Guest post by Azizonomics.
Americans are either celebrating or damning the Supreme Court’s 5-4 ruling that the individual mandate is constitutional.
I find it hard to believe that anyone believed that the Supreme Court would rule any other way. Precedent dictates that the Commerce Clause, and Federal powers of taxation are unimpeachable, and have been so since the New Deal. That’s the state of reality, and I found it puzzling that the individual mandate to purchase healthcare might be deemed unconstitutional when the collective mandate to collect taxes to purchase next-to-everything (including both healthcare and broccoli) has been considered constitutional for the best part of a century.
If America wants to overturn current legal norms America needs to elect different politicians. But with a greater and greater welfare-bound population, it seems inevitable that more and more Americans will vote themselves greater and greater quantities of free stuff.
Yet there is a bigger point to all of this, and it’s nothing to do with broccoli.
If Congress can constitutionally create a mandate for individuals to purchase healthcare, then Congress can create a mandate for individuals to purchase financial securities. Which — given the fiscal cliff that we are about to run off, and the reality that more and more sovereigns are dumping dollars and treasuries — could well be a useful weapon in keeping the Treasury’s borrowing costs low and the bread and circuses flowing.
Bill Gross on “safe” yields, Uncle Sam’s debt and the return of your money.
Guest post by Peter Tchir of TF Market Advisors on the JPM Trade.
Algos, Twitter, or Laziness?
I am surprised by the market reaction to the NY Times article about JP Morgan’s whale trade. The headline JP Morgan trading loss may reach 9 billion seems devastating. I can understand why a computer would react to the headline maybe programs missed the subtlety of the word “may”. But why are so many people reacting so quickly and selling the stock when the details don’t really say anything new? I thought Twitter restricted you from writing more than 140 characters, but maybe it has had a side effect of restricting people to reading 140 characters?
The loss amount referenced is useless:
So let’s look at what was written about the loss.
In April, the bank generated an internal report that showed that the losses, assuming worst-case conditions, could reach $8 billion to $9 billion, according to a person who reviewed the report.
This is it. A report from April, where under worst case conditions, the loss could reach $8 to $9 billion. So this isn’t a report from June. It isn’t a current estimate of the losses. It is long before Mr. Dimon actually told politicians that JPM would have a “solid” profitable quarter. As arrogant as he may or may not be, it would seem a stretch to believe he would tell such a whopper to politicians on national TV.
With markets having put in a nice rally going into the Euro summit, there could be nice opportunities playing the outcome via volatility. Both the VIX and the “euro VIX” EVZ, could be possibly good hedges. If you agree even the slightest with Soros, the market could move nicely after the summit. Some thoughts by Vix and more.
It is not that difficult to come up with data and charts that have many investors wondering if risk and uncertainty are being underpriced in advance of the euro zone summit. Earlier today, I offered up one possible example in Euro Volatility and Risk. Since the VIX receives top billing in this space (and not too long ago carried the mostly tongue-in-cheek moniker, “Your One-Stop VIX-Centric View of the World…”), I thought a VIX-specific example might also be of interest.
The chart below shows the last three months of VIX data, with VIX candlesticks on the main chart on the top. The second chart from the top compares the 20-day historical volatility of the VIX (blue line) with the 30-day implied volatility of the VIX (red line), with the yellow area chart just below it calculating the HV minus IV. Much to my surprise the current 20-day HV is 144, while the current IV is only 98. In other words, the markets expect the VIX to be considerably less volatile in the month ahead than it has been over the course of the last month. I am not surprised to see the gap, but do the markets have the direction of the gap right? In terms of trading opportunities, if you disagree with the market consensus, then VIX straddles probably look fairly cheap right now.
The LIBOR event was seen as a minor event by the investment community. People are occupied with the Eurozone summit and what Germany will say. Let’s not forget though, the LIBOR market is not a small stock some HFT algo is pushing around. Some thought on the “big market manipulation”, by Jessie.
There were two new developments in the ever unfolding crime drama known as the Anglo-American financial system.
Peter Madoff, brother to infamous Bernie and long time ‘chief compliance officer’ for the Madoff fund, is pleading guilty to the charge of ‘falsifying documents.’ As you may recall Harry Markopolos had attempted to call the fraudulent nature of the Madoff investment model to the attention of the regulators for years and was ignored, ridiculed, and threatened.
The bigger news of the day was the settlement with Barclays in the absolutely egregious fraud of fixing the LIBOR market rate. The Bank will pay a $450 million fine and incur no criminal penalties or trading sanctions. The American CEO Bob Diamond says he will forgo his personal bonus as well.
Other banks were involved, but Barclays has settled. Barclays Pays 450m to End LIBOR Prove
Bart Chilton of the CFTC was on the news claiming victory for the regulators.
A read of the some of the emails discovered in the case shows that the manipulation was almost as blatant and obvious as placing food orders at a takeaway restaurant.
Ah hey old boy, our positions are up against it, so would you be a good chap and knock 50 basis points off LIBOR for us tomorrow morning please.
Anything for your my good man. Consider it done.
Tomorrow we’ll get the Third Estimate for Q1 GDP from the Bureau of Economic Analysis. Meanwhile, the Wall Street Journal’s June survey of economists was posted a couple of weeks ago, and the Federal Reserve weighed in with its GDP estimates last week. Let’s see what their various crystal balls and tea leaves are telling them about the future (download the WSJ Excel File).
First, some context: The BEA’s Second Estimate for Q1 GDP came in at 1.9 percent, a decline from Preliminary Estimate of 2.2 percent. The average GDP since the inception of quarterly GDP reporting in the late 1940s is 3.3 percent, which is nearly double the 1.7 percent 10-year moving average of GDP through the end of 2011 (illustrated here).
Of course, many of us are eager to know what the Third Estimate will be. The Briefing.com consensus is for 1.9 percent, no change. And the June WSJ survey considers Q1 history. The latest questionnaire skipped Q1 and asked about the remaining quarters of 2012 and the annual forecasts for 2012 through 2014.