As expected, absolutely nothing new was disclosed in today's latest Jamie Dimon dog and pony show. To summarize what we did learn:
- "JPM is not too big to fail, but it is not at risk of failing unless the earth is hit by the moon"
- "We make CDS for the benefit of veterans, retirees, orphans and widows"
- "We only bought Bear's assets in a firesale while the Fed backstopped its liabilities, because the US government made us"
- "VaR can be made to show anything. We have a closet full of models"
- "Gambling is not investing"
Finally, Jamie Dimon once again refused to disclose the to-date losses on the CIO trade, but promises the firm will be profitable. Which only leaves one question open: how much "profit" from "reserve release" and "DVA", aka blowing out in JPM CDS, will the firm need to take to mask the CIO losses?
The relationship between two measures of risk-aversion, VIX (forward expectations of equity volatility) and Gold (forward expectations of central bank largesse), are diverging in a very pro-printing manner over the last few days. Emprically, it appears we see a rotation through three phases: a perfectly anti-correlated 'liquidation' plunge in gold prices on dramatic rises in VIX (or risk); a highly correlated period of VIX and Gold movements (as uncertainty over the binary print-and-be-saved or don't-print-and-peril process evolves); and a hopeful period of anti-correlation where Gold rises and VIX plunges on the back of further printing to the rescue. We find ourselves in the latter phase currently. It appears that VIX at a 17 handle is pricing rather notably more QE (and its implied vol compression) relative to Gold at only $1620.
As if last week's bought and paid for by JPMorgan media circus in the Senate was not enough, in which Jamie Dimon played several bribed muppets like a fiddle, today we get part two. Momentarily, the Committee on Financial Services will pick up the baton where the Senate left off, and confirm to everyone that the people who lead this country, at least on paper, are some of the most incompetent, and outright clueless when it comes to financial matters. The same matters that have led America to the Second great depression, which has so far been prevented from wiping out 20% of the economy only courtesy of Bernanke's relentless money printing. Dimon's testimony, which is a replica of last week's, can be found here. In other news, Jamie Dimon is furious he never bribed Maxine Waters before. Now he will have to explain introductory math for absolute idiots. Karma is a bitch.
And from pure rumor, whereby the ECB's SMP which is not used due to Germany's stern disapproval, gets somehow replaced with the ESM, which does not exist, we go to fact, whereby we find that LCH, just as expected earlier, has hiked Spanish margins.
- LCH SAYS CHANGE IN SPANISH MARGINS EFFECTIVE FROM CLOSE JUNE 21
- LCH RAISES MARGIN COSTS FOR TRADING MOST SPANISH BONDS
Recently, there has been an intense debate in Europe on the TARGET2 system (Trans-European Automated Real-time Gross Settlement Express Transfer System 2), which is the joint gross clearing system of the eurozone the interpretation of this system and its balances has provoked divergent opinions. Some economists, most prominently Hans-Werner Sinn, have argued that TARGET2 amounts to a bailout system. Others have vehemently denied that. Philipp Bagus adresses the question of whether this 'mysterious' system, that we have been so vociferously discussing, simply amounts to an undercover bailout system for unsustainable living standards in the periphery? Concluding by comparing TARGET2, Eurobonds, and the ESM, he notes that all three 'devices' serve as a bailout system and form a tranfer union but governments prefer to hide the losses on taxpayers as long as possible and prefer the ECB to aliment deficits in the meantime.
The rating agencies have lots of problems, but they are not to blame for the financial crisis. The regulators and investors are the ones who deserve the blame. The agencies have too much influence, but it’s been given to them by the regulators. Clearly Europe is trying to get rid of rating agencies to be aggressive, but the situation has to change. For too long, laziness has driven regulatory policy. Too much emphasis has been put on ratings, and the safety at the high end has been dramatically exaggerated. One thing virtually every banking crisis has in common, is when a previously “safe” or AAA asset, that carried minimal capital charges deteriorates. The sub-prime mortgage market and European Sovereign debt are just two of the most recent examples. We need a realistic regulatory framework like the one we discuss in regulatory-capital-size-and-how-you-use-it-both-matter. What the EU is doing is probably even worse than the existing framework, but the idea of diminishing the role of rating agencies is a good one.
Imagine a ship with 100 passengers and crew drifting down a river that eventually cascades over a 1,000 foot waterfall. It's easy to plot the ship's course and the waterfall ahead. You might think 100% of those onboard would agree that something drastic must be done to either reverse course or abandon ship, but before we jump to any conclusion we must first identify what each of the 100 people perceive as serving their self-interest. If life onboard is good for 55 of the 100, they may well rationalize away the waterfall dead ahead. Indeed, they might vote to maintain the current course, thus dooming the 45 others who can hear the thundering cascade ahead but who are powerless to change course in a democracy. This is the "tyranny of the majority" feared by some of the American Founding Fathers. I cannot locate reliable statistics on what percentage of the Greek population is dependent on the State for a paycheck, entitlement, retirement, disability, unemployment, etc., but I suspect the number exceeds the full-time private payroll of that nation. It seems likely that the number of voters in Greece who draw a check or benefit from the State exceeds the number of privately employed voters whose perception of self-interest is radically at odds with continuing State borrowing to fund the Status Quo. If 55% of the voting public is dependent on government spending, then they will vote to continue that spending regardless of its unsustainability.
Why are we not surprised? The EU has just voted to scrap the use of ratings agencies in the next step on the road to a ban of all policy criticism. Via Bloomberg,
- *EU LAWMAKERS APPROVE AMENDMENT TO END USE OF CREDIT RATINGS
It seems just a few years ago, when these very same ratings agencies were raising ratings and supporting banking systems, mortgage provision, and sovereign-inclusions-into-monetary-unions, that the political elite could not showing off their bronzed statues of AAA/AA-ness.
And in the most bizarre of twists, they would prefer if they were allowed to rate themselves:
- *LAWMAKERS CALL FOR EU TO ISSUE SOVEREIGN CREDIT RATINGS :MCO US
The BLS April JOLTS survey was released earlier and it was ugly - of particular attention was the number of "job opening" which collapsed from 3.741MM to 3.416MM, a drop of 325,000, which just happens to be the biggest decline since May 2010. It is also the 6th largest drop in history as the second chart below from John Lohman shows. Adding to the dire jobs picture was the New Hires number which dropped by 160,000, the biggest sequential drop since April 2011, and finally separations, which after months of increases (remember: more separations is a good thing supposedly, meaning people are confident they can find better paying jobs elsewhere), had their biggest drop by 81,000, also the most since April 2011.
The hopes and prayers of a legion of long-only managers, stock-brokers, retiring boomers, and TV personalities rest heavily on the shoulders of one Ben Bernanke and just as into the last FOMC meeting in April, equity markets are surging on self-delusion (amid fading volumes and plunging average trade size) - while Treasury markets remain far less sanguine. Will it be different this time?
Remember when Whitney Tilson praised every drop in the price of JC Penney stock as a gift from heaven, give or take? Well the gods really are generous to the Sharpe ratio 0.000 asset manager of over a hundred million in stock call equivalents, all of which are now deeply underwater. Because if Tilson liked JCP at $27 one short month ago, he must absolutely love it at $21 where it is today after collapsing over 10% overnight. After yesterday's announcement of the departure of the company's president, the stock is getting blowtorched and is now down to 2 year lows. Someone else who better be doubling down is retail "genius" Bill Ackman who is down $100 million on the stock today alone, and will need to seriously defend his these or, well, else. Who else is getting pulverized? See below.
Between markedly higher yields at the Spanish T-Bill auction (which has been spun as 'successful' due to demand?), a step in the right direction for ESM (from the German courts), and a dismal ZEW survey, finding a reason for the outperformance of Spanish bonds this morning - where 10Y bond spreads have rallied around 20bps (but remains above 7% yield) is a guess at best. However, while this fulcrum security is encouraging risk-on (reality-off) around the world, we suspect in a sorry-to-disappoint way, that the marginal bid on Spanish bonds is in fact once again the CDS-bond arbitrage trading community. Since last Monday's open (post Spanish bailout), the spread between the Spanish bonds and CDS has widened to over 100bps (from around 0bps). This underperformance of bonds relative to CDS has again and again provided an arbitrage opportunity at around these levels and given the thinness of the Spanish bond market, we suspect some renewed arbs (trying to lock in 80-100bps of 'risk-free' carry and convergence) were the real drivers of Spain's strength. So, be careful in believing what you are seeing as sometimes the whole picture is obscured when you don't know where to look - as 10Y Spanish bonds are 20bps tighter while 10Y CDS are 12bps wider. And once the spread between CDS and bonds is gone then away goes that marginal bid for bonds - so now you know what to watch for a signal of pending weakness in Spanish debt.
The question of whether conflict between US and China is inevitable is among the most important for the world as the US-China relationship, as JPMorgan's Michael Cembalest notes, is likely to be one of the most important issues of the 21st century. The inevitability view is sometimes explained by the thesis that countries rarely rise economically without also doing so militarily. The chart below looks at the major economic powers of the world since the year 1 at various intervals. Ignore for the moment some of the abstract issues which this kind of data involves; it’s pretty clear that China’s rise, fall and subsequent rise is something that hasn’t happened a lot over the past 2,000 years, and that the United States is on the front lines of having to adjust to it. Cembalest's recent interview with Henry Kissinger noted the impact of China's troubled relations with the West during the 19th century, which remains on China's political consciousness, and how China might define its interests in different ways than the West would, whether they relate to global energy security, North Korea, global warming, currency management or trade.
We have long been concerned at the implicit and explicit subordination of both financial and sovereign bondholders in Europe by the actions of their overlords political elite in pursuit of short-term liquidity fixes to insolvency issues. As talk of the ESM coming to life in the short-term and a 'Redemption Pact' in the intermediate term - which as Goldman describes involves mutualizing a portion of each country's debt (resulting in a partial upgrade of the existing pool of Eurozone sovereign bonds) in a European Redemption Fund (ERF) and, in the process, extending debt maturities (kicking that can) onto the public sector's balance sheet. As with all these mutualization schemes, the ERF ineluctably raises the twin problems of 'moral hazard' and 'subordination', which need to be mitigated. Goldman discusses these two sides of the same coin as it notes subordination is explicit when the ESM intervenes (and also with the ECB's SMP) but a little less obvious in the ERF (though still as painful) which is, we note, perhaps more appealing to keep the masses unaware.