We decided to do a little research to find out the size of different investable asset classes globally, to try to get some color on the money flows in this extraordinary period. The data is from various dates from 2013 to 2014, but the differences don’t matter much.
In what amounts to still more evidence that investors are moving into derivatives in order to avoid illiquid cash markets, UBS finds that over the "past three months, daily average futures volume stands at nearly 70% of cash Treasuries, based on the notional amounts transacted... up from about 50% in 2011."
In yet another sign that Russia and China are set to work together to extricate themselves from a dependence on the dollar specifically and on Western financial institutions more generally, Russia’s largest bank has, for the first time, extended yuan-denominated letters of credit in concert with the Chinese Export-Import bank.
"Central bank distortions have forced investors into positions they would not have held otherwise, and forced them to be the ‘same way round’ to a much greater extent than previously... unless fundamentals move so as to justify current valuations, when central banks move towards the exit, investors will too.... The way out may not prove so easy; indeed, we are not sure there is any way out at all."
On Tuesday, Deutsche Bank agreed to a $55 million SEC settlement tied to allegations it hid billions in losses by mismarking its crisis-era derivatives book. The bank has always contended its valuation methodologies were sound. Here is the real story...
The financial world today is now an island on its own – separated from the real economy, as can be seen by the paradox of record high valuation in the stock market coinciding with record low inflation, employment , productivity and no hope. There is asset inflation, but deflation in the real economy. When the world has been this long at the zero-bound, the misallocation, the inability to reform, and a toolbox without new tools creates a mandate for change. "I expect stocks to trade sideways for the balance of 2015 and have now sold all my fixed income, increased my gold exposure, and I’m looking to buy mining companies and overall to increase my exposure to commodities beyond the normal allocation."
Central bank liquidity lines like those the Fed used to bailout the world seven years ago have become a fixture of the post crisis financial system. Since 2009, China has essentially blanketed the globe with yuan liquidity lines, inking swap agreements with nearly three dozen countries with the primary goal of increasing the degree to which the renminbi is used in international trade.
Tsipras has got the Eurogroup on speed dial now...
Following an Illinois Supreme Court ruling that struck down a pension reform plan aimed at closing a $100 billion funding gap, Moody's downgrades Chicago to junk, giving the city the dubious distinction of being the only major city "in recent history" to carry such a low rating other than Detroit. Chicago now faces accelerated payments to creditors of more than $2 billion.
While officials have begun their own versions of capital controls by raiding pension funds, confiscating local government cash, and surcharges on withdrawals (and transfer ceilings); it appears the market participants themselves have now imposed their own share of capital controls. As Bloomberg reports, international securities firms are curtailing trading with major Greek banks - pulling credit lines and restricting FX trading limits - as fear of Grexit looms.
"Deutsche Bank’s illegal conduct involved nearly a decade of lying, cheating, and stealing. This criminal conduct was pervasive and widespread, involving dozens of employees from Deutsche Bank offices including New York, Frankfurt, Tokyo, and London. Deutsche Bank’s traders engaged in a brazen scheme to defraud Deutsche Bank’s counterparties and the worldwide financial marketplace by secretly manipulating LIBOR. The conduct is appalling. It was a complete criminal fraud upon the worldwide marketplace."
- SEC Commissioner Kara Stein
NY Fed Head Of Banking Supervision, And Person Who Handed Over Billions In AIG Profits To Goldman, ResignsSubmitted by Tyler Durden on 04/30/2015 12:29 -0400
Just three questions here about Sarah Dahlgren's "resignation":
1. Why is she resigning now: is there a crackdown on just how corrupt the Goldman Sachs branch office at Liberty 33 truly is?
2. What will her salary at Goldman Sachs be once she joins the 200 West firm?
3. Which Goldman partner will replace her.
The law of unintended consequences is becoming ever more prominent in the economic sphere, as the world becomes exponentially more complex with every passing year. Just as a network grows in complexity and value as the number of connections in that network grows, the global economy becomes more complex, interesting, and hard to manage as the number of individuals, businesses, governmental bodies, and other institutions swells, all of them interconnected by contracts and security instruments, as well as by financial and information flows. It is hubris to presume, as current economic thinking does, that the entire economic world can be managed by manipulating one (albeit major) subset of that network without incurring unintended consequences for the other parts of the network.
The trio of macro-prudential policy, the onset and evolution of shadow banking, and the nebulous concept of financial stability may have become a toxic cocktail which can be instrumental in moving forward the Federal Reserve’s timeline for lift-off zero bound rates. The intuition here is stooped in concepts of volatility and how market structure evolution may contribute or detract from asset volatility. Volatility is the square root of time. Financial repression times time equals volatility. Financial repression and/or macro-prudential policy times time equals the inverse of financial stability. Financial stability inverted equals volatility squared.