Lehman

When first the speculation and subsequently the confirmation that in addition to suffering massive losses on its IG-9 position, JPM had engaged in massive, reckless and criminal CDS mismarking with the intent to defraud and to boost the appearance of profit for selfish reasons, we promptly concluded that "Jamie Dimon's "tempest in a teapot" just became a fully-formed, perfect storm which suddenly threatens his very position, and could potentially lead to billions more in losses for his firm." So far, the regulators which are currently on page two of "CDS for Absolutely Corrupt Criminal Morons", are only slowly catching up. And while the stench will eventually lead to Jamie, as what happened in the over the counter, unregulated CDS market has most certainly happened at the tens of trillions in other OTC products traded by JPM, most of which are IR swaps, tying it all back nicely to the Libor scandal of which JPM is also a part, the first person who will certainly experience some major pain as the JPM scapegoating plays out, is none other than the London Whale himself Bruno Iksil, who was loved by all at JPM when he was making money, and is now being hung out to dry, once the bank is in the prosecution's cross hairs.

I have to admit, I am pretty sick of writing about Europe, particularly since nothing has changed over there in the last month.

Instead what’s happened is that Mario Draghi issued a borderline ridiculous statement that he somehow will be able to fix the EU’s solvency Crisis.

The actual speech started with a philosophical inquiry comparing the Euro to a bumblebee. I kid you not:

I am reminded that this is the 5-year anniversary of the emergency Fed Discount Rate cut in response to the collapse of Countrywide Financial (CFC) earlier that week.  

Here come the facts!!! Warning, if you get your feelings hurt over hearing the truth, simply move on. You may have a couple of quarters lefft.

It was the best of times (US equities); it was the worst of times (the world's growth engine - China). HSBC-Markit just announced the Flash PMI for August and it's not pretty - printing at a nine-month low (47.8 vs 49.3 in July). Of course, China's own version remains in the Schrodinger-like >50-expansion state for now but with all 11 sub-indices in this evening's data pointing to weakness, we suspect not even the Chinese can sell that data for much longer. So what next - RRR? Massive stimulus? - don't hold your breath given the recent reverse repos and the already creeping-inflation in food and energy prices. The piece-de-resistance of the data-dump though has to be (in line with Japan's trade data last night) is the New Export Orders slumped to 44.7 - lowest since March 2009 when trade finance collapsed post-Lehman.

Gold’s remonetisation in the international financial and monetary system continues.  LCH.Clearnet, the world's leading independent clearing house, said yesterday that it will accept gold as collateral for margin cover purposes starting in just one week - next Tuesday August 28th. LCH.Clearnet is a clearing house for major international exchanges and platforms, as well as a range of OTC markets. As recently as 9 months ago, figures showed that they clear approximately 50% of the $348 trillion global interest rate swap market and are the second largest clearer of bonds and repos in the world. In addition, they clear a broad range of asset classes including commodities, securities, exchange traded derivatives, CDS, energy and freight. The development follows the same significant policy change from CME Clearing Europe, the London-based clearinghouse of CME Group Inc. (CME), announced last Friday that it planned to accept gold bullion as collateral for margin requirements on over-the-counter commodities derivatives.  It is interesting that both CME and now LCH.Clearnet Group have both decided to allow use of gold as collateral next Tuesday - August 28th. It suggests that there were high level discussions between the world’s leading clearing houses and they both decided to enact the measures next Tuesday.  It is likely that they are concerned about ‘event’ risk, systemic and monetary risk and about a Lehman Brothers style crisis enveloping the massive, opaque and unregulated shadow banking system.

We're doomed, doomed, I tell you. 

Just under two years ago, Meredith Whitney made a much maligned, if very vocal call, that hundreds of US municipalities will file for bankruptcy. She also put a timestamp on the call, which in retrospect was her downfall, because while she will ultimately proven 100% correct about the actual event, the fact that she was off temporally (making it seem like a trading call instead of a fundamental observation) merely had a dilutive impact of the statement. As a result she was initially taken seriously, causing a big hit to the muni market, only to be largely ignored subsequently even following several prominent California bankruptcies. This is all about to change as none other than Warren Buffett has slashed half of his entire municipal exposure, in what the WSJ has dubbed a "red flag" for the municipal-bond market. Perhaps another way of calling it is the second coming of Meredith Whitney's muni call, this time however from an institutionalized permabull.

A key sticking point in the ongoing presidential debate is what happens to US tax rates, either for just those making over an arbitrary $250,000/year, aka "the rich", or for everyone. To put this debate into perspective, here is a chart that shows how over the past 20 years the US funding needs (demonstrated previously here), have been met in terms of the only two components of US funding - tax revenue and debt issuance.

http://usawatchdog.com - The stock market rallied on news the European debt crisis is on its way t

Over the past several years, there has been much speculation and numerous reports that America is deleveraging. It isn't. In fact, consolidated across the 5 different kinds of American debt, which takes into account not only federal, but also financial, municipal, household and non-financial, total debt as a percentage of GDP has not budged over the past 4 years and is flat at 350% of GDP. Which simply means that all of the household debt that has supposedly vaporized (at least until the next major Flow of Funds revision), all of which has taken place purely from discharges on uncollectable mortgage and credit card debt, has been replaced by federal debt, while financial debt has merely soared to take the place of the collapsing shadow debt which is imploding as the confidence in a Fed-free financial system erodes to zero. Which of course, is the worst possible outcome: instead of funding private, individual entrepreneurs, who are the true basis for America's historic growth, prosperity and success (and who, unlike the government can and will fail if they dont allocated capital efficiently) the transferred debt (from household to federal) merely goes to fund the unproductive components of the US economy: the US government which by definition produces nothing, and the financial sector, whose only product is financial innovation which serves to make the TBTFs TBTFer, and pay record bonus after record bonus, and... that's it.

We have discussed this somewhat obscure indicator of our obese nation's spending comfort-factor in the past, but just as divergences from economic and non-equity market realities seem de rigeur currently, we though we'd dust it off. The percentage of disposable income spent on eating-out has plunged dramatically in the last two months (the biggest drop since Lehman!) - after running up in a well-correlated manner with stocks - from the 2009 lows. It would seem that once again, equity hopefulness-divergence is writ large here and yet consumers are not buying the hype/hope.

One name comes up again and again when we look back at critical tipping points in the financial system. Whether it is Lehman, WaMu, MFGlobal, or more recently Knight Capital's implosion, the house-of-Dimon is tied directly, in one way or another, to creating the crisis or offering 'help' to fix it. As the WSJ notes, the Knight CEO Thomas Joyce reached out "we're looking for help" and sure enough JPMorgan were more than happy to help (with just the right amount of vigorish of course) especially given their 'complicated' relationship with Knight (and MFGlobal) at the time of distress. Sure enough, after playing hardball for 2 days, they agree terms and Knight is saved (for now) but once again the bank-that-didn't-need-TARP fixes another tempest-in-a-teapot as the squid and the whale battle for global interconnected dominance.

The market may have found itself in the purgatory of the summer doldrums, where unlike last year this time, not only are volumes over 50% lower, but volatility is non-existent, but that doesn't mean that investors are sleeping easy. In fact, quite the opposite because as the following chart from MS confirms, the lack of market volatility merely mimics the complete chaos and lack of decisiveness in Congress, where each passing day brings America not only closer to the most contentious presidential election in ages, but to another debt ceiling hike debate, and, of course, the fiscal cliff. All of these combined have brought US policy uncertainty to the third all time highest level, on par with September 11 and the collapse of Lehman/TARP, and just short of last year's imminent European collapse, which was only staved off courtesy of the coordinated global central bank intervention on November 30.

Up until now we were a lone voice in the wilderness, with our "dry-humored" Transatlantic colleagues, working for a newspaper funded with Goldman Sachs advertisements, periodically mocking our "misunderstanding" of credit and money creation. We are now delighted that none other than one of the foremost opinions on all topics "shadow" stood up this week, and admitted that indeed, it is Zero Hedge whose view on money creation is the correct one. Behold several absolutely critical observations by Citi's Matt King. The same Matt King who a week before the collapse of Lehman wrote "Are The Brokers Broken" and explained to all those who had heretofore been reading and basing their understanding of finance on the above-mentioned Transatlantic newspaper, why everything they know about the modern financial system is wrong. Lehman filed for bankruptcy 12 days later. Unless and until this $3.8 trillion 'shadow banking' hole is plugged, one thing is certain: risk is not going anywhere.