Initial JPM thoughts

First, while this loss is a one time adjustment to capital, the use of this type of ‘trading’ as a profit center is probably a thing of the past.

Additionally, my guess is the whale has been liquidating a long oil position (and maybe paying on long bma ratios) for the last several weeks.

That is, this announcement probably came after their liquidations were pretty much over to minimize losses.

This means the market effects are probably behind us.

Psychopaths On Wall Street

I’d guess closer to 100%.
;)

The Shocking Statistic About Psychopaths On Wall Street

By Sam Ro

February 28 — The March/April issue of the CFA Magazine has a fascinating article titled “The Financial Psychopath Next Door.”

A shocking statistic jumped out at us. From the article:

Studies conducted by Canadian forensic psychologist Robert Hare indicate that about 1 percent of the general population can be categorized as psychopathic, but the prevalence rate in the financial services industry is 10 percent. And Christopher Bayer believes, based on his experience, that the rate is higher.

Bayer is a well-known psychologist who provides therapy to Wall Street traders.

The type of psychopath the author is writing about is characterized by compulsive gambling. And the Wall Street psychopath doesn’t necessarily show up to his or her first day of work in this condition. From the article:

Taken to the extreme, some traders become compulsive gamblers. The behavior is often latent–neither they nor anyone else knows they have this propensity. They hide small losses and keep doubling their position to try to eliminate them. When those trades turn sour, they dig themselves into a deeper hole and deny ay wrongdoing or failure. They rationalize by telling themselves that poor investment decisions are an occupational hazard. They lie to family members or others to conceal the extent of their involvement with gambling and commit forgery, fraud, theft, and embezzlement to support their habit.

A little more color on these particular types of psychopaths:

These “financial psychopaths” generally lack empathy and interest in what other people feel or think. At the same time, they display an abundance of charm, charisma, intelligence, credentials, an unparalleled capacity for lying, fabrication, adn manipulation, and a drive for thrill seeking.

A financial psychopath can present as a perfect well-rounded job candidate, CEO, manager, co-worker, and team member because their destructive characteristics are practically invisible. They flourish in fast-paced industries and are experts in taking advantage of company systems and processes as well as exploiting communication weaknesses and promoting interpersonal conflicts.

Unfortunately–writes the author–the best candidates for many Wall Street jobs exhibit the traits of a financial psychopath.

Volatility article in Markets Media

Thanks to Will Thompson. I got a nice mention here explaining how tail hedging can cause the kind of volatility we are now seeing, much like the crash of 1987:

Volatility: An Asset Class or Quick Buck?

Posted on August 8, 2011

The CBOE Volatility Index, commonly referred to as the market’s “fear index,” has had a one-day range of 27.54 to 39.25. As the past week showcases a near 30 percent change in the VIX, market participants wonder if the great volatility era has returned.

“Institutions have increased interest in volatility, not the VIX per se, but more so, hedging tail risk,” said Warren Mosler, co-founder of AVM L.P, a provider of brokerage, trading and administrative services to its affiliates, one of which is eponymous hedge fund III Associates, based in Boca Raton, Florida.
Mosler, currently a resident of the U.S. Virgin Islands, had run for the U.S. Senate in 2010, and is a published economist.

“There are programs out there to hedge tail risk when extremes happen because people want to be protected,” Mosler told Markets Media. “Out of the money options have gone way up, and they’re going to stay high for a long time. There has been a real shift of money into these strategies.”

Ironically, Mosler noted that increasingly used practices, such as tail hedging are propelling more volatility in the markets, causing a pro-cyclical self-fulfilling prophecy in the markets. Investors create fear to protect themselves from fear.

Despite an increased institutional interest in utilizing volatility, it remains to be a measure of protection, not a standalone asset class, for fund managers.
Volatility is traded more but it’s not an asset class by traditional definition, according to Mosler. “It’s a money-making activity, a way to hedge a position, a way to express one’s view.”

a word on tail hedging

Just realized there’s been enormous institutional tail hedging I forgot about as per the elevated vol skews from out of the money option buying that that triggers accelerating selling as price falls.

Much like the 1987 crash.

Should have picked this dynamic up sooner but that kind of unstable equilibrium can’t be forecast.

The risk is just always there.
And it can work in both directions.

Zoellick Sees ‘Elephant,’ Not Endorsing Gold Standard

Back pedaling from yesterday’s remarks, but just getting the fish hook in deeper.

Gold is a non financial asset,not an ‘alternative monetary asset’

Starting to look like the QE fairy dust is wearing off.
The dollar selling was the focus of the ‘risk on’ hysteria, and it looks like the dollar may have stopped going down.

From what I see, the risk positions mostly look like short dollar bets, including long gold, commodities, and commodity currencies, etc. And long equity trades have had support from weak dollar assumptions as well.

I’ve yet to see any fundamental reason for the dollar weakness apart from misunderstanding QE. In fact, the firming US economy continues to lower the US budget deficit modestly, which tightens things up a bit, and also attracts foreign direct investment and financial investment. (I recall in the late 90’s reading that US FDI was the highest in the world, and it sure wasn’t due to cheap labor.)

So I’m watching for what’s potentially a dramatic dollar reversal here and all the other reversals that will come with it.

Zoellick Sees ‘Elephant,’ Not Endorsing Gold Standard

By Robin Knight

November 10 (Bloomberg) — Gold is the “elephant in the room” that must be addressed by policymakers, as it’s being used as an alternative monetary asset because of unease about the strength of developed economies, Robert Zoellick, president of the World Bank, told CNBC Wednesday.

What “the price of gold has been telling people is that there is a lack of confidence in some of the fundamentals growth policies,” Zoellick said.

“The golden elephant in the room, whether people recognize it or not, is being used as an alternative monetary asset,” he said.

cross currents

I wasn’t sure whether to send this, as it reveals my lack of clarity on current events, but decided to send it to make the point.

Here’s what I see:

Markets are already discounting a large QE and are also discounting that QE actually makes a difference:

The dollar went down
Gold went up
Commodities went up
Interest rates fell
Stocks went up

So we have a big ‘buy the rumor sell the news’ leading up to the Fed meeting.

AND a potential ‘QE doesn’t work anyway’ let down.

I’ve never seen a more confused set of circumstances.
I recommend all traders stay out of this one.
Making money on this probably falls into the ‘better lucky than good’ category.

One of two things will happen- QE will or will not happen, data dependent

1. Good news for the economy means QE might not happen.

So the dollar reverses, and it went down for the wrong reason anyway, as QE fundamentally doesn’t alter the dollar, so it’s probably net short.

But how about the euro? It’s fundamentally strong with no end in sight, and good econ news helps them as much as anyone.
But an over sold dollar reversing can rally it against most everything while the unwinding goes on.

Stocks up, as that would be good news for stocks?
Or stocks down as rates go up and the dollar goes up, and the world goes to ‘risk off mode?’
(Stocks were helped by the weak dollar and lower rates.)

Is good econ news good or bad for gold? More demand in general is good, but less risk, less fear, and a strong dollar hurts. And it could be over bought in the QE craze as QE in fact has nothing to do with demand, currencies, or gold. It’s just a duration shift for net financial assets.

10 year notes? QE buying reverses and they go higher in yield.
But strong dollar and weak commodities and weak stocks and the Fed still failing on both mandates means low for long is still in place, even without QE.

It’s been strange enough that rates fell with a weak dollar (inflation) and rising commodities, so who knows what actually happens when whatever has been going on is faced with some combo of no QE and/or the realization that QE doesn’t do anything of consequence.

2. Bad news for the economy means QE happens.

Dollar keep falling? Or already discounted?
Gold and commodities keep rising? On bad econ news? And when already discounting QE working?
Stocks keep rising? On bad econ news? And already discounting QE working?

To a point, based on the presumption that QE actually works to add to domestic demand.
But has it already been discounted? And if markets believe QE works won’t they discount the Fed hiking after it works and the economy ‘takes off’???

The answer?

Don’t think of the medium term, just the short term.
Short term technicals will rule due to what’s been discounted.

The dollar is the pivot point, as it’s moved the most and for the wrong reason (except maybe vs the euro).

If nothing else, the dollar will appreciate if:

No QE due to good econ news
Buy the rumor sell the news/already been discounted forces
There is awareness that QE doesn’t do anything in any case
Foreign govt buying (currency war, etc.)

The dollar continues to fall if QE is larger than expected and the belief that it does something holds.

Recent economic news and Fed speak indicate that is not likely.

The other short term market moves will be reactions to the dollar move, and not so much reactions to what made the dollar move.

I do continue to like BMA forwards.
The one thing there is to be know is that high end marginal tax rates won’t go down, and that forward libor rates won’t fall below 50 bp.

State of the Hedge Fund Industry Conference – Sept 14 – NYC


State of the Hedge Fund Industry

September 14, 2010, 1pm-5pm followed by cocktail reception

New York City

Join us as distinguished experts from the hedge fund industry speak candidly about the biggest issues affecting managers today. Speakers will discuss challenges and opportunities in a post-financial crisis world, including the new—more difficult—capital raising environment; what smaller firms can do to ‘institutionalize’ themselves; and how seeding firms are playing a important role as the fund of funds model wavers. Other topics include regulatory reform and what it means for hedge funds, and a discussion about where alpha can be found going forward.

Co-hosted by FINalternatives

Agenda

1:00 – 1:30 Registration

1:30 – 2:00 State of the Industry, State of the Markets

2:10 – 3:00 Panel One: Growing Your Assets

JOHN SEIGENTHALER, CEO-NY, Seigenthaler Public Relations (former NBC News Anchor) – Moderator

ALAN GLATT, Managing Partner, Protocol Capital Management

ANTHONY SCARAMUCCI, Managing Partner, SkyBridge Capital

DANIEL SOLOMON, President and COO, Lyford Group International

3:00 – 3:30 Coffee Break

3:30 – 4:20 Panel Two: Post-Crisis: Challenges And Opportunities

SIMON FLUDGATE, Partner, Aksia

Additional Speakers to be announced

4:30 – 5:00 Keynote Speaker

WARREN MOSLER, Founder and Principal, III Offshore Advisors

5:00 – 6:30 Cocktail Reception

updates

Markets are getting closer to the idea that:

Interest rates don’t/won’t help
QE doesn’t/won’t help

With the larger point being coming to terms with the possibility the Fed can’t inflate, or do much of anything that actually matters for the real economy, except maybe fund zombie entities to keep them from failing.

So bonds are throwing in the inflation towel and yields are coming down.
The dollar is going up with miles to go before ppp is reached.
Gold is well off the highs and being held up probably by europeans running from the euro to dollars and a bit of gold.

(***Bernanke just again testified that a contango in futures prices is a reasonable forecast of higher prices down the road. So much for the credibility of their inflation forecast)

Meanwhile the eurozone is continuing it’s methodical implosion with no credible response in sight.
And the realization that all eurozone bank deposits are only insured by the national govts has yet to hit the headlines.

The Obama administration believes the US Treasury is ‘out of money’ and we have to borrow from China to spend and leave that for our children to pay back.
So any kind of meaningful US fiscal response seems off the table.

The American economy works best when people working for a living make enough to be able to one way or another buy their own output, and business competes for their dollars. It’s not happening.

We are grossly overtaxed for current circumstances with no meaningful relief in sight.

Lots of reasons to stay on the sidelines.

UN calling trade deficit a privilege


[Skip to the end]

Interesting! At least a small sign of the world beginning to figure it all out.

>   
>   The United Nations called on Tuesday for a new global reserve currency to end dollar
>   supremacy which has allowed the United States the “privilege” of building a huge trade
>   deficit.
>   


UN calls for new reserve currency

Oct. 6 (Breitbart) — The United Nations called on Tuesday for a new global reserve currency to end dollar supremacy which has allowed the United States the “privilege” of building a huge trade deficit.

“Important progress in managing imbalances can be made by reducing the reserve currency country?s ‘privilege’ to run external deficits in order to provide international liquidity,” UN undersecretary-general for economic and social affairs, Sha Zukang, said.

Speaking at the annual meetings of the International Monetary Fund and World Bank in Istanbul, he said: “It is timely to emphasise that such a system also creates a more equitable method of sharing the seigniorage derived from providing global liquidity.”

He said: “Greater use of a truly global reserve currency, such as the IMF?s special drawing rights (SDRs), enables the seigniorage gained to be deployed for development purposes,” he said.

The SDRs are the asset used in IMF transactions and are based on a basket of four currencies — the dollar, euro, yen and pound — which is calculated daily.

China had called in March for a new dominant world reserve currency instead of the dollar, in a system within the framework of the Washington-based IMF.


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