RIGHT ON TIME

The WSJ published a very interesting article concerning winners and losers in the bond market following Dodd/Frank.  Not surprisingly, it was determined that bigger is better.  No kidding, but the real tale is the switch in the nature of the market makers or perhaps a better phrase would be the participants in the market because market maker implies a very specific function.  I'm not sure the nature of the business remains the same and as I have written this could, through the lack of future liquidity, present multiple problems.  This is the real importance of the WSJ story.

We have gone over the importance of being able to move paper, in size, particularly during periods of market upset, and there is no need to replow that field again.  However, what has not been discussed is the very simple  delineation between banks and other financial corporation and it is almost as simple as Paul Volker's observation that, "Banks are different."  What's the difference between Citibank and a hedge fund or a private equity fund...or for that matter even an enormous funds manager such as Blackstone?  The association with the Federal Reserve.  These days the Fed doesn't like to point that out but in the end, it is the last refuge in a desperate situation, BUT to take advantage of what the Fed offers you have to be a bank.  Make a market?  That means you use your capital often when it inconvenient to so do.  What's the difference between capital and liquidity?  In certain conditions, not much.  At the end of it it comes down to the Fed and if you can't go there...well, you don't make a market which if the condition is enough widespread, exacerbates the problem.  So thanks, WSJ.  Between us we might fix this thing.  Of course we might need the Fed to own up to some basic truths out there in Realville.  That could really help.

THE MADMAN RETURNS

"Where the hell you been?"

"The Keys.  Just got back on Monday.  Wonderful."

"You stop?"

"For now.  Told you I was going to. Should have done it a couple of years ago.  This is really Coo-Coo land."  But I still read the Journal and still have the screens although their damn expensive for what I do now but there's some good stuff.  Like today.  Did you see the story on Greek Bonds?"

"You mean the greatest investment in the past year except you can't sell 'em because nobody trades 'em?"

"That's the one!  So tell me something banking wiz, if nobody trades 'em, how do you value 'em?"

"You didn't lose the habit of asking awkward questions down in the Keys did you?  You make a S.W.A.G.--you know what that is right? A Sophisticated Wild-Ass Guess."

"Just like..."

"Yes, just like 2007.  That's what you were going to ask, right?  And yes, they are all being held at cost or better by everybody in Euroland even though somebody tried to blow up the former Prime Minister with a letter bomb today.  And yes, the ECB holds a bucketful, and no, nobody cares."

"Not a short, eh?"

"Not even for a Mad Man."

"Reassuring.  Nothing has changed in five months...hell nothing has changed in ten years!  Except for my gold buddy Trump Who is right where he wants to be, the Biggest Swinging..."

"OK, OK.  I get the picture.  You really know him well?"

"Well enough...from golf, charities.  He gives away a lot.  Should have been a trader.  Biggest set ever.  Problem is he's always all in.  You know you just have to be right 51% of the time.  This guy thinks he's right ALL the time and he scares the crap out of people so they dump the positions."

"So why don't the call him Mad Donald?"

"You know what, Charlie? I don't know.  Maybe because he don't drink.  I don't know. Now The Original...I've been known to have a cocktail..."

"Or six."

"Or eight if the truth be known.  Tell ya what though.  He's got some smart guys around him.  But what the hell do I care.  I bought a house in the Keys."

" You what!  You!"

"Me.  Charlie, this could go either way.  In fact it could go either way about five times!  I can't trade this gig.  Still should be all over the place but like you say, nobody cares.  So Mad Max is no more. I'm becoming respectable."

"It's called age, Max"

"For you, Charlie but not for me! Still have the condo for you-know-who.  She won't make a big move.  Me neither I guess, but I'm done, I really am.  You told me to do it  I owe it to you......you bastard!"



I don't know how to feel about this.  Max is about the last of a breed and without people like him I'm not sure we are better off.  There are things about this business...it's feel I guess the thing that machines do not have.  Max was better than 51%.   Not a lot but when you are you make a lot of money.  Too bad.  Then again, the Keys are great in the winter.  He says it's not big but it does have four bedrooms and fish all over.  My Man Max!bonds

SUCKING THE AIR OUT

Of everything.  Politics, that is, the latest being the firing of Comey.  Now I for one think the guy and his butt boy Fitzgerald should have been put in the slammer 10 years ago for the railroading of Scooter  Libby who, while apparently not the neatest guy in the world didn't deserve 2 years for a trumped up charge (no pun intended) of lying to the FBI.  Got that off my chest and the world goes on...unnoticed though it may be.

Big note auction today that stank causing yields to sneak up a bit (long bond was lower) in anticipation that the Fed will get in gear again next month and take the discount rate up again.  Right now, fixed income is not the place to be. And while half of Washington is proclaiming the end of the Republic and very possibly democracy bolstered by the New York Times making up stuff to support the position, very quietly things in the view of a lot of people are looking up; witness the Fed.  Remarkably, and with this I do not agree, Europe seems to have become the darling based on Macron,    better corporate news, the Greeks and the rest of the Euros making nice-nice (we're not too sure about the Germans) and the rise from the dead of DeutscheBank with the infusion of a whole lot of borrowed Chinese Money from a company about whom nobody knows anything.  Of course there comes the realization that the ECB now has the biggest balance sheet in the world, loaded up with Euro Sovereign debt and an unknown amount of unknown corporate fixed rate.  The best line I've heard is, "if everything goes right we are going to be great!"  Ooooooook.

This does bring up an interesting point to wit what happens when the central banks of the world begin to lighten up on their holdings in light of perceived improved economic conditions.  If interest rates are anticipated to rise surely the lightening of balance sheets will have a knock-on effect which leads to the further question of did they wait too long?  Probably if not undoubtably and has been argued here the continued outpouring of liquidity kept the boat afloat and created false readings in a myriad of areas.  There is an extraordinary around of debt out there and the spread between the best rated and the somewhat questionable continues to close or to put it another way a lot of risk is being taken for not much reward...a condition not unlike what led to the great collapse; the mispricing of risk. But as the guy said, "If everything goes right we are going to be great!"  There is no graveyard anywhere in sight but don't stop whistling.

A BRAVE NEW WORLD?

10 year closed at 2.25%.  As suggested, the drop below 2.30% signaled a serious buying move with the flight to quality continuing.  And why not.  Today witnessed...

--A meeting between the American and Russian foreign ministers.  About the only thing on which they agreed--in public at least--is that relations stink.  Putin did meet with Tillerson, however, much to the disgust of MSNBC which practically guaranteed that as a slight to Trump he would not.  They are beside themselves.

--the Security Council tried to condemn Syria but Russia vetoed the resolution along with Bolivia.  Big Woof.  China abstained.  Good?

--The Donald held a joint news conference with the head of NATO.  I've been around since the founding of NATO and I can't remember a President doing this.  The again, this is a different guy.

--The Donald mused that interest rates were too high and maybe keeping Janet around for another term might not be a bad thing.  Say WHAT?!  Odds on that three months ago were off the daily sheets.  Trump, currency manipulator!  Oh, it seems as though China is off the hook on that score as well which may be part of the new, better trade deal Trumpster claims he offered Xi if he made the Crazy Fat Kid go away.  Nobody has figured this guy out yet.

The thing on Janet is interesting, however.  One of the truisms about the guy is that debt doesn't scare him Somebody else's money is the mother's milk to the real estate industry and I've been wondering for some time now when the guy's breeding was going to rise up especially in regard to his plans for infrastructure development.  As we have discussed, there is a huge demand for long dated fixed income paper.  Can you visualize:  "The Unites States of America, Series A, National Development Bonds Due April 15, 2117?"  Amount?  As much as you want.  Coupon?  Take it now 'cause tomorrow it will be lower.  Lead underwriter?  The last guy alive.  It will not be Goldman Sachs.  They, will just run the books.

2.25%.  Think it's too low?  Could be but while we're waiting for it to turn around why not come along with me.  Tomorrow I'm off the find the Easter Bunny.  Be back on Tuesday.

OLD HOUSE, NEW HOUSE

Ours.  We've spent the past few days selling our present abode and buying a new one, so this is going to be short.  It has been an emotional experience which also makes it hard to write.


OK, we can probably say we are in the midst of a bond rout with the 10 year closing today yielding 2.44%That is one hell of a move since the election boys and girls indicating that suddenly the entire Street and a good part of the investing world are positive on The Donald or at least what he might mean for the economy.  Whilst I normally pay little attention to the consumer confidence number this week's move upward to over 100% was equally extraordinary.  Of course equities are like a rocket ship aided in no little degree by the announced deal to cut oil production ...more on that in a bit.

Tomorrow brings the jobs report which suddenly is more or less meaningless absent the political ramifications.  Estimates are up 180,000 but once again the quality of what is being reported is open to serious question.  In an age of big data one would think that there could be more of a delineation between bedpans/burgers and quantum physics hires but one has to really struggle to find it.  Memo to President Elect: better reporting is something we desperately need along with believable data which half the time we haven't received.  but right now there are a lot of people around the world staring with shock and awe at where the U.S. appears to be headed and whether Mr. Trump's promises in regard to role of government are about to be fulfilled.  If there is one consistency since his election it is that his Cabinet appointments are doers--you may not like what they do but there are damn few theorists named so far.  To think this is not being closely watched globally is to be sadly mistaken...especially Over There.  That election cycle is coming around at precisely the wrong time for Europe's entrenched interests even in Italy which of course votes this Sunday (Memo to Us: the whole world votes on Sunday, why can't we?).  And even there, the word is "change;" we just don't know what kind it will be.

Finally...oil.  The agreement will last in practice for about a month and then the leaking will start and become a flood.  My buds in the West Texas Town of El Paso tell me there's more damn oil and gas out around their place and in the Permian than anybody ever dreamed about and Good Ol' Donald gonna let us go git it.  And don't forget them Mexicans, they say.  They gotta get their production up and they need us and the money to do it which they only git if Good Ol' Donald gits himself a deal on NAFTA otherwise that boy just gits up and walks away from the table.  Now I don't know whether these guys are right or not but in this business it's a lot what people believe that counts.  They are believers.

Jobs number tomorrow.   Whoopy damn-do.

THE SOVEREIGN'S BALL

Seems as though the hottest thing around these days is sovereign debt or at least the easiest to sell.  I neglected to mention yesterday that Austria had successfully completed an offering of five billion Euros in two tranches, one of 3 billion for eight years priced to yield -.091% and a 2 billion tranche for 70 years at 1.53%.  What's that you ask?  SEVENTY Years!?  Yep, you read it right, seventy (70) years.

Now I suppose that there are a lot of good reasons to lock ones self into a 70 year obligation at 1.53% when every central bank in the world is telling you they want inflation above 2.00% but I can't think of many.  A pension fund perhaps wants the certainty of liquidity in the future but what else?  Insurance Companies?  Yeah, maybe.  But demand was supposed to be over 7 billion which means that there must be a hell of a lot of pension funds and Insurers with the same financial profile, so I guess there was real investor demand.  Oh well, it's Austria...waltzes and schlage and the continued belief among a substantial body of the Volk that Beethoven was Austrian and Hitler was German.  Lovely bunch.  Then again, I wonder if anyone even considers the fact that in 70 years (or less) there may not be a Euro?  Guys buying this stuff don't...it's not going to be their problem.  And there is always a secondary market, right?

But not to be outdone Mexico waltzes into Europe today and peddles 1.9 billion of Euros in eight year and 15 year tranches at 1.49 and 2.27 per cent respectively.  No problema, senor.  Way over subscribed.

I suppose to the yield-starved, this looks like a heck of a deal.  To Mexico it must look fantastic.  Kudos all around.  Other than 40-odd thousand Narco killings a year what's the worry?  For 15 years, Mexico will be more or less Mexico and 15 years at 2.19%?  Sure beats Bunds.  And of course there is always a secondary market.  Good planning, good results.  Just like the Cubbies.  Oh, they lost 6-0 last night.

OUCH!

The rout continued today...in spades.  Anything that looked like a bond got sold, leaving the 10 year Bund at 0.97 and the 10 year at 2.48%.  Emerging markets were crushed once again not at all helped by the Euros completely rejecting Greece's latest proposal with hints that there was a bait and switch going on as opposed to what Tsapris and the boys had agreed and the end of last week.  An added problem seems to be that the equities markets, against a lot of opposing opinions are sliding steadily downward obviously fear a Fed move giving even more credence to the proposition that the sky-high valuations was All About the Fed and not so much about fundamentals...or at least that is the view I find more persuasive.

As to the Greeks, whether the noise out of Europe is true or not, I'm becoming more convinced that it  makes little difference as the Euros will wait until they are fairly convinced that the Greeks have gone as far as they can--it's all political now except for the Rock Star but he doesn't count--and they will then decide whether to bail them out.  My bet is they will come up with some sort of nonsense next week and we can then find something else to worry about until the solution collapses in six to nine months.

With that settled and the debt and currency markets locked in a single direction for a while it seems, it is a good time for this up-coming break.  I have eye surgery in 24 hours to correct a problem resulting from my torn retina surgery of seven months ago.  On the bottom line, it is the kind of operation that one has to replace a lens as a result of the growth of cataracts normally no big deal these days, but in my case a special lens to correct a severe astigmatism caused by the previous surgery is to be inserted.  Don't know whether this complicates things or not but it's supposed to cure the double vision I have been experiencing.  Hope it works.  Trying to write this blog on two key boards isn't a lot of fun, so to make sure I'm ready, I'm going to take a break until next week.  I doubt I will miss much.  Any way, wish me luck and see you on Monday.  They tell me this will not hurt...ouchless is the medical term.  The things one learns

ROUT EXPLAINED?

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.

Incredible!!

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.