Capital Markets

Despite the barrage of geopolitical headlines involving Iran, and as of today, the US and Israel, especially as pertains to wargame exercises in the Straits of Hormuz, a different, and potentially much more important story is to be found in the country's capital markets, and specifically its currency, which has continued to tumble ever since Obama signed the Iran financial boycott on New Year's Day as reported here. And, as we predicted, it is the aftershocks of the boycott which may have the most adverse impact on geopolitics. Because if the Iran regime finds itself in a lose-lose situation with its economy imploding and its currency crashing, the opportunity cost of doing something very irrational, from a military standpoint or otherwise, gets lower and lower. Then again, something tells us the US administration has been well aware of this sequence of events all along. Here is Art Cashing explaining it all.

For anyone who still hasn't grasped the magnitude of the central planning intervention over the past four years, the following two charts should explain it all rather effectively. As the bottom chart shows, currently the central banks of the top three developed world entities: the Eurozone, the US and Japan have balance sheets that amount to roughly $8 trillion. This is more than double the combined total notional in 2007. More importantly, these banks assets (and by implication liabilities, as virtually none of them have any notable capital or equity) combined represent a whopping 25% of their host GDP, which just so happen are virtually all the countries that form the Developed world (with the exception of the UK). Which allows us to conclude several things. First, the rapid expansion in balance sheets was conducted primarily to monetize various assets, in the process lifting stock markets, but just as importantly, to find a natural buyer of sovereign paper (in the case of the Fed) and/or guarantee and backstop the existence of banks which could then in turn purchase sovereign debt on their own balance sheet (monetization once removed coupled with outright sterilized asset purchases as is the case of the ECB). And in this day and age of failed economic experiments when a dollar of debt buys just less than a dollar of GDP (there is a reason why the 100% debt/GDP barrier is so informative), it also means that central banks now implicitly account for up to 25% of developed world GDP!

When it comes to the fabled President's Working Group on Capital Markets, also known as the Plunge Protection Team, the myths about the subject are certainly far greater than any underlying reality. To be sure, vast amounts of popular folkflore has been expounded into the public arena, with most of it being shot down simply due to it assuming conspiracy theories of such vast scale that the human mind is unable to grasp the complexity, and ultimately the inverse Gordian Knot makes an appearance with the claim that vast conspiracies are largely untenable simply because it is impossible to keep a secret from so many people for so long. Yet what if the secret is not a secret at all but is fully out in the open, and is only a matter of interpretation, and contextualizing? Why just 3 years ago it would appear preposterous to allege the capital markets are a ponzi and that the Fed does everything in its power to keep stocks higher. Well, what a difference three years make: now the Chairman himself in a Washington Post OpEd has admitted that the sole gauge of Fed success is the loftiness of the Russell 2000, neither unemployment nor inflation really matter now that the Fed's third mandate has been fully whipped out. Furthermore, Keynesian economics, and the entire top echelon of the educational system have also been accurately represented as a paradigm which merely perpetuates the status quo as the alternative is the realization that the whole system is a house of cards. As for the global capital markets being nothing short of a ponzi, we merely point you to the general direction of Europe, the ECB and the continent's banks, where the monetary interplay is nothing short of the world's biggest pyramid scheme. Yet the PPT, or whatever it is informally called, does not exist? Consider further that only recently did it become known that the former SecTres Hank Paulson himself was exposed as presenting material non-public information to a bevy of Goldman arb desk diaspora hedge funds, headed by with none other than the head of the President's Working Group on Capital Markets Asset Managers committee David Mindich. So, if contrary to all the evidence that there is some vast underlying pattern, if not a conspiracy per se, one were to take the leap of faith and take the next step, where would one end up? Well, most likely looking at the Exchange Stabilization Fund, or ESF, which Eric deCarbonnel has spent so much time trying to unmask. Is it possible that the ESF, located conveniently at the nexus between US monetary policy, foreign policy and last but not least, a promoter of the interests of the US military-industrial complex, is precisely the  organization that so many have been trying to expose for years? Watch and decide for yourself.

Continuing our tradition of listing what according to Zero Hedge readers were the key news events of the year for the third year in a row (2009 and 2010 can be found here and here), we present, as is now customary, the most popular posts of the year as determined by the number of page views, or said otherwise - by the readers themselves. So without further ado, here are this year's top 20.

One of the long-term recurring themes both here and in other more objective media, has been the encroaching domination of the central planning regime, or monetary authorities, read central banks, in the domain of capital markets and overall broad sovereignty, to the point where there is neither technical nor fundamental analysis left, but merely the question of where is the next batch of excess liquidity going to come from. Welcome to the death throes of the fiat system. Artemis Capital has released an extended must read presentation that summarizes just how global changes in trade, currency exchange, global monetary excess liquidity in recent decades, and especially in the coming future, will increasingly determine and define risk, and more troubling, the centuries old anarchism of state sovereignty. Anarchism, because as Europe has demonstrated so very well, in the current world the only real actors are the central banks. And with each passing day they become ever more powerful players in the global capital markets arena, as confirmed by correlations that rise every higher, approaching 1.000 across all asset classes. Anyone wondering why the only fulcrum variable for the future of risk will be FX exchange rates, and why any and all wars in the future will be primarily in binary "currency" format, we urge a careful reading of the attached slideshow by Artemis Capital titled "Fall of the House Of Money: Changes in Global Trade and Currency Exchange."

The only thing better than general satire, is capital markets satire, courtesy of William Banzai, who explains precisely what to expect following the imminent start of trading in GRPN shares (remember: get them now before they are "90% off" in a group discount liquidation, and bundled free with that weekly Brazilian wax special). 

Take a good look at the chart below of the best bids and offers of the stock TDI. The red circles are new best ask prices and each new circle (ask) cancels and replaces the previous one. The green circles are best bid prices -- which never change on this chart. All quotes (both bid and ask) are from one exchange. We selected this example for its simplicity. Many stocks are much more complex to analyze, as there are multiple exchanges involved and all four quote components change: bid price, bid size, ask price, and ask size.Using the chart below, see if you can answer these questions: 1. What is the Bid/Ask spread of this stock at 9:43:13? 2. What is the average Bid/Ask spread for the time period shown? The answer to both questions of course, is that the Bid/Ask spread depends greatly on where you live.

It is not 2008. It is far worse. Unlike 3 years ago, the central banks were not all in on "bailing out the world" and thus actually had dry powder to do so, as they eventually did: where will the status quo go for a global bail out this time? Below we present 7 Bloomberg charts, following yesterday's indication of a liquidity lock out, showing all too well the surge in counterparty risk, but more importantly the lock out in European capital markets. To all those who thought that transferring ever more peripheral risk to the European core would have no consequences (sorry, it did: German CDS is wider than the UK for the first time ever), and did not hedge appropriately, our condolences.

Anyone just waking up and noticing futures trading just barely below the closing print may get the impression that things are fine. They are not. Here is what has happened overnight as the global central planning cartel does everything in its power to prevent the global market rout, which has so far wiped out $7.8 trillion in market value around the world, from morphing into the catalyst that ends the status quo. To wit: ECB resumes buying Italian and Spanish bonds (UniCredit says the bank is losing a “game of chicken” with lawmakers by not holding out for budget cuts and higher taxes, and may eventually need to print money), the G-20 is prepared to take joint measures to stem a global crisis, Brazilian Finance Minister Guido Mantega said. Greece’s securities regulator banned all short-selling on the Athens exchange for two months starting today. Taiwan’s government bought stocks yesterday and this morning through four funds it controls. South Korea’s regulator asked pension funds, brokerages and asset-management companies to step up efforts to stabilize the market. South Korea also bans short selling for three months starting August 10. And lastly, rumors of an emergency Fed announcement are ripe. So... after all this global cartel intervention, is it any wonder that futures staged a near vertical move up overnight?

Zero Hedge has been warnings about the scourge of High Frequency Trading long before most in the general public had even heard about the concept. Over the past 2 years, and culminating with the Flash Crash it became all too clear that HFT is nothing but a parasitic phenomenon which churns volume in stocks providing the best liquidity rebates, while pretending to be adding liquidity. Recently the best we can do is to provide glaring examples of HFT algos gone wrong in hopes that some regulator somewhere will finally take the long overdue step to establish a minimum bid/ask time delay and thus put virtually the entire HFT frontrunning math Ph.D. crew out of business. The latest development in the ongoing saga against these parasites comes from none other than the Bank of England's Andrew Haldane who prepared a speech to the International Economic Association Sixteenth World Congress in Beijing China, titled "The race to zero" which essentially recaps the hundreds if not thousands of posts we have written on the matter of risks posed by High Frequency Trading, and blasts the concept, as well as the toothless captured regulators who continue to exist in their zombie, porn-addicted state, and refuse to move one finger to finally end this next Flash Crash-in-waiting.

Following the just completed teleprompted preaching of concentrated, yet inverse, truthiness, we find that yet another bankrupt country has in fact been lying about its economic prospects. Following the recent stunning disclosure out of Portugal that contrary to constat promises to the contrary the country was in fact, broke, now we get another admission, this time from a country already bankrupt. Per the FT: "Greece needs time to convince international investors about its reform programme and may not be able to return to financial markets next year as planned, its finance minister has admitted. Greece’s budget plans are fully funded this year but Athens will have to raise between €25bn-€30bn on financial markets in 2012 – a step that would mark the first stage of its international rehabilitation. But Mr Papaconstantinou suggested that goal was in doubt and the timetable would not become clearer until an EU-IMF agreement had been struck for Portugal, the latest victim in the eurozone debt crisis. “A judgment cannot be made before the summer and before Portugal closes its deal,” he said." So now it is trendy for one broke country to bash another broke country? In retrospect Greece should have a right of first refusal of bailout funding: after all it first (was forced to) disclose its bankruptcy. Surely there should be some brownie points for that. But all this may well be moot: Germany is now openly saying the need for a Greek restructuring is coming. Which means that senior creditor haircuts (supposedly up to 50-60%) are imminent.

Today we learn that Squidco is pulling the FaceShnook "private placement" from US Investors and instead will direct the offering to it's "off-shore" or foreign clients.

Unfortunately, this is not a moment to be savoring delicious fried squid. This is a time to reflect on what this latest two week Squidco sponsored fiasco truly signifies. I submit that it signifies in bright Chinese neon, that the capital formation process in the United States is truly broken.

So often with managing wealth, it is too easy to focus on the really important issues that are making central bankers behave like drunken poker players. While we have (in our opinion) covered the big issues very well during 2010, we would be ashamed if we didn’t finish the year by expressing our unbridled love for the Good in the World – gold, commodities, and the commodity driven theme. In our opinion, the humongous demographic & sociographic wave slowly and surely pushing China and India into the 21st century is creating an enormous end market for commodities. Which commodities? Take your pick – oil, wheat, corn, copper, rare earths, we could go on and on. The fact is, there are millions of people on the verge of permanently entering the middle class - the very economic stage in life that many of us take for granted in the developed World. These new entrants will undoubtedly adopt better diets (read: agriculture), require transportation to work (read: energy) and demand a roof over their head (read: anything housing related). The simple question to ask is “who sells commodity related stuff?”

In the following interview with the WaPo's Ezra Klein, Janet Tavakoli shares some more information on why every bank is about to shut down all foreclosures, in what she calls the "biggest fraud in the history of capital markets." Not very surprisingly, we are, so far, spot on in our 29th September projected timeline at this point: "We predict that within a week, all banks will halt every foreclosure currently in process. Within a month, all foreclosures executed within the past 2-3 years will be retried, and millions of existing home sales will be put in jeopardy."

The much anticipated "low volume market" casualties are accumulating. As we noted first a few weeks ago, and subsequently picked up by other MSM publications, it was only a matter of time before Wall Street, which earlier in 2010 decided to foolishly lever up on the economic "reflation" myth and hire tons of people, is once again preparing to fire in droves, a phenomenon which traditionally is the best indicator a given economic cycle's peak has come and gone. Bloomberg has just disclosed that Bank of America is following similar actions from RBS disclosed earlier, and is firing as many as 400 employees in global banking and markets division. Charlie Gasparino, who first broke the news, also added the twist that the departures are taking place now "so as to deprive the unlucky employees year-end bonuses." Gotta love Wall Street's code of ethics. At least in the past layoffs would wait until after year end. No such luck anymore, now that most other banks are also likely considering comparable steps, and news of terminations start flooding in.