In a stunning shun to Congressional lawmakers, WSJ reports that The Fed has failed to comply with a request that the bank-owned entity identify the individuals who leaked The FOMC Minutes to Medley Global Advisors a day before the official release in October 2012. Rep. Jeb Hensarling sent a letter to Fed Chairwoman Janet Yellen on April 15 asking the Fed to name them by 5 p.m. EDT April 22. The deadline passed without any response by the Fed...
Hence, if and when a genuine price for risk reappears, the effect may be greatly magnified as it was in the US housing market a few years back under not dissimilar circumstances. As Karl Popper noted, volatility can be suppressed in a capitalist system, but it must ultimately reappear. Sooner or later, we will face a good deal of fireworks.
"Where are the defaults?" UBS asks, referring to the highly leveraged US shale complex. "They're coming," is the answer, as current bond prices assume oil prices in the 60s and 70s.
One must understand that the easy money via QE from the Fed and zero interest rates allowed many shale players to burn free cash flow while showing operationally net of capital expenditures (which were funded by cheap flowing monies via FED) cash generation. To be clear, that model is now broken as the era of free Fed money appears to waning as both QE, and soon, zero rates become a thing of the past. The cost of capital is no longer falling but is now rising through higher bond yields and/or lower stock prices. The madness that is occurring in financial markets on discounting these events despite very weak, almost recessionary economics, boggles the mind.
- Because it just gets funnier: UK speed trader arrested over role in 2010 'flash crash' (Reuters)
- ... and funnier: Mystery Trader Armed With Algorithms Rewrites Flash Crash Story (BBG)
- Presidential hopeful Rubio reaches out to gay Republicans (Reuters)
- Varoufakis Sees Differences Narrowing in Creditor Talks (BBG)
- China Debt Mess Brings Out the Yin and Yang in Policy Makers (BBG)
- Hedge Fund That Made 18% on Dollar Strength Now Bets on Drop (BBG)
- Whistleblower Jim Marchese Scores Millions in Payout—Again (WSJ)
- Release of Benghazi Report on Hillary Clinton Likely Pushed to Election Season (BBG)
Whether it is in sympathy with the now relentless surge in the Shanghai Composite which tacked on another 2.44% overnight to close at a fresh multi-year high just shy of 4400, well more than double from a year ago, or because Mrs Watanabe was unable to read the latest Japan trade data whose first trade surplus in 3 years hinted that there will be no new easing by the BOJ any time soon, but overnight the Nikkei closed above 20,000 for the first time in 15 years, with "makers of chocolate, mayonnaise, potato chips and household appliances" helping lift the Tokyo market according to the WSJ. The now daily Asian euphoria however did not last long in the European session, and after opening higher, the Stoxx Europe 600 slipped into negative territory just an hour into trading, and was down 0.4% by midmorning, lead by a near 1% decline on Athens' mains stock index, which has since recouped losses stemming from the overnight report that the ECB is considering an up to 50% haircut on Greek bank collateral, a move that would wipe out the Greek financial sector with ease.
Despite goldilocks (to use a financial market cliche) conditions characterized by the interplay between yield-starved investors, rock-bottom borrowing costs, and companies’ propensity to leverage their balance sheet in order to inflate earnings and underwrite their stock price, at least one leading indicator is flashing red.
It has begun...
30% of German debt trades at or below the depo rate and some 60% carries a negative yield. The way things are going now, central bank Bund purchases will have to be in maturities of 7 years or more within just 6 weeks, and of course that timeframe could accelerate meaningfully should things take a turn for the worst in Athens. Ultimately, the math doesn't add up and it appears as though modifications to PSPP's structure will be necessary (perhaps at the ECB's September meeting) in order to prevent a forced taper.
Of course no two financial crashes ever look exactly the same. The crisis that we are moving toward is not going to be precisely like the crisis of 2008. But there are similarities and patterns that we can look for. Sadly, most people are not willing to learn from history. Even though it is glaringly apparent that we are in a historic financial bubble, most investors on Wall Street cannot see it because they do not want to see it. This next financial crisis will be strike number three. After this next crisis, there will never be a return to “normal” for the United States.
"...the ladder that has supported the move to record high U.S. corporate profit margins is beginning to snap. It may be a long way down."
On one hand, Bill Gross says that "German 10yr Bunds = The short of a lifetime." On the other, the ECB is about to run out of bonds to monetize at current prices as the Bund yield slides every lower to the ECB's hard floor of -0.20%. End result: someone will be very hurt...
Despite our exposure of the contagious risk increases in peripheral bond spreads, "many European officials believe a Greek exit would be manageable, and in contrast to 2010-2011, we wouldn’t see the same cascading effect on countries like Spain or Ireland,” according to the European Centre for International Political Economy in Brussels and EU Chair Jeroen Djisselbloem even noted that "the Greek situation can be isolated." It appears America is getting nervous at Europe's apparent complacency... White House economic adviser Jason Furman says a Greek exit from the euro zone would present "VERY LARGE AND UNNECESSARY RISK FOR GLOBAL ECONOMY."
From 8x over-subscribed to 60c on the dollar in one year: (almost) well played "yield chasers" with other people's money!
Mario Draghi said this week that the transmission channels for European Q€ were opening up and crowed how well his cunning plan was working (by well we assume he means stocks are up). Today we get the ultimate test of that 'transmission' as 3-Month EURIBOR fell below 0.00% for the first time ever (likely wreaking havoc on European derivative pricing models). In English that means banks are being paid to borrow from one another in the interbank money-markets (which sounds a lot like a 'glut' of excess cash) seemingly confirming ICMA's de Vidts fears: "We are scared about the [repo] market freezing," as the ECB is "driving without headlights in the dark." Of course this is yet another disturbing distortion on the heels of homeowners being paid to take out mortgages...