Wednesday, December 16, 2009

See No Evil, Hear No Evil

So Japanese banks rose 7% last night in the face of a huge impending share offering by Mitsubish/UFJ. What gives? Well, the Nikkei reported that the BIS will smooth the path towards implementing Basel II by phasing in the stricter requirements over a 10-20 year horizon.

Ten to twenty years? Are you effing kidding me? What's the point of implementing new rules if they won't bite before another two or three crises have erupted and the Macro Boys (current ages: seven and six) will be old enough to have their bonuses garnisheed by bankrupt governments?

Sweet Lord almighty, it's enough to make one weep. Macro Man is sitting here, thinking about investment themes for next year (he has a roundtable lunch today) , and he feels like he's embroiled in some weird fairy-tale cross between Pinnochio and the Emperor's new clothes.

From suspension of marking-to-market to extend-and-pretend to setting LIBOR rates at levels no bank can borrow at to now, evidently, relaxing capital requirements because it might crimp somebody's style, Macro Man feels like he's embroiled in a world where the consensus has agreed to try and bluff their way out of crisis.

Going all-in whilst holding a pair of twos might occasionally work at the poker table, and indeed it has worked pretty well for the last few quarters. But ultimately it's a weak hand that is pretty likely to fail if the holder is forced to show his cards.

The people who called this mess correctly- your Meredith Whitneys, your Laurie Goodmans- are still bearish, though who the hell knows what it will take for reality to bite (though Macro Man cannot help but notice that the BKX is sagging a bit...perhaps heralding wider bank credit premia next year!?!?!?)
Perhaps the trigger will be a raft of lawsuits from angry investors- maybe Abu Dhabi is trying to get Citi to foot the bill for the Dubai slush fund? Or maybe it will be a withdrawal of liquidity
from major central banks. Today sees the last ECB LTRO- given the indexation announced the other week, takeup is expected to be modest. And of course this evening, the Fed will announce its policy decision to change nothing.

Heaven forbid that anyone rock the boat! Macro Man does think that you'll see a few more jitters next year than you have for the last nine months, even though global policymakers (pictured, left) do their best to prevent it.....


Anonymous said...

Sell DJS Banks!!

You gotta know when to hold 'em... said...

You've mentioned something there which I've often wondered about; namely, how valuable are poker skills in a trading room?

I think the discipline you can learn and the bankroll management skills are great, but what are your thougths beyond this?

Macro Man said...

I'm actually not much of a poker guy at all...but I can see why it would be good practice for someone like a market maker, where anticipating what the customer wants can help you read the price a bit. For trading positions, the stuff that you mention-risk control, etc- is useful, but I tend to think its benefits are probably overstated by its adherants....

Steve said...

I don't get it either MM. I suppose we're all living in a fiat world, and it's the governments' to save.

Gotta Know, I think poker skills come in handy in that anticipating the market is key. We've all had the experience of being right on xyz and still losing money. It's also helpful to look at this macro stuff as a set of probabilities. And knowing when to fold, how to take small losses...

Steve said...

Yes MM I do agree the overlap is limited. I will say this though: I spent some time with the old Salomon crew, and you did NOT want to play Liar's Poker with them. Not the same game, but similar in most respects.

Tiny Tim said...

I'm sure I read a study about this (poker vs. trading) recently (from MIT?); I'll hunt around for a link but don't hold your breath.

As for the similarities, I too think they are grossly overestimated - you get your hand (trade idea), weigh up how likely it is to be right vs. how much you can win vs. how much you wanna risk to find out. Thats where the similarities end.

(the paper was a proponent of scouring the ranks of professional poker players for recruitment as traders I believe)

Anonymous said...


Donlast said...

You think the world is weird and can't get weirder. What about this:
.... City Council is expected to give preliminary approval to Mayor Luke Ravenstahl’s proposal for a 1 percent tuition tax on students attending college in Pittsburgh, which he says will raise $16.2 million in annual revenue that is needed to pay pensions for retired city employees."

Over in the real world, John Hussman, no mean analyst and commentator, claims his long-term trend models show US equity markets to be 40% overvalued.

Bring on 2010!

Anonymous said...

As far as stock levels are concerned OPEC calculate that on land OECD commercial stocks began the year at 2.7bn bbls and at the end of 3Q stood at 2.8bn bbls, increasing forward consumption days cover from 58 to 60. Add in another 150 million bbls of crude and products in floating storage and the picture emerges of increasing global stock levels despite a huge decrease in OPEC production. Nevertheless the crude price has increased by $25/bbl since the beginning of the year! Whatever the pure bred fundamentalists may claim, the oil price/stock level correlation has been broken again this year as it was in 2008.And the jan10/jan11 contango in wti is $8.90, on yday settles.

But What do I Know? said...

I don't want to be the one to say it, but this is just another argument for gold, silver, et al. Banks with no capital requirements (isn't that what not implementing Basel II means) have no constraints other than custom on their creation of new fiat money nor on the amount of leverage they can employ, if I understand this correctly.

Please let me know if I have this wrong.

Steve said...

But What, you assume that banks will start lending with zero reserves, and that's not true.

Basel just sets international standards. I can't think of any country that doesn't have a reasonable capital standard, they're just not all the same and arguably not high enough.

Also, banks can be willing to lend but there may be no takers, which is pretty much the case globally.

Not marking to market was much more important in the way that you are suggesting and I would agree that that contributed to the metals rally.

Macro Man said...

Don, re Pittsburgh: bear in mind that the mayor is a) about 15 years old, b) no doubt stressed because he's splitting from his wife, and c) probably suicidal given the Steelers' performance.

In all seriousness, 1% tax on a Pitt tuition that's probably $5k - $10k isn't that onerous. Meanwhile, in Brown's Britain, things are so dire that diplomats are actually being asked to contribute 5% of the £28k/year to send their little dralings to Eton....with the taxpayer picking up the other 95%.

Anonymous said...

knowledge of poker and its rules is good, just the characters playing it are hopeless and would never get a job as traders.

Vandalsstolemyhandle said...

@ anon 12:45, Most of them would never get a job, full stop...

Anonymous said...

The tournament poker players do not get a do over when they are beat. The crap posing as financial strategists now are using my money against me now, taken by compunction. Crap hcan pe personified, in my opinion of course. 'The outlook for 2010 is steadily improving. The danger is to wait too long and miss the boat on the companies that have been left behind. We'll continue to see upside in equities.' Andrew Bell, equity strategist at Rensburg Sheppards Plc in London, as quoted today on Bloomberg. Crap is Shittybank and Goldbitch raising homebuilders in the face of continuing bankruptcy. Crap is builders continuing to drain precious capital to the FIRE economy. Casting twenty years into the future, I would choose any other career except finance. If hoi polloi do not have our hides, the taxman will.

Bob_in_MA said...

"Going all-in whilst holding a pair of twos..."

That is a great summation. All the bringing forward of demand with stimulus packages, all the government backing of dodgy loans...

Here in the U.S., as an example, the FHA has essentially become a no-money down subprime lender. When it was created in the 1930s, housing prices had already bottomed and buyers needed to put 30% down.

Now we are using it to try to arrest the fall in over-valued home prices with 3% down, and a tax credit to cover the 3% and closing costs.

As you say, if the bluff works, all is well.

Anonymous said...

Say goodbye to any Lehman money you thought you might get back. Golden Sacks and GLG have taken whats left.

New York ( – Hedge funds controlled by Goldman Sachs and GLG Partners won a significant court ruling yesterday, over how to properly distribute billions of dollars of client money held by Lehman Brothers when it collapsed, The Financial Times reported.

The High Court in London said that the Lehman funds were not “ring-fenced,” by the investment bank’s European arm and could not be claimed out of a $1 billion pool of funds currently controlled by Lehman administrators.

The Financial Times also said that while the ruling is a win for Goldman and GLG, whose cash was properly ring-fenced, it is a blow to several Lehman affiliates and other hedge fund clients, who now will not be eligible to pursue $3 billion worth of claims against the pool of funds.

The New York Times reported that roughly $11.4 billion in assets, including stocks, bonds, derivative contracts and other securities owned by hedge funds, insurance companies and other investors remain to be distributed in Lehman International’s trust account. Those funds have been frozen since Lehman collapsed in September 2008, frustrating some hedge funds that made trades through the firm before it fell into bankruptcy, the newspaper said.

Anonymous said...

@ Bob in MA

All well and good but who's the house?

Raphaƫl Kahan said...

Meanwhile, equities are starting to become quite overvalued:

Bob_in_MA said...

"All well and good but who's the house?"


leftback said...

Roubini's site has a very interesting article comparing the present situation with the mid-1930s. Of course, BB knows all about the mistakes of the 30s, which means he may well avoid (or attempt to avoid) some of those errors. From this vantage point, a more modern parallel is probably the most useful. To this point, the FED has followed the BoJ script almost perfectly.

Right now I expect more dovishness from the FED, which will probably trigger a resurgence of DGDF trades for a few days. But we all know that the "risk-on, DGDF" trade is getting tired, and this will probably lead to another round of flamingo hunting in the New Year.

Bob said...

MM: the BIS will smooth the path towards implementing Basel II by phasing in the stricter requirements over a 10-20 year horizon.

The problem facing the BIS is the same as the one facing the Fed and BoE (and most G7 central banks). They have always been the "Great and Powerful Oz", but sooner or later some annoying shitzu dog pulls back the curtain and reveals the wizard is a fat old dude wearing multiple layers of make-up and pulling levers to control some special effects.

ZIRP can buy time, but it doesn't fix any problems. 20yrs of Japan have proven that beyond a doubt. Now England and the USA are trying it, and getting the same results.

With most member banks insolvent, and political puppets running each bank, the central banks have become pretty powerless.

And the BIS is nothing but the sum of a bunch of has-been central banks

Anonymous said...

poker is good for life lessons too. you can be right but still get unlucky and lose. And you can be wrong but still get lucky and win. Don't confuse luck with skill.

PJ said...

MM - Superb! Best short statement of the current situation I've seen.

Of course LB is right, they are following the BoJ / Richard Koo prescription to the letter -- delay suffering as long as possible, hope growth bails you out before further delay becomes impossible.

The Koo prescription is now failing Japan, as for demographic reasons growth will never arrive and all they have done is make the inevitable catastrophe worse than it needed to be.

We'll see if the same prescription works better in the US and UK. I have a feeling we won't need to wait 20 years to find out.

Gary said...

There are some differences between poker and trading:

In most poker games, players are expected to put their chips on the table -- not IOUs, not debt instruments that their kids may or may not be able to pay.

No street hustler would accept the idea that Tim Geithner says this used kleenex is worth par for loan collateral purposes. Only a "highly educated" MBA would accept that proposition

When you lose a hand in poker, if you start singing "I will gladly pay you Tuesday for a hamburger today" ...

Gary said...

The old game of Liar's Poker described by Michael Lewis is probably very close to today's trading environment.

Forget the rules of the game itself -- that's what magicians call misdirection

The game is much simpler than that. The bids go around the circle, starting with the head of the desk, then the senior traders, then the middle guys, then the junior guys.

The senior guys all make really straight forward, low risk bids that no one is going to call.

Each bid gets a little more absurd (a little riskier) -- so that by the time it gets around to the junior guys, they are forced to bid something that most likely isn't true ... and the genius senior guys call "liar"

The game is heavily rigged to favor the established players.

Anonymous said...

Ben & Co. work under the assumption that if one avoids the Great Depression and Japanese policy mistakes then one will solve the problem. However, the number of outcome possibilities is beyond anyone's imagination. I would also argue that the odds of creating additional systemic problems to the entire system only tend to increase by using Ben's approach.

But What do I Know? said...


Points well taken--but I didn't say they *would* start lending with zero reserve, I said they *could* (if they wanted to). Not implementing mark-to-market (or some reasonable facsimile of a market price) is just another way of creating reserves--also known as avoiding writedowns.

Anonymous said...

-- Roubini's site has a very interesting article comparing the present situation with the mid-1930s.

Roubini is an innumerate fool

The cumulative decline in GDP in 1932-33 was more than 27%

The cumulative decline in 2008-2009 was less than 6%

Its apples and octopus -- absolutely nothing in common except the hysteria of "experts" wanting to sell books

Gary said...

Quote of the day from FT Op-Ed pages:

The late Eddie George was very fond of a little joke that went as follows. “There are three types of bankers: those that can count, and those that can’t.”

Steve said...

Good point But What, it's a dilution of capital and marking to market no doubt would expose many banks to be insolvent.

How the hell can banks not mark to market? And yet that ruling seemed to "work" inasmuch as the S&P is a few hundred points higher.

MM did you hear anything worth sharing at your roundtable?

Steve said...

On topic, here is a good poker game: We all know that Bernanke wants to get reconfirmed, and we know that any dreams he has of snugging or draining can and will wait til next time.

So why will the market in all likelihood return to DGDF, as LB mentions?

leftback said...

"Roubini is an innumerate fool"

Certainly not a fool, and probably not innumerate either, although doubtless no match for the quants who brought us the 2008 debacle.

The article is not written by Roubini and simply compares the political rhetoric of the 30s to today, with regard to easing or tightening of policy.

This is a rather different world from the 30s, but there were Asian countries that had -10% or greater GDP last year, so the comparison is less fanciful than you think.

We do try to engage our brains normally before commenting on this blog.... enjoy your octopus.

Gary said...

Steve -- Bernanke must keep rates low and cause inflation (aka dollar depreciation) in order to inflate away the debts of insolvent banks.

"Encouraging lending" or whatever silly ideas the Keynesians have is and always was a non-starter -- in Japan and now in the US/UK.

No one wants to borrow -- if anything, we all went to de-lever.

Meanwhile, we all know Bernanke must raise rates soon. You can only run around yelling that its an emergency and the sky is falling for so long. Its two years and counting now.

We all know ZIRP didn't work in Japan and its not working in the west either. It benefits politically connected (eg Goldman), but hurts registered voters everywhere else.

Rates also need to go up in order to attract international capital to finance the Great Spending Spree

Bernanke must keep rates low in order to pretend the banks are solvent (never mind Basel II). Bernanke must raise rates to keep inflation "moderate" and avoid Treasury creditor flight (not to mention allowing the baby boomers to retire)

Bernanke cannot serve two masters -- the only question is when he will realize this, and who is going to get the squeeze

If Bernanke is going to inflate -- its risk on / DGDF. If Bernanke is going to let insolvent banks fail -- its risk off / flight to perceived safety.

The Fed is screwed either way -- they lose independence or they lose relevance. The longer Bernanke waits, the more likely the answer is "both"

Bernanke and other FOMC members are indicating they see this dilemma, and they are trying real hard to get myopic Wall Street to prepare. Odds are, Wall Street will cry "No one could have seen this coming!" again.

leftback said...

Gary, that's an excellent summary of where we are, and you correctly point out the role of the dollar in determining risk-on/risk-off, but you forgot to mention the critical role of time. The longer the Fed can play extend and pretend, the more likely it is that some insolvent institutions can mend their balance sheets. This is their game plan - stay with ZIRP as long as possible and tweak other aspects of policy in the meantime. It will work until it doesn't.

Bernanke's hope is that he can keep all the plates spinning long enough that the damage will be reduced when he has to start letting them fall. His biggest problem may be the fact that some of the plates are going to fall far away, out of reach of the Fed, in a less protective Europe where the FDIC is not available to mop up.

Sooner or later, in between the Dubai bailout and the Irish bailout and the Greek bailout there will be bondholders somewhere who are not bailed out, and there will be debt-to-equity swaps, there will be losses, there will be asset liquidation and there will be a flight-to-safety trade. The only question is who is going to be Credit Anstalt - and does it even matter who or where?

Gary said...

LB -- the longer Bernanke waits, the more likely the defaulted creditors end up being the retiring baby boomers.

Interestingly, most of these victims-to-be are also registered voters with influence on members of Congress.

And many of them were scheduled (hoping?) to start retiring next year -- which is why entitlement programs go cashflow neutral (and cashflow negative in 2011, just in time for Obama-thon part II)

My bet is that Obama and what remains of Congress after Nov 2011 will want to get re-elected more than they want to explain banker bonuses.

They won't let every bank fail at once, but they will unwind this too big to fail stupidity and let a few greedy, no good, fat cat bankers clear out their desks next year... its good TV and good for election prospects.

It would also clear the decks for Obama-thon 2012.

The status quo works for dealer banks, but it looks downright ugly for incumbent politicians

In Japan, ZIRP didn't save the LDP -- it ended 50 years of virtual party monopoly. The incumbents in Washington can see the parallels as well as you can.

Hence, I think a politically compromised Fed will end ZIRP next year -- out of Congressional self interest

Our Man in NYC said...

But (to add/suggest to Gary/LB's posts) by extending & pretending aren't the FED just paying premium (through increasing the BS, increased Federal Debt, increased agency debt, political will, etc) away, limiting their ability (and options) to do anything should the plates fall?

leftback said...

Don't forget that the Krugmeister General is already whispering in their ears that they will need MORE stimulus to create jobs b/c so much capital remains inactive or impaired ... pretty soon the real political problems will arise when citizens of non-bubble states (e.g. Germany and Texas) finally balk at the idea of bailing out the bubble states (e.g. Greece, Spain, Ireland, New York and California) in any way whatsoever. We all know where this is going, the issue is the timing of the defaults and how each central bank responds to the acrimony.

Donlast said...

Bernanke and his entourage may be relying on his close study of the Depression to guide us, plus Koo's close analysis of Japan's lost years, but I am damned if I can see how this can help them.
In the 1930s America was lending to the world and ran an export surplus; now it is a debtor nation and runs a persistent deficit. Japan was a nation of savers, ran a trade surplus and the deleveraging was done by corporates, massively so and over many years. In America it is not corporates that are deleveraging but households. They have paltry savings and their borrowing dwarfs that of corporates and business. Will the US consumer deleverage over many years? We just don't know but we do know that if doesn't start borrowing again, forgets about saving and starts playing the plastic in style there ain't going to be a sustainable US recovery. And if he does, we know we are heading for another of bout of endemic instability. Hobson's Choice.

Skippy said...

Must be some brown shorts for the DGDF crowd today... Did someone yell "stop"?