Duration mismatch is when a bank (or anyone else) borrows short to lend long. It is fraud, it is unfair to depositors (much less shareholders) and it is certain to collapse sooner or later. This discussion is of paramount importance if we are to move to a monetary system that actually works. By taking demand deposits and buying long bonds, the banks distort the cost of money. They send a false signal to entrepreneurs that higher-order projects are viable, while in reality they are not. The capital is not really there to complete the project, though it is temporarily there to begin it. Capital is not fungible; one cannot repurpose a partially completed desalination plant that isn’t needed into a car manufacturing plant that is. The bond on the plant cannot be repaid. The plant construction project was aborted prior to the plant producing anything of value. The bond will be defaulted. Real wealth was destroyed, and this is experienced by those who malinvested their gold as total losses. Note that this is not a matter of probability. Non-viable ventures will default, as unsupported projects will collapse. Unfortunately, someone must take the losses as real capital is consumed and destroyed - and these losses are caused by government’s attempts at central planning, and also by duration mismatch.
Since the EU-Summit, US and European equity markets have (in general) outperformed. From being in sync before the Summit, US equities went into the weekend with a sell-off, which then spurred a short-squeeze push as the S&P 500 was over-exuberant (relative to European equities) on the way up at the start of last week. That cracked back to reality at the end of last week - squeezing the over-levered longs to a significant underperformance relative to European equities. It would appear that in the last 24 hours, US equities are now rallying back to that European 'surreality'. Surreal because European stocks remain dramatically exuberant relative to European (peripheral spreads unch and AAA massively bid) and US (Treasuries bid) bonds and European corporate and financial credit. As we stand, the S&P 500 has retraced back to Europe's 'fair' perspective.
Whether 'size matters' or not to the average hedge fund matters is a question many ask; but as Goldman's Hugo Scott-Gall summarizes perfectly in this chart, it is clear that the preference for herding into the biggest of big caps is becoming ever more crowded. Certainly this likely accounts for the massive rise in correlations (and the over-crowded momentum factor style skew in the market) but the dilemma is foraging for alpha in these huge mega-cap over-researched names is an ever-decreasing game of a-fraction-of-a-basis-point-of-alpha against a sea of beta - and for that mutual-fund-like return, you pay your 2-and-20.
Immigration is always a tricky subject to address honestly. Racists and the far right have dominated the debate and appropriated the language necessary to make even a well reasoned argument. Nevertheless, I think it is about time that some aspects of immigration, in the context of it’s supposed benefits (cui bono ?) are more widely understood and if by doing so I upset anyone, then I hope it will suffice to say that it is not my intention to do so. If you are from the USA you may like to know that the UK, with a population of 63 million, is one fifth of that of the USA, but the USA has a land mass 38 times bigger. In the USA there are 32.3 people per square kilometre, in the UK it is 250.2 per sq km.
Just two weeks after the 'Back To The Future'-Day hoax, Citi's Global Head of International Economics Nathan Sheets, notes that, the experience with fiscal deleveraging after World War II offers some striking lessons, as well as some important caveats, for the United States in the present episode. With the debt again on a high and rising trajectory, even if the headwinds that are now afflicting U.S. aggregate demand quickly abate, economic growth is unlikely to be as strong as that recorded in the late-1940s and 1950s. At the very least, demographics are less supportive. Similarly, while we cannot dismiss the risk that the Federal Reserve may stumble as it eventually exits from its unconventional policies. The key, Sheets concludes, is to find a path for expenditures and revenues that avoids the so-called “fiscal cliff” in the near term but that firmly reduces the trajectory of the debt over the medium to long run. Without such a solution, we leave ourselves vulnerable to the vagaries of sentiment in the bond market, thus opening the door to an unwelcome set of severe financial risks.
Here are the choice highlights from the Fed datadump as we see them.
From Barclays to NYFed:
"Libor's going to come in at.. .. three-month libor is going to come in at 3.53.
...it's a touch lower than yesterday's but please don't believe it. It's absolute
rubbish. I, I, I'm, putting my libor at 4%
...I think the problem is that the market so desperately wants libors down it's actually putting wrong rates in."
Just because the market is so stupid it completely ignores what the news of the day is: namely that JPM engaged in what Jacob Zemansky on TV just called criminal behavior when it consistently mismarked its CDS book, as it itself admitted 10 minutes before releasing its earnings today, an act that in itself is nothing short of what Barclays is in the 10th circle of hell for due to blowing up Lieborgate sky high, here is a stark reminder of what happened the last time a trader was caught fudging his CDS book...
The Fed has released the first of its Lieborgate treasure trove: "Attached are materials related to the actions of the Federal Reserve Bank of New York (“New York Fed”) in connection with the Barclays-LIBOR matter. These include documents requested by Chairman Neugebauer of the U.S. House of Representatives, Committee on Financial Services, Subcommittee on Oversight and Investigations. Chairman Neugebauer requested all transcripts that relate to communications with Barclays regarding the setting of interbank offered rates from August 2007 to November 2009. Please note that the transcript of conversations between the New York Fed and Barclays was provided by Barclays pursuant to recent regulatory actions, and the New York Fed cannot attest to the accuracy of these records. The packet also includes additional materials that document our efforts in 2008 to highlight problems with LIBOR and press for reform. We will continue to review our records and actions and will provide updated information as warranted."
While the increasing use of gold as accepted explicit (not implied) collateral has long been known, especially with an increasing push by Germany to receive gold as the ultimate guarantee backstop of the only viable Eurozone extension scheme, the Redemption Fund, the other side's perspective, that of the exchanges has been missing. Now, courtesy of a report by Harriet Hunnable from the CME, titled "Some Insights into Changes in the Gold OTC market", we can see just how the status quo views gold's rising role in a world increasingly short of good collateral (even if, as the Chairman says, it is anything but money). And yes: that the CME has its gold custodian facilities with JPM London, where it is subsequently infinitely rehypothecatable and where it serves to restock the occasiona physical shortage here and there, does not surprise us at all.
As Euro area policymakers continue to ‘muddle through’ the crisis, everyone's favorite FX Strategist - Goldman's Thomas Stolper, summarizes the decline in the EUR so far as due to slower growth and easier monetary policy, together with growing EUR short positions. Of course, the root cause of both developments is the political crisis in the Euro area. The uncertainty about the stability of the institutional framework of the Euro area forces front-loaded fiscal tightening, which in turn damages growth. In response, the ECB eased policy more than expected, while the Fed, did not ease as much or as early as many projected. Despite today's ecstacy in EURUSD, Stolper believes the EUR is unlikely to strengthen materially as long as this situation persists especially as the potential for the ‘fiscal risk premium’ to rise on the back of daily headlines that are dominated by disagreement and dispute remains. In an effort to clarify his thinking, Stolper identifies eight key issues that will determine the outlook for the Euro. Most of them relate to the Euro area crisis. The most interesting ones are possibly the timing of a recovery in the periphery, the ability of France and Germany to develop a common vision for further integration, and the evolution of fiscal policies in major economies outside the Euro area. He concludes that the risks in the near term remain substantial.
As JPM takes off, US equities go vertical, and EURUSD overdoses on erectile dysfunction stop-hunting-algo medicine, the good old US consumer - that bastion of demand and foundation of all things GDP-based just said sentiment levels are the worst of the year so far. UMich Consumer Confidence Sentiment just printed 72.0 against expectations of 73.4 - the biggest miss since December 2009. Worst still is the plunge in expectations (economic outlook) to the lowest in 7 months as the 2-month drop is the biggest in a year. It would appear all is not well on Main Street - as the massive schism between ISM Composite relative strength and the reality of the economy remains. As an aside, given this morning's hotter than expected inflation data, 1 year ahead forecasts for inflation fell to their lowest in 19 months.
This is how a completely news-less FX move looks like under the new normal, at precisely the moment when market opens. Did we say no news? Yes. 80 pips move in minutes on absolutely nothing, but an avalanche of very specific stop limit triggers. And since the EURUSD is the highest levered fulcrum security, and since shorts have piled in aggressively in the last few days, ramping the pair to the stratosphere is why risk is soaring, once again on no positive news. And now that the market move has happened, the news to explain it will come fast and furious. One wonders if all of the now unwound CIO capital has moved into JPM's most recent prop trading addition: the CFXO.
JPM Admits CIO Group Consistently Mismarked Hundreds Of Billions In CDS In Effort To Artificially Boost ProfitsSubmitted by Tyler Durden on 07/13/2012 06:52 -0400
Back on May 30 we wrote "The Second Act Of The JPM CIO Fiasco Has Arrived - Mismarking Hundreds Of Billions In Credit Default Swaps" in which we made it abundantly clear that due to the Over The Counter nature of CDS one can easily make up whatever marks one wants in order to boost the P&L impact of a given position, this is precisely what JPM was doing in order to boost its P&L? As of moments ago this too has been proven to be the case. From a just filed very shocking 8K which takes the "Whale" saga to a whole new level. To wit: 'the recently discovered information raises questions about the integrity of the trader marks, and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses being incurred in the portfolio during the first quarter. As a result, the Firm is no longer confident that the trader marks used to prepare the Firm's reported first quarter results (although within the established thresholds) reflect good faith estimates of fair value at quarter end."
Behold Newton's 3rd law of Fraudics: Every gross fraudulent action has a laughably inadequate and unequal wristslap reaction. For years of mismarking CDS and the CIO 'Mistake', which incidentally everyone at JPM knew about for quarters, and where JPM thought it could manipulate any market it wants simply by sheer scale and due to being the market itself (just like the Fed), the response is: 2 years of clawbacks for the key exec responsible. In other words, just like Goldman paid a "massive" SEC fine of a few hundred million for activity that allowed it to make billions in profits, so those who have made tens of millions for years end up having to pay back one or two years of ill-gotten gains. And all shall be well.