Feb 08

Today’s News 8th February 2018

  • Three Top Russian Officials (Quietly) Visit United States

    Authored by Alex Gorka via The Strategic Culture Foundation,

    Nothing like this ever happened even at the best of times.

    The heads of three Russian intelligence agencies all visited the US simultaneously. This is an extraordinary and unprecedented event, especially at a time when that relationship has so greatly deteriorated. Sergei Naryshkin, the foreign intelligence chief, Alexander Bortnikov, who heads the Federal Security Service, and Lieutenant General (two stars) Igor Korobov, the head of Russia’s military intelligence, visited Washington in late January. Not much has been leaked to the media but it was reported that they met with CIA Director Mike Pompeo. There was no secrecy about the visit or attempts to hush it up. The Russian ambassador to the US, Anatoly Antonov, mentioned the event on television. He claimed that the visit had been a success and that despite the extreme tension between the two countries, their intelligence agencies were continuing to cooperate. As he put it, “Politics is politics, work is work. There are political proclamations, and there is real work.”

    At least one of the Russian visitors is affected by the sanctions constraints. Obviously, President Donald Trump permitted the visit, as he is the only one who is authorized to temporarily waive those restrictions. No doubt there was a discussion of the terrorist threat posed by the Federal Security Service, but that team was headed by Mr. Naryshkin. The negotiations over the joint efforts to counter international terrorism could have been held anywhere. Such contacts between intelligence agencies do not require the top officials to head the delegations. Thus one must conclude that the talks addressed a much broader agenda – there must have been something really significant to discuss, with an agenda not limited to just one or two issues.

    There was a particular context for this event.

    It’s important to note that Kurt Volker, the US Special Representative for Ukraine, and Vladislav Surkov, the Russian president’s top aide, also met in late January in Dubai. The American official is known for his stints at the CIA. Many observers found it rather surprising that President Trump did not say anything critical about Russia in his remarks at the Davos World Economic Forum on Jan. 26. During his stay in Switzerland, the US president was too busy to meet Ukrainian President Poroshenko but managed to find time for talks with his “friend” Rwandan President Paul Kagame! The long- awaited “Kremlin List” was nothing but a meaningless administrative step.

    There have been reports that Washington has been seeking ways to improve ties. The two countries’ top military leaders met last September to discuss Syria. More such events are planned for the future. The two foreign-office chiefs regularly hold private meetings. And Feb. 5 was an important date – both parties reported they had met their obligations under the New START Treaty.

    This is the moment when the tide is starting to turn, as President Trump is seeing some success from his efforts to undermine public confidence in the Russiagate investigation. The president is going on the offensive. Donald Trump has given permission to release a memo, which alleges that there was an abuse of power by the FBI and the Justice Department in the investigation into Russia’s alleged meddling in the US presidential election. The document shines a light on the role of the “deep state” in America and its influence on the media. It provides a clue about who raised the hullabaloo over “Russiagate” and why, and shows that they are ready to go to any length to spoil the US relationship with Moscow and jam a spoke into Donald Trump’s wheel.

    With the economy surging, the US president felt strong enough to approve the visit. This shows, better than any other example, that Russia is too important not to talk to. The two powers need to be engaged in dialog and the issues are too vital to ignore or sweep under the rug. President Trump has never shied away from claiming that he wants to repair that relationship. In his own words, “Putin is very important.” It’s an open secret that personal chemistry between leaders can play a very significant role in kick-starting the reconciliation process. With the memo released and “Russiagate” going nowhere, the president may have more supporters in Congress after the 2018 midterm elections. The US policy on Russia may be one of the things to change.

    The odds are slim of Russia and the United States becoming close partners. This makes engagement, “deconfliction,” and interaction in certain areas even more important. The contacts between the intelligence chiefs indicate that the parties are serious about bringing about positive changes. We may never know what the officials talked about, but the very fact of the meeting speaks for itself. It really is impossible to underestimate its importance. Looks like there might well be a light at the end of the tunnel.

  • Tesla Building 250MW "Virtual Solar Power Plant" Using 50,000 Homes In Australia

    After building the world’s largest lithium battery in Australia nearly 40 days ahead of schedule, Tesla has announced plans to build the world’s largest “virtual power plant” by outfitting 50,000 homes in South Australia with solar panels and Tesla battery storage units over the next four years, slashing participants’ energy bill by 30%.

    Beginning with a trial of 1100 Housing Trust properties, a 5kW solar panel system and 13.5kWh Tesla Powerwall 2 battery will be installed at no charge to the household and financed through the sale of electricity.

    Following the trial, which has now commenced, systems are set to be installed at a further 24,000 Housing Trust properties, and then a similar deal offered to all South Australian households, with a plan for at least 50,000 households to participate over the next four years. –ourenergyplan.sa.gov.au

    Over 6,500 households have already applied for the 250MW program (which will provide the panels for free), tweeted South Australian Premier Jay Weatherill on Monday.


    The AUD$32 million ($25 million USD) project bankrolled by taxpayers and a state-funded techonlogy grant will be recovered by selling the electricity to customers on the grid. “We will use people’s homes as a way to generate energy for the South Australian grid, with participating households benefiting with significant savings in their energy bills,” says South Australia’s premier Jay Weatherill. “More renewable energy means cheaper power for all South Australians.”

    Price predicts utility bills for participating households will be slashed by 30%. The installations will begin with 100 households in a low-income housing community. Those systems should be completed by the end of June. Then another 1,000 systems will be installed in similar properties by the end of the year.

    After that, another 24,000 Housing Trust residents will be offered the opportunity to join the program, followed by 25,000 more households over the next 4 years. Minister for Social Housing Zoe Bettison said the decision to install the systems in Housing Trust homes would assist the most vulnerable. “We know that people in social housing can often struggle meeting their everyday needs and this initiative will take some pressure off their household budget,” she said. –cleantechnica.com

    South Australia’s 1.7 million residents regularly suffer power outages and energy reductions, with several major incidents leaving people without power following storms and a massive heat wave. 

    Off to a good start

    Tesla’s lithium battery storage project has already proven its worth; after the 129 MWh installation was activated on December 2, the Loy Yang coal power plant – one of the largest in Australia, went offline – depriving the grid of 560 MW of electricity, enough for 170,000 homes. Within 140 milliseconds, the Tesla “Hornsdale Power Reserve Battery System” kicked in, providing the grid with 100 MW of power – buying grid operators enough time to reroute other power sources and make up for the shortfall. Utility customers were largely unaffected. 

    That’s a record and the national operators were shocked at how quickly and efficiently the battery was able to deliver this type of energy into the market,” said State energy minister, Tom Koutsantonis, who added “Until now, if we got a call to turn on our emergency generators it would take us 10 to 15 minutes to get them fired up and operating which is a record time compared to other generators.”

  • Trump Administration To Test Biometric Program To Scan Faces Of Drivers

    Authored by Derrick Broze via ActivistPost.com,

    The U.S. Customs and Border Protection is preparing to launch a pilot program to scan the faces of drivers and passengers at Anzalduas Port near McAllen, Texas.

    On Thursday the U.S. Customs and Border Protection announced plans for a new pilot program that will test out biometric facial recognition technology as part of an effort to identify fugitives or terror suspects. The Austin-American Statesman reported on the announcement:

    Thanks to quantum leaps in facial recognition technology, especially over the past year, the future is arriving sooner than most Americans realize. As early as this summer, CBP will set up a pilot program to digitally scan the faces of drivers and passengers — while they are in moving vehicles — at the busy Anzalduas Port of Entry outside of McAllen, the agency announced Thursday.

    The Texas-Mexico border is being used as the testing grounds for the technology. The results of the pilot program will be used to help roll out a national program along the entire southern and northern borders. The Statesman notes that the Department of Energy hired researchers at Tennessee’s Oak Ridge National Laboratory to help overcome the difficulties of using facial recognition technology on moving vehicles. The researchers developed a method for combating window tinting and sun glare which can make a vehicle’s windows impenetrable to cameras. The facial recognition technology being developed for the pilot program will be capable of identifying the driver, front passengers, and the passengers riding in the back.

    The CBP currently operates facial recognition exit programs at almost a dozen international airports in the United States. Colleen Manaher, the CBP’s executive director of planning, program analysis and evaluation, told the Statesman that travelers have been accepting of the technology and noted that “we can thank the Apples and the Googles for that.”

    Although the CBP claims implementing facial recognition technology could eventually eliminate the need for passports, boarding passes and other travel documents, the technology is without a doubt an invasion of privacy. Both the Electronic Frontier Foundation and Georgetown University’s Center on Privacy and Technology have called for further investigation into the potential dangers of a massive facial recognition apparatus. In the U.S., only Texas and Illinois have laws preventing the use of biometric data for commercial purposes.

    The new Texas pilot program is only the latest effort by the federal government to implement a wide range of biometric and surveillance programs around the United States.

    In August 2017 Activist Post first reported on the plans to launch a national program scan the faces of all airline passengers in the U.S. Customs and Border Protection launched a “Traveler Verification Service” (TVS) that intends to use facial recognition on all airline passengers, including U.S. citizens, boarding flights exiting the United States. That same month it was reported that thirty-one sheriffs along the U.S.-Mexico border voted unanimously to adopt tools that will allow the collection and storing of iris scans.

    Additionally, Activist Post just last week reported that the U.S. Immigration and Customs Enforcement (ICE) agency now has access to a nationwide license plate recognition database after finalizing a contract with the industry’s top license plate data collection company. This database allows ICE to search a vehicles whereabouts over the last five years, as well as developing “hot lists” that can track particular vehicles indefinitely.

    The U.S. Immigration and Customs Enforcement is currently facing a lawsuit for failing to release records related to the agency’s use of devices to gather biometric data from immigrants. Mijente and the National Immigration Project of National Lawyers Guild are asking a federal court to force ICE and the Department of Homeland Security to release information related to the use of handheld devices used to gather biometric data from immigrants during raids.

    These programs are reminiscent of mass surveillance systems established in Russia and China.

    The truth of the matter is that all three nations are taking different paths towards the same goal: control and monitoring of their population and suppression of critical thought or opposition. The only way to stand against this is to refuse to fund the programs at every turn and sharing the information. It might be too late to stop the establishment of these programs, but the people could potentially form enough of a resistance to establish free communities and neighborhoods where these invasive technologies are rejected.

  • Yuan Is Crashing After Huge China Trade Surprise

    China’s overseas shipments held up (exports +11.1% YoY in USD terms) despite the stronger yuan and rising trade tensions with the U.S., but it was the imports that stunned many, rising 36.9% YoY in USD terms, slamming the trade surplus well below expectations.

    In Yuan terms the spike in imports was just as impressive…

    In USD terms, the China trade balance printed $20.34bn, well below the $54.65bn expectation and collapsing from last month.

    Perhaps in an effort to show there is no trade war, January exports to U.S. rose 7.5%, but ‘friendly’ imports surged 20.5% on the year.

    While coal (colder than normal) and oil imports (record) surged in January more than expected, it is crucial to understand that the Lunar New Year, which began earlier in 2017, may have distorted the data notably.

    Nevertheless, stocks extended their losses on the data…


    But the big impact is extending the losses from the US session in the Yuan as it crashes 5 handles after the data…

    Offshore Yuan is now down over 11 handles on the day and down 1.5% in the last two days.

    It would appear all bets are on again for another devaluation.

    Today is actually the biggest drop in the Yuan since the Aug 2015 devaluation (and remember what ripples that sent through global markets)

  • Paul Craig Roberts Exposes The Plunge Protection Team's Fraud

    Authored by Paul Craig Roberts,

    After the extraordinary sudden loss in equity values, the last two days brought gains back to the stock indices (albeit with a late day tumble today).

    What happened? Did the market sneeze, cough, or was something misread and today perceived in a different light?

    In my opinion this is what happened:

    The Plunge Protection Team, as they have done on previous equity market drops, or the Federal Reserve operating for the Working Group on Financial Markets, sent a purchase order for S&P futures to the trading floor. The hedge funds, seeing the incoming bid, front-ran the bid by stepping in and buying S&P futures. This pushed the market back up, ended the correction, and prevented financial panic.

    The Plunge Protection Team was created in 1987, approaching the end of the Reagan administration, in order to prevent a market correction from costing George H. W. Bush the presidential election as Reagan’s successor. The Republican Establishment was desperate to reestablish its control over the party. The Republican Establishment, convinced by Wall Street that the Reagan tax cut would result in high inflation, found themselves instead confronted with a long economic expansion. In those days that meant that the expansion could be nearing its end, and a stock market correction could deny the presidency to George H.W. Bush.

    To prevent any such correction, the US Treasury and Federal Reserve created a “working group” to intervene in the stock market in order to support values. Whenever the market starts to drop, the team purchases S&P futures which halts the market decline.

    We have witnessed this on several occasions. And, most likely, again this week.

    Pundits who speak about “market forces” are speaking about something that doesn’t exist. “Market forces” are the interventions that support existing values with money infusions.

    How long can the fraudulent valuation of equities continue?

    My sometimes coauthor Dave Kranzler and I think it can continue until the dollar as reserve currency comes under attack. Neither of us believed that the fraud could be perpetrated this long. The two other world powers, Russia and China, are moving away from use of the US dollar, but the consequence for the dollar could still be in the future. In the meantime, liquidity supplied by central banks and the interventions of the Plunge Protection Team could send equity prices higher.

  • Uber CIO : We Were Wrong To Pay Hacker $100,000 And Cover Up Breach Of 57 Million Accounts

    Testifying in front of Congress on Tuesday, Uber CIO John Flynn said that there was “no justification” for the company covering up a massive 2016 breach by hackers from Canada and Florida which affected 57 million accounts.

    John Flynn, Uber CIO

    I think we made a misstep in not reporting to consumers, and I think we made a misstep in not reporting to law enforcement,” said Flynn.

    The CIO also said that it was inappropriate to have paid one of the hackers $100,000 through a “bug bounty” program to destroy the stolen data. The bounty program offers financial rewards to anyone who identifies vulnerabilities.

    Flynn confirmed the man who obtained data from Uber was in Florida and that his partner, who first contacted the company on Nov. 14, 2016, to demand a six-figure payment, was located in Canada. The company’s security team made contact with both people and received assurances the pilfered data had been destroyed before paying the intruders $100,000, Flynn said. –Reuters

    We recognize that the bug bounty program is not an appropriate vehicle for dealing with intruders who seek to extort funds from the company,” Flynn said in his written testimony. “The approach that these intruders took was separate and distinct from those of the researchers in the security community for whom bug bounty programs are designed.”

    Of the 57 million user accounts were compromised last November, 25 million were located in the United States. Of those, 4.1 million were Uber drivers, according to Flynn’s testimony. The hackers were able to obtain names, addresses and drivers license numbers. 

    Lawmakers on the Senate Commerce consumer protection subcommittee railed against the company over how it handled the breach.

    The fact that the company took approximately a year to notify impacted users raises red flags within this Committee as to what systemic issues prevented such time-sensitive information from being made available to those left vulnerable,” said subcommittee chairman Sen. Jerry Moran (R-KS).

    There ought to be no question here that Uber’s payment of this blackmail without notifying consumers who were greatly at risk was morally wrong and legally reprehensible and violated not only the law but the norm of what should be expected,” added Sen. Richard Blumenthal (D-CT).

    Blumenthal also noted that Uber was in the process of negotiating a settlement with the Federal Trade Commission over an earlier, smaller breach and charges of deceptive privacy claims – while covering up the giant breach from November 2016. 

  • Brandon Smith: Is A Massive Stock Market Reversal Upon Us?

    Authored by Brandon Smith via Alt-Market.com,

    I have been saying it for years and I will say it again here – stocks are the worst possible “predictive” signal for the health of the general economy because they are an extreme trailing indicator. That is to say, when stock markets do finally crash, it is usually after years of negative signs in other more important fundamentals.

    Of course, whether we alternative analysts like it or not, the fact of the matter is that the rest of the world is psychologically dependent on the behavior of stock markets. The masses determine their economic optimism  (if they are employed) according to the Dow and the S&P and, to some extent, by official and fraudulent unemployment statistics. When equities start to dive, society takes notice and suddenly becomes concerned about fiscal dangers they should have been worried about all along.

    Well, it may have taken a couple months longer than I originally predicted, but it would seem so far that a moment of revelation (that slap in the face I discussed a couple weeks ago) is upon us. In less than a few days, most of the gains in global stocks for 2018 have been erased. The question is, will this end up as a “hiccup” in an otherwise spectacular bull market bubble? Or is this the inevitable death knell and the beginning of the implosion of that bubble?

    After I predicted the election of Donald Trump, I also predicted that central banks would begin pulling the plug on life support for equities markets. This did in fact take place with the Fed’s continued program of interest rate increases and the reduction of their balance sheet, which effectively strangles the flow of cheap credit to banking and corporate institutions that fueled stock buybacks for years. Without this constant and ever expansionary easy fiat, there is nothing left to act as a crutch for stocks except perhaps blind faith. And blind faith in the economy always ends up being smacked down by the ugly realities of mathematics.

    I believe the latest extraordinary dive in stocks is NOT a “hiccup,” but a sign that “contagion” is still a thing, and also a trailing sign of instability inherent in our fiscal system. Here are some reasons why this trend is likely to continue.

    Historic Corporate Debt Levels

    As mentioned above, artificially low interest rates have allowed corporations incredible leeway to manipulate stock markets at will using stock buybacks and other methods.  However, there are still consequences for this strategy.  For example, corporate debt levels are now at historic annual highs; far higher even than debt levels just before the crash of 2008.

    If this doesn’t illustrate the falseness of the so called “economic recovery”, I don’t know what does.  Beyond that, what happens as the Fed continues to raise interest rates and all that debt held by the “too big to fails” becomes vastly more expensive?  Well, I think we are seeing what happens.  Over time, faith in the corporate ability to prop up equities will erode, and a considerable decline is built directly into the farce.

    Price To Earnings Ratio

    In some of her final statements upon stepping down as the head of the Federal Reserve, Janet Yellen had some choice comments about the state of equities markets. These included statements that stock market valuations were high and that the price-to-earnings ratio of the S&P 500 (the ratio of stock values versus actual corporate earnings per share) were at a historical peak. This fits exactly with the policy shift I warned about in 2017, and my assertion that Jerome Powell will be the Fed chairman to oversee the final crash of the post-bailout market bubble.

    The spike in P/E ratios is not only taking place in U.S. markets. For example, the same trend can be observed in countries like India.  Meaning, there are equities valuation problems around the world.

    The issue here is that corporate earnings do not justify such high stock prices. Therefore, something else must be inflating those prices. That something was, of course, central bank stimulus, and now that party is almost over, whether the “buy the f’ing dippers” want to admit it yet or not.

    10-Year Treasury Yield Spike

    Have spiking Treasury bond yields actually been a signal for an “accelerating economy” as mainstream economists often suggest? Not really. In the era of central bank monetary manipulation, it is more likely that yields were spiking because markets are anticipating the arrival of Jerome Powell as Fed chair and accelerating interest rate hikes rather than an accelerating economy.

    The notion that the economy itself might be “overheating” in 2018 is a rather new and nefarious propaganda meme being used by central bankers to set a particular narrative. I believe that narrative will be the claim that “inflation” is a key concern rather than deflation and that central banks must act to temper inflation with more aggressive rate increases. In reality, what we are seeing is not “inflation” in a traditional sense, but stagflation. That is to say, we are seeing elements of price inflation in necessary goods and services and well as property markets, but continued deflation in the rest of the economy.

    The Fed in particular will continue to ignore negative fundamentals because they are seeking to deliberately pop the market bubble they have created.

    The spike in 10-year bond yields seems to be correlating closely to the recent volatility in stocks. This volatility increased exponentially as yields neared the 3% mark, which appears to be the magical trigger point for equities failure.  Though yields suffered a modest decline as stocks tumbled this week, I still recommend keeping an eye on this indicator.

    Dollar Weakness

    As I have mentioned in recent articles, there has been a strange disconnect between interest rates and the U.S. dollar. As the Fed continues its policy of hiking interest rates, generally the dollar index should rise in response. Instead, the dollar has been swiftly falling, only stalling in the past couple of trading sessions. If the dollar index continues to fall even as stocks decline and rates increase, this may suggest a systemic risk to the dollar itself.

    Such risk could include a dollar dump by foreign central banks in favor of a wider basket of currencies, or the SDR trading basket created by the IMF.

    Balance Sheet Reductions Accelerating

    The Fed’s most recent release of data on its balance sheet reduction program shows a drop in holdings of $18 billion; this is far higher that the originally planned $12 billion slated by the Fed.  Meaning, the Fed is dumping its balance sheet holdings much faster than it told the public initially.

    Why is this important?  Well, if you have been tracking the behavior of stocks over the past few years as well as the increases in the Fed’s balance sheet, you know that stock markets have risen in direct correlation with that balance sheet.  In other words, the more purchases the Fed made, the higher stocks climbed.

    Image result for Fed balance sheet and Stocks 2017

    If this correlation is directly linked, then as the Fed reduces its balance sheet, stocks should fall.

    So, the fed announces its latest round of balance sheet reductions on January 31st, the reduction is much higher than anticipated, and within a week we witness the largest two day market drop in years.  You would think this observation might just be important, but if you look at the mainstream economic media, almost NO ONE is mentioning it.  Instead, they are searching for all sorts of random explanations for what just happened, none of which are very logically satisfying.

    I believe that the Fed will not only continue its program of interest rate increases even if stocks begin to flounder, but that they will also unload their balance sheet as quickly as possible.

    Corporate Investor Comments

    Major corporate investment firms are beginning to raise their voices about the potential not only for stock devaluations, but also the amount that they might fall. Sydney-based AMP capital suggested a rather moderate 10% pullback in equities, which I think will become the talking point for most of the mainstream media over the next couple weeks. At least, until the whole thing comes crashing down much further than that.

    The head of Blackstone COO expects stocks to fall at least 20% this year, a much more aggressive number but not high enough in my view.

    I still believe these kinds of estimates are only applicable in the very short term. By the end of 2018, it is possible that markets will double the worst estimated declines predicted by the mainstream investment world given the fundamentals.

    Central Banker Comments

    Comments by agents of the Federal Reserve reinforce the notion that the central bank is about to crush the bull market bubble. San Francisco branch head Robert Kaplan has been quoted as saying the Fed may be required to hike interest rates MORE than the three times expected by mainstream economists in 2018.

    As noted above, Janet Yellen’s exit statements were decidedly “hawkish,” suggesting that property markets and stocks are overpriced. On top of this, Jerome Powell, the new Fed chair, has been quoted in Fed documents from 2012 (finally released this past month) discussing the market bubble the Fed had created and the need to temper than bubble. In other words, Powell is the perfect man for the job of imploding stocks. Powell even predicted in 2012 that when the Fed raises rates the reaction by stock markets might be severe.  Interesting that markets would plunge the very first day Powell assumes the Fed chair position.

    I suppose finally a Fed agent and I have something in common. We’ve both been predicting the same exact market outcome caused by the same trigger event for around the same number of years.

    I outlined in great detail the plan for the “global economic reset” and Powell’s role in overseeing the next stock crash in my article Party While You Can – Central Bank Ready To Pop The Everything Bubble. In that article, I predicted exactly the results which seem to be developing today in equities.

    In essence, Powell is being portrayed by the mainstream media as “Trump’s guy,” and the change in Fed leadership is now being referred to as “Trump’s Fed.” This is not random rhetoric.  I can’t think of ANY other president in the past that was given credit by the mainstream media for the activities of the Federal Reserve. Trump’s control over the Federal Reserve is zero. But, the actions of the Fed over the course of this year will undoubtedly crash the very equities markets that Trump has been foolishly taking credit for since his election.

    The real issue here now is, how fast will this ugly festering sore explode? That’s hard to say. I would not be surprised if markets fall about 20% below recent highs in the course of the next couple of months and then stall. We may even see a couple spectacular bounces in the near term, all set to trumpets and fanfare by the mainstream economic media who will proclaim that the latest shock-drop was nothing more than an “anomaly.” Then, the crash will continue into the end of 2018 and panic will ensue.

    That said, if there is some kind of major geopolitical crisis (such as a war with North Korea), then all bets are off. Stocks could crash exponentially over the course of a few weeks rather than a year. As the past few days have proven, stocks are not invincible, not in the slightest. And all the gains accumulated in the span of years can be wiped away in an instant.

    *  *  *

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  • "Do I Have To Worry About Another Volatility Spike"- A Q&A With Goldman's Head Quant

    After a day of conference calls with investors, Goldman’s newly-hired quant Rocky Fishman has assembled the most frequently asked questions that are relevant for trading dynamics in the VIX and equities in the coming days.

    Here is the result: Goldman’s Q&A on the Trading Dynamics of ETPs

    * * *

    1. Do I have to worry about VIX ETPs driving another similar volatility spike?

    Not for now, and not likely anytime soon. The large short VIX products were the primary driver of Monday afternoon’s late-day acceleration in the VIX, and with them diminished ($300mm AUM now vs $3.9bln peak AUM), the quantity of VIX futures ETP issuers would have to buy on a further volatility spike is diminished as well. Levered long ETPs remain sizable ($1.1bln AUM), but per unit of VIX futures exposure, they trade less on a volatility spike than inverse products would (filling the gap between long futures that have risen and a fund NAV that has risen faster requires fewer units of futures than between a NAV and futures position that are moving in opposite directions). The higher level of VIX futures also makes an N-point move a lower percentage move than it would be with lower VIX futures prices.

    2. What’s the impact of the XIV (and Japan-listed 2049) redemption? What’s the impact of the SVXY continuing to trade?

    The previously sizable short VIX ETPs no longer have a significant impact on the VIX futures market because Monday’s sell-off pushed their AUM down so much that their VIX futures holdings would be immaterial to the broad market (the SVXY is short less than 1% of VIX futures open interest), regardless of whether or not they continued trading.


    3. Why were VIX futures and S&P futures both down throughout much of Tuesday’s trading day?

    Typically, VIX futures rise when S&P 500 futures are falling; however, VIX futures had such outsized, technicals-driven buying pressure on Monday afternoon that the absence of this was enough to allow VIX futures to fall on Tuesday, even in the context of an initially weaker equity market.

    4. Were short ETPs a material percentage of the VIX futures market? What implications do this week’s events have on VIX future trading volumes?


    VIX future volumes closely track VIX ETP trading volumes, so we would expect a material drop in ETP volumes due to the lack of sizable short ETP trading activity to result in a similar drop in VIX future volumes. We estimate short VIX ETPs constituted over 40% of ETP trading volume in January, when measured in VIX future-equivalent terms. While VIX derivatives naturally are active when volatility is moving around, we expect VIX future volumes to fall below – perhaps substantially below – their typical 2017 range (1st & 2nd futures volume was 30% higher than the typical 2015-6 volume) as conditions normalize.


    5. Is there a transmission mechanism by which VIX futures activity can lead to S&P 500 trading?

    Investors may use S&P 500 futures to hedge some of the risk of short VIX future positions. If some of the investors selling VIX futures to ETP issuers on Monday simultaneously sold SPX futures as a hedge against the market risk inherent in their short VIX future positions, their positioning could potentially have impacted equity prices. High volatility can also pressure equity prices via flows from systematic volatility-linked funds, investor confidence, and VAR-driven risk reduction.


    6. Was this technical selloff expected? Should vol-of-vol (i.e., VIX option prices) be structurally higher given what has taken place?
    VIX option prices had been abnormally high for the current low level of volatility throughout much of January as investors had priced in some risk of outsized short VIX ETPs causing turmoil like Monday’s. In effect, option pricing implied that should volatility rise, it would rise quickly. With the short VIX ETP market now small, we think that implied volatility of VIX options should reset to levels lower than the last few months once conditions normalize, which could create opportunities to sell VIX options.

    7. If the AUM of short VIX ETPs was only $3.9bn at their peak, why are they important?

    Short VIX ETPs were important because a hypothetical spike in VIX futures would economically drive their issuers to buy an outsized amount of VIX futures, and that buying could push VIX futures up more, creating escalating volatility like we saw on Monday. VIX ETPs are small relative to the US equity market, but large relative to the VIX futures market (often accounting for 40% of open interest). These ETPs were also highly correlated with the equity markets and had multiples of the SPX’s volatility, giving them a larger impact on portfolios than their AUM would suggest.

    8. Why do short and levered long VIX ETPs both buy more VIX futures when volatility spikes?

    When volatility rises, both inverse and levered long VIX ETP issuers are economically driven to buy VIX futures: the inverse product issuers do so to reduce a short position that has become too large relative to their AUM, and the levered issuers do so to supplement a long position that has not risen as quickly as the AUM of the ETP itself.

    9. Can VIX ETPs cause vol to fall abnormally quickly just like they caused this rise?

    Yes and no, in our view. VIX futures tend to spike up more than they spike down, but should volatility drop dramatically, ETP rebalancing could help VIX futures overreact to the downside as well. We estimate that Tuesday’s normalization of volatility left ETP issuers with around 40k VIX futures to sell – a large amount but far below Monday’s estimated “vega to buy” that exceeded 200k VIX futures.

    10. Why do issuers have to trade near the 4:15 futures market close?

    The indices behind the VIX ETPs are based on one-day changes in VIX futures levels, measured by their 4:15 PM NY time prices. Every day, an ETP’s NAV change is a weighted average of the one-day returns of two VIX futures, but those weights change every day. It is only at the close of each trading day that the next day’s weights are fully known, because the total dollar amount of futures involved needs to be exactly the right leverage times the price of the product. This process becomes a feedback loop because each ETP’s closing NAV is an input to the size of its position the next trading day. As we approach the close every day, an ETP issuer shifts its portfolio to the next day’s position so it can correctly replicate the next day’s return.

    11. Did the XIV and SVXY cause 2017’s surprisingly low VIX range? Now that they are diminished will volatility return?

    In our view, 2017’s low VIX range was driven primarily by low S&P 500 realized volatility (the lowest S&P 500 realized volatility since 1964), which was a byproduct of low volatility across asset classes, low intra-SPX correlation, and benign economic conditions. We do not see evidence that VIX ETPs furthered this in any material way.

    12. What is vega?

    Vega is a measurement of volatility risk that represents dollars per volatility point. Because the contract has a 1,000 multiplier, each VIX futures contract carries 1,000 vega – i.e. its value changes by $1,000 for each point that the VIX futures price moves. The amount of vega in any one VIX ETP share changes over time, as the amount of VIX futures exposure that can “fit” inside a share is a function of the share’s NAV and the price of VIX futures. Short VIX ETPs had seen their vega per share grow quickly in late 2017, but now the SVXY has very little vega per share.

  • US-Led Coalition Bombs Syrian Forces Following Israeli Strike Near Damascus

    A US-led coalition has conducted several “defensive” airstrikes against Syrian forces allied with President Bashar al-Assad on Wednesday in Syria’s Deir al-Zor province, in retaliation for what the coalition said was an “unprovoked” attack on the US-backed left-wing Syrian Democratic Forces (SDF) headquarters.

    Furthermore, CNN reported late Thursday that US forces are now investigating whether Russian contractors were involved in the initial attack against the SDF, after a US official told the news outlet that the possibility could not be ruled out.

    The retaliatory airstrikes are said to have occurred 8km (5 miles) east of the Euphrates River, while no U.S. troops embedded with the local fighters at their headquarters are believed to have been wounded or killed in the attack on the headquarters, reports Reuters.

    The US-led coalition did not say whether any pro-Syrian forces were killed in the retaliatory strike.


    Syrian pro-regime forces initiated an unprovoked attack against well-established Syrian Democratic Forces headquarters,” reads a Feb 7 press release from Central Command. “In defense of Coalition and partner forces, the Coalition conducted strikes against attacking forces to repel the act of aggression against partners engaged in the Global Coalition’s defeat-Daesh mission.” 

    Although no U.S. servicemembers were reportedly involved in the attack on the SDF, the US-led coalition has previously asserted a “non-negotiable right to act in self-defense,” pointing to the fact that coalition service members are embedded with the SDF “partners” on the ground in Syria. 

    Syrian President Bashara al-Assad has repeatedly stated that the presence of the US-led coalition on Syrian soil is an act of aggression and a violation of Syrian sovereignty. Officially, Russian and Syrian air forces are the only military allowed to operate in Syria – however Syria and Iran are close strategic allies, with the latter providing logistical, technical and financial support to the Syrian government during the ongoing Syrian Civil War. Syria has repeatedly asked the United Nations to convince the United States to leave following the defeat of most ISIS forces in the country, however US Secretary of State Rex Tillerson says US troops will remain in Syria as a counter to Syrian President Bashar al-Assad and Iranian forces.

    Secretary of State Rex Tillerson

    News of the retaliatory coalition airstrike comes on the heels of what we reported was an overnight attack against Syrian government locations near Damascus, in yet another attempt to provoke war with Syria. 

    Bombs Away

    As we discussed earlier, for at least the third time since the start of the 7-year long war in Syria, Israeli jets attacked a site just outside of Syria’s capital city called Jamraya – believed to be a military research facility related to chemical weapons.


    Jamraya’s government facilities are well known – and include a branch of Syria’s Scientific Studies and Research Center – the site of two previous Israeli attacks in 2013 and December of 2017. 

    Like with other recent attacks, Israeli jets are reported to have fired from over Lebanon, with a Syrian military media statement saying that its air defenses intercepted most of the inbound missiles, though no further details were given. Unconfirmed international media reports, however, indicate one or more of the Israeli missiles may have impacted parts of the Syrian government facility during the strikes which occurred at 03:42 am local time Wednesday morning.

    In response to Israel’s most recent attack – apparently timed to coincide with recent allegations against repeated chemical attacks conducted by the Syrian government against al-Qaeda held pockets of the country, the Syrian military said “The general command of the armed forces holds Israel fully responsible for the dangerous consequences of its repeated, aggressive and uncalculated adventures.”

    Though admitting “no evidence” US Defense Secretary Jim Mattis suggested last week that the Syrian Army may be using sarin gas while also alleging multiple smaller scale chlorine attacks. 

    Israel, however, has lately been quick to justify what Damascus has condemned as unprovoked “acts of aggression” in humanitarian terms as retribution for supposed gas attacks. Israel has long been on record as condemning Iran’s presence in the region, however, Israeli leaders lately appear increasingly reliant on chemical attack claims as rationale for bombing Syrian government sites. 

    Looks like more regime change is on the menu. The only question is when, and whether or not chocolate cake will be served for dessert. 

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