Archive - Jun 12, 2013

Following the dramatic self-revelatory interview/profiling of Edward Snowden by the Guardian's Glenn Greenwald, the media world, and everyone else, has been abuzz about what other revelations the NSA whistleblower may bring to light. Moments ago, the South China Morning Post releases the much anticipated second interview with the 29 year old. While hardly earthshattering, it does provide some additional insight into the mind of the administration's current persona most non grata.

It may come as news to some, but the Fed really has no idea what it is doing (no, really - just read "Fed Confused Reality Doesn't Conform To Its Economic Models, Shocked Its Models Predict "Explosive Inflation" if you don't believe us ). After all, there is a reason for the saying "we are in uncharted waters." Which is why, to help it in its monetary decision-making, every few months, the Fed issues a survey to the 21 Primary Dealers (used to be 22 but MF Global showed that often the PDs also have no idea what they are doing) asking for their feedback on when it should tighten, how big it's balance sheet should be, how big monthly POMO should be, what the Fed Funds target range "may" be, where the GDP and unemployment rate will be, what the likelihood of the 10 Year soaring to 4% by the end of 2014 is, and other pertinent questions that frame the "independent" thinking of the Fed.

Dare 'Ye Test the Analysis To Ascertain It's Virility? Madness, I say! Sheer, Utter Madness! In other words - SYSTEMIC RISK is here, NOW!

Nothing like the smell of a fresh Eurozone (thank you Greece!) crisis in the air, to remind everyone that in an insolvent world, where every counterparty is suddenly once again suspect (and collateral-free), there is only one asset class that has no counterparty risk (although the distinction between paper and physical gold is still a far too complicated lesson for most) - gold.

We have been gently reminding readers for the last few weeks that Greek bonds and stocks have not been dancing to the same tune as the European Union's leaders' proclamations of victory but today it seems the fears are spilling over into other assets. With the closure of the nation's state-owned TV station ERT, it seems the coalition is rapidly coming unglued. The highest of high beta liquidity-fueled momentum dash-for-trash trades are discovering that large crowds and small doors don't mix as the marginal 'flow' is slowing (or feared to slow). Greek stocks are now notably underwater for the year (after being up almost 28%) and Greek bonds are down almost 17% from their highs just a few weeks ago...

It would appear the cleanest dirty shirt is losing its appeal as both bonds and stocks are being sold this morning and the JPY and EUR are rallying as the liquidity washes back home. The USD Index is back at its 10DMA again but it seems the building tension in Europe (Turkey and now the potential for a collapse in the Greek coalition over the ERT closure - which we warned about yesterday) and Abenomics hangover is leading to an unwind of these levered carry trades everywhere around the world.

We showed yesterday the truly dreadful state of this economic recovery had one odd bright (green) spot, US auto production (and sales). While cash-for-clunkers started it, and easy money from the Fed expanded it (via credit for an ever-growing cohort of subprime borrowers), the car companies have now reached back into the bag of old tricks that blew them up before - incentives in May jumped to 8% of market value - or almost $2,500 per vehicle - the highest in over 2 years. If things are going so well in this 'recovery' why are the car makers forced to squeeze margin for volume... The problem, as BusinessWeek reports, is that increasingly rich incentives aren't moving the needle much on sales.

Following last night's revelation that FX trading is the latest addition to the "rigged" column, here is a summary of the known market manipulation scandals (because it can be problematic keeping track of all by now):

• Libor - interest rates (link)
• ISDAfix - swaps (link)
• Platts - oil prices (link)
• WM/Reuters - FX (link)
• High-Frequency Trading - equities (link)

We also know that the Fed and world central banks are engaged in a full blown (and unprecedented) Treasury curve modeling exercise courtesy of both ZIRP (short-end) and QE (long-end), and that courtesy of some $12 trillion in extra liquidity in the past 5 years, stocks are at an artificial "weath effect" sugar high. We can therefore deduce that, following the process of elimination, gold and silver are the only markets that are unmanipulated and where transparent price discovery is allowed to take place without intervention from key players.

"Be lawyered up to the max... and and always check your six," is the warning (advice) that Thomas Drake offers Edward Snowden in this brief interview. "Always make sure you know what's behind you," he adds, "when you offer up information about the dark side of the surveillance state they don't take too kindly to it." Drake, whose life was "essentially destroyed," after being prosecuted in 2010 under the Espionage Act, is now a technical expert at an Apple store, but he still believes what he did was worth it, having no doubts: "Is freedom worth it? Is liberty worth it? Is not living in a surveillance society worth it? You've got to stand up and defend the rights and the freedoms that prevent that from actually happening. [Edwards' information] is validation of this vast, now systemic, industrial-scale leviathan surveillance system."

Milton Friedman once said that “if you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand”. I think if he were around still, he would need to revise that.

Five Eurozone countries now have loans for half a trillion Euros. These members of the Euro currency union are receiving loans from the one of two bailout funds which are financed by the other 12 Eurozone members. Eurozone members receiving assistance from the two European rescue funds do not pay into it. That means the higher the assistance, the higher the obligations of the healthier countries. Germany already guarantees 27 percent of the loans, France 20 percent and Italy 18 percent. The rescue funds borrow capital, guaranteed by nations of the European Union, in the financial markets and then hand the money to the indebted countries. In doing this they engage in a kind of Quantitative Easing where money is printed based upon the various guarantees. None of these guarantees are counted against the liabilities of any country when the debt to GDP ratios are made public. There is a new scheme underway where bondholders would have to pay for the vast amount of any losses with the money of depositors also in question. There is no agreement yet on this plan. What can be said is that the playing field is being tilted with much more risk now placed in the hands of bond owners and depositors.

The biggest news out of Greece is that the events in the 24 hours have pushed the depressed country right back into crisis mode, with political bickering front and center (the opposition leader called the uncoordinated move "a coup" even as coalition partners blasted the broadcaster shutdown while Europe washed it hands), while the economic contraction is set to accelerate once more following what is certain to be another escalation in daily protests and riots. And who can blame them - with that last civilizational "premium" - free TV for all - gone, what else is there to do?

Employees have been front-running client orders and rigging WM/Reuters rates by pushing through trades before and during the 60-second windows when the benchmarks are set, said five current and former traders, who requested anonymity because the practice is controversial.  Dealers colluded with counterparts to boost chances of moving the rates, said two of the people, who worked in the industry for a total of more than 20 years. The behavior occurred daily in the spot foreign-exchange market and has been going on for at least a decade, affecting the value of funds and derivatives and all investments.  The Financial Conduct Authority, Britain’s markets supervisor, is considering opening a probe into potential manipulation of the rates, according to a person briefed on the matter. Informed observers have long warned that the global $4.7-trillion-a-day foreign exchange market, the biggest in the financial system has all the hallmarks of a casino. The inherent conflict banks face between executing client orders and profiting from their own trades is exacerbated because most currency trading takes place away from exchanges.

• Pimco Sees 60% Chance of Global Recession in Five Years (BBG)
• Global Tumult Grips Markets (WSJ)
• NSA Secrecy Prompts a Pushback (WSJ)
• ANA Scraps 787 Dreamliner Flight as Engine Fails to Start (BBG) - one of these days, though, it shall fly
• Kuroda’s April-Was-Enough Message Faces Markets Wanting More (BBG)
• S&P warns top US banks are still ‘too big to fail’ (FT)
• Democracy for $500 per plate (Reuters)
• Iran, the United States and 'the cup of poison' (Reuters)
• Japan grapples with lack of entrepreneurs (FT)
• Greece First Developed Market Cut to Emerging at MSCI (BBG)
• Asia's ticking time bonds; time to cut and run? (Reuters)
• Sony Outduels Microsoft in First PS4-Xbox One Skirmish (BBG)

Wednesday may be the new Tuesday (which halted its relentless and statistically impossible streak of 20 out of 20 up DJIA days last week), if only in terms of the overnight no news stock futures ramp, which today is back with a vengeance. In a session that was devoid of any news, the e-Mini is up enough to practically erase all of yesterday's losses. Whether this is due to a relatively calm Nikkei trading session, to no further surge (or collapse) in the USDJPY, or to the 10 Year trading flat inside 2.20% is unclear. What is clear is that the bipolar market swings from extreme to extreme on speculation about the largely irrelevant topic of whether the Fed will taper (because if it does, it will be very promptly followed by an untapering once risk assets around the world implode.)