It seems every critical-to-stay-relevant talking head and blogger is trying to make sense of, and gain as much airtime discussing, how JPMorgan’s CIO unit could have been so ‘stupid’. The answer is – they weren’t. As we described first here and here – and has now been accepted by the mainstream media as fact (of course we are flattered by the mimicry) – the reason that the hedge got out of control was the massive amount of delta-hedging that Iksil had to do to manage the position as the Fed and ECB crushed the systemic risk out of the system and blew up the correlation assumptions in his models. This is complex to explain but, by way of example, we show a chart of the implied delta of a proxy for the JPM hedge. The lower the delta, the more and more index protection that needs to be sold to maintain a stable hedge – and as is clear, not only did the delta collapse (almost halving in 4 months) but it reached pre-crisis levels which would have been generally unthinkable in the risk scenarios – given the backdrop of reality. Whether Iksil arrogantly enjoyed ignored the cornering of the IG9 index market and the momentum and P&L he was relishing in is a different matter but to comprehend the forced selling protection pressure he was under, this chart is all you need to understand…


Source: Morgan Stanley


Example - if the tranche notional was $100bn (we suspect it was more given that it was a tail-risk hedge for JPM’s aggregate book), then the shift from Q4 2011 to end Q1 2012 would have forced Iksil to sell over $30bn IG9 protection alone (as the delta dropped from over 0.7x to under 0.4x). The trend was so strong that there is little wonder that day after day we saw the IG9 skew (the spread between the technically-rich-and-under-pressure index and the trading-on-fundamentals intrinsics or single-names) widen massively – even in the face of an almost ubiquitous (no it wasn’t just Weinstein) knowledge of the discrepancy and attempts to arb the difference.

While greed and avarice were likely strong drivers that blind-folded Iksil and his colleagues to the fact that they were getting too big and that the position was out of control, it remains fact that it was a combination of the Fed/ECB’s actions to squelch systemic risk entirely and a total reliance on models that is now bleeding to every other credit index and just as we said – leading to increased losses at JPM.

What is more worrying for them now – is that with systemic risk re-appearing, deltas are rising AND that means that the models will be screaming to unwind the sold protection positions even more aggressively. So as the market rallied they bought more and more and with the market selling off, they are forced to sell more and more – not a fun position to be in – and we suspect unwinding the original tranche deal will be practically impossible, given a lack of liquidity in tranche land in the last week. 

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Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero | http://www.zerohedge.com/news/how-jpms-hedge-blew-one-easy-chart


The story of the moment: deposit flight!

That’s the nice way of saying: A run on the banks.

Sky News’ Ed Conway has put together this chart on the relative level of deposits in various countries’ banking systems since the beginning of 2011.

Greece has just been taken to the woodshed over the last year or so. Note that this doesn’t include the latest data, which would probably show an increasing in outflows over the last month and a half, as fears of a Grexit get even more real.

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Original source at: Money Game | http://feedproxy.google.com/~r/TheMoneyGame/~3/d3am8h9DF7o/chart-of-the-day-greeces-big-run-2012-5


From Goldman…

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Original source at: Money Game | http://feedproxy.google.com/~r/TheMoneyGame/~3/ZREVamc7Mrg/the-us-economy-in-one-simple-swirlogram-2012-5


Bloomberg’s weekly Consumer Comfort Index just had its largest two-week drop in over 13 months after tracking stocks up to near four-year highs in early April. These levels are still markedly negative compared to the zero print in early 2007 and while the index has generally tracked sideways, the consumer finally seemed to go all-in when Europe’s LTRO and Fiscal Compact was announced and the world’s coordinated easing occurred starting in November of last year. However the divergences within the data are growing rapidly with high-income individuals near four-year highs in terms of their comfort as low-income individuals at near record-lows for comfort. The comfort spread between rich and poor has not been this wide since before the crisis and yet so many expected ‘change’.

Consumers finally threw in the towel as recession fatigue appeared to hit in November of last year and sentiment suddenly improved…

But the last two weeks have seen the biggest plunge in 13 months…

with lower income households near four-year (all-time) lows and yet higher income (>50K) near four-year highs – not a pretty picture as the rich-poor divide (lower pane) nears record pre-crisis levels…

 

Charts: Bloomberg

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Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero | http://www.zerohedge.com/news/class-warfare-succeeding-rich-vs-poor-divide-near-record-consumer-comfort-plunges


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What are rich people thinking?

Brokerage firm Charles Schwab aimed to answer that question in its recently completed a survey of its high net-worth (HNW) clients.  There were 504 respondents.  Each had a minimum of $1,000,000 of investable assets and were between the ages of 30 and 80.

Click Here For Key Slides From Schwab’s Presentation >

Here is what HNW clients see in the next six months:

  • 31 percent thought unemployment was about to increase.
  • 27 percent see a “double dip” recession coming.
  • 60 percent expect inflation to heat up.
  • 8 percent think energy prices will fall.

The study was accompanied by a 33 slide presentation, much of which included findings regarding the advisor-client relationship.  However, we pulled the slides relating to advisors’ and HNW clients’ thoughts on the markets and the economy.

Follow the money, right?

Click Here To See What Millionaires And Their Advisors Are Saying About The Markets And Economy >

(h/t The Big Picture)

See the rest of the story at Business Insider

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Original source at: Money Game | http://feedproxy.google.com/~r/TheMoneyGame/~3/YjEST-YIgMc/schwab-high-net-worth-survey-economy-markets-2012-5