There are real-world consequences to over-issuing credit and currency. Eventually this leads to a bidding war for trust: Whose credit/cash will be trusted to retain its purchasing power? There is a grand irony here, of course; as issuers of credit/cash attempt to debase their currency to boost their exports, their debased currency buys fewer real-world resources.
It is well-known that as part of the S&P500's ascent to new records, investor margin debt has also surged to all time highs, surpassing for the past three months previous records set during both prior, the dot com and the housing, stock market bubbles. And as more attention has shifted to the topic of speculator leverage once more, inquiries into the correlation between bets upon bets and stock performance are popping up once more, in this case in a study by Deutsche Bank titled "Red Flag! - The curious case of NYSE margin debt." Of particular note here is a historical comparison of margin-debt warnings that have recurred throughout history but especially just before major stock bubble crashes, such as in the period 1999/2000, 2007/2008 and of course today, which have time and again been ignored. Here is what was said then, what is being said now, and what is ignored always.
President Obama said yesterday that he wouldn't support restoring FNMA and Freddie Mac to the status they enjoyed before the credit crisis, which let Fannie and Freddie make profits during good times, "knowing that if their bets went bad, taxpayers would be left holding the bag." The implications loom large not just for property owners but for investors if there will not be any "implicitly guaranteed" Agencies. For home owners it is likely to mean that their cost of mortgage products will rise and perhaps significantly if this task is left totally to the private sector. We suspect that in times of trouble then no one will lend and the volatility in the housing sector will increase dramatically.
The rapid pace of China credit expansion since the Global Financial Crisis, increasingly sourced from the inherently more risky and less transparent "shadow banking" sector, has become a critical concern for the global markets. From the end of 2008 until the end of 2013, Chinese banking sector assets will have increased about $14 trillion. As Fitch notes, that's the size of the entire US commercial banking sector. So in a span of five years China will have replicated the whole US banking system. What we're seeing in China is one of the largest monetary stimuli on record. People are focused on QE in the US, but given the scale of credit growth in China Fitch believes that any cutback could be just as significant as US tapering, if not more. Goldman adds that China stands to lose up to a stunning RMB 18.6trn/$US 3trn. should this bubble pop. That seems like a big enough number to warrant digging deeper...
Information overload and cognitive dissonance often hide the facts from right under one's nose. Sometimes, as in the case of the following image, a picture paints a thousand words; and in this case, any doubt about where the world's 'most-bust-prone' nations are in the post-crisis new normal should be instantly (and visually) dismissed (as we noted here, here, and here).
Wall Street bankers, Washington politicians, economists and the media trumpet a substantial rebound in the U.S. economy, in the second half of 2013 and beyond, as a result of the Federal Reserve’s continued and open ended use of $85 billion dollars a month in quantitative easing. Learn why this is wishful thinking. Rather than do want is necessary to solve the ongoing 2008 credit crisis, those in power stoop to public relations tricks and propaganda.
Many high profile investors, economists and companies got burned during China's recent woes. We look at the errors they made and what you can learn from them.
Greed; corporate arrogance; lobbying influence; excessive leverage; accounting tricks to hide debt; lack of transparency; off balance sheet obligations; mark to market accounting; short-term focus on profit to drive compensation; failure of corporate governance; as well as auditors, analysts, rating agencies and regulators who were either lax, ignorant or complicit. This laundry list of causes has often been used to describe what went wrong in the credit crunch crisis of 2008-2010. Actually these terms were equally used to describe what went wrong with Enron more than twenty years ago. Both crises resulted in what at the time was the biggest bankruptcy in U.S. history — Enron in December 2001 and Lehman Brothers in September 2008. Naturally, this leads to the question that despite all the righteous indignation in the wake of Enron's failure did we really learn or change anything?
The heart of any con is winning the trust of the mark, and the heart of counterfeiting is persuading the mark that a facsimile of value is real. What happens when trust in the counterfeiters is lost? What happens when the assets presented as zero-risk lose value? What happens when "the Fed has our back" doesn't stop the stock market from careening off the cliff of a global credit crisis, which is another term for a crisis of faith that the system is as stable and resilient as it is presented? Trust is a fragile creature. It is a most ephemeral yet powerful force. Once lost, it can never be fully regained; it can only be earned back, one step at a time. We are fast approaching the moment when the value of the counterfeit trust, the counterfeit assets and the counterfeit promises are revealed as fakes.
- More Doctors Steer Clear of Medicare (WSJ)
- Syrian Looters in Bulldozers Seek Treasure Amid Chaos (BBG)
- Siemens CEO Peter Löscher Is Set to Leave His Post After Series of Earnings Misses (WSJ)
- Silver Vault for 200 Tons Starts in Singapore as Wealthy Buy (BBG)
- Omincom and Publicis merger shows that advertising is now firmly in the business of Big Data: collecting and selling the personal information of millions of consumers (NYT)
- Apple supplier accused of labour violations (FT)
- 'BarCap was the Wild Wild West – that’s what we called it’ (Telegraph)
- P&G chief seizes opportunity in era of three-day stubble (FT)
- Federal Reserve 'Doves' Beat 'Hawks' in Economic Prognosticating (WSJ) - LOL: Fed "hawks"
Lately, the parasitic, price manipulative "Office Space"-inspired HFT practice known as "spoofing" has been consistently in the news: a week ago, it was the third largest futures broker, Newedge, who made headlines following a "record" FINRA handslap. Then yesterday, a Red Bank, NJ-based HFT shop called Panther Energy Trading, and its sole owner Michael Coscia were fined $4.5 million and got a 1 year ban from the industry for engaging in the same activity. "Panther, based in Red Bank, New Jersey, and Coscia used a computer algorithm that placed and quickly canceled bids and offers in futures contracts for commodities including oil, metals, interest rates and foreign currencies. Panther and Coscia engaged in spoofing from August 8, 2011, to October 18, 2011, related to 18 futures contracts. The firm accumulated $1.4 million in profits by using the algorithm." While none of this is fundamentally new to any of our readers, we are happy to report that in conjunction with Nanex, we can now present documentary evidence of the Panther algo in action.
As part of the Appendixed disclosures in the aftermath of JPM's London Whale fiasco, we learned the source of funding that Bruno Iksil and company at the firm's Chief Investment Office used to rig and corner the IG and HY market, making billions in profits in what, on paper, were supposed to be safe, hedging investments until it all went to hell and resulted in the most humiliating episode of Jamie Dimon's career and huge losses: it was excess customer customer deposits arising from a $400+ billion gap between loans and deposits. After JPM's fiasco went public, the firm hunkered down and promptly unwound (or is still in the process of doing so) its existing CIO positions at a huge loss. However, that meant that suddenly the firm found itself with nearly $400 billion billion in inert, nonmargined cash: something that was unacceptable to the CEO and the firm's shareholders. In other words, it was time to get to work, Mr. Dimon, and put that cash to good, or bad as the case almost always is, use. So what has JPM allocated all those billions in excess deposits over loans? Courtesy of Fortune magazine we now know the answer - CLOs.
The internet is on the verge of transforming manufacturing and China's dominance in this industry will soon be under serious threat.
Dive! Take cover! Or, at least, hold on to your pants in the scramble. The Chinese bubble has just burst. It looks like the world is going to have egg on its face and elsewhere as Chinese banks are scrambling to get the hands on cash.
Following on from our annual update on the wealth (re)distribution of nations, we thought it important to look at the other side of the household balance sheet - that of 'debt' to see just how much 'progress' has been made in the world. In the aftermath of the credit crisis (and the ongoing crisis in Europe), government debt levels continue to rise but combining trends in household debt highlights countries that have sustainable (and unsustainable) overall debt levels - and thus the greatest sovereign debt problems. Whether the 'number' is from Reinhart & Rogoff or not, the reality is that moar debt is not better and the nations with the highest debt-per-capita may surprise many. Critically, despite the rise in 'wealth' from 2000-2008, the ratio of debt-to-net-worth rose on average by about 50% (and in many nations continues to rise). The bottom line - in almost all countries, government liabilities exceeded government financial assets in 2011, leaving the government a net debtor.