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This Is How To Kill JPM's CIO Operation

While JPM may or may not have succeeded in burying its deeply humiliating CIO fiasco at the expense of two things: i) a loss of up to 25% in recurring net income and ii) Jamie Dimon proudly throwing numerous of his key traders under the regulatory bus as scapegoats because it took the firm until July 12 to realize that its entire CDS book was criminally mismarked, thus confirming a "weakness in internal controls" (a statement not only we, but Bloomberg's Jonathan Weil vomits all over), the truth is that one way or another, Jamie Dimon will find a way to reposition his prop trading book somewhere else, even if it means far smaller and less obtrusive profits for the next several years. Yet there is a way to virtually make sure that Jamie Dimon is never allowed to trade as a hedge fund ever again, and in the process risk insolvency and yet another taxpayer bailout. Ironically, it is JPMorgan itself that tells everyone precisely what it is.



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Guest Post: Does Central-Bank Gold-Buying Signal The Top Is Near?

Central banks have added a net of 1,290 tonnes since the fourth quarter of 2008. This total excludes China and other nations that don't regularly report their activity, as well as countries that have been surreptitiously buying their own production. That's a lot of gold buying. One has to wonder whether so much buying may in fact signal a top for gold. After all, a number of prominent analysts have claimed for some time that gold is in a bubble and that it's all downhill from here. Not so fast. Like many mainstream reports, looking at the short-term picture usually leads to erroneous conclusions. Let's put central-bank purchases into historical perspective.



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Even Dilbert Gets It



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Guest Post: The New York Times And Socialism

In lieu of the election of Socialist President Francois Hollande and a Socialist Party collision as the majority in France’s Parliament, the New York Times recently asked “what does it mean to be a Socialist these days, anyway?”   According to The Grey Lady, socialism today is “certainly nothing radical” and simply meant the “the emancipation of the working class and its transformation into the middle class” during its heyday.  Essentially the article categorizes the contemporary socialist as one who is a rigorous defender of the welfare state.  The piece quotes French journalist Bernard-Henri Levy as saying “European socialists are essentially like American Democrats.”  It even accuses center-right political parties in the West of being quite comfortable with socialism’s accomplishments. So is the New York Times correct?  Is socialism just a boogeyman evoked by the “fringes” to scare the public into questioning the morality and efficiency of the welfare state?



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Economic Countdown To The Olympics 2: Predicting Olympic Medals

In the second part of our five-part series on The Olympics (Part 1 here) we ponder the impossible to predict - the medal count. As Goldman notes: Economists like to think that the toolkit of their profession helps them explain many things or, as some would claim, everything that is interesting about human behavior. In the context of the forthcoming Olympic Games in London, therefore, the key question is whether economic variables can help explain and predict success at the Olympics itself. At one level, this seems like a daft question even to consider. It is hard to imagine that economic variables could even begin to capture the kind of individual skill, mental determination and hunger that drive athletes to perform feats of unimaginable virtuosity that is the stuff of Olympic legends. But at the level of a country, it may be possible to identify the ingredients that unlock success at the Games. As British Paralympian Tim Hollingsworth explains: "...when you create a world class environment you are far more likely to create world class athletes." What is a 'world class environment' and how do we measure it across countries? Luckily, we have an answer in the GS Growth Environment Scores (GES), a broad measure of growth conditions across countries - and, indeed, this is what we find: gold does go where the growth environment is superior. The forecast leaves USA, China, and Great Britain battling it out for 'Most Golds' and USA leading China overall - but remember "the most important thing in the Olympic Games is not winning but taking part."



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Guest Post: Are Treasuries The Worst Investment In The World?

Lots of people have made good profits on Treasuries by buying them and flipping them to a greater fool or a central bank. On the other hand, so did many during the NASDAQ bubble, or during the ’00s ABS bubble. Bubbles are profitable for some, and that’s why there have been so many throughout history. But once the money starts to dry up they become excruciatingly painful. In theory, there are no limits to how low rates could go. In theory, nominal yields could go deeply negative, so long as there are buyers coming into the market ready to buy at a lower rate, and a push a profit to bond flippers. The inherent value in a bond is its yield; everything else is speculation. It is hard to really call the timing on the end of a bubble. People and events can always get more irrational. Japan has kept the Treasury ball (painfully) rolling for far longer than most of us expected (through market rigging as much as anything else). But this cannot end well.



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Ben Bernanke Has Created The Ultimate Bondsy Scheme

Since January 2007, long-only equity funds have seen redemptions of $545 billion. In the same period bond funds have seen inflows of $630 billion. In the last few months, cumulative flows into equity funds have retraced all the way back to 1996. While every day is a QuEasy day for stocks, it seems the 'financial repression' is working as instead of getting everyone else to do the opposite of what the Fed is doing by making yields on other 'riskless' assets meaningless, all that the Fed has succeeded in doing, is getting everyone in the world to frontrun it in buying bonds. Period



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Low Volume Squeeze Takes Stocks To Green On Week

S&P 500 e-mini futures (ES) traded up to almost perfectly recapture their 415ET close from last Friday after a 15-point, 30-minute ramp out of the gates at the US day-session open recouped five days of losses - as once again - we go nowhere quickly. Just for clarity: China GDP disappointed and provided no signal for massive stimulus; JPM announced bigger than expected losses, cheating on CDS marks, and exposed just how large their CIO was relative to income; Consumer sentiment printed at its worst this year; and QE-crimping inflation printed hotter than expectations - and we get a more-than-30 point rally in the S&P. Whether the fuel was JPM squeeze or another big European bank biting the liquidity dust and repatriating cajillions of EUR to cover costs (or Austria needing some cash for a debt payment), what was clear was equity market's outperformance of every other asset class - with the late day surge for a green weekly close particularly noteworthy. Apart from unch on the week, ES also managed to close right at its 50DMA, revert up to credit's less sanguine behavior intra-week, and up to VIX's relative outpeformance on the week (as VIX ended the week with its steepest term-structure in over 4 months). Treasuries ended the week 6-9bps lower in yield at the long-end (2-3bps at the short end) but the USD's plunge, on the absolute rampfest in EURUSD, took it back to unch for the week. Despite the USD unch-ness, Oil and Copper surged (on the day to help the week) up 2.5-3% on the week while even Gold and Silver managed a high beta performance ending the week up around 0.5%. ES ended the day notably rich to broad risk assets - and wil need some more weakness in TSYs and carry crosses to extend this - for now, the steepness of the volatility slope, velocity of squeeze, and richness of stocks to risk makes us a little nervous carrying longs here.



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Jamie Dimon's Quandary: Now That JPM's Internal Hedge Fund Is Gone, Where Will 25% Of Net Income Come From?

Much has been said about JPM's CIO Loss (which so far has come at a little over $5 billion, just as we calculated in the hours after the original May 10 announcement). And with the so called final number out of the way, investors in JPM have breathed a sigh of relief and are stepping back into the company hopeful that a major wildcard about the firm's future has been removed. The issue, however, is that the CIO loss was never the question: after all JPM could easily sell debt or raise equity to plug liquidity shortfalls. The real issue is that just as we explained months before the loss was even known, the Treasury/CIO department was nothing short of the firm's unbridled hedge fund which could do whatever it chooses, and not be held accountable to anyone at least until its counterparties broke a story of an epic loss to the media. And thus the problem becomes apparent: now that every action of the CIO group is scrutinized under a microscope by everyone from management to auditors to regulators to analysts to fringe blogs, the high flying days of whale trades are forever gone. The question then is just how big was the contribution of the Treasury/CIO group, which until today was buried deep within JPM's Corporate and PE Group and not broken out. Thanks to the new breakout, reminiscent of Goldman starting to break out its own Prop Trading group some years ago, we now know exactly just how big the contribution to both revenue, but more impotantly, net income was courtesy of JPM's Hedge Fund.

The result is nothing short of stunning.



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Farage On The 'Scientology-Like' Cult Of The Euro

In an extended discussion with various pro- and con- European Parliamentarians, everyone's favorite (well, most forthright, for sure) British MEP, Nigel Farage, opined on entering the hallowed halls of Europe's Hogwarts-like hub in Brussels that he is surprised:

"After five (soon to be six) nations already bailed out, that so few people inside these institutions are even prepared to contemplate that there might be something wrong with the Euro project"

adding that he feels that:

"he is surrounded by some weird cult - that, even after disaster, continue to believe"



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Full PFG CEO Suicide Note

"I have committed fraud. For this I feel constant and intense guilt...

 

The forgeries started nearly twenty years ago...

 

Should I go out of business or cheat...

 

I guess my ego was too big to admit failure..."



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Guest Post: Duration Mismatch Will Always Fail

Duration mismatch is when a bank (or anyone else) borrows short to lend long.  It is fraud, it is unfair to depositors (much less shareholders) and it is certain to collapse sooner or later. This discussion is of paramount importance if we are to move to a monetary system that actually works. By taking demand deposits and buying long bonds, the banks distort the cost of money.  They send a false signal to entrepreneurs that higher-order projects are viable, while in reality they are not.  The capital is not really there to complete the project, though it is temporarily there to begin it. Capital is not fungible; one cannot repurpose a partially completed desalination plant that isn’t needed into a car manufacturing plant that is.  The bond on the plant cannot be repaid.  The plant construction project was aborted prior to the plant producing anything of value.  The bond will be defaulted.  Real wealth was destroyed, and this is experienced by those who malinvested their gold as total losses. Note that this is not a matter of probability.  Non-viable ventures will default, as unsupported projects will collapse. Unfortunately, someone must take the losses as real capital is consumed and destroyed - and these losses are caused by government’s attempts at central planning, and also by duration mismatch.



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PFG Head Arrested

UPDATE: Suicide note details added:

  • *WASENDORF SAID HE USED PHOTOSHOP, SCANNER IN FORGERY, U.S. SAYS
  • *WASENDORF SAID CHOICE WAS GO OUT OF BUSINESS OR CHEAT: U.S.
  • *WASENDORF'S STATEMENTS MADE IN SUICIDE NOTE, PROSECUTORS SAY
  • *PEREGRINE'S WASENDORF SAID `I HAVE COMMITTED FRAUD,' U.S. SAYS

While unable to successfully kill himself, it appears the CEO of PFGBest is even less successful at evading the police. As just reported,

  • *PFGBEST'S WASENDORF ARRESTED IN IOWA
  • *FED PROSECUTORS CHARGE IOWA FIRM CEO  W/ LYING TO REGULATORS:AP
  • *PEREGRINE CHIEF WASENDORF CHARGED BY FEDERAL PROSECUTORS (with making false statements to the CFTC)
  • *WASENDORF FRAUD AT PEREGRINE LASTED 20 YEARS, PROSECUTORS SAY

What is probably more concerning to him now is the fact that he was not a Presidential bundler - as the Big House is definitely calling...



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One Explanation For Today's Irrational Exuberance

Since the EU-Summit, US and European equity markets have (in general) outperformed. From being in sync before the Summit, US equities went into the weekend with a sell-off, which then spurred a short-squeeze push as the S&P 500 was over-exuberant (relative to European equities) on the way up at the start of last week. That cracked back to reality at the end of last week - squeezing the over-levered longs to a significant underperformance relative to European equities. It would appear that in the last 24 hours, US equities are now rallying back to that European 'surreality'. Surreal because European stocks remain dramatically exuberant relative to European (peripheral spreads unch and AAA massively bid) and US (Treasuries bid) bonds and European corporate and financial credit. As we stand, the S&P 500 has retraced back to Europe's 'fair' perspective.



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