Guest Macro Commentary: The “Our Capital Levels Are Adequate” Dance

Tyler Durden's picture

From Brian Rogers of Fator Securities

Macro Commentary: The “Our Capital Levels Are Adequate” Dance

“Our capital levels are adequate.”  Perhaps it’s just me but It seems like every time the market sells off more than 10%, we end up hearing that phrase a lot.  Hmm, perhaps it has something to do with the huge amount of leverage still sitting on the balance sheets of the TBTF banks and their exposure to the global derivatives market?  We need banks in our society, but do we really need these banks?  Until the world finally realizes that the concentration of leverage that currently sits on the balance sheets of the world’s largest 15-20 banks is the source of our global instability and protecting these same banks is literally cutting off our nose to spite our face, we will continue to suffer huge bouts of “risk-on/risk-off” madness. 

Systemic risk will continue to grow and government instability will only increase once the final shoe, rising rates, finally drops.  In 2008, the market was not concerned about Greece.  And then rates rose.  Now they are a walking default and a threat to the TBTFs.  Look at Italy and Spain as well.  Italy especially is Too-Big-To-Bailout but with low rates, they can scrape by.  Hike rates by a few hundred basis points, however, and the endgame starts to unfold.  The same fate awaits the US.  Eventually.  We can get in front of the problem, take our pain now by nationalizing and breaking up the big banks, or we can wait until the crisis spirals out of control and threatens something much worse. 

Futures markets in the US were positive at 6am this morning, turned sharply negative again on fears that the European banking system is entering into a liquidity crisis on fears of weakness in the French banking system and are now positive again in typical “risk-on/risk-off” dyslexia.  Ensuring that this perceived weakness becomes a full-blown reality, there are reports that a major Singaporean bank has cut all credit lines to French banks while other Asian banks are considering the same action.  The French government could inject billions into the balance sheets of the largest banks but such a bailout would be politically controversial and could also call into question the stability of France’s AAA rating and thus the viability of the EFSF fund.  Rock, meet hard place.  Meanwhile, as a parade of finance ministers and central bankers assure the world that the French banking system is sound and “adequately” capitalized, the NYTimes is reporting that the European regulators are considering a ban on short-selling.  Nothing like a little gasoline from the regulators to stoke the fire!  If this happens, the disaster that follows will be yet another example of how trying to centrally plan an economy is a really, really bad idea. 

Perhaps the best option here is for the US and Europe to join hands and craft a global balance sheet reorganization, aka The Great Reset, bilaterally.  At over 50% of global GDP, anything the US and Europe did together would almost certainly be influential enough to bring the rest of the world on board.  Think Bretton Woods III.  Yes, this would mean debt write-offs and the nationalization of the banks.  Yes, it would likely mean a drop in asset prices and could push the world into a recession.  And yes, it would likely mean that the end result would be the USD ending its reign as the world’s reserve currency.  However, doing it now also means the US and Europe would be leading the process rather than following it.  It also means that we would be pushing for this at a time when our two economic areas are still quite strong militarily.  Waiting too long to acknowledge the severity of our debt problems could mean that we continue to weaken while our rivals continue to strengthen.  By the time the system finally forces a new reserve currency, it could be too late for the US to influence this process to our advantage as we likely could now.  In trading, sometimes your first loss is your best loss. 

Gold is taking its medicine today (or eating Obama peas), down over 1% after the CME raised margin requirements by 22%.  However, this comes after gold hit a high price of $1,815 per ounce in after-hours trading.  Given gold’s recent rapid move up, it’s trading higher by over 18% since the beginning of July, it seems likely that a pullback here is warranted.  However, until the current banking weakness is resolved, expect any pullback to be shallow and weakness bought.  If a temporary, short-term solution can be brought to bear on the growing concerns over the French banks, expect gold to pull back to the 1600-1550 area.  Exeter’s pyramid is very quickly being discovered by many market participants who previously only understood the dogma of “you can’t fight the Fed” so I don’t expect any pullback to be long-lasting as the system weakness overwhelms the technical argument for a gold pullback.

Looking at Brazil, after bottoming out on Monday at 47,793, the IBOV has bounced back 8% to its currently level of 51,732.  Given the weakness in Europe, particularly the concern over the banking sector, I still believe it’s too early to buy beta in Brazil.  In my opinion, a defensive stance is still warranted.  My desk economist in Brazil, Luiza Ladeira, highlighted the increase in June retail sales this morning.  While not a huge increase, the +0.2% increase was greater than market consensus (0%) and greater than Banco Fator’s estimate (-0.4%).  So the good news is that the consumer in Brazil is alive and well, despite a slowdown in the growth of credit.  The bad news is that systemic risk will be the driver of the stock market in the short-run so the best thing for an investor to do is build a wish list of positive beta names to buy when this current bout of bad news eventually passes. 

* Fator Securities LLC, Member FINRA/SIPC, is a U.S. entity and a member of the Fator group of companies in Brazil. The comments below are from Brian Rogers, who is employed by Fator Securities (Brian’s opinions are his own and do not constitute the opinions of Fator Securities or the Fator group of companies).

Fator Securities LLC is not affiliated with Zero Hedge or any third party mentioned in this communication; nor is Fator Securities LLC responsible for content on third party websites referred to in this communication.

This material was not prepared by Fator Securities LLC. U.S. Persons seeking further information must contact Fator Securities LLC in New York at (646) 205-1160. This material shall not constitute an offer to sell or the solicitation of any offer to buy (may only be made at the time qualified participants are in receipt of the requisite documentation, e.g., confidential private offering memorandum describing the offering, related subscription agreement, etc.). Securities shall not be offered or sold in any jurisdiction in which such offer, solicitation or sale would be unlawful or until all applicable regulatory or legal requirements of such jurisdictions have been satisfied. This material is not intended for general public use or distribution and is intended for distribution only to appropriate investors. The opinions contained herein are based on personal judgments and estimates and are, therefore, subject to revision. Past performances are not indicative of future results.

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Cognitive Dissonance's picture

The check is in the mail. I'll never lie to you again. I only did it once.

Any more out there?

Hard1's picture

This market has become really easy to profit from, just short the banks that comment on their strength or the sovereign bonds of any country that states that it is not Greece...oh, and also Greece

Cognitive Dissonance's picture

How many times have I told you to put that thing away?

AlaricBalth's picture

Ben Bernanke (November 21, 2002) "The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost."

tip e. canoe's picture

By enhancing liquidity, credit derivatives achieve the financial equivalent of a “free lunch”


- mistress blythe masters

tsx500's picture

no, really honey, your ass doesn't look fat in that dress ...

hedgeless_horseman's picture

By definition, adequate capital is always a hope of, rather than a fact of, fractional reserve banking, where it is all about maintaining the confidence of the depositors. Should that confidence fail (bank runs), then the game becomes all about passing the losses on to the taxpayer.  Rinse, wash, repeat.

fx's picture

This is getting silly! if the banks had NOT taken on this enormous, often hidden leverage, the U.S. consumer and the govt. would long ago had to stop spending money they didn't have on things they didn't need - be it ipads or foreign wars.. Now, is it alone the banks' fault that the consumer got ever more into debt?. In most parts of the now oh-so blamed Europe, consumers did never go so much into debt! european banks are still holding quite an amount of private and public U.S. debt, btw.

it's very easy and popular these days to blame the reckless lenders which sounds legitimate - if it wasn't coming from the even more reckless borrowers!

hedgeless_horseman's picture

if the banks had NOT taken on this enormous, often hidden leverage, the U.S. consumer and the govt. would long ago had to stop spending money they didn't have on things they didn't need - be it ipads or foreign wars..

Agreed.  That would be a bad thing?

10 "I also, with my brethren and my servants, am lending them money and grain. Please, let us stop this usury!
11 "Restore now to them, even this day, their lands, their vineyards, their olive groves, and their houses, also a hundredth of the money and the grain, the new wine and the oil, that you have charged them."

-Nehemiah 5:10,11

Kayman's picture


So true. BUT... the drug dealers (the banks) and the debt addicts (the American consumer) were encouraged by the Fed and the U.S. government.

It seems no one in the mix, ever heard of personal responsibility, or putting the country ahead of one moment of personal gain.


WonderDawg's picture

Hope turns to doubt, doubt turns to fear, fear turns to panic. The psychological profile of the markets. We've come off the hope and are in the doubt stage, with bouts of fear. Soon we'll be solidly in the fear stage, and when we have bouts of panic, they'll need more fans for the shit that will be flying. When it's all out panic, it will be raw.

slewie the pi-rat's picture

hey, w_d, i thought i saw some panic on monday. 

this is a paste:  Perhaps the best option here is for the US and Europe to join hands and craft a global balance sheet reorganization, aka The Great Reset, bilaterally.

oh?  really?  wtf?????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

WonderDawg's picture

Yeah, Slewie, I caught that quote, too. Sounds kind of New World Ordery doesn't it?

slewie the pi-rat's picture

wld you like fries w/ that, dawg?

Zero Debt's picture

Further to that, what is often referred to as "capital" is often just debts = credits, not assets and certainly not money.

Debts are derivatives of cash flows and collateral. If those underlying cash flows and collateral assets are gone, the debt "asset" itself suddenly becomes worthless. With low rates, even a small cash flow can sustain a very large debt. Hence these derivatives allow an enormous amounts of liabilities to be held using very small cash flows. Valuation of sovereign debt is a derivative of the certainty of underlying net surplus of taxpayer money inflows. Once our dear taxpayer goes on strike, any "assets" derived on that cashflow disappears.

This is what hasn't dawned on a lot of people, debts are derivatives. Once the Fed et al raises rates, the debt pyramid is going to implode.

Steaming_Wookie_Doo's picture

I offer this snippet from The Golden Jackass (


My harping disrespectful criticism of the deflation camp with all their half-blind observations and blockheaded conclusions and mindnumbing errant forecasts has been steady and well deserved. The best description of the current situation is the collision of high pressure zones against low pressure zones. The high pressure is the result of thrust by central banks of monetary expansion that has actually wrecked the USFed balance sheet, and the EuroCB balance sheet. Each is the shameful owner of worthless mortgage bonds and sovereign bonds respectively, that nobody wants, that will never recover in price. The low pressure is the result of a powerful push by falling housing prices and big bank balance sheet insolvency. The banks are making a transition from insolvent Zombies to undercapitalized Dead Made Men. They are soon to be recognized as dead. They are agents of the Syndicate, and thus guaranteed for slush fund income from multiple sources.

onlooker's picture

"""" when this current bout of bad news eventually passes """

should I hold my breath?

reader2010's picture

"The market has sold off in such a rapid way with so much momentum that I am smelling as if something really wrong will happen in the next two or three months. Because the market is a discounting March 2009, the market went up and people were baffled by that. And now it goes down, and maybe in three months, people will wake up scratch their head and understand why..." - Marc Faber, 8/10/11

Atomizer's picture

I have some good news folks, The President delivers remarks at Johnson Controls @ 2:40ish. You know no what that means..

Fasten your seatbelt at market closing.

slaughterer's picture

Starting tomorrow Obama has "No public schedule."

RobD's picture

Now that is some good news!

RiskAverseAlertBlog's picture

“Our capital levels are adequate.” The ultimate contrarian's sell signal in the new normal...

anarkst's picture

"We need banks in our society,... ."

Wrong, we DO NOT need banks in our socierty.

snowball777's picture

Right....7 billion people will just "go Amish". Do you financial Luddites really believe the crap you tout?

SMG's picture

Correction, we do not need these fractional reserve, parasitic current banks in our society.

dwdollar's picture

Fractional reserves are a consequence of banking as competition drives it during the boom.  However, in a sane and/or decentralized banking system where failure is not rewarded, the bust takes out the garbage that extended too far.

hedgeless_horseman's picture

Rewarding the failure of banks by socializing the losses is one of the central tenets of The Federal Reserve. 

Read all about it in this book:

WonderDawg's picture

HH, I'm reading it for the second time. So much info to absorb, I'm picking up things I missed on the first pass. Definitely a must read for anyone who wants to understand our financial system and how we arrived here with this catastrophic mess.

baby_BLYTHE's picture

G. Edward Griffin's solutions presented towards the end of the book are some of the best I have ever seen, in terms of returning to a workable gold/silver standard without any central banking apparatus.

Make sure when you buy the book to get the latest edition (5th Edition) which has been updated to include the content of the 2008 financial crisis.

snowball777's picture

Woohoo! Bank Panics for everyone!

snowball777's picture

Because you can't have banks without fractional reserve lending...or change the ratios to something less insane than 40:1?

Try again. This time without a false dichotomy.

Whittaker's picture

Go Amish? Last I checked, banks did not produce electric power or manufacture cars. And people are perfectly capable of saving, lending and borrowing money without going through government-chartered boondoggles.

snowball777's picture

Name one large-scale industry (like your example of car manufacturing) that existed prior to the banking industry.

People can save, lend, and borrow, but not at the scale of capital formation required for the endeavours you describe.

Should fractional reserve lending be reigned in? Yes.

Should investment banks be completely divorced from depository institutions? Yes.

Can we really have a capitalist society without ANY banking? Uh, no.

hedgeless_horseman's picture

I agree with your paragraphs 2-4.

Regarding paragraph 1...

Name one large-scale industry (like your example of car manufacturing) that existed prior to the banking industry.

...correlation does not equal causation. One could substitue any number of large industries for banking in this premise, starting with the oil industry.

I will also add this: 

Can we really have a sustainable society with an unsustainable banking industry? Uh, no.

slewie the pi-rat's picture

this is where the nutty prof fekete is so good with his "bills of credit" lecturezzz...

snowball777's picture

The keyword being 'unsustainable'. I'm not arguing for the status quo, but rather against the complete elimination of banking as a practice.

Correlation is one thing, but a definite chain of causation can be presented; even if you were talking about something that didn't require the fundaments of industrialization like oil

(say...knitting...sheep, grass, shears, needles and looms or people), you would have a tough time reaching any kind of economy of scale without the assistance of at least a credit union or other cooperative.

Banking and credit itself are tools. Claiming that we need to abolish them due to misuse and abuse is analogous to saying we need to outlaw fire because of arsons (or guns because of criminals, if you prefer).

Pay Day Today's picture

Banking system may exist as it is useful.

However, make it so that it is not allowed to charge interest, only fixed absolute fees for services. And as others have mentioned, put an end to fractional reserve banking.

And Glass Steagal please (of course).

snowball777's picture

Make 2:1 reserve ratio...don't cripple lending for no reason, just take away the power to swamp the economy in bubbliciousness.

Agreed on bank should be a bank, not a bookie.

Cap interest at 8% secured and 12% unsecured, if you think the debtor should pay more, don't lend, but also don't pretend all debtors are alike and present zero risk, mmkay?

Even bankers gotta eat, yo!

Bam_Man's picture

So now they say "our capital levels are adequate".

Notice how careful they are to avoid using the words "well capitalized". Those two words are the kiss of death and they know it.

Kayman's picture

Until theTBTF black holes of capital are eliminated, the economies of the West will never be healed.

The only good news is that Western governments have painted themselves into a corner, and the Fed needs to scare the crap out of stockholders and into government debt, to keep the balloon afloat. 

This is the beginning of the end of macro intervention.  Printing is the last resort and that will just accelerate the collapse, Krugman's bleatings notwithstanding. 

slaughterer's picture

"Perhaps the best option here is for the US and Europe to join hands and craft a global balance sheet reorganization, aka The Great Reset, bilaterally.  At over 50% of global GDP, anything the US and Europe did together would almost certainly be influential enough to bring the rest of the world on board.  Think Bretton Woods III.  Yes, this would mean debt write-offs and the nationalization of the banks.  Yes, it would likely mean a drop in asset prices and could push the world into a recession.  And yes, it would likely mean that the end result would be the USD ending its reign as the world’s reserve currency."

 This proposal is too radical for any sovereign nation in the developed world to accept--at this point.   It also goes against nearly all of the principles of the current system.  No politician except Ron Paul would want that on their resume.       

monopoly's picture

No public schedule for Obama? That means he will shut-up for a change. Luv it. Miners bouncing back even with gold down, this is a first and what I have been hoping for. Added early on when the "brilliant ones" sold there miners. No shorts, as usual. But at some point my bear will rock.

snowball777's picture

So....paper-holding assclown with zero balls.

pazmaker's picture

I think I'll pass on nationalizing banks....if I want that I'll move to Venezuela

slackrabbit's picture

at the rate they're screwing this thing up, we be there soon

monopoly's picture

adequate means we are good till the weekend.