Archive - Jun 2013 - Story

Remember: what is unsustainable, can never crash...

Recent comments by the Federal Reserve Chairman Ben Bernanke have shocked the world financial markets. Since the first allusion to tapering, volatility has been on the rise across the board (stocks, currencies and bonds). The chaotic reaction by market participants and the corresponding increase in yields now risks destabilizing this very fragile equilibrium. It is yet unclear whether or not the damage control from the other Fed Presidents will put a lid on yields and market volatility, or if the damage to the Fed’s (poorly executed) exit strategy is permanent.

Back in 2002 Warren Buffet famously proclaimed that derivatives were ‘financial weapons of mass destruction’ (FWMDs). Time has proven this view to be correct. As The Amphora Report's John Butler notes, it is difficult to imagine that the US housing and general global credit bubble of 2004-07 could have formed without the widespread use of collateralized debt obligations (CDOs) and various other products of early 21st century financial engineering. But to paraphrase those who oppose gun control, "FWMDs don’t cause crises, people do." But then who, exactly, does? And why? And can so-called 'liquidity regulation' prevent the next crisis? To answer these questions, John takes a closer look at proposed liquidity regulation as a response to the growing use of 'collateral transformation' (a topic often discussed here): the latest, greatest FWMD in the arsenal.

When it comes to deflation, mainstream economics becomes not the science of common sense, but the science of nonsense. Most economists today are quick to say, “a little inflation is a good thing,” and they fear deflation. Of course, in their personal lives, these same economists hunt the newspapers for the latest sales. The person who epitomizes this fear of deflation best is Ben Bernanke, chairman of the Federal Reserve.

Presented with no comment...

If there is a better way to admit guilt, and several decades of ill-gotten billions courtesy of now legendary "information arbitrage", coupled with some heavy expert network hot tips and one year contract retentions of every biotech expert from here to Calcutta, than pleading the Fifth, we have yet to hear it. We are confident, however, that SAC FoF investor Anthony Scaramucci will provide some truly memorable examples. Or if not that, then at least a few guest passes to his "fun" and brilliant "Hooters for Hedgies" concept.

Succinctly summarizing the positive and negative news, data, and market events of the week...

The S&P 500 ended the month with an odd shade of green (called red). This is the worst month in stocks for 8 months and makes only the 5th negative month in the 20 months since the global central bank co-ordinated save in Q4 2011. The week, however, saw the S&P gain around 1.25% on the back of endless repeated bullshit from various Fed heads about how we all got it so wrong... which also saw Treasury yields drop notably (30Y -8bps on the week and 10Y down 16bps from its Monday highs). Equities remain the big year-to-date winners and despite some of the biggest single-day gains in over a year today gold and silver remain at the lower end of the pile. The Nikkei and the S&P lead global DM equities (now what do they have in common?). Then with minutes to go, S&P futures collapsed on massive volume to the lows of the day...

Just. One. Moar...

It seems, based on the latest Fed POMO schedule that there will be no 'Taper' anytime soon. We are downgrading our communications warning from "shorting the market on these days 'will' cause pain" to "shorting the market on these days 'may' cause pain" based on the increased volatility and total disarray that appears to have broken out among the great, good, and wise at the Fed this week - we still await the big "just kidding..." line from the Bernank... In summary, spot the non-tapering trend: May POMO: $44 billion; June POMO: $45 billion; July POMO: $45 billion.

If judging a state's intellectual capacity can be quantified by the percentage of the population with higher education (or the street smarts to garner student loans... to gain a degree of course because anything else would be illegal), then the District of Columbia ranks as the 'smartest' while Mississippi and West Virginia rank as the 'dumbest'. Perhaps most notable is that 52% of US Graduates are either employed with jobs that don't require a degree or are unemployed.

“We just want to make sure that all of those things are in a spot that we control, simply because of what they are," is the 'excuse' that the Canadian Mounties are using to seize a “substantial amount” of firearms from homes in the evacuated town of High River. That news didn't sit well with a crowd of frustrated residents, as The Calgary Herald reports, who found it "absolutely incredible that [the Mounties] have the right to go into a person’s belongings out of their home,” warning that "when people find out about this there’s going to be untold hell to pay." About 30 RCMP officers set up a blockade at the checkpoint, preventing 50 residents from walking into the town which sent the crowd of residents into a rage, "What’s next? Tear gas?” shouted one resident, "it’s just like Nazi Germany, just taking orders," shouted another, "this is the reason the U.S. has the right to bear arms."

The world is a big place, after all. And there’s a tremendous amount of freedom and opportunity ripe for pioneering, talented people. Snowden is now marred in a number of banal legal technicalities. The US government has cancelled his passport (another questionable legal move from Uncle Sam). So he appears stuck in the international transit area at Moscow’s Sheremetyevo airport. He’s not legally able to fly back to Hong Kong. Nor is he legally able to board a flight to Havana for onward travel to Ecuador, in order to apply for asylum. If Mr. Snowden had been able to procure a second passport prior to stepping into the limelight, he would likely not be in this predicament as he could have been traveling on his other passport. This is one of the hidden virtues of having a second passport. You might never ‘need’ one. But should such a need ever arise, it can really be a life saver.

Day after day we are force-fed the typical mumbo-jumbo jargon memes from strategists, analysts, and asset-gethering commission-takers. Today we get a breath of fresh air from, arguably, the man on the street - whose perspective seems very prescient. 'Pawn Star' show business owner Rick Harrison explains to CNBC - in words that we can all understand - why gold remains a crucial insurance for people because "governments can screw up the currency," how our economy is based purely on printing money, physical gold and paper gold disconnects - "I'm having a real difficult time right now getting physical metal. It is the crazy world of gold and silver; sometimes the paper market is going down, but you can't actually find the physical items," and the increasingly bubble-like reality of our housing market (especially in Las Vegas).

How bad is the situation? Quite bad. As as of last night, courtesy of SMRA, we know that the amount of ten-year equivalents held by the Fed increased to $1.608 trillion from $1.606 trillion in the prior week, which reduces the amount available to the private sector to $3.603 trillion from $3.636 trillion in the prior week. There were $5.211 trillion ten-year equivalents outstanding, down from $5.242 trillion in the prior week. After the Treasury issuance, maturing securities, rising interest rates, and Fed operations during the week, the Fed owned about 30.86% of the total outstanding ten year equivalents. This is above the 30.63% from the prior week, and the percentage of ten-year equivalents available to the private sector decreased to 69.14% from 69.37% in the prior week.