February 23, 2018

China's "AIG" Moment Arrives: Beijing Bails Out "Systemically Important" Anbang, Chairman Removed

In November of last year, we set forth the four candidates that would trigger China's downfall and expose the Potemkin village economy as nothing but a facade...

It might be Anbang - the acquisitive insurance behemoth – see “Anbang Just Became A ‘Systemic Risk’: Revenues Crash As Its Chairman Is “Detained”

It might be China Evergrande – the developer of “ghost” properties and described by J Capital’s, Anne Stevenson-Yang as “the biggest pyramid scheme the world has yet seen” – see “Stevenson-Yang Warns ‘China Is About To Hit A Wall”.

It might be HNA. The highly-leveraged Chinese conglomerate, which has been on an overseas acquisition binge, is paying more for a 363-day dollar loan than serial defaulter, Argentina, paid on a 100-year loan earlier this year.

Or It might be Dalian Wanda, which established itself building and operating commercial property, luxury hotels, culture and tourism, and department stores. While the company has its roots in property and infrastructure, it recently begun to push in a bold new direction: investing in all six of Hollywood's major studios.

And now we know

A day after banning VIX, it appears China has finally reached its "Minsky Moment," or in the case of echoing America's demise, its "AIG Moment."

According to the China Insurance Regulatory Commission website, China regulators to take control of Anbang Insurance from Feb. 23, 2018 to Feb. 22, 2019.

Read the entire article

February 22, 2018

Treasury Proposes Dubious, Untested Chapter 14 Bankruptcies for Too Big to Fail Banks

The Trump Treasury has proposed changing Dodd Frank rules, supposedly to make resolving Too Big to Fail banks easier.

The Treasury yesterday proposed replacing the resolution scheme under Dodd Frank, called the Orderly Liquidation Authority, confusingly also called Title II liquidations, with a new type of bankruptcy, Chapter 14. While there was a lot not to like about the OLA, Chapter 14 is no better and in key respects, markedly worse.

The costly fallacy underlying Chapter 14 is the idea that big banks can be wound up without a taxpayer backstop. And despite Treasury’s chest thumping that taxpayer monies won’t be at risk, in fact, government funding is still available if needed.

And like it or not, that makes sense. The reality is that banks provide critical infrastructure for commerce, known as a payment system. Recall that in the crisis, the authorities had to guarantee money market mutual funds up to $250,000 because the Lehman implosion brought down the Reserve Fund, precipitating a run on mutual funds. Mutual funds are big participants in the repo market, which is critical for financing the trading of banks and large investors.

We’ve embedded the Treasury proposal at the end of this post. Note that some measures could be implemented by regulators directly, but the Chapter 14 scheme requires Congressional approval.

Read the entire article

February 21, 2018

Brandon Smith: New Fed Chairman Will Trigger A Historic Stock Market Crash In 2018

Ever since the credit and equities crash of 2008, Americans have been bombarded relentlessly with the narrative that our economy is “in recovery”. For some people, simply hearing this ad nauseam is enough to stave off any concerns they may have for the economy. For some of us, however, it’s just not satisfactory. We need concrete data that actually supports the notion, and for years, we have seen none.

In fact, we have heard from officials at the Federal Reserve that the exact opposite is true. They have admitted that the so-called recovery has been fiat driven, and that there is a danger that when the Fed finally stops artificially propping up the economy with constant stimulus and near zero interest rates, the whole farce might come tumbling down.

For example, Richard Fisher, former head of the Dallas Federal Reserve, admitted a few years ago that the U.S. central bank has made its business the manipulation of the stock market to the upside:

  • What the Fed did — and I was part of that group — is we front-loaded a tremendous market rally, starting in 2009.

  • It’s sort of what I call the “reverse Whimpy factor” — give me two hamburgers today for one tomorrow.

  • I’m not surprised that almost every index you can look at … was down significantly.

Fisher went on to hint at the impending danger (though his predicted drop is overly conservative in my view), saying: “I was warning my colleagues, don’t go wobbly if we have a 10-20% correction at some point…. Everybody you talk to … has been warning that these markets are heavily priced.”

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February 20, 2018

Ahead Of Record Weekly Treasury Issuance, Traders Rush To Cover Record Shorts

Two weeks ago, and one day ahead of the Monday 5 VIXplosion, we warned that the combination of record equity longs...

... and record Treasury shorts in the 2Y maturity and the Ultra-Long buckets...

... was "Recipe For Disaster."

Indeed it was, and what followed next was a dramatic vol and risk-parity puke, which forced both equity and bond investors to drastically reduce their record exposure, and as Reuters' Jamie McGeever writes, speculators have been scrambling to scale back their bets on higher yields... by a record margin.

According to the latest CFTC data, in the weekend ending Feb 13, what was until 2 weeks earlier a record net short position, saw a furious rush to cover (perhaps shorts were worried that the Fed could cut rates it stocks continued to tumble), and as a result net 2Y short positions were slashed by 76,772 contracts to 133,986: that’s less than half the record net short of 329,066 contracts just two weeks ago.

If one extends the frantic move by one week to Feb 6, the reduction in spec net short positions of almost 200,000 contracts in that period is the second largest two-week fall in bearish bets ever.

Read the entire article

February 19, 2018

Here's Why Banks Hate Cryptocurrencies

Banks like to pretend that they're so much more established and secure than the world of cryptocurrencies, but as anybody who pays close attention to the headlines would know...that's just not the case...

Setting aside all of their rhetoric about embracing the blockchain, banks have mostly avoided or opposed cryptos (Goldman Sachs, sensing the opportunity for profit, is one notable exception), often citing their volatility and the ease with which they can be used to launder money as qualities that disqualify them from being taken seriously (though, as we recently witnessed with the US dollar, perhaps banks need to rework this volatility argument a bit).  Even yesterday's announcement of the first criminal charges against a cryptocurrency trader pales in comparison to the many, many crimes that banks (or even one bank) have settled allegations of. The real answer to why the banks’ dislike cryptocurrencies is probably because they feel threatened. The recent selloff notwithstanding, the rise of cryptocurrencies has continued unabated, despite the efforts of some of the most powerful governments on Earth, while the concept is still very young, it does have potential to shake up the aging fiat system. In order to understand the race between the banks and cryptocurrencies, we developed a visual to see just how "David" is comparing to "Goliath."

Using data from Yahoo Finance and CoinMarketCap.comhttps://howmuch.net/articles/banks-vs-cryptocurrencies, HowMuch.com's data team developed a visual that compares the market caps between some of the world’s largest banks and the largest cryptocurrencies. On the left blue column, there are four banks listed from largest to smallest market caps: JPMorgan Chase, Bank of China, Goldman Sachs, and Morgan Stanley. Conversely, the right red column features the total cryptocurrency market, Bitcoin, Ethereum, Litecoin, NEO, Ripple, Bitcoin Cash, Cardano, and Stellar. The larger the circle, the bigger the market cap.

After an extraordinarily volatile (even for bitcoin) start to the year, cryptocurrencies are rallying once again, with bitcoin breaking above $10,000. As of Feb. 16, 2018, the crypto market had a market cap of $470 billion - larger than the size of the United States’ largest bank, JPMorgan Chase.

Bitcoin's market cap alone is comparable to Bank of China's. The second largest cryptocurrency by market cap, Ethereum, is comparable in size to Morgan Stanley. It is stats like these that have the global banking sector worried that cryptocurrencies are on track to make a serious impact on their operations.

Read the entire article

February 16, 2018

SEC Blocks Chinese Takeover Of Chicago Stock Exchange

In a decision that many had anticipated, the SEC Thursday night officially rejected a proposal from a Chinese investment group to purchase the Chicago Stock Exchange - which handles a tiny 1% of daily order volume - in an acquisition that would have created a conduit for a Chinese entity to exert more control over IPOs of China-based companies in the US, where markets are significantly more open to international investors than in China. Hundreds of small companies are waiting to list in China, where they're being held up by red tape.

The CSE buyers group included Chongqing Casin Enterprise Group Co. and a consortium of US based investors after two original Chinese members of the investor group dropped out late last year after the deal appeared to stall.

As Bloomberg explains, the small transaction would nevertheless have allowed a Chinese company to gain an important foothold in US financial markets, even as the Congress in recent years has passed laws trying to make it easier for companies to go public. The exchange planned to leverage the Jumpstart Our Business Startups, i.e. JOBS, Act, a 2012 law Congress passed to make it easier for smaller companies to go public.

It was reported late last year that the White House was exerting pressure to block the deal. SEC staff had reportedly wanted to approve the deal, but the new chairman, Jay Clayton, froze the agency's pending decision to approve back in August - a rare move for a new commissioner.

The deal, a Chinese takeover of an institution in the American financial markets, has drawn fierce political opposition as Trump pushes back against unfair trade practices with several measures indirectly and directly  aimed at China.

Read the entire article

February 15, 2018

Bridgewater's European Short Grows To A Massive $22 Billion: Here Are The Targeted Companies

In the red corner we have Mario Draghi, who runs the world's biggest and most activist central bank... and in the blue corner we have Ray Dalio, who runs the world's biggest hedge fund and has been systematically betting against the companies backstopped by his opponent.

They are set for a historic clash.

Less than a week ago, we were surprised to learn  that what was until the start of the month "only" a $3 billion short bet against a broad selection of Europe's most popular public companies, had grown into a massive $13 billion basket of shorts. Well, fast forward to today when according to the latest breakdown of his filings by Reuters, Ray Dalio has been especially busy, and since last Friday he added another $9 billion shorts, bringing Bridgewater's total short against some of the continent’s biggest companies to a record $22 billion.

While there was no offsetting data to show whether the $160 billion in AUM Bridgewater holds more European stocks than it “shorts” overall, an investor in the hedge fund firm’s Pure Alpha Major Markets strategy said that the fund had reduced its long exposure significantly this year.

And although the filings do not say when Bridgewater first took out its European short positions - our first report of Dalio's European short was back in October when the fund had a tiny $700 million short - many of its latest disclosures are recent, with some in Germany, Italy and France in the past two weeks.

As shown in the breakdown below, Bridgewater has bet against firms ranging from Anglo-Dutch consumer giant Unilever to French oil giant Total, and virtually every single prominent public bank.

Read the entire article

February 14, 2018

$1.2 Trillion Asset Manager: Forget Volatility, The Real Financial Timebomb Is Public Pensions

As we have reported over and over and over (and over, and over), public pensions are in deep, deep trouble. 

In addition critical funding shortfalls (U.S. public pensions had just 71.8% of assets required to meet obligations as of June 2016), many of the country's largest pensions have completely unrealistic target rates-of-return of 7% on average.

And while interest rates and therefore the cost of leverage has been at historic lows, and markets at historic highs (until they underwent a brief Vol-fib cardiac arrest last week), the question is what happens when the music stops, liquidity dries up, and economic contraction besets (or catch up to) the markets? 

David Hunt, CEO of $1.2 trillion asset manager PGIM, is asking this exact question.

"If you were going to look for what’s the possible real crack in the financial architecture for the next crisis, rather than looking in the rearview mirror, pension funds would be on our list,” Hunt said in a Friday interview with Bloomberg, discussing what municipalities and states will do when local tax revenues decline and unemployment worsens. "So we're worried about those pension obligations.”

Read the entire article

February 13, 2018

What's Behind Global Inflation: China Creates A Record 2.9 Trillion New Loans In One Month

According to one monetary theory, in a world in which China is the dominant creator of debt - which it has been since the financial crisis - it is also China that is the marginal creator of the global inflationary impulse. In which case, the latest Chinese new loan data helps explain the recent inflationary burst which judging my the recent market volatility has freaked out US traders, because according to the PBOC, in January China created a record CNY2900 billion in new loans ($458.3 billion), a striking rebound from the CNY2030 billion a year ago, and almost 1 trillion yuan above the CNY2000 expected.

According to Reuters, the credit boom has been fueled "by strong economic growth, a robust property market and a crackdown on riskier shadow lending, which has forced banks to shift some loans back onto their balance sheets." But mostly it has been forced by an implicit demand on Beijing to keep the global reflationary impulse strong at a time when the Fed is shrinking its balance sheet - a highly deflationary, if only for circulating monetary aggregates, exercise.

A more detailed breakdown of the loan data showed sharp pickups in demand for credit from both households and companies, a harbinger of strong consumption and investment, if both funded on credit. Corporate loans surged to 1.78 trillion yuan from 243.2 billion yuan in December, while household loans rose to 901.6 billion yuan in January from 329.4 billion yuan in December.

Meanwhile, with the fate of the US capital markets in the hands of the inflation/deflation debate, the real answer what happens next will not be found in the BLS seasonally adjusted average hourly earnings dataset or the Wednesday CPI print - these are merely measurements of the underlying credit dynamics - but half way across the world, in Beijing, which decides month after month, what is the proper level of new credit with which to lubricate not only China, but the rest of the world as well.

Read the entire article

February 12, 2018

Goldman's Shocking Capitulation: The Buy-The-Dip Era Is Dead, "This Is A Genuine Regime Change"

Earlier today, we were delighted to report that after the biggest vol explosion in history, the world's largest hedge fund Bridgewater, went from urging traders to go all in as recently as January 23, to warning that a "bigger shakeout is coming."

It turns out that Ray Dalio wasn't the only fund to urge its broader client universe - and anyone else who cared to listen - to do one thing, while telling a select group of clients to do the opposite. As we noted on Saturday, in his latest Weekly Kickstat published on Friday, Goldman's chief equity strategist David Kostin essentially told clients to BTFD, suggesting that the correction was likely almost over, based on historical patterns.

Meanwhile, on the very same Friday, Brian Levine - co-head of global equity trading at Goldman Sachs - sent out an email to the investment bank’s bigger clients, in which he made a stunning prediction: the Buy the Dip Regime is now over.

In the email, first reported by the Financial Times, Levine writes that "Historically shocks of this magnitude find their troughs in panicky selling" and yet "I’ve been amazed at how little ‘capitulation selling’ we’ve seen on the desk . . . The ‘buy on the dip’ mentality needs to be thoroughly punished before we find the bottom."

And, more shockingly, the person in charge of the most important trading desk also said that “longer term, I do believe this is a genuine regime change, one where you sell-the-rallies rather than buy-the-dips."

Read the entire article

February 9, 2018

"Strong Dollar"..."Weak Dollar"...What About A Gold-Backed Dollar?

The recent hullabaloo among President Trump’s top monetary officials about the Administration’s “dollar policy” is just the start of what will likely be the first of many contradictory pronouncements and reversals which will take place in the coming months and years as the world’s reserve currency continues to be compromised.  So far, the Greenback has had its worst start since 1987, the year of a major stock market reset.

A modern-day reenactment of the famous “our currency, your problem” play that went over so extremely well in the 1970s… [PT] 

The brief firestorm was set off by Treasury Secretary Steven Mnuchin who said in response to the dollar’s recent slide:

Obviously, a weaker dollar is good for us, it’s good because it has to do with trade and opportunities.”*

Mnuchin backtracked a bit as international financial leaders criticized the apparent shift in policy while Administration officials sought to clarify the Secretary’s remarks.  President Trump weighted in on the matter saying:

“Ultimately, I want to see a strong dollar” and added that Mnuchin’s comments were “taken out of context.”

While President Trump sought to allay jittery currency markets that monetary policy had not changed, candidate Trump supported the Federal Reserve’s suppression of interest rates and did not want to see a rising dollar:

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February 8, 2018

"Do I Have To Worry About Another Volatility Spike"- A Q&A With Goldman's Head Quant

After a day of conference calls with investors, Goldman's newly-hired quant Rocky Fishman has assembled the most frequently asked questions that are relevant for trading dynamics in the VIX and equities in the coming days.

Here is the result: Goldman's Q&A on the Trading Dynamics of ETPs

1. Do I have to worry about VIX ETPs driving another similar volatility spike?

Not for now, and not likely anytime soon. The large short VIX products were the primary driver of Monday afternoon's late-day acceleration in the VIX, and with them diminished ($300mm AUM now vs $3.9bln peak AUM), the quantity of VIX futures ETP issuers would have to buy on a further volatility spike is diminished as well. Levered long ETPs remain sizable ($1.1bln AUM), but per unit of VIX futures exposure, they trade less on a volatility spike than inverse products would (filling the gap between long futures that have risen and a fund NAV that has risen faster requires fewer units of futures than between a NAV and futures position that are moving in opposite directions). The higher level of VIX futures also makes an N-point move a lower percentage move than it would be with lower VIX futures prices.

2. What’s the impact of the XIV (and Japan-listed 2049) redemption? What’s the impact of the SVXY continuing to trade?

The previously sizable short VIX ETPs no longer have a significant impact on the VIX futures market because Monday's sell-off pushed their AUM down so much that their VIX futures holdings would be immaterial to the broad market (the SVXY is short less than 1% of VIX futures open interest), regardless of whether or not they continued trading.

Read the entire article

February 7, 2018

Just A Coincidence?: The Dow Goes From Being 567 Points Down To 567 Points Up At The Closing Bell

Seriously?  We were expecting that Tuesday would be an unusual day on Wall Street, and that was definitely the case.  At the low point, the Dow Jones industrial average was down 567 points, but at the closing bell it was up 567 points.  That is a swing of more than 1000 points, but what is more surprising is the exact symmetry of those numbers.  Is this just some sort of bizarre coincidence?

At the opening bell, stock prices collapsed and many were concerned that we were heading for another really bad day for investors.  According to CNBC, the Dow was down 567 points at the lowest point…

The Dow Jones industrial average opened with a big whoosh lower, then rallied all the way back. As of 3:41 p.m. ET, the Dow is 600 points higher and trading at a new session high. At its session low it was down by 567 points.

But then momentum shifted and the Dow soared.  By the end of the Day, the Dow Jones industrial average was up 567 points.  The following comes from CNN

The Dow plunged 567 points at the open on Tuesday and briefly sank into correction territory — a drop of 10% from its record high. But those losses quickly vanished, and the index ended the day up 567.

It was the Dow’s biggest point gain since August 2015 and the fourth-largest in history. The percentage gain of 2.3% is the biggest since January 2016.

Read the entire article

February 6, 2018

"The Vol Market Finally Broke": A Quant Explains What Happened To The Market

The “grey swan” we all have spoken about for years—that being the absurd “tail wagging the dog” potential of VIX ETN market structure (inverse and leveraged products) AND the massive growth in “negative convexity” / “vol target” / “vol rebalancing” strategies to either generate extra income or “systematically allocate risk” (looks good in the prospectus, right?!) –finally “broke” the volatility market, and has now bled-through to the “underlying” spot equities market…as the short vol trade went “lights out.” 

The ETNs are the “patient zero” of this current market meltdown.  It is estimated that there was anywhere from ~$125mm to $200mm of vega / VIX futs to BUY on the close from the two main “short VIX” ETNs that rebalance daily (XIV and SVXY).  As S&P traded -50 handles AFTER the cash close from 4:00pm to 4:15pm into the market’s anticipation of the massive rebalancing of volatility (buy to cover) on the close, XIV then saw a delayed and terrifying ~-87 PERCENT move after the close, as some who owned XIV puts as crash protection sniffed this potential and speculated liquidation from the ETN, which is set per a rules-based system to buy back short vega after an 80% “crash trigger”(which again isn’t a certainty because they use a blend of 1st and 2nd month).  The asset pool nonetheless was seemingly / largely wiped-out and the note is guaranteed to “pay out” to their shareholders as set per their prospectus.  It is likely that this thing has indeed been “triggered” and will be forced to liquidate.  SVXY doesn’t have the firm 80% “trigger” but too is seeing its NAV “wiped out” and is trading ~-80% post-close as well.

The issue NOW is the pile-on going-forward across assets, as the systematic “short vol” community’s models are now completely toast, and they too will be forced to cover remaining “short vol” positions that didn’t trade today—i.e. BE PREPARED FOR A MAJOR VIX FOLLOW-THROUGH TOMORROW. 

VaR-based models need to be reset across all asset-class strategies, forcing further de-risking over the coming days and potentially weeks, as heads of funds and heads of risk try to figure out how much their models are forcing them to “gross-down.”  Shorter-term vol target / vol allocation strategies (think CTAs) and longer-term models like risk-parity and too will reset and “rebalance” their risk (lower) as realized vols are re-priced.  Structured products, annuities and other vehicles with built-in protection?  Also purging exposure on the vol reset.  Finally, it also shouldn’t be lost on the popularity of “short VIX” trades in the retail community, and the “butterfly flapping its wings” relationship to the recent melt-down in the crypto-currency space. 

Read the entire article

February 5, 2018

666 Points: We Just Witnessed The 6th Largest Single Day Stock Market Decline In U.S. History

On Friday, the Dow Jones Industrial Average fell 666 points (665.75 points to be precise), and many are pointing out that this was the 6th largest single day crash that we have ever seen.  This decline happened on the 33rd day of the year, and it was the worst day for the stock market by far since President Trump entered the White House.  I have been repeatedly warning that we are way overdue for a stock market crash, and many are concerned that we may be on the precipice of another great financial crisis.  We shall see what happens on Monday, because that will set the tone for the rest of the week.  If we see another huge decline early Monday morning, that could easily set off full-blown panic selling on Wall Street.

Rising interest rates appear to have been the trigger for the enormous market drop on Friday.  The following comes from the New York Post

“We all know that many bull markets have ended by the Federal Reserve as they raise the rates to the point of slowing the economy down perhaps too much,” Quincy Krosby, chief market strategist at Prudential Financial, told The Post.

“It’s come on quickly and it caught the market off guard,” Krosby said.

The Dow sell-off brought it below the 26,000 plateau — to 25,520.96 — the biggest points drop since Dec. 1, 2008.

It is quite rare for the market to drop this much in a single day.  The largest single daily decline was a 777 point drop in 2008, and overall the Dow has fallen by more than 600 points less than 10 times throughout history

Read the entire article

February 2, 2018

BoJ Offers To Buy Unlimited Debt, Boosts POMO In Panic Response To Surging Rates

Kuroda is losing kontrol

After unexpectedly boosting its bond-buying in the 3-5Y segment of the JGB curve on Tuesday, as global bond yields break ever higher, it appears The Bank of Japan is realizing it is losing control of its yield curve and today unleashed a double-whammy to stifle the bond bears...

Whammy 1 - BoJ offers to buy unlimited 10Y notes at 11bps.

Result - a 0.5bps drop in the JGB yield!!

Let's hold back on the 'mission accomplished' celebration for now, because in a rerun of the failed attempt from Tuesday, when the BOJ boosted its 3-to-5 year bond purchase operation (aka POMO) from 300BN to 330BN yen, today it proceeded with...

Whammy 2 - BoJ increasese its usual POMO to 450 billion yen from 410 billion in the 5Y and 10Y range of the curve.

Result: a very brief weakening of the JPY followed by a 'policy error-like' drop in USDJPY as the Yen spiked now that the market demands even more.

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February 1, 2018

10 Amazing Facts About America’s Economic Recovery From Trump’s State Of The Union Address

If the U.S. economy continues to surge under President Trump, I may need to change the name of my website.  In December 2009 I started “The Economic Collapse”, and it was quite an appropriate title at the time.  In fact, the 10 years immediately preceding the Trump presidency was one of the worst stretches for the U.S. economy in our entire history.  But now things are changing.  Manufacturers are coming back to America, unemployment is falling, and the stock market has been soaring.

During his State of the Union address, President Trump called this “our new American moment”, and at this time it is hard for anyone to disagree with him.  Things are definitely better for ordinary Americans than they were under previous administrations, and even some of Trump’s most hardcore critics are starting to come around.

The Democrats were hoping to use Trump’s speech to launch a new wave of attacks against him, but that massively backfired.  The State of the Union address may have been Trump’s best performance to date, and even a CBS News poll found that his speech got an astounding 75 percent approval rating.

No matter how Democrats try to spin things, the truth is that there is a lot of good economic news right now.  The following are 10 amazing facts about America’s economic recovery that come directly from the transcript of Trump’s State of the Union address

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