Diary of a Financier

Top Newsstuffs (June 17-23)

In Bookshelf on Sun 23 Jun 2013 at 05:10

Summer solstice 2013…

US weighs doubling leverage limits for biggest banks | Bloomberg
Regulators may raise minimum capital requirements for TBTFs from 3 to 6%, known as the simple leverage ratio (capital/assets). That would exceed Basel III mandate for implementation by 2018.
Only $WFC currently meets the proposed standard.
$XLF

Millennials strike back: Meet Steve, your Dad at your age in the old economy | Marketplace Radio
Kids are fighting back against Baby Boomers’ ridicule with this clever comparison of today’s generation vs their parents’:
Your dad graduated from college & gets hired.
“I made $14k/year in my first job,” which is $47k today (vs 1979).
Got his dream job by applying to a classified.
Mocks your $200 smartphone, but was a homeowner himself at 22 years old.
Says his summer job paid for his tuition, which cost only $400/year.
Worked 9 to 5 in a great job without a bachelor’s degree.

Video: How we can predict the next financial crisis | Didier Sornette (TED)
Contradicting black swan theory, “dragon kings” are early warning signs of a bubble. For example, one input for his crash risk index measures super-exponential growth, in which an asset returns 5, 10, 20, 30%, etc. in successive years, creating a non-linear feedback loop that forces it away from fundamental value & trend.
Applications are found throughout natural world & we should save suffering by engaging in ex ante identification/perturbation, as opposed to mere post ex facto posterity.
[See also White paper: Mechanisms, statistical methods & empirical evidence for finding dragon-kings]

Exchange Traded Funds’ tracking errors mount | The Financial Times (FT)
Recent volatility has caused many ETFs to dislocate from their NAVs, due to less liquid/illiquid underlying securities & wide spreads. Muni bonds & emerging markets ETFs the hardest hit.
An authorized participant, Citi’s trading desks stopped accepting redemption orders when they reached their risk limits; State Street refused cash redemptions (still permitted “in kind”).
[What happens when there’s real volatility or a crash? Reminds me of portfolio insurance from 1987.]
#Whocouldanode

Rail traffic weekly: Unchanged | Association of American Railroads (AAR)
Weekly traffic +1.1% y/y; total ytd volume remains at +0.9% y/y.
4 of 10 carload groups posted gains: Petroleum products +35.6%; grains -12.1.
[Happy to see this good report, after a few weeks’ worth of stagnant data & this ugly trading week.]

Federal Reserve Open Market Committee statement & press conference (June 2013) | Business Insider
Ben Bernanke said that the Fed’s models project economic conditions will justify a start to QE tapering at YE13 through an end to the program in mid-2014, when “unemployment rate would likely be in the vicinity of 7%, with solid economic growth supporting further job gains.”
He cited both housing and state & local municipal government spending (budget surpluses) as major growth catalysts for 2h13.
FOMC revised-down projections for GDP, unemployment & inflation.
Next meeting is July 30-31; next pressers are September & December.
[Intraday: $SPX -1.39%, $AGG -67bps, $FVX +18bps @ 1.227, $TNX +13bps @ 2.311.]

New warning signs from Chinese economy: Interbank market freezes | Sober Look
China’s consumer confidence plummeted in May (down from 103.7 to 99.0), following manufacturing PMI lower in lockstep.
Also, their yield curve has inverted–a signal of imminent recession last seen in the US during April 2007, just before Great Recession began in December.
[Short term SHIBOR remains elevated after spiking last week on rumors that China Everbright Bank failed to repay a short term loan to Industrial Bank Co; then this week, overnight repo rates spiked to a record high, amidst rumors that the PBOC backdoor bailed-out an unnamed bank via RMB 50B “targeted liquidity operations.” Curiously, PBOC waited until the end of the week to swoop-in with broad injections via modest reverse repos <RMB 400B, rousing suspicions that they’re trying to squeeze the shadow banking system. The government’s opacity & historical lack of honesty has made this worse, as nobody seems to trust their denials of a problem.]
#Bearish

Household debt service & financial obligations ratios (1q13) | Federal Reserve
Debt service/disposable income ratios show that private sector consumers/households have more than deleveraged:
After Q4’s alltime low, total debt service ratio increased slightly q/q fm 15.40% to 15.69.
By segment, total household (homeowners & renters) of 13.75%, mortgagee 8.67% & consumer 5.07% all remains at 1980s levels.
#Bullish #Balance Sheet Recession

Peak capacity utilization? (May 2013) | Sober Look
Capacity utilization in May surprised with a fall to 77.6% vs 77.9 exp (April revised down from 77.8 to 77.7), down from a high of 78.3 in March & far below 82-85 long run average (e.g. potential).
[50 year secular decline continues.]
#Bearish #Manufacturing $XLI

Interview: Stanley Druckenmiller (Duquesne Capital/Soros Quantum Fund) | Goldman Sachs
Rife with corruption & disregard for property rights, China’s frantic 2008 stimulus will cause slower growth after misallocating & crowding-out more productive investments.
Ageing Chinese demographics are a quiet problem that’ll surface by 2016; only India has favorable population dynamics.
Appreciating Yuan (RMB) will hurt productivity vs resurgently innovative Korea & competitive Japan.
Oil & gas aren’t as susceptible to slowing emerging market demand as rising supply from shale/fracking.
US tech innovation will cause creative destruction (job losses) in services too–not just manufacturing.
After global QEs/ZIRP, markets’ “price signals are compromised & I’m seriously questioning whether I have any competitive advantage left [in investing].”
$CNY $FXI $EEM $CL_F $NG_F $XLK

–Romeo

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  1. […] What really happened in China’s liquidity crunch this June | JP Morgan Good explanation goes into more detail than media reports & suggests that the PBOC intentionally orchestrated the squeeze, a byproduct of regulatory crackdown: Like US SIVs, Chinese Wealth Management Products are short maturity (3-6 month) retail investment products used by banks to gather wholesale deposits. As competition among products increased, WMPs bought higher yielding (illiquid/junk) underlying bonds, increasing their asset/liability duration mismatch. Not coincidentally, WMPs mature at quarter-end, when banks have to report loan/deposit ratios. So, the banks repo underlying WMP bonds with a friendly counterparty to satify capital requirements & redemptions, then reverse the repo when they issue new WMPs–like a ponzi scheme. In May, regulators banned such off-balance sheet WMP repos, causing a scramble for cash & distressed selling in advance of June’s Q2-end. [Previously: SHIBOR interbank market freezes] […]

  2. […] capital/risk weighted assets kept at 8%. 100 banks will have to raise $4.5B by 2019 to comply. [Previously] $XLF […]

  3. […] The Chairman clarifies: NBER speech and Q&A (2013.07.10) | Ben Bernanke (Federal Reserve) Rates (ZIRP) will remain low for a long time, long after 6.5% unemployment goal (not trigger) is reached, because: 1. U3 probably understates the weakness in the U.S. labor market 2. Inflation is far below the Fed target [See also: FOMC June minutes; Previously] […]

  4. […] question of how we have growth without taking on the kind of debt that leads to crises [Previously] M&A (Steve Schwarzman, $BX & Jimmy Lee, $JPM)- it’s a seller’s market […]

  5. […] products that’re linked to ever more illiquid underlying indices; we saw a sample of their destructive potential  during 6/2013′s emerging market and muni bond selloffs, in which FMVs unhinged from NAVs […]

  6. […] products that’re linked to ever more illiquid underlying indices; we saw a sample of their destructive potential  during 6/2013’s emerging market and muni bond selloffs, in which FMVs unhinged from NAVs […]

  7. […] lot of CUSIPs within passive funds [Previously: ETFs can be a dangerous financial innovation & ETF tracking errors spike in bond selloff] $LQD $AGG $BWX #Unintended consequences #Crisis? […]

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