three days after producer prices increased more than forecast, spurring concern inflation may accelerate even as the economy slows.

General Motors Corp., General Electric Co. and Alcoa Inc. led declines in New York trading after the Labor Department said wholesale prices climbed more than twice the rate forecast by economists. Office Depot Inc., the world’s second-largest office-supplies retailer, tumbled the most since December after saying small businesses and consumers curbed spending. Google Inc. dropped to the lowest since May after UBS AG slashed its earnings estimates for the most-popular search engine.

The Standard & Poor’s 500 Index dropped 6.01 points, or 0.4 percent, to 1,365.79 at 10:32 a.m. in New York. The Dow Jones Industrial Average lost 38.51, or 0.3 percent, to 12,531.71. The Nasdaq Composite Index slid 6.63, or 0.3 percent, to 2,320.85. About eight stocks dropped for every seven that rose on the New York Stock Exchange.

“High inflation creates a difficult environment for equity investors,” said Steven Neimeth, a Jersey City, New Jersey- based mutual-fund manager at AIG SunAmerica Asset Management Corp., which manages $56 billion. …

Interestingly, for the first time in this monetary easing cycle that I can remember, the dollar fell on a higher-than-expected inflation reading. Normally, if the market is surprised by higher inflation, the dollar rallies. Inflation is theoretically a backward-looking statistic, and higher inflation means that the Fed has less perceived bandwidth to ease; therefore, future expectations of Fed easing decline on a higher inflation report, pushing the value of the dollar up.

It’s pretty interesting that that didn’t happen this time. The USD is kissing $1.49 per euro, very close to its all-time low.

Yesterday, Frederic Mishkin — whom the market sees as a clone of Bernanke — maintained his delusion that “core” inflation should remain the focus of Fed targeting. Damn the inflation, full steam ahead.

Inflation expectations officially became unmoored today, if they weren’t already.

Analogously, on Monday, S&P and Moody’s maintaind the charade of AAA ratings for MBIA and Ambac.

NEW YORK (Standard & Poor’s) Feb. 25, 2008-Standard & Poor’s Ratings Services today took rating actions on several monoline bond insurers following additional stress tests with respect to their domestic nonprime mortgage exposure.

The financial strength ratings on XL Capital Assurance Inc. (XLCA) and XL Financial Assurance Ltd. (XLFA) were lowered to ‘A-’ from ‘AAA’ and remain on CreditWatch with negative implications;

The financial strength rating on Financial Guaranty Insurance Co. (FGIC) was lowered to ‘A’ from ‘AA’ and remains on CreditWatch with developing implications;

The ‘AAA’ financial strength rating on MBIA Insurance Corp. was removed from CreditWatch and a negative outlook was assigned;

The ‘AAA’ financial strength rating on Ambac Assurance Corp. was affirmed and remains on CreditWatch with negative implications; and

The ‘AAA’ financial strength ratings on CIFG Guaranty, CIFG Europe, and CIFG Assurance North America Inc. were affirmed and retain a negative outlook.

The downgrades on XLCA, XLFA, XL Capital Assurance (UK) Ltd., and Twin Reefs Pass-Through Trust (a committed capital facility supported by, and for the benefit of, XLFA) reflect our assessment that the company’s evolving capital
plan has meaningful execution and timing risk.

The downgrades on FGIC, FGIC Corp., and Grand Central Capital Trusts I-VI (a committed capital facility supported by, and for the benefit of, FGIC) reflect
our current assessment of potential losses, which is higher than previous estimates.

The removal from CreditWatch of, and assignment of negative outlooks on, MBIA Insurance Corp., MBIA Inc., and North Castle Custodial Trusts I-VIII (a committed capital facility supported by, and for the benefit of, MBIA) reflect MBIA’s success in accessing $2.6 billion of additional claims-paying resources, which, in our view, is a strong statement of management’s ability to address the concerns relating to the capital adequacy of the company.

My guess is that both monolines dumped a lot of their CDO garbage into the Fed Term Auction Facility or the FHLBs again (i.e., the taxpayer), using this bailout smokescreen. It’s ludicrous that $3 billion, and a canceled dividend by MBIA, will salvage the monoline business model. They got more help from somewhere.

The ‘political’ solution is to cannibalize the little monolines and consolidate them under MBIA and Ambac, I guess. But a political solution is, almost by definition, a long-term problem. In the short term, it’s inflationary: either Uncle Sam just swapped short-term debt guarantees in exchange for CDO garbage — printing money, effectively — or this will crap out.

Either way, precious metals are the place to be right now.