Just when one thought every imaginable taxpayer bailout scheme had been seen, experienced and in many cases, forgotten, here comes AIG once again. The specifics come from Deutsche Bank's Joshua Shanker initiation of coverage report on AIG (naturally with a Buy rating, $34.00 target price), where within the fine print he notes: "the company believes there may be bargains available from buying RMBS securities from European banks seeking better positioning under Basel III requirements. " Prudently, he adds: "We note that increased yield, in this regard, also carries with it increased risk." Translated this means that AIG is about to do for European banks what the ECB so far has been unwilling and/or unable: namely to transfer the risk associated with European banks' massive ongoing exposure to the continuously collapsing US housing market back to the US taxpayer, in the form of AIG, which was bailed out once, and which will certainly be bailed out again, when the time comes.
Over A Year After Being Dismissed As Sensationalist For Questioning the ECB's Continued Solvency After Sovereign Debt Buying Binge, Guess What!Submitted by Reggie Middleton on 06/09/2011 09:08 -0500
I warned that the attempt to centrally plan 16 economies in concert, by force nonetheless, would result in the Eurocalypse (that's a Reggie Middleton copyrighted term)! As is customary with warnings of common sense against unbridled, optimistic BULL(ishness), I was dismissed as being sensationalist. Well, as Malcom X is known as saying, "The chickens are coming home to roost!"
Trichet: "Strong Vigilance" Needed, ECB Raises 2011 Inflation Range From 2.0%-2.6% To 2.5% to 2.7%; July 1.50% Rate Hike ComingSubmitted by Tyler Durden on 06/09/2011 07:42 -0500
Soundbites from the Trichet conference:
- TRICHET: ECB SEES "UPWARD PRESSURE" ON EURO AREA INFLATION
- TRICHET: "STRONG VIGILANCE" NEEDED ON INFLATION RISKS; ECB WILL ACT IN FIRM AND TIMELY MANNER; ECONOMIC UNCERTAINTY REMAINS "ELEVATED"
- SEES 2011 INFLATION AT 2.5% TO 2.7% VS PREV 2.0% TO 2.6% *TRICHET SAYS HIGHER INFLATION FORECASTS REFLECT ENERGY COSTS
- TRICHET: COMMODITY, ENERGY COSTS DRIVING PRICE PRESSURES; UNDERLYING PACE OF MONETARY EXPANSION RECOVERING
- TRICHET: UNDERLYING PACE OF MONETARY EXPANSION RECOVERING; MONETARY STANCE IS "ACCOMODATIVE"
- TRICEHT: GREECE NEEDING ABOUT EU45B OF NEW LOANS; GREECE WILL GET EU57B OF LOANS UNTAPPED FROM 2010; RAISE EU30B FROM ASSET SALES THRU '14
- TRICHET: ECB TO SECURE FIRM ANCHORING OF PRICE EXPECTATIONS; ECB "WILL DO ALL THAT IS NEEDED" ON INFLATION
- TRICHET: NON-STANDARD MEASURES ARE TEMPORARY
- TRICHET: ECB TO KEEP FIXED RATE ALLOTMENT TENDER FOR 3 MONTH LTRO OPERATIONS FOR Q3
- TRICHET: ECONOMIC ACTIVITY EXPECTED TO BE SOMEWHAT DAMPENED BY BALANCE SHEET ADJUSTMENT
The EURUSD chart looks like an EKG
Our research analyst was interviewed by Carolyn Cui from Wall Street Journal regarding why we believe CME should have raised margins on silver earlier and had missed the best opportunity to do so.
The latest soundbite from Bill Gross comes from the Morningstar fund conference, where he again repeated his conviction that there will be no QE3. Reuters reports: "Pimco co-chief investment officer Bill Gross said the Federal Reserve would not be able to start a third round of quantitative easing after the second round expires at the end of this month. The members of the central bank's open market committee are "balanced but divided," Gross, manager of the world's largest bond fund, said on Wednesday in a speech at the Morningstar fund conference. "It will be difficult to initiate a QE3." Instead, the Fed will try to keep interest rates low with its official statements, Gross said. Gross's fund, the $243 billion Pimco Total Return Fund, has gained 3.24 percent so far this year, trailing 58 percent of similar funds, according to Morningstar data."
One of the conclusions that I try to coax, lead, and/or nudge people towards is acceptance of the fact that the economy can't be fixed. By this I mean that the old regime of general economic stability and rising standards of living fueled by excessive credit are a thing of the past. At least they are for the debt-encrusted developed nations over the short haul -- and, over the long haul, across the entire soon-to-be energy-starved globe. The sooner we can accept that idea and make other plans the better. To paraphrase a famous saying, Anything that can't be fixed, won't. The basis for this view stems from understanding that debt-based money systems operate best when they can grow exponentially forever. Of course, nothing can, which means that even without natural limits, such systems are prone to increasingly chaotic behavior, until the money that undergirds them collapses into utter worthlessness, allowing the cycle to begin anew.
Yesterday Reuters reported that a troubling, yet potentially inevitable development may be imminent: the default of the US, granted, a short-lived one (though we are not sure just how the world's "reserve" currency will be backed by a national that is technically insolvent). Luckily for the US, everyone else (except China) is just as bankrupt. Yet if there is one thing pushing Lehman into competitive bankruptcy just so that Goldman would have a monopoly in the US fixed income sales and trading market, it is that any such action will have massive downstream consequences, and in the pyramid of "unpredictable downstream effects", the insolvency of the US is at the very top. And just to make it clear, now that a default is becoming a palpable option, China announced that the United States is "playing with fire" if it opts to briefly default on its debt, which could undermine the dollar, Li Daokui, an adviser to China's central bank said on Wednesday. Yet the statement could very well backfire after Li, speaking on the sidelines of a forum, said China needs to dissuade the United States from defaulting on its debt, but he believed China may hang on to its investment in U.S. Treasuries in any case. This is precisely the case made by Stanley Druckenmiller: in fact, should there be a technical default, US bonds will become a true safe haven investment as America will for the first time take a step to indicate that it believes the relentless abuse of its fiscal situation is coming to an end.
As has been repeated on Zero Hedge many times, with the stock market just 15% off its post-Jackson Hole surge highs, the market continues to be irrationally exuberant that QE3 will come come hell or high water. No. That will not happen until all the mutual funds who have been holding for 2+ years realize that in order to get another heroin hit, some will have to be wiped out (thank near-record margin debt and record low cash holdings) before QE3 does arrive. The latest to confirm this is Goldman Sachs, which via a note just released by Dominic Wilson confirms our speculation that "QE3 optimism is excessive." Ironically, the only thing that will guarantee QE3 is a fresh round of significant pains which retraces the entire QE2 move higher. Nobody in the long-only community wants to hear it. Alas, it is the truth. As usual: he who sells first, will have a job tomorrow...
There is a great deal of uncertainty among investors about what the future of the U.S. economy may look like – so I decided to take a stab at what’s likely to happen over the next 20 years. That's enough time for a child to grow up and mature, and it's long enough for major trends to develop and make themselves felt. I’ll confine myself to areas that are, as the benighted Rumsfeld might have observed, “known unknowns.” I don’t want to deal with possibilities of the deus ex machina sort. So we’ll rule out natural events like a super-volcano eruption, an asteroid strike, a new ice age, global warming, and the like. Although all these things absolutely will occur sometime in the future, the timing is very uncertain – at least from the perspective of one human lifespan. It’s pointless dealing with geological time and astronomical probability here. And, more important, there’s absolutely nothing we can do about such things. So let’s limit ourselves to the possibilities presented by human action. They're plenty weird and scary, and unpredictable enough.
Not only are the PDs treating Treasury paper like last week’s garbage, banks in general are also dumping the stuff.
Dollar At One Month Lows On PBOC Advisor Comments That Chinese FX Formation Mechanism Needs "Drastic" ReformSubmitted by Tyler Durden on 06/07/2011 06:12 -0500
Appeals for changing the fixed CNY exchange mechanism are now coming not only from the office of Chuck Schmuer. In a column in China's Caixin website, Zhou Qiren, a central bank advisor, said that China's yuan exchange rate formation mechanism needs drastic reform. "The central bank has used too much money to intervene in the foreign
exchange market, so modest reform is not going to help," said Zhou, a
member of the Monetary Policy Committee under the People's Bank of
China, in his special column on the Caixin website. "We need drastic measures," he said. Zhou said the growth of China's monetary base is largely decided by the
central bank's purchase of foreign exchanges, which in turn is fueling
inflation. The comments resulted in dollar weakness overnight as soon as they hit the wires, sending the DXY to one month lows of about 73.616, a level last seen on May 5. The statement offset some carry currency weakness overnight after the RBA decided to keep rates unchanged at 4.75% in a widely expected decision, though a hike is still thought likely in coming months to combat inflation amid a massive trade and mining boom. Additionally, courtesy of further rumormongering out of Europe, which today has been with a EUR-bullish bias, the EURUSD has continued its uptrend, and is now also trading at one month highs, appreciating by 700 pips since recent lows of under 1.40 on May 23, last printing at 1.4666. As usual, Greek newsflow will dominate the EURUSD, and thus, the general market.
The media has been replete lately with a variety of different government officials saying that there will not be a third round of Quantitative Easing. Even the great Ben Bernanke himself on April 27th spoke against the possibility of QE 3. This isn't surprising, of course, because in order for something like QE to have the most effect it needs to be, well, a surprise. However, I am throwing down the gauntlet and making the call - there will be Quantitative Easing, and a big one most likely, by the end of summer. There I said it; of course, I have actually been saying this for the last couple of months and it doesn't take much of a real genius to figure it out considering that we are heading into a presidential election year. However, it most likely won't be called QE 3 since the term QE is now politically and socially almost taboo.
It's one thing for the EU to vote on a rescue plan for Greece that bounds the population into lives of servitude to pay off Central Bank loans but quite another to get the people to accept it.
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The Real "Margin" Threat: $600 Trillion In OTC Derivatives, A Multi-Trillion Variation Margin Call, And A Collateral Scramble That Could Send US Treasurys To All Time Records...Submitted by Tyler Durden on 06/05/2011 20:42 -0500
While the dominant topic of conversation when discussing margin hikes (or reductions) usually reverts to silver, ES (stocks) and TEN (bonds), what everyone so far is ignoring is the far more critical topic of real margin risk, in the form of roughly $600 trillion in OTC derivatives. The issue is that while the silver market (for example) is tiny by comparison, it is easy to be pushed around, and thus exchanges can easily represent the illusion that they are in control of counterparty risk (after all, that was the whole point of the recent CME essay on why they hiked silver margins 5 times in a row). Nothing could be further from the truth: where exchanges are truly at risk is when it comes to mitigating the threat of counterparty default for participants in a market that is millions of times bigger than the silver market: the interest rate and credit default swap markets. As part of Dodd-Frank, by the end of 2012, all standardised over-the-counter derivatives will have to be cleared through central counterparties. Yet currently, central clearing covers about half of $400 trillion in
interest rate swaps, 20-30 percent of the $2.5 trillion
in commodities derivatives, and about 10 percent of $30 trillion in
credit default swaps. In other words, over the next year and a half exchanges need to onboard over $200 trillion notional in various products, and in doing so, counterparites, better known as the G14 (or Group of 14 dealers that dominate derivatives trading including Bank of America-Merrill Lynch,
Barclays Capital, BNP Paribas, Citi, Credit Suisse, Deutsche
Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, RBS,
Societe Generale, UBS and Wells Fargo Bank) will soon need to post billions in initial margin, and as a brand new BIS report indicates, will likely need significant extra cash to be in compliance with regulatory requirements. Not only that, but once trading on an exchange, the G14 "could face a cash shortfall in very volatile markets when daily margins are increased, triggering demands for several billions of dollars to be paid within a day." Per the BIS "These margin calls could represent as much as 13 percent of a G14 dealer's current holdings of cash and cash equivalents in the case of interest rate swaps." Below we summarize the key findings of a just released discussion by the BIS on the "Expansion of central clearing" and also present a parallel report just released by BNY ConvergEx' Nicholas Colas who independetly has been having "bad dreams" about the possibility of what the transfer to an exchange would mean in terms of collateral posting (read bank cash payouts) and overall market stability, and why a multi-trillion margin call could result in the biggest buying spree in US Treasurys... Ever.