Archive - Jun 2013

Fractional reserve banking is unlike most other businesses. It's not just because its product is money. It's because banks can manufacture their product out of thin air. Under the bygone rules of free market capitalism, only one thing kept banks from creating an infinite amount of money, and that was fear of failure. Periodic bank failures remind depositors of the connection between risk and reward. What is not widely appreciated is that the ensuing government bailouts allowed an underlying shadow banking system to not only survive but grow even larger. To the frustration of Keynesians, and despite an unprecedented Quantitative Easing (QE) by the Federal Reserve, conventional commercial banks have broken with custom and have amassed almost $2 trillion in excess reserves they are reluctant to lend as they scramble to digest all the bad loans still on their books. So most of the money manufactured today is actually being created by the shadow banks. But shadow banks do not generally make commercial loans. Rather, they use the money they manufacture to fund proprietary trading operations in repos and derivatives. No one knows when the bubble will pop, but when it does a donnybrook is going to break out over that thin wedge of collateral whose ownership is spread across counterparties around the world, each looking for relief from their own judges, politicians, bureaucrats, and taxpayers.

And Other Stunning Facts I Learned Last Night ...

With the biggest drop in Turkish stocks in a decade and the biggest jump in Turkish bond yields on record, the troubled nation finally made some mainstream media screens today. As we have noted here and here most recently, the social unrest is escalating rapidly, as Stratfor notes, the protests grew rapidly over the weekend and spread quickly to other major regions and cities in the nation. The largest protests, in Istanbul and Izmir, brought out predominantly young protesters in the tens of thousands. These protests will be highly significant if they grow to the hundreds of thousands, include a wider demographic and geographically extend to areas with traditionally strong support for the ruling party.

This is no time to be complacent.  Massive economic problems are erupting all over the globe, but most people seem to believe that everything is going to be just fine.  In fact, a whole bunch of recent polls and surveys show that the American people are starting to feel much better about how the U.S. economy is performing.  Unfortunately, the false prosperity that we are currently enjoying is not going to last much longer. Unfortunately, the majority appear to be purposely ignoring the economic horror that is breaking out all over the globe.

With JPY losing 100 and the Nikkei futures trading down to a 19.25% loss from the highs (12815 the dreaded bear-market 20% drop level), a combination of a desperate Japanese 2015 plan for the pension fund to buy moar stocks, bad-is-good economic data, and front-running of the now-ubiquitous Tuesday rally provided the ammo for a rally in equities - recovering almost 50% of their post Friday drop losses. Risk-assets in general correlated extremely closely on the day and while volume was well above average, this was driven by the surge to the downside (not the upswing). Treasuries ended the day unchanged (amid a 12bps range on the day) ending near the low yields (moar QE). VIX snapped above 17.5% (its highest in 6 weeks) before fading back in the ramp to unchanged at 16.25%. Credit tracked stocks closely but was less exuberant in the late-day ramp. USD weakness (JPY and EUR strength) supported commodities, with gold and silver outperforming on the day (up 1.65% and 2.2% respectively).

Since Mr. Krugman tells us all this spending and debt issuance/guarantees are not only good and necessary but in the long run, painless, why are we bothering with personal income taxes?
 
The US government will collect approximately $2.0bn this year in Personal Income and Payroll taxes.  But why?  Why are we even bothering with this when today’s leading economists and politicians are telling us that debts/deficits don’t matter and running up astronomical debts is a long-term painless process?  It’s practically patriotic.  So why shouldn’t we just add our tax burden to the list of items the Fed should be monetizing?  Seriously.  Why not relieve the burden on every tax paying citizen in the United States (about 53% of us according to Mitt Romney)?  You want an economic recovery?  Reduce my taxes to zero and see how fast I go out and start spending some of that extra income.

Virtual currencies were hailed as revolutions. They were the way forward., the way to overhaul the system and the way to replace the Dollar, Sterling, the Euro and the rest of them.  But, just last week Liberty Reserve was closed down for illicit transactions and money-laundering activities that could have nothing more than repercussions for the rest of the companies living quietly in the auspices of cyberspace doing more or less the same sort of activity.

ECB Bath Salts available by advance order only... 

With Lerner pleading 'da fif' and Steven Miller now long-gone, it is up 'new' IRS Acting Commissioner Daniel 'Danny-boy' Werfel to face the House subcommittee hearing music. While the focus (for now) is the IRS' targeting of conservative groups seeking tax-exempt status, we suspect the Dance-Prance-Revolution clips that have been so broadly disseminated this weekend may make an appearance.

While preparing to leave for work Monday, U.S. Attorney General Eric Holder reportedly loaded up his iPod with dozens of Associated Press reporters’ confidential phone conversations to enjoy on his morning commute. “It usually takes me about 30 minutes to get to the office, so I’ll have something to listen to to pass the time,” said the Justice Department head while transferring the wiretap recordings taken from dozens of AP journalists’ work and cell phone lines from his home computer to his mp3 player.

Curious why (formerly) government-subsidized, ultra-luxury battery operated car maker Tesla has a market cap of $10.6 billio (a little over 25% of GM's market cap). Here's a hint

• AUTODATA ESTIMATES TESLA MAY U.S. MODEL S SALES WERE 1,425

And that's with the surge in daily publicity, the headline news articles resulting from the epic short squeeze, and the nearly daily CNBC infomercials.

Worried that manipulated official data is the only thing one has to "predict" on a day to day basis in a world drenched with "Baffle with BS", where China expanding and contracting at the same time is perfectly normal, and where Chicago PMI soaring by an 8 sigma beat to multi year highs precedes by one day the lowest US manufacturing print in 4 years? Turns out that's not all - in addition to everything else, one should also realize that key market moving data continues to be disseminated ahead of its official release time to those who have the "funds" and the interest in trading on early leaks. Take today's key economic data point: the Manufacturing ISM. As Nanex shows, trading in SPY exploded at 09:59:59.985, which is 15 milliseconds before the ISM's Manufacturing number released at 10:00:00. Activity in the eMini (traded in Chicago), exploded at 09:59:59.992, which is 8 milliseconds before the news release, but 7 milliseconds after SPY. Surely someone decided to perform a massive headfake and like a plunging goaltender during a penalty kick just happened to guess the direction right. That, or the clock on the CQS tape is just a little off. Oh, and this is merely today's example of early distribution of data to those who have the means(and the funds) to trade on it. Everyone else - well, the saying involving a sucker, a poker table and confusion, is quite applicable right now...

A German election is drawing close and it is evident in many small things that are happening lately. The latest is that Mrs. Merkel is now apparently distancing herself from her erstwhile demands to create a 'fiscal union' and give the eurocracy in Brussels more powers. Incidentally, her change of heart comes shortly after her summit with France's president Hollande, which indicates that the latter has probably let her know that France is none too happy with the idea either. She still talks about the alleged need for 'more policy coordination', but luckily handing more powers to the bureaucrats in Brussels seems to be off the table for now.

Here's the challenge the Status Quo monetary and fiscal authorities faced in the 2008 global financial meltdown: how do we maintain the power structure and keep the masses passive while masking the fact that the Status Quo is broken? The solution: sell bonds to fund benefits to the masses, lower interest rates to zero to keep the explosive rise in fiscal deficits affordable, and rapidly inflate new bubbles in assets that painlessly enrich the top 25% of households who then increase their borrowing and spending, i.e. the "wealth effect." The political calculus is simple: the bottom half of households don't vote, don't contribute to political campaigns and don't have enough income to borrow huge sums of money to enrich the banks. They are thus non-entities in the fiscal-monetary project of maintaining the power structure of the Status Quo. All the Status Quo needs to do is borrow enough money to fund social programs that keep the masses passive and silent: food stamps, Section 8 housing vouchers, Medicaid, Medicare, Social Security, SSI permanent disability, unemployment, etc. Unfortunately for the Powers That Be, the cost of placating the rapidly increasing marginalized populace is rising much faster than tax revenues.

Ever feel like you can't put that math PhD to good use anymore and make money scalping ahead of order flow, sub-pennying and frontrunning retail in normal and dark pool markets because volumes are just off 1929 levels? Then the Chicago Fed has an offer you just can't refuse. And since money printers can't be choosers, the Fed may also have a spot for those who tried their hand at the New Media (i.e., churning slideshows): "Develop presentations and clarify complex issues for broad audiences." Yet what is most interesting is the following requirement: "Interact with highly informed and technically skilled outside stakeholders while preserving the reputation and credibility of the Reserve Bank." We'll just let that one slide...