Moral Hazard

Holy Trinity Caption Contest: Bernanke, Paulson, Geithner

If anyone's bucket list includes hearing, and seeing, the unholy trinity of Bernanke, Paulson and Geithner whose actions have pretty much doomed America, today is your lucky day, because as part of the lawsuit brought on by former AIG CEO Hank Greenberg, the three legendary statists will field questions from prominent, and very flamboyant, lawyer David Boies. As has been reported previously, Maurice “Hank” Greenberg is challenging the terms of the 2008 bailout for the company he built into a global financial-services powerhouse before being pushed out in 2005. He is not challenging the bailout which prevented AIG from liquidating as a result of selling billions of default protection on worthless companies, and which avoided the all out, and much needed, purge of trillions in bad debt and just as worthless equity.

China Launches CNY500 Billion In "Stealth QE"

It has been a while since the PBOC engaged in some "targeted" QE. So clearly following the biggest drop in the Shanghai Composite in 6 months after some abysmal Chinese economic and flow data in the past several days, it's time for some more. From Bloomberg:

  • CHINA’S PBOC STARTS 500B YUAN SLF TODAY, SINA.COM SAYS
  • PBOC PROVIDES 500B YUAN LIQUIDITY TO CHINA’S TOP 5 BANKS: SINA
  • PBOC PROVIDES 100B YUAN TO EACH BANK TODAY, TOMORROW WITH DURATION OF 3 MONTHS: SINA

Just as expected, the Chinese "derivative" currency, the AUD, goes vertical on the news, and the S&P 500 goes vertical alongside:. As for those confused what the SLF is, here is a reminder, from our February coverage of this "stealth QE" instrument.

Same $#!%, Different PIIGS

Desperate governments call for desperate measures. Unfortunately for us, citizens often end up paying for the mistakes of their governments. That’s not how it should be but, sometimes, that’s how it is. If and a when a government is no longer able to meet its obligations, capital controls, broad wealth confiscation measures, and other extreme burdens are often considered. Spanish bond yields just fell to their lowest levels in history but does that mean that your money is safe there? Absolutely not. It means that investors are complacent, not that Spain’s political risk has diminished. Portugal is in the same boat. While its borrowing costs continue to fall, its prospects for economic growth and its financial position continue to worsen. If you’ve got assets in Portugal then now would be a good time to contemplate how safe they really are. Unless you like bail-ins, that is.

What Mario Draghi Really Did

Some believe that actions today were jointly agreed to by the Fed and ECB to allow the stimulus baton to be passed from one major central bank to another. Could this be to help ease the risk-off fallout that is likely to ensue in anticipation of the first Fed hike? Maybe the price action in US equity markets today should serve as an early warning signal.

"Deflation In Europe Is Just Beginning"... And How To Trade It

Zero inflation is like death penalty to debt-laden countries. It has been estimated that Italy would need a primary surplus of ~8% if it wanted to stabilize its debt/GDP at zero inflation, which means just stopping it from moving even higher. Spain would need a primary surplus of 2%+, instead of current negative 1.44%. Which means more austerity and more contractionary policies, to cause more internal devaluation than it is currently the case, more declines in unit labor costs, more salary cuts, more unemployment, less consumer spending, less corporate investments.... Incidentally, we have for European assets and the ECB the same feeling we have for Japan and the BoJ. Abenomics has a high chance of failure, in the long term. Nevertheless, on the road to perdition, chances are that efforts will be stepped up and more bullets shot in an attempt to avert the end game. As stakes are raised, financial assets will be supported and melt-up in bubble territory, doing so at the expenses of a more turbulent end-game in the years ahead.

Phoenix Capital Research's picture

We believe Fed’s actions would be more appropriately described as permitted cancerous beliefs to spread throughout the financial system, thereby killing Democratic Capitalism which is the basis of the capital markets. Today we’re going to explain what the “final outcome” for this process will be. The short version is what happens to a cancer patient who allows the disease to spread unchecked (death).

The Fed's "Mutant, Broken Market"

Financial markets are broken. Fundamental analysis and Modern Portfolio Theory are relics of the past. Investors used to care about maximizing a portfolio’s expected return for a given amount of targeted risk. Fed policies have led to (investor) herd behavior that has plunged market volatilities and manipulated asset prices and correlations to lofty levels. The allure of the Fed’s magic spell has lapsed investors into a soporific state of cognitive dissonance, with them focusing more on trying to justify valuations, rather than on the Upside Downside Capture Ratio. Markets have thus mutated into one of two possible combustible states. Either financial assets have all transcended into prodigious bubbles, or stocks and bonds are signifying two completely separate outcomes. Either possibility will have dangerous repercussions for the economy, and for portfolios and investors.

JPMorgan Sees 50% Chance Of ECB QE By Year-End, Will Ease More Next Week

Wondering why US and European stocks knee-jerked higher in the last hour - wonder no more. JPMorgan released a report stating they expect the ECB to ease next week, masking some policy changes next week to make TLTROs more attractive and even a slight disappointment in data may trigger sovereign QE (30% chance next week and 50% by year-end). Of course, the kicker in all of this discussion of QE is that the ECB is already doing it - willing to buy whetever bonds European banks buy via repo agreements (with no haircut) - and with yields already at record lows (or negative) in the face of record-high 'real' financing costs for non-financials, the exuberance appears misplaced.

Futures Levitate To Fresh Record Highs On Just Right Mix Of Bad News

With the FOMC Minutes in the books, the only remaining major event for the week is the Jackson Hole conference, where Yellen is now expected to talk back any Hawkish aftertaste left from the Minutes, and which starts today but no speeches are due until tomorrow. And while the Minutes were generally seen as hawkish, stocks continue to levitate, blissfully oblivious what tighter monetary conditions would mean to an asset bubble, which according to many, is now the biggest in history. And speaking of equities, US futures climbed to a fresh record high overnight on just the right mix of bad news.

Why The Fed Can't, And Won't, Let The Stock Market Crash

Why can't, or rather won't, the Fed let the bubble market collapse once again? Simple - as the following chart shows, the illusion of wealth is now most critical when preserving the myth of the welfare state: some 50% of all US pension fund assets are invested in stocks and only 20% in Treasurys.

"Central Bank Post-Crisis Quasi-Coordination Has Broken Down"

The global monetary system is diverging and fraying.  Central bank post-crisis quasi-coordination has broken down.  Initially, foreign central banks unhappily followed the Fed in cutting rates toward zero; or else risked an appreciating currency affecting competitiveness. As domestic challenges developed and the Fed initiated ‘tapering’, many central banks pushed rates back up.  Developed world economies have grown from around 30% of global GDP 20 years ago to 50% today.  This improvement has helped motivate the unfolding of a new international economic order between developed and developing world economies. 

Wall Street Isn't Fixed: TBTF Is Alive And More Dangerous Than Ever

Practically since the day Lehman went down in September 2008 Washington has been conducting a monumental farce. It has been pretending to up-root the causes of the thundering financial crisis which struck that month and to enact measures insuring that it would never happen again. In fact, however, official policy has done just the opposite. The Fed’s massive money printing campaign has perpetuated and drastically enlarged the Wall Street casino, making the pre-crisis gamblers in CDOs, CDS and other derivatives appear like pikers compared to the present momentum chasing madness. In a nutshell, the Fed’s prolonged regime of ZIRP and wealth effects based “puts” under risk assets has destroyed two-way markets.