For anyone who had doubts that the JPM CIO debacle was only just starting, the just broken news by Bloomberg that the firm has hired former SEC enforcement chief William McLucas "to help respond to regulatory probes of the firm’s $2 billion trading loss" should put all doubts to rest. Because the last thing JPM needs now is to be perceived as engaging in even more regulatory capture (its current general counsel was also previously a head of enforcement at the SEC) . Yet because it is doing precisely this, means that the offsetting cost, namely the fallout that will be associated with the CIO unwind if and when completed (and we will know for sure when the Q2 earnings are released at the latest), will be fast and furious.
My sense is that the government has been watching the number of expatriates rise over the years, and simultaneously watching the value of the exit tax fall… and they’ve been looking for an excuse to make sweeping (i.e. retroactive) changes. Eduardo Saverin is the perfect excuse. The Facebook co-founder’s recent renunciation of US citizenship has become a rallying cry for politicians to go back in time and steal money from former citizens retroactively…plus establish a larger base for future tax revenues. This is a truly despicable thing to do considering that these former citizens followed the appropriate rules at the time, paid the tax, and moved on with their lives. Now Uncle Sam wants to go back in time to unilaterally change the deal, and expect everyone to abide even though they’re not even citizens anymore. The arrogance is overwhelming. More importantly, this bill is also a major deterrent for people who are thinking about renouncing US citizenship today.
The following chart from Dylan Grice does a good job of demonstrating, once and for all, what is going on in the bond market. And speaking of bond markets, a few hours ago the German debt agency announced that it will for the first time ever, issue zero coupon 2 year bonds, which as the name implies will pay zero cash interest. In other words, Germany, sick and tired of being the only good cash collateral in Europe, is gradually halting the payment of any cash interest on its paper. After all: why should it? Coming soon to a market near you: negative interest bonds, where one pays the government for the privilege of holding repoable collateral. This is not a joke.
Dismissing the propaganda-like vision of growth and jobs that is now at the forefront of any and every word from the status-quo seekers that are the European Elite, England's Nigel Farage notes the hypocrisy of the forthcoming summit's agenda. The Euro itself was supposed to create growth and jobs and yet it is actively destroying both of those things - more of the same - as the medicine is killing the patient. He attacks the idea that the world will end if Greece were to exit the Euro - "European leaders say if Greece leaves the sky will fall in - it won't!" - though notes that there will indeed be a difficult few weeks - and when challenged by a Greek politician (who questions what will happen when gas prices for Greeks rise on Farage's suspected 50% devaluation in the Drachma), Nigel, offering the other side of the coin related to real growth, investment, and innovation to compete with expensive imports pointedly remarks: "Give Greece a chance because stuck inside the Euro, you are going to be literally destroyed".
Wondering why PCX is plummeting, and slowly taking the entire energy complex lower? It is due to the following report from DebtWire as of last night, and reposted this morning.
From Egan-Jones: "Spain will inevitably be faced with sizable payments to support its banking sector and for its weaker provinces. Assets of Spain's largest two banks exceed its GDP. We are slipping our rating to "BB"; watch for requests for support from the banks."
"Economists today primarily serve the needs of powerful interests at the expense of society in general" is how Robert Johnson - the frighteningly honest Executive Director of INET - describes the self-indoctrinating field of study that remains in such seemingly high regard in the nation. In an excellent and forthright brief interview with Stifterverband, Johnson notes that "Economists are very much accused of 'only seeing the economy through the eyes of the model' as opposed to seeing the economy and building a model as a map of what reality is." And while "when the people become anxious they want the expert to tell them what's going to happen. And they feel good when their anxiety is relieved because they think they understand the future. But if the expert instead of telling the truth is selling snake oil - a false story - when that is unmasked the expert becomes the scapegoat." Overall he believes 'economists' did a great disservice to mankind and suggests a number of approaches to "cleaning up after that". Sadly, he opines, "At the core, economics is about politics and about power, and the question for the economists is whose power are you going to serve as an expert."
Back on March 21, Goldman's Peter Oppenheimer released the "Long Good Buy, The Case For Equities", which was Goldman's subversive attempt to rally equity into buying all the stocks that Goldman had to offload, as well as buy all TSYs that GS clients had to sell. Needless to say, Goldman top ticked the market and stocks have tumbled ever since, even as the 10 Year soared from 2.5% to the current ~1.75%. So what? Well, this morning the same analyst, precisely two months on the anniversary of his "once in in a lifetime" stock buying opportunity, has released a new report with the paradoxical header: "Near-term risks are to the downside." But, but... Anyway, that's all the market needed to grasp that Goldman's prop desk is now buying every piece of risk not nailed down hand over fist as the June FOMC meeting is now the D-Day. Futures have soared ever since.
Asking "what is wealth?" seems needless because we all know what wealth is: never having to work again, endless leisure, endless consumption of the "good things of life," being waited on hand and foot, luxurious belongings, vehicles and homes, a life of travel and sport, trust funds, stacks of secure gold, and so on. All this is "obvious," but is that certainty illusory? There are many people with $2 million in net worth, a significant number with $20 million, and more than a few with $200 million. All would be considered wealthy by the average household earning $63,000 annually with a total net worth of less than $100,000, not to mention the 61 million American wage-earners who pull down less than $20,000 a year who own negligible net worth. Those with a mere $2 million may not reckon themselves wealthy, if their eyes are fixed on those with $20 million. But if a wealthy person suddenly discovers they are riddled with fast-growing cancer, then they quickly lose interest in financial wealth except in terms of what medical treatment it can buy. There really isn't much more modern medicine can do for someone worth $200 million than it can for someone worth $2 million; once one's life and health are at risk, then conceptions of "wealth" are drastically reordered: health is wealth, and nothing else matters.
Translating Germany's standard line on joiontly-backed European bonds is simple: "We don't want to pay" - it is as simple as that so you can ignore the rest of the rhetoric. France at the next EU summit is going to push for Eurobonds and Germany will resist in what may be a quite unpleasant stand-off. From Germany’s perspective we can easily understand their feelings about this matter because the consequences of Eurobonds are very negative for them. Eurobonds are quite clearly a “transfer union” where Germany is the primary source of funding then for the rest of Europe. If Eurobonds are ever enacted we would suggest selling any/all of the “AAA” countries and buying the periphery ones as the correct play in the intermediate term. In fact, Eurobonds are the crux where Federalism comes head to head with Nationalism and where the rhetoric gives way to actualization.
No close encounters of the Dimon kind today, but we get our first sworn testimony on all matters #FailWhale, when Mary Schapiro and Gary Gensler open their mouths at 10:00 am, and confirm what everyone knows - that the TBTF's prop trading desks are alive amd well, that the Volcker Rule was one big misdirection, and most importantly, that nobody has any idea what multi-billion trades the big banks engage in until it is far too late, and even then they refuse to give their investors a snapshot of how big the real losses are.
UPDATE: 6 minutes into the day-session and FB has a $30 handle and 17mm shares traded.
1.8mm shares have traded this morning as the long-selling continues as the stock-that-shall-not-be-named traded as low as $32.70 this morning (from its $45 highs on Friday)...
Whether one believes that Bernanke's mandate mission in life is to 'save the banking system', 'reflate asset prices', 'devalue the USD' - all of which seem to err on the side of inflation (and ultimately hyper-inflation once the trust is gone); it seems more critical to focus on the other side of the coin - deflation. Bernanke's true raison d'etre is simple: avoid debt deflation and implicitly everything he has said and studied points to the avoidance of any deflation. For this reason, BofA notes that today's chart of the day is the Break-even inflation rate in the US. This has been the most consistent - non-numeraire-based - leading indicator of Fed QE efforts. We note that the initial QE2 decision took a little longer to enact but was signaled considerably earlier (Jackson Hole) as the break-evens dropped below its NEW QE threshold. But with the levels currently 25-30bps off their threshold levels, we suggest those holding their breaths for the next Fed-induced liquigasm in stocks, should practice Pranayama.