Oct 10

Today’s News 10th October 2016

  • Here's Where The Next Bank Deposit "Bail-In" Will Strike…

    Submitted by Nick Giambruno via InternationalMan.com,

    One shot from a pistol pierced the night right before Antonio Bedin collapsed, dead.

    Antonio, a 67 year-old retired Italian, had just committed suicide. He was plagued by health problems and by the loss of his savings.

    Last year, four small Italian banks became insolvent and immediately needed capital. They turned to a bail-in.

    Antonio was one of thousands of small savers who were wiped out. Antonio lost everything. Then he shot himself.

    He wasn’t alone.

    There was another pensioner who hung himself at his home near Rome after he lost more than $100,000.

    Their stories became national news sensations. It generated intense anger at the bail-ins.

    A bail-in is when a bank recapitalizes itself by tapping its creditors, including depositors.

    Most people think of the money they deposit into the bank as a personal asset they own.

    But that’s not true.

    Once a deposit is made at the bank, it’s no longer your property. It’s the bank’s. What you own is a promise from the bank to repay. It’s an unsecured liability. That’s a very different thing from owning physical cash stuffed under your mattress. Money deposited into the bank technically makes you a creditor of the bank. You’re liable to get burned from a bail-in should the bank get into trouble.

    People in Cyprus had to find this out the hard way in early 2013. People awoke on an otherwise normal Saturday morning to the shock that the money in their bank accounts had been taken by a bail-in to recapitalize the banks.

    Not surprisingly, many Italians aren’t just waiting around to get “Cyprused.”

    I recently spent weeks on the ground in Italy investigating the ongoing banking crisis. I spoke with a prominent lawyer who told me that most Italians are now distrustful of the banks. They’re keeping a substantial portion of their savings in cash under their mattresses. They’re also buying lots of gold.

    I’ve been to Italy numerous times over the years. But this time, I saw something new. There were signs everywhere advertising gold bullion, like the one below.

     

    I think it indicates a strong demand for gold and a strong distrust of the banks. It seems to me like a slow motion bank run is already happening. This is the last thing Italy’s banking system needs. It’s further bleeding the capital in the banking system.

    I only see the situation getting worse…

    Italians are rightly afraid of bail-ins. That fear is leading them to withdraw their savings as cash and also to buy gold. This further drains the banks’ capital, making it more likely they’ll need to do a bail-in to remain solvent, which fuels even more withdrawals. It’s like a self-fulfilling prophecy.

    This means that the chances are good that a large number of unsuspecting Italian savers are going to get wiped out.

    The thought of potentially many more old, struggling pensioners committing suicide because they got wiped out from bail-ins has enormous emotional power in Italy. It’s like political nitroglycerin.

    It would have a catalyzing political effect.

    Bottom line, if Italians get Cyprused before the referendum later this year it’s a virtual certainty it will fail.

    That’s the unenviable conundrum the current, pro-EU Italian government is facing. They can stall and save the banks through a bail-in, or they can let the whole house of cards come down. Either option is political suicide.

    It’s hard to imagine that the frustrated Italian populace won’t vote to give the establishment the finger in the referendum, and humiliate the pro-EU government.

    Prime Minister Matteo Renzi has promised to resign if that happens.

    If he does, the anti-euro, populist Five Star Movement will almost certainly come to power. They’ve promised to promptly hold another referendum. This one would be on whether Italy should leave the euro and go back to its old currency, the lira.

    If Italy—the third-largest member of the eurozone—leaves, it will have the psychological effect of someone yelling “Fire!” in a crowded theater. Other countries will quickly head for the exit, and return to their national currencies.

    Economic ties and integration are what hold the EU together. Think of the currency as the economic glue. Without the euro, economic ties will weaken, and the whole project could unravel.

    It would be a deathblow to the EU, the world’s largest economy… And it would explode into a global stock market crash like the world has never seen.

    The Financial Times recently put it this way:

    An Italian exit from the single currency would trigger the total collapse of the eurozone within a very short period. It would probably lead to the most violent economic shock in history, dwarfing the Lehman Brothers bankruptcy in 2008 and the 1929 Wall Street crash.

    That’s how important the upcoming referendum in Italy is. It would be the first domino to fall in the collapse of the EU.

    Not surprisingly, the unsavory George Soros is keenly aware of what’s going on. He recently said, in reference to the Brexit and events in Italy, “Now the catastrophic scenario that many feared has materialized, making the disintegration of the EU practically irreversible.”

    Soros Fund Management has been picking up gold assets and placing bets that stocks will crash.

    He’s positioning to make big profits from the coming crisis. And I think we should, too.

    That’s exactly why I recently spent weeks on the ground in Italy.

    There are potentially severe consequences in the currency and stock markets.

  • INSiDe THe MeN'S LoCKeRooM…

    INSIDE THE MEN'S LOCKER ROOM

  • Debate Post-Mortem: Trump Crushes Clinton – "You Should Be In Jail"

    From the no-handshake start, following the most awkward Bill-Melania pre-debate greeting, it was clear the gloves were off. While Trump started apologetically, once Clinton opened up ad hominem character attacks, The Donald turned it up to '11'. Lashing out at Bill's indiscretions "his actions are worse than words", Hillary's lying "you should be in jail… I will call for a special prosecutor", and the biases of the moderators"it's one of three here" even the crowd cheered.. before being quickly shushed. Online polls, unbiased commentators, and the Mexican Peso agreed Trump won.

     

    A picture paints a thousand words…

    *  *  *

    Melania meets Bill…

     

     

     

    No handshake at the start…

     

     

     

    Hillary appeared to attract a fly…

    "You should be in jail"

     

     

     

    "I will bring a special prosecutor"

     

     

    Brief Transcript:

    TRUMP: "Bernie Sanders and between super delegates and Debra Wassermann Schultz and I was surprised to see him sign on with the devil. The thing that you should be apologizing for are the 33,000 e-mails that you deleted and you acid washed and the two boxes of e-mails and other things last week that were taken from an office are are now missing. I didn't knowledge I would say this, but I'm going to and I hate to say it. If I win, I am going to instruct my attorney general to get a special prosecutor to look into your situation. There has never been so many lies, so much exception. There has never been anything like it. We will have a special prosecutor. I go out and speak and the people of this country are furious. The long time workers at the FBI are furious. There has never been anything like this with e-mails. You get a subpoena and after getting the subpoena you delete 33,000 e-mails and acid watch them or bleach them. An expensive process. We will get a special prosecutor and look into it. You know what, people have been — their lives have been destroyed for doing 1/5 of what you have done. You should be a shamed."

     

    COOPER: "Secretary Clinton, I will let you respond."

     

    CLINTON: "Everything he said is absolutely false. It would be impossible to be fact checking Donald all the time. I would never get to talk and make lives better for people. Once again, go to Hillary clinton.com. You can fact check trump in realtime. Last time at the first debate we had millions of people fact checking and we will have millions more fact checking. It's just awfully good that someone with the temperament of Donald Trump is not in charge of the law in our country."

     

    TRUMP: "Because you would be in jail."

     

    COOPER: "We want to remind the audience to please not talk out loud. Do not applaud. You are wasting time."

    And, AG Holder chimed in…

     

    "I was surprised to Bernie sign on with you the devil…"

     

     

     

    "It's just words, folks"

     

    "I don't know Putin"…

     

    Trump slams Clinton over "Deplorables" comment…

     

    They shook hands at the end…

     

    Clinton's campaign responded…

    *  * *

    The Interruption count remained high…..

     

    *  *  *

    Online polls show it as an overwhelming win for Trump… (DrudgeReport.com)

     

    CNBC…

     

    Ohio…

     

    Fox St.Louis…

     

    And then – 90 minutes after the debate ended – CNN finally releases their poll of 537 Voters!!!!!

    What a total embarrassment!

    *  *  *

    Finally, the most real-time indicator of performance…

    It's on like Donkey Kong.

  • Deutsche Bank Tells Investors Not To Worry About Its €46 Trillion In Derivatives

    Having first flagged Deutsche Bank enormous derivative book for the first time back in 2013, it wasn’t until last week that JPMorgan admitted just what the biggest risk facing Deutsche Bank was. In a note by JPMorgan’s Nikolaos Panigirtzoglou, the strategist warned that, “in our opinion it is not so much funding issues but rather derivatives exposures that more likely to trouble markets going forward if Deutsche Bank concerns continue. This is especially true if these concerns propagate into a confidence crisis inducing more rapid unwinding of derivative contracts.”

    For those new to the story, Deutsche has one of the world’s largest notional derivatives books — its portfolio of financial contracts based on the value of other assets. As we first noted in 2013, It peaked at over $75 trillion, about 20 times German GDP, but had shrunk to around $46 trillion by the end of last year. That’s around 12% of the total notional value of derivatives outstanding worldwide ($384 trillion), according to the Bank for International Settlements.  It was €46 trillion as of Q2 measured by notional outstanding.

    JPMorgan bank analysts confirmed the size of DB’s book, and note that BIS data provide an alternative but indirect way to gauge the size of derivatives exposures. According to BIS data the exposure of foreign banks to German counterparties via derivatives contracts stood at $312bn as of Q1 2016.


    Source: BIS

    While the topic of DB’s derivative book size emerges any time the bank’s stock slides, it tends to be swept under the rug whenever due to fake rumors or otherwise, the stock rebounds.

    And in light of yesterday’s latest news, in which Germany’s Bild reported that Deutsche bank CEO John Cryan “failed to reach an agreement with the US Justice Department“, it is possible that on Monday the stock will have an adverse reaction, which also means that attention will once again turn to what JPM believes is the biggest concern for investors for the world’s most systematically risky bank.

     

    So what is the embattled German lender, the same one which two weeks ago at the depth of its stock plunge blamed its woes on market “speculators“, to do?

    As the Chief Risk Officer Stuart Lewis told Welt am Sonntag in an interview published on Sunday, it was to take a preemptive stance on market concerns about Deutsche Bank’s staggering derivative position.

    Speaking to the German publication, Lewis said that Deutsche Bank continues to cut back the size of its derivatives book, “which is not as risky as investors may believe.” Well, not just investors: it also includes that “other” bank with some $53.3 trillion in derivatives, JPMorgan.

    “The risks in our derivatives book are massively overestimated,” Lewis told the paper cited by Reuters. He said 46 trillion euros in derivatives exposure at Deutsche appeared large but reflected only the notional value of the contracts, while the bank’s net exposure to derivatives was far lower, at around €41 billion.

    “The 46 trillion euros figure sounds gigantic, but it is completely misleading. The real risk is far lower,” Lewis said, adding that the level of risk on Deutsche Bank’s books was in line with that seen at other investment banking peers. While he is largely correct about gross notional netting down to a vastly smaller number in a functioning, stable derivatives market in which there is no contagion and all counterparties continue to function during a Deutsche Bank “stress event”, that assumption falls out of the window the moment a counterparty fails, and becomes even worse whould any of the underlying derivative collateral be found to have been rehypothecated more than once, something not just we, but the BIS itself warned about in 2013.

    But back to Deutsche Bank, whose Chief Risk Officer tried to further belay concerns of a derivative fiasco when he said that “we are trying to make our business less complex and are paring back our derivatives book. Parts of it were transferred into a non-core unit some years ago.” While that is true, most of its exposure remains in the core unit (where the deposits are to be found), and what’s worse, one wonders why DB hasn’t had more success with derisking its gross notional derivative holdings, which still remain a substantial outlier within the European banking system.

    More to the point, it is worth recalling that only two short months ago, on July 31, the same Stuart Lewis, when interviewed by Frankfurter Allgemeine said exactly the same thing, in an article titled “We are not dangerous“… 

    … and promising that concern for the bank in the aftermath of the IMF report labeling it the most systematically risky bank in the world, was unfounded.

    When asked if Deutsche Bank is indeed the most important net contributor to systemic risks,  he replied:

    “No, not at all. Only one IMF report has recently muddled up the situation: We are not dangerous. We are very relevant. Deutsche Bank is interwoven with the entire financial sector. We are one of the largest universal banks in the world. But to make it clear: Our house is stable. The balance sheet is healthy.”

    When further asked if he can make this claim in good conscience, he said:

    “Absolutely. Look at how we have capitalized the bank since the Financial Crisis. We have taken €115 billion in risks off the balance sheet and have €220 billion of liquidity. Concern for us is unfounded.”

    Two months later it turned out that concern for us was, in fact, “founded.”

    Amusingly, when Wolf Richter pointed out Lewis’ comments, he noted that “wisely, Deutsche Bank’s elephantine exposure to derivatives didn’t even come up. It’s better to silence the topic to death than to cause a panic with it.”

    Now, just over two months later, the topic has come up, and this time Stuart Lewis is scrambling to preempt concerns about the dozens of trillions in derivatives, using the same exact rhetoric: please ignore the elephant in the room; Deutsche Bank is fine.

    But the biggest irony from Lewis’ August appeal to investors was the following: “The good news is: the taxpayer does not have to step in; according to the new regulations for banks, bondholders will get hit first.” If anything, events over the past two weeks confirmed that this will not happen.

    * * *

    Still, perhaps an even more important story ahead of Monday’s open is not Deutsche Bank’s latest attempt to ease investor concerns about its balance sheet and trillions in derivatives, but Friday’s report that global banking regulators are sticking to their guns on capital standards in the face of intense European pressure to soften planned rule-changes.

    As Bloomberg reported on Friday, the Basel Committee on Banking Supervision will wrap up work on the post-crisis capital framework, known as Basel III, on schedule by the end of the year, William Coen, the regulator’s secretary general, said on Friday. Key elements criticized by European Union policy makers will be retained, according to the text of Coen’s remarks in Washington.

    One flashpoint is a proposed new capital floor that caps the benefit banks can gain by measuring asset risk using their own models compared with a formula set by regulators. Coen said “discussions are still under way” on the floor, though Valdis Dombrovskis, the EU’s financial-services chief, called last month for it to be scrapped.

    What this means is that as it wraps up Basel III, the regulator is under instructions not to increase overall capital requirements significantly in the process. That promise, first made in January, left open the possibility that individual countries or banks could face a marked increase.

    “This is not an exercise in increasing regulatory capital requirements,” Coen said. “However, this does not mean that the minimum capital requirement for all banks will remain the same; variability in risk-weighted assets can only be reduced if there is some impact on the outlier banks. So some banks which are genuinely outliers may face a significant increase in requirements as a result.”

    Banks such as Deutsche Bank, which while not named can be inferred: among the most vocal opponents to a boost in overall capital levels is German Finance Minister Wolfgang Schaeuble who has insisted that the Basel Committee not only keep any overall increase in capital requirements to a minimum, but also ensure the rules have no “particularly negative consequences for specific regions,” such as Europe. Or rather, Germany.

    In the current round of talks, Europe and Japan are keen to retain risk-sensitivity in the capital rules, including the use of models where appropriate.  The European Commission, the EU’s executive arm, doesn’t believe capital floors are an “essential part of the framework,” Dombrovskis said. Europe also opposes the Basel Committee’s proposal to bar some asset classes from modeling entirely, and objects to the calibration of risk-weights in the standardized approach to credit risk.

    Why is Europe, and its biggest bank, “keen” on retaining the existing model-based framework which would not require substantial capital increases for risky banks, of which Deutsche Bank is at the very top? Simple: the largest German lender is already notably undercapitalized, and any further capital needs would only lead to further pressure on its stock, forcing it to seel even more equity when the inevitable capital raising moment arrives; it also means that the models used by DB’s risk managers are likely to materially misrepresent the bank’s true value at risk, not only when it comes to its loan book, and especially Level II and III assets, but more importantly, its derivative book, where while we appreciate Mr. Lewis’ assertion that the bank’s €46 trillion in gross notional derivatives collapse to just €41 billion, we would be far more interested in seeing the math and assumptions behind this calculation.

  • Two Words Suddenly Strike Fear In Silicon Valley Hearts…"Price Reduced"

    Authored by Mark St.Cyr,

    Remember way back in the glory days when the combination of “everything social” and “IPO” meant near instant stardom and riches? For those who might be having a little trouble remembering; it was way back in days past just a little under 24 months ago. Yes, that’s months, not years.

    Yet, as far as the many still clinging to IPO cash-outs, or stock option redemption in lieu of salary? It’s bordering on an eternity. And, believe it or not, that waiting game may have just been extended. The reason?

    Look no further than the once hailed songbird of both “social,” and in a larger context, much of what being a tech firm in “Silicon Valley” encapsulated: Twitter™

    Twitter has truly morphed into the literal “canary in the coalmine” of what I believe portends in the not so distant future for much of “The Valley” and “social media” in general. i.e., Laying on their backs, in the bottom of their cages, with nothing more than rumors and innuendo of either an offer to buy, or worse, an offer to just look. The latter having the worst of consequences once the “Thanks, but no thanks!” formality becomes public.

    It would seem, in my opinion, Twitter™ received the equivalent of both in the very same week. Can anyone say (or should I say tweet?) Ouch!

    As I stated earlier: “way back” was just under 24 months ago. And what truly took place as to hinder, or tarnish the implied “genius” status of founders, or the brilliance of the “it’s different this time” defense as it pertained to actual fundamental business metrics was The Fed’s ending of QE (quantitative easing.)

    And with that has come the realization (albeit very slowly) that “unicorn and rainbow” thinking belongs where it should – in fairy-tales and folklore.

    Want proof? Just look back to the ancient texts circa 1990-2000 in the “dot-com mania and crash section” via your search engine of choice. And for those of you old enough to had been “invested” back then? Just remember to have a tissue at the ready is all I’ll say.

    For those not familiar, or those painfully trying to forget, the condensed version is this…

    First there were cracks in the meme (think “it’s different this time”) then, one by one, once heralded IPO high flyers (think Twitter, LinkedIn™, etc.) began losing value from their peaks. At first it was slowly, then suddenly, and all at once, where they never regained their former lofty valuations. Till finally, the revenue models (think “eyeballs for ads”) along with their assumptions (think “billions upon billions of potential customers!”) were completely destroyed, taking even the largest of players down only a few years later of what was seen at that time as “unimaginable” with the demise of the then king of “new media” AOL™, yesterday’s equivalent of Facebook™ today.

    But not too worry, after all, it’s different this time, yes?

    Although I’m not as old as Methuselah (if you don’t ask the kids) I penned an article way back when in Sept. of 2014 titled “The Shot Heard Round The Valley World.”  right before the official ending of QE. And in it I made the following argument. To wit:

    “But, one shouldn’t read into this as “confirmation” the risk appetite story is not only alive but growing. For that is all about to change.

     

    Once the Fed shuts down the section of QE that has been pumping Billions upon Billions of dollars every month – it’s over for a great many of today’s Wall Street darlings.

     

    Think of it this way: Who is going to fund your next round when they no longer have access to the Fed.’s piggy bank? Let alone pump more money into older start-ups that just haven’t produced any real money (as in net profit,) but have produced nothing more than great new employee digs or benefits?

     

    Tack along side this the culture shock in what will seem near instantaneous with the shunning that will take place of any business resembling the, 3 employee, menial customer base, Zero if not negative profit margin businesses formed with the implicit intent as to be bought up or “acquired” for Billion dollar pay days.

     

    These will be the first to go. That formulation is going way of the now infamous Pets dot-com sock puppet. This will be the first true shock to Silicon Valley culture that hasn’t been seen in many years. And it will be far from the only one.”

    Along with this assertion:

    “And that won’t be the only monumental shift coming. Maybe, one at an even faster pace: The meaning of IPO.

     

    IPO is not going to have the same term of endearment it now has. I believe it will turn into the last and most dreaded three-letter acronym no one ever imagined in Silicon Valley.

     

    The IPO screams of joy will turn into wails of terror when those VC “angels” meet at many “treps” desk and state – they’re IPO-ing.

     

    No, not getting one set up for the big pay-day. No IPO will mean: “I’m pulling out.” i.e., “Have a nice day. Where’s the rest of my money?”

     

    The once renowned purchases of “Billion dollar babies” will prove out not to be worth two cents in this environment.

     

    Valuations will get crushed and people will be shocked at just how fast a company touted across the financial channels and other media as “fantastic buys” are flogged and fleeced when Wall Street comes back for their “investment.”

     

    If the story or the numbers aren’t there – neither will these once darlings of Wall Street. Regardless of size or stature.”

    You saw the ensuing cracks begin during the initial months of 2015 as the IPO market began drying up faster than a puddle in the Sahara as once Wall Street IPO darling stock prices went from “high flyer” to “dropped like a lead balloon” status – and never, repeat, never ascended within earshot of those once “totally worth it!” valuations.

    Twitter is just the latest, LinkedIn showed just how much “hype” there was to all these valuation metrics. For without a Microsoft™ buy-out? It appeared when it came to getting more LinkedIn shares? There were more people looking to Link-out.

    But not too worry! 2016 was said to be “The year for a rebirth of the IPO market.” That was said during the closing months of 2015. It’s now mid October 2016. How’s that all working out? (insert crickets here)

    However, many will state this is all a bunch of “hyperbole” or “uninformed assertions” or better yet, as is portrayed among the main stream financial media crowd as “the doom and gloom-ers looking only to be proved wrong again, i.e., “For just look at these markets!” I leave you with 2 words that were near unconscionable over the last few years.

    Two very small words that have monumental implications and should bring panic to anyone in tech, “Silicon Valley,” or still holding dreams of cashing out large on the basis of an IPO built on the “Eyeballs for ads” model. And it’s right there in Palo Alto, California for all to see. That is – if one dares look.

    Those two words?

    “Price Reduced!”

    And no, that’s not in reference to a Silicon Valley darling such as a start-up. No, those two words belong to that other seemingly invincible meme which was seen as far more stable than the IPO’s that afforded them.

    Real estate.

  • Russian Options Against A US Attack On Syria

    Via The Saker,

    This article was written for the Unz Review: http://www.unz.com/tsaker/russian-options-against-a-us-attack-on-syria/

    The tensions between Russia and the USA have reached an unprecedented level. I fully agree with the participants of this CrossTalk show – the situation is even worse and more dangerous than during the Cuban Missile Crisis. Both sides are now going to the so-called “Plan B” which, simply put, stand for, at best, no negotiations and, at worst, a war between Russia and the USA.

    The key thing to understand in the Russian stance in this, an other, recent conflicts with the USA is that Russia is still much weaker than the USA and that she therefore does not want war. That does not, however, mean that she is not actively preparing for war. In fact, she very much and actively does. All this means is that should a conflict occur, Russia you try, as best can be, to keep it as limited as possible.

    In theory, these are, very roughly, the possible levels of confrontation:

    1. A military standoff à la Berlin in 1961. One could argue that this is what is already taking place right now, albeit in a more long-distance and less visible way.
    2. A single military incident, such as what happened recently when Turkey shot down a Russian SU-24 and Russia chose not to retaliate.
    3. A series of localized clashes similar to what is currently happening between India and Pakistan.
    4. A conflict limited to the Syrian theater of war (say like the war between the UK and Argentina over the Malvinas Islands).
    5. A regional or global military confrontation between the USA and Russia.
    6. A full scale thermonuclear war between the USA and Russia

    During my years as a student of military strategy I have participated in many exercises on escalation and de-escalation and I can attest that while it is very easy to come up with escalatory scenarios, I have yet to see a credible scenario for de-escalation. What is possible, however, is the so-called “horizontal escalation” or “asymmetrical escalation” in which one side choses not to up the ante or directly escalate, but instead choses a different target for retaliation, not necessarily a more valuable one, just a different one on the same level of conceptual importance (in the USA Joshua M. Epstein and Spencer D. Bakich did most of the groundbreaking work on this topic).

    The main reason why we can expect the Kremlin to try to find asymmetrical options to respond to a US attack is that in the Syrian context Russia is hopelessly outgunned by the US/NATO, at least in quantitative terms. The logical solutions for the Russians is to use their qualitative advantage or to seek “horizontal targets” as possible retaliatory options. This week, something very interesting and highly uncharacteristic happened: Major General Igor Konashenkov, the Chief of the Directorate of Media service and Information of the Ministry of Defence of the Russian Federation, openly mentioned one such option. Here is what he said:

    “As for Kirby’s threats about possible Russian aircraft losses and the sending of Russian servicemen back to Russia in body bags, I would say that we know exactly where and how many “unofficial specialists” operate in Syria and in the Aleppo province and we know that they are involved in the operational planning and that they supervise the operations of the militants. Of course, one can continue to insist that they are unsuccessfully involved in trying to separate the al-Nusra terrorists from the “opposition” forces. But if somebody tries to implement these threats, it is by no means certain that these militants will have to time to get the hell out of there.”

    Nice, no? Konashenkov appears to be threatening the “militants” but he is sure to mention that there are plenty of “unofficial specialists” amongst these militants and that Russia knows exactly where they are and how many of them there are. Of course, officially, Obama has declared that there are a few hundred such US special advisors in Syria. A well-informed Russian source suggests that there are up to 5’000 foreign ‘advisors’ to the Takfiris including about 4’000 Americans. I suppose that the truth is somewhere between these two figures.

    So the Russian threat is simple: you attack us and we will attack US forces in Syria. Of course, Russia will vehemently deny targeting US servicemen and insist that the strike was only against terrorists, but both sides understand what is happening here. Interestingly, just last week the Iranian Fars news agency reported that such a Russian attack had already happened:

    30 Israeli, Foreign Intelligence Officers Killed in Russia’s Caliber Missile Attack in Aleppo:

     

    “The Russian warships fired three Caliber missiles at the foreign officers’ coordination operations room in Dar Ezza region in the Western part of Aleppo near Sam’an mountain, killing 30 Israeli and western officers,” the Arabic-language service of Russia’s Sputnik news agency quoted battlefield source in Aleppo as saying on Wednesday. The operations room was located in the Western part of Aleppo province in the middle of sky-high Sam’an mountain and old caves. The region is deep into a chain of mountains. Several US, Turkish, Saudi, Qatari and British officers were also killed along with the Israeli officers. The foreign officers who were killed in the Aleppo operations room were directing the terrorists’ attacks in Aleppo and Idlib.”

    Whether this really happened or whether the Russians are leaking such stories to indicate that this could happen, the fact remains that US forces in Syria could become an obvious target for Russian retaliation, whether by cruise missile, gravity bombs or direct action operation by Russian special forces. The US also has several covert military installations in Syria, including at least one airfield with V-22 Osprey multi-mission tiltrotor aircraft.

    Another interesting recent development has been the Fox News report that Russians are deploying S-300V (aka “SA-23 Gladiator anti-missile and anti-aircraft system”) in Syria. Check out this excellent article for a detailed discussion of the capabilities of this missile system. I will summarize it by saying that the S-300V can engage ballistic missiles, cruise missiles, very low RCS (“stealth”) aircraft and AWACS aircraft. This is an Army/Army Corps -level air defense system, well capable of defending most of the Syrian airspace, but also reach well into Turkey, Cyprus, the eastern Mediterranean and Lebanon. The powerful radars of this system could not only detect and engage US aircraft (including “stealth”) at a long distance, but they could also provide a tremendous help for the few Russian air superiority fighters by giving them a clear pictures of the skies and enemy aircraft by using encrypted datalinks. Finally, US air doctrine is extremely dependent on the use of AWACS aircraft to guide and support US fighters. The S-300V will forces US/NATO AWACS to operate at a most uncomfortable distance. Between the longer-range radars of the Russian Sukhois, the radars on the Russian cruisers off the Syrian coast, and the S-300 and S-300V radars on the ground, the Russians will have a much better situational awareness than their US counterparts.

    It appears that the Russians are trying hard to compensate for their numerical inferiority by deploying high-end systems for which the US has no real equivalent or good counter-measures.

    There are basically two options of deterrence: denial, when you prevent your enemy from hitting his targets and retaliation, when you make the costs of an enemy attack unacceptably high for him. The Russians appear to be pursuing both tracks at the same time. We can thus summarize the Russian approach as such

    1. Delay a confrontation as much as possible (buy time).
    2. Try to keep any confrontation at the lowest possible escalatory level.
    3. If possible, reply with asymmetrical/horizontal escalations.
    4. Rather then “prevail” against the US/NATO – make the costs of attack too high.
    5. Try to put pressure on US “allies” in order to create tensions inside the Empire.
    6. Try to paralyze the USA on a political level by making the political costs of an attack too high-end.
    7. Try to gradually create the conditions on the ground (Aleppo) to make a US attack futile

    To those raised on Hollywood movies and who still watch TV, this kind of strategy will elicit only frustration and condemnation. There are millions of armchair strategists who are sure that they could do a much better job than Putin to counter the US Empire. These folks have now been telling us for *years* that Putin “sold out” the Syrians (and the Novorussians) and that the Russians ought to do X, Y and Z to defeat the AngloZionist Empire. The good news is that none of these armchair strategists sit in the Kremlin and that the Russians have stuck to their strategy over the past years, one day at a time, even when criticized by those who want quick and “easy” solutions. But the main good news is that the Russian strategy is working. Not only is the Nazi-occupied Ukraine quite literally falling apart, but the US has basically run out of options in Syria (see this excellent analysis by my friend Alexander Mercouris in the Duran).

    The only remaining logical steps left for the USA in Syria is to accept Russia’s terms or leave. The problem is that I am not at all convinced that the Neocons, who run the White House, Congress and the US corporate media, are “rational” at all. This is why the Russians employed so many delaying tactics and why they have acted with such utmost caution: they are dealing with professional incompetent ideologues who simply do not play by the unwritten but clear rules of civilized international relations. This is what makes the current crisis so much worse than even the Cuban Missile Crisis: one superpower has clearly gone insane.

    Are the Americans crazy enough to risk WWIII over Aleppo?

    Maybe, maybe not. But what if we rephrase that question and ask

    Are the Americans crazy enough to risk WWIII to maintain their status as the “world’s indispensable nation”, the “leader of the free world”, the “city on the hill” and all the rest of this imperialistic nonsense?

    Here I would submit that yes, they potentially are.

    After all, the Neocons are correct when they sense that if Russia gets away with openly defying and defeating the USA in Syria, nobody will take the AngloZionists very seriously any more.

    How do you think the Neocons think when they see the President of the Philippines publicly calling Obama a “son of a whore” and then tells the EU to go and “f*ck itself”?

    Of course, the Neocons can still find some solace in the abject subservience of the European political elites, but still – they know that he writing is on the wall and that their Empire is rapidly crumbling, not only in Syria, the Ukraine or Asia, but even inside the USA. The biggest danger here is that the Neocons might try to rally the nation around the flag, either by staging yet another false flag or by triggering a real international crisis.

    At this point in time all we can do is wait and hope that there is enough resistance inside the US government to prevent a US attack on Syria before the next Administration comes in. And while I am no supporter of Trump, I would agree that Hillary and her evil cabal of russophobic Neocons is so bad that Trump does give me some hope, at least in comparison to Hillary.

    So if Trump wins, then Russia’s strategy will be basically justified. Once Trump is on the White House, there is at least the possibility of a comprehensive redefinition of US-Russian relations which would, of course, begin with a de-escalation in Syria: while Obama/Hillary categorically refuse to get rid of Daesh (by that I mean al-Nusra, al-Qaeda, and all their various denominations), Trump appears to be determined to seriously fight them, even if that means that Assad stays in power. There is most definitely a basis for dialog here. If Hillary comes in, then the Russians will have to make an absolutely crucial call: how important is Syria in the context of their goal to re-sovereignize Russia and to bring down the AngloZionist Empire? Another way of formulating the same question is “would Russia prefer a confrontation with the Empire in Syria or in the Ukraine?”.

    One way to gauge the mood in Russia is to look at the language of a recent law proposed by President Putin and adopted by the Duma which dealt with the issue of the Russia-US Plutonium Management and Disposition Agreement (PMDA) which, yet again, saw the US yet again fail to deliver on their obligations and which Russia has now suspended. What is interesting, is the language chosen by the Russians to list the conditions under which they would resume their participation in this agreement and, basically, agree to resume any kind of arms negotiations:

    1. A reduction of military infrastructure and the number of the US troops stationed on the territory of NATO member states that joined the alliance after September 1, 2000, to the levels at which they were when the original agreement first entered into force.
    2. The abandonment of the hostile policy of the US towards Russia, which should be carried out with the abolition of the Magnitsky Act of 2012 and the conditions of the Ukraine Freedom Support Act of 2014, which were directed against Russia.
    3. The abolition of all sanctions imposed by the US on certain subjects of the Russian Federation, Russian individuals and legal entities.
    4. The compensation for all the damages suffered by Russia as a result of the imposition of sanctions.
    5. The US is also required to submit a clear plan for irreversible plutonium disposition covered by the PMDA.

    Now the Russians are not delusional. They know full well that the USA will never accept such terms. So what is this really all about? It is a diplomatic but unambiguous way to tell the USA the exact same thing which Philippine President Duterte (and Victoria Nuland) told the EU.

    The Americans better start paying attention.

  • JPM Explains How HFTs Caused Friday's Sterling Flash Crash

    On Friday, in the aftermath of the historic pound sterling flash crash, we presented Citi’s forensic take of how in just 30 seconds, bid/ask spreads in cable exploded as wide 600 pips.

    Today, we provide another take, that of JPM’s Nikolaos Panigirtzoglou, who looks at the “gapping market” that emerged on Friday morning Asia time, and shares some color on the role of high frequency traders behind the sudden, dramatic plung in sterling.

    Below is his full note:

    Friday’s flash crash in sterling reinvigorates the debate about market liquidity and the role of High Frequency Traders (HFTs) as providers of liquidity. Similar to previous flash crashes such as the August 24th 2015 flash crash in US equities or the October 15th 2014 flash crash in USTs, market gapping, a step change in prices from one level to another without much trading in-between, raises questions about market structure and liquidity in FX markets. This is also because FX markets are perceived to be a lot more liquid than equity or bond markets, so the conventional view is that FX markets are unlikely to experience flash crashes or market gapping in the absence of high impact news.

    The flash crash in a major currency like sterling questions the above perception and perhaps shows there are liquidity vulnerabilities in FX markets that are more similar to those seen in equity or bond markets. A step change following a significant event such the Brexit referendum or the SNB’s abandonment of its peg is not problematic as it represents a natural market resetting. But a step change triggered by an order flow is more problematic and in our opinion reflective of how vulnerable market liquidity is in FX markets also.

    Liquidity vulnerabilities in equity or fixed income markets as a result of changing market structures are well documented. In equity markets the shift away from principal trading towards agency trading, where markets makers simply match buyers with sellers without holding inventory beyond a short period of time, took place well before the Lehman crisis. But the Lehman crisis caused a similar shift within fixed income markets. Regulatory and other forces have made it a lot more costly for traditional dealers to act as principal traders in fixed income markets, inducing them to change towards a more order-driven trading model of matching buyers and sellers with minimal inventory risk, or to retrench and be replaced by agent traders.

    At the same time electronic trading and advances in technology has encouraged the emergence of HFTs as liquidity providers in the most liquid segments of equity, FX and to some extent income markets. These HFTs use sophisticated quantitative models coupled with speed and high trading frequency, to exploit small price moves. They do so by arbitraging price differences across venues or by detecting and taking advantage of order shifts or imbalances or by simply exploiting very short term momentum or mean reversion signals.

    However, different to traditional market makers, HFTs tend to operate with a much shorter inventory cycle, meaning that they conduct offsetting trades within seconds or even shorter, in order to neutralize  their original position. As a result they tend to quote for smaller sizes and for a very short period of time. This in turn reduces market depth, i.e. the ability to trade in size in markets, especially in those markets where HFTs are important liquidity providers like equity markets. So we note that while the emergence of HFTs has been beneficial for bid ask spreads and small investors, it has likely had a negative impact on the ability of big institutional investors to trade in size. This is one of the reasons big institutional investors have resorted to dark pools for implementing large equity trades.

    More importantly, because HFTs’ models are typically adapted to exploit small price moves, HFTs have a higher incentive to withdraw from their market making role in periods when volatility rises abruptly as  they are reluctant to subject themselves to the risk of large price moves. In addition, there is a similar incentive to withdraw from market making when they detect a big order imbalance, i.e. when they detect markets becoming one-sided, as they are reluctant to subject themselves to the risk of not being able to close their position in a very short period of time.

    In addition, given HFTs employ similar models, this creates the risk of a simultaneous withdrawal by HFTs in periods of high volatility or stress or in periods when market become more one-sided. A simultaneous withdrawal by HFTs not only amplifies the initial market move, but also creates step changes or gapping markets as liquidity provision gets impaired and quotes are withdrawn.

    How big is the role of HFT in FX markets relative to other markets? A previous report by the BIS “Highfrequency trading in the foreign exchange market”, September 2011 concluded that around a quarter to one third of spot FX trading volumes are due to HFTs. But given that this study was conducted five years ago, we suspect that this share has risen since then.

    Indeed, the latest 2016 Euromoney FX rankings survey is consistent with a rising share by HFTs as liquidity providers. The biggest change in this year’s rankings has been the advent of non-bank liquidity providers led by XTX Markets who was ranked third for electronic spot FX trading with a market share of more than 10% and third for FX trading platforms. In contrast, the combined market share of the top five global banks dropped to just 44.7% for overall FX trading in this year’s survey. This market share had peaked in 2009 at 61.5% and was above 60% as recently as 2014.

    Moreover, many of the banks ranked outside the top 10 for overall FX trading are understood to be sourcing liquidity from non-bank liquidity providers. According to Euromoney, these non-bank liquidity providers or HFTs are set to gain more market share in the future, helped by advances in technology, more defined business models and a lower-cost infrastructure base than traditional FX banks. HFTs are already very important in FX spot markets as mentioned above, but they look to build capability in forwards and other products in the near future.

    In all, the FX market appears to be going through structural changes similar to those experienced by equity markets in the past. The advent of non-bank liquidity providers such as HFTs has reduced bid ask spread and increased market efficiency in FX markets, but at the cost of lower market depth and withdrawal of liquidity provision in periods of stress.

     

  • Hillary, Trump Refuse To Shake Hands At Start Of Debate

    If the pre-debate intro was dramatic, the actual debate was right out of Rocky IV, when in an unprecedented moment, Hillary and Trump both refused to shake hands, leading to a social media frenzy as “no handshake” promptly became what may have been the most tweeted phrase on twitter. 

    This is what it looked like.

  • Trump vs Clinton Part 2 – The Gloves Come Off: Live Feed

    Update: As we noted previously, Willey, Broaddrick, Jones and Shelton will be in the debate audience…

    As we detailed earelier, tonight's town-hall style presidential debate from St.Louis promises to be an eyeball-scorcher. With the bout scheduled for 90 minutes with questions from the web, the crowd, and moderators, parents are strongly advised to lock up small chidren (and pets) as the chances of the words 'pussy', 'liar', 'monica', and 'rape' emerging during the battle are high. Luckily CNN's Anderson Cooper and ABC's Martha Raddatz are moderating so everything should be 'fair'.

    The War Of The Noses escalates…

    One thing to watch will be whether Clinton, an audience member or one of the moderators addresses the Trump tape first.

    Some of the questions "you" want answered, include:

    The body language between the two will also be scrutinized — some liberal voices on social media have suggested that Clinton should decline to shake hands with Trump.

    As we noted earlier, previewing a hard-line attack on Clintons' sexual past, Trump on Sunday morning tweeted an interview given by Juanita Broaddrick, who claimed Mr. Clinton sexually assaulted her in the late 1970s…. Ms. Broaddrick tearfully recounts the episode in the videotaped interview and said "I'm afraid of him."

    As the WSJ adds, "Trump, facing fierce blowback for his lewd comments about women, is signaling that he will target Mr. Clinton's behavior as he tries to stabilize a campaign coping with its biggest crisis to date."

    In weekend apologies for his remarks, the Republican nominee invoked Mr. Clinton repeatedly, saying he had "abused women" and talked about them in ways that were more offensive than his own in a 2005 video in which he boasted of sexual aggression.

     

    He also claimed Mrs. Clinton attacked the women who accused her husband of sexual misconduct.

     

    "I've said some foolish things, but there's a big difference between the words and actions of other people," Mr. Trump said in a Saturday morning video. "Bill Clinton has actually abused women and Hillary has bullied, attacked, shamed and intimidated his victims. We will discuss this more in the coming days."

     

    That line of attack threatens to yank Mr. Clinton directly into the campaign scrum, a space the former two-term president has largely avoided since his wife launched her campaign a year and half ago.

    The WSJ notes that according to strategists in both parties, a tactic where Trump goes for Clinton's past infidelities may backfire… but then again, what's his downside?

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    Live Feed:

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    Bring your popcorn…

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    Finally, the drinking game… (via DebateDrinking.com)

     

    And the scorecard…

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