Tag: finance

Submitted by Kevin Muir, The Macro Tourist

Quick – someone asks you whether you will bet on Hillary Clinton winning the next election. Would you take that bet? At even odds, you would have to be insane. But what if someone offered you 100-to-1 odds? How about 1000-to-1? At a certain point, it’s worth a punt.

And this is the trouble with discussing option trading. At times, even if you don’t think a specific outcome the most probable result, it still makes sense to take a position based on the market underpricing the probability of that outcome. It’s a nuanced difference, but often missed by the financial media.

I am not a big Eurodollar futures trader, but I recognize that it is one of the biggest, most liquid markets in the world. And if you are a STIR (short term interest rates) trader, then you are most likely aware of the interesting option order flow that has been crossing the tape all summer long. The pits are abuzz with talk, but for the rest of us who aren’t clued into the intricacies of the fixed-income option market, we are probably overlooking this huge bet that is being slapped on.

For me, I rely on Alex Manzara’s blog, Chartpoint, to keep me up to date on the developments in the Eurodollar pit. Alex is an institutional futures broker at RJ O’Brien and all-around nice guy in that Chicago sort of way.

Alex has recently been highlighting the activity of in the Eurodollar futures option pit where a client (or maybe a group of clients) has been aggressively selling long-dated put ratio option spreads. Got that? Yeah, it’s a mouthful and sometimes deciphering the language of options traders leaves you scratching your head wondering if they are speaking the same language.

But let me walk you through what’s happening and then we can ponder the implications.

This morning, Alex sent me an update on the action in the Eurodollar options futures pit.

This cryptic headline came across my Bloomie:

EDM0 9650-9600 ps 1×6 ppr sell 6 legs over at 7.0 ref 9694. 1k only

See what I mean? Not the easiest to understand…

Let’s try to decipher it. The underlying contract month is represented by EDM0. This is the June 2020 Eurodollar futures contract. M is for June and 0 is the last digit of the year.

Then the “9650-9600 ps” signifies a put spread with the strikes of 9650 and 9600. “1×6” refers to the fact that it is a ratio put spread.

The next part “ppr sells 6 legs over at 7.0 ref 9694. 1k only” means the “paper” (which equates to “client” in the language of the pit) sells 6,000 9600 strike puts and buys 1,000 9650 strike puts for a net credit of 7.0 ticks.

Here is a snap shot of the current quotes:

The fact that the put ratio was done for a credit of 7 ticks means that the actual prices for the spread would be something like 0.0325 for the 9600 puts and 0.125 for the 9650 puts (0.0325 * 6 – 0.125 = 0.07). The actual specific prices don’t matter as long as the net amount equals 7 ticks. Finally the “ref 9694” means that the actual future was trading at around 9694 at the time of the trade (as opposed to 9692.5 in our example above).

Great. So now we understand ED option trader-lingo, so what? How’s that going to help our trading?

Although today’s order was only 1,000 contracts by 6,000, over the past couple of months this trade has been done in size. Over and over, and then some more. This whale-of-a-trader has been buying closer-to-the-money-puts and funding it by shorting gobs of out-of-the-money-puts. This position has been put on in unprecedented amounts.

This is obvious when we look at the open interest figures. Sticking with the EDM0 contract, we can see a marked increase in open interest as we head down the strike curve (I am using EDM0, but the trader has been doing this trade on many far-dated months).

In practical terms, if there is a large trader demanding liquidity in options that are close to the money, while shorting many multitudes of options in puts that are way out of the money, then this will influence the shape of the vol curve.

Although many market observers are accustomed to lower strike puts being more expensive in implied volatility terms due the well-known skew in the equity option market, there is no law dictating that all markets need to trade with such a skew.

Have a gander at the table below, focusing on the IVM column (implied volatility at mid price).

Look closely at what happens to the implied vols as the strikes become smaller. Instead of the vols increasing, the opposite is happening.

Now to some extent, I get it. A jump condition (every short gamma trader’s nightmare), would most likely be to the upside in Eurodollar futures. Imagine some horrific geopolitical disaster that causes equities to crack by 20% overnight. In that scenario, short-term rates would most likely be slashed and Eurodollar futures would rally hard (all else being equal). So having the opposite skew than equities makes sense.

But to think that this skew hasn’t been influenced by this monster-of-a-trader who keeps wailing on the out-of-the-money puts would be naive. When dealers got hit with the first 25,000 out-of-the-monies, I am sure they were immediately bid. But when this selling continues day after day, the natural consequence is for them to lower their bids.

When the big client started putting on this trade a couple of months ago, the futures were higher along with implied vols. As both the underlying and volatility has drifted lower, the trade has been a good winner for the client.

What is the client really betting on?

If we stop to analyze what market view this client’s position is trying to express, we can probably agree that, above all else, a large move higher in rates is the one thing that will hurt the most. Depending on the strikes, some rate rise would be profitable, but an-above-consensus-move would be disastrous.

It’s easy to understand why the client would be willing to take this bet. The Federal Reserve has been the most aggressive major Central Bank out there. Over the past two years, they have raised the Fed Funds rate by 150 basis points. When combined with their bold policy of quantitative tightening, there has been a tremendous amount of stimulus withdrawn from the US economy.

This bet is in essence a way to express the view that the Fed is tightening into the next recession, and that this tipping point is sooner rather than later.

Is this the most probable outcome? Most likely, yes.

But is the market accurately pricing the possibility of an outsized rate hike scenario? Nope. Not a chance.

As my pal Alex said to me this morning, “fixed-income volatility is already dirt cheap, and with the skew, these puts are being given away.”

I couldn’t agree more.

Already leaning that way, but this is a cheap way to play it.

I have long thought market participants have underestimated the possibility for dramatically higher rates. Although I still think such a move will be led by the long-end, in general, I am willing to bet on all rates going higher than most can imagine.

This monster-trader’s relentless supply of out-of-the-money Eurodollar puts means we can pick up lottery tickets at a discount. Everyone thinks the Fed is almost done raising rates. Consensus is firmly in the camp that the Fed will stop hiking in about 3 hikes.

See this great graph from Robin Brooks that shows the difference between what the Fed is saying and what the market believes:

Markets are pricing around 75 bps in additional Fed hikes cumulatively through end-2020, for a terminal rate around 2.7 percent (red). This is around 75 bps, i.e. 3 hikes, below the rate indicated by the Fed at that point (black). pic.twitter.com/K3uMPi2vSP

— Robin Brooks (@RobinBrooksIIF) September 11, 2018

What if the market is once again overly optimistic about the Fed’s policy trajectory? What if the Republican tax cuts have finally ignited the “animal spirits” and this economic expansion accelerates from here instead of rolling over?

Yeah, it is not the high probability bet. Will those out-of-the-money ED puts most likely be dust? Sure. But that doesn’t mean they aren’t buys down here.

via RSS https://ift.tt/2N3P2uK Tyler Durden

Authored by Peter van Buren via The American Conservative,

There are ways for officials to honorably dissent, like blowing a whistle, resigning, or penning a protest with your actual name on it.

The anonymous New York Times op-ed writer inside government thwarting Trump’s plans does not understand how government works. Amplified by worn accusations in Bob Woodward’s new book, the op-ed is nonetheless driving calls for Trump’s removal under the 25th Amendment to save America. But look closer: there are no patriots here, and little new; it’s all nasty politics.

You don’t join government to do whatever partisan thing you think is right; you serve the United States, and take an oath to a Constitution which spells out a system and chain of command. There is no Article 8 saying “but if you really disagree with the president it’s OK to just do what you want.”

I served 24 years in such a system, joining the State Department under Ronald Reagan and leaving during the Obama era. That splay of political ideologies had plenty of things in it my colleagues and I disagreed with or even believed dangerous. Same for people in the military, who were told who to kill on America’s behalf, a more significant moral issue than a wonky disagreement over a trade deal or a boorish tweet.

But the only way for America to function credibly was for us to work on her behalf, and that meant following the boss, the system created by the Constitution, and remembering you weren’t the one elected, and that you ultimately worked for those who did the electing. There were ways to honorably dissent, such as resigning, or writing a book with your name on the cover (my choice), and otherwise taking your lumps.

But acting as a wrench inside the gears of government to disaffect policy (the Washington Post warned “sleeper cells have awoken”) is what foreign intelligence officers recruit American officials to do, and that doesn’t make you a hero acting on conscience, just a traitor.

It seems odd someone labeled a senior official by the New York Times would not understand the difference before defining themselves forever by writing such an article. (Then again, Sen. Cory Booker didn’t seem to know the documents he was so bravely disclosing were already declassified before he called the gesture his “I am Spartacus moment.”)

So don’t be too surprised if the op-ed author turns out to be a junior official not in a position to know what they claim to know, a political appointee in a first government job reporting second- or third-hand rumors—maybe an ex-Bushie in over their head. That will raise important questions about whether the NYTexaggerated the official’s importance, and thus credibility, and whether anonymity was being used to buff up the narrative by encouraging speculation.

Next up: sorting out the “new” facts forming the underbelly of calls to end the Trump presidency. The op-ed’s release was set by the Times to perfectly dovetail with Bob Woodward’s new book, Fear (It would be interesting to know how much of this was created by the Times — did the paper encourage the heretofore unidentified ‘patriot’ to write? Did they have to be persuaded? How much editing was done? How far from the role of journalism into political activism did the Timesstray?)

Neither the book nor the op-ed breaks any new ground. Both are chock full of gossip, rumors, and half-truths present from Trump day one and already ladled out by Michael Wolff’s own nearly-forgotten book and Omarosa’s unheard recordings: the man is clinically insane, has the mind of a child, acts impulsively, and is thus dangerous. Same stuff but now 18 months shinier and sexier—Woodward! Watergate! Anonymous! Deep Throat! It’s clever recycling, a way to appear controversial without inviting skepticism by telling people what they already believe because they’ve already heard it. What seems like confirmation is just repetition.

There are plenty of accusations in Woodward’s book (“Trump is not smart“) that were quickly denied by those quoted (Jim Mattis and JohnKelly, for example.) But one new item, the claim that Gary Cohn, Trump’s former economic adviser, walked into the Oval Office and snatched a letter off Trump’s desk, suggests how sloppy the reporting is. Cohn supposedly stopped Trump from pulling out of a trade agreement with South Korea by stealing an implementing letter, preventing Trump from signing it. Woodard writes Cohn did the same thing on another occasion to stop Trump pulling out of NAFTA.

“Paper” inside government, especially for the president’s signature, does not simply disappear. Any document reaching a senior official’s desk has been tasked out to other people to work on. The process usually begins when questions are asked at higher levels and then sent down to the bureaucracy; no president is expected to know it’s Article 24.5 of an agreement that allows withdrawal. That request creates a paper trail and establishes stakeholders in the decision, for example, people standing by to implement a decision or needing to know ahead of negotiations with Seoul POTUS changed his mind.

So paper isn’t forgotten. I know, I had a job working as the Ambassador’s staff assistant in London where most of my day was spent tracking letters and memos on his behalf. Inside the State Department an entire office known as The Line does little else but keep track of paper flowing in and out of the Secretary of State’s actual In/Out boxes. This isn’t just bureaucratic banality at work; this is how things get done in government, as documents with the president’s signature instantly turn into orders.

So even if, playing to the public image of a dotard-in-chief, Trump didn’t remember calling for that letter on South Korea, and thus never missed it after Cohn allegedly stole it to change history, a lot of other people would have gone looking for it. Stealing a letter off the president’s desk is not the equivalent of hiding the remote to keep grandpa from changing channels. And that’s to call the claim absurd even before noting how few individuals the Secret Service allows into the Oval Office on their own to grab stuff. While the example of the stolen letter is a bit down in the bureaucratic weeds, it is important because what is being widely reported, and accepted, is not always true.

The final part of all this which doesn’t pass a sniff test is according to the op-ed, 25th Amendment procedures to remove the president from office were discussed at the Cabinet level. The 25th, passed after the Kennedy assassination, created a set of presidential succession rules, historically used for short handovers of power when a president has gone under anesthesia. Most relevant is the never-used full incapacitation clause.

An 2018 interpretation of that clause made popular by TV pundits is now the driver behind demands that Trump is so stupid, impulsive, and insane he cannot carry out his duties, and so power must be transferred away from him today. While the op-ed writer says the idea was shelved only to avoid a Constitutional crisis, in fact it makes no sense. The 25th’s legally specific term “unable” does not mean the same thing as the vernacular “unfit.” An unconscious man is unable (the word used in the Amendment) to drive. A man who forgot his glasses is unfit (not the word used in the Amendment), but still able, to drive, albeit poorly.

The use of the 25th to get Trump out of office is the kind of thing people with too much Google time, not senior officials with access to legal advice, convince themselves is true. The intent of the amendment was to create an administrativeprocedure, not a political thunderbolt.

But intent aside, the main reason senior officials would know the 25th is not intended to be used adversarially is the Constitution already specifies impeachment as the way to force an unfit president out. The 25th was not written to be a new flavor of impeachment or a do-over for an election. It has to be so; the Constitution at its core grants ultimate power to the people to decide, deliberately, not in panic, every four years, who is president. Anything otherwise would mean the drafters of the 25th wrote a backdoor into the Constitution allowing a group of officials, most of whom were elected by nobody, to overthrow an elected president they simply think turned out to be bad at his job.

The alarmist accusations against Trump, especially when invoking mental illness to claim Americans are in danger, are perfectly timed fodder, dropped right after Labor Day into the election season, to displace the grinding technicalities of a Russiagate investigation. Political opponents of Trump had been counting on Mueller by now to hand them November amid a wash of indictments, and thus tee up impeachment with a Democratic majority in the House.

The op-ed does indeed signal a crisis, but not a Constitutional one. It is a crisis of collusion, among journalists turned to the task of removing a president via what some would call a soft coup.

Because it’s either that, or we’re meant as a nation to believe an election should be overturned two years after the fact based on a vaguely-sourced tell-all book and an anonymous op-ed.

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Fresh on the heels of publishing his latest book, “Big Debt Crises”, Bridgewater Associates founder Ray Dalio appeared on CNBC Tuesday morning to share what he learned while researching the book, and explain its central theme: That while debt crises are an inevitable feature of our capitalist system, there are steps that can be taken to better manage them.

While Dalio doesn’t see a crisis exploding in the coming months, the next downturn isn’t far away, he argued. And one straightforward step that could be taken to help control it lies with central banks which, through their easy money policies, have helped aggravate the debt problem in both the developed and emerging world. 

Because of this, Dalio believes that lawmakers should modify the mandate of the Federal Reserve and other major major central banks to enable them to step in when aggregate debt levels begin to appear unmanageable.

Dalio: Of all of them, there’s the debt growth that finances the bubbles that happen before it that create the busts. You know, there’s basically six stages to it. There’s the normal debt growth that finances growth that pays for itself. Then you get into the bubble stage, when everybody’s extrapolating what happened in the past. So asset prices are going up and everybody is borrowing a lot of money to extrapolate what’s happened. And that bubble stage, central banks don’t pay much attention to because it doesn’t affect inflation and growth. And so I think at that stage is when the central banks should be looking at “are those debts going to be able to be paid back from the financial?” that would be the biggest.

This shouldn’t be too much of a leap: After all, though it’s not part of the Fed’s “official” purview, the Fed and the “plunge protection team” step in to defend stocks whenever a selloff starts to become self-reinforcing.

Before moving on to Dalio’s next point, it’s probably worth revisiting the Bridgewater Founder’s now-famous “1937” thesis (where he posited that the US market was nearing a “1937”-style top that would soon give way to another retrenchment). Dalio first introduced the concept three years ago, then modified it following President Trump’s upset victory in the presidential election:

• Debt Limits Reached at Bubble Top, Causing the Economy and Markets to Peak (1929 & 2007)
• Interest Rates Hit Zero amid Depression  (1932 & 2008)
• Money Printing Starts, Kicking off a Beautiful Deleveraging  (1933 & 2009)
• The Stock Market and “Risky Assets” Rally  (1933-1936 & 2009-2017)
• The Economy Improves during a Cyclical Recovery  (1933-1936 & 2009-2017)
• The Central Bank Tightens a Bit, Resulting in a Self-Reinforcing Downturn (1937)

And with the release of his new book, Dalio has adapted these priniciples to serve as a general guide to the business-debt cycle.

• The Early Part of the Cycle
• The Bubble
• The Top
• The Depression
• The Beautiful Deleveraging
• Pushing on a String/Normalization

* * *

Today, Dalio argues, the cycle hasn’t arrived at its climax just yet – rather, we’re closer to the seventh inning. Because while debt levels have surpassed their levels from before the crisis, companies aren’t yet being choked by their debt payments (well, at least not in the US).

Dalio: Corporate debt of course — but if you look at the corporate cash and you look the maturity of the debt. When we run the pro forma financial business calculations, it’s nothing like 2007 looked like to 2008. There’s a squeeze that will be emerging. But generally speaking, we’re in, I would say, the seventh inning of the cycle. I think that we’re at the stage in the cycle where interest rates are being raised. We’re in the later stage. Probably, maybe we have two more years into the cycle, something like that. And then the issues of this debt crisis are very different than the last debt crisis. Each one’s a little bit unique. This one look very much more like the 1935 to ’36 — 1935 to ’40 period.

But once interest rates rise high enough to choke the expansion into submission, the economy will be heading into a downturn at a time when wealth inequality is so profound – and populism is so ascendant – that political factors will complicate the next turnaround. Because with governments tapped out on the fiscal side, and monetary policy already at its most accommodative level, markets will be forced to grapple with issues that they have never before seen as pension funds collapse and problems of unfunded benefits – like health-care, for example – will provoke an even more incendiary reaction from the public.

Dalio: Because I think the parallels are really important to understand. Okay. 1929 to ’32 and 2008 to 2009, we have a debt crisis. And interest rates hit zero. Both of those cases, interest rates hit zero. Only two times this century. There’s only one thing to do next. And that is to print money and buy financial assets. So in both of those cases, that’s what the central bank did, and they pushed asset prices up. As a result we had an expansion, we had the markets rising. And we particularly had an increase in the wealth gap. Because if you owned financial assets, you got richer. And if you didn’t, you didn’t. And so what today we have is a wealth gap that’s the largest since that period. The top 0.1 of the 1% of the population’s net worth is equal to the bottom 90% combined. You have to go back to 1935-40. As a result we have populism, okay. Populism is the disenchanted – capitalism not working for the majority of people. So we have that particular gap. So we have a political gap, a social gap in terms of the economics, and we’re coming into the phase where we’re beginning the tightening cycle. 1937, we begin a tightening cycle. We begin a tightening cycle at this point. No tightening cycle ever works out perfectly. That’s why we have recessions. We can’t get it perfectly. So as we’re going into this particular cycle, we have to start to think, “well, what will the next downturn be like?” we’re nine years into this. As you have a downturn, I believe that there’s a political and social implication to that related to populism. And less effective monetary policy. There’s less effective monetary policy because so far there are two types of monetary policy used: lowering interest rates, we can’t lower interest rates, and the second is quantitative easing. And it’s maximized its effect. So I think the next downturn is going to be a different type of downturn. I think pension problems, health care problems in terms of obligations that are not funded that are not debt —

The result will be a slower, more grinding crisis.

Sorkin: More severe next time?

Dalio: I think it’ll be more severe in terms of the social/political problems. And I think it will be more difficult to handle –

Quick: What you’re saying –

Dalio: It won’t be like the — it won’t be the same in terms of the big bang debt crisis. It’ll be a slower growing, more constricting sort of debt crisis. But I think it’ll have bigger social implications and a bigger international implication.

And while we don’t have the tools to prevent the next crisis, taking a good hard look at the people who have been left behind by the present expansion – and doing more to help them – could be one way to mitigate the the fallout from the next debt implosion.

Dalio: I think there should be a national initiative to look at the parts of the population that are not benefitting from the cycle. And I think that then, you know, education in many ways is just terrible.

Kernen: You’re not talking about pure redistribution, you’re not talking about universal basic income, you’re not talking about anything like — you want to keep things going in terms of the private sector.

Dalio: I think the most important thing is the ways to create opportunity and productivity in that group.

It’s worth noting that Dalio’s doomsaying forecasts in recent years have proven premature. But with the 10th anniversary of the Lehman Bankruptcy on Saturday, and the tenth anniversary of the bull market looming in March, he isn’t the only major investor who’s questioning how much longer the good times can possible last.

Watch the full interview below:

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Via ConsortiumNews.com,

In a memo to President Trump, a group of former U.S. intelligence officers, including NSA specialists, warn that the potential for a U.S.-Russia confrontation has never been greater at a moment the White House has confirmed it’s in the planning stages of a strike on Syria, claiming “new intelligence” that Assad has already “ordered” a chemical weapons attack, according to the WSJ. 

MEMORANDUM FOR: The President

FROM: Veteran Intelligence Professionals for Sanity (VIPS)

SUBJECT: Moscow Has Upped the Ante in Syria

Mr. President:

We are concerned that you may not have been adequately briefed on the upsurge of hostilities in northwestern Syria, where Syrian armed forces with Russian support have launched a full-out campaign to take back the al-Nusra/al-Qaeda/ISIS-infested province of Idlib.  The Syrians will almost certainly succeed, as they did in late 2016 in Aleppo.  As in Aleppo, it will mean unspeakable carnage, unless someone finally tells the insurgents theirs is a lost cause.

That someone is you. The Israelis, Saudis, and others who want unrest to endure are egging on the insurgents, assuring them that you, Mr. President, will use US forces to protect the insurgents in Idlib, and perhaps also rain hell down on Damascus. We believe that your senior advisers are encouraging the insurgents to think in those terms, and that your most senior aides are taking credit for your recent policy shift from troop withdrawal from Syria to indefinite war.

Big Difference This Time 

Russian missile-armed naval and air units are now deployed in unprecedented numbers to engage those tempted to interfere with Syrian and Russian forces trying to clean out the terrorists from Idlib. We assume you have been briefed on that — at least to some extent. More important, we know that your advisers tend to be dangerously dismissive of Russian capabilities and intentions.

We do not want you to be surprised when the Russians start firing their missiles.  The prospect of direct Russian-U.S. hostilities in Syria is at an all-time high.  We are not sure you realize that.

The situation is even more volatile because Kremlin leaders are not sure who is calling the shots in Washington.  This is not the first time that President Putin has encountered such uncertainty (see brief Appendix below).  This is, however, the first time that Russian forces have deployed in such numbers into the area, ready to do battle.  The stakes are very high.

We hope that John Bolton has given you an accurate description of his acerbic talks with his Russian counterpart in Geneva a few weeks ago. In our view, it is a safe bet that the Kremlin is uncertain whether Bolton faithfully speaks in your stead, or speaks INSTEAD of you.

The best way to assure Mr. Putin that you are in control of U.S. policy toward Syria would be for you to seek an early opportunity to speak out publicly, spelling out your intentions.  If you wish wider war, Bolton has put you on the right path. 

If you wish to cool things down, you may wish to consider what might be called a pre-emptive ceasefire. By that we mean a public commitment by the Presidents of the U.S. and Russia to strengthen procedures to preclude an open clash between U.S. and Russian armed forces.  We believe that, in present circumstances, this kind of extraordinary step is now required to head off wider war.

FOR THE VIPS STEERING GROUP, SIGNED: 

William Binney, former Technical Director, World Geopolitical & Military Analysis, NSA; co-founder, SIGINT Automation Research Center (ret.)

Marshall Carter-Tripp, Foreign Service Officer (ret.) and Division Director, State Department Bureau of Intelligence and Research

Philip Giraldi, CIA Operations Officer (retired)

James George Jatras, former U.S. diplomat and former foreign policy adviser to Senate Republican leadership (Associate VIPS)

Michael S. Kearns, Captain, U.S. Air Force, Intelligence Officer, and former Master SERE Instructor (retired)

John Kiriakou, Former CIA Counterterrorism Officer and Former Senior Investigator, Senate Foreign Relations Committee

Matthew Hoh, former Capt., USMC Iraq; Foreign Service Officer, Afghanistan (associate VIPS)

Edward Loomis, NSA Cryptologic Computer Scientist (ret.)

Linda Lewis, WMD preparedness policy analyst, USDA (ret) (Associate VIPS)

David MacMichael, Senior Estimates Officer, National Intelligence Council (ret.)

Ray McGovern, Army/Infantry Intelligence Officer and CIA Presidential Briefer (retired)

Elizabeth Murray, Deputy National Intelligence Officer for the Near East, National Intelligence Council (retired)

Todd E. Pierce, MAJ, US Army Judge Advocate (ret.)

Coleen Rowley, FBI Special Agent and former Minneapolis Division Legal Counsel (ret.)

Ann Wright, retired U.S. Army reserve colonel and former U.S. diplomat who resigned in 2003 in opposition to the Iraq War

* * *

Appendix: 

Sept 12, 2016:  The limited ceasefire goes into effect; provisions include separating the “moderate” rebels from the others. Secretary John Kerry had earlier claimed that he had “refined” ways to accomplish the separation, but it did not happen; provisions also included safe access for relief for Aleppo.

Sept 17, 2016: U.S. Air Force bombs fixed Syrian Army positions killing between 64 and 84 Syrian army troops; about 100 others wounded — evidence enough to convince the Russians that the Pentagon was intent on scuttling meaningful cooperation with Russia.

Sept 26, 2016:  We can assume that what Lavrov has told his boss in private is close to his uncharacteristically blunt words on Russian NTV on Sept. 26. (In public remarks bordering on the insubordinate, senior Pentagon officials a few days earlier had showed unusually open skepticism regarding key aspects of the Kerry-Lavrov agreement – like sharing intelligence with the Russians (a key provision of the deal approved by both Obama and Putin).   Here’s what Lavrov said on Sept 26:

“My good friend John Kerry … is under fierce criticism from the US military machine. Despite the fact that, as always, [they] made assurances that the US Commander in Chief, President Barack Obama, supported him in his contacts with Russia (he confirmed that during his meeting with President Vladimir Putin), apparently the military does not really listen to the Commander in Chief.”

Lavrov went beyond mere rhetoric. He also specifically criticized JCS Chairman Joseph Dunford for telling Congress that he opposed sharing intelligence with Russia, “after the agreements concluded on direct orders of Russian President Vladimir Putin and US President Barack Obama stipulated that they would share intelligence. … It is difficult to work with such partners. …”

Oct 27, 2016:  Putin speaks at the Valdai International Discussion Club
At Valdai Russian President Putin spoke of the “feverish” state of international relations and lamented: “My personal agreements with the President of the United States have not produced results.” He complained about “people in Washington ready to do everything possible to prevent these agreements from being implemented in practice” and, referring to Syria, decried the lack of a “common front against terrorism after such lengthy negotiations, enormous effort, and difficult compromises.”

Veteran Intelligence Professionals for Sanity (VIPS) is made up of former intelligence officers, diplomats, military officers and congressional staffers. The organization, founded in 2002, was among the first critics of Washington’s justifications for launching a war against Iraq. VIPS advocates a US foreign and national security policy based on genuine national interests rather than contrived threats promoted for largely political reasons. An archive of VIPS memoranda is available at Consortiumnews.com.

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Amid east coast disruptions and Iran-related headlines, WTI spiked above $69 ahead of tonight’s inventory data, before extending gains when API reported a much bigger than expected crude draw (-8.4mm vs -1.75mm exp).

 

API

• Crude -8.636mm (-1.75mm exp) – biggest draw since July 2018

• Cushing +2.122mm (+900k exp) – biggest build since March 2018

• Gasoline +5.821mm – biggest build since Dec 2017

• Distillates -1.165mm

This is the 4th weekly crude draw in a row (and the biggest since July) but most notable was the huge build in gasoline – the biggest weekly rise in inventories since Dec 2017…

 

Bloomberg reports that East Coast motorists may see “dramatic” spikes in gasoline prices, according to AAA, as mass evacuations stretch supplies and Florence’s heavy rains imperil major fuel pipelines. Meanwhile, France and South Korea are shunning Iranian crude, forcing the Islamic Republic to effectively remove some oil from global markets.

Some investors “believe we are going to see a significant jump in gasoline prices,” said John Kilduff, a partner at New York-based hedge fund Again Capital LLC. “The supportive factors in this market still remain.”

WTI traded above $69 ahead of API and spiked up to within a tick of $70 on the crude draw…

And despite the biggest build since Dec 2017 RBOB also spiked.

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Several months after his last live address to investors in his fund, Double Line CEO Jeffrey Gundlach is holding his latest periodic live webcast with investors, titled “Miracle Grow.”

Readers can listen to the webcast live by clicking on the slide below or the click on this link (registration required).

We will publish the accompanying slides shortly, but until then, here is what Gundlach believes is the “Miracle Grow” pushing the US economy higher: debt, which according to Gundlach shows a remarkable correlation to the S&P.

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Another day of this..

China was weak overnight after the World Trade Organization said China would ask for permission to retaliate against the U.S. due to its failure to modify anti-dumping methodologies.

 

Europe was mixed to lower across all the majors…

 

 

US Futures were weighed down by that until WSJ reported that Beijing was backing off on the tough talk and wooing US firms’ investment dollars, sending stocks soaring… with Nasdaq best…

 

However, gains for the day were pretty much capped at around the European close…

 

Tech stocks outperformed financials for the second day in a row…

 

But that is not helping the big banks as Goldman is now down 10 days in a row – the longest losing streak since the company’s IPO…

 

Treasuries sold off across the curve as U.S. equities rebounded from early lows. The belly led losses in the run-up to Treasury’s $35b auction of 3-year notes, which tailed slightly.

 

Benchmark 10-year yields rose to within a hair of 2.98%, touching the highest level in a month.

 

Meanwhile, traders are shifting to a more hawkish stance as the market’s expectations for rate-hikes in 2019 are now at cycle highs (+42bps) but still well short of The Fed’s +75bps dot plot expectation…

 

The Dollar Index ended the day practically unchanged after testing down to pre-payrolls lows intraday and bouncing…

 

Cryptos were broadly lower with Bitcoin managing to drop the least…

 

Spot the odd one out in commodity-land…

 

Crude rose the most in a week as Hurricane Florence threatened U.S. East Coast gasoline markets and sanctions began crimping Iranian oil exports. East Coast motorists may see “dramatic” spikes in gasoline prices, according to AAA, as mass evacuations stretch supplies and Florence’s heavy rains imperil major fuel pipelines.

 

Perhaps of most note in the commodity space is the divergence between copper and crude… both telling quite different stories about global growth…

Gold futures broke back below $1200 briefly but bounced…

 

But the biggest divergence of all is Gold/Silver which just reached its highest ratio since March 1995 (NOTE  – we appear to be at a historical resistance level)…

 

Finally, we note that the S&P 500 Index is on the verge of setting a new high for overvaluation. Its trailing 12-month price-to-sales ratio surged to 2.25 on Monday, the highest since the dot-com era. If you think it’s just the tech giants skewing the number, think again: The median PSR for index members is more than twice the level of the late 1990s.

And the end of last week showed a new cluster of Hindenburg Omens forming…

Probably nothing.

All it will take to topple this house of cards is a little tap on the brakes from an exogenous factor…

#BREAKING: Marinelli Snipers Team have cancelled the contract with rider Romano Fenati after grabbing a rival’s brake while travelling at 132mph during the San Marino Moto2.

(Video: @MotoGP) pic.twitter.com/cSfh2DdbQ2

— BreakingNNow (@BreakingNNow) September 10, 2018

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Authored by Christoph Gisiger via Finanz und Wirtschaft,

On September 15, 2008, the global financial system was on the brink of a collapse. The trigger for the worst financial crisis in generations was the failure of the US investment bank Lehman Brothers. Key policy makers at that time have strongly assorted that they lacked the legal authority to save Lehman because the staggering financial giant did not have adequate collateral for the loan it needed to survive.

Laurence Ball disputes that explanation. In his new book, «The Fed and Lehman Brothers: Setting the Record Straight on a Financial Disaster», he debunks the official narrative of the crisis. Based on a meticulous four-year study of the Lehman case, he shows that the Federal Reserve could have rescued Lehman, but officials chose not to because of political pressures and because they didn’t understand the damage that the Lehman bankruptcy would do to the economy.

Professor Ball, the bankruptcy of Lehman Brothers shocked the world. What’s the main takeaway from the outbreak of the financial crisis looking back from the distance of a decade?

In the fall of 2008, all the big investment banks – Lehman Brothers, Bear Stearns, Goldman Sachs and so on – were in a fragile state for the same combination of reasons. First, they all had big investments in real estate which produced losses when the housing bubble burst. Second, they were highly leveraged so that once they started losing money on real estate, their low levels of equity got even lower and people started worrying that they might become unviable. The third factor that proved fatal was that these firms were so heavily dependent on very short term, often overnight, borrowing to operate their business. So, when people started to worry about their viability we had essentially a twenty first century version of a bank run: The investment banks were cut off from funding and couldn’t get cash to operate.

But why was Lehman the investment bank which went bankrupt?

All these investment banks had such different faiths and history has judged them so differently. For a lot of people, Lehman Brothers and CEO Dick Fuld were the great villains of the financial crisis. But Lehman didn’t do anything very differently from all the other investment banks. For instance, as of 2007 the magazine «Fortune» named Lehman Brothers the most admired securities firm. There was no obvious reason why Lehman should suffer a much worse fate than other investment banks.

Nevertheless, it was Lehman which went belly up in the fall of 2008.

The first thing to say is what’s not the explanation for that. Former officials of the Federal Reserve and especially Chairman Ben Bernanke have said repeatedly that the reason they didn’t rescue Lehman Brothers was that Lehman did not have enough collateral for an emergency loan. They say that under the law they could not lend to a firm unless there is adequate collateral. They also say that all the firms they did lend to – Bear Stearns, AIG and so on – did have enough collateral. So, it was legal to lend to them.

But long story short: This is not true. Lehman had plenty of collateral. Actually, in the case of some of the firms the Fed lent to, the collateral was more questionable.

How do you come to this conclusion?

The policy makers today keep saying the same thing: The reason that they did not rescue Lehman Brothers was that the bank did not have enough collateral for the amount of cash that it needed to borrow. That is untrue in two distinct ways. It’s first of all untrue in the sense that they did not pay any attention to collateral. There is a lot of hard evidence from investigations by the bankruptcy examiner, by the bankruptcy court and by the financial crisis inquiry commission. So, you don’t have to do much guesswork. You can see what the policy makers were discussing. On one hand, they were talking about that a rescue of Lehman would be politically horrible. On the other hand, they were talking about that it might hurt the economy if they don’t rescue Lehman. But the concept of collateral legality was not brought up. This is a story that was invented after the bankruptcy as an excuse.

Then again, the situation in the fall of 2008 was very messy. Hardly anybody knew what exactly was going on in the financial markets.

But if the policy makers had actually looked at how much collateral Lehman had they would have found that Lehman had plenty of collateral. In my book, I do a version of the calculations they could have done in real time. Sure, Lehman had things like equity stakes in real estate developments or private equity firms which were very hard to value and very illiquid. But Lehman had also corporate equities, corporate bonds and mortgage backed securities on the balance sheet. The other investment banks – both before and after the Lehman failure – were borrowing money from the Fed using those securities as collateral. Of course, there are a lot of details. But the bottom line is that Lehman had plenty of assets that could have been pledged as collateral.

What’s the real reason for the Lehman bankruptcy then?

The real reasons had to do with the particular political and economic circumstances which lead the policy makers to rescue some banks and not others. Bear Stearns was the first investment bank to get into trouble and policy makers realized that a failure could do damage to the economy. So, they rescued Bear Stearns.

But then there was tremendous political criticism from all across the spectrum: The liberal Democrats were saying: «You give away tax payer money to Wall Street.» Conservative Republicans were saying: «This is socialism, you’re taking over the banking system, you’re interfering with free markets».

So, Barack Obama and John McCain who were presidential candidates both came out against any more government help for big banks.

So, who’s to blame for the tragedy that unfolded with the Lehman crash?

First of all, a lot of people are to blame for the fact that there was a financial crisis. Certainly, the Lehman executives and the executives of other firms made risky bets that in retrospect they shouldn’t have done. Also, people took out mortgages they shouldn’t have taken out. Banks made loans they shouldn’t have made. Regulators did not do as good a job. Actually, you could have a long list of people to blame why we ended up in a crisis situation.

And what about in the case of Lehman particularly?

Lehman Brothers had the misfortune to be the second bank to get in trouble. Given how much criticism there had been of the first rescue with Bear Stearns policy makers decided not to rescue Lehman. Maybe, they engaged in some wishful thinking that the economic effects wouldn’t be too bad. For this big mistake I think Treasury Secretary Henry Paulson, Fed Chairman Ben Bernanke and Tim Geithner, the head of the Federal Reserve Bank of New York, are to blame in somewhat different ways.

What do you mean by that?

Under the law at the time, the authority to decide whether the Federal Reserve could make a loan or not was entirely the Fed’s decision. With respect to this decision, the Treasury Secretary legally had as much authority as the Secretary of Defense or as the Mayor of Chicago or anybody else. But as far as I can tell, what happened in practice was that simply because of the force of his personality, Paulson arrived at the New York Fed and told Geithner what to do. Geithner followed his instructions and Bernanke stayed in Washington. That’s why I think one can blame Paulson for making the decision not to rescue Lehman for political reasons. One could also blame Bernanke and Geithner for not standing up to Paulson and saying: «This is none of your business». Legally they could have said: «We don’t care about your political problems. We are going to do what’s right for the economy.» But they didn’t do that.

It’s also no secret that Paulson and Lehman CEO Dick Fuld didn’t get along. How important was their tense relationship with respect to Lehman’s fate?

Dick Fuld and Henry Paulson were rivals on Wall Street when Paulson was the CEO of Goldman Sachs. I don’t know it personally. But what people say is that they didn’t like each other and maybe that Paulson was happy to have a chance to make Fuld’s firm fail. I think that is exaggerated at best. Paulson was not happy that Lehman failed. He tried very hard to avoid that outcome. In his book, he writes: «I worked night and day to try to rescue Lehman. I was desperate for them not to fail. I tried to arrange a take-over.»

That’s true, just with the exception that when all else failed Paulson was not willing to allow the Fed to be the lender of the last resort for Lehman.

How about the executives of the other big Wall Street banks? How did they experience what happened during Lehman’s final days?

They were very worried. The whole story of the weekend of September 13 and 14 is very complicated. On Saturday, everybody thought there was a deal: Barclays was to acquire Lehman. But as a condition, Lehman was going to spin off about $30 or $40 billion of assets that Barclays didn’t want. This was similar to JPMorgan Chase saying Bear Stearns has to get rid of some assets before they buy them. The difference is that in the Bear Stearns case the Fed set up Maiden Lane to buy the unwanted assets. In the Lehman case, a group of the big Wall Street firms had agreed to finance the unwanted assets. So, Goldman Sachs, Citigroup, Credit Suisse  and other firms were worried enough that they were willing to put up several billion dollars each to try to help rescue Lehman. But then on Sunday, at the last minute, the Barclays deal fell apart because of objections by regulators in the UK.

How much money would have been needed to rescue Lehman?

The policy makers made a bad mistake in the case of Lehman. To their credit, they recognized the mistake quickly within a day or two when they saw that everything was falling apart. At that point, they changed course completely and rescued AIG and everybody else. AIG got well over $100 billion in loans and Morgan Stanley got around $100 billion. Of course, we don’t know exactly how much funding Lehman would have needed. But I estimate it would have needed around $84 billion – and again: this sum could have been backed by good collateral. It wouldn’t have been such a risky loan.

Instead Lehman ended up as the largest corporate bankruptcy in US history. What exactly happened on September 15th?

This was the largest bankruptcy ever. It was incredibly complex. Actually, some bankruptcy proceedings are still going on today. Bankruptcy law is very complex. You do a lot of planning. You have a series of first day motions where you sign you’re going to go bankrupt on a certain day and when you go into court you already have a whole bunch of plans for what’s going to happen during the bankruptcy. For my research, I had a talk with Harvey Miller who was a famous bankruptcy lawyer and was the lawyer for Lehman Brothers. He stressed that there was an incredible lack of planning. The way he put it was, that the bankruptcy petition Lehman filed was one of the shortest bankruptcy petitions in history. It was written in a few hours although this was arguably the most complex bankruptcy in history. So, it was extremely inadequate and just chaotic.

In an alternative universe: What would have happened if Lehman was rescued?

We will never know for sure. But I feel pretty strongly that the whole financial crisis probably would have been quite a bit less severe. As far as Lehman is concerned, I think it’s possible that if Lehman had survived it could still be an independent firm today. It’s also possible that Lehman would have had to be wound down over time. But one thing is quite obvious: We would not have had this chaotic bankruptcy.

Then again, Lehman wasn’t the only big bank that got into trouble. The whole financial system was drowning in debt.

Of course, there were problems. We had a housing bubble and risky things were happening on Wall Street. People were going to lose some money. If you look at the weeks before the Lehman bankruptcy, the US unemployment had risen somewhat to 6%. There were falling house prices and there were problems in the economy. But nobody expected the catastrophe we saw. This was the result of the panic that broke out when Lehman failed. I think when Lehman would have been rescued we might look back at this episode the way we look back at the savings and loans crisis in the 80s or at the bursting of the dotcom bubble in 2000. Those were cases in which financial mistakes were made. Billions of dollars were lost and there was some effect on the economy. But nothing like the catastrophe of 2008/09.

What were the consequences of the Lehman crash?

Again, nobody can know for sure. But I think the whole crisis and the great recession would have been quite a bit less severe if Lehman would have been saved.

Also, a big question is how US politics might have been different. American voters turned out to be very angry in 2016. As a result, they elected the kind of person I might have thought would never be elected president. Maybe things would have been different if the economy had not suffered such a big blow.

So, what’s the big lesson of the Lehman crisis?

One big lesson is that the Federal Reserve should be ready to do its job as the lender of last resort. We don’t know when the next financial crisis will occur. This last time it was subprime mortgages, the next time it will be something else. Important is that at some point there will be another big financial institution in which people lose confidence. Therefore, we need the Fed to be ready to provide liquidity. It’s very worrisome whether that will actually happen because a lot of people have taken away the wrong lesson. I fear that the next time there is a crisis there will once again be political pressure on the Federal Reserve not to commit any funds. Also, the Dodd-Frank Act goes in the wrong direction in one way because it puts some legal restrictions on the Fed’s ability to lend. The details are a little bit complex. But if we had the same history and there was some firm just like Lehman in the same situation, it’s possible that under the current law it would be illegal for the Fed to rescue it.

Today, Mr. Paulson, Mr. Bernanke and Mr. Geithner are celebrated as courageous heroes who saved the global economy from the financial crisis. What are your personal thoughts on that?

I can imagine some kind of counterfactual world in which Fed officials said: «Well yes, we were not perfect. We did our best to combat the financial crisis on September 14 when we had a few hours to figure out what to do in this incredibly complex situation. We hadn’t slept, and we didn’t get it quite right. But when we realized our mistake we changed gears the next day and did all these great things.» So, I would not criticize them for not being perfect. But that is not what they’ve said. They have absolutely refused to own up to any kind of mistake. They stuck to this line that «we didn’t have the legal authority» – and that’s just not true.

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The U.S. budget deficit rose to $211 billion in August, nearly double the gap during the year-ago month, the Congressional Budget Office estimated late Monday, which however was largely due to a calendar quirk: adjusted for shifts in payments, which would have occurred on a weekend, the deficit would have grown by 19%.

Excluding the timing shifts, outlays grew 8%, as the net interest on public debt jumped 25%, defense spending jumped 10%, outlays for Social Security grew 5%, and outlays for Medicare benefits rose 7%. Tax receipts fell by 3%, with corporate taxes dropping by $5 billion, while revenue from income and payroll taxes rose marginally.

Revenue from individual and payroll taxes was up some $105 billion, or 4 percent, as increasing wages, mostly due to more people having jobs, offset a lower withholding rate. while corporate taxes fell $71 billion, or 30% largely due to Trump tax reform, which lowered corporate tax rates as well as the expanded ability to immediately deduct the full value of equipment purchases.

Spending on Social Security and Medicare have climbed 4% as more baby boomers retire, outlays on net interest on the debt have jumped 19% in part due to a higher rate of inflation triggering more payments to inflation-protected securities holders, and defense spending has jumped 6%.

Still, on a cumulative basis, the budget deficit is blowing out in a big way, and in the first 11 months of the fiscal year, the deficit was $895 billion, $222 billion or 39% more than the previous year. This is largely due to outlays which have climbed 7% while revenue rose a mere 1%.

Commenting on the soaring deficit, White House chief economic adviser Kevin Hassett, told reporters on Monday that corporate tax cuts, but not the whole package, would pay for themselves with higher growth.

“I think that the notion that the corporate tax side has about paid for itself is clearly in the data,” he said. “On the individual side, there was about a trillion-dollar cost. About $700 billion of that was a refundable child credit that got expanded at the last minute to get the votes they needed to pass it.”

While other administration officials have made even more bombastic claims that the entire tax cut would pay for itself, including Treasury Sec. Steven Mnuchin and Gary Cohn, this has yet to manifest itself in the numbers.

But what is most ominous, at least to budget hawks, is that the CBO now says the deficit will approach $1 trillion by the end of this fiscal year or one year sooner than disclosed in the CBO’s most recent forecast ; in April the agency didn’t expect the deficit to reach $1 trillion until 2020.

Then again, over the long run none of this matters…

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Dr. Copper was just clubbed like a baby seal as someone got a $300 million tap on the shoulder, reminding them that the metal with the economics PhD is forecasting trouble ahead…

Between 8:42 to 8:45 a.m. in New York, almost 5,000 contracts were traded, each covering 25,000 pounds of the red metal. That was 16 times the 100-day average for that time of day, a spike in volume that extended the metal’s losses on the Comex.

As Bloomberg points out, that is over $300 million notional value of Copper dumped in just three minutes and follows August’s collapse – the worst month for the forecasting commodity in over two years.

If Copper is right, DoubleLine’s Jeff Gundlach’s favorite bond indicator suggests 10Y Yields have a long way to fall to ‘growth’ expectations…

So is Dr.Copper right? And US Stocks wrong?

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