Ten days ago, when predicting what may and likely will be the outcome of the August ECB announcement, we said that it is virtually certain that it will follow in the trailblazing footsteps of what Mario Monti did at the June 29th meeting. To wit: "The bottom line here is that Draghi most likely pulled a Mario Monti (and his hanger on Mariano Rajoy), and spoke up before pre-clearing with Buba's Weidmann. Draghi thinks that, like Monti with Merkel at the June 29 summit, he can bluff the Bundesbank into submission, and Germany will agree to monetization, especially if markets have risen enough where nothing out of the ECB next week leads to a market plunge. The problem is that as we patiently explained, Monti got absolutely no concessions our of Merkel, as was seen in the bond yields of Spain after the June 29 summit." Sure enough, the market soared in the days after June 29 as well, giddy with optimism that Germany would never settle for being bullied publicly and had implicitly agreed with the Monti and Rajoy. Euphoria promptly turned to despair as it became quickly clear that Monti had bluffed without preclearing with Merkel and Buba. Fast forward one month, and what we expected to happen is precisely what did happen.
UPDATE: *CHEVRON RICHMOND REFINERY HYDROCRACKER EXPLODED: KPIX-TV, REFINERY SHUTDOWN, CAN PROCESS 244,000 BBL/DAY
Chevron's Richmond refinery, the largest refinery in California, is under a Level 3 Hazardous Material extreme immediate warning with local authorities advising local citizens to "to shelter in place, go inside, close all windows and doors, turn off all heaters, air conditioners and fans. If not using the fireplace, close fireplace dampers and vents, and cover cracks around doors and windows with tape or damped towels." As KTVU2 comments, it appears massive and out of control currently. Live KRON4 stream embedded below.
- *2 DISTINCT PLUMES OF SMOKES OBSERVED EMITTING FROM CVX REFINERY
- *CHEVRON SPOKESWOMAN SAYS NOT SURE WHAT CAUSE OF FIRE IS :CVX US
- *CHEVRON RICHMOND REFINERY HAS EVACUATION ON EMISSIONS: FILING
Earlier today the Spanish stock exchange was down for nearly 5 hours - the reason is unclear: perhaps as a form of precrime punishment to all those felons who would even consider selling stocks in the future. Now, the SkyNet self-awareness wave goes East just as Japan opens and takes down all Tokyo derivative trading:
- Tokyo Stock Exchange Stops Derivative Trades, Cites System Error - BBG
- Tokyo Stock Exchange Group stopped trading of Topix futures, JGB futures and options from around
9:20 a.m. because of a systems error.
- Co. spokesman Naoya Takahashi spoke in phone interview
In the aftermath a series of events such as the FaceBook IPO collapse, Knight, IBEX, this was only logical and expected. Tomorrow, any stock market that even thinks of a red candle will be halted indefinitely.
Instead of having to fire 1900 people, Deutsche Bank will now have to only let go 1899. The reason: the second most prominent casualty of the Lieborgate scandal is now none other than Bob Diamond's daughter Nell, who made quite a splash in the aftermath of the Barclays Libor manipulation revelations when the social circuit butterfly tweeted that "George Osborne and Ed Miliband can go ahead and #hmd.” As it turns out after graduation from Princeton University in June 2011, and following a stint in UNICEF, the philanthropist, whose twitter profile is riddled with photos of shoes and runway poses, joined Deutsche Bank in November 2011, whether due to her natural curiosity into the minutae of Investment Banking, or for other reasons. Of course, considering her Princeton thesis was on "The Cultural Myth of Female Hair in the Victorian Imagination" (strinkingly comparable to "The Power Of Women's Hair In The Victorian Imagination" but we digress), it likely was the latter. As it turns out, 9 months after joining the firm full time (she had a part-time stint in the summer of 2010, following comparable stints at the Abernathy Macgregor Group, Nantucket Ice Cream Company, Abercrombie and Fitch), the young woman who sold "Rates" products (Libor and other IR derivatives? Surely that would be ironic at a bank which is now front and center into the Lieborgate investigation) at Deutsche Bank has decided to call it quits, in the process saving the job of at least one low level banker who now will not have to be let go because of the lack of an English thesis focusing on Female hair during Victorian times
In the weeks and months directly ahead, we need to monitor the tone of business capital spending and hiring. If businesses freeze up, economic growth will slow even further. This may be great for Bernanke in terms of providing cover to implement more QE, but for the real economy and financial asset investors it’s another story entirely. In fact it’s a story that stands in direct contrast to outcomes in the latter parts of 2010 and 2011. Moreover for equity investors, we need to remember that in the latter half of 2010 and 2011, the trajectory of corporate earnings growth was very strong. That’s not the case any longer in terms of growth rate. That tells us that economic growth must reaccelerate in good part to justify the already seen upward movement in financial assets largely driven to this point by QE sugar plum fairies dancing. Stay tuned. We know the key drivers to monitor. In the months ahead, it’s all about the interaction of key economic drivers, central bank QE drive by’s, and potential US fiscal cliff dives.
Last week we wrote that we were not surprised to learn that the first party of interest in the PFG bankruptcy was "none other than JPMorgan, which together with various other banks, will be the target of a subpoena by the PFG trustee." We added "How shocking will it be to find that Dimon's company is once again implicated in this particular episode of monetary vaporization." It appears that we were not the only ones shocked to learn that Jamie Dimon's firm could make a repeat appearance again when it comes to missing client money: JPM itself seems to not have expected this development. The result, as just reported by Reuters: "JPMorgan Chase & Co on Monday sought to limit the power the bankruptcy trustee for Peregrine Financial Group has to subpoena information from financial institutions that did business with the failed brokerage." Why, whatever may JPMorgan be hiding, and whyever is it taking preemptive steps from preventing such information from leaking into the public domain: because it is too "burdensome" - it is only logical that Jamie can not dedicate one person of his 261,453 employees to this modest matter. No fear though: even if it is found that just like in the MF Global bankruptcy JPM may have overreached just a tad when it comes to money that doesn't belong to it, the CFTC can just say that as a result of an extensive 4 year investigation, JPM was found to have done nothing wrong, and if the public can please already disperse.
This is the where we would normally do our daily market summary, but frankly there is no longer a market left to summarize: today's volume may not have been the lowest of 2012, including holidays, but it was close. Total volume on Tape A for all exchanges was just above 3 billion shares, 20% below the YTD average, which in turn is 20% below the 2011 average, and so on. As more and more firms such as Knight are carted out, and as confidence in the market follows the US corn reports percentage of corn in "good excellent" condition lower to zero, and then negative (why not? We have NIRP in half the developed world after all) more firms will have no choice but to go out of business: some may blame their extinction on a rogue algo, some on a social network IPO, but the reality is that unless trading volume picks up, banks and trading desks, in their current shape, are doomed.
With 40 minutes trading left, stock trading volume is so abysmal (we will present the final tally shortly) one would be forgiven to think that not even the Knight algo is giving today's stock levitation the old plunge protection college try. And as warned yesterday, expect the balance of the week to be just as lethargic - meaning banks will have no choice but to take out even more competitors as fundamentally, in the absence of end trading demand, one has to remove supply: by any means necessary. So in a complete tangent, and in light of last night's latest Olympic record in the 100 M spring by Jamaica's Usain Bolt, below we show the evolution of gold medals in the Men's Olympic sprint. The Y axis is not logarithmic, and as such the growth is not quite up to par with Moore's Law, but the ever faster sprint is unmissable, and makes one wonder at what point will human speed top out, or will new, improved and completely undetectable stimulants keep pushing homo sapiens until such point as one cross the finish line before the starter pistol has even gone off.
Eventually — because the costs of the deleveraging trap makes organicy growth very difficult — the debt will either be forgiven, inflated or defaulted away. Endless rounds of tepid QE (which is debt additive, and so adds to the debt problem) just postpone that difficult decision. The deleveraging trap preserves the value of past debts at the cost of future growth. Under the harsh discipline of a gold standard, such prevarication is not possible. Without the ability to inflate, overleveraged banks, individuals and governments would default on their debt. Income would rapidly fall, and economies would likely deflate and become severely depressed. Yet liquidation is not all bad. The example of 1907 — prior to the era of central banking — illustrates this. Although liquidation episodes are painful, the clear benefit is that a big crash and depression clears out old debt. Under the present regimes, the weight of old debt remains a burden to the economy.
Just because Italy's 2 Year bond yield has plunged, bringing its cost of short term funding to manageable levels, if only for a day or two, it is suddenly "obvious" that it will not need Germany's goodwill ever again. Sure enough...
On the day Knight blew up, and its stock tumbled initially to the $7 range, when the market speculated the loss may be "only" as large as $150-$250MM, we calculated courtesy of a Nanex analysis which suggested the modus operandi of the "berserk" algo, that the finaly loss would be far greater. This was confirmed a day later when it was made public that the final loss KCG experienced in just 45 minutes of trading was at least $440 million, and will be far greater when the losses associated with all the external trading reroutes are calculated. Nonetheless, with the SEC still completely mum on the whole issue (for one simple reason: it has no idea what happened, and is quiet not out of malice, but sheer incompetence), there is still an open question of just what happened. Here, once again from Nanex, is the complete post-mortem of a firm that was almost fully mortem, explaining everything that happened.
I was sitting across from an impossibly blonde account executive this afternoon when I heard three words I never thought I’d hear at a foreign bank.
“Are you Greek,” she asked me with a bit of a smile…
me: “Uh, no. I have a US passport, among others…”
she: “OK good, as long as you’re not Greek.”
I couldn’t believe what I was hearing. Let me explain.
Every now and then, US taxpayer money goes for something useful and surprisingly informative. Such as this infographic from the US Census Bureau deconstructing the "American Economic Machine" or at least justifies its generally accepted popular representation in the aftermath of the recently concluded Census. The graphic cites facts dealing with manufacturing, services, retail trade, construction, government and much more as seen through the numerous economic programs and surveys conducted by the Census Bureau. And while entertaining, we urge readers to remember that there is no such thing as a free lunch, and that the American "economic machine" is merely the culmination of a global financial system that is full to the gills with credit money to the tune of $707 trillion as shown in this infographic previously. Is the trade off worth it? We will find out in the coming years when at some point, we hope, the economy will be allowed to take off on its own and attempt to recreate the virtuous cycle, however without the training wells of the world's central planners who day after day steal from the future to preserve today's house of cards. We are not very hopeful.