What Could Possibly Go Wrong

Commodity Rout Worsens as Prices Tumble to Lowest Since 2002

"The rout in commodities deepened with prices touching the lowest since 2002 as the prospect of higher U.S. interest rates sent gold tumbling. Raw materials are losing favor with investors as the dollar gains amid signals from Federal Reserve Chair Janet Yellen that the central bank may raise rates this year on the back of an improving U.S. economy. Higher borrowing costs curb the attractiveness of commodities such as gold, which doesn’t pay interest or give returns like assets including bonds and equities. Gold futures sank to the weakest in more than five years while industrial metals, grains, Brent crude and U.S. natural gas also slid as a measure of the dollar climbed to the highest since April 13." Continue reading →

Continue ReadingCommodity Rout Worsens as Prices Tumble to Lowest Since 2002

Hidden Time Bombs Behind Greece Bailout

"Just these top four derivatives players — B of A, Goldman, Citi and JPMorgan — control nearly $203.5 trillion, or 92% of all derivatives held in the U.S. banking system. And the largest 25 U.S. banks control 99.8%. All told, the thousands of other regional, mid-sized and small banks in this country control a meager one-fifth of one percent of the derivatives. This is an oligopoly unlike any other in the financial world — one that ties the fate of the U.S. economy to these firms’ stability far beyond anything ever witnessed in prior centuries. In contrast, Lehman Brothers was actually smaller by comparison — with 'only' $7.1 trillion in derivatives." Continue reading →

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The One Lesson to Learn Before a Market Crash

"The media incorrectly suggests that the collapse of the market in 2008 began with the Lehman bankruptcy on September 15. The fact is that the market fully recovered to even higher levels the following week as the government banned short selling of financial stocks (much like China is doing more broadly at present). Weeks later, in a wicked case of 'sell the news,' the actual collapse started literally 15 seconds after the TARP bailout was passed by Congress. Investors want to tie market outcomes to very specific events or catalysts. But history suggests a different lesson: once extreme valuations are joined by a shift toward risk-aversion among investors, the specific events become irrelevant." Continue reading →

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Risky Loans Shunned by Banks Are Booming in Wall Street’s Shadow

"Regulators’ efforts to rein in Wall Street’s biggest banks are in danger of backfiring. Guidelines aimed at strengthening lending standards are shifting the market for high-yield credit to less-supervised loan funds, raising alarm this week from the Financial Stability Oversight Council. Because the funds don’t have depositors, some of their money comes from Wall Street banks, leaving systemically important institutions exposed to risks regulators hoped to avoid. BDCs and private credit funds [are called] 'Dodd-Frank banks' because they’ve grown in the wake of the 2010 Dodd-Frank Act’s heightened supervisory scrutiny of regulated lenders." Continue reading →

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Capital Controls and a Bank Holiday in Greece

"When you hear a central banker or politician deny that something is going to happen to bank depositors, you can almost be certain that it will happen. And probably soon. There’s a reason for the dishonesty. The government needs to take the public by surprise. Otherwise they won’t get the results they want from capital controls or a bank holiday. Calling the experience a bank holiday is like calling a street mugging a surprise party. Once the banks are closed - or on 'holiday,' as the government puts it - the politicians are free to help themselves to as much of the customer deposits (including yours) as they want. It’s like an all-you-can-steal buffet." Continue reading →

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China bans major shareholders from selling for next six months

"China’s securities regulator took the drastic step of banning shareholders with stakes of more than 5% from selling shares for the next six months in a bid to halt a plunge in stock prices that is starting to roil global financial markets. The China Securities Regulatory Commission (CSRC) said on its website late on Wednesday that it would deal severely with any shareholders who violated the rule. The prohibition is also seen applying to foreign investors who hold stakes in Shanghai- or Shenzhen-listed companies, although most of their holdings are below 5%. More than 500 China-listed companies announced trading halts on the Shanghai and Shenzhen exchanges on Wednesday." Continue reading →

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Loads of Debt: A Global Ailment With Few Cures

"As central banks like the Federal Reserve and the European Central Bank have printed trillions of dollars and euros, markets in stocks and bonds, as well as other types of assets, have responded optimistically, sometimes reaching highs that were unthinkable seven years ago in the depths of the financial crisis. Central banks can make debt less expensive by pushing down interest rates. Crucially, though, they cannot slash debt levels to bring much quicker relief to borrowers. In fact, lower interest rates can persuade some borrowers to take on more debt. Many countries are now in a position where their governments and companies live in fear of an increase in interest rates." Continue reading →

Continue ReadingLoads of Debt: A Global Ailment With Few Cures

China Bans Margin Calls; Limits Pension Funds To Buying Stocks Only

"What do you do when two policy rate cuts, $19 billion in committed support from a hastily contrived broker consortium, and a promise of central bank funding for the expansion of margin lending all fail to quell extreme volatility in a collapsing equity market? Well, you can simply ban selling, which is apparently the next step for China. According to Caijing, the country's national social security fund is now forbidden from selling (but is welcome to buy). The pension selling ban comes just days after China moved to curtail margin calls in a similary ridiculous attempt to stop the bleeding by simply making selling against the rules." Continue reading →

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China’s brokers pledge to buy stocks to prop shaky markets

"China’s top securities brokerages said on Saturday that they would collectively buy at least 120 billion yuan ($19.3 billion) of shares in a bid to stabilize the country’s stock markets after a slump of nearly 30% since mid-June. The pledge follows near-daily official policy moves over the past week, including an interest rate cut and a relaxation of margin lending rules, that have so far failed to arrest the sell-off, which some market watchers fear could turn into a full-blown crash. While brokerages were likely to focus on stronger, blue-chip companies, Hao said there would be little interest in saving small and wildly overvalued 'growth' firms. Such companies are favored by ordinary investors." Continue reading →

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MSCI backs itself into corner on China share inclusion into global index

"MSCI’s decision to defer including Chinese shares in its emerging market benchmark share indexes for a second time may have trapped the index provider into making promises it can’t keep, both to Beijing and to its investor constituents. MSCI’s clients want Beijing to open its capital accounts so they can reliably move their money in and out of China’s markets, but the economy is facing its slowest growth in decades, which has led to capital flowing out of the country. For China, inclusion in the index could over time bring an estimated $400-billion into its stock markets and would help in its drive to internationalize the yuan currency." Continue reading →

Continue ReadingMSCI backs itself into corner on China share inclusion into global index