• Marc To Market
    11/22/2014 - 10:16
    Contrary to the death of the dollar chatter, the US currency continues to appreciate.  Here's why there is still punch left in the bowl.  

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Is Fat Tails Insurance Worthless?

Regular Zero Hedge readers know about our fascination with fat tail insurance, which is particularly relevant in modern day central planning when nothing is as it should be and everything is as the central bankers determine it is, at least until such time as the general market calls their bluff and we see the kinds of six sigma dislocations that marked trading for months on end after the Lehman bankruptcy. Probably the best most recent example is our overview of the 5 black swans that keep Dylan Grice up at night, and the way to hedge against them (incidentally, these were Long-term deflation, a Chinese Hard Landing, Asset Bubbles, Hyperinflation, and of course, a Bond Market Blow-up). And while one should always be hedge against prevailing conventional wisdom, because more often than not the crowd is wrong, and with very disastrous consequences, GMO's James Montier, in a just released white paper asks the fundamental question (whose affirmative answer could put purveyors of fat tail insurance such Nassim Taleb's Universa fund out of business), whether fait tails insurance is even necessary if everyone is protecting for the very same selection of "black swans" (therefore confirming that the hedged against events are anything but a black swan). Specifically, in Montier's words: "Tail risk protection appears to be one of many investment fads du jour. All too often those seeking tail risk protection appear to be motivated by the fear of missing out (not fear at all, but greed). However, the surge of tail risk products may well not be the hoped-for panacea. Indeed, they may even contain the seeds of their own destruction (something we often encounter in finance – witness portfolio insurance, etc). If the price of tail risk insurance is driven up too high, it simply won’t benefit its purchasers." His solution for the best tail hedge: cash. "In many situations, cash is a severely underappreciated tail risk hedge." And somewhat more philosophic: "When it comes to timing tail risk protection, a long-term value-based approach and an emphasis on absolute standards of value, coupled with a broad mandate (a wide opportunity set, or, investment flexibility, if you prefer) seems to offer the best hope." Too bad that one must also factor for career risk, which usually means that everyone does end up doing precisely the same trade no matter what, which ultimately brings everyone back to square one.

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Chicago PMI Data Now Catering To HFT Algos, As Deutsche Borse Buys And Adds Datastream To AlphaFlash HFT Product Offering

A few months ago we reported on Deutsche Boerse's Alpha Stream: a product suite especially designed to allow subscribers to get a millisecond advantage when market moving economic data is reported, which would then set HFT algos off the races, with the expectation that those paying a pretty penny for such access could scalp a few nickels from those without this critical (in our day and age of collocated needs) data feed. As a reminder, among the key benefits to customers, Deustche Boerse, now the owner of NYSE Euronext were that i) Data is sent directly by our journalists from government lock-ups; ii) Designed for easy direct integration into trading algorithms; iii) Global co-location and other connectivity options iv) AlphaFlash uses the high speed global network of Deutsche Börse and was designed by technology experts from the world of low latency trading. And while Euronext has had about 3 market halts in Europe in the past week, that appears to be irrelevant: with reverse merger listing fees now a thing of the past, the Deustche Borse has to continue raking in high margin HFT clients with the promise of some free latency arbitrage. Therefore, in order to make its product offering that much more appealing to 19 year old Ph.D.'s everywhere, NYSE Boerse has just announced its purchase of Kingsbury International Ltd., which surveys managers for the Chicago Business Barometer, also known as the company that hosts the Chicago PMI data, in order to bring PMI data direct to feed subscribers. Net result: expect even more market volatility at each PMI release, now that the market is not two but three-tiered, and consisting of regular HFTs, HFTs with access to the Deutsche Boerse feed, and everyone else. Does this make capital markets any more efficient? Hell no. Does it benefit the willing participants in a rigged casino who are about to purchase a faster reaction time for one of the blackjack tables? But of course.

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With Special Repo Negative Again, Is General Collateral The Next "Buck-Breaking" Source Of Frozen Liquidity?

Back in April, Zero Hedge first exposed the impact on the repo market as a direct consequence of the then introduced FDIC assessment rate, which pushed general collateral rates to just above zero, and in some cases, outright negative. Since then GC repo rates have meandered well lower than the historical average, somewhere in line with the IOER, and the ongoing 20 bps arb available to banks who have the wherewithal to arbitrage the GC-IOER spread, indicates that not all is as it should be with the repo market. This was to be expected once the FDIC started messing around directly in the multi-trillion repo market. Well, courtesy of increasing tightness in European liquidity where contagion concerns have spooked money market participants, forcing them to enter the already thin GC market, rates have once again collapsed, and as Barclays' Joseph Abate points out, "Treasury collateral fell from around 6bp earlier this month to barely 1bp this morning. This means that every special issue – even those with only a modest premium in the repo market – trades at a negative rate." As a result, the GC and the special repo rate, together with participation in the ECB's MRO operation (update tomorrow) and Chinese SHIBOR, have now become the best indicators of what is truly happening in the liquidity underbelly of the multi-trillion unsecured market. Alas, this latest move has unpleasant implications for money market managers, who unable to find yield in repo (0.01%?) will now be forced to look for higher yielding assets, and thus expose them to even more contagion risk once the house of cards falls, facilitating the "breakage of the buck" once again just like what happened in the aftermath of the Lehman catastrophe, and snarling all global fund flows, forcing the Fed to become liquidity provider of last resort. But no need to worry about this: after all Bernanke's centrally planned economy would never let this happen.

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Like A Swiss Watch The Daily Risk Spread Divergence Is Here, On Less Than Vapor Volume

As of 30 minutes ago, the ramp in stocks which came out of nowehere, on now news, but is certainly going to generate a whole lot of FRBNY trade tickets over at Citadel, has managed to do absolutely nothing to restore confidence in the average man that the economy is not heading into redepression, but been very successful at causing the risk spread to surge to day wides. Historically the spread has closed promptly on high correlation days, although today's market action is so abnormally surreal it may be best to just step back and observe.

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Operation Intifada: Hacker Group Anonymous Prepares For DDOS Attack On Israel Parliament

The latest target of Operation Anonymous, which following the dissolution of LulzSec is the last substantial non-amorphous hacker collective left out there, could lead to some substantialgeopolitical fallout. That is because the target of the just announced upcoming DDOS attack is none other than the Israeli Parliament, the Knesset, and while Israel has allegedly been happy to dispense hack attacks in the past, the onslaught on the Iranian nuclear power plant courtesy of the Stuxnet virus coming to mind, we doubt it will as happy to be seen on the receiving end of decentralized computer warfare. Either way, with the world focusing on Greece tomorrow, this development, and specifically what form of retaliation Israel adopts, will be yet another important factor to keep track of over the next 24 hours.

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Here Are The Most Actively Traded Names In Goldman's Dark Pool (Or Why Is The Big Money Fascinated With Italy?)

Courtesy of recent disclosures, the common man (as in anyone who does not pay millions in kickbacks, er, soft dollar fees to GS) can now observe what is being traded on Goldman's Dark Pool, better known as Sigma X. Why is this important? Because as Themis Trading presented last week, only 30% of all trading occurs on open exchange venues, meaning the bulk of actual shares change ownership behind the scenes, in places such as Sigma X, Chi X, and the dark pools of Credit Suisse, Citi, and various other banks, not to mention numerous other secondary ATS, where very little if any of the daily trading detail is released for general observation. This means that while HFT algos drive up the volume of numerous top 10 stocks merely for the sake of collecting rebates, the real action is in the most actively traded dark pool names, where the big boys are actively trading risk, where HFTs are non-existent, and the companies that represent the top 5 is what investors, speculators, and vacuum tubes should be focusing on. Not surprisingly, today's most active names are Banca Monte dei Paschi di Siena, Unicredit and Intesa Sanpaolo. Translation: someone is actively positioning for serious action in Italy shortly.

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Dealers Rescue Very Weak 2 Year Auction As Indirects Flee From Short End, Despite Record Low Yield

Following recent speculation originating from Bill Gross that Operation Twist would materialize possibly as soon as last week's FOMC statement and cap rates on 2-3 Year Bonds, the yield on the 3 Year had fallen to unprecedented low levels. Well, the FOMC came and went, and now everyone has to wait until this year's version of Jackson Hole for OT2 to come to market. However, many have decided not to wait. Namely foreign central banks: those who are somehow supposed to come in and buy up US debt when the Fed goes away. In the just completed 2 Year auction (CUSIP: RA0), which just priced at a record low yield of 0.395%, which was a nearly 1 bp tail, all the action was behind the headlines: the Bid To Cover tightened substantially from the 3.46 in May to 3.08 currently, but the kicker was the Indirect take down which at a paltry 22% came at the lowest since February 2008, or even before the Bear Stearns implosion, when central planning was merely a gleam in the central planning cartel's eye. As a result Primary Dealers were left holding the bag on this auction, with 64% of the total notional going to Dealer syndicate, and the balance or 13.5% going to Direct Bidders, also a big drop from the 19.2% in May. The problem for the Dealers is that there are no more 2 year focused POMO as part of QE3, so they will all be scrambling to sell the On The Run back to the Fed during the once a month 2 Year targeting POMO as part of the continuing QE Lite.

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Hoenig Says Big Financial Firms (i.e., JPMorgan, Goldman, Citi) Put "Capitalism At Risk"

So 3 years after bailing them out and making the Bernanke put the defacto trading policy of the MOMO/POMO generation, they finally realize they destroyed the system? Better late than never.


We can only hope a closer reading of the last bullet means that Hoenig is now pushing for an end of Glass-Steagall. Expect to hear bankers screeching about tanks in the streets and mass suicides if a repeal of Gramm-Leach-Bliley is even mentioned.

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An MLEC In PIIGS' Clothing: The Latest Greek Bailout Proposal Picks Up Where the Super SIV Failed

Confused about the latest attempt by an insolvent French banking cartel to sugarcoat what they are doing in Greece? Don't be. After all this is nothing but a repeat of a failed idea first floated back in October 2007, when a Super SIV was supposed to shore up the hundreds of billions of toxic subprime debt while packaging it in a tidy off-balance sheet little packet. Presenting the MLEC part deux. And yes. Back then the idea crashed and burned because it was understood it would be a total disaster. If it passes beyond the production stage this time, it really is game over for the ponzi extend and pretend brigade.

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The Communists Have Taken Over The Acropolis

Xerxes Blankfein's attempts to auction off Athens' monuments appear to have met with a resilient match in the face of the communist affiliated Spartans who have now covered the Parthenon with slogans that read: "The peoples have the power and never surrender - Organise - Counterattack." For indications of just what this "organized counterattack" will look like keep an eye on livestreams from Syntagma tomorrow, when the stakes will be far higher than during last week's vote of confidence.

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A Glance At The Layout Of The Greek Parliament On The Eve Of The Austerity Vote

As the Greek parliament begins its debate on the mid-term austerity plan expected to culminate with a vote later in the week, below is a quick glance at the layout of the Greek parliament via Reuters for those who are still unsure of the distribution of power. As can be seen, PASOK's majority is in question, with just 5 votes in protest needed to scuttle the carefully set up house of cards which would set off in motion a chain of events that would lead to a liquidity freeze worse than anything seen in the aftermath of Lehman. The question is whether any of the opposition parties will shift their allegiance to G-Pap: if the vote of confidence is any indication, in which not a single non-Pasok member voted for the PM, it does not look good.

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Guest Post: What If The Consensus Is Wrong?

There are a variety of consensus views floating around the Mainstream Media and the blogosphere. The two sets of consensus don't align on much, as might be expected: the financial MSM is still spouting the Federal Reserve/Wall Street's "happy story" about how the recovery is weak but muddling forward with "uneven growth" (i.e. someone else got laid off, you still have a job) but corporate profits (the only metric of "growth" that counts) will still be rising forever (as usual). The financial blogosphere consensus is more or less that the fiscal-stimulus/Fed-goosed "recovery" is obviously rolling over here, and since inflation and fear are baked in, gold will continue its steady climb towards $3,000 an ounce and beyond. Oil, meanwhile, is poised to rise as suppliers either lose production to depletion or ratchet production down to support prices. We all know about confirmation bias, the tendency to seek evidence which supports our views after they have hardened into conviction...Which leads me to play Devil's Advocate: what if both consensus camps are wrong?

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EU Working On Greek "Plan B" If Austerity Plan Voted Down

Just out from Reuters:


But, but, didn't Schaeuble just say there is no "Plan B"... or was that just the now traditional weekend lie to get the EURUSD to spike higher on nothing but an endless barrage of lies. In other news, here comes the (heavily collateralized) Greek Debtor in Possession loan we predicted a month ago.

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Dallas Fed Plunges, Down -17.5 On Expectations Of Increase To -3.2 From -7.4

The collapse in the manufacturing base continues: the Dallas Fed general business activity index just printed at a whopping -17.5 on expectations of -3.2,  number that was supposed to be a gain from before, and yet another confirmation that Wall Steet is populated by a bunch of illiterate lemmings. From the report: "Perceptions of general business conditions were mixed in June. The general business activity index pushed further negative, falling from –7.4 to –17.5. Twenty-eight percent of respondents said activity weakened this month, the highest share in nine months. However, the company outlook index rose from 3.2 to 7.2, suggesting manufacturers were more optimistic about their firms’ prospects for the near future." Ah, back to consuming hopium. We wonder how many of these manfucturers were optimistic back in Q1 when the the index was printing in the 20 range only to see a near-historic collapse. We are now certain the ISM will pring sub-50, with a print as low as 46 most certainly possibly.

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Prepare For A Surge Of Treasury Issuance As Soon As The Debt Ceiling Is Lifted

One of the side effects of the US hitting its debt ceiling in mid-May is that while the components of its total debt have been shifting, with total marketable debt slowly grinding higher, while intragovernmental holdings (i.e., government retirement pension accruals) declining, the total thing has been flat as a pancake at just $25 million below the mandated ceiling. Since May 16 (or 57 working days now), total US debt has been $14.345 billion and not a penny more. Yet the issue is that with the US expected to have a roughly $1.5 trillion budget deficit in the calendar 2011 year, the ongoing contraction in debt issuance is only temporary. Basically when and if the debt ceiling is lifted, the Treasury will not only have to issue as much debt as before, but it will have to issue massively more in the short term to catch up to the ongoing run rate, and also in order to prefund the same retirement accounts it has been plundering for the past 6 months. So here's the math. As the chart below shows, since May 16, the cumulative divergence between where total debt is and where it should be is now a whopping $265 billion. That's right: when the debt ceiling cap is finally lifted, and it will be lifted, with republicans "kicking and screaming", Geithner will suddenly find himself needing to plug a gap of over 2 months worth of accrued treasury issuance. Mathematically, this means the Treasury will have to sell not the $100 billion or so in net debt but well over double that in August and September. And this will happen at a time when there is no QE2 to soak up the excess slack.

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