Bruce Krasting

Risk from High Frequency and Algorithmic Trading Not as Big as Many Think

Hard for me to accept this given that HFT regularly exceeds 50% of the volume on the NYS. Even more difficult is the fact that GS is responsible for half the HFT activity.

I doubt this ends with a whimper. One of two things will happen. Either Mary Schapiro at the SEC steps up to the plate and curbs this or someday we are going to have another of those 1987 Black Swan events.

How The Federal Reserve Is Monetizing Debt

Nice article. Excellent graphics. A few comments:

The deal to buy Agency MBS was not a slight of hand as you suggest. The Asian Central Banks put a gun to Bernanke last year and said, "Buy this stuff back at par or we will never buy a dime of T notes again."

So Paulson/Bernanke said, "Okay, but you have to agree that for every dollar of Agency junk we take back you have to take an equal (or greater) amount of Treasury paper.

So that was the deal.

The purchases of Agency Paper are being funded by the excess reserves that the Fed has created. This is why the Fed started paying interest on reserves. So that it would attract sufficient money to allow it to buy up all of the junk. (This is the QE process)

On the dollar. You make a pretty good case for a flow of funds that argues for a lower dollar. That may happen, but it is not a sure thing. The dollar has had an uphill battle on the fundamentals for decades. We have always run a current account deficit that had to be financed by 'willing' foreign central banks. Because of the weak economy our imports are down and the traded deficit has actually improved a bit.

There are two factors for the dollar. Flow of funds and sentiment. The flow of funds is an important element in the equation but in the short term is overshadowed by sentiment which is not negative today. This is a reflection of the Store of Wealth factor for any reserve currency. Which currency is the best Store of Wealth? That is a hard question to answer. They all stink. The Euro has a huge set of problems. Possibly more significant than we face. The Yen looks like a standout in that but who cares? It is a very expensive currency today and on an economic Store of Wealth Basis is probably worth 110 vs 95.

So the % looks stable because there is no legit alternative. Keep in mind that to be a reserve currency you must have lots of debt for those reserves to be invested in. So while the third tier currencies (A$,C$,Sterling and CHF) may look attractive it is unlikely that they will get much in the way of reserve diversification.

We are going to get a run on the dollar at some point as a result of all of what has been done. But I would not bet on it happening anytime soon. Things have to get much worse in the USA for that to happen. It also has to evolve that some of the alternatives to the dollar truly start to look better.

Analyzing Strange Volume on the NYSE

The cost to borrow FRE stock was 30% PA last Thursday. That is about the highest 'short' cost I have seen lately. So this was a squeeze, pure and simple.

But how it turned into this chaos is another issue.

When C did its convert on July 29 the craziness started. In that deal the Treasury converted TARP preff at Full Face Value into common at the then current level.

If that type of solution were applied to FRE it would mean that the Pref holders would get about 4 shares of FRE for each pref share.

If that were to happen the old $25 pref would be worth $8 and the old $50 pref would be worth $16.

That is not happening. The $25 pref trades between $1.5 and $2. Less than the common stock as of last night.

For me this is the proof that this is just a late summer short squeeze and nothing more. If the Pref starts to respond then I might take notice.

Uncle Sam's 'F' Rated Bonds

It seems that everyone is looking and writing on this issue. The feds must be aware of the sentiment. The solution where the FED buys up the supply simply will not work. The market will turn on the dollar and the Treasury bonds if they just keep buying.

My solution: Treasury is going to stuff the banks with about $1 trillion of longer term floating rate notes. Because it is a floater the banks will be able to match fund it and make a nickle. Keep in mind that Treasury still owns a ton of common from the banks. The banks "owe" the American people. There will be a lot of political pressure to do this.

Treasury will change the reserve requirement on Treasuries to zero so this will not affect tier one capital ratios. The banks will likely get accounting relief from the balance sheet consequences of this. Who cares about EPS for the banks anyway??

The Curious Case of Missing Intervention

From your excellent description of the conditions for successful intervention can we conclude that the Swiss National Bank decision to go it alone and achieve next to nothing for their effort was (a) a mistake and (b) a poorly executed mistake?

I do not think that the CB's care all that much about a strong Yen. No coordinated intervention there. Same can be said about the Euro. The weak Euro is troubling but the benefits to exports dampens that concern.

The next round of coordinated intervention will take place only when the buck runs into trouble. That is not an issue today, but it will be before this year is over.

You are right. They will be back....

Social Security: Bankrupt System Will Impact Markets Sooner than Expected

"a method of triage where we give only palliative care"

You are tough r cohn. I do not believe that we face such hash choices. The thought however gives me an idea for a new business.

Euthanasia centers. I will call them YD-LB. (Your Dead-Lets Boogie)

The Worst Case Scenario (Someone Has to Say It)

Neither your worst fears nor your highest expectations will come true.

The future is murky. The clouds are dark in spots. It is not going to happen as you describe however...

Social Security: Bankrupt System Will Impact Markets Sooner than Expected

Note to readers:

My copy editor has swine flu. As a result there was a significant typo in this piece.

Mr. Steven Goss is the Chief Actuary of the Social Security Trust fund.

If Mr. Goss happens to see this, I extend an apology.

My copy editor is on Tamiflu and is recovering nicely. It is unlikely that an error of this magnitude will occur again...................

bk

Social Security: Bankrupt System Will Impact Markets Sooner than Expected

kotika, I know what you are saying about SS and illegals. I have seen this as well. You sound like you know something about this. I think it is actually a big deal. I have had trouble getting a sense of this size of the issue.

Do you have some insight?

Social Security: Bankrupt System Will Impact Markets Sooner than Expected

Jimbo, Thanks for that information.
bk

Social Security: Bankrupt System Will Impact Markets Sooner than Expected

Tom A:
I am going to disagree with you. NPV is NPV. The net present value of the existing obligations is 13.6 t. That is the check you would have to write today to solve this problem.

If SS taxes were eliminated it would result in an injection of spending into the economy of $700 billion per year. That would create a big economic effect. That is 5% of GDP. It would be the biggest tax cut in history. It most certainly would have an economic impact.

I respect your view that a combination of tax increases and benefit cuts could change the dynamics of the fund. In our political world that is the compromise that is likely.

For the system to succeed long term the US economy would have to grow at a rate of 4% on average every year forever. That is the least likely thing to happen. The system is busted.

We may choose door number 2 (band aide and pray). I stand by my prediction. That choice will result in a long term economic decline.

More taxes today is not going to happen. You saw those 'tea bag' protests. The most likely outcome is to do nothing. Who in their right mind would want to take this issue on? That also will also kill us.

2009 Depression Will Be Nothing Like 1929

There are significant differences today and 1929. I do not see how those differences make today "safer".

The internet has brought us together. We are one world now. The US could sink into something we can not even think about because of something that happens in E. Europe or Asia. We can not stop that from reaching us any more. My guess is that in the next few months much of E Europe will fall into chaos. This will take out the already weak banks in Austria, Germany Switzerland France and Spain.

Your small world will bring this back to the US in a matter of days.

In 29 the US and the world had not have any debt to speak of. We got out of that period over a decade with deficit spending. Here is a bet for you: Sometime this year the Treasury will have a big bond auction and not enough people will come. You are a savy investor/advisor, would you recomend that someone should own the ten year t bill at 2.8%??? I am sure your answer is no. Well, the problem is we have to sell 3T of this in the next two years. If we do not all your stock bets are going to be toast.

There are 2.5 billion more people today than 1929. That is going to make this process even more difficult.

The magnitude of the capital losses from housing/other investments ('wealth effect') is already many multiples of the losses from 29 on an inflation adjusted basis.

I could go on.

We have nearly busted the system. It will take 10 years to recover from this. Stocks will go up and down. But the US stock market will look like Japan. 15 yrs of steady declines. Sorry.

Wall Street Breakfast: Must-Know News

You missed what might become an important development. Triad Guarantee basically went belly up yesterday. Triad provided guarantees for the top 10-20% of mortgage pools in 06, 07, 08. Many Wall Street firms have already taken losses on paper the acquired with the Triad chomp.

Heres the story that may become significant. Triad guaranteed a lot of paper that ended up in FNM/FRE.

This week FRE finally eliminated Triad as an acceptable counter-party. Just a little bit late.

Keep in mind that the Agencies have taken no losses or reserves on this