http://www.zerohedge.com/fullrss2.xml en How The Fed Creates Zombies In One Simple Flow Chart http://www.zerohedge.com/news/2015-04-25/how-fed-creates-zombies-one-simple-flow-chart <p>We’ve written quite a bit over the years about the many unintended consequences of unbridled money printing. In fact, it was just last month that we asked the following question which, on the surface, comes across as counterintuitive: “<a href="http://www.zerohedge.com/news/2015-03-01/are-central-banks-creating-deflation">Are Central Banks Creating Deflation?</a>”&nbsp;</p> <p>The premise is simple. By keeping rates artificially suppressed, the central banks of the world effectively make it impossible for the market to purge itself of inefficient actors and loss-making enterprises. As a result, otherwise insolvent companies are permitted to remain operational, contributing to oversupply and making it difficult for the market to reach equilibrium. The textbook example of this dynamic is the highly leveraged US shale complex which, by virtue of both artificially low borrowing costs and the Fed-driven hunt for yield, has retained access to capital markets in the midst of the oil slump and has thus continued to drill contributing to the very same price declines that put the entire space in jeopardy in the first place. Here’s what Citi’s Matt King said about this dynamic last month:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em>It’s that linkage between investment (or the lack of it) and all the stimulus which we find so disturbing. If the first $5tn of global QE, which saw corporate bond yields in both $ and € fall to all-time lows, didn’t prompt a wave of investment, what do we think a sixth trillion is going to do?</em></p> <p>&nbsp;</p> <p><em>Another client put it more strongly still. <strong>“By lowering the cost of borrowing, QE has lowered the risk of default. This has led to overcapacity (see highly leveraged shale companies). Overcapacity leads to deflation. With QE, are central banks manufacturing what they are trying to defeat?”</strong></em></p> </blockquote> <p>Now, Citi is out with a new note bemoaning the fact that the monetary policies ostensibly designed to rescue the world from the deflationary bogeyman have had the effect of destroying creative destruction creating a legion of zombie corporations in the process.&nbsp;</p> <p>From Citi:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em>How odd! Markets not following fundamentals…</em></p> </blockquote> <p><a href="http://www.zerohedge.com/sites/default/files/images/user92183/imageroot/2015/04/SpreadsVersusLeverage.jpg"><img src="http://www.zerohedge.com/sites/default/files/images/user92183/imageroot/2015/04/SpreadsVersusLeverage.jpg" width="521" height="587" /></a></p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em>Beware unintended consequences…</em></p> </blockquote> <p><a href="http://www.zerohedge.com/sites/default/files/images/user92183/imageroot/2015/04/KingZombies.jpg"><img src="http://www.zerohedge.com/sites/default/files/images/user92183/imageroot/2015/04/KingZombies_0.jpg" width="600" height="326" /></a></p> <p>&nbsp;</p> <p>And here’s King summing up the legacy of every iteration of QE the market has seen since the crisis: </p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong><em>“Sometimes the side effects outweigh the benefits.”</em></strong><span style="font-size: 1em; line-height: 1.3em; white-space: pre;"> </span></p> </blockquote> <p><span style="white-space: pre;"> </span> <span style="white-space: pre;"> </span></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="608" height="288" alt="" src="http://www.zerohedge.com/sites/default/files/images/user92183/imageroot/KingTeaser.png?1429999971" /> </div> </div> </div> http://www.zerohedge.com/news/2015-04-25/how-fed-creates-zombies-one-simple-flow-chart#comments Bond Borrowing Costs Capital Markets Central Banks default Sat, 25 Apr 2015 22:40:00 +0000 Tyler Durden 505522 at http://www.zerohedge.com America's Drone-Death Outrage (Summarized In 1 Awkward Cartoon) http://www.zerohedge.com/news/2015-04-25/americas-drone-death-outrage-summarized-1-awkward-cartoon <p>Stunned hypocrisy...</p> <p>&nbsp;</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04-overflow/20150425_drone.jpg"><img src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04-overflow/20150425_drone_0.jpg" width="600" height="447" /></a></p> <p>&nbsp;</p> <p><em>Source: @ianbremmer</em></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="653" height="487" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20150425_drone.jpg?1429982173" /> </div> </div> </div> http://www.zerohedge.com/news/2015-04-25/americas-drone-death-outrage-summarized-1-awkward-cartoon#comments Sat, 25 Apr 2015 22:05:34 +0000 Tyler Durden 505511 at http://www.zerohedge.com The "War On Cash" Migrates To Switzerland http://www.zerohedge.com/news/2015-04-25/war-cash-migrates-switzerland <p><a href="http://www.acting-man.com/?p=37037"><em>Submitted by Pater Tenebrarum via Acting-Man blog</em></a>,</p> <h3><strong>Banks Increasingly Refuse Cash Withdrawals &ndash; Switzerland Joins the Fun</strong></h3> <p><strong>The war on cash is proliferating globally. It appears that the private members of the world&rsquo;s banking cartels are increasingly joining the fun, even if it means trampling on the rights of their customers.</strong></p> <p>Yesterday we came across an <a href="http://www.zerohedge.com/news/2015-04-23/largest-bank-america-joins-war-cash">article at Zerohedge</a>, in which Dr. Salerno of the Mises Institute notes that JP Morgan Chase has apparently joined the &ldquo;war on cash&rdquo;, by &ldquo;<em>restricting the use of cash in selected markets, restricting borrowers from making cash payments on credit cards, mortgages, equity lines and auto loans, as well as prohibiting storage of cash in safe deposit boxes</em>&rdquo;.</p> <p>This reminded us immediately that we have just come across <a href="http://www.srf.ch/news/wirtschaft/negativzins-bank-verweigert-pensionskasse-bargeld-auszahlung">another small article in the local European press</a> (courtesy of Dan Popescu), in which a Swiss pension fund manager discusses his plight with the SNB&rsquo;s bizarre negative interest rate policy. In Switzerland this policy has long ago led to negative deposit rates at the commercial banks as well. The difference to other jurisdictions is however that negative interest rates have become so pronounced, that it is <em>by now worth it to simply withdraw one&rsquo;s cash and put it into an insured vault</em>.</p> <p>Having realized this, said pension fund manager, after calculating that he would save at least 25,000 CHF per year on every CHF 10 m. deposit by putting the cash into a vault, told his bank that he was about to make a rather big withdrawal very soon. After all, as a pension fund manager he has a fiduciary duty to his clients, and if he can save money based on a technicality, he has to do it.</p> <p>&nbsp;</p> <p style="text-align: center;"><img alt="snb2" class="aligncenter size-full wp-image-37040" height="419" src="http://www.acting-man.com/blog/media/2015/04/snb2.jpg" width="600" /></p> <p style="text-align: center;">Swiss National Bank headquarters</p> <p style="text-align: center;">Photo credit: <a href="http://www.danielrohr.ch" target="_blank">Daniel Rohr</a></p> <h3><strong>A Legally Murky Situation &ndash; but Collectivism Wins Out</strong></h3> <p>What happened next is truly stunning. Surely everybody is aware that Switzerland regularly makes it to the top three on the list of countries with the highest degree of economic freedom. At the same time, it has a central bank whose board members are wedded to Keynesian nostrums similar to those of other central banks. This is no wonder, as nowadays, economists are trained in an academic environment that is dripping with the most vicious statism imaginable. As a result, withdrawing one&rsquo;s cash is evidently regarded as &ldquo;interference with the SNB&rsquo;s monetary policy goals&rdquo;. Thus SRF reports:</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>&ldquo;Since the national bank has introduced negative interest rates, pension funds in the country are in trouble. Banks are passing the negative rates on to them. This results in the saved pension money shrinking, instead of producing a return. <strong><em>A number of pension funds are therefore thinking about keeping their money in an external vault instead of leaving it in bank accounts. </em></strong></p> <p>&nbsp;</p> <p><strong><em>One fund manager showed that for every CHF 10 m. in pension money, his fund would save CHF 25,000 &ndash; in spite of the costs involved in vault rent, cash transportation and other expenses.</em></strong></p> <p>&nbsp;</p> <p>However, as our research team has found out, <strong><em>there is one bank that refuses to pay out money in such large amounts</em></strong>. The editorial team has gotten hold of a letter from a large Swiss bank in which it tells its customer, a pension fund:</p> <p>&nbsp;</p> <p><strong><em>&ldquo;We are sorry, that within the time period specified, no solution corresponding to your expectations could be found.</em></strong>&rdquo;</p> <p>&nbsp;</p> <p><strong><em>Bank expert Hans Geiger says that this &ldquo;is most definitely not legal&rdquo;. The pension fund has a sight account, and has the contractual right to dispose of its money on demand.</em></strong></p> </blockquote> <p><em>(emphasis added)</em></p> <p>Indeed, although we all know that fractionally reserved banks <em>literally don&rsquo;t have the money their customers hold in demand deposits</em>, the contract states clearly that customers may withdraw their funds at any time on demand.<em> The maturity of sight deposits is precisely zero.</em></p> <p>So how come the unnamed &ldquo;large bank&rdquo; (they should have named it, just to see what happens&hellip;) is so bold as to break the law by refusing to pay out funds in a demand deposit? Note here that it is indeed breaking the law, as there is nothing in Swiss legislation that states that banks are allowed to refuse or delay servicing withdrawals from demand deposits upon request.</p> <p>The answer is that it has probably received a &ldquo;directive&rdquo; from the Swiss National Bank. Note here that these directives <em>are not legally binding</em>. SFR further:</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>&ldquo;The president of the pension funds association ASIP, Hanspeter Konrad, has been irritated for weeks that pension funds are suffering from negative interest rates. He says: <strong><em>&ldquo;We simply cannot understand that the banks are butting in here&rdquo;. Konrad suspects that the National Bank is exerting its influence</em></strong>.</p> <p>&nbsp;</p> <p><strong><em>Indeed, the SNB confirms that it doesn&rsquo;t like to see the hoarding of cash to circumvent its negative interest rate policy.</em></strong> <strong><em>&ldquo;The National Bank has therefore recommended to the banks to approach withdrawal demands in a restrictive manner.&rdquo;</em></strong></p> <p>&nbsp;</p> <p>Hans Giger, professor eremitus at the University of Zurich, says to this that the question how far the SNB can go is legally complicated. <strong><em>While the SNB is not allowed to influence the contract between a bank and a pension fund, it can however &ldquo;issue directives to the banks in the collective interest of the Swiss economy&rdquo;. What banks do with the SNB&rsquo;s directives is however up to them.</em></strong></p> </blockquote> <p><em>(emphasis added)</em></p> <p>In other words, large depositors in Swiss banks have now become <em>victims of collectivism</em>. Collectivism is of course precisely what informs all central planning endeavors. Obviously, property rights count for nothing if the central planners can revoke them at the drop of a hat.</p> <h3><u><strong>Conclusion</strong></u></h3> <p>It is undoubtedly a huge red flag when in one of the countries considered to be a member of the &ldquo;highest economic freedom in the world&rdquo; club, <strong>commercial banks are suddenly refusing their customers access to their cash</strong>. This money doesn&rsquo;t belong to the banks, and it doesn&rsquo;t belong to the central bank either.</p> <p>If this can happen in prosperous Switzerland, based on some nebulous notion of the &ldquo;collective good&rdquo;, which its unelected central planners can arbitrarily determine and base decisions upon, it can probably happen anywhere. Consider yourself warned. As the modern day fiat money system inevitably cruises toward its final denouement, individual rights will come increasingly under attack as the world&rsquo;s ruling elites and centrally directed banking cartels begin to batten down the hatches.</p> <p>Better continue stacking, and keep a pile of <em>this</em> within grabbing distance &ndash; after all, it can be purchased at a generous discount these days:</p> <p style="text-align: center;"><img alt="gold-bars" class="aligncenter wp-image-37039" height="365" src="http://www.acting-man.com/blog/media/2015/04/gold-bars.jpg" width="600" /></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="480" height="385" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20150425_cash.jpg?1429983266" /> </div> </div> </div> http://www.zerohedge.com/news/2015-04-25/war-cash-migrates-switzerland#comments Central Banks Mises Institute Monetary Policy Swiss Banks Swiss National Bank Switzerland Zurich Sat, 25 Apr 2015 21:15:33 +0000 Tyler Durden 505513 at http://www.zerohedge.com Is Greece About To "Lose" Its Gold Again? http://www.zerohedge.com/news/2015-04-25/greece-about-lose-its-gold-again <p>When it comes to the topic of Greece, most pundits focus on two items: i) when will Greece finally run out of <em>confiscated </em>cash, and ii) will Greece fold to the Troika (and agree to another bailout(s) with even more austerity) or to Russia (and agree to the passage of the Russian Turkish Stream pipeline, potentially exiting NATO and becoming the most important European satellite of the USSR 2.0) once that moment arrives. </p> <p>And yet what everyone appears to be forgetting is a nuanced clause buried deep in the term sheet of the second Greek bailout: a bailout whose terms will be ultimately reneged upon if and when Greece defaults on its debt to the Troika (either in or out of the Eurozone). Recall that as per our report from <a href="http://www.zerohedge.com/news/negative-salaries-negative-bailout-and-now-negative-gold-greece-just-became-banksters-paradise">February 2012</a>, in addition to losing its sovereignty years ago, Greece also lost something far more important. It's gold:</p> <p>To wit: </p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Ms. Katseli, an economist who was labor minister in the government of George Papandreou until she left in a cabinet reshuffle last June, <strong>was also upset that Greece’s lenders will have the right to seize the gold reserves in the Bank of Greece under the terms of the new deal.</strong></p> </blockquote> <p>The "new deal"referred to is the <em>Second </em>Greek Bailout, which either will be extended and lead to a third (and fourth, and fifth bailout, each with every more draconian terms until finally Greece does default), or will collapse at which point the Troika will indeed have the right to seize the Greek gold reserves.</p> <p>What makes this case particularly curious, however, is that it won't be the first time Greece will have "lost" its gold. In <a href="http://www.amazon.com/Tower-Basel-Shadowy-History-Secret/dp/1610393813"><em>The Tower of Basel</em></a>, citing the BIS archive from Febriary 9, 1931, Adam LeBor writes:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>In <strong>February 1931</strong>, Gates McGarrah, the [BIS’s] American president, wrote to H. C. F. Finlayson, in Athens, <strong>asking about the Bank of Greece’s gold. </strong>Finlayson, a former British financial attaché in Berlin, was now an adviser to the Bank of Greece. <strong>Some of the Greek bank’s gold may have gone missing. </strong>Rather like nowadays, it seemed the accounting at the Bank of Greece left something to be desired. “<strong>What has ever happened to the gold of the Bank of Greece, some of which you thought might be left in our custody in Paris or elsewhere?” </strong>inquired McGarrah, who, as the president of the BIS might have been expected to know what it held and where. <strong>It might, McGarrah suggested, be a good time to find the Greek gold and place it with the BIS.</strong></p> <p>&nbsp;</p> <p><strong>The BIS, wrote McGarrah, could give the Bank of Greece “all sorts of facilities, rather greater than those of a local Central Bank.” </strong>For example, if the Bank of Greece held gold at the Bank of France and wanted to buy another currency, it first had to buy francs from the Bank of France. The Bank of Greece then converted the francs to the second currency, with all the usual losses of exchange rates and commissions. However, if the Bank of Greece held gold at the Bank of France in the name of the BIS, the BIS could “give the Bank of Greece any currency it desires at any time and can fix an agreed rate without going through the actual exchange operation.” And, the BIS did not charge any commission.</p> </blockquote> <p>And all Greece would need to do to get these copious and generous "benefits"would be to hand over its gold to the Bank of International Settlements. Of course, it would have to <em>find it </em>first...</p> <p>But most importantly, and what ties everything together is that <em><strong>other </strong></em>historic event which took place in 1931. </p> <p>For those who may not be gold history buffs, this is what happened: in September of that year the Bank of England decided to formally (and for the final time) abandon the gold standard. And, as the chart below first posted on Zero Hedge many years ago, that decision, coupled with the great depression and the loss of confidence in the pound, ultimately ended the reserve status of the British currency, ushering the reserve currency status of the US Dollar.</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2012/01/20120103_JPM_reserve.png"><img src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2012/01/20120103_JPM_reserve_0.png" width="500" height="423" /></a></p> <p>&nbsp;</p> <p>A few months ago, when the Minutes from the Bank of England's court were published for the first time in January, we learned precisely what happened months after the BIS casually inquired about the lost Greek gold. The <a href="http://www.telegraph.co.uk/finance/commodities/11330611/How-the-Bank-of-England-abandoned-the-gold-standard.html">Telegraph summarized it as follows</a>:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>At the time, sterling was pegged to bullion. This meant that the pound was worth a fixed amount compared to other currencies and gold itself. In order to ensure that sterling retained its value, the Bank of England was obligated to exchange gold for pounds at the specified rate.&nbsp; </p> <p>&nbsp;</p> <p>However, as political turmoil engulfed the UK, the country’s first national government – a coalition between Labour and the Conservatives – presided over a budget crisis that triggered a run on the pound. </p> <p>&nbsp;</p> <p><a href="http://www.bankofengland.co.uk/archive/Documents/archivedocs/codm/19141950/codm041931031932b.pdf">Minutes from the Bank’s court in 1931</a>, published on Wednesday, detailed how foreign exchange reserves were being drained to such an extent that the gold standard had to be abandoned.&nbsp; </p> <p>&nbsp;</p> <p>Up to that point, the gold standard had been preserved by loans from the Federal Reserve and the French central bank, with the Bank’s bullion reserves used as collateral. But Threadneedle Street decided in September that its reserves would run dry if New York and Paris withdrew support.&nbsp; Ernest Harvey, the Bank’s deputy governor at the time, wrote to Ramsay MacDonald, the prime minister, and Philip Snowden, the chancellor, on September 19, 1931, saying that reserves worth more than £100m were close to running out.</p> <p>&nbsp;</p> <p>Mr Harvey wrote: “I am directed to state that the credits for $125,000,000 and Fcs 3,100,000,000 arranged by the Bank of England in New York and Paris respectively, are exhausted, and that the credit for $200,000,000 arranged in New York by His Majesty’s Government, together with credits for a total of Fcs 5 milliards [5bn] negotiated in Paris, are practically exhausted also." “The heavy demands for exchange on New York and Paris still continue. In addition the Bank are being subjected to a drain of gold for Holland.</p> <p>&nbsp;</p> <p>“Under these circumstances, the Bank consider that, having regard to the above commitments and to contingencies that may arise, <strong>it would be impossible for them to meet the demands for gold with which they would be faced on withdrawal of support from the New York and Paris exchanges.</strong></p> <p>&nbsp;</p> <p>“The Bank therefore feel it their duty to represent that, in their opinion, it is expedient in the national interest that they should be relieved of their obligation to sell gold under the provisions of [the Gold Standard Act 1925].” </p> </blockquote> <p>In other words, the Bank of England became insolvent in hard money terms, and was forced to back the currency with nothing but its "faith and credit." No wonder at that moment the sun had set on the British Pound. </p> <p>40 years later, Nixon finally did the same with the US Dollar (but not before FDR confiscated all gold as the US also devalued its currency by 40% in "hard money terms" on January 30, 1934 with the Gold Reserve Act), but in the absence of any gold-backed currency to arise (oh, hi Beijing), the dollar still remains the one-eyed king in the land of blind fiat.</p> <p>Still, one wonders: the last time Greek gold was "lost" a historic event for the world's reserve currencie took place. Is Greek gold about to be "lost" once more, and will monetary history rhyme?</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="298" height="298" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20150425_gre.jpg?1429989529" /> </div> </div> </div> http://www.zerohedge.com/news/2015-04-25/greece-about-lose-its-gold-again#comments Bank of England Bank of International Settlements BIS British Pound default Eurozone Federal Reserve fixed France George Papandreou Great Depression Greece Reserve Currency Term Sheet Sat, 25 Apr 2015 20:30:51 +0000 Tyler Durden 505519 at http://www.zerohedge.com Gold, The SDR, & BRICS http://www.zerohedge.com/news/2015-04-25/gold-sdr-brics <p><a href="http://www.goldmoney.com/research/analysis/gold-sdr-brics"><em>Submitted by Alasdair Macleod via GoldMoney.com,</em></a></p> <p>Last Monday there was<strong> a meeting in Washington hosted by the Official Monetary and Financial Institutions Forum (OMFIF) to discuss the future relationship, if any, of gold with the Special Drawing Rights (SDR).</strong></p> <p>Also on the agenda was the inclusion of the Chinese renminbi, which seems certain to be included in the SDR basket in this year's revision, assuming that the United States doesn't try to block it.</p> <p>This is <strong>not the first time the subject has come up.</strong> OMFIF's chairman,<a href="http://www.chathamhouse.org/sites/files/chathamhouse/field/field_document/0212gt_desai.pdf"> Lord Desai wrote a paper</a> about it after the last Washington meeting on gold and the SDR exactly four years ago. The inclusion of the renminbi in the SDR was rejected in 2010 because of inadequate liquidity and is due to be reconsidered this year.</p> <p>Desai pointed out in his paper that there are difficulties when it comes to including gold, because (and I think this is what he was trying to say) none of the SDR's paper constituents are convertible into gold, but gold's inclusion in the SDR would make them convertible through the back door. However, Desai seemed keen to re-examine the case for gold.</p> <p><strong>It should be pointed out that if gold is included in SDRs the arrangement cannot be long-lasting so long as the major central banks insist on printing money as an economic cure-all.</strong> However, China's position with respect to gold and her own currency could be a different matter.</p> <p><strong>The Chinese government has almost certainly accumulated large amounts of gold yet to be included in her reserves, and she has also encouraged her own citizens to own gold as well. </strong>We can therefore be certain that China sees a monetary role for gold while at the same time she is pushing for the renminbi to be included in the SDR basket. There is no doubt, if you read the IMF papers from the last SDR review in 2010 that the renminbi does now fulfil the criteria for inclusion today. So the question then is will the advanced nations, which dominate the IMF's membership, permit the renminbi's inclusion, and will the US, which has dragged its heels on giving China and the other BRICS nations a greater shareholding in the IMF, relent and permit these reforms, which were accepted by the other members back in 2010?</p> <p><strong>The Americans' blocking of reform signals her desire to preserve the dollar's hegemony</strong>; but given she lost out spectacularly over the creation of the Asian Infrastructure Investment Bank, IMF reform could become the next serious threat to the dollar's dominance. And if America does not back down over the IMF and the SDR, she will have no fall-back position; China on the other hand still has some aces up her sleeve.</p> <p><strong>One of them is gold, and another is her role in a rival organisation established by the BRICS. </strong>The New Development Bank (NDB) is in the final stages of being set up, driven by frustration at America's attempts to protect the dollar's role and to keep the IMF as an exclusive club for advanced nations. Instead, the NDB could easily issue its own version of the SDR with the gold lining Desai referred to in his original paper.</p> <p>The reason this would work is very simple. <em><span style="text-decoration: underline;"><strong>The BRICS members, unencumbered by the cost burden of modern welfare states could exercise the monetary restraint required to tie their currencies to gold, perhaps running a Bretton-Woods-style gold-exchange arrangement between member central banks to stabilise their currencies.</strong></span></em></p> <p>However, the NDB would almost certainly want to see the gold price considerably higher if it is to play any part in a new rival to the SDR. Other BRICS members would be encouraged to make sure they have sufficient gold on board by selling US dollar reserves to buy gold, ahead of any decision to go ahead with a new super-currency.</p> <p><strong>It would appear the era of the dollar's global domination as a reserve currency is coming to an end</strong>, and the stage is now being set for gold to be officially accepted as the ultimate reserve money once again, this time by the next generation of advanced nations.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="555" height="424" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20150424_CHS_0.jpg?1429975074" /> </div> </div> </div> http://www.zerohedge.com/news/2015-04-25/gold-sdr-brics#comments BRICs Central Banks China None Renminbi Reserve Currency Sat, 25 Apr 2015 20:30:08 +0000 Tyler Durden 505506 at http://www.zerohedge.com Germany Prepares For "Plan B", Says Greece Would "Need Not Only A Third Bailout, But Fourth, Fifth Or Even More" http://www.zerohedge.com/news/2015-04-25/germany-prepares-plan-b-says-greece-will-need-not-only-third-bailout-fourth-fifth-or <p>It has been a very disturbing 24 hours for Greece.</p> <p>It all started during yesterday's surprisingly short, just one hour long Eurozone finmin meeting in Riga, where Yanis Varoufakis not only got the most "hostile" reception yet being called "<a href="http://www.zerohedge.com/news/2015-04-24/futures-fizzle-after-greece-hammered-riga-varoufakis-accused-being-time-waster-gambl">a time-waster, gambler, and amateur</a>", but for the first time <a href="http://www.reuters.com/article/2015/04/24/us-eurozone-greece-idUSKBN0NF0BJ20150424">one minister openly said </a>that maybe it was time governments prepared for the plan B of a Greek default. This happened after Jeroen Dijsselbloem slammed the door on Varoufakis' proposal for early cash after partial reforms.</p> <p><span id="articleText">"A comprehensive and detailed list of reforms is needed," Dijsselbloem told a news conference following a meeting in Riga. "<strong>A comprehensive deal is necessary before any disbursement can take place ... We are all aware that time is running out."</strong></span></p> <p><span>And so, what was once anathema, namely the official hints that a Grexit is being contemplated at the highest ranks, has now become almost commonplace, courtesy of the backstop provided by the ECB's QE, which has lulled everyone into a sense of calm because somehow the hope has been kindled that the ECB (which is rapidly running out of government bonds to buy) can offset the realization that what was once an "unbreakable union" is suddenly not only breakable, but no longer a union. As such the trillions in deposit outflows that will sweep the periphery are somehow to be ignored because, well, "Draghi."</span></p> <p><span>This continued earlier today, </span>when none other than German Finance Minister Schaeuble hinted <strong>that Berlin was preparing for a possible Greek default, drawing a parallel with the secrecy of German reunification plans in 1989.</strong></p> <p>As <a href="http://www.reuters.com/article/2015/04/25/us-eurozone-greece-germany-idUSKBN0NG0HB20150425">Reuters reports</a>, at a briefing with reporters after a tense meeting of euro zone finance ministers on Greece on Friday, Schaeuble was asked if euro zone finance ministers were working on a "Plan B" in case negotiations on funding with cash-strapped Athens fail.</p> <p>"You shouldn't ask responsible politicians about alternatives," Schaeuble answered, adding one only need to use one's imagination to envisage what could happen.</p> <blockquote><p><strong>He indicated that if he were to answer in the affirmative that ministers were working on a Plan B -- what to do when Greece runs out of money and cannot pay back its debt -- he could trigger panic. </strong></p> <p>&nbsp;</p> <p>To explain his position, he drew a parallel with the secrecy that was necessary during the initial stage of planning for German reunification in 1989.</p> <p>&nbsp;</p> <p>"If back then a minister in charge -- I was one of them -- would have said beforehand, we have a plan for reunification, then the whole world probably would have said: 'The Germans have gone completely crazy.'"</p> </blockquote> <p>He is correct, but what is left unsaid is that the mere suggestion that Grexit no longer not being contemplated is a major escalation in Europe's attempts to launch a bank run, which they have done an admirable job at so far, leading to more than half of total Greek deposits being funded by the ECB's ELA as of this moment.</p> <p>In other words, should the ECB boost the haircut on Greek bank collateral, and both a depositor bail-in and capital controls become inevitable.</p> <p>Which incidentally, is what was also touched upon today, when the head of the Bundesbank and ECB governing council member Jens Weidmann said at a press conference in Riga, Latvia, that officials will discuss haircuts on collateral for emergency funding for Greek banks.</p> <blockquote><p>"As you know I have doubts about the provision of this emergency liquidity, because the banks are not doing all they can to improve their liquidity position, which I would expect from banks that avail of this assistance."</p> <p>&nbsp;</p> <p>"<strong>Instead, they are extending their loans -- so-called T-bills -- to the Greek state, which is each time a new credit decision. As these T-bills aren’t liquid, this means that in comparision with the alternatives, this is a deterioration of the liquidity situation which I find unacceptable</strong>."</p> <p>&nbsp;</p> <p>“The haircuts are designed according to the quality of the collateral -- which in this case is mostly government debt securities -- and that depends on the&nbsp; outlook for debt sustainability which is connected to a successful conclusion of the aid program.”</p> <p>&nbsp;</p> <p>“From my point of view it is clear: time is running out, the solution cannot come from the central banks, we have a clearly limited task, a clearly limited mandate, and must abide by our rules.”</p> </blockquote> <p>He, too, is of course correct, and yet his statement is also quite hypocritical, considering it is precisely the check-kiting scheme that Greek banks are engaged in and which the ECB "suddenly" finds objectionably, that has been the norm across Italy, Spain and Portugal for years: all countries whose reform efforst are laughable, and the only reason they haven't imploded in the same pile of rubble as Greece is because the ECB has remained ss a buyer of last resort of their sovereign debt.</p> <p>For now: because should Podemos or Beppe Grillo take chart in Spain or Italy, all bets are off, and the Greek "contagion", which is really just the realization that there is no ECB bid into insolvent paper, will spread overnight.</p> <p>Which brings us to the final reason why it has been a very nerve-wracking 24 hours for Greece.</p> <p>In an <a href="http://www.bild.de/politik/ausland/griechenland-krise/endlich-ein-politiker-der-uns-nicht-fuer-dumm-verkauft-40688638.bild.html">interview with Bild</a>, Mark Hauptmann, a lawmaker from German Chancellor Angela Merkel’s political party said that <strong>"if Greece stays in the euro, it will need not only a third bailout, but also a fourth, fifth or even more."</strong></p> <p>He added that a Greek euro exit would be good in the long term because European contracts would regain their validity and Greece could regain its competitiveness.</p> <p>He, too is correct.</p> <p>Still, even with three "correct" statements laying out clearly why Greece should Grexit, somehow we doubt that anything will happen even as the posturing on all sides reaches a fever pitch, because while Europe may have Q€ as recourse to a Greek contagion, Greece now has a Putin threat as its final trump card. Because the second Greece is kicked out (or is forced to leave), the construction of the Turkish Stream begins, and with it the cementing of Russian energy dominance for the next decade, as well as the collapse of Ukraine (and the billions of western aid flowing into Kiev over the past year) into irrelevance.</p> <p><img src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/04/Merkel%20Tsipras%202_0.JPG" width="500" height="433" /></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="1024" height="886" alt="" src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/Merkel%20Tsipras%202.JPG?1429977719" /> </div> </div> </div> http://www.zerohedge.com/news/2015-04-25/germany-prepares-plan-b-says-greece-will-need-not-only-third-bailout-fourth-fifth-or#comments B+ Bank Run Central Banks default Eurozone Fail Germany Greece Italy Latvia None Portugal Reuters Sovereign Debt Ukraine Sat, 25 Apr 2015 20:24:34 +0000 Tyler Durden 505508 at http://www.zerohedge.com Volatility Is The Square Root Of Time & Fat Tails http://www.zerohedge.com/news/2015-04-25/volatility-square-root-time-fat-tails <p><em>Authored by <a href="http://www.breancapital.com/">Russ Certo of Brean Capital</a> via <a href="http://www.cumber.com/commentary.aspx?file=042415.asp">David Kotok of Cumberland Advisors</a>,</em></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><em>Russ Certo of Brean Capital has penned a superb research note (<a href="http://www.cumber.com/content/special/Volatility_is_the_square_root_of_time_and_fat_tails.pdf">PDF here</a>). Readers may note that this is a technical essay and it is <strong> thought provoking for the professional in the money management and/or for those skilled in the monetary policy arena</strong>.&nbsp; We thank Russ and his colleague, Peter Tchir, for allowing us to share their effort with our clients, friends and readers worldwide.&nbsp;&nbsp; Please enjoy what is probably better printed and read leisurely during the weekend.</em></p> <p>&nbsp;</p> <p><em>David Kotok</em></p> </blockquote> <p>*&nbsp; *&nbsp; *</p> <p><strong>The trio of macro-prudential policy, the onset and evolution of shadow banking, and the nebulous concept of financial stability may have become a toxic cocktail</strong> which can be instrumental in moving forward the Federal Reserve&rsquo;s timeline for lift-off zero bound rates.&nbsp; The intuition here is stooped in concepts of volatility and <strong>how market structure evolution may contribute or detract from asset volatility</strong>. &nbsp;Please bear with me with the following pros.</p> <p><u><strong>Volatility is the square root of time.&nbsp;</strong></u></p> <ul type="disc"> <li>For price making a random walk, variance is proportional to time.</li> <li>Standard deviation is the square root of variance and therefore it is proportional to the square root of time.</li> <li>Volatility is standard deviation and therefore it is proportional to the square root of time.</li> </ul> <p align="center"><img alt="Volatility formula" border="0" height="42" src="http://www.cumber.com/images%5C042415_clip_image001.jpg" width="234" /></p> <p>In modern portfolio theory one standard deviation from the mean accounts for 68% confidence interval of all activity and observations within the mean distribution.&nbsp; Two standard deviations account for 95% of occurrences.&nbsp; Three standard deviations account for 99% of activity relative to the mean in a given probability outcome.</p> <p>Fortunately or unfortunately, <strong>there are many asset price occurrences and events globally which occur outside the mean and with far greater frequency than typical option pricing theory suggests</strong>.&nbsp; Ironically, outlier events outside the mean can be sown by the seeds of persistent LACK of volatility.&nbsp; This can be a challenge in a zero interest rate policy world.&nbsp;</p> <p><u><strong>Annualized Standard Deviation</strong></u></p> <p>Unlike implied volatility - which belongs to option pricing theory and is a forward-looking estimate based on a market consensus - regular volatility looks backward.&nbsp; Specifically, it is the annualized standard deviation of historical returns.&nbsp; For the sake of bond trading there are approximately 252 trading days a year which is the time series used to derive daily volatility of interest rates.&nbsp; But these normal bell curve distributions have been repressed by vagaries of central bank policy.&nbsp;</p> <p><strong>There are limitations to capital asset pricing theory (CAPM) and one is that regular volatility looks BACKWARD.&nbsp;</strong> In fact, we know a few acquaintances that think typical option pricing theory is limited in its capacity and that FAT tails occur much more frequently than a normal distribution bell curve would suggest.&nbsp; To some there is a wall at the end of that fat tail with black swans perched atop in far greater frequency than option pricing theory academically suggests.&nbsp;</p> <p>Allow me the license of some theoretical equations to serve for relevant discussion to markets and policy today.&nbsp;&nbsp; These are conceptual.</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>Financial repression times time equals volatility</p> <p>&nbsp;</p> <p>Financial repression times time is an input to the inverse of financial stability</p> <p>&nbsp;</p> <p>Macro-prudential policy times time is an input that can contribute to volatility</p> <p>&nbsp;</p> <p>Macro-prudential policy times time+ financial repression times time equals volatility squared.</p> </blockquote> <p><strong>We all realize that during period of low volatility, market participants are incented to reach for alpha in a variety of expressions</strong>.&nbsp; Sometimes investors go down in credit quality to gain enhanced yield.&nbsp; Others execute buy-right strategies to augment performance whereby one owns an asset and writes a call on that asset to take in premium which enhances return.&nbsp; Others simply write naked options on assets.&nbsp; Some increase leverage or increase exposures to an asset class to achieve desired performance.&nbsp; Others simply become lulled to sleep and miss-allocate resources.&nbsp; So much for sharp ratios, a risk adjusted return, the average return earned in EXCESS of the risk-free rate per unit of VOLATILITY or TOTAL RISK.&nbsp;</p> <p><strong>These concepts of risk allocation or miss-allocation have historically led to consequent periods of great volatility spikes and deleveraging</strong>.&nbsp; The basic premise and inference here is that these bouts or tails occur at greater frequency than the inputs imbedded in our statistical pricing models.&nbsp;</p> <p><strong>These periods of selling volatility or miss-allocated resource absorption chasing alpha for performance enhancement and portfolio boosting can endure for EXTENDED periods of time.&nbsp; </strong>The classic unwinds of these allocations are of epic fare and proportion; tulip manias, alchemists, Mississippi Company, South Sea Company bubbles, modern prophesies, fortune-telling, great orators, dot.com bubbles, housing bubbles, Alt-A at par, national delusions, peculiar follies and other miss-guided exercises which tend to unravel at meteoric pace.&nbsp; Negative interest rates across large swaths of global rate structure come to mind at the moment.&nbsp; Buy volatility.&nbsp; <strong><em>Extraordinary Popular Delusions and the Madness of Crowds </em></strong><a href="http://books.google.com/books?id=xeHsAgAAQBAJ&amp;printsec=frontcover&amp;source=gbs_ge_summary_r&amp;cad=0#v=onepage&amp;q&amp;f=false"><strong><em>http://books.google.com/books?id=xeHsAgAAQBAJ&amp;printsec=frontcover&amp;source=gbs_ge_summary_r&amp;cad=0#v=onepage&amp;q&amp;f=false</em></strong></a><strong><em>.&nbsp; </em></strong></p> <p>What I would like to talk about is the marriage of three timely, prescient, and inter-related topics noted above which are encased with an understanding of how volatility can be catalyst:&nbsp; <strong><em><u>Macro-prudential policy, shadow banking formation and market structure and financial stability.&nbsp;</u></em></strong></p> <p><u><strong>MACRO-PRUDENTIAL POLICY: </strong></u></p> <p>This is an all-encompassing topic and is<strong> defined by the IMF is &ldquo;protecting the whole.&rdquo;</strong>&nbsp; &ldquo;Keeping individual financial institutions sound is not enough.&nbsp; A broader approach is needed to safeguard the financial system and mitigate risks to systemic stability.&nbsp; To reduce the cost to society and the economy from a <em>disruption in financial services</em> that underpin the workings of financial markets&mdash;such as the provision of credit, but also of insurance and payment and settlement services.&rdquo; (FSB/IMF/BIS, 2009; IMF 2011a).</p> <p>&ldquo;<strong>The failure of an individual institution can create systemic risk</strong> <em>when it impairs the ability of other institutions to continue to provide </em><a href="http://www.imf.org/external/pubs/ft/fandd/basics/finserv.htm" target="_blank"><em>financial services</em></a><em> to the economy. </em>Usually only a large institution that is heavily connected to many other institutions can cause such spillovers that its failure threatens systemic stability. These spillovers can occur through one or more of four channels of contagion:</p> <ul> <li>direct exposure of other financial institutions to the stricken institution;</li> <li>fire sales of assets by the stricken institution that cause the value of all similar assets to decline, forcing other institutions to take losses on the assets they hold;</li> <li>reliance of other financial institutions on the continued provision of financial services, such as credit, insurance, and payment services, by the stricken institution; and</li> <li>increases in funding costs and runs on other institutions in the wake of the failure of the systemic institution&rdquo;</li> </ul> <p><a href="http://www.imf.org/external/pubs/ft/fandd/basics/macropru.htm">http://www.imf.org/external/pubs/ft/fandd/basics/macropru.htm</a>.&nbsp;</p> <p>One could or should look at the pursuit of macro-prudential policy as a sort of parallel regulatory exercise of the likes of Glass-Steagall, which separated the activities of commercial and investment banks.&nbsp; Only the late macro-prudential regulatory arena isn&rsquo;t centrally legislated per se.&nbsp; In fact, it is decentralized regulation in a variety of forms.</p> <p><strong><em>One can broadly consider Basel III, Dodd Frank, risk based capital standards, haircut capital, leverage reduction, floating rate NAV money market reform, evolution of monetary tools tested and available at the Federal Reserve, litigation, stress tests, derivative and repo reform, central clearing houses and much more as representative of macro-prudential policy geared toward making the financial system safer by neutering a bevy of systemically relevant financial institutions.&nbsp;</em></strong></p> <p>Without validating or invalidating the integrity and effectiveness of such reforms, both explicit, implicit, and tacit capital, legal, and operative strictures have been placed on financial institutions intended to ring-fence a variety of real or perceived organizational behaviors which are deemed to put the greater financial system at risk.&nbsp; The collective and aggregate ring-fencing of SYSTEMICALLY RELEVANT institutions appears to have reduced some leverage, proprietary, and service aspects of banking and dealer models, and now asset manager, fund, and other capital company models.&nbsp;&nbsp;</p> <p>Some specific examples follow along with a discussion of how these behaviors have altered the protocols in the financial market landscape.&nbsp; These &ldquo;altered&rdquo; protocols are ultimately passed along to clients in terms of various frictions of quality and quantity of service and price of service.&nbsp;</p> <p>Primary Dealers/Banks/ &amp; Boutique Financial Institutions:&nbsp;&nbsp; Some banks and financial intermediaries are charging clients for funding in a variety of capacities both in extension of balance sheet and in business protocols.&nbsp; Financing of client positions is prioritized with a business premium embedded in decision.&nbsp; In other instances, total dealer repurchase exposure has shrunk and is shrinking.&nbsp; Dealers are trading LESS volume in the over the counter and cash securities markets across multiple product lines.&nbsp; There is less balance sheet deployment and usage in secondary security positioning for house franchise or client service commitment.&nbsp; These are merely a few topical examples of adverse OR desired prudential impacts on intermediary models.&nbsp;</p> <p>Further, there are additional facilities in the broad framework of macro-prudential arena that have been created, intended or not, which bypass traditional banking/dealer activities.&nbsp; For instance, the Federal Reserve has tested and used in various capacities its overnight Reverse Repo Facility (RRP) and its Term Deposit Facility (TDF) which INCLUDES additional counterparties like asset managers and money market institutions which qualify based on capitalization, commitment and other factors.&nbsp;</p> <p><strong>This is a departure and augmentation of the traditional market piping of bi-lateral Open Market Operations with the Federal Reserve which were traditionally inclusive and unique to PRIMARY dealers.&nbsp;</strong> This decentralization of funding counterparties has also reduced the volume and impact of dealers in financing markets with clients as these facilities have been inclusive of other genre of management firms WHILE increasing the Federal Reserve as an active repo counterparty as a percentage of total counterparty exposure.&nbsp;<strong> These are tools which have effectively allowed for diminished total participation of traditional repo and financial dealing with traditional cadre of players which, in turn, is passed along the financial market food chain of diminishing utility.&nbsp;</strong></p> <p>In other arenas, the Bank of England estimated the impact on collateral markets of macro-prudential policy to exceed $800 billion dollars.&nbsp; This was an estimate years ago but still evolving today which aspired to quantify how much of high quality assets would be required and applied for risk-based capital standards.&nbsp; The obvious storehouse asset of cash or marketable securities, U.S. Treasury securities, have compressed more than 50 basis points in market structure as a result of the implementation of these globally aligned reforms.&nbsp; I rhetorically ask, will this gobbling up of collateral for macro-prudential considerations spurn negative rates in U.S. money markets?&nbsp; I cuff envelope analysis and imperfectly suspect the collateral impacts of cumulative risk based capital requirements have and will exceed several trillion notional par value worldwide.&nbsp;</p> <p>Not to stray from point, <strong>I think a very interesting linkage is that the collateral required for banks in macro-prudential regulatory reform HAPPENS to be held within global central banking balance sheets at the moment and is rolling into the front end of capital and money market curves</strong>.&nbsp; <strong><em><u>The Federal Reserve alone has approximately $1.3 trillion in collateral scheduled to roll off or mature between early 2016 and 2022.&nbsp;</u></em></strong></p> <p>In other prudential related areas, actual and perceived litigation has likely impacted dealer&rsquo;s behavior in a variety of lending, trading, and commitment of balance sheet usage.&nbsp; The changing dynamic has increased the challenges of assigning INTELLECTUAL and CAPITAL resources to any specific strategic product line or business unit, which again, ultimately serves consumers/clients.&nbsp; Oh, the fun of assigning a return on equity to a business line for your reporting line (boss) and to dedicate resources across the product spectrum of distressed, emerging markets, Equities, HY, IG, ABS, MBS, Rates, Loans, FX, Commodities and more.&nbsp;</p> <p>It may be a chore to allocate resources above in light of the dynamic of elevated asset prices globally due to central bank quantitative easing duly coupling your VAR decisions for asset growth across your products lines in the coming fiscal year?&nbsp; What rate of growth would YOU assign to those businesses and then how would you respectively allocate your precious capital which is definitely shrinking and yet not possibly known?</p> <p>Perception of increased organization friction increases perception of RISK of allocating resources and to real risk management with increasingly scarce vision of firm capital and cost of capital.&nbsp; Some managers don&rsquo;t know what their capital allocation is due to revolving&nbsp; and evolving litigation and reform. Firm total capital and makeup literally are evolving in a regulatory and litigious continuum.&nbsp; A moving target.&nbsp;</p> <p>Volatility is the square root of time.&nbsp; <strong><u><em>The more time that elapses in a zero interest rate climate puts greater pressure on an array of relevant factors affecting bank&rsquo;s behavior including declining net interest margins, compensation scheme challenges for critical employees, retention of intellectual capital and skill sets, and mobilization of firm resources to compete and dynamically changing operating and market environment.&nbsp;&nbsp;</em></u></strong></p> <p><u><strong>SHADOW BANKING</strong></u></p> <p>Why is this important?&nbsp; <strong>This is important because financial activity like liquidity provisioning and service to the global investment community is increasingly occurring outside the banking system.&nbsp;</strong>&nbsp; In fact, a web of non-dealer/non-bank financial institutions are getting caught up in she school of systemically relevant institutions and, hence, increasingly under the macro-prudential regulatory reform umbrella.&nbsp; To point and without analyzing in detail, look at GE&rsquo;s decision to rid more than $150 billion in financial, housing, loan, security, and mortgage assets partially due to the stigma of prudential regulation and associated adverse capital impacts, as the moniker of systemically relevant was specifically stated as a consideration in the re-organization.&nbsp; <strong>Also, extrapolate that the prospective sale of such assets may also continue to fall OUTSIDE the traditional financing, dealing, and market service players of prudentially regulated landscape.&nbsp;</strong></p> <p>The BIS supported this notion with a recent working-paper called &ldquo;Global dollar credit: links to US monetary policy and leverage.&rdquo;&nbsp; This paper&rsquo;s main points are that U.S. monetary policy is transmitted DIRECTLY to the rest of the world and limits national policies.&nbsp; The fastest growth of U.S. dollar credit, the objective of the Federal Reserve in monetary multiplier concepts, is IN BOND ISSUANCE of non-financial non domestic issuers abroad.&nbsp; This credit growth OUTSIDE the typical monetary transmission mechanism of U.S. banking institutions is close to $8 trillion dollars and is prone to reversals of non-financial issuer and sovereign credit risk and interest rate rollover risk of securitized funding.&nbsp; The paper concludes that the genesis of policy, linkages to central bank policy, has <strong>created these FINANCIAL STABILITY concerns</strong>.&nbsp; <a href="http://www.bis.org/publ/work483.pdf">http://www.bis.org/publ/work483.pdf</a>.&nbsp;</p> <p>My favorite flowchart in the piece is page 6 which demonstrates the <strong>diminished role of banks in dollar credit expansion</strong>.&nbsp; Many investment managers have pondered where are the possible unintended consequences of credit creation lurking and miss-allocated around the world?&nbsp; I think this paper sheds light on where and what the implications are.&nbsp; I would add that this concept may also <strong>partially explain why MONETARY VELOCITY has plunged despite central bank quantitative easing policies, the bank transmission mechanism is pushing on a string versus where the liquidity is currently store housed, overseas and outside banks.&nbsp;</strong></p> <p><strong>The new pod of $8 trillion dollar liquidity mechanism is in corporate bond issuance in non-finance companies and held by ASSET&nbsp; MANAGERS.&nbsp;</strong> This is the linking of macro-prudential policy which is pushing the functionality of traditional market service, credit creation and financial market service outside the traditional realm of banking.&nbsp; For reference, $8 trillion dollars is <strong>more than twice the size of the entire money market fund business in the United States.&nbsp;</strong></p> <p>To complement the discussion above with some examples, there has been considerable discussion about exit fees with fund families to mitigate risk within active and passively managed fund community.&nbsp; There has been plenty of colorful debate regarding the<strong> relevance of asset manager&rsquo;s liquidity to the overall marketplace.</strong>&nbsp; This debate has become so relevant, even contested, that it has even been acknowledged or validated by a Federal Reserve Bank of New York Staff Report titled, &ldquo;Gates, Fees, and Preemptive Runs.&rdquo;&nbsp; <a href="http://www.newyorkfed.org/research/staff_reports/sr670.pdf">http://www.newyorkfed.org/research/staff_reports/sr670.pdf</a>.&nbsp;</p> <p>The preliminary findings noted in the abstract are:&nbsp; &ldquo;We build a model of a financial intermediary and show that allowing the intermediary to impose redemption fees or gates in a crisis&mdash;a form of suspension of convertibility&mdash;<strong><u>can lead to preemptive runs.&rdquo;</u></strong></p> <p>Why is this important?&nbsp;<strong> This is important as in an unforeseen period of asset or market volatility, traditional market structure has evolved in light of the macro-prudential observations above.&nbsp; The liquidity function and ability to transact and execute investment philosophies could be compromised with the evolution of where liquidity is STORED.&nbsp; </strong>Increasingly, the financial press has aspired to qualify where risks may now lie within the fund community and products that are being offered to institutional and retail investors alike.&nbsp;</p> <p><em>Varied discussion on the topic includes whether proper product disclaimers are being used in the marketing of new fund products like ETFs?&nbsp; Are some products being exploited as a cash equivalent under the perception of offering a liquidity advantage to cash securitized issues, products, markets, and service?&nbsp; Is there a &ldquo;cross-shareholding&rdquo; of other fund family assets held WITHIN funds, a leverage component so to speak?&nbsp; Can products accurately replicate the performance of the underlying assets?&nbsp; Does an unconstrained nature of new product design and financial engineering create &ldquo;performance chasing?&rdquo;&nbsp; Is there a first mover liquidity advantage of assets portfolio arbitrage relative to NAV?&nbsp; Is there an inter-relationship between indexing and the storehouse in these products?&nbsp; Can volatility in the fund arena reverse impact the asset volatility of the underlying financial security instruments?&nbsp; Can everyone get out in time?&nbsp;&nbsp;</em></p> <p><u><strong>FINANCIAL STABILITY</strong></u></p> <p>The IMF just published a White Paper titled &ldquo;Shadow Banking Around the Globe: How Large, and How Risky.&rdquo;&nbsp; This paper describes the<strong> growth and risks of and regulatory responses to shadow banking</strong>&mdash;financial intermediaries or activities involved in credit intermediation outside the regular banking system, and, therefore, lacking a formal safety net!</p> <p><strong>I find timing and nature of this paper to be significant for a variety of reasons.</strong>&nbsp; First, the IMF infers that prudential regulation have made the financial system MORE unstable despite containing systemically relevant banking institutions.&nbsp; Control the parts at the expense of the whole per se, the ironic opposite of the definition of macro-prudential regulation.&nbsp;</p> <p>Further, I find the IMF to be traditionally ALIGNED with the central banking, policy, and regulatory circles.&nbsp; Therefore, this is quite the empirical work of DEPARTURE from many post-crises regulatory developments.&nbsp; This has generally been a liberal policy body which is decidedly bucking traditionally liberally aligned prudential principals at the current moment.&nbsp;</p> <p>Moreover,<em><strong><u> the timing and nature of the work sends a shot across the bow possibly in the MONETARY and regulatory policy community due to perceived imbalances that may exist within the realm of FINANCIAL STABILITY.</u></strong></em>&nbsp;&nbsp;&nbsp; <a href="http://www.imf.org/external/pubs/ft/gfsr/2014/02/pdf/c2.pdf">http://www.imf.org/external/pubs/ft/gfsr/2014/02/pdf/c2.pdf</a>.&nbsp;</p> <p>Why is the linkage of MACRO-PRUDENTIAL policies pushing traditional behavior outside the banking system and dealing community while simultaneously diminishing traditional intermediary bank/dealer incentives to serve global securities market important?&nbsp; This is because by altering the traditional market transmission mechanism of bank and market liquidity to other areas possibly encumbers the traditional monetary mechanism which appears to be adversely impacting monetary velocity due to meandering global liquidity movement into the SHADOW BANNKING SYSTEM.&nbsp;</p> <p><em>What are the implications of the newfound and evolved shadow banking framework, systemically identified or not, with the creation of new fund products as pertained to market infra-structure, liquidity, and market profile important?&nbsp; Will the liquidity function hold up in case of wholesale asset sales or fund redemptions?&nbsp; Has the liquidity function been tested and what are the implications for market liquidity?&nbsp; What are some possible near term implications for policy makers regarding FINANCIAL STABILITY?&nbsp;</em></p> <p><u><strong>POSSIBLE MONETARY POLICY IMPACTS</strong></u></p> <p><strong><u><em>I suspect the concept of financial stability has the potential to be a mover in the monetary policy framework at the moment.&nbsp;&nbsp; The Federal Reserve, and other quasi bank and policy bodies, appears to increasingly be focusing on the concept of financial stability.&nbsp;</em></u></strong></p> <p>A BIS working paper defines financial stability as the following:&nbsp; &ldquo;Financial stability is difficult to define and even more difficult to measure. Strictly speaking, a financial system can be characterized as stable in the absence of excessive volatility, stress or crises.&rdquo;&nbsp; <a href="http://www.bis.org/ifc/publ/ifcb31ab.pdf">http://www.bis.org/ifc/publ/ifcb31ab.pdf</a>.&nbsp;</p> <p>In a theoretical world, market critics often refer to &ldquo;the Greenspan put&rdquo; , &ldquo;Bernanke put&rdquo;, the &ldquo;Yellen put&rdquo;, the &ldquo;plunge protection team&rdquo; and other monikers for the perceived desire for central bankers and other policy bodies to engage in market stabilizing activities, WHATEVER they may be.&nbsp;</p> <p><strong>In the broad notion to restore order in the post credit crises world we have witnessed many schemes which generally fall into categorical definition of financial repression schemes </strong>or monetary policy devices and other policy devices geared towards stabilizing markets mostly in the stated pursuit of price stability, stable employment, moderate interest rates and other economic or social variables.&nbsp;</p> <p><strong>Most policies align themselves with LOWER volatility outcomes and better economic tidings for the middle class, society at large or global economy alike.</strong>&nbsp; Financial repression schemes of negative real interest rates, or ZIRP, quantitative easing, even crude no short rules of times past, and many other interventions, bail outs etc. were geared towards asset stabilization, with the sole exception of currency markets.&nbsp; An assumption here is monetary policy, other than twin mandates, has also been engineered to manifest stability and generally lower asset market volatility.&nbsp;</p> <p>In market and policy circles <strong>it is being debated that the overwhelming and varied onslaught of monetary accommodation has reasonably achieved &ldquo;financial stability&rdquo;</strong> as defined by the BIS above.&nbsp; Recall, the BIS (Bank of International Settlements) is the central bank of the central banks, so, their thoughts are important in the central banking arena.&nbsp;</p> <p>Recent references to financial stability concerns along with recent working papers by quasi bank and regulatory bodies, coupled with decentralized, varied, and even conflicting comments from central bank speaking engagements may <strong><em><u>posit that there is an uneasy feeling within the policy community regarding certain market incentives created by central banks</u></em></strong>.&nbsp;&nbsp; The concerns are that quantitative easing, and lengthy liquidity provisioning have encouraged investors globally to reach for alpha, sell volatility, increase leverage, miss-allocate investment capital, and generate a self-imposed central bank induced financial stability artificiality of investment valuation imbalance in the world&rsquo;s financial markets.&nbsp; This seems to be a significant change of heart given the policies which were instrumental in affecting global investor behavior.&nbsp; However, times and policies change.&nbsp;</p> <p><u><em><strong>I equate the narrative as one of controlling an avalanche by detonating the technical so the outdoor alpine sportsman, doesn&rsquo;t fall victim to uncontrollable landslide.</strong></em></u>&nbsp; Central bankers appear to speak of both sides of hawkish/dovish tongues recently as warning signals to those engaged in the pursuit of excess return vis a vis excessive leverage and risk allocation.&nbsp; This tongue and check communication style I think is suited to bankers that aspire to temper notions of financial stability.&nbsp; To me, a sea change seems to have occurred either in political or monetary policy community where proactive communication is now the order of the day.&nbsp; For these reasons I think there is asymmetric policy risk with the Federal Reserve in moving forward its liftoff and I believe this week we have witnessed a coordinated protocol with other central bankers.&nbsp;</p> <p><strong><em><u>Collectively, conflicting but revealing reference to financial stability in domestic policy speeches, uniquely timed and nature of working papers on market structure, liquidity, shadow banking risks, and financial stability, the possibility of increased mouthpiece financial disclaimers within press corps on liquidity and fund risks.&nbsp;</u></em></strong></p> <p>Overseas, of course, on Friday <strong>China raised red flag on its stock markets</strong> as China regulator warned small investors, raising fears of a market selloff that cause ripples across the globe.&nbsp; China tightened rules on margin lending as the main market index has doubled over 12 months and the riskiest index is up 70% this year.</p> <p>The China Securities Regulatory Commission warned small investors not to borrow money or sell property to buy stocks as mainland investors opened stock trading accounts at the fastest pace ever in the week ended April 10, and margin account balances reached a record 1.16 trillion yuan as of Thursday.</p> <p>Further, the regulator banned a type of financing called umbrella trusts that provided cash for margin trading.&nbsp; CSRC also warned that limits may be placed on trading for small investors. <a href="http://www.wsj.com/articles/china-raises-red-flag-on-its-stock-markets-1429274641">http://www.wsj.com/articles/china-raises-red-flag-on-its-stock-markets-1429274641</a>.</p> <p>In another example yesterday, this time in England,<strong><em><u> The BOE is the first central bank to consider a pickup in inflation may not be gradual</u></em></strong> in their Minutes of the Monetary Policy Committee, from April 8 &amp; 9.&nbsp; <a href="http://www.bankofengland.co.uk/publications/minutes/pages/mpc/default.aspx">http://www.bankofengland.co.uk/publications/minutes/pages/mpc/default.aspx</a>.&nbsp;</p> <p>I also noticed that Canadian core inflation was the fastest in 6 years.&nbsp; This morning there was a Bloomberg article which noted that Euro-Area swaps show faith in Draghi as 5 year inflation swaps have risen meaningfully other break even&rsquo;s in Germany and U.S. have also responded in kind.&nbsp;</p> <p><u><strong>To revert to the beginning of this newsletter;</strong></u></p> <p><em>Volatility is the square root of time.&nbsp; Financial repression times time equals volatility.&nbsp; Financial repression and/or macro-prudential policy times time equals the inverse of financial stability.&nbsp;&nbsp; Financial stability inverted equals volatility squared.&nbsp;</em></p> <p>And one to part with, <strong><em><u>&ldquo;Financial Stability is the one variable that could change the impetus for the Federal Reserve to have conviction to lift the floor of rates sooner than later.&nbsp;</u></em></strong></p> <p>This, my friends, finds the Eurodollar complex longest in a year and coming from a 2016 legacy lift-off guy.&nbsp;&nbsp; We&rsquo;ll see soon enough.&nbsp; Good luck.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="171" height="162" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20150425_stab.jpg?1429981959" /> </div> </div> </div> http://www.zerohedge.com/news/2015-04-25/volatility-square-root-time-fat-tails#comments Alt-A Bank of England Bank of International Settlements Bank of New York BIS Black Swans BOE Bond Central Banks China Counterparties Crude default ETC EuroDollar Federal Reserve Federal Reserve Bank Federal Reserve Bank of New York Germany Global Economy Google Monetary Policy Open Market Operations Prudential Quantitative Easing Random Walk Real Interest Rates Reverse Repo Risk Based Capital Risk Management Shadow Banking Volatility Yuan Sat, 25 Apr 2015 19:45:50 +0000 Tyler Durden 505510 at http://www.zerohedge.com Just 6 Charts http://www.zerohedge.com/news/2015-04-25/just-6-charts <p>Presented with one comment... <strong>Di(e)Vergence?</strong></p> <p>&nbsp;</p> <p><u><strong>Stocks vs Macro Data</strong></u> - too snowy, too droughty; closed ports, lower oil prices... any more excuses? Macro data - already drastically revised lower - continues to disappoint on&nbsp; a scale not seen since 2008</p> <p><img alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04-overflow/20150425_chart4_0.jpg" style="width: 600px; height: 337px;" /></p> <p>&nbsp;</p> <p><u><strong>Stocks vs Earnings Expectations</strong></u> - no lift in earnings expectations despite talking heads proclaiming earnings sesason a success (which it is not even with already collapsed expectations)</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04-overflow/20150425_chart3.jpg"><img alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04-overflow/20150425_chart3_0.jpg" style="width: 600px; height: 326px;" /></a></p> <p>&nbsp;</p> <p><strong><u>Stocks vs GDP Expectations</u></strong> - the sell-side weathermen were once again surprised that winter was wet and cold... but think of all the pent-up demand?</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04-overflow/20150425_chart5.jpg"><img alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04-overflow/20150425_chart5_0.jpg" style="width: 600px; height: 331px;" /></a></p> <p>&nbsp;</p> <p>The sell-side analyst&#39;s ruler of recovery at its finest... <u><strong>providing all the retail-investor reassurance needed...</strong></u></p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04-overflow/20150425_chart1.jpg"><img alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04-overflow/20150425_chart1_0.jpg" style="width: 600px; height: 476px;" /></a></p> <p>&nbsp;</p> <p>But, as BofAML&#39;s &#39;The Flow Show&#39; exhibits, <u><strong>professionals are exiting en masse. Stocks vs Equity Flows...</strong></u></p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04-overflow/20150425_chart2.jpg"><img alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/04-overflow/20150425_chart2_0.jpg" style="width: 600px; height: 458px;" /></a></p> <p>&nbsp;</p> <p><strong><u>With outflows in 9 of the last 10 weeks - and $79 billion of outflows from equities year-to-date</u></strong> - BofAML&#39;s &#39;Flow Show&#39; report warns that with stocks are record highs the risk of a correction continues to grow.</p> <p>So, macro, micro, and flow data all show weakness but stocks remain at record highs on collapsing volume - Fragile much?</p> <p>And remember, <u><a href="http://www.zerohedge.com/news/2015-04-24/75-year-itch-starts-next-week"><strong>next week is the 7.5 Year Itch...</strong></a></u></p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/03-overflow/20150331_751.jpg"><img height="314" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/03-overflow/20150331_751_0.jpg" width="600" /></a></p> <p>&nbsp;</p> <p><em>Charts: Bloomberg, BofA, and @Not_Jim_Cramer</em></p> <p>&nbsp;</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="318" height="208" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20150425_chart6.jpg?1429979762" /> </div> </div> </div> http://www.zerohedge.com/news/2015-04-25/just-6-charts#comments Jim Cramer recovery Sat, 25 Apr 2015 19:00:54 +0000 Tyler Durden 505509 at http://www.zerohedge.com Overview Of Our Energy Modeling Problem http://www.zerohedge.com/news/2015-04-24/overview-our-energy-modeling-problem <p><a href="http://ourfiniteworld.com/2015/04/23/overview-of-our-energy-modeling-problem/"><em>Submitted by Gail Tverberg via Our Finite World blog,</em></a></p> <p><strong>We live in a world with limits, yet our economy needs growth. </strong>How can we expect this scenario to play out? <strong>My view is that this problem will play out as a fairly near-term financial problem, with low oil prices leading to a fall in oil production.</strong> But not everyone comes to this conclusion. What were the views of early researchers? How do my views differ?</p> <p>In my post today, I plan to discuss the first lecture I gave to a group of college students in Beijing.</p> <p><em>A PDF of it can be found here:&nbsp;<a href="https://gailtheactuary.files.wordpress.com/2013/06/1-overview-of-energy-modeling-problem-v2-pptx.pdf">1. Overview of Energy Modeling Problem</a>. A MP4 video is available as well on my&nbsp;<a href="http://ourfiniteworld.com/presentationspodcasts/">Presentations/Podcasts Page</a>.</em></p> <p><u><strong>Many Limits in a Finite World</strong></u></p> <p>We live in a world with limits. These limits are not just energy limits; they come in many different forms:</p> <p><a href="https://gailtheactuary.files.wordpress.com/2015/04/2-we-are-reaching-limits-in-many-ways.png"><img alt="2 We are reaching limits in many ways" class="aligncenter size-full wp-image-39751" height="464" src="https://gailtheactuary.files.wordpress.com/2015/04/2-we-are-reaching-limits-in-many-ways.png?w=640&amp;h=464" width="640" /></a></p> <p>All these limits work together. We can work around these limits, but the workarounds are higher cost&ndash;for example, substituting less polluting energy resources for more polluting energy resources, or extracting lower grade ores instead of high-grade ores. When lower grade ores are used, we need to process more waste material, raising costs because of greater energy use.&nbsp;When population rises, we must change our agricultural approaches to increase food production per acre cultivated.</p> <p>The problem we reach with any of these workarounds is <em>diminishing returns.</em> We can keep increasing output, but doing so requires disproportionately more inputs of many kinds (including human labor, mineral resources, fresh water, and energy products) to produce the same quantity of output. This creates higher costs, and can lead to financial problems. This phenomenon is one of the major things that a model of a finite world should reflect.</p> <p>&nbsp;</p> <p><u><strong>Economists Views</strong></u></p> <p>Economists developed their views of the economy long ago, when limits seemed to be far in the distance. Thus, the models they built do not reflect the expected impact of limits. They are missing variables that would be needed to adjust for changes in the economy&rsquo;s behavior as limits are reached.</p> <p><a href="https://gailtheactuary.files.wordpress.com/2015/04/3-economists-put-together-models.png"><img alt="3 Economists put together models" class="aligncenter size-full wp-image-39752" height="502" src="https://gailtheactuary.files.wordpress.com/2015/04/3-economists-put-together-models.png?w=640&amp;h=502" width="640" /></a></p> <p><a href="https://gailtheactuary.files.wordpress.com/2015/04/4-economy-will-adapt.png"><img alt="4 Economy will adapt" class="aligncenter size-full wp-image-39754" height="500" src="https://gailtheactuary.files.wordpress.com/2015/04/4-economy-will-adapt.png?w=640&amp;h=500" width="640" /></a></p> <p>The story in Slides 3 and 4 tends to be true if we are far from limits, but is it really true when we are close to limits? Perhaps diminishing returns as we approach limits changes the results.</p> <p><a href="https://gailtheactuary.files.wordpress.com/2015/04/5-what-is-the-real-story.png"><img alt="5 What is the real story" class="aligncenter size-full wp-image-39756" height="475" src="https://gailtheactuary.files.wordpress.com/2015/04/5-what-is-the-real-story.png?w=640&amp;h=475" width="640" /></a></p> <p>&nbsp;</p> <p><u><strong>World Oil Situation as We Approach Limits</strong></u></p> <p>Perhaps we can get some indication of how diminishing returns are affecting the economy by looking at historical oil supply and prices. Up until 1970, US oil production grew quite steadily.</p> <p><a href="https://gailtheactuary.files.wordpress.com/2015/04/6-us-oil-production.png"><img alt="6 US oil production" class="aligncenter size-full wp-image-39757" height="510" src="https://gailtheactuary.files.wordpress.com/2015/04/6-us-oil-production.png?w=640&amp;h=510" width="640" /></a></p> <p>After 1970, oil production suddenly began to decline. Oil companies did not expect such a decline; they assumed that oil production would rise endlessly. Once oil production began to decline, oil companies quickly began trying to find ways to fix their problems. One of these approaches was quickly to ramp up production in areas that they knew contained oil, but hadn&rsquo;t previously been drilled. These included Alaska (northern United States), Mexico, and the North Sea. Oil production in these areas is now in decline.</p> <p>Several ways were also found to reduce oil usage. These included change from oil to alternate fuels for electricity generation and home heating, and offering smaller, more fuel-efficient cars. With this combination of approaches, oil prices were brought down, most of the way to the $20 level (Slide 7).</p> <p>The inflation adjusted level of oil prices is important because oil is the single largest source of energy use in both the US and world economy. If oil prices are cheap, it easy to grow food cheaply, and manufacturing and transport can be done cheaply. Because of this, the economy tends to grow. If oil prices rise, economic growth tends to slow, because the cost of many types of goods (including&nbsp;oil products, food, and building new homes) tends to rise faster than wages. It becomes more expensive to replace infrastructure such as roads and pipelines as well. The higher cost of oil effectively acts as a &ldquo;tax&rdquo; inhibiting economic growth.</p> <p><a href="https://gailtheactuary.files.wordpress.com/2015/04/7-world-oil-supply.png"><img alt="7 World oil supply" class="aligncenter size-full wp-image-39758" height="502" src="https://gailtheactuary.files.wordpress.com/2015/04/7-world-oil-supply.png?w=640&amp;h=502" width="640" /></a></p> <p>Oil prices again reached a high level in the early 200os as we again began to reach limits of the amount of oil that could be extracted at the then-available price. This time we weren&rsquo;t able to cut back on world demand, so prices tended to stay high. Instead, the big change made was in oil supply, with higher oil prices enabling (after a several years time-lag) greater production both from US oil from shale formations (called &ldquo;tight oil&rdquo; in Slide 6 above) and from the oil sands in Canada.</p> <p>The question becomes: can the economy really function adequately on $100+ barrel oil? Or do the negative feedbacks from these high oil prices have too adverse an impact on economic growth?</p> <p><a href="https://gailtheactuary.files.wordpress.com/2015/04/8-now-oil-price-is-too-low.png"><img alt="8 Now oil price is too low" class="aligncenter size-full wp-image-39759" height="502" src="https://gailtheactuary.files.wordpress.com/2015/04/8-now-oil-price-is-too-low.png?w=640&amp;h=502" width="640" /></a></p> <p>Slide 8 shows more detail regarding production and prices for recent years. We see that oil prices were generally rising up until mid 2008, and then dropped steeply. Prices rose again after several types of economic stimulus were added. More government spending was added, interest rates were dropped to very low levels and a program called quantitative easing (QE) began.</p> <p>Prices stayed at a level a little over $100 barrel from January 2011 though mid-2014. More recently, oil prices have dropped to a little more than half of their previous level. This decline in oil prices appears to correspond to a time when world debt is not rising as rapidly: the US stopped its QE program, and China&rsquo;s debt no longer rising as rapidly. Thus, some of the economic stimulus that helped hold oil prices up is disappearing.</p> <p>The problem we are now encountering is not the high price problem that economists thought would bring on more supply. Instead, we are encountering a problem with oil prices that are too low for oil producers to make a profit. Such low oil prices can quite possibly bring down world oil production, because investment in oil production is no longer profitable. A person might ask: Is the low price situation we saw in 2008 and are encountering again in 2014-2015 what diminishing returns really looks like? <em>Is the problem we encounter as we reach limits one in which oil prices drop too low, rather than rise too high? </em></p> <p>In 2008, huge stimulus efforts were required to bring oil prices were brought back up to the $100+ level. Perhaps one point raised by economists (Slide 3) was correct: Maybe there is a connection between economic growth and oil demand. <em>Perhaps the issue as we reach limits is that world&nbsp;economic growth sinks too low</em>, and it is because of this slow growth that wages stagnate, debt stops rising quickly, and oil (and other commodity) prices drop too low.</p> <p>Now let&rsquo;s look at what some early energy researchers have said.</p> <p><u><strong>M. King Hubbert&nbsp;</strong></u></p> <p>Many believers in Peak Oil theory consider M. King Hubbert to be the originator of their theory. It seems to me, though, that Peak Oilers have inadvertently picked up some of the economists&rsquo; theories, and mixed them with Hubbert&rsquo;s theories.</p> <p><a href="https://gailtheactuary.files.wordpress.com/2015/04/9-m-king-hubbert.png"><img alt="9. M. King Hubbert" class="aligncenter size-full wp-image-39761" height="479" src="https://gailtheactuary.files.wordpress.com/2015/04/9-m-king-hubbert.png?w=640&amp;h=479" width="640" /></a></p> <p><a href="https://gailtheactuary.files.wordpress.com/2015/04/10-m-king-hubbert-model.png"><img alt="10 M. King Hubbert Model" class="aligncenter size-full wp-image-39762" height="532" src="https://gailtheactuary.files.wordpress.com/2015/04/10-m-king-hubbert-model.png?w=640&amp;h=532" width="640" /></a></p> <p><a href="https://gailtheactuary.files.wordpress.com/2015/04/11-model-applies-when-there-is-perfect-replacemnt.png"><img alt="11 Model applies when there is perfect replacemnt" class="aligncenter size-full wp-image-39763" height="502" src="https://gailtheactuary.files.wordpress.com/2015/04/11-model-applies-when-there-is-perfect-replacemnt.png?w=640&amp;h=502" width="640" /></a><a href="https://gailtheactuary.files.wordpress.com/2015/04/12-hubbert-understood-need-for-perfect-replacment.png"><img alt="12 Hubbert understood need for perfect replacment" class="aligncenter size-full wp-image-39764" height="508" src="https://gailtheactuary.files.wordpress.com/2015/04/12-hubbert-understood-need-for-perfect-replacment.png?w=640&amp;h=508" width="640" /></a></p> <p><a href="https://gailtheactuary.files.wordpress.com/2015/04/13-believers-in-peak-oil.png"><img alt="13 Believers in peak oil" class="aligncenter size-full wp-image-39765" height="506" src="https://gailtheactuary.files.wordpress.com/2015/04/13-believers-in-peak-oil.png?w=640&amp;h=506" width="640" /></a></p> <p>It seems to me that the only way a Hubbert Curve might happen is if oil prices stay high, as we approach limits. That way, as much oil as possible can be extracted. If oil prices fall too low, then the decline may be much quicker. If low oil prices are a problem, above ground problems such as governments of oil exporting nations collapsing, or rising debt defaults leading to bank failures, may be a problem.</p> <p><u><strong>Dennis Meadows and Donella Meadows</strong></u></p> <p>Dennis Meadows led early computer modeling efforts at MIT regarding limits of a finite world. His wife, Donella Meadows, led the write-up effort regarding this model in a 1972 book called &ldquo;Limits to Growth&rdquo;. The model looked at physical quantities of resources, expected amounts of pollution, and expected population trends. The base model suggested that the world would start reaching limits in roughly the current timeframe.</p> <p><a href="https://gailtheactuary.files.wordpress.com/2015/04/16-meadows-limits-to-growth.jpg"><img alt="16 Meadows Limits to Growth" class="aligncenter size-full wp-image-39767" height="474" src="https://gailtheactuary.files.wordpress.com/2015/04/16-meadows-limits-to-growth.jpg?w=640&amp;h=474" width="640" /></a></p> <p>In fact, more recent analyses suggest that the base model is more or less on track.</p> <p>I don&rsquo;t think that we can count directly on this analysis, however.</p> <p><a href="https://gailtheactuary.files.wordpress.com/2015/04/18-how-will-the-situation-work-out.png"><img alt="18 How will the situation work out" class="aligncenter size-full wp-image-39768" height="475" src="https://gailtheactuary.files.wordpress.com/2015/04/18-how-will-the-situation-work-out.png?w=640&amp;h=475" width="640" /></a></p> <p><u><strong>Charles Hall</strong></u></p> <p>Prof. Charles Hall has been one of the recent thought-leaders with respect to oil limits and how they might play out. He started work in the early 1970s as an ecologist, studying the energy patterns of fish. When he read about the possibility of energy shortages that might occur in the 1972 book <em>Limits to Growth, </em>he tried to adapt an approach used for studying energy patterns of fish to the world of energy production. The result was new way of measuring the efficiency of a particular energy product, called Energy Return on Energy Invested (EROEI).</p> <p><a href="https://gailtheactuary.files.wordpress.com/2015/04/20-energy-return-on-energy-invested.png"><img alt="20 Energy Return on Energy Invested" class="aligncenter size-full wp-image-39769" height="503" src="https://gailtheactuary.files.wordpress.com/2015/04/20-energy-return-on-energy-invested.png?w=640&amp;h=503" width="640" /></a></p> <p>This idea was an advance when it was first developed, but it has a number of practical difficulties. One of these difficulties is that its usefulness is tied to a particular view of how oil limits will affect us, namely that prices will rise, and this will allow a slow transition to alternative fuels that are less favorable in terms of EROEI. On Slide 21, this is Item (2).</p> <p><a href="https://gailtheactuary.files.wordpress.com/2015/04/21-two-different-models.png"><img alt="21 Two different models" class="aligncenter size-full wp-image-39770" height="499" src="https://gailtheactuary.files.wordpress.com/2015/04/21-two-different-models.png?w=640&amp;h=499" width="640" /></a></p> <p>At this point, it is my view that the EROEI approach to analyzing energy products can be misleading and needs updating. Energy extraction is much more complicated than the energy use of fish swimming upstream. The EROEI approach, besides being tied to the Peak Oil view of how limits will occur, is difficult to calculate. Different researchers get quite different answers, when analyzing the same energy product.</p> <p>Furthermore, EROEI looks at a piece of energy costs (those involved with production at the well head), but how this piece relates to the total varies from one type of energy to another. It lumps together cheap energy and expensive energy. There are several other issues as well, with the result being that in practice, low EROEI doesn&rsquo;t necessarily correspond to <em>expensive to produce</em>, and high EROEI doesn&rsquo;t necessarily correspond to <em>low cost to produce</em>.</p> <p>I should point out that the same problem exists with a wide range of similar metrics including Life Cycle Analysis, Energy Payback Period, and Net Energy. In practice, what seems to happen is that if an energy type is high-priced, the use of one of these metrics is used to justify its production, anyhow. Low EROEI (for example, of biofuels) does not seem to be a barrier to production, even though it was the hope of Prof. Hall and other EROEI researchers that this would be the case.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="454" height="359" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20150424_gail.jpg?1429908011" /> </div> </div> </div> http://www.zerohedge.com/news/2015-04-24/overview-our-energy-modeling-problem#comments Bank Failures China Mexico Quantitative Easing Sat, 25 Apr 2015 18:15:52 +0000 Tyler Durden 505498 at http://www.zerohedge.com October 15th Bond Market Crash Explained http://www.zerohedge.com/news/2015-04-25/october-15th-bond-market-crash-explained <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">By&nbsp;<a href="http://www.econmatters.com/search/label/EconMatters">EconMatters</a></p> <p class="separator" style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal; clear: both; text-align: center;"><a href="http://3.bp.blogspot.com/-RimjCyJ5kp4/VTqIM0citYI/AAAAAAAAFcs/wJ_wurwPpzI/s1600/images%2B(1).jpg" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img src="https://images-blogger-opensocial.googleusercontent.com/gadgets/proxy?url=http%3A%2F%2F3.bp.blogspot.com%2F-RimjCyJ5kp4%2FVTqIM0citYI%2FAAAAAAAAFcs%2FwJ_wurwPpzI%2Fs1600%2Fimages%252B(1).jpg&amp;container=blogger&amp;gadget=a&amp;rewriteMime=image%2F*" width="320" height="211" border="0" style="cursor: move;" /></a></p> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;">Treasury, Fed, CME &amp; HFT Community</span></strong></p> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">Since there seems to be a fundamental lack of knowledge lately regarding market crashes, I thought I would explain what happened in the epic bond market crash of last year. It seems Treasury along with the Fed and various other players from the CME and the large financial institutions have been searching for answers regarding what caused the October 15<sup><span style="font-size: x-small;">th</span></sup>&nbsp;crash in bonds.</span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;">Markets Don`t Crash Up!</span></strong></span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">First of all it wasn`t a crash, this is the misnomer in how mainstream financial media portrays the bond market. A market cannot crash if it goes up, it is bond prices that the financial media should concentrate on not the bond yields. Think in terms of bonds as assets like stocks, ever since global ZIRP bonds have become assets just like stocks. Bonds are played just as much for price appreciation since the ZIRP era began as they are for yield returns.</span></p> </div> <div style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; text-align: center;"> <p style="margin: 0px;">&nbsp;</p> </div> <div style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; text-align: center;"> <p style="margin: 0px;">Read: &nbsp;<a href="http://www.econmatters.com/2015/01/the-german-10-year-bund-effectively.html">The German 10 Year Bund Effectively a Call Option at 30 Basis Points</a></p> </div> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;"><br /></span></strong></span><span style="font-family: Calibri;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;"><br /></span></strong></span><span style="font-family: Calibri;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;">Price Appreciation versus Yield Returns</span></strong></span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">For example, GE stock owners could care less about the lower yield returns if their stock doubles and triples in value over the course of a year. And in the case of the German 10- Year Bund nobody is complaining because they were receiving a paltry .05 or 5 basis point yield return on their investment (which was the case a couple of weeks ago) when the price of the German 10-Year bund has appreciated so much over the past 14 months.</span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">Therefore don`t think of the bond market in terms of yield. Think of the bond market in terms of price appreciation. The bond market didn`t crash on October 15<sup><span style="font-size: x-small;">th</span></sup>, it went parabolic in price appreciation, and bondholders practically wet themselves trying to execute sell orders on that morning to take advantage of their gift from Heaven after the shorts were squeezed on that momentous day.</span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;">Bonds have morphed into Stocks</span></strong></span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">Prices are a relative thing, today the price and yield might not seem like that big a deal on the 10-Year US Bond yielding 1.86%, but for bondholders who bought these bonds at the beginning of 2014 when the yield was 3%, or mid-year at 2.5%, or earlier that fateful morning at 2.20%, to wake up and have these same bonds appreciate in price with an equivalent yield being 1.86% in a matter of hours, this represented a real relative take profits moment if there ever was one for bondholders in their respective portfolios. I am describing the bonds in terms of yields just like the financial media because this is how readers can identify with the market. If I described these moves in terms of price given how bonds have been portrayed for most of the readers by the financial media it might confuse readers. Just keep in mind that when yields go lower this is not a bad thing for bondholders because as the yields are going lower this corresponds with the prices of the bonds going higher. Again think of bonds as an asset like stocks, which is what they have become in the insanity which central banks have created in a ZIRP world.</span></p> <p style="margin: 0px;"><span style="font-family: Calibri;"><br /></span></p> </div> <div style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; text-align: center;"> <p style="margin: 0px;">Read: &nbsp;<a href="http://www.econmatters.com/2015/01/the-bond-market-has-reached-tulip.html">The Bond Market Has Reached Tulip Bubble Proportions</a></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;">Remember when Bonds were actually serving as a Bond Function in Markets?</span></strong></span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">Theoretically in a normalized bond market with normalized interest rates bonds trade in a price range and the 10-year bond has a yield of 3.5 to 4.5%, and then yes bondholders are in this trade to take advantage of a hedged, balanced portfolio with a steady yield which nicely offsets their more volatile brethren in the equities market. So these investors in a normalized market are playing bonds for the steady yield returns and safe haven aspect of the investment. However, those days are long gone in financial markets since ZIRP went into effect globally! What bonds were intended when originally conceived as an asset class, and what they represent or how they are being used by investors today is one gigantic paradigm shift in financial markets. The way they are being used today is only possible with major central bank dysfunction in monetary policy. Central banks have completely altered the landscape of bond markets, and in effect changed the asset class to be exactly like stocks. So there no longer is a natural market hedge in a portfolio by owning bonds, they have in essence been turned into stocks by the central banks extreme monetary policy initiatives.</span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;">October 15<sup>th</sup>, 2014</span></strong></span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">I have set the background for this story, so now I will describe what happened on that fateful day.<span>&nbsp;&nbsp;</span>So this was the time of the Ebola outbreaks in the United States. Also the bonds were bid all year in 2014 starting at a 3% yield and perceived as a good value going into 2014. But the bond market really changed when the ECB lowered their fed funds rate equivalent several times in 2014 to devalue the Euro currency, and signaled to financial markets that they were going to embark on their own QE Bond buying program. Once the ECB went to essentially zero for borrowing and signaled to market participants QE was on the way, investors really started to buy bonds at an even more feverish pace in 2014.</span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; text-align: center;"> <p style="margin: 0px;">Read:&nbsp;<a href="http://www.econmatters.com/2014/08/european-bond-market-bubble-of-all.html">European Bond Market: Bubble of all Bubbles!</a></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;"><br /></span></strong></span><span style="font-family: Calibri;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;">ECB Changed the Bond Market in 2014</span></strong></span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">Every dip in price was bought with a backing up the truck mentality. A good jobs report pushed down price, buyers were just waiting for the 1-3 days of selling, and then they came in buying like they never saw such a bargain. Consequently even without any European economic malaise, or Ebola outbreak, or Geo-political event like the Russia-Ukraine turmoil investors wanted to buy bonds because they all remembered the previous year when they pushed the US Treasury 10-Year Bond yield all the way to 1.40% in trying to front run the Federal Reserve`s QE Bond Buying Program. They were likewise going to front run the hell out of the ECB!</span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;">2.20% Yield Level</span></strong></span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">Then Ebola hit the US, and this pushed yields on the 10-Year down to 2.20%. The 2.20% was thought to be a major support level for the 10-Year Yield. Even a fervent bond bull like Jeffrey Gundlach thought this was as low as yields could go considering the US was winding down its QE bond buying program. Consequently there were a lot of hedge funds shorting the bond market via the futures market with the thought that yields couldn`t go any lower than 2.20% on the 10-Year. This all with the belief that yields were going higher, and they probably would have given the US economic data the second half of 2014 if it weren’t for the ECB going ballistic in devaluing the Euro to almost parity with the US Dollar. The ECB manipulation of interest rates wasn`t in the cards when many of these hedge funds started shorting the bond market in early 2014, and adding to their bets as yields went lower and prices went higher in the bond market.</span></p> <p style="margin: 0px;"><span style="font-family: Calibri;"><br /></span></p> </div> <div style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; text-align: center;"> <p style="margin: 0px;">Read:&nbsp;<a href="http://www.econmatters.com/2015/02/the-swiss-10-year-bond-illustrates.html">The Swiss 10-Year Bond Illustrates Central Banks` Flawed Monetary Policy</a></p> </div> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;"><br /></span></strong></span><span style="font-family: Calibri;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;">Ebola Hysteria</span></strong></span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">Then on that fateful October 15<sup><span style="font-size: x-small;">th</span></sup>&nbsp;early morning two more Ebola cases were identified here in the US, the media hysteria over Ebola was tremendous as usual for ratings purposes, making many people think the worst epidemic imaginable. Stocks were selling off, funds were moving from equities to bonds as customary on these days. Then the US econ data at 8:30 eastern time which was a double if I remember like retail sales and PPI reports thus showing slow growth (The Retail Sales Reports always miss) and deflation fears with the drop in oil and gasoline prices. You need to realize that traders just sit on these 8:30 econ reports waiting to flush the currencies and blow the bonds out of the water on any “bullish for bonds” type reports or Fed Related Dovish Events. Retail Sales, PPI, CPI, Fed Minutes, GDP, and Employment Reports are all fair game for major juice events where currency moves involving major bond flushes (usually to the upside in 2014) occur.</span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; text-align: center;"> <p style="margin: 0px;">Read:&nbsp;<a href="http://www.econmatters.com/2014/10/cnn-in-full-fear-mongering-mode-cashing.html">CNN in Full Fear Mongering Mode Cashing in on Ebola</a></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;">Traders try to Break Markets Everyday: Stop Hunting, Support Crashing &amp; Breakouts</span></strong></span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">Thus here we are sitting under the 2.20% model threshold at around 2.15% yield, hedge funds holding on for dear life who were short, bad econ data, Ebola cases spreading, and the bond buying bazookas locked and loaded to blow out the shorts on this trade for major pain. They knew full well that the shorts were at their mercy point, and pushing the market over the edge was going to cause short covering of an unprecedented nature. Even in normal times without an Ebola scare bond traders try to break the market from a support and resistance standpoint in the direction of the trend which was lower in yields and higher in prices for all of 2014. Just watch a routine PPI report or a retail sales number or a ‘Say nothing Fed Minutes release’ and watch how the currencies move and the simultaneous movement in bonds.</span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">Traders are trying to break through levels, blow out markets, happens all the time in our current market environment of electronic trading and global market access. There is just too much firepower at the hands of the big players today, so everything is over exaggerated, moves are much greater today than in the past. Therefore what should have been a 5-8 point drop in yields in a normal, healthy functioning market turned into the blowout of all blowouts for those who pushed the bond market over the ledge. Traders walked away from one side of the market causing a massive liquidity vacuum!</span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;">Record Trading Volumes</span></strong></span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">Yields crashed from 2.15% to 1.86%, that means bond prices jumped that much higher in direct relation to the crashing yields. This moment caused the most forced buying back of bond shorts mainly in the futures markets, which then corresponds given the nature of electronic markets to the corresponding bonds themselves, which has probably ever taken place on a single trading day. The CME made out like bandits from a trading volume records standpoint, and it wasn`t like the Ebola cases suddenly went away several hours later. There were no more bond shorts, they were all forced to close out their positions that morning.</span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; text-align: center;"> <p style="margin: 0px;">Read:&nbsp;<a href="http://www.econmatters.com/2015/03/michael-lewis-is-right-spoofing-proves.html">Michael Lewis is Right “Spoofing” Proves Market Rigged on Daily Basis</a></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;">Take Advantage of Price Appreciation for Massive Profit Taking Portfolio Exits</span></strong></span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">The reason yields recovered and basically ended the day back at the 2.15% yield area where they began was because a bunch of bondholders thought to themselves that for the near term those prices for their portfolio holdings were as good as they were going to get for the most part for all of 2014, and they better take advantage of this short covering gift in prices to sell into this short squeeze rally. Sure some new shorts probably also jumped in the market after the ‘crash’ occurred to front run the profit-taking by existing bondholders. However, the 30 basis points move back in bond yields was mainly due to all the bondholders trying to take advantage of such good profits on their investments from a price appreciation standpoint, and trying to beat everyone else to the profit-taking. Like what commonly happens in financial markets yields ended up coming all the way back to 2.33% from this 1.86% low in yields for 2014 in a slow but continuous trending move, only to go lower during the first quarter of 2015.</span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;">Bond Market Not Healthy Functioning Market Right Now</span></strong></span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">A slow trending, grinding move in bond markets is one thing but a 30 basis point move for bond markets at the edge of a trading range is just not the sign of a healthy, functioning asset class. Remember a Nuclear bomb wasn`t dropped on New York City, we had a couple of nurses at a piss poor hospital catch Ebola and a couple of meaningless econ reports in Retail Sales (with the advent of Internet Shopping) is an outdated metric, and a PPI reading that is going to be misleading due to the sudden collapse in oil and gasoline prices. These are trading events and not really great economic barometers for long term capital allocation strategies.</span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; text-align: center;"> <p style="margin: 0px;">Read:&nbsp;<a href="http://www.econmatters.com/2014/05/the-bond-market-explained-for-cnbc.html">The Bond Market Explained For CNBC</a></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;">Excess Liquidity, Correlated Electronic Markets &amp; Walking Away From Markets: Huge Vacuums Develop &amp; Market Liquidity Vanishes</span></strong></span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">In a normal functioning bond market this should have been a 5-8 basis point move in bonds. The fact that a 30 basis point round tripping in bond yields is possible shows how central banks have completely destroyed the underlying structure of the bond markets. They have accomplished this by providing excessive liquidity being readily available for large market players at ZIRP borrowing costs, along with their bond asset purchases. Throw in the changing dynamics of the modern era of electronic trading where fund flow transfers from asset classes take place with a few mouse clicks or auto-programmed via trading algos which are instantaneous versus taking days in the past. These nasty side effects of modern electronic trading technology all played a part in exacerbating the bond market ‘crash’ on October 15<sup><span style="font-size: x-small;">th</span></sup>&nbsp;2014. And yes just like in 2010 in equities, 2014 in bonds, and forward looking in currencies, commodities and any other electronically traded financial market it is going to happen again. The real question isn`t if they are going to happen again, but when they are going to occur!</span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;">Mini “Crashes” Happen Every Week in Bond Markets</span></strong></span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">But what happened in bonds on October 15<sup><span style="font-size: x-small;">th</span></sup>&nbsp;was a short squeeze of momentous proportions all set about by big players trying to break a market, all one has to do is look at the size in the market to determine who caused the market to go over the edge. And you can start with the same players who try to break the market from a support and resistance standpoint every Retail Sales day in the bond markets. On Tuesday April 14<sup><span style="font-size: x-small;">th</span></sup>&nbsp;of 2015 we also had a Retail Sales and PPI econ reports out and the same participants in the bond market smashed the US Dollar and blew out the bond market simultaneously.</span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">Now there was no Ebola outbreak, and shorts weren`t hanging on by a thread on this day, but the explosion of price action is just not normal, and as long as markets are set up with this much liquidity available at the touch of a button or pre-configured Algos loaded for liftoff, once the other factors are in place the same market crashes are going to continue to take place.</span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;"><span style="font-family: Calibri;">Watch the Currency Markets for Key Culprits</span></span></strong></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">Any time there are large currency moves simultaneous with the asset moves look at the large institutional banks for your culprits. These aren`t insurance companies, high frequency trading firms, small to medium sized hedge funds, retail or independent traders. Who do you think holds the most bonds and currencies on their very liquid portfolio balance sheets and moves in and out of these markets on an hourly, daily, and weekly basis? Who has been caught and fined many times for both market collusion and outright market rigging? Who can afford 12 Billion Dollar fines like mere nuisances because their trading profits are so big? Who rarely has a single losing day trading?&nbsp;<span>&nbsp;</span>Anytime there is a large corresponding currency slam downs in a millisecond start with the big banks, the large institutional players who have huge currency capabilities necessary to move large global currency markets to this degree. Markets don`t crash if the large institutional players don`t stop their usual daily market making activities! A coordinated ‘walking away from the market’ is just as bad for financial markets as a coordinated attempt to ‘break a market’! The large financial institutions participate in doing both on a regular basis in their trading activities.</span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">An insurance company or large pension fund isn`t sitting on an 8:30 a.m. econ report waiting to blow out the currency and bond markets on a meaningless data point in the overall grand scheme of things. In any investigation start with the players who have the size and motives to really move markets. It takes enormous size, and usually ‘coordinated size’ to move markets in a blowout manner, start any investigation with who was behind the ‘enormous size’! This is who is mainly responsible for any market crash. And if a normal market participant who provides market making activities on a daily basis in a given market all the sudden on one day completely steps aside and pulls all orders at every price level this is your other clue as to who contributed to the market crash! But it sure isn`t some independent trader trading with a 6 Million dollar account at a small brokerage firm that ever causes a market crash in any large market! Always follow the size or the evaporation of size as to clues regarding large market moves.</span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;">Financial Markets are Broken</span></strong></span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">In effect, financial markets are broken today! When you have this much ZIRP liquidity floating around in the financial markets on a daily basis it is the same as a drought in California setting the conditions suitable for Fire Events. Add to this ZIRP environment the complex dynamics of electronic markets, global access, the instantaneous flow of capital between markets, and traders trying to break markets for profit. This all goes into one nasty witches brew, paving the inevitable outcome for future market crashes.</span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;">Inflation Cycle is where the Market finds Religion</span></strong></span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">Just wait until inflation spikes in the next inflation cycle, and these same traders are all shorting bonds trying to break the market from the other side. Now that will be an actual market crash, and yields probably will not roundtrip in a day, but lead to crash after crash in succession, and the ultimate collapse that necessitates changes being made to the structure of the bond market and electronic markets in general. This is what lies ahead in the future, and why the Fed and Janet Yellen were so scared to raise rates a measly 25 basis points and fretted over the rise in the US Dollar at the March Quarterly Fed Meeting. They haven`t seen anything yet, inflation and the inflation cycle is where the rubber meets the road. A true come to God moment on asset prices given the insanity of ZIRP by central banks. The inflation cycle, and I think in terms of just a 3% inflation number on an annual basis is going to cause the entire bond market to crash beyond anything we have seen previously. And if we get a couple of quarters with a 5% inflation rate most of the global banks will need to be bailed out again by taxpayers. They are all insolvent as we speak with a 5% rate of inflation given what they are holding on their books right now in terms of inventory and at what prices!</span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;"><strong><span style="font-size: 12pt; line-height: 17.1200008392334px;">Drought Conditions Create Wild Fires</span></strong></span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <div class="MsoNormal" style="font-family: 'Times New Roman'; font-size: medium; line-height: normal; margin: 0in 0in 8pt;"> <p style="margin: 0px;"><span style="font-family: Calibri;">It is because of the extreme nature of Central Bank Policies that has all these regulatory agencies fraught with concerns over what caused these mini market crashes. It is because they know what is ahead for financial markets when the ZIRP era ends due to just a normalized inflation model and asset re-pricing. These are the unintended consequences of flawed policies. Everything has a cost, and market crashes are the cost of doing business with regard to creating asset bubbles in financial markets; central banks have no business creating conditions for the next wildfire! They know it and are scared to death of the magnitude of unintended consequences that will come to pass in financial markets on the unwinding of ZIRP. October 15<sup><span style="font-size: x-small;">th</span></sup>, 2014 wasn`t a market crash! Stick around folks, I will show you what a Real Bond Market Crash looks like! And there is nothing the Treasury secretary or the Federal Reserve Chairperson or the CME can do about avoiding this market crash. It is as inevitable as fires in California as a result of prolonged drought conditions!</span></p> </div> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">&nbsp;</p> <p style="margin: 0px; font-family: 'Times New Roman'; font-size: medium; line-height: normal;">©&nbsp;<a href="http://www.econmatters.com/">EconMatters</a>&nbsp;All Rights Reserved |&nbsp;<a href="http://www.facebook.com/EconMatters">Facebook</a>&nbsp;|&nbsp;<a href="http://twitter.com/#!/EconMatters">Twitter</a>&nbsp;|&nbsp;<a href="http://feedburner.google.com/fb/a/mailverify?uri=EconForecast">Free Email</a>&nbsp;|&nbsp;<a href="http://astore.amazon.com/econforecast-20?_encoding=UTF8&amp;node=80">Kindle</a></p> http://www.zerohedge.com/news/2015-04-25/october-15th-bond-market-crash-explained#comments Bond Borrowing Costs Central Banks CPI Federal Reserve Futures market Gundlach HFT High Frequency Trading High Frequency Trading Insurance Companies Janet Yellen Market Crash Michael Lewis Monetary Policy New York City Price Action ratings Twitter Twitter Sat, 25 Apr 2015 18:01:07 +0000 EconMatters 505515 at http://www.zerohedge.com