After weeks of emptying of their Gold vaults and making headlines in recent days over their oligolopolization of commodity warehousing, it seems the threat of a probe has excited Blythe and her colleagues to dump while the dumping is good:
- JP. MORGAN TO EXPLORE STRATEGIC ALTERNATIVES FOR ITS PHYSICAL COMMODITIES BUSINESS
Options include sale, spin-off, or strategic partnership as they re-confirm that they are "fully committed to traditional banking activities," as they look to drop the holdings of commodities assets and the physical trading business. We can only assume that "physical commodities" include the company's extensive inventories of tungsten (as well as the vault housing it), and not so extensive stores of gold and silver. That said, we are confident that the collapse in represented (but not warranted) JPM Comex gold vault holdings to a record low, and this news is completely unrelated.
As we warned here most recently, the shadow-banking system remains the most crisis-catalyzing part of the markets currently as collateral shortages (and capital inadequacy) continue to grow as concerns. In recent weeks, between The Fed, Basel III, and the FDIC, regulators have signalled the possible intent to change risk, netting, and capital rules that could have dramatic implications on the repo markets and now, it seems, the SEC has begun to recognize just how big a concern that could be. As Reuters reports, the SEC urged funds and advisers last week to review master repurchase agreement documentation to see if there are any procedures to handle defaults, and if necessary, prepare draft templates in advance. A retrenchment in repo markets is unwelcome news for the liquidity of the underlying securities and the impact on the derivative portfolios should not be underestimated.
Following Barclays' fine of $453 million by FERC for manipulating electric energy prices in California (and other other Western markets), it seems the price of infamy is weighing heavy on Blythe Masters' overlords at JPMorgan in yet another derivative debacle for the "I invented CDS" queen. As we discussed in great detail here, FERC's investigations into JPMorgan's actions saw them pursuing actions against the firm and Ms. Masters. In recent weeks settlement rumors have been heard and now as the NYTimes reports, it appears - in light of last year's PR and P&L 'London Whale' disaster - the best-CEO-in-the-entire-world-so-there is preparing to settle to the tune of $500 million to keep Blythe out of jail. To settle Ms. Masters' alleged “manipulative schemes” that transformed “money-losing power plants into powerful profit centers,” and then her giving “false and misleading statements” under oath, must mean she has some serious dirt on Jamie (and his fortress balance sheet and best-in-class risk management).
An unprincipled, deceitful, unreliable scoundrel. A vicious and solitary animal. An organism that shows a variation from the standard. What are we talking about? Rogue Traders! Does the cap fit?
Three years ago we discussed the details of Didier Sornette's approach to identifying bubble-like characteristics of price evolutions. In this brief TED talk, the bubble-whisperer combines behavioral finance with risk management with his super-exponential model view of the world that "we have been operating under a few detrimental illusions that have landed us in our current economic state." He warns that there are many early warning signs of what he calls 'Dragon Kings' - in direct contrast with 'black swans,' are at the core characterized by a slow maturation of instability, which move toward a bubble, until the bubble reaches a climax and bursts.
Back in 2002 Warren Buffet famously proclaimed that derivatives were ‘financial weapons of mass destruction’ (FWMDs). Time has proven this view to be correct. As The Amphora Report's John Butler notes, it is difficult to imagine that the US housing and general global credit bubble of 2004-07 could have formed without the widespread use of collateralized debt obligations (CDOs) and various other products of early 21st century financial engineering. But to paraphrase those who oppose gun control, "FWMDs don’t cause crises, people do." But then who, exactly, does? And why? And can so-called 'liquidity regulation' prevent the next crisis? To answer these questions, John takes a closer look at proposed liquidity regulation as a response to the growing use of 'collateral transformation' (a topic often discussed here): the latest, greatest FWMD in the arsenal.
What do NYU Stern School of Business, world renknown professors of risk and analytics, and BoomBustBlog have in common? Wild horses couldn't drag a penny of our money through the French banking system!
As more and more "baby boomers" head into retirement the need for high quality, independent, registered investment advisors will continue to grow. The need for firms that do organic research, analysis and make investment decisions free from "conflict," and in the client's best interest, will continue to be in high demand in the years to come as more "boomers" leave the workforce. While the "Wall Street" game is not likely to change anytime soon; the trust of Wall Street is fading and fading fast. The rise of algorithmic, program and high frequency trading, scandals, insider trading and "crony capitalism" with Washington is causing "retail investors" to turn away to seek other alternatives.
Over the past few months we have explained in detail just how 'frothy' the credit market has become. Probably the most egregious example of this exuberance is the resurgence in covenant-lite loans to record levels. It seems lenders are so desperate to get some yield that they are willing to give up any and all protections just to be 'allowed' to invest in the riskiest of risky credits. With credit having enjoyed an almost uninterrupted one-way compression since the crisis, momentum and flow has taken over any sense of risk management - but perhaps, just perhaps, Sallie-Mae's corporate restructuring this week will remind investors that high-yield credit has a high-yield for a reason. The lender's decision to create a 'good-student-lender / bad-student-lender' and saddle the $17.9bn bondholders with the unit to be wound-down, while as Bloomberg notes, the earnings, cash flow, and equity of the newly formed SLM Bank will be moved out of bondholders’ reach. Bonds have dropped 10-15% on this news - considerably more than any reach-for-yield advantage would benefit and we wonder if these kind of restructurings will slow the inexorable rise in protection-free credit.
While stocks could continue to climb higher that does not mitigate the underlying risks. In fact, it is quite the opposite. It is very likely that we are creating one, or more, asset bubbles once again. However, what is missing currently is the catalyst to spark the next major correction. That catalyst is likely something that we are not even aware of at the moment. It could be a resurgence of the Eurocrisis, a banking crisis or Japan's grand experiment backfiring. It could also be the upcoming debt ceiling debate, more government spending cuts, or higher tax rates. It could even be just the onset of an economic business cycle recession from the continued drags out of Europe and now the emerging market countries. Regardless, at some point, and it is only a function of time, reality and fantasy will collide. The reversion of the current extremes will happen devastatingly fast. When this occurs the media will question how such a thing could of happened? Questions will be asked why no one saw it coming.
In a world of shrinking 'quality' collateral to back the ever-increasing leverage and reach-for-yield practicalities of a centrally-repressed market, it seems the actions of the BoJ (as we warned over a month ago) may have just removed the last best hope for keeping Japanese rates stable. As the chart below shows, JGB volatility is simply off-the-scale relative to the other major bond markets. Sustainable? How much return (yield) would you demand for such risk (volatility) before just jettisoning the position?
Peak collateral is just a notion - one we have discussed in detail many times (most recently here). The notion that at the time we want yield and growth we are running out of collateral which is supposed to underpin the high yielding assets and loans. Such a shortage would cause the ponzi-like growth that is necessary to sustain a bubble, to stall and then implode. We think our lords and rulers know this and have decided that it must not be allowed. And this – the need for collateral – is the reason for the endless QE. If this is even close to the mark, then recent murmurings about the Fed tailing off its bond buying will prove to be hollow. The Fed will quickly find it cannot exit QE without precipitating precisely the disorderly collapse, to which it was supposed to be the solution.
Just when you thought the R&R debate was finished, it seems Paul Krugman's latest "spectacularly uncivil behavior" pushed Reinhart and Rogoff too far. In what can only be described as the most eruditely worded of "fuck you"s, the pair go on the offensive at Krugman's ongoing tete-a-tete. "You have attacked us in very personal terms, virtually non-stop... Your characterization of our work and of our policy impact is selective and shallow. It is deeply misleading about where we stand on the issues. And we would respectfully submit, your logic and evidence on the policy substance is not nearly as compelling as you imply... That you disagree with our interpretation of the results is your prerogative. Your thoroughly ignoring the subsequent literature... is troubling. Perhaps, acknowledging the updated literature on drawbacks to high debt-would inconveniently undermine your attempt to make us a scapegoat for austerity."
Up until today, the narrative was one trying to explain how a soaring dollar was bullish for stocks. Until moments ago, when Bill Dudley spoke and managed to send not only the dollar lower, but the Dow Jones to a new high of 15,400 with the following soundbites.
- DUDLEY: FED MAY NEED TO RETHINK BALANCE SHEET PATH, COMPOSITION
- DUDLEY SAYS FISCAL DRAG TO U.S. ECONOMY IS `SIGNIFICANT'
- DUDLEY: FED MAY AVOID SELLING MBS IN EARLY STAGE OF EXIT
- DUDLEY: IMPORTANT TO SEE HOW WELL ECONOMY WEATHERS FISCAL DRAG
- DUDLEY SAYS HE CAN'T BE SURE IF NEXT QE MOVE WILL BE UP OR DOWN
And the punchline:
- DUDLEY SEES RISK INVESTORS COULD OVER-REACT TO 'NORMALIZATION'
Translated: the Fed will never do anything that could send stocks lower - like end QE - ever again, but for those confused here is a simpler translation: Moar.