There was a time when portfolio insurance guaranteed that events like Black Monday would never happen. Then Black Monday happened precisely due to portfolio insurance. Some years later, the credit-driven housing boom made modeling of declining home prices at rating agencies (and everywhere else) redundant. Then the (first) housing and credit bubble popped leading to the biggest housing market crash in US history. Fast forward to today, when ETFs were supposed to be the "greatest thing since sliced bread" and providing an ultra-low cost alternative to mutual fund and other market exposure "for the people", were supposed to revolutionize investing. Until days like yesterday. To wit from the FT: "The losses for ETFs today were far beyond what the most sophisticated financial risk models could have predicated for worst-case scenarios," said Bryce James, president of Smart Portfolio, which provides ETF asset allocation models.
First it was the conspiracy theory that Li(e)bor traders were manipulating the entire rates market which a year ago became conspiracy fact. Then it was commodities with an emphasis on the energy market (but not gold - gold is never, ever manipulated) with even such luminaries as JPMorgan's Blythe Masters, subsequently implicated. And moments ago, via Bloomberg, to absolutely nobody's surprise, we learn that that final market which so far had not been exposed as the "wild west" of manipulators, the FX market, is part of the conspiracy "fact" too. According to Bloomberg, "employees have been front-running client orders and rigging WM/Reuters rates by pushing through trades before and during the 60-second windows when the benchmarks are set, said the current and former traders, who requested anonymity because the practice is controversial. Dealers colluded with counterparts to boost chances of moving the rates, said two of the people, who worked in the industry for a total of more than 20 years."
Europe Opens $80 Trillion Shadow Banking Pandora's Box: Will Seek To Collapse Repo "Collateral Chains"Submitted by Tyler Durden on 05/24/2013 10:51 -0400
In what may be the most important story of the day, or maybe year, for a world in which there already is an $11 trillion shortfall in high-quality collateral (and declining every day courtesy of Ben's monetization of Treasury paper) so needed to support the deposit-free liability structures of the shadow banking system (as most recently explained here), Bloomberg has just reported that Europe may begin a crackdown on that most important credit money conduit: the $80 trillion+ global shadow banking system, by effectively collapsing collateral chains, and by making wanton asset rehypothecation a thing of the past, permitted only with express prior permission, which obviously will never come: who in their right mind would allow a bank to repledge an asset which may be lost as part of the counterparty carnage should said bank pull a Lehman. The result of this, should it be taken to completion, would be pervasive liquidations as countless collateral chain margin calls spread, counterparty risk soars all over again, and as the scramble to obtain the true underlying assets finally begins.
Why the Western Banking Cartel’s Gold and Silver Price Slam Will Backfire - And How You Can Protect Yourself from the BlowbackSubmitted by smartknowledgeu on 04/22/2013 05:27 -0400
Let's get down to the facts of the recent banker gold & silver paper price smash and the lies about the banker gold & silver paper price smash being propagated by the mass media and banking shills like Paul Krugman so everyone can understand why this smash will blow up in the face of the very bankers that executed it at some point down the road. Retail individuals AND global institutions all around the world are finally beginning to understand that physical ownership of gold and silver is how to counter banker fraud & intervention into the gold and silver markets and this realization is going to produce massive blowback.
We have discussed the divergence between US equities and credit markets a number of times in the last few months with the old adage that "credit anticipates, and equity confirms." Well, it appears the high-yield credit investors are 'anticipating' in size. State Street reports that yesterday saw the 2nd biggest withdrawal ever from their $11.6bn JNK ETF. Around $380mm (or over 3%) was redeemed - and we note the price did not exactly reflect that kind of unwind. The more worrying feature is that the last time HY credit investors were this 'sure' was May 2012 and it pre-empted a 9% drop in the S&P 500 and 5% drop in JNK price. The divergence remains extreme.
- U.S. Wants Criminal Charges for RBS (WSJ)
- Bernanke Seen Buying $1.14 Trillion in Assets in 2014 (BBG)
- Irish banks at mercy of international paymasters (Reuters)
- Do badly, and we will let you do even worse: Rehn Signals EU May Ease Spain Budget Goal in Austerity Retreat (BBG)
- Too Soon to Celebrate for Europe's Banks (WSJ)
- Army says political strife taking Egypt to brink (Reuters)
- Media Firms Probed on Data Release (WSJ) - No Criminal Charges Seen
- Japan’s Government Proposes First Spending Cut in 7 Years (BBG)
- Nazi Goebbels’ Step-Grandchildren Are Hidden Billionaires (BBG)
- Goldman seeks to reduce China exposure (FT)
- More than 70% of Chinese airports generate losses (People's Daily)
- CAT beats ex-Chinese fraud: $1.91, Exp. $1.70; Warns 2013 could be a "tough year"; sees 2013 EPS in $7.00-$9.00 range, Exp. $8.54, sees Q1 sales well below Q1, 2012
- Yi Warns on Currency Wars as Yuan Close to ‘Equilibrium’ (BBG)
- Monte Paschi seeks new investor as scandal deepens (Reuters)
- Assault Weapons Ban Lacks Democratic Votes to Pass Senate (BBG)
- Toyota Again World's Largest Auto Maker (WSJ)
- Curious why all those Geneva Libor manipulators moved to Singapore? Bank probes find manipulation in Singapore's offshore FX market (Reuters)
- Japan eased safety standards ahead of Boeing 787 rollout (Reuters) - so like Fukushima?
- Goldman is about to be un charge: Osborne cools on changing inflation target (Telegraph)
- Abe Predicts Bump in Revenue as Japan Emerges From Recession (BBG) - actually, "hopes" is the correct verb here
- Toxic Smog in Beijing Fueling Auto Sales for GM, VW (BBG)
- Fed waits for job market to perk up (Reuters) ... any minute now that S&P to BLS trickle down will hit, promise
- BofA shifts derivatives to UK (FT)
Over the course of the last two weeks, I attempted to explain to the general investing public how, thanks to the virtual impossibility of distinguising between 'legitimate' market making and 'illegitimate' prop trading, some of America's systemically important financial institutions are able to trade for their own accounts with the fungible cash so generously bestowed upon them by an unwitting multitude of depositors and an enabling Fed.
The US Fed is playing a very dangerous game by purchasing as many Treasuries as it is. But that game can last much longer than anticipated.
Perhaps one of the most startling and telling charts of the New Normal, one which few talk about, is the soaring difference between bank loans - traditionally the source of growth for banks, at least in their Old Normal business model which did not envision all of them becoming glorified, Too Big To Fail hedge funds, ala the Goldman Sachs "Bank Holding Company" model; and deposits - traditionally the source of capital banks use to fund said loans. Historically, and logically, the relationship between the two time series has been virtually one to one. However, ever since the advent of actively managed Central Planning by the Fed, as a result of which Ben Bernanke dumped nearly $2 trillion in excess deposits on banks to facilitate their risk taking even more, the traditional correlation between loans and deposits has broken down. It is time to once again start talking about this chart as for the first time ever the difference between deposits and loans has hit a record $2 trillion! But that's just the beginning - the rabbit hole goes so much deeper...
In March 2012, Okayama Metal & Machinery became the first Japanese pension fund to make public purchases of gold, in a sign of dwindling faith in paper currencies. Okayama manages pension funds for about 260 small and mid-sized companies in the Okayama area. "By diversifying currencies, we aim to reduce risks associated with them," said Yoshi Kiguchi, the fund's chief investment officer. "Yields become stable if you put small amounts into as many types of holdings as possible." Of its 40 billion yen ($477 million) in assets, the fund has invested around ¥500 million-¥600 million in gold, he said. Initially, the fund aims to keep about 1.5% of its total assets of Y40bn ($500m) in bullion-backed exchange traded funds, according to chief investment officer Yoshisuke Kiguchi, who said he was diversifying into gold to “escape sovereign risk”. Other pension funds in Japan are following their lead according to the Wall Street Journal. Japanese pension funds are diversifying into gold "largely to mitigate the damage from possible market shocks"... Mitsubishi UFJ Trust and Banking Corporation said it has secured more than Y2 billion in investments from two pension funds for a gold fund it started in March.
- Boehner comments show tough road ahead for "fiscal cliff" talks (Reuters)
- Argentina angry at hedge fund court win (FT)
- EU Spars Over Budget as Chiefs See Possible Deadlock (Bloomberg)
- Merkel doubts budget deal possible this week, more talks needed (Reuters)
- Greek deal hopes lift market mood (FT)
- Greek Rescue Deal Faltering Cut in Rescue-Loan Rate (Bloomberg)
- Japan's Abe Pushes Stimulus (WSJ) - Unpossible: a Keynesian in Japan demanding stimulus? Say it isn't so.
- Authorities Tried to Flip Trader in Insider Case (WSJ)
To summarize: European stocks are little changed although Spanish shares rise. Spain 10-yr bond yields fall to the lowest level in more than 6 months. S&P futures are now higher on the trading session, driven by correlation engines as the euro is up vs the dollar, despite major disappointments by IBM and Intel. In other news Germany formally shut down the debt redemption fund proposal, ending one more rescue avenue for when the recent baseless euphoria ends, even as Spanish La Vanguardia reports that Germany is pressuring Italy to request European aid alongside Spain so that the government of Prime Minister Mario Monti doesn’t reap the benefit of lower borrowing costs without being tied to tougher economic reforms. Needless to say, Italy is said to resist the proposal: after all in Europe one just wants the upside from being bailed out, as opposed to actually being bailed out...
- Hillary Clinton Accepts Blame for Benghazi (WSJ)
- In Reversal, Cash Leaks Out of China (WSJ)
- Spain Considers EU Credit Line (WSJ)
- China criticizes new EU sanctions on Iran, calls for talks (Reuters)
- Portugal sees third year of recession in 2013 budget (Reuters)
- Greek PM says confident Athens will secure aid tranche (Reuters)
- Fears over US mortgages dominance (FT)
- Fed officials offer divergent views on inflation risks (Reuters)
- China Credit Card Romney Assails Gives Way to Japan (Bloomberg)
- Fed's Williams: Fed Actions Will Improve Growth (WSJ)
- Rothschild Quits Bumi to Fight Bakries’ $1.2 Billion Offer (Bloomberg)
One place where the S&P level still does have a modest influence is the number of shorts in the market, which are strategically used by repo desks and custodians (State Street and BoNY), to force wholesale short squeezes at given inflection points, usually just when the bottom is about to drop out. The problem is that even short squeezes are increasingly becoming fewer and far between, for the simple reason that the Fed has managed to nearly anihilate shorters as a trading class with its policy of Dow 36,000 uber alles. This was demonstrated with the latest NYSE Group short interest data, which tumbled to 13.6 billion shares short as of the end of September, or the lowest since early May, just as the market was swooning to its lowest level of 2012 to date.