Behold The Fed’s Takeover Of The Bond Market

Friday, August 17th, 2012

The must see time lapse video below courtesy of Stone McCarthy shows the distribution across the entire curve of the US marketable debt, as it was held by either the Fed, or the private sector over the past three unconventional monetary policy programs: starting in 2003 and concluding yesterday. In one short minute, this clip demonstrates very vividly how the Fed effectively took over the US bond market.

Some things to note:

• The reason why the Fed no longer holds any debt with a maturity under ~3 years is because of the “ZIRP through late-2014″ language which means there is no point for the Fed to hold that debt. For all intents and purposes it is the equivalent of cash. Debt maturing between now and 2014 amounts to just under $5 trillion.  Which means the Fed only has about $5.5 trillion in marketable debt with a maturity over 3 years to work with, and already owns about a third of it. It also means that as all the Fed’s holdings in the under 3 year category are sold, Twist will have to be extended, and with it the ZIRP language to beyond 3 years – most likely 5 or so.
• What is very visible is how the Fed had no choice but to expand its SOMA limit holdings per CUSIP from 35% to 70%. Soon, once the Fed owns 70% of every longer-dated Cusip, it will have no choice but to again extend the maximum permitted holdings, this time to 100% as it gradually become theentire market.

If after watching this clip anyone still believes that the biggest bond market in the world resembles anything even close to fair and efficient or which would have clearing prices anywhere near to where they transact now, they may want to double down on the FaceBook IPO allocation now.

Initial marketable debt distribution by holders starting back in2003 when the first Fed monetary policy started:

And most recent.

Tags: 3 Years, Cusip, Debt Distribution, Distribution Curve, First Fed, Intents And Purposes, Ipo, Marketable Debt, Maturity, Maximum, Mccarthy, Monetary Policy, Private Sector, Reason, Soma, Takeover, Time Lapse Video, Trillion, Us Bond Market, Zirp
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China Buys U.S. Businesses at Record Pace – What are the Implications?

Friday, August 3rd, 2012

CNN Money reports Chinese buying of U.S. business at record pace

Chinese direct investment in the United States could hit a record high in 2012, according to a new research report released Wednesday.

Total Chinese foreign direct investment in the U.S. is on pace to reach at least $8 billion this year, according to the report from research firm Rhodium Group.

That would top the previous record of $5.7 billion reached in 2010, said Thilo Hanemann, research director with Rhodium Group, which tracks all acquisitions and investments in manufacturing facilities, warehouses, labs and offices by foreign companies in the United States valued at $1 million or higher.

In manufacturing, the biggest investments are being made by Chinese firms with products that have been slapped with hefty anti-dumping tariffs, Hanemann said.

Opening up a plant in the United States allows Chinese firms such as Golden Dragon Precise Copper Tube Group, Inc. — which broke ground this year on a $100 million plant in Thomasville, Ala. — to avoid these tariffs.

What are the Implications?

China buying US businesses is a necessary part of correcting global imbalances.

As a direct function of trade math, China’s reserves must eventually return to the US. The only way that will not happen is if the US defaults on foreign-held treasuries.

However, don’t be deceived by the words “record pace”.

To put the $8 billion of direct investment in perspective, China has close to $1.75 trillion in US dollar reserves and $3.2 trillion worth of total reserves.

Will Alarm Bells Ring?

Some might be alarmed by China buying US businesses.

Actually this is a good thing, and the faster things speed up, the better off the US and China will both be. Direct investment will provide much-needed jobs in the US and it will alleviate China’s dependence on an unsustainable model of fixed investment.

Unfortunately, “record pace” is nowhere close enough to matter, but all trends start somewhere. The key point is that mathematically, dollars must return home, and the sooner it happens the better off the global economy will be.

Don’t expect alarmists in Congress and union sympathizers to see it that way.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Tags: Ala, Bells, Chinese Firms, Cnn, Cnn Money, Copper Tube, Dependence, Foreign Direct Investment, Golden Dragon, Manufacturing Facilities, Record Pace, Research Director, Rhodium, Tariffs, Thomasville, Treasuries, Trillion, Tube Group, Warehouses
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Is The Inexplicable American Consumer Rebelling?

Friday, August 3rd, 2012

by Wolf Richter, www.testosteronepit.com

The strongest and toughest creatures out there that no one has been able to subdue yet, the inexplicable American consumers, are digging in their heels though the entire power structure has been pushing them relentlessly to buy more and more with money they don’t have, and borrow against future income they might never make, just so that GDP can edge up for another desperate quarter.

But it’s been tough. Despite the Fed’s insistence that inflation is “contained,” or its periodic fear-mongering about deflation, consumers have been hit with rising costs. Tuition has been ballooning—up 21% in California in 2011 alone! Student loan balances exceed $1 trillion. Some parents who are still paying for their own student loans are now watching their kids piling them up too [read.... Next: Bankruptcy for a whole Generation]. Healthcare expenses have seen a meteoric rise. And so have many other items that cut deep into the average budget.

Inflation is a special tax. It’s not that horrid if it’s small, if higher yields compensate investors and savers for it, and if higher wages compensate workers for it. But that hasn’t been the case. The Fed’s Zero Interest Rate Policy has seen to it that entire classes of investors and savers get their clocks cleaned; and wages haven’t kept up with inflation since the wage peak of 2000—with the very logical but brutal goal of bringing wages in line with those in China.

But for a welcome change, disposable income adjusted for inflation, reported earlier this week, actually rose 0.3% in June from May. So spending should have gone up as well. It didn’t. The inexplicable American consumer spent less in June than in May. And April. The decline was focused on goods, the lowest since January.

And instead of buying goods with the additional money they’d earned, they saved! What temerity! It wasn’t a one-month fluke. The savings rate reached 4.4%, after a fairly consistent uptrend from the November low of 3.2%. An unusual and courageous act of rebellion in face of the punishment the Fed inflicts on savers.

There’s other evidence: while new car and truck sales weren’t great in July at a seasonally adjusted annual rate of 14.09 million units—down from June’s 14.38 million and February’s 14.50 million, the high of the year—they concealed ominous undercurrents. Honda’s sales jumped 45.3% and Toyota’s 26.1% over July 2011. After the March 11 earthquake last year, supply-chain problems created shortages, which the flood in Thailand made worse. Brand-loyal buyers who couldn’t find the right model, option package, or color, rather than switching to other makes, delayed their purchase—thus creating pent-up demand. Now, supply problems have been resolved, and buyers are swarming all over their favorite dealerships. This specialized pent-up demand obscured a huge problem: GM’s sales dropped 6.4% and Ford’s 3.8%. The two leaders taking a simultaneous turn south! This doesn’t bode well for total vehicle sales once Honda’s and Toyota’s pent-up demand has been satisfied. Another act of rebellion by the inexplicable American consumer.

But the Commerce Department, in its press release on income and spending, had a convenient answer: blame “the economic turmoil in Europe.” For everything. And then it added what was practically a campaign ad: “Therefore, it is critical that we continue to push for policies that will grow our economy and support our middle class, such as abolishing the Fed (sorry, my screw-up) the remaining proposals in President Obama’s American Jobs Act.” And it goes on to praise Obama’s tax proposal. Priceless! Expunging the last vestiges of objectivity from our government agencies, such as the Department of Commerce whose Bureau of Economic Analysis had collected the numbers.

The cellphone in your pocket is NASA-smart, write Alex Daley and Doug Hornig. Yet it costs just a couple hundred dollars. So why is it that these rising technical capabilities are leading to drastically falling prices in tech products, but not in your medical bill? The answer may surprise you. Read…. “Why Your Health Care Is so Darn Expensive.”

Tags: American Consumers, Clocks, Disposable Income, Fear Mongering, Fluke, GDP, Healthcare Expenses, inflation, Insistence, Interest Rate Policy, Many Other Items, Meteoric Rise, Power Structure, Richter, Student Loan Balances, Student Loans, Temerity, Trillion, Wages, Zero Interest
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On Fx (Krasting)

Monday, July 23rd, 2012

I’ve been running a short EURUSD for the past six weeks. I got in at 1.2650 on June 30, and doubled up on July 8 at 1.2260. I was delighted to see the Euro get cheap in Friday’s trading, but the market action forced a decision. I wrote some things down on a pad, thought about it a bit, and said, “Screw it”, and cut the whole position. Some of my thinking:

I hate trading FX at the end of July . The markets shut down with the approaching European August vacations. The last week of the month is about cleaning up positions, not putting new ones on. August is never a time to be involved, unless you have to.

There was something odd about the EURUSD trading Monday through Thursday. Tyler Durden, at Zero Hedge, made note of this.

The red arrows that Tyler drew bother me. This stinks of “official guidance”. It’s tough to make a buck at the FX casino, it’s tougher still when the tables are rigged.

In May and June the Swiss National Bank (SNB) bought CHF 110Bn worth of Euro’s. That’s a staggering amount. I’m convinced that the intervention was heavy in July as well. Reserves are headed up another CHF50Bn. I think these numbers still understate what is happening, as the SNB has been writing calls on the Franc.

In the course of just three months ¼ Trillion Euros have crossed into the Alps. This is unsustainable. At some point it will have to result in a messy blow up. But not necessarily in the month of August.

I don’t think the SNB is going to fold its cards just because they are under attack. If the SNB were to quit intervening, the EURCHF would be nearing par in a matter of days. The cost to the SNB would be CHF40Bn (15% of GDP).

Before taking a loss of this magnitude, the SNB, (with the blessings of the government), would implement a variety of exchange controls. I think this is a something that could come sooner than the market believes.

It is my understanding that there is significant macro hedge fund positioning in the EURCHF. I don’t believe that the SNB is going to simply write a monster check to some fat cats up in Greenwich. There will be (at least) one more chapter in this story.

Should there be something that makes people blink on the CHF, it could end up causing short positions in the EURUSD to get jumpy. I’d rather not be part of a jumpy crowd.

I’m worried about what Bernanke may do on August 1st. We could see something that brings the US negative short-term interest rates. (My thoughts on this). It’s very difficult for me to be a dollar bull. I’m much more comfortable playing the dollar from the short side.

The Euro weakness on Friday was related to a big selloff in Spanish bonds. The Spanish ten-year ended up at 7.27%. This means that a Spanish bailout is not far off and Italy is next in the crosshairs.

Really? I don’t think so. It’s not going to be that easy.

The Euro technocrats are not going to fold in August. They may be going down, but I fear more battles are in the offing first. SMP purchases of sovereign debt is likely next week.

Realized gains have been elusive for me this year.

Now that I don’t have a position to worry about, I’m worried about not having a position. I will be looking for an opportunity to re-load a short Euro exposure. Hopefully it will be at higher levels than Friday. Either way, I will act before September rolls in. The Euro is still toast.

Tags: Alps, Bank Snb, Blessings, Eurchf, Eurusd, Franc, GDP, Guidance, Hedge Fund, Magnitude, Monday Through Thursday, Month Of August, Red Arrows, S Trading, Six Weeks, Swiss National Bank, Three Months, Trillion, Tyler Durden, Vacations
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Follow the ETP Flows: Corporates Rule

Wednesday, July 18th, 2012

by Dodd Kittsley, CFA, iShares

One of the advantages to working for the largest exchange traded product (ETP) provider in the world is that you have a lot of data at your disposal.  In my role as the Global Head of ETP Research for BlackRock, I deal in data every day, particularly as it relates to the in- and outflows of the 4500+ global ETPs currently in existence.  As you can imagine, examining flows can be a great way to spot investment trends, take the temperature of the market and reveal sentiment shifts.

Right now, for example, global ETPs just experienced their largest first half inflows ever.  ETPs attracted net new assets of $105 billion during the first half of 2012, representing a 16% increase on the $90.6 billion of flows posted during H1 2011.  Total industry assets now stand at nearly $1.7 trillion.

Not surprisingly, fixed income ETPs were a main driver of growth.  As global markets continue to be volatile, investors have increasingly been using these products to capture new and diversified sources of income.  Fixed income ETPs attracted 41% of all inflows with $42.0 billion on the year, or 114% above 2011’s comparable YTD figure of $19.6bn. In fact, June was the 18th consecutive month in which global fixed income ETPs have attracted net inflows.  Total assets invested in fixed income ETPs now exceed $300 billion and account for over 18% of total industry assets.

But here’s something you might not have guessed – within fixed income, investment grade corporate ETPs were the clear leader, bringing in $15.5 billion.  Throughout this year, investors have consistently committed new money to the category, with monthly flows ranging from $1.7bn to $3.2bn.  It appears that many investors may agree with Russ K’s feeling that investment grade debt is the place to look for relative safety (albeit less than Treasuries) with the opportunity for positive real yield.

So what do we think is in store for the second half of the year?  Well, if volatility remains an issue (and Russ K believes it will), we expect to see the flows into fixed income ETPs continue (see chart below).  In fact, if they continue to follow their current trajectory, FI ETPs could actually sextuple their assets over the next 10 years – from $300 billion to $2 trillion.  As my colleague and fellow blogger Matt Tucker has said many times, investors are starting to realize that fixed income ETPs are simply a better way to invest in bonds.

Fixed Income Cumulative Net New Asset Trends

Never one to keep a good story to myself, I’ll be sharing interesting ETP flow data and related insights on a regular basis here on the iShares blog.  And I’d love to hear from all of you – what questions do you have that our data might be able to answer?

Source: BlackRock Investment Institute

Tags: Assets, Blackrock, Cfa, Corporates, Diversified Sources, Dodd, Etps, Fixed Income Investment, Global Head, Global Markets, Investment Trends, Ishares, Nbsp, New Money, Relative Safety, Russ, Second Half, Sentiment, Treasuries, Trillion
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Inside Job, Narrated by Matt Damon (Full Length HD)

Monday, July 9th, 2012

‘Inside Job’ provides a comprehensive analysis of the global financial crisis of 2008, which at a cost over $20 trillion, caused millions of people to lose their jobs and homes in the worst recession since the Great Depression, and nearly resulted in a global financial collapse. Through exhaustive research and extensive interviews with key financial insiders, politicians, journalists, and academics, the film traces the rise of a rogue industry which has corrupted politics, regulation, and academia. It was made on location in the United States, Iceland, England, France, Singapore, and China.

Inside Job, Narrated by Matt Damon (Full Length HD) from jwrock on Vimeo.

For up to date information for preparing for a financial collapse go to preppernews.net/

Tags: Academia, Academics, China Job, England, Financial Collapse, Full Length, Global Financial Crisis, Great Depression, Hd, Insiders, Jobs, Journalists, Matt Damon, Nbsp, Politicians, Recession, Singapore Job, Trillion, United States, Vimeo
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The U.S. is Not Europe

Wednesday, July 4th, 2012

by Peter Tchir, TF Market Advisors

How Much Worse Would Our Budget Problems be Without the Fed?

The biggest difference between what is going on in Europe and what is happening here, is the ability of the Fed to get rates where they want them across the entire curve. For all the talk about Spain and Italy not being “sustainable” at today’s rates, where would the U.S. be?

Starting with just our fixed rate debt look at what the Fed has done. Since Q4 2009, the Treasury department has extended the average maturity out from 5.8 year to 6 years. At the same time, they have managed to get the average coupon down from 3.37% to 2.5%. That is a huge cost savings to the government. If we were paying 3.37% on the $8.2 trillion of bonds, our annual interest expense would be $275 billion instead of “only” $204 billion. That is huge difference and is largely a result of the Fed’s treasury purchase programs. Keeping rates low and buying up the long end of the curve has resulted in substantial savings for the government. This is something Europe hasn’t figured out how to do, yet.

The more you think about it, the more impressive it is what the Fed has been able to help treasury do. They have allowed massive new issuance, at a longer average maturity, while driving the rates paid down significantly.

The Fed has been even more supportive than that. The Fed gives back their “profits” to treasury, so all of the coupon income the Fed earns, goes right back to the treasury department, further reducing the annual deficit. Assuming 20% of the bonds are held by the Fed, that would be an extra $40 billion cut off the annual expense. So instead of paying at least $275 billion if the Fed wasn’t involved, the current government is only spending $165 billion or so. The Fed is “enabling” the government to overspend by $100 billion a year.

Low rates aren’t so much for the consumer, but for the biggest debtor nation on the planet.

I don’t know whether Europe and the ECB will ever be able to match the Fed and the U.S. government in terms of being able to control rates, but assuming they can’t or won’t come close is dangerous, especially as they continue to take steps, albeit baby steps, in that direction.

Americans think Politicians Outside of the U.S. are Different

We get a Supreme Court ruling and every party is a winner. It doesn’t matter who you talk to, their party won. The spin is out of control, but we accept it. The U.S. has only two parties and has regularly scheduled elections, making it one of the easiest political situations to navigate. Everyone understand that. Everyone understands politicians say what they want.

Yet, somehow we believe European politicians tell the truth. That Merkel says what she actually plans to do? That Rajoy actually believes he won? Every comment from European leaders is viewed as a clear signal of dissent and that the deal will fall apart. Maybe, just maybe, investors need to pay attention to the actions and steps the leaders have taken, and less of the rhetoric they are selling their voters.

Could you imagine Romney saying the SCOTUS decision was a stunning defeat because he thought the decision would be much stronger? Or Obama admitting that calling it a tax is a horrible thing? Probably not, so why would you expect Merkel and Rajoy to go home and focus on what they gave up, rather than what they gained?

Ignore some of the noise coming out of Europe. It is leaders trying to placate their voters. They are politicians the same as ours. Watch and see if actions occur. In spite of the talk, the German government ratified the treaties and ESM. Yes, we have to see if their court upholds the law, but they are doing what they said, so far. It is scary that it is beginning to look like the hodge podge of European leaders may actually be able to implement programs to help their people while the U.S. politicians go out of their way to avoid accomplishing anything in their effort to get a couple more years in office.

The Economy Is What Matters

One key theme I keep reading is that Merkel won’t give in because people in Germany no longer support the programs. Merkel will do what she thinks will have the best results for the German economy. If you think, as I do, that a Greek Exit would lead to a collapse in Spain and Italy causing a devastating drop in the German economy, you would find it easy to see why she would change her attitude. Her best hope of getting re-elected is having a strong German economy. How she achieves that goal is of secondary importance. Many of the governments in Europe that were toppled, were doing what their people wanted, but it didn’t matter when the economy declined.

Ultimately, this is where Europe and the U.S. are the same. In spite of all the other issues, the election will likely be decided based on the economy at the time of the election. Right now, that is bad for Democrats as every indication is that the economy here is slowing. It also won’t help if Europe starts pointing at the U.S. to get its house in order. Without the Fed, our deficit would be much worse and the EU knows this. There is typically no better way to get a disparate group of people to work together than to find a common “enemy”. I expect that as European leaders continue to take incremental steps on their debt problem, that they will focus attention to the U.S. to divert some internal scrutiny. I have no idea what that will do for markets, but should throw another dynamic into global markets.

Will Short Covering turn into a Reach for Yield?

So far, this rally is one that even a mother can’t love. Friday morning, virtually everything I read was negative. More positive comments came out, and today I finally see them as being balanced. I see the number of table pounding bulls about equal to the number of red-faced bears.

We are still in the “short covering” phase as far as I can tell. We are getting little moves up and down, as people adjust their positions, but for the rally to gain momentum, it has to be driven by a reach for yield or risk rather than just short covering. From Saturday, here is why I think we could see a reach for yield trade. So far Spanish and Italian bonds are still slightly better again after Friday’s monster move, and CDS indices are all grinding tighter.

A Data Intensive Week

ISM just missed by a lot. Though how long before someone points out that prices paid dropped even more? Is anyone that prepared to bet that the EU, ECB, Fed, and PBOC will do nothing? Look for the market to bounce back from this weak data.

On NFP, the best possible outcome for the Fed is a job number close to the 90k expected, but for a nice uptick in the unemployment rate due to people entering the workforce. At least to the extent they are looking for excuses to act, while hoping the economy hasn’t truly derailed.

Tags: 6 Years, Bonds, Budget Problems, Coupon Income, Curve, Debtor Nation, Fixed Rate, Hasn, Interest Expense, Issuance, Italy, Maturity, Nbsp, Profits, Q4, Spain, Substantial Savings, Tf, Treasury Department, Trillion
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China’s PMI, Hong Kong Retail Disappoint; Philippines, Russia, and Korea Lead in Improvement (June 4, 2012)

Monday, June 4th, 2012

Emerging Markets Radar (June 4, 2012)

Strengths

• The Philippine’s GDP increased 6.4 percent year-over-year in the first quarter this year, greater than estimated, and exceeded the previous quarter’s revised 4 percent. In Korea, industrial production rose 0.9 percent month-over-month in April, the biggest increase in three months, and it saw the Consumer Price Index (CPI) rise 2.5 percent in May, holding at a 21-month low.
• Thailand’s CPI for May rose 2.53 percent year-over-year, in line with expectations.
• Hunan Province in central China announced a provincial investment plan totaling RMB 4.2 trillion for 12th 5-years, or about Rmb 800 billion a year.
• China’s State Council has announced it will provide RMB 26.5 billion in subsidies to promote energy-efficient appliances, one of a series of stimulus measures that the market is expecting from the Chinese government.
• Turkey’s trade deficit was much better than expected in April, down to $6.6 billion from $9.1 a year ago.  Exports have been resilient in the first four months of 2012, rising by 10.9 percent over the same period a year ago. The eurozone is Turkey’s largest partner, and as a result of weaker demand in the region, exports to eurozone countries fell by 6.1 percent year-over-year in January through April. On the other hand, exports to North Africa rose by 63.3 percent (after falling by 23.9 percent in 2011), and exports to the Middle East increased by 35.5 percent.

Weaknesses

• China’s official PMI for May was 50.4 versus the estimate of 52; the reading was also the lowest in the year. The new order index dropped 470 basis points to 49.8 percent, which doesn’t bode well for productivity in the next few months if the downtrend is not stopped.  The HSBC final China flash PMI was 48.4 versus 49.3 in the previous month, a consecutive seventh month below 50. A PMI below 50 indicates industrial activities are contracting. HSBC China flash PMI tells more about export contraction at the moment.
• Hong Kong retail sales grew 11.4 percent in April versus estimate 16.4 percent, disappointing the market.
• Korean exports fell 0.4 percent year-over-year in May, exceeding estimates but still declining for a third month.
• The European Central Bank said that Hungary’s amended draft law still fails to address a number of previously highlighted concerns over central bank independence and executive powers of monetary council.

Opportunities

• The Russian manufacturing sector gained further growth momentum in May, with PMI remaining above 50.0 for the eight month running, rising to 53.2 in May.  Output and employment are higher, while inflationary pressures remain relatively weak.
• The Philippine’s GDP went up 6.4 percent in the first quarter, illustrating the fact that infrastructure investment and domestic demands are driving economic growth and corporate profits.

Threats

• With China PMI in May weakening and key sub-indices reflecting weak demand in the economy, this increases the probability of further policy relaxation and accelerated approval of infrastructure projects.
• Czech PMI fell to 47.6 from 49.7 in April, pointing to downside risk in coming quarters. HSBC survey data and anecdotal evidence suggested weak demand from both domestic and external markets, linked to the crisis in Western European economies.

Tags: Basis Points, Central China, Chinese Government, Consumer Price Index, Emerging Markets, Energy Efficient Appliances, Eurozone Countries, First Quarter, Four Months, GDP, Index Cpi, Investment Plan, Korea Industrial, North Africa, Pmi Hong Kong, Provincial Investment, Stimulus, Subsidies, Trade Deficit, Trillion
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The Consumer is Back… Consumer Credit Positive (Even Excluding Student Loans)

Monday, May 28th, 2012

SF Gate details:

Consumer borrowing in the U.S. surged in March by the most in more than a decade on growing demand for educational financing and autos.

Credit rose by $21.4 billion, the biggest gain since November 2001, to $2.54 trillion, Federal Reserve figures showed today in Washington. The advance was paced by a $16.2 billion jump in non-revolving debt, including student and car loans.

Americans may have been trying to get school financing before a possible increase in interest rates takes place on July 1. Rising consumer confidence also means that households are more willing to take on debt to boost spending, which accounts for about 70 percent of the economy.

I’ve been showing the below chart for some time. It shows the year-over-year change in revolving consumer credit, non-revolving consumer (excluding student loans), and student loans. Headline consumer credit has been growing since early last year, but this had been solely due to student loans (not necessarily a bad investment, but it doesn’t reflect consumers re-leveraging for goods and services).

Well, as the chart shows, after a strong March where revolving consumer credit (i.e. credit cards) jumped 7.8% month over month and non-revolving (excluding student loans) posted a positive print… the day has arrived in which the consumer is no longer deleveraging in nominal terms (important for all that nominal debt out there).

We’ll see if this continues, but the consumer looks like they may be back.

Source: Federal Reserve

Tags: Autos, Car Loans, Consumer Confidence, Consumer Credit, Consumer Loans, Consumers, Credit Cards, Credit Loans, Debt Loans, Decade, Economy, Federal Reserve, Households, interest rates, July 1, Loans Student, Revolving Debt, Sf Gate, Student Loans, Trillion
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The “World’s Largest Prop Trading Desk” Just Went Bust

Thursday, May 10th, 2012

A month ago we warned that JPM’s CIO office is nothing short of the world’s largest prop trading desk. Not only were we right, but what just transpired is just shy of our worst possible prediction. At the end of the day, the real question is why did JPM put in so much money at risk in a prop trade because we can dispense with the bullshit that his was a hedge, right? Simple: because it knew with 100% certainty that if things turn out very, very badly, that the taxpayer, via the Fed, would come to its rescue. Luckily, things turned out only 80% bad. Although it is not over yet: if credit spreads soar, assuming at $200 million DV01, and a 100 bps move, JPM could suffer a $20 billion loss when all is said and done. But hey: at least “net” is not “gross” and we know, just know, that the SEC will get involved and make sure something like this never happens again.

As for what we said before, we will just repost the whole thing as we were, once again, right.

From April13: Why JPM’s “Chief Investment Office” Is The World’s Largest Prop Trading Desk: Fact And Fiction

For the fiction, we go to JPM’s conference call transcript where we had the following disclosures.

• “I did want to talk about the topics in the news around CIO and just take a step back and remind our investors about that activity and performance. We have more liabilities, $1.1 trillion of deposits than we have loans, approximately $720 billion. And we take that differential and we invest it, and that portfolio today is approximately $360 billion. We invest those dollars in high grade, low-risk securities. We have got about $175 billion worth of mortgage securities, we have got government agency securities, high-grade credit and covered bonds, securitized products, municipals, marketable CDs. The vast majority of those are government or government-backed and very high grade in nature. We invest those in order to hedge the interest rate risk of the firm as a function of that liability and asset mismatch.”

• “We hedge basis risk, we hedge convexity risk, foreign exchange risk is managed through CIO, and MSR risk. We also do it to generate NII, which we do with that portfolio. The result of all of that is we also need to manage the stress loss associated with that portfolio, and so we have put on positions to manage for a significant stress event in Credit. We have had that position on for many years and the activities that have been reported in the paper are basically part of managing that stress loss position, which we moderate and change over time depending upon our views as to what the risks are for stress loss from credit. And I would add that all those positions are fully transparent to the regulators. They review them, have access to them at any point in time, get the information on those positions on a regular and recurring basis as part of our normalized reporting. All of those positions are put on pursuant to the risk management at the firm-wide level. They are done to keep the Company effectively balanced from a risk standpoint…. “ Of course, when you own the regulators, it is not much of an issue… And would it be the same regulators who we have now confirmed don’t understand the first thing about markets?

• “All of those decisions are made on a very long-term basis.”  Indeed – and the Norway sovereign wealth fund bought Greek bonds investing in “eternity.” Only problem is eternity came far faster than expected.”
  

• “The last comment that I would make is that based on, we believe, the spirit of the legislation as well as our reading of the legislation and consistent with this long-term investment philosophy we have in CIO we believe all of this is consistent with what we believe the ultimate outcome will be related to Volcker.”

For the facts, we go to Bloomberg again, which was the first to break the Bruno Iksil story, and which exposes without shadow of a doubt why the Chief Investment Office is nothing but the world’s largest prop desk.

Tags: Agency Securities, Bps, Bullshit, Chief Investment, Conference Call, Covered Bonds, Credit Spreads, Desk, Differential, Disclosures, Dv01, Fact And Fiction, Government Agency, Interest Rate Risk, Investment Office, Jpm, Liabilities, Mortgage Securities, Municipals, Trillion
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