Friday, May 7, 2010

Gorillas In The Drawing Room

One of these days the entire world is going to wake up and realize that its debt problems are one heck of a lot bigger and more serious than Greece, which is just the first Debtopia to unravel.  That it's not the debts of Portugal, Ireland, or even Spain that may cause the entire post-WWII financial system to come crashing down.

But that it is the United States, with a total debt load of $53 trillion (380% of GDP) and monstrous unfunded medical and pension liabilities (pick a BIG number, it's all quite fictional anyway), that is the huge gorilla in the drawing room that everyone is studiously trying to ignore.
Financial panics are not created in a vacuum;  they are born from a mixture of  high leverage, overvaluation and serious negative economic developments that simmer underneath, while complacency drives prices ever upward until there is nothing below to support them.  And when the inevitable aha! - ohoh! - oh shit! - what the f*ck?! -  moment arrives everyone wants to jump off the trapeze at the same time, only to discover that the safety net that is composed entirely of "faith" is gone.

One of these days people will panic, start selling into a hollow market  that has no bids at all, take out sell stops in one fell swoop and force the cavalry to come to the rescue, later claiming that the plunge was - perhaps - some sort of a technical glitch.  

It looks to me, then, that yesterday was a dress rehearsal for a bona fide panic, even if it was exacerbated by the prevalence of automated electronic trading in non-traditional venues (i.e. outside of NYSE and NASDAQ) where liquidity suddenly disappeared (and why did liquidity suddenly disappear?).  Some will point fingers to such black-box trades in order to explain away the sudden plunge in prices, but my experience tells me it was otherwise.

(Here's a piece of information that may explain massively abrupt declines: thirty or forty years ago most shares were owned directly by individuals.  Today this figure has shrunk to around 20%, the rest controlled by professional money managers who, playing with Other Peoples' Money, mostly follow the same play-book.)

The real cause, in my opinion, is the same as a year or two ago: there's just too much debt in the system.  Governments and central banks took unto themselves the toxic and defaulted debt of the private  sector (mostly financial), but the entire debt is still there - albeit in different form.  It was, therefore, only a question of when and where its crushing weight would make itself felt once again.

Let me put it this way: we have painted the gorilla to match the curtains in an attempt to make him almost invisible to those willing to be fooled. But that doesn't mean he's not there.

Something totally unrelated, I just couldn't resist.  Or, maybe, it isn't unrelated?  The UK is about to have its first hung Parliament in 35 years.

The following picture is from yesterday's UK elections.  David Cameron, leader of the Tories (Conservatives) is at the podium, presumably giving a thank-you speech for being re-elected to his seat in Parliament.

Now, who's the guy behind him?  And... they call it the Conservative party?  OOOOkkkkkkk...
Photo: NY Times


  1. I'd guess that it was a Monster Raving Looney party candidate (not a Conservative),


  2. The reality in the UK is that nobody wanted change, just wanting to continue to believe in the debt soaked illusion of the past.

    The actions of the Labour government to try and hide the reality mean that the majority of the population have no real idea of the size of the problem that awaits.

    (For non-UK readers these actions have included paying the interest on mortgages of the recently unemployed for the past two years and the BoE £200Bn QE and £300Bn 'Special liquidity scheme' buying up Gilts and toxic mortgage assets)

    Re: Greece, I read somewhere yesterday that it's the French banks that are disproportionately on the hook for Greek sov. debt (one for Debra there I think)

    Oh, and thanks for the Lane-Fox book recommendation Hell, fascinating stuff.

  3. "(For non-UK readers these actions have included paying the interest on mortgages of the recently unemployed for the past two years "

    And some. For mortgages up to 200K, you get the interest paid at a rate of slightly above 6% (irrespective of whatever rate you actually have).

    I believe that pressure has also been applied to stop any repossessions,


  4. The man in the white suit is indeed the Monster Raving Loony Party candidate.

    (As the results are called, the candidates all stand around on stage. And as the winner gives their speech, they all stay there. Which is why they're sharing the stage.)

  5. Why, it's Boss Hogg. David's campaign financeer.

  6. Colonel Sanders

  7. Over here is La La Land, savings continues to fall.

    And in the UK, where 52% of all national consumption comes from the public purse (and this before bank looting is even included in those numbers), it will be interesting (sad) to see when push comes to shove who will find their chair out from under them when the music stops playing.

    One thing however, I seriously don't think we can predict who it will be.

    PS- Krugman thinks Greece will pull from the Euro anyway; if Krugman thinks this, you can bet others are thinking it too.

    Since I assume a bunch of you have money in European banks...

    1st rule of crises: don't panic

    2nd rule of crises: If you are going to panic, panic first.

  8. Tom, thanks for the UK voting map

    And I used to think America was relatively unique in its Red State- Blue State divide.

    It seems there are certain (self) similar properties to politics in distant lands after all.

  9. You can tell what political party the candidates are from from the ribbons they wear on their chest.

    Blue (conservative), Red (Labour), Green (Green), Yellow (Lib Dem) and so forth.

    Notice how the red and blue are the opposite of American political parties.

  10. I just found this this morning:

    As of about 6 p.m., all the officials knew was that there had been what one official called “a huge, anomalous, unexplained surge in selling, it looks like in Chicago, at about 2:45.” The source remained unknown, but it had apparently set off algorithmic trading strategies, which in turn rippled across everything, pushing trading out of whack and feeding on itself — until it started to reverse.

    U.S. Markets Plunge, Then Stage a Rebound


    A number of high-frequency firms stopped trading Thursday in the midst of the market plunge, possibly adding to the market's selloff.

    Tradebot Systems Inc., a large high-frequency firm based in Kansas City, Mo., closed down its computer trading systems when the Dow Jones Industrial Average had dropped about 500 points, said Dave Cummings, founder and chairman of the firm.

    Tradeworx Inc., a N.J. firm that operates a high-frequency fund, also stopped trading during the market turmoil, according to a person familiar with the firm.

    Mr. Cummings said Tradebot's system is designed to stop trading when the market becomes too volatile, ...

    Did Shutdowns Make Plunge Worse?

  11. Okie, I came across this

    ... And of course, no one complains about the computers when they are pushing the market up. ;-)

    I know, maybe we can solve this with congressional hearings on the dangers of programmed trades!

  12. Oh, by the way, I read yesterday that the drop on US markets coincided with a drop in the Euro.

    The TED spread also widened considerably.

  13. Thai,

    First my apologies for not having answered you in a older previous thread, but my time has been under pressure.

    Time for one small comment though:

    1st rule of crises: don't panic

    2nd rule of crises: If you are going to panic, panic first.

    I've been telling close friends the following:

    1. Have some money at hand.

    2. If you see people running to the bank, run to the supermarket with money stored in point 1.

  14. That's the British "Drill baby drill" mascot. You know we all have to have clowns for entertainment.

  15. slightly off topic...:

    Let me let you in on a little fact. Yesterday's event was a cyber attack by China and NK.... They started to set it up early Wed.... Their target was the mini s&p....

    So far from the looks of it, they have succeeded as everyone seems to be pointing the finger in every other direction....... Just do a quick investigation and you will see how all the buying beneath the market was matched with sell stop orders down to "no man's land", where rational minds found it inconceivable to have placed standing buy orders.

    They intentional picked P&G as the catalyst for 2 reasons.... 1. the weight it would place on the index and 2. it's relative lack of liquidity off of the NYSE.

    Yesterday's event was no accident, no fat finger, no computer glitch. It was a sophisticated bear raid, executed with perfect timing, by brilliant minds.



  16. Can someone explain to me what is happening during the 15 minutes that is recorded here?

    From Zero Hedge:

    Market Crash from the trade floor (MP3 file)

  17. @Econolicious:

    What are the ramifications if we find that China has executed a cyber attack on our financial markets?

    I shudder to even bring such a thing up, because I think I already know the answer.

    I am trying to keep in mind Occam's Razor, rather than looking to conspiracy theories. (Leave the tin foil hat in the closet for now, please.)

  18. Fat finger, my a$$!!! China conspiracy... interesting (but I doubt it)

    If you check out the Down volume vs up volume yesterday... and check out the times, you'd see pressure didn't start at 2.45!!!

    Here’s my take. As I've said yesterday to everyone I spoke with… algo trading programs kicked in. To boot, all of your MF / Pen net subscription/redemptions also kick in between 2:30 – 3pm.

    Combine Selling Algo’s with large redemptions from your institutions, then add it shutdowns of those same high speed algo’s (which every high speed trader did since buys were being triggered on the drop…)

    …and viola. You have huge sales with 0 bids. There’s no conspiracy here.

    To boot, you had not only institutional cash, but all fgn gov't cash in a full on sprint to get T's yesterday. That's more cash that was not available for buying...

    OK... just got news that they've evacuated downstairs... (I'm at north Times square)

    All the best,
    Miss America - Rich Hartmann

    p.s. Not sure if anyone caught this pice I just did... (more like a rant. I waited a week to publish it, hoping someone else would bring this crap to light... but nada!)

  19. Conspiracy, tin foil hat, call it what you want... I don't care, you can take it or leave it.... IT DON'T MATTER TO ME.....! All I know is what I saw and how I played it, yesterday was the best year I've ever had and trust me when I tell you that I've been doing this for a very long time......

    If I would have had the resources, I would have done it myself. Perhaps not, I'm not a sovereign state that requires respect.

    Now, having said that, it's very unlikely that you will hear any official announcements from the reg agencies. I mean really..... What are they going to do about it....? Other than whine....

    Perhaps it was Russian renegades however I doubt it. China doesn't conspire, China executes, they are single minded and they have the resources, here and abroad. At aprox. 13.00 ET yesterday, asymmetric, pyramid scale down buy orders were being entered in the minis with 5, 6 and 7 point gaps. All i know is that the HFT trade got nailed to the wall yesterday and again today, they don't know when to shut down. Someone figured out how to nail them and they are going to be scratching their heads all weekend wondering how someone reversed the algorithm on them.

    Best regards,


  20. @ Econo...

    I''m not saying your wrong. I have NO facts to back my case that it wasn't China...

    So you could be right? It is interesting.

    ...but many people don't realize that 2:30 to 3pm is when The Mutual and Pension Funds get their figures on what their net Sub/redm for the day will be.

    Ya see, early morning, the traders get the projections, and the custodians/accountants provide them with the days cash availability. They trade!

    Come 2:30, Redm/Subs come in, and PM's need to figure out what they are rolling over in Repo's, CD's and Time deposits. Likewise, their STiFs, and various custodial funds need to be aligned to not be OD. At the same time, the banks and the broker houses are doing the same. The brokers are seeing how much they need to borrow to cover the days activity.

    ...with all this said. I think yesterday's fear (especially on the lead up to yesterday) had redms trumping subs big time. I can say, I too shifted my entire 401k to MMKTs/PIMCOBDs. I was not alone.

    Credit agrigole was buying Treasuries from everyone they could!!! Jap banks were killing it because they own and lend tons of the stuff. (Jap banks are still holding T's from the 70's and 80's!!! I don't get the past redeption stuff... but somehow they are grandfathered in on some weird clauses...)

    Anyway... what I saw happening was a liquidity freeze. Couple that with the bot trades, and the shut downs... and you've got 0 bids to purchase.

    Am I righyt???
    I don't know. I'm usually pretty decent at getting this stuff right.

    ..but I am not 100%

    All the best, & Le cho ta hoho. Guy jo loley (Chinese for - you're doing a great job, keep up the good work)
    MA - RH

  21. ".......Come 2:30, Redm/Subs come in, and PM's need to figure out what they are rolling over in Repo's, CD's and Time deposits. Likewise, their STiFs, and various custodial funds need to be aligned to not be OD. At the same time, the banks and the broker houses are doing the same. The brokers are seeing how much they need to borrow to cover the days activity....."

    absolutely, no debate there.... this is every day..... and plays well under stress.... a little nudge goes a long way..... if you match the buying with selling it nets out to zero ie open space fast gaps in hyper space, with lots of volume, however you can't do it in the pits because you cant go through bidders limits because they hand you a beating.... the electronic servers execute without whining.... that's the beauty of the beast....



  22. Redm/Subs come in, and PM's need to figure out what they are rolling over in Repo's, CD's and Time deposits. Likewise, their STiFs, and various custodial funds need to be aligned to not be OD


    Could you please define these acronyms and abbreviations for those of us who don't work on Wall Street?

    Redm, STiFs, OD, Time deposites, Repo's, CD

    I think I know what Repo's are only because it became part of the "Repo 105" story. I assume CDs are "certificate of deposit?" The rest of them I can only guess at and Google is no help.

  23. Can someone explain to me what is happening during the 15 minutes that is recorded here?

    From Zero Hedge:

    Market Crash from the trade floor (MP3 file)

    Here is an answer to my question by the guy on the mp3 file:

    Ben Lichtenstein on Business News Network

  24. OkieLawyer:

    Sounds like the guy is posting customers on the phone, many of the floor brokers on the exchange floor have phone clerks that are like the color commentators of a sporting event. It keeps the direct clients (big shooters) happy. However, as I mentioned before, that's not where the real action took place, they couldn't even keep up with it on the actual exchange..... The real action was electronic, in the s&p minis... Each mini is half the size of a floor traded s&p, we spend our day doing arbs when the market is slow.... It's a way to kill time at the desk. However, on Thursday, it felt like Tim Geithner sent me an invitation the read...

    "...I've instructed the Chairman of the Federal Reserve to open up all the vaults, please, do drop by and help yourself to whatever you want...."

    ".... SEE ENCLOSED VIP PASS...."

    I've been spoiled for the rest of my life...

    Best regards,


  25. Econolicious:

    I will have to study up on "mini S&P." I am curious on how that is traded.

    I am assuming that "arbs" means arbitrages. I was always under the impression that arbitrage opportunities were very rare.

    However, on Thursday, it felt like Tim Geithner sent me an invitation the read...

    Did you mean that read...? I guess you are trying to say that you did very well during the crash?

    This is all so fascinating to me. I would like to learn more about it.

  26. This is choice: "The Chinese don't conspire, they execute." Yes, they execute people, their own, in large numbers. As for pulling off such an audacious gambit, anything's possible, but I strongly suspect your feverish imagination has got the best of you. In the meantime I suggest you contact the media and the authorities and make your case formally. Let us know how it goes.

  27. My tooth was buzzing a little as well Edwardo

    But congratulations on your big winnings Eco never the less.

    ... And in the zero-sum nature of the market, please enjoy your next meal as you remember a small amount of it came from my retirement plan.

    Bon Appetite

  28. Tiago, I'm sure your already aware but just in case...

    I was impressed to learn Portugal is loaning Greece money at interest rates far below the rate it borrows the very money it needs to loan Greece.

    We live in interesting times

  29. @ Okie.

    Forget Repo 105. That has nothing to do with the mutual fund / pension Fd world of Money markets.

    (it's a big deal on the broker dealer side, but it's not anything to do with this. (It's more of an off balance sheet bookkeeping loophole for quarter ends.))

    Repo. - Tri Party repos, CDs- Cert of Depot, and ECD - European cert of Dep, TD = Time Deposits, STiF - Short Term investment Funds.

    Pretty much what these come down to are based on how the particular fund is set up. Certain funds have limits and restriction on how much they can have in each type of vehicle, as well as restrictions of how much they can have against a particular broker, and likewise against a particular typ of collateral.

    These vehicles ARE the most liquid form of cash floating around in the investment world. 90% are overnight investments. (the MF and PenFds can't just keep their money in cash. THAT IS A HUGE NO NO! (In the relationship management world, try to explain to the public in a perspectus why you: had cash, AND DID NOT INVEST IT?!?!?! It's egg on the RM and the fund's face. Why would the public put money in to sit, when you can do that on your own???) So that money has to invest. (even if the overnight investment is technically "breaking the buck" because RoI is so low due to the Int rate beiong so low, and the fees of the transactions being takin out in soft dollars.)

    That ENOURMOUS bundle of money is liquid in overnight form. and the Broker dealers "B/D" count on this. They set aside all their leveraged collateral to borrow against this nightly. (this is what JPMChase pulled from Lehman!)

    ...anyhow, this is what I suspect dried up instantly. with net redm. For example, When I used to do custody work for Fidelity, I would typically sign off on about $1.5 billion of wires DAILY, going out to the vehicles to the different B/D's. That was a typical day, and I was co managing (so the other manager was moving the other half. We were 1 of 30 groups at BNY doing the same thing... ...and this was just BNY.

    OK... gotta go.
    All the best,
    MA - RH

  30. Thai,

    Yes, we are lending circa 2B (~10% of our yearly market financing) at a rate below what we are able to get financed on the market.

    What troubles me the most is not that. It is the total opacity of local banks. We know that private debt is around 2/3 times more than state debt. But, for mostly ideological reasons, nobody discusses that.

    Euro banks are much more opaque than Gringo banks, and southern European even worse. I have no idea on the time to maturity of the debt of PT banks, no idea on how they are marking their assets, nothing. Maybe they are OK, as they say they are. Should I trust?

    The only thing I know is: if a big local bank blows, there is no way the sovereign can protect it without entering an abyss (which it might be getting into, anyway).

    In fact a possible black swan in Europe is precisely that: a big bank blows or a big important company (train, utility, ...) cannot roll its debt.

  31. With apologies to Hellasious, I read your posting and your description "the inevitable aha! - oh shit!..." brought to mind the image of a drunk who's just reached the point where his body/stomach revolts at all of the alcohol. I couldn't resist the urge to adapt your story to that of a person who has just reached that point. Not speaking from experience of course. I know this guy... 8^) Hopefully you'll find it amusing.

    Hangovers are not created in a vacuum; they are born from a mixture of over-consumption of products that can cause harm in large quantities but that seem, at least initially, to provide only feelings of euphoria. And when the inevitable Uurp! – ohhh! – Oh shit! – Baaaarrrrffff! moment arrives everyone wants to switch to coffee at the same time only to discover the damage is already done; the stomach has started to revolt, cold sweats, heaves. The question is no longer if but when?

    One of these days people will swear never to drink again. “Never again and I mean it this time!” And yet we all know they’ll be back soon enough in worse shape, claiming this time is different from all the others.

    It seems then this time was a dress rehearsal for the last time. It’s only a matter of time before this leads to a car wreck, a fatality, a ruined life, perhaps all of them. Some will point fingers at those who should have known, who could have acted…

  32. Thai:

    "....... And in the zero-sum nature of the market, please enjoy your next meal as you remember a small amount of it came from my retirement plan.

    Bon Appetite...."

    Adam Smith gave us the concept of an "invisible hand" that giveth and that's that's how we have conceptionlized that "hand" with our delusional western cultural optimism... The "invisible hand" also taketh way..... "Retirement plan" is an oxymoron. There's an old saying in the pits of the exchanges..... "A trader that dies with money in the bank, died a pre-mature death...." The name of the game is to go out even....

    "All glory is fleeting....."

    Best regards,


  33. @Econolicious

    Re: everything you said except this one little statement "The name of the game is to go out even...."

    Amen and fair enough

    You see, I've read your comments on this blog and elsewhere for years now. So I don't believe for a moment you really believe this last statement anywhere except in the traders break room.

    ... I'm not sure we have the exact same vision of what we want the planet to look like, but I do know you definitely want the world to be a better place as much as I when you leave it.

    So as I (honestly) said before: "Bon Appetite"

    Be well

  34. @ Okie…

    I could be 100% wrong. I’m 100% speculating with my theory regarding last week’s plunge. …but my “speculation” is based on (from my experience / knowledge) what I would think is “common sense” to a person with my specific background.

    (Funny analogy based on a true event. About 3 years ago, I went to park my car by the bus stop on a VERY STORMY morning. As I drove down Ridge Blvd from 89th st to 69th st (where the bus stop was), I got to 73rd st, and saw lots of leaves on the ground… Got to 72nd st and saw branches on the ground… Got to 71st St and 70th st and saw SEVERE DAMAGE. Trees down, roofs ripped up and people poking their head out their doors looking dumbfounded. Passed by Ovington and Bay Ridge Ave, and there were branches and leaves down… Parked my car on 69th, where there was no sign of any damage. Myself and others walked back to 70th and surveyed the damage up and down the block. We all concluded… A TORNADO JUST RIPPED THROUGH BROOKLYN!?!?!?! We were sure of it. It was 8am.

    Later that night, at about 7 or 8pm, the national weather service, and our local authorities concluded that a Tornado had indeed touched down. 12 hours later!!! ??? !!!)

    What I said immediately after the drop, and even posted was a similar severe storm.

    You have Algo trading bots in place. They are programmed. They don’t think. During our crisis 2 years ago, our quants realize their faults in programming when buys would trigger during a true collapsing market. My “assumption” is that the quants have now plugged in a short circuit at a certain point. As algo’s and Quant go, they probably “think” alike.

    Market activity was DOWN all day, from the get go. Sells/downs HEAVILY outnumbered the Buys. Combine that pressure, with redms in the Money Market world (remember, those MMKTs are the oxygen, lifeblood of the entire market) …and now you have the size of the days drop starting to trigger these new short circuits on the algos…

    Perfect storm. There are open sale orders. …and high speed bit/algos are not buying because they are tripping circuits. Then you’ve got MMKT cash coming in short, so you big institutions aren’t just lumping buys either. The NEED cash.

    0 bids on buys. Yet there are open sale orders that need filling (but the sells aren’t “thinking” they’re just programmed to do their function, which on the sell order was to sell.) Was it manipulation??? …or poor planning? or those damn variables?

    All the best,