Tuesday, May 18, 2010

Germany Lowers the Boom on Being Naked

I have no idea where the time has been going but I am late again. Huge rainstorm coming tonight, maybe 2 inches of rain. Spring time indeed.

All Time Low Rates for All Time?
A point I have hammered home many times is the total reliance on all time low rates for the economy to even function these days. By now you are well aware of the hazards of zero rates, and it seems a few others are voicing some concern:
Michale Pento on Prudent Bear:
U.S. Solvency Contingent on Low Interest Rates
I would not agree 100% with everything in the piece but he does cover the important ground. Snippet:
The United States is the largest debtor nation in history. Our continued solvency depends upon low interest rates. But low rates are engendered either naturally from increased savings or artificially from money printing. Without having the adequate savings to bring down rates, the Fed has supplanted savings with monetization of debt. However, money printing eventually leads to intractable inflation and will send bond yields much higher, especially on the long end of the curve.
A risk aversion mindset or a flight to quality (stop laughing) cannot account for the ultra low bond yields in the face of the kinds of deficits the US is running and projected to run. I think that forces are at work to keep yields low. I would say this is going to change, but I thought that a year ago. V shaped recovery and a 3% 10 year bond. Sounds about right.

For more on this topic:
Greek Crisis Is Latest Excuse for Fed’s 0% Rate: Caroline Baum

Foreclosure Numbers are Getting Better, NOT!
You have to check out the foreclosure maps over at Housing Doom today for the Phoenix Metro area. My first thought was that this could not be correct but I am almost sure it is. See the maps here. The names of the towns are El Mirage and Surprise. How fitting.

Germany Lowers the Boom on Being Naked
Yes, I did have that title in mind all day, HA!

In a move that was quite out of left field, Germany has now prohibited naked short selling of various instruments until March 31, 2011 or forever whichever comes first. Included are:
-Sovereign government debt
-Credit default swaps involving eurozone debt
-10 Institutions in the banking industry. A run down is on Clusterstock. About half are insurance or re-insurance firms

Karl Denninger had this take:
It appears that the German Government has just plain had enough of the crap that the banksters have tried to pull, and has decided to do what Barack Obama should have done in early 2009.
That is:
•No more naked credit crap, especially against sovereigns but not only against sovereigns. No insurable interest, no CDS - period.
•Naked shorting will now be actually stopped in 10 leading financial institutions.
•Germany has had it with naked shorting of Gold, and specifically noted bank manipulation of gold prices via naked shorts beyond intent or ability to deliver.
•Germany has also said that they're not going to permit Euro derivatives that are not a "bonafide" FX hedge. That is, no more naked bets on Euro movements either.
•Hedge funds are going to be regulated, position size limits mandated and enforced, reporting enhanced and a transaction tax is coming.
It's about damn time.

Oh, and it appears that instead of telling all the banksters what they were going to do and "getting permission" first, or even discussing it with other governments, the German Government did what all governments should do - make up your mind and then do it without giving a good damn whether the banksters or other governments like it - and without giving them input into the decision or notice that it's coming.

The details are available on the web so I will not run down all that again.

What is interesting here is that nothing happens in a vacuum. What would be the reason Germany felt this action was needed and on so little notice? There was no way these kinds of positions could have been closed out during market hours. What's the deal?

I wish I knew. I imagine we will have a better idea by the weekend. Until then, I will speculate because it is so much fun! Reasons for this event could be:
-Germany was aware of a new and very large influx of naked shorts on debt instruments and worried about a panic run. They were convinced the threat was real enough to pull the trigger in a hurry. If this is true the details should be coming out very soon.
-This was a temper tantrum by Germany and Merkel in particular after being dragged into a huge Greece bailout and overall Eurozone bailout package.
-This was an angry response to the clear usage of Quantitative Easing by the ECB.

I suggest you leave other ideas in the comments section.

Overall I would say I am in favor of banning this kind of trading. It is one shade shy of outright fraud and is yet another from of leverage. Still, markets hate "uncertainty" and this opens up some serious cans of worms not limited to enforcement issues as well as intermarket crossover questions. Again I think the "why" is more important than the "what" here. I imagine I will be coming back to this!

Not to be out done, the SEC opened up some new rules for US markets as well:
SEC proposes new trading rules
Major exchanges to impose stock 'circuit breakers' to prevent plunges under new SEC rules

The rules would take effect in mid-June under a six-month pilot program agreed to by major U.S. exchanges and the Securities and Exchange Commission. The SEC announced them and put them forward for public comment, in a response to the stunning plunge of May 6.
Under the plan, trading of any Standard & Poor's 500 stock that rises or falls 10 percent or more -- within a five-minute span -- would be halted for five minutes. These rules, known as "circuit breakers," would be applied if the price swing occurs between 9:45 a.m. and 3:35 p.m. Eastern time. That's almost the entire trading day.
Importantly, the new circuit breakers would apply to all U.S. exchanges. Most of the 50 or so U.S. exchanges regulate themselves and design their own tools for slowing or halting trading.
I am a little surprised they allowed this to be applied on the way UP as well as DOWN when it is clear the DOWN is all that matters. It will be funny to see some daytrader freaking out when his stock keeps getting halted all day on one of our rally days, usually Monday's right at the open. "Dudes, you are killing my MOMO model with this crap!". Too funny.

And again, while this seems harmless there is no way to know just how this is going to work out.

Why don't they all just quit fooling around and just makes stocks unable to cross below where they are on today's date? That way you can weed out any "outlier" prices not tied to solid fundamentals. I always thought that kind of thinking was a joke, but we get closer everyday. What a mess.

Added:
If you think I am sarcastic, wait until you get a read on Tom of the North's newest entry at The Looming Doom:
Superhyperinflation Just Around The Corner
The Looming Doom has learned leading experts are advising the Obama Administration that the U.S. is poised to experience the most painful economic cycle of all: the Super-Hyper-Inflation Trauma (SHIT). While there is yet slight division amongst the experts as to whether the U.S. is already in SHIT or not, once the U.S. is fully in deep SHIT, there is no quick fix. Furthermore, if the SHIT is too deep, the economy may never recover.
The rest just gets better.

Have a good night.

10 comments:

GawainsGhost said...

I too am opposed to this sort of trading. To my mind, you have to have physical possession, or at least own the note, on a property or commodity in order to sell or insure it.

Naked short selling is no different from credity default swaps. Max Keiser, who is somewhat of a madcap I admit, argues that it's counterfeiting. Interesting discussion between him and Jim Rogers on the latest Keiser Report on this very subject. Rogers disagrees.

It's a fascinating debate, politicians vs. the markets. Everyone seems to agree the markets always win. Yeah. Bullshit talks and money walks.

Anyway, at least Germany is trying to rein in financial fraud. It won't be long before they return to the Deutschmark. The Euro is a dead currency.

But as Sammy Hagar says, "Turn Up the Music."

http://www.youtube.com/watch?v=mtU9jWy2aWc

getyourselfconnected said...

Gawains,
never thought of it that way (counterfeiting). Great song as well.

Anonymous said...

I like you, you make me laugh.

http://tinyurl.com/3yw5vbl

GTFO!

Lt. G

getyourselfconnected said...

Lt G,
I love that film! Some vinatge Mimi Rogers and so much more.

CT-Hilltopper said...

Perhaps Germany got wind that someone was thisclose to defaulting. My money is on Greece.

CT-Hilltopper said...

Oh...I forgot...

Regarding SHIT (Super-Hyper-Infflation-Trauma)...

That was a nice synopsis of what SHIT is, and whether we might be in the middle of said SHIT, but most of us want to know when the SHIT is going to hit the FAN (Fanatical American Nincompoops).
(Otherwise known as Sheeple)
Please get back to me on this.

=-)

GawainsGhost said...

By the way, GYC, there is an interesting article over at Pragmatic Capitalism http://pragcap.com/ on the irony of the Euro crisis. It argues that this is exactly what would happen if the world were on the gold standard. The thesis is that this is not an indictment of fiat currencies but of inflexible currencies. Well worth a read.

Anonymous said...

We live in a physical world, do we not? I can't seem to understand how an elastic currency makes sense. I know barter is hard to work in a large scale global economy but it does have pros. True it's hard to manage large transactions but it's also hard to flub the numbers if your counting head or coins. You can't have half a cow or half an egg. I know those are bad examples but when you look at how messed up everything is you ask how did this happen or how did we ever let it get to this point?

FIAT DEBT BASED GLOBAL ECONOMY PONZI SCHEMES DON'T WORK!

Lt. G.

PS: I guess I need to go back to school and drink the cool-aid.

insanity shelter said...

>Furthermore, if the SHIT is too deep, the economy may never recover.

This is preposterous. Just yesterday I began reading about the situation that unfolded in Argentina.

I only got half way through the piece so far, but they appear to have come back from 4000% inflation.

Anyone here ever read Atlas Shrugged. It's actually necessary for the SHIT to get that high IN ORDER to make necessary correction.

I'll get off my soap box now.

sedintary state said...

Anyone got a clue why oil has been going down ever since the gulf disaster.

Seems like the opposite would be the case. Of course California instantaneously went into over reaction mode and are kicking around the idea of a permanent ban on offshore drilling. That can't be good for price trends.

Funny world we live in. Everything moves in the opposite direction of what's predictable.

Oh, and what a principled and steady leader that Schwarzenegger is. Whatever way the wind blows, that's where he's headed. I can't believe what an idiot I was for supporting him.