A few hours ago, the IBEX hit a level of 5905, the lowest since April 2003. The irony is that as recently as weeks ago, various momentum chasing self-professed stock "experts" saw some technical formation or another, making them believe that the bottom is finally in for the IBEX, which is "fixed." Turns out it wasn't; it also turns out the market was completely wrong and the result is a 12% slide in the Spanish stock market in two days as reality's return is fast and furious. If this happened in the US, it would be the equivalent of 1500 DJIA point collapse in 48 hours, and unleash mass panic and civil disobedience as people realized their 201(k) is really a +/- 001(k).
Here we go again: just like the summer of 2011, when it achieved absolutely nothing but succeeded in increasing the panic to a fever pitch, Italian regulator Consob has just reintroduced a selling ban for financial stocks. Supposedly, it will last only a week. Last year it was also supposed to be short-term but was only removed after the LTRO fooled everyone (well, not everyone) into believing Europe was fixed. It wasn't. Expect a modest blip higher, followed by the inevitable flush lower as every other European country follows suit, starting first with Spain.
Spain-Men in Black are here
Riots, chaos, mayhem—these are not the earmarks of a contented society... But can the stock market go up anyway??
Falling interest rates are a feature of our current monetary regime, so central that any look at a graph of 10-year Treasury yields shows that it is a ratchet (and a racket, but that is a topic for another day!). There are corrections, but over 31 years the rate of interest has been falling too steadily and for too long to be the product of random chance. It is a salient, if not the central fact, of life in the irredeemable US dollar system. Irving Fisher, writing about falling prices (I shall address the connection between falling prices and falling interest rates in a forthcoming paper) proposed a paradox: “The more the debtors pay, the more they owe.” Debtors slowly pay down their debts and reduce the principle owed. This would reduce the NPV of their debts in a normal environment. But in a falling-interest-rate environment, the NPV of outstanding debt is rising due to the falling interest rate at a pace much faster than it is falling due to debtors’ payments. The debtors are on a treadmill and they are going backwards at an accelerating rate. How apropos is Fisher’s eloquent sentence summarizing the problem!
Scandal At The IMF: Senior Economist Resigns, Says "Ashamed To Have Had Any Association With Fund At All"Submitted by Tyler Durden on 07/20/2012 13:58 -0500
The rats everywhere are now jumping furiously off the titanic, but few had taken the time to write a letter explaining in detail just how cracked and broken the hull really was. This has now changed, with the departure of Peter Doyle, formerly a division chief in the IMF’s European Department responsible for non-crisis countries and currently an adviser to the Fund. Not content with quietly slinking off the scandal ridden organization which has become the butt of all jokes in the international community, where humor about Lagarde's Louis Vuitton panhandling bag is as pervasive as punchlines about just how incompetent the organization is at actually doing its duty, Doyle has penned the following scathing letter which tears down every myth about the IMF: from its impartiality, to the selection process of its head, to its effectiveness. The letter also contains the following gem: "After twenty years of service, I am ashamed to have had any association with the Fund at all." Pretty much says it all. This is a scandal in the making, and one which may shake to the core the credibility of the IMF in the context of international organization.
Two days ago we made the "missing link" connection between traders in Libor manipulating banks (all of which curiously had a hub in Singapore: something else for the media that has been about 4 years too late on this topic to focus on) and hedge funds (most of which curiously centering on the otherwise sleepy bastion of banking: Geneva, Switzerland). The immediate aftermath was the loss of trading privileges of one Michael Zrihen. We are fairly certain this is just the beginning of the hedge fund bust: when all is said and done, many more funds will have terminated traders they hired for reasons (and kickbacks) unknown over the past 2 years as Lie-bor manipulators sought to put a clean firewalled break between their old employer and current one. Because apparently sometimes the regulators are that stupid and can be confused by a simple job change. And while many have assumed (and even calculated based on completely groundless assumptions) that only BBA member banks have benefited from Libor manipulation, the reality is that hedge funds were just as complicit and benefited just as much if not more. What is worse, they took advantage of their whale client status with manipulating banks, and courtesy of Total Return Swap and other leveraged gimmicks, made far more money when they co-opted two or more banks to do their bidding. Impossible you say: hedge funds would never be so stupid. Oh very possible: we present exhibit A - Brevan Howard, a "fund, with assets of $20.8 billion as of Dec. 31, has never had a losing year and returned 14.4 percent annualized from its April 2003 inception through the end of 2008" as Bloomberg said in a made to order profile of the funds recently. Perhaps there is a very simple reason for this trading perfection: "Brevan Howard telephoned on 20 Aug 2007 to ask the defendant to change the Libor rate," according to a paper filed with the Singapore High Court cited by Bloomberg."
Consumers are paying an easy $35 dollars per barrel over what they would otherwise dole out for a barrel of oil if fund managers didn`t use the benchmark futures contracts as their own personal ATMs.
This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied - The SequelSubmitted by Tyler Durden on 07/19/2012 18:05 -0500
Two years ago, in January 2010, Zero Hedge wrote "This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied" which became one of our most read stories of the year. The reason? Perhaps something to do with an implicit attempt at capital controls by the government on one of the primary forms of cash aggregation available: $2.7 trillion in US money market funds. The proximal catalyst back then were new proposed regulations seeking to pull one of these three core pillars (these being no volatility, instantaneous liquidity, and redeemability) from the foundation of the entire money market industry, by changing the primary assumptions of the key Money Market Rule 2a-7. A key proposal would give money market fund managers the option to "suspend redemptions to allow for the orderly liquidation of fund assets." In other words: an attempt to prevent money market runs (the same thing that crushed Lehman when the Reserve Fund broke the buck). This idea, which previously had been implicitly backed by the all important Group of 30 which is basically the shadow central planners of the world (don't believe us? check out the roster of current members), did not get too far, and was quickly forgotten. Until today, when the New York Fed decided to bring it back from the dead by publishing "The Minimum Balance At Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market FUnds". Now it is well known that any attempt to prevent a bank runs achieves nothing but merely accelerating just that (as Europe recently learned). But this coming from central planners - who never can accurately predict a rational response - is not surprising. What is surprising is that this proposal is reincarnated now. The question becomes: why now? What does the Fed know about market liquidity conditions that it does not want to share, and more importantly, is the Fed seeing a rapid deterioration in liquidity conditions in the future, that may and/or will prompt retail investors to pull their money in another Lehman-like bank run repeat?
Despite all the pats on the back from fellow EU political members and reassurances that all will be well with political reforms, 10Y Spanish bond spreads (the additional risk over German bunds that investors demand before lending money to Spain) just hit all-time record highs. At over 580bps, we are now we well above the pre-Euro era highs (remember focus on spread not yield since Bund rates were so different back then - though current yields remain above the 7% Maginot Line of unsustainability). Spain 10Y bond spreads are now 40bps wide of pre-Summit peak levels and 130bps wider than post-Summit kneejerk reaction lows. But look at stocks and we know all is fixed in Europe...
In an exclusive report Zero Hedge yesterday presented the connection between the 16 BBA member banks, and something far more sinister: the sleepy, quiet (just as they want it) universe of Swiss hedge funds and private banks. One of our key focuses was on a gentleman named Michael Zrihen. We said: "So allegedly Zrihen, who now works in Geneva (keep a note of this), manipulated Libor at CA, and is now at Lombard Odier - "Geneva's oldest firm of private bankers and one of the largest in Switzerland and Europe." There is no news on whether Zrihen has been let go by Lombard Odier. Yet." We now have news. As of moments ago:
- LOMBARD ODIER SAYS MICHAEL ZRIHEN `NO LONGER TRADING'
- LOMBARD ODIER SAYS ZRIHEN JOINED THE FIRM IN DEC 2010
- LOMBARD ODIER SAYS HAS NO ROLE IN EURIBOR, LIBOR SUBMISSIONS
As a reminder, this is just the tip of the Swiss Liebor rabbit hole. Many more hedge funds will be implicated.
Morgan Stanley reported earnings this morning, and showed that unless one has massive loan loss reserves to release, US banks are in big trouble. The firm just reported $0.28 EPS including DVA benefit, on expectations of $0.29. But it was the top line that got blown out, with the firm reporting $7.0 billion in revenue including the DVA fudge, but more importantly $6.6 billion. The expectations was for a $7.58 billion top line: a 14% miss. The top line number plunged over 25% compared to a year ago. The main reason for the collapse in profit: the virtual disappearance of any cash from combined fixed income, commodity and equity sales and trading, which imploded from $3.7 billion a year ago, to just $1.9 billion this quarter. And while the company slashed comp in Q2 as was to be expected following such horrible results, by over 33% to $1.4 billion from $2.2 billion, here is what most are focused on: "As a result of a rating agency downgrade of the Firm's long-term credit rating in June, the amount of additional collateral requirements or other payments that could be called by counterparties, exchanges or clearing organizations under the terms of certain OTC trading agreements and certain other agreements was approximately $6.3 billion, of which $2.9 billion was called and posted at June 30, 2012." In other words, the company has yet to post more than half of its contractually required collateral. In the aftermath of these atrocious earnings, we wish them all the best in getting access to this cash.
Libor is not a market determined interest rate, rather it is a trimmed mean from a survey of banks participating in a survey conducted on behalf of the British Bankers Association (BBA). There are a number of problems inherent in the survey-based Libor calculation. Chairman Bernanke was asked in testimony several times yesterday whether Libor should be dropped as a benchmark interest rate. His answer was Libor should be repaired or some market determined interest rate should be embraced as an alternative. He offered up 2 market-determined replacement possibilities for Libor: (1) Repo Rates; and (2) OIS rates. Both are market determined interest rates, but neither in our minds captures the essence of what Libor is supposed to measure. Stone & McCarthy's preference for a Libor alternative would simply be the eurodollar rate.
It's about time for Frances funding rate to feel a little pressure, no?
There is a strange delayed reaction between the initial exposure of weakness in the financial system and the public’s realization of the truth, sort of like Wile E. Coyote dashing off a cliff in the cartoons only to continue running in mid-air above the abyss below. It is a testament to the fact that beyond the math, there is an undeniable power of psychology in our economy. The investment world naively believes it can fly, even with the weight of endless debt around its ankles, and for a very short time, that pure delirious oblivious belief sustains the markets. Eventually, though, gravity always triumphs over fantasy…