Derivatives Trading Legend: “As Little As A 4% Decline In One Day Could Start A Critical Crash”

After building out Merrill’s mortgage trading floor basically from scratch, then moving to the buyside at Pimco, several weeks ago Harley Bassman, more familiar to many traders as the “Convexity Maven” – a legend in the realm of derivatives (he helped design the MOVE Index, better known as the VIX for government bonds) – decided to retire (roughly one year after his shocking suggestion that the Fed should devalue the dollar by buying gold).

But that did not mean he would stop writing, and just a few days after exiting the front door at 650 Newport Center Drive in Newport Beach for the last time, Bassman wrote his first full article as a “free man”, in which the topic was, not surprisingly, derivatives and specifically the recent collapse in vol – and convexity – what prompted it, but most importantly and what everyone wants to know: what threshold would be sufficient to finally launch the next “critical mass” market move (i.e. crash) and, just as importantly, what could catalyze it. Continue reading

Fed’s Kashkari Says “We Won’t See Next Crisis Coming”, Compares Banks To Risky Nuclear Reactors

Coming as a replacement to perhaps the biggest dove in Fed history, few were expecting former Goldman and Pimco staffer Neel Kashkari to be as vocally outspoken on a topic that is so near and dear to regulators everywhere: their own cluelessness, and more importantly, the topic of “too big to fail” banks, which according to the Fed are a pillar of stability in an unstable world, and which according to Kashkari are anything but.

It is doubly surprising because it was none other than Kashkari himself who served as one of the key architects of the bank bailout plan in the aftermath of the financial crisis. Shortly thereafter he lived for an extended period in the wild. Continue reading

Interest rate rise: turning point looms for US debt binge

With a $4tn mountain of debt maturing over the next five years, corporate America’s reliance on cheap cash is about to get tested.

With the prospect of steadily higher interest rates in the coming years as the Federal Reserve gradually tightens policy, US companies that tapped global markets for inexpensive finance over the past four years will soon face a different environment.

But as rates turn higher, investors may see the flip side of cheap financing. Analysts warn companies will begin defaulting in greater numbers, particularly in the energy sector, which has found itself in the line of fire as commodity prices languish. Continue reading

El-Erian: Greek deal only prolongs the inevitable

Please see the source link for the video.

 

Despite the new rescue package, there’s still a strong risk that Greece will eventually have to drop the euro, influential economist Mohamed El-Erian said Thursday.

“The baseline scenario is still that Greece ultimately exits the euro zone,” he said. Continue reading

Bond crash across the world as deflation trade goes horribly wrong

Markets ignored clear warnings in Europe and America that the money supply is catching fire, signalling a surge of inflation later this year

The global deflation trade is unwinding with a vengeance. Yields on 10-year Bunds blew through 1pc today, spearheading a violent repricing of credit across the world.

The scale is starting to match the ‘taper tantrum’ of mid-2013 when the US Federal Reserve issued its first gentle warning that quantitative easing would not last forever, and that the long-feared inflexion point was nearing in the international monetary cycle.

Paper losses over the last three months have reached $1.2 trillion. Yields have jumped by 175 basis points in Indonesia, 160 in South Africa, 150 in Turkey, 130 in Mexico, and 80 in Australia.

Continue reading

“I’m Not Crazy, I’m Scared” – Why For One Trader, This Time It Is Different

Bloomberg’s Richard Breslow, author of “Trader’s Notes” is painfully accurate with his latest take on the “markets.”

I’m Not Crazy, I’m Scared

Over the last three days, we have reported that some of the most important investment voices in the world are more than a little scared about the ravenous appetite for risk playing out in the market, and the fact that they have been ignored is beyond unnerving. Central banks are driving all investment decisions, and what this implies is that they are in this trade so  deeply that there is no obvious or practical exit. Continue reading

As Euro Slides, Strategists Cut Forecasts

Some Investors See Single Currency Falling to Parity With U.S. Dollar

A day after the European Central Bank unveiled its bond-buying program, the single currency still was in free fall, blowing past analysts’ expectations for how low the euro can go.

Some investors now say the euro could fall to the point where it is on equal footing with the U.S. dollar for the first time since it climbed above the buck in late 2002.

“If you would have asked me a few months ago, I would’ve said that parity could be in the cards in the years ahead. Now, we can’t rule it out anymore even by the end of this year,” said Thomas Kressin, head of European foreign exchange at Pacific Investment Management Co., or Pimco, which has $1.68 trillion under management. Continue reading

PIMCO hit by second month of consecutive outflows

Bond giant Pimco has been hit by a second consecutive month of record outflows in its flagship fund following the departure of star fund manager Bill Gross. Continue reading

ECB ready to cut rates and push banks into lending to boost euro zone economy

(Reuters) – The European Central Bank is poised to impose negative interest rates on its overnight depositors, seeking to cajole banks into lending instead and to prevent the euro zone falling into Japan-like deflation.

At its meeting on Thursday, ECB policymakers may also launch a loan program for banks with strings attached to make sure the money actually gets out into the euro zone economy.

It will be the first of the “Big Four” central banks – ECB, Bank of England, Bank of Japan and U.S. Federal Reserve – to go the negative interest rate route, essentially charging banks to deposit with it. Continue reading

Money for Nothin’ Writing Checks for Free

When coming from PIMCO, alarm bells should be going off.

Mr. Bernanke never provided additional clarity as to what he meant by “no cost.” Perhaps he was referring to zero-bound interest rates, although at the time in 2002, 10-year Treasuries were at 4%. Or perhaps he knew something that American citizens, their political representatives, and almost all investors still don’t know: that quantitative easing – the purchase of Treasury and Agency mortgage obligations from the private sector – IS essentially costless in a number of ways. That might strike almost all of us as rather incredible – writing checks for free – but that in effect is what a central bank does. Yet if ordinary citizens and corporations can’t overdraft their accounts without criminal liability, how can the Fed or the European Central Bank or any central bank get away with printing “electronic money” and distributing it via helicopter flyovers in the trillions and trillions of dollars?

Well, the answer is sort of complicated but then it’s sort of simple: They just make it up. When the Fed now writes $85 billion of checks to buy Treasuries and mortgages every month, they really have nothing in the “bank” to back them. Supposedly they own a few billion dollars of “gold certificates” that represent a fairy-tale claim on Ft. Knox’s secret stash, but there’s essentially nothing there but trust. When a primary dealer such as J.P. Morgan or Bank of America sells its Treasuries to the Fed, it gets a “credit” in its account with the Fed, known as “reserves.” It can spend those reserves for something else, but then another bank gets a credit for its reserves and so on and so on. The Fed has told its member banks “Trust me, we will always honor your reserves,” and so the banks do, and corporations and ordinary citizens trust the banks, and “the beat goes on,” as Sonny and Cher sang. $54 trillion of credit in the U.S. financial system based upon trusting a central bank with nothing in the vault to back it up. Amazing! Continue reading