First Impressions

Nonbank Runs – A Flight of the Fancy
Doug Ashburn – JLN
“Potter’s not selling; Potter’s buying. Why? Because we’re panicking and he’s not!” – George Bailey
We all remember the scene in “It’s a Wonderful Life” when James Stewart (as George Bailey) tries to stave off a run by nervous depositors at his Bailey Bros. Building and Loan while, across town, financier Mr. Potter looks to swoop in at fire sale prices. These days, according to a panel of economists at Monday’s CME Group-MSRI Prize in Innovative Quantitative Applications seminar, it may well be the Mr. Potters of the world who touch off a bank run.

Quote of the Day

“It’s easier for firms to give up their compliance officer, because what are they going to do, give up the CEO?”

A compliance officer who has worked for large US and foreign banks, in the story, “The Most Thankless Job on Wall Street Gets a New Worry”

Lead Stories

Risk of US recession back on the agenda for markets
John Authers – Financial Times
The risk of a US recession is back on the agenda, and rapidly moving towards the top of it. As the year turned, with many concerns facing the globe, it was treated as axiomatic that there was no risk of imminent recession in the US, and hence any damage would be limited. Any growth in recession risk from that low level would inevitably lead to falls in the price of risk assets, which is exactly what we have seen, even if an outright US recession remains on balance unlikely. The litany of market indicators that make no sense unless there is a clear and imminent danger of a recession is growing longer.

Fixed Income: Is It or Isn’t It Broken?
Chuck Mackie – TABB Forum
The message at TabbFORUM’s 2016 fixed income conference, ‘The BIG Fix,’ was clear: There is a full-on assault on banks and this is having profound implications on market liquidity. While certain gripes about the changing face of trading and a lack of liquidity may seem to be unchanging, the good news is that the market and its participants are evolving to meet the challenges, something that was less apparent as little as a year ago.

Toxic Loans Around the World Weigh on Global Growth
Peter Eavis – NY Times
Beneath the surface of the global financial system lurks a multitrillion-dollar problem that could sap the strength of large economies for years to come.
The problem is the giant, stagnant pool of loans that companies and people around the world are struggling to pay back. Bad debts have been a drag on economic activity ever since the financial crisis of 2008, but in recent months, the threat posed by an overhang of bad loans appears to be rising. China is the biggest source of worry. Some analysts estimate that China’s troubled credit could exceed $5 trillion, a staggering number that is equivalent to half the size of the country’s annual economic output.

Goldman Sachs Says It May Be Forced to Fundamentally Question How Capitalism Is Working
Joe Weisenthal – Bloomberg
One of the most heated debates among investors is the question of whether corporate profit margins can maintain their elevated level, or whether they will inevitably revert to mean.
Here’s a quick look at S&P 500-stock index profit margins, for example, going back more than 25 years. They remain high by historical standards.

****SD: If that happens… *brain explodes*

Wells Fargo to pay $1.2 billion in U.S. mortgage fraud settlement
Nate Raymond and Sruthi Shankar – Reuters
Wells Fargo & Co said on Wednesday it had agreed to pay $1.2 billion to settle claims that it engaged in mortgage fraud, resolving a major U.S. lawsuit brought in the wake of the 2008 financial crisis. The settlement resolves a lawsuit filed in federal court in Manhattan in 2012 accusing Wells Fargo, the country’s largest mortgage lender, of engaging in misconduct in originating and underwriting government-insured mortgages.

****SD: And also, Deutsche Bank must face U.S. lawsuit over $3.1 billion mortgage loss: judge

Banks Blaming Regulators for Repo Squeeze May Have Their Proof
Eshe Nelson – Bloomberg
Banks have been complaining for years that regulation is damaging Europe’s 5.6 trillion-euro ($6.1 trillion) market for borrowing and lending securities, without much proof. Now, they say they have evidence to back up their claims.
Repurchase agreements, an essential component in the functioning of financial markets, showed a sharp drop in the availability of securities to use as collateral for short-term loans. The result was the general collateral rate for German debt plummeted in the final week of 2015 before recovering in the first weeks of January.

Mapped: Europe divided – how the jobless disease is splitting the continent apart (INFOGRAPHIC)
The Telegraph
Europe is stuck in a jobs crisis. Eight years on from the financial crash, unemployment remains the biggest threat to the social fabric of the single currency’s weakest economies.

The Yield Curve Inverted!
John Carney and Ben Eisen – WSJ
A small part of the yield curve inverted Tuesday.
Indicative bid yields on one-year Treasurys briefly dipped below yields on six-month Treasurys, reversing the customary pattern and producing what’s known as a yield curve inversion. Specifically, the indicative yield on the one-year was at 0.462% while the yield on the six-month was at 0.464% between 10:08 and 10:16 a.m. during the New York trading day.

U.S. Debt Burden: It’s Gotten a Bit Less Bad
Greg Ip – WSJ
Budget watchdogs for years have warned of a looming debt crisis in the U.S. The federal debt, already its highest as a share of the economy since 1950, is poised to rocket higher as retiring baby boomers draw on Medicare and Social Security.

EU Banking Rules Divide at Euro-Area Border in Cameron Deal
Ian Wishart – Bloomberg
A European Union deal intended to satisfy Prime Minister David Cameron’s demands for greater U.K. sovereignty may include two-track banking rules for euro-area countries and those outside the currency bloc.
A draft settlement published on Feb. 2 states that “prudential requirements for credit institutions” and other rules needed to bolster financial stability may need to be “conceived in a more uniform manner” for application in the euro area, with its single supervisor and resolution authority, than in the EU’s nine non-euro states, including the U.K., Sweden and Poland.

What Republicans and Bernie Sanders get wrong about Wall Street
Matt O’Brien – The Washington Post
Nothing gets less respect than incremental change.
Opponents attack it as only the first step in your plan to remake the world, and supporters attack it as, well, the only step in your plan that doesn’t actually remake the world. And so the truth gets forgotten somewhere in the middle.

****SD: Also see Goldman Sachs chief: Sanders’s criticism is ‘dangerous’

Central Banks

Zervos: The Beauty of Monetary Policy? It’s a Tax On the Risk-Averse
Luke Kawa – Bloomberg
More than seven years after the collapse of Lehman Brothers Holdings Inc., investors and economists alike wonder how potent the monetary elixir deployed by central banks really was.
Detractors of aggressive quantitative easing contend it did little except to further enrich the wealthy and had limited effect on real economic activity, with low interest rates merely helping facilitate debt-fueled buybacks. Moreover, it may have spurred malinvestment, contributing to the boom in U.S. shale production that’s left the world in an oil glut and dragged down global economic activity.
But on a day when even Goldman Sachs Group Inc. is starting to wonder about the efficacy of capitalism, Jefferies LLC Chief Investment Strategist David Zervos offered a full-throated defense of one of its most contentious modern features: the use of unconventional monetary policy to kick-start an economy.

Dudley flags tight conditions ahead of Fed meeting
Sam Fleming and Robin Wigglesworth – Financial Times
Global financial conditions have tightened markedly since the Federal Reserve lifted interest rates in December and the central bank will have to take that into account if the situation persists into March, the president of the New York Fed has said.

****SD: In other Fed people talk, Fed’s Brainard Makes Case for ‘Watchful Waiting’

If No BOE Rate Hike Until 2018 Sounds Crazy, What About a Cut?
Scott Hamilton – Bloomberg
Here’s one question we never thought we’d ask in 2016: Is the Bank of England going to cut interest rates?
With traders starting to price in looser policy at the BOE and market expectations for the first increase in borrowing costs since the financial crisis pushed back to 2018, questions are shifting from how long officials will sit tight to whether the next move might even be a reduction. The Bank of Japan’s decision to introduce negative rates last week prompted renewed speculation about whether a similar move in the U.K. could ever be possible.

Bank of England says would focus first on markets and economy if UK left EU
The Bank of England’s first priority if Britain votes to leave the European Union would be to keep financial markets stable and deal with the fallout on the wider economy, BoE Deputy Governor Andrew Bailey said on Wednesday.

Bank of Japan Has No Lower Rate Limit, Kuroda Ally Says
Toru Fujioka – Bloomberg
The Bank of Japan’s negative interest rate could be reduced to as low as negative 1 percent from its already record low of minus 0.1 percent, said a professor who has collaborated on research with Governor Haruhiko Kuroda.
“There is no floor for a negative interest rate,” Masahiro Kawai said in an interview in Tokyo on Tuesday, adding that he wouldn’t find it surprising if the rate “goes down to a minus 1 percent. The BOJ can move it as much as they want.”

****SD: From Seeking Alpha, What The Bank Of Japan’s Negative Rate Policy Means For Investors

The Negative Effects Of Global Negative Yields
Seeking Alpha
The Bank of Japan announcement to adopt negative rates has ramifications for government bond indices. Currently nearly 25 percent or $6 trillion of the index is at a negative yield.
An increasingly more negative yielding bond index could become problematic. One effect is traditional government bond investors (pensions, life insurance, banks) are “forced” to invest into riskier assets.
Rather than QE4, U.S. negative interest rates are becoming a greater likelihood as market volatility and distress wears on and affect the world economy adversely.

Bond Market Moves Closer to Seeing No Fed Rate Increases in 2016
Alexandra Scaggs and Alex Harris – Bloomberg
Bond traders are sending the clearest signal yet that they doubt the Federal Reserve will be able to raise interest rates this year.

The nature and effectiveness of central-bank communication
Stephen Hansen and Michael McMahon – VOX, CEPR’s Policy Portal
In addition to setting interest rates, central banks also communicate with the public about economic conditions and future actions. While it has been established that communication can drive expectations, less is known about how it does so. This column attempts to shed light on this question. Applying novel measures to the content of Federal Reserve statements, it shows that forward guidance is a more important driver of market variables than disclosure of information about economic conditions.

San Francisco Fed reins in Twitter use after wayward tweet
The Federal Reserve Bank of San Francisco on Wednesday imposed a new policy banning staff from tweeting from its official Twitter account on their personal devices, a day after the bank apologized for an employee’s unauthorized tweet dismissing the Iowa caucuses as irrelevant.

****SD: Tweet in question: “Rick Santorum won #Iowa in 2012. Rick Santorum didn’t win…anything that matters. Iowa is…Iowa.”


Wall Street not scared of China reserves
Linette Lopez – Business Insider
China is making a $3 trillion threat — but ‘nobody’ on Wall Street is scared
Some of the biggest names on Wall Street have piled into one trade — shorting the Chinese yuan. This, despite the fact that the Chinese government has threatened to punish anyone trying to pull the currency down.

Lew: China Must Clearly Communicate Currency Policies to Markets
Ian Talley – WSJ
U.S. Treasury Secretary Jacob Lew urged Chinese Vice Premier Wang Yang late Tuesday to ensure Beijing’s transition to a market-determined exchange rate is “orderly and transparent,” and said authorities need to clearly communicate their policies and actions to markets.

China to Plan Looser Limits on Foreign Fund Outflows
China’s central bank plans to loosen rules for when foreign investors can bring money in and out of the country in a signal of its commitment to further open financial markets, according to people with direct knowledge of the matter.

Best Execution FX: A Shifting Landscape
Ivy Schmerken – TABB Forum
With more regulatory oversight expected, the buy side is paying more attention than ever to best execution and FX TCA. The focus on algorithmic trading, analytics and execution metrics reflects the evolution of foreign exchange toward a more equities-like market structure.
As European regulators eye the foreign exchange market, the onus is falling on buy-side firms to develop best execution standards and take more control over its trades, according to a recent industry conference.
In light of recent scandals involving currency-rate rigging and the controversy over “last look,” where banks have the right to reject a trade after a client requests a quote, traders are paying close attention to data

The Dollar Dog Ate Corporate America’s Homework: 6 Casualties of the Strong US Dollar
Mauldin Economics
We’re in the middle of earnings season, and one of the themes I am hearing over and over from American companies is how the strong dollar is killing their profits. How strong? Since mid-2014, the US dollar has appreciated about 15% against a basket of trade-weighted foreign currencies. In 2015 alone, it was up 12%, the biggest one-year gain since the 1970s.

Why Bitcoin Will Thrive First in the Developing World
Cade Metz – WIRED
Explaining the appeal of bitcoin to the average American isn’t easy. Here in the US, it’s not terribly hard to save, spend, and send money. Most people have bank accounts and credit cards, and when they need to send money to a friend, relative, or acquaintance, they can use any number of online services, from PayPal and Square to SnapChat and Facebook. For most people, bitcoin and other digital currencies looks like a solution in need of a problem—a technological end-run around big banks and big government that interests only geeks, drug dealers, and crazed libertarians.

EU Commission Wants Increased Oversight Over Bitcoin as it’s “Used by Terrorists”
Avi Mizrahi – Finance Magnates
Another high ranking European bureaucrat is again talking about cryptocurrencies as a tool used by terrorists without presenting any evidence or research on the matter. The European Commission is proposing a number of updates to the rules they want to rush through for the Fourth Anti-Money Laundering Directive, only introduced last year, using the recent attacks in Paris to advance this aim.

Indexes & Index Products

Too Many ETFs ‘Spoil Low Costs’
Chief Investment Officer
New entrants into the ETF space cause liquidity constraints and higher prices, according to research from the University of Mississippi.
When it comes to exchange-traded funds (ETFs), more is not merrier.
“The addition of new funds to a particular segment radically increases both the costs and the price impact of trading.”Unlike most market situations, where increased competition puts downward pressure on prices, the costly process of buying and redeeming ETFs shares through an exchange mitigates the benefits, according to research by Assistant Professor Travis Box, Ph.D candidate Ryan Davis, and Associate Professor Kathleen Fuller of the University of Mississippi.

Debunking ETF Liquidity Myths
Ellie Lan –
On Aug. 24, 2015, the Dow Jones industrial average saw its largest-ever intraday decline.
Major stocks, such as J.P. Morgan, KKR, Ford and General Electric, all experienced at least 20% price declines before recovering.
The disruption was short-lived, but while it lasted, a set of ETFs traded at large discounts to the underlying securities.
ETFs were supposed to be liquid in good and bad markets, but there is the perception among investors that they played a major role on Aug. 24 in causing the market’s strange interlude.

When Diversification Works
Ben Carlson – A Wealth of Common Sense
The S&P 500 has outperformed the MSCI World Index each of the past three years and six out of the last eight. This is quite a run when you consider how often U.S. stocks have outperformed the rest of the world’s markets over historically.

January ISM non-manufacturing index report
The U.S. economy’s service sector expanded in January but at a slower pace than the previous month, according to an industry report released Wednesday.

Tradeweb Taps into US-ETF Growth With Trading Platform Launch
Jeff Patterson – Finance Magnates
Tradeweb Markets, a global provider of fixed-income, derivatives, and exchange-traded-funds (ETF) marketplaces, has launched a new electronic over-the-counter (OTC) marketplace for US-listed ETFs, helping streamline liquidity choices for users, according to a Tradeweb statement.


Gold Resilient as This Year’s Best Commodity as Stocks, Oil Wilt
Eddie Van Der Walt and Luzi-Ann Javier – Bloomberg
Gold climbed to a three-month high, helping propel Newmont Mining Corp. to its biggest gain in seven years, as mining shares rallied amid diminishing expectations for more U.S. rate increases.

Why you should buy gold ahead of 2016 election
Jared Dillian – Mauldin Economics via Business Insider
Long before I started writing for Mauldin Economics, I was a gold bull.
A mega-gold bull.
This started in 2005. I was making markets in ETFs at the time and—as head of the ETF desk at Lehman Brothers—I signed the firm up to be one of the early authorized participants in the SPDR Gold Shares fund (GLD).
I was pretty excited.
It may seem quaint now, but at the time there really wasn’t an easy way to invest in gold outside of coins or bars (high transaction costs, cumbersome) or futures (high barriers to entry). Physical gold, of course, is preferable, but you can’t really trade it, per se.

Chinese Seen Buying More Gold as Investors Seek Haven Assets
China’s gold demand will keep expanding as investors seek safe assets and jewelry buying increases, the China Gold Association said.
Consumption in the country that vies with India as the world’s biggest user climbed 3.7 percent to 985.9 metric tons in 2015 from a year earlier, according to group data released on Wednesday. Demand rose as prices declined and investors allocated more wealth to the safety of bullion than to other financial assets, according to the association, which represents jewelers, refiners, banks, brokerages and miners.

Pizza Hut celebrates Super Bowl 50 by giving away 24-karat gold pizzas
Dallas Morning News
Pizza Hut is setting the gold standard of pizza’s in honor of Super Bowl 50 this Sunday in San Francisco. The Plano-based pizza company has created a pizza that is topped with 24-karat gold. The glittering and glam pie is the new stuffed garlic knot pizza topped with $100 worth of edible 24-karat gold.

****SD: Super-duper gross. Pizza Hut plans on selling two million pizzas on Super Bowl Sunday — two million of the normal gross ones, not the gold gross ones.


Most thankless job on Wall Street gets a new worry
Emily Glazer – WSJ via Financial News
Those officers on Wall Street in charge of ensuring that traders and other employees stay on the right side of laws and regulations are increasingly in the cross hairs themselves.
Several recent enforcement actions found compliance officers personally liable for mistakes within their firms. Meanwhile, New York’s principal financial regulator, backed by New York Gov. Andrew Cuomo, wants the power to seek criminal charges against compliance officers in some cases.

Chris Blackhurst: Did jailed Libor fixer Tom Hayes really conspire with himself?
London Evening Standard
Is it me, or am I justified in feeling uneasy about the conviction and sentence handed down to former UBS and Citi trader Tom Hayes for rigging Libor?
Last week, six brokers were acquitted of conspiracy to fix the interbank rate. Their walking free was described as a severe blow to the Serious Fraud Office that brought the prosecutions.
But in his cell at Her Majesty’s Prison Lowdham Grange, Hayes could be forgiven for raging against the iniquity of a system that has seen his life ruined.

Zac Efron Set To Produce Paramount’s Adaptation Of Wall Street Tell-All “Straight To Hell”
The Tracking Board
The High School Musical alum will produce the adaptation of John LeFevre’s non-fiction best-seller through his Ninjas Runnin’ Wild banner.
Zac Efron is set to produce STRAIGHT TO HELL, Paramount’s feature adaptation of John LeFevre’s scathing tell-all, Straight to Hell: True Tales of Deviance, Debauchery, and Billion-Dollar Deals, sources confirm. Jason Barrett and Michael Simkin will also produce the project for Efron’s shingle, Ninjas Runnin’ Wild. Efron will produce alongside Doug Banker of Five All in the Fifth Entertainment. No word yet on whether or not Efron will star.

****SD: I have a sneaking suspicion this won’t be as good as The Big Short. Sorry, Zac.

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