Archive - Sep 16, 2013

From just after the opening of futures late last night - when US equities knee-jerked up dramatically - stocks went only one way - lower. While of course its all unicorns and butterflies with a triple-digit gain for the Dow, the major indices all traded lower all day long on dismal volume as no one seemed interested in buying the Yellen-rip. AAPL collapsed -3.25%, closing back below its 200DMA, and dragged NASDAQ into the red for the day. Treasuries were all rallying handsomely and there was much rejoicing that the housing recovry will be back in full swing... and then it all fell apart and by the close the 10Y was unch, 30Y +4bps, and 5Y -6bps as the curve flattened notably (as bonds sold off with stocks). The USD surged off knee-jerk overnight lows (though ended -0.3% still) but that momentum during the day-session drove commodities all lower relatively uniformly (Oil, gold, and silver down 1.5 to 2%). What was most odd was that everything changed trend when OPRA broke...

When we first posted this article a month ago, few paid attention as the entire world was gripped in Summer-mania. Now that Summers is out of the picture, and the monetary policy acumen of the former San Fran Fed president are under the spotlight, it is probably an opportune time to recall Janet Yellen's ability to foresee the future heading into the great financial crisis whose five year anniversary took place this weekend. Or rather lack thereof, because as the following excerpt from a 2010 FCIC hearing, noticed first by the NYT, demonstrates, if this is the best Fed head replacement we can do then we may as well fast forward to the Great Financial Crisis ver 2.0:  “For my own part,” Ms. Yellen said, “I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the S.I.V.’s — I didn’t see any of that coming until it happened.”

What started off as a tempest in a teacup just ended up becoming not only the largest, $6.2 billion prop trading blunder in JPMorgan history, but the latest ligitation headache for Jamie Dimon amounting to at least $750 million to get the government off his back, and who will of course neither admit nor deny it used customer deposits in an attempt to corner the IG and HY markets:

• JPMORGAN SAID TO AGREE TO AT LEAST $750 MILLION IN WHALE FINES
• JPMORGAN SAID TO SEEK END TO U.S., U.K REGULATORY PROBES IN Q
• SOME WHALE SETTLEMENTS MAY BE ANNOUNCED AS EARLY AS THIS WEEK
• JPM TO ADMIT FAULTY INTERNAL CONTROLS IN WHALE SETTLEMENT: WSJ

Of course, we hope that as part of the settlement JPM will announce just what it is investing its current $500 billion in prop trading dry powder in as we disclosed last week.

Now that Syria has been disposed of - that is, indefinitely consigned to failed state purgatory - the world can focus its remaining attention on the almighty taper. We're with those who think we’ll get a taper test. That is, the Fed will cut back ten or fifteen percent on its treasury bond purchases to see what happens. What happens is perfectly predictable: interest rates shoot above 3 percent on the ten-year and holders of US paper all the world round fling them away like bales of smallpox blankets and... Houston, we’ve got a problem. After a month (or less) of havoc in the bond market, and the housing market, Mr. Bernanke will issue an advisory saying (in more words than these) “just kidding.” Then it will be back to business as usual, which is to say QE Forever, which might as well be saying “game over.” One must feel for poor Mr. Bernanke. He’s tried to run a long-distance foot-race against reality and now it’s breathing down his neck near finish line.

As we warned here exactly one month ago, the tapering discussion may be merely a "sideshow to a previously undiscussed main event: the Fed's first forecast of 2016 interest rates." Now, the Fed's mouthpiece-at-large has decided we can handle the truth and the WSJ's John Hilsenrath explains the dilemma - The Fed's updated economic projections could show an economy that appears back to normal by 2016, but their projections of where short-term interest rates will be could show rates still quite low by then. Their challenge: How to justify the low interest-rate plan when their own estimates suggest an economy regaining its health. Crucially, Hilsenrath adds, as the economy improves, the Fed is trying to shift its emphasis from bond buying, which has uncertain costs and benefits, to the low-rate pledge. How will the Fed square an economy near full employment with a federal funds rate that remains historically low? "There is an inconsistency there," said John Taylor - apparently confirming what Rick Santelli asked before - "What is the Fed afraid of?"

For all complaints about painful, unprecedented (f)austerity, the PIIGS (even those with restructured debt such as Greece) sure have no problems raking up debt at a record pace. Over the weekend, Spanish Expansion reported that Spanish official debt (ignoring the contingent liabilities) just hit a new record. "The debt of the whole general government reached 942.8 billion euros in the second quarter, representing an increase of 17.1% compared to the same period last year. Debt to GDP of 92.2% exceeds the limit set by the government for 2013..." Moments ago, it was Italy's turn to show that with employment still plunging, the only thing rising in Europe is total debt. From Reuters, which cites a draft Treasury document it just obtained: "Italy's public debt will rise next year to a new record of 132.2 percent of output, up from a previous forecast of 129.0 percent."

"Summers is out" exuberance appears to have been trumped by "the exchanges are down again" bull$hit. The moment that OPRA data dissemination ceased and exchanges began declaring self-help, the major indices began to plunge (as did AAPL even more to -2.5%). The Treasury complex is twisted with the belly -9bps and the long-end yields up 3bps (but that is compressing a little as equities give up their gains)... The total outage of all options exchanges is seen below from Nanex...

Gold and silver futures surged 2.1% and 3.6% respectively and the dollar fell on the open in Asia prior to determined selling which again capped precious metal prices. Analysts and media attributed the price gains on the withdrawal of Larry Summers from the race to be the new Fed Chairman, leaving Janet Yellen as the new frontrunner.

Last week, we presented a table showing what 26 centuries of global financial innovation, which incidentally is the main reason why the Fed is now stuck in a corner and forced to keep the system from collapsing using every possible means, looked like. The source of the table, Deutsche Bank, had this to say: "financial innovation is a major positive driver of the money multiplier as it determines, among other things, the amount of leverage the banking system runs." It is indeed a positive driver until the point when the leverage in the system becomes unsustainable, and in the absense of yet another paradigm step function in innovation, leads to such catastrophic events as the Great Financial Crisis of 2008, whose aftermath is still very tangible today, five years later.  We concluded our post with a question directed to readers: "we ask: what is the next, perhaps final, can-kicking "financially innovative" milestone? If any." Overnight the answer appears to have presented itself.

China.

The Lord Works in Mysterious Ways...

What was originally supposed to be Obama's statement on the Lehman five year anniversary is now expected to be a speech focusing on the tragic shooting in the DC shipyards. Watch it live below. We assume the people behind Obama are former Lehman traders.

While perhaps not entirely surprising, the UN's report on the chemical weapons (alleged) usage in Syria has come back positive:

• *UN INSPECTORS SAY SARIN WAS RECOVERED FROM ROCKETS FOUND
• *UN FINDS 'CONVINCING EVIDENCE' OF SYRIA CHEMCIAL GAS USE: AP
• *BAN SAYS 85% OF BLOOD SAMPLES TESTED POSITIVE FOR SARIN GAS
• *BAN SAYS SAYS UN UNABLE TO VERIFY TOTAL DEATHS IN ATTACK

But of course - crucially:

• *UN REPORT, AS PLANNED, DOESN'T SAY WHO USED CHEMICALS IN SYRIA

Greek PM Antonis Samaras: "You have to tell people the truth but you have to give them hope as well." i.e., lie