Forget Ebola – Here’s Why US Banks Are Now Extremely Vulnerable

Submitted by Simon Black via Sovereign Man blog,

For a casual observer of the US economy (most “experts”), you could say that things look pretty good. Unemployment is at its lowest rate in six years. Earnings of S&P 500 companies are higher than ever, while their debt is lower than it’s been in the last 24 years.

Nonetheless, rather than getting excited for good economic times, the big commercial banks are all battening down the hatches. They’re preparing for bad times ahead.

I often stress the importance of being prepared, so in theory, that should be a great sign.

But then, you look at what they are “defensively” investing in, and you see that what they consider as prudence is simply insanity.

What banks are stockpiling these days are US government bonds, and they’re not doing this casually, they’re going nuts for them.

In just the last month alone American banks increased their holdings of US treasuries by $54 billion, to a record $1.99 trillion.

Citigroup, for example, held $103.8 billion worth of bonds at the end of June, up 19% from the end of last year.

This is like preparing for an earthquake by running out and buying whole new sets of porcelain dishes and glass vases.

All it’s going to do is make things more dangerous, and even if you somehow make it through the disaster, you have a million more shards to clean up.

With government bonds you are guaranteed to lose both in the short-term and the long-term. Bonds keep you consistently behind inflation (even the deceptively named TIPS—Treasury Inflation Protected Securities), so the value of your savings is slowly being chipped away.

But that’s nothing compared to the long-term threats of the US government not being able to repay the loans.

Facing $127 trillion in unfunded liabilities – which is nearly double 2012’s total global output – and with no inclination to reduce those numbers at all, at this point disaster for the US is entirely unavoidable.

Never before in history has a government stretched itself so thin and accumulated anywhere close to this amount of debt.

So when the day comes, it won’t be a minor rumble. It will be completely off the Richter scale.

These facts about the US government are in no way secret. Every bank out there knows it, yet they keep piling in.

Why do they keep buying bonds that they know the government will never be good for?

Even though people know in their guts that the government has no earthly possibility to ever repay its debt, on paper it’s a no risk investment.

The US government’s sovereign debt has an AA+ rating after all. They might not make money off it, but no fund manager and investment banker is going to get fired for investing in “risk-free” US government debt.

Under the rather arbitrary Bank of International Settlements Basel capital adequacy rules government debt rated at least AA continues to carry a “zero risk” weighting. Meaning that banks do not need to set aside capital against it.

Beyond that, regulations imposed after the last crash to reduce risk require banks to hold $100 billion in liquid assets, which of course includes bonds. Thus, they are not only encouraged, but actually forced to buy government bonds.

With a combined position of nearly $2 trillion in US government debt, against which they hold little or no capital buffer, US banks are now EXTREMELY vulnerable to a bond market sell-off.

In the aftermath of the meltdown of 2008, banks were made to pay multi-billion dollar fines for having “knowingly sold toxic mortgages to investors”. Will politicians and central bankers ever be held responsible for not only “knowingly selling” their toxic debt to investors, but actually forcing it on the banks?

The global economy shivered when the consequences of lending to subprime homebuyers came to fruition. Just imagine how it will quake when the US government – the largest subprime borrower in history – eventually defaults (or hyperinflates) its debt away.

There’s nowhere in the world the tremors won’t be felt.

via Zero Hedge Tyler Durden

Happy 27th Anniversary Black Monday

"It could never happen again… right?"



And if you think this time is different – just take a look at the 'tricks' they used 27 years ago to stop the fall – A Fed statement and borken/halted exchanges…


Charts: Bloomberg and Yahoo

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Bonus Clip – as we noted previously,

"This is a market that has been seriously overvalued for some time," exclaims Paul Tudor Jones,"and what we are seeing today is the piercing of the bubble…" adding that "Wall Street was uniformly unprepared for this kind of a drop."

Of course Bill Griffeth asks should we buy this dip… Tudor Jones replies – so ironically –

"we should see massive Federal Reserve and Government intervention in the FX and debt markets to stem what has unquestionably been a panic."

But Tudor-Jones cautions:

"prudent investors should use any rally to scale back into short-term Treasuries."

The legendary trader goes on to explain he is trading fear as investors fear deflation and disinflation and warns

"every American needs to get their house in order, needs to be conservative in their investments, the next few years will be about capital preservation."

Wise words for record highs…

via Zero Hedge Tyler Durden

5 Things To Ponder: “Buy” or “Run”

Submitted by Lance Roberts of STA Wealth Management,

This past week investors took a blow from a sharp selloff in the financial markets. I have spilled quite a bit of ink in recent months discussing the probabilities of such as corrective event as the Federal Reserve’s current liquidity operation came to a conclusion this month.

Now that the correction has occurred, at least to some degree, the question that must be answered is simply: “Is it over?”

That is the basis of this weekend’s reading list which is a compilation of reads that debate this point. The bulls remain wildly bullish, believing that this is simply a “dip” in the ongoing “bull market.” The more pessimistic crowd sees the opposite.

As I have stated previously, it is inherently important to consider both arguments to reduce the cognitive biases that lead to emotionally poor investment decisions.

Is the correction over? Maybe. Or this could be a “sucker’s rally” before a deeper decline. A big concern at the moment, as stated above, is the conclusion of the Federal Reserve’s ongoing liquidity intervention program. The liquidity pushed into the markets by the Fed has been the driver behind the markets unbridled advance since its inception in 2012. The same thing occurred in 2011, which led to a topping process as QE2 was coming to an end. 


From yesterday:

"While no two periods are ever the same what is important is the current defense of 1850 level on the S&P 500 so far.  A rally from this level, which fails to attain a new high, suggests that the market will complete an important topping process in the months ahead."

I don’t have the answer, but this is what I will be “pondering” over the weekend.


1) 5 Reasons Why Stocks Are Falling by Steve Forbes via Forbes

  • The U.S. Senate
  • Misbehavior By The Fed
  • Profit Picture Is Getting Blurry
  • World Economies Are A Mess
  • World Security Is Worsening
  • The Yield Curve May Not Invert Prior to a Recession
  • Stock Prices Appear to Be Issuing Economic Warnings
  • The Signal of the Bond Markets Might Be a Precursor to Slowing Growth
  • The Signal of the Oil Markets Is Negative
  • Expanding Geopolitical Risks Raise Risks 
  • Growing Health Concerns Could Dent Economic Growth
  • The Growing Dominance of the  U.S. Could Have a Negative Twist    

He concludes with a bullish view:

“At any rate, trying to time the market is a fool’s game. Ride the storm. After 2016, the U.S. will experience a Reaganesque revival. Markets will go up before then in anticipation of a better era ahead.”

Also Read:  Could The Liquidity Crisis Be Back by Izabella Kaminska via FT


2) Does Wall Street Know Something We Don’t by Neil Irwin via NYT

“Things are looking better, that is, unless you turn your eye to Wall Street. There, the stock market’s main gauge, the Standard & Poor’s 500-stock index, fell 0.8 percent on Wednesday after a wild ride during the day. It is off 7.4 percent since mid-September.


Moreover, longer-term interest rates are down sharply, which normally signals pessimism in the bond market about the nation’s economic future. A measure of expected volatility hit its highest level since 2011 on Wednesday, signaling that more manic days could lie ahead.


This apparent contradiction — and how it is resolved — points to the basic question for the United States economy and for Federal Reserve policy makers right now. How powerful is that underlying economic strength?  And will the recent market volatility prove ultimately inconsequential, or does it presage harder times ahead for a nation still trying to muddle its way out of a downturn that technically ended more than five years ago?”

Also Read: It’s Beginning To Look A Lot Like 2011 via GaveKal Capital Blog


3) If The Bull Market Has A Savior, This Is It by Christopher Hyzy via MarketWatch

“Five years into an often uneven recovery, and with stocks more volatile, are the American economy and financial markets running low on gas?


No. In fact, the U.S. is in the early stages of an extended business cycle and a secular bull market for stocks that could last another two decades.


Compared with previous cycles, this new phase could be longer and more favorable to equities, the U.S. in general, and specific investment themes. Why? Because this is the beginning of a global recycling of growth. The gigantic scale of this transition should lead to a far longer business cycle than is typical, one centered on and driven by changes in the U.S. — including a manufacturing renaissance, coupled with greater energy independence and enhanced technological independence.”

Also Read:  Bulls May Be Losing Control Of The Market by Anthony Mirhaydari via CBS MoneyWatch


4) 7 Reasons A Recession Is More Likely Than You Think by Doug Kass via

“I would argue that it is different this time and the risks of recession have increased.”

  • The Yield Curve May Not Invert Prior to a Recession
  • Stock Prices Appear to Be Issuing Economic Warnings
  • The Signal of the Bond Markets Might Be a Precursor to Slowing Growth
  • The Signal of the Oil Markets Is Negative
  • Expanding Geopolitical Risks Raise Risks
  • Growing Health Concerns Could Dent Economic Growth
  • The Growing Dominance of the U.S. Could Have a Negative Twist

Also Read:  The Easy Money Stock Market Is Over by Barry Ritholtz via Bloomberg


5) The Potential For 10-years Of Negative Returns by Shawn Langlois via MarketWatch

“At the same time, the number of hedging measures is mounting in the option pits. The CBOE put/call ratio just hit the fourth-highest level of all time at 1.53. Higher than it was during the Lehman Bros. implosion. Meaning, money is pouring into bearish equity bets. The temptation is to read that as a buy-the-fear signal. Think again.


Ryan Detrick, who always comes up with the goods, numbers-wise, found that average returns when that ratio tops 1.5, as it has this week, are rather dismal. Six months following the signal, the S&P has dropped 2.4%. That’s not the meltdown some doomsdayers are talking about — heck, stocks are down 6% since last month — but it’s still noteworthy.”

Also Read: Don’t Buy Into A Rebound Rally  by David Weidner via MarketWatch

Also Read: 10 Signs The Selling Is Over by Jeff Cox via CNBC

Also Read: What A Correction Feel’s Like by Jared Dillian via ZeroHedge

“Everyone has a plan until they get punched in the  face.” – Mike Tyson

Have a great weekend.

via Zero Hedge Tyler Durden

WTForced Buy In: Shorts Crucified By Biggest Squeeze Since 2013

Many market participants are looking dumbstruck at the miraculous surge in Dow Transports, Small Caps, and Homebuilders this week off the bond-short-puke lows of Wednesday morning. The answer – sadly for those who believe this is presaging new new highs and utopia once again – is that this was the biggest weekly short-squeeze in 11 months… and more troubling for the bulls – it ran out of steam today.


“Most Shorted” stocks (BBG Ticker GSCBMSAL Index) rose 3.3% on the week…


…with a 7.1% swing intra-week off the bond-short-puke lows…


This is the biggest squeeze in 11 months (after last week’s biggest drop in 3 years)


But… a quick glance at the top chart shows the squeeze has run its course (and today’s considerable weakness in Small Caps)…


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Trade Accordingly

via Zero Hedge Tyler Durden

S&P Drops 4th Week In A Row – Worst Streak In Over 3 Years

Despite a Bullard-bullshit-driven rampalicious surge in the last 36 hours, this is the first weekly close below the 200DMA for the S&P 500 in 2 years and longest losing streak since August 2011. Today was the best day of the year for the Dow Industrials and 4th up-day in a row for the Transports (which ended the week up 3%) as the major indices saw significant divergence on the week. The USDollar closed lower for the 2nd week in a row with EUR strength the main driver. Treasury yields ended the week remarkably stable (30Y -3bps, 5Y -11bps) up 30-40bps above intraday lows on Wednesday. Despite USD weakness, only gold managed gains in the commodity complex. Oil bounced off $80 but ended the week down 3.2% (around $82). VIX was slammed lower at the open today, closing -3 at 22 (+1 on the week).

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Before we begin…

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Umm Small Caps today!!


Quite a divergence in indices this week – as favored shorts were rip-squeezed sending Trannies and Small Caps surging…


As everything took off after Bullard's QE4 comments (and was helped by Coeure)


VIX was jammed lower at the open today (likely reflecting ECB's Coeure's QE comments)…


Treasuries were insane this week – what can only be called a total pukefest on Wednesday on record volumes saw bond yields rip back higher in the last 2 days to close 3-10bps lower on the week..


The USDollar closed down 0.7% (2nd week in a row) with CAD weakness ofset by EUR strength…


Despite USD weakness, only gold managed gains on the week (2nd up week in a row – first time since July). Oil bounced but still ended notably lower on the week


WTI bounced perfectly off $80 as, perhaps, The Saudis got a tap on the shoulder that they were killing US Shale. 3rd week down in a row…


Charts: Bloomberg

Bonus Chart: Seems like The Hindenberg Omen worked this time? (broken clock syndrome? or world without a Fed reverting to natural reactions?)

via Zero Hedge Tyler Durden

The 10 Things That Will Determine The Path Of Global Markets For The Rest Of 2014

Despite the ‘sound and fury’ from various Fed-Heads, the world – according to Deutsche Bank – faces 10 significant factors that will (one way or another) drive markets for the remainder of the year



Source: Deutsche Bank

via Zero Hedge Tyler Durden

113 Federal Reserve Staff Members Make $250,000 Annually

Screen Shot 2014-10-17 at 2.14.18 PMJust in case you need another reason to dislike the thieving Federal Reserve. From Reuters:

(Reuters) – The top 113 earners among staff at the Federal Reserve’s Washington headquarters make an average of $246,506 per year, excluding bonuses and other benefits – more than Fed Chair Janet Yellen and nearly double the normal top government rate.

Don’t worry Janet, once you leave, you can earn $250k per speech like your hero Banana Ben Bernanke.

continue reading

from Liberty Blitzkrieg

Mel Watt, Federal Housing Finance Agency Head, is Pushing Banks to Make Extremely Risky Home Loans

Screen Shot 2014-10-17 at 1.43.16 PMMel Watt is one of the most dangerous financial oligarch puppets operating in America today. The first time he came across my radar screen was back in 2009, when he “gutted” Ron Paul’s End the Fed bill while it was in subcommittee, something I outlined in the post: Leverage in PE Deals Soars Despite Fed Warnings; Amidst Insatiable Demand for Risky Fannie Mae Debt.

Then in May of this year, I zeroed in on his latest authoritarian maneuver after being appointed to head the FHFA in the post: New Massive Federal Database to Hold Financial Information on Hundreds of Millions of Americans. Here’s an excerpt:

continue reading

from Liberty Blitzkrieg

Yellen Translated: “Let Them Eat Cake”

ECRI’s Lakshman Achuthan is not happy at Janet Yellen’s speech this morning

According to the Fed’s triennial Survey of Consumer Finances, the top 10% of U.S. families are doing just fine, and those in the bottom fifth are essentially being kept afloat by transfer payments; but the inflation-adjusted median family income has shrunk by one-eighth since 2004. Quite simply, middle-class incomes are being gutted.

[C]iting that same survey, Ms. Yellen expressed concern about “lower-income families without assets” that “can end up, very suddenly, off the road.” She therefore advised families to “take the small steps that over time can lead to the accumulation of considerable assets.” She did not, however, explain how they were to accumulate these assets, in light of falling incomes and zero interest rates.

This uncomfortable disconnect between theory and reality also came out during her Senate confirmation hearings last fall. Given the predicament of “the little person out there who is just trying to pay the bills and maybe put a buck away for retirement,” Ms. Yellen was asked to “explain to the senior citizen who is just hoping that CD will earn some money” the impact of “a policy that says, for as far as the eye can see … keep interest rates low.” She replied: “I understand … that savers are hurt by this policy, [but] savers wear a lot of different hats… They may be retirees who are hoping to get part-time work in order to supplement their income.”

In essence, despite a zero interest rate policy that mainly helps the wealthy, struggling families with falling incomes ought to take steps to accumulate “considerable assets,” as retirees take part-time jobs to make ends meet. Let them eat cake, indeed.

via Zero Hedge Tyler Durden