• Tag Archives Derivatives
  • Flynn Flush Rescues ‘VIX Elephant’ As ’50 Cent’ Backs Up The Truck

    The ‘VIX Elephant’ has awakened. And ’50 Cent’ is back.
    That’s the mysterious-sounding ointroduction to a notable market insight from Bloomberg this mornig as they note the turmoil surrounding Mike Flynn headlines – spiking VIX and slamming stocks – provided two big options market ‘whales’ with some relief and room to move…
    First, the trader who’s known as the Elephant for making big moves in the VIX — but who’s been surprisingly quiet in recent weeks — returned with a vengeance to start December, buying and selling more than 2 million contracts Friday to continue betting on a modest rise in the Cboe Volatility Index. That’s three times the average daily volume for all VIX options.
    The Elephant caught a major break thanks to the sharp retreat in the S&P 500 Index following reports that former national security adviser Michael Flynn would implicate members of President Donald Trump’s transition team in the probe into Russian meddling in the 2016 election. The VIX spiked to as high as 14.58 as equities tumbled.
    Pravit Chintawongvanich, head of derivatives strategy at Macro Risk Advisors, said the investor had been poised to lose $20 million to $30 million on the December leg of this trade before Friday, but was able to escape with a loss of less than $2 million in closing up those positions.
    ‘They got really lucky with the selloff today,’ Chintawongvanich said.
    ‘They were down a lot on the December position, and this allows them to get out of it without too much of a loss.’

    This post was published at Zero Hedge on Dec 1, 2017.


  • Doug Noland: Not Clear What That Means”

    This is a syndicated repost courtesy of Credit Bubble Bulletin . To view original, click here. Reposted with permission.
    November 15 – Bloomberg (Nishant Kumar and Suzy Waite): ‘Hedge-fund manager David Einhorn said the problems that caused the global financial crisis a decade ago still haven’t been resolved. ‘Have we learned our lesson? It depends what the lesson was…’ Einhorn said he identified several issues at the time of the crisis, including the fact that institutions that could have gone under were deemed too big to fail. The scarcity of major credit-rating agencies was and remains a factor, Einhorn said, while problems in the derivatives market ‘could have been dealt with differently.’ And in the ‘so-called structured-credit market, risk was transferred, but not really being transferred, and not properly valued.’ ‘If you took all of the obvious problems from the financial crisis, we kind of solved none of them,’ Einhorn said… Instead, the world ‘went the bailout route.’ ‘We sweep as much under the rug as we can and move on as quickly as we can,’ he said.’
    October 12 – ANSA: ‘European Central Bank President Mario Draghi defended quantitative easing at a conference with former Fed chief Ben Bernanke, saying the policy had helped create seven million jobs in four years. Bernanke chided the idea that QE distorted the markets, saying ‘It’s not clear what that means’.’
    Once you provide a benefit it’s just very difficult to take it way. This sure seems to have become a bigger and more complex issue than it had been in the past. Taking away benefits is certainly front and center in contentious Washington with tax and healthcare reform. It is fundamental to the dilemma confronting central bankers these days.

    This post was published at Wall Street Examiner on November 18, 2017.


  • Comex Gold Sees ‘Another Large Sell’ as Bullish Silver Betting Grows to 7-Week High

    COMEX gold contracts recovered a $5 drop against a weakening US Dollar in London lunchtime trade Tuesday, rising back to last week’s finish at $1275 after what analysts called another “large sell” order on the futures market.
    Commodities retreated and bond prices edged higher as world stock markets fell again.
    Germany’s Dax dropped for the fourth session running after the 19-nation Eurozone released a raft of stronger economic data, led by 2.5% annual GDP growth across the region for the third quarter of the year.
    “Speculative financial investors stopped withdrawing from gold and built up net long positions again in the week to 7 November,” says German financial group Commerzbank in a commodities note today, looking at the latest Comex gold derivatives data from US regulator the CFTC.

    This post was published at FinancialSense on 11/14/2017.


  • Draghi Knew About Hiding Losses by Italian Banks

    The Bank of Italy, when it was headed at the time by Mario Draghi, knew Banca Monte dei Paschi di Siena SpA hid the loss of almost half a billion dollars using derivatives two years before prosecutors were alerted to the complex transactions, according to documents revealed in a Milan court.
    Mario Draghi, now president of the European Central Bank, was fully aware of how derivatives were being used to hide losses. Goldman Sachs did that for Greece, which blew up in 2010. It is now showing that Draghi was aware of the problems stemming from a 2008 trade entered into with Deutsche Bank AG which was the mirror image of an earlier deal Monte Paschi had with the same bank. The Italian bank was losing about 370 million euros on the earlier transaction, internally they called ‘Santorini’ named after the island that blew up in a volcano. The new trade posted a gain of roughly the same amount and allowed losses to be spread out over a longer period. We use to call these tax straddles.

    This post was published at Armstrong Economics on Nov 13, 2017.


  • Global Banks, City of London Raise ‘Disorderly Brexit’ Alarm

    Shifting trillions of euros of derivatives positions could be hugely disruptive.
    The growing prospect of a hard or disorderly Brexit is sending jitters through the global financial community. This week the Financial Times reported that a group of ‘large financial institutions with big London operations’ had met with US Commerce Secretary Wilbur Ross to express their dissatisfaction with the lack of progress in Brexit negotiations.
    ‘The fears over a potential Brexit no-deal are rising, as we move within 16 months of the UK’s exit from the EU,’ said Joshua Mahony, market analyst at IG.
    While New York stands to benefit from some of the disruption caused by the UK’s separation from the EU, there is rising concern that Brexit could set off global ripples. That fear was compounded on Friday after Teresa May announced plans to set the UK’s departure date and time (March 29, 2019 at GMT 23:00) from the EU in law, warning she will not ‘tolerate’ any attempt to block Brexit.
    ‘[The banks] are becoming nervous,’ said City of London Corporation’s policy chief Catherine McGuinness after meeting representatives of US banks earlier this week. ‘It wasn’t just curiosity, it was concern at the lack of progress that we have been making, and nervousness that it had implications beyond Europe’s borders in terms of causing disruption to markets.’

    This post was published at Wolf Street by Don Quijones ‘ Nov 11, 2017.


  • Frontrunning: November 3

    House GOP Readies for Tax-Bill Battle (WSJ) GOP’s United Front on Tax Cuts Masks Divisions (BBG) Republican tax plan a blow to Democratic states, officials say (Reuters) As Trump Embarks on Asia Tour, North Korea Looms Large (WSJ) Apple Store Lines Return as iPhone X Debuts (WSJ) There’s Some Good News About 401(k)s in the Tax Bill (BBG) iPhone Xs Are Already Being Resold in Hong Kong (BBG) CNN to Launch Subscriptions for Digital News (WSJ) Mr. Ordinary: Who Is Jerome Powell, Trump’s Fed Pick? (WSJ) U. S. bomber drills aggravate North Korea ahead of Trump’s Asia visit (Reuters) Bitcoin Is the ‘Very Definition’ of a Bubble, Credit Suisse CEO Says (BBG) Goldman Retreats From Options as Stock Derivatives Trading Struggles (WSJ) Here’s a Juicy Tax Break. Now, How to Keep Everybody From Claiming It? (BBG) Dark Side at Fidelity: Women Describe a Culture of Revenge (BBG) Get Ready for an Appalachian Gas Bonanza (BBG) PDVSA Bonds Slump After Venezuela Calls for Restructuring: Chart (BBG) Drug Deaths Rose More Last Year Than in the Previous Four Combined (BBG) Overnight Media Digest
    WSJ
    – Two U. S. B-1B bombers flew near North Korea on Thursday, alongside Japanese and South Korean jet fighters, provoking anger from Pyongyang ahead of President Donald Trump’s closely watched trip to Asia. on.wsj.com/2gZ02qP
    – The Justice Department is laying the groundwork for a potential lawsuit challenging AT&T Inc’s planned acquisition of Time Warner Inc if the government and companies can’t agree on a settlement, according to people familiar with the matter. on.wsj.com/2ipyGuh
    – T-Mobile US Inc and Sprint Corp are working to salvage their potential blockbuster merger, people familiar with the matter said, days after Sprint Chairman Masayoshi Son appeared to call off the talks. on.wsj.com/2gZNq2Q

    This post was published at Zero Hedge on Nov 3, 2017.


  • Germany Also Engages in Political Prosecution

    The Alternative for Germany party (AfD) in Germany has asked the Federal Government to file a lawsuit against all decisions of European Central Bank (ECB) regarding the purchase of government bonds and corporate bonds as well as derivatives since 2015. They are petitioning to file in the European Court of Justice asserting that the policies of the European Treaties and by the Federal Constitutional Court were being violated.
    Effectively, the ECB ‘stimulus’ policy (QE) has completely failed and instead has become a life-support system subsidizing the debt of Eurozone member states. Even reducing the amount bought per month is an attempt to see if the marketplace takes up the debt. But the Eurozone governments never cut back spending or reformed. They never had to. The QE program was merely targeting to support the government – not the average person in the economy.

    This post was published at Armstrong Economics on Nov 2, 2017.


  • The EU Just Did the Big Banks a Massive Favor

    The European Union’s executive arm, the European Commission, made a lot of bank executives very happy this Tuesday by abandoning its multi-year pledge to break-up too-big-to-fail lenders. Despite the huge risk they still pose to Europe’s rickety financial system, big European banks like Deutsche Bank, BNP Paribas, ING, and Santander can breathe a large sigh of relief this week in the knowledge that they will not have to split their retail units from their riskier investment banking arms.
    Breaking up the banks would remove much of the risk from today’s government-backed banks, such as derivatives and other instruments that were heavily involved in the Financial Crisis. Without these hedge-fund and investment-banking activities, even large banks would be smaller, less interconnected, and could be allowed to fail without jeopardizing the entire global financial system.
    According to the Commission, such a drastic measure is no longer necessary since the main rationale behind ring-fencing core banking services from investment banking divisions – i.e. to make Europe’s financial system less disaster prone – has ‘already been addressed by other regulatory measures in the banking sector.’ That’s right: Europe’s banking system is already safe, stable and secure. Bloomberg:

    This post was published at Wolf Street on Oct 25, 2017.


  • Passive Should Never Laugh At Active

    I have been meaning to write this post for quite some time. As an ex-ETF trader, I have watched with bemusement as investors have both embraced and shuddered at the wide adoption of ETFs. But most pundits are missing the larger picture. ETFs are just a symptom of the bigger phenomenon. The true battle lies in the passive versus active debate.
    Let me get this out of the way right off the bat. I have no dog in this hunt. I see both the benefits and the negatives to each side. Yet as a trader, I definitely have a view on which end of the boat is leaning lopsided right now.
    Lessons from triple witching
    But first, let me tell you a story. I was lucky enough to have a ringside seat for the coming of age of equity index derivatives. Sure they existed before my time, but the true widespread global adoption occurred in the 1990’s. In Canada, when I first sat down on the institutional desk, clients had little interest in what the young kids with their fancy SUN workstations were doing. Yet as money flowed into the derivatives complex, what had first just been a strange little science experiment, suddenly started moving the underlying market. Our index arbitrage flows became significant, and regular plain vanilla clients began took notice.
    Along with the increased index arbitrage flows came this bizarre triple witching expiry. When open interest was small, these expiries were minor. But as the usage of derivatives expanded, one morning we experienced an imbalance that was uncomfortably large. Being index traders, we instantly understood what had happened. Someone was letting a whole bunch of exposure expire into the open, and therefore there was a very large, and very real, index sell basket to execute at the open.
    Many institutional clients were not used to trading on the open. Most often, they let retail orders and market makers set the price, and then after it settled down, they would give us their orders.
    Given that institutional clients were not interested in trading at the open, there was little liquidity for the large expiring sell basket. Sensing an opportunity, we bid spec for a decent portion of the sell imbalance, hoping to get a good fill which we could then offset in the futures market. The trouble was, not nearly enough market participants joined us, and the market gapped down huge. It was a terrific trade as the opening settlement was many hundreds of basis points below the previous close.

    This post was published at Zero Hedge on Oct 24, 2017.


  • Law Firm that Silenced Harvey Weinstein Accusers also Involved in SIVs that Tanked Citigroup

    Matthew Garrahan dropped a bigger bombshell in the Financial Times yesterday than even he realizes. Garrahan named the law firm that had crafted a gag order in 1998 to silence two women from ever speaking about their encounters with Harvey Weinstein. One woman, Zelda Perkins, was an assistant to Weinstein in London and charged him with egregious sexual harassment. The other unnamed female colleague charged Weinstein with sexual assault. The two were paid $125,000 each and given an iron-clad gag order. The terms of the gag order were so confidential that the women were not even allowed to have a full copy of what they had agreed to, just a summary of some of its terms.
    The law firm representing Weinstein with the settlements and gag orders (officially called non-disclosure agreements) was Allen & Overy – the London derivatives powerhouse that also signed off on the Structured Investment Vehicles (SIVs) that played a significant role in helping to blow up Citigroup in 2008, resulting in the largest taxpayer bailout of a bank in financial history.
    In 2007, according to Standard & Poor’s Structured Finance research reports, Citigroup was managing the following Structured Investment Vehicles that were incorporated in the Cayman Islands and not consolidated on Citigroup’s balance sheet: Centauri Corp., Beta Finance Corp., Sedna Finance Corp., Five Finance Corp., and Dorada Corp. In addition, according to press reports, Citigroup had created two more SIVs in 2006: Zela Finance Corp. and Vetra Finance Corp. The SIVs contained approximately $80 billion of mostly toxic debt, much of which ended up back on Citigroup’s balance sheet. Allen & Overy was the London counsel to Citigroup on these SIVs.
    You don’t have to take our word for this. One of Allen & Overy’s own lawyers actually bragged on the law firm’s website about the key role it played in the ‘fascinating time’ of the financial crisis – the most devastating economic collapse since the Great Depression that left millions of Americans out of work and foreclosure notices on their front door.

    This post was published at Wall Street On Parade on October 24, 2017.


  • Two of the Biggest Bailed Out Derivative Banks, Citi and Merrill, Get Fined for Breaking Derivatives Rules

    Over the past month, with little media attention, both Citigroup and Merrill Lynch have received fines from regulatory bodies for failure to properly report their trading in derivatives – an opaque trading arena that played a significant role in bringing down both firms during the financial crisis. As reported by the Government Accountability Office (GAO) in 2011, Citigroup received $2.5 trillion in cumulative, secret low cost loans from the Federal Reserve during the 2007-2010 financial crisis while Merrill received $1.9 trillion. These loans, many at almost zero interest rates, were made without the authorization or awareness of Congress. (See GAO chart below.) The loans to the two firms were on top of the publicly disclosed and Congress-approved TARP bailout funds.
    Significant portions of the money loaned to Citigroup and Merrill Lynch were authorized by the Federal Reserve to be funneled to the broker-dealer subsidiaries of the firms in London – where it found its way into pursuits that remain undisclosed to this day. The GAO noted in its report:
    ‘…without more complete documentation, how assistance to these broker-dealer subsidiaries satisfied the statutory requirements for using this authority remains unclear. Moreover, without more complete public disclosure of the basis for these actions, these decisions may not be subject to an appropriate level of transparency and accountability.’

    This post was published at Wall Street On Parade By Pam Martens and Russ Marte.


  • In The Shadows Of Black Monday – “Volatility Isn’t Broken… The Market Is”

    Authored by Christopher Cole via Artemis Capital Management,
    A full version of the article is available on the Artemis website.
    Volatility and the Alchemy of Risk
    The Ouroboros, a Greek word meaning ‘tail devourer’, is the ancient symbol of a snake consuming its own body in perfect symmetry. The imagery of the Ouroboros evokes the infinite nature of creation from destruction. The sign appears across cultures and is an important icon in the esoteric tradition of Alchemy. Egyptian mystics first derived the symbol from a realphenomenon in nature. In extreme heat a snake, unable to self-regulateitsbody temperature, will experience an out-of-control spike in its metabolism. In a state of mania, the snake is unable to differentiate its own tail from its prey, and will attack itself, self-cannibalizing until it perishes. In nature and markets, when randomness self-organizes into too perfect symmetry, order becomes the source of chaos.
    The Ouroboros is a metaphor for the financial alchemy driving the modern Bear Market in Fear. Volatility across asset classes is at multi-generational lows. A dangerous feedback loop now exists between ultra-low interest rates, debt expansion, asset volatility, and financial engineering that allocates risk based on that volatility. In this self-reflexive loop volatility can reinforce itself both lower and higher. In a market where stocks and bonds are both overvalued, financial alchemy is the only way to feed our global hunger for yield, until it kills the very system it is nourishing.
    The Global Short Volatility trade now represents an estimated $2+ trillion in financial engineering strategies that simultaneously exert influence over, and are influenced by, stock market volatility. We broadly define the short volatility trade as any financial strategy that relies on the assumption of market stability to generate returns, while using volatility itself as an input for risk taking. Many popular institutional investment strategies, even if they are not explicitly shorting derivatives, generate excess returns from the same implicit risk factors as a portfolio of short optionality, and contain hidden fragility.

    This post was published at Zero Hedge on Oct 21, 2017.


  • The $2.5 Trillion Paradox: “While The Short End Is Optimistic, The Long End Has Never Been More Pessimistic”

    Last weekend, as Deutsche Bank’s derivatives strategist Aleksandar Kocic was looking at the spread between the short and long end of the curve, and while contemplating the lack of market volatility, he concluded that “given where long rates are, Fed appears as overly hawkish – it has only two more hikes to go and, for volatility and risk premia to reprice higher, the gap has to widen. As is appears unlikely that the Fed will be cutting rates any time soon, the gap could widen only if the Long rates sell off.”
    In practical terms – if only for bond traders – this meant that “for anything to happen, 5Y5Y sector has to move higher”, however the $2.5 trillion question is whether this sell off in long rates will be violent or controlled. Kocic concluded that “This is the catalyst for everything.”
    In other words, those lamenting the pervasive complacency and the ubiquitous lack of volatility in the market, may not have much more to wait: after just two more rate hikes, absent a parallel move wider across the rest of the curve, the Fed’s “breathing space” will collapse, and Yellen, or rather her successor, will lost control of both vol markets and long-dated yields, as the Fed effectively hikes into a self-made recession, where it itself inverts the yield curve. That would be a problem.

    This post was published at Zero Hedge on Oct 21, 2017.


  • Ray Dalio Is Shorting The Entire EU

    A point BOE Governor Mark Carney made recently may be the biggest cog in the European Union’s wheel (or is it second biggest? Read on). That is, derivatives clearing. It’s one of the few areas where Brussels stands to lose much more than London, but it’s a big one. And Carney puts a giant question mark behind the EU’s preparedness.
    Carney Reveals Europe’s Potential Achilles Heel in Brexit Talks
    Carney explained why Europe’s financial sector is more at risk than the UK from a ‘hard’ or ‘no-deal’ Brexit. [..] When asked does the European Council ‘get it’ in terms of potential shocks to financial stability, Carney diplomatically commented that ‘a learning process is underway.’ Having sounded alarm bells about clearing in his last Mansion House speech, he noted ‘These costs of fragmenting clearing, particularly clearing of interest rate swaps, would be born principally by the European real economy and they are considerable.’
    Calling into question the continuity of tens of thousands of derivative contracts , he stated that it was ‘pretty clear they will no longer be valid’, that this ‘could only be solved by both sides’ and has been ‘underappreciated’ by Europe . Carney had a snipe at Europe for its lack of preparation ‘We are prepared as we should be for the possibility of a hard exit without any transition…there has been much less of that done in the European Union.’
    In Carneys view ‘It’s in the interest of the EU 27 to have a transition agreement. Also, in my judgement given the scale of the issues as they affect the EU 27, that there will ultimately be a transition agreement. There is a very limited amount of time between now and the end of March 2019 to transition large, complex institutions and activities…

    This post was published at Zero Hedge on Oct 19, 2017.


  • These Are The Wall Street Jobs Most Threatened By Robots

    Cashiers at fast food restaurants aren’t the only workers who should fear being imminently replaced by kiosks and artificial intelligence. Advances in machine-learning software could soon render many high-paying Wall Street jobs obsolete – jobs that will no doubt quickly disappear as electronic trading in equities and foreign exchange markets squeezes trading revenue, forcing banks to seek cost savings elsewhere.
    As Bloomberg points out, ‘the fraternity of bond jockeys, derivatives mavens and stock pickers who’ve long personified the industry are giving way to algorithms, and soon, artificial intelligence.’
    Indeed, firms are already rolling out machine-learning software to recommend trades and hedging strategies. And while many of these tools will undoubtedly help the employees who remain vastly improve productivity (if history is any guide), one day soon, the machines may not need much help.
    But as anyone in the industry has probably noticed, banks have stepped up recruiting of tech talent since the financial crisis. Of the jobs Goldman Sachs’s securities business posted online in recent months, most were for tech talent.
    Billionaire trader Steven Cohen is reportedly experimenting with automating his top money managers. Venture capitalist Marc Andreessen has said 100,000 financial workers aren’t needed to keep money flowing.

    This post was published at Zero Hedge on Oct 18, 2017.


  • The Power Players Behind Silencing Wall Street Reformers

    America has now been through various iterations of ‘it’s time to stop bashing Wall Street’ by writers who seem to easily get air time or plenty of print space to make their case. An OpEd in the New York Times today is the latest in this endless series. We’ll get to that column shortly, but first some necessary background.
    Wall Street did not accidentally run a barge aground and leave a small oil slick on the Hudson River. Wall Street did not accidentally release tainted lettuce that sickened a few dozen people. What Wall Street did was intentional and criminal: it financially engineered a toxic subprime house of cards which it knew from its own internal reviews was going to collapse; it then molded the toxic product into inscrutable bundles; it sold the bundles to unsuspecting investors around the globe while making side bets that it would all come crashing down. Then, after causing the greatest financial collapse in the United States since the Great Depression, Wall Street’s unrepentant scoundrels paid themselves billions of dollars in bonuses with taxpayer bailout funds.
    One of the largest wrongdoers of this era, Citigroup, received the largest taxpayer bailout in history (over $2.5 trillion in loans, cash infusions and asset guarantees) and while this was occurring, one of its executives, Michael Froman, was staffing up the administration of the next President of the United States, Barack Obama, including an accepted recommendation for the head of the Justice Department.
    The 2007-2009 financial crash was more than the product of greed. There was both knowing and criminal wrongdoing, but none of those responsible have gone to jail. None of the regulatory gaps that allowed this to happen have been rectified. The biggest Wall Street banks have grown even bigger and remain too-big-to-fail; Wall Street is still paying the rating agencies for their Triple-A ratings; highly speculative Wall Street firms are still allowed to hold trillions of dollars in taxpayer-backstopped insured deposits in the commercial banks that they are allowed to own under a Byzantine bank-holding company structure with thousands of far-flung subsidiaries around the globe; and a handful of Wall Street banks continue to house trillions of dollars of derivatives inside their insured depository banks – something the public was assured would end under the Dodd-Frank financial reform legislation.

    This post was published at Wall Street On Parade on October 18, 2017.


  • “One Of The Biggest Fears I Have Is I Miss It”: There Is A Sudden Rush To Open Long-Vol Funds

    Last month, Soc Gen analyst, Praveen Singh, analyzed evolving cross-asset volatility trends, and boldly went where so many have unsuccessfully gone before. Singh’s warning was that the market is “now entering dangerous volatility regimes.”
    The crux of Soc Gen’s argument was mean reversion, notably that the current low level of volatility happens less than 2% of the time for equities. Furthermore, Soc Gen found that when equity volatility has been this low in the past, it went on to rise by 3 points in the subsequent 12 months. This means that volatility is more likely to go up than fall further from current levels… at least in theory.
    Portfolio managers, however, are increasingly thinking along the same lines. While it’s rumoured that Brevan Howard will shortly launch a long volatility fund, according to a Bloomberg it appears that there is a surge of interest in launching long volatility funds.
    According to Bloomberg ‘Brevan Howard Asset Management, 36 South Capital Advisors, One River Asset Management and at least three other firms are rolling out new funds designed to protect investors from rising market turbulence.’ Former SAC Capital’s, Hamming Rao, opened a volatility fund with a long bias this June, based in Florida.
    While buying volatility has been a widowmaker trade in recent years, the fund managers Bloomberg spoken to by Bloomberg couldn’t be more optimistic: Jerry Haworth, the co-founder of 36 South who ‘tripled investor’s money’ during the GFC, launched the Lesidi Fund earlier this month. Haworth commented ‘This is a multi-decade opportunity to buy volatility’… To increase the appeal of his long-volatility strategy, Haworth focuses on reducing the ‘negative carry,’ or steady bleed of cash, that accompanies calm markets. That’s gotten easier these days as prices for options and other volatility-linked derivatives have fallen.’

    This post was published at Zero Hedge on Oct 17, 2017.


  • Gary Cohn is Concerned about Wall Street Clearinghouses – Blockchain is Already Fixing it

    Gary Cohn, chief economic adviser to the President, voiced concern over the weekend about risk posed by Wall Street clearinghouses that became systemically important following the 2008 financial crisis.
    As Bloomberg reported:
    As ‘we get less transparency, we get less liquid assets in the clearinghouse, it does start to resonate to me to be a new systemic problem in the system,’ Cohn, director of the White House’s National Economic Council, said at a banking conference in Washington on Sunday.
    Cohn isn’t the first to raise the risk. JPMorgan Chase & Co. and BlackRock Inc. have argued for years that clearinghouses pose their own threats, shifting risk to just a handful of entities. The Treasury Department’s Office of Financial Research has warned that clearinghouses used for derivatives trades can be vulnerable and potentially spread risks through the financial system.
    While it is worth noting that this is another example of how the government’s response to a crisis they created made the economy as a whole more fragile, the good news for Mr. Cohn is that there is an exciting technological breakthrough that allows people to transparently move money without relying upon third parties to guard against shady counterparties: blockchain.

    This post was published at Ludwig von Mises Institute on October 17, 2017.


  • Robert Gore’s “Hard Core Doom Porn”

    It will be a crash like we’ve never seen before.
    ***
    SLL has been accused of trafficking in ‘doom porn.’ Guilty as charged. If you don’t like doom porn, don’t read this article, it’s hard core. If you prefer feel good and heartwarming, there are plenty of Wall Street research reports and mainstream media stories about the economy available. Enjoy!
    In 1971, President Nixon closed the ‘gold window,’ which allowed foreign governments to exchange their dollars for gold. This severed the last link between any government and central bank-created debt and the real economy. Debt could be conjured at whim, and governments and central banks have done so for the last 46 years.
    Not surprisingly, credit creation without restraint has papered the globe with the greatest pile of debt mankind has ever amassed, measured in nominal terms or relative to the underlying economy. A measure of how extraordinary this situation is: most people regard it as normal, if they think of it all. Debt is a first mover, a financial constant. Any exigency small or large can be met from an unlimited credit pool that will always be with us. How to rebuild Houston, Florida, and Puerto Rico? No problem, borrow.
    Although fiat credit creation by governments and central banks is unconnected to the real economy, its effects are not. Their debt becomes an asset within the financial system. Through fractional reserve banking, securitization, and derivatives it become the basis for a multiplication of the original debt. That multiplication is many times the multiplier (the reciprocal of the reserve requirement) taught in introductory macroeconomics classes whereby the debt is contained within the banking system.

    This post was published at Zero Hedge on Oct 12, 2017.


  • Trading And Investing In Gold: Follow The Money

    The paper gold attack that I first suggested might occur in the September 7th issue has taken gold from $1360 down to $1270 (continuous contract basis). Technically, gold has moved from an ‘overbought’ condition to a mildly ‘oversold’ condition. The RSI and MACD indicate that gold is slightly ‘oversold’ but I believe both indicators will flash ‘extremely oversold’ before this price attack over. This should occur sometime in the next 2-3 weeks.
    I say this because I continue to believe the open interest in Comex paper gold, combined with the analyzing the weekly Commitment of Traders report, is the best indicator of gold’s next move, at least until the western Central Banks are unable to control the price of gold with paper derivatives. To be sure, the COT report is not always a perfect predictor but in the last 15 years the two reports combined have been around 90% accurate.
    Currently, the Comex banks’ net short position in paper gold is at the high end of its historical range. Concomitantly, the net long position of the hedge funds is also at the high end of its historical range. Per last Friday’s COT report, the banks began to reduce the short positions, thereby reducing their net short position, and the hedge funds began to reduce the long positions, thereby reducing their net short position (click to enlarge):

    This post was published at Investment Research Dynamics on October 11, 2017.