Jobs, Queen of Commodities and Whale Traders
In case you missed it while you were busy eating easter eggs.
The NFP was a small disaster with the ES futures dropping hard.
The JPM Trader Bruno Iksil, is “distorting the index”. From Bloomberg.
A JPMorgan Chase & Co. (JPM) trader of derivatives linked to the financial health of corporations has amassed positions so large that he’s driving price moves in the $10 trillion market, traders outside the firm said.
Iksil may have “broken” some credit indexes — Wall Street lingo for creating a disparity between the price of the index and the average price of credit-default swaps on the individual companies, the people said. The persistence of the price differential has frustrated some hedge funds that had bet the gap would close, the people said. Full article here.
More on the topics below.
Treasuries Update: A Look at Recent Volatility
Guest post by Doug Short.
Treasury yields have been a bit of a roller coaster ride for the past few months. The 10-year note had been hovering around the two percent level for the past few months after hitting its historic low of 1.72 immediately following the September 21st announcement last year of Operation Twist. Despite the Fed’s stated purpose of lowering long-term interest rates, the 10-year steadily rose to an interim high of 2.42 on October 27th, but it soon settled into a pattern of hovering around 2.00 with the one quick dip to 1.82 and an upper range of 2.11. But in mid-March the yield on the 10 surged to a closing high of 2.39 on March 19th and then declined to a hover range around 2.23.
Today’s disappointing jobs report triggered a bond rally with the yield on the ten falling to 2.07 at the close, a decline of 12 basis points from the previous close.
Here is a snapshot of selected yields and the 30-year fixed mortgage since the inception of Operation Twist.
Vulturecrats?
Interesting aspects of finance, law and the European situation. By Golem.
A horrid thought has been incubating for the last few days.
I don’t know how many of you know much about Vulture Funds, what they do and how they do it, but it forms the basis of my horrid thought.
Nations issue debt. After it is bought, it often gets re-sold on what is called the secondary market. The price of debt on the secondary market changes much as stock prices change. The market is big.
When a nation looks like it might default the price of its debt begins to sink. What was bought for full price is offered for sale at a reduced price – say 60 cents on the dollar. Buyers and sellers have to decide if they think the nation will proceed to default or avoid it. The decision is, sell now and accept a loss but avoid a potentially larger loss later, or buy now at a discount and if the nation avoids default, profit as the value of that cheaply bought debt recovers its original value.
HFT and Commodities
A question many have asked themselves over the past few years; “Is HFT affecting commodity prices”? Voxeo on the subject.
What is causing the sharp price movements of many primary commodities? The debate goes on. (See Fattouh et al 2012 on Vox for a recent contribution.) Yet despite the range of views, three developments over the last decade are constantly referred to:
Biggs is back
Some weeks ago he said he would buy more if SPX came off 5 %, but as the market has come off, he is now selling, in order to buy if the market comes off. We feel rather confused, but Biggs is now less bullish than he was at the top, when he expected the “money on the sidelines” to push the market further in the no volume melt up. Video below.
VIX Premium to SPX Historical Volatility at Record High in Q1
Guest post by Vix and more.
Back in September 2010, in VIX and Historical Volatility Settling Back into Normal Range, I presented an earlier version of the chart below to explain that in spite of the protestations of the time, the relationship between the VIX and historical volatility (a.k.a. realized volatility) was actually right in line with historical norms.
The same claim cannot be made for 2012.
In fact, as low as the VIX appears to many, for the first three months of 2012 the VIX has been tracking at 177% of the 10-day historical volatility of the S&P 500 index. This ratio is well above the long-term average of 129% and also above the record for a single year – 162% in 1995 – which was back in the time when the premium of the VIX over realized volatility in the SPX (“volatility risk premium”) was routinely much higher than it has been in recent years.
Consider for a moment that from January 27 to March 7, 10-day historical volatility of the SPX never crossed above 10.00. Had the VIX volatility risk premium been at the typical historical level of 129%, the VIX would have been below 13.00 for this entire period. Of course, the VIX never traded below 13.00 during this six-week period. Instead, investors were unwilling to accept a VIX this low (i.e., drop prices in SPX options) in spite of low realized volatility, which is part of the reason (perhaps along with disaster imprinting and related issues) why the volatility risk premium was at a record high during the first quarter.
March 2012: The Month in Charts
From Scott Barber of Reuters.
The events of March seemed to confirm that 2012 will be a much less nerve-racking year than investors have had to endure in the recent path. That doesn’t mean the advance has been free from anxiety: debate about whether the stock market rebound in the United States may have outpaced the recovery in the underlying economy increased steadily as the month progressed, while unease about the health of the European financial system remains a constant. In the following series of charts, we hope you’ll find additional insight into what has already taken place, and contribute to your analysis as the second quarter kicks off this week. All charts here.
Krugman vs Keen
By Edward Harrison of Credit Writedowns.
I think this video is worth watching because Keen gets to the heart of the issues with the standard approach toeconomics. He says that banks, money and debt are front and center in reality as we now see after the crisis. Consequently, they should also be integral in economic models. I have made exactly the same criticisms in the past. See my piece on the origins of the next crisis which is holding up well in the two years since I wrote it.
For me, the bottom line here is that the crisis is really not over. We need authoritative people like Blinder telling us we’ve got it wrong if we are to have a reasonable chance of getting out of this unscathed. I lobe that kind of stuff – more please! My fear is that the debt and banking problems re-assert themselves in the next downturn to cause significant economic damage. And since I am predicting this is what is likely to occur, it’s not just a worry, it’s something more than that.
US losing its competitivness
Niall Ferguson on the US economy, regulation, taxes and how it is losing its competitiveness. Video below.
Bernanke’s famous speech
There has been a lot of talk lately of the old vs the new Bernanke. What did Bernanke actually think before he became the man ruling the markets? The scholar of the Great Depression gave a famous speech on the Japanese situation. We suggest a quick recap of what Bernanke said prior to becoming Mr Market.
Conclusion
The Bank of Japan became fully independent only in 1998, and it has guarded its independence carefully, as is appropriate. Economically, however, it is important to recognize that the role of an independent central bank is different in inflationary and deflationary environments. In the face of inflation, which is often associated with excessive monetization of government debt, the virtue of an independent central bank is its ability to say “no” to the government. With protracted deflation, however, excessive money creation is unlikely to be the problem, and a more cooperative stance on the part of the central bank may be called for. Under the current circumstances, greater cooperation for a time between the Bank of Japan and the fiscal authorities is in no way inconsistent with the independence of the central bank, any more than cooperation between two independent nations in pursuit of a common objective is inconsistent with the principle of national sovereignty.
I have argued today that a quid pro quo, in which the MOF acts to immunize the BOJ’s balance sheet from interest-rate risk and the BOJ increases its purchases of government debt, is a good way to attack the ongoing deflation in Japan. I would like to close by reiterating a point I made earlier–that ending deflation in consumer prices is only part of what needs to be done to put Japan back on the path to full recovery. Banking and structural reform are crucial and need to be carried out as soon and as aggressively as possible. Although the importance of reforms cannot be disputed, however, I do not agree with those who have argued that deflation is only a minor part of the overall problem in Japan. Addressing the deflation problem would bring substantial real and psychological benefits to the Japanese economy, and ending deflation would make solving the other problems that Japan faces only that much easier. For the sake of the world’s economy as well as Japan’s, I hope that progress will soon be made on all of these fronts.
Below is the full speech from the source.
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