Wednesday, December 16, 2015

DEJA VU ALL OVER AGAIN  (Rate Hike?)  Pull Back the Curtain on Exchange Traded Funds and Out Pop Wall Street Mega Banks

Speak an undeniable truth to power.
- Václav Havel

[HINT:  Chris Hedges' "Constructing" is on LINK TV right now.  Do yourself a favor and see it in order to learn about some current methods for constructing a new and decent democratic society in the USA! USA! USA!.]

(If you have trouble reading lots of figures, don't despair; just get a tall drink and dive in - it's easier than you think (and way more enlightening).)


Posted on 13th December 2015
Janet Yellen will increase interest rates for the first time in nine years on Wednesday. She isn’t raising them because the economy is strengthening. The economy just happens to be weakening rapidly, as global recession takes hold.

The stock market is 3% lower than it was in December 2014, and has basically done nothing since the end of QE3. Wall Street is throwing a hissy fit to try and stop Janet from boosting rates by an inconsequential .25%. Janet would prefer not to raise rates, but the credibility and reputation of her bubble blowing machine is at stake. The Fed has enriched their Wall Street benefactors over the last six years, while destroying the real economy and the middle class.
The quarter-point increase will be reversed in short order as soon as we experience Market Collapse Part Two. It will be followed with negative interest rates and QE4, as these academics have only one play in their playbook – print money. They created the last financial crisis and have set the stage for the next – even bigger collapse. John Hussman explains how their zero interest rate policy has driven speculators into junk bonds as the only place to get any yield.

Over the past several years, yield-seeking investors, starved for any “pickup” in yield over Treasury securities, have piled into the junk debt and leveraged loan markets.

Just as equity valuations have been driven to the second most extreme point in history (and the single most extreme point in history for the median stock, where valuations are well-beyond 2000 levels), risk premiums on speculative debt were compressed to razor-thin levels. By 2014, the spread between junk bond yields and Treasury yields had fallen to less than 2.4%. Since then, years of expected “risk-premiums” have been erased by capital losses, and defaults haven’t even spiked yet (they do so with a lag).

Years of excessive risk taking, spurred by the reckless Fed policy convinced Wall Street to issue billions in junk bonds, just as ridiculously low rates from 2001 through 2005 spurred billions of subprime mortgage issuance. Wall Street has no care about clients, investors, or the impact on the economy. They care about fee generation and dumping their toxic sludge on someone else. The junk bond market is imploding and any muppet who has been lured in during the last two years is getting slaughtered.

The entire shale scam was funded with easy money and junk bonds. The dozens of companies who issued billions in junk bonds weren’t profitable at $80 oil. They are plunging towards bankruptcy at $36 oil.

The amount of mal-investment created by the Federal Reserve over the last six years is almost incomprehensible. The tremors in the junk bond market portend another Lehman moment in the near future.
From an economic standpoint, the unfortunate fact is that the proceeds from aggressive issuance of junk debt and leveraged loans in the past few years were channeled into speculation. Excess capacity in energy production was expanded at the cyclical peak in oil prices, and heavy stock buybacks were executed at obscene equity valuations. The end result will be unintended wealth transfers and deadweight losses for the economy. Since the late-1990’s, the Federal Reserve has actively encouraged the channeling of trillions of dollars of savings into speculation. Recurring cycles of malinvestment and crisis have progressively weakened the resilience and long-term growth prospects of the U.S. economy.

The coming collapse will be three pronged as stocks, bonds, and real estate are all simultaneously overvalued. Junk bonds are the canary in a coalmine. High end real estate in NYC has topped out. New and existing homes sales growth has stalled out. Retailers desperately slash prices to maintain sales, while destroying their profits. Corporate profits are falling. The stock market is teetering on the edge. If you can afford to lose 50% of your retirement savings, now is the time to buy some Facebook, Netflix, Google, or Amazon on margin.
Given the valuation extremes we presently observe in the equity market (see Rarefied Air: Valuations and Subsequent Market Returns), our view is that spiking yields in the junk debt market are a precursor of significant losses in stocks, as we’ve observed in other market cycles across history.

At current valuations, the notion that “There Is No Alternative” (TINA) to zero-interest cash is profoundly incorrect. The only thing that equities offer here is to promise wider extremes of panic, despair, excitement, and hope over the coming 10-12 years, on the way to overall returns no better than safe, liquid cash equivalents are likely to achieve.

Over the last two decades the Fed’s interventionism has created artificial booms and real busts. Their dreadful mistakes are “fixed” by currency debasement, lower interest rates, and money printing – creating even worse mistakes. They have successfully gutted the American economy and left a hollowed out shell.
Moreover, as we should have learned from the global financial crisis, when the Fed holds interest rates down for so long that investors begin reaching for yield by speculating in the financial markets and making low-quality loans, the entire financial system becomes dangerously prone to future crises. If the Fed’s mandate is really to support long-run employment and price stability, the first priority of Congress should be to rein in this cycle of activist Fed intervention; to end the Fed’s ability to promote yield-seeking speculation and malinvestment that only produces inevitable crises and weakens long-run U.S. economic prospects.

Bernanke is no hero. He did not save us. He saved his cronies on Wall Street and their captured politician lackeys in Washington DC. The unholy alliance between central bankers, corporate America, and corrupt politicians resulted in Glass Steagall being repealed and allowing Wall Street to run roughshod over our economic system, reaping riches during the good times and heaping the inevitable losses onto the backs of taxpayers. That’s the new American Dream.
Some would argue that the Federal Reserve “saved” us from the global financial crisis. I couldn’t disagree more. My view is that the financial crisis was caused because the Fed overly depressed interest rates in the early 2000’s, encouraging investors to reach for yield in mortgage securities.

In response, poorly regulated financial institutions, with banks free from the constraints of Glass Steagall, and other institutions having inadequate capital requirements, created a huge mountain of new, low-grade mortgages in the frenzy to create more “product.” The easy lending created a housing bubble, but someone had to hold the mortgages when they went belly-up, and those holders were banks, insurance companies, hedge funds, and individuals. As the mortgages went into foreclosure, banks had to mark the value of those mortgages to market value on their books, to the point where the value of their assets was less than the value of their liabilities:  insolvency.

The liquidation of insolvent criminal Wall Street banks would have set the country back on the path to legitimate recovery. Instead, the ruling class chose accounting fraud, QE to infinity, and screwing senior citizens with 0% interest rates.

In hindsight, the financial crisis actually ended – precisely – in March 2009. How? The Financial Accounting Standards Board changed rule FAS 157 and overturned the mark-to-market requirement, instead allowing financial institutions “significant judgment” in the way they valued their assets: often called mark-to-model (or as some of us call it, mark-to-unicorn).

John Hussman warned those who chose to listen in 2000 and 2007 about the impending collapses. He has been warning those who choose to listen for months again. This market has gone nowhere in the last 13 months. It’s about to go somewhere, and that is DOWN. Remember 2000 and 2007. Enjoy the trip – deja vu all over again.

In the absence of clear improvement in market internals – and last week was categorically opposite to that – I view the stock market as being in the late-phase of an extremely overvalued top formation that will likely be followed by profound losses over the completion of this market cycle, and the U.S. economy as being on the cusp of a new recession.


robert h siddell jr says:

Since 1988, every time the FED raises the Fed Fund Rate there has been a recession in about 6 months that required the FED to lower the rate to below where it was before they raised rates and caused the recession. The chart looks like a down staircase since 1988. Raise rates in Dec2015 and by (or before) June 2016 the FED will have to plunge the rate lower than it is now (ie, this time they’d have to give borrowers a cash bonus to borrow some money) or who knows how low the economy would go after about June 2016.

Maggie says:

I think that so many people have seen these warnings and held their breaths (figuratively) for the crash only to have the Power Brokesters pull another trick out of their hat and put it off just a bit longer. We know the crash truly is coming and we aren’t exactly HOPING for it, but we know that every trick that puts it off makes the final crash that much harder and intense.
We had unexpected guests last night, cousins out for a ride in the hills stopping by to “have a cold one.” They were welcome and the talk and chatter was mostly fun, until it wasn’t.
Their grandson is the same age as my son. He will graduate this May from the Colorado School of Mines, where he has been paying out of state tuition for four years to become a Petroleum Engineer. My son lost a semester by getting an associates in Jr. College in programming, allowing me the time to establish residency here to avoid out of state tuition. There is no competition between the boys… they only met twice in their lives and the second time was this past summer. However, my cousins are very much aware that the “boys” are the same age and both pursuing technical degrees.
This comment in the article above has burst his and dozens of his Colorado soon to be grads bubbles. “The entire shale scam was funded with easy money and junk bonds. The dozens of companies who issued billions in junk bonds weren’t profitable at $80 oil.” Apparently, out of 22 of his peers in the Petro Engineering field graduating in May, only 5 have gotten offers from their interviews with companies. Apparently the companies that the college was telling them all were jumping to pay their new Petro Engineers $100K out of the starting gate haven’t gotten there yet.
Well, I told his grandparents to not worry because the oil industry is volatile and has been since the 70s. But, I never understood how they didn’t understand the concept of Peak Oil. I thought everyone had watched Chris Martenson’s Crash Course and realized that shale oil was just a drop in the bucket that wouldn’t last long. It turns out that I was wrong and now that all these young people have gone into six figures of debt to walk into their six figure paying jobs and discovered that they may be working two or three part-time jobs just to make their student loan payments, they are really upset.
Again, I feel like the little red hen, but I am so happy that if my son graduates and can’t get a job in “engineering,” at least there won’t be a loan payment.
What a mess we face. I just wish the Power Brokesters would stop making it worse.

Jfish says:

The controlled demolition begins. When the bond market blows, lights out. Note to self: pick up some more canned goods B 4 Tuesday

Phaedrus says:

Second verse.
The End Of The Bubble Finance Era Zero Hedge 12/13/2015

14th December 2015 at 8:48 am

Administrator says:
Another High Yield Domino Falls As $900 Million Lucidus Capital Liquidates

Submitted by Tyler Durden on 12/14/2015 07:34 -0500
Last week, the world began to wake up to the fact that all of the “Chicken Littles” screaming that the sky is falling in high yield were right.
There was Third Avenue which announced it would gate investors in a $788 million mutual fund on the way to liquidating over the next several months (as though liquidity is set to return any day now in HY) and then in short order, the “venerable” Stone Lion Capital (founded by none other than Alan Jay Mintz and Gregory Augustine Hanley, both veterans of Bear Stearns distressed debt and HY trading desk) suspended redemptions after receiving “substantial requests.”
Yes, “substantial requests” or, in more colloquial terms, “rats from a sinking HY ship” and as we noted just moments after we confirmed the Third Avenue gate news, “investors in all other junk bond-focused hedge funds, dreading that they too will be gated, will rush to pull what funds they can and submit redemption requests, in the process potentially unleashing a liquidity – and liquidation – scramble within the hedge fund community, which will first impact bonds and then, if the liquidity demands continue, equities as well.”
It’s probably more appropriate to call that a foregone conclusion than “prescient.” That is, if one depositor loses access to his demand deposits and tells a friend about it, it won’t be long before the bank run is on. Same principle here.
Sure enough, just moments ago a third domino fell as Lucidus Capital Partners, a high-yield credit fund founded in 2009 by former employees of Bruce Kovner’s Caxton Associates, has liquidated its entire portfolio and plans to return its $900 million in AUM.
Unsurprisingly, the trouble at Lucidus started in October when a “significant investor” submitted a redemption notice. Following that request, Lucidus decided “to start winding down the portfolio and shedding staff,” according to a person familiar with the fund’s operations who spoke to Bloomberg. “Shrinking trading volume in credit-default swaps and indexes in the wake of the financial crisis posed a challenge to Lucidus, whose founders sought to profit from volatile credit markets when they started the company in 2009, the person said.”
“The fund has exited all investments. We would like to thank our investors and counterparties for their support over the years,” Chief Executive Officer Christon Burrows and Chief Investment Officer Geoffrey Sherry said.
Here’s a look at the management team:
The founders, Geoff Sherry and Darryl Green, were former heads of distressed debt trading at JP Morgan and Donaldson Lukfin, respectively.
Make no mistake, this will just add more fuel to the fire. As we’ve been warning for months, HY faces the dreaded “crowded theatre” scenario wherein the crowd has gotten larger and larger while the exit has become smaller and smaller.
Someone – or, more appropriately, several someones – yelled “fire” and now the rush to the exit is on. The question now is how quickly this spreads across the space and as we said last week, watch HYG and JNK closely to get a read on how quickly the panic is spreading to the more “mainstream” vehicles.
Unfortunately for those funds who plan on liquidating over the course of the coming weeks or months, liquidity is only going to dry up from here, and that means wide bid-asks and firesale prices, triggering harrowing declines that will only serve to spread more panic, leading to more redemption requests, and around we go. “After junk-bond prices posted their largest drop since 2011 on Friday, investors say they are bracing for another difficult week, likely featuring hectic trading and large splits between buy and sell orders,” WSJ warned on Sunday, adding that “gaps as wide as 10% between the price bondholders are willing to accept and buyers are willing to pay are likely to be commonplace until at least the conclusion of the Federal Reserve’s two-day meeting Wednesday, hedge-fund and mutual-fund managers said.”
One hedge-fund manager who spoke to The Journal said he tried Friday morning to sell loans issued by Clear Channel Communications, now known as IHeartMedia (one of the Third Avenue fund’s largest holdings), at 71 cents on the dollar, the price Wall Street traders quoted him. “No buyers materialized until late afternoon when he received a single bid at 64 cents on the dollar, an offer he refused,” WSJ says, rather ominously.
By the way, remember that the Street isn’t going to be willing to inventory any of this paper, especially into a falling market. So ask yourself this: who’s going to buy this stuff? And if buyers can be found, at what price?
We close with the following observation from Bloomberg’s Richard Breslow:
One of the sad side-effects, is successful strategies, with liquid investments that are built for volatile markets and have no gates, become the piggy-bank for everyone that needs cash. Investors end up liquidating the good ones and are forced to keep the bad ones.

14th December 2015 at 9:05 am

  • Administrator says:

    High Yield ETFs Are Already Tumbling In The Pre-Market
    Submitted by Tyler Durden on 12/14/2015 08:20 -0500
    Small doors, large crowds. Amid yet more liquidations (Brazilian Bank BTG flushing its European credit exposure and Lucidus US HY fund), the large high-yield bond ETFs are tumbling in pre-market as two years worth of under-water easy-money trend-followers head for the exits from the “highly liquid” ETFs.. . and crush what little liquidity there is in the underlying. When will The Fed step in and buy US HY debt to stymie “fire-sale” prices?
    This will be the 8th drop in the last 9 days…
    As MacroMan noted earlier,
    In the meantime, ponder the idea that there are still 19.6 million more shares of HYG and 41 million more of JNK than existed at the end of last year, and ask yourself what those holders are going to do in the coming weeks.
    Then ponder on what professional holders of high yield and other credit will do after having gorged for the last several years only to see the wheels finally start to fall off.

    14th December 2015 at 9:07 am

  • rob in Nova Scotia says:

    Even though Nova Scotia is long way from Alberta. My province is tied into that economy. Most of the jobs “created” in Nova Scotia in last 5 to 10 years have been actually “Fly in, Fly out” jobs in Fort McMurray Alberta, Fort Mac to everyone around these parts. This is where the heavy oil “tarsands” projects are located and like the shale oil in North Dakota all these jobs flowed while price was high. Projects that are all losing money now. I might be a bit of an exaggeration but while it was happening guys were leaving here and making 6 figure paychecks driving bulldozers and holding shovels. All that hot money flowed back home. It was sunk into you guessed it, Toys and Big houses. I was in Newfoundland in September and situation there is even worse. Big monster homes in places where there is no local economy to support them. Now I sense a change. People, I think, are now realizing the trap that has been set. The jobs have dried up out west and now all these guys are sitting in their red neck mansions collecting Employment Insurance checks. This will last for another 8 to 10 months. In the meantime, much like the banks and zombie retailers, it will extend and pretend. But there is a reckoning coming.
    I mentioned all this in a previous post on how the economy has taken turn for worse. Recently while listening to radio on drive to work a so called expert was talking about the Nova Scotia Economy. The chatter was about predictions for upcoming year. How this Province could lead entire country in GDP growth. If that is bourne out then we are in trouble. But here will be winners just like in depression of 1930’s.

    It is hard to fathom but there is a tremendous opportunity for all us Doomers. Standing on sidelines watching this means that when crash inevitably comes there will be lots of assets to pick from at huge discounts. Some years ago I was standing in a huge barn not far from town I live in. It was built in 1920’s. Calling it a barn undersells the place. It was built as a hall for concerts. Even now almost 100 years later it stands. A testament to the craftsmanship of the builders. It is now owned by the local University and used for special events and weddings. The caretaker of building is ironically from the family that originally built it all those years ago. I asked him why it was sold. He said that during the depression his grand father was forced to sell it. He needed the money. History may not repeat itself but it certainly rhymes.
    The knife has already dropped in my province. The winners will be those brave enough to reach and grab it.
    Read this on zerohedge.

    14th December 2015 at 9:11 am

  • DC Sunsets says:

    Look, I don’t want to burst anyone’s bubble here (pun intended) but I think you all are missing the forest…
    People piled into junk bonds. WHY? Think about it. WHY?
    Were you? No, you were fearful. It looked like a good way to lose money, right? I agree. But we are not the masses.
    The masses of men (and women, God, don’t forget the women!) are optimistic. You look at the world and see danger, but the masses of your fellows do not, they see visions of fabulous wealth in their future, just like purchasers of lottery tickets.
    ONLY in an environment of phenomenal shared optimism could the Fed be allowed (and encouraged) to promote an unimaginably large quantity of IOU’s to be issued. Only a phenomenally optimistic system could generate the pyramiding of value on Wall Street (because recall that there is NO NET MOVEMENT OF MONEY THERE, no money comes in “from the sidelines,” this is a stupid lie oft repeated that makes no sense at all to a 5 year old, but we see it all the time.)
    We read articles about how crappy is the economy (and it is,) but outside events don’t affect Social Mood. Social Mood is unconscious and contagious, and it is endogenously regulated. There is ample evidence of all this.
    Just as in prior epochs, when the mania hits it will run its course. This one has lasted longer and run vastly higher than any in recorded history, but it’s still the same thing Charles Mackay recorded in his 1841 tome, Extraordinary Popular Delusions and the Madness of Crowds.
    Stop attributing this to TPTB or other nefarious characters. They are the symptom, not the disease. The disease is best described as a folie a plusiers, a “madness shared by many.”
    YOU CAN’T CHEAT AN HONEST MAN. You can’t build a Ponzi Scheme without people willing to believe the unbelievable.
    Just because this shared delusion is operating on a scale too large to grasp doesn’t change its nature. Charles Ponzi couldn’t have ever acted without people volunteering to suspend their disbelief. The Fed, the Treasury, Congress, Wall Street, ALL could not be involved in doing this crap if vast numbers of people were not immersed in Lottery Fever.
    From open-borders idiocy to demands to tolerate and enable what amounts to MENTAL ILLNESS (e.g. “transgender” bullshit) to a willingness to trust (for the moment) the value of an OCEAN of IOU-dollars, the same cause underlies all.

    14th December 2015 at 10:21 am

  • DC Sunsets says:

    Maggie, if you think the job market for petro engineers looks like a bad bet, imagine how many people today are borrowing huge to obtain “work permits” in medicine and related fields.
    My guess is that now 30% of decent-paying jobs in the USA are directly tied to the Medical-Industrial-Complex, which is not one iota less dependent upon Uncle Sam than is Lockheed-Martin or Raytheon.
    While there is surely infinite demand for the output of the Med-Ind-Complex (much of it from hypochondriacs and those with Munchhausen’s Syndrome), there is no way to pay for it all.
    When the coming bust finally arrives, the biggest surprise of all will be that Uncle Sam’s borrowing ability will be cut off.
    Expect there to be a 50-80% decline in the ability to pay for medical care. It will utterly DESTROY employment in related fields (as well it should, they are overbuilt many times more than is the McMansion industry.)
    The time will come when what was once a sure path to upper-middle-class comfort will be a guaranteed trip to bankruptcy and destruction.

    14th December 2015 at 10:28 am

  • DC Sunsets says:

    @ Rob,
    “It is hard to fathom but there is a tremendous opportunity for all us Doomers. Standing on sidelines watching this means that when crash inevitably comes there will be lots of assets to pick from at huge discounts. Some years ago I was standing in a huge barn not far from town I live in. It was built in 1920’s. Calling it a barn undersells the place. It was built as a hall for concerts. Even now almost 100 years later it stands. A testament to the craftsmanship of the builders. It is now owned by the local University and used for special events and weddings. The caretaker of building is ironically from the family that originally built it all those years ago. I asked him why it was sold. He said that during the depression his grand father was forced to sell it. He needed the money. History may not repeat itself but it certainly rhymes. ”
    The buildup to the coming debacle is almost certainly a degree of trend LARGER than the precursor to the Great Depression.
    It sounds great to say you’ll husband your resources and plan to swoop in and buy when “blood is running in the streets,” but I suspect that just keeping access to “cash” (in any form, from short-dated treasury paper to bank accounts to banknotes) will prove very challenging at some point during the next 10 years.
    There are no obvious sure things in this regard, as I see it.

    14th December 2015 at 10:37 am

  • DRUD says:

    DC – Completely agree that there are no sure things. The only thing we can do is look at a few possible scenarios. I agree that the coming crash will at least begin with a huge wave of defaults leading to devastating deflation. Again, no guarantee, but this seems most likely. How will the worlds governments/central banks react? Again, the most probably is massive money printing combined with starting more wars. There could also be MASSIVE civil unrest/riots/terrorism break out at this point. Then things get out of control and take on a life of their own. Would hot wars lead to nuclear powers launching EMP attacks on each other to avoid total holocaust? Possible for sure. Or would people start “storming the castle” so to speak and literally attacking their own government buildings/people? How long until JIT systems break and gas stations/supermarkets are closed? Another big question we’ve all discussed here: how will military personnel react?
    There are a million ways this can break and no one can predict any of it. The more important questions are 1) How fast does this get from the Financial sector to main street? 2) How long do stores stay open when they can’t get credit, then can’t get supplies? 3) How long, under various scenarios, until people get desperate and crazy (“blood in the streets”) 4) How does one manage each scenario to protect himself, his family and his wealth?

    14th December 2015 at 10:50 am

  • DC Sunsets says:

    @ DRUD,
    Totally agree.
    My answers (so far, subject to change at all times)
    1. Be a mild prepper (so I have some food, some water and some fairly notable firepower) without going Full Retard about it.
    2. Be out of debt. As long as I can pay my property tax extortion I’ll have a roof over my head.
    3. Get used to living small.
    4. Avoid traditional “investments” even though this has been astonishingly costly for most of my adult life.
    5. Try to have some wealth in non-traditional forms (I won’t discuss this in a public forum, other than to say that nothing is at my house so a robbery would net nothing but cops chasing the robbers, assuming the robbers survived, given that I am actually quite a good shot.)
    I think the biggest thing is mental. Only those who can entertain the need to be flexible in their thinking are likely to BE flexible when times change.

    14th December 2015 at 11:00 am

  • Administrator says:

    The Market Has Just Gone Nuts
    Submitted by Tyler Durden on 12/14/2015 10:19 -0500
    Presented with little comment, aside to ask: “where are the liquidity-providers?”
    Extremely heavy volume… and wild swings
    420 Point roundtrip in The Dow in under 9 minutes…

    As HYG hit Friday’s lows…
    And all of this is happening right on cue following JPMorgan’s Marko Kolanovic warnings of “massive stop losses” ahead..
    Not surprisingly, the biggest potential selloff catalyst is the Fed itself and specifically the Dec. 16 FOMC announcement, which the Fed is desperate to guide as being “priced in” by the market, but considering the Fed’s track record with getting any forecast right, concerns are starting to grow. “As for near-term risks—we believe the most imminent market catalyst will be the December Fed meeting in which we are likely to see the first rate hike of the cycle.”
    * * *
    So far so good, but to a market which has traded mostly on technicals and program buying (and selling) in recent months, there is something far more troubling than just what the Fed will announce:
    This important event falls at a peculiar time—less than 48 hours before the largest option expiry in many years. There are $1.1 trillion of S&P 500 options expiring on Friday morning. $670Bn of these are puts, of which $215Bn are struck relatively close below the market level, between 1900 and 2050. Clients are net long these puts and will likely hold onto them through the event and until expiry. At the time of the Fed announcement, these put options will essentially look like a massive stop loss order under the market.
    What does this mean? Considering that the bulk of the puts have been layered by the program traders themselves, including CTA trend-followers, and since the vol surface of the market will be well-known to everyone in advance, there is a very high probability the implied “stop loss” level will be triggered, and the market could trade to a level equivalent to the strike price, somewhere in the 1,800 area, or nearly 200 points below current levels.
    Which would be a tragedy for the Fed: after all, nothing is more important to Yellen, Draghi et al, than affirmative market signaling – pointing to the (surging) market’s reaction and saying “look, we did the right thing”, just as Draghi did on Friday when he explicitly talked the market higher in the aftermath of the ECB’s disastrous announcement.
    The irony will be if, regardless of what the Fed does, the subsequent move is driven not by the market’s read through of monetary policy but by the “pin” in this massive $1.1 trillion option expiry, the biggest in many years, one which if recent market action is an indicator, suggests the stop loss strike level will be taken out in the process setting the “psychological” stage for market participants who will look at the drop in the market, and equate it with a vote of no confidence in what the Fed is doing, potentially forcing the Fed to backtrack in less than 2 days!
    Whether this happens remains to be seen, and we are confident the Fed’s “arm’s length” market-moving JV partner, Citadel, is currently scrambling to prevent any imminent selloff. However, considering Kolanovic’ track record of hinting at key risk inflection risk, it is quite likely that whatever the ultimate closing price on December 16 and, more importantly, December 18, volatility may very soon have an “August 24” type event.

    14th December 2015 at 11:06 am

  • JFish says:

    DC Sunsets – Regarding your first post above and the “Extraordinary Popular Delusions and the Madness of Crowds”; your contestations are fascinating and made with astounding eloquence.
    Yet, I tend to look at the TPTB as the “game-makers” and the “folie a plusiers” crowd (blinded with lottery fever) as simply the “players”. Obviously, both in a symbiotic relationship and making love in an decadent orgy of greed.
    Some may reject the concept of “puppet masters”, but the question remains: Do they exist or not? I think they do. But then again I also know that everyone thinks I am paranoid (get it?) :)
    It could also be likened to a financial game of “musical chairs” whereby all want their “chair” and the rest be damned.
    But they are all fools.
    It reminds me of the old King James Proverb:
    “Wilt thou set thine eyes upon that which is not? for riches certainly make themselves wings; they fly away as an eagle toward heaven.”

    14th December 2015 at 11:38 am

  • DRUD says:

    JFish – Some may reject the concept of “puppet masters”, but the question remains: Do they exist or not?”
    I don’t think that is the question. As I have stated in the past, usually with either/or question the anser lies in a combination of the two. Of course there are extremely powerful people with grand designs to rule world. But they are still only human. They have blind spots, they have pride (which as we know precedes a fall), they do not have the ability to predict the future any more than the next man. They are just megalomaniacs, with lots of money, influence and a few parlor tricks to fool the brain-dead masses.
    Think of it like a cattle drive—while the cows are happy and calm, the drovers are in total control. If the herd stampedes, however, that control is rapidly revealed as illusory.
    And I, for one, am not out to get you…
    as far as you know. :)

    14th December 2015 at 11:55 am

  • DRUD says:

    DC – great list. Almost lock-step with my own thinking.
    I do have plenty of debt–but nothing unsecured. If/when SHTF they can take anything they want without really hurting me that much. The mortgage is an issue–it is large, but right now, at the bubble’s peak, I have a ton of equity as well–but I figure I can hold out longer than most. The whole world can’t become repo men, after all.
    I have some solid preps, but nothing over the top. If it is hell on earth, how long do you want to survive? That is a question each must answer for themselves.
    I have also avoided investing and have therefore made nothing in the few years–except again my home equity–my home’s value is up about 40% in the last 3 years. As far as non-traditional investments, I am on a pretty much month-to-month existence right now. Not much in the way of disposable income.
    I think we live pretty small, all that said—though the wife does like decorating the house and we have gotten new appliances.
    Prepping is mostly mental/psychological since there are so many unknowns. It is also very difficult. I have never lived in a world without grocery stores, readily available gasoline, credit cards and endlessly flowing electricity. How will I deal with it, when it comes?
    No idea, but I hope better than most.

    14th December 2015 at 12:06 pm

  • JFish says:

    I hear ya’, DRUD. If this thread (and perhaps TBP overall) could be allegorically compared to a college thesis paper, I believe most of us monkeys are on the “same page” so to speak. Some of us are now merely quibbling over the “minor punctuation” details…

    14th December 2015 at 12:37 pm

  • Rise Up says:

    “Bernanke is no hero. He did not save us. He saved his cronies on Wall Street and their captured politician lackeys in Washington DC. The unholy alliance between central bankers, corporate America, and corrupt politicians resulted in Glass Steagall being repealed and allowing Wall Street to run roughshod over our economic system, reaping riches during the good times and heaping the inevitable losses onto the backs of taxpayers. ”
    Thanks Admin, David Stockman, John Hussman and others for getting the truth out there.
    But the lies continue, as in today’s FOX Business online section:
    “Seven years ago, during the darkest days of the financial crisis, the Ben Bernanke-led Federal Reserve lowered interest rates to an unprecedented near-zero range in an effort to prevent another Great Depression.
    It worked.
    “They helped stave off a depression and ultimately helped get the economy out of recession and back to (albeit slow) growth,” said Greg McBride, chief financial analyst at”

    14th December 2015 at 12:50 pm

  • Administrator says:

    Janet Yellen’s “Junk Bonds Are Contained” Moment
    Submitted by Tyler Durden on 12/14/2015 12:38 -0500
    From Janet Yellen’s February 27, 2014 Testimony before the US Senate Committee:
    Low interest rates can give rise to behavior that poses threats to financial stability and therefore we need to be looking at that very carefully and we are doing so in a very thorough way, I believe. We’re looking at credit growth to see whether or not that has potential worrisome trends.
    We’re looking particularly to our stress tests at financial institutions. In a low-interest rate environment we have to worry about whether or not they’re appropriately dealing with interest rate risk.
    We are watching very carefully for the development of any such excesses. We are very focused on not allowing such a thing to happen again.
    While there might be a few areas where I have concerns, such as deteriorating underwriting standards in leveraged lending, farmland prices, a few things, I don’t see those excesses having developed at this point.
    And then, from Janet Yellen’s news conference after the March 18, 2015 FOMC meeting:
    In some corporate debt markets, we do see evidence of unusually low spreads.
    More broadly, we do try to assess potential threats to financial stability. And in addition to looking at asset valuations, we also look at measures of credit growth, of the extent of leverage being used in the economy and in the financial sector, and the extent of maturity transformation.
    And taking into account a broad range of metrics that bear on financial stability, our overall assessment at this point is that threats are moderate.
    How about now?

    14th December 2015 at 12:53 pm

  • nkit says:

    As Brendan Brown in his book “Euro Crash” alluded to, the sun of asset price inflation is slowly sinking into the sea as the moon of asset price deflation is rising. The Fed’s monetary disequilibrium has caused the virus of speculative fever to spread out of control. The irrational exuberance (that DC Sunsets alluded to in his first post) caused speculators to don their rose colored spectacles that magnified the size of expected gains and filtered out risk. The mal-investment and erosion of risk-appetite that occurred as the sun of asset price inflation was higher in the sky, will ultimately meet a watery grave and rose colored spectacles will be shattered. As the moon of asset price deflation looms higher, it will cast its hue on goods and services deflation causing the Fed to engage in more hopeless monetary disequilibrium. And so it goes, as the Keynesians know no other strategy, (or so it seems) and they will never admit their dangerous folly. Prep on.

    14th December 2015 at 1:05 pm

  • Pull Back the Curtain on Exchange Traded Funds and Out Pop Wall Street Mega Banks

    Number of Active Authorized Participants in Exchange Traded Funds (Source: Investment Company Institute)

    Number of Active Authorized Participants in Exchange Traded Funds (Source: Investment Company Institute)

    By Pam Martens and Russ Martens

    December 15, 2015

    The selloff in junk bonds has rattled the markets and is raising questions about just who it is that is providing liquidity to the junk bond Exchange Traded Funds (ETFs) — which have magically redeemed billions of dollars in withdrawals from retail investors while the underlying bonds in their portfolio are under severe stress in the broader marketplace. (Both a junk bond mutual fund and a separate hedge fund were forced to freeze investor withdrawals of their cash last week due to illiquidity in the junk bond market.)

    Unknown to most retail investors is that there is an entity called an “Authorized Participant” hiding behind the curtain of ETFs that is making that liquidity possible.
    According to an August 8, 2014 written question and answer exchange between the National Association of Insurance Commissioners and BlackRock and State Street – two large sponsors of ETFs — the most active Authorized Participants for corporate bond ETFs include “Deutsche Bank, Goldman Sachs, JPMorgan, Bank of America Merrill Lynch, Morgan Stanley and Cantor Fitzgerald.”

    Let’s pause for a moment and think about that. JPMorgan Chase is the largest insured depository bank in the United States. Merrill Lynch was teetering toward failure during the crash of 2008 and was taken over by Bank of America, also one of the top four largest insured depository banks in the U.S.  Both Goldman Sachs and Morgan Stanley became bank holding companies during the 2008 crash and now have access to the Fed’s discount window for emergency borrowing.

    It seems pretty obvious why these so called “Authorized Participants” are hiding behind that esoteric title. Their liquidity to ETFs is actually being backstopped by their too-big-to-fail status which is actually backstopped by the U.S. taxpayer.

    As Senator Elizabeth Warren told a Senate hearing on March 3 of this year:

    “During the financial crisis, Congress bailed out the big banks with hundreds of billions of dollars in taxpayer money; and that’s a lot of money. But the biggest money for the biggest banks was never voted on by Congress. Instead, between 2007 and 2009, the Fed provided over $13 trillion in emergency lending to just a handful of large financial institutions. That’s nearly 20 times the amount authorized in the TARP bailout.

    “Now, let’s be clear, those Fed loans were a bailout too. Nearly all the money went to too-big-to-fail institutions. For example, in one emergency lending program, the Fed put out $9 trillion and over two-thirds of the money went to just three institutions: Citigroup, Morgan Stanley and Merrill Lynch.

    “Those loans were made available at rock bottom interest rates – in many cases under 1 percent. And the loans could be continuously rolled over so they were effectively available for an average of about two years.”

    So what exactly is the role of these Authorized Participants? According to the Investment Company Institute, an industry group whose members are mutual funds, ETFs, closed-end funds and unit investment trusts, it goes like this:

    “ETF shares are created when an ‘authorized participant’ deposits a daily ‘creation basket’ (or cash) with the ETF. So let’s get the definitions straight.

    “What is an authorized participant? An authorized participant is typically a large institutional investor, such as a broker-dealer, that enters into a contract with an ETF to allow it to create or redeem shares directly with the fund. The authorized participant does not receive compensation from the ETF or the ETF sponsor for creating or redeeming ETF shares.

    “What is a creation basket? A creation basket is a specific list of names and quantities of securities or other assets that may be exchanged for shares of the ETF. The creation basket typically either mirrors the ETF’s portfolio or contains a representative sample of the ETF’s portfolio. The contents of the creation basket are made publicly available on a daily basis.

    “In return for the creation basket or cash (or both), the ETF issues to the authorized participant a ‘creation unit,’ a large block of ETF shares (generally 25,000 to 200,000 shares). The authorized participant can either keep these ETF shares or sell some or all of them on a stock exchange. ETF shares are listed on a number of stock exchanges, where investors can purchase them as they would shares of a publicly traded company.”

    Comparing this process to trading shares of a publicly traded company on a stock exchange is like comparing the Byzantine Empire to Hoboken, New Jersey.

    What could possibly go wrong in this trading model? According to the Investment Company Institute, here’s one possibility:

    “Citigroup, a major AP [Authorized Participant], temporarily ceased transmitting redemption orders to various ETFs that had foreign underlying securities on June 20, 2013, because it had reached an internal net capital ceiling imposed by its corporate banking parent. According to press reports, Citigroup made the business decision to no longer post collateral in connection with redemption activity in these ETFs. Although fewer APs can quickly step into the international space … one large AP that was active in these ETFs was able to process the redemption requests without any problems. In addition, investors could have turned to the secondary market, which was functioning normally and not showing signs of stress, to sell their ETF shares.”

    So what happens when Authorized Participants back away and the secondary market is also under unprecedented stress? Like everything else on Wall Street, there doesn’t seem to be a carefully considered or constructed backup plan.

    No comments: