Wall Street Journal
While we have warned about the problem with near-infinitely rehypothecated physical/funding commodities/metals, be they gold or copper, many times in the past, and most recently here, it was only this week that China finally admitted it has a major problem involving not just the commodities participating in funding deals - in this case copper and aluminum - but specifically their infinite rehypothecation, which usually results in the actual underlying metal mysteriously "disappearing", as in it never was there to begin with. It would appear our fears of global contagion (through various transmission channels) are now coming true as WSJ reports that as many as a half-dozen banks are trying to determine whether the collateral for loans they made to commodities traders was used fraudulently by a third party to obtain other loans. As we detailed previously, it appears the day when the Commodity Funding Deals finally end is fast approaching... and as we note below, why that will certainly be a watershed event.
This past week has been all about "anticipation." The markets made little headway during the first half of the week as traders waited in an almost breathless anticipation of the announcement from the European Central Bank. When the news was finally received, investors were initially disappointed but David Tepper stepped into the fray with his ever bullish optimism. The more we read, the clearer it becomes that the world's Central Banks have become caught in a "liquidity trap" which is entirely based on circular logic... Central banks must create asset bubbles in the hopes of stimulating economic activity. When the bubble eventually pops the economic activity evaporates which requires the creation of another asset bubble.
It would appear the Fed, after being angry at itself for creating the "complacency" evident in the markets globally has reached the pinnacle of critically circular logic in its defense of policies that are aimed at financial stability (i.e. prices flat or rising but absolutely not falling). Fed's Williams, a la Greenspan's "a-ha" moment, appears to have realized that investors are not always 'rational' and "bull markets may cause investors to get ‘carried away’ over time and confuse what is a one-time, perhaps transitory, shift in fundamentals for a new paradigm of rising asset prices."
- U.S. sets new import duties on Chinese solar products (Reuters)
- U.S.-China Solar-Products Dispute Heats Up (WSJ)
- China Mulls Offshore Yuan Gold Trade in Free Trade Zone (BBG)
- Insider-Trading Probe Could Snarl a Deal for Icahn (WSJ)
- KCG Holdings Suspects Its Trading Code Was Stolen (WSJ)
- ‘Period. Full Stop’ Is the New ‘At the End of the Day’ (BBG)
- Draghi not so goof for bonds: Investors Flag Risk of ECB Disappointing After Europe Bond Rally (BBG)
- But great for stocks: Equity Traders See Draghi Turning Throttle Up on Rally (BBG)
If yesterday's non-record, red-tick close can be attributed to algos applying the wrong ISM seasonal factor to the day, believing it was Wednesday instead of the permabullish Tuesday, today there is no such excuse, which is why we fully expect the unallowed redness with which futures are currently trading to promptly morph into a non-red color especially with the USDJPY doing it best to ramp to 103.000 levels overnight, stopping out all shorts, and push spoos to fresh record highs. It is an algo world after all. It appears that already record low volatility is being pushed even lower in anticipation of numerous imminent data releases, including today's ADP and Services ISM (first, second and final release), tomorrow's ECB announcement and Friday's payrolls number. Which while good for low volume levitation means bank trading revenues continue to deteriorate forcing banks to pitch M&A deals to clients, which in turn result in even more synergies and more layoffs: because in order to preserve the bottom line, crushing real employment further is perfectly acceptable collateral damage.
Citing "tangible economic benefits," the FAA has decided that the current prohibitions against commercial uses of drones in US skies can be lifted. As WSJ reports, Federal regulators said they are considering exempting a handful of companies working for the film and television industry with proposed rules for small drones are expected to be issued by the end of the year, though they aren't likely to become final until 2015 or later. While law-enforcement agencies already can rely on procedures to obtain FAA approval to fly some of the largest models in designated airspace, this shift by the FAA opens the door to the thousands of drones expected to plague US skies in the next few years.
"The investigators believed it was hard to wiretap Icahn without him finding out because he owned a stake in a telecommunications company through which surveillance might have to be conducted, the Wall Street Journal reported, citing one of its sources."
With Eric Holder suddenly playing hardball with the banks (most notably not US banks), it has not gone unnoticed among the largest European newspapers. The potential $10 billion penalty for BNP Paribas - France's largest bank - for alleged dealings with a sanctioned Iran has been called a "masterful slap," by Le Monde and Le Figaro said the U.S. was making an example of BNP to deflect criticism it had been "lenient with the American banks responsible for the financial crisis." This could make for an awkward week for Obama, not only facing Putin as he visits Europe to celebrate D-Day but as the allies themselves turn on him with France's Hollande likely to raise the matter and, as Bloomberg reports, newly elected National Front party called on the French government to "defend the national interest" in the case.
As Senator Ron Johnson so appropriately blasted, "I'm not sure sanctions had any effect whatsoever other than, you know, the Russians have mocked them," and so it is that the Treasury's (little heard of) "Terrorism and Financial Intelligence" division is preparing to unleash its most deadly weapons yet - an arsenal of financial weaponry aimed at hitting foreign adversaries with limited cost to allies. It appears clear that while the US dropped speech-bombs and sanction-mines, proclaiming the disastrous economic significance of these efforts, Russian stocks soared (vastly outperforming the US) and the Ruble strengthened... and so - as undersecretary David Cohen tells the WSJ, "What we've done over the past 10 years is to create a new method of projecting U.S. power..." e.g. sell non-US stocks (thus buy US stocks).
Dispassionae look at the several events in the week ahead.
June is seasonally a poor month for gold and technical damage means gold could be manipulated lower again before half year end ... As one astute commentator said on Twitter this week, being able to acquire cheaper gold given the state of the world today is "like being given discounts on life-rafts on the Titanic ... "
With real incomes stagnant and the cost of everything from food, school tuition and healthcare premiums skyrocketing for millions of Americans, it appears that borrowing against one’s home is once again a key source for consumption, if not survival, for the nearly extinct socio-economic demographic known as the middle-class. The Wall Street Journal reported yesterday that home-equity lines of credit (Helocs) had increased at a 8% rate year-over-year in 1Q14...The new American Dream.
Has the next major economic downturn already started? The way that you would answer that question would probably depend on where you live. If you live in New York City, or the suburbs of Washington D.C., or you work for one of the big tech firms in the San Francisco area, you would probably respond to such a question by saying of course not. In those areas, the economy is doing great and prices for high end homes are still booming. But in most of the rest of the nation, evidence continues to mount that the next recession has already begun for the poor and the middle class.
Did you hear the one about the Vegas gambler, the Pro golfer, and the Wall Street insider? Straight off the pages of some Hollywood script, the Wall Street Journal reports that Federal investigators are pursuing a major insider-trading probe involving finance, gambling and sports, examining the trading of investor Carl Icahn, golfer Phil Mickelson and Las Vegas bettor William "Billy" Walters. All three men have denied any investigations or "no comment"-ed about "well timed" stock trades in Clorox in 2011 - around the time Icahn made a $10.2bn bid for the company. Mr. Walters and Mr. Mickelson, 43, play golf together; and rather comedically, Mr. Icahn said he didn't know who Mr. Mickelson was...?
With leverage rapidly rising while credit spreads approach record lows, high-yield bond markets have long since lost any sense of sanity with regard to forward-discounting... but that hasn't stopped the world's biggest bond managers (and now Japan's pension fund GPIF because as they say "now they have a chance to chase higher returns without taking on much risk") from diving in while the water is warm. With the smell of risk essentially removed from any and every market, why not pile into the riskiest credits, gain some extra yield (for free) - what could go wrong?