Wednesday, November 12, 2014

Foreign Exchange Rigging and QE by Any Other Name

The details of the bank price rigging of foreign currency markets are a bit too complex to go over here but I'll give an example that explains the concept.

A gas station receives an order to buy 10 gallons of gas at the market price (currently $3.29).

The station contacts their neighboring stations that they have a standing order for 10 gallons of gas and they'd like to see the price a little higher.

The banks slow buy gas in one ounce increments moving the price of gas up to $3.35/gallon.  The station then fills the original order with gas they bought at $3.29-$3.34 for the current market price of $3.35.

Now imagine doing this in a market that trades $5.3 trillion per DAY and you can see how the banks were ripping everyone off.

Lay on top of this that many of the most active stock trading programs are triggered by moves in the foreign exchange markets and you begin to understand why people might question the validity of current stock prices.

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Again, this is a little wonky but bear with me.

As QE has wound down the concern has been, what happens when the Fed backs away from the Treasury market?  Will US Treasury prices fall and interest rates rise if no one is there to keep buying?

Well, guess who has ridden to the rescue?  The same big banks that are in no way trying to manipulate the market (sarcasm, see above).

"Last quarter, US Treasuries were the fastest growing form of security bought by banks, increasing by 26.3% or $72 billion over the prior quarter. As the Fed tapered, banks stepped in to do their part in the coordinated Fed-private bank QE game. In the past year, banks have added $185.8 billion of US Treasuries to their books, more than doubling their share of government debt."

So, there you have it, the bailed out banks have decided all on their own to act in a coordinated manner (but it definitely isn't coordinated, wink, wink) and provide their own version of QE for the markets.

Awesome.

Cheers!

Fact of the Day - Alibaba (basically, China's Ebay) is now worth more than General Electric or Walmart.  Nope, there is definitely no bubble going on here.

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