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The defining book for the current

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Gordon T Long

RESEARCH ANALYTICS for the GLOBAL MACRO

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SULTANS OF SWAP: Explaining $605 Trillion in Derivatives!

 

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COMMENTARY for all articles by Gordon T Long

 

EXTEND & PRETEND: The Flash Crash Omen

 

The highly discussed and quickly forgotten Flash Crash was an omen of what lies ahead for the financial markets. It was a uniquely distinctive occurrence relative to anything we have ever experienced. Likewise, what we are about to witness will be startling and never before observed by this generation of investors. After only thirty days the Flash Crash signal has become unambiguous and historians will wonder why the public didn’t react sooner to its clarion call.

Over the last ten years we have systematically accelerated the shifting of risk through the advancement of three new strategies; Dynamic Hedging, Capital Arbitrage and Regulatory Arbitrage.

Individually they may seem sound but when pyramided as we have done over this period of time, they set the stage for systemic instability. The underlying bedrock of this shaky pyramid is Dynamic Hedging. 

READ MORE

 

 

EXTEND & PRETEND: Its either RICO Act or Control Fraud

 

We are entering the Age of Rage.

 

It is presently most visible in Europe as austerity programs that potentially could shred a half century of social entitlement advances are met with increasingly violent street demonstrations.  It is seen in the US Tea Party rallies with their fury that the very fabric which the US capitalist system is based on is being destroyed and discarded. Unfortunately these demonstrations of rage are focusing on the effects and not the cause. The cause is a systemic plaque of unenforced financial control fraud.

 

We have much more than a crisis of integrity. We have fraud that is so pervasive that it is now unknowingly institutionalized into our business and political culture.

 

The sickening part is that it a like a cancer; if it’s not detected early, it will be too late to fight. We need to fully understand and prosecute the tenets of fraud before it is too late.

 

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READER ROADMAP -  2010 TIPPING POINTS aid to positioning COMMENTARY

 

 

 

1

         

SOVEREIGN DEBT PIIGS

EU BANKING CRISIS
BOND BUBBLE

STATE & LOCAL GOVERNMENT

CENTRAL & EASTERN EUROPE
BANKING CRISIS II
RISK REVERSAL

COMMERCIAL REAL ESTATE

CREDIT CONTRACTION II

RESIDENTIAL REAL ESTATE - PHASE II
EXPIRATION FINANCIAL CRISIS PROGRAM
US FISCAL IMBALANCES
PENSION CRISIS
CHINA BUBBLE

TODAY'S TIPPING POINTS UPDATE

Last Update: 06/05/2010 01:21 PM

RED ALERT

AMBER ALERT

ACTIVITY

MONITOR

Click to Enlarge

 

POSTS:   FRIDAY 06-04-10

 

 

GEO-POLITICAL TENSIONS - ISRAEL / KOREA

 

 

 

SOVEREIGN DEBT & CREDIT CRISIS - PIIGS

 

Euro-zone Credit Crunch & Shanghai Shakeout  Gary Dorsch

 

On May 6th, Greece’s 2-year CDS rate surged to a record 1,195-basis points, and triggered the historic “flash crash” on Wall Street, - an intra-day, 1,000-point  meltdown in the Dow Jones Industrials, climaxed by a shocking 700-point drop, in less than 20-minutes, to below the psychological 10,000-level. Since the mainstream media was unfamiliar with the movements of the Greek CDS market, it peddled a story, that a computer glitch caused the “flash crash.”

 

This Map Will Help You Figure Out If The Euro Is Going To Blow Up  BI

 

Right now, there's no clear way to calculate the likelihood of a euro collapse, but Independent Strategy claim to have some sort of idea. They rate the risk of the euro's demise at 20%. Here's there map of the possible solutions to the euro crisis, via FT Alphaville.

Click here to see a larger version

Euro Spider Chart

Europe's Sovereign Debt Crisis: No Place to Hide? AEI (Makin)

As the debt-to-GDP ratio approaches 100 percent, the effort to reduce it by cutting government spending, raising taxes, or both actually raises the ratio.

 

GREECE

Greek Debtor Sets Himself On Fire Inside Athens Bank BI

Euro-zone Credit Crunch & Shanghai Shakeout  Gary Dorsch

With the ECB pledging to buy Greek bonds, yields on its two-year note plunged in the blink of an eye, from an intra-day high of 24%, to 7.5-percent. Since May 10th, the ECB has effectively locked Greece’s two-year yield between 7% and 9.5-percent. However, the cost of insuring Greek debt is still hovering around 850-bps today, very high by historical standards. CDS traders reckon that at some point, Athens might grow tired of trying to pay-off an insurmountable mountain of debt, and will demand a restructuring, - a haircut of 50% or more for its creditors.

Roubini Says Greece Needs `Orderly' Public Debt Restructuring BL

 

ITALY

 

SPAIN / PORTUGAL

 

FRANCE

 

GERMANY

 

CENTRAL & EASTERN EUROPE

Hungary  Plans Steps to Rein in 'Worse' Deficit Reuters

 

UK

The gamblers betting on Britain going bust Telegraph
A small band of hedge funds is now building up a series of sizeable bets on Britain defaulting.
UK 'must sell bailed-out banks to save AAA rating' Telegraph

Britain adopts an industrial policy  FT

Bank of England: 'Inflation not the way out of debt' Telegraph

 

JAPAN

Japan Bond Yields Drop as Kan Takes Power  WSJ

 

CHINA

 

DUBAI WORLD

 

USA

 

EU BANKING CRISIS

 

Euro-zone Credit Crunch & Shanghai Shakeout  Gary Dorsch

Since May 10th, the EU’s “shock and awe” effect has worn-off. The EuroStoxx-600 Index briefly fell to new lows on May 25th, and the Athens stock index fell to within 5% of its March 2009 lows. The Euro failed to gain any traction, and is still sliding lower along a slippery slope towards $1.20 versus US-dollar. While the “Big-Bang” bailout has subdued the threat of a Greek debt default, the next lethal phase of the European debt crisis is starting to materialize, - a frightful situation where European banks become unwilling to lend money to the private sector.

There are latent fears that a Euro-zone “credit crunch,” is looming on the horizon which could put the $14-trillion Euro-zone economy, into a deep freeze. On May 31st, the ECB warned that Euro zone banks could face a new wave of loan losses - up to €195-billion of losses over the next 18-months. Euro-zone banks would need to raise additional capital in order to cover expected losses of €90-billion this year and €105-billion in 2011, on top of €238-billion in bad debts already written off. Banks have already begun hoarding a record amount of cash at the ECB, opting for the safety of the central bank, rather than risk more profitable lending in the private sector.

Euro-zone banks are finding it very difficult to find buyers for their debt in the capital markets. Bond issuance has slumped to $2.6-billion in May, down from $82-billion in January. Also, indicative of a potential credit crunch in the offing, the credit default swap rate for the Euro-zone’s top-50 junk bond index, measuring lesser credit worthy companies, jumped as high as $625,000 on May 25th, from around $460,000 four weeks ago. Each upward surge in Euro-zone junk bond CDS rates has ignited a sell-off in the EuroStoxx-600 Index. Conversely, each decline in CDS junk bond rates has lifted the fortunes of the Euro-zone stock market.  

The Euro-zone is a major player on the world economic stage, accounting for roughly 22% of the world’s economic output. The Euro-zone buys 20% of China’s exports, and 15% of Latin America’s, and nearly a quarter of S&P-500 multinational income is earned by US-affiliates located in Europe. Given the increasing synchronization of the world’s economy, any sharp downturn in the Euro-zone economy, precipitated by a lending freeze, could undermine global commodity and stock markets.

 

Got Gold- Head Of IMF Policy-Steering Committee Says Fund Needs $320 Billion To Be "Properly Resourced"  ZH

 

BOND BUBBLE

 

Increasingly hawkish Fed ponders raising rates Reuters

Three top Fed officials said it may soon be time to begin raising interest rates

Most Primary Dealers Agree Fed Rate Increase Won’t Come Soon WSJ
Bonds: Avoid the next great bubble Money Magazine

 

STATE & LOCAL GOVERNMENT

 

Fitch downgrades Connecticut's GO bonds to "AA" – EarthTimes

Spill could mean dark times for Sunshine State – MarketWatch

Expected 'terrible problem' for municipal debt – Bloomberg

San Carlos considers outsourcing police duties

Scheme to Bar City Bankruptcies.
 

CENTRAL & EASTERN EUROPE

 

 

BANKING CRISIS II

 

Global Bank-Capital Pact Advances  WSJ

International regulators aremoving toward a pact that would require multinational banks to raise vast sums to cushion against losses, but the rules are likely to take effect later than expected.

Fed's Central Bank Swaps Increase By $5.4 Billion To $6.6 Billion Zero Hedge

 

FINANCIAL REGULATION BILL

Dallas Fed's Fisher Rages Against TBTF, Says Only Way To Remove Systemic Risk Is Shrinking The Megabanks  ZH

 

RATING AGENCIES

Rating Firms to Hold Off Downgrades  WSJ

Credit Ratings Offensive-  Zero Hedge

The European Commission is proposing that an already-planned central European Union regulatory body — the European Security Markets Authority — should take on oversight of the existing rating agencies when it is due to begin work in January 2011. Will this be enough?

 

RISK REVERSAL

 

Central bank co-operation and international liquidity in the financial crisis of 2008-9 BIS

 

COMMERCIAL REAL ESTATE

 

 

RESIDENTIAL REAL ESTATE - PHASE II

 

Rent vs. Buy   WSJ

More Important Than Europe And The Jobs Report- Fresh Signs That Housing Is ALREADY Double Dipping  BI  (and The Pragmatic Capitalist)

Earlier this year I detailed my outlook on housing and why I believe the real estate market is on the precipice of a double dip.  I said we were likely in for further declines of 7-15% starting with the end of government stimulus:

House prices decline 7%-15%.  This is the most probable outcome in my opinion.  In this scenario the private sector remains weak, labor markets rebound slowly, wage growth remains tepid, the economy grows below trend, government stimulus stops bolstering markets in 2011/2012, the economy perhaps double dips or re-recessions in 2012, and house prices ultimately succumb to the laws of supply and demand and decline another 15% or so.”

mortgages

  Diana Olick at CNBC has done a fantastic job covering the housing market.  She had the details yesterday:

“Mortgage applications to purchase a home began to sink. Now, four weeks later, mortgage purchase applications are down nearly 40 percent from a month ago to their lowest level since April of 1997. Yes, you can argue that a larger-than normal share of buyers today are all cash, but those are largely investors.

That means real organic buyers are exiting in droves.”

 

Purchase Demand In Freefall. Housing Industry Unraveling MND

 

CHRONIC UNEMPLOYMENT

 

May's Payrolls Report Is a Private Affair  WSJ

Investors hold fire ahead of US employment data   FT

Non-farm payrolls expected to show increase of 513,00 jobs

Payrolls Probably Rose for Fifth Straight Month, Led by U.S. Census Jobs   BL

European Stocks Rally for Fifth Day on Speculation U.S. Employment Rising  BL

Dead Cat Bounce In Progress; Key Resistance Reached  Zero Hedge

All eyes are on the NFP number coming out tomorrow. I personally believe that the number will match or beat expectations. HOWEVER the jury it out regarding the relevance of a number propped up by a birth-death model and census hiring. This week Citi Financial announced it was closing multiple branches and HP is going to reorganize 6,000 jobs and terminate an additional 3,000. Jobless claims are also not really painting that cheerful a picture, and neither did ADP earlier today. That's right even HP is still not done cutting jobs even though the stock is still up almost 100% from last March's lows and I am sure analysts are trampling each other to upgrade the price target. My macro view is that the global economy is imbalanced and too many jobs in the US are services which only thrive when the stock market is booming and the wealthy spends lavishly (do you seriously need a massage and a beer brought by someone you tip $20 every time you get a haircut?). Since we no longer have the possibility to run our economy on credit, we have reached the tipping point where we need real jobs to support growth otherwise without a strong middle class spending will drop and to make matters worse people will rely on asset sales to support whatever spending they still engage in as the political capital to use federal funds to maintain the economy afloat vanishes.

Goldman- Today's Jobs Data Better Be Awesome, Because The Stimulus Is Dying  BI

Jobless claims in US decreased by 10,000 to 453,000 – Bloomberg
 

Video Exposes Fraud by Census Bureau... Mish

 

GOVERNMENT BACKSTOP INSURANCE

 


FLASH CRASH

Superfast Traders Get New Edge  WSJ

 

Recapping The SEC's HFT Panel  Zero Hedge

Yesterday's SEC panel discussion on HFT was largely uncovered by the media, as it was for the most part a one-sided, lobbying effort of the HFT industry to make it seem that all is good with the market and to make it explicit that "once in a lifetime" events like the May 6th 1,000 point crash don't really occur and what was experienced (and will be again quite soon) was a statistical impossibility. Tell that to all those who got stopped out by the market's arbitrary 60% cut off for DK'ed trades and lost millions. For a good, clean, simplistic perspective on HFT, we present this most recent summary piece by the Daily Finance's Peter Cohan, called "What you need to know about HFT." As Cohan summarizes it, "All this so-called liquidity, which generally makes it possible for buyers and sellers to meet, suddenly disappeared because the high-frequency traders' books became too imbalanced. So the HFTs stopped trading, the liquidity dried up and the market plunged." For more sophisticated readers who wish to dig between the lines of naive explanations of industry participants whose primary goal is to escape scapegoating in this time of regulatory upheaval, here is the link to the SEC panel on HFT, which among other industry participants, includes Themis Trading's Sal Arnuk, arguably one of the most objective voices of caution when it comes to broken market structure. In the attached clip, Sal's prepared remarks begin 3 minutes into the video.

And for those short on time, here is Sal's summary of events from his point of view, as posted on the Themis Trading blog.

I thought I’d give you a rundown of Panel II, which I was on, and I’ll try to do it objectively as well. The panel included myself, Kevin Cronin of Invesco, Dave Cushing of Wellington, Michael Goldstein of Babson College, Richard Gorelick of RGM, Mark Grier of Prudential, Terrency Henderschott of UC of Berkeley, Stephen Schuler of Getco, and Jeff Wecker of Lime.

I know 14 investors watched on live web TV instead of Buffet on CNBC, so this is for all the other 94 million who didn’t. Here goes:

Sal: It’s like with ticket brokers; high frequency related firms and brokers, and they seem to get all the best seats to the Springsteen concerts. The overwhelming majority of us have to put in that code thingy on the website, complete a form in 2 minutes, and get seats in Section 3,467, Row YYZ, Seats 86, 87, 88, 89, and inexplicably 7. PS The world is ending.

Kevin: We are real investors, examining companies, etc. We don’t own stocks for 6 seconds, and we don’t have funds named Enhanced Institutional Elephant Order Neutralizer, like Rich does.

David: HFT has lowered my costs a lot. The market order is evil.

Michael: Chicago is not near New York. It takes an order 4 milliseconds to travel to Plymouth. The markets may be too fast. There should be one auction a day where Big Papi decides the prices.

Richard: We have this trading algo that picks off Kevin’s orders. What’s the problem? Anyone can get the public tools to do this; just call the exchanges with your credit card in hand.

Mark: These kids are all playing video games and need to go study history and cut this crap out (Mark was a big picture voice of calm and reason on our panel; sorry for poking fun at him, but what the hey anyway).

Terrence: Nasdaq gave me some data to study. I studied it. The markets are fine.

Stephen: If Sal shows his face in Chi-town, Me and Coach Ditka are gonna take him for a ride.

Jeff: Lime has no conflicts of interest, unlike G and G, and we give small guys the speed they need to play along side the G and G big boys. Bwaaaaahaaaaahaaaaaaaa. HAHAHAHAHAHAHAHA. Did I just say that? I just listened to myself. Scratch that.

 

 

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Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

 

© Copyright 2010 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.

 

         

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ARCHIVAL

SOVEREIGN DEBT PIIGS

EU BANKING CRISIS
BOND BUBBLE

STATE & LOCAL GOVERNMENT

CENTRAL & EASTERN EUROPE
BANKING CRISIS II
RISK REVERSAL

COMMERCIAL REAL ESTATE

CREDIT CONTRACTION II

RESIDENTIAL REAL ESTATE - PHASE II
EXPIRATION FINANCIAL CRISIS PROGRAM
US FISCAL IMBALANCES
PENSION CRISIS
CHINA BUBBLE
CHRONIC UNEMPLOYMENT
INTEREST PAYMENTS
US PUBLIC POLICY MISCUES
JAPAN DEBT DEFLATION SPIRAL
US RESERVE CURRENCY.
GOVERNMENT BACKSTOP INSURANCE
SHRINKING REVENUE GROWTH RATE
FINANCE & INSURANCE WRITE-DOWNS
RETAIL SALES
CORPORATE BANKRUPTCIES
US DOLLAR WEAKNESS
GLOBAL OUTPUT GAP
CONFIDENCE - SOCIAL UNREST
ENTITLEMENT CRISIS
IRAN NUCLEAR THREAT
OIL PRICE PRESSURES
FOOD PRICE PRESSURES
US STOCK MARKET VALUATIONS
PANDEMIC
US$ RESERVE CURRENCY
TERRORIST EVENT
NATURAL DISASTER

 

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Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

Copyright and Disclaimer

© Copyright 2010, Gordon T Long. The information herein was obtained from sources which the Gordon T Long. believes reliable, but we do not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that the Gordon T Long. or its principals may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Gordon T Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from us.