Friday, May 11, 2012

It's The Economy Stupid: PPI & JPMorgan Chase's Egg on their Face

-  Producer Prices in U.S. Decrease for First Time in Four Months


-  JPMorgan Chase loses $2 Billion on Risk Unit’s ‘Egregious Mistakes’


Economic Event


Economic Survey

Actual Reported

Original Prior

Revised Prior

Producer Price Index MoM






PPI Ex Food & Energy MoM






Producer Price Index YoY






PPI Ex Food & Energy YoY







Wholesale prices in the U.S. fell in April for the first time in four months, led by a decline in fuel costs that signals inflation may cool.


The producer price index dropped 0.2 percent after no change in March. Economists projected the gauge would be unchanged in April, according to the median estimate in a Bloomberg News survey. The 1.9 percent increase over the past 12 months (the YoY number) was the smallest since October 2009.


Falling raw-material costs mean companies will have less incentive to charge customers more. Slowing inflation would underscore views of some Federal Reserve policy makers who have said higher fuel prices will have only a temporary effect, allowing the central bank to stick to its plan to keep interest

rates low at least until late 2014.


Estimates for the producer price index of the 73 economists surveyed by Bloomberg ranged from a decrease of 0.6 percent to an increase of 0.3 percent.


JPMorgan Chase


Yesterday afternoon JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said the firm suffered a $2 billion trading loss after an “egregious” failure in a unit managing risks, jeopardizing Wall Street banks’ efforts to loosen a federal ban on bets with their own money.


The firm’s chief investment office, run by Ina Drew, 55, took flawed positions on synthetic credit securities that remain volatile and may cost an additional $1 billion this quarter or next, Dimon told analysts yesterday. Losses mounted as JPMorgan tried to mitigate transactions designed to hedge credit exposure.


“There were many errors, sloppiness and bad judgment,” Dimon said as the company’s stock fell in extended trading. “These were grievous mistakes, they were self-inflicted.”


The chief investment office was thrust into the debate over U.S. efforts to ban proprietary trading when Bloomberg News reported last month that the unit had taken bets so big that JPMorgan, the largest and most profitable U.S. bank, probably couldn’t unwind them without losing money or roiling financial markets. Dimon, 56, had transformed the unit in recent years to make bigger and riskier speculative trades with the bank’s money, five former employees said.  


Dimon had defended the unit as a “sophisticated” guardian of the bank’s funds on an April 13 conference call, calling news coverage “a complete tempest in a teapot.” On May 2, he led fellow Wall Street CEOs in a closed-door meeting to lobby the Federal Reserve about softening proposed U.S. reforms that might

crimp their profits.


‘Egg on His Face’


Yesterday, Dimon said the timing of the trading blunders “plays right into the hands of a bunch of pundits out there” who are pushing for a strict version of the proprietary trading ban named for former Federal Reserve Chairman Paul Volcker.




I am not against proprietary trading, per se.  But when you combine prop trading with low interest rates and easy money from the Fed, it distorts the risk reward dynamic.  In general, that’s what’s wrong with many markets.  The risk premium between the classic risk free assets, Treasury securities, and other asset classes are too compacted, too narrow a spread given the current economic uncertainty.  I doubt that JPMorgan is the only one facing a “come to Jesus” moment.  Given what’s going on in Europe, I fear that this could just be the first of many.



John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury

Ph:  225-342-0013

Fx:  225-342-9721



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