Author Archives: Kevin

Fundamental State of Matter

A Liquid – has a definite volume but no fixed shape.

The World got even more liquid over night. The PBOC joined the ranks of global CBs and governments embracing the fallacy of a Liquidity Trap. Grey-hairs love to oscillate between inflationary fears and “pushing on a string”. We continue to believe it is the system infrastructure that is damaged not the “volume” of its liquidity.( see  Ad Nausea earlier postings)  Whether the Fed’s balance sheet, the ECBs threats or the PBOC pump, the “shape” of the liquidity is not calibrated correctly.

The Modern Monetarists continue to advocate the view that if you aren’t getting the desired results, you simply need to do MORE. The truth is the Globe wasn’t running at stall-ish speed because it lacked liquidity. Now, there’s more of it. Perhaps, when this proves feeble too, we’ll start working at changing the structure of the “vessel” rather than the quantity in it.

More BS About Oct 15

Another day…another weak story on the Treasury “Crash Up” of Oct. The promulgated meme is that “There was record volume so everything is fine.” This is an argument only the head of the CME Group could love, oh wait , HE’s THE ONE THAT MADE IT !

That the Ultra Bond went up 9 points on roughly 165 contracts is never mentioned. Abnormally large volume after the crash up is to be expected. The real question is: Why do exchange officials and regulators persist in selling this false narrative? IF, they truly believe this falsehood, we are in bigger trouble than thought because the leaders and officials of the industry are ignorant.

Everything is NOT ok in the trading of US Treasury securities and futures. The reasons are a mulligatawny of LSAP, regulatory change, electronic platforms and ZIRP.  Rates fell in the Oct seizure but the next disruption could be in the other direction. We got a glimpse of the carnage that could cause in the Taper Tantrum. In the meantime, people will keep telling you there’s nothing to see, move along, everything is fine. It reminds me of the Mayor in Jaws: They’re not going to look inside and have the little Kitner boy spill all over the dock.


Who Said It ?

“The fate of the Federal Reserve can’t depend on the accuracy of the forecasts it makes two years ahead,” he said. Offering up forecasts with greater frequency and details–the Fed now does this on a quarterly basis–simply demonstrates to the public “more frequently the forecasts aren’t that accurate.”

Fed guidance that has at points pointed to calendar-date expectations of rate increases, as well as official guidance that rates will stay very low for a long time to come, are ultimately unproductive, he said. “If you make it precise in terms of interest rates, then the market begins working against you,” and any disconnect between what the Fed promised and what it’s delivering can cause market trouble, he said.

Paul Volcker – Former Fed Chairman at Philly Fed Symposium – via The WSJ

Now go back and look at the Red and Green Pack on Oct 15th. That’s exactly what happened. If the Fed wants to increase efficacy it just needs to shut up.


Nice Work Boys


Early in the Obama Administration, the Economic Plan was sometimes referred to as “Full Employment for Lawyers”….lets go to the scoreboard-

From Bloomberg News:

Citigroup Inc. (C) andJPMorgan Chase & Co. (JPM)were the hardest hit in the first settlements since authorities began a global probe into the rigging of key foreign-exchange benchmarks last year.

Citigroup will pay $1.02 billion to three regulators in the U.S. and U.K., and JPMorgan $6 million less, according to statements from the firms today. They are among six firms that will pay $4.3 billion to four regulators ranging from the U.S. to Switzerland’s Financial Market Supervisory Authority.

Banks and individuals could face further penalties and litigation following the 13-month probe into allegations dealers at the biggest banks colluded with counterparts at other firms to rig benchmarks used by fund managers to determine what they pay for foreign currency. The Justice Department, which is working with the Federal Reserve, and Britain’s Serious Fraud Office are still leading criminal probes into the $5.3 trillion-a-day currency market.


JPMorgan, based in New York, had a $1 billion legal expense in the third quarter which was tied “in large part” to the currency probes, Chief Financial Officer Marianne Lake said on Oct. 14. Zurich-based UBS this week set aside $1.94 billion for litigation provisions and said it’s in talks with the antitrust and criminal divisions of the U.S. Justice Department about currency rigging.

Deutsche Bank disclosed $1.1 billion of litigation costs for the third quarter, without breaking out individual matters. The Frankfurt-based bank is one of the four biggest currency dealers in the world, along with Citigroup, Barclays and UBS, according to Euromoney Institutional Investor.

In addition to pursuing banks, U.S. prosecutors will probably file charges against individuals in 2015, people familiar with the probe said last month. The Justice Department may seek guilty pleas, including from at least one U.S. firm, one of the people said.

The costs will climb beyond just legal reserves, Citigroup analysts led by Kinner Lakhani said last month. The total bill for fines and other settlements could be as much as $41 billion.

10 Yr Notes

The market crashed up on Oct 15. Yesterday, the regulators announced they were looking into the event. Hooper generated a new Daily pattern on 10-15 close and new Weekly after 10-17. The SELL levels were 128.11 (daily) and 127.23 (weekly). The pop after Employment and into Monday morning stopped short of an optimal Trap Gap sale for those left behind. We should be tagging the downside objectives around the time the government gives you a half baked excuse for why the market crashed up. Its in the APP, you really should download the APP.

SP Future

The SP tagged the Weekly upside objective last week (as noted) and generated a new pattern Sunday night. The Daily followed along Monday morning and generated a new pattern this morning. The POCs (point of control –where people change their minds ) are 2028 on the Day and 2014 on the Week. Get the APP..its all in the APP.

Be Afraid

From this morning   WSJ

Bond Swings Draw Scrutiny

Focus Is on Oct. 15 Plunge in Treasury Yield

By Tom Lauricella and Katy Burne

Nov. 9, 2014 7:59 p.m. ET

The day’s trading was just hitting its stride in New York on the morning of Oct. 15 when bond investors, traders and strategists were stunned by an unusual move in the $12 trillion U.S. Treasury market playing out on their computer screens.

The yield on the 10-year Treasury note took a sharp dive below 2% within minutes, and few could understand exactly why. Some dealers immediately pulled the plug on automated trading systems that provided price quotes to customers. Fund managers rushed to convene meetings. Many investors scrambled to pinpoint the reason behind the accelerating decline.

“It starts moving faster and faster, and you can’t point to anything,” recalled Mark Cernicky, managing director at  Principal Global Investors , which oversees $78 billion.

Now, investors and regulators are burrowing into the causes of the plunge in yields to try to understand whether electronic trading and new regulations are fueling sudden price swings in a market that acts as a key benchmark for interest rates, investments and U.S. home loans.

At the time, bond-market analysts attributed the fall in yields to weak U.S. economic data, shaky European markets and hedge funds scrambling to cover wrong-way bets. But many investors felt that didn’t fully explain why the yield on the 10-year Treasury note tumbled to its biggest one-day decline since 2009. When yields fall, prices rise.

Regulators and other experts are examining deep-seated shifts in trading since the financial crisis, which could help explain the unusual size of the move in a market many investors rely on for its relative stability.

“What happened on Oct. 15 is the result of things that had been building for a while,” said Alex Roever, a strategist at  J.P. Morgan Chase  & Co. who follows the government-bond market.

The Federal Reserve, Treasury and Commodity Futures Trading Commission are looking at that day’s trading activity, according to people familiar with the situation. One focus is the role of high-speed electronic trading in the bond market, although regulators haven’t yet drawn any conclusions, these people said.

Market supervisors at the Fed and Treasury have pored over the day’s trading data and reached out to big banks to better understand what caused the sudden drop in yields, said people familiar with the matter.

Last Monday, CFTC officials briefed the federal government’s Financial Stability Oversight Council on activity in Treasury-futures trading on Oct. 15. The amount of Treasury futures traded at  CME Group  Inc. doubled from the prior day’s levels.

The moves also dominated recent discussions with the Treasury Borrowing Advisory Committee, but the group said “no firm conclusions could be drawn without further analysis” about who and what was driving it.

Some officials see parallels in the stock-market shifts that paved the way for the May 2010 Flash Crash that sent the Dow Jones Industrial Average down almost 900 points in a few minutes before recovering.

Regulatory changes have made bond dealers less willing to hold even relatively safe government bonds on their books, especially in times of wild price swings. At the same time, government bond trading—where not long ago most trading was done over the phone—is becoming more electronic, attracting high-speed computer-driven traders.

Some of these changes have made it faster and easier for professional investors such as mutual funds to trade. But another result, traders and investors say, is that there is less cushion in the bond market when news prompts a herd of buying or selling.

During the plunge in bond yields, trading volumes exploded in the futures market and in Treasury bonds. But, according to J.P. Morgan data, that morning the average amount of Treasury 10-year notes available to be bought or sold near current market prices was 54% below the average for the prior two weeks. For two-year notes, the available stock of notes was 75% below the two-week average.

Global banking rules adopted since the financial crisis require firms to hold more capital in reserve against securities held on their books. Although Treasurys are considered to be safe investments, banks still must count them when determining how much capital to hold as part of new regulations.

The impact can be seen in Treasury holdings by primary dealers—firms, mostly large global banks, that trade directly with the Fed. Their monthly average holdings of Treasurys have fallen 69% to $33.3 billion over the past year, according to a  MarketAxess Holdings  analysis of data from the Federal Reserve Bank of New York.

Potentially amplifying swings, banks have become wedded to risk measures that mandate traders pull back from the market when volatility spikes.

While these models help manage risk, by forcing dealers out of the market when prices get volatile, “at times like mid-October they can in a way be self-fueling,” said William O’Donnell, head Treasury strategist at RBS Americas.

Capital rules have also led to a shrinking of the “repo” market. Short for repurchase agreements, repos are short-term loans crucial to the smooth functioning of the market by enabling bondholders to lend out securities to investors who want to sell and bet on price declines. “The net effect of regulation has been to lower liquidity,” said Ashish Shah who heads credit at $473 billion asset manager  AllianceBernstein  LP. “So you get short-term dislocations that are larger than what we used to get—even in Treasurys.”

At the same time, traders are increasingly shifting to electronic venues.

CME Group has said about 35% of its volume is attributable to high-frequency traders, and some bond-market participants say much of the electronic trading is concentrated in roughly a dozen speedy-trading firms.

Researcher Tabb Group estimates that electronic trading in Treasury securities will rise to 60% of overall market volume by 2015 from 37% in 2013.

A decade ago, a trader at a fund company would have to pick up a phone to call a salesperson at a bank for a quote on bonds they want to buy or sell. Today, dealers have computer programs that automatically spit out quotes to clients on a screen.

This change has meant firms can process information and trade much faster. But where dealers used to have a closed network of brokers through which to set prices, in the last few years fast-trading hedge funds and proprietary-trading firms have been allowed to trade in this network.

The presence of high-frequency traders has help offset some of the decline in trading by dealers. But in times of market tumult, those speedy traders often seek to avoid losses by pulling back from the market, while dealers tend to seek to help clients get trades completed.

What’s more, virtually all major dealers have shifted to using computers to automate Treasury prices quoted to clients. While that has generally helped make trading faster, on Oct. 15, several traders shut down these systems.

Among them was Guggenheim Securities. A spokesman for the firm said it does so “at time of great volatility…as it cannot keep up with the extreme volatility of the market.”

He said shutting such automated systems off “protects the firm from giving erroneous prices,” and allows it to continue quoting clients—albeit at a slower pace—over the telephone.

—Ryan Tracy contributed to this article.

Write to Tom Lauricella at and Katy Burne at

Deep Thoughts

1. The Payroll Report came out to the usual over-hype and delivered more “meh.” The trading community has switched from parsing participation to parsing wages and ages. The bull market in over thinking is going bubble. The immediate default position to the news is “The Fed will raise rates ______ (insert arbitrary future date here). Large swaths of the term structure remain valueless and need to fall well in advance of the Fed doing anything but yak.

2. Stux don’t it? In a retaliatory caper fit for the Black List, Russia is being suspected of a system wide power grid hack here in the US. Where Stuxnet was aimed at a single facility this is much more dangerous. Officials say they knew the virus was there for years but this was the first time it was launched. Well isn’t that special. The ruble has gone spastic to add to the intrigue.

3. Via Ivan the K and Reuters : Eaton Vance has been given the go ahead from the Mensa candidates at SEC to create a block of ETFs that …wait for it…Don’t have to disclose what’s in them ! Reaching the apex of the “Yes, but what are you buying right now?” age, one can answer “Something.” Appropriately named NextShares these “non-transparent” vehicles fit perfectly into the investment themes of the Millennial’s mentioned in #1. It was available, thus I purchased it. The Fed’s infatuation with openness is also an aid to these silly securities. The Fed is so open about its actions that you can profit from buying  a Fund without regard to contents !

4. A moment of Zen. CNBC celebrated its 25th Anniversary last night, thus joining the 25-40 demographic to which all of the above applies. The message, provided the Russians don’t block you from getting it. is clear. Buy “corporate-y, business-y equity type “things” and stuff.” The business of America is the ownership of equity (and derivatives of, and soon shadowy possibilities of). A birthday for the Home Shopping Network for shares. The industry has commoditized capital formation. The consumption (and regular regurgitation) of financial products fits perfectly into the Mr. Creosote (#GIK) mentality of the age. Happy Anniversary, wafer thin mint?

On Oil

The global equilibrium price for crude oil is about half of its current price. Another day, another completed Hooper pattern to the downside. Oil is the ultimate Economic commodity because it adheres to the Golden Rule: Everything in Economics is true, and its opposite.

Higher (not high) prices are and indicator of activity and a “tax” on consumption. Lower prices are a boost to consumer confidence and an omen of faltering growth. High prices buttressed the move to “energy independence” and solidified the supply for lower prices. The rise of ISIS is financed on the back of $90.00 oil as is the House of Saud. The stronger dollar is reflected in lower prices but Petro-dollar has slipped into the grey market. Note, the words “inflation” and “deflation” aren’t part of the conversation.

Long time followers know that outside of the Arabian pipeline getting terrorized (a possibility) we are almost always bearish on oil. A myriad of momo floor traders paraded across TV and Futures Now extolling oil’s upside when it wore a third digit. Supply and demand aren’t just “good ideas” however, they are the Law. Lower gasoline prices always help the American consumption Juggernaut. Europeans?…not so much, as cheap gas has never been perceived as a birth-rite. In typical “What are you buying?” fashion, Natural Gas has moved up with the chill.

I think the decline should halt and the new pattern will be ripe for reversal. That’s just an agnostic trader opinion. If left to the forces of Supply and Demand, the equilibrium price of oil is below $40.00 and the Dakota’s boom goes bust.



Now what ?

In November of 2008 Quantitative Easing became a household word and the LSAP (Large Scale asset Purchase ) program was launched. Quickly, the 2 concepts became viewed as one. Like Ebeneezer’s nighttime guests, QE 2 and QE 3 were visited upon us in Nov. 2010 and Sep. 2012. Unlike Scrooge, the nation has not risen with a renewed outlook and joyful re-incarnation. The landscape has changed markedly, however.

The simple truth is markets care about the calibration of monetary policy not the ugly way in which its delivered. Now that LSAP has faded away, we will get another chance to see how far, if any, the spigot has been left open. Taylor, and many others, has argued that the FF rate should be considerably higher. Here’s a thought experiment: When oil prices move, a multitude of global adjustments take place. Yet, when the most fundamental borrowing rate in the financial system is “artificially held too low” for years….nothing happens and more importantly, Mr. Market makes no attempt to alter it. Oil traders are brilliant but bankers are all dumb.  We do not,,,and have never believed it.

The purest example of our belief is what transpired earlier this month. After months of FG prodding that the Ghosts had all visited us, participants herded into the promoted idea of “raising the rate.” 10 sessions ago, just before the POMO swansong, that idea blew up magnificently. QE continues to have the dubious reputation of being completely ineffective AND the cause of everything. We have tried over the past years to draw the distinction between LSAP (and other innovative programs) and the policy regime..QE. We remain in a QE regime so prepare for reports on halting of re-investment and the roll down of the Fed balance sheet. Raising rates is reactionary Fed policy not precautionary. Goodbye POMO, hello ???