The Paris climate-change conference kicked off Monday morning with pledges from Bill Gates and other billionaires to send a flood of new money into clean-energy investments as the governments of 19 countries, including Canada, said they would launch a parallel plan.
While the technology and investment billionaires put no dollar figure on the amounts they would devote to the their initiative, dubbed the Breakthrough Energy Coalition, they vowed to build on government research to help bring clean energy innovations into commercial production. “Our primary goal with the coalition is as much to accelerate progress on clean energy as it is to make a profit,” Mr. Gates, the philanthropist and Microsoft co-founder, said.
The governments were more specific, pledging to double collective research and development spending on clean energy to $10-billion (U.S.) over five years. The initiative, which is open to all countries, builds on a Group of Seven initiative announce earlier this year.
The billionaires hope their coalition will trigger more government spending on low- or zero-carbon energy sources. They warned that “current governmental funding levels for clean energy are simply insufficient to meet the challenges before us.”
The United States and other developed countries are pushing the clean-energy development hard in Paris, where 195 countries will try to reach a global accord to limit average temperatures from rising more than 2 degrees Celsius over pre-industrial levels. Many climate-change scientists predict potentially catastrophic consequences, from extended droughts to mass extinctions, if man-made carbon dioxide levels are allowed soar, heating the planet.
It is already accepted that emission reductions pledged announced by most countries ahead of the Paris summit, known as COP21 – the 21st conference of the parties since the landmark Rio de Janeiro Earth summit in 1992 – will not be sufficient to limit global warming to 2 C. In a Sunday statement, the White House said: “While significant progress has been made in cost reduction and deployment of clean energy technologies, the pace of innovation and the scale of transformation is falling far short of what is required.”
Throughout Monday, the first day of the Paris conference, government leaders will lay out their national plans and give a moral boost to their negotiating teams, who are under instruction to reach a deal by the close of the conference on Dec. 11. But already, cracks are forming in the global initiative to reach consensus six years after the failure of the Copenhagen climate change conference.
Indian Prime Minister Narenda Modi has warned that it is up to the rich countries that used fossil fuels to power their way to prosperity have to bear most of the burden in creating a low-carbon economies. “Anything else would be morally wrong,” he said in Monday’s Financial Times.
Meanwhile, a group of developing countries that may suffer the most from climate change, known as the Climate Vulnerable Forum (CVF), are campaigning for a 1.5 C warming target. The group includes the Philippines, Bangladesh and Costa Rica.
That target appears impossibly ambitious. The CVF countries, however, will endeavour to extract billions of dollars from the developed world to assist in adaptation measures. Their effort met with some success on Monday morning, when 11 countries pledged almost $250-million in new money for adaptation support in the countries most vulnerable to climate change.
The fund, known as the Global Environment Facility (GEF), will receive $22.4-million from Canada over the next two years. Other big contributors include the United States, France, Britain and Germany. “Given that we’re already locked into climate change trajectories for many years to come, increased investment in adaptation has to be at the core of the new climate agreement,” said GEF head Naoko Ishii.
The billionaires of the Breakthrough Energy Coalition that will promote clean-energy development include Amazon CEO Jeff Bezos, Virgin Group founder Richard Branson, Facebook CEO Mark Zuckerber and Saudi Arabian investor Prince Alwaleed bin Talal.
The coalition’s website said the group will “form a network of private capital” to take risks that mainstream investors would not accept. Mr. Gates, who has traditionally has said he would personally spend about $2-billion clean-energy technologies over the next five years.
JPM also warns about a market which has lost more than half of its orderbook depth as a result of collapsing liquidity over the past decade courtesy of Reg NMS and the advent of predatory, order frontrunning HFT algos. As a result, the market no longer has any capacity to "absorb large shocks"
While equity volumes look robust, market depth has declined by more than 60% over the last 2 years. With market depth so low, the market does not have capacity to absorb large shocks. This was best illustrated during the August 24th crash.
What does this mean? Considering that the bulk of the puts have been layered by the program traders themselves, including CTA trend-followers, and since the vol surface of the market will be well-known to everyone in advance, there is a very high probability the implied "stop loss" level will be triggered, and the market could trade to a level equivalent to the strike price, somewhere in the 1,800 area, or nearly 200 points below current levels.
Which would be a tragedy for the Fed: after all, nothing is more important to Yellen, Draghi et al, than affirmative market signaling - pointing to the (surging) market's reaction and saying "look, we did the right thing", just as Draghi did on Friday when he explicitly talked the market higher in the aftermath of the ECB's disastrous announcement.
The irony will be if, regardless of what the Fed does, the subsequent move is driven not by the market's read through of monetary policy but by the "pin" in this massive $1.1 trillion option expiry, the biggest in many years, one which if recent market action is an indicator, suggests the stop loss strike level will be taken out in the process setting the "psychological" stage for market participants who will look at the drop in the market, and equate it with a vote of no confidence in what the Fed is doing, potentially forcing the Fed to backtrack in less than 2 days!
25 basis points requires an $800B withdrawal of liquidity
It seems that that 0.25% rate rate will require an $800B withdrawal of liquidity which could derail the market.
Where will General Collateral trade when the fed funds target range is moved 25 basis points higher to .25% to .50%? In the most simple method, GC has averaged about .15% for the past month, which implies a GC rate around .40% after the Fed move.
However, given the unprecedented amount of liquidity in the financial system, there's a belief the Fed will have problems moving overnight rates higher.
We have two quantifiable events over the past few years where the Fed moved Repo rates higher or lower: quarter-end and the QE programs. Given there are so many moving parts, consider these to be very rough estimates: Beginning in 2015, when funding pressure began each quarter-end, the market, on average, took approximately $255B additional collateral from the Fed and, on average, GC rates averaged 20.5 basis points higher.
In 2013 on my website, I calculated that QE2 moved Repo rates, on average, 2.7 basis points for every $100B in QE. So, one very rough estimate moved GC 8 basis points and the other 2.7 basis points per hundred billion. In order to move GC 25 basis points higher, in a very rough estimate, the Fed needs to drain between $310B and $800B in liquidity.
If readers didn't just have an "oops" moment, please reread the last bolded sentence until they do, because it explains precisely what the market is missing about the Fed's rate hike cycle: according to Skyrm's calculations, to push rates by a paltry 25 bps, the smallest possible increment, what the Fed will have to do is drain up to a whopping $800 billion in liquidity!
Putting that in context, QE2 - which pushed the S&P higher from November 2010 until June 2011 - was "only" $600 billion.
In other words, to "prove" to itself that it is in control and the economy is viable, the Fed will effectively conduct, via reverse repo, an overnight QE2.... only in reverse.
For those who think this will have a positive, or even neutral, impact on risk assets, we have several bridges located in Brooklyn that we are looking to offload at 150% of par. Please send your BWICs to the usual address.
One week ago, and again last night, we previewed today's main event: an immensely important quad-witching expiration, the year's last, one which as JPM's head quant calculated will be the "largest option expiry in many years. There are $1.1 trillion of S&P 500 options expiring on Friday morning. $670Bn of these are puts, of which $215Bn are struck relatively close below the market level, between 1900 and 2050."
What is most important, is that the "pin risk", or price toward which underlying prices may gravitate if HFTs are unleashed to trigger option stop hunts, is well below current S&P levels: as JPM notes, "clients are net long these puts and will likely hold onto them through the event and until expiry. At the time of the Fed announcement, these put options will essentially look like a massive stop loss order under the market."
What does this mean? Considering that the bulk of the puts have been layered by the program traders themselves, including CTA trend-followers and various momentum strategist (which work in up markets as well as down), and since the vol surface of today's market is well-known to everyone in advance, there is a very high probability the implied "stop loss" level will be triggered.
For those few sillies who still think the bankers cartel (aka the "FED") is a central bank who is working to help the American public and the American economy, rather than line the cartel's members pockets ....
Federal Reserve will pay banks $12 billion in 2016
By Jared Blikre December 24, 2015 11:52 AM
In 2016, the Federal Reserve will pay at least $12.2 billion to U.S. and foreign banks to keep the money created via its quantitative easing programs out of the economy. If the Fed raises rates as expected next year, the amount nearly doubles to $23.1 billion.
From 2008 to 2015, the Fed purchased over $4 trillion worth of bonds to stimulate growth in the economy. Risk markets responded, as is demonstrated by the close correlation between the S&P 500 and growth of the Fed’s balance sheet through its bond purchases.
To sterilize the vast sums of money that would otherwise circulate throughout the economy and cause price inflation, the Fed pays an above-market interest rate of 0.50% to banks on reserves, or digital cash, held at the Fed. Currently, banks are holding $2.5 trillion at the Fed and are paid $34.5 million per day in interest.
The Fed has telegraphed its intent to raise rates in 2016, and analysts expect two to four rate hikes. Assuming the Fed raises rates four times‑-once at each of the meetings that are accompanied by a press conference--payments to banks at the end of 2016 would amount to $103.6 million per day.
In addition to paying interest on reserves, the Fed conducts daily auctions to drain cash from the economy and maintain a floor on short-term interest rates. These reverse repo operations pay 0.25% and have averaged $154 billion per day since the Fed raised rates on December 16.
The interest paid by the Fed to banks and funds that participate in the operations amounts to $1.06 million per day. If the Fed raises rates as expected in 2016, total payments would be $1.03 billion in 2016, which is in addition to the $23.1 billion paid as interest on reserves.
After six years of near-zero interest rates, the Fed is in uncharted territory. Never before has a central bank attempted to raise rates after having provided so much stimulus and expanding its balance sheet to such a degree. The legacy of the Fed’s quantitative experiment is largess to banks and funds that will likely total $24 billion in 2016.