Tag Archives: derivatives

#FederalReserve aka #Fed Discovers Gold – Fools Gold

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No.  I am NOT talking about the movie, Fool’s Gold.

foolsgold

I am talking about the Fed finding wealth and a strong economy where there is none.

Like the little boy who cried “Wolf!”,  the Fed keeps saying “The Economy is good!”

Here is the fool’s gold the Fed uses to keep saying :The Economy is good!”

1. Auto sales are up.  Well they were up until the recently released May report showed a drop of 6%.  The recent auto sales were propped up by easy credit but now they have run out of buyers.  Here are details.

http://www.reuters.com/article/us-usa-autos-idUSKCN0YN4K0

2. Home sales are up.  Well they were up until the June 1, 2016 report.  Again home sales have been boosted by easy credit and low interest rates until now. Here are details.

http://www.cnbc.com/2016/06/01/mortgage-applications-drop-because-of-rate-uncertainty.html

3. Unemployment is down.  Well unemployment has dropped to 4.7% but the recent jobs report announced June 3, 2016 showed a shocking one fifth the average number of jobs created.  Unemployment went down because more people have given up or are retired. Here are details.

http://money.cnn.com/2016/06/03/news/economy/us-economy-may-jobs-report/

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Here are the real concerns the Fed should be looking at.

1. Freddie Mac and Fannie Mae.  These firms have been using derivatives to hedge against interest rate changes and lost $475 million last year. Here are details.

http://www.marketwatch.com/story/freddie-mac-may-need-another-taxpayer-bailout-next-week-2016-04-29

2. US Productivity.  The statistics show it went down 1% in the first quarter and now one of the Fed members says it may go down again this month. Here are details.

http://www.reuters.com/article/usa-fed-evans-productivity-idUSU8N16O051

3. Corporate Bond Sales.  These are still high and may match last year’s record in order to finance other mergers. Here are details.

http://www.bloomberg.com/news/articles/2016-04-28/get-ready-for-a-big-wave-of-u-s-corporate-bond-sales-in-may

In summary, the 2008 bailout involved lower interest rates.  But the Fed should have raised interest rates in 2011 instead of maintaining the ridiculous 2% inflation target.  Here is how:

https://michaelekelley.com/2015/03/27/the-kelley-monetary-policy-rule/

Or if you want more information on whether a recession is coming or not, read this.

https://michaelekelley.com/2015/03/02/why-another-recession-is-coming/

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The Fed is chartered with controlling inflation and encouraging job growth.  One Fed member recently said they are too busy to add a third task aka improving the economy.  Well they have dropped the ball on job growth which would have improved the economy.  Here is what the Fed could have and still can do for job growth.

https://michaelekelley.com/2014/03/28/federal-reserve-can-create-jobs/

Good luck out there.

Bonds Dry Up – Derivatives Explode

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Here is an excellent article about why derivatives are exploding.

nuclear

https://marketwatch.creatavist.com/story/7571

Here is a summary of that article.

The Volcker Rule was passed as part of the Dodd-Frank financial reform bill in 2010. It banned banks from trading securities with their own money, or proprietary trading. Nonetheless, banks had already wound down their proprietary trading operations in anticipation of the rule taking effect…

For larger investors, another trick to circumvent liquidity issues is to deal in more liquid synthetic securities such as derivatives contracts, which can be used to bet on the credit quality of a company without having to deal with the same liquidity problems of the bond market.

Douglas Peebles, chief investment officer and head of AllianceBernstein fixed income, says he finds himself using more derivatives. These allow buyers to invest in the same underlying assets, but in many cases, they can be assured of more liquidity that the actual bond. Bond guru Bill Gross, who runs the world’s biggest bond fund, also concedes that he has begun using derivatives in his Pimco Total Return Fund.

Here is another article.

http://www.marketwatch.com/story/4-reasons-why-the-bond-market-is-going-wild-2015-05-12

The reasons are “four Feds”, less yield for more risk, lack of liquidity, and fear of a bubble.

For more on derivatives and tranches see this article.

https://michaelekelley.com/2015/01/28/remember-cdos-theyre-baaaack/

 Good luck!

Remember CDOs? They’re Baaaack!

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Like Poltergeist II, prepare for CDOs II.

poltergeistII

(Here is Poltergeist II trailer –  https://www.youtube.com/watch?v=rH-B6A04iK0 )

Remember those financial instruments known as Collateralized Debt Obligations that caused the 2008 Great Recession?  Well they never went away.  In fact they are baaack.

The Financial Crisis Inquiry Commission concluded that CDOs were one of the major causes of the 2008 Great Recession as shown at this website.

http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_conclusions.pdf

For 2014, global CDO Issuance is back to 2004 levels valued at about $135 billion.

Collateralized loan obligations (CLOs) are CDOs based on bank loans. Many of the subprime loans have been packaged and sold as CLOs.

The following chart shows that Collateralized Loan Obligations (CLOs) in 2014 have reached the same level as 2007 or $35 billion.  Total outstanding CLOs in the US amount to $300 billion.

clo_banks

Though the large financial institutions have backed away from collateralizing mortgages, they are now doing it for commodities such as gold, silver and oil.  Here is one example.

https://www.google.com/search?q=jpmorgan+precious+metals+as+collateral&ie=utf-8&oe=utf-8

 

http://theeconomiccollapseblog.com/archives/plummeting-oil-prices-destroy-banks-holding-trillions-commodity-derivatives

 

Another problem is not the collateral but the reselling of the same assets. In 2007 one financial firm sold 610 out of 3,400 CDOs more than once. That is nearly 18%.  Let me repeat.  More than once.

Because buyers are dealing with paper not physical assets, how do they know they are trading real, actual commodities? If the markets started to go down and everyone wanted their physical commodities such as gold, what if there was not enough gold to meet all the obligations?  Would there be an international panic?

Update
Evidently CDOs were not selling as well as desired.  So the banks have renamed them “bespoke tranche opportunities.”

BTOs are slightly different, as explained in this website.

http://thinkprogress.org/economy/2015/02/05/3619325/bespoke-tranche-opportunities-are-your-god-now-america/?utm_source=newsletter&utm_medium=email&utm_campaign=tptop3

Thanks