As widely expected, the Bundesverfassungsgericht (Germany's Federal Constitutional Court) ruled in favor the German government and did not overturn the EFSF bailouts. Of course, this does not greenlight the safety of each and every profligate spending peripheral and core country at the expense of the German taxpayer. The court continued on its path of demanding more from the Bundestag with regard to the strict adherence of conditions, as the budget committee must approve any new guarantees, and this ruling is not a blank check.
A few days ago we learned that the SEC was either objectively going after every single HFT shop by demanding frontrunning blueprints, or it was merely pandering to the requirements of GETCO, which is in dire need of eliminating some of its more profitable competitors. Now, the WSJ informs that the same porn-addicted regulators are going after ETFs: yet another market product that the enforcement regulator, in its multi-year long career-enhancement focused hiatus, has totally forgotten about and is finally starting to realize has more of an impact on the market than virtually anything else currently in the trading domain. The skeptics will say that this is nothing but ETF giant Blackrock stretching its wings and making sure it doesn't have to share the spoils of frontrunning war with anyone. Whether that is the case, we will find out soon enough, in the meantime we learn that the SEC is "looking into whether turbocharged exchange-traded funds amplified August's topsy-turvy swings in the stock market." Apparently years, because it is no longer months, after the flash crash, the SEC has realized that the convexity and gamma brought about by HFTs in the ETF space merely adds leverage upon leverage, sending the market into spasms of unnecessary but inevitable bouts of momentum chasing: "SEC officials are zeroing in on "leveraged" ETFs, which amplify investor bets, often through derivatives. Derivatives are financial contracts with values linked to another asset. The funds typically offer double or even triple the return of an index, such as the Standard & Poor's 500-stock index." Soon enough, we dread to think, the SEC may also realize that it has absolutely no clue about market topology and structure, nor how anything actually works in modern markets. But since the response by the midget porn fanatics will take years if not decades, we doubt anyone is too concerned. After all Keynesianism itself has at best one, maybe two summers left. Max.
I’ve Just Been Fired
I am very sad to tell you that I’ve just been fired over the phone by Yahoo’s Chairman of the Board. It has been my pleasure to work with all of you and I wish you only the best going forward.
Sent from my iPad
When it comes to European bureaucrats, the easiest way to determine if they are lying is whether or not their mouths are open. Yet there are those rare occasions in which even the most hardened of liars let one slip. The Economic Collapse, always the master of compiling impactful bulletins, has prepared a list of just such "slip" quotes that "are absolutely shocking. In Europe they openly admit that the financial system is dying, that the euro is in danger of not surviving and that the EU does not work in its present form." In other words, ignore the ceaseless headlines of promises that all shall be well. Because it won't. Here is all you need to know about the imminent end of the Eurozone, straight from the horses' mouths.
Oddly enough, just two years after hiring Sallie Krawcheck from Citi, BofA has just made her into the first sacrificial scapegoat. Odder still, is that Lehman also fired a women scapegoat a few weeks before it filed for bankruptcy. Coincidence? Find out when Brian Moynihan is fired in a few short weeks.
In keeping with the tradition of always blaming something for everything that doesn't do quite as expected, be it the rain, the heat, the cold, the snow, (henceforth known as "the climate"), the earthquakes, the tsunamis, the nuclear power plant explosions (henceforth known as "the life"), or simple things (no pun intended) such as former presidents (henceforth known as the "Bush"), even when the current one is campaigning hard for this second term, we now have identified the one and only culprit for the market collapse: Europe. As the following chart from John Lohman demonstrates, just like back in 2009/2010 the entire market move higher was due to POMO days and the "first Monday" phenomenon (between these two events alone, they accounted for about 120% of the entire market move higher) in the past two years, so now we have the inverse situation, whereby almost the entire drop in stock can be blamed on Europe. Specifically, well over twice the market decline since the beginning of July can be traced to market hours in which Europe is open, while the drop in hours when Europe sleeps is completely unremarkable. For the arb-minded, this means that selling the Europe close to Europe open and buying the Europe open to Europe close boundaries will result in outsided returns. Then again, this has been known for a while: as we tweeted today at 11:30 am Eastern when Europe close, we expected the melt up to proceed. Sure enough, 150 DJIA points later, this was the only catalyst that was required. However, a caveat: these simplistic trades usually work amazingly well, until they don't and someone ends up getting badly hurt.
One of the very first questions that spread like wildfire in the aftermath of the FHFA's $196 billion lawsuit against 17 banks (and alleged settlement with Wells Fargo), is just how cluelessly idiotic and beyond incompetent must Fannie and Freddie have been to allow themselves to be duped to the amount of not $1, not $2, but hundreds of billions of dollars worth of mortgages, for which they are now demanding a pound of flesh. Well, here comes the original refutation, which is supposed to make it all better: "At the heart of the suits is FHFA’s conclusion that the actual mortgages backing many of the securities had characteristics that differed in a material way from what had been represented in securities filings. Under the securities laws at issue here, it does not matter how “big” or “sophisticated” a security purchaser is, the seller has a legal responsibility to accurately represent the characteristics of the loans backing the securities being sold." Get it? Like every other mom and pop out there, the FHFA was simply duped by the originators: after all who expects an investor to check even the basest of logical premises in a market in which negative growth rates would lead to a #Ref! result. As for allegations that the FHFA will blow up the world should it pursue this litigation, here is what they had to say: "Some have claimed that these suits will disrupt economic recovery, or endanger the targeted banks, or increase their cost of capital. While everyone is concerned with these important issues, the long-term stability and resilience of the nation’s financial system depends on investors being able to trust that the securities sold in this country adhere to applicable laws. We cannot overlook compliance with such requirements during periods of economic difficulty as they form the foundation for our nation’s financial system. Therefore, through these lawsuits, FHFA turns to the courts to adjudicate the violations that it has alleged in its complaints." Who would have thunk it: faith in the rule of law is actually required from a systemic basis. Well, how about someone actually go to jail?
When all else fails, change the rules, and shove your head even deeper in the sand:
- IMF has agreed to substantially lower initially estimate for European bank sector capital needs according to Eurozone sources
- Private sector expected to meet bank recapitalisation needs, according to Eurozone sources
- Eurozone has no plans for public support for banks over and above money in bailouts for Greece, Ireland and Portugal according to Eurozone sources
- "We have discussed this with the IMF in detail and the IMF has agreed that this initial figure will be revised downwards and the revision will be quite substantial," a euro zone official participating in the talks said.
Of course, this won't change anything about the fact that Eurobanks are insolvent, that the ECB is undercapitalized, that the Greek bailout is falling apart. But what matters is that the IMF, or the world's former bailout, and now completely irrelevant, organization courtesy of China, will allow banks to proceed far further undercapitalized than prudent, until it has to bail out not one, but all, and at the same time. As a reminder, the IMF expected a need of $200 billion, which the eurocrats say is goign to be far lower... Even as Goldman's report, first released on Zero Hedge, said that the full amount will be 5 times bigger, or $1 trillion. As much as Goldman is blasted left and right, they at least know how to use that HP12C. Which is far more than we can say about the idiots from Luxembourg.
As of Monday, which may have been a holiday in the US but was anything but in floundering Europe, the ECB held a whopping €166.8 billion in its deposit facility. This is an increase of €15 billion over Friday, and is the highest since August 2010. What this means, simply said, is that European banks are so terrified of holdings cash with each other or frankly in any market conduit not explicitly backstopped by the ECB (we will spare you the LIBOR chart, suffice it to say that 3M USD Libor increased again, this time from 0.333% to 0.336% as perfectly non-shadow interbank funding is becoming rares than hen's teeth). Between the Libor chart and the amount of cash banks have dumped en masses with Trichet (who for some reason is considered a safe locus for capital), one will have a very good perspective of just how ugly the European funding crisis is. Tomorrow we also get an update of how many if any banks borrowed USDs on the special ECB lending facility, which in turn would mean a conduit loan from the New York Fed. If the answer is affirmative, and if one or more banks did indeed borrow dollars, expect SocGen and the usual European suspects to be slammed hard as usual in regular trading tomorrow.
Here Is How Switzerland Caught Up To The Rest Of The World In Devaluing Paper Currencies Against GoldSubmitted by Tyler Durden on 09/06/2011 - 14:42
There is just one chart that must be seen to appreciate the rationale behind the SNB's action earlier today: the relative performance of any given currency against the absolute: gold. Just like back in FDR times, the only thing that mattered was how to devalue the dollar against the yellow metal, so too now various fiat issuers realize that while they all devalue relative to each other on a step-wise basis, they all must devalue in absolute terms against such undilutable "constant curerncies" as gold. As the chart below shows, the CHF was dangerouly lagging its own devaluation relative to gold, with even the Brazilian Real doing far better, er, worse, in absolute terms. Which is why today's action resulted in a nearly 10% devaluation in the currency against what matters. As for the relative devaluation, well, trade flows will take care of that. Or so the rabid Keynesians roaming the countryside believe. The final take home from the chart is that the SNB still has quite a ways to go in devaluation before it catches up with the rest of the 'developed' world.
Confirming that this is a market for idiots, by idiots, was the 4 am response in the price of gold, which following the SNB's Swiss Franc peg announcement did not surge, as it should have considering that the SNB just singularly changed the role of the CHF from a "flight to safety" to a carry currency, making gold the only island of stability in a world of fiat insanity, but instead plunged by over $50. Subsequent attempts to regain the $1900+ level were met with constant program selling for no other reason, than just because someone 'else' was selling. Of course, the logic is completely and totally the opposite. But don't take our word for it: here is Reuters: "Switzerland's decision to peg the erstwhile safe-haven franc to the euro may finally give gold bugs the chance to see prices hit the once-unimaginable $2,000 an ounce mark, as the metal holds on track for its strongest annual rally in three decades. By buying euros in unlimited amounts to weaken the franc, the SNB is in effect putting more of its own currency into circulation, which threatens to trigger inflation. It has also impacted the Swiss currency's status as a haven in its own right. While gold prices initially dipped as the move sparked a rush to liquidity in the form of other currencies such as the dollar, the SNB move is likely to lend firm support to gold in the medium term, analysts said." Precisely. And it is not only Reuters: Bank of America's MacNeill Curry said that Gold will probably rise to $2,050 this year. The rationale - identical to the above: SNB decision to peg franc to euro should also support gold. "They have taken out one of the big safe-haven assets, which is the Swissie." As for the amount of time the idiots will need to realize that QE3 coupled with the SNB action means that gold is now valued somewhere well over $2000: at least a few days...Which everyone who looks for even the smallest golden pullback will be happy to take advantage of.