Archive - May 2010

And so we get one step closer to the end. Look for bond yields in Europe, and especially the Bund, to roll over and accelerate to infinity as investors realize what monetary prudence capitulation is. Amusingly, the KomIntern won - comrades Lenin, Stalin, Marx, Engels, and all others who grace the dark pages of US historybooks, would have been celebrating if only they were alive today: May 9, in addition to "victory over fascism" day, is now also "victory over capitalism and free markets day." Rejoice comrades!

The race to the currency devaluation bottom is now in its final lap. And gold is the only alternative to the now imminent collapse of the fiat system: the world had a chance to take writedowns on losses, punish those who took risk and failed, and refused to do so. There is now no risk left, but it only means that eventually all the risk will come back and lead all capital markets to zero. The result will be the end of Keynesian economics as we know it. Do not trade in this broken market, do not hold your money in a bank as they are all now one hour away from a terminal bank run - buy and hold real, FASB mark-to-myth independent assets.

This is supposed to calm down the markets Monday morning. The Fed opened its swap lines with other central banks and treasuries to provide dollar liquidity as investors flock to the euro. Mish says short squeeze.

Unbelievable.

The message to speculators is clear: you no longer have free reign to mount destructive speculative attacks on European sovereign debt or the Euro. Even though it's late, Europe's show of force is resolute and decisive. In my opinion, this will have a profound impact on markets, helping shore up confidence and it will stem the slide to deflationary depression.

According to stories circulating around the trading floor, Dow’s a thousand points of fright on May 6 is the result of a "fat finger" trade. However, trade data seems to suggest the catalyst could be some big fat cats doing "sell in May and go away".

Just plain insanity - EURJPY goes from session highs to session lows, a 100 pip swing, in 2 minutes. Same with EURUSD. And as for the EU conference, don't expect it to happen until a leak finally drives the EUR up for at least 5 minutes straight. We may be at 1 trillion before the night is over.

More flags, more fun - 500 billion flags! A 50 pip move in an FX pair in a week is big. A 50 pip move in an FX pair in a minute is a several hundred sigma event. As all correlation algos are near unity, we believe the risk of Thursday's 2:40 pm festivities to recur in the afterhours session (either up or down) is frighteningly high.

Germany proposed on Sunday evening the establishment of a comprehensive plan of financial aid can be used for countries in the euro area, totaling 500 billion euros and involves the IMF, told AFP European diplomatic source. "Germany has put on the table a proposal of 500 billion euros," she said. It would include 60 billion euros in loans from the European Commission, he was in the last day, and 440 billion would accrue if necessary, the euro zone countries and the International Monetary Fund. This envelope would be established "bilateral loans, collateral for loans and lines of credit from the IMF," the source said. It would be in scale, if the subject of an agreement, an assistance plan is unprecedented in history.

Uhm, we have one simple question - where will the money come from? The EUR is surging currently on the kneejerk, although for all those who realize that the next step in this now entirely Federal Reserve mandated playbook is debt monetization, it provides just a good re-shorting opportunity. Of course, before our own Maestro Junior finds a new and improved way to pummel the greenback.

Courtesy of ShadowCap contributor Logan Schuler.

With less than 2 hours before Asia opens, the EU is scrambling - on net, the newsflow this weekend has been far more negative than Europe had hoped, with just the token minimum provided so far by the IMF (thank you Joe Sixpack) which the political situation in the UK and Germany deteriorating substantially. The live webcast from the Counsil of the European Union, the Extraordinary meeting of finance ministers - press conference is starting imminently at the following link.

First posted 17 November 2008, this column's analysis is more relevant than ever. It asks why investors rush to government securities when the US was at the epicentre of the financial crisis? This column attributes the paradox to key emerging market economies’ exchange practices, which require reserves most often invested in US government securities. America’s exorbitant privilege comes with a cost and a responsibility that US policy makers should bear in mind as they address financial reform. - Carmen Reinhart and Vince Reinhart

Political doctrine - meet Newton's third law. Headline from Reuters. This will serve as a huge setback to a consolidated European rescue of not only Greece but all PIIGS (and then all of Europe itself). Polls are now closed and the first preliminary read is as follows: 34.5 CDU, SPD 34.5, 12.5 Green, FDP 6.5 Left 5.5.And the biggest losers from this, aside from the line of willing bailout recipients may be German public utility: as Bloomberg notes: "Chancellor Angela Merkel’s parliamentary spokesman for economy and energy, Joachim Pfeiffer, said that the German government may not have to get approval from the federal parliament’s upper chamber to extend the operating life of nuclear power plants." EON, RWE and other utilities may not appricate their 10 year ultimatum in tomorrow's DAX.

The reason given by Reuters why the FinMin is in the hospital is due to an adverse reaction to a new medicine. While we wish Schaeuble all the best, his the timing could not possibly have been worse: the whole world is watching with baited breath to see what happens in Europe before 6pm eastern tonight. Anything less than an "ironclad" bailout program will result in a total market wipeout tomorrow.

The story of financial markets in the past twelve months has not been one of organic growth. It has been a central bank accommodated liquidity story. This melt up will end in melt down when unsustainable liquidity policy is insufficient to address deleveraging and default. Macro trade positioning needs functional measures of liquidity. As has been said before, liquidity will always be around until you need it.
Given the explosion of financial product innovation, international capital flows, and leverage some measures of liquidity are not as informative as they once were. New ones are needed. Further, thinking through liquidity phenomena to their essence is really about understanding connections to market-maker and/or seller distress, manifested in the bid-ask. So measures that exhibit a myopic view on credit risk of market players in some ways serve as a function liquidity measures.