Monthly Archives: June 2012

The Matrix Fails

http://www.ibtimes.co.uk/articles/357858/20120629/libor-rate-fixing-scandal-rbs-barclays-euribor.htm thanks to @munilass

Long time readers know my affiliation with Eurodollar futures. I started in the T-Bill pit in 1984 and was in the group of young guys and gals that migrated over to a new contract in 1986. Strips of Eurodollars were the most innovative and elegant exchange traded product ever. Their use, as shown in open interest, mirrors the great credit driven economic expansion as their decline coincides with the Great Recession (we call debt depression).

The post-crash analysis has focused on the diminishing returns on Federal Reserve quantitative easing measures. The focus should be on the replacement of the money market based system with the collateral based one. As the new system has been rolled out some of its own draw backs are becoming evident. General Collateral rates have risen and available supply has diminished. What about the old system? As we have noted before, it has been put into a coma to keep it from further damaging itself. LIBOR submissions for dollars have clustered in the mid-40s rather than the mid-20's fantasy. Throughout the EZ meltdown, the money system barely twitched. If it were to wake, surely the harsh reality of market determined rates would shock the majority of "risk on- risk off" drive by players. The economy is anemic because the financial system that supports it is a fraud.

The Barclay's settlement is just the tip of the trouble to come for the old system and the $360T in contracts based on it. Barclay's submission at the low of the distribution on the day of the fine should be framed and mounted. The record shows manipulation well before the crisis and that makes one wonder, why?  Simple, just like LTCM, because a big customer needed it. The settlement shows that virtually any and all transactions made in LIBOR over last decade were subject to a conspiracy. Ho hum, where's RIMM? LIBID is not LIBOR, there is NO offer. The alternative to the Matrix is  an ugly beast. Let's go take a look at it.

What’s in a Slur

The buzz phrase we keep hearing from the media elite is a "Lehman moment for Europe." The implication is a financial institution failure that takes the system down with it. This is a dangerous simplification and a disservice to understanding our crisis, the EZ debacle and most importantly, the way forward. If by "Lehman Moment" one means hubris gambit writ large, then I'm on board. Fuld bet the farm that a bailout was coming so holding onto toxic stuff that was 26 cent bid in the market and betting on the "pass" line was logical. The government had already told him (and his competitors) to reduce their gearing months before. The others reluctantly  complied and paper trading around 43 cents after Bear took the hit with all the coincident carnage. Lehman remained in the neighborhood of 35x geared while Goldman and Morgan Stanley had moved down markedly. (In the ultimate burn, Goldman bumped back up ahead of returning the government money, while MS played tight with the taxpayer and paid the price in stock valuation when earnings posted several quarters later.)
A Lehman Moment is thus the moment when entities are taken to the curb. The EZ is not geared at the ratios that brought Fuld's firm to the woodshed. In fact, the only financial constructs operating at extreme gearing are the central banks. The Fed is at 70x by some metrics. The structural problems with the ECB are evident when viewed through this prism. This is not to say that the Euro financial system is not fracturing, clearly it is. But if we are going to point to the risk as a Lehman Moment, we should at least  agree on what that risk is.

Running On Empty

Looking out at the road rushing under my wheels
Looking back at the years gone by like so many summer fields
In sixty-five I was seventeen and running up one-on-one
I don't know where I'm running now, I'm just running on
Running on-running on empty
Running on-running blind
Running on-running into the sun
But I'm running behind

Jackson Browne- Running On Empty

The markets have had their post-Fed wipe down and ignited the usual apoplectic drive by macro ranting. As we noted on Tuesday, "the easy choice" didn't really exist for the Fed and extending Twist. At 6 months and considerable size, The Fed will be running on empty inside of 2016 when the Twisting stops. The market showed its attachment to the flow aspect of Fed policies as Bernanke and Co. again promoted the stock characteristic. The negative money multiplier should be a hot topic in the Hamptons this summer.

The empty short end tank at the Fed means more weight on the street. Repo rates and general collateral will continue to simmer at the core of the gambit. Surprisingly, NO financial journalist in the presser asked the Chairman about his empty short end inventory. Twist not only extends duration, it extends the imagined exit date. The deceit at the FOMC is predictions remain in the late 2014 period leaning slightly to 2015. The Fed will be shooting with puffs of air. We have always compared the Bond to Pam Anderson- over sized, chaotic, sloppy and slightly diseased..yet still garnering all the attention in the room. Avert your eyes, watch the front.

S&P Trading Levels 22 Jun

Support & Resistance Levels for multiple time-frames on the Cash Index on the annotated charts below. (Click on graphs to enlarge. May need to click a few times to get to full size)

Technical Trading Charts & Levels for S&P, Euro, 10 Year Note & 30 Year Bond are in  Hooper’s subscription portion of contrariancorner.com

S&P Globex 11:57 AM

 

S&P Globex

30 Year Treasury Trading Levels 21 Jun

Support & Resistance Levels for multiple time-frames on the Cash Index on the annotated charts below. (Click on graphs to enlarge. May need to click a few times to get to full size)

Technical Trading Charts & Levels for S&P, Euro, 10 Year Note & 30 Year Bond are in  Hooper’s subscription portion of contrariancorner.com

30 Year Treasury

Germany DAX Trading Levels 21 Jun

Support & Resistance Levels for multiple time-frames on the Cash Index on the annotated charts below. (Click on graphs to enlarge. May need to click a few times to get to full size) Current Hooper Levels for the DAX.

Technical Trading Charts & Levels for S&P, Euro, 10 Year Note & 30 Year Bond are in  Hooper’s subscription portion of contrariancorner.com

Germany DAX 8:50 GMT

We’re All Dumber For Hearing It

http://www.youtube.com/watch?v=ZpmIBJ_MKas

 

The overwhelming call for the Fed today is an extension of the Operation Twist activity because "they have a couple hundred billion in securities left to use and it would be easy to implement." Monetary policy has somehow morphed into "easy choices." This Fed will not be remembered for crafting policy that was easy to do. Even the original message of "credit easing" for ZIRP and LSAP 1 was a palatable description of something much more complex.
A quick look at the steady rise in GC rates -our call in January - shows the structural cost to the system of Twist. The 2 year note hovered above 25bp even as Schatz went nominal negative.The EZ debacle has been an accelerating event  squeezing collateral based monetary regimes. We were/are vocal opponents of Twist as it extends the date and complexity of Exit - a strategy that used to garner much attention but is now accepted as "held to maturity."
Let's view the mess from 20,00 feet. The Fed has a zero rate policy that uses its balance sheet to enforce negative yields at the zero bound. They have tempered skeptics views by adopting a "stock" characteristic to the size of the balance sheet. The market, however, prefers the flow aspects of Fed operations whether in commodities or Treasuries and equities. Easy it ain't.
We like steep curves, low oil, and accommodating Central banks. That's as close to "easy" we can get.