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Authored by Matt Taibbi via TK News,

Nearly fifteen years ago, on December 10, 2006, the CEO of Senderra, a subprime mortgage lender owned by Goldman, Sachs, sent a grim report to its parent company. “Credit quality has risen to become the major crisis in the non-prime industry,” Senderra CEO Brad Bradley wrote, adding that “we are seeing unprecedented defaults and fraud in the market.”

Within four days, senior executives at Goldman decided to “get closer to home” by unloading risky mortgage instruments. They didn’t alert regulators, of course, but did save their own hides, with Goldman CEO Lloyd Blankfein soon after ordering subordinates to sell off the ugly “cats and dogs” in their mortgage portfolio.

Around the same time that Goldman was having its come-to-Jesus moment, rival Lehman Brothers was going the other way. In one meeting, the bank’s head of fixed income, Mike Gelband, pounded a table, telling the firm’s infamous Vaderqsque CEO Richard “Dick” Fuld and hatchetman-president Joe Gregory there was a $15-18 trillion time bomb of lethal leverage hanging over the markets. Once it blew, it would be the “grandaddy of credit crunches,” and Lehman would be toast.

Fuld and Gregory scoffed. They didn’t understand mortgage deals well and thought Gelband lacked nerve. “Be creative,” they told him, adding, “What are you afraid of?”

“We called it ‘Goldman Penis Envy,’” says Lawrence McDonald, former Lehman trader and author of A Colossal Failure of Common Sense. In telling the Gelband story, he explains that Fuld and Gregory were so desperate to beat out Goldman and become the richest men on Wall Street, they chased every bad deal at the peak of the speculative bubble.

“These tertiary financial institutions, in order to win business away from the big players, they have to continually juice their offerings, offer more leverage, more goodies,” says McDonald. “Dick and Joe, they wanted to do these banking deals, to steal Goldman’s business by offering more.”

In the end, Goldman got out just in time, and Lehman – which had scored record profits in every year from 2005 through 2007, pulling in $19.3 billion in revenue in 2007 alone – became a bug on the windshield of history.

In the triggering episode, Goldman was the first bank to smell a rat in AIG’s financial products division and demand collateral calls to AIG swaps, just before AIG imploded. Goldman ultimately got bailed out in its AIG dealings by the Fed and the taxpayer to the tune of a hundred cents on the dollar, while the collapse of Lehman’s portfolio of bonehead deals sent them into bankruptcy and helped trigger a global chain reaction of losses that cost Americans $10 trillion in 2008 alone.

It feels like déjà vu all over again. We’re in a frothy economy where banks are pouring money into the worst conceivable deals, upselling the most dubious clients in an effort to outdo each other, resulting in huge losses. Just like in 2008, the warning signs are being ignored.

The narrative started in January, when GameStop captured the public imagination. The struggling retail video game company, targeted by short-sellers, saw its share price shoot from $6 to $347 in a few months, spurring elation among Redditors and day-traders who’d bet the stock.

Wall Street pundits threw a fit over GameStop because for whatever else was going on there, there were outsiders trying to break into a rigged game, which was deemed unacceptable. Across the political spectrum, there were howls of outrage and calls for official probes of all involved, down to YouTuber-in-ski-hat Keith Gill, a.k.a. “Roaring Kitty,” who had the temerity to invest $745,991.

While GME gobbled headlines, other short-targeted companies saw wild jumps. GSX, a Chinese online tutorial firm shorts had circled since last year, moved from $46 on January 12th to $142 fifteen days later. Baidu, a Chinese Internet services firm some claimed used shady reporting practices, went from $133 in late November to $339 in February. Viacom, the most heavily shorted media stock, went from $36 on January 1st to an incredible $100 on March 22, in a rally that supposedly left investors “scratching their heads.”

There was no million-member army of Redditors to focus on in these cases. The rallies of Viacom, Baidu, Discovery, GSX, Tencent Music Entertainment Group, Vipshop Holdings, Farfetch, and IQIYI Incorporated — all targets of institutional short sellers — were at the center of an elaborate, multi-billion-dollar short squeeze play by a single SEC-sanctioned Jesus freak of an investor: Sung Kook “Bill” Hwang, head of a fund called Archegos.

Once fined $60 million and banned by the S.E.C., Hwang as a character is a compelling fusion of religious weirdness and old-fashioned manipulation. He claims he invests “according to the word of God,” and he’s “not afraid of death or money,” allowing him to be “fearless” and “free” from concern about consequence. “The people on Wall Street wonder about the freedom I have, actually,” he said two years ago, ominously.

Despite throwing off a crazy vibe strong enough that the average person would cross the street to get away, he was able to borrow gargantuan sums — billions — from the world’s biggest banking institutions, using them to place a string of long bets that single-handedly sent the share prices of major companies skyrocketing.

Firms like Goldman, Sachs, Morgan Stanley, JP Morgan Chase, UBS, Japan’s Nomura, and Credit Suisse helped Hwang arrange his investments in the form of swaps. In return for collateral, banks would buy his targeted stock in four, five, six, even seven times the amount posted, then hold it on their own balance sheets. If the stock went up, the banks paid Hwang. If it went down, Hwang owed more.

The arrangement allowed Hwang to evade S.E.C. regulations requiring any investor who amasses more than 5% of any stock to issue a public filing as a beneficial owner. So enabled, Hwang quietly racked up more than 10% of the float of all his target companies, and as much as 30% interest in some of them, a setup that created massive systemic risk, but to the banks looked like an easy source of funding and management fees.

The current legend is that each of the banks thought they were the only ones doing the bad thing. Even the “smartest guys on the Street” at Goldman supposedly did not put two and two together, or wonder if Hwang was peddling the same trade to other shops. As a result, Hwang was allowed to keep bidding up and up until it all came crashing down in late March.

The end came after the CEO of Viacom, Bob Bakish — perhaps moved by a 73% jump in the firm’s share price — came to Goldman and Morgan Stanley on March 24th, asking to “discreetly” unload $3 billion in securities in an overnight sale. As one hedge fund analyst put it this week, this “might have been the what-the-fuck moment” for those two banks, who finally put two and two together.

Others scoff at the idea that firms like Goldman and Morgan Stanley didn’t see what was going on. “Even if they didn’t talk (and we know they do), they could all see the stock action as the prices ratcheted up over a relatively short period of time, and they could see each other’s increasing holdings albeit in the aggregate,” says Dennis Kelleher of Better Markets. “These guys are market makers, after all, and see the flow and have eyes and ears everywhere. Not credible.”

No matter how it happened, within a day after Bakish moved to sell those 20 million shares at $85 — the firm claimed, ludicrously in hindsight, that they were just raising money “for general corporate purposes, including investments in streaming” — the banks began demanding Hwang post more collateral. When he couldn’t meet his margin calls, the dealers one-by-one dumped his shares into the market, characteristically led by Goldman, which claimed to escape with “immaterial” losses thanks to its quick exit. “How are they always the only guys who don’t get carried out on a stretcher?” asks short-seller Marc Cohodes.

The Archegos story broke back on March 26th. Since then, Wall Street has been scrambling to contain both the financial and reputational damage. To date, the monetary hit to the banks alone is said to be $10 billion, but that number keeps rising, as Nomura and UBS only just this week disclosed a combined $3.7 billion in losses. Meanwhile, some analysts think the total loss in market value due just to this episode might ultimately be as big as $100 billion — one source thinks the number might be $200 billion.

Most of the straight-news coverage of Archegos has been of the “Who was that masked man?” variety, i.e. profiles of the terrible rogue trader who hit poor Wall Street like a weather event, a stroke of random luck. “He built a $10 billion empire. It fell apart in days,” was the New York Times offering, one of many stories to describe Archegos as a self-contained disaster.

The real issue isn’t Hwang but his banks. Just like 2008, some of the “tertiary” players rushed to give Hwang the extra “goodies” McDonald described, likely in the form of more leverage. The company destined to wear the historical dunce-cap this time a la Lehman looks like Credit Suisse, which has at least $5.5 billion in Hwang-related losses and has already fired investment bank chief Brian Chin and chief risk officer Lara Warner.

With firms like this in a race to shower even the most preposterous clients with unlimited funds, the grim reality of finance in the post-CARES Act era is that anyone with a tie and a business card can borrow enough to blow a $100 billion hole in the economy without being detected.

This raises the question: how many more Hwangs are out there? Not many people think he’s the only one.

“The system can’t take many more of these,” says McDonald.

“I think this guy [Hwang] is running the biggest Ponzi since Bernie Madoff, maybe bigger,” says Cohodes.

Like the failure of the two subprime-laden hedge funds that led to the collapse of Bear Stearns in 2008, Archegos exposed a rat’s nest of bad practices. Hwang was able to traipse through the system in part because Archegos is a “family office.” In theory, family offices provide a framework to manage money for individual wealthy families. In reality, it’s a loophole allowing mega-borrowers to be regulated less than the smallest retail consumers. As McDonald points out, if an ordinary person maxes out credit cards before a trip to Vegas, that person’s FICO score pings. Yet a tire-fire like Hwang buying swaps can make trades of a billion, even ten billion dollars without it registering anywhere.

This is the same problem we saw in 2008, when banks and hedge funds created mountains of theoretical risk (which became trillions in real losses) using derivative products like credit default swaps. Despite years of loud debates around the Dodd-Frank Act, the lack of even a basic tracking mechanism for such unexploded risk remains. “There are no leverage controls whatsoever. The only leverage control is market discipline,” sighs Marcus Stanley of Americans for Financial Reform.

Another common factor between 2008 and now is the hyper-availability of leverage, distributed on tap by Too Big To Fail Banks to all comers. Then the inappropriate borrower might have been an ordinary person buying too much house, or a company like AIG writing millions in synthetic mortgage insurance it never planned on honoring. This time it’s a known, SEC-sanctioned freak show taking out billion-dollar bank loans to bet on black at the roulette table. The issue isn’t that people like Hwang are out there, it’s that all of Hwang’s bankers went along with this game, hugely amplifying the irresponsible gambling.

“Hwang was basically using the balance sheets of Goldman and Morgan Stanley against the hedge funds,” says McDonald.

“Regulators have no chance,” says the hedge fund analyst. “Every time they tidy up one area, the rats just find a new hole to chew.”

The symbiotic relationship between banks that are overeager to lend and rapacious (or, in the case of Hwang, sociopathic) clients gambling with other people’s money is what blew up firms like Lehman. In order for those romances to happen, compliance officers can’t get in the way, and they don’t. The Hwang episode revealed that even in top-drawer firms, the dumbest people on the roster — usually, the salespeople on prime brokerage desks — have almost total autonomy.

Even Goldman placed Hwang on a “blacklist” as recently as 2018, yet suddenly reversed course and lent him enough money to make him the de facto owner of Viacom, suggesting that compliance even at the storied industry leader is a joke.

“A compliance dept at a big bank is nothing but a fig leaf,” says former Lehman lawyer and whistleblower Oliver Budde. “Things get flagged by line personnel, sure, but then they get overruled. If… internal rules are all being evaded, that does not matter if the boss says it is okay.”

With a few exceptions, financial professionals don’t mind being ripped as unethical. The dirty secret they do want covered up is that they’re not that smart. In the Covid-19 age especially, there’s a lot of subsidized mediocrity.

“All of these huge hedge funds have shitty performance, disguised by leverage,” says Cohodes. “If the markets go up 12% a year, you go up 5%, but you lever up seven times. Now it’s 35% and you’re getting three and thirty.” The top hedge funds charge 3% fees on assets under management and 30% of net gains.

That’s a great deal under any circumstances, but even better when 70-80% of your “performance” comes from being lent money by Goldman or Morgan Stanley or Credit Suisse, and even better still when you and your bank artificially drive up your gains together by pumping up the market. With limitless leverage, banks and hedge funds can in this way partner up to print themselves profits forever, until of course something goes wrong. With Archegos, something did go wrong — even on Wall Street, really dumb chasing really crazy eventually cracks up — but does anyone think there isn’t more?

Read the rest here…

The worsening precarity of the millennial generation has been a hot topic for the financial press over the last year, and it hasn’t failed to disappoint. Thinkpieces about crushing student loan debt, rising housing prices placing home-ownership further out of reach, and the soul-crushing intensity of formerly sought-after jobs in finance have abounded. And now, the Financial Times has launched a new series where it explores some of the biggest problems facing its millennial readers. And what the report discovered might come as a surprise to some. Picking up where that PowerPoint about the miserable working conditions of Goldman junior analysts left off, the FT reported that even millennials with strong resumes and “good jobs” who “did everything right” are “drowning in insecurity.”

As the FT sees it, millennials’ fate will depend largely upon whether they’re the progeny of wealthy families, or not. Those who can depend on “the bank of mom and dad” for an interest-free loan (or a generous inheritance) will always have an advantage in procuring the best homes, jobs and school placement as entry to the upper echelon of society still largely depends on having access to the best schools and alumni networks. Millennials who don’t enjoy these advantages will be forced to compete in a market set up to cater to those who do.

Source: FT

But while that conclusion is relatively self-evident, an even more surprising detail from the FT’s report is that once-safe careers in investment banking and private equity no longer convey the same promise of long-term security. As an example of these phenomon, the FT introduces Akin Ogundele, who works in London’s financial sector, and lives in the city with his wife and young family. The fact that he’s struggling to pay his bills in a rental flat, with little hope of affording his own home any time soon, has given him a “sense that the social contract is broken for his generation…” something that’s shared by many young people “and not just in London.”

Many of the story’s most striking examples are delivered with a quote. Here are a few of our favorites:

• “If I carry on the way I am, I’m not sure what I’ll be able to pass down,” he says. “It can’t be good for the country — the disparities are just going to grow, the wealthy are going to grow wealthier and those that aren’t will get more and more removed.”

• For Killian Mangan, who graduated during the pandemic last year and struggled to find a job, it feels as if “we are drowning in insecurity with no help in sight”. A twenty-something who works for a central bank says: “I sometimes have this feeling that we are edging towards a precipice, or falling in it already.”

• A 30-something who works in private equity in the UK turns to collateralised debt obligations for a metaphor to describe the position of his generation. “The space I feel I occupy in the sociopolitical order is akin to being the first loss tranche in the debt stack,” he says. “Whenever anything bad happens I have no doubt that, because we lack political and economic clout, we will be left holding the bag.”

• “At the moment, while the wealth is still held by older generations it shows up in the data as a difference between generations, but wealth doesn’t disappear, it’s going to flow down and [then] it moves on to being an issue about inequality within younger generations,” says David Sturrock, an IFS senior research economist. “It’s basically saying how much you stand to gain depends on who your parents are and the wealth they have.” Many developed countries share “a lot of the same dynamics”, he adds.

• “I ate spaghetti for a month in 2009 because the company I worked for was owned by a private equity firm, which thought it best to cut me so it could buy out smaller competitors,” says Jim from California in the US. “They eventually hired me back for close to half the pay…way to develop talent, right?”

• “After 30 or so rejections, I was chosen out of a pool of 2,500 applicants to undergo a psychometric test, followed by a video interview, followed by an assessment centre, followed by a week-long virtual scheme culminating in an interview before being offered a two-year training contract,” says Hadrien, a recent UK graduate. “We are competing with machines and bots, and an ever increasing population of skilled humans,” says another.

But while some might dismiss these quotes as more whining from millennials who have nobody but themselves to blame for being duped into taking out hundreds of thousands of dollars in debt for a four-year liberal arts degree, the FT also peppered the story with data supporting this vision of a downwardly mobile fate.

It started with data showing fewer millennials will out-earn their parents.

Source: FT

And how feelings of career insecurity are shared by young people around the world, in both developing and emerging economies.

Source: FT

Millennials, meanwhile, struggling with a stubbornly low share of household wealth (partly a factor of the wealth-draining impact of student loans).

Source: FT

According to an editor’s note, the story is merely the first in a series about the myriad problems facing the millennial generation. While we’re sure its audience will appreciate the FT’s attempt to court more youthful readers, we suspect it might come off as a tad whiny. After all, millennials just had the opportunity to get in on one of the greatest wealth-creation engines of all time (crypto) while boomer CEOs were mostly left scratching their heads.

Authored by Michael Snyder via TheMostImportantNews.com,

If you wanted to design a perfect currency for the farce that our financial system has become, you couldn’t do better than Dogecoin. 

It was created as a joke, it has no real value, but investors are feverishly gobbling it up as if it was the greatest investment that any of us have ever seen.  A lot of people talk about the “Bitcoin bubble”, but Bitcoin is only up about 600 percent over the last 12 months.  Dogecoin is up about 18,000 percent over the past year even though there is no restriction on how many Dogecoins can eventually be created.  There is absolutely no reason why any rational investor should be putting a single red cent into Dogecoin, and yet it just keeps going up.  In fact, at one point this week Dogecoin had a total market value “of almost $42 billion”…

Initially started as a joke in 2013, dogecoin is now the sixth-largest digital coin with a total market value of almost $42 billion, according to CoinGecko. It takes its name and branding from the “Doge” meme, which depicts a Shiba Inu dog alongside nonsensical phrases in multicolored text.

It is hard for me to believe that “investors” are being so incredibly stupid.

Dogecoin was just supposed to be a meme, but thanks to relentless promotion by the “Dogefather”, one “investor” has seen the value of his Dogecoin holdings rise to 11 billion dollars…

THE world’s first dogecoin billionaire watched their stock soar to $11 BILLION as the “joke” cryptocurrency boomed after Elon Musk dubbed himself the “Dogefather”.

Its value rocketed after the Tesla tycoon spoke out ahead of a much-hyped appearance on SNL suggesting he might talk about it on the hit show watched by millions.

This explosion in interest in Dogecoin is obviously going to spur Dogecoin miners to work harder than ever before.

And unlike Bitcoin, Dogecoin miners can keep creating more tokens forever and ever…

Originally, Dogecoin had a hard limit of 100 billion tokens, similar to Bitcoin’s cap of 21 million tokens. However, the developers changed their plans in 2014, eliminating the supply constraints. In other words, as long as miners continue to build the blockchain, more Dogecoin will continue to wink into existence.

In fact, each time a block is verified, the miner receives a fixed reward of 10,000 Dogecoin tokens. Unless the code is rewritten, this will go on forever.

That’s a critical flaw.

“A critical flaw”?

That is quite an understatement.

But of course what is happening to Dogecoin is the same thing that is happening to our financial system as a whole.  Our leaders in Washington have been creating, borrowing and spending money at an absolutely insane pace, and the numbers that we are now witnessing would have been unimaginable at one time…

On the fiscal side, Congress has allocated some $5.3 trillion toward enhanced unemployment compensation along with a variety of other spending programs that helped push the federal budget deficit to $1.7 trillion in the first half of fiscal 2021 and has sent the national debt soaring to $28.1 trillion. Congress also is considering a $1.8 trillion infrastructure plan from the White House.

The Fed also has come through, cutting its benchmark short-term borrowing rate to near zero and buying nearly $4 trillion worth of bonds, pushing its balance sheet to just shy of $8 trillion.

Almost everyone is cheering the fact that the Fed balance sheet is ballooning dramatically.

And almost everyone is cheering all of the “free money” that the federal government is handing out.

But the truth is that we are going down the same road that so many other troubled nations have gone down throughout history, and there is no way that this story is going to end well.

As I have been detailing in recent articles, we are already starting to see very painful inflation, and major corporations are now warning that even more inflation is on the way…

Toilet paper, baby care products, soft drinks and many other everyday products are about to get more expensive.

Procter & Gamble, Kimberly-Clark and Coca-Cola have all warned that they’ll raise prices on many of their products as raw material costs rise. Plastic, paper, sugar, grain and other commodities are all getting more expensive as demand outpaces supply. Companies are also paying more for shipping as fuel costs rise and ports experience longer delays because of congestion.

Yes, you may cheer when you get a check for a few thousand dollars in the mail from the government, but that is just a temporary sugar high.

Unfortunately, the dramatic increase in the cost of living that we are starting to experience will be permanent.

Of course it isn’t just the U.S. government that is engaging in this sort of behavior.  Governments all over the globe have been flooding their financial systems with money, and this is setting the stage for much higher food prices and “periods of social unrest”…

Today, DB’s Jim Reid picked that chart as his “Chart of the day”, repeating what readers already know, namely that Bloomberg’s agriculture spot index has risen by c.76% year-on-year, noting that “that’s the biggest annual rise in nearly a decade, and there are only a couple of other comparable episodes since the index begins back in 1991.”

Like us, Reid then patiently tries to explain to all the idiots – like those employed in the Marriner Eccles building – that the importance of this record surge “extends far beyond your weekly shop, as there’s an extensive literature connecting higher food prices to periods of social unrest.”

Needless to say, the scenario that we are seeing play out right in front of our eyes is perfectly in line with warnings that I issued in my most recent book.

At this point, the powers that be have shown no indications that they plan to reverse course, and so that means that we will be steamrolling into a future of much higher prices, growing global hunger and widespread civil unrest.

That is what is real.

What isn’t real are all of the absolutely ridiculous bubbles that we are witnessing in the financial markets.

Dogecoin may be the most absurd of them all, but every single one of them will end up bursting by the time it is all said and done.

*  *  *

Michael’s new book entitled “Lost Prophecies Of The Future Of America” is now available in paperback and for the Kindle on Amazon.

April saw gold, bonds, and stocks (The Dow) all rise around 2% while the dollar fell around 2% against its fiat peers…

Source: Bloomberg

All major US equity indices ended April higher with Nasdaq 100 leading the way and Small Caps lagging…

Source: Bloomberg

And while the 5%-ish gain for the month in S&P is notable, during 18 sessions this month through trading on Thursday, 95% or more of the index’s members traded above their 200-day moving average.

Source: Bloomberg

That’s the most days ever observed in a single calendar month and double the previous high of nine days in September 2009.

Source: Bloomberg

“The fact that 95% of the S&P 500 is now above its 200-day moving average is NOT a bullish sign,” Matt Maley, chief market strategist for Miller Tabak + Co., wrote in an April 26 note.

“Yes, a high number of stocks above their 200 DMA’s is usually positive, BUT it is NOT bullish when the number becomes extreme (like it is now…at 95%). In other words, this data point is much like sentiment. When it is strong, it is positive…but when it becomes extreme, it becomes a contrarian indicator!”

Remember, if stocks are up…

Trannies continue their all-time record streak of weekly gains (now 13 weeks in a row) while the other US majors struggled on the week (with Nasdaq 100 the biggest laggard)…

Source: Bloomberg

Financials managed to lead the S&P sectors on the month (despite lower yields) and the Energy sector was laggard (despite surging oil prices)…

Source: Bloomberg

Despite crushing earnings this week, FAAMG stocks went nowhere (though were up large on the month)…

Source: Bloomberg

Treasury yields were lower on the month with the long-end down 11bps, 2Y unch. This was the first monthly drop in yields since November (and biggest 10Y Yield drop since July)

Source: Bloomberg

Treasury yields were higher on the week with the long-end up around 7bps

Source: Bloomberg

April saw Real Yields tumble (and drag gold higher with them)…

Source: Bloomberg

April saw the dollar on a one-way dump all months, ending down almost 2% – the first monthly loss since Dec 2020. The last three days saw the dollar whipsawed as Fed losses were reversed and stops run…

Source: Bloomberg

Bitcoin surged today, reversing some of April’s Ethereum outperformance…

Source: Bloomberg

Ripple was up 177% in April, Ethereum was up 43%… and Bitcoin slipped 3%…

Source: Bloomberg

After reaching record highs at $65,000, Bitcoin saw its first monthly loss since September…

Source: Bloomberg

Ethereum ended the month at its record highs, despite a couple nasty drawdowns…

Source: Bloomberg

Commodities soared in April – the best monthly return since Feb 2014…

Source: Bloomberg

Copper was among the best performers in April – back near record highs – and crude also performed well. Gold saw its first positive month of the year..

Source: Bloomberg

Copper and Crude rallied this week as PMs modestly lagged.

Source: Bloomberg

Commodities are the top-performing asset for the first time since 2002…

Finally, after 8 straight months of yields rising with soaring commodity prices, April saw that correlation regime collapse with bonds bid (yields dropping) despite spike commodity prices.

Source: Bloomberg

We wonder who’s right? Bonds or Commodities?

Depends if you trust ‘real’ economic data or ’emotion’-based surveys?

Source: Bloomberg

“Hope” is still not a strategy.