Market Crash

Witness in real time the fundamental collapse of a REIT lauded as a buy by the Sell Side of Wall Street. Come on, admit it! Blogs/alternative media are a better source of analysis than the bank that you just parked your life savings at!!!

It should come as no surprise to anyone that major commercial banks manipulate Libor submissions for their own benefit. As Jefferies David Zervos writes this weekend, money-center commercial banks did not want the “truth” of market prices to determine their loan rates. Rather, they wanted an oligopolistically controlled subjective survey rate to be the basis for their lending businesses. When there are only 16 players – a “gentlemen’s agreement” is relatively easy to formulate. That is the way business has been transacted in the broader OTC lending markets for nearly 30 years. The most bizarre thing to come out of the Barclays scandal, Zervos goes on to say, is the attack on the Bank of England and Paul Tucker. Is it really a scandal that central bank officials tried to affect interest rates? Absolutely NOT! That’s what they do for a living. Central bankers try to influence rates directly and indirectly EVERY day. That is their job. Congresses and Parliaments have given central banks monopoly power in the printing of money and the management of interest rate policy. These same law makers did not endow 16 commercial banks with oligopoly power to collude on the rate setting process in their privately created, over the counter, publicly backstopped marketplaces.

Nothing short of the improper taking of private property against the will of the owner?

Over the last few weeks markets have recovered from the significant stresses that were building towards the end of May (until yesterday's slow realization). The recovery has been in no small part due to expectations of intervention and that fresh rounds of QE and their equivalents will soon be implemented around the developed world. Deutsche Bank believes that markets are now addicted to stimulus and can’t function properly without it. There is little evidence yet to suggest that markets in this post crisis world have the ability to prosper in a period without heavy intervention, though empirically asset prices benefit from liquidity but that the environment remains fragile enough for them to struggle to maintain their levels when the liquidity stops. Critically, they agree with us that the structural problems the West faces mean that QE and its equivalents and refinements will likely need to be around for several years to come to ensure that the financial system and its economies don’t relapse into a depressionary tail-spin. There is no evidence that we are currently close to being able to wean ourselves off our liquidity addiction. The hope would be that with further injections we can prevent the worst case scenario but the base case remains for the stress and intervention cycle repeating itself as far as the eye can see. Central banks still have much to do.

Even though it was one of the first to call for a coordinated market crash (remember XO going over 1000 bps?) last month before a coordinated policy response can come into play, today Citi's Mohammed Apabhai has doubled down on yesterday's market moving Goldman call, once again making it quite clear that only a collapse can bring the much needed policy "salvation." The bogey? 12% down according to Citi, before the "liquidity put" comes in play and 1285 could "indicate liquidity support." In other words: in order to go up, first the market must go down.

The middle class has a gut feeling they are being screwed by somebody, they just can’t figure out who to blame. The ultra-wealthy elite keep up an endless cacophony of propaganda and misinformation designed to confuse an increasingly uneducated and willfully ignorant public while blurring the facts for those educated few capable of understanding the truth. They have been able to keep the masses dumbed down through government run education; distracted by sports, reality TV, Facebook, internet porn, and igadgets; lured by mass media messages of materialism; and shackled with the chains of debt used to acquire the goods sold by mega-corporations. We’ve become a society oppressed by a small faction of ultra-wealthy masters served by millions of impoverished, uneducated, sedated slaves. But the slaves are getting restless and angry. The illegally generated wealth disparity chasm is growing so large that even the ideologue talking head representatives of the elite are having difficulty spinning it. Even uneducated rubes understand when they are getting pissed on.

All you need to read.

Think the Fed will pump more today? You are not alone: an implicit 7 out of 10 market participants do so too (and have for the past 70 or so S&P points, urged by nothing more than hopes of more easing as economic data after economic data has come in worse than expected). Which naturally means the pain trade today will be one of disappointment. But fear not: everyone will be able to sell ahead of everyone else if and when the Fed disappoints. Or so the thinking goes. Others like Citi, Deutsche and now SocGen, believe that a real policy intervention will come in only following a market crash. Bottom line: nobody knows anything. Correction - we know one thing. Absent central bank intervention everyone now agrees that the economy would be a complete disaster, so at least we can stop pretending that the word "recovery" makes any sense.

With mere hours left until the first Greek exit polls are released, one group of the Greek population, perhaps the most important one if the country of 23% unemployment is to have any hope of not sinking into the Mediterranean, its business executives, has yet to express its opinion on the aftermath of today's election. And while we know that many local businesses have already transferred their money (whether or not taxed is a different question) abroad, it is after all they that will serve as the backbone of any possible future Greek renaissance, whether EUR or XGD denominated. So do they think? Recently Citigroup's European team met with executives from big Greek / Cyprus banks and several officials - independent parties. The key message is that the situation is critical but there is some optimism on the Day after the elections.

This weekend, everyone's attention will be on the Greek elections, however it is Spain that has now become the "fulcrum security" of Europe. As such, events in Greece are merely a catalyst that will set off a chain of events that will have an impact not only on Spain, but on all of Europe, and thus, the world. As we pointed out last week after the Spanish bailout announcement, based on a preliminary analysis which had been compiled by Deutsche Bank's europhiles hours before the formal announcement, and one which just happened to be a carbon-copy of what was proposed as the 'final (and failed) Spanish solution', it appears that the events in Europe are if not orchestrated by the largest German bank, then certainly receiving part-time advice. Which brings us to the present, where we find that even Deutsche Bank has given up hope for interim solutions, having realized that the market will no longer accept transitory, feeble arrangements. Instead DB is now formally calling for a big bang resolution, one coming from the ECB. Here is the punchline: "ECB has room for manoeuvre, but needs political cover for a ‘big’ policy" or said otherwise, "A shock is required to get a liquidity response." In other words: Europe's only real hope for even a stop gap solution... is a wholesale market crash, not surprisingly the very same conclusion that Citi reached on May 19 when they warned that only Crossover (XO) at 1000 bps or wider could push Europe into acting... Basically stated, anything less than a controlled market crash, one that finally gets the ECB involved with Germany's persmission of course, merely pushes the market higher on nothing but hope of an intervention that said market lift makes even more improbable, as now both Citi and DB admit, which can and will lead to an uncontrolled market collapse, one from which not even the ECB will be able to extricate Europe.

If yesterday was a repeat of the market action from that day three weeks ago before the last FinMin conference, when everyone expected Germany to announce it had agreed to a bank deposit guarantee, then today is, logically, day after. Because just like back then, so now, Germany has once again made it clear that it will first see the EUR crushed, and all off Europe begging for a bailout (as in the case of Spain - when presented with reality, they all will beg the one with the cash to come to the rescue). To wit from the German Finance Minister, via Stern magazine:

• Schaeuble Rejects European Redemption Fund: Stern Magazine
• German finance minister says redemption fund would violate EU treaties, in interview with Stern magazine

At the rate the market has soared in the past 3 days, one would think Bernanke has already formally announced QE. Instead we have had a rumor, a hint, and a headline. All of this was sufficient to push the DJIA up 500 points. Problem is there has been nothing official from the Fed. Which is why everyone will be looking for the Chairman to leak something at the 10am hearing before the Joint Economic Committee. Otherwise, if nothing comes now, and nothing comes on June 20, we may be looking at another deja vu event from 2011: namely the August 2011 market crash.

Back in October 19, 1988, in response to Black Monday from a year earlier (the SEC is not known for fast turnaround times) a little known SEC rule came into effect, known as Rule 80B, and somewhat better known as "Trading Halts Due to Extraordinary Market Volatility" which set trigger thresholds for market wide circuit breakers - think a wholesale temporary market shutdown. According to Rule 80B (as revised in 1998), the trigger levels for a market-wide trading halt were set at 10%, 20% and 30% of the DJIA. Needless to say, a 30% drop in the market in our day and age when the bulk of US wealth is concentrated in the stock market, would be a shot straight to the heart of the entire capitalist system. Which is why the smallest gating threshold is and has always been the key.However, despite the revision, as anyone who traded stocks on that fateful day in May knows, the market-wide circuit breakers were completely ineffective and unused during the HFT-induced and ETF-facilitated flash crash of May 6, 2010. In turn, the SEC's flash crash response was to implement individual stock-level circuit breakers which however, instead of restoring confidence in the market, have become the butt of daily jokes involving freaked out algos. This was merely the most recent indication of how horribly the SEC's attempts to "regulate" a market it no longer has any grasp or understanding of, backfire on it. However, even that may pale in comparison to just how badly the SEC may have blundered yesterday afternoon, when it proposed yet another revision to its market-wide halt rule. And once again, instead of making traders and investors more comfortable that the SEC is capable and in control, the questions have already come pouring in: is the SEC preparing for another massive market crash?

Imagine, if you will, a fantastic near future in which the United States is facing an unmitigated economic implosion.  Not just a mere market crash, or a stint of high unemployment, but a full spectrum collapse driven by unsustainable debt spending and hyperinflationary printing.  The American people witness multiple credit downgrades of U.S. Treasury mechanisms, the dollar loses its reserve status, devaluation of the currency runs rampant, and the prices of commodities and imported goods immediately skyrocket.   In the background of this disaster, a group of financial elite with dreams of a new centralized economic and political system use the chaos to encourage a removal of long held civil liberties; displacing Constitutional protections they deem “outdated” and no longer “practical” in the midst of our modern day troubles.  This group then institutes draconian policies through the executive orders of a puppet president, including indefinite detention, assassination, and even martial law against citizens... With modern computer driven weaponry at their fingertips, any resistance appears futile.  Some Americans, though, do their homework, and discover that most successful revolutions against better equipped opponents utilize low tech methods in highly intelligent ways.  They study the inherent weaknesses of the enemy weapons platforms using readily available online manuals and scientific journals.  They realize that these pieces of equipment costing millions of dollars each can be defeated using methods that cost little more than pocket change.  A war of economic attrition ensues.

Just when we though that nobody would take advantage of the cover provided by the epic flame out of the FaceBomb IPO and the ongoing market crash, here comes Spain. Because there is nothing quite like a little Friday night action following a market drubbing and an "IPO for the people" shock in which to sneak the news that, oops, sorry, we were lying about all that austerity. Because while it came as a surprise to the market back in December when Spain announced it would post a 2011 budget deficit of 8.5% instead of the previously promised 6%, the market will hardly be impressed that Spain actually overspent by another €4.2 billion, to a brand new total of €95.5 billion of 8.9% of GDP. So Monday now has two things to look forward to: the Spanish bond margin hike on one hand courtesy of LCH.Clearnet earlier, and the fact that despite spending even more than expected, GDP growth has disappointed and the country is now officially in a double dip. Hardly what the country with the record wide CDS needs right now.