Thursday, May 14, 2015


I was staying awake at night trying to figure out this rout in bonds without any success, so I decided to call My really Smart Friend, Larry for his take.  Here it is.

China eases monetary policy, so oil prices bottom trapping shorts; this begins a cascading of reversals of crowded trades in other asset classes, primarily Bunds; this then cascades into US Treasuries and finally other FI markets. In short a chain reaction of a whole series of crowded trades thanks to CB QE that everyone is keying off of.

Now if I understand what he is saying...and I am not sure that I do...this thing is like Topsy in Uncle Tom's Cabin; it just growed.  Which means that nobody really has a handle on this thing which means if you were scared before you should be terrified now.  Add on to that Mr. Greenspan today projecting a good deal of blood in the water when rates finally begin to move up and the pucker factor should be red-lining about now.  Makes sense, right?  Nah.  The equity markets went crazy today with the S & P reaching a new all-time high on the basis of a slightly better than expected jobless claims number and signs of growth in parts of the EU though, remarkably, Germany's GDP fell in the first quarter.  "SIGNS THAT QE IS WORKING IN EUROPE" screamed the headlines.  That is of course crap.  What it is is people trying to talk themselves into believing that loose money will be with us for a while.  The gains in Europe can be attributed entirely to (finally) the move towards economic structural adjustment in Italy and France with a strong movement in Spain.  Of course, the area leader, the UK's strong rebound has hurt European emotions one bit.  Greece remains a wild card but at this stage nobody cares.  The "solution" being talked about is having a referendum and allowing the Greek people to decide their fate.  Funny, I thought that was the point of elections but when faced with the contrary desires of his electorate--to stay with the Euro but not accept that which will accomplish that wish--Mr. Tsapris will be more than happy, I think, to lead from behind.  Heck, there's a lot of that going around these days.

Over Here, things are just great.  That 0.3% growth figure for the first quarter is probably going to get revised down to a negative number and there are rumblings that the projected 3.3% figure for quarter #2 is looking more and more like 1.5-1.8%.  The other good news is that inflation appears to be rising, which should make the Fed happy but with no growth is it going to be long before we start hearing the stag-word?  Want to bet on a rate hike with an election coming up next year and the entire board chock full of Democrats?  This ain't your father's Fed, boys and girls.  This is a politically motivated Fed so I suspect that Ms. Janet will be dragged kicking and screaming to the rate-rise door especially if the howls in Congress begin reaching a fever pitch unless something turns around real quickly.  Now don't get me wrong, this isn't terrible; it's just not good--certainly not as good as had been reported.  And that's not good.

But with Il Duce's guys, it's business as usual.  A hand full of banks are about to undergo another round of extortion at the hands of the Justice Department for "fixing" the FX market in past years.  This time, for a little added flavor, they are going to force the holding companies to plead guilty to a felony of FX market fixing or some such thing.  Now of course one may ask what the hell did the holding companies have to do with any of this and the answer would probably be, "nothing."  So "Why" one might also ask and the answer is because if you force the banks to plead guilty to a felony, a substantial amount of their business goes away by law.  Felons cannot act as trustees.  One might also ask, "Hang on, how do seven institutions fix a $7 TRILLION A DAY market," and the answer from any honest person will be, "Beats the crap outta me."  Be sure to take a close look at the explanation of what these hoodlums did wrong; it should be the finest piece of creative writing since The Sound and the Fury.  And since it will certainly involve market making activities, one should ask one's self what effect this might have in banks making markets the next time the Chinese muck about with their monetary policy, and some other short gets squeezed and everybody winds up on the same side of a half dozen trades looking for a bid.  Nobody likes a smart-ass, Larry, but you are probably right again.

No comments:

Post a Comment