It has been another session of overnight weakness, in which, to quote Deutsche Bank, "something has changed" as ES algos no longer track every tick of the EURJPY (or other JPY pair variants). Usually in such transition periods where the robots are not sure how to trade risk based on highly leveraged inputs, things go bump in the night, and they did just that with the E-Mini trading just off its overnight lows, despite a notable rise in the EURJPY from yesterday's close. Keep a close eye on the now traditional pre-market ramp in the EURJPY - if unaccompanied by an increase in the E-mini, it may be time to quietly exit stage left.
- Wall Street Exhales as Volcker Rule Seen Sparing Market-Making (Bloomberg)
- GM to End Manufacturing Down Under, Citing Costs (WSJ)
- U.S. budget deal could usher in new era of cooperation (Reuters)
- Ukraine Police Back Off After Failing to Stop Protest (WSJ)
- First Walmart, now Costco misses (AP)
- Dan Fuss Joins Bill Gross Shunning Long-Term Debt Before Taper (BBG)
- China New Yuan Loans Higher Than Expected (WSJ)
- China bitcoin arbitrage ends as traders work around capital controls (Reuters)
- Blackstone’s Hilton Joins Ranks of Biggest Deal Paydays (BBG)
Volcker Rule Details Revealed: Compensation For Prop Trading Will Be Barred... Just Not Prop Trading ItselfSubmitted by Tyler Durden on 12/09/2013 18:03 -0400
The WSJ has revealed the latest developments of tomorrow's "fluid" Volcker Rule vote on prop trading:
- Volcker Rule Will Bar Compensation Arrangements That Reward Proprietary Trading, Rule Text Says
- Rule Will Exempt Foreign Sovereign Debt From Proprietary Trading Ban, According To Rule Text Reviewed By Wall Street Journal
In other words, prop trading itself will not be explicitly barred, just associated compensation (and banks can still buy as much Italian and Spanish bonds for their accounts as they want). Which means banks can engage in as much prop trading as they wish (which courtesy of $2.4 trillion in excess deposits aka excess reserves is a lot) and bang as much VIX closes as they desire, they just need to have trader bonus "arranagements" to be tied to something else. Like make-believe flow trading which can be manipulated to show anything and everything.
As we have been covering for the past year and a half, most explicitly in "A Record $2 Trillion In Deposits Over Loans - The Fed's Indirect Market Propping Pathway Exposed", when it comes to the pathway of the Fed's excess deposits propping up risk levels, it has nothing to do with reserves sitting on bank balance sheets as assets, and everything to do with excess deposits (of which there are now $2.4 trillion thanks to the Fed) which are used as Initial collateral by banks such as JPM and then funding such derivatives as IG9 in a failed attempt to cover a segment of the corporate bond market.
Faith in the current system is as high as it has ever been, and folks don't want to hear otherwise. If you're one of those people who thinks it prudent to have intelligent discussion on some of these risks -- that maybe the future may turn out to be less than 100% awesome in every dimension -- you're probably finding yourself standing alone at cocktail parties these days. A helpful question to ask yourself is: if I could talk to my 2009 self, what would s/he advise me to do? Don't put yourself in a position to relearn that lesson so soon after the last bubble. Exercise the wisdom to look like an idiot today.
With Top 4 US Banks Holding $217 Trillion In Derivatives, Total Number Of US Banks Drops To Record LowSubmitted by Tyler Durden on 12/03/2013 10:49 -0400
Overnight, the WSJ reported a financial factoid well-known to regular readers: namely that as a result of a broken system that ever since the LTCM bailout has encouraged banks to become take on so much risk they become systematically important (as in their failure would "end capitalism as we know it"), and thus Too Big To Fail, there has been an unprecedented roll-up of existing financial institutions especially among the top, while the smaller, less "relevant", if far more prudent banks have been forced out of business. "The decline in bank numbers, from a peak of more than 18,000, has come almost entirely in the form of exits by banks with less than $100 million in assets, with the bulk occurring between 1984 and 2011. More than 10,000 banks left the industry during that period as a result of mergers, consolidations or failures, FDIC data show. About 17% of the banks collapsed."
Just as in the 1930s the Fed fueled deflation by not making credit available, today the opposite seems to be the case – low rates are fueling deflation and preventing markets from clearing.
Some clarification from Wu Tang Financial on the ten key principles of economics...
"...they ain't no such thang as free lunch... if you haven't figured that out yet in yo life, we is shaking our heads at ya...
PV=MV bitches. Velocity of money just not picking up boo. People been deleveraging up in here..."
In Feb 2007, Oaktree Capital's Howard Marks wrote 'The Race to the Bottom', providing a timely warning about the capital market behavior that ultimately led to the mortgage meltdown of 2007 and the crisis of 2008 as he worried about "carelessness-induced behavior." In the pre-crisis years, as described in his 2007 memo, the race to the bottom manifested itself in a number of ways, and as Marks notes, "now we’re seeing another upswing in risky behavior." Simply put, Marks warns, "when people start to posit that fundamentals don’t matter and momentum will carry the day, it’s an omen we must heed," adding that "the riskiest thing in the investment world is the belief that there’s no risk."
Here’s the crucial part of what Summers and Krugman are saying: this is not a temporary gig. This isn’t going to just “get better” on its own over time. This really is, as Mohamed El-Erian of PIMCO would call it, the New Normal. And if you’re Jeremy Grantham or anyone for whom a stock has meaning as a fractional ownership stake in a real-world company rather than as a casino chip that gives you “market exposure” … well, that’s really bad news... Just don’t kid yourself into thinking that your deep dive into the value fundamentals of some large-cap bank has any predictive value whatsoever for the bank’s stock price, or that a return to the happy days of yesteryear is just around the corner. It doesn’t and it’s not, and even if you’re making money you’re going to be miserable and ornery while you wait nostalgically for what you do and what you’re good at to matter again. Spoiler Alert: Godot never shows up.
The Fed's Catch 22 just got catchier. While most attention in the recently released FOMC minutes fell on the return of the taper as a possibility even as soon as December (making the November payrolls report the most important ever, ever, until the next one at least), a less discussed issue was the Fed's comment that it would consider lowering the Interest on Excess Reserves to zero as a means to offset the implied tightening that would result from the reduction in the monthly flow once QE entered its terminal phase (for however briefly before the plunge in the S&P led to the Untaper). After all, the Fed's policy book goes, if IOER is raised to tighten conditions, easing it to zero, or negative, should offset "tightening financial conditions", right? Wrong. As the FT reports leading US banks have warned the Fed that should it lower IOER, they would be forced to start charging depositors.
Reading between the lines of recent Fed communications, it’s becoming increasingly clear to me that the Fed wants to exit its quantitative easing policies as soon as possible. Though they’re loath to admit it, the architects of quantitative easing now recognize that their efforts are achieving diminishing marginal returns while at the same time building up massive imbalances, distortions, and speculative excesses in the capital markets. Moreover, they’re realizing that the eventual exit costs are also likely much higher than they had previously thought, and continue to rise with each new asset purchase. Implications for the markets, which may not yet be fully prepared for this outcome, are likely to be significant. In short, we would expect yield curves to steepen, the dollar to strengthen, equities to fall, credit spreads to widen, commodities to weaken (the metals in particular), and volatility to rise. How the Fed will then respond to these developments will be very telling indeed. Their hand will be forced, and we may all soon learn how strong the QE trap has become.
In the aftermath of the devastating, vicious, tax-deductible DOJ settlement with JPMorgan, its stock may have responded by soaring to new all time highs (unclear if it was JPM's prop desk - in violation of the Volcker and every other rule - doing most of the buying) but that doesn't mean the benefits go out equally to all. According to Reuters, while JPM's shareholders will reap the benefits of yet another year in which Jamie Dimon uses nearly $600 billion in excess reserves, aka excess deposits, to ramp product risk around the globe and corner assorted markets (until various unknown teapot tempests blow up in his face), JPM's employees - unable to manipulate every market as much as they want to, and as much as they have in the past now that every action by JPM is scrutizined - will be stuck with total all in compensation that is unchanged from last year. Oh the humanity.
Barring any exogenous shock, and assuming that current reported earnings estimates actually occur, the S&P 500 will be sporting a P/E ratio of 21.17x in 2015 if fed balance sheet correlations hold. However, if earnings growth stagnates then valuation multiples will rise dramatically from current levels. The further that multiples deviate from the long term mean the greater the eventual reversion will be. Should we have an expectation that the same monetary policies employed by Japan will have a different outcome in the U.S? Anything is certainly possible. However, history suggests that artificial, liquidity driven, market inflations always end poorly.