Plain vanilla bank runs are as old as fractional reserve banking itself, and usually happen just before or during an economic and financial collapse, when all trust (i.e. credit) in counterparties disappears and it is every man, woman and child, and what meager savings they may have, for themselves. However, when it comes to shadow bank runs, which take place when institutions are so mismatched in interest, credit and/or maturity exposure that something just snaps as it did in the hours after the Lehman collapse, that due to the sheer size of their funding exposure that they promptly grind the system to a halt even before conventional banks can open their doors to the general public, the conventional wisdom is that this is a novel development (and one which is largely misunderstood). It isn't.
It would seem, in the case of momo-chasing levered fast-money flows, that Propertius was correct - "fickleness has always befriended the beautiful..." and Japanese stocks are no longer the once beautiful trend that Abe had promised them to be. A tapering of the US flow; a ripple across the bow of emerging markets; and suddenly Kyle Bass' sarcastically-named "macro tourists" are running for exits as Shakespeare himself once wrote, "was ever feather so lightly blown to and fro as this multitude." Historical quotations aside, the last time flow swung so violently negative, the Nikkei ended up losing 55% in the next 18 months. We love the smell of nay-sayers in the morning...
Investors in China have been running scared of a default on a high risk trust product; but, as Bloomberg's Tom Orlik notes, they should embrace it. The implicit guarantee that no investments will go sour is one of the key problems with China’s financial system as Orlik adds it encourages reckless lending often to borrowers whose only merit lies in backing from a deep-pocketed government. Crucially, as JPMorgan warns in a recent note, "avoiding defaults is not the right answer, as it will only delay or even amplify the problem in the future." A default that encourages lenders to price in risk would be a positive development and the CEG#1 was an ideal product to 'fail' with its 11% yield and clear idiosyncratic company problems. However, regulators won't have to wait long for a second chance as JPM warns "There will be a default in China’s shadow banking industry this year as economic growth momentum slows."
Backdrops conductive to crises can drag on for so long – sometimes seemingly forever - as if they’re moving in ultra-slow motion. Invariably, they lull most to sleep. Better yet, such environments even work to embolden the optimists. This is especially the case when policy measures are aggressively employed along the way, repeatedly holding the forces of crisis at bay. In the face of mounting risk, heightened risk-taking and leveraging often work only to exacerbate underlying fragilities. But eventually a critical juncture arrives where newfound momentum has things unwinding at a more frenetic pace. It is the nature of such things that most everyone gets caught totally unprepared. Now, Bubbles are faltering right and left - and fearful “money” is heading for the (closing?) exits. And, as the global pool of speculative finance reverses course, the scale of economic maladjustment and financial system impairment begins to come into clearer focus. It’s time for the marketplace to remove the beer goggles.
The US wants its dollar system to prevail for as long as possible. It therefore has every interest in preventing a ‘rush out of dollars into gold’. By selling (paper) gold, bankers have been trying in the last few decades to keep the price of gold under control. This war on gold has been going on for almost one hundred years, but it gained traction in the 1960's with the forming of the London Gold Pool. Just like the London Gold Pool failed in 1969, the current manipulation scheme of gold (and silver prices) cannot be maintained for much longer.
As we first reported one week ago, the first shadow default in Chinese history, the "Credit Equals Gold #1 Collective Trust Product" issued by China Credit Trust Co. Ltd. (CCT) due to mature Jan 31st with $492 million outstanding, appears ready to go down in the record books. In turn, virtually every sellside desk has issued notes and papers advising what this event would mean ("don't panic, here's a towel", and "all shall be well"), and is holding conference calls with clients to put their mind at ease in the increasingly likely scenario that there is indeed a historic "first" default for a country in which such events have previously been prohibited. So with under 10 days to go, for anyone who is still confused about the role of trusts in China's financial system, a default's significance, the underlying causes, the implications for the broad economy, and what the possible outcomes of the CCT product default are, here is Goldman's Q&A on a potential Chinese trust default.
S&P filed a declaration of McGraw yesterday in federal court in Santa Ana, California, as part of a request to force the U.S. to hand over potential evidence the company says will support its claim that the government filed a fraud lawsuit against it last year in retaliation for its downgrade of the U.S. debt two years earlier. In his court statement, McGraw said Geithner called him on Aug. 8, 2011, after S&P was the only credit ratings company to downgrade the U.S. debt. Geithner, McGraw said, told him that S&P would be held accountable for the downgrade. Government officials have said the downgrade was based on an error by S&P. “S&P’s conduct would be looked at very carefully,” Geithner told McGraw according to the filing. “Such behavior would not occur, he said, without a response from the government."
Frontier markets offer some of the best investment opportunities over the next decade. We like Vietnam which is recovering after a massive credit bust.
The markets seem to think we live in a largely riskless world. Are risk assets now riskless assets or are they risk assets disguised as riskless?
As the S&P 500 continues to make higher highs, Citi's FX Technicals group attempts to identify important levels to watch. As they have highlighted before, while they respect the price action and the fact that the markets are making higher highs, there is an underlying degree of skepticism surrounding the sustainability of this uptrend from a more medium term perspective. Important levels/targets on the S&P 500 converge between 1,806 and 1,833. A convincing rally through this range (weekly close above) may open the way for a test of the 1,990 area (coincidentally the Fed balance-sheet-implied levels for end-2014); however, at this stage they are watching closely over the coming weeks as we approach the New Year.
The correlation between stock prices and margin debt continues to rise (to new records of exuberant "Fed's got our backs" hope) as NYSE member margin balances surge to new record highs. Relative to the NYSE Composite, this is the most "leveraged' investors have been since the absolute peak in Feb 2000. What is more worrisome, or perhaps not, is the ongoing collapse in investor net worth - defined as total free credit in margin accounts less total margin debt - which has hit what appears to be all-time lows (i.e. there's less left than ever before) which as we noted previously raised a "red flag" with Deutsche Bank. Relative to the 'economy' margin debt has only been higher at the very peak in 2000 and 2007 and was never sustained at this level for more than 2 months. Sounds like a perfect time to BTFATH...
- Desperate Philippine typhoon survivors loot, dig up water pipes (Reuters)
- Fading Japanese market momentum frustrates investors (FT)
- China's meager aid to the Philippines could dent its image (Reuters)
- Headline du jour: Granted 'decisive' role, Chinese markets decide to slide (Reuters)
- Central Banks Risk Asset Bubbles in Battle With Deflation Danger (BBG)
- Navy Ship Plan Faces Pentagon Budget Cutters (WSJ)
- Investors pitch to take over much of Fannie and Freddie (FT)
- To expand Khamenei’s grip on the economy, Iran stretched its laws (Reuters)
- Short sellers bet that gunmaker shares are no long shot (FT)
- Deflation threat in Europe may prompt investment rethink (Reuters)
Meet The Man Responsible For Regulating $234 Trillion In Derivatives: The CFTC's New Head Timothy MassadSubmitted by Tyler Durden on 11/12/2013 11:38 -0400
It's official - goodbye Gary Gensler, we hardly knew you... as a commodities regulator that is, although Bart Chilton (who is finally also stepping down due to being too burdened by lack of funding to actually do anything) was kind enough to provide much needed perspective on how the CFTC truly works. In place of the former Goldmanite, today Obama will announce that going forward America's top derivative regulator and CFTC head will be Timothy Massad, the Treasury Department official responsible for overseeing the U.S. rescue of banks and automakers after the credit crisis.
"It will end badly," Marc Faber explains in this brief CNBC clip, "the question is whether we will have a minor economic crisis and then huge money printing or get into an inflationary spiral first." If you thought that "we had a credit crisis in 2008 because we had too much credit in the economy," then Faber notes "there is that much more credit as a percent of the economy now." Of course, as Bill Fleckenstein recently noted, as long as stocks are rising, investors remain blinded by the exuberance, but as Faber concludes, "we are in a worse position than we were back then," and inflation is already here...
- Christie Sets Himself Up for Run in 2016 (WSJ)
- De Blasio Elected Next New York City Mayor in Landslide (WSJ)
- Hilsenrath: Fed Study: Rate Peg Off Mark (WSJ)
- MF Global Customers Will Recover All They Lost (NYT) - amazing what happens when you look under the rug
- Virginia, Alabama Voter Choices Show Tea Party Declining (BBG)
- Explosions kill 1, injure 8 in north China city (Reuters)
- Toyota boosts full-year guidance as weak yen drives revenues (FT)
- Starbucks wants to recruit 10,000 vets, spouses to its ranks (Reuters)
- U.S. Economy Slack Justifies Stimulus, Top Fed Staff Papers Show (BBG)
- Israel set to become major gas exporter (FT)