Mabye this will light you all up. It should.
Our little local banks here in NYC have $25 trillion plus of interest rate "products" outstanding on their books as of this moment (source: the NY Times). But don't worry their eqity capital exposure is only 3% according to the NY Times. Do the math kids. What is the top number anyone gets for the equity capital of the top 5 NY banks?
It's going to be a long hot summer.
Ref: Bill Flekenstein (re: Tiger rumors)
For Private Use Only
"Equities in denial... We have to remember that there's very serious potential for another Long Term Capital Management-type of implosion, due to the derivatives we've discussed. In any case, in the early going, the stage was set in a pretty dicey fashion for everything except equities.
....To think that there won't be a derivative debacle given the size of the move in bonds and the total size of the derivative exposure measured in the trillions of dollars, I think is preposterous. The surprise would be if something horrible does not happen. Speaking of that, rumors were circulating all day long that some big hedge fund was in trouble, and my comment basically would be, how could somebody not be?
This has been an absolute huge bludgeoning in the bond market and it's all been precipitated without any Fed tightening. That kind of activity argues for the idea that when that first rate hike happens, there are going to be more to follow. The Fed is hopelessly behind the curve, and it's the one that fomented this bubble in the first place.
...Along with the same rumors about hedge fund troubles, there was also a rumor that the Fed was having an emergency meeting. Just another logical extension of the moral hazard problem the Fed has continued to build. I don't believe those rumors were true about the Fed meeting. But at some point the Fed is going to be in a situation where it's got a derivative debacle or a financial market debacle, and it's in a box and can't ease because the currency's going down or because of the impact of all the asset inflation that's occurred. Suffice it to say that things are getting more and more complicated.
I'm getting sick and tired of saying this, but I think it's the only thing to say: Bonds will continue to get crushed until stocks do. Stocks will get crushed at some point, because liquidity is not there. The money supply is coming down, the banking system is very illiquid at the moment if you look at the loan-to-deposit ratio and the currency is now going down so the flow of funds is not positive there. In addition, mutual fund data has been very lukewarm, and the public's already taken on a lot of margin debt to buy their Internet stocks or what have you.
On borrowed time... The liquidity backdrop has been very poor, and liquidity is what this whole rally has been about since October anyway. So we continue to be on borrowed time, even though the bulls are doing their best to explain away everything, including saying that a rate hike is already priced into the market.
Even a rate hike's bullish... It's kind of ironic that whenever the Fed met and we wouldn't get a hike, we'd have a rip-roaring rally as that was perceived to be bullish. Now they expect us to believe that when we get a hike, that's supposed to be bullish too. Which again further confirms my observation that folks expect all news to be bullish all the time and things only go up. That's worked because the market wanted to go up, and when we finally get everyone loaded to the gills and the market gets exhausted, then it can turn down. I think that is finally in the process of occurring, but that doesn't mean it has to happen tomorrow". |
