Events over the weekend have led us to considering a “Hype Index” again.
Markets are moved, as we’ve learned, from a combination of both fact and fiction. We see the ‘facts’ as pretty obvious in the economic news releases and data updates. But, the fiction?
Ah, there’s the rub. Fiction depends on who is writing it and what their dreams and fears are.
Over the weekend, a pleasant call from a long-time subscriber asked “So if a bank-in-trouble spins off a ‘bad bank’ to holds credit default swaps, and then let’s the bad bank ‘go down’ who will be stuck with how many trillions worth of losses?”
The question is not hypothetical since later today Deutsche Bank will announce future plans. Everyone I know (like my consigliere) has been waiting for DB to have its ‘crisis moment’ since their failed co-CEO debacle a couple of years back. What’s been going on has been more a glacial slide of confidence as the financial engineers try to figure a way out of the corner they’ve painted themselves into.
There are a list of un-answerables as of this morning’s open, however.
What’s true is the BBC is reporting Deutsche Bank begins cutting 18,000 jobs. And yes, here’s one of those NSS stories that has popped up: “Deutsche Bank’s aim to make profit in 2020 is uncertain: CFO.” Yah think?
On the other hand, we have to look remain data-based at times like this. Mt caller noted that there are “Several times US GDP worth of derivatives involved.”
That’s all well and good, but we need to remember the different between notional values and realizable values.
Show you what I mean.
I hold an IOU for $100 from John Doe. You hold a $120 IOU from Bill Smith. The notional value here is $220.
But since you need some ready cash for some others reason, I negotiate down the price I will pay you for the $120 to, oh, say t0 $110. I’ll pay you that in January. We agree, shake on it and that’s our ‘set-up.’
Fortunately, my lawyers put language into our agreement that stipulates that if Bill Smith’s credit falls below $110 expected payback, I can renegotiate the deal.
Now, let’s say the value of Bill Smith’s IOU is ‘marked to market’ and is only $105 come January. You’d have to drop your price to me and if you paid $120 for the IOU,, too bad. Book the loss and move along.
The important thing is the underlying debt is still there., Bill Smith isn’t going to get ‘something for nothing.’ All that happened was that I made a better judgment of Bill Smith’s ability to pay than you did. Which is what financial engineering is all about.
Now let’s go over and turn on the Hype-o-Meter.
The “Collapse is here! Go Short! Get out!” people are likely to be both early and wrong.
“But my God, there’s $240 worth of money involved!”
Not quite. Notional is only somewhat connected to realizable. In this case the Hype-o-Meter says $240 divided by the the more likely realizable loss of $5.
Staring at our machine for a few minutes while it rolls through long-tail interest calculations, we finally get the answer. Realizable may be closer to 2.0833% of notional, and in reality even less.
The Truth of the Tape
If this is a little too “Urban” for you, let’s use another tool to line up the risk. (Investopedia has a more ‘correct’ but less fun version of how CDS’ work over here…)
Since Deutsche is nominally a German bank, it would seem logical to us that if the end of the world is nigh, the German marts would be on the ropes and about to be counted out.
They are not.
In fact, the German market was only down 14-points when I looked earlier. That’s 11-10ths of one percent. And that, dear reader is not the end of the world in anyone’s book.
In fact, trading variance (noise) was higher in Japan (down almost 1% overnight).
As our first order of business this morning, put down the Malox and start using your head.
The Germans aren’t apparently too worried about one of their banks, so why churn stomach acid here? Plenty of time for that in Q3-Q4 of this year and especially Q1-Q2 next year when we will have completed whatever the wave counts are doing now.
“What about the Big Earthquake Impacts?”
As I wrote this weekend, natural disasters are a kind of synthetic growth media. Just like hurricanes up and down the east coast haven’t toppled the market, a distant earthquake and some sloshing pools won’t matter – yet.
There isn’t an insurance company in the world that will cut any checks today on ‘quake damage’ – that takes months and months. And with distributed risk? Maybe it will be one more thumb on the scale this fall.
But today? Pa-leeze….
“What about Politics and the Election?”
True Tom Steyer may toss hat into presidential ring, after all, but he’s just another billionaire with stars in his eyes. Alexa tells me she knows about 563 American billionaires. Line’s over there.
Besides, there are some observers (see Fox Leslie Marshall: Democrats are losing the plot in their fight to unseat Trump in 2020, for example) who are beginning to see Trump as having a commanding chance over all rivals. Including Joe Biden since Michelle Obama won’t defend him.
As an aside: The REAL BIG story of today is who’s going to be outed as part of the (alleged) child sex ring which (allegedly) involved Jeffrey Epstein. The question is well framed by the Forbes headline “Jeffrey Epstein Documents Could Expose Powerful Politicians, Businessmen.”
Which will keep conspiracy types wondering if this isn’t an extension off the Pizzagate allegations. All in due time.
“OK- But the Futures Are Down…”
And? The market last year, for a couple of days after the holiday weekend had a nice rally. Running up the red flags will give professionals a chance to really buy low and then sell high if that’s where we’re going.
Look at Trends, watch the Hype-O-Meter. And for failing German banks, see how the German’s are taking it.
If we take out the Friday lows, OK, we’ll get interested in a bearish position. Maybe.
Lots of news to come this week including inflation data and two Powell speaking engagements…all worth close scrutiny.
Markets climb walls of worry. And to us, looks like another Monday at the Wall…YMMV
The Dudly Sun and Climate
Speaking of Hype: There are two major stories going on in background most people are totally missing and you need to pay attention to to keep up with class.
First is the report from the Solar Cycle Progression researchers showing the Sun went back to sleep mode in June, as we’ve telling you to expect.
The forward data still offers a view that the Sun will be napping for several years to come and that likely accounts for the weather shifts. Oh, and notice how the predicted crustal cooling is setting off more Pacific basin quakes. Amazing stuff, science.
Wake mode in 2025 – just in time for the world war – driven in part by food (which is why we are working on things like continuous yield farming…).
Now Here’s the Hidden Hand
Hat tip to Chris Tyreman of the Chronicle Project for catching this one:
Take the time to watch the video on this one because it really does matter.
When you’re done with that, click over to this Ben Swann video on how the US National Defense Authorization Act now makes it legal for the the US government to propagandize American citizens.
We’d be willing to be a nickel or two on “climate hype” as one of those areas of “shaping operations – internally.”
We can also see what is coming more clearly now – but more on that Wednesday in Peoplenomics.
Just remember: When you wake up on a morning like this forget the quakes and the D-Bank chatter. Look at the big picture:
As you go through life, make this your goal
Keep your eye on the doughnut, and not on the hole.
Moron the morrow, my friend!