Lost In the Weeds
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BY ROB KIRBY
Financial Sense - Market Wrap Up
3-12-07
Today, I would like to touch on a couple of seemingly innocuous developments which I learned of in the past week.
First, I would like to direct everyone’s attention to a piece penned by Jim Willie – titled, Gold Sniffs Rate Cut. I consider the piece a ‘must read’ for anyone trying to make sense of today’s conflicted news reporting being served up by mainstream financial news outlets.
Regarding Mr. Willie’s article – I would specifically like to draw everyone’s attention to this passage,
“Why just last week the Board of Governors at the Federal Reserve System voted to reduce disclosure requirements in what are known as Call Reports for major shareholders and officers for member banks.”
This charge by Willie left me with my head shaking. Here’s why:
If you visit this page, which is published by the Comptroller of the Currency – Administrator of National Banks, you will notice that,
“Each quarter, based on information from the Reports of Condition and Income (call reports) filed by all banks, the Office of the Comptroller of the Currency prepares a Fact Sheet. That fact sheet describes what the call report information discloses about banks' derivative activities.”
The information ‘disclosed’ in these very call reports represents the ONLY gleaning we receive on the make up and changes of the book size of derivatives behemoths like J.P. Morgan Chase and their [as of Q3/06] 63 TRILLION notional positions.
I cite J.P. Morgan’s derivatives position because theirs is the largest, and in recent quarters, it’s been growing at a cancerous rate of 5 TRILLION per quarter.
Where I come from, cancerous growth is NOT something that one would generally dismiss as needing LESS attention or oversight, but, quite the opposite – MORE.
The Devil In The Detail
Just this past weekend [March 10, 2nd hour], Jim Puplava interviewed Mr. Peter D. Schiff regarding his new book, Crash Proof: How to Profit from the Coming Economic Collapse. At the tail end of the interview, Mr. Schiff and Jim Puplava engage in a discussion about money supply, unnaturally low market interest rates, money growth and then Schiff opines that there are no REAL buyers of government bonds – in as much as, no one REALLY buys government bonds to ‘clip the coupons’ and live off the interest. Schiff states his belief that the buying of U.S. government bonds is largely conducted by foreign Central Banks for political reasons.
I would like to point out that there exists a connection between the explosive growth in derivatives and the propensity of the global financial markets to ‘consume’ U.S. government debt.
For this to begin to make sense, one must first realize that 75 – 80% of all outstanding derivatives positions held by the banking system are composed of Interest Rate Swaps.
Secondly, one needs an appreciation that Interest Rate Swaps, almost exclusively, trade at a ‘spread’ over U.S. government bonds. What this entails when a trade is consummated is the fixed rate payer and the fixed rate receiver exchanging a duration weighted amount of the underlying bench mark bond – to generate the contract [fixed] rate.
Put another way, imbedded in each and every interest rate swap – is a bond trade – hence DEMAND for U.S. government bonds.
I cannot help but shake my head once again at the timing of the Fed’s move to “relax” reporting standards regarding these same derivatives. It would appear, with Iran set to “outlaw the use of the almighty U.S. dollar” as of March 21, 2007 – the Fed is proactively moving to ‘neutralize’ [or hide from public view, perhaps?] the reverberations that one might prudently expect to be felt in global currency markets as a result.
In summary, it would appear that ‘derivatives reporting’ – like it’s twin sister – M3 Money Supply - is destined to get lost in the weeds of fanciful, fictional - Central Bank finance.
Today’s Market
Overseas equities began the week on a positive note with Japan’s Nikkei Index gaining 103 points to close at 17,267. North American markets also came out of the gate strong with the DOW adding 42.30 to 12,318.62, the NASDAQ ahead by 14.74 to 2,402.29 and the S & P adding 3.75 to 1,406.60. NYMEX crude oil futures gave up 1.11 to end the day at 58.94.
Interest rates were little changed with the benchmark 5-year note ending the day at 4.50% and the 10-year at 4.55%.
On foreign exchange markets, the U.S. Dollar Index fell .36 to 83.85.
Precious metals ended the day mixed with COMEX gold futures losing 1.20 to close at 6.50 per ounce while COMEX silver futures managed to gain .13 to end the day at 13.05 per ounce. The XAU gained 1.72 to 133.76 while the HUI added 3.38 to 331.62.
On tap for tomorrow, at 8:30 a.m. Feb. Retail Sales data is due – headline number expected +.2% vs. prior 0.0%, ex – autos expected +.3% vs. prior +.3%. At 10:00 a.m. Jan. Business Inventories data is due – expected +.2% vs. prior 0.0%.
Wishing you all a pleasant evening and prosperous tomorrow!
Rob Kirby
Copyright © 2007 All rights reserved.
Contact Information
Rob Kirby
Kirby Analytics Newsletter
Toronto, Ontario, Canada
Link to this article
financialsense.com
Link to Jim Willie's article
financialsense.com
Office of Comptroller of the Currency's Derivatives Statements (contains spreadsheet downloads on the site)
occ.treas.gov
Definition of "Interest Rate Swap" re Treasuries and Deriv's
en.wikipedia.org |
