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   Non-TechDerivatives: Darth Vader's Revenge


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From: Worswick4/21/2017 10:12:57 AM
4 Recommendations   of 2702
 
April 21, 2017 Gains, Pains

Why the Big Banks Are Terrified of Le Pen Winning in France (but not BREXIT or Trump)

France holds the first round of its Presidential election this weekend.

The big worry for the markets is the fact that anti-Euro candidate Marin Le Pen could potentially win.

Now, the polls show Le Pen as having NO chance of becoming Prime Minister.

Of course, the polls also showed that BREXIT would not happen and Hillary Clinton had a 98% of becoming President.

We all know how those turned out.

“So what?” one might ask, “why would a Le Pen victory matter? Both BREXIT and Trump’s Presidential election ignited massive stock market rallies… why wouldn’t France leaving the Euro do the same?”

One word…

Collateral.

The big problem for EU members from is debt.

Yes, we all know that EU countries are saturated in debt… but the key issue here WHO owns this debt and WHAT it represents to them.

To citizens of a nation, sovereign debt represents payment of social entitlements in exchange for long-term debt servitude as a nation.

To politicians of a nation, sovereign debt represents a means of paying for welfare schemes promised on the campaign trail.

For banks… sovereign debt represents the senior-most collateral backstopping their massive derivatives portfolios.

The derivatives markets, the same markets that triggered the 2008 meltdown, were never properly dealt with.

Today, at the time of this writing, there are over $700 TRILLION worth of derivatives in the financial system.

The bulk of this is owned/controlled by the large banks. And more than $500 TRILLION of this is related to interest rates or BOND YIELDS.

Why do banks own so many derivatives?

The Big Banks love derivatives because they represent a completely opaque asset class that can be priced/ traded/ etc. at whatever value the banks want.

Imagine being able to sell something of nebulous real value to anyone (corporates, other banks, pension funds, hedge funds and even countries buy derivatives from the big banks) at whatever value you want.

THAT’s what the derivatives markets represent to the big banks.

Now, of course, the banks all know the real deal here: that the derivatives they’re selling/ trading are in fact complete make believe of next to no real value.

Because of this, banks demand that other banks put up “collateral” to backstop these trades.

Collateral= an asset of actual, determinable value that would be posted if the derivative trade ever goes bad and a counter-party demands something of REAL value to cover the imploding value of the derivatives trade.

Sovereign bonds… as in the same bonds France issues… the same bonds that would be re-priced if France leaves the Euro… are some of the senior-most collateral backstopping these trades.

So… IF Le Pen wins… and IF she pushes for France to leave the Euro… and France subsequently has to revalue its bonds based on its new credit rating as a standalone country (not an EU member) we’re talking about over €2.2 TRILLION in sovereign debt needing to be re-priced.

Based on standard leverage for big banks’ derivatives portoflios, this debt is backstopping anywhere between €20 trillion and €50 trillion in derivatives trades (truthfully even €100 trillion isn’t out of the question).

In simple terms… France leaving the Euro represents another Lehman Brothers times 10.

THIS is why Le Pen potentially winning the French Presidential election is NOT another BREXIT or Trump situation… there is in fact real potential for a debt-driven derivatives bomb here.

Will Le Pen? We have no idea. But the stakes are VERY different here for the banks than BREXIT or Trump winning.


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From: ggersh5/3/2017 11:22:18 AM
4 Recommendations   of 2702
 
What could possibly go wrong here?

uk.reuters.com

U.S. SEC approves request to list quadruple-leveraged ETFs

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From: ggersh5/13/2017 12:38:50 PM
   of 2702
 
theautomaticearth.com

The swamp that can’t be drained without causing explosions.

$500 Trillion in Derivatives “Remain an Important Asset Class” – NY Fed (WS)

Economists at the New York Fed included this gem in their report on a two-day conference on “Derivatives and Regulatory Changes” since the Financial Crisis: “Though the notional amount [of derivatives] outstanding has declined in recent years, at more than $500 trillion outstanding, OTC derivatives remain an important asset class.” An important asset class. A hilarious understatement. Let’s see… the “notional amount” of $500 trillion is 25 times the GDP of the US and about 7 times global GDP. Derivatives are not just an “important asset class,” like bonds; they’re the largest “financial weapons of mass destruction,” as Warren Buffett called them in 2003.

Derivatives are used for hedging economic risks. And they’re used as “speculative directional exposures” – very risky one-sided bets. It’s all tied together in an immense and opaque market interwoven with the banks. The New York Fed: The 2007-09 financial crisis highlighted weaknesses in the over-the-counter (OTC) derivatives markets and the increased risk of contagion due to the interconnectedness of market participants in these markets. This chart from the New York Fed shows how derivatives ballooned 150% – or by $360 trillion – in less than four years before the Financial Crisis. They ticked down during the Financial Crisis, then rose again during the Fed’s QE to peak at $700 trillion. After the end of QE, they declined, but recently ticked up again to $500 trillion. I added in red the Warren Buffett moment:





The vast majority of the derivatives are interest rate and credit contracts (dark blue). Banks specialize in that. For example, according to the OCC’s Q4 2016 Report on Derivatives, JPMorgan Chase holds $47.5 trillion of derivatives at notional value and Citibank $43.9 trillion. The top 25 US banks hold $164.7 trillion, or 8.5 times US GDP. So even a minor squiggle could trigger some serious heartburn.

Read more …

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From: Worswick9/20/2017 9:35:59 AM
2 Recommendations   of 2702
 
Six months since I've posted .... as the world turns

When This Debt Bubble Bursts, Central Banks Will Turn to Money Printing... Again

by Phoenix Capital...

Sep 19, 2017

The only reason the financial system has held together so well since 2008 is because Central Banks have created a bubble in bonds via massive QE programs and seven years of ZIRP/NIRP.

As a result of this, the entire world has gone on a debt binge issuing debt by the trillions of dollars. Today, if you looked at the world economy, you’d find it sporting a Debt to GDP ratio of over 327%.

Well guess what? The REAL situation is even worse than this. The Bank of International Settlements (the Central Banks’ Central Bank) just published a report revealing that globally the financial system has $13 trillion MORE debt hidden via junk derivatives contracts.

Global debt may be under-reported by around $13 trillion because traditional accounting practices

exclude foreign exchange derivatives used to hedge international trade and foreign currency bonds, the BIS said on Sunday.

Source: Yahoo! Finance.

As has been the case for every single crisis since the mid’90s, the problem is derivatives.

Consider that as early as 1998, soon to be chairperson of the Commodity Futures Trading Commission (CFTC), Brooksley Born, approached Alan Greenspan, Bob Rubin, and Larry Summers (the three heads of economic policy) about derivatives.Born said she thought derivatives should be reined in and regulated because they were getting too out of control. The response from Greenspan and company was that if she pushed for regulation that the market would “implode.”

Fast-forward to 2007, and once again unregulated derivatives trigger a massive crisis, this time regarding the Housing Bubble

And today, we find out that once again, derivatives are at the root of the current bubble (debt). And once again, the Central Banks will be cranking up the printing presses to paper over this mess when the stuff hits the fan.

Already, Central Banks are printing nearly $180 billion per month in QE. When the next crisis hits, it’s going to be well north of $250 billion if not $500 billion per month.

As the world turns I'd suggest one read The Accidental Superpower by Peter Zeihan.

Zeihan, a protégé of George Friedman of Statfor, lays out the future in an incandescent manner based upon the collapse of Pax Americana. Cf. Bretton Woods, 1944 and the world that followed

... Cf. further to Zeihan above the idea of Demographic Collapse. I might add this V. Putin's greatest problem: Russia's startling demographic collapse not much covered in the west ....

Finnish Politician Tells Women 'Be Patriotic, Have More Babies' As Birth Rates Crashes To 150 Year Lowsby Tyler Durden Sep 20, 2017


For years, the Japanese government has been desperately trying to encourage its citizenry to have more sex to combat the collapsing demographics the nation faces, trying guilt ( blasting their "sexual apathy") and punishment ( imposing a "handsome tax" to make lief more even for ugly men), to no avail.

Now it appears Finland is suffering a similar fate.
As Bloomberg reports, Finland, a first-rate place in which to be a mother, has registered the lowest number of newborns in nearly 150 years.




The birth rate has been falling steadily since the start of the decade, and there's little to suggest a reversal in the trend. Demographics are a concern across the developed world, of course. But they are particularly problematic for countries with a generous welfare state, since they endanger its long-term survival.

For Heidi Schauman, the statistics are "frightening."

"They show how fast our society is changing, and we don't have solutions ready to stop the development," the Aktia Bank chief economist said in a telephone interview in Helsinki. "We have a large public sector and the system needs taxpayers in the future."

As Bloomberg notes, that's a surprisingly low level, given the efforts made by the state to support parenthood.

Perhaps nothing illustrates those better than Finland's famous baby-boxes.

Introduced in 1937, containers full of baby clothes and care products are delivered to expectant mothers, with the cardboard boxes doubling up as a makeshift cot.The idea behind the maternity packages was prompted by concerns over high infant mortality rates in low-income families.

The starter kits were eventually extended to all families.

Offering generous parental leave and one of the best education system in the world doesn't seem to be working either.

Reversing the modern idea that it's ok not to have kids is impracticable. Opening the doors to immigrants is a political no-go area (Prime Minister Juha Sipila's center-right government relies on the support of nationalist lawmakers).

The leader of the opposition Social Democrats, Antti Rinne, caused a stir in August when he urged women to fulfill their patriotic duty and have more babies.

"The discussion has revolved around gender equality and the employment of women, with the issue of natality sent to the background," she said.

What Finland really needs is a political program that treasures the family and increases the value of parenthood, the economist argued.

The baby boxes that are delivered to expectant mothers contain all sorts of goodies. They include bodysuits, leggings, mittens, bra pads, talcum powder, lubricant, a hairbrush and a bath thermometer.

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From: Worswick6/7/2018 3:22:32 PM
1 Recommendation   of 2702
 
Heavens a dead thread!

9 months since posting ....

Yet the chickens coming home to roost cloud the skies. Same species but now 5 to 10 generations older ....

Best to you all whom might occasionally check in.,

Clark

Does Deutsche Bank's Junk Bond Firesale Mean The Party Is Over?





by Tyler Durden

Thu, 06/07/2018

Less than a month ago, Moody's warned that "the prolonged environment of low growth and low interest rates has been a catalyst for striking changes in nonfinancial corporate credit quality," and adds that "the record number of highly leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives."



This was followed by an ominous warning from Bill Derrough, the former head of restructuring at Jefferies and the current co-head of recap and restructuring at Moelis:

"I do think we're all feeling like where we were back in 2007," he told Business Insider: "There was sort of a smell in the air; there were some crazy deals getting done. You just knew it was a matter of time."

Which makes sense when one notes that since 2009, the level of global nonfinancial junk-rated companies has soared by 58% representing $3.7 trillion in outstanding debt, the highest ever, with 40%, or $2 trillion, rated B1 or lower. Putting this in contest, since 2009, US corporate debt has increased by 49%, hitting a record total of $8.8 trillion, much of that debt used to fund stock repurchases.

Meanwhile, as a percentage of GDP, corporate debt is at a level which on ever prior occasion, a financial crisis has followed.



And while all this chaotic risk is building, risk appetite is flashing red signals for the analysts at CreditSights. As Bloomberg reports, students of history will find two parallels to today’s credit market - and neither will provide much comfort. According to a key valuation metric, investors are headed for the kind of bullishness on high-yield bonds that’s been seen just twice before: during the halcyon days of 1997’s tech bubble before the Asia crash, and on the eve of the global financial crisis a decade later.

The ratio between U.S. junk-bond yields and their high-grade counterparts has reached levels that “hearken back to the high risk appetite days of October 1997 and June 2007,” CreditSights Inc. strategists Glenn Reynolds and Kevin Chun wrote in a note this week.

That’s “not a great set of dates along the credit market timeline of overconfidence,” they noted.



“The fear is that the market is underestimating the threat of trade wars and European political instability and what turns they could take,” Reynolds and Chun wrote.

And as that risk appetite surges, so LeveragedLoan.com reports that US High Yield Bond issuance tumbled in May...



In what is typically an active period for the U.S. high-yield market, just $15.3 billion of deals were issued in May, making it the lightest volume for that month since the paltry $9.5 billion in recession-era May 2010, according to LCD

And finally, adding one more straw to the irrepressible credit bid camel's back is news that Bloomberg reports Deutsche Bank is seeking to sell its portfolio of non-investment grade energy loans, worth about $3 billion, according to people with knowledge of the matter.

The potential firesale comes as Deutsche's short-dated CDS (counterparty risk) is soaring..



And comes as European HY Energy debt is weakening notably and US HY Energy is as good as it gets...



Bloomberg reports that Deutsche is planning to sell the loan book as a whole and has marketed it to North American and European peers, said one of the people. The portfolio is expected to sell for par value, said the people, who asked not to be identified because they weren’t authorized to speak publicly; good luck with that!

The bank’s energy business is expected to wrap up on June 30, one of the people said. The bank has been an active lender in the energy space in the past year, participating in the financing of companies including Peabody Energy Corp. and Coronado Australian Holdings Pty., according to data compiled by Bloomberg.

So to summarize: Moody's is warning that when the economy weakens we will see an avalanche of defaults like we haven't seen before; Corporate debt-to-GDP and investor risk appetite is reminding a lot of veterans of previous credit peaks; and now the most desperate bank in the world is offering its whole junk energy debt book in a firesale... just as high yield issuance starts to slump.



All of which raises more than a single hair on the back of our previous lives in credit necks... and reminds us of this...

Thank you all for coming in a little early this morning. I know yesterday was pretty bad and I wish I could say that today is gonna be less so, but that isn't gonna be the case. Now I'm supposed to read this statement to you all here, but why don't you just read it on your own time and I'll just tell you what the fuck is going on here. I've been here all night... meeting with the Executive Committee. And the decision has been made to unwind a considerable position of the firm's holdings in several key asset classes. The crux of it is... in the firms thinking, the party's over as of this morning.

"For those of you who've never been through this before, this is what the beginning of a fire sale looks like." - Sam Rogers, Margin Call

[iframe allow="autoplay; encrypted-media" allowfullscreen="" src="https://www.youtube.com/embed/v4P4cS5jKmQ" id="fitvid772789" frameborder="0"] [/iframe] There's gonna be considerable turmoil in the Markets for the foreseeable future. And *they* believe it is better that this turmoil begin with us.

See:

https://youtu.be/v4P4cS5jKmQ

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From: Worswick6/24/2018 9:57:47 AM
2 Recommendations   of 2702
 
Paul Tudor Jones: Here's why the 1987 crash was an accident waiting to happen
Julia La Roche 23 hours ago
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Scroll back up to restore default view.

Legendary hedge fund manager Paul Tudor Jones became famous after predicting the market crash of October 19, 1987, known as “Black Monday” when the Dow Jones dropped more than 22%.

“The crash of ’87 was really interesting just because the crash of ’87 probably never would have happened except for, again, the market infrastructure at that point in time,” Jones said in a conversation with Goldman Sachs CEO Lloyd Blankfein as part of the firm’s “Talks at GS” series.

Jones, 63, began his career at E.F. Hutton as a commodities trader in the cotton pits in 1976 before transitioning to macro trading and founding his hedge fund, Tudor Investment Corp in 1980.

“I remember, because I started out in ’76 trading commodities,” Jones said. “For 120 years all commodity futures had limits, and I remember so many times in the late ’70s, early ’80s, where the cotton market would be limit up or the soybean market would be limit up because that was the allowable amount that prices could move. And they would not let them go anymore because they knew the irrationality of human nature and the possibility of what a mob can do to anything, so they had limits.”

Then financial futures came along.

“[In] ’87, there were no limits on any financial futures,” Jones said. “It was an absolute accident waiting to happen. And then they started portfolio insurance. And in ’87 you could just look on any kind of historical metric and see the stock market was stupidly overvalued. 10-year rates were 10 1/2%. I think the dividend yield on the stock market was about 4 and 1/2 or 5, so just think about that compared to today right? 500 basis points, we have 10-year rates right now at something like 7 and 1/4, 7 and 1/2.”


Eduardo Munoz | Reuters. Finally, the market broke. One thing Jones has learned over the last 40 years is that it’s the “same story” over and over again.

“It’s the same old story so often, just with different characters, different times, different plots,” he said. “So that looked a lot like 1929 to me and I knew for a fact that, if and when it broke, because of the derivative structure, that the downside was going to be unlimited, literally unlimited because there were no limits on futures.”

The most recent example was this past February when the market entered correction territory and traders got hosed on short volatility products.

“[That] was just a bomb ready to explode. That was just a matter of time. And that entire break in the first week of February was all derivative inspired. And if I think of some of the greatest financial crisis of the last 30 years, they, generally speaking, are derivative inspired because that’s where all the leverage is.”

A year after his 1987 bet, he founded Robin Hood, a nonprofit dedicated to combating poverty in the New York City area. Over the last 30 years, Robin Hood has given away more than $3 billion.

Watch the full discussion here >>

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To: Worswick who wrote (2683)6/24/2018 7:02:37 PM
From: Sam
   of 2702
 
Great interview, thanks for posting it.

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From: ggersh7/25/2018 8:19:41 AM
1 Recommendation   of 2702
 
We've reached the quad mark? the leap from tril to
quad, at the speed of light, the end must be near

hat tip to The Pre Beakerite

“Cliff Edge” Brexit Threatens $34 Trillion of Derivative Contracts: UK Regulator

wolfstreet.com

from the comments we have...

"Joan of Arc
Jul 24, 2018 at 11:38 am
$34 trillion seems like a big number until you realize that the total derivative universe world wide has an estimated notional value of over $1 quadrillion. That’s $1,000,000,000,000,000.

The only other human creation that outdoes that on the planet earth is the 5 gyres swirling in the 5 oceans composed mostly of discarded plastic each the size of the State of Texas with an average depth of 300 feet."

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To: ggersh who wrote (2685)7/30/2018 6:01:36 PM
From: Worswick
   of 2702
 
Well that is something to wake the nearly comatose isn't it?

We seem to be either sleepwalking or crawling into our future ...

Many thanks for posting this.

Clark

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To: Worswick who wrote (2686)7/30/2018 8:05:13 PM
From: ggersh
   of 2702
 
Agree, the public only has time for their Iphone
sadly nothing else matters

ggersh

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