Month: August 2014

via Zero Hedge http://ift.tt/1vbnDYt williambanzai7

Submitted by Simon Black via Sovereign Man blog,

When you think about “strong banking”, what country comes first to mind?

A few years ago, the most obvious answer would be Switzerland.

Today, however, Switzerland’s reputation for banking is nowhere near where it once was.

Starting in 2009, the US, as chief financial bully, led the charge in assaulting the country’s banking sector and dragging it down brick by brick.

The pummelling has continued ever since, culminating in the end of banking secrecy in the country altogether.

Meanwhile, as Switzerland endured one blow after the next, the Chinese renminbi (RMB) quietly slipped past the steadfast Swiss franc to become a more popular currency for use in trade settlements.

Eager to restore some of its former banking luster, Switzerland has taken note of this and is rapidly positioning itself to become a major center of European RMB trade.

So the government of Switzerland recently signed a bilateral currency swap agreement with China, enabling the two countries to buy and sell up to 150 billion RMB or 21 billion Swiss Francs of each other’s currencies.

Switzerland is just the latest to join the queue, as nearly 25 other central banks already signed similar agreements with China.

Every few weeks, and with increasing frequency, we’re hearing news of the next country that is accepting China’s future financial primacy.

There’s no denying that both sovereign nations and market participants are accepting the validity of the RMB as a major trade currency. This is no longer an anomaly, but part of an obvious trend.

To be fair, it’s not that the RMB is a shoe-in for the next global reserve currency—because the country and its currency undoubtedly both have problems.

What’s really being revealed with these latest developments is relative confidence.

It may not be clear whether or not the RMB will make it to the top, but what is clear to everyone is that the USD is going down.

Here we see ambitious countries like the UK and Switzerland proactively trying to adapt to and take advantage of the changing financial climate.

The sole tactic of the US government, on the other hand, is to lash out at countries which make them feel threatened.

They rally the whole world against Russia for acts of war. They blast China as a currency manipulator.

And all of this as if the US wasn’t dropping bombs by remote control drone… or heavily manipulating its own currency.

This has accomplished nothing other than to demonstrate just how weak and insecure the former financial superpower has become.

Continuing to believe that the dollar is going to maintain its global reserve status is now not only foolish, but financially hazardous. To countries, businesses and individuals.

Those that accept these changes and try to get out in front of this trend will do incredibly well. They are the ones who will survive intact when the financial system resets.

Those who ignore the trend do so at their own peril.

via Zero Hedge http://ift.tt/1AV2gek Tyler Durden

Every quarter, as part of the Treasury’s refunding announcement, the TBAC, aka the Treasury Borrowing Advisory Committee (aka the Supercommittee that Really Runs America), which is the committee that until recently was chaired by JPM and Goldman and which in 2014 handed over mock leadership roles to Dodge & Cox and BNY, shares some critical insight into what Wall Street’s banks are really thinking in a private head to head with the US Treasury. As a reminder, it was this same TBAC which, several months after we warned about plunging asset liquidity, issued a warning about just this issue, something which even the Fed, whose QE is the primary culprit for the disappearance of high quality collateral, is now actively worried about.

So what did the TBAC hint at as one of the biggest concerns currently on the Treasury’s mind? As it turns out, the primary charge (the secondary was even more interesting and we will discuss it in a post shortly) of the TBAC was to come up with its views on plunging, and until recently, record low market volatility, or as it also defines it: “Market Complacency And Excessive Risk Taking.” To wit:

Asset price volatility has declined over the past two years both in the United States and globally. At the same time, forward-looking measures of market uncertainty across a range of fixed income, equity, and foreign exchange markets have also declined.

 

What are the Committee’s views on these developments and the factors that have contributed to the current environment of low volatility globally?

Remember, that it is not just the Treasury that is worried about plunging Vol. Ironically, so is the Fed (why it’s ironic? read on).

Here is what the TBAC had to say on the topic of plunging volatility, market complacency and where we go from here (link):

Current State of Volatility

Monthly count of Bloomberg articles that contain the phrase “low volatility”.

 

Credit Suisse Interest Rate Volatility Estimate: yield curve weighted index of normalized implied volatility on a rolling series of constant at-the-money one-month expiry swaptions weighted across benchmark maturities 2yr, 5yr, 10yr and 30yr.

And for the irony: the bankers find, as we do, know that primary culprit for record low volatility is none other than the Fed itself with its vol-suppression policies (and Kevin Henry selling Vol futures). To wit:

Factors contributing to low volatility

1. Actions by the Fed and ECB have significantly clipped the left tail risk, in terms of both economic outcomes and market outcomes (QE I)
2. As interest rates approached the zero lower bound, rate vol is lower by construction which leads to maturity extensions, lower term premia and declining volatility across other asset classes through a lower and more certain discount rate (QE II)

* * *

But that’s not all: here is what the all too clear punchline: “Suppression of yield and vol induces investors to take on more risk (QE III). The market clings to perception of certainty regarding outcomes, despite the Fed shifting commitment modes from time or level-based to data dependent. This stage of policy should eventually lead to increased uncertainty and risk.”

Translation: the TBAC itself, whose summary assessment this is, is now actively derisiking!

* * *

For the VIX addicts and all those curious for more, here are some other key observations that substantiate the TBAC’s view that now is the time to head for the exits.

Supply / demand factors in the options markets

Tail hedgers have decreased as evidenced by

• Falling prices of downside puts on the S&P
• Shrinking fund size of VIX ETF

Convexity hedging by mortgage accounts has gone down significantly after the crisis because of lower issuance and the Fed’s QE purchases. QE mortgage purchases remove both duration and convexity from the market, making it one of the most powerful policy tools.

QE mortgage purchases remove both duration and convexity from the market, making it one of the most powerful policy tools.

 

Market complacency and excessive risk taking

Interest rate volatility can be viewed as a proxy for the corporate bond market and the interest rate at which people and companies borrow money.

Shown below is 1y10y interest rate vol with 5yr spreads of the credit default index of investment grade on the left and high yield on the left

Note the lack of 10% corrections during the past hiking cycles in 2004 and 1994

Against environment of low vol and low returns, the only way to achieve the same return targets is to take on more risk

• Ballooning AUM invested in hedge funds, now $2.7 trillion
• VAR-based risk management frameworks and risk-parity investment models in which volatility is an input that determines the amount of risk to take

 

Mostly unchanged target for investment returns from the pension community. Latest data from November 2013 shows the median target shifted to just under 8% in 2012, despite the yield on Moody’s AA index having fallen to 4.2%.

Equity vol term structure has held up against complacency in the market place

FX vol term structure is also near the steepest level in the last 5 years.

Rate vol term structure is off the highs despite the Fed being closer to tightening than at any other point in the last 5 years

 

Equity volatility term structures

 

Interest rate volatility term structures

Conclusions

• Monetary policy and regulatory changes have contributed to the decline in volatility.
• Less demand for volatility across asset classes naturally lowers the price for such insurance.
• VAR-based analysis leads to self-reinforcing loops as low volatility causes models to
  recommend scaling up risk.
• The term structure of volatility is a powerful indicator; flatter vol curves would suggest excessive complacency and presage increasing risk.
• Volatility tends to rise mid-to-late stage of the business cycle as expansive endeavors increase through the system.
• An unexpected increase in volatility might come from broad-based selling of assets wanting to de-risk in front of a turn in policy.
• With liquidity providers having declined in number and capacity, the system is less able to deal with such episodes of higher volatility. Institutions which deliver absolute returns or provide liquidity to the system would be most at risk.

* * *

It couldn’t be said any clearer.

via Zero Hedge http://ift.tt/1AV2brc Tyler Durden

Every quarter, as part of the Treasury’s refunding announcement, the TBAC, aka the Treasury Borrowing Advisory Committee (aka the Supercommittee that Really Runs America), which is the committee that until recently was chaired by JPM and Goldman and which in 2014 handed over mock leadership roles to Dodge & Cox and BNY, shares some critical insight into what Wall Street’s banks are really thinking in a private head to head with the US Treasury. As a reminder, it was this same TBAC which, several months after we warned about plunging asset liquidity, issued a warning about just this issue, something which even the Fed, whose QE is the primary culprit for the disappearance of high quality collateral, is now actively worried about.

So what did the TBAC hint at as one of the biggest concerns currently on the Treasury’s mind? As it turns out, the primary charge (the secondary was even more interesting and we will discuss it in a post shortly) of the TBAC was to come up with its views on plunging, and until recently, record low market volatility, or as it also defines it: “Market Complacency And Excessive Risk Taking.” To wit:

Asset price volatility has declined over the past two years both in the United States and globally. At the same time, forward-looking measures of market uncertainty across a range of fixed income, equity, and foreign exchange markets have also declined.

 

What are the Committee’s views on these developments and the factors that have contributed to the current environment of low volatility globally?

Remember, that it is not just the Treasury that is worried about plunging Vol. Ironically, so is the Fed (why it’s ironic? read on).

Here is what the TBAC had to say on the topic of plunging volatility, market complacency and where we go from here (link):

Current State of Volatility

Monthly count of Bloomberg articles that contain the phrase “low volatility”.

 

Credit Suisse Interest Rate Volatility Estimate: yield curve weighted index of normalized implied volatility on a rolling series of constant at-the-money one-month expiry swaptions weighted across benchmark maturities 2yr, 5yr, 10yr and 30yr.

And for the irony: the bankers find, as we do, know that primary culprit for record low volatility is none other than the Fed itself with its vol-suppression policies (and Kevin Henry selling Vol futures). To wit:

Factors contributing to low volatility

1. Actions by the Fed and ECB have significantly clipped the left tail risk, in terms of both economic outcomes and market outcomes (QE I)
2. As interest rates approached the zero lower bound, rate vol is lower by construction which leads to maturity extensions, lower term premia and declining volatility across other asset classes through a lower and more certain discount rate (QE II)

* * *

But that’s not all: here is what the all too clear punchline: “Suppression of yield and vol induces investors to take on more risk (QE III). The market clings to perception of certainty regarding outcomes, despite the Fed shifting commitment modes from time or level-based to data dependent. This stage of policy should eventually lead to increased uncertainty and risk.”

Translation: the TBAC itself, whose summary assessment this is, is now actively derisiking!

* * *

For the VIX addicts and all those curious for more, here are some other key observations that substantiate the TBAC’s view that now is the time to head for the exits.

Supply / demand factors in the options markets

Tail hedgers have decreased as evidenced by

• Falling prices of downside puts on the S&P
• Shrinking fund size of VIX ETF

Convexity hedging by mortgage accounts has gone down significantly after the crisis because of lower issuance and the Fed’s QE purchases. QE mortgage purchases remove both duration and convexity from the market, making it one of the most powerful policy tools.

QE mortgage purchases remove both duration and convexity from the market, making it one of the most powerful policy tools.

 

Market complacency and excessive risk taking

Interest rate volatility can be viewed as a proxy for the corporate bond market and the interest rate at which people and companies borrow money.

Shown below is 1y10y interest rate vol with 5yr spreads of the credit default index of investment grade on the left and high yield on the left

Note the lack of 10% corrections during the past hiking cycles in 2004 and 1994

Against environment of low vol and low returns, the only way to achieve the same return targets is to take on more risk

• Ballooning AUM invested in hedge funds, now $2.7 trillion
• VAR-based risk management frameworks and risk-parity investment models in which volatility is an input that determines the amount of risk to take

 

Mostly unchanged target for investment returns from the pension community. Latest data from November 2013 shows the median target shifted to just under 8% in 2012, despite the yield on Moody’s AA index having fallen to 4.2%.

Equity vol term structure has held up against complacency in the market place

FX vol term structure is also near the steepest level in the last 5 years.

Rate vol term structure is off the highs despite the Fed being closer to tightening than at any other point in the last 5 years

 

Equity volatility term structures

 

Interest rate volatility term structures

Conclusions

• Monetary policy and regulatory changes have contributed to the decline in volatility.
• Less demand for volatility across asset classes naturally lowers the price for such insurance.
• VAR-based analysis leads to self-reinforcing loops as low volatility causes models to recommend scaling up risk.
• The term structure of volatility is a powerful indicator; flatter vol curves would suggest excessive complacency and presage increasing risk.
• Volatility tends to rise mid-to-late stage of the business cycle as expansive endeavors increase through the system.
• An unexpected increase in volatility might come from broad-based selling of assets wanting to de-risk in front of a turn in policy.
• With liquidity providers having declined in number and capacity, the system is less able to deal with such episodes of higher volatility. Institutions which deliver absolute returns or provide liquidity to the system would be most at risk.

* * *

It couldn’t be said any clearer.

via Zero Hedge http://ift.tt/1AV2brc Tyler Durden

Last week we noted Russia was considering banning fruit from Europe (as well as various other sanctions retaliations) but this morning Vladimir Putin has come out swinging by signing ‘a decree on countermeasures to Western sanctions’:

• *PUTIN BANS FOOD IMPORTS FROM COUNTRIES SANCTIONING RUSSIA: IFX
• *PUTIN ORDERS GOVT TO PREVENT ACCELERATED GROWTH OF FOOD PRICES

So trade wars escalate externally and price controls internally. It appears the US (and Europe) will indeed feel “tangible losses” despite Jack Lew’s promises.

 

Putin adds:

• *PUTIN BANS, LIMITS FOOD IMPORTS FOR YR: IFX
• *PUTIN CALLS FOR INCREASE IN DOMESTIC FOOD SUPPLIES
• *PUTIN ORDERS GOVT TO MAKE LIST OF RESTRICTED AGR. PRODUCTS
• *RUSSIAN GOVT WORKING ON LIST OF FOODS, PRODUCTS TO RESTRICT

As ITAR-TASS reports,

President Vladimir Putin on Wednesday signed a decree on countermeasures to Western sanctions.

 

The document entitled “On the Application of Certain Special Economic Measures to Ensure the Security of the Russian Federation” prohibits or restricts, for one year, the import of certain kinds of agricultural products, raw materials and food originating in a country that has imposed economic sanctions against Russian companies and (or) individuals or has joined such sanctions.

In addition, local analysts consider all the possibilities:

“Russia’s response to Western sanctions may vary from country to country. In relations with the United States Russia may raise the question of banning US fast food outlets, which treat their customers to products harmful to health. The same applies to the marketing of PepsiCo products and genetically modified goods from the US,” the expert said.

 

“Some claim that tens of thousands of Russians may lose jobs in US fast food chains, while others argue that Russian businessmen are quite capable of opening a chain of domestic fast food joints selling natural fried potatoes, and not of Brazilian flour,” Delyagin said.

 

“In relations with the United States the most sensitive measures may be taken in the banking sphere. Also, there is a possibility of replacing Microsoft software being used at Russia’s government structures with alternative substitutes,” the analyst said.

 

“Also, Russia may stop letting NASA use its rockets as a means of delivering cargoes to the International Space Station, a service the United States is so much interested in. Or, if asked to go ahead with space cooperation, Moscow may address Washington with its own conditions,” Delyagin said.

 

“As far as Germany as Russia’s main economic partner in the European Union is concerned, the two countries have strong bonds in power engineering and the automobile industry. But Russia may as well import high precision machine tools from advanced countries in the Asia-Pacific Region, which will surely result in direct losses for German manufacturers,” the analyst said.

*  *  *

US officials are not happy…

“Assuming that they take this action, it would be blatant protectionism,” Clayton Yeutter, a U.S. Trade Representative under President Ronald Reagan, said in a phone interview. 

via Zero Hedge http://ift.tt/1AV25zR Tyler Durden

Having lost contact with JPY crosses early on, it was left to VIX to be the momentum ignition to run equities back up to the scene of the crime yesterday. US equity indices are close to the levels pre-Sikorski yesterday as VIX is hammered back under 16.

 

JPY not buying it… (AUDJPY disconnect)

 

VIX driving it…

 

As stocks recover Sikorski losses…

 

Charts: bloomberg

via Zero Hedge http://ift.tt/1AV1ZIs Tyler Durden

Having lost contact with JPY crosses early on, it was left to VIX to be the momentum ignition to run equities back up to the scene of the crime yesterday. US equity indices are close to the levels pre-Sikorski yesterday as VIX is hammered back under 16.

 

JPY not buying it… (AUDJPY disconnect)

 

VIX driving it…

 

As stocks recover Sikorski losses…

 

Charts: bloomberg

via Zero Hedge http://ift.tt/1AV1ZIs Tyler Durden

Talking-heads drew “this is not geopolitical risk fears” comfort yesterday that the stock sell-off was not accompanied by a big bid for gold. Today… not so much. Gold and silver have surged since around 8amET (when Ukraine incursion headlines began today from NATO) with the yellow metal up over $20 – its biggest jump since mid-Jun (with futures over $1310).

 

via Zero Hedge http://ift.tt/1zUlAXG Tyler Durden

On the heels of yesterday’s comments from Poland’s Sikorski, NATO has confirmed there’s a risk of Russia sending troops into Ukraine under the ‘pretext’ of a humanitarian or peacekeeping mission. “We’re not going to guess what’s on Russia’s mind, but we can see what Russia is doing on the ground – and that is of great concern,” a NATO spokesperson warned, adding, “this is a dangerous situation.” Then US SecDef Hagel added, “the threat of Russian incursion in Ukraine is a reality.” Russia’s response to this warmongering (as Ukraine appears desperate to instigate something before the money runs out) is to blast the disinformation, “reports of troop buildups near the Ukraine border are groundless.” It appears we are going to need more YouTube clips…

 

US Secretary of Defense Hagel is chiming in…

• *HAGEL SAYS THREAT OF RUSSIAN INCURSION IN UKRAINE IS `REALITY’
• *HAGEL SEES ‘POSSIBILITY’ OF RUSSIAN TROOPS ENTERING UKRAINE

And as Bloomberg reports, NATO sees incursion risk on apparent troop buildup…

NATO said there’s a risk of Russia sending troops into Ukraine under the “pretext” of a humanitarian or peacekeeping mission after President Vladimir Putin massed soldiers on his country’s western border.

 

“We’re not going to guess what’s on Russia’s mind, but we can see what Russia is doing on the ground — and that is of great concern,” Oana Lungescu, a spokeswoman for the North Atlantic Treaty Organization, said by e-mail today. “The latest Russian military buildup further escalates the situation and undermines efforts aimed at finding a diplomatic solution to the crisis. This is a dangerous situation.”

 

…

 

“Putin will likely aim at a fig leaf policy with an incursion under the guise of a peacekeeping operation,” Amanda Paul, an analyst at the European Policy Centre in Brussels, wrote in an e-mail. “As other conflicts in the former Soviet Union have shown, once there is a Russian military presence it usually never leaves.”

On the heels of yesterday’s comments from Poland…

Poland has “reason to believe” that the risk of an incursion is “greater than a few days ago,” Prime Minister Donald Tusk told reporters in Warsaw today. His foreign minister, Radoslaw Sikorski, yesterday said that any incursion would be under the guise of a peacekeeping operation.

The Germans are not buying NATO’s perspective…

“I cannot believe Russia would attack Ukraine, which would worsen the situation further and deepen the conflict with the West,” Meister said by phone today. “I don’t see signs for invasion. In fact, Russia has tried to bring in some distance from the separatists.”

Russia’s response:

• *RUSSIA SAYS REPORTS OF ARMY BUILDUP NEAR BORDER GROUNDLESS: IFX
• *INTERFAX CITES RUSSIAN DEFENSE MINISTRY ON MILITARY BUILDUP
• *PENTAGON, NATO STATEMENTS ON BORDER BUILDUP DISINFORMATION: IFX

*  *  *

We are sure evidence will be forthcoming…

via Zero Hedge http://ift.tt/1AV1U7x Tyler Durden

On the heels of yesterday’s comments from Poland’s Sikorski, NATO has confirmed there’s a risk of Russia sending troops into Ukraine under the ‘pretext’ of a humanitarian or peacekeeping mission. “We’re not going to guess what’s on Russia’s mind, but we can see what Russia is doing on the ground – and that is of great concern,” a NATO spokesperson warned, adding, “this is a dangerous situation.” Then US SecDef Hagel added, “the threat of Russian incursion in Ukraine is a reality.” Russia’s response to this warmongering (as Ukraine appears desperate to instigate something before the money runs out) is to blast the disinformation, “reports of troop buildups near the Ukraine border are groundless.” It appears we are going to need more YouTube clips…

 

US Secretary of Defense Hagel is chiming in…

• *HAGEL SAYS THREAT OF RUSSIAN INCURSION IN UKRAINE IS `REALITY’
• *HAGEL SEES ‘POSSIBILITY’ OF RUSSIAN TROOPS ENTERING UKRAINE

And as Bloomberg reports, NATO sees incursion risk on apparent troop buildup…

NATO said there’s a risk of Russia sending troops into Ukraine under the “pretext” of a humanitarian or peacekeeping mission after President Vladimir Putin massed soldiers on his country’s western border.

 

“We’re not going to guess what’s on Russia’s mind, but we can see what Russia is doing on the ground — and that is of great concern,” Oana Lungescu, a spokeswoman for the North Atlantic Treaty Organization, said by e-mail today. “The latest Russian military buildup further escalates the situation and undermines efforts aimed at finding a diplomatic solution to the crisis. This is a dangerous situation.”

 

…

 

“Putin will likely aim at a fig leaf policy with an incursion under the guise of a peacekeeping operation,” Amanda Paul, an analyst at the European Policy Centre in Brussels, wrote in an e-mail. “As other conflicts in the former Soviet Union have shown, once there is a Russian military presence it usually never leaves.”

On the heels of yesterday’s comments from Poland…

Poland has “reason to believe” that the risk of an incursion is “greater than a few days ago,” Prime Minister Donald Tusk told reporters in Warsaw today. His foreign minister, Radoslaw Sikorski, yesterday said that any incursion would be under the guise of a peacekeeping operation.

The Germans are not buying NATO’s perspective…

“I cannot believe Russia would attack Ukraine, which would worsen the situation further and deepen the conflict with the West,” Meister said by phone today. “I don’t see signs for invasion. In fact, Russia has tried to bring in some distance from the separatists.”

Russia’s response:

• *RUSSIA SAYS REPORTS OF ARMY BUILDUP NEAR BORDER GROUNDLESS: IFX
• *INTERFAX CITES RUSSIAN DEFENSE MINISTRY ON MILITARY BUILDUP
• *PENTAGON, NATO STATEMENTS ON BORDER BUILDUP DISINFORMATION: IFX

*  *  *

We are sure evidence will be forthcoming…

via Zero Hedge http://ift.tt/1AV1U7x Tyler Durden