Author Archives: Kevin

Do Not Bend, Mutilate or Fuld

I woke up today to discover a vigorous "hindsight" understanding of the financial crisis and the fall of Lehman. A mini-Christmas for a left-coast, semi-recluse, front line survivor. The disdain for Fuld (he gave a talk today somewhere) remains high but I was amused by the pedestrian lens that this critical slice of history is being viewed through.

Let's reset the table, shall we?

The big I-banks and the morphing hybrid bank/security firms were all riding the crest of the long credit super-cycle. Securitized mortgages (anything with a time-able cash flow really) were flowing through the system like high octane gasoline. The manufacturing, rating and adjusting anchor to these "things" - it was well known and turned out to be - was completely corrupt on many levels. (Note WSJ article today showing Bcc emails on LIBOR manipulation going to the BOE trade desk !)

These institutions, representing a huge chunk of the SP, were gearing their activities at double digit speeds in recognition that; contrary to the prevailing wisdom that US manufacturing was dead, the business of America was the creation, distribution and accumulation of promised payments. When the music stopped, the regulatory arbitrage that smoke screened the illusion went all the way to the Fed.

MS and GS quickly asked for, and were granted, status as "banks." This allowed the Fed to help them along with the other now exploding giants. Lehman found itself in a tricky spot. Levered up at a higher gear to keep up with its beefier friends, the wholesale funding lock out had them hemorrhaging cash like oil from the Exxon Valdez (#GIK). Unsure of who was to listen to whom, Treasury and the Fed showed a unified voice : We will cover it, but we want the gearing ratios down first. This reality led to the part of the chaos I like to call Fuld's Gambit.

As the others - yeah we're looking at you Merrill - tagged out billions to 22 cent bid lists, Fuld held back, and continued to fund daily in a variety of  common yet sketchy and increasingly difficult ways (Repo 105, nice to see you old friend). This did not sit well with the schphitzing government suits, nor the falling in line competitors. After a few harrowing days, Fuld's tower of promises remained heavily levered as the others had recognized some Costanza-sized shrinkage. The bid would be 45 cents soon, but Lehman had to go for not playing along.

I say, good on you, Dick. You went down with the ship. The others, most now heavily fined, some still revered, remain on the thrones of their hypocritical kingdoms.  TBTF? I'm pretty sure it failed. You might even say..EPIC.

It’s Not Me, It’s You

Madame Chair spoke again today and finally floated a view over the marketplace we fully endorse : She'll adjust official funding rates when Mr. Market tells her, not the other way around.

Rather than join "the bond market is manipulated by the Fed," and "the stock market is just addicted to free money" ranters, we have argued (for some time) that the primary missing ingredient to Fed action has been the prevailing term structure of rates. We put it this way, "Show me the place in color coded Eurodollars that is demanding the Fed to act?" Crickets.

Last week, Matt Boesler of Bloomberg  emailed me a chart of my equilibrium FF model over the actual2015-05-22-ktf-rule

The Fed's aggressively easy stance in 2011 and 2012 are the foundation of the expansion. The more recent readings of sluggishness align with the NEUTRAL policy stance of 2013 and 2014. Policy lags of 9 to 18 months are fairly common historically. I'm of the opinion the Yellen Fed would like to know if Mr. Market is up to doing the heavy lifting, as opposed to the plethora of participants mapping their course the other way around. (i.e. the Fed will raise rates on X date at Y time by Z much and it'll be bullish)

So, on this Memorial Day we not only remember our fallen service men and women but take a minute to reflect on something encouraging, a return to the way things used to be.

Piketty, Mao and Wine


Today from Bloomberg Business "Hong Kong executive makes $22B and this week loses most of it."

So what is Goldin Financial really worth? In his capacious Hong Kong office, furnished with generous touches of faux Louis XV marble and gold, Pan pauses from a game of solitaire and explains.

“It is important to understand the business behind it,” he says. First, the Hong Kong office tower will start generating cash next year, he says. Second, Pan has notified the stock exchange about plans to inject two massive wine storage facilities located in free trade zones of Tianjin and Guangzhou into the company, whose inventories will steadily increase in value as bottles in the cellars age.

“Goldin Financial wants to be the king of the wine business,” he says.

Third, is a factoring arm, which involves buying receivables from manufacturers at a discount. The business, which Pan describes as low risk and low return, will put the firm “into a different playing field,” he says, once it obtains a license to operate in Shanghai’s free-trade zone.

What's that? Wine ? Storage facilities? I'm  listening.

The anger and trepidation that attach themselves to the US expansion like Remora pale in comparison to the realities of the Chinese credit super cycle. Every day, I negotiate sales of library wine to Asian customers. The stock of late-80s to mid-90s vintages is being hoarded up like copper several years ago. The Government has opened up some licencing in the free trade zones for distribution and  wine shops. Wealthy (on paper) Chinese come to the valley to "Make business with" people like me.

The concept is simple: They want me (and other wine producers) to sell them moderate quantities at significant discount so they can ship it back to themselves and mark it back up. I have come to two understandings from the process:

1. The distrust of  government induced wealth creation runs very deep. The objective is to convert Renminbi into anything else as rapidly as it is acquired.

2. After a generation of Communist price controls the concept of "market price discovery" does not yet exist in "modern" China. (Amazingly, discussing this topic with a younger employee last week, the Millenial admitted he had never heard of "The Little Red Book or Mao !" [ #GIK its available on Amazon] Price is "discovered" in accordance with unspoken deals avoiding tax and government officials. Often, customers demanding deeper discounts bolster their terms with, "I pay cash." An homage to the grey market economy they know as capitalism.

The Bloomberg article is a keeper. This individual's massive wealth swing is not the story. The story is a nation creating a credit induced wealth gap of Grand Canyon proportion. The off-loading of the US credit super-cycle to the East will have far darker consequence than the much feared US Government debt "problem." The Piketty Moment will erupt - someday - over there. Until then? Sure, i make business with you, and I don't care how you pay, the tax is on top!


For What Its Worth

"There's nothing happening here, What its not ain't exactly clear. There's a man with a mic over there, telling me I've got to beware."

with apologies to Steven Stills

The bond market has settled back to the levels of March after another period of stretched reasoning as to why you should own it. The SP is also bouncing around levels routinely traded as March came in like a lion and left like a lamb.

Here on the Left Coast prices, wages and especially real estate are all extremely tight. We cannot find workers and Temp Agencies are offering $500.00 bonuses for referrals. This situation clearly does not extend across the country. As we have contended from 2010 on, QE elasticizes the relationship between asset prices and economic activity. The consequence is a rupturing of the belief system that "The markets are telling us something about the future."

For what its worth, what does waffling around  the same place for an extended period of time mean?



So There’s This…

At the beginning of the month everyone was wondering how high the government obligations of respected nations could go. Their ascension has come with an under current of foreboding warnings of "shortage" and "hoarding." Long ago, we posited that the concept of "too few bonds (usually promoted because a CB was buying them)" was a meta-issue. A classic case of "sounds right economics."We have, on the other hand, been a bit of a worry wart about liquidity. Any C Team player now understands that Volume is not Liquidity, so now we can look at the issue more clearly.

And David Schawel pinged this:

"Definitely the first to highlight this issue…

(Twitter confessions). I'm so tired of the bond market liquidity story. Been hearing and writing about it for 3 years"

Tracy is a respected journo and David is a sharp player. I'm not convinced that just because the negative impact of the liquidity change hasn't manifested itself we should be writing it off. PDs have decimated their FI desks, especially in Govies. FF transactions have fallen off a cliff. A whole generation of "T Traders" experience now revolves around bidding a dutch auction and pitching your allotment to the Fed. Not exactly Mensa candidate work. Few have EVER had to actively participate in a Bear. The Taper Tantrum did kinda - sorta happen.

There was an old expression in the Eurodollar Pit (yes, I'm that old); where volume seemed to increase no matter what and then a crisis would pop up, "There's plenty of liquidity until you need to tap it." Then, things just reprice. Bond shortage? i still say "Challenge." Aunt Janet could help you out with a few trillion if you ever freaked hard enough for them. Bond liquidity? Color me skeptical. There may not be "bad bonds, just bad prices" but those prices can get thin and wide on the way down.

Of Myths and Men

The dollar is a funny thing. Back in 2009 many a town crier warned of the "devaluing", "debasement" "demise" and impending implosion of the world's reserve currency. Any down day in the dollar brought out a host of commentators to challenge the integrity of Fed and Treasury officials and hype the "crashing greenback." Many shared an affinity for shiny metal.

Lately, the "strength" of the dollar has been causing some dyspepsia in the "single issue" market observation crowd. The rising fiat is "slowing the economy", "hurting exports", "causing deflation" and "complicating the Fed's exit." Over the weekend, the strong dollar even took the mantle of the "weak dollar" and was to blame for the coming "age of the Yuan as the reserve currency of the world." Clearly James Carville was wrong about the Bond Market, he would want to be re-incarnated as the Dollar because "It gets whatever it wants."

The truth is the dollar never "crashed" or was "debased" under the prior Treasury Secretary and is not escalating out of control now. The real rate differentials that have ebbed and flowed around the world, though abnormal, are not unjustified. The missed opportunity with the Asian Infrastructure Bank (well outlined in Hank Paulson's new book) will aid Renminbi openness and Eastern dollar diversification for some time.

Living, breathing currency problems, as opposed to Myths, tend to morph from debt exits and capital flight. Unlike the P.C. (Pre-Crisis) world threat of "the Chinese will sell all their bonds and destroy us," a deep stock of our obligations are now owned by US. The little grey haired lady in charge of them shows little inclination to sell. The recent rise should open a window for a robust debate on a greenback based infrastructure bank for the West. The dollar is not rising too fast and "killing" the expansion, nor did it "crash" in the crisis. Fiat moves. The ability to adjust is the hallmark of a fiat currency world. The rigidity of anchored paper and heavy metal have caused more frequent and harmful outcomes. Like George and Lennie in Of Mice and Men, currencies tend to define themselves by the reflection of another.

Here’s the Thing

Greg Ip is wrong.

Yesterday, veteran economics reporter and former Greenspan mouthpiece (he was Jon Hilsenrath before Hilsenrath #GIK) Greg Ip penned a story explaining that the Fed had already tightened. A litany of anecdotal evidence was presented to support the theory. The base idea was: By vocalizing their intent, the Fed had nudged markets to the future event pricing and done the Fed's lifting for them. If only.

In fact, beyond Treasury/Corp spreads widening, there is scant evidence of market "tightening." Futures prices (forward forwards) have been wary to stray far from the well advertised Fed exit plan. Consider a path with NO Fed jawboning - the way things used to be . Markets would have dropped bond prices, widened spreads and flattened the curve. As Europe crumbled for the umpteenth time, oil prices collapsed (because there's too much of it) [causing the large amount of speculative notes issued in the space to falter] and the US data slipped, rates would adjust lower some until a clearer view of the future emerged.

Well I'll be damned. That's exactly what transpired. Never mind that the most basic gauge of "tightening" - the Bank Lending Survey - continued to show accommodative tilt throughout the zigging and zagging. No, Mr. Ip, the Fed has not already tightened by flapping at the lip. Markets have not done the heavy lifting for them. Our core theme of a Structurally Trapped economy continues to evolve as the Liquidity Trapp-ers change their story. And some start to make things up.

Martini Musings

Last week, I posted some thoughts on the Minutes that provoked some debate about Fed Exit Sequencing (a fancy way of saying "stuff"). The post led to some exchanges from fun follows like Boes and Klein and "the K." One of the more lucid stances comes from my friend (yes friends have different opinions) Mark Dow, here in his tumbler, Behavioral Macro

Mark and I became friends exchanging ideas over Twitter and martinis at Nobu in New York. Although our conversations are more about dogs and the beach these days, he's a brilliant thinker and brings an incredible experience to the table. That said, I see Fed Sequencing risks in a different light.

In the protracted advertised hikes leading up to the Financial meltdown, we (and others) railed against the Greenspan experiment. Bernanke, you may recall, was practically cornered into hiking to start his tenure or risk the Dove label. This hike took place despite high real rates, an inverting yield curve and spiking oil. Because the increment and timing of adjustments had been predetermined, the system was able to avoid de-leveraging despite the above mentioned characteristics. This is key. Although the ghosts of LTCM floated about, the financial institutions were the real geared monsters. Morgan Stanley and Goldman were running at least 15x. Lehman was well north of that. Citi? Well, they were insolvent by many measures. Fast forward to today:

Regulatory changes have plopped assets on the balance sheets of the system. IOER (the Advil of damaged banking systems) has replaced the wholesale funding operations of Fin System 1.0. As Jamie Dimon (and his CFO) have pointed out, these Fed created "assets" are unwanted and relatively useless beyond regulatory filings. What is the logical reaction to raising the funding cost of an unwanted asset? Correct, it is to purge it, and shrink the system by design.

Thus, inching up the Funds Rate faces 2 conflicting pressures not relevant to the old system. On one hand, funds outside the Fed accounts can cap over the raise. On the other, The Death Star, Term Facility and internal term structure funding positioning, could lock up the new system much quicker than the days of the off balance sheet wholesale funded credit orgy. Although, I respect the "risk diffusion" argument, I am skeptical the risks are identical to the last experience. And again, the worst offenders were the system anchors themselves.

I continue to advocate a balance sheet approach to Leaving Wonderland. A quantitative regime needs to operate with quantitative tools. Applying Interest Rate Targeting Regime blunt instruments to multi-trillion dollar balance sheets reeks of Mid-evil Tonsorial blood letting to me.  As I stated last week, Fed flexibility has been their finest attribute. Let's hope the haven't lost it. And keeping reading and listening to the heavily armed Bonobo (Mark Dow) after all, I'm just a dog watching TV.

Got a Minute ?

The Fed Minutes once again provided some interesting substance to the over analyzing and parsing of statements that "Fed Watching" has devolved into. None other than Jon Hilsenrath (Last Board's "IT" Journo ) weighed in with a great piece this morning.

Last year, when many of us still held lollipop dreams of rate hikes and Death Star firings, we suggested tweaking the balance sheet and reserves was a more practical place to start than adjusting the funding rate. We were quickly brushed back by a plethora of younger (and obviously wiser) practitioners copying and pasting Fed statements on the order of exit.

Yesterday's Minutes showed several (many?) FOMC-ers with similar concerns to ours.

From Hilzy himself today:


"In March they agreed they might need to ignore their own cap, according to the minutes.
Fed officials also entertained ways to eliminate reserves more quickly than planned, including by selling some securities before they mature or allowing some to mature without reinvesting the proceeds. It is striking that they discussed new strategies for eliminating reserves at the March meeting"

What's that you say? "Striking"? Well, yes and no. What's striking is the modern incarnation of a Fed Watcher is someone who can read. What's striking is that despite a very solid track record of ingenuity and FLEXIBILITY, the populist view of the FOMC is that of a gaggle of clowns.  In fact, since the halcyon days of TARP, Fed Flexibility has been its strongest trump card. Considering alternative routes (1 that we advocated) down an exit path NEVER successfully navigated in modern Central Banking is reassuring. The mantra of a quality Fed Watcher remains "watch what they DO, not what they SAY."

Countdown to Liftoff

According to the talking box in my living room, the Fed is going to raise the overnight funding rate and (insert thinly developed quasi-logical market reaction here).

Yesterday on Rapido the always refreshingly frank Josh Brown of Ritholtz Wealth Management responded to a condescending anchor inquiry with, "How could I know what the market will do? It might go up it might go down." The producers don't like it (I know from experience) but the answer is honest and accurate.

Here's a brief history from our data base:

Jan 2011 -- .78

Jan 2012-- 1.13 (Arab Spring, Hungary, EU debt mess)

Jan 2013 -- .84

Jan 2014 -- .58

Jan 2015 -- .63 Today .713

In Jan of 2012 Germany had the lowest unemployment since 1991 and Spain had the highest ever recorded. The data set show that the only "rate rise" feedback from the money market over the last 5 years has been crisis induced. Our model suggests an equilibrium level of FF (Fed neither easy nor tight) of .11 today. Hmmm, the actual rate is 12-11.

If the FF window goes up to .12 to .37 and settles quietly around 25, then the money rate will need to go to AT LEAST .85 (given a first move, several more should filter in suggesting a rate over 1%). If not, the Fed moves to a "tight" calibration too quickly. The like rate for funding Euros is a paltry .21  ! This dislocation will increase the difficulty of "flooring" the Funds rate and - wait for it - possibly force the firing of the Death Star in real time.

The SP has been +1.25% down .6%, up 1.35% and down .45% in the last 4 sessions. What's it going to do tomorrow afternoon? Pulleeeease !