In the US and Europe we have slowly come to the realization that traditional accommodative economic policies leave, and have left, the real economy limp. Wildly divided governments don't help, but beyond the fact that western decision making bodies are polarized, it is abundantly clear that the panacea for the global economy is not even on the table right now. The western world has been thrown into a bout of sovereign game theory, and by the constructs of game theory itself, one country will "win," while everyone else will lose to varying degrees. But that we are such a highly integrated global economy--the reason the whole world is heading towards recession right now--means that a solution must incorporate every economy around the world. The current game Europe is playing is bound to fail because if one country gets their way, others lose by definition.
In a memo released to Barclays staff, outgoing Chairman Marcus Agius appeared to throw the rest of his Liebor-fixing cohort banks under the bus, noting that "As other banks settle with authorities, and their details become public, and various governments' inquiries shed more light, our situation will eventually be put in perspective" by the fines handed out to other international banks. As Sky News reports, it appears 90 million emails and 1 million voicemails will be made available to the independent body spearheading the Liebor probe - the details of which are being finalized this weekend. While the rest of the memo focused on the restoration of Barclays' reputation and the "trust that has been so badly damaged", they quite clearly hinted at its rivals were likely to be hit with even harder fines that the GBP290 million imposed on Barclays. They add, as if we did not need reminding that "the macro-environment remains febrile, especially in Europe. We have to remain vigilant on balance sheet exposures and risk management. In short, our focus must remain on capital, funding and liquidity; improving returns; and driving income growth." But we can't help but feel a Charles Prince-esque defense coming here that 'everyone was doing it' and while the music still played, we kept 'dancing'.
Last week the S&P erased 6 days of consecutive losses in 30 minutes of trading on the back of news that JPMorgan lost at least 25% of its average annual Net Income in one epic trade, and stands to make far fewer profits in the future, even as the regulators are about to fire a whole lot of traders for mismarking hundreds of billions in CDS. This was somehow considered "good news." This being the "new normal" market, where nothing makes sense, and where EUR repatriation as a result of wholesale asset sales by European banks drives stocks higher, we were not too surprised. Sadly, even in the new normal, things eventually have to get back to normal. And that normal will come as corporate earnings are disclosed over not so much over the next 3 weeks, when 77% of the companies in the S&P report Q2 results, but in the 3rd quarter. Why the third quarter? Simple: as Goldman's David Kostin explains, "consensus now expects year/year EPS growth to accelerate from 0% in 2Q, to 3% in 3Q to 17% in 4Q." Sorry, but this is not going to happen...
Central banks have added a net of 1,290 tonnes since the fourth quarter of 2008. This total excludes China and other nations that don't regularly report their activity, as well as countries that have been surreptitiously buying their own production. That's a lot of gold buying. One has to wonder whether so much buying may in fact signal a top for gold. After all, a number of prominent analysts have claimed for some time that gold is in a bubble and that it's all downhill from here. Not so fast. Like many mainstream reports, looking at the short-term picture usually leads to erroneous conclusions. Let's put central-bank purchases into historical perspective.
In lieu of the election of Socialist President Francois Hollande and a Socialist Party collision as the majority in France’s Parliament, the New York Times recently asked “what does it mean to be a Socialist these days, anyway?” According to The Grey Lady, socialism today is “certainly nothing radical” and simply meant the “the emancipation of the working class and its transformation into the middle class” during its heyday. Essentially the article categorizes the contemporary socialist as one who is a rigorous defender of the welfare state. The piece quotes French journalist Bernard-Henri Levy as saying “European socialists are essentially like American Democrats.” It even accuses center-right political parties in the West of being quite comfortable with socialism’s accomplishments. So is the New York Times correct? Is socialism just a boogeyman evoked by the “fringes” to scare the public into questioning the morality and efficiency of the welfare state?
In the second part of our five-part series on The Olympics (Part 1 here) we ponder the impossible to predict - the medal count. As Goldman notes: Economists like to think that the toolkit of their profession helps them explain many things or, as some would claim, everything that is interesting about human behavior. In the context of the forthcoming Olympic Games in London, therefore, the key question is whether economic variables can help explain and predict success at the Olympics itself. At one level, this seems like a daft question even to consider. It is hard to imagine that economic variables could even begin to capture the kind of individual skill, mental determination and hunger that drive athletes to perform feats of unimaginable virtuosity that is the stuff of Olympic legends. But at the level of a country, it may be possible to identify the ingredients that unlock success at the Games. As British Paralympian Tim Hollingsworth explains: "...when you create a world class environment you are far more likely to create world class athletes." What is a 'world class environment' and how do we measure it across countries? Luckily, we have an answer in the GS Growth Environment Scores (GES), a broad measure of growth conditions across countries - and, indeed, this is what we find: gold does go where the growth environment is superior. The forecast leaves USA, China, and Great Britain battling it out for 'Most Golds' and USA leading China overall - but remember "the most important thing in the Olympic Games is not winning but taking part."
Lots of people have made good profits on Treasuries by buying them and flipping them to a greater fool or a central bank. On the other hand, so did many during the NASDAQ bubble, or during the ’00s ABS bubble. Bubbles are profitable for some, and that’s why there have been so many throughout history. But once the money starts to dry up they become excruciatingly painful. In theory, there are no limits to how low rates could go. In theory, nominal yields could go deeply negative, so long as there are buyers coming into the market ready to buy at a lower rate, and a push a profit to bond flippers. The inherent value in a bond is its yield; everything else is speculation. It is hard to really call the timing on the end of a bubble. People and events can always get more irrational. Japan has kept the Treasury ball (painfully) rolling for far longer than most of us expected (through market rigging as much as anything else). But this cannot end well.
Since January 2007, long-only equity funds have seen redemptions of $545 billion. In the same period bond funds have seen inflows of $630 billion. In the last few months, cumulative flows into equity funds have retraced all the way back to 1996. While every day is a QuEasy day for stocks, it seems the 'financial repression' is working as instead of getting everyone else to do the opposite of what the Fed is doing by making yields on other 'riskless' assets meaningless, all that the Fed has succeeded in doing, is getting everyone in the world to frontrun it in buying bonds. Period
S&P 500 e-mini futures (ES) traded up to almost perfectly recapture their 415ET close from last Friday after a 15-point, 30-minute ramp out of the gates at the US day-session open recouped five days of losses - as once again - we go nowhere quickly. Just for clarity: China GDP disappointed and provided no signal for massive stimulus; JPM announced bigger than expected losses, cheating on CDS marks, and exposed just how large their CIO was relative to income; Consumer sentiment printed at its worst this year; and QE-crimping inflation printed hotter than expectations - and we get a more-than-30 point rally in the S&P. Whether the fuel was JPM squeeze or another big European bank biting the liquidity dust and repatriating cajillions of EUR to cover costs (or Austria needing some cash for a debt payment), what was clear was equity market's outperformance of every other asset class - with the late day surge for a green weekly close particularly noteworthy. Apart from unch on the week, ES also managed to close right at its 50DMA, revert up to credit's less sanguine behavior intra-week, and up to VIX's relative outpeformance on the week (as VIX ended the week with its steepest term-structure in over 4 months). Treasuries ended the week 6-9bps lower in yield at the long-end (2-3bps at the short end) but the USD's plunge, on the absolute rampfest in EURUSD, took it back to unch for the week. Despite the USD unch-ness, Oil and Copper surged (on the day to help the week) up 2.5-3% on the week while even Gold and Silver managed a high beta performance ending the week up around 0.5%. ES ended the day notably rich to broad risk assets - and wil need some more weakness in TSYs and carry crosses to extend this - for now, the steepness of the volatility slope, velocity of squeeze, and richness of stocks to risk makes us a little nervous carrying longs here.
Jamie Dimon's Quandary: Now That JPM's Internal Hedge Fund Is Gone, Where Will 25% Of Net Income Come From?Submitted by Tyler Durden on 07/13/2012 15:40 -0400
Much has been said about JPM's CIO Loss (which so far has come at a little over $5 billion, just as we calculated in the hours after the original May 10 announcement). And with the so called final number out of the way, investors in JPM have breathed a sigh of relief and are stepping back into the company hopeful that a major wildcard about the firm's future has been removed. The issue, however, is that the CIO loss was never the question: after all JPM could easily sell debt or raise equity to plug liquidity shortfalls. The real issue is that just as we explained months before the loss was even known, the Treasury/CIO department was nothing short of the firm's unbridled hedge fund which could do whatever it chooses, and not be held accountable to anyone at least until its counterparties broke a story of an epic loss to the media. And thus the problem becomes apparent: now that every action of the CIO group is scrutinized under a microscope by everyone from management to auditors to regulators to analysts to fringe blogs, the high flying days of whale trades are forever gone. The question then is just how big was the contribution of the Treasury/CIO group, which until today was buried deep within JPM's Corporate and PE Group and not broken out. Thanks to the new breakout, reminiscent of Goldman starting to break out its own Prop Trading group some years ago, we now know exactly just how big the contribution to both revenue, but more impotantly, net income was courtesy of JPM's Hedge Fund.
The result is nothing short of stunning.
In an extended discussion with various pro- and con- European Parliamentarians, everyone's favorite (well, most forthright, for sure) British MEP, Nigel Farage, opined on entering the hallowed halls of Europe's Hogwarts-like hub in Brussels that he is surprised:
"After five (soon to be six) nations already bailed out, that so few people inside these institutions are even prepared to contemplate that there might be something wrong with the Euro project"
adding that he feels that:
"he is surrounded by some weird cult - that, even after disaster, continue to believe"
UPDATE: Suicide note details added:
- *WASENDORF SAID HE USED PHOTOSHOP, SCANNER IN FORGERY, U.S. SAYS
- *WASENDORF SAID CHOICE WAS GO OUT OF BUSINESS OR CHEAT: U.S.
- *WASENDORF'S STATEMENTS MADE IN SUICIDE NOTE, PROSECUTORS SAY
- *PEREGRINE'S WASENDORF SAID `I HAVE COMMITTED FRAUD,' U.S. SAYS
While unable to successfully kill himself, it appears the CEO of PFGBest is even less successful at evading the police. As just reported,
- *PFGBEST'S WASENDORF ARRESTED IN IOWA
- *FED PROSECUTORS CHARGE IOWA FIRM CEO W/ LYING TO REGULATORS:AP
- *PEREGRINE CHIEF WASENDORF CHARGED BY FEDERAL PROSECUTORS (with making false statements to the CFTC)
- *WASENDORF FRAUD AT PEREGRINE LASTED 20 YEARS, PROSECUTORS SAY
What is probably more concerning to him now is the fact that he was not a Presidential bundler - as the Big House is definitely calling...