The market grudgingly comes back to work today, overdosed on caffeine and other alkaloid derivatives, a day when traditionally everyone calls in sick, as absolutely nothing has been resolved over the Fiscal Cliff with just 3 real trading sessions left in the year. And the likelihood that no real trading will take place is very high as both the House and Obama are still out of town, although the latter will take a late night AF-1 trip back to D.C. to rekindle rumors of an imminent 11th hour deal. It is increasingly looking as though the E-bay market, when all real trading take places at 3:59:59 pm, will manifest itself at the calendar level too, with either a market surge or plunge in what appears to be the last trading day of the year. One can only hope if the news is negative that it has a hard limit like the ES limit down plunge last Thursday.
To some, such as those few whose daily net worth is still a function of the policy vehicle formerly known as the 'market', it is a merry Christmas (at least until such time as the recoupling between central planning and reality once again inevitably occurs). To others, such as the 50 million (by now) Americans on food stamps, and billions of others around the world living in conditions of poverty, it is not so merry. But no matter one's current state of one's mind, there is always hope that the future will bring better days: after all that is what reflective holidays such as today are all about. We too hope that there is hope, if at the same time realizing that ever more of the promise of the future is packaged away in chunks of debt and securitized in order to fund an unsustainable present. We open up this open thread to readers to share their hopes and concerns about the present and the future.
The most hopeful thing in my mind is that the Status Quo is devolving from its internal contradictions and excesses. It is a perverse, intensely destructive system with horrific incentives for predation, exploitation, fraud and complicity and few disincentives. A more human world lies just beyond the edge of the Status Quo. I know many smart, well-informed people expect the worst once the Status Quo (the Savior State and its corporatocracy partners) devolves, and there is abundant evidence of the ugliness of human nature under duress. But we should temper this Id ugliness with the stronger impulses of community and compassion. If greed and rapaciousness were the dominant forces within human nature, then the species would have either died out at its own hand or been limited to small savage populations kept in check by the predation of neighboring groups, none of which could expand much because inner conflict would limit their ability to grow.
Last year's AmeriCatalyst interview with Kyle Bass provided much more color than the normal 30-second soundbites that we are subjected to when serious hedge fund managers are exposed to mainstream media. This year, Bass was the keynote speaker and in the following speech (followed by Q&A), the fund manager provides 60 minutes of eloquence on the end of the grand experiment and its consequences. From Money Printing and Central Bank Balance sheets to Japan and the psychology of the current situation - which in many cases trumps the quantitative data - the question remains, "when will this unravel" as opposed to "if?"; Bass provides his fact-based heresy against the orthodoxy of economic thought "On The Financial Nature Of Things" extending well beyond his recent note. Must watch (there's no football or X-Factor on tonight).Make sure to stay tuned to the last 2 minutes when Kyle succinctly sums up our society...
Aside from the occasional deranged FX algo which today has decided to take out all its pent up binary anger on the GBPUSD, everything else today is closed. Everything, except, of course, for InTrade which come holiday, rain or apocalypse, is a true OTC market and is open all the time 24/7, non stop. Of particular interest is InTrade's market on "The US debt limit to be raised before midnight ET 31 Dec 2012" which moments ago once again came closer to reflecting reality and not the clueless gibberish of "expert" political pundits, and plunged to a contract low 10.1% probability (and price) which considering the late stage in the game, and that at this point the Fiscal Cliff is beyond any 2012 resolution, let alone the debt ceiling, is 10.1% too high (as forecast here nearly two months ago). And like a true market, one can naked short on InTrade. So for all the habitual gamblers out there just itching for some global futures market to reopen somewhere: have at it (but mind the brief squeeze at the next appearance of the "we have a deal" rumor, only to be refuted by the sad political reality of this country moments later).
Frankly we have no idea what this is all about, because as far as we are concerned, CNN long ago became a politicized, ratings-starved farce, wrapped in a joke inside a humiliation (after once upon a time being the only go to place for objective breaking news), but it is rather funny. The Hill reports that "a White House petition calling for the deportation of CNN personality Piers Morgan, a U.K. citizen, over his recent comments criticizing U.S. gun laws rocketed past the 25,000 signatures it needed for an official response Monday. As of this writing, nearly 40,000 people had signed a petition demanding “Mr. Morgan be deported immediately for his effort to undermine the Bill of Rights and for exploiting his position as a national network television host to stage attacks against the rights of American citizens.” A petition on the White House's “We the People” website needs 25,000 signatures in the first month of being posted to earn an official administration response. “I don't care about petition to deport me,” Morgan tweeted Monday. “I do care about poor NY firefighters murdered/injured with an assault weapon today. #GunControlNow.”
UPDATE: GBP -160pips now
It seems that while all the good boys and girls of the world are opening gifts and starting to drink heavily on this festive day, something is afoot in the GBPUSD FX pair. With not a creature stirring apart from a few algos, the transatlantic cross has gone steadily bidless - now down 90 pips in a well coordinated dribble-down algo battering. Happy Christmas Johhny-5...
With the market still hopeful of some deus ex resolution to the Fiscal Cliff will take place in the last few trading sessions of the year (one where the market itself will not have to be the catalyst for such a resolution, because once the selling starts in earnest, who knows if and when it stops, hence the loading up on prodigious amounts of puts), here is Iran out of left field, adding yet another known unknown to the inequality, announcing that it will begin six days of naval drills in the Straits of Hormuz on Friday. In other words a one year flashback deja vu, as Iran held a similar 10-day drill last December, when everyone was expecting an imminent escalation out of the endless Israel-Iran foreplay and was analyzing which were the new moon days allowing Israel unobstructed access to the greatest distraction of all - Iran's nuclear facility being moved under a mountain: a catalyst which Israel repeatedly said is the only reason to attack a weaponizing, nuclear Iran, and which took place some time in 2012. Now that the official window of opportunity is closed, will Israel tone back on the aggressive rhetoric? Hardly: after all that is precisely why the Syrian "outlet valve" has been put in play over the past 6 months.
Obviously I don’t want to conflate complex issues of foreign policy and war with the Sandy Hook shooting, but it is important to make the broader point that our federal government has zero moral authority to legislate against violence. Furthermore, do we really want to live in a world of police checkpoints, surveillance cameras, metal detectors, X-ray scanners, and warrantless physical searches? We see this culture in our airports: witness the shabby spectacle of once proud, happy Americans shuffling through long lines while uniformed TSA agents bark orders. This is the world of government provided "security," a world far too many Americans now seem to accept or even endorse. School shootings, no matter how horrific, do not justify creating an Orwellian surveillance state in America. Do we really believe government can provide total security? Do we want to involuntarily commit every disaffected, disturbed, or alienated person who fantasizes about violence? Or can we accept that liberty is more important than the illusion of state-provided security? Government cannot create a world without risks, nor would we really wish to live in such a fictional place. Only a totalitarian society would even claim absolute safety as a worthy ideal, because it would require total state control over its citizens’ lives. We shouldn’t settle for substituting one type of violence for another. Government role is to protect liberty, not to pursue unobtainable safety.
For the time being, the silver price is essentially set in the paper market where the daily average trade on the Comex is approximately 300 million ounces. An outrageous number when you compare it to the daily mine production of about 2 million ounces. As Bart Chilton, Commissioner of the Commodity Futures Trading Commission stated on October 26, 2010, “I believe there have been repeated attempts to influence prices in silver markets. There have been fraudulent efforts to persuade and deviously control that price. Based on what I have been told and reviewed in publicly available documents, I believe violations to the Commodity Exchange Act have taken place in the silver market and any such violation of the law in this regard should be prosecuted.” Which brings us back to the phrase “Follow the money.” In our view, it is almost inconceivable that investors would allocate as many dollars to silver as they would to gold, but that is what the data shows. The silver investment market is very small. While the dollar value of gold in the world approaches $9 trillion, the value of silver in the forms of jewelry, coins, bars and silverware is estimated at around $150 billion (5 billion ounces at $30 per ounce). This is a ratio of 60:1 in dollar terms. How long can investors continue to buy silver at the current ratios when the availability for investment is only 3:1? We are surprised that the price of silver has remained at such a depressed level compared to gold. Historically, the price ratio between gold and silver has been 16:1, when both were currencies. Today the ratio is 55:1, so what are the numbers telling us? We believe this is one of those times when smart investors will be well rewarded to “Follow the money.”
Equity futures closed at their lows (after cash ended nearer its highs) amid deathly quiet volume with VIX at 6 week highs and HYG underperforming. Much was made Friday about the compression in VIX from its early spike highs - with those that have the microphones explaining how this must be a bullish sigh - surely, and that this also means the cliff resolution is merely hours away. Unfortunately, as we noted at the time, both VIX's behavior (and the reality of our politicians) means that resolution is nowhere near (and the options market remains priced for more pain). In fact the rolling of hedges in VIX futures (and Friday's quad-witching) almost forced spot VIX to drop; today we see spot VIX rising (towards its now anchored January futures levels) and still pointing to significantly more 'concerned' pricing than the market would suggest. We go back to what we have been saying - managers know that selling down their exposure into this thin market creates a bid vacuum (a la Thursday's flash-crash) and so bidding option protection is the only way to survive (meanwhile dribbling down the underlying exposure). During this holiday week, with its low volumes, it would surprise us to see VIX rising further as algos take advantage of low volumes to tickle stocks higher - but the vacuum underneath grows larger by the day.
There is much debate whether when it comes to the total notional size of outstanding derivatives, it is the gross notional that matters (roughly $600 trillion), or the amount which takes out biletaral netting and other offsetting positions (much lower). We explained previously how gross is irrelevant... until it is, i.e. until there is a breach in the counterparty chain and suddenly all net becomes gross (as in the case of the Lehman bankruptcy), such as during a financial crisis, i.e., the only time when gross derivative exposure becomes material (er, by definition). But a bigger question is what is the actual collateral backing this gargantuan market which is about 10 times greater than the world's combined GDP, because as the "derivative" name implies all this exposure is backed on some dedicated, real assets, somewhere. Luckily, the IMF recently released a discussion note titled "Shadow Banking: Economics and Policy" where quietly hidden in one of the appendices it answers precisely this critical question. The bottom line: $600 trillion in gross notional derivatives backed by a tiny $600 billion in real assets: a whopping 0.1% margin requirement! Surely nothing can possibly go wrong with this amount of unprecedented 1000x systemic leverage.
Post-Hyperinflationary Zimbabwe Welcomes The Holidays With 80% Unemployment, Empty ATMs And Paralyzed TransportSubmitted by Tyler Durden on 12/24/2012 14:02 -0400
Zimbabwe's hyperinflation, courtesy of one Gideon Gono - the brilliant man behind such grand monetary experiments as QE and its offshoots throughout the developed world - and numerous one hundred trillion dollar Zimbabwe dollar bills, may have come and gone, and the country may no longer have a functioning currency of its own, but it certainly has the aftermath of the most recent episode of modern-era monetary hyperinflation to contend with. And with the holidays here, AP provides a very bleak snapshot of what the country which currently has an 80% unemployment, has to look forward to. Zimbabweans are facing bleak holidays this year amid rising poverty, food and cash shortages and political uncertainty, with some describing it as the worst since the formation of the coalition government in the southern African nation.... Banks have closed, ATMs have run out of cash and transport services have been paralyzed." It gets worse: "Zimbabwe's unemployment is pegged at around 80 percent with many people in Harare, the capital, eking out a living by selling vegetables and fruits on street corners." And all of this is after the massive economic imbalances in Zimbabwe's economy should have been "fixed" (or so conventional economic theory would have one believe) courtesy of hyperinflation, which left any savers in tatters, destroyed the value of the old currency, benefited solely debtors but also allowed a fresh start to a government, which could only remain in power due to a violent power grab by the democratically elected-turned-dictator Robert Mugabe.
Copper is often referred to as the PhD of commodities for, as JPMorgan's Ken Landon notes, "When companies ramp up production of various products, whether during or in anticipation of economic recovery, they demand more cooper." Gold, however, he adds, "is not sensitive at all to business-cycle demand. Its price is driven by the monetary environment." While Bloomberg's chart of the day prefers to take the short-term (last few weeks) view of the world to justify a bullish equity market call, we prefer to look at longer-term cycles and the message is extremely clear - manufacturers are anything but confident, are doing anything but buying copper in anticipation of demand, and despite gold's recent fluctuations it is anything but implying that the world's grand monetary policy experiment is slowing down. What we see from this chart is yet another clear fundamental divergence between Dr. Copper's take on the global economy and the US equity market's nominal recovery.
Sometimes it takes 60 pages to describe where we have been this year; on other occasions it takes 28 pages to describe where we are going and why. However, BBVA (via Constantin Gurdgiev's True Economics) have managed to condense the state of risk in our global markets down to seven critical dimensions (and into one table). From Macro (GDP and inflation) to Fiscal, Liquidity, and Credit Growth, the following matrix is your must-have guide for this new-year's cocktail party circuit. You're welcome...