Guest Post: Federal Reserve Policy Mixed With Extreme Weather Has Put The World On A Fast Track To Revolution And WarSubmitted by Tyler Durden on 08/25/2011 - 22:39
There are many factors that clearly demonstrate why it would be disastrous for the Federal Reserve to repeat their vicious Quantitative Easing (QE) policy. If you want to know a significant reason why they cannot get away with another round of QE, here is an equation for you: (Quantitative Easing + Extreme Weather = Revolution + World War III)
The biggest news of the day today was not that some old crony capitalist had doubled down yet more of his non-taxable wealth on a bet Bank of America would yet again be bailed out, or that Wall Street is about to be sumberged under 3 feet of water. No, the most notable event from today was what we commented on in our first post from 7 am, namely that: "If we crossed through some spacetime vortex that brought us back in time just two short months ago, to July of this year, today's confirmation that the second Greek bailout has now failed, following the Finnish finance minister's comments that the country will defy Germany and will not give in to demands to abandon its deal for Greek collateral, which in turn has sent the Greek 2 year bond bidless, its yield up 227 bps to an all time record 46.38%, would have been enough to send the futures and the EURUSD plunging." Well, a few hours later, we did get a plunge, even if it was not in the US, but in Germany, where the entire local market flash crashed upon realizing what we noted hours prior: that Greece is now pretty much done. Yet it turns out there was more: unwilling to admit defeat yet, Greece was forced to pull out the last rabbit hiding deep in the recesses of the hat. As the Telegraph reports, "In a move described as the "last stand for Greek banks", the embattled country's central bank activated Emergency Liquidity Assistance (ELA) for the first time on Wednesday night." Such efficiency out of the Greeks for once- not a single Persian was harmed, or even needed, in this 21st century version of Thermopylae: the Greeks did it all on their own.
On August 25, 2011 at 15:45:48, in a one second period of time, there were more than 10,000 quotes and exactly zero trades in DELL. Close inspection of these quotes reveals something very disturbing. This cannot be dismissed as a computer problem or glitch. This can't be explained as stupidity or some oversight. It is not pinging for hidden liquidity. And it's certainly not price discovery. As far as we can tell, it's not adding liquidity or narrowing the bid/ask spread. There are approximately 4,000 stocks that quote during active trading. Which means 40 million quotes/second if just one of the 9 exchanges allow this nonsense to spread to all 4,000 symbols. You would need 40 gigabits per second of bandwidth to receive data at that rate. Unfortunately, we think it's just a matter of time, because events like this one in Dell are no longer isolated or rare. And it doesn't look like there are any grown-ups in charge.
Presenting Warren "Archimedes" Buffett's Amazing 24 Hour Monster Bank of America Due Diligence SessionSubmitted by Tyler Durden on 08/25/2011 - 20:59
Earlier today, courtesy of the unbreakable bond between Warren Buffett and CNBC's Becky Quick, we learned that supposedly Warren came up with the idea to invest $5 billion in Bank of America (which really is $2 billion when accounting for the intrinsic value of the warrants, which in turn makes the dividend on his at risk investment a stunning 15% but we digress - more here) while in the bathtub on Wednesday morning. What is interesting, is that according to the just released Securities Purchase Agreement, between Warren's Archimedes moment yesterday, and the announcement this morning, here is what he contractually represents and warrants that he did...
In addition to tomorrow's 10am headline event, which most likely will not tell us anything we don't already know, a just as important data release will occur at 8:30 am, when the BEA releases its second Q2 GDP estimate. Wall Street, which is now proven to be beyond incompetent when predicting GDP data (just recall the first Q2 GDP number fiasco), anticipates a number of 1.1%, down from the preliminary 1.3% announced last month. What is disturbing is that the far more credible analysts at Stone McCarthy, a firm that does not sell bonds or stocks, and just so happens is far more accurate than most sellsiders, now predicts a stunning 0.7% first revision to GDP. And remember: this number comes 90 minutes before Bernanke comes off embargo. What will happen to the market if the algos suddenly realize that the economy is currently experiencing its first sub-0% growth GDP quarter (the first condition of a recession), and there is no help coming from Bernanke. Furthermore, Wall Street has already started revising down its August NFP data, due out the first week of September. So with the next FOMC meeting on September 20 (followed by the November 1-2 two day meeting, during whicha week ago the Fed formally announced QE2), how will the market react knowing there is no help in sight for at least 4 weeks? We doubt it will be favorable.
Hopefully, this is as bad as it will get. Per Reuters, New York Governor Andrew Cuomo on Thursday declared a state of emergency to prepare for the potential impact of Hurricane Irene, which could hit the state this weekend. The formal declaration allows the state to aid counties, cities and towns "more effectively and quickly," get help from the national Emergency Management Assistance Compact and get federal help earlier, the Democratic governor said in a statement. "We are communicating with our federal and local partners to track the storm and to plan a coordinated response, and we will deploy resources as needed to the areas expected to be hit the hardest," Cuomo said.
When it comes to counterparty risk, one can look at CDS, for an indication of how the market view a given bank's counterparty risk, or, one can observe how the banks themselves evaluate each other, courtesy of daily Libor fixings by bank. When it comes to Europe it is well known that dollar funding pressures are the most representative of overall liquidity stress. As such, we look at the 3 Month USD libor for various BBA-reporting banks. The picture, over the past month, is not pretty, especially if one is Barclays or RBS. The chart says it all.
RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 25/08/11
The European Dollar Funding Crunch Is Back: Fed Does Another $500 Million In USD Swaps This Time With The ECBSubmitted by Tyler Durden on 08/25/2011 - 16:25
And now for some disturbing news out of the ECB, just in time for tomorrow's sub-1% GDP announcement and Jackson Hole disappointment. Unlike last week, when the Fed conducted a $200 million FX swap with the Swiss National Bank, this week the bank in dire needs of dollar funding is the ECB itself... and for two and a half times than last week. Furthermore, unlike last week, when we knew in advance that at least one European bank was experiencing a dollar liquidity event, this time the update from the ECB indicated no USD-based liquidity constraints: the $500 million in 7 day USD punitive loans quietly expired and everyone once again assumed that Eurozone liquidity is back to normal. It isn't. The question once again now becomes, who finds themselves in a dollar funding crunch?
Now that we can directly monitor the amount of quote stuffing in the NYSE courtesy of Nanex (an ability that the SEC apparently never will have), we know that every time there is a massive spike in hollow trade (as in without intentions to cross bids or asks, something everyone but the SEC and the HFT lobby believes should be a felony offense), the market is programmed to either rip of plunge. Sure enough, at just after 3:19 pm we saw an epic spike in empty packets on the NYSE, which set off red flags and immediately prompted us to observe the move in ES, which naturally confirmed that an HFT driven coordinated buy order (no block) was going through and pushing the ES well on its way to VWAP. Market manipulation no longer needs anything more than a coordinated packet stuffing dump, as what happened on May 19. Keep in mind: these work on both the upside and the downside- the reason why suddenly everyone hates HFT after loving it for over 2 years, is that while it provides volumeless levitation, it just as easily can serve as quicksand in a downmarket. That, however, does not make it right, and just as two years ago, when we first brought attention to the matter, so today, we claim that HFT should be abolished immediately by the imposition of a minimum active quote latency. That would eliminate all quote stuffing in a millisecond.
After 3 months ago everyone was convinced there was no QE3 imminent ever, all it took for the lemming majority to scramble to the other side of the boat was a 20% drop in stocks. Since then, following a brief stabiliziation in stocks, based precisely on beliefs that Bernanke would once again pull something from this bag of goodies, the lemmingrati once again shifted back, and the majority now pretends it does not expect anything out of Jackson Hole tomorrow, even though it obviously does, as otherwise the market would resume its plunge. UBS earlier conducted a survey among money managers, finding that 50% of the 82 respondents expect Bernanke to limit Jackson Hole remarks only to reviewing the rationale for the Fed to pledge ZIRP until mid 2013. Then there are those who actually told the truth, such as Goldman which, in a note yesterday, says that $1 trillion in QE3 is an absolute minimum if the Fed wants to get GDP higher by at least 0.5%. To wit: "Taken together, our analysis suggests that QE3 is unlikely to be a panacea for growth. Nonetheless, our estimates suggests that $1trn of asset purchases–or an equivalent increase in the duration of the Fed's balance sheet–might increase GDP growth by up to 0.5 percentage point in the first year after any announcement of QE3." And since we are talking the truth here, why not stop pretending you care about GDP - just think of the marginal impact on Wall Street bonuses...
Just like Interactive Brokers predicted the last CME margin hike with 100% precision, here it comes again. It is now all too clear that the CME risk managers have decided to do to gold what they did to silver: namely shake out the weak hands with as many as 5 or more margin hikes in a row. Since everyone else is all cash, the CME's attempt to manipulate the market is coming to an end.
Krieger is on fire today: "The interesting thing about today is that I had intended to write this piece on Warren Buffett all week. It was just really fortuitous timing that this Bank of America news came out today. Gosh where to start. First of all, this $5 billion preferred investment by Uncle Warren in preferred stock is extremely bearish for the market, the economy and the financial system. This is not an investment, it is political-economic strategy. It tell us so many things that we probably already suspected. It tells us that Bank of America did indeed need capital. Even worse they probably need so much that they went to Uncle Warren for five big ones so that people would just look the other way and gain “confidence.” This is how out to lunch these guys are. They don’t understand that the root of the lack of confidence is that the people see a country devolving into a Banana Republic led by greedy oligarchs and politicians stealing everything in sight as the ship sinks....This is 1789 France folks as I have said many times before. Second, the fact that TPTB are resorting to Uncle Warren for everything now may mean the Fed is out of the game. No one has confidence in the Fed to come save the day so they need the next thing. That next thing is Uncle Warren. Unfortunately it’s not working and it is not going to work. You can see it in the market today. People are waking up. They are starting to see through the matrix. Buffett is a fraud and a shill. If you follow him it will be right over a cliff."
There is a silver lining though: just as it has over the past 3 years, the world's Bernanke Put "Heads I win, Tails the world blows up" hub may survive simply courtesy of being in the eye of the Hurricane. Alas, this time around, the other side will arrive much faster: after all the Fed can not print windbreaks.
And so the Irene-induced state of emergency pronouncements start trickling in. First, New Jersey Governor Chris Christie signed a state of emergency order and urged people at the Jersey Shore to leave voluntarily by mid-day tomorrow as Hurricane Irene approaches the Northeast. The governor, in a briefing with reporters, said he was considering a mandatory evacuation of the Jersey Shore area. Following this news is the announcement by the US coast guard which issued a hurricane alert for Long Island sound. But the biggest losers? Insurance companies: both Chubb and Allstate CDS have spiked on expectations this hurricane could be a doozy in claim terms (although we urge readers to check their hurricane insurance: many times the deductible is far higher if the damage is caused by a Hurricane than a Tropical Storm: alas, this may be a saving grace for some insurance cos). What would be amusing is if the biggest loser out of today, now that BAC is threatening to close read for the day, is Berkshire's insurance empire.