Volcker Rule - Who cares? I know we are supposed to care more about this convoluted rule, but we just can’t. The concept that somehow “prop” trading brought down the banks seems silly. The idea that market making desks were a dangerous part of the equation is ludicrous. They could have fixed this with a few simple changes, but that would have meant some blame would have had to be shifted onto the regulators...
Ben Bernanke is participating in an IMF panel with Larry Summers, Ken Rogoff, and fromer Bank of Israel chief Stan Fischer... Full speech below...
There are three dimensions to the broader investment climate: the trajectory of Fed tapering, the ECB's response to the draining of excess liquidity and threat of deflation, and Chinese reforms to be unveiled at the Third Plenary session of the Central Committee of the Communist Party.
The Fed will have to increase QE (not taper it) because systemic debt is compounding faster than production and interest rates are already zero-bound. Lee Quaintance noted many years ago that the Fed was holding a burning match. This remains true today (only it is a bomb with a short fuse). Thirteen years after the over-levered US equity market collapsed, eleven years following Bernanke’s speech, five years after the over-levered housing bubble burst, and four years into the necessary onset of global Zero Interest Rate Policies and Long-Term Refinancing Operations, global monetary authorities seem to have run out of new outlets for credit. In real economic terms, central bank policies have become ineffective. In other words, the US is now producing as much new debt as goods and services.
This week marked what we suspect will become an important inflection point when the world looks back at this debacle of a bubble. The Fed, having already warned in January of 'froth' in credit markets (and ths the fuel for 'hope' in stocks) proposed tougher underwriting standards for leveraged loans. Credit markets have underperformed since; but as Diapason Commodities' Sean Corrigan notes, the baleful impact of the central banks is still everywhere to be seen in the credit markets. From junk issuance to the rapid regrowth of the CDO business to the 'record' high multiples now being exchanged for LBOs; Central Banker's monomaniacal fixation on zero interest rates and artificial bond pricing is setting us up for the next, great disaster of misallocated capital and malinvested resources.
As it turns out, a lot... and also very little.
As fast-food workers of the world unite under a common banner of "higher minimum 'livabale' wages", one can't help but reflect on the terrible jobs data this morning and the potential inability of workers to get anything but a low-skill 'part-time' job flipping burgers. But most importantly, these workers may soon not be able to afford the product they manufacture. Concerns over rising wage costs can be put aside for now as it is the soaring costs of beef (as we discussed here previously) that are causing "Dollar Menu" items to be adjusted upwards. "You can't sell a burger for $1 anymore because the cost of beef has gone up so much," and sure enough, as Bloomberg reports, McDonalds is testing a new version, dubbed 'Dollar Menu and More', that includes items selling for as much as $5. As one analyst notes, the industry's "definition of value has moved up from the Dollar Menu to $1.50 or $2.”
Those curious if the Indian Rupee cratered once again in overnight trading will be disappointed: following the previously reported intervention by the RBI in which it would provide US dollars only to crude companies, the currency rose strongly at the open only to fade and trade rangebound before closing in the mid 67 range. In other words, much more will be needed by the central bank to stabilize the currency, the markets and the economy. The main overnight story, however, remains the Syrian conflict and market reactions to it. Stocks traded higher in Europe early today, with credit spreads tightening as market participants scaled back expectations of an imminent strike on Syria after US Defense Secretary Hagel said that the US will act on Syria only with international collaboration. Of note, the G-20 is set to take place next week where Syria is widely expected to be the hot topic for discussion among global world leaders. But while futures ramped in early trade following a spike in the USDJPY over 98, they have since retraced most of their upside, and crude is back to nearly unchanged.
While hardly news to frequent visitors, especially those who recall the following list, anyone who needs a 7 minute refresher into why the US middle class is on collision course with extinction is urged to watch the following brief video which highlights all the salient facts such as:
- 76% of Americans live paycheck to paycheck
- 27% of American have no savings at all
- 46% of Americans have less than $800 in savings
- The conversion of America into a part-time working society and the country's second largest employer - a temp agency.
- The college trap and the student loan bubble
- And of course, foodstamps, foodstamps, foodstamps and the nearly 50 million poverty-level Americans who need them to survive
Why seven minutes? Because everyone knows that just like you can't get "six minute abs", so it is impossible to recap the doom of America's middle class in only six minutes (or, gasp, less).
"At all times, ultimate collateral and ultimate money remain crucial reference points in modern financial markets, but the actual instruments are important only in times of crisis when promises to pay are cashed rather than offset with other promises to pay.... Our world is organized as a network of promises to buy in the event that someone else doesn’t buy. The key reason is that in today’s world so many promised payments lie in the distant future, or in another currency. As a consequence, mere guarantee of eventual par payment at maturity doesn’t do much good. On any given day, only a very small fraction of outstanding primary debt is coming due, and in a crisis the need for current cash can easily exceed it. In such a circumstance, the only way to get cash is to sell an asset, or to use the asset as collateral for borrowing."
For the second consecutive day futures have drifted lower following a drubbing in the Nikkei which was down nearly 3% to just above 14K (time to start talking about the failure of Abenomics again despite National CPI posting the first positive print of 0.2% in forever and rising at the fastest pace in 5 years) and the Shanghai Composite which dropped to just above 2000 once again, after PBOC governor Zhou saying that China has big economic downward pressure and further reiterated prudent monetary policy will be pursued. This is despite Hilsenrath's latest puff piece which pushed the market into the green in yesterday's last hour of trading and despite initial optimism which saw stocks open higher following forecast-beating EU earnings gradually easing and heading into the North American open stocks are now little changed. It may be up to the WSJ mouhtpiece to provide today's 3pm catalyst to BTFATH, or else it will be up to the circular and HFT-early released UMichigan confidence index to surge/plunge in order to push stocks on any red flashing news is good news.
Plunging Chinese manufacturing and an 11 month low PMI got you down? Don't worry: there's a Europe for that, which overnight reported that manufacturing and service PMI in Germany and, don't laugh, France soared far above expectations (German Mfg and Services PMIs of 50.3 and 52.5, up from 48.6 and 50.4, and above expectations of 49.2 and 50.8; French Mfg and Services PMIs of 48.3 and 49.8, up from 47.2 and 48.4 and an 11 and 17 month high, respectively, blowing away expectations of 47.6 and 48.8). The result was a composite Eurozone Manufacturing PMI of 50.1, above 50 for the first time since February of 2012, up from 48.8 and at a 24 month high - reporting the largest monthly increase in output sunce June 2011, as well as a composite Services PMI of 49.6, up from 48.3, and an 18 month high. In other words, European Composite PMI is expanding (above 50) for the first time since January 2012.
The following story from Bloomberg's Jonathan Weil should be familiar to anyone who i) wanted to get rich quick; ii) wasn't too willing to read the small print, and iii) put their faith in a TBTF bank. Or simply watches South Park. Jon recounts the story of "Philip L. Ramatlhware, an immigrant from Botswana who went to a Citigroup branch in downtown Philadelphia one day five years ago to open a regular bank account. He was 48 years old at the time and disabled, after being hurt in an accident as a passenger on a Greyhound bus. In April 2008, he received $225,000 in a settlement for his injuries, part of which went to pay legal fees. He was holding the settlement check when he walked into the branch. Immediately he was referred to a broker for a “financial consultation,” according to an arbitration claim he filed against Citigroup. The broker assured him the money would be invested in “guaranteed” funds and that he could have access to them whenever the need arose, the complaint said. Ramatlhware gave him $150,000 to invest. The broker put $5,000 into a bank certificate of deposit, bought a $133,000 variable annuity and invested the rest in a series of mutual funds. Less than six months later, Ramatlhware had lost $40,000, according to the complaint."
Overview of the investment climate.
Goldman On ECB's Collateral Shift: "Total Eligible Collateral Of €15 Trillion Expands By €20 Billion, Or 0.1%"Submitted by Tyler Durden on 07/19/2013 08:06 -0500
Yesterday, in a widely leaked move, the ECB announced it was lowering haircut higher rated collateral (and rising haircuts on lower rated collateral) for European banks in a move that is supposed to ease credit channels in Europe and boost lending. But will it? And what is the impact on actual eligible collateral as a result of this move. According to Goldman analysis, the impact of the ECB's move is virtually non-existent (but then why do it?) or 0.1% to be specific. Specifically, what yesterday's announcement does is boost the pool of eligible collateral, estimated at €15 trillion, by €20 billion.