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The Two Mega-Pain Trades: JPM Explains Why The "Big Money" Is Losing Big Money In 2014
Yesterday at the Deutsche Bank Global Financial Services Conference the biggest blockbuster announcement came from Citigroup which, following in JPM's footsteps, announced that trading revenue could slide by 20%-25%. As such, this would mean that just like JPM, more of the big banks are setting up for the worst trading start in the first half of the year since the financial crisis. However, a far more important announcement came during the Keystone Presentation by JPM's CEO of its Investment Bank, Daniel Pinto, who explained the reason behind this TBTF trading revenue slowdown, which also happens to be the explanation why the bulk of the hedge fund community is not profitable so far in 2014.
According to Pinto, a pair of wrong-way bets made by clients at the start of the year is partly to blame for Wall Street’s trading slowdown. Namely: the two mega-pain trades so far in 2014: being long USDJPY and short Treasurys which everyone had put on with mega-conviction at the beginning of the year, have so far in 2014 generated mega-losses for all those involved.
Bloomberg quotes Pinto who said succinctly summarized that "Neither of those trades paid." He added: "Essentially you start the year with the wrong momentum, where you lose money at the very beginning, and you ended up with probably a lower risk appetite than you would have otherwise." And, as a result of actually, gasp, losing money, "Clients appear to be hesitating in placing the larger hedges that typically happen earlier in the year."
Imagine that: trading in size only when guaranteed profits in "right momentum" trades. So what happens to volume when the Fed fully walks away - one block of spoos moves the market by 1%?
More from Pinto: "You have episodic trades, big hedges, big corporate trades, that happen along the year,” Pinto said. “Particularly in the first and part of the second, the amount of those trades, even though the pipeline is very healthy, they haven’t happened. It looks like they are going to happen later in the year, and that is a big swing factor."
There was a third, and just as ironic, culprit: in its attempt to restore confidence, the Fed, both directly via its trading desk, and indirectly, has pushed volatility to near historic lows as covered here previously. So much so in fact, that nobody is making any money from daytrading anymore! Pinto added that when "the market doesn’t move, it’s really difficult to monetize your flows,” Pinto said. “It makes the market more competitive and margins really tighten because it costs you very little to provide liquidity, so you provide a lot.”
Well isn't it ironic, again, then that it is the Fed's explicit intervention and micromanagement of the market that has crippled banks? Sadly for JPM, considering that the Fed will likely not do much to boost vol on its own, and certainly not for the duration of Bernanke's lifetime if the former chairman is correct, one probably shouldn't expect much of a pickup in bank trading revenues any time during the next decade.
The full Pinto statement can be heard 10 minutes into the recording of his fireside chat below:
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When the great casino of the universe hands you a free lunch voucher, and that free lunch voucher becomes your staple income, you need go home and think over your life.
Fire side chat, yeah.
these BS excuses are merely papering over the consequences of "taper" -which is an end to the transfer of funds from the Fed Res to the banks.
The real question-is why the Fed Res stopped going out with these banks? they catch AIDS or something?
IMHO-the Fed Res has a new lover somewhere-and they're probably overseas.
The biggest casino in world history is about to close!
Bullshit. Everyone and their idiot brother knows that rates cannot go up, ever. What are you up to Jamie, you cocksucker.
Banks being hurt by the same Fed policies that saved them 5 years ago? That's irony I can live with.
Especially because the banks ARE the Federal Reserve.
Maybe the banks themselves will end the Fed soon cause it's become just like the EU where the moron members ruined it for all.
About fucking time. These cocksuckers are hardly "hurting", look at their lifestyles. All of these "arsonists" (credit to Timmy G.) should be executed. It would have been far more equitable to simply divide the money among all americans and let them do what they will with the freshly printed dough. The money may have ended up in the same hands, but the smart folks would have paid off debt and wouldn't still be underwater on their properties.
It's like listening to the whinings of some pampered heiress at a polo match complaining about the caviar and champagne.....so sad.
Millions of Americans lost their homes.
Thousands of Americans then became Billionaires.
.gov had the opportunity to help the maximum number of people.
It chose to enrich the few instead.
.gov enriched it's owners and backers. There shouldn't be any surprise.
It's almost as if it's not a government of the people, by the people, and for the people anymore.
the banks will just paper over the loss of revenue with reserves. i don't care what excuse they make for the lack of volume or volatility, the truth is that everyone knows the "markets" are rigged in favor of the .000042%.
My guess is if you are short treasuries and long USD?JPY you were probably also long momo and short gold. Hopefully they got a nice asswhooping. I am going to hoard my bawnds and div paying stawks until Yellen finally okay's sending some checks out to me to avoid deflation. I'm waiting Janet.
Piketty's animated charts :
https://www.youtube.com/watch?v=0nixhWpHNkI
and its french comment
http://www.pauljorion.com/blog/?p=65410
It's all over, man, you can't make this shit up!!! I expect a major market meltdown to start tomorrow- Friday at the latest!!! http://blogs.marketwatch.com/thetell/2014/05/27/dennis-gartman-calls-for-a-stock-market-correction-including-his-are-all-wrong/
Here's another one:
http://www.marketwatch.com/story/4-things-doom-and-gloomers-got-totally-...
When I have eleventy trillion $$ and only get .0000001 on it....is it really worth keeping?
http://www.bloomberg.com/news/2014-05-27/fed-likened-to-poker-player-as-...
If the banks are losing money I am worried because these losses will inevitably be saddled onto the public one way or another.
Central Banksters choking on their free buffet? Aw that's a shame.
In the recent ZH article analyzing whether insiders at Mt Gox ran an algo ramping bitcoin, there was an analogy I thought extremely apt. The algo bought bitcoin with fake cash, ramping the price of bitcoin up, then sold bitcoin for real cash. The article author compared this to banks using money created out of thin air or borrowed at zirp to juice the markets.
Yea and now apparently that isn't paying out enough for them anymore? I guess it's time for the Bankster pirates to start plundering out each other now.
"The market" is in Jepardy.
"What is"... I'll take quaranteed return of 18% for $300,000,000,000 - Alex ..... otherwise, I'm taking my fucking ball and going home
when a bank buys any kind of collateral, it's not "fake cash", it's "real cash". or as real any fiat fractional reserve banking accounting unit can be
though the correct term is OPM. Other's People Money
The financial markets have been destroyed by Bernanke. This is just the beginning phase of the realization of it. Some people are just a little slow in figuring it all out. The treasury market is so f'd up right now and everyone knows huge losses await anyone holding those securities eventually. Since the Fed holds 4.5 trillion it's determined they will do everything else besides normalizing interest rates any time soon. A 200 basis point rise on the 10 and 30 yr which is in the forecast for 2015 - 2016 results in huge capital losses(20% and more). The Fed balance sheet needs to be sold (and no one wants it) and at the same time interest rates need to go higher to absorb higher inflation worries. There is no escape from this and Bernanke is going to pay dearly when history writes this story honestly.
EA until there are actual serious cracks in the currency, this is just a win win for the fed. I am sure they would like more activity and volume, but falling yields and rising stocks are not the worst outcome.
We are at zero interest rates right now and unless they go negative there is a losing trade awaiting anyone chasing these low treasury yields. The high risk is certainly not worth the low reward. How long can they keep the balls all in the air. Tic toc.
I've met actual bank traders; FX and "equity specialists" -from several of the fucking TBTF cunt-banks
I'm sure there are some good ones - but the ones I met (to a person) were either;
*somebody's friend/relative/bank-bot douchebag
*under 25, and as dumb as a chicken
*old, jaundiced and pissed (in one occasion)
Dangerous words. When "everybody knows" something is going to happen, the opposite tends to happen.
With the US 10yr just touching 2.45% while at the same time US equities are at all-time highs AND the big-money short Treasury trade still not unwound, I am even more confident that the 10yr yield has much further to fall.
Imagine if stocks correct by a mere 10% (no crash, just a long overdue correction), and the scared money rushes to the safety of T-notes, yields will crash down hard....only leading to MORE pain for the short Treasury crowd, which will eventually cry "uncle" and get out....sending the yield down even further.
I wouldn't be surprised to see a sub-2.0% yield on the 10yr later this year.......so I'm staying long and will add on price pull backs.
Who are the counter parties in those bad bets on long USDJPY and short Treasuries? Obviously they are in the money. Why, it wouldn't be any of the market makers aka manipulators would it? Surely not. Not a peep from JPM about that. I have to ask why anyone would want to risk a lot in currency or bond markets knowing the degree of manipulation?
I can't blame them for being wrong on treasuries and USD/JPY. The fed clearly said they would taper QE, so that should imply rising interest rates. Japan bet the farm on destroying their currency and bankrupting the country. Right now we're in bizarro world. Why are interest rates falling? Why is gold going down as inflation goes up? Why is Japan not experiencing a full blown crack up boom? Why is mainstream media saying that soaring food and gasoline costs are a good thing? Why did Obama say inflation is too damn high while his fed chairman says inflation is too damn low?
Rob Kirby on USAWatchdog. Well worth the watch!
http://investmentwatchblog.com/rob-kirby-i-think-were-close-to-the-curre...
When "Game Theory" eclipse "Accounting Fundamentals" as a decision making medium, especially for long term investors, bad things are going to happen.
Deutsche warning on risks? WTF.
When sitting in a meeting today, I was flying over the Deutsche Annual Report of 2013. Page 191.
"The potential future exposure measure which we use is generally given by a time profile of simulated positive market values of each counterparty’s derivatives portfolio, for which netting and collateralization are considered. For limit monitoring we employ the 95th quantile of the resulting distribution of market values, internally referred
to as potential future exposure (“PFE”). The average exposure profiles generated by the same calculation process are used to derive the so-called average expected exposure (“AEE”) measure, which we use to reflect expected future replacement costs within our credit risk economic capital, and the expected positive exposure (“EPE”) measure driving our regulatory capital requirements. While AEE and EPE are generally calculated with respect to a time horizon of one year, the PFE is measured over the entire lifetime of a transaction or netting set for uncollateralized portfolios and over an appropriate unwind period for collateralized portfolios, respectively. We also employ the aforementioned calculation process to derive stressed exposure results for input into our credit portfolio stress testing.
The PFE profile of each counterparty is compared daily to a PFE limit profile set by the responsible credit officer. PFE limits are integral part of the overall counterparty credit exposure management in line with other limit types. Breaches of PFE limits at any one profile time point are highlighted for action within our credit risk management
process. The EPE is directly used in the customer level calculation of the IRBA regulatory capital under the so-called internal model method (“IMM”), whereas AEE feeds as a loan equivalent into the Group’s credit portfolio model where it is combined with all other exposure to a counterparty within the respective simulation and allocation process (see Chapter “Monitoring Credit Risk”)".
Erm.... say what?!?!
Let's try to translate all of this sentence by sentence to understandable language (sorry, I'm not a banker, so please correct me if you find errors or can propose a better translation):
"The potential future exposure measure which we use is generally given by a time profile of simulated positive market values of each counterparty’s derivatives portfolio, for which netting and collateralization are considered".
- We have risks. Tons of them. You can see it in the above table on page 189. In case you got the digits wrong, we have 54 trillion 652 billion EUR of such risks.
- We cannot quantify those risks and have no clue of our exposure.
- But the number 54 trillion is definitely too high to explain to anybody. This is why we use a certain "in-house" rigging for coming up with any number for the exposure
- Most of the times ("generally"), we fill our simulation tools with some random bullshit numbers, having to estimate OTHER BANKS ("counterparties") portfolio risks (of course we don't have a fucking clue what their risks are, but same on our side, so we might just as well estimate theirs as well)
- These numbers are mostly so fucking gigantic that we have to use regulator backed manipulation methods ("netting" and "collateralization") to reduce them by up to two orders of magnitude.
"For limit monitoring we employ the 95th quantile of the resulting distribution of market values, internally referred to as potential future exposure (“PFE”)":
- All these fudged numbers let's just call "market values", although it is mostly OTC bilateral dodgy agreements and nobody else has a fucking clue how we came up with the "price" or contractual conditions.
- We aggregate the "market values" into bell shaped "normal distribution curves", although we definitely shouldn't be doing this because many of these deals are interdependent and are certainly not the same nature/type of data or contracts or counterparties. This would be necessary to make the normal distribution assumptions. But who cares. We have to use the normal distribution hypothesis, otherwise the handling of so many different types of crazy data with no history wouldn't even be thinkable
- Once we calculated our approximate bell curve shape, we pretend to be scientific by throwing around certain levels of confidence in sigma levels or percentiles. We learned this in our CFA curriculum. In this specific case, we chose to use 95 quantile for no specific reason. Sounds like we're being reasonable, no?
- Out of this, we created an internal abbreviation "PFE" for our potential future exposure (the abbreviation is to be used as often as possible when talking to senior management!). This gives the impression that we are on top of things when we report the development of our toxic portfolios.
"The average exposure profiles generated by the same calculation process are used to derive the so-called average expected exposure (“AEE”) measure, which we use to reflect expected future replacement costs within our credit risk economic capital, and the expected positive exposure (“EPE”) measure driving our regulatory capital requirements".
- Since our top management is always super busy on their I-Phones playing candy crush, they told us they don't have the time to go through all the hundreds of different sheets of PFE reporting for each counterparty ("Do you have any idea how fucking busy I am?"). They told us to come up with something more simple, like a traffic light.
- This is why we introduced the measure "average expected exposure" (AEE), which functions like an indicator and is simplified enough to not contain any more useful information, let alone the possibility to use it as basis for decision making.
- We fudge this AEE long enough to be able to show that with our allocated credit risk capital we will definitely be able to cover the invented number of potential losses. This we can use in communication with the politicians and the public to tell them how safe our bank is.
- Also, this fudged AEE number is the basis for yet another created measure that we named "expected positive exposure" (EPE), which is including the word "positive" to make sure everybody gets that the losses can simply never be larger than the capital we claim to set aside and that we are actually doing something good
- What is also quite important, the EPE comes in useful to fuck over the completely help- & clueless regulators and tell them how much regulatory capital we have to set aside based on our own calculation that nobody else can understand or contest. And then we explain them, why all is good. We are well capitalized and safe. According to our simulations.
"While AEE and EPE are generally calculated with respect to a time horizon of one year, the PFE is measured over the entire lifetime of a transaction or netting set for uncollateralized portfolios and over an appropriate unwind period for collateralized portfolios, respectively".
- Most of the times, we calculate AEE and EPE for one year only, not showing the complete picture. Doing so helps us manipulate at a later stage, should there be an unexpected shortfall of bits and bytes somewhere in our system ("available regulatory capital") or some legislative changes of equity requirements to make the public feel more safe.
- It would also look good, if we could somehow come up with an exposure number for everything until the end, like a lump sum. This is why we simulate the PFE over the entire lifetime. However, we managed to include a further manipulation possibility for collateralized portfolios, simply arguing that there is not one single "lifetime" but instead we are responsibly chosing an "appropriate period" which is in our interest.
- Basically, we just have to make sure everything big will be collateralized, then we can continue the numbers fudging also on that end.
"We also employ the aforementioned calculation process to derive stressed exposure results for input into our credit portfolio stress testing".
- As you have probably already expected, we use the same internal manipulation, rigging and glass-balling process to pretend we know what will happen with our assets in case of international financial meltdown, an operation we call "credit portfolio stress testing"
"The PFE profile of each counterparty is compared daily to a PFE limit profile set by the responsible credit officer".
- To pretend all our risks are managed very resposibly, we have decided to introduce a "rigorous" process of looking at those completely meaningless and made up numbers on other banks exposures on a daily basis by a simple IT-comparison (Excel file "IF THEN")
- For that, the responsible "credit officer" (sounds very official and serious; he wears a uniform) made up a random number and declares it as "limit" (mostly based on looking at what happened in the past or by just coming up with a number that is far enough away from the actual number so that the limit is not breached. In case the limit is breached, the limit is adapted to the new reality.
"PFE limits are integral part of the overall counterparty credit exposure management in line with other limit types".
- These limits really do make sense, we act responsibly and there is no manipulation whatsoever. Really. You just have to believe us. The whole thing fits into a bigger picture. Of course you can't understand, because it is so complicated, but we are in control of everything. Stop asking yourself all those questions. That is not necessary. We are safe. It's our top priority.
"Breaches of PFE limits at any one profile time point are highlighted for action within our credit risk management process".
- In the unlikely case any such a limit at any point in time (we're really covering it all, 24/7!) is breached, and red flag will be coming up and we might do something (mostly just acknowledge and modify the limits)
"The EPE is directly used in the customer level calculation of the IRBA regulatory capital under the so-called internal model method (“IMM”), whereas AEE feeds as a loan equivalent into the Group’s credit portfolio model where it is combined with all other exposure to a counterparty within the respective simulation and allocation process (see Chapter “Monitoring Credit Risk”)".
- WTF
- The EPE we use directly - without another intermediate step - to rip off our customers, by throwing around even more abbreviations, models and methods. Call the whole thing internal model method (IMM)
- Not only the EBE feeds into this, but also AEE, however as a loan equivalent in addition to all other counterparty risk simulation and allocation BS.
Did I understand it correctly?
So basically, if a black swan appears, we are all fucked.
Same for brown swan, or even a marginally dirty white swan
re "The Two Mega-Pain Trades: JPM Explains Why The "Big Money" Is Losing Big Money In 2014
Or...
The No1 Mega-Pain-In-The-Ass Explains Why Another Mega-Pain-In-The-Ass Is Losing Mega Money In 2014
- Megan from Meggico
Lawsofphysics: About fucking time. These cocksuckers are hardly "hurting", look at their lifestyles. All of these "arsonists" (credit to Timmy G.) should be executed. It would have been far more equitable to simply divide the money among all americans and let them do what they will with the freshly printed dough. The money may have ended up in the same hands, but the smart folks would have paid off debt and wouldn't still be underwater on their properties.
Why the hell would they (banks) do that? "Divide the money?" The money they put into circulation to refloat the banks was debt. "but the smart folks would have paid off debt and wouldn't still be underwater on their properties" Smart people pay off debt with debt money? Not sure how that works.
The "money" (debt) is backed by taxpayers.... so you want taxpayers to bail out people? If people pay off their debt, the banks would reduce their profits, so it's not in their interest to have people pay down or pay off debt.