- Meanwhile In Greece, Pension Funds Tap Emergency Loans
This has not been a great year to be a pensioner in Greece.
Over the course of the country’s fraught bailout talks, Greece’s pension system was frequently in the troika’s crosshairs. As for PM Alexis Tsipras, pension cuts were generally considered to be a so-called “red line” and intractable disagreements over pension reform quite frequently resulted in the total breakdown of negotiations.
Meanwhile, the increasingly untenable financial situation and acute liquidity squeeze very often meant that payments to pensioners were in doubt, even as Athens went out of its way to assure the public that whatever funds were left in Greece’s depleted coffers would go to public sector employees before they would go to EU creditors or to Christine Lagarde.
The situation reached it’s “heartbreaking” low point on July 1 when Greek banks that had been shuttered after the institution of capital controls opened for a few hours to ration payments to long lines of pensioners who were forced to effectively beg for €120.
In theory, the bailout agreement – while promising more austerity and more pressure on the bloated pension system – should at least guarantee that there will be money in the banks to make monthly payments, but that assumption now looks to be in doubt because as Kathimerini reports, both IKA and ETAA are tapping a contingency fund that guarantees social security programs for fear that the provisions of the bailout will not provide for sufficient enough savings to fund the remainder of this year’s payouts. Here’s the story:
Greece’s state insurance funds are resorting to external loans to cover their needs as fears grow that the measures of the third bailout will not be enough to cover the rest of 2015’s liquidity needs.
The Unified Fund for the Self-Employed (ETAA) received funding from the Generational Solidarity Insurance Fund (AKAGE) to cover its legal and notary workers’ branch. A similar application for 180 million euros has been approved by the board of the country’s biggest insurance fund, the Social Insurance Institute (IKA).
A ministerial decision by Labor Minister Giorgos Katrougalos and Alternate Finance Minister Dimitris Mardas foresees economic assistance to the tune of 20 million euros from AKAGE to ETAA to cover part of the latter’s deficit.
Of the course the punchline to the idea that funds from AKAGE will be used “to cover part of ETAA’s deficit” is this:
The deficit of AKAGE is expected to grow due to the dramatic increase in unemployment, political and economic uncertainty, capital controls, the measures of the third memorandum and the early elections, which are expected to impact on the revenues of insurance funds this autumn.
So in short, the pension funds are broke as is the contingency fund meant to guarantee payouts from those funds.
So Greece, we truly do wish you the best of luck and as you head back to the polls next month, don’t forget, if things get really bad, you can always storm the mint…
- Denver Police Arrest "Jury Nullification" Activist For Passing Out Informational Pamphlets
Submitted by Mike Krieger via Liberty Blitzkrieg blog,
Most of you will be familiar with the concept of jury nullification. Unfortunately, the vast majority of Americans are not. This is precisely why Mark Iannicelli set up a “Jury Info” booth outside the Lindsay-Flanigan Courthouse in Denver. In a nutshell, jury nullification is the idea that jurors can “can ignore the law and follow their conscience when they believe the law would dictate a miscarriage of justice.” In other words, jurors have the right to judge the law as well as the facts. As you will see in the video at the end, this concept has centuries of precedence in these United States behind it.
When you recognize the vast power that such a concept holds, you recognize why it would be so hated by statists and authoritarians across the land. That is precisely why Mr. Iannicelli was arrested and charged with handing out information.
For a little background, read the following from the Denver Post:
Denver prosecutors have charged a man with seven counts of jury tampering after they say he tried to influence jurors by passing out literature on jury nullification on Monday.
Mark Iannicelli, 56, set up a small booth with a sign that said “Juror Info” in front of the city’s Lindsay-Flanigan Courthouse courthouse, prosecutors say.
The Denver District Attorney’s Office says Iannicelli provided jury nullification flyers to jury pool members.
Jury nullification is when jurors believe a defendant is guilty of the charges but reject the law and return a not guilty verdict.
In response to what appears to be a clear attack on freedom of speech, the Denver Post editorial board published an admirable defense of Mr. Iannicelli several weeks after his arrest. Here are a few excerpts:
It is astonishing that Denver police would arrest someone for handing out political literature outside a courthouse.
It’s even more astonishing that prosecutors would charge that person with seven felony counts of jury tampering.
Now, fortunately, civil rights attorney David Lane has filed a lawsuit in federal court on behalf of other jury nullification activists. They want an injunction to stop the city from violating their First Amendment rights should they too wish to pass out literature.
They deserve to get one.
Jury nullification is understandably controversial — and is especially resented by courts and prosecutors. It is the notion that jurors can ignore the law and follow their conscience when they believe the law would dictate a miscarriage of justice. But it is hardly a new concept.
In the 19th century, Northern juries refused to convict abolitionists for harboring runaway slaves. In the 20th century, juries often balked at enforcing Prohibition and later, on occasion, at what they considered overly harsh drug laws or laws governing sexual behavior.
Jury nullification had a darker strain, too, as Southern juries would sometimes refuse to convict white defendants guilty of racial violence.
The point is that jury nullification is not some crank theory concocted out of the blue.
As First Amendment scholar Eugene Volokh has written, “It’s clear that it’s not a crime for jurors to refuse to convict even when the jury instructions seem to call for a guilty verdict.”
Those who believe the public needs to know about this possibility should have every right to publicize their views — even outside a courthouse.
Their jury nullification literature, as it happens, merely offered general statements, such as, “Juror nullification is your right to refuse to enforce bad laws and bad prosecutions.”
Four years ago, prosecutors in New York City charged a retired chemistry professor with jury tampering after he stood outside a federal courthouse handing out information on jury nullification. But Judge Kimba M. Wood of federal district court wouldn’t buy it. She ruled that prosecutors needed to show the protester meant to influence jurors in a specific case, and dismissed all charges.
Denver officials should be held to no less of a standard.
So where do things stand now?
The good news is that Denver’s city attorney has come to the aid of the activists, setting up a fight between him and the district attorney. Once again, from the Denver Post:
Denver’s city attorney has directed the police and sheriff’s department to stop arresting people passing out jury nullification literature in front of the courthouse.
The order was revealed Friday in U.S. District Court during a hearing involving a lawsuit against the city and Denver police chief Robert White.
The lawsuit was filed earlier this month on behalf of activists who want to distribute jury nullification information outside the Lindsey-Flanigan courthouse. They sued after two others who were handing out pamphlets were charged with seven counts of jury tampering by District Attorney Mitch Morrissey.
The lawsuit argues that the arrests are a violation of free speech rights and asks for a federal injunction against further arrests.
The lawsuit also named Denver Chief Judge Michael Martinez, who on Thursday issued an order barring demonstrations, protests, distributing literature, proselytizing and other activities on the courthouse grounds.
City Attorney Scott Martinez said his staff argued that the Denver judge’s order was overly broad. They also argued against arrests targeting people handing out jury nullification literature.
The city attorney’s office also has taken a position that their actions do not violate state law.
“We agree that the court house steps are a public forum and that people can pass out information, including pamphlets, in accordance with the First Amendment,” the city attorney said.
The city attorney’s position is unusual in that it is siding with the very people who are suing the city. It also pits the city attorney’s office against the district attorney’s office, which filed criminal charges.
Well done Mr. Martinez.
If you want a little more info on jury nullification, check out the following video featuring a much younger Ron Paul:
Part 2:
* * *
For related articles, see:
The War on Free Speech – U.S. Department of Justice Subpoenas Reason.com Over Comment Section
French Authorities Demonstrate Defense of Free Speech by Arresting 54 People for Free Speech
- Is Asia Set For Another Financial Crisis? Here's Goldman's Take
As the emerging market meltdown accelerates, plunging half of EM equity bourses into bear market territory and wreaking unspeakable havoc on currencies from LatAm to Asia-Pac, analysts and commentators alike have scrambled to find historical analogs that can serve as a guidepost when assessing the damage and, more importantly, predicting where things go from here.
One historical episode that’s received quite a bit of attention in the wake of the yuan deval is the Asian Financial Crisis of 1997/1998 and indeed, FX strategists from across the bulge bracket have done their best to catalogue the similarities (e.g. low real rates, increasing debt, exogenous shock factor, commodity transmission mechanism, similarities between Japanese and Chinese REER appreciation in the lead up, etc.) and point out the differences.
For commentary from Morgan Stanley and BofAML, see “The Ghost Of 1997 Beckons, Can Asia Escape?.”
Below, find excerpts from Goldman’s take.
* * *
From Goldman
Asian FX weakness is stirring memories of the Asian Financial Crisis (AFC) and raising questions on how Asia’s fundamentals look now, compared with the mid-1990s.
Given that Asia’s current account positions are in much better shape now than the mid-1990s – and indeed since the ‘taper tantrum’ period in 2013, given the notable improvement in the current account deficits of India and Indonesia – focus is on the challenges to Asia’s external balances that may emerge from portfolio outflows.
Foreigners also hold substantial proportions of outstanding debt in some markets – around 40% in Malaysia and Indonesia.
Given the size of foreign holdings of Asian equity and debt, should foreigners reduce their portfolio holdings by 2-3% over the course of a month, it would broadly offset the region’s current account surpluses, leaving their external balances in a shakier position. During the ‘taper tantrum’ period, foreigners sold markedly more than 3% of their portfolio holdings through June and July 2013, highlighting the risk that portfolio outflows could cause further Asian currency weakness. The small current account deficits in India and Indonesia make their respective currencies most vulnerable. The high concentration of foreign holdings of Malaysian and Indonesian debt suggests that the MYR and IDR could be vulnerable to notable foreign selling of local currency debt.
Recent Asian currency weakness has increased the focus on Asia’s external debt levels given that currency depreciation raises the cost of servicing the debt. Post the Global Financial Crisis (GFC), external debt has risen in India, Indonesia, Malaysia, Thailand and Taiwan, but has fallen in the Philippines and Korea. Malaysia has the highest level of external debt in the region at over 60% of GDP.
External debt is above the levels recorded prior to the AFC in Malaysia, Taiwan and Korea, but below AFC levels elsewhere. Indeed, Malaysia’s external debt is equivalent to the peaks reached in Indonesia and the Philippines prior to the AFC.
Across the region, foreign currency denominated debt makes up at least 50% of external debt, rising to close to 100% in the Philippines. However, maturity also matters: the level of short-term external debt is judged to be the most vulnerable part of external debt given that it may need to be rolled over in a period of market tension. Short-term external debt makes up around 50% of external debt in Malaysia and China, but less than one-third elsewhere.
The ability of a central bank to lean against FX volatility depends on whether or not the country in question has an adequate amount of FX reserves. FX reserves have fallen across the region due to valuation losses on the non-Dollar holdings and/or for intervention purposes. In some cases, this drop has been notable – by 31% in Malaysia, since the middle of 2013 and by 17% in Thailand since early 2011. Indonesian FX reserves have fallen by 7% since February. We examine the adequacy of Asia’s FX reserves on several typical metrics:
Import cover is defined as the number of months imports can be sustained should all inflows cease. The IMF uses three months’ import coverage as the benchmark for reserves. FX reserves across Asia more than satisfy this criterion. Regional import coverage tends to be between 6 and 10 months, with a high of 22 months for China and a low of 6 months for Malaysia.
The ratio of reserves to short-term debt: the most widely used metric for reserve adequacy is the Greenspan-Guidotti rule of 100% coverage of short-term debt. The rationale is that countries should have enough reserves to resist a significant withdrawal of short-term foreign capital. The level of Malaysia’s short-term debt is equivalent to the level of FX reserves.
The ratio of reserves to broad money is less frequently used a measure of adequate FX reserves. This metric is designed to capture the risk of capital flight, in particular outflows of deposits of domestic residents. The upper limit of a prudent range for reserve holdings is 20%. Reserves in China and Korea do not cover 20% of broad money (they only cover 18% of broad money), but everywhere else the coverage is well above 20%.
Broadly, Asian FX reserves can be judged to be adequate, with the exception of Malaysia, where FX reserves now barely cover short-term debt.
In comparison to their status prior to the Asian Financial Crisis, Asia’s fundamentals are (broadly) in better shape. Consequently, we are unlikely to see explosive FX weakness. But other factors are at play, including large debt overhangs in some countries, the sharp decline in commodity prices and political uncertainty in some countries. On the other side of the FX equation, we expect US Dollar strength to continue on the back of solid US growth and the prospect of Fed tightening in coming months. We therefore expect Asian currencies to continue to depreciate.
- China Devalues Yuan To Fresh 4-Year Lows, Arrests Top Securities Firm Exec As Stocks Slide Despite Rate Cuts
Update: Chinese stocks are seeing no lift whatsoever from the rate cuts…
CSI-300 is fading fast…
And
- *SHANGHAI COMPOSITE INDEX SLIDES 3.3%
- *SUGA: HOPE CHINA RATE CUT WILL CONTRIBUTE TO CHINA GROWTH
Confusion reigns at Bloomberg also… (look at URL – original title, and compared to title posted at 8pmET)…
And now…
h/t Beermunk
As we detailed earlier:
The Asia morning begins mixed in stock markets, The PBOC explains itself "this is not a shift in monetary policy," – except it is the first such set of measures since 2008, further deleveraging as China margin debt drops CNY1 Trillion from June peak to lowest since March, Regulators begin probing securities firms (and their malicious short sellers), Index futures trading fees will be raised and trading positions restricted. Stocks are limping only modestly higher (after the rate cuts) as Yuan is fixed at 6.4043 – the lowest since August 2011.
Yuan fix weaker for 2nd day to new 4 year lows…
- *CHINA SETS YUAN REFERENCE RATE AT 6.4043 AGAINST U.S. DOLLAR
- *CHINA LOWERS YUAN FIXING TO WEAKEST SINCE AUG. 2011
Before China opens, it's worth noting that all the post-China close, pre-China open exuberance from the PBOC multiple rate cut has been eviscerated…
So The PBOC explains why it did something it hasn't done since 2008…
- *PBOC'S MA SAYS RATE CUTS NOT A SHIFT OF MONETARY POLICY: XINHUA
- *PBOC'S MA SAYS RATE CUTS TO KEEP MODERATE CREDIT GROWTH: XINHUA
- *PBOC'S MA SAYS CHINA MONETARY POLICY REMAINS PRUDENT: XINHUA
The rate cut did have some impact…
- *CHINA ONE-YEAR IRS FALLS 7 BPS TO 2.47%
- *CHINA ONE-YEAR IRS HEADS FOR BIGGEST DROP SINCE JUNE
- *CHINA SEVEN-DAY REPO RATE DROPS 25 BPS TO 2.30%
And stocks are only marginally higher..
- *CHINA'S CSI 300 STOCK-INDEX FUTURES RISE 0.7% TO 2,852
- *CHINA SHANGHAI COMPOSITE SET TO OPEN UP 0.5% TO 2,980.79
And bearin mind that…
- *ABOUT 17% OF MAINLAND STOCKS STILL HALTED FROM TRADING
Some more good news as deleveraging continues… lowest since March 2015
- *CHINA MARGIN TRADING DEBT DROPS 1 TRILLION YUAN FROM JUNE PEAK
- *SHANGHAI MARGIN DEBT BALANCE HALVES FROM JUNE RECORD HIGH – Balance is lowest since Jan. 12
But more restrictions are put in place:
- CHINA TO RAISE TRANSACTION FEES ON STOCK INDEX FUTURES TRADING – EXCHANGE STATEMENT
- CHINA TO RESTRICT TRADING POSITIONS IN STOCK INDEX FUTURES – EXCHANGE STATEMENT
As things are not going well in the Communist intervention – so the probes begin (as ForexLive reports)
The South China Morning Post report that four brokers say the CSRC is probing their business
- Haitong Securities, GF Securities, Huatai Securities and Founder Securities
- All made stock exchange statements that they had received notices from the China Securities Regulatory Commission
- For suspected failure to review and verify clients' identities
Along similar lines, Xinhua reported:
- 8 people from Citic Securities were being investigated for possible involvement in illegal securities trade
- A staff member from Caijing magazine was also being probed for spreading rumours
- A current and a former staff member at the CSRC were also being investigated for suspected insider trading
* * *
This morning, as China wakes up…
They. Didn't. Sell pic.twitter.com/LURxnikMyR
— zerohedge (@zerohedge) August 25, 2015
…And realizes that PBOC policy changes have not been working. As BofAML explained,
The combined rate and RRR cuts announced today, clearly targeted to boost A-share market sentiment in our view, may provide some temporary sentiment relief. However, we doubt that this represents the bottom of the market…
It appears to us that the government has significantly reduced its direct purchase in the market in recent days and is now trying to replace the direct intervention with the softer, more market oriented, and indirect support. We doubt this will work beyond a few days. As a result, we recommend selling into any rebound. A few things worth highlighting:
- Psychologically, the cuts may have some impact in the short term because they are the first combined interest rate and universal RRR cuts since Dec 2008, after a sharp market fall. Nevertheless, we doubt the impact will be significant as they are already the eighth cut to either rate or RRR since late 2014.
- The key overhangs of the A-share market are stretched valuation and high leverage. It’s our view that the only way that the government can hold up the market is by being the buyer of last resort, i.e., the direct support that the government appears to be withdrawing
- From real economy’s perspective, we doubt monetary loosening is the solution to China main problem – overcapacity/a lack of consumption, and leverage. All it does may be to encourage property speculation, likely using more leverage
- If the government fails to defend the A-share market ultimately, the key risk we should watch out for is financial system instability.
It's not just BofA that is not buying it… As Bloomberg reports, China’s latest cuts in RRR and interest rates will limited boost to stks, according to most analysts and economists. Move is mainly aimed at supporting economy, not starting another mkt rescue.
DEUTSCHE BANK
Move largely in-line with expectations, reaffirmed leadership’s policy priority is growth support: strategist Yuliang Chang
Stk mkt appears oversold amid “jittery” sentiment
Recommends investors buy H-shrs to position for macro improvementEVERBRIGHT SEC.
Cuts should not be interpreted as beginning of fresh round of strong mkt rescue; move may help stabilize capital mkts though boost to stk mkt will be limited: chief economist Xu Gao
Cuts won’t be able to reverse mkt trend; focus seen returning to macro fundamentals amid valuation bubble burst, deleveraging, pressure from exit of earlier rescue policies
Need for govt to intervene in stk performance greatly reduced after decline in leveraged positions; stk mkt declines posing less threat to financial stability
Mkt rescue policies exited steadily, though at slower paceGUOTAI JUNAN SEC.
Cuts to improve overly pessimistic mkt sentiment, reduce possibility of further accelerated decline in mkt: analysts led by Qiao Yongyuan
Shanghai Composite may trade in range 2,800-3,200 pts
Sees relative gains in:
Stks with high div.: transport, home appliances, auto, financials, property
Low valuation with earnings support: food & beverage, power
Beneficiaries of fiscal policies: rail transitJPMORGAN
Cuts to bring temporary support for stk mkt; earlier correction in stks partly due to disappointment over later- than-expected RRR cut: chief China economist Zhu Haibin
Absence of govt support during recent mkt declines indicate changes in intervention strategy, which is focused more on mkt mechanism restoration than maintaining index levelMACQUARIE
Central bank reacted to shore up confidence in stk mkt to stop panic: analysts led by Larry HuUBS
Cuts signal authorities’ determination of arresting passive tightening and safeguarding financial stability, should help boost sentiment in financial mkts: economists led by Wang TaoBNP PARIBAS
Cuts look like response to panic selling in A-shr mkt, main aim is to support economy: analyst Judy Zhang
Banks to be key beneficiaries of cuts as earnings more sensitive to asset quality improvement than NIM contraction
H-shr-listed China banks present attractive risk/reward for long-term investorsCICC
Monetary easing good for valuation recovery in property stks: analysts led by Yu Zhang
Strong momentum in property sales to continue into Sept., Oct. after reduction in mortgage repayment
Buy CR Land, COLI on dips; sees >30% upside in H-shr property players* * *
Putting China's demise into context – off the March 2009 lows…
And here's a gentle reminder of who to listen to from now (or not!)…
July 7: "Goldman Sachs Says There’s No China Stock Bubble, Sees Rally" http://t.co/LhQFDfWfPB
— zerohedge (@zerohedge) August 25, 2015
Charts: Bloomberg
- "Biggest Rally Of 2015" Crashes Into Biggest Reversal Since Lehman
Did you drink the Kool-Aid?
It appears not everyone did… The first 6-day losing streak for the S&P 500 since July 2012…
The S&P 500 has gapped up +3% and closed down on the day only once since the inception of the futures, 10/16/08 (h/t @sentimenttrader)
Call that a bounce-back…?
Across asset-classes the last 2 days have been 'eventful' to say the least…
The Dow is down almost 700 points from the post-PBOC highs!!!
Stocks bounced, half-heartedly… but Nasdaq was on target for its best day of the year… (and best since the first trading day of 2013's meltup) before they puked it all back in the last hour…
Cash indices remain red on the week as once again Nasdaq was driven up to unchanged before the selling pressure resumed..
While we are well aware of the 'hope' priced into this rebound, the actual gains from the China rate cut
VIX was total chaos…
None other than Eric Hunsader summed it all up perfectly…
U.S. Stock Market back to trading like a banana republic
— Eric Scott Hunsader (@nanexllc) August 25, 2015
What was really driving stocks today was simple – USDJPY fun-durr-mentals…
Utes were worst today (as rates soared) and Tech remains the winner on the week – though all S&P sectors are under water…
Still financials did not look overly excited…
Treasury yields were battered higher today – biggest rise in 10Y yields (13bps) since Feb 2015…the late-day selloff in stocks put a modest bid into bonds… We can't help but wonder if this move is rate-lock-buying ahead of panic-last-minute corporate issuance before rates go up in Spetember
The US Dollar was bid as EUR weakened but JPY was critical…
Commodities were mixed with crude and copper bouncing back in anticipation and comfort at the rate cut as PMs dumped as the USD levitated…
Charts: Bloomberg
Bonus Chart: We're Gonna Need Another Rate Cut…
Bonus Bonus Chart: Is China really to blame?
Bonus Bonus Bonus Chart: Trade Accordingly…
/ES Balding Top pattern on the 5-minute pic.twitter.com/WiD8nB3Ulj
— StockCats (@StockCats) August 25, 2015
- Saudi Arabia Paying American Lobbyists To Spread Anti-Iran Propaganda
Submitted by Carey Wedler via TheAntiMedia.org,
Though the Saudi Arabian government publicly declared its tentative support for the widely-praised Iran nuclear deal last month, new reports reveal it is secretly funding propaganda efforts to undermine it. A new group called the American Security Initiative has spent over $6 million on advertisements criticizing the deal — using money supplied by the Saudi monarchy.
The president of the American Security Initiative Norm Coleman is a former Republican senator who now runs the lobbying firm, Hogan Lovells. He is a registered lobbyist for Saudi Arabia and his firm is on retainer for the Saudi monarchy at a rate of $60,000 per month.
According to The Intercept, “In July 2014, Coleman described his work as ‘providing legal services to the Royal Embassy of Saudi Arabia’ on issues including ‘legal and policy developments involving Iran and limiting Iranian nuclear capability.’”
Other founders of the American Security Initiative include former Senator Joe Lieberman ( a Democrat) and former Senator Saxby Chambliss (a Republican), who works at DLA Piper, yet another firm hired to lobby on behalf of the Saudi monarchy. Opposition to the deal enjoys bipartisan support.
The lobbying effort has run commercials in nine states — Arizona, Colorado, Connecticut, Indiana, Maryland, Montana, North Dakota, Virginia, and West Virginia — and was initiated in partnership with a group called Veterans Against the Deal. One ad features a maimed Iraq War veteran who ominously warns that “Every politician who is involved in this will be held accountable. They will have blood on their hands.”
The Iran deal is set to be voted on in September, but the Saudi government has a vested interest in its failure. This is not only because of longstanding divides between Sunni and Shiite factions, but because relief from economic sanctions on Iran could increase Iran’s oil exports and threaten Saudi dominance of the market, which has already started to wane. Further, as The Intercept observed, “The crises in Syria and in Yemen have become proxy wars between the two nations as Saudi Arabia and Iran are playing an active role in fueling opposing sides in both conflicts.”
Last month, Defense Secretary Ashton Carter announced that the Saudi government had abandoned many of its apprehensions toward the deal, moving to endorse it. However, according to Reuters, an official from the Saudi government revealed that he behind the scenes, the deal is still very much scorned. “We have learned as Iran’s neighbors in the last 40 years that goodwill only led us to harvest sour grapes,” he said on the condition of anonymity.
Though the Saudi monarchy has been widely criticized for its inhumane policies —including everything from brutal beheadings to life-threatening lashes inflicted on bloggers — the government continues to exert powerful influence over American leadership (according to Wikileaks, it has paid for media influence in other countries, as well). It rivals the Israeli lobby, which has also invested heavily in demonizing the Iran nuclear agreement. Last month, Israeli lobbying group AIPAC spent $20 million in 20 states to advertise against the agreement. Opposition to the deal comes even as the crux of the accord cripples Iran’s nuclear capabilities.
The glaring, underlying irony of the deal is that three of its biggest opponents — a bipartisan assembly of American lawmakers, the Saudi monarchy, and the Israeli government — are a far greater threat to peace than the admittedly oppressive Iranian government. The lawmakers who oppose the deal are the same ones who advocate perpetual American war, which has killed countless innocent civilians. Saudi airstrikes against the Houthi insurgency in Yemen are repeatedly slaughtering civilians. Israel’s ongoing occupation of Palestine creates a steady stream of needless innocent deaths.
In the face of the new revelations about Saudi manipulation of public perception surrounding the Iran deal, statements from the monarchy are now tinged with irony:
“Given that Iran is a neighbour, Saudi Arabia hopes to build with her better relations in all areas on the basis of good neighborliness and non-interference in internal affairs,” a Saudi official said last month.
- CNBC: No Need For A Fork – It’s Done
Submitted by Mark St. Cyr
CNBC: No Need For A Fork – It’s Done
Yesterday I wrote on what I considered a very strange development that took place on CNBC™ in regards to one of the morning shows where Jim Cramer produced, then read on-air, an email he received (and stated only he had) from Tim Cook of Apple™ about China’s health as far as he saw it. As I wrote yesterday this hit me in that “Wait, what?” type moment. So much so I instinctively hit the record button as to watch it later to make sure I truly did hear correctly. For the implications would be far from subtle. Why?
Never mind whether it may have legal ramifications or not for the moment. What was said, how it was obtained, and exactly who knew what, when, and where struck me as an obvious “something just doesn’t seem right here.” No SEC or law degree needed. Just common sense.
Add to this was also the timing. Right before the open where liquidity has shown to be at its most vulnerable (meaning lack there of) where it’s basically the window where HFT, headline reading algos feast upon stop runs and more clearing out what many consider the “order book” of the market every morning. This phenom has been detailed in near scholarly work by Eric Scott Hunsader at a company called Nanex™.
So with this understanding; anyone with a modicum of insight as to what these “markets” have now become listened to this email exchange and could draw conclusions near immediately what would follow such a revelation. And sure enough it seemed to do exactly what one inferred as the market steamrolled back 1000 Dow points in what seemed mere minutes, with HFT’s gorging on any and all orders available. (It’s been reported yesterday was one of HFT’s most profitable days just for some context.)
The issue? A lot (and I’ll wager to say – a whole lot) of the remaining Mom and Pop retail customers with their 401K’s that are still left in this market, if they weren’t steamrolled themselves, may have been scarred with orders they thought protected their stops, only to find the rules allowed those “stops” to turn into market orders (i.e., what ever someone wants to pay) and were filled at levels they never dreamed of selling or buying at.
Some of these types of order fills have been reported to have transpired at cents on the dollar. (i.e., you wanted to sell at $1 to preserve your money and during the chaos – your order was filled and sold at .05 cents or vice versa) It’s said some of the egregious ones have been broken (e.g., cancelled) however, we can all imagine there are a far greater number that will not. i.e., you wanted to sell at $1 and it was filled at .35 cents as an example. I guess you would be asked to take solace in that – at least you did better than a nickel. Feel better?
As I said yesterday I hadn’t watched a morning show on CNBC in years and have stated my reasons ad nauseam over those years. Yet, I would guess, just like you, with such turmoil currently taking place you may have also decided to flip over and see what two cents they might be adding to the discussion. So, like yesterday, I once again did just that: only to have all my past revelations reassured as to thwart any doubt that watching this channel is an absolute waste of time. And, in my opinion: does more harm than give insight into the markets for any of today’s very few retail investors. (One caveat: I do watch their Asia Squawk™ programming)
When I tuned in I happened on what I thought was perfect timing because the guest was Joseph Saluzzi, partner/co-founder of Themis Trading™. There probably isn’t a person more abreast in everything HFT than Mr. Saluzzi. The other trait he has that’s desperately needed in today’s environment is: he can make the complexities of HFT and its effect on the markets understandable to the lay person. So with that in mind I thought what an opportunity to expand further insight into what I’m sure are many frightened retail investors as to understand what these “markets” have morphed into. For the topic was HFT, the sell-off, and liquidity.
And what took place? Nothing more than irrelevant causational assumptions asked by one of the hosts. And, as Mr. Saluzzi tried to explain the why’s of the inherent dangers – he was either talked over (as in questioned) as if what he was saying wasn’t addressing the issue. Or worse – seemed to be dismissed in a tone or tenor of “Thanks, for that info – we’ll let you know next time we need another 5 minutes of dead air to fill.” What a freakin’ shame is all that came to my mind.
What an absolute missed opportunity to ask some real pointed questions in regards to what truly is making these markets, in my opinion; unstable.
Here you had a person that could answer any question one needed enlightening on when it comes to HFT and liquidity issues, that can explain it in understandable sound bites that are informed as well as actionable – and they seemed not only to care less – but rather – cared more about how quickly the segment could be over. I guess HFT and liquidity isn’t news that needs to be reported with any depth or insight to its viewers. After all, maybe that is the case – no viewers.
Or, maybe there’s another viewer. One especially suited, and Pavlovian in nature that feeds on the information that now is disseminated there: The HFT, algorithmic, headline reading machines themselves.
After all, if Mom and Pop (what’s left of them) aren’t watching any longer as proved via their last Neilsen™ ratings (last as in they no longer report them.) then I guess you turn to the one viewer that desperately needs “headlines” to work with: The HFT cabal themselves. After all, who needs viewers when there’s a market moving mass of machines just waiting for the right headline to cross the network?
The problem with this is two-fold. Whether it’s intentional or accidental. The more Mom and Pop tunes out – the less to feed on for the HFT’s till eventually there’s no one left to feed on except for themselves – and I believe you are witnessing in real-time this exact phenom which will be brought on not only quicker, but with more ferocity moving forward. For Mom and Pop are not coming back to either the “markets” or CNBC. They’re done.
And just as an addendum to my article yesterday. It seems I wasn’t the only one who said “Wait, what?” ZeroHedge™ asked the same question and posted it at about the same time I did in far greater detail. Then later in the evening I was sent a note sending me to the New York Times™. It seems the issues I raised are indeed worth questioning. From the article:
Bill Singer, a regulatory lawyer, said he expected the S.E.C. to investigate the context of the email and provide guidelines as to whether companies can disclose financial information this way to selected news reporters.
“I can see here that Cook is literally dancing on the edge of a razor,” he said. “At the end of the day it’s one of the largest companies in the world telling one reporter via a private email that our ongoing quarter is actually going to surprise people, and I consider that material.”
As I stated then as I do now, it raises a lot of questions to exactly “who” is the target audience. Mom and Pop retail that were basically the bread and butter reasons for the channel and programming? Or, someone (or something) other?
A reasonable question I’ll contend when one audience is still rushing to the exits as shown in any credible inflow/outflow analysis. While for all intents and purposes is also no longer considered “market moving” participants. While the other: moves the markets at whim for the select few still participating.
I contend HFT already has a “captured” audience, and doesn’t need to pay advertising fees on-top of their subsequent co-location and other incidentals. They don’t need the lights, sets, and hosts on a near 24 hour basis to give them pragmatic “financial insights.” Yet, the very life blood that made these markets (the retail 401K holder) is exactly the one that does. And from what I witnessed, they’re not only not getting it, when they try one last time they understand – there’s none to be had and hit the off button realizing how much time they just wasted. Or worse: their money.
Someone needs to remember “Last one out – please turn off the lights.” For inasmuch of what I witnessed today, using myself as an example. If this is what remains going forward? No one’s coming back.
- The Latest Currency War Entrant: India Warns May Retaliate To Chinese Devaluation
When China moved to devalue the yuan earlier this month, it was seen by virtually everyone for exactly what it was: a tacit admission that the country’s economy was in freefall and a desperate attempt to boost exports stinging from REER appreciation of more than 14% in just a little over twelve months.
Of course coming out and accusing China of entering the global currency wars for the sole purpose of supporting the export-driven economy isn’t something that’s politically correct and if you’re China, you want to deflect that criticism so naturally, there was plenty of polite talk about the need to allow the yuan to move in a more market determined way and that rhetoric squares nicely with China’s SDR inclusion hopes.
Ultimately though, trade competitiveness is now front and center in everyone’s minds, especially Asia ex-Japan nations who will now see their respective REERs appreciate even as the weaker yuan means demand from the mainland will be suppressed.
And while we’ve talked plenty about the impact on Asia-Pac and LatAm (especially Brazil, where the trade ministry immediately acknowledged the adverse effect of the yuan deval), we haven’t yet mentioned India where yesterday, in the midst of the turmoil, Central bank governor Raghuram Rajan sought to calm nervous markets by reassuring the world that India is not, for now anyway, in any danger thanks to ample FX reserves and a low CA. Here’s more from Reuters:
Central bank governor Raghuram Rajan told a banking conference Asia’s third-largest economy was in a good position relative to other countries to withstand the current global markets volatility.
“India is better placed compared to other countries with low current account deficit, and fiscal deficit discipline, moderate inflation, low short-term foreign currency liabilities, very sizeable base of forex reserves,” he said.
“We will have no hesitation in using our reserves when appropriate to reduce volatility in the rupee.”
The rupee fell to as low as 66.74 per dollar on Monday, its lowest since September 2013, as Asian markets reeled under fears of a China-led global economic slowdown.
The 30-share Sensex dropped 5.94 percent, its biggest daily percentage fall since Jan. 7, 2009. The index fell to as low as 25,624.72 points at one point, its lowest intraday level since Aug. 11, 2014.
Amusingly, Rajan also pledged to stick to a disciplined monetary policy noting that “rate cuts should not be seen as goodies that the RBI gives out stingily after much public pleading.”
Be that as it may, economic realities are economic realities and a currency war is a currency war, which is why, we suppose, the Indian government’s chief economic advisor Arvind Subramanian thinks the country might just have to hit back. Here’s Bloomberg:
India may need to respond to China’s monetary policy stance
India’s exports to be hurt if global slowdown persists, ET Now television channel reports, citing Finance Minister’s Chief Economic Adviser Arvind Subramanian.
Underscoring this is the following from Deutsche Bank:
India’s export sector continues to be under pressure, with merchandise exports contracting yet again in July by 10.3%yoy. The weakness in India’s exports is striking (this is the eighth consecutive month of decline), not only in terms of past trend, but also from a cross country perspective. Indeed, India’s exports performance has been the weakest in the region thus far in 2015. In the first quarter of the current fiscal year (April-June’15), Indian exports have contracted by 17%yoy, one of the sharpest declines on record. The main reason for such a weak Indian export performance can be attributed to the sharp decline in oil exports (down 51%yoy between April-June’15), which constitute 18% of total exports.
Another factor that could likely explain the weak performance of exports is the probable overvaluation of the rupee. As per RBI’s 36-country trade based real effective exchange rate, rupee remains overvalued at this juncture and this could be impacting exports to some extent, in our view.
Currency competitiveness is an important factor in influencing exports performance, but global demand is even more important, in our view, to support exports momentum. As can be seen from the chart [below], global demand remains soft at this stage which continues to be a key hurdle for exports momentum to gain traction.
And that, in turn, helps to explain this (from Citi):
The likelihood of a rate cut at the RBI policy review on September 29 has risen given the downside surprise from July CPI inflation and the disinflationary impulse from the continued slide in commodity prices. But market pricing does not seem too far from that outcome. 1y ND-OIS is pricing in about 80% probability of a 25bp rate cut in September (and unchanged rates thereafter).
So while we wait to see if indeed India decides to return fire, the ECB isn’t biting. Or at least that’s the line from Vice President Vitor Constancio who, as MNI reports, “on Tuesday signalled that he saw no reason for the ECB to step up policy support, as it was too early to assess what impact economic turmoil in China and renewed oil prices declines would have on medium-term price stability.”
“It is really too early to understand the effect of what is happening, which is now being corrected. Markets are now correcting the initial overreaction to the events in China. [The] yuan devaluation is not a major factor” for the euro-area inflation outlook, Constancio continued. So while Europe may be putting on a brave face for the time being, if exports from the currency bloc’s economic growth engine (Germany) begin to take a hit from the weaker yuan, we shall see how calm the ECB remains.
- Devaluation Stunner: China Has Dumped $100 Billion In Treasurys In The Past Two Weeks
On August 11, China devalued its currency, and in the subsequent 3 days the onshore Yuan, the CNY, tumbled by some 4% against the dollar. Then, as if by magic, the CNY stabilized when China started intervening massively, only this time not through the fixing, but in the actual FX market.
This means that while China has previously been dumping reserves as a matter of FX policy, after August 11 it was intervening directly in the FX market, with the intervention said to really pick up after the FOMC Minutes on August 19, the same day the market finally topped out, and has tumbled into a correction since then. The result was the same: massive FX reserve liquidations to defend the currency one way or the other.
And yet something curious emerges when comparing the traditionally tight, and inverse, relationship between the S&P and the Treausry long-end: the drop in yields has not been anywhere near as profound as the tumble in stocks. In fact, the 30 Year is wider now than where it was the day China announced the Yuan devaluation.
Why is that?
We hinted at the answer on two occasions earlier (here and here) and yet the point is so critical, and was missed by virtually all readers, that it deserves to be repeated once again: as part of China’s devaluation and subsequent attempts to contain said devaluation, it has been purging foreign reserves at an epic pace. Said otherwise, China has sold an epic amount of Treasurys in the past two weeks.
How epic? We turn it over to SocGen once again:
The PBoC cut the RRR for all banks by 50bp and offered additional reductions for leasing companies (300bp) and rural banks (50bp). All these will take effect as of 6 September, and the total amount of liquidity injected will be close to CNY700bn, or $106bn based on today’s onshore exchange rate. In perspective, the PBoC may have sold more official FX reserves than this amount since the currency regime change on 11 August.
There you have it: in the past two weeks alone China has sold a gargantuan $106 (or more) billion in US paper just as a result of the change in the currency regime!
But wait, there’s more: recall that one months ago we posted that “China’s Record Dumping Of US Treasuries Leaves Goldman Speechless” in which we reported that China has sold some $107 billion in Treasurys since the start of 2015.
When we did that article, we too were quite shocked at that number. However, we – just like Goldman – are absolutely speechless to find out that China has sold as much in Treasurys in the past 2 weeks, over $100 billion, as it has sold in the entire first half of the year!
In retrospect, it is absolutely amazing that the 10 and 30 Year Bonds have cratered considering the amount of concentrated selling by China.
But the bigger question is how much more does China have left to sell, if this pace of outflows continues. Here is SocGen again:
From an operational perspective, China’s FX reserves are estimated to be two-thirds made up of relatively liquid assets. According to TIC data, China held $1,271bn US treasuries end-June 2015, but treasury bills and notes accounted for only $3.1bn. The currency composition is said to be similar to the IMF’s COFER data: 2/3 USD, 1/5 EUR and 5% each of GBP and JPY. Given that EUR and JPY depreciation contributed the most to the RMB’s NEER appreciation in the past year, it is plausible that
the PBoC may not limit its intervention to selling only USD-denominated assets.
* * *
China’s FX reserves are still 134% of the recommended level, or in other words, around $900bn (1/4 of total) and can be used for currency intervention without severely impacting China’s external position.
Should the current pace of liquidity outflows continue, and require the dumping of $100 billion in FX reserves, read US Treasurys, every two weeks this means China has, oh, call it some 18 weeks of intervention left.
What happens when China liquidates all of its Treasury holdings is anyone’s guess, and an even better question is will anyone else decide to join China as its sells US Treasurys at a never before seen pace, and best of all: will the Fed just sit there and watch as the biggest offshore holder of US Treasurys liquidates its entire inventory…
- "It's Not The US Economy, It's Just Stocks Stupid!!"
Well… Maybe it was the US economy all along?
Just ask Jack Bouroudjian from 2,000 Points ago: August 19th – Chair Yellen, please take your victory lap…
Remember, bull markets don’t end because the central bank starts to raise rates — they end when the central bank stops raising rates.
Or maybe when the world realizes the entire rally is smoke an mirrors…
Charts: Bloomberg
- ReTuRN OF THe GRiM MaRKeT ReaPeR
I looked, and behold, an ashen horse; and he who sat on it had the name Market Collapse; and Zero Hedge was following with him.
- What Can the Fed Do to Hold Back the Crisis? Not Much.
The financial system is in uncharted waters… and it's not clear that the Fed has a clue how to navigate them.
A number of key data points suggest the US is entering another recession. These data points are:
1) The Empire Manufacturing Survey
2) Copper’s sharp drop in price
3) The Fed’s own GDPNow measure
4) The plunge in corporate revenues
Why does this matter? After all, the US typically enters a recession every 5-7 years or so.
This matters because interest rates are currently at zero. Never in history has the US entered a recession when rates were this low. And it spells serious trouble for the financial system going forward.
Firstly, with rates at zero, the Fed has little to no ammo to combat a contraction. Some Central Banks have recently cut rates into negative territory. However, this is politically impossible in the US, particularly with an upcoming Presidential election.
This ultimately leaves QE as the last tool in the Fed’s arsenal to address an economic contraction.
However, at $4.5 trillion, the Fed’s balance sheet is already so monstrous that it has become a systemic risk in of itself. And the Fed knows this too… Janet Yellen, before she became Fed Chair, was worried about how the Fed could safely exit its positions back when its balance sheet was only $1.3 trillion during QE 1 in 2009.
Moreover, it’s not clear that the Fed could launch another QE program at this point. For one thing there is that aforementioned upcoming Presidential election. Another QE program would just be fuel for the fire that is growing public anger with Washington’s meddling in the economy. And this would lead to greater scrutiny of the Fed and its decision making.
Even if the Fed were to launch another QE program in the next 15 months, it’s not clear how much it would accomplish. A psychological shift has hit the markets in which investors’ faith in Central Bank policy is no longer sacrosanct.
Consider China, where despite rampant money printing, the stock market has continued to implode, crashing to new lows. China’s Central Bank is pumping $29 billion into its stock markets per day. This bought a few weeks of a bounce before Chinese stocks continued to collapse.
In short, as we predicted, Central Banks will indeed be powerless to stop the next Crisis as it spreads. The Fed could potentially go “nuclear” with a massive QE program if the markets fall far enough, but this would only accelerate the pace at which investors lose confidence in Central Banks’ abilities to rein in the carnage.
Smart investors should start preparing now. What happened on Monday was just a taste of what's coming…
If you’ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report Financial Crisis "Round Two" Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits.
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Best Regards
Graham Summers
Chief Market Strategist
Phoenix Capital Research
- New UN Privacy Chief Proclaims – UK Digital Surveillance Is "Worse Than Orwell"
Submitted by Mike Krieger via Liberty Blitzkrieg blog,
Cannataci says we are dealing with a world even worse that anything Orwell could have foreseen. “It’s worse,” he said. “Because if you look at CCTV alone, at least Winston was able to go out in the countryside and go under a tree and expect there wouldn’t be any screen, as it was called. Whereas today there are many parts of the English countryside where there are more cameras than George Orwell could ever have imagined. So the situation in some cases is far worse already.
– UN Privacy chief, Joseph Cannataci
The UN special rapporteur on privacy, Joseph Cannataci, pulls no punches when it comes to privacy. It’s hard to disagree with what he has to say.
From the Guardian:
The first UN privacy chief has said the world needs a Geneva convention style law for the internet to safeguard data and combat the threat of massive clandestine digital surveillance.
Speaking to the Guardian weeks after his appointment as the UN special rapporteur on privacy, Joseph Cannataci described British surveillance oversight as being “a joke”, and said the situation is worse than anything George Orwell could have foreseen.
He added that he doesn’t use Facebook or Twitter, and said it was regrettable that vast numbers of people sign away their digital rights without thinking about it.
One thing that is certainly going to come up in my mandate is the business model that large corporations are using
“Some people were complaining because they couldn’t find me on Facebook. They couldn’t find me on Twitter. But since I believe in privacy, I’ve never felt the need for it,” Cannataci, a professor of technology law at University of Groningen in the Netherlands and head of the department of Information Policy & Governance at the University of Malta, said.
Appointed after concern about surveillance and privacy following the Edward Snowden revelations, Cannataci agreed that his notion of a new universal law on surveillance could embarrass those who may not sign up to it. “Some people may not want to buy into it,” he acknowledged. “But you know, if one takes the attitude that some countries will not play ball, then, for example, the chemical weapons agreement would never have come about.”
Cannataci came into his new post in July after a controversial spat involving the first-choice candidate, Katrin Nyman-Metcalf, who the Germans in particular thought might not be tough enough on the Americans.
But for Cannataci – well-known for having a mind of his own – it is not America but Britain that he singles out as having the weakest oversight in the western world: “That is precisely one of the problems we have to tackle. That if your oversight mechanism’s a joke, and a rather bad joke at its citizens’ expense, for how long can you laugh it off as a joke?”
However, Cannataci says we are dealing with a world even worse that anything Orwell could have foreseen. “It’s worse,” he said. “Because if you look at CCTV alone, at least Winston [Winston Smith in Orwell’s novel 1984] was able to go out in the countryside and go under a tree and expect there wouldn’t be any screen, as it was called. Whereas today there are many parts of the English countryside where there are more cameras than George Orwell could ever have imagined. So the situation in some cases is far worse already.
“The way we handle it is going to be the difference. But Orwell foresaw a technology that was controlling. In our case we are looking at a technology that is ever-developing, and ever-developing possibly more sinister capabilities.” Because of this, the Snowden revelations were very important, he said.
“We have a number of corporations that have set up a business model that is bringing in hundreds of thousands of millions of euros and dollars every year and they didn’t ask anybody’s permission. They didn’t go out and say: ‘Oh, we’d like to have a licensing law.’ No, they just went out and created a model where people’s data has become the new currency. And unfortunately, the vast bulk of people sign their rights away without knowing or thinking too much about it,” he said.
Now that we’ve got that out of the way…
Yes, the UK is particularly bad when it comes to privacy, as has been noted on many occasions. See:
Britain’s “War on Terror” Insanity Continues – David Cameron Declares War on Encryption
“Minority Report”-esque Big Brother Billboards are Coming to England
- Is China Quietly Targeting A 20% Devaluation?
When China took the “surprising” (to anyone who was naive enough to think that the country’s economy isn’t in absolute free fall) step of resorting to a dramatic yuan devaluation on the heels of multiple ineffectual policy rate cuts, Beijing pitched the move as a “one-off” effort to erase a ~3% persistent dislocation in the market.
Seeing the effort for what it most certainly was – a tacit admission of underlying economic malaise and a last ditch effort to rescue the export-driven economy via an epic beggar thy neighbor along with the whole damn EM neighborhood competitive devaluation – analysts were quick to note that the PBoC may ultimately be targeting a 10% or more depreciation in order to provide a sufficient boost to exports.
Well, official protestations to the contrary, it appears as though even some Party agencies are assuming a much weaker yuan both over the near- and medium-term. Here’s Bloomberg:
Some Chinese agencies involved in economic affairs have begun to assume in their research that the yuan will weaken to 7 to the dollar by the end of the year, said people familiar with the matter.
The research further factors in the yuan falling to 8 to the dollar by the end of 2016, according to the people, who asked not to be identified because the studies haven’t been made public.
Those projections — which suggest a depreciation of more than 8 percent by Dec. 31 and about 20 percent by the end of 2016 — were adopted after the currency was devalued this month and compare with analysts’ forecasts for the yuan to reach 6.5 to the dollar by the end of this year.
While the rate used in the research isn’t a government target, it suggests China may allow the yuan to fall further after a depreciation in which the currency was allowed to weaken by nearly three percent on Aug. 11 and 12. The yuan weakened for a second day in Shanghai to 6.4124.
“It wouldn’t be totally unreasonable for China to allow a weakening like this,” said Zhou Hao, an economist at Commerzbank AG in Singapore, referring to the 7 level against the dollar at the end of this year. “A certain level of depreciation can be accepted according to China’s international payments situation, but it may bring unforeseeable pressure on foreign debt repayments and capital outflows.”
The rate used in the research constitutes reference levels used for economic assessments and projections, according to the people. The PBOC didn’t respond to a fax seeking comment.
A dollar-yuan rate of 7 would be a more than 8 percent depreciation from Tuesday’s level. At an Aug. 13 briefing on the yuan, PBOC Deputy Governor Yi Gang dismissed the idea that China would devalue the yuan by 10 percent to boost exports, calling it “nonsense.”
Yes, “nonsense”, just like how Chinese QE “doesn’t exist” despite the fact that untold billions in stocks have been transferred from CSF to the sovereign wealth fund just so the PBoC can continue to insist that its balance sheet isn’t expanding.
In any event, a more dramatic devaluation may ultimately be necessary not only to boost exports, but to alleviate the necessity of interveing constantly to arrest the yuan’s slide. As BNP’s Mole Hau put it in a note out Monday, “what appears to have happened is that, whereas the daily fix was previously used to fix the spot rate, the PBoC now seemingly fixes the spot rate to determine the daily fix, [thus] the role of the market in determining the exchange rate has, if anything, been reduced in the short term.” Which explains why the FX reserve drain may well be continuing unabated causing the massive liquidity crunch that’s forced the PBoC to inject hundreds of billions of liquidity via reverse repos and ultimately forced today’s RRR cut.
Of couse as we said earlier today, “while global markets received China’s announcement with their typical ‘a central bank just came to our rescue’ exuberance, the reality is that as least today’s RRR cut will have zero impact on spurring aggregate demand, and is merely a delayed response to FX interventions that have already taken place [which means] for China to net ease, it will have to do more, much more [but] ironically, doing so, will merely accelerate the capital outflows as a result of the ongoing plunge in the CNY, which leads to the circular logic of China’s intervention … the more it intervenes in an attempt to stabilize every aspect of its economy and finance, the more it will have to intervene, until either it wins, or something snaps.”
Ultimately, that “something” may end up being the daily yuan management effort because the intervention game is getting expensive and incremental easing will only make it more so.
A free float may be the better option and if the passages excerpted above from Bloomberg are any indication, the yuan is going to be much, much lower by the end of next year one way or another. The only question is how much pain China incurs on the way there. We’ll close with the following quote from SocGen:
If the PBoC wants to stabilise currency expectations for good, there are only two ways to achieve this: complete FX flexibility or zero FX flexibility. At present, the latter is also increasingly unviable, since the capital account is much more open. Therefore, the PBoC has merely to keep selling FX reserves until it lets go.
- 1929 And Its Aftermath – A Contra-Keynesian View Of What Really Happened
Submitted by Murray N. Rothbard via The Mises Institute,
[First published in Inquiry, November 12, 1979.]
A half-century ago, America — and then the world — was rocked by a mighty stock-market crash that soon turned into the steepest and longest-lasting depression of all time.
It was not only the sharpness and depth of the depression that stunned the world and changed the face of modern history: it was the length, the chronic economic morass persisting throughout the 1930s, that caused intellectuals and the general public to despair of the market economy and the capitalist system.
Previous depressions, no matter how sharp, generally lasted no more than a year or two. But now, for over a decade, poverty, unemployment, and hopelessness led millions to seek some new economic system that would cure the depression and avoid a repetition of it.
Political solutions and panaceas differed. For some it was Marxian socialism — for others, one or another form of fascism. In the United States the accepted solution was a Keynesian mixed-economy or welfare-warfare state. Harvard was the focus of Keynesian economics in the United States, and Seymour Harris, a prominent Keynesian teaching there, titled one of his many books Saving American Capitalism. That title encapsulated the spirit of the New Deal reformers of the ’30s and ’40s. By the massive use of state power and government spending, capitalism was going to be saved from the challenges of communism and fascism.
One common guiding assumption characterized the Keynesians, socialists, and fascists of the 1930s: that laissez-faire, free-market capitalism had been the touchstone of the US economy during the 1920s, and that this old-fashioned form of capitalism had manifestly failed us by generating, or at least allowing, the most catastrophic depression in history to strike at the United States and the entire Western world.
Well, weren’t the 1920s, with their burgeoning optimism, their speculation, their enshrinement of big business in politics, their Republican dominance, their individualism, their hedonistic cultural decadence, weren’t these years indeed the heyday of laissez-faire? Certainly the decade looked that way to most observers, and hence it was natural that the free market should take the blame for the consequences of unbridled capitalism in 1929 and after.
Unfortunately for the course of history, the common interpretation was dead wrong: there was very little laissez-faire capitalism in the 1920s. Indeed the opposite was true: significant parts of the economy were infused with proto–New Deal statism, a statism that plunged us into the Great Depression and prolonged this miasma for more than a decade.
In the first place, everyone forgot that the Republicans had never been the laissez-faire party. On the contrary, it was the Democrats who had always championed free markets and minimal government, while the Republicans had crusaded for a protective tariff that would shield domestic industry from efficient competition, for huge land grants and other subsidies to railroads, and for inflation and cheap credit to stimulate purchasing power and apparent prosperity.
It was the Republicans who championed paternalistic big government and the partnership of business and government while the Democrats sought free trade and free competition, denounced the tariff as the “mother of trusts,” and argued for the gold standard and the separation of government and banking as the only way to guard against inflation and the destruction of people’s savings. At least that was the policy of the Democrats before Bryan and Wilson at the start of the 20th century, when the party shifted to a position not very far from its ancient Republican rivals.
The Republicans never shifted, and their reign in the 1920s brought the federal government to its greatest intensity of peacetime spending and hiked the tariff to new, stratospheric levels. A minority of old-fashioned “Cleveland” Democrats continued to hammer away at Republican extravagance and big government during the Coolidge and Hoover eras. Those included Governor Albert Ritchie of Maryland, Senator James Reed of Missouri, and former Solicitor General James M. Beck, who wrote two characteristic books in this era: The Vanishing Rights of the States and Our Wonderland of Bureaucracy.
But most important in terms of the depression was the new statism that the Republicans, following on the Wilson administration, brought to the vital but arcane field of money and banking. How many Americans know or care anything about banking? Yet it was in this neglected but crucial area that the seeds of 1929 were sown and cultivated by the American government.
The United States was the last major country to enjoy, or be saddled with, a central bank. All the major European countries had adopted central banks during the 18th and 19th centuries, which enabled governments to control and dominate commercial banks, to bail out banking firms whenever they got into trouble, and to inflate money and credit in ways controlled and regulated by the government. Only the United States, as a result of Democratic agitation during the Jacksonian era, had had the courage to extend the doctrine of classical liberalism to the banking system, thereby separating government from money and banking.
Having deposed the central bank in the 1830s, the United States enjoyed a freely competitive banking system — and hence a relatively “hard” and noninflated money — until the Civil War. During that catastrophe, the Republicans used their one-party dominance to push through their interventionist economic program. It included a protective tariff and land grants to railroads, as well as inflationary paper money and a “national banking system” that in effect crippled state-chartered banks and paved the way for the later central bank.
The United States adopted its central bank, the Federal Reserve System, in 1913, backed by a consensus of Democrats and Republicans. This virtual nationalization of the banking system was unopposed by the big banks; in fact, Wall Street and the other large banks had actively sought such a central system for many years. The result was the cartelization of banking under federal control, with the government standing ready to bail out banks in trouble, and also ready to inflate money and credit to whatever extent the banks felt was necessary.
Without a functioning Federal Reserve System available to inflate the money supply, the United States could not have financed its participation in World War I: that war was fueled by heavy government deficits and by the creation of new money to pay for swollen federal expenditures.
One point is undisputed: the autocratic ruler of the Federal Reserve System, from its inception in 1914 to his death in 1928, was Benjamin Strong, a New York banker who had been named governor of the Federal Reserve Bank of New York. Strong consistently and repeatedly used his power to force an inflationary increase of money and bank credit in the American economy, thereby driving prices higher than they would have been and stimulating disastrous booms in the stock and real-estate markets. In 1927, Strong gaily told a French central banker that he was going to give “a little coup de whiskey to the stock market.” What was the point? Why did Strong pursue a policy that now can seem only heedless, dangerous, and recklessly extravagant?
Once the government has assumed absolute control of the money-creating machinery in society, it benefits — as would any other group — by using that power. Anyone would benefit, at least in the short run, by printing or creating new money for his own use or for the use of his economic or political allies.
Strong had several motives for supporting an inflationary boom in the 1920s. One was to stimulate foreign loans and foreign exports. The Republican party was committed to a policy of partnership of government and industry, and to subsidizing domestic and export firms. A protective tariff aided inefficient domestic producers by keeping out foreign competition. But if foreigners were shut out of our markets, how in the world were they going to buy our exports? The Republican administration thought it had solved this dilemma by stimulating American loans to foreigners so that they could buy our products.
A fine solution in the short run, but how were these loans to be kept up, and, more important, how were they to be repaid? The banking community was also confronted with the curious and ultimately self-defeating policy of preventing foreigners from selling us their products, and then lending them the money to keep buying ours. Benjamin Strong’s inflationary policy meant repeated doses of cheap credit to stimulate this foreign lending. It should also be noted that this policy subsidized American investment banks in making foreign loans.
Among the exports stimulated by cheap credit and foreign loans were farm products. American agriculture, overstimulated by the swollen demands of warring European nations during World War I, was a chronically sick industry during the 1920s. It had awakened after the resumption of peace to find that farm prices had fallen and that European demand was down. Rather than adjusting to postwar realities, however, American farmers preferred to organize and agitate to force taxpayers and consumers to keep them in the style to which they had become accustomed during the palmy “parity” years of the war. One way for the federal government to bow to this political pressure was to stimulate foreign loans and hence to encourage foreign purchases of American farm products.
The “farm bloc,” it should be noted, included not only farmers; more indirect and considerably less rustic interests were also busily at work. The postwar farm bloc gained strong support from George N. Peek and General Hugh S. Johnson; both, later prominent in the New Deal, were heads of the Moline Plow Company, a major manufacturer of farm machinery that stood to benefit handsomely from government subsidies to farmers. When Herbert Hoover, in one of his first acts as president — considerably before the crash — established the Federal Farm Board to raise farm prices, he installed as head of the FFB Alexander Legge, chairman of International Harvester, the nation’s leading producer of farm machinery. Such was the Republican devotion to “laissez faire.”
But a more indirect and ultimately more important motivation for Benjamin Strong’s inflationary credit policies in the 1920s was his view that it was vitally important to “help England,” even at American expense. Thus, in the spring of 1928, his assistant noted Strong’s displeasure at the American public’s outcry against the “speculative excesses” of the stock market.
The public didn’t realize, Strong thought, that “we were now paying the penalty for the decision which was reached early in 1924 to help the rest of the world back to a sound financial and monetary basis.” An unexceptionable statement, provided that we clear up some euphemisms. For the “decision” was taken by Strong in camera, without the knowledge or participation of the American people; the decision was to inflate money and credit, and it was done not to help the “rest of the world” but to help sustain Britain’s unsound and inflationary policies.
Before the World War, all the major nations were on the gold standard, which meant that the various currencies — the dollar, pound, mark, franc, etc. — were redeemable in fixed weights of gold. This gold requirement ensured that governments were strictly limited in the amount of scrip they could print and pour into circulation, whether by spending to finance government deficits or by lending to favored economic or political groups. Consequently, inflation had been kept in check throughout the 19th century when this system was in force.
But world war ruptured all that, just as it destroyed so many other aspects of the classical-liberal polity. The major warring powers spent heavily on the war effort, creating new money in bushel baskets to pay the expense. Inflation was consequently rampant during and after World War I and, since there were far more pounds, marks, and francs in circulation than could possibly be redeemed in gold, the warring countries were forced to go off the gold standard and to fall back on paper currencies — all, that is, except for the United States, which was embroiled in the war for a relatively short time and could therefore afford to remain on the gold standard.
After the war, the nations faced a world currency breakdown with rampant inflation and chaotically falling exchange rates. What was to be done? There was a general consensus on the need to go back to gold, and thereby to eliminate inflation and frantically fluctuating exchange rates. But how to go back? That is, what should be the relations between gold and the various currencies?
Specifically, Britain had been the world’s financial center for a century before the war, and the British pound and the dollar had been fixed all that time in terms of gold so that the pound would always be worth $4.86. But during and after the war the pound had been inflated relatively far more than the dollar, and thus had fallen to about $3.50 on the foreign-exchange market. But Britain was adamant about returning the pound, not to the realistic level of $3.50, but rather to the old prewar par of $4.86.
Why the stubborn insistence on going back to gold at the obsolete prewar par? Part of the reason was a stubborn and mindless concentration on saving face and British honor, on showing that the old lion was just as strong and tough as before the war. Partly, it was a shrewd realization by British bankers that if the pound were devalued from prewar levels England would lose its financial preeminence, perhaps to the United States, which had been able to retain its gold status.
So, under the spell of its bankers, England made the fateful decision to go back to gold at $4.86. But this meant that Britain’s exports were now made artificially expensive and its imports cheaper, and since England lived by selling coal, textiles, and other products, while importing food, the resulting chronic depression in its export industries had serious consequences for the British economy. Unemployment remained high in Britain, especially in its export industries, throughout the boom of the 1920s.
To make this leap backward to $4.86 viable, Britain would have had to deflate its economy so as to bring about lower prices and wages and make its exports once again inexpensive abroad. But it wasn’t willing to deflate since that would have meant a bitter confrontation with Britain’s now-powerful unions. Ever since the imposition of an extensive unemployment-insurance system, wages in Britain were no longer flexible downward as they had been before the war. In fact, rather than deflate, the British government wanted the freedom to keep inflating, in order to raise prices, do an end run around union wage rates, and ensure cheap credit for business.
The British authorities had boxed themselves in: They insisted on several axioms. One was to go back to gold at the old prewar par of $4.86. This would have made deflation necessary, except that a second axiom was that the British continue to pursue a cheap credit, inflationary policy rather than deflation. How to square the circle? What the British tried was political pressure and arm-twisting on other countries, to try to induce or force them to inflate too. If other countries would also inflate, the pound would remain stable in relation to other currencies; Britain would not keep losing gold to other nations, which endangered its own jerry-built monetary structure.
On the defeated and small new countries of Europe, Britain’s pressure was notably successful. Using their dominance in the League of Nations and especially in its Financial Committee, the British forced country after country not only to return to gold, but to do so at overvalued rates, thereby endangering those nations’ exports and stimulating imports from Britain. And the British also flummoxed these countries into adopting a new form of gold “exchange” standard, in which they kept their reserves not in gold, as before, but in sterling balances in London.
In this way, the British could continue to inflate; and pounds, instead of being redeemed in gold, were used by other countries as reserves on which to pyramid their own paper inflation. The only stubborn resistance to the new order came from France, which had a hard-money policy into the late 1920s. It was French resistance to the new British monetary order that was ultimately fatal to the house of cards the British attempted to construct in the 1920s.
The United States was a different situation altogether. Britain could not coerce the United States into inflating in order to save the misbegotten pound, but it could cajole and persuade. In particular, it had a staunch ally in Benjamin Strong, who could always be relied on to be a willing servitor of British interests. By repeatedly agreeing to inflate the dollar at British urging, Benjamin Strong won the plaudits of the British financial press as the best friend of Great Britain since Ambassador Walter Hines Page, who had played a key role in inducing the United States to enter the war on the British side.
Why did Strong do it? We know that he formed a close friendship with British financial autocrat Montagu Norman, longtime head of the Bank of England. Norman would make secret visits to the United States, checking in at a Saratoga Springs resort under an assumed name, and Strong would join him there for the weekend, also incognito, there to agree on yet another inflationary coup de whiskey to the market.
Surely this Strong–Norman tie was crucial, but what was its basic nature? Some writers have improbably speculated on a homosexual liaison to explain the otherwise mysterious subservience of Strong to Norman’s wishes. But there was another, and more concrete and provable, tie that bound these two financial autocrats together.
That tie involved the Morgan banking interests. Benjamin Strong had lived his life in the Morgan ambit. Before being named head of the Federal Reserve, Strong had risen to head of the Bankers Trust Company, a creature of the Morgan bank. When asked to be head of the Fed, he was persuaded to take the job by two of his best friends, Henry P. Davison and Dwight Morrow, both partners of J.P. Morgan & Co.
The Federal Reserve System arrived at a good time for the Morgans. It was needed to finance America’s participation in World War I, a participation strongly supported by the Morgans, who played a major role in bringing the Wilson administration into the war. The Morgans, heavily invested in rail securities, had been caught short by the boom in industrial stocks that emerged at the turn of the century. Consequently, much of their position in investment-banking was being eroded by Kuhn, Loeb & Co., which had been faster off the mark on investment in industrial securities.
World War I meant economic boom or collapse for the Morgans. The House of Morgan was the fiscal agent for the Bank of England: it had the underwriting concession for all sales of British and French bonds in the United States during the war, and it helped finance US arms and munitions sales to Britain and France. The House of Morgan had a very heavy investment in an Anglo-French victory and a German-Austrian defeat. Kuhn, Loeb, on the other hand, was pro-German, and therefore was tied more to the fate of the Central Powers.
The cement binding Strong and Norman was the Morgan connection. Not only was the House of Morgan intimately wrapped up in British finance, but Norman himself — as well as his grandfather — in earlier days had worked in New York for the powerful investment banking firm of Brown Brothers, and hence had developed close personal ties with the New York banking community. For Benjamin Strong, helping Britain meant helping the House of Morgan to shore up the internally contradictory monetary structure it had constructed for the postwar world.
The result was inflationary credit, a speculative boom that could not last, and the Great Crash whose 50th anniversary we observe this year. After Strong’s death in late 1928, the new Federal Reserve authorities, while confused on many issues, were no longer consistent servitors of Britain and the Morgans. The deliberate and consistent policy of inflation came to an end, and a corrective depression soon arrived.
There are two mysteries about the Great Depression, mysteries having two separate and distinct solutions. One is, why the crash? Why the sudden crash and depression in the midst of boom and seemingly permanent prosperity? We have seen the answer: inflationary credit expansion propelled by the Federal Reserve System in the service of various motives, including helping Britain and the House of Morgan.
But there is another vital and very different problem. Given the crash, why did the recovery take so long? Usually, when a crash or financial panic strikes, the economic and financial depression, be it slight or severe, is over in a few months or a year or two at the most. After that, economic recovery will have arrived. The crucial difference between earlier depressions and that of 1929 was that the 1929 crash became chronic and seemed permanent.
What is seldom realized is that depressions, despite their evident hardship on so many, perform an important corrective function. They serve to eliminate the distortions introduced into the economy by an inflationary boom. When the boom is over, the many distortions that have entered the system become clear: prices and wage rates have been driven too high, and much unsound investment has taken place, particularly in capital-goods industries.
The recession or depression serves to lower the swollen prices and to liquidate the unsound and uneconomic investments; it directs resources into those areas and industries that will most-effectively serve consumer demands — and were not allowed to do so during the artificial boom. Workers previously misdirected into uneconomic production, unstable at best, will, as the economy corrects itself, end up in more secure and productive employment.
The recession must be allowed to perform its work of liquidation and restoration as quickly as possible, so that the economy can be allowed to recover from boom and depression and get back to a healthy footing. Before 1929, this hands-off policy was precisely what all US governments had followed, and hence depressions, however sharp, would disappear after a year or so.
But when the Great Crash hit, America had recently elected a new kind of president. Until the past decade, historians have regarded Herbert Clark Hoover as the last of the laissez-faire presidents. Instead, he was the first New Dealer.
Hoover had his bipartisan aura, and was devoted to corporatist cartelization under the aegis of big government; indeed, he originated the New Deal farm-price-support program. His New Deal specifically centered on his program for fighting depressions. Before he assumed office, Hoover determined that should a depression strike during his term of office, he would use the massive powers of the federal government to combat it. No more would the government, as in the past, pursue a hands-off policy.
As Hoover himself recalled the crash and its aftermath,
The primary question at once arose as to whether the President and the federal government should undertake to investigate and remedy the evils. … No President before had ever believed that there was a governmental responsibility in such cases. … Presidents steadfastly had maintained that the federal government was apart from such eruptions … therefore, we had to pioneer a new field.
In his acceptance speech for the presidential renomination in 1932, Herbert Hoover summed it up:
We might have done nothing. … Instead, we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action. … No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times.
The massive Hoover program was, indeed, a characteristically New Deal one: vigorous action to keep up wage rates and prices, to expand public works and government deficits, to lend money to failing businesses to try to keep them afloat, and to inflate the supply of money and credit to try to stimulate purchasing power and recovery. Herbert Hoover during the 1920s had pioneered the proto-Keynesian idea that high wages are necessary to assure sufficient purchasing power and a healthy economy. The notion led him to artificially raising wages — and consequently to aggravating the unemployment problem — during the depression.
As soon as the stock market crashed, Hoover called in all the leading industrialists in the country for a series of White House conferences in which he successfully bludgeoned the industrialists, under the threat of coercive government action, into propping up wage rates — and hence causing massive unemployment — while prices were falling sharply. After Hoover’s term, Franklin D. Roosevelt simply continued and expanded Hoover’s policies across the board, adding considerably more coercion along the way. Between them, the two New Deal presidents managed the unprecedented feat of making the depression last a decade, until we were lifted out of it by our entry into World War II.
If Benjamin Strong got us into a depression and Herbert Hoover and Franklin D. Roosevelt kept us in it, what was the role in all this of the nation’s economists, watchdogs of our economic health? Unsurprisingly, most economists, during the depression and ever since, have been much more part of the problem than of the solution. During the 1920s, establishment economists, led by Professor Irving Fisher of Yale, hailed the 20s as the start of a “New Era,” one in which the new Federal Reserve System would ensure permanently stable prices, avoiding either booms or busts.
Unfortunately, the Fisherites, in their quest for stability, failed to realize that the trend of the free and unhampered market is always toward lower prices as productivity rises and mass markets develop for particular products. Keeping the price level stable in an era of rising productivity, as in the 1920s, requires a massive artificial expansion of money and credit. Focusing only on wholesale prices, Strong and the economists of the 1920s were willing to engender artificial booms in real estate and stocks, as well as malinvestments in capital goods, so long as the wholesale price level remained constant.
As a result, Irving Fisher and the leading economists of the 1920s failed to recognize that a dangerous inflationary boom was taking place. When the crash came, Fisher and his disciples of the Chicago School again pinned the blame on the wrong culprit. Instead of realizing that the depression process should be left alone to work itself out as rapidly as possible, Fisher and his colleagues laid the blame on the deflation after the crash and demanded a reinflation (or “reflation”) back to 1929 levels.
In this way, even before Keynes, the leading economists of the day managed to miss the problem of inflation and cheap credit and to demand policies that only prolonged the depression and made it worse. After all, Keynesianism did not spring forth full-blown with the publication of Keynes’s General Theory in 1936.
We are still pursuing the policies of the 1920s that led to eventual disaster. The Federal Reserve is still inflating the money supply and inflates it even further with the merest hint that a recession is in the offing. The Fed is still trying to fuel a perpetual boom while avoiding a correction on the one hand or a great deal of inflation on the other.
In a sense, things have gotten worse. For while the hard-money economists of the 1920s and 1930s wished to retain and tighten up the gold standard, the “hard-money” monetarists of today scorn gold, are happy to rely on paper currency, and feel that they are boldly courageous for proposing not to stop the inflation of money altogether, but to limit the expansion to a supposedly fixed amount.
Those who ignore the lessons of history are doomed to repeat it — except that now, with gold abandoned and each nation able to print currency ad lib, we are likely to wind up, not with a repeat of 1929, but with something far worse: the holocaust of runaway inflation that ravaged Germany in 1923 and many other countries during World War II. To avoid such a catastrophe we must have the resolve and the will to cease the inflationary expansion of credit, and to force the Federal Reserve System to stop purchasing assets, and thereby to stop its continued generation of chronic, accelerating inflation.
- So This Is Why The "Smart Money" Was Selling The Most Stocks In History
Precisely two months ago, we reported something very troubling, namely that “The “Smart Money” Just Sold The Most Stocks In History.” This is what BofA reported at the time: “BofAML clients were big net sellers of US stocks in the amount of $4.1bn, following four weeks of net buying. Net sales were the largest since January 2008 and led by institutional clients—after three weeks of net buying, institutional clients’ net sales last week were the largest in our data history.”
Just to make sure the message was heard loud and clear we followed up ten days later with “The “Smartest Money” Is Liquidating Stocks At A Record Pace: “Selling Everything That’s Not Bolted Down“
We got definitive confirmation that the truly “smartest money in the room”, those who dabble not in the bipolar public markets but in private equity had indeed started “selling everything that is not nailed down” several years ago hitting a climax this past quarter, when Bloomberg reported that two years after Leon Black’s infamous statement, “other private-equity firms are following suit – dumping stakes into the markets at a record clip.”
According to Bloomberg data, firms including Blackstone Group and TPG have been “capitalizing on record stock markets around the world to sell shares, mostly in their companies that have already gone public. Globally, buyout firms conducted 97 stock offerings in the second quarter, more than in any other three-month period.”
What happened next should not have been a surprise to our readers: as we reported shortly thereafter, the divergence between the “smart money flow” and the S&P 500 – which at this point was merely reflecting HFT momentum ignition traps and the occasional stray retail investor – had reached unseen proportions:
So following the biggest (and only) market correction in years, the biggest weekly surge in the VIX ever, the second wholesale market flash crash in history coupled with the first ever limit down trade in the Nasdaq and the E-Mini, not to mention the biggest intraday bearish reversal since Lehman, it would appear that the “smart money” was aptly named (and hopefully wasn’t selling to you).
And, lo and behold, following the dramatic market moves of the past two weeks, the S&P has finally caught up with the Smart Money flow.
A quick reminder of the “Smart Money Flow” index in question:
The Bloomberg Smart Money Flow Index is calculated by taking the action of the Dow in two time periods: the first 30 minutes and the close. The first 30 minutes represent emotional buying, driven by greed and fear of the crowd based on good and bad news. There is also a lot of buying on market orders and short covering at the opening. Smart money waits until the end and they very often test the market before by shorting heavily just to see how the market reacts. Then they move in the big way. These heavy hitters also have the best possible information available to them and they do have the edge on all the other market participants. To replicate this index, just start at any given day, subtract the price of the Dow at 10 AM from the previous day’s close and add today’s closing price. Whenever the Dow makes a high which is not confirmed by the SMFI there is trouble ahead.
Starting sometime in February, the smart money started getting out of Dodge, and yes, “there was troubled ahead.”
- Aug 26 – Turnaround Tuesday as China Cuts Rates
EMOTION MOVING MARKETS NOW: 3/100 EXTREME FEAR
PREVIOUS CLOSE: 3/100 EXTREME FEAR
ONE WEEK AGO: 14/100 EXTREME FEAR
ONE MONTH AGO: 10/100 EXTREME FEAR
ONE YEAR AGO: 34/100 FEAR
Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 10.17% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.
Market Volatility: EXTREME FEAR The CBOE Volatility Index (VIX) is at 36.02 and indicates that investors remain concerned about declines in the stock market.
Stock Price Strength: EXTREME FEAR The number of stocks hitting 52-week lows is slightly greater than the number hitting highs and is at the lower end of its range, indicating extreme fear.
PIVOT POINTS
EURUSD | GBPUSD | USDJPY | USDCAD | AUDUSD | EURJPY | EURCHF | EURGBP| GBPJPY | NZDUSD | USDCHF | EURAUD | AUDJPY
S&P 500 (ES) | NASDAQ 100 (NQ) | DOW 30 (YM) | RUSSELL 2000 (TF) | Euro (6E) |Pound (6B)
EUROSTOXX 50 (FESX) | DAX 30 (FDAX) | BOBL (FGBM) | SCHATZ (FGBS) | BUND (FGBL)
MEME OF THE DAY – IT’S THE JERKS
UNUSUAL ACTIVITY
KING vol pop to highs SEP 14 CALL ACTIVITY @$.20 2000+ Contracts
PFE NOV 38 CALLS block @$.24 on offer 19713 Contracts
HZNP SEP 30 CALLS block @$1.45 on offer 3900 Contracts
UNFI President and CEO Purchase 5,500 @$45.24
CMRX Director Purchase 1,000 @$47.38
HEADLINES
Turnaround Tuesday as China cuts rates
PBOC cuts rates by 25 bps, RRR by 50 bps
PBOC: Economy still facing downwards pressure
China Premier Li: We have the ability to hit annual economic targets
China Premier Li: No Basis For Continued CNY Depreciation
Questions over Li Keqiang’s future amid China market turmoil –FT
US CBO improves deficit view, sub-2% PCE seen to mid-2017
Fed Discount Rate Mins: 5 Fed banks vote for discount rate hike, 6 vote to hold, 1 votes for cut
US Consumer Confidence Index Aug: 101.5 (Est 93.4; Rev Prev 91.0)
US New Home Sales Jul: 507k (Est 510k; Rev Prev 481k)
US New Home Sales (MoM) Jul: 5.40% (est 5.80%; rev prev -7.70%)
US FHFA House Price Index (MoM) Jun: 0.20% (Est 0.40%, prev 0.40%)
US Richmond Index Aug: 0 (est 10; prev 13)
ECB Constancio: ECB ready to act if inflation outlook changes materially
ECB Constancio: European stocks are ‘fairly valued’
GOVERNMENTS/CENTRAL BANKS
Fed Discount Rate Mins: Five Fed banks renew calls for discount rate hike
Fed Discount Rate Mins: Minneapolis Fed again votes to cut discount rate by 25bps
Fed Discount Rate Mins: Six banks voted to hold discount rate
US CBO improves deficit view, sub-2% PCE seen to mid-2017 –MNI
FED COMMENT: Summers, Dalio raise prospect of QE4 from the Fed –FT
BoC Schembri: Canada macroprudential housing policy is working –BBG
ECB Constancio: ECB ready to act if inflation outlook changes materially –Rtrs
ECB Constancio: Chinese economy is not decelerating strongly –Rtrs
ECB Constancio says European stocks are ‘fairly valued’ –FT
ECB: E949.0m borrowed using overnight loan facility –Livesquawk
ECB: E162.3bn deposited overnight –Livesquawk
Ifo economist: China to be bigger factor for German business –Rtrs
Japanese PM Advisor Hamada: BoJ should consider acting if yen rises sharply –WSJ
Senior Japan ruling party member Toshihiro Nikai calls for fiscal spending amid stocks rout –ET
Swiss parliament panel grills SNB’s Jordan on negative rates impact –Rtrs
CHINA
China cuts RRR ratio by 50 bps to 18%, effective 6 Sept –BBG
China cuts 1yr deposit rate and lending rate by 25 bps each –BBG
PBOC Removes fixed deposit rate ceiling for more than 1yr –BBG
PBOC: Economy still facing downwards pressure –BBG
PBOC: Cuts will provide long term liquidity –BBG
PBOC gauges MLF demand this week –BBG
China plans to cut stamp tax on stock trading to 0.05% –Hexun via BBG
China Premier Li: We have the ability to hit annual economic targets –MNI via ForexLive
China Premier Li: No Basis For Continued CNY Depreciation –MNI via ForexLive
Questions over Li Keqiang’s future amid China market turmoil –FT
Germany EcoMin Gabriel: German economy has no fear for Chinese turmoil -ForexLive
France EcoMin Macron: China poses risks to global economic recovery –ForexLive
FIXED INCOME
US sells 2-year notes to tepid demand –Rtrs
Fed RRP $73.2bn, 32 bidders (prev $73.8bn, 32 bidders) –Livesquawk
Bund hit after China rate cut lessens need for safety –FT
UK DMO to sell £3.75bn 1.5% 2021 gilt on 2/Sept –Livesquawk
Eonia settles at -0.135% (prev -0.126%) –Livesquawk
FX
USD: Dollar recovers against euro, yen –MW
EUR COMMENT: The Euro Emerges as Unlikely Safe Haven –BBG
JPY: Japanese PM Advisor Hamada: BoJ should consider acting if yen rises sharply –WSJ
ENERGY/COMMODITIES
CRUDE: WTI futures settle 2.8% higher at $39.31 per barrel –Livesquawk
MARKETS: Commodity prices pushed higher after China cut –FT
CRUDE: Oil rallies but still near six-and-a-half-year lows –Rtrs
CRUDE: Iran’s oil investments shrink on crude slump –BBG
CRUDE COMMENT: Opec ‘feels the heat’ on oil, but will it cut? –CNBC
CRUDE: BP restarts large crude distillation unit at Whiting –BP
METALS: Trafigura to exit LME’s metals storage business –FT
EQUITIES
MARKETS: US stocks soar at open after market tumult –FT
POLICY: ECB’s Constancio says European stocks are ‘fairly valued’ –FT
M&A: Nippon Life to pay Y300-Y400bn for Mitsui Life –Nikkei via BBG
M&A: Monsanto ups bid for Syngenta –CNBC
EARNINGS: Best Buy shares soar after earnings beat –CNBC
O&G: BHP Billiton posts worst profit in 11 years, maintains dividend –SMH
INDUSTRIALS: Boeing looks through turbulence with rosy China view –FT
FX: GE will seek compensation for FX loan conversion in Poland –BI
EMERGING MARKETS
CHINA: Shanghai Comp closed down 7.6% before (before PBOC cut rates) –BBC
RUSSIA: Russia Cuts 2015 Outlook But Sees Growth In 2016 –MW
- Dollar Depeg Du Jour: 32-Year Old Hong Kong FX Regime In The Crosshairs
On Monday, we brought you two charts which vividly demonstrated market expectations for the abandonment of more currency pegs in the wake of Kazakhstan’s decision to float the tenge and China’s “unexpected” move to devalue the yuan.
As you can see from the following, the market seems to be convinced that Saudi Arabia and UAE, under pressure from falling crude revenue, will ultimately be either unwilling or unable to maintain their dollar pegs (incidentally, the Saudis did succeed in jawboning USDSAR forwards down 125bps on Tuesday):
Of course no discussion of global dollar pegs and entrenched FX regimes would be complete without mentioning the Hong Kong dollar and as you can see, the 12-month forward chart looks remarkably similar to those shown above:
Needless to say, the dynamic here is complicated by the degree to which Hong Kong is effectively wedded to US monetary policy (which is itself now thoroughly confused), the extent to which HKD has tended to sit at the strong end of the band, economic links to the mainland, exposure to weakening regional currencies via tourism, and expectations of an eventual yuan peg.
Below, for what it’s worth, is some commentary from the sellside.
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From Citi
Our long-standing house view remains that the HKD peg will stay status quo, with an eventual re-peg to RMB when the latter is fully convertible. The LERS has weathered HK through even larger external shocks since 1983, and it is an important sign of stability for businesses in HK, and policymakers of HK and China. The current Linked Exchange Rate System is likely to withstand regional FX moves, but the economy would have to adjust with (1) moderate raw food prices decline with a lag, (2) other second-round price impacts from an overall slower economy, but (3) likely sharper reversals in asset prices appreciation that we have witnessed in recent years (as already started in the equity market, and worries could spread to the property market).
RMB and other regional FX depreciation will make tourist shopping more expensive…It is important to gauge both tourist arrivals and tourists spending trends — if we start seeing even tourist arrivals fall, then it will be quite worrying, and should force shop rents to fall more broadly and faster.
From BNP
Predictably, Hong Kong’s peg with the USD has, once again, come under scrutiny. On the same day Kazakhstan abandoned control of its exchange rate, one-month implied volatility of HKD options spiked to a ten-year high (Chart 1).
Periodic bouts of price and pay swings are inevitable, as Hong Kong has effectively delegated the determination of its monetary policy to the US, even when the business cycles of the two economies do not move in tandem. As the Federal Reserve moves ever closer to delivering the first interest rate hike in almost a decade, Hong Kong is condemned to import tighter US monetary policy. In fact, Hong Kong is caught in a pincer movement between a prospective US monetary policy tightening and the continued slowdown and travails of the mainland economy with whom Hong Kong’s economic cycle is increasingly more correlated. Downward pressures on domestic costs and asset prices, including property values, will build, adding to more popular discontent against the peg (Chart 2).
But painful as the operation of the peg may be in the short term, there remains a distinct lack of alternatives.
From Barclays
In contrast to other currency pegs, including the VND and SAR, the HKD is not facing depreciation pressures due to the capital outflows but rather the contrary. In fact, over the past year the HKD has been trading near the strong side of the Convertibility Undertaking of 7.75 (Figure 3), despite the rising USD against most majors and EM currencies. Even after the PBoC announced changes to the USDCNY fixing mechanism, after an initial spike spot USDHKD has moved little, although HKD forwards and option vols have moved more sharply in recent days.
Importantly, unlike the oil producers, Hong Kong does not face the same extent of downward pressures on its current account and fiscal balances due to the collapse in oil and commodity prices. That said, it is likely that Hong Kong will face more downward pressures on business activity and BoP services receipts due to China’s growth slowdown. This raises the question was to whether the link to the USD and the US monetary policy – especially now that the Fed is closer to tightening – remains relevant for the Hong Kong SAR given the growth drag from China.
A depreciating CNY could perhaps make it easier for the Hong Kong and Chinese authorities to change the anchor of the HKD currency peg, although there are few signs that a policy change will happen in the near term. The HKMA has said that pegging to a strong and appreciating CNY would pose downward pressures on Hong Kong’s domestic prices (including wages, consumer prices and property prices), or could lead to structural deflationary pressures.
* * *
Finally, it’s worth noting that, back in 2011, Bill Ackman took to a 150-page presentation to explain why betting on an HKD revaluation was a slam dunk.
Bonus: History of the peg via Citi
- Cutting Through The HFT Lies: What Really Happened During The Flash Crash Of August 24, 2015
One of the fallacies being propagated about yesterday’s flash crash, is that somehow HFTs came riding in as noble white knights and rescued the market from a collapse instead of actually causing it. This particular lie is worth a few quick observations and explanations of what really happened.
What did not happen, is what Doug Cifu, the CEO of HFT titan Virtu, the firm which as we have profiled repeatedly in the past has lost money on 1 day in 6 years…
… told CNBC when he said it wasn’t Virtu’s fault the market did not work for anyone as a result of countless HFT glitches: “we don’t cause volatility, as a market maker we’re absorbing volatility and we think we soften it.”
The most amusing bit was when Cifu said that “we’re really just in the role of transferring risk from natural buyers to natural sellers.” Considering Virtu and its “special sauce” has never actually taken on risk with its trading record, discussing risk is a little rich for the owner of the Florida Panthers, and here’s why: in a note by Credit Suisse’s Laura Prostic (the typos are because she is in S&T) we now know precisely what happened:
HFT is typically 50% of overall volm, but they have to walk away in this heightened vol envt, which dramatically reduces liquidity. Hightened vol was mainly unwinding of hedges, not panic.
Anyone who actually trades (and is not part of the Modern Market initiative) knows that this precisely what happens every time there is a spike in market vol: HFTs simply walk away leading to the dreaded “HFT STOP” moment, creating a feedback loop of even less liquidity, and even more volatility, until circuit breakers are finally hit or asset prices hit limits. Yesterday, for the first time in history, not only the S&P500, but the Nasdaq and the DJIA all hit their particular “limit down” triggers.
Credit Suisse also directly refutes what Doug Cifu said: HFTs, far from not causing volatility, merely step aside when volatility surges thus leading to such stunners as VIX soaring above 50 overnight (with the CBOE too ashamed to even report what it would have been in the first 30 minutes of trading).
This also ties in with the summary in our last night’s post comparing the flash crashes of 2010 and 2015:
The good news is that with liquidity inevitably collapsing ever further to a state of near singularity with ongoing central bank interventions, and with markets broken beyond repaid, we will very soon have a repeat flash crash like today, one which will provide enough satisfactory answers to the question of just happened that lead to a market that was completely broken for nearly an hour, and where the VIX was so very off the charts, the CBOE was afraid to show it for at least thirty minutes.
One thing is certain though: while the market dies a slow, painful, miserable death, the biggest HFTs will continue pocketing millions. Such as Virtu: “Virtu Financial Inc., one of the world’s largest high-frequency trading firms, was on track to have one of its biggest and most profitable days in history Monday amid a tumultuous 24 hours for world markets, according to its chief executive.”
As we previously reported, while Virtu may have fabricated its role in yesterday’s events, there was one truth: it had an amazingly profitable day because as a result of the total chaos, HFTs were able to frontrun block orders from a mile away and as a result of soarking bid/ask spreads, Virtu raked in millions by simply capitalizing on the chaos it and its peers have created. As Cifu said then “Our firm is made for this kind of market.” We quickly corrected him: “your firm made this kind of market.”
But back to the lies: earlier today the WSJ reported the following:
The speed and depth of the drop harked back to the flash crash of May 2010, when program-driven trading produced a self-reinforcing wave of selling. This time around, high-frequency trading firms like Virtu Financial Inc. and Global Trading Systems LLC were buyers that helped U.S. stocks rebound midday from their early slump.
“We were catching those falling knives,” said Ari Rubenstein, co-founder of Global Trading Systems.
Actually no. What happened is that in early trading the entire market was in freefall, and the only thing that saved it was the various major market indices hitting their limit down levels for the first time in history – not even during the Flash Crash of 2010 did this happen. The following Nanex chart documents this beyond a doubt.
If HFTs did anything, it was merely to frontrun the buy orders once the selling wave – halted thanks to limit downs being hit – had exhausted itself, and the buying scramble was unleashed around 9:35am leading to a 5% move in less than 10 minutes! It was here that Virtu made its colossal profits, however not from taking the least amount of risk, but merely from frontrunning order flow into a stil chaotic market with gargantuan bid-ask spreads, which incidentally not only does not provide liquidity, but reduces it as it competes with other buy offers for any market offers, also known as “providers” of liquidity, only to immediately flip the transaction to those buyers which Virtu knew with 100% certainty were just behind it. In any other market this would be illegal, except for one in which Reg NMS has made such frontrunning perfectly legal (courtesy of billions spent by the same HFTs who now benefit from it).
So what was the real contribution of HFTs: an unprecedented failure of ETFs to trade with their underlying securities and vice versa. As we said yesterday: “for minutes at a time, there was an unprecedented disconnect in ETF fair value as hedge funds sold off ETFs however correlation arbitrageurs were unable to capitalize on the discrepancy with the underlying leading to historic, and extremely lucrative divergences.”
… experts are still scratching their heads over what may have caused these ETFs to nosedive. One possible explanation is that liquidity providers — think high-speed traders and other Wall Street firms — charged with stabilizing the market weren’t there when needed. That’s what happened during the flash crash of 2010. “When markets get hairy, sometimes those liquidity providers step out of the way to avoid getting run over,” said Matt Hougan, CEO of ETF.com.
So while we await for the first clear break of the ETF model, thanks to none other than HFTs, here is a visual example of what really happened: some 220 ETFs which all fell by 10% yesterday!
But it wasn’t just the “transitory” failure of the ETF model: yesterday the Nasdaq ETF, the QQQ, had its widest 1 minute price swing in history. Yes, the NASDAQ!
And just in case there is still any confusion if yesterday’s event was indeed a flash crash, the answer is yes, most certainly, as can be seen by the 15% tumble in QQQs right at the open. That, ladies and gentlemen, is the definition of a flash crash.
Again: thank you HFTs.
With that we leave matters into the SEC’s capable hands which we know will do absolutely nothing until the time comes when the next marketwide crash does not see a promptly rebound, and the time to finally point the finger at the HFTs comes. It’s just a matter of time, plus someone has to be a scapegoat for the real, and biggest, market manipulator in history: the Federal Reserve.
And since, naturally, the complicit and corrupt SEC won’t do anything, expect another wave of retail investors to drop out of the market forever and to never come back, having seen yet again what a truly broken and rigged casino it has become.
Finally, while we are delighted that firms like Virtu make outside profits on days in which the market crashes and leads to untold losses for retail investors, we have just one simple request – please don’t take us for fools anymore: by now everyone knows all of your tricks, and can see right through your bullshit.
So, dear Virtu, frontrun whoever you have to, other HFTs, hedge funds, mutual funds, or whoever else is left in this quote-unquote market, and have another Madoff year (one with zero trading losses) but you will have to do it without what was once called the “investing public.” They are now permanently gone until two things happen: i) the market is once again a market, not artificially propped up by $14 trillion in central bank liquidity which makes every asset “price” a illusion, and ii) HFT frontrunning is no longer legal, endorsed and blessed by the SEC, the regulators and all law enforcement agencies.
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