Credit Default Swaps
As bad as the month of January was for the global economy, the truth is that the rest of 2016 promises to be much worse.
Last week, we noted that Italy is rushing to defuse a €200 billion time bomb in the country’s banking sector as investors fret over banks’ exposure to souring loans. On Wednesday we learn that Italy has indeed managed to strike a deal with Brussels to help alleviate banks’ NPL burden but the agreement falls well short of the type of comprehensive "solution" the market was hoping to see.
Despite Larry Fink's relentless efforts to convince everyone how safe ETFs are, these products and their bastard offspring - ETNs - continue to demonstrate exactly how rigged financial markets have become. Barron's uncovered the cause of the huge anomaly in the OIL ETN: The wide premium developed after Barclays limited how many new shares could be created, inhibiting the normal mechanism that keeps an ETN's price in line with its index.
A week ago we warned of some insane movements and mysterious bid in OIL (the Barclays iPath oil tracking ETN) as it traded a stunning 36% rich to its underlying NAV. Well with oil resurgent today, as contracts roll, something just imploded in OIL...
Let’s just say that if you are focused on domestic North American issues…you are missing the point.
What's wrong with this picture?
With the feds probing Deutsche Bank's exaggerating Auto ABS demand, car dealerships suing automakers for being forced to channel-stuff, direct evidence of massive channel-stuffing with near-record inventories-to-sales, and sales now beginning to tumble after last month's weak credit growth, it is perhaps no wonder that Fitch has raised the warning flag about automotive vehicle and parts makers...
The default of Sherwin Alumina, a US subsidiary of Glencore, refocused the market's attention on the one company which in September was among the hardest hit in the post-China devaluation rout, and the immediate result was that while Glencore stock plunged and is once again approaching all time lows, a more ominous development was that GLEN's CDS spiked to as much as 950 basis points, the highest since April 2009 and suggesting far more pain is in store for the commodity trading giant.
An unseen bubble at the heart of the financial system is deflating with unknown consequences. When bubbles deflate, and here we are talking about one in the hundreds of trillions, bad debts are usually exposed. Even though much of the reduction in outstanding OTC derivatives is due to consolidation of positions following the Frank Dodd Act, much of it is not. When free markets reassert themselves, and they always do, the disruption promises to be substantial. We appear to be in the early stages of this event. If so, demand for physical gold can be expected to escalate rapidly as a financial crisis unfolds.
Derivatives like credit default swaps turned a mere bubble in the US housing market into a global financial catastrophe...
The Big Banks manipulate credit default swaps to perpetrate economic terrorism against other nations in the world, where they literally destroy the economies of those victim-nations. It used to be a theory, but now the proof is finally emerging.
The next financial crisis could manifest itself in the coming months. If so, it will mark the end of current central bank monetary policies and state control of markets, as free markets reassert realistic pricing. Government bond yields will normalise, stock markets will fall, and banks will almost certainly fail. When something as epochal as this happens, we can expect the macroeconomic establishment to be clueless with respect to the problem itself and its scale.
Turkey is the next key region in this conflict, since the only alternative gas pipeline that supplies Russia, and comes from Asia (Nabucco), passes through Turkey. Future conflicts between Turkey and Russia will be part of the Russian strategy within the region.
"This is legal?" Stephanie Ruhle on CDS after watching "The Big Short" (Bloomberg TV)