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2021 Year in Review: Crisis of Authority and the Age of Narratives

January 9, 2022

Every year, friend-of-the-site David Collum writes a detailed “Year in Review” synopsis full of keen perspective and plenty of wit. This year is no exception. Poignant and delightfully acerbic when necessary, considering the troubling times. As with past years, he selected Peak Prosperity as the site where it is published in full. It is longer than our usual posts, but worth the time to read in full. This is Part 1.

Introduction

Dave: You do lack self control, but I learned and laughed making my way thru this.

~ Larry Summers (@LHSummers), former Secretary of the Treasury

I’ve been trying to reach you about your car’s extended warranty. What began more than a dozen years ago as a synopsis of the year’s events in markets and finance for a few friends morphed beyond my control into a Year in Review (YIR)—an attempt to chronicle human folly and world events for the entire year. It captures key moments before they slip into the brain fog. The process of trying to write a coherent narrative helps me better understand WTF just happened and seminal moments that catch my eye.

By far my favorite end-of-year recap for the last ten years. Finished it yesterday. Once again David hasn’t disappointed. He’s on my I want to go to dinner with list.

~ Jim Pallotta (@jimpallotta13), money manager and former owner of Boston Celtics

I’m game, Jim, even if it’s just a pretzel, nachos, and a brewski. The title, “Crisis of Authority,” is a double entendre. On the one hand, previously trusted authorities that we relied on to better understand the world are long gone. Edward R. Murrow, Walter Cronkite, and Tim Russert have been replaced with Chris Cuomo, Don Lemon, and Brian Stelter. Oops. Scratch Chris Cuomo..

…click on the above link to read the rest of the article…

April Cheers Could Bring May Tears, Have a Look…

April 21, 2016

April Cheers Could Bring May Tears, Have a Look…

When people stop trusting a market they stop using that market.  Trust is at near 20 year lows.  The conundrum is that as volumes decline it becomes ever easier for price insensitive participants to manipulate the market only furthering the distrust.  This first three charts depict the deterioration of volumes and capital outflows in the face of a ‘7 year bull’.  A hard to explain phenomenon.

Screen Shot 2016-04-21 at 12.52.14 PM

Raw Price to Monthly Volume:

Screen Shot 2016-04-21 at 11.33.29 AM

And the capital outflows….

Screen Shot 2016-04-21 at 11.58.31 AM

Now I heard Rick Santelli yesterday discuss whether the market can continue its run to new all time highs.  And with the obvious caveat of completely accepting that the fundamentals no longer have any correlation or relevance whatsoever to the market then yes, Santelli believes the market can reach all new highs.  On what, one may reasonably ask?  Well “kinetic energy”, he says, otherwise known as ‘Animal Spirits’ on Wall Street.

But it’s not so much kinetic energy that is levitating this market devoid of any supportive fundamentals, it is the fact that volumes are thin enough and technology has progressed enough that it has become entirely viable for existing policy champions (NY Fed/Citadel algos) to halt even drastic downward momentum runs and then for corporate treasury departments to grind the markets higher through record buybacks.  What we have left is a market of price insensitive participants i.e. corporate treasury departments and the Fed’s cronies (who incidentally make a fortune enacting the manipulation on behalf of the Fed).

Now I know that the last few remaining true believers, because I’ve talked to several, will suggest this explanation is just fancy talk.  But I ask you to look at the above charts and explain to me how else a market runs higher for 7 years in the face of the capital and volume exodus that has taken place?

…click on the above link to read the rest of the article…

Eric Hunsader: The Financial System is ‘Absolutely, Positively Rigged’

April 19, 2016

Eric Hunsader: The Financial System is ‘Absolutely, Positively Rigged’

And the abuses are getting worse, not better

Eric Hunsader, founder of Nanex, has been at the vanguard of warning about the dangers and the rampant fraud that the rise of high-frequency trading (HFT) algorithims have let loose in today’s financial markets.

While he usually feels like a lone voice in a world happy to deceive itself, he was shocked to receive a $750,000 whistleblower award from the SEC for his efforts. He’s been sadly less shocked to see that since the award was publicly announced, the abuses he reported have only become more extreme and frequent.

Of the situation that led to his award, he says:

The folks at the NYSE were selling their direct feed for north of $30,000 a month versus the SIP which is under a thousand dollars a month. Their customers are not buying it because it has that much more rich data. The thing that makes it worth $29,000 more is that it is faster, but that is illegal. Up until this point they deny that that is the case. And somehow it works. So the exchanges make all their money from their highest paying customers which are the high frequency traders. And the high frequency traders pay the exchanges exorbitant amounts of money to have a slight advantage.

That’s how the whole system works. It is absolutely, positively rigged. There is no question about it. It is rigged on many different levels in many different ways — for example, no retail order ever gets to see the light of day of the stock exchange. That’s one of the many eye openers. People who aren’t pros in the market don’t realize that it’s all a rigged game.

…click on the above link to read the rest of the article…

A Desperate China Begged Fed For “Plunge Protection Playbook” As Its Market Crashed

March 21, 2016

A Desperate China Begged Fed For “Plunge Protection Playbook” As Its Market Crashed

Last June, China’s stock market miracle ended in tears.

The SHCOMP’s inexorable, parabolic ascent was to a large degree facilitated by an explosion of margin debt, the likes of which could not be found in any other major market across the globe. For instance, by the end of June, the outstanding balance of margin transactions as a percentage of the SHCOMP’s free float market cap was nearly 14% compared to just 5.5% for the S&P and less than 1% for the TOPIX.

A dramatic unwind in the half dozen backdoor margin lending channels that had funneled an additional CNY1.5 trillion into equities brought the party to a thunderous end and by late July, the market was off by more than 30% from its peak.

Chinese officials had already begun to panic by mid-month and then, on the 27th, the bottom fell out.

A harrowing bout of late day selling led the SHCOMP to post its worst one-day drop since February of 2007 and its second worst single session decline in history as the market collapsed by 8.5%.

More than two-thirds of stocks in the index traded limit down that day.

At that point, China was out of ideas. It had been nearly three weeks since Beijing announced it would inject capital into China Securities Finance Corp., effectively giving the PBoC a mandate to not only underwrite brokers’ margin lending businesses but in fact to buy A-shares directly, and nothing seemed to be working to arrest the slide.

Indeed, starting on June 27 (by which time the Shenzhen had fallen by more than 20% from its peak) the PBoC unleashed an eye watering array of measures that encompassed everything from an RRR cut to the easing of regulations to state mandated investments by pension funds to verbal interventions in the form of threats against “malicious” shorts. Nothing was working.

…click on the above link to read the rest of the article…

Wall Street Banks Admit They Rigged CDS Prices Too

October 2, 2015

Wall Street Banks Admit They Rigged CDS Prices Too

Back in June, we noted that a group of investors which included hedge funds, pension funds, university endowments, and others were looking to push forward with a lawsuit that alleged Wall Street had conspired to limit competition in the CDS market.

Of course the whole case was based on what amounts to tautological reasoning.

That is, everyone knows that Markit effectively monopolized the CDS market and because Markit was owned by Wall Street, it was self evident that big banks both monopolized and manipulated the market. 

Amusingly, one of the firms that plaintiffs alleged was kept out of the credit default swap market as a result of Wall Street’s absolute stranglehold was Citadel. As we joked a few months back, this meant that by conspiring to keep the Fed’s plunge protection team shut out in 2008, Markit and Wall Street robbed the world of the chance to see what happens when VIX 90 meets HFT, meets CDS market making.

In any event, earlier this month, the Street agreed to settle for nearly $2 billion and today we learn that none other than JP Morgan – whose offshore, taxpayer sponsored hedge fund at CIO seems to have quite a bit of trouble trading CDX without losing billions – is set to bear the brunt of the pain. Here’s Bloomberg:

JPMorgan Chase & Co. is set to pay almost a third of a $1.86 billion settlement to resolve accusations that a dozen big banks conspired to limit competition in the credit-default swaps market, according to people briefed on terms of the deal.

JPMorgan is paying $595 million, with the lender’s portion of the accord largely based on the plaintiffs’ measure of market share, said the people, who asked not to be identified because the firms haven’t disclosed how they’re splitting costs. The settlement also enacts reforms making it easier for electronic-trading platforms to enter the CDS market, according to a statement Thursday from the attorneys for the plaintiffs, which include the Los Angeles County Employees Retirement Association.

…click on the above link to read the rest of the article…

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