Via email,
Good morning Kate-
I don’t think you’re going to see this anywhere else, so here goes….
With no excess margin left in any trader’s account nowadays, the littlest foreign exchange hiccup is blowing up every hedge fund’s and Wall street prop desk’s most favorite trade, the emerging market swap. Lend the Jap 10 year note, and borrow the Thai 10 year note, at the same time, as an example, and pocket the difference in yield., in a corporate margin account, using borrowed US Treasury bills pledge to borrowed Japanese Yen to finance the larger swap trade. Because of the unidicted status of Jon Corzine, any “smart” trader will leave no uninvested cash at any brokerage account, knowing that the brokerage firm may use it for its own purposes with little or no recourse. And certainly no access to your cash, for months on end. The margin call comes in when the borrowed security’s value falls, in this case a Thai 10yr, compounded with a currency move (Thai Baht) against the borrower, who borrowed in Japanese Yen, which also moves against the borrower, and you have a multicase of margin call, which forces the sale of the whole thing. And actual, realized losses.
Hedge funds will be closed today because of these bets. And the banks? Oh, Jack Lew will be “forced” to bail out some of them out. (see def. “reliable donor class”)
Going to get very messy into next week.
Discuss.
The traders have done very well… I was a bit worried to see some of the big names getting out of the trading biz with the commentary that shares had reached their peak valuations. It’s starting to make more sense now.
http://silvergoldbull.com/about-us
If history is any guide, some of the more egregious crap won’t be bailed out – remember Lehman? – and the rest will be forced to rationalize. (As in “layoffs.”)
But how will George Soros take over the world now?????
The emerging market turmoil centres around Argentina, one of the most naturally blessed but ineptly run countries in the world.
Margin Calls, how i hate them…yes next week i expect to lose money as i did today.Market corrections affect everyone, even the little people.
I think they are realizing that we are coming to the end of the road, and there is no place left to kick the can.
Then again, I have been thinking this for the last 2 years. I have been wrong so far, and I hope I continue to be wrong.
IMHO, as a non-involved outsider with no real knowledge of the stocks/bonds/currency markets, anyone still betting big in the markets after 2008 is begging for a haircut. The entire thing appears increasingly shaky, unsound and corrupt.
Lets face it. The markets made new records this week, at a time when the USA has one of the worst unemployment rates in living memory, and major stores like J.C. Penny, Sears and a few more are going to be closing stores and laying off staff. American cities are defaulting on their muni bonds. Valuations are 100% disconnected from the fundamental worth of businesses.
Anybody wanna buy a two million dollar tulip bulb? I’ve got a bushel of ’em here.
“anyone still betting big in the markets after 2008 is begging for a haircut.”
I’ve been investing for about 25 years. The air pockets don’t bother me. So long as one’s timeline is long enough, the risk is not excessive. In fact the real hazard is not taking any chances and retiring in poverty.
Don’t confuse the financial industry (which is often perverse) with the businesses that stocks represent (which are often true treasures).
I have been told by a few financial guys that it’s coming to an end but will also come back with common sense , just hang in there with what you have ,don’t bet the farm don’t put all your eggs in one basket (stock,bonds or other paper assets) but don’t leave them either , just keep doing what your doing it’s going to crash and crash hard but buying on the way down is just as good as buying on the way up and that is what will happen it will tank, sit at the bottom for awhile then start to come back with common sense at the wheel. Hold real physical silver and gold on your person, ammo, all the other stuff is good too guns food ,medicine ….but keep buying stocks as well. In 10-15 years it will come back probly not as high but will be with honest gains.
So, Paul, riddle me this. Where is that common sense going to come from? I see precious little anywhere.
rabbit – on the other hand, there are many rich societies that became poor. And we have no idea how the 1 trillion us budget deficit will be resolved, nor do we now how that open-ended off the balance sheet liability called Obamacare will be resolved. But $1 trillion in US corporate profits must be very tempting to a demagogue like Obama. If he manages to confiscate half of those, any US stock portfolio will immediately have its income, and value cut in half.
There are very few stocks worth buying presently.
The dire prediction rests on the flat statement “With no excess margin left in any trader’s account nowadays …” Please provide proof of this, and that it is drastically different than at any other time in the last X years.
1929, borrow now, “invest” in stocks.
Can’t lose opportunity.
MikeM, “Because of the unindicted status of Jon Corzine, any “smart” trader will leave no uninvested cash at any brokerage account, knowing that the brokerage firm may use it for its own purposes with little or no recourse.”
It used to be that margin money at a brokerage was as safe as cash in the bank. Corzine demonstrated there is no consequence to the broker for scooping it to cover his own trading risks. So why would anyone risk funds in excess of minimum margin requirements?
We all knew this was coming for the last five years. I was praying for last summer so the US election wouldn’t have turned out the way it did. I figured if Mitt made hundreds of millions turning things around, he would have perfect for the job at hand. I wonder what’s going to come out of the White House if the bleeding gets worse. I suspect something like hire more teacher and nurses.
Historically most recessions have been localized to one country with the IMF as a last resort backstop. This is different in the sense that the entire free world is up to its neck in debt and the consumer driven market on which capitalism relies has stalled with very few options left in the bag. Rock bottom interest rates have not picked up the economy in spite of governments wishful thinking. We need consumers and consumers are broke and overwhelmingly maxed out on their credit cards. Many corporations are doing well but are sitting on the money due to a uncertain or hostile investment climate. If they do re invest, it’s overseas where wages, lack of unions and regulations are friendlier to the bottom line. Almost everything produced in those “cheaper” countries is designated to be sold to consumers in the free world that are now broke, unemployed, under employed or working for minimum wages with few exceptions. The only growth is in government which only exacerbates the problem. To capsulate a complicated death spiral, it goes something like this: You can’t simply shut down thousands of factories, kick millions of well paid employees to the curb, turning them from taxpaying contributors to the economy into tax sucking liabilities, while keeping a unaffordable social safety net in place. As goes the USA there goes the free world. The USA is now borrowing 85 billion a month just to pay their bills on a short turn debt load of 17 trillion with over 100 trillion in unfunded liabilities. One 6th of the economy is about to be sent into a black hole called Obamacare when the country could least afford it. Even if the stock market doesn’t go 1929 now, all we are doing buying time until this whole house of cards collapses. It’s in the numbers and numbers don’t lie.
http://www.usdebtclock.org/index.html
Congratulations. If you are a US taxpayer you now owe over 1 million in the governments name. Should have voted Romney. Obama couldn’t run a hot dog stand.
Of course the unacceptable solution to all these problems is another world war. Debts wiped out(for the winner), full employment and a rapid mobilization of industrial capacity at home. That’s for a different segment and debate.
In which Tyler Durden at Zerohedge tries to cheer us up:
http://www.zerohedge.com/news/2014-01-24/20-early-warning-signs-we-are-approaching-global-economic-meltdown
Nice to see Tyler Durden agrees with The Phantom. 🙂
On second thought, maybe not so nice. 🙁
The Market Experts. Have about as much faith in them as all the climate change experts and 10-day weather forecasts.
I know nothing about the stock market, hedge funds, bonds, or treasury bills. But I know that a good day on Wall Street just means that somebody is making money today – it is not an indicator of what will happen a year, a month, or even a week from now.
I’ve been hearing the same dire warnings that the stock market is going to crash and we’ll all loose our savings for as long as I can remember. The worst I’ve seen was 2008, and my investments completely recovered from that in a couple of years. The market won’t ‘crash’ unless a significant number of people panic and all want their imaginary money converted into real money and precious metals. There’s not enough real currency and precious metals to cover everyone and somebody will get burned in a bank rush. Governments will do everything including imposing martial law to prevent that from happening.
There are many trillions of derivatives (junk) and unfunded liabilities (plus who knows what is hidden in the cooked books) that will one day come home to roast. So while I have equities and bonds; I also have hard assets: farm land, PM in my hands, and other useful stuff like trusty neighbors-family, food, water, seeds, fuel, and ammo. If your only investments are digital/paper assets you are betting the can will never be kicked into the abyss and therefore you are betting against history. Severe crashes (depressions) and decades long chaos are like the weather…. bad shit happens.
@GLENN
Let me first say I don’t have the first clue, BUT after the riots, bloodshed, Ect Ect…..wich will not last more that 5 years….a good number of Eco fascists and Obama bots communists, Marxists,socialists will be dead, more dead than those like you and me who own guns, ammo ,toilet appear and gold . Follow me?
Let me tell you something and tell me If I am wrong….let’s say Justine is in power….and he declares all guns are banned or pushes for a 60% tax on income over 100 k ….would you follow any civil law other than the ones granted by our constitution? If a cops came to take my guns for no reason I guess I would die.
No I don’t give a f2ck …my wife knows what’s up. And my kids do to. So everything tanks but we are still civilized ….ok keep working …pay the bills,and while there will be civil unrest it will be from unionized Marxist crap heads…,I will let the cops deal with them…again this works in my favour…eventually the left kills itself….. There will be a vacuume and if we do it right someone who is right of centre but clearly pro individual, business, liberty and freedom will come to the front. Because we here in Canada will have seen for long enough the leftist garbage on display and Canadians are ok with scharades for only so long then it’s time for results…no results….means you go….and go they will. Canada May split in the process …however it will emerge stronger and more savvy than it is now. No bs health care unionized crap it will be you work and perform or you go….and that will be with everything because people will for the first time in our history realize that we have all the power!! And the tax payers get to name the tune!!!
Margin calls are the proverbial butterfly wings in china causing windstorms in north america. Debt magnifies all of these issues. That combined with the pattern of markets challenging a new fed chair within the first year means rough weather. There is no one answer just do what you need to knowing a storm is coming.
“…using borrowed US Treasury bills pledge [sic] to borrowed [sic] Japanese Yen to finance the larger swap trade [sic].”
I don’t really know, but I have studied it a bit, and it sounds to me like there are some uncovered speculative positions, to wit:
– as I understand the theory of covered interest arbitrage, if somebody puts on a swap involving any two currencies, any changes in respective short-term interest rates and currency values should basically shake out over the duration of the contract. If there is a call or put option available to either party in the midst of any of that duration, the cost of risk, to either side, almost certainly would have been built into the contract, with no harm done, basically, to either of the two parties to the contract.
– Accordingly, if it was a straightforward Yen-Baht deal (pardon the pun, but meaning a two-currency swap at then-prevailing current exchange rates), there would be no risk to either party of a “sudden” (er, less than 362.5 day — inside joke there) movement in a third-party exchange rate (as in the USD).
– A simple reading of Canada-US spot-market exchange rates would tell you that the USD has been strengthening again, probably because of the Fed ease-back (or talk thereof) on monetary policy (implicitly implying higher short-term interest rates) and the burgeoning strength of the US oil and natural gas sectors (the latter factor inherently meaning a reduced American trading requirement for any other currency).
– I’d guess, on the basis of the post, that somebody, or everybody, had agreed to lend US Treasury securities, which are, after all, a bit numerous these days, out to somebody, or everybody, at, er, a lower-than-“normal”-market cover charge, to fulfill asymmetrical cross-currency swaps, on the simple basis that the USD would stay the same or weaken (which would be like betting against your own currency and economy, wouldn’t it?).
– So the weakness in New York over the last and next few days might be Wall Street firms having to sell tradable shares they have in the kitty to cover “margin calls” (i.e. losses incurred by uncovered exposures in three-way currency deals).
– David Stockman wrote recently about how US Treasury securities were being holed-up in “the canyons of Wall Street” (i.e. not being lent to American business and consumers to stimulate demand): maybe these “hole-plugging” exercises are where they have gone (?).
– If my hypothesis (and that’s only what I’m suggesting — after all, I’m not Michael Mann, or anything) is correct, the impact on investors will be determined by the relative value of the stocks the Wall Street firms hold, versus their exposure to these “innovative” currency deals). Whether this triggers another stock-market crash remains to be seen, but either way I’d guess that the big outfits have been a weakened by all of this, quite apart from the bubble-style disconnect between stock valuations and earnings, which now prevails.
Well said!
Possible contagion out of China on/after Jan. 31st will have the market money music of “let’s party like 1929” end.
Yeah well my take is that these folks can stop a 1929 like crash but the decline will proceed anyhoo…..
Businesses will fold, banks fail, jobs lost just over a period of weeks/months rather than hours/days……like King Canute and the tide……..
That don’t mean there won’t be emotional events….riots, etc.
Enjoy the decline…..
rabbit,,,, I have been retired for some time now. I took a real bath during the last and continuing recession. I had too much sitting in U.S. stuff. while I am not in poverty I did get one heck of a haircut and my timeline is nowhere near long enough to recover. everything I had went into the most stable low interest vehicles I could find. maybe I will have enough to live the moderate life I now do but I am not holding my breath. every year the government inflates the currency making my retirement investments worth less. how long until they are insufficient for my needs remains to be seen. heck, maybe I will get lucky and win the lottery, any lottery.
I wish that were all true, Paul. But the most likely scenario when the SHTF is for the sheeple to turn to government to deal with it. We are outnumbered by lefties, so the push back will be against us to the benefit of the commies. And that’s not the outcome we would want. Then we would need to wait until that system collapsed before we got any relief.
Look at France. Apparently, Hollande has thrown in the towel on socialism, declaring it doesn’t work and is now pushing free markets. Time will tell. But one thing is certain, every country will try the full flavour variety of communism before giving in.
so what’s the price of ‘TEA’ in China?…it’s goin down because Starbux is opening new stores and transforming china into a coffee drinking country.
APPLE IPHONES now selling in China like hotcakes.All kids want is an iphone and starbux….that’s your hot stock Tip of the day.
Pretty accurate summary Skweeker,
I suspect Hollande is simply trying to BS investors back into the French economy. I don’t think by nature that progressives ever think their beliefs are at fault. It is always the fault of implemention failures not the philosophy.
I do agree that as the ship sinks the progressives will cease whatever assets they can to make things work for another month, week or day. The vast majority of people have already sunk to the point that they shrug and leave to the ‘big boys’ to fix things. To big to fail is a oft used phrase.
I always remember that study that indicated only 10% of people faced with imminent danger actually take action to save themselves. Unfortunately as I sit on the fence I realize I am probably one of them. The market was very good to me last year and greed mode is in full gear.
Remember folks.
Too big to fail in Canada means: There banks will look INWARDS for Relief…YOUR depsoited money.! (TFSA’s anyone..??)
I am in no way, shape or form a progressive, and have voted Conservative since the Reform days…but this little tidbit is all Mr. Harper. and it is written in Law by the conservatives.
And that STINKs…