Earlier today, the Financial Stability Board (FSB), one of the few transnational financial "supervisors" which is about as relevant in the grand scheme of things as the BIS, whose Basel III capitalization requirements will never be adopted for the simple reason that banks can not afford, now or ever, to delever and dispose of assets to the degree required for them to regain "stability" (nearly $4 trillion in Europe alone as we explained months ago), issued a report on Shadow Banking. The report is about 3 years late (Zero Hedge has been following this topic since 2010), and is largely meaningless, coming to the same conclusion as all other historical regulatory observations into shadow banking have done in the recent past, namely that it is too big, too unwieldy, and too risky, but that little if anything can be done about it. Specifically, the FSB finds that the size of the US shadow banking system is estimated to amount to $23 trillion (higher than our internal estimate of about $15 trillion due to the inclusion of various equity-linked products such as ETFs, which hardly fit the narrow definition of a "bank" with its three compulsory transformation vectors), is the largest in the world, followed by the Euro area with a $22 trillion shadow bank system (or 111% of total Euro GDP in 2011, down from 128% at its peak in 2007), and the UK in third, with $9 trillion. Combined total shadow banking, not to be confused with derivatives, which at least from a theoretical level can be said to offset each other (good luck with that when there is even one counterparty failure), is now $67 trillion, $6 trillion higher than previously thought, and virtually the same as global GDP of $70 trillion at the end of 2011.
Together, the market and democracy are what we like to call "the system." The system has driven and enticed bankers and politicians to get the world into trouble. One of the side effects of the crisis is that all ideological shells have been incinerated. Truths about the rationality of markets and the symbiosis of market and democracy have gone up in flames. Is it possible that we are not experiencing a crisis, but rather a transformation of our economic system that feels like an unending crisis, and that waiting for it to end is hopeless? Is it possible that we are waiting for the world to conform to our worldview once again, but that it would be smarter to adjust our worldview to conform to the world? At first glance the world is stuck in a debt crisis; but, in fact, it is in the midst of a massive transformation process, a deep-seated change to our critical and debt-ridden system, which is suited to making us poor and destroying our prosperity, social security and democracy, and in the midst of an upheaval taking place behind the backs of those in charge. A great bet is underway, a poker game with stakes in the trillions, between those who are buying time with central bank money and believe that they can continue as before, and the others, who are afraid of the biggest credit bubble in history and are searching for ways out of capitalism based on borrowed money.
Great timing. The ubiquitous post-European close trend-reversal was extended by some 'nothing' comments from Boehner that every media outlet is inferring means everything's fixed and compromise is close. Boehner says talks with Obama were constructive. Outlined a framework with Obama; Will accept revenue if spending cuts. It's not - what did we expect him to say?AAPL jumped up to VWAP and S&P 500 futures coincidentally reached overnight highs/stops. Now let's see if anyone really believes...
There was precious little in terms of actionable news in the overnight session, which means that, like a broken record, Europe falls back to contemplating its two main question marks: Greece and Spain, with the former once again making noises about the "inevitability" of receiving the Troika's long delayed €31.5 billion rescue tranche. The chief noise emitter was Italian Finance Minister Vittorio Grilli who said he was "confident that euro-region finance chiefs will reach an agreement on aiding Greece when they meet next week." He was joined by Luxembourg Finance Minister Frieden who also "saw" a Greek solution on November 20. Naturally, what the two thing is irrelevant: when it comes to funding cash flows, only Germany matters, everything else is noise, and so far Schauble has made it clear Germany has to vote on the final Troika report so Europe continues to be in stasis when it comes to its main talking point. In fundamental European news, there was once again nothing positive to report as Euro-area exports fell in September as the region’s economy slipped into a recession for the second time in four years. Exports declined a 1.1% from August, when they gained 3.3%. Imports dropped 2.7%. The trade surplus widened to 11.3 billion euros from a revised 8.9 billion euros in the previous month. Global trade, at whose nexus Europe has always been at the apex, continues to shrink rapidly. Elsewhere, geopolitical developments between Israel and Gaza have been muted with little to report, although this will hardly remain as is. Providing some news amusement is Japan, where the LDP opposition leader Shinzo Abe continues to threaten that he will make the BOJ a formal branch of the government and will impose 2% inflation targeting, which in turn explain the ongoing move in the USDJPY higher. This too will fade when laughter takes the place of stunned silence.
A number of economists and economics writers have considered the possibility of allowing the Federal Reserve to drop interest rates below zero in order to make holding onto money costlier and encouraging individuals and firms to spend, spend, spend. This unwillingness to hold currency is supposed to stimulate the economy by encouraging productive economic activity and investment. But is that necessarily true? No — it will just drive people away from using the currency as a store of purchasing power. It will drive economic activity underground and banking would be turned upside down. Japan has spent almost twenty years at the zero bound, in spite of multiple rounds of quantitative easing and stimulus. Yet Japan remains mired in depression. A return to growth for a depressionary post-bubble economy requires a substantial chunk of the debt load (and thus future debt service costs) being either liquidated, forgiven or (very difficult and slow) paid down.
Until recently, the only question traders had to ask themselves was "how much more to buy?" The last week or so has left traders across the market now suddenly plagued by numerous questions. Will an Obama speech continue to be the catalyst for selling pressure to resume? Why is VIX 'low' when all around is asunder? When do the BTFD crowd step back in? Where's the 'wall of money' flowing now? From new issue demand to Italy's ratings agency trials and from bounce-buyers waiting for Godot to VIX's complacency, FBN's Michael Naso and Mint's Blain cover some of the conundra.
28 million taxpayers would be faced with a very large, unexpected tax liability for the current tax year (2012).
Markets, you see, always live in this “day before” where the bend in the highway never comes, where the path is always straight and fixed and where it is generally thought that nothing of consequence will happen. Then some event takes place, something magical or wonderful or awful occurs and the world is turned on its axis and nothing is ever the same again. We are in danger, “clear and present danger” and the strategy of the “day before” is no longer appropriate. $400 billion has poured into bond funds this year, an all-time record, with yields at depressed levels indicating a quite real flight to safety. The United States lost thirty-six percent of its wealth during the American Financial Crisis and, people or institutions, the song rolls across the landscape, “We won’t get fooled again!”
The US Presidential election has ended and the market is beginning to return to reality. And reality is not pretty...
We have discussed the apparent (though anecdotal) divergence between refinancing rates and interest rates a number of times. Furthermore, we have exclaimed at the significant drop in refi rates since QE3 (following the initial spike) noting the unintended consequence that US households are increasingly realizing that rates will never be allowed to rise and so every rate rise is not a signal to rush into refinancing but instead a signal to pause for lower rates. The chart below is somewhat surprising in its clarity as Goldman Sachs note that despite record low mortgage rates, borrowers are refinancing at a rate of just 20-30% per year - far lower than prepayment speeds we would expect. The great majority of 'in the money' mortgages are not being refinanced and while we suggest this is the unintended Bernanke conditioning, Goldman also opines that industry capacity and underwriting standards on the supply side; and consumer awareness and household behavior on the demand side. Bernanke's wealth-building transmission channel via housing is entirely broken...
With expectations that Europe will once again become a flaming powderkeg after the US elections are over running high, Europe has so far not disappointed. And as usual, the focal catalyst of greatest pain remains Greece, which is only now learning what ZH readers knew days ago, namely that the Greek "austerity" vote was merely theater, and that Europe, i.e., Germany, has certainly not decided to release any of the much needed cash that Greece needs not only to run its society but to make a key bond payment on November 16. Confirming this was German finance ministry spokeswoman Marianne Kothe, who said on Friday that Eurozone finance ministers will probably not be able to decide at their upcoming Eurogroup meeting on Monday whether to disburse a badly-needed €31.5 billion loan tranche to Greece, as MNI reported earlier. "Speaking at a regular government press conference here, Kothe reminded that German Finance Minister Wolfgang Schaeuble needs the approval of the German Bundestag, the lower house of parliament, before being able to approve any further aid for Greece. “It will be difficult to achieve this by next Monday,” she said." In other words, the Greek default is suddenly in the hands of the German people, of whom at last check about 60% wanted Greece gone. There is yet hope for Greece, with a story overnight running that George Soros is ready to commit "serious funds to aid Greece." Surely that generosity too will end well for the Greek people who by now must feel as if they are in the 5th circle of a NWO globalization hell.
Yesterday, we were offered 'hopes and prayers' by Gluskin Sheff's David Rosenberg. However, as he warned then, there are some things to be worried about. From the wide gaps in voting patterns across socio-economic lines and the expectations that populist policies will be the hallmark of Obama's second term to the mixed-to-negative data across employment data, consumer spending indications, housing, and Europe; it appears the market is starting to price in some positive probability of a fiscal cliff and these macro data do nothing to subsidize that reality. While the President does not face the Great Recession of four years ago, he does confront the "Not So Great Recovery" nonetheless.
There was one election outcome yesterday that few noticed, judging by mainstream media. We are referring to Colorado’s Amendment 64, which regulates marijuana in a similar manner to alcohol. It is basically full legalization of pot for adults over 21. It’s interesting that the two states to legalize marijuana both voted for Obama in this election. Will he now betray all these faithful voters? Based on his first term performance, you can count on it. Your move Mr. Holder.
The very same problems that the world faced on November 5, 2012 remain in place. And we now know that those in power (Bernanke and Draghi) favor money printing over everything else. So the cost of living/ inflation will continue to rise and the world will lurch ever closer to the great debt implosion that will eventually take down the financial system.
The "Believe In Germany Bailing The EU" Trade: Go Long Magic Wand Raw Materials & Harry Potter ParaphernaliaSubmitted by Reggie Middleton on 11/07/2012 09:56 -0500
How's this for a Harry Potter-like Incantation? Margin up magic, go short math! Believe Germany will escape unscathed, prepare to take a bath!