Archive - May 12, 2015

What's the opposite of 'Goldilocks'?

When risk-free assets, with de minimus regulatory capital requirements move like penny stocks, firms are forced to do something about economic risk capital - either derisk (sell assets), or increase capital (delever carry). The ongoing carnage in the world's bond market is creating just such a self-fulfilling problem for risk-assets everywhere (despite simpleton hopes that bond-selling means stock-buying - it doesn't as the marginal buyer is all repo/carry funded and not 'real' cash being rotated). Everywhere one looks, financial markets are turmoiling...

When people think about crashes, they tend to think about an event – as if some massive, grotesque, red, scaly, fire-breathing, razor-toothed catalyst should be obvious beforehand. But we know from history that that’s not the way it works...

"What most traders have said though is that liquidity is awful. Big moves are possible on relatively low or average volumes. What has become increasingly clear over the last couple of years is that the combination of high money liquidity (ZIRP and QE) and low trading liquidity (regulation and bank capital constraints) creates air pockets. The former encourages investors to move in a similar (positive) direction until overheating occurs with the latter then creating problems when they want to collectively lighten up. However that this is increasingly spreading up the top of the capital structure is a worry. It’s also a worry that these events are occurring in relatively upbeat markets. "

• Bonds Extend Global Rout as Europe Stocks Slide, Dollar Weakens (BBG)
• Verizon Communications to Buy AOL for $4.4 Billion (BBG)
• Fresh Nepal earthquake kills dozens, triggers panic (Reuters)
• Sen. Shelby to Unveil Legislation Heightening Fed Scrutiny (WSJ)
• Bill Gross: The Amount of Money I'll Give Away 'Is Staggering, Even to Me' (BBG)
• U.S. rejects notion that Gulf rulers snubbing Obama summit (Reuters)... what about AIIB?
• In Asia, Debt Market Gets Tougher (WSJ)
• Iran’s Mahan airline defies sanctions in shadowy aircraft deal (FT)

As a diversification, art has some merit but only as a small part of an overall portfolio. For those of us who cannot afford a Picasso - as the great heritage of western art continues to be shuttered away in private Xanadus - gold remains an accessible and ideal store of value.

The last time AOL was involved in a mega merger was January 2000, when AOL acquired Time Warner for $182 billion in what was the mega deal of the last tech bubble, creating a $350 billion behemoth. Fast forward 15 years and here is AOL again in yet another period-defining if far, far smaller transaction once again, when moments ago Verizon announced that it would acquire AOL for $50/share, a deal value of $4 .4billion. And with that the golden age of digital (and in many cases robotic) content, has now been top-ticked.

It all started again in Asia, although not in China where the berserker mania bid for stocks has returned and the SHCOMP is now up nearly 5% in the past two days following the PBOC's latest easing, but in Japan where once again the massively illiquid JGB market, of which the BOJ owns roughly a third as of this moment, is going through yet another shock period (if not quite VaR yet) with last night's 10 Year JGB auction seeing the lowest Bid to Cover since 2009. This was the beginning, and promptly thereafter bond yields around the globe spiked once more, with 10-year Treasury yields climbing to a five-month high, as the global rout in debt markets deepened. The biggest casualty so far is the Bund, which having retraced some of the flash crash losses from two weeks ago is once again in panic selling mode, and while not having taken out the recent 0.8% flash crash wides, traded just shy of 0.75% this morning.

There is an unwarranted assumption that market prices are always right, and represent "fair value". In the case of commodities, particularly metals, this is not necessarily true, because regulated financial markets make it too easy for government agencies and large banks to game the system.

For the first time in history, China overtook the US as the world’s biggest importer of crude oil in April, as The FT reports, representing the culmination of a seismic shift in global energy flows over the past decade. The jump in China imports last month was partly down to higher shipments from Iran, who "may be offering more discounts on its oil as part of an effort to increase ties with Chinese oil companies," according to consultancy Energy Aspects. "Iran is keen to secure more Chinese investment." But as OilPrice.com's Jim Hinton warns this shift means that China could hold the oil markets to ransom... And that means that oil futures are tied intimately in with China and the future of the South China Sea.

BANZAI7 FOOD AND BEVERAGE WARNING

Italian women would "like to have more [children], but the conditions just aren't good enough," laments one new mother as CBS News reports, official figures show that in 2014 there were fewer babies born in Italy than at any time since 1861. "Nowadays people don't want to raise their child in poverty," but Pope Francis had a different opinion, as The Guardian reported, "a society with a greedy generation, that doesn't want to surround itself with children, that considers them above all worrisome, a weight, a risk, is a depressed society."

Today's 10Y JGB auction saw the lowest bid-to-cover ratio since Feb 2009 at just 2.24x with a notable tail of 1.1bps (the widest since March) as it appears once again, the total dissolution of liquidity from the largest bond market in the world has left the BoJ and Ministry of Finance losing control. The reaction is dramatic with 5Y through 30Y yields up 5-8bps (10Y +8bps at 47.6bps - the biggest absolute jump in yields in 2 years) leaving 30Y yields at 2-month highs above 1.49% and 10Y yields at 6-month highs.