LIBOR

Fear, like greed, makes people, and that would include investors, behave irrationally. Two major equity bear markets in the last 13 years have traumatized investors. The belief in Modern Portfolio Theory in general and the Efficient Markets Hypothesis (EMH) in particular has been shaken and finance theory will have to be re-written. So, Absolute Return Partners' Niels Jensen asks, what is it specifically that has changed? Human behavior certainly hasn’t. Greed and fear have been factors to be reckoned with since day nought. When faced with the unknown, people (in this case, fund managers) will use whatever information they can get hold of. Hence we shouldn’t really be surprised that fund managers extrapolate current earnings trends when forecasting future earnings, despite the evidence that it is a futile exercise. Occasionally, the Wisdom of Crowds turns into the Madness of Mobs and all rational behavior goes out the window. History provides many examples of that. EMH is entirely unsuited to deal with froth. What made economists love the EMH is that the maths behind it is so neat whereas the alternative truth is a little messy.

There are times when some people bite their own nose of just to spite their face. According to a report that has just been published by the Chartered Institute of Personnel and Development (CIPD), the people working in the financial sector in 120 different countries in the world think in the overriding majority of cases that they are paid far too much for what they do. Were they serious?

• Global Stocks Tumble as Treasuries Rally, Yen Strengthens (BBG)
• China Export Gains Seen Halved With Fake-Data Crackdown (BBG) - so a crash in the GDP to follow?
• FBI and Microsoft take down botnet group  (FT)
• Quant hedge funds hit by bonds sell-off  (FT)
• Russia's Syria diplomacy, a game of smoke and mirrors (Reuters)
• Obama Confidantes Get Key Security Jobs (WSJ)
• BMW to Mercedes Skip Summer Breaks to Keep Plants Rolling even as European auto demand slides to a 20-year low (BBG) - thank you cheap credit
• Paris threat to block EU-US trade talks  (FT)

Another day, another sell off in Japan. The Nikkei index closed down 0.9%, just off its lows and less than 1% away from officially entering a bear market, but not before another vomit-inducing volatile session, which saw the high to low swing at nearly 400 points. Hopes that a USDJPY short-covering squeeze would push the Nikkei, and thus the S&P futures higher did not materialize. And while the weakness in Japan is well-known and tracked by all, what may come as a surprise is that the Chinese equities are down for the 6th consecutive session marking the longest declining run in a year. Elsewhere in macro land, the Aussie Dollar continues to get pounded on China derivative weakness, tumbling to multi-year lows of just above 94 as Druckenmiller, who called the AUDUSD short nearly a month ago at parity shows he still has it.

Does it really make any sense at all that Bernanke would leave gold to trade in an open and transparent market? Hardly. Consider. The Fed has conjured multiple trillions of digital dollars out thin air in the last five years. These efforts have propped up the Treasury market, the domestic TBTF banks, the foreign TBTF banks, the ECB, the BOE, every European sovereign bond market, the RMBS market, the CMBS market, the equity market, the housing market and the entire industrial and soft commodity complexes, to name a few. Since the price of gold we see on our Bloomberg screens is set via derivatives and overwhelmingly settled in USD, the ability for central banks and bullion banks to manipulate the price of gold is way too easy. All the bullion banks have to do is coordinate (as in LIBOR), sell in size and punish anyone in their way. Take losses? No problem, more fiat can be conjured post-haste. So long as no one is taking physical delivery, the band(k) plays on. (Actually, physical demand delivery IS becoming a major new problem for the banks but this is a topic for a different note.) A quickly rising gold price upsets this fiat-engineered, centrally planned, non-market based recovery. Gold left to its’ own devices would signal the unwinding the rehypothecated world of shadow banking where latent monetary inflation goes to summer (think of it as the monetary Hamptons where only the Wall Street elite get to play). Most importantly, it would signal a huge lack of faith in the US dollar. A currency backed by nothing more than faith in central banking.

• Global shares sink, following 7.3 percent drop in Japan's Nikkei (Reuters)
• When all fails, pull a Kevin Bacon: Japan Economy Chief Warns Against Panic Over Stock Sell-Off (BBG)
• White House Feeds IRS Frenzy by Revising Accounts (BBG)
• In any scandal, lying to Congress is tough to prove (Reuters)
• Debt limit resets at higher level, budget impasse grinds on (Reuters)
• China factory data to test political calculations (FT)
• European Leaders Saying No to Austerity (BBG)
• And yet, nobody wants in anymore: Iceland’s new coalition government suspends EU accession talks (FT)
• Oil Manipulation Inquiry Shows EU’s Hammer After Libor (BBG)
• The Fed Squeezes the Shadow-Banking System (WSJ)
• Diamond Said to Weigh Backing Barclays Alumni in Venture (BBG)
• Spain’s Private Jets Disappearing as Tycoons Cut Flights (BBG)

Since there are now numerous hard proofs that China’s export data (and to some extent import data as well) were significantly distorted recently, we naturally wonder the incentives behind the distortion and the detailed mechanism of these manipulations. As BofAML notes, there are four reasons why the distortions have risen so sharply since Q4 2012 but the various arbitrages (described in actionable detail below) between onshore and offshore currencies and interest rate differentials (and the role of gold in this) remain in place to make judging China's real trade growth as much art as science.

The gold and bond markets have been "saying" that QE is ending for the past few months. The equity and junk markets have largely ignored the signs. June is setting up as an interesting month.

European Union Launches Investigation Into Manipulation of Oil Prices Since 2002

• Mine union threatens to bring South Africa to 'standstill' (Reuters)
• Russia Raises Stakes in Syria (WSJ) - as reported here yesterday 
• Japan buys into US shale gas boom (FT)
• Bill Gates Retakes World’s Richest Title From Carlos Slim (BBG) - so he can afford a Tesla now?
• China Wages Rose Sharply in 2012 (WSJ)
• Regulators Target Exchanges As They Ready Record Fine (WSJ)
• Citi Takes Some Traders Off Bloomberg Chat Tool (WSJ)
• After Google, Amazon to be grilled on UK tax presence (Reuters)
• Apple CEO Cook to Propose Tax Reform for Offshore Cash (BBG)
• French, German politicians to pressure Google on tax (Reuters)
• Gold Bears Revived as Rout Resumes After Coin Rush (BBG)
• A stretched Samsung chases rival Apple's suppliers (Reuters)

• As scandals mount, White House springs into damage control (Reuters)
• Glencore Xstrata chairman ousted in surprise coup (Reuters), former BP CEO Tony Hayward appointed as interim chairman (WSJ)
• JPMorgan Chase asks Bloomberg for data records (Telegraph)
• Platts Retains Energy Trader Confidence Amid Price-Fix Probe (BBG)
• Syrian Internet service comes back online (PCWorld)
• Japan Q1 growth hits 3.5% on Abe impact although fall in business investment clouds optimism for recovery (FT)
• Soros Joins Gold-Stake Cuts Before Bear Market Drop (BBG)
• Factory Ceiling Collapses in Cambodia (WSJ)
• Sony’s $100 Billion Lost Decade Supports Loeb Breakup (BBG)
• Snags await favourite for Federal Reserve job (FT)
• James Bond’s Pinewood Turned Down on $300 Million Plan (BBG)

After the Libor rigging scandal in 2012, authorities have sharpened their act, deeply scrutinizing company financial records, and implementing stricter regulations. This has led to a new investigation which has led European authorities to raid the offices of Shell, BP, and Statoil, in what is suspected to be one of the largest international actions since Libor. The Commission has "concerns that the companies may have colluded in reporting distorted prices to a price reporting agency to manipulate the published prices for a number of oil and biofuel products."

• Hilsenrath: A Top Contender at the Fed Faces Test Over Easy Money (WSJ)
• Yen drops further as G7 avoids criticizing Japan (Reuters)
• Markets missed Flaherty’s clues on next Bank of Canada chief (G&M)
• Republicans turn screws over Tea Party tax probes (FT)
• Dual-track Libor replacement lined up (FT)
• Risks to China recovery seen as factory output underwhelms (Reuters)
• Barack Obama’s goal of universal healthcare could be set back significantly by Texas Governor Rick Perry (FT)
• Gold Bears Pull $20.8 Billion as BlackRock Says Buy (BBG)
• Mexico sets shelters as volcano shakes, spews ash (AP)
• Europe Eases Corporate Tax Dodge as Worker Burdens Rise (BBG)
• IPOs Set to Raise Most Cash Since Crisis (WSJ)
• Melting Ice Opens Fight Over Sea Routes for Arctic Debate (BBG)
• Top hedge funds bet on Greek banks (FT)
• Icahn Asks Investors to Make Big Bet on a Debt-Laden Dell (BBG)

When it is on the receiving end of coure.

Think frontrunning clients, trading against recommendations, manipulating LIBOR, and slamming gold at the London fixing is all investment bankers do? Wrong. What really happens in banker life is far more exciting and enjoyable (at least for preferred banker clients) as the following story by the WSJ's David Enrich shows. In reality, the activities that bankers seem to spend the most time on, is treating their "preferred clients" with free gambling trips to Las Vegas, skiing in Chamonix, flying wives and girlfriends in helicopters, doing blow in industrial amounts, and, of course, cavorting with strippers and hookers. All paid for by some unwitting clients of course. It is this environment of utter and perfectly permitted, if not encouraged, debauchery that allowed scandals such as the Libor fixing "conspiracy" (first theory, then fact of course), to flourish, and which makes being a banker still the most desired job in the world (contrary to beliefs that it was all about the passion of crunching goalseeked DCFs at 2 am in the morning).