Sunday, October 11, 2015

Fed Quietly Revises Total US Debt From 330% To 350% Of GDP, After "Discovering" Another $2.7 Trillion In Debt

Everyone has seen the chart of "Total Credit Market Instruments", which as of its most recent update on March 31, 2015, was just over $59 trillion, or 330% of US GDP.

For those who have not seen it, as well as for those who are familiar with this chart, take a long look, because this is the last update of this particular data series, pulled straight from the Fed's Z.1 Flow of Funds (section L.1), you will ever see.
So did the Fed spontaneously terminate the reporting of what until the second quarter's update of the Flow of Funds, was the most comprehensive official summary of Household, Financial, Corporate and Government debt in existence? And if so why?
Many Fed watchers assumed that this is precisely what happened, and indeed, searching high and low for the infamous L.1 Section revealed nothing.
We can only assume that the vocal outcry that emerged in the aftermath of the Fed's release of its Q2 Flow of Funds statement missing this most critical of data sets on September 18, was so loud that three weeks later, this past Friday on October 9, the Fed released an official follow up explanation what exactly happened.
Here is what happened to the missing so very critical data series, straight from the horse's mouth:
Q: In the September 18, 2015 release of the Z.1 Financial Accounts of the United States, some tables in the summary section on credit market instruments seem to have disappeared. What happened to these tables and where can I find the equivalent data series?

With the September 18, 2015 Z.1 release, the classic presentation of the instrument category "credit market instruments" has been discontinued and replaced with two new instrument categories, "debt securities" and "loans".  Reporting debt securities and loans separately brings the Financial Accounts more in line with the international standards for national accounts. The debt securities instrument includes open market paper, Treasury securities, agency- and GSE-backed securities, municipal securities, and corporate and foreign bonds. The new loans instrument includes depository loans not elsewhere classified, other loans and advances, mortgages, and consumer credit. Together, debt securities plus loans include all of the financial assets or liabilities previously included in credit market instruments. While the underlying instrument categories that make up the sum of debt securities and loans are the same as those in old "credit market instruments" concept, changes to a few of these categories make the new sum of debt securities and loans larger than in previous publications. 

This change has had three major impacts on the table structure of the publication: (1) summary tables focusing on "credit market instruments" have been eliminated; (2) remaining summary tables have been renumbered; and (3) new instrument tables for debt securities (tables F.208 and L.208) and loans (tables F.214 and L.214) have been created.
That's the "what", as for the why, note what the Fed said above: "the new sum of debt securities and loans larger than in previous publications." Which means that not only did the Fed stop reporting a consolidated total debt series, it admits that the actual debt was higher. Some $2.7 trillion higher.
Oops.
Here is the Fed's mea culpa on that particular topic:
Q: Why is the level of total debt outstanding in the September 18, 2015 release of the Z.1 Financial Accounts of the United States so much higher than it was in the previous Z.1 release?

Total debt outstanding was revised upwards due to methodology changes to both Treasury securities and security credit. Total debt outstanding is now the sum of two new instrument categories: debt securities (table L.208) and loans (table L.214). The aggregate of these instrument categories was previously called credit market instruments.

Treasury securities, part of the debt securities instrument category, now include nonmarketable Treasury securities held by federal government defined benefit retirement plans (FL343061145). The inclusion of federal government defined benefit retirement plans resulted in an upward revision to the level of federal government debt of about $1.408 trillion for 2014:Q4. See the published FEDS Note "Federal Government Defined Benefit Retirement Plans" for more detailshttp://www.federalreserve.gov/econresdata/notes/feds-notes/2015/federal-....

In the domestic financial sector, borrowing previously classified as security credit liabilities (see release highlights) are now included as part of loans for the securities brokers and dealers sector. These are: (1) U.S.-chartered depository institutions loans for purchasing or carrying securities (FL763067003); (2) foreign banking offices in the U.S. loans for purchasing or carrying securities (FL753067003); and (3) Households and nonprofit organizations cash accounts at brokers and dealers (FL153067005). The revision to broker dealer debt for 2014:Q4 was roughly $962 billion.

Similarly, borrowing previously classified as security credit liabilities of the household sector are now classified as loan liabilities. Margin accounts at brokers and dealers (FL663067003) are now included in the household sector's other loans and advances instrument category. This change resulted in an upward revision of $370 billion to the outstanding amount of household sector loans for 2014:Q4.
The bottom line:
The total revision to the level of debt outstanding (debt securities plus loans) due to these methodology changes is approximately $2.74 trillion 2014:Q4. 
And so the Fed has managed to kill two birds with one stone: it no longer provides a simple, one-stop-shop way to reconcile the total US credit stock, and it quietly boosted total US consolidated credit by $2.7 trillion to $62.1 trillion as of June 30, 2015.
Luckily, for those who still care about such trivial memorandum items as "data" - made up as it may be - and would like to keep track of total US credit exposure, now better known as total debt and total loans, they can simply add up the two line items, with debt (found here) and loans (found here).
This is how the old and new data look like: as noted, the consolidated total has risen by $2.7 trillion as of March 31, the last time the Fed reported the "old" series, and is currently a total of $62.1 trillion.

Not surprisingly, with GDP not revised higher, it means that the two most important data sets for the US economy, total debt (or credit) however defined, and total GDP, now look as follows:

The end result is that the ratio of Consolidated Credit to GDP, has quietly risen from 330% to 350%, without anyone in the broader public saying a word and without any of the official institutions, so seemingly concerned about the total stock of global debt, even noticing. And why should they: the S&P500 is back over 2000 so all is well.

Friday, October 9, 2015

One Part Of The Economy Is Booming: The Underground/Cash-Only Sector

If you make it so burdensome to operate a legit business, then you're basically giving people without big lines of credit and capital few choices but to work in the cash-only underground economy.
It won't be much of a surprise to those living outside the Washington D.C. beltway and the Unicorn Herd of start-ups selling for millions of dollars that the underground cash-only economy is one of the few bright spots in the U.S. economy. Correspondent B.U. recently submitted this report from rural America in response to my entry What Happens to our Economy as Millions of People Lose the Habits of Hard Work?, which mentioned those in the cash-only sector as not showing up in official employment statistics:
It is very common for folks where I live to get some form of subsidy be it SSI or WIC or whatever. Then they maintain their lifestyle by:

-- Selling items for cash on Craigslist:

This is mostly sub $1500 cars, Building materials or scrap metal.

I know quite a few folks that are doing very well in this line of business.

--Selling at various ‘trades-days’:

A friend mine clears ~$100K just trading in gold, firearms and ammunition.

Others I know trade cattle and livestock.

Another friend repairs cars at his home. He has weeks of backlog and turns away work all the time.

The key to all of this is that these folks have no official business. They trade only in cash. They do not make deposits in the bank except for the government checks.

The point is that for these folks, unplugging was a pay raise just in the tax exposure. When they get sick, they claim indigent and get whatever they need.

The spread between the burden of regulation and taxes is getting so onerous that folks are just falling into the very solution you describe.

I believe your focus is more professional in nature in terms of folks being a hired gun (i.e. free-lancer/contract employee). But what I see are the non-professionals as the ones who are really moving to fill the void of value that is growing as deflation/inflation oscillate.
Thank you, B.U., for the straight-up report from the real world. Despite the fact I pay all my taxes (and am royally reamed as a result), I sympathize with those making tax-free incomes in the cash-only economy.
Back when I had multiple employees in the 1980s, I was basically working to pay workers compensation insurance (40% to 80% of the hourly wage for construction workers), liability coverage, unemployment insurance, disability insurance, FICA (employers' share of Social Security), excise tax, income tax, rent on the office that we were required by law to maintain, healthcare insurance for all the employees, filling out HUD/FHA forms required when building homes with FHA loans, and so on. Then there's the cost of accounting and tax returns (complicated when you're operating a business), and a long list of other expenses I've forgotten.
My partner and I had a stock response when any employee griped about all the money we must be making: we'd take out our keys to the office and offer it to them, and say "payday's on Friday. It's all yours." I'd have been relieved if any had been dumb enough to accept the offer. No one ever did.
It's no wonder that legit small business and self-employment is often a struggle for financial survival. I've covered the travails of one serial entrepreneur in launching a new business in today's America: the costs were so heavy that he gave up. It was impossible to actually make a living once you met all the absurd regulations, codes and requirements.
The people enforcing the regulations ("just doing my job") are paid by taxpayers; their job is safe, their paycheck and benefits guaranteed.
Financial independence is the American Dream because it gives us the freedom to say Take This Job And Shove It (Johnny Paycheck).
This chart shows the tax-paying self-employed as a percentage of those with jobs (all nonfarm employees). According to the FRED data base, there are 142 million employed and 9.4 million self-employed. (The incorporated self-employed, typically physicians, attorneys, engineers, architects etc. who are employees of their own corporations, total about 5 million.)
This chart depicts self-employment from 1929 to 2015. Self-employment is cratering in the "recovery" of high taxes, senseless regulations and burdensome report-filing (big fines if you don't comply), tax preparation, business licence fees, fishing-expedition lawsuits, etc.
I have no problem with paying all my taxes for a couple of reasons. One relates to "Render therefore unto Caesar the things which are Caesar's." That's my view, but I don't hold anyone else to it. That's up to them to deal with.
I live by Andy Grove's dictum Only the paranoid survive and for good reasons. (Intel co-founder Grove wrote a book with this as the title: Only the Paranoid Survive: How to Exploit the Crisis Points That Challenge Every Company.)
Having experienced COINTELPRO in the early 1970s, I know what's it like to be an enemy of the State. Violating tax codes makes you a very easy target for the state. If you want to draw a target on your back, be my guest. I'm going to pass.
(The FBI thug who "was just doing his job" snarled at me, "This isn't the Sunshine Biscuit Company, this is the FBI!" Hopefully their witty-threat training has improved.)
Anyone who can't find a state/Corporate America job or says Take This Job And Shove It has my sympathy. I've been down to my last $100, and it's a lonesome, troublesome feeling. If you make it so burdensome to operate a legit business, then you're basically giving people without big lines of credit or plenty of capital and regulatory expertise few choices but to work in the cash-only underground economy.

Thursday, October 8, 2015

Hillary Pushes HFT Tax (A Day After BlackRock Warns Of "Wild Price Swings")

Following yesterday's flip-flop on TPP, Hillary Clinton has unleashed some new financial system 'policies' this morning, the most crucial of which includes the provision of a transaction tax which will dramatically penalize high-frequency traders (gratifying critics of HFT's instability-creating market structure). The question is, who is she trying to appease with this 'policy'? The answer is simple - Follow the money... once again.

As Bloomberg reports, Hillary Clinton is proposing a tax on the flash boys that may be unlike any in the world.
She wants to penalize traders who use super-fast computers to repeatedly submit and then retract their stock orders by charging a fee for transactions they cancel. The proposal, released by her presidential campaign late Wednesday, will gratify critics of high-frequency trading, who’ve long argued that the industry’s reliance on orders that are never executed is a hallmark of unfair markets, and worse, manipulation.

...

While a group of European nations have tried to curb rapid buying and selling by proposing a tax on the volume of trades, charging a fee for canceled orders is a new idea.The plan is designed to target “harmful” high-frequency trading that makes markets “less stable and less fair,” Clinton’s campaign said. She plans to formally propose the tax on Thursday as part of a broader plan to reform financial rules.
It appears more lobbying dollars need to be thrown Hillary's way...
A trade group for high-frequency firms said Clinton’s plan was misguided because it would act as a disincentive for equity traders who make markets by submitting a high level of buy and sell orders every day.

“We are in favor of curtailing irresponsible levels of cancellations,” said Bill Harts, chief executive officer at Modern Markets Initiative. “However, a tax on liquidity providers is a tax on investors and the very traders who make our markets efficient and cost effective for those average investors.”
So who is Hillary really trying to appease with this aggressive policy move?
Let's see - just yesterday, the world's largest asset manager BlackRock made a modest proposal to "fix" markets - by shutting them down when there is significant volatility...
Among the fund company’s suggestions: The entire $23 trillion market should automatically come to a halt if a certain number of shares stop trading, giving traders time to regroup on a wild day, according to BlackRock. Tweaking the rules on halts and making all stock openings electronic are among other ideas in a paper published Wednesday by the firm.

BlackRock’s proposals come as money managers talk with market-makers and stock exchanges to identify what happened amid the market turmoil on Aug. 24 and how to prevent a repeat. Trading that day was disrupted by delayed openings, more than 1,000 halts, and wild price swings. The fund company believes that many of its recommendations can be adopted with a minimum of fuss.

"They’re all very doable changes without a whole lot of magic," Barbara Novick, co-vice chairman of BlackRock, said in an interview. "I don’t think they’re going to be contentious. I don’t think they’re going to be difficult."
Simply put, BlackRock hates HFTs because they destabilize their precious ETF business cash cow.
*  *  *
So, a day after BlackRock calls for curbs on trading to "protect" investors and ensure its ETF business does not get massaccred (a la Black Monday) in the next vicious circle sell-off; Hillary Clinton, having previously gone "nuclear" on short-term capital gains, drops a new anti-high-frequency-trading "transaction tax"... apparently confirming her status as a BlackRock puppet...
Mills was chief of staff for Clinton’s State Department and was general counsel to Clinton’s 2008 campaign. As Politico notes, Mills "has worked for the Clintons for years [and] regardless of whether there’s ultimately an official title on the [2016] campaign, hers will be a key voice." Earlier this year, The NY Post (in an admittedly hyperbolic piece) describedMills as Clinton’s "consigliere" who "knows where the [Benghazi] bodies are buried." Mills also serves on the board of the Clinton Foundation. 
Ok, so what? Now we know who Cheryl is, but what’s she got to do with anything? 
Good question. 
And for the answer, we’ll leave you with the following screengrab which should tell you everything you need to know about why Clinton is now going the nuclear route on capital gains taxes... and pushing for a tax that will kill the high-frtequency-trading business.
*  *  *
Bonus: BlackRock contributions to the DNC
Source: opensecrets.org

Sunday, October 4, 2015

More Pain For Biotechs Ahead: Valeant's "Astronomical" Price Increases Take Center Stage; Pfizer Gets Dragged In

Two weeks ago, the biotech sector imploded after a piece by the NYT'a Andrew Pollack drew attention to the 5000% increase in the price of a toxoplasmosis drug by specialty biotech firm Turing Pharma, whose CEO Martin Shkreli promptly became the poster child for greedy biotech executives who seek to profit on the back of people's misery by gouging the price of life-extending/saving drugs.
However, as we subsequently pointed out, what Shkreli did was merely an extension of the far more gradual if far more aggressive hiking in drug prices by every other company in the sector. Indeed, according to a Citron report in which the bearishly-focused research boutique "in the Twitter-storm furor over Turing’s recent one-drug price gouge attempt, the media has overlooked the reality that Martin Shkreli was created by the system. Shkreli is merely a rogue trying to play the gambit that Valeant has perfected."
Conveniently, Deustche Bank laid out just what the average wholesale acquisition cost increases by Valeant for its univers of drugs in the past 3 years.
We compiled the data to show that even as the US is supposedly drowning in deflation, Valeant had not gotten the memo, and its average annual drug price increase had risen from 21% in 2012 to a whopping 66% YTD.

In fact, as shown in the table below, Valeant had clearly put all its biotech peers to shame when it comes to enforced price increases.

Then late last week, after looking at Valeant soaring default risk as measured by the price of its blowing out CDS, soaring to over 30% even as its stock prices was surging, we wondered - does someone know something?
It appears someone may have known that this weekend, the same Andrew Pollack whose NYT article exposing Turing's 5000% price increase resulted in Hillary Clinton promising to cap specialty biotech prices if elected, has come back for round two and after taking aim at Shkreli and Turing, much to the chagrin of Bill Ackman, Pollack is now taking aim at the biggest culprit: Valeant Pharmaceutcals.
Here are some of the highlights from his just released article: "Valeant’s Drug Price Strategy Enriches It, but Infuriates Patients and Lawmakers" which is certain to put the biotech sector right back in the crosshairs of regulators and legislators, not to mention presidential candidates, just as the market was hoping the biotech pricing scandal was about to fade from collective memory.
J. Michael Pearson has become a billionaire from his tough tactics as the head of the fast-growing Valeant Pharmaceuticals International. And consumers like Bruce Mannes, a 68-year-old retired carpenter from Grandville, Mich., are facing the consequences.

Mr. Mannes has been taking the same drug, Cuprimine, for 55 years to treat Wilson disease, an inherited disorder that can cause severe liver and nerve damage. This summer, Valeant more than quadrupled its price overnight.
Yes, Mannes' out of pocket expenses will soar, from the $366 he paid in may to $1,800, but guess who will be charged for the balance of the price surge? Why you, dear taxpayers:"Medicare will now have to cover about $35,000 for the 120 capsules he takes each month."
Which is also why biotech companies have been able to get away with such prices hikes for so long: courtesy of "buffers" such as Medicare and Obamacare, their impact has been diluted on the back of everyone else.
Whom should US taxpayers thanks for this sad state of affairs, in which drug prices are literally hyperinflating? Two people. As we explained last week, most of the reason for soaring prices "devolves from a backroom deal cut when the Bush administration set in motion the Medicare Drug benefit and inexplicably (if you’re not a lobbyist) gave away the rights of the US Government - the nation's largest buyer of pharmaceuticals - to negotiate drug prices with suppliers."
The other person: well, the name Obamacare should give you a hint.
Back to the NYT piece which having laid out the strawman, next goes for the emotional angle:
"My husband will die without the medicine,” said his wife, Susan, who is now working a second part-time job to help pay for health care. “We just can’t manage another two, three thousand dollars a month for pills."
And then goes for the jugular:
Valeant’s habit of buying up existing drugs and raising prices aggressively, rather than trying to develop new drugs, has also drawn the ire of lawmakers and helped stoke public outrage against the growing trend of higher and higher drug prices imposed by big drug companies. This year alone, Valeant raised prices on its brand-name drugs an average of 66 percent, according to a Deutsche Bank analysis, about five times as much as its closest industry peers.
Just as we showed above. The bigger prolem is that now even Congress understands what is going on, and Valeant's "valiant" stonewalling of Congress where it has shown a dramatic determination to not testify, will fail in the coming days:
For example, after Valeant acquired Salix Pharmaceuticals this year, it raised the price of one Salix drug, the diabetes pill Glumetza, about 800 percent, in two steps.

“How can they just do this?” said Gail Mayer, a retired computer systems analyst on Long Island, who said her monthly supply of Glumetza went from $519.92 in May to $4,643 in August. For now, her insurance is covering most of that increase, but she is worried that it will stop covering the drug altogether, as others have.

“I’m sure it didn’t cost them $4,000 more to make,” Ms. Mayer said. “You don’t just go buy a bottle of milk and suddenly the supermarket charges you $100.”
The irony is that what Valeant and its peers are doing is quite logical in the framework of the broken US healthcare system, whose failure has only been compounded with the insurtance free-for-fall that is Obamacare.
Mr. Pearson has told analysts that it is standard industry practice to raise the price of a drug shortly before it faces generic competition, which Glumetza might face in February.

The drug industry argues that list prices are typically not what health plans pay after discounts and rebates are negotiated, and there is evidence that these discounts are increasing.

But even if patients are often shielded, the costs are paid by insurers, hospitals and taxpayers and lead to higher premiums and co-payments for everyone, critics say.
There is much more in the NYT piece but the kicker is the chart which will soon make its way to a Congressional deposition room and the latest kangaroo court in which Congress demands a corporate CEO explain how dare he take advantage of the idiotic laws passed... by Congress.
As the NYT calls it, the VRX price increases are "astronomical" - an adjective that will stick with the company throughout the now-inevitable congressional hearings:
For Prescription Drugs, Some Astronomical Price Increases - Valeant Pharmaceuticals has made a business of buying prescription drugs and raising their prices when possible. Now some members of Congress are demanding information from the company about price increases on two heart drugs, one of which is Isuprel. Some examples of price increases in Valeant’s drugs over the last several years:

What happens next: "last week, Democrats on the House Committee on Oversight and Government Reform demanded that Valeant be subpoenaed for information about big price increases on two old heart drugs that the company acquired in February."
After this NYT article, one can be certain that the House will get its subpoena, but the bigger irony is the following:
Hillary Rodham Clinton, who is seeking the Democratic nomination, called for efforts to control “price gouging” after a public outcry over the actions of Turing Pharmaceuticals, which abruptly increased the price on a drug to $750 a tablet from $13.50.
Yes, it will indeed be great to have Hillary involved because as we said two weeks ago, we are very curious "to see how Hillary's populist outrage at [biotech price gougers] will be explained when the public realizes that it is only thanks to the benefits of socialized insurance programs such as Obamacare, of which Hillary is a staunch supporter, that such price gouging was possible in the first place."
Finally, just in case the rest of the biotech and specialty pharma industry thinks it is safe and that Valeant will be the scapegoat for everyone's shadow price increases, here comes Bloomberg with "Pfizer Raised Prices on 133 Drugs This Year, And It's Not Alone"
Pfizer Inc., the nation’s biggest drugmaker, has raised prices on 133 of its brand-name products in the U.S. this year, according to research from UBS, more than three-quarters of which added up to hikes of 10 percent or more. It’s not alone. Rival Merck & Co. raised the price of 38 drugs, about a quarter of which resulted in increases of 10 percent or more. Pfizer sells more than 600 drugs globally while Merck has more than 200 worldwide, including almost 100 in the U.S.
Pfizer's saving grace: it's average price hike according to Deutsche Bank was 9%, or "only" 5 times more than core inflation.
Will this be enough to placate Congress which is finally realizing the Frankenstein pricing monster the broken US healthcare system has unleashed? The answer will be revealed in the coming weeks.

Global Dollar Funding Shortage Intesifies To Worst Level Since 2012

The last time we observed one of our long-standing favorite topics (first discussed in early 2009), namely the global USD-shortage which manifests itself in times of stress when the USD surges against all foreign currencies and forces even the BIS and IMF to notice, was in March of this year, when we explained that "unlike the last time, when the global USD funding shortage was entirely the doing of commercial banks, this time it is the central banks' own actions that have led to this global currency funding mismatch - a mismatch that unlike 2008, and 2011, can not be simply resolved by further central bank intervention which happen to be precisely the reason for the mismatch in the first place."
Furthermore JPM conveniently noted that "given the absence of a banking crisis currently, what is causing negative basis? The answer is monetary policy divergence. The ECB’s and BoJ’s QE coupled with a chorus of rate cuts across DM and EM central banks has created an imbalance between supply and demand across funding markets. Funding conditions have become a lot easier outside the US with QE-driven liquidity injections and rate cuts raising the supply of euro and other currency funding vs. dollar funding. This divergence manifested itself as one-sided order flow in cross currency swap markets causing a decline in the basis."
To which we rhetorically added: "who would have ever thought that a stingy Fed could be sowing the seeds of the next financial crisis (don't answer that rhetorical question)."
All this was happening when the market was relentlessly soaring to all time highs, completely oblivious of this dramatic dollar shortage, which just a few months later would manifest itself quite violently first in the Chinese devaluation and sale of Treasurys, and then in the unprecedented capital outflow from emerging markets as the great petrodollar trade - just as we warned in November of 2014 - went into reverse. In fact, there are very few now who do not admit the Fed is responsible for both the current cycle of soaring volatility, or what may be a market crash (as DB just warned) should the Fed not take measures to stimulate "inflation expectations" (read: more easing).
In any event, since March we have received numerous requests for follow-up of where said funding shortage is now. So here are the latest observations on the current level of the global dollar funding shortage as measured by the Dollar fx basis, courtesy of JPM:
The dollar fx basis declined further over the past two months. The 5-year dollar fx basis weighted across six DM currencies declined to a new  low for the year and the lowest level since the summer of 2012 during the euro debt crisis.
In other words: the USD funding shortage is even worse than it was when we looked at it in March, it still is a function of conflicting central bank liquidity flows, and while not as bad as it was at its all time worst levels in late 2011, it is slowly but surely getting there with every passing week that the Fed does not ease monetary conditions. 
A brief history of the three key periods of global USD-funding shortfalls:
  • The first episode immediately after the Lehman bankruptcy coincided with a US banking crisis that quickly became a global banking crisis via cross border linkages. Financial globalization meant that Japanese banks had accumulated a large amount of dollar assets during the 1980s and 1990s. Similarly European banks accumulating a large amount of dollar assets during 2000s created structural US dollar funding needs. The Lehman crisis made both European and Japanese banks less creditworthy in dollar funding markets and they had to pay a premium to convert euro or yen funding into dollar funding as they were unable to access dollar funding markets directly.
  • The second episode of very negative dollar basis took place during the Euro debt crisis. The sovereign crisis created a banking crisis making Euro area banks less worthy from a counterparty/credit risk point of view in dollar funding markets. As dollar funding markets including fx swap markets dried up, these funding needs took the form of an acute dollar shortage. European banks and companies that had dollar assets to fund had to pay a hefty premium in fx swap markets to convert their euro funding into dollar funding. Those European banks and companies that were unable to do so, were forced to liquidate dollar assets such as dollar denominated bonds and loans to reduce their need for dollar funding
  • The third phase of very negative dollar basis started at the end of last year. Monetary policy divergence has for sure played a role during the end of 2014 and the beginning of this year. The ECB’s and BoJ’s QE has created an imbalance between supply and demand across funding markets. Funding conditions have become a lot easier outside the US with QE-driven liquidity injections raising the supply of euro and yen funding vs. dollar funding. This divergence manifested itself as one-sided order flow in cross currency swap markets causing a decline in the basis. And we did see these funding imbalances in cross border corporate issuance.
More from JPM:
Similar to the beginning of this year, the decline in the dollar fx basis is raising questions regarding shortage in dollar funding. This is because the fx basis reflects the relative supply and demand for dollar vs. foreign currency funds and an even more negative basis currently points to more intense shortage of USD funding relative to the beginning of the year.

Figure 5 shows that the current negativity of the dollar fx basis represents the third major episode since the Lehman crisis. Before the Lehman crisis the fx basis was remarkably stable hovering around zero as funding markets were well balanced. After the Lehman crisis, funding markets experienced persistent imbalances with an almost structural shortage of dollar funding.
This is how it looks now:
The conclusion:
In all, continued monetary policy divergence between the US and the rest of the world as well as retrenchment of EM corporates from dollar funding markets are sustaining an imbalance in funding markets making it likely that the current episode of dollar funding shortage will persist.
What does this mean in simple terms? Think back to what David Tepper said several weeks ago on CNBC when, contrary to popular opinion, he admitted he was bearish on risk assets mostly as a result of the "reserve streams" going in two different ways. This is precisely what the dollar shortage as quantified by the negative dollar basis is telling us: the policy divergence between the "tight" Fed and the ultra loose ECB and BOJ is starting to reach extreme levels, and will likely continue until the basis blows out to its theoretical limit of -50bps as set by the Fed-ECB swap line.
At that point either the Fed will be forced to admit it was beaten by the market, and either cut rates (to negative) while perhaps unleashing even more QE to offset the monetary imbalance with the rest of the world, or it will once again engage in even more swap lines with foreign central banks as the dollar funding shortage moves beyond simply synthetic and into an actual shortage of USD "bills" all in electronic credit format of course, because as we further explained last week, it is simply impossible to satisfy all global USD-denominated claims.

"They Just Don't Want A Job" - The Fed's Grotesque "Explanation" Why 94.6 Million Are Out Of The Labor Force

In a note seeking to "explain" why the US labor participation rate just crashed to a nearly 40 year low earlier today as another half a million Americans decided to exit the labor force bringing the total to 94.6 million people...
... this is what the Atlanta Fed has to say about the most dramatic aberration to the US labor force in history: "Generally speaking, people in the 25–54 age group are the most likely to participate in the labor market. These so-called prime-age individuals are less likely to be making retirement decisions than older individuals and less likely to be enrolled in schooling or training than younger individuals."
This is actually spot on; it is also the only thing the Atlanta Fed does get right in its entire taxpayer-funded "analysis."
However, as the chart below shows, when it comes to participation rates within the age cohort, while the 25-54 group should be stable and/or rising to indicate economic strength while the 55-69 participation rate dropping due to so-called accelerated retirement of baby booners, we see precisely the opposite. The Fed, to its credit, admits this: "participation among the prime-age group declined considerably between 2008 and 2013."

And this is where the wheels fall off the Atlanta Fed narative. Because the regional Fed's very next sentence shows why the world is doomed when you task economists to centrally-plan it:
The decrease in labor force participation among prime-age individuals has been driven mostly by the share who say they currently don't want a job. As of December 2014, prime-age labor force participation was 2.4 percentage points below its prerecession average. Of that, 0.5 percentage point is accounted for by a higher share who indicate they currently want a job; 2 percentage points can be attributed to a higher share who say they currently don't want a job.
And there you have it: there are nearly 100 million working-age Americans who could be in the labor force, but are not "mostly" because they don't want a job.
Nothing about the lack of job demand as mega corporations continue to lay workers off in droves instead of hiring, instead using every last dollar of free cash flow to buyback their own stock to boost executive compensation instead of growing their company and hire more workers.
Nothing about the collapse in small business formation - that driver of 80% of US employment - as firm exit rates are now greater than firm entry rates
Nothing about the inability to get a job in a world in which the rest of
the global is lapping the US in educational and labor skills.
Nothing about the US economy never having left the post-2008 depression where $4.5 trillion in Fed credit was created just to boost the S&P to all time highs and never making it to the actual economy (until the helicopters finally start paradropping of course)
Nothing about millions of aging, 55 and over, Americans refusing to retire or quit their job simply because they have no return on their savings to fall back on thank to the Fed's ZIRP, thus keeping the labor pipeline clogged and preventing younger Americans from getting promoted and achieving better paying jobs.
Nothing about a Millennial generation encumbered with $1 trillion in debt, that is so terrified of its job prospects and having to pay down its debt, it choose instead to keep rolling and piling on to this debt by remaining in college indefinitely
Nothing about the perverted incentive structure of a welfare state that makes it more attractive to collect generous government handouts which end up punishing hard work.
None of that.
You see, it is because Americans "mostly don't want a job."
And these are the pompous academic "intellectuals" who are supposed to micromanage the US economy. But how can they fix the biggest problem facing the US economy when they fail to even accurately diagnose what the problem is?
Which, incidentally, is why the same old Fed tools will be used and abused in hopes of kicking the can down a few more months at at time, be it QE 4, 5, 100, or ever more negative rates, both of which are coming.
How long will this continue? Now that is a very simple question: it will continue until the dollar loses its reserve status, just like the pound before it, and the livre before that, and the guilder before that, and so on.

Thursday, October 1, 2015

Bailed Out FX Broker FXCM Says It Was Hacked, Resulting In "Wire Transfers From Customer Accounts"

It has not been a good year for retail currency broker FXCM which in January faced massive losses in the aftermath of the shocking Swiss Franc revaluation. In fact, only a $300 million bailout from Jefferies/Leucadia allowed the currency trader to meet regulatory requirements and continue operations.
Then, this morning, FXCM clients woke up with even more headaches when the currency broker admitted it had been hacked, leading to a "small number" of unauthorized wire transfers from customers’ accounts. FXCM said it received an email from a self-proclaimed hacker who claimed to have access to customer information. The company said it is working to establish the scope of the breach and identify affected customers.
Not a bad idea: hack clients accounts, then quietly syphon money out.
So, blame the Chinese again? That would be awkward after Xi Jinping's visit with Obama last week.
But more importantly, will this be the final straw for FXCM, and will the broker's client decide to give the already teetering company one more chance? Perhaps the biggest question is why would anyone still want to trade FX when this is clearly the domain of the central banks, and anyone with a less than infinite balance sheet get stopped out virtually on a daily basis, especially once the momentum igniting effect of the HFT algos is added.
As a final remember, FX trading is the one venue where HFT firms like Virtu are betting their on. Expect even more grotesque moves in any given FX pair as liquidity in this critical market evaporates to nothing.