it Feels Good to Be a Banker

Green shoots! Recovery is close! Recession is about to be extinguished by Bernanke's decree.

Investments in commercial banks are growing!



Do they, really? And what is it that those "investments" do to economy?

Let's look at commercial banks loan positions,
in particular consumer loans, that is us,
struggling to deal with increasing credit card rates and other profit enhancing tricks.

May be banks are capable now to provide precious credit to soften the blow from unemployment
and salary freezes shock.



Nope, this share of banks asset portfolio decreases steadily.

2009-06 2009-07 2009-08
859.0 853.1 846.7

Ok, ok, there are people who claim that Americans over borrowed and there is a need for financial shackles to avoid further temptations.

May be banks try stimulate new, more efficient and profitable enterprises, right?



False hope again. The credit for new enterprises is almost nonexistent (unless it is Obama-sponsored, read -
inefficient, crappy, politically and socially motivated), established industries still struggle to refinance and reduce
their existing debt load.

2009-04 2009-05 2009-06 2009-07 2009-08
1543.5 1526.1 1502.4 1487.3 1453.2

What lifts banks "investment" position then? Not surprisingly...



of course it is government paper which keeps growing and growing clobbering private capital markets.

2009-05 2009-06 2009-07 2009-08
1264.5 1300.1 1324.3 1360.3

It must really feel good to be a Banker those lucky days of Obama administration.
It doesn't get any dumber that that - making
huge profits from simply shuffling the paper from one pocket to another.

Government and Wall Street in one bed licking each other -
that kind of political/economic porno we are forced
to watch each and every day.

Time to Panick

TED spread shrinked down to 16 base points.

This is the level of maximum historical placidity of the times untouched by any thought of crisis.
This is the level of reckless subprime mortgage lending and junk-bond trading, sorry - CLOs, CDS, SPVs and other financial innovations supposedly reducing the risk of toxic asset down to the safety of gold standard.



Is this good news? Is crisis finally over? Is it time for Bernanke to stop pouring liquidity on the markets?

No, I think it is quite the opposite - we are right now in The Eye of a Financial Hurricane.
There is absolutely no reason for risk to be priced so low.

The rate of defaults keeps climbing to historical high from consumer to commercial lending.
Banks keep going bankrupt.
Consumers are not spending, companies are not selling, the number of unemployed in US reached 15 million mark.
This the the highest number of unemployed in US ever, during the Great Depression the number was less than 13 million.

Of course, some people would say economy is much larger now and absolute numbers doesn't matter so much, I disagree. Yes, if economy expands it can absorb this surplus labor force. However, if further shrinkage of economy occurs, which is very likely, the next quasi-stable point will be at yet MUCH lower employment level. There are still many pockets of artificially inflated employment where companies just didn't do enough firing hoping that economy will recover fast, not to mention that Obama stimulus did create many artificial jobs in the government and construction further preventing any recovery possible. The absolute number does indeed matter because with economy bigger the unemployment benefits also got MUCH bigger than in Great Depression times. Who is going to pay for those benefits as the number of unemployed continues to grow?

So, nor matter what props up equity markets and how long the lending, that became even more reckless than in subprime peak time, will continue the outcome is unavoidable.

We have not seen the crisis yet.

So far, it's been just a fair warning, like a hit of fever indicating it is time to take your health condition seriously.
No one took it this way, everyone just got a shot of strong drugs to get a quick relief.
Now, instead of quite possible recovery after the first shock instead we are going to have economy in coma for a very long time after the second shock that is about to hit us in coming months.

The Clinton Gambit

From Luigi Zingales article

http://nationalaffairs.com/publications/detail/capitalism-after-the-crisis

THE FUTURE OF AMERICAN CAPITALISM

We thus stand at a crossroads for American capitalism. One path would channel popular rage into political support for some genuinely pro-market reforms, even if they do not serve the interests of large financial firms. By appealing to the best of the populist tradition, we can introduce limits to the power of the financial industry — or any business, for that matter — and restore those fundamental principles that give an ethical dimension to capitalism: freedom, meritocracy, a direct link between reward and effort, and a sense of responsibility that ensures that those who reap the gains also bear the losses. This would mean abandoning the notion that any firm is too big to fail, and putting rules in place that keep large financial firms from manipulating government connections to the detriment of markets. It would mean adopting a pro-market, rather than pro-business, approach to the economy.

The alternative path is to soothe the popular rage with measures like limits on executive bonuses while shoring up the position of the largest financial players, making them dependent on government and making the larger economy dependent on them. Such measures play to the crowd in the moment, but threaten the financial system and the public standing of American capitalism in the long run. They also reinforce the very practices that caused the crisis. This is the path to big-business capitalism: a path that blurs the distinction between pro-market and pro-business policies, and so imperils the unique faith the American people have long displayed in the legitimacy of democratic capitalism.

Unfortunately, it looks for now like the Obama administration has chosen this latter path.

In fact, I'd hesitate to call this administration "Obama administration" anymore.


Obama right now is nothing but a figurehead for Clinton dominated political landscape.
Nor matter where you look you find either someone with "Clinton" as a last name or someone closely connected to them.




Sometime ago I asked one congressman why this government is not doing anything except providing vital support for large Wall Street insiders at taxpayers expense, why nothing is done to encourage healthy competition in financial services. The answer was simple: the government wants stability and control and it is easier to control few super concentrated businesses than a variety of smaller independent enterprises.



This is not a new trend, it started just before Reagan administration came to power, but the speed of revamping American economy into one big crony capitalism intensified dramatically since 90s.




Economic efficiency doesn't matter anymore, social mobility and fairness doesn't matter either.

"Kirk had known the ship would be available. Kirk wanted that ship. For years he had played the political games behind the scenes at the Command. Gone to the right parties, volunteered for the right committees, directed all his duty assignments to that one..."
"Star Trek: Spectre"

Live long and bow to the government/Wall Street, oh yes, that's the future for humankind, nor matter the cost.



Forget about so-called "American dream", forget about people who made a fortune by being honest entrepreneurs, forget even about moving up by doing political activism at local level or otherwise practicing "Obama supporter" line of thought.

The only thing that matters these days is how well you are connected to Wall Street elite sitting on government coffers with taxpayers (ours) money.

The so-called "socialism" (read "big business tyranny") came not from Michael Moore's movies or subversive activities of "leftists". It came as always - from big business interests in cahoots with the government "of the Wall Street, by the Wall Street, for the Wall Street".

The Rally is Dead, Long Live the Crisis

In recent weeks markets were under strong tidal waves that left visible indicators barely changed.
Something very big was going on undetected during that time.

Let's look at some historic graphs, in particular on Dow Jones Industrial daily trading volume.

First, take a look at year 2007.




The famous "August 2007" peak stands as Mount Kilimanjaro being the first indicator that "shadow banking system" is under serious stress, see for details "Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007" by
Gary Gorton. Very few people noticed the shock wave at that time and those who did were mostly quant traders.

Next, we look at the Year of Crisis (small font: caused by Bush administration phenomenal efforts to prevent any Republican from being ever elected again), and we see dramatic storm coming out right after the Summer lull.



That was something that, as we kind of know, already has happened.

Let's try to understand what's going on now.




We see a spike in activity in mid July - August.
This is a bit puzzling because technically there is no large movement in any of the indicators, mean returns during this period are basically zero. Plus, Summer is supposed to be a quiet time, there is really no new information coming to the markets and so on.

Why then we see this level of activity, which is almost unnoticeable at price (S&P 500, Dow Jones etc. nominal values) and in volatility level?



Compare, for example, to 2007 where correlation between volatility spikes and trading activity is strong.





Again, there is a large spike in trading activity in mid-July-August while there is no substantial new information,
no dramatic asset price changes and no volatility to speak of.
Trading, however, IS very costly, so there is a puzzle here indeed what exactly would justify such substantial costs.

My hypothesis so far is very simple.

Let's ask indeed a simple questions - why people trade?
It is surprising that no economics or finance professor would offer you an explanation that makes any sense.
This is really the biggest puzzle in modern finance.

I also can't provide the explanation valid for all times and all markets. However, it makes sense to me that certain market players who are more talented, or well-connected finished riding the public equities rally and they successfully dumped their stakes into the hands of players who are barely literate, worse in talent than a monkey doing stock-picking. Definitely, most 401(k) pension funds, probably some larger state and big company retirement fund managers as well bought into "recovery is close" story.
That's why we have all those so-called "associations of finance professionals" like Chartered Financial Analyst (CFA) Institute and similar time-share salesmen organizations, so that big and well-connected players could easily manipulate thousands of low level financial managers who would do anything (risking of course only someone else money) to "belong" to this impenetrable club.

Where did the smart money go? Which class of assets is going to shine during and after the Second Crisis (small font: caused by Obama administration phenomenal efforts to alienate its most vocal supporters)?
(to be continued)

Oil Demand Indicators

There are few economic indicators as important and precise as VLCC carriers charter rate and related indices.
This is basically how much the owners of very big ships get from transporting goods, oil or other cargo.

It gives a clear and undistorted picture of demand on the markets right away without all the nonsense about seeing "green shoots" or whatever Feds are smoking.

Unfortunately, those indicators require costly subscription and they are generally hard to understand.
Sometimes those quotes get into mainstream media, but even then it is not obvious how to read them.

Let's walk through one simple and recent example. The explanation is very rough and it is given here
purely for illustrative purposes.


Asia-Wide Refinery Output Cut Causes Marine Fuel Oil Shortage
July 17, 2009

The London-based Baltic Exchanges’s benchmark rate for very large crude carriers, or VLCCs, for the Saudi Arabia-to-Japan route fell to 30.83 Worldscale points yesterday after rising to 54.66 Worldscale points.

Notice, that the title of Bloomberg article is misleading - if you (as many others) just take a quick look over the headlines you'd get the idea that oil supply is going down which immediately translates in your mind into higher oil price expectations. This is very typical for most economic and financial information coming out from the mainstream media - they all take their lessons from Orwell's doublethink. If you have a lot of experience and know how to read the numbers then you might get some idea about real state of economy. For a casual reader there is nothing these days but disinformation cleverly sprinkled around hard numbers.

Now, lets' get back to the numbers. Bloomberg says something about "Wordscale points". What the heck is that?
Those are quoted with second decimal point precision but most likely you'd have no idea whether, for example, the number "Wordscale points=50" is good or bad.

The following link would help you to translate this number into something you can relate to:

Wordscale points converter


This online calculator is still quite confusing but what it basically does is converting abstract "Wordscale points" per particular route into hard dollars that the owner of the tanker would make on the route.

Skipping over additional details I can tell you how much the owner of tanker would make on the route from Bloomberg quote.

Ready?

MINUS $6,500 PER DAY...

Now, I hope, this is something you can relate to. Bloomberg headline looks somewhat different after this number, doesn't it? The rates do fluctuate but in general most routes from the Gulf to US are in the deep red and Asian routes fare not much better.

Does this make sense? It seems that it would be much more profitable for the ship owners to simply sunk their tankers than to keep them running.

That's a different matter, what we know from this information is that markets are still very much dead. There are no "green shoots", there is no end of recession, in fact those rates are simply the lowest in the history ever.

Most of VLCCs used for floating storage during the second quarter of this year have since discharged their cargoes and returned to the spot market. There were 73 VLCCs available to load Middle East crude in the next four weeks and only eight have been chartered so far.

Oil demand is definitely down both in Asia and US. What happens next is that very inefficient marginal small refineries are taken out of service and large modern very efficient refineries dominate the market driving oil demand even lower.
Those large refineries can fill demand very quickly if markets improve, there is no need to store much crude oil in anticipation.

This is real, although it is not much harder to fake those numbers in a way certain statistical offices "adjust" employment numbers or big Wall Street insiders keep stock market indices in "approved" range. The reason VLCC charter rates are more reliable is simply because those numbers are not quite transparent to public, at least not until I wrote this commentary. They don't need to fake numbers if "dumb" public don't even understand them well.

After reading this short walkthrough you are already ahead of the curve and you can proceed having somewhat cleaner picture of current economic terrain.

update. another example:

http://reports.platou.com/OnlineServices/Pages/TankFixtures.aspx

22.07.09 Front Energy - WS = 20
go back to calculator
choose VLCC, RAS TANURA (Arabian Gulf) - LOOP (US), type WS=20 and you get something around minus $3,000 per day.