Saturday, March 23, 2013

Even when it has not become SERIOUS…Juncker mandate “LIE"...

Trichet’s pack of LIES are a great example of what apparently is a contagious problem within the ECB, the EU and the Central Banking Cartel in general. Below is Trichet’s speech welcoming Cyprus into the EURO - apparently approved by Juncker:

The successful entry of Cyprus into the euro area
Speech by Jean-Claude Trichet, President of the ECB
Speech at the Conference
“Welcoming Cyprus to the euro area”
Nicosia, 18 January 2008

Ladies and Gentlemen,

It is a great pleasure for me to attend this conference celebrating your adoption of the euro. Let me first congratulate all parties involved in the successful cash changeover that took place at the beginning of the year. It has been going smoothly. None of this would have been possible without the excellent performance of the Cypriot economy during the convergence process.

1. Cyprus’s economic achievements on the way to the euro [1]

Today’s euro celebrations are the result of the successful macroeconomic policies that the Cypriot authorities have pursued in recent years. Cyprus has made significant progress in both nominal and real convergence, owing to successful policies – namely, well-managed monetary and exchange rate policies combined with a range of structural reforms. In the last decade, HICP inflation in Cyprus has been contained, averaging 2.2% in 2007, with the only exceptions being in 2000 and 2003, when inflation rose mainly because of increases in energy prices as well as VAT harmonisation. Short-term as well as long-term interest rates have followed a declining trend in recent years to levels in line with those of the euro area as a whole. This suggests that market participants have confidence in Cyprus’s macroeconomic and fiscal developments as well as in its monetary and exchange rate policies.

The process of nominal convergence has been accompanied by robust economic growth. Real GDP growth in Cyprus has been well above that in the euro area in recent years. Real output growth has been underpinned by domestic demand, and in particular by strong private consumption and, importantly, by strong fixed capital formation. Cyprus’s GDP per capita (in PPP terms) progressed from around 74% of the 1996 average of the 12 countries which initially joined the euro area to around 84% in 2006: this is a significant improvement, and may it continue that way.

In spite of its remarkable progress towards nominal and real convergence, Cyprus has not experienced major imbalances: price and cost competitiveness developments have been favourable since 2004. The fiscal balance (the deficit-to-GDP ratio) has been improving since 2004 and stood at -1.2% of GDP in 2006. Looking at the financial side, Cyprus is experiencing substantial financial deepening, which has been reflected in robust credit activity. Although this process accompanies and supports economic development, it should be carefully monitored, particularly because it is taking place at a very rapid pace.

Membership of the Exchange Rate Mechanism II (ERM II) was another element in Cyprus’s successful convergence. The pound-euro exchange rate at which Cyprus joined the ERM II in May 2005 remained very stable throughout the period of ERM II participation. The EU Council decided that the central parity should also become the final conversion rate of the pound to the euro.

2. Cooperation between the Central Bank of Cyprus and the ECB

Let me also say that the ECB has established excellent working relations with the Central Bank of Cyprus over the last couple of years. The Governor of the Central Bank of Cyprus has been a member of the General Council of the ECB since May 2004. As from mid-2007, Governor Orphanides attended the meetings of the Governing Council as an observer, and on 1 January 2008 he became an official member of that decision-making body for monetary policy in the euro area.

The ECB and the Central Bank of Cyprus, together with the National Changeover Board, the European Commission and national and international authorities cooperated closely in many ways to prepare the introduction of the euro. The euro information campaigns played a vital role here. The ECB together with the Central Bank of Cyprus made sure that Cypriots became familiar with the euro banknotes and coins.

The information campaigns consisted of an optimal communication mix that drew on the experience of the communication campaign in 2002, when euro cash was introduced in 12 countries, as well as the campaign for Slovenia prior to its joining the euro area in 2007. It included public opinion polls, advertising and direct marketing. Over 900,000 copies of different publications were distributed by the Central Bank of Cyprus - this is more than one copy per Cypriot! The aim was to enable everyone in Cyprus to check their new euro banknotes: every household received euro banknote ‘cards’, the same size as a credit card. They show the three main security features of the €50 and €20 banknotes and how to check them.

As a result of these efforts, today we can celebrate a successful cash changeover. I am sure that the excellent relationship between the Central Bank of Cyprus and the ECB will grow even stronger, now that the central bank is a member of the Eurosystem. Indeed, intimate cooperation between the members of the team, the national central banks of the Eurosystem, and the ECB is the key for the success of the single monetary policy in the euro area.

3. Ensuring the sustainability of convergence as a euro area country

The entry of Cyprus into the euro area implies that the benefits of the Single Market will be further enhanced by the single currency. The euro offers a credible framework for price stability in an environment characterised by the absence of exchange rate uncertainty within the euro area. Cyprus will benefit from the stability-oriented policy of the ECB, which will help anchor inflation expectations. Furthermore, for a small open economy such as Cyprus, the euro adoption provides protection against international financial turmoil, which often has a disproportionate effect on smaller economies.

Now, almost three weeks after the introduction of the new currency, I would like to stress that, in the short term, the conversion of prices into euros should not be taken as an opportunity to make unjustified price rises. This is especially important considering that food and energy prices are already exerting upward pressure on inflation in the euro area as a whole. Against this background, measures taken by the Cypriot government together with retailers, importers and manufacturers in order to avoid such adjustments are commendable.

Looking further ahead, in order to fully reap the advantages of the euro and to ensure sustainable convergence, additional efforts with structural reform should be undertaken and appropriate policies implemented. The Cypriot economy needs to continue on a sustainable and credible path of fiscal consolidation based on structural measures, to improve its fiscal performance by reducing its debt ratios and to comply with the medium-term objective quantified in the convergence programme. In particular, public finances should have sufficient room for manoeuvre in order to better cope with the expected substantial increase in age-related public expenditures. Moreover, wage settlements need to remain moderate, taking into account labour productivity growth, labour market conditions and developments in competitor countries. For example, the indexation mechanism for wages and for some social benefits (cost-of-living allowances) should be reviewed in order to reduce risks associated with inflation inertia and losses in competitiveness. Such measures will not only make Cyprus’s economy more resilient to shocks but also create the best conditions for sustainable economic expansion, employment growth and price stability.

Ladies and gentlemen, let me again congratulate you on your successful adoption of the euro and extend my very, very warm welcome to the new member of the Eurosystem family. Warmest welcome Cyprus!

Friday, March 22, 2013

Everything is wrong...

At this time:
  • Dollar Down = Silver Down
  • Dollar Down = Gold Down
  • Oil Up = Silver Down
  • 10 year Up = Equities Up
  • Recent Trend: Dollar Up = Equities Up
  • Nikkei Down = S&P500 Up
  • Russell2000 Flat = S&P500 up
  • Copper Inventory Record High = Equities Record High
  • Margin Debt Record High = Tail Risk Eliminated
  • Deposit in Bank = High Risk Trade
  • BURNanke Here = BURNanke Going
  • Money = Debt
and the coup de grâce:
  • IR Magazine gave JPMorgan the prize for "best crisis management” 
People are barely hanging on to sanity among other things…and as I’ve said before, this is not going to be pretty…something about to go BOOOOMMM?

The S&P500 - long-term view...

The good news for Mr. BURNanke (bad for newsletter authors) is that he can finally cancel his subscriptions to Richard Russell, Boom Doom and Gloom, Elliotwave Theorist and a host of others…since he will not be staying on the job past this term…he certainly has done an extremely good job of making the market do exactly the opposite of the pronouncements of most analysts of notariety…now that we know that the central banking system really qualifies as a large hedge fund perhaps its all starting to make sense...

Sunday, March 17, 2013

The END of Quantitative Easing in its current form may have arrived…theFED now has to focus on global bank RUN...

This is just a short post regarding the charlatans at the FED who so proudly puffed up the margin borrowing to what appears to be all time highs…just in front of the obvious tail risks that always accompany it. Instead of moderating QE they continued the force feed liquidity into a system designed to get people to make ever riskier bets…and people overwhelmingly have complied. Now, however, the FED has to deal with something much bigger and much more dangerous…all eyes and resources will go to managing a global bank run.

Is CYPRUS a cover for JP Morgan and Goldman Sachs etal counter party risks? It is my view that CYPRUS is a little problem that could have easily been solved in ways that made the EU, the ECB and IMF look like the good guys or at least better guys…they could have demanded a haircut on deposits in private but strong armed the Cypriot officials to take the fall for inventing and implementing the actual tax (theft/haircut whatever you want to call it) - and instead they could have come out swinging pontificating how unethical and counter productive the idea was. Then they could have pretended to take Cyprus to task publicly and legally, meanwhile making no serious effort to hamper or impede the plan…they could have at least gotten better PR out of it. Too much here just does not make sense at all! It just defies logic entriely…that the only thing these guys were unwilling to compromise, sanctity of bank deposits was sacrificed in this type of public display.

Additionally, all the ECB needed to do was a little insider trading to create magical funding - and next to the abortion they created - insider trading is a walk in the park…short a few billion of the EURO…in a Cypriot account, announce some bad news cash out and bingo…CYPRUS 17 billion EUR - problem is solved.

Or they could have just written the little check (for them these days), demanded anonymity and quietly let Cyprus disappear into white noise. That certainly wild have it less than their current choice. Heck BURNanke would have given them the money in less than a few seconds flat since he's so very interested in liquefying banks - especially foreign ones. (I hear he carries that much in his satchel every day on his way to his daily pitstop at dunkin donuts before work)

The thing is, this is a much easier problem to solve than $700 trillion of derivatives ready to blow up because counter party risks are now significantly greater than they were in 2007…and aberrant narcissistic behavior by the big banks is more impetuous too since they have proven they are above the rest of us…and that depsite a public agenda against too big to fail…nearly every big bank is now bigger than ever.

So, is Cyprus a test case and even more significantly, is it a cover for a blow up of derivatives counterparties. 

Marked and Pitted…how to use LIESman and a Nuclear Bomb in afairytale...

Theory has it that if you tell someone stupid enough to believe that you will insure their deposits that you actually will. Theory has it that if you can hold positions indefinitely or till maturity everything will be fine. Theory has it that if you lie to your depositors, manipulate your customers and falsify your balance sheet you will get very large bonuses…Theory has it that if you are a little island, that takes in lots and lots of deposits for safekeeping because you are willing to skirt some of the rules…you will be rich and prosperous. Certainly for a time, that has occurred, however, the enticement of leverage is the theme that all of these actors have in common. And then the implicit question is WHY? Why does everyone need all this leverage?

JPMorgan, Goldman Sachs and Cyprus are symbols of the nature of theoretical finance…inthis fairy tale you will want to keep your nuclear bomb close by and try to camouflage it each of these participants have their own nuclear bombs that regulators, finance ministers and employees themselves are or will likely fire off under the pretence of calming/managing stresses, their customers, business partners and the markets.

We have had two nuclear bombs go off last week:
  • JPMorgan’s clear deception and mismanagement of risk and derivatives positions that they are supposed to be the AXE of…
  • IMF, ECB, EU and German complicity in destroying the only thing keeping the financial system from imploding…the theory of deposit insurance, official contracts and sanctity of asset and property rights. 
This indeed has been sold as a fairy tale, Steve LIESman will be conferencing with officials at the FED any minute to begin spinning the tale even further, one in which the realities of increasing leverage that increases wealth disproportionately and creates gargantuan catastrophes that just keep getting bigger and bigger - does not EVER happen. The reason we need all this leverage is to enable Steve LIESman to tell his fairy tales and more practially for the theoretical payment of interest on debts where the money to pay said interest has not been created yet. This is certainly a Nuclear Bomb painted into an Easter egg just waiting for the kids to find. The sad thing is that the kids are going to find it…its the legacy fools like GreenSPIN, BURNanke, DRUGhi, Larry SUMTimers, Robert RUBin etc have specially engineered for them. Its the legacy that KRUDMan so desperately wants to believe and spread. 

The funny thing about all this is: the leverage junkie is nowhere near dead. The ECB and FED are pushing their drugs apparently till they not only kill the patient but also themselves. Perhaps this is by design and deliberate, or perhaps they are just outrageous narcissists and have lost all touch. However, there are strange things going on as we all will be required to suffer the withdrawal effects. 

Certainly, the last place I would want to invest after a bank, central bank and international arbiter bank outright stole my money…would be into a bank that covered up using my money to trade without permission and lie about its books for the benefit of corporate bonuses - especially said bank. But the possibility is significant that after the desire for US treasuries wears off,  people will become very generic in their view and preference of holding assets as opposed to bank deposits and could feel required to pay higher and higher prices for desperately overvalued assets in the U.S. because it is clearly NOT the ECB, EU, Europe, Russia etc. and espeically if rates on US Treasuries go negative. Though this is certainly not the highest probability outcome, when and if people end up resigning themselves to the concept that they may only get a portion of their assets back no matter where or how they hold them, they may just decide certain US assets (such as stocks and real-estate) are not that different of a risk…until of course it is and in which case they will likely see almost all of the asset fail to hold tolerable purchasing power.

All in all, the threat of deflation is the greatest reaction to this kind of nuclear bomb. If you had $100,000 in a bank account you may choose instead to hold that purchasing power in treasuries and only deposit funds as needed into your bank account to pay bills. On its face, if people reduce the cash held in banks, that head wind is enormous for all companies - let alone the constrained spending because cash is less accessible. All arrows point to deflation…is the US really is the last bastion?

Mark, Marks and Marked...

The funny thing about theoretical finance is that it really does not exist at all with the exception of the leaching effects it has when employed in a non-theoretical environment. JP Morgan and Goldman Sachs (and most central bankers) epitomize the effects directly. Neither institution has a net positive effect on our economy but rather, in my opinion, ultimately a very negative one. This is because the compensation they require and receive is larger not only than they deserve but than reality has the capability to deliver. Why does this occur? Why has it continued for so long? Why did Rubin and Greenspan fight so hard for these new financial models?

We can answer all those questions in that they are rooted in a simple problem people accepting obligations that they are unable to meet and people providing said opportunities to people knowing that they will not meet them. GreenSPIN, BURNanke, BlankFIEND, DRUGhi, BarBOOMo, Jamie DEAMONd have made their legacies and their fortunes selling concepts that they know don’t really exist, can not work and are doomed to fail. They prey on a social and economic structure based on destruction rather than creation.

What we saw at the “Whale Trade Testimony” was a veritable disaster and much worse than the Goldman Sachs episode from a few years ago. At least Goldman had a kind of complex and arbitrary breach. JP Morgan on the other hand in this case (though Goldman has the same issues and possibly worse) had a very simple breach…lies about prices, lies about losses and gains, lies about assets and lies about their process. If each one of these issues were not a very clear issue it would at least give them cover. But its absolutely clear what someone’s intentions are when then show derivatives priced on one side of  the book as gains or break even and in reality they know to show huge losses. This is very different than an opinion or even directional bet on some sub prime security. This is the simplest deception aimed purely at compensation (forget even speculation)…and the most egregious kind of deception.

It is my view, that Jamie DEMONd will have been found to have received most of his compensation based on derivatives transactions (ironically not banking) and that when those transaction are all ultimately unwound - they will finally show gargantuan losses. Certainly we have the impetus for people to lie because everyone involved could receive much better compensation by attempting to move a price around a little bit. Ironically, it should also be well understood that there is no regulation that can really solve the pricing issue with illiquid theoretical securities. The entire enticement for using these securities lies in their vague pricing and flexible marks. With out those characteristics they are not worth the paper they are not written on to a company such as JPM of GS. Fancy having to earn money by really making a real profit - that’s much too boring for companies at the cutting edge. Moreover, JPM is a big player in a small pond. It only takes a few players to move a price, bid or offer in a systematic way that shifts a market with few participants and non-transparent pricing. For these reasons, I do not believe that pricing service will do the trick. We supposedly have all sorts of rules to prevent quote stuffing, yet if you trade in a dark pool and buy collocated servers on the exchange you apparently can send as many quotes as you would like. If that is the case with simple securities like stocks and futures, it opens up Pandora's box with derivatives.

Have you ever traded leap options contracts? If you have you can easily manipulate the market yourself by placing offers and bids for single contracts at prices that shift the mid point in your favor because there are very few other serious participants willing to operate at those prices and the spreads are wide. You can even execute a trade at a less than high quality price for a single contract just to show that your marks were good. How can someone fight infrastructure like that? Options are simple and they operate on an exchange yet the prices of leaps are easily manipulated. If you are trading JPM style derivatives the terms of the contracts are long and their behaviour is very similar to leaps but with out the public exchange or standards of execution. Even if an exchange would be designed and clearing rules and process be enforced, these prices would still be highly malleable. Not only that, but in periods of severe liquidity constraints these prices can distend to levels that make absolutely no sense to any model because liquidity needs not to have the slightest respect for any model…it is rather quite the reverse. In my algorithms, for example, I respect liquidity before I respect theoretical outcomes. This is an art and not a science which is why Phd’s in my opinion are so bad at it. JPM and GS are two examples of banks trading at very very high leverage between 60 and 400 to 1 and doing so primarily based on the theories and supposed market efficiencies and inefficiencies identified by theoretical financial modeller phd’s with little practical understanding of human behavior at all - especially in markets.

I believe that JPM’s testimony in Washington this week was a total disaster. I believe that charges of some kind will be coming (they will probably promptly be settled of course) and perjury and obstruction will probably be reduced to some minor infraction with the ability to neither admit or deny guilt. But needless to say, what ever happens, it will be risky for the individuals involved but certainly mostly for the bank(s) that really really need people to believe in their confidence game in order to payout bonuses and be believable regarding being viable counter-parties on derivative securities of nearly $80 trillion - as well managing and executing safely. As we can see from their testimony, we have nothing but full risk controls and perfect. hedging by these large institutions - right?

The reality is that in 2008 and 2009 JPM had HUGE discrepancies in their derivatives books, some of which led partially to the bankrupting of Lehman but also that, without belief in and acceptance of their confidence game, would have led to JPM”s bankruptcy too. Please remember that Fannie Mae and FredieMac both had books of derivatives that in one moment reflect huge profits/bonuses and then when evaluated by people not receiving those huge bonuses showed disastrous losses. This is exactly what has been able to happen at JPM, BAC, GS, C and a host of other large players…as long as the music plays and there are bonuses to be had why not move a few marks around, or play with LIBOR between friends to engineer the desired result, especially when it can be done with other peoples money!

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