Wednesday, May 6, 2015


That's when the Russians show off all their new pretty equipment with which to kill people.  It's also a lovely month in the fly-over zone.  It's also a universal distress call meaning immediate assistance required.  Pick a scenario and you're covered.

Janet Yellen laid a big one on the market today.  Channeling Alan Greenspan, she expressed the view that equity prices are quite generous.  A bit short of irrational exuberance, but good enough to scare a bunch of people.  Janet should know.  After all the valuations in the equity markets are a direct result of the world's central banks irrational exuberance in tearing down rain forests to print money, creating single shop shopping for the investor; there is no place else to put it.  Nevertheless, it is extraordinary that so smart a woman can come up with such a dumb statement at a time when it would appear that a healthy dose of reassurance is or will soon be needed.

I've been writing about this for a while but finally it is beginning to catch on.  More and more commentators are looking at the state of the fixed income market and not liking what they see--in particular, U.S. Treasuries.  The 10 year closed at a 2.24% yield today.  Why?  Who knows for sure but it's now trading above it's recent range.  Is it the movement that has produced the liquidity squeeze of which we have spoken or is it the lack of liquidity that has provoked the move?  You may well have noticed that for the first time in a long while Japan has replaced China as the largest holder of U.S. debt.  The Chinese have been sellers.  Who have been the buyers?  Amazingly, there were a couple of tales floated that it was the Belgians.  That's crap.  Certainly not the EU.  Not the Fund.  Not the ECB.  Then who?  Actually, that is not the mystery; that remains with the Chinese.  It's not the buyers it's the sellers and the reason for the sales.

We have also spoken of the need created by Dodd/Frank for the banks to hold a greater percentage of liquid assets in their asset pool and the additional requirement to reduce "market making" in their trading operations.  Now once again, bonds are not like loans; bond valuations change day-to-day based on prices.  Yield goes up, price comes down.  If the yield goes way up...on a daily valuation you can lose your shirt.

Well, then, what does a girl do?  A smart girl says, "I'm getting the hell out of this position...GIVE ME A BID!"  But there are no bids...and today there are no bids.  Of course the harder our gal tries to find a bid the lower goes the price and if the price lowers, the loss increases until...

Well, you have to take your medicine at some point in order to live to fight another day, but suppose instead of a more-or-less orderly market reversal you have an "event" that moves everything  l i k e   r i g h t  n o w.   One of those 10-sigma moves that the quants love to talk about.  A Lehman,...or to make it simpler, the Chinese or the Russians jumping up really ugly with one of their neighbors.  Or a Greek exit from the EU.  Or--God forbid--a terrorist success in the United States.  And suddenly, the every assets mandated to protect the solvency of the system turn into weapons of mass destruction, because if that market collapses, all markets collapse.

But, it's a glorious day here, and I'm not going to worry about it; I'll leave that to Janet--she knows about these things.  I'll also leave her with something else she might be able to use   ...  ---  ...   Any port in a storm.

Addendum:   The Greeks are seriously buggered in so many ways there in no point in writing about it any more.  Let's just see what happens and if they can pull it out.

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