Fractional reserve banking is unlike most other businesses. It's not just because its product is money. It's because banks can manufacture their product out of thin air. Under the bygone rules of free market capitalism, only one thing kept banks from creating an infinite amount of money, and that was fear of failure. Periodic bank failures remind depositors of the connection between risk and reward. What is not widely appreciated is that the ensuing government bailouts allowed an underlying shadow banking system to not only survive but grow even larger. To the frustration of Keynesians, and despite an unprecedented Quantitative Easing (QE) by the Federal Reserve, conventional commercial banks have broken with custom and have amassed almost $2 trillion in excess reserves they are reluctant to lend as they scramble to digest all the bad loans still on their books. So most of the money manufactured today is actually being created by the shadow banks. But shadow banks do not generally make commercial loans. Rather, they use the money they manufacture to fund proprietary trading operations in repos and derivatives. No one knows when the bubble will pop, but when it does a donnybrook is going to break out over that thin wedge of collateral whose ownership is spread across counterparties around the world, each looking for relief from their own judges, politicians, bureaucrats, and taxpayers.
Peak collateral is just a notion - one we have discussed in detail many times (most recently here). The notion that at the time we want yield and growth we are running out of collateral which is supposed to underpin the high yielding assets and loans. Such a shortage would cause the ponzi-like growth that is necessary to sustain a bubble, to stall and then implode. We think our lords and rulers know this and have decided that it must not be allowed. And this – the need for collateral – is the reason for the endless QE. If this is even close to the mark, then recent murmurings about the Fed tailing off its bond buying will prove to be hollow. The Fed will quickly find it cannot exit QE without precipitating precisely the disorderly collapse, to which it was supposed to be the solution.
Through most of the 20th century, America led something of a charmed life, at least when compared with the disasters endured by almost every other major country. We became the richest and most powerful nation on earth, partly due to our own achievements and partly due to the mistakes of others. The public interpreted these decades of American power and prosperity as validation of our system of government and national leadership, and the technological effectiveness of our domestic propaganda machinery - our own American Pravda - has heightened this effect. Author James Bovard has described our society as an “attention deficit democracy,” and the speed with which important events are forgotten once the media loses interest might surprise George Orwell.
- Global shares sink, following 7.3 percent drop in Japan's Nikkei (Reuters)
- When all fails, pull a Kevin Bacon: Japan Economy Chief Warns Against Panic Over Stock Sell-Off (BBG)
- White House Feeds IRS Frenzy by Revising Accounts (BBG)
- In any scandal, lying to Congress is tough to prove (Reuters)
- Debt limit resets at higher level, budget impasse grinds on (Reuters)
- China factory data to test political calculations (FT)
- European Leaders Saying No to Austerity (BBG)
- And yet, nobody wants in anymore: Iceland’s new coalition government suspends EU accession talks (FT)
- Oil Manipulation Inquiry Shows EU’s Hammer After Libor (BBG)
- The Fed Squeezes the Shadow-Banking System (WSJ)
- Diamond Said to Weigh Backing Barclays Alumni in Venture (BBG)
- Spain’s Private Jets Disappearing as Tycoons Cut Flights (BBG)
... the Bank of Israel!
- Pentagon Plans for the Worst in Syria (WSJ)
- Russia and US agree to Syria conference after Moscow talks (FT)
- Hedge Funds Rush Into Debt Trading With $108 Billion (BBG)
- Detroit is the new "deep value" - Hedge funds in search of distress take a look at Detroit (Reuters)
- Commodities hedge funds suffer weak first quarter (FT)
- But... but... Abenomics - Toshiba posts 62% decline in Q1 net profit (WSJ)
- Americans Are Borrowing Again but Still Less Than Before Freeze (WSJ)
- Man Utd announce Alex Ferguson to retire (FT)
- Asmussen Says ECB Discussed ABS Purchases to Spur SME Lending (BBG)
- Benghazi Attack Set for New Review (WSJ)
- Belgium Says 31 People Arrested Over $50 Million Diamond Theft (BBG)
- Brazilian diplomat Roberto Azevêdo wins WTO leadership battle (FT)
- Bangladesh Garment Factory Building Collapse Toll Reaches 782 (BBG)
Physical demand for coins and bars internationally continues and is the strongest since the immediate aftermath of the Lehman Brothers collapse on September 15, 2008, and the consequent global financial crisis.
Government mints, refiners and bullion dealers internationally are reporting demand as high as in the aftermath of the Lehman crisis.
People always stop and stare at traffic accidents (no matter how minor) and arguing couples (no matter how unattractive); ConvergEx's Nick Colas has the same problem with the ever-moribund CBOE VIX Index, even though it’s essentially the exact opposite of the proverbial train wreck. Even with the zombie-like march higher for US stocks, surely the uncertain state of the world would demand more than a 13-handle VIX? Well, it doesn’t; and Nick offers up some off-the-beaten track explanations for why “13” isn’t the right answer. Implied volatility should either be higher or… (gulp)… much lower. The biggest overlooked factor for both directions: the role of technology in society and commerce.
Australia’s Perth Mint, the largest refinery in Australia and one of the largest in the world, said that demand has jumped to the highest level since the Lehman crisis in 2008. Demand has been robust due to currency devaluation concerns and then the 15% price fall led to a massive surge in demand as store of wealth buyers leapt at the chance to acquire physical bullion at much cheaper prices. This led to the Perth Mint which refines nearly all of the nation’s bullion, having to stay open over the weekend to meet orders. There’s been strong interest, including from the U.S., with buyers confident that the metal will rebound from the decline, Ron Currie, sales and marketing director, told Bloomberg in a phone interview from Perth. “We haven’t seen levels like this since the 2008 global financial crisis,” Currie said yesterday. “Compared to March sales, April sales have doubled or tripled,” he said. “We worked all weekend to keep the factory running to make more stock and that was only to fill orders,” Currie said from the facility founded in 1899. “We’re being inundated with people buying products.”
The slight rebound in prices from multi-year lows has as of yet failed to dampen the global appetite for bullion, causing a shortage in the physical supply of gold coins and bars.
The man who is the chief advisor to the US Treasury on its debt funding and issuance strategy was just promoted to the rank of second most important person at the biggest commercial bank in the US by assets (of which it was $2.5 trillion), and second biggest commercial bank in the world. And soon, Jamie willing, Matt is set for his final promotion, whereby he will run two very different enterprises: JPMorgan Chase and, by indirect implication, United States, Inc.
And that, ladies and gentlemen, is how you take over the world.
US commercial bank loans and leases flat since Lehman, and yet US GDP higher by $2 trillion since the biggest bankruptcy in history. How does one reconcile this monetary and growth quandary? Simple. Enter the Fed.
The Fed's Jackson Hole, Wyoming symposium is one of the most sacred of annual Fed meetings: it is here that the Fed has historically hinted at any and all upcoming episodes of major monetary experimentation. As such, presence by the high priests of global monetarism is not only compulsory, it is a circular stamp of approval of the Fed's ongoing status quo-preservation capabilities. Which is why the fact that the man at the top himself, Ben Bernanke, whose term is due to expire just five months after this year's Jackson Hole gathering, will be absent "due to a scheduling conflict", is set to spark a fire of questions, first and foremost of which: is this the sign Bernanke is handing over the suitcase with the printer launch codes to some yet unspecified, second in command? Or, even worse for those addicted to monetary heroin, will Bernanke simply try to put as much distance as possible between himself and the place where (and when) the Fed announces the grand "open-ended" QE experiment is set to begin tapering?
The debate about the usefulness of sovereign credit default swaps (SCDS) intensified with the outbreak of sovereign debt stress in the euro area. SCDS can be used to protect investors against losses on sovereign debt arising from so-called credit events such as default or debt restructuring. With the growing influence of SCDS, questions arose about whether speculative use of SCDS contracts could be destabilizing - and this caused regulators to ban non-hedge-related protection buying. The prohibition is based on the view that, in extreme market conditions, such short selling could push sovereign bond prices into a downward spiral, which would lead to disorderly markets and systemic risks, and hence sharply raise the issuance costs of the underlying sovereigns. The IMF's empirical results do not support many of the negative perceptions about SCDS. In particular, spreads of both SCDS and sovereign bonds reflect economic fundamentals, and other relevant market factors, in a similar fashion. Relative to bond spreads, SCDS spreads tend to reveal new information more rapidly during periods of stress, admittedly with overshoots one way or the other. Given the current apparent 'stability' in many nations' bond market spreads, the chart below suggests an alternative way of judging what the credit market thinks - the volume of protection bid - and in this case some interesting names emerge.