- IMF Says It Will Continue Lending To Ukraine Even After A Default, And Why This Is Bad News For Greek Gold
With Tsipras’ delegation in Brussels desperate to work out a last minute deal and preserve Greek pension cut “red lines”, not to mention Greece in the Eurozone, it is the IMF which has become the biggest hurdle to getting a deal done because while even the European Commission is ready defer €400 million of cuts in small pensions if Greece reduced military spending by same amount, the IMF promptly scuttled this suggestion according to FAZ.
So as we enter Sunday and what may well be the last possibility to get deal done before the “accidental” Grexit scenario is put in play, we thought our Greek readers would be interested to learn that while Lagarde’s “apolitical” IMF is digging in tooth and nail against giving Greece even the smallest amount of breathing room, the equivalent of half an our of a typical daily Fed POMO notional amount, yesterday the same Lagarde said that the IMF “could lend to Ukraine even if Ukraine determines it cannot service its debt.“
This is the same Ukraine whose bonds last week tumbled by 9% after the country’s American finance minister Natalie Jaresko said Ukraine will default on its debt unless creditors (among which both Russia and the US taxpayer via the IMF in addition to various hedge and mutual funds all used to getting a last minute bailout on their terrible investments) acquiesce to their demands for more aid (i.e., more debt).
Lagarde’s statement also indicates that the Hermes and tanning bad connoisseur does not know the difference between a loan and an equity investment, which is what “lending” to an insolvent Ukraine would be equivalent to.
But more to the point, the very reason why the IMF has kept such a hard line position with Greece is precisely because the IMF alleges that unless Greece takes steps to solvency, the DC-based IMF will no longer give the country funds sourced primarily courtesy of US taxpayers.
In other words, under pressure by someone (and ZH readers know who), what for the IMF is a deal killer in Greece, is not even a small stumbling block when it comes to Kiev.
From Deutsche Welle:
IMF chief Christine Lagarde has reassured Ukraine that funds can still be made available even if the country fails to repay its private creditors. She ruled out resorting to national reserves to avoid defaulting.
Christine Lagarde, head of the Washington-based crisis lender, which had launched a four-year loan program of $17.5 billion (15.6 billion euros) in March for Ukraine’s government, said that the IMF was still encouraging a settlement in the debt talks, while highlighting that there were backup options in place.
“I believe that their program warrants the support of the international community, including the private sector, which is indispensable for the success of this program,” Lagarde said. She stressed that the IMF did not have to cut off its funding of the Ukraine government if it stopped servicing its private debts.
“But in the event that a negotiated settlement with private creditors is not reached and the country determines that it cannot service its debt, the fund can lend to Ukraine consistent with its lending-into-arrears policy,” Lagarde explained.
There actually is such a thing: as the following document reveals there is an “IMF Policy on Lending into Arrears to Private Creditors“, one which a 2006 paper described as merely encouraging moral hazard. Although with the world so far past the point of terminal insolvency, with capital markets centrally-planned from Tokyo to Shanghai to Frankfurt to New York, regional or global moral hazard is the last concern on anyone’s mind.
Also, sadly for Greece which barely has any private creditors left as all the debt has been funneled over to the public sector and the ECB, this loophole is impractical.
Actually, there is one loophole.
When talking about Ukraine, Lagarde ruled out recent speculations saying that Ukraine could use its central bank reserves to pay back creditors. The reserves of the National Bank of Ukraine “cannot be used for sovereign debt service without the government incurring new debt,” which she said ran against the aims of the IMF bailout program for the troubled country.
Actually, the reason why the reserves of Ukraine, which already received $5 billion from the IMF loan in March with the proceeds long since sent offshore by criminal, US-muppet politicians, can not be used is simple: with foreign reserves barely there, Ukraine’s true reserve, gold, was long ago confiscated and/or sold in the open market as we reported last November when Ukraine Admitted Its Gold Is Gone: “There Is Almost No Gold Left In The Central Bank Vault.”
Greece however does.
Some 112.5 tons of gold to be precise, or a fraction more than the infamous Bank of International Settlements, which at today’s price of gold is just over $4 billion, or enough to keep Greece solvent for a month or so.
It is also an amount which the BIS, or any other central bank would be delighted to take. Why just today the NY Fed learned it will have to part with another $1 billion in gold to satisfy a suddenly very concerned about its assets state of Texas.
So one wonders: will Greece use its last card, and agree to dump its gold using the proceeds to repay 1-2 months of arrears to the IMF or the ECB which will gladly print the money it needs to purchase all the gold Greece has to sell.
And if so, just how will the Greek population react it when it learns that it too was “Ukrained” and sold out by its corrupt western-puppet politicians to the highest central bank bidder, all of which can print fiat but none can print physical gold?
- The War On Cash: Officially Sanctioned Theft
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
While the benefits to banks and governments of banning physical cash are self-evident, there are downsides to the real economy and to household resilience.
You've probably read that there is a war on cash being waged on various fronts around the world. What exactly does a war on cash mean?
It means governments are limiting the use of cash and a variety of official-mouthpiece economists are calling for the outright abolition of cash. Authorities are both restricting the amount of cash that can be withdrawn from banks, and limiting what can be purchased with cash.
These limits are broadly called capital controls.
The War On Cash: Why Now?
Why are governments suddenly acting as if cash money is a bad thing that must be severely limited or eliminated?
Before we get to that, let’s distinguish between physical cash—currency and coins in your possession—and digital cash in the bank. The difference is self-evident: cash in hand cannot be confiscated by a “bail-in” (i.e. officially sanctioned theft) in which the government or bank expropriates a percentage of cash deposited in the bank. Cash in hand cannot be chipped away by negative interest rates or fees like cash held in a bank.
Cash in the bank cannot be withdrawn in a financial emergency that shutters the banks, i.e. a bank holiday.
When pundits suggest cash is “obsolete,” they mean physical paper money and coins, not cash in a bank. Cash in the bank is perfectly fine with the government and its well-paid yes-men (paging Mr. Rogoff and Mr. Buiter) because this cash can be expropriated by either “bail-ins” or by negative interest rates.
Mr. Buiter, for example, recently opined that the spot of bother in 2008-09 (the Global Financial Meltdown) could have been avoided if banks had only charged a 6% negative interest rate on cash: in effect, taking 6% of the depositor’s cash to force everyone to spend what cash they might have.
Both cash in hand and cash in the bank are subject to one favored method of expropriation, inflation. Inflation—the single most cherished goal of every central bank—steals purchasing power from physical cash and digital cash alike. Inflation punishes holders of cash and benefits those with debt, as debt becomes cheaper to service.
The beneficial effect of inflation on debt has been in play for decades, so it can’t be the cause of governments’ recent interest in eliminating physical cash.
So now we return to the question: Why are governments suddenly declaring war on physical cash, the oldest officially issued form of money?
The first reason: physical cash has the potential to evade both taxes as well as officially sanctioned theft via bail-ins and negative interest rates. In short, physical cash is extremely difficult for governments to steal.
Some of you may find the word theft harsh or even offensive. But we must differentiate between taxes—which are levied to pay for the state’s programs that in principle benefit all citizens—and bail-ins, i.e. the taking of depositors’ cash to bail out banks that became insolvent through the actions of the banks’ management, not the actions of depositors.
Bail-ins are theft, pure and simple. Since the government enforces the taking, it is officially sanctioned theft, but theft nonetheless.
Negative interest rates are another form of officially sanctioned theft. In a world without the financial repression of zero-interest rates (ZIRP—central banks’ most beloved policy), lenders would charge borrowers enough interest to pay depositors for the use of their cash and earn the lender a profit.
If borrowers are paying interest, negative interest rates are theft, pure and simple.
Why are governments suddenly so keen to ban physical cash? The answer appears to be that the banks and government authorities are anticipating bail-ins, steeply negative interest rates and hefty fees on cash, and they want to close any opening regular depositors might have to escape these forms of officially sanctioned theft. The escape from bail-ins and fees on cash deposits is physical cash, and hence the sudden flurry of calls to eliminate cash as a relic of a bygone age—that is, an age when commoners had some way to safeguard their money from bail-ins and bankers’ control.
Forcing Those With Cash To Spend Or Gamble Their Cash
Negative interest rates (and fees on cash, which are equivalently punitive to savers) raise another question: why are governments suddenly obsessed with forcing owners of cash to either spend it or gamble it in the financial-market casinos?
The conventional answer voiced by Mr. Buiter is that recession and credit contraction result from households and enterprises hoarding cash instead of spending it. The solution to recession is thus to force all those stingy cash hoarders to spend their money.
There are three enormous flaws in this thinking.
One is that households and businesses have cash to hoard. The reality is the bottom 90% of households have less income now than they did 15 years ago, which means their spending has declined not from hoarding but from declining income.
While Corporate America has basked in the glory of sharply rising profits, small business has not prospered in the same fashion. Indeed, by some measures, small business has been in a 6-year recession.
The bottom 90% has less income and faces higher living expenses, so only the top slice of households has any substantial cash. This top slice may see few safe opportunities to invest their savings, so they choose to keep their savings in cash rather than gamble it in a rigged casino (i.e. the stock market).
The second flaw is that hoarding cash is the only rational, prudent response in an era of financial repression and economic insecurity. What central banks are demanding–that we spend every penny of our earnings rather than save some for investments we control or emergencies—is counter to our best interests.
This leads to the third flaw: capital — which begins its life as savings — is the foundation of capitalism. If you attack savings as a scourge, you are attacking capitalism and upward mobility, for only those who save capital can invest it to build wealth. By attacking cash, the central banks and governments are attacking capital and upward mobility.
Those who already own the majority of productive assets are able to borrow essentially unlimited sums at near-zero interest rates, which they can use to buy more productive assets, while everyone else–the bottom 99.5%–is reduced to consumer-serfdom: you are not supposed to accumulate productive capital, you are supposed to spend every penny you earn on interest payments, goods and services.
This inversion of capitalism dooms an economy to all the ills we are experiencing in abundance: rising income inequality, reduced opportunities for entrepreneurship, rising debt burdens and a short-term perspective that voids the longer-term planning required to build sustainable productivity and wealth.
Physical Cash: Only $1.36 Trillion
According to the Federal Reserve, total outstanding physical cash amounts to $1.36 trillion.Given that a substantial amount of this cash is held overseas, physical cash is a tiny part of the domestic economy and the nation’s total assets. For context: the U.S. economy is $17.5 trillion, total financial assets of households and nonprofit organizations total $68 trillion, base money is around $4 trillion, and total money (currency in circulation and demand deposits) is over $10 trillion (source).
Given the relatively modest quantity of physical cash, claims that eliminating it will boost the economy ring hollow.
Following the principle of cui bono—to whose benefit?–let’s ask: What are the benefits of eliminating physical cash to banks and the government?
Benefits To Banks And The Government Of Eliminating Physical Cash
The benefits to banks and governments by eliminating cash are self-evident:- Every financial transaction can be taxed
- Every financial transaction can be charged a fee
- Bank runs are eliminated
In fractional reserve systems such as ours, banks are only required to hold a fraction of their assets in cash. Thus a bank might only have 1% of its assets in cash. If customers fear the bank might be insolvent, they crowd the bank and demand their deposits in physical cash. The bank quickly runs out of physical cash and closes its doors, further fueling a panic.
The federal government began insuring deposits after the Great Depression triggered the collapse of hundreds of banks, and that guarantee limited bank runs, as depositors no longer needed to fear a bank closing would mean their money on deposit was lost.
But since people could conceivably sense a disturbance in the Financial Force and decide to turn digital cash into physical cash as a precaution, eliminating physical cash also eliminates the possibility of bank runs, as there will be no form of cash that isn’t controlled by banks.
While the benefits to banks and governments of banning physical cash are self-evident, there are downsides to the real economy and to household resilience.
In Part 2: What To Do With Your Cash Savings, we'll look at the most influential forces in play in this war, and consider strategies for preserving purchasing power, avoiding bail-ins, fees and other threats to cash savings.
Click here to read Part 2 of this report (free executive summary, enrollment required for full access)
- California Water Wars Escalate: Government Orders Massive Supply Cuts To Most Senior Rights Holders
Just two weeks after California's farmers – with the most senior water rights – offered to cut their own water use by 25% (in an attempt to front-run more draconian government-imposed measures), AP reports that the California government has – just as we predicted – ignored any efforts at self-preservation and ordered the largest cuts on record to farmers holding some of the state's strongest water rights. While frackers and big energy remain exempt from the restrictions, Caren Trgovcich, chief deputy director of the water board, explains, "we are now at the point where demand in our system is outstripping supply for even the most senior water rights holders."
With "the whole damn state out of water," AP reports State water officials told more than a hundred senior rights holders in California's Sacramento, San Joaquin and delta watersheds to stop pumping from those waterways.
The move by the State Water Resources Control Board marked the first time that the state has forced large numbers of holders of senior-water rights to curtail use. Those rights holders include water districts that serve thousands of farmers and others.
The move shows California is sparing fewer and fewer users in the push to cut back on water using during the state's four-year drought.
"We are now at the point where demand in our system is outstripping supply for even the most senior water rights holders," Caren Trgovcich, chief deputy director of the water board.
The order applies to farmers and others whose rights to water were staked more than a century ago. Many farmers holding those senior-water rights contend the state has no authority to order cuts.
The reductions are enforced largely on an honor system because there are few meters and sensors in place to monitor consumption.
California already has ordered cuts in water use by cities and towns and by many other farmers..
The move Friday marked the first significant mandatory cuts because of drought for senior water rights holders since the last major drought in the late 1970s. One group of farmers with prized claims have made a deal with the state to voluntarily cut water use by 25 percent to be spared deep mandatory cuts in the future.
The San Joaquin River watershed runs from the Sierra Nevada to San Francisco Bay and is a key water source for farms and communities.
Thousands of farmers with more recent, less secure claims to water have already been told to stop all pumping from the San Joaquin and Sacramento watersheds. They are turning to other sources of water, including wells, reservoirs and the expensive open market.
Some farmers have built their businesses around that nearly guaranteed access to water.
Jeanne Zolezzi, an attorney for two small irrigation districts serving farmers in the San Joaquin area, says she plans to go to court next week to stop the board's action. She said her clients include small family farms that grow permanent crops such as apricots and walnuts without backup supplies in underground wells or local reservoirs they can turn to when they can't pump from rivers and streams.
"A lot of trees would die, and a lot of people would go out of business," said Zolezzi. "We are not talking about a 25 percent cut like imposed on urban. This is a 100 percent cut, no water supplies."
California water law is built around preserving the rights of such senior-rights holders. The state last ordered drought-mandated curtailments by senior-water rights holders in 1976-77, but that order affected only a few dozen rights holders.
* * *
As NASA concluded previously, as difficult as it may be to face, the simple fact is that California is running out of water — and the problem started before our current drought. NASA data reveal that total water storage in California has been in steady decline since at least 2002, when satellite-based monitoring began, although groundwater depletion has been going on since the early 20th century.
Right now the state has only about one year of water supply left in its reservoirs, and our strategic backup supply, groundwater, is rapidly disappearing. California has no contingency plan for a persistent drought like this one (let alone a 20-plus-year mega-drought), except, apparently, staying in emergency mode and praying for rain.
In short, we have no paddle to navigate this crisis.
Several steps need be taken right now.
First, immediate mandatory water rationing should be authorized across all of the state's water sectors, from domestic and municipal through agricultural and industrial. The Metropolitan Water District of Southern California is already considering water rationing by the summer unless conditions improve. There is no need for the rest of the state to hesitate. The public is ready. A recent Field Poll showed that 94% of Californians surveyed believe that the drought is serious, and that one-third support mandatory rationing.
Second, the implementation of the Sustainable Groundwater Management Act of 2014 should be accelerated. The law requires the formation of numerous, regional groundwater sustainability agencies by 2017. Then each agency must adopt a plan by 2022 and “achieve sustainability” 20 years after that. At that pace, it will be nearly 30 years before we even know what is working. By then, there may be no groundwater left to sustain.
Third, the state needs a task force of thought leaders that starts, right now, brainstorming to lay the groundwork for long-term water management strategies. Although several state task forces have been formed in response to the drought, none is focused on solving the long-term needs of a drought-prone, perennially water-stressed California.
- The Fed And Most Economists Are Nothing More Than Glorified Weather Rock Analysts
I must make one statement before I go on any further, for I believe it needs to be said as to clarify my intentions in writing the above headline. Let me first express my sincere apologies to weather-rock weathermen everywhere. At least you understand why the rock may, or may not, show signs for contemplation. The others have demonstrated far too many times by their own proclamations of analysis – they have no clue.
Let me put out another premise that should not be lost on anyone trying to figure out what they’ll both do in their business, as well as – with it. Because, unlike those of us that live and die by the decisions we need to make when it comes to pricing, inventories, labor, location, etc., etc. An economist not only is usually not on the same page as you or I. In most cases one can argue: they may not even be on the same planet.
“You know what the difference is between an Economist/Analyst and a Business-owner? When a Business-owner makes a prediction on his or her business and predicts wrong: The business as well as they could wind up in bankruptcy. When the Economist/Analyst makes a wrong prediction: They just make another prediction.”
So why the use of the proverbial “weather-rock” analogy you may be asking as it pertains to something so complex as the economy. Well, in many cases the economy is just as complex with just as many unknowns and misunderstood relationships as the weather. (Please, for the sake of this discussion refrain from interjecting any “climate change” arguments . Please! I’m begging you!!)
What was once a joke (e.g. the weather-rock) now seems to symbolize what today stands for “serious analysis” or “markers” as to base monetary policy decisions on. Today, forecasts of nearly any sort are adjusted more times as well as their initial direction of strength or lack of it making TV weatherman everywhere ask – “Dang! And they say we’re not reliable?”
Far worse, these predictions are made using data in every way that resembles the known use for proper analysis of the weather-rock. i.e., If it’s wet – it’s raining. If it’s cold – it’s cold outside. And as ridiculously obvious as the aforementioned example is. What seems lost on most economists (as well as the financial media as a whole) is that their version of a weather-rock is being manipulated as to be wet not from rain – but from someone dousing it with a garden hose or other source whenever needed.
Nevertheless – their resulting analysis would be the same: The rock (or data) is wet, therefore it must be raining.
It’s one thing for those who want to express their “brilliance” in professing this style of insight and/or analysis. We can pay attention, or not. It’s a far different thing when monetary policy that will affect not only your business or personal finances – but quite possibly the sovereignty of the monetary system as a whole I’ll argue – is quite another.
Today, the world of Ivory Towered Economists (ITE) and their prognostications have taken on an aire in quite the opposite direction as well as tone of what we’ve now come to expect when watching a local or even national weather broadcast. If a typhoon, monsoon, hurricane, you name it, is somewhere visible on the planet, whether it’s reached land or is 2000 miles out at sea. A diagnosis and analysis of the impending potential havoc will be strewn across your preferred media consumption device in a never-ending cycle of breaking news alerts with more force and rapidity; than the actual wind speeds of the rotating storm front itself.
As much as we may laud or laugh at the coverage, the fact is – at least there is a case to be made for the potential of such predictions coming to fruition. i.e., there is an actual visible storm. On the other hand, the ITE acknowledge more often than advisable prudence would allow for, that there is no need for concern. For after all – the “rock” is not wet. All in a reticent tone implying: No need to worry – “They’ve got your back.”
Then it’s up to you as to infer exactly “who’s” back do they indeed have? Yours? Or the banks and insurance companies? And if it’s the latter – does that translate into help for you after any such storm clears? If you want any clues on how much help the latter may provide – just ask anyone still trying to put their lives and homes together since Hurricane Sandy in 2012. Same goes for anyone trying to prudently protect their savings after the 2008 financial crisis.
The issue at hand is: far more people have discovered whether by chance or direct analysis of their own, both the Fed., as well as their gaggle of cohorts throughout academia, as well as in the financial media, are all watching and gaining their clues – from the same “rock.” Furthermore: It’s now self-evident to anyone willing to look. It’s not to see if the rock is wet, dry, or anything else. It’s to make the rock wet, dry, or anything else needed for the narrative. Because today; narrative trumps reality in today’s economic disciplines. For “Fake it till you make it” seems to have become the most dangerous expression of monetary policy group think the world has ever known.
GDP numbers not what you would like? (i.e., the rock is dry) Simply allow for some “double seasonally adjusted” garden hose operator to make it so. “Jobs” numbers showing too much, or too little, conflicting the narrative of why, or why not, raise rates? No problem. Put a hairdryer on it today, and the garden hose tomorrow. After all, wet is wet, and dry is dry, regardless of how, right? Caught in a quagmire of trying to fend off accusations that the rock is clearly visible? Again, no problem. Order up a fog machine and take to the podiums and pronounce: The data is a little murky. We’ll have to just wait and see. After all, who could argue with holding off any policy adjustments without clear visibility, correct?
As ludicrous as the above sounds. If one truly looks at just how the articulated views from both the Fed. as well as most other economists. I would venture to say it’s not that far removed as they would like one to think. And there’s also one other small truth that looms quite large in the annuls of their predicting prowess. Just like the weather-rock, the damaging effects as well as the outright disastrous implications are unseen by this crowd until the actual catastrophe is upon them.
One would have thought being in an Ivory Tower might have supplied a better advantage or viewpoint. Oh well!
- Artist's Impression Of US Cyber-Attack Protection
- The Warren Buffet Economy, Part 4: Why Its Days Are Numbered
Submitted by David Stockman via Contra Corner blog,
As documented previously (Part 1, Part 2, Part 3), the Fed has generated a $50 trillion financial bubble since Alan Greenspan took the helm in August 1987. After 27 years, honest price discovery has been destroyed, thereby reducing the nerve centers of capitalism – the money and capital markets – to little more than gambling casinos.
Accordingly, speculative rent-seeking in the financial arena has replaced enterprenurial innovation and supply side investment and productivity as the modus operandi of the US economy. This has resulted in a severe diminution of main street growth and a massive redistribution of windfall wealth to the tiny share of households which own most of the financial assets. Warren Buffett’s $73 billion net worth is the poster boy for this untoward state of affairs.
The massive and systematic falsification of asset prices which lies at the heart of this deformation of capitalism is a direct and unavoidable consequence of monetary central planning. That is, the pursuit of Keynesian business cycle management and stimulus through central bank interest rate pegging and massive monetization of existing public debt and other securities—-especially since the latter has no purpose other than to artificially goose the price of bonds and lower their yields; and also via other indirect methods of financial asset levitation such as the Greenspan/Bernanke/Yellen doctrine of wealth effects and the implicit central bank “put” which underpins the economics of buy-the-dip speculators.
As previously indicated, the Keynesian bathtub model of a closed, volumetrically driven economy is a throwback to specious theories about the inherent business cycle instabilities of market capitalism that originated during the Great Depression. These theories were wrong then, but utterly irrelevant in today’s globally open and technologically dynamic post-industrial economy.
As reviewed in Part 3, the very idea that 12 people sitting on the FOMC can adroitly manipulate an economic ether called “aggregate demand” by means of falsifying market interest rates is a bad joke when in it comes to that part of “potential GDP” comprised of goods production capacity. In today’s world of open trade and massive excess industrial capacity, the Fed can do exactly nothing to cause the domestic steel industry’s capacity utilization rate to be 90% or 65%.
It all depends upon the marginal cost of labor, capital and materials in the vastly oversized global steel market. Indeed, the only thing that the denizens of the monetary politburo can do about capacity utilization in any domestic industry is to re-read Keynes’s 1930 essay in favor of homespun goods and weep!
As I detailed in the Great Deformation, the Great Thinker actually came out for stringent protectionism and economic autarky six years before he published the General Theory and for good and logical reasons that his contemporary followers choose to completely ignore. Namely, protectionism and autarky are an absolutely necessary correlate to state management of the business cycle and related efforts to improve upon the unguided results generated by business, labor and investors on the free market. Indeed, Keynes took special care to make sure that his works were always translated into German, and averred that Nazi Germany was the ideal test bed for his economic remedies.
Eighty years on from Keynes’ incomprehensible ode to statist economics and thorough-going protectionism, the idea of state management of the business cycle in one country is even more preposterous. Potential labor supply is a function of the global labor cost curve and now comes in atomized form as hours, gigs, and temp agency contractual bits, not census bureau headcounts.
In fact, the Census Bureau survey takers and the BLS numbers crunchers have not the foggiest idea as to what the real world’s potential labor force computes to, and how much of it is deployed on any given day, month or quarter. Accordingly, printing money and pegging interest rates in pursuit of “full employment”, which is the essence of the Yellen version of monetary central planning, is completely nonsensical.
Likewise, the Fed’s current “soft” target of 5.2% on the U-3 unemployment rate is downright ridiculous. When in the year 2015 you have 93 million adults not in the labor force—-of which only half are retired and receiving social security benefits(OASI)—-and a U-3 computational method that counts as “employed” anyone who works only a few hour per week—-then what you have in the resulting fraction is noise, pure and simple. The U-3 unemployment rate as a proxy for full employment does not even make it as primitive grade school economics.
At the present time, there are 210 million adult Americans between the ages of 16 and 68—to take a plausible measure of the potential work force. That amounts to 420 billion potential labor hours, if we accept the convention that all adults are at least theoretically capable of holding a full-time job (2,000 hours/year) and pulling their share of society’s need for production and work effort.
By contrast, during 2014 only 240 billion hours were actually supplied to the US economy, according to the BLS estimates. Technically, therefore, there were 180 billion unemployed labor hours, meaning that the real unemployment rate was 42.9%, not 5.5%!
Yes, we have to allow for non-working wives, students, the disabled, early retirees and coupon clippers. We also have drifters, grifters, welfare cheats, bums and people between jobs, enrolled in training programs, on sabbaticals and much else.
But here’s the thing. There are dozens of reasons for 180 billion unemployed labor hours, but whether the Fed is monetizing $80 billion of public debt per month or not, and whether the money market interest rate is 10 bps or 35 bps doesn’t even make the top 25 reasons for unutilized adult labor. What actually drives our current 43% unemployment rate is global economic forces of cheap labor and new productive capacity throughout the EM and dozens of domestic policy and cultural factors that influence the decision to work or not.
To be sure, for a brief historical interval—-from roughly the New Economics of the Kennedy Administration to the 2007 eve of the housing crash and financial crisis—- the Fed did levitate the GDP and meaningfully impact the labor utilization rate. That was owing to the one-time trick of levering up the household and business sector through the inducements of cheap debt.
Household Leverage Ratio – Click to enlarge
But that monetary parlor trick is over and done. Household’s are still de-levering relative to income, and the Fed’s bubble economics have channeled incremental business borrowing almost entirely into the secondary market of financial engineering. That is, borrowings which are applied to stock buybacks, M&A deals and LBOs result in a re-pricing of existing equity claims and more gambling stakes in the casino, but do not add to demand for new plant, equipment and other tangible assets.
So the transmission channels through which monetary central planning could historically impact the labor utilization rate are now broken and done. The Fed’s default business, therefore, is inflating the financial bubble and subsidizing carry trade speculators. That’s all there is to monetary policy at the limits of peak debt.
In that context, consider the complete foolishness of school marm Yellen’s campaign to fill up the bathtub of potential GDP by causing labor utilization to reach full employment. And start with the case of non-monetized labor.
Back in the 1970s during one of those periodic debates about full-employment, legendary humorist Art Buchwald proposed a sure fire way to double the GDP and do it instantly. That was in the time that most women had not yet entered the labor force and politically incorrect discussion was still permitted on the august pages of the Washington Post.
Said Buchwald, “Pass a law requiring all men to hire their neighbor’s wife!” That is, monetize all of the cleaning, cooking, washing and scrubbing done every day in American households and get the monetary value computed in the GDP; and, in the process get homemakers factored into the labor force and their contribution to the economy’s real output in the labor utilization rate.
As a statistical matter—-even though four decades of women entering the labor force have passed since Buchwald’s tongue-in-cheek proposal—- there are still approximately 75 billion un-monetized household labor hours in the US economy. Were they to be counted in both sides of the equation, our 43% unemployment rate would drop to 25% for that reason alone.
Needless to say, whether household labor is monetized or not has no impact whatsoever on the real wealth and living standards of America, even if it does involve important social policy implications. The point is, as an economic matter Janet Yellen can’t do a damn thing about it, even as she dithers about asking Wall Street speculators to pay 35 bps for their overnight borrowings.
And the same thing is true for almost every single factor that drives the true hours based unemployment rate. Front and center is the massive explosion of student debt—now clocking in at $1.3 trillion compared to less than $300 billion only a decade ago. The point is not simply that this debt bomb is going to explode in the years ahead; the larger point is that for better or worse, Washington has made a policy choice to keep upwards of 20 million workers out of the labor force and to subsidize them as students.
Whether millions of these debt serfs will get any real earnings enhancing benefits out of this “education” is an open question—–one that leans heavily toward not likely in either this lifetime or the next. But these 40 billion potential labor hours are far greater in relative terms than under the stingy student subsidy programs which existed in 1970 when Janet Yellen was learning bathtub economics from James Tobin at Yale.
Likewise, there are currently about 17 billion annual potential labor hours accounted for by social security disability recipients. Again, that is a much larger relative number than a few decades back, and it is owing to the deliberate liberalization of social policy by Congressional legislators and administrative law judges. The FOMC has nothing to do with this form of unemployment, either.
Then there is the billions of potential labor hours in the un-monetized “underground” economy. While the work of drug runners and street level dealers is debatable as a social policy matter, it is self-evident that state policy—–in the form of the so-called “war on drugs” and the DEA and law enforcement dragnet—–account for this portion of unutilized labor, not the central bank.
The same is true of all the other state interventions that keep potential labor hours out of the monetized economy and the BLS surveys—-most especially the minimum wage laws and petty licensing of trades like beauticians, barbers, electricians and taxi-drivers, among countless others.
Finally, there is the giant question of the price of labor as opposed to the quantity. And here it needs be noted that “off-shoring” is not just about shoe factories and sheet and towel mills that went to China because American labor was too expensive. Owing to the rapid progress of communications technology, an increasing share of what used to be considered service work, such as call centers and financial back office activities, have already been off-shored on account of price. And that process of wage suppression has ricocheted into adjacent activities owing to the willingness of off-shored workers to accept lower wages in purely domestic sectors when push comes to shove.
Indeed, the cascade of the China “labor price” through the warp and woof of the entire economy is so pervasive and subtle that it cannot possibly be measured by the crude instruments deployed by the Census Bureau and BLS.
In short, Janet Yellen doesn’t have a clue as to whether we are at 30% or 20% unemployment of the potential adult labor hours in the US economy. But three things are quite certain.
First, the real unemployment rate is not 5.5%—–the U-3 number is an absolute and utterly obsolete joke.
Secondly, the actual deployment rate of America’s 420 billion potential labor hours is overwhelmingly a function of domestic social policy and global labor markets, not the rate of money market interest.
And finally, the Fed is powerless to do anything about the real labor utilization rate, anyway.
The only tub its lunatic money printing policies are filling is that of the Wall Street speculators. And that’s what the Warren Buffett economy is actually all about.
In Part 5, the possibility that the free market in finance could function just fine without activist monetary policy intervention and bubble finance fortunes like Warren Buffett’s $73 billion will be further explored.
- Two of the Most Economically Sensitive Commodities Suggest a Crash is Coming
If the foundation of the financial system is debt… and that debt is backstopped by assets that the Big Banks can value well above their true values (remember, the banks want their collateral to maintain or increase in value)… then the “pricing” of the financial system will be elevated significantly above reality.
Put simply, a false “floor” was put under asset prices via fraud and funny money.
Consider the case of Coal.
In the US, Coal has become a political hot button. Consequently it is very easy to forget just how important the commodity is to global energy demand. Coal accounts for 40% of global electrical generation. It might be the single most economically sensitive commodity on the planet.
With that in mind, consider that Coal ENDED a multi-decade bull market back in 2012. In fact, not only did the bull market end… but Coal has erased virtually ALL of the bull market’s gains (the green line represents the pre-bull market low).
Those who believe that the global is in an economic expansion will shrug this off as the result if the US’s shift away from Coal as an energy source. The US accounts for only 15% of global Coal demand. The collapse in Coal prices goes well beyond US changes in energy policy.
What’s happening in Coal is nothing short of “price discovery” as the commodity moves to align itself with economic reality. In short, the era of “growth” pronounced by Governments and Central Banks around the world ended. The “growth” or “recovery” that followed was nothing but illusion created by fraudulent economic data points.
We get confirmation of this from Oil.
For most of the “so called” recovery, Oil gradually moved higher, creating the illusion that the world was returning to economic growth (demand was rising, hence higher prices).
That blue line could very well represent the “false floor” for the recovery I mentioned earlier. Provided Oil remained above this trendline, the illusion of growth via higher energy demand was firmly in place.
And then Oil fell nearly 60% from top to bottom in less than six months.
As was the case for Coal, Oil’s drop was nothing short of a bubble bursting. From 2009 until 2014 Oil’s price was disconnected from economic realities. Then price discovery hit resulting in a massive collapse.
Moreover, the damage to Oil was extreme. Not only did it collapse 60% in a matter of months. It actually TOOK out the trendline going back to the beginning of the bull market in 1999.
This is a classic “ending” pattern. Breaking a critical trendline (particularly one that has been in place for several decades) is one thing. Breaking it and then failing to reclaim it during the following bounce is far more damning.
We’ve just reclaimed the line a week or so ago. But unless we hold here, Oil will be dropping down to $30 per barrel if not lower.
In short, the era the phony recovery narrative has come unhinged. We have no entered a cycle of actual price discovery in which financial assets fall to more accurate values. This will eventually result in a stock market crash, very likely within the next 12 months.
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- Saudi Warplanes Destroy 2,500 Year Old Heritage Site In Yemen
When ISIS militants took control of the ancient Syrian city of Palmyra last month, observers feared the world was set to lose a treasure of antiquity. The city, which houses ruins that date back thousands of years, is a UNESCO world heritage site. Historians say its destruction would represent a tragic defeat in the effort to preserve the cultural heritage not just of the Middle East, but of modern civilization itself.
(Palmyra)
On Friday, the proxy wars that, thanks in large part to US foreign policy, now plague the Middle East, took their toll on another UNESCO heritage site when Saudi warplanes decimated Old City, a 2,500 year-old collection of homes, towers, gardens, mosques, and public baths in the Yemeni capital of Sana’a.
NY Times has more:
A protected 2,500-year-old cultural heritage site in Yemen’s capital, Sana, was obliterated in an explosion early Friday, and witnesses and news reports said the cause was a missile or bomb from a Saudi warplane. The Saudi military denied responsibility.
The top antiquities-safeguarding official at the United Nations angrily condemned the destruction of ancient multistory homes, towers and gardens, which also killed an unspecified number of residents in Al Qasimi, a neighborhood in Sana’s Old City area.
“I am profoundly distressed by the loss of human lives as well as the damage inflicted on one of the world’s oldest jewels of Islamic urban landscape,” said the official, Irina Bokova, the director general of Unesco, the United Nations Educational, Scientific and Cultural Organization…
“This heritage bears the soul of the Yemeni people; it is a symbol of a millennial history of knowledge, and it belongs to all humankind,” Ms. Bokova said.
Before:
After:
More visuals:
- The Index Of Evil: Who's The Bad Guy Now?
Submitted by Bill Bonner via Bonner & Partners,
Bullies, Chiselers, and Zombies
Let us finish our series, “The Good, the Bad, and the Ugly.” We’ve been looking at how, when everybody’s a lawbreaker, it’s hard to spot the real criminals. (To catch up, here’s Part I, Part II, Part III, and Part IV.)
You’ll recall that we imagined a conversation between two German soldiers on the Eastern Front in 1943.
“Klaus, are we the bad guys here?” one might have asked the other.
Yesterday, we mentioned a few “bad guys.” It was no trouble to find them. Just check the lobby of the Four Seasons Hotel in Washington, D.C.
But today we move on – beyond the two-bit bullies, chiselers, and zombies – to the really ugly guys.
Who are the evil ones?
It’s easy to see evil in dead people. Stalin… Hitler… Pol Pot… people who tortured and killed just to feel good. The jaws of Hell must open especially wide to let them in.
But who should go to the devil today?
Counting the Bodies
It is not for us to say. But we can make some recommendations:
Paul Wolfowitz, Richard Perle, and Lindsey Graham come to mind, along with John McCain, Dick Cheney, George W. Bush, and all the other clownish warmongers.
Of course, we want to be fair and respectful. Each should definitely get an impartial hearing… and then his own lamppost.
But everybody has his own idea about who should swing. So, let’s try to look at it objectively.
Things governments do are quantifiable. We can follow the money. We can count the bodies.
We’re going to make it easy to tell the good from the bad and the ugly with our new Index of Evil.
Which are good? Which countries really are evil?
Russia? Iran? North Korea? The Islamic State? How do we know?
We put our trusty researcher, Kelly Green, on the case.
“Kelly,” we asked, “can you quantify ugliness? Can you help our readers figure out who is good and who is bad? Can you identify who really should be included in the Index of Evil?”
Kelly was not put off by the magnitude and gravity of the job. She went to work on it. What are the marks of evil in a nation? Murder. Assassination. Wars. Torture. False imprisonment.
We’ll forgive theft. All governments steal. (Some more than others.) But we’re talking about “ugly” not just “bad.” So let’s stick to capital crimes and mortal sins, not just venial sins and misdemeanors.
Who kills? Who puts people behind bars? Who tortures?
Kelly added it up, creating the world’s first objective standard.
Who’s the Bad Guy Now?
Three decades after the U.N. Convention Against Torture, torture still happens in 141 countries.
Alas, torture, says Kelly, is not reliably quantifiable. The CIA, for example, calls it “enhanced interrogation techniques.”
To his credit, Senator John McCain – a prisoner of war in Vietnam – has consistently opposed torture and introduced new legislation to ban it just this month.
We also had to take out countries for which data was unavailable. North Korea, for example, is a mystery. ISIS, too, is such a special case that the numbers won’t mean much.
You’ll notice that we included many numbers that were not clearly evil. Military spending, for example, is not necessarily a bad thing. And the homicide rate is not always the fault of an evil government.
Nevertheless, the numbers are there; make of them what you will.
And we included the U.S. for comparison:
So, Klaus, who’s the bad guy?
- Writing's On The Wall: Texas Pulls $1 Billion In Gold From NY Fed, Makes It "Non-Confiscatable"
The lack of faith in central bank trustworthiness is spreading. First Germany, then Holland, and Austria, and now – as we noted was possible previously – Texas has enacted a Bill to repatriate $1 billion of gold from The NY Fed's vaults to a newly established state gold bullion depository…"People have this image of Texas as big and powerful … so for a lot of people, this is exactly where they would want to go with their gold," and the Bill includes a section to prevent forced seizure from the Federal Government.
From 2011:
"The University of Texas Investment Management Co., the second-largest U.S. academic endowment, took delivery of almost $1 billion in gold bullion and is storing the bars in a New York vault, according to the fund’s board."
The decision to turn the fund’s investment into gold bars was influenced by Kyle Bass, a Dallas hedge fund manager and member of the endowment’s board, Zimmerman said at its annual meeting on April 14. Bass made $500 million on the U.S. subprime-mortgage collapse.
“Central banks are printing more money than they ever have, so what’s the value of money in terms of purchases of goods and services,” Bass said yesterday in a telephone interview. “I look at gold as just another currency that they can’t print any more of.”
And now, after we noted the possibility previously, as The Epoch Times reports, Texas Governor Greg Abbott signed a bill into law on Friday, June 12, that will allow Texas to build a gold and silver bullion depository. In addition, Texas will repatriate $1 billion worth of bullion from the Federal Reserve in New York to the new facility once completed.
On the surface the bill looks rather innocent, but its implications are far reaching. HB 483, “relating to the establishment and administration of a state bullion depository” to store gold and silver coins, was introduced by state Rep. Giovanni Capriglione.
Capriglione told the Star-Telegram:
“We are not talking Fort Knox. But when I first announced this, I got so many emails and phone calls from people literally all over the world who said they want to store their gold … in a Texas depository. People have this image of Texas as big and powerful … so for a lot of people, this is exactly where they would want to go with their gold.”
But isn’t New York, where most of the world’s gold is stored, also big and powerful? Why does the state of Texas want to go through the trouble of building its own storage facility?
There are precisely two important reasons. One involves distrust in the current storage system. The second threatens the paper money system as a whole.
“In a lot of cases with gold you may not have clear title to the metal. You may have a counterparty relationship that makes you a creditor. If the counterparty has a problem unrelated to gold, they can default and then you become an unsecured creditor in bankruptcy,” said Keith Weiner, president of the Gold Standard Institute.
This means you get whatever is left after liquidation, often just a fraction of the initial value of your holdings.
“This exact scenario happened with futures broker MF Global. I knew people who had warehouse receipts to gold bars with a specific serial number. But that gold had an encumbered title and they became unsecured creditors in bankruptcy,” said Weiner.
In Texas, two big public pension funds from the University of Texas (UoT) and the Teacher Retirement System (TRS) own gold worth more than $1 billion.
Being uncomfortable with holding purely financial gold in the form of futures and Exchange-traded Funds, University of Texas actually took delivery of the gold bars in 2011 and warehoused it with HSBC Bank in New York.
At the time pension fund board member and hedge fund manager Kyle Bass explained: “As a fiduciary, which I am in that position to the extent you own gold and you are going for a long time, and it’s not a trade. … We looked at the COMEX at the time and they had about $80 billion of open interest between futures and futures options. And in the warehouse they had $2.7 billion of deliverables. We are going to own it a long time. You are on the board, you are a fiduciary, so that’s an easy one, you go get it.”
Bass is implying that there is much more financial gold out there than physical, and that it is prudent to actually hold the physical.
Taking the gold to Texas would then also solve the counterparty risk. “In this case it’s going to be a depository, the gold is going to be there, they are not going to be able to lend it out and it won’t serve as collateral for other transactions of the bank.” said Victor Sperandeo of trading firm EAM Partners. “Because if the bank closes, you are screwed.”
“I think that somebody was looking at that, we better have this under our complete control,” said constitutional lawyer and gold expert Edwin Vieira, of the Texas bill. “They don’t want to have the gold in some bank somewhere and in two to five years it turns out not to be there.”
So far most of the attention has focused on the part of the depository and the big institutions. However, the bill also includes a provision to prevent seizure, which is important for private parties who want to avoid another 1933 style confiscation of their bullion by Federal authorities.
Section A2116.023 of the bill states: “A purported confiscation, requisition, seizure, or other attempt to control the ownership … is void ab initio and of no force or effect.” Effectively, the state of Texas will protect any gold stored in the depository from the federal government.
And free from the threat of confiscation, private citizens can use gold and silver as money, completely bypassing the paper money system.
“People can legally do that with gold contracts. The difficulty is the implementation. Now Texas has set up a mechanism with the depository. We have accounts in that institution and can easily transfer back and forth certain amounts. So we can run our money system a gold or silver basis if we were so inclined,” said Vieira.
This would not be possible if the gold is stored in a bank because of the risks of bank holidays and bankruptcies. It would also not be possible if the federal government could confiscate gold.
According to Vieira, this anti-seizure provision rests on Article 1, section 10 of the Constitution of the United States, which obliges the States to not make anything tender in payment of debts apart from gold and silver coin.
“If someone from the Department of Justice comes along you are going to see legal and political fireworks. The state is going to say ‘we need to have a mechanism to make gold and silver money. This is pursuant to the constitutional provision we have. You can’t touch this. Our state power on the constitutional level is more powerful than any statute you may pass,'” said Vieira.
Because one of the litigant parties is a state, the case would go directly to the Supreme Court.
“We are talking about something completely new in terms of the legal playing field. This is no longer a fringe concept,” he adds, but cautions about a possible fight with the federal government: “We will have to see how committed the governor and the attorney general are.”
Official Statement from Governor Abbott:
Governor Greg Abbott today signed House Bill 483 (Capriglione, R-Southlake; Kolkhorst, R-Brenham) to establish a state gold bullion depository administered by the Office of the Comptroller. The law will repatriate $1 billion of gold bullion from the Federal Reserve in New York to Texas. The bullion depository will serve as the custodian, guardian and administrator of bullion that may be transferred to or otherwise acquired by the State of Texas. Governor Abbott issued the following statement:
“Today I signed HB 483 to provide a secure facility for the State of Texas, state agencies and Texas citizens to store gold bullion and other precious metals. With the passage of this bill, the Texas Bullion Depository will become the first state-level facility of its kind in the nation, increasing the security and stability of our gold reserves and keeping taxpayer funds from leaving Texas to pay for fees to store gold in facilities outside our state."
* * *
Is this the first step down a road to secession? Notably, they'll need that gold to establish their own country once they win the potentially imminent war with the US military which starts on Monday (Jade Helm).
* * *
This implicit subordination of The Fed's gold sends a more ominous signal of rising fears of confiscation and leaves us wondering just how long before every state (and or country) decides to follow Texas' lead?
- Cyberwarfare Threat To Nuclear, Banking and Financial System
Cyberwarfare Threat To Nuclear, Banking and Financial System
– Legacy of stuxnet is risk posed to technology dependent world
– 20 countries have launched cyberwarfare programmes since exposure of Stuxnet in 2010
– Stuxnet virus targeted safety mechanisms in Iran’s nuclear reactors in 2010
– Virus launched to sabotage Iran’s nuclear program was also used for mass spying
– All types of digital systems at risk, including financial, banking and gold providers
– Direct ownership of physical gold, unlike digital currency, not vulnerable to cyber warfare
20 Countries Have Announced Digital Warfare Programs
A new book detailing the development, operation and ramifications of the deployment of the notorious Stuxnet virus shows that it has created a far more risky world.
The book, Countdown to Zero Day, by Wired magazine writer Kim Zetter, shows that – apart from being an extremely irresponsible and dangerous act of sabotage – the deployment of Stuxnet against Iran has led to an acceleration in development of cyberwarfare.
In a must-read article in the Irish Times, respected technology journalist, Karlin Lillington reviews the book which presents some fascinating insights into the whole Stuxnet affair which she describes as “the world’s first digital weapon”.
Wired Magazine writer Kim Zetter
Most unnerving is the fact that twenty different countries have announced digital warfare programmes since the exposure of Stuxnet in 2010.
The U.S. had been demanding that other countries refrain from engaging in cyber warfare techniques until it emerged that the U.S. itself, along with Israel, had deployed the extremely destructive virus against Iran. The NSA had been authorised to launch Computer Network Attacks (CNA’s) for over a decade.
Zetter’s book gives a fascinating insight into how the virus operates. It was launched via a USB key rather than via the internet. The developers had identified glitches in Microsoft’s operating systems which were not publicly known and used these flaws against their target.
The virus secretly collected data on the operation of centrifuges in nuclear reactors for thirty days. Then it began interfering with the operation of the centrifuges in such a way that it would damage the reactors while reporting back the data of the previous thirty days so that engineers could not identify any problem.
Normally, Iranian engineers would need to decommission around 800 centrifuges in a year. Stuxnet caused such havoc that they were forced to change 2000 in a two month period.The virus then spread rapidly into the systems of contractors working in the power stations who unwittingly infected systems all around the world. In all, over 100,000 computers were infected which Zetter says laid the groundwork for a mass espionage program.
Lillington writes
“Zetter says the attackers also failed to eventually kill the code and stop log files in Stuxnet from communicating back to the command and control server, even after it was apparent the worm had spread beyond Iran. She argues this was to keep the backdoors into millions of computers globally that were obtained in this way, which would form the basis for subsequent mass surveillance programmes.”
Zetter believes that the launch of Stuxnet by the U.S. and Israel was particularly foolish because its
“development also meant the US lost moral ground for demanding other countries not use cyberwarfare techniques … And, inevitably, it launched many more digital warfare programmes across the world.”
She warns that it
“ignores the fact that our systems are just as vulnerable, because U.S. systems are the most connected systems in the world.”
Indeed, our modern western financial and banking system with its massive dependency on single interface websites, servers and the internet faces serious risks that few analysts have yet to appreciate and evaluate.
We previously referred to Russian Prime Minister Medvedev’s allusion to cyber warfare when he stated the Russia’s response to U.S. attempts to have it locked out of the SWIFT system that the Russian response “economically and otherwise – will know no limits.”
Dormant malware, apparently of Russian origin had previously been discovered buried in the software that runs the Nasdaq stock exchange according to Bloomberg.
Given that a military confrontation is not desired by Russia it is likely that cyber-warfare will be part of Russian arsenal in any confrontation with the U.S. and NATO countries.
Hacking is becoming more common and recent months have seen the hacking of Sony Pictures, allegedly by North Korea, and the hacking of Instagram, Tinder and Facebook.
Banks have been hacked, stock exchanges have been hacked and critical infrastructure, including nuclear have been hacked in recent years. It is likely that many of these small scale attacks have been merely testing of defenses.
Even one of the largest and most powerful banks in the world, JP Morgan has been hacked.
Exactly a year ago, in June 2014, JP Morgan Chase were hacked by unknown parties who stole the personal details of 83 million customers.
A concerted attack on the western financial system would likely include attempts at disabling various exchanges including stock markets and foreign exchange markets. Banks could be attacked in such a way that bank balances, which are merely digital figures, could be erased.
Should banks be hacked and customers deposit accounts compromised then the vista of potential bail ins becomes a real one.
The vulnerability of investment providers, banks and the global banking system – reliant as they have become on single interface websites, servers, computer systems, information technology and the internet – is very slowly being realised.
Academic and independent research and indeed the modern and historical record shows how physical gold is a safe haven asset – provided you have direct ownership of coins and bars and are not dependent on single websites and technology.
An allocation of some of one’s portfolio to physical gold is insurance against technological and systemic risks posed to all virtual wealth today – whether that be digital bitcoin and gold or electronic currencies in deposit accounts.
These risks have never been seen before and are largely unappreciated and ignored by brokers, financial advisors, bankers and the majority of people.
Having all your eggs in a deposit account or with one single investment, or indeed gold broker or storage provider, is no longer prudent.
Must Read Guide: 7 Key Gold Must Haves
- Assailant Attacks Dallas Police Headquarters With Automatic Guns, Pipe Bombs
Over the past several years, the US government has been confounded with not only explaining, but properly responding to one of the clear and obvious consequences of the Fed’s disastrous policy of the past 7 years, namely record wealth inequality and a tearing social fabric (recall Paul Tudor Jones prediction that it may all once again end in “war or revolution“) leading to rising social instability and a surge in public outbreaks of violence, frequently lethal. One need only note the flash riots in Baltimore and Ferguson to comprehend how fragile the US social fabric has become.
But while the government is still clueless how to explain this surge in social violence, something Zero Hedge readers have known for a long time is imminent (recall “despite what should be a steadily improving economy and improving social and economic conditions, what readers founds most fascinating, and troubling, was the increasing preponderance of social disobedience, of covert, proxy or outright wars, and of civil unrest: all phenomena that accompany a world sliding deeper into distress, not as most central banks and their puppet media would have us believe, a global recovery.”), where its response has been even more deplorable is how to respond to this increase in civil disobedience: by weaponizing the US police force to an extent reminiscent of pre-civil war state leading to a police force which feels enabled and duly required to intervene well beyond the required in quelling and pre-empting imminent violence, leading to even more bloodshed much of it caught on phonecam and promptly uploaded on YouTube.
The result: in a game of rapidly escalating violence, public antagonism against the police is met with increasingly more acute brutality, which in turn forces even more social unrest and violence and so on in a positive feedback loop.
An example was shown yesterday when we reported that the murder rate in Baltimore skyrocketed as a result of the local Police responding to the infamous Baltimore riots by essentially shutting down.
Another example happened hours ago when overnight as many as four gunmen fired automatic weapons against the Dallas Police headquarters, Reuters reports, and that at least at least two pipe bombs were found outside the police headquarters after the initial shooting.
Initially, witness said there might have been 4 suspects. @DPDChief says we believe that one suspect shot from various locations.
— Dallas Police Depart (@DallasPD) June 13, 2015
At least one attacker opened fire on Dallas’ police headquarters early Saturday, riddling windows and police cars with bullets before fleeing in a van to a suburban restaurant parking lot, where officers surrounded the vehicle in a standoff that has lasted for hours, CNN reports.
Subsequently Reuters reported that the assailant was believed to have acted alone, motivated by personal grievances, and he had no known connection to any terrorist groups.
Reuters adds that Dallas Police Chief David Brown told reporters that a motive for the attack was not yet known, but he also said there had been threats and attacks on police elsewhere in the country in the past few months.
One of the devices, a pipe bomb, exploded when a police robot attempted to move it. Another, which was under a police vehicle, was detonated by a bomb squad, according to the police department.
Brown said witnesses reported that up to four suspects were involved in the incident, which began around 12:30 a.m.
The incident started when police responded to reports of automatic gunfire from what was described as an armoured van outside police headquarters.
The van then rammed a squad car and gunfire erupted. The van drove off as police returned fire and officers gave chase, Brown said. Witnesses told police that one suspect may have failed to enter the van before it sped off, according to Brown.
The van stopped in a fast food restaurant parking lot in the city of Hutchins, some 10 miles (16 km) south of Dallas, where there was another exchange of gunfire. Police said they surrounded the van and managed to disable it with a high-powered rifle.
Brown said police negotiators had spoken with someone inside the van, who identified himself as James Boulware, shown in the mugshot below as per CBS DFW.
Suspect Mug Shot from Dallas County Sheriff’s Office that matches name given to police – James Boulware
The police chief said they had not yet been able to confirm the identity of the man, but said that police had responded previously to three incidents of domestic violence involving a man with that name.
Brown told reporters at the early morning news conference that the suspect had said that police had taken his child and had accused him of being a terrorist. The police chief said that the man then threatened to “blow us up.”
Several bags were found scattered around police headquarters, two of which had explosives inside, police said. Another suspicious package was found in a dumpster near a different police station in the city, according to police.
Nearby residents were evacuated, Brown said.
Various video of the shoot out were found on social media:
NEW VIDEO: Armored van with gun ports opens fire on #Dallas police
— Conflict News (@rConflictNews) June 13, 2015
This footage of the Dallas shootout scared the hell out of me:
— BrownBlaze (@brownblaze) June 13, 2015
Dallas shooting???? pic.twitter.com/UUq3AWsjZE
— janin ruiz (@janinruiz1) June 13, 2015
Perhaps even more interesting is that the Dallas Police Department reported all updates as it got them on Twitter:
Shots were fired @DallasPD headquarters this morning, 911 received first call 12:27 am
— Dallas Police Depart (@DallasPD) June 13, 2015
Suspects parked in front of HQ. Patrol elements arrived; suspects rammed a DPD squad car & began shooting @ officers, striking squad cars.
— Dallas Police Depart (@DallasPD) June 13, 2015
This is the first time DPD HQ has been under attack.
— Dallas Police Depart (@DallasPD) June 13, 2015
#breaking As the Explosive Ordinance Robot attempted to move one of the bags @DallasPD HQ, the bag exploded on its own #DallasPDShooting
— Dallas Police Depart (@DallasPD) June 13, 2015
Device found under police vehicle at HQ has detonated – no injuries #DallasPDShooting
— Dallas Police Depart (@DallasPD) June 13, 2015
Here are some pictures of the damage at HQ. pic.twitter.com/ic18axSTPO
— Dallas Police Depart (@DallasPD) June 13, 2015
Picture of squad car that was shot at. No officers were injured. pic.twitter.com/vfT2nCiJzP
— Dallas Police Depart (@DallasPD) June 13, 2015
This is where the Explosive Ordinance Robot attempted to move one of the bags. #DallasPDShooting pic.twitter.com/mgbgytBhWv
— Dallas Police Depart (@DallasPD) June 13, 2015
As CNN reports, after the police caught up with the suspect in Huchins, a standoff began, and a SWAT team was negotiating with a suspect in the vehicle who gave the name James Boulware. Police said that they cannot independently confirm that it is the suspect’s real identity.
Police found a previous record of domestic violence by a man under that name. The suspect told police that he was angry because they took away his child and labeled him a terrorist.
He threatened to blow them up and broke off negotiations, Brown said.
At one point, police used a .50-caliber rifle to “disable” the vehicle, police said.
Investigators are looking into whether a van sold in Newnan, Georgia, on eBay last week may be the van used in the Dallas attack, a source familiar with the investigation said. They are investigating, among other things, who may have purchased the vehicle.
As the story develops, moments ago the Dallas Police Department announced that the standoff has likely ended after
0507 PD Sniper shot @ suspect through front windshield of van. Suspect may be hit.
— Dallas Police Depart (@DallasPD) June 13, 2015
#UPDATE: Suspect in Dallas police standoff shot, presumed dead; no known links to terrorism http://t.co/kbZgMX59ej
— Agence France-Presse (@AFP) June 13, 2015
The good news is that according to DPD no police officers were wounded. However, that armed assailants are now eager to bring the fight literally to the doorstep of regional police headquarters is certainly not a welcome development for a nation that over the past year has seen an unprecedented surge in violence on both sides of the legal divide and is sure to escalate the tensions even futher, leading to even more social instability and violence.
Chopper 11 live feed from CBS FDW.com
- The Fallacies Of GDP
Submitted by Alasdair Macleod via GoldMoney.com,
The common error of confusing growth with progress goes largely unnoticed, though it permeates all macroeconomic analysis. There is no better example of this mistake than the fallacies behind the interpretation of Gross Domestic Product. GDP is the market value of all final goods and services in a given year. As such, it is only an accounting identity reflecting the quantity of money in the economy.
Econometricians constructing GDP have devised a sterile statistic that should not be used to set economic policy. It leads to the common error of assuming any increase in GDP is desirable. Statistics like GDP tell a story of an economy based on historical prices but devoid of any qualitative value; and progress, the improvement in the human condition, is what really matters.
Transactions reflecting both wealth creation and also economically destructive state spending are included in GDP without differentiation. Far from the government component of GDP being singled out from the total, it is often welcomed as contributing to economic growth. Macroeconomists, with an eye on the statistical impact of cuts in government spending, discourage governments from making them. The lack of distinction between wealth-creation and wealth-destruction is fundamental to their belief that state intervention is beneficial.
More light can be shed on this issue with an example. Imagine an economy with a fixed quantity of money and credit; further assume foreign trade is in balance, and that the population is stable. Products will succeed, stagnate or fail. People will get pay rises, pay cuts or be encouraged by reality to move from the least successful businesses into more successful businesses. The businesses of yesteryear fade and those of tomorrow evolve. Winners will redeploy resources released from the failures. Annual GDP, the sum total of all production paid for by everyone's earnings and profits, will therefore be unaltered from the previous year: it is a zero sum, assuming that as a whole people's money preferences relative to goods do not change. Without the injection of extra money, people are always forced to choose between items: they cannot add to the purchasing power of their income through extra credit created out of thin air, creating demand that otherwise would not exist.
Progress is, therefore, marked by improved products and lower prices, because as the volume and quality of production increases the total money value of them must remain the same. This is true for both final products and for investment in the higher orders of production. But importantly, GDP growth is nil.
Now we must consider what happens in the case of unsound money; that is to say money and credit that can be expanded by the will of the state and the banks it licences. Over a period of time, this new money is absorbed into the economy, reflected in new transactions that otherwise would not have occurred. The value of transactions attributable to the expansion of money and credit is likely to be a multiple of the new money introduced, as it passes from the original beneficiaries to later receivers.
If we assume this is a single expansion of the quantity of money these new transactions will only be a temporary feature. The prices of goods bought with the new money rise to compensate with a time lag. Having initially expanded, real GDP would then contract as the temporal lag between stimulus and price effect is fully unwound. With all transactions fully accounted for real GDP ends up unchanged, always assuming there has been no change in consumer preferences between money and goods.
The dubious benefit of stimulating demand by increasing the quantity of money and credit has been only temporary. Changes in GDP described above reflect not economic progress, but the absorption of the extra quantity of money and credit deployed. If the matter stopped there, the damage to a properly functioning economy would be limited, but monetary inflation also triggers a transfer of wealth from the majority of people to a small rich minority. This happens because price increases spread from where the new money is first deployed (typically through the banks and financial markets), leaving the majority of people to face higher prices with no offsetting monetary benefit. There is, therefore, a secondary impact: the apparent benefit of increasing the quantity of money is followed by a fall in demand for goods and services because of the wealth-transfer effect, the opposite of the intended result. The economy as a whole ends up worse off than if no monetary stimulus had occurred. This is why extreme monetary inflation is always accompanied by economic collapse.
In the foregoing example, the effect of a single injection of additional money and credit was considered, but once this policy is embarked upon it is almost always continued at a compounding pace. Macroeconomists note only the initial benefits, and when they fade, as described above, they clamour for more. The result over time is that weak-money policies lead to the continual currency debasement with which we are familiar today, together with the build-up of debt, which is the counterpart of expanding bank credit. As the currency buys less, more is required to achieve the same initial effect.
That changes in money and credit do not equate accurately to changes in GDP in practice is partly due to econometricians selecting which activities to include in GDP. They interpose an artificial distinction between categories of spending with the intention of isolating spending on new goods and services deemed to be consumption. This is an error, because these economists are forced into making a subjective judgement that is bound to be at odds with reality. In practice, a consumer can only be described in the broadest terms.
Consumers may spend money on buying assets such as housing, art or stocks and shares: there is no difference between spending on these and on anything else, because they all have a valid purpose in the mind of the consumer. In addition, there are unrecorded transactions on the black market or not recorded from small businesses, as well as transactions in second-hand goods which are specifically excluded on the grounds that the purpose of GDP is to record new production only. Therefore, much economic activity is excluded from the GDP calculation with the complication that money will flow between the econometrician's version of GDP to the wider transaction universe, undermining all the macroeconomists' attempts to link an increase in prices to an increase in the quantities of money and credit.
In conclusion, GDP has nothing to do with economic progress. It is a flawed statistic that imperfectly summarises the money-value of selected transactions over a given period. The fact it is usually positive is a reflection of the temporal difference between monetary inflation and the lagging effect on prices, and has nothing to do with economic progress.
- Why Goldman Is About To Become The Biggest HFT Firm In The World
When faced with the choice of perpetuating a fake facade of morality or continuing its old ways, was there ever any doubt what Goldman would choose.
One year ago, just as Michael Lewis issued Flash Boys, a book which summarized everything we have said about broken markets and HFT manipulation since day one, Goldman decided to not only keep a lower profile, but to miraculously take the side of the “little guy” by not only providing backing to the new anti-HFT exchange IEX, but having Goldman COO’s Gary Cohn pen a WSJ Op-Ed titled “The Responsible Way to Rein in Super-Fast Trading” in which the firm lamented the rise of algorithmic trading, and market fragmentation:
With the overwhelming majority of transactions now done over multiple electronic markets each with its own rule books, the equity-market structure is increasingly fragmented and complex. The risks associated with this fragmentation and complexity are amplified by the dramatic increase in the speed of execution and trading communications.
In the past year alone, multiple technology failures have occurred in the equities markets, with a severe impact on the markets’ ability to operate. Even though industry groups have met after the market disruptions to discuss responses, there has not been enough progress. Execution venues are decentralized and unable to agree on common rules. While an industry-based solution is preferable, some issues cannot be addressed by market forces alone and require a regulatory response. Innovation is critical to a healthy and competitive market structure, but not at the cost of introducing substantial risk.
Some were shocked by this moral position adopted by Goldman: after all, when in history has the great vampire squid with a penchant for parking its alumni in key central bank and regulatory positions ever foregone profits in order to do what is right.
More shocking, just a few days later, Goldman announced it would sell its designated market maker post on the NYSE, the last remnant of its legacy year 2000 $6.5 billion purchase of Spear Leeds & Kellogg, suggesting Goldman was waving goodbye to lit exchanges.
Even more shocking, a few weeks later Goldman was reported to be shutting down its own dark pool, the once massive Sigma X, thus exiting not only lit but dark exchanges as well.
Back then we said that “this is a momentous development, if true.”
Turns out it wasn’t true.
In fact, all Goldman did was a well-orchestrated PR campaign to avoid the public backlash for the prominent role it had in destroying Sergey Aleynikov not once, but on countless occasions, a programmer first profiled here in 2009, and whose life ever since has been a living hell thanks to Goldman’s army of lawyers. As a reminder, Aleynikov’s plight was one of the main topics of Flash Boys.
Well, now that both Lewis’ book has been long forgotten, now that Virtu has successfully IPOed (with Goldman Sachs as lead underwriter), Goldman can finally drop the facade of doing the right thing for once and as Bloomberg reports, “Goldman Sachs Group Inc., which called for reform of high-speed stock trading before Michael Lewis’s “Flash Boys” spurred an outcry last year, is diving back in.”
Aka hypocrisy 101.
The bank’s electronic equity-execution unit is hiring executives including Keith Casuccio from Morgan Stanley and investing in software, trading infrastructure and its dark pool, according to people with knowledge of the plan.
Goldman Sachs emerged last year as an early supporter of the U.S. stock platform created by IEX Group Inc., portrayed in Lewis’s book as an antidote to the perceived ills of the super-fast, multi-venue electronic trading in today’s market. Now, after few major changes in the way stocks are traded, the investment bank is seeking to execute faster, catching up with competitors and leveling the playing field for its clients.
Goldman Sachs is one of the world’s top equity-trading banks, climbing to No. 1 by revenue in the first quarter after ranking second in 2014, when it produced $6.74 billion. The latest push, which included hiring Raj Mahajan as head of equity electronic-execution services this year, shows it’s focused on establishing itself as one of the top players in automated trading in particular.
But Gary Cohn warned about “fragmentation and complexity” risks… does that mean he was just pandering to the lowest common gullible denominator? And what about that stuff when Goldman said in a memo after the op-ed that “markets would be well-served if IEX achieved “critical mass,” even if that meant reduced volume at its own dark pool, Sigma X.”
Why that was a lie too.
In reality all Goldman did was a rehash of its 2008 strategy when, trailing badly behind Lehman in fixed income revenue, it used its former employees at the Treasury department (Hank Paulson) and the NY Fed (Stephen Friedman) to let Lehman collapse thus allowing Goldman to become the undisputed champion of bond trading. That Goldman would end up the beneficiary of hundreds of billions in taxpayer bailout funds leading to record after record bonus season was only the icing on the cake.
Fast forward to 2014 when Michael Lewis no doubt gave Goldman advance notice of the shit storm Flash Boys would bring. Goldman, in post-crisis crossfire since day 1 and an expert at managing public anger, promptly realized this would lead to the collapse of numerous HFT competitors, and potentially the ascent of a brand new market entrant, the “spotless” IEX. Which is why Goldman was one of the primary backers of the new exchange. After all, there was little downside for its nominal investment, substantial upside, and best of all, it would somehow end up looking like a good guy in Flash Boys despite everything it has done.
Well, “peak” IEX came and went, and the start up exchange was unable to dethrone the reigning king of dark pools Credit Suisse, while corrupt to the bone regulators paid by the HFT lobby, showed that Goldman has no concerns about a wholesale crackdown on HFT: after all, without the Flash Boys, not only will the SEC have vastly less “retirement” funds, but the market itself may well implode now that algorithms have embedded themselves in every trade in the process sucking away virtually all market liquidity.
So where does that leave Goldman now?
Goldman Sachs plans to pitch its improved systems to customers by highlighting fill rates, the percentage of orders that are executed, according to one of the people, who asked not to be identified talking about internal strategy. Part of the focus will be on winning business from quantitative hedge funds that already are clients of other parts of the bank, such as the prime brokerage.
Casuccio, an executive director at Morgan Stanley, will join Goldman Sachs as a managing director reporting to Mahajan later this year, the person said. Tiffany Galvin, a spokeswoman for New York-based Goldman Sachs, declined to comment. Casuccio didn’t return a phone call to a listed number seeking comment.
Who is Raj Mahajan?
Mahajan, the first partner-level hire in the bank’s equities group in more than a decade, was recruited in January from high-frequency trader Allston Trading to guide the overhaul.
He was the CEO at Allston, the same Allston which in January announced it would withdraw from trading US equities altogether (although you won’t find it on his LinkedIn profile).
The same Allston which as we profiled in March in “Parasite Turns On Parasite” was sued by fellow HFT firm HTG Capital, accusing Allston of pervasive manipulation in the US Treasury market.
In other words, HFT powerhouse Allston is dead and all of its secrets including how to manipulate the US Treasury market better than anyone, were just funneled into, drumroll, Goldman Sachs.
What appens nest:
The electronic group aims to add more people in coming months, specifically technology specialists, according to the person. Upgrading Sigma X also is on the agenda, said the person, who added that the company believes the group could achieve a double-digit growth rate if the changes are successful.
So much for Goldman shutting down Sigma X. Instead, Goldman once again played its cards beautifully:
- It pretended to be the champion of the “retail investor” just as the anti-HFT backlash erupted after Flash Boys was published.
- It pretended to be getting out of HFT and dark pools.
- It pretended to be truly sorry for the fate of Sergey Aleynikov (even though a year later Aleynikov is facing prison time after he was found guilty, again, of stealing “secret scientific material” from Goldman, a charge the repentant vampire squid forgot to drop).
- It did its underwriter due diligence on Virtu and now knows the top HFT firm’s most intimate secrets, including the magic behind its “holy grail of trading” or how it had just one trading day loss in 6 years of trading.
- It just bought the brains behind one of Virtu’s main competitors, Allston Trading, a firm embroiled in litigation for manipulating the Treasury market, which recently exited the US equity market (most likely with some hush payments from none other than Lloyd Blankfein).
In short, Goldman is about to aggressively expand into High Frequency Trading and Dark Pools, and courtesy of its captured regulators and Federal Reserve officials, we give Goldman 12-18 months before it is the dominant HFT trading firm in the US and the entire world. And this time, unlike 2008, Goldman did not even have to blow up the financial system to achieve its goal.
Shorter yet: Goldman wins again.
Which, incidentally is good news. Recall that at this point since the current system is far beyond the point of no fixable return, the only real option is letting the status quo burn itself out as fast as possible in a supernova of unbridled greed and endless liquidity, leading to the inevitable systemic reset. A reset which, amusingly, was predicted by none other than Goldman partners and co-heads of Goldman’s global stock markets, Ron Morgan and Brian Levine.
From page 24 of Flash Boys:
And nobody more so than the hypocrites at Goldman Sachs.
- If The Fed Put Its Interest Rate Where Its Mouth Is…
“but it’s different this time…”
This time they really mean it!
Number of times in past 9 1/2 yrs Fed gasbags have talked about hiking rates: 3767.Number of hikes: 0. Now talking about slowing rate rises?
— fred hickey (@htsfhickey) May 26, 2015
- Texas Cops Raid, Shutdown Lemonade Stand Run By 7 Year Old Girls
Submitted by Mike Krieger via Liberty Blitzkrieg blog,
Don’t mess with Texas. Particularly if you happen to be a person who enjoys the freedom to purchase lemonade from two adorable little girls trying to raise money to buy their dad a Father’s Day gift. In that case, you better watch out. The cops are on the case, ever vigilant to protect the unsuspecting citizen from the perils of contraband juice.
There is a war on normal human behavior happening all across America. It was only yesterday that I highlighted the inhumane case of a Florida couple which had its children snatched away from them by Child Protective Services (CPS), because the kids were playing alone in their own backyard for 90 minutes. Here are a few excerpts from the piece titled, 11-Year-Old Boy Taken Away by CPS for Being Left in Backyard Alone for 90 Minutes; Parents Charged with Neglect:
One afternoon this past April, a Florida mom and dad I’ll call Cindy and Fred could not get home in time to let their 11-year-old son into the house. The boy didn’t have a key, so he played basketball in the yard. He was alone for 90 minutes. A neighbor called the cops, and when the parents arrived—having been delayed by traffic and rain—they were arrested for negligence.
They were put in handcuffs, strip searched, fingerprinted, and held overnight in jail.
It would be a month before their sons—the 11-year-old and his 4-year-old brother—were allowed home again. Only after the eldest spoke up and begged a judge to give him back to his parents did the situation improve.
Well done Florida.
Not to be outdone, Texas is using taxpayer resources to crackdown on little girls selling lemonade. From the Free Thought Project:
Tyler, TX — Last week, police in Texas heroically saved the town from likes of two young girls who attempted to open a black market lemonade stand. The girls, one 7-year-old and one 8-year-old, dared to try to raise money to buy a Father’s day present for their dad by setting up a lemonade stand in their neighborhood.
Andria and Zoey Green told ABC affiliate KLTV they were trying to raise about $100 for a Father’s Day present. They wanted to take him to Splash Kingdom.
Over the weekend, the two young entrepreneurs took to the streets with their delicious batch of homemade lemonade and began to provide willing customers with their product. Only one hour into their business endeavor, these girls had raised 25% of their goal.
However, their cash cow would be shut down not long after it started. Overton police chief Clyde Carter showed up along with the city code enforcer and shutdown their criminal operation.
The girls had violated Texas House Bill 970, or the Texas Baker’s Bill, which does not allow the sale of food that needs time or temperature control to prevent it from spoiling. Since the lemonade would eventually grow mold after being left out for days, police said they needed an inspection from the health department and a permit to sell it and deemed their operation “illegal.”
The cost of the permit is $150 dollars.
Police officers can certainly use discretion and choose not to “enforce” this law for use in such an asinine application. The fact that these girls had their good intentions ruined by those who claim to protect them speaks to the level of discontent with law enforcement in America today.
The heartening side to this story is that these young girls are now learning to bypass this tyrannical system of bureaucratic nonsense. The girls said they will be setting up their lemonade stand again this weekend. Instead of selling it though, they will be giving it away, but they will gladly be accepting donations.
I’m still waiting for a bank executive to be sentenced.
In case you still don’t understand how the “rule of law” is applied in America, see:
Florida Man Faces 15 Years in Jail for Having Sex on the Beach (Still No Bankers in Jail)
The U.S. Department of Justice Handles Banker Criminals Like Juvenile Offenders…Literally
Couple Fined $746 for the Crime of Feeding Homeless People in Florida Park
90-Year-Old WW2 Veteran and Two Clergymen Face 60 Days in Jail for Feeding the Homeless in Florida
- How Fund Managers Use ETF Phantom Liquidity To Avert A Meltdown
Last month we learned that some of the country’s largest fund managers (including Vanguard) have been busy lining up billions in emergency liquidity lines with banks to protect them in the event rising rates, shale defaults, or some unexpected exogenous shock leads to a sudden exodus from the high yield and other more esoteric ETFs that have become popular among today’s yield-starved investors.
Essentially, these liquidity lines would allow fund managers to cash out investors with borrowed money, while holding onto the underlying assets rather than selling into an illiquid secondary market where dealers are no longer willing to hold inventory, and where a wave of liquidations could become self-fulfilling.
The problem with this strategy is that it’s yet another example of delaying the inevitable. That is, if fund managers are forced to tap these liquidity lines it likely means investors have found a reason to sell en masse and if that reason turns out to be something that permanently impairs the value of the underlying bonds (as opposed to a transitory, irrational panic) then all they’re doing by borrowing to meet redemptions is employing leverage to stave off the recognition of losses, which is ironically the same thing (in principle anyway) that the companies whose bonds they’re holding have done to stay in business. It’s a delay-and-pray scheme designed to avoid selling the debt of companies whose similar delay-and-pray schemes have run their course.
All of this comes back to underlying liquidity. The reason all of the above is necessary is because fund managers are afraid that when they go to sell the assets behind their funds, the secondary market will be so illiquid that trading in size will have an exaggerated effect on prices which could then trigger more retail fund outflows, forcing more managers to sell into an illiquid market, and so on and so forth until a sell-off becomes a firesale and a firesale becomes an all out panic.
This wasn’t the case in the pre-crisis world and as Barclays notes, fund managers are now using ETFs as a substitute for liquidity that would have previously been provided by dealer inventories. As you’ll see below, this works as long as gross flows are appreciably different from net flows, but when the two begin to converge (i.e. when it’s a one-way rush to the exits), trading the underlying assets and thus venturing into what is now a very thin secondary market for corporate bonds becomes unavoidable, which is precisely why ETF providers are arranging for liquidity lines — it’s an attempt to forestall the inevitable.
* * *
Using ETFs To Mitigate Fund Flows
As asset managers continue to struggle to manage portfolios amid low corporate bond liquidity, we have seen a surge in the use of portfolio products, such as ETFs, CDX, and TRS on corporate bond indices. While some of these products – notably ETFs – are often lumped in with open-end mutual funds as a potential source of trouble in the event of concentrated retail selling, they are also being used by fund managers to mitigate the problems posed by poor liquidity. This raises the natural question: how much can portfolio products offset the decline in liquidity? Or, more colloquially: are ETFs good or bad for corporate bond liquidity?
Although fund flows have been a major focus of market participants over the past several years, the aggregate flows attract the most attention. This is particularly true in the high yield market, where retail ownership is relatively high and the price swings associated with contemporaneous fund flows have been well documented. Aggregate flows have effectively become a market signal.
From the perspective of an individual fund manager, the risk posed by fund flows and the strategies available to help mitigate that risk depend to a large extent on the correlation of flows across funds. If flows are highly correlated – i.e., if every fund experiences inflows at the same time – then the risk is relatively high. Funds will have a difficult time selling bonds when they experience an outflow, since other managers would similarly be selling. In this circumstance, managers have a relatively short list of strategies to deal with flows. They can keep increased cash on hand, or (less likely) they can hope that other non-retail buyers step into the market at a reasonable discount to market levels.
On the other hand, if flows are relatively uncorrelated they may, in principle, pose less of a risk – funds with outflows can sell to those with inflows. Funds can exchange bonds (or portfolio products, see below) with other funds, rather than draw down on or build cash. This process may be made more difficult by the decline in liquidity, but the price discount/premium faced by an individual fund with an inflow or outflow could, theoretically, be limited by the existence of investors looking to go in the opposite direction.
Portfolio Products Replace Dealer Inventory
While diversifiable flows limit the risks to portfolio managers in principle, the reality of the high yield market is more complicated. Managers have specific views on tenor, callability, sectors, covenants, and, most importantly, individual credits, such that actually finding buyers for specific bonds can be quite difficult. In the pre-crisis period, dealers ran large inventories that effectively facilitated the netting of flows across funds (Figure 1). A fund with an outflow would sell bonds into the dealer community, and funds with outflows would buy bonds out of the dealer inventory. When inventory is large, the fact that the specific bonds bought and sold did not match was largely irrelevant. Funds with outflows could sell the bonds of their choice, and the funds with inflows could pick investments from the large variety of inventory held by dealers.
The matching problem has become more acute as dealer inventories have declined. Even funds can net flows in principle, dealers are much less willing to warehouse bonds, and are much more likely to buy only when they believe they can quickly offload the risk. Under this scenario, the fact that flows can theoretically be netted is of little practical use to fund managers – actually netting individual bonds is extremely difficult, particularly in the short time frame required by funds offering daily liquidity to end investors.
This is where portfolio products come in. Investors can use portfolio products to fund outflows/invest inflows immediately and execute the necessary single-name bond trades over time as liquidity in the underlying bond market allows (Figure 2). In this scenario, funds with inflows and outflows simply exchange portfolio products, sidestepping (the immediate need to trade single-name corporate bonds.
To assess the extent to which flows are diversifiable across funds, we examine about two years of weekly flows at the individual fund level. We have data from Lipper on the flows of more than 800 dedicated high yield mutual funds. We separate the funds into those with inflows and those with outflows for the week, and sum the aggregate inflows and outflows..
The total volume of high yield ETFs has grown nearly seven-fold since 2009 (Figure 8). While the “net” portion of the volume must be satisfied by share creation or destruction (which leads to buying or selling of underlying corporate bonds), the remaining share captures risk transfer that takes place without tapping into the corporate bond market Figure 9 shows that the “net” portion of the volume was only 12% in 2014 and has declined meaningfully over the past few years. This suggests that ETFs are additive to liquidity,allowing mutual funds to manage daily liquidity requirements while circumventing the underlying bond markets where liquidity remains poor.
While portfolio products are clearly a useful tool for liquidity management, their use can exacerbate the problem they are meant to solve. Said another way, choosing to trade liquid portfolio products to avoid trading less liquid bonds makes the latter even harder to trade.
* * *
To summarize, fund managers are concerned primarily about the direction of flows into and out of their own funds versus the direction of flows into and out of other funds. Outflows from one fund can be matched with inflows to another, and ETFs can facilitate this, allowing managers to avoid tapping what is an increasingly illiquid corporate bond market. The fact that net flows (i.e. those that must be settled by buying or selling actual bonds) have declined as a percentage of gross volume amid the proliferation of bond ETFs suggests that ETFs have had a positive effect on liquidity. But there’s a problem with this logic.
This only works when net flows are lower than gross flows. If the two converge in a sell-off (i.e. when trading becomes unidirectional) the underlying assets must necessarily be sold as there are no inflows to net against a wave of outflows.
In other words, if I’m a fund manager, the idea that ETFs provide liquidity rests on the assumption that when I experience outflows, someone else will be experiencing inflows and thus I can sell ETFs and avoid offloading my bonds into an illiquid corporate credit market. Put another way: I am depending on new money coming into the market to fund redemptions from previous investors who are exiting the market, all so that I can avoid liquidating assets that are declining in value and that I believe will be difficult to sell. There’s a term for that kind of business. It’s called a ponzi scheme and just like all other ponzi schemes, when the new money dries up (so, for example, when HY bond ETF flows are all headed in the wrong direction), the only way to meet redemptions is to get what I can for the assets I have and when the market for those assets is thin (as the secondary market for corporate credit most certainly is), I may incur substantial losses.
Note also that the more often ETFs are used as a way of avoiding the underlying bond market, the more illiquid that market becomes, making the situation still more precarious in the event of a panic.
As we said last month, this is why fund managers are arranging emergency liquidity lines and on that point, we’ll close by saying that no fund manager in the world will be able to line up enough emergency liquidity protection to avoid tapping the corporate credit market in the event of panic selling in the increasingly crowded market for bond funds.
- WTF Chart Of The Day: Stock Allocation Just Crashed By The Most In 9 Years
On the other hand…
In a post the other day, we mentioned that often times when constructing an investment strategy, a money manager is faced with having to parse data inputs that are diametrically opposed to each other. We didn’t realize at the time that the Charts Of The Day for these past 2 days would offer a prime example of that situation. Yesterday, we noted that according to the Federal Reserve’s quarterly Z.1 release, the % of household financial assets that is invested in stocks is at 2007 peak levels.
Today, we show a different story from the American Association of Individual Investors via their survey on members’ asset allocations. For the month of May, the AAII reports that the % of members’ allocation to stocks dropped over 10 percentage points, from 67.9% to 57.8%. That marks the largest monthly drop in over 9 years, and an especially eye-opening move for a normally fairly stable series.
(note: This is not the AAII weekly sentiment survey which can be extremely volatile. Data from the AAII via sentimentrader.com.)
The last time the AAII stock allocation reading fell as much as 10% in a month was in May of 2006. Not even during the 2011 selloff nor the flash crash nor even during the financial crisis did stock investment drop so much in a month. At the same time, the main beneficiary of the decrease in stock allocation was cash. Cash allocation jumped from 15.9% to 22.8% in May, the largest increase since November 2009.
So how should this development be interpreted? Typically, extreme shifts in sentiment are best addressed by fading them – that is, go in the opposite (contrarian) direction, investment-wise. Therefore, the knee-jerk interpretation is that this development is bullish for stocks. There are a couple issues, however, that make us hesitant to lean too heavily on that interpretation.
First off, as the chart indicates, the out-sized drop in stock allocation comes from an extremely high level. We have often seen that one exception to the contrarian behavior in asset prices versus sentiment is when initially reversing from extremes. That is, when sentiment is extremely high, for example, then begins to fall, it is not necessarily a bullish indicator. The reversal from an extremely high sentiment reading can actually mark the beginning of the unwinding of the extreme position. In that case, it can carry potentially intermediate to longer-term negative connotations.
Another asterisk on this development, in our eyes, is the context of the drop in stock allocation vis-a-vis the action in the stock market. During the month of May (which reflects the survey period), the S&P 500 was up just over 1% and closed the month just over 1% from its all-time high. This is not typically the kind of price action that inspires out-sized risk-off type of investment behavior. Participants in this survey, as with most investment surveys normally chase the trend in price. Therefore, this reading seems like a possible outlier, or one-off.
Now, it may be that in this contemporary information age, survey respondents are more aware of their reputation as “fades” or “dumb money”. I think we may be seeing a bit of that in the weekly AAII survey. Participants seem to be reluctant to take either side – bullish or bearish – for fear of being the “mark” and instead seemingly everyone has resided in the friendly confines of “neutral” for several months now.
So back to the dichotomy between the Fed’s household stock investment series and this AAII survey. Which one is correct? Well, for one, thet can both be correct. There is a slight difference in timing that could account for the opposing readings. The Fed series is through March whereas the AAII survey applies to the month of May. So it could be that events since the end of March triggered the change in investment habits that would not yet show up in the Fed data. Again, though, this is unlikely. We spent the better part of the past 3 months writing posts about the historically narrow range in stocks, hardly the kind of action that would inspire a massive shift in households’ investment in stocks.
And therein lies our answer to which data series to lean on more heavily. The AAII allocation survey has been a useful and informative tool. It has generally been more prone to deliberate moves rather than erratic behavior (unlike its weekly sister survey).
- Clash Of The Titans: Merkel, Schaeuble Spar Over Greece As German FinMin Draws Up Grexit Plans
“Yanis, have this nourishment for the nerves. You’re going to need it,” German FinMin Wolfgang Schaeuble told his Greek counterpart last week, presenting Varoufakis with a box of chocolate euros at a meeting in Berlin.
That’s what counts as humor for Schaeuble who, as Speigel puts it, has become the embodiment of the despicable German to the Greek populace over the course of fraught negotiations with Athens and who now faces a rift with Chancellor Angela Merkel over how far Germany should be willing to go to keep the Greeks in the single currency.
Although Merkel enjoys widespread popularity, Schaeuble is a veteran of the German government and lawmakers’ reverence for the FinMin is increasingly manifesting itself in the growing parliamentary opposition to what some view as an unacceptably soft stance towards Athens on the part of the Chancellor. Speigel has more on Merkel, Schaeuble, and politics in Berlin.
Via Speigel:
Schäuble is extremely good at shrugging off conflict with gallows humor — a gift that has served him well throughout his lengthy career. He is well aware that a handful of Social Democrats aren’t the only ones talking about the widening rift in the government. Insiders who know Merkel well are saying the same. The chancellor has to answer one of the hardest questions she’s had to face since assuming office, namely, should Greece be allowed to remain in the euro, or should the whole drama be brought to a spectacular close with a Grexit.
Merkel would like Greece to remain in the euro. Not necessarily at any cost, but she’s prepared to pay a high price. Schäuble is not. He is of the opinion that a Greek withdrawal from the euro zone is in Europe’s best interests..
Schäuble is something of an éminence grise in the German government: He became a member of parliament in 1972, when Merkel was preparing to graduate from high school in Templin. In 1998, as head of the CDU/CSU parliamentary group in the Bundestag, he made Merkel his secretary general, but then became enmeshed in the CDU donations scandal. Merkel succeeded him in 2000.
Although she’s the one in charge, he intermittently makes it clear that he remains his own man; that he doesn’t kowtow to anyone. Appointed finance minister in 2009, Schäuble remarked that Merkel likes to surround herself with people who were uncomplicated, but that he himself was not uncomplicated. He tends to be a little derisory about Merkel, admiring her hunger for power but deeming her too hesitant when the chips are down.
The euro crisis first drove a wedge between them in 2010, when they disagreed on the International Monetary Fund’s contribution to the Greek rescue fund. Schäuble was against it, on the grounds that Europe should sort out its problems by itself. Merkel, however, was keen to enlist the help of a body that has clear criteria when it comes to offering aid, and which would therefore prevent the Europeans from making one concession after another. Merkel prevailed.
But they’ve now traded positions. Schäuble believes that enough concessions have been made to Greece and he’s bolstered by the frustration currently rife in his parliamentary group over Merkel’s strategy. It will be hard for Merkel to secure majority support if he opposes her, so her fate is effectively in his hands..
The conflict is not about differences in their respective assessments of the situation.. Where they differ is when it comes to the consequences..
Officially, the differences between Schäuble and Merkel are explained away as a reflection of their respective tasks. It’s Schäuble’s job to hold the purse strings and Merkel’s to keep an eye on what’s happening on the international stage. Will Putin be getting a foot in the door if the euro zone cuts the rope on Greece? Will the country turn into a failed state in the middle of Europe if it no longer has the euro?
This isn’t just a matter of good cop, bad cop. Unlike Merkel, Schäuble doesn’t need to worry about looking as though he doesn’t care enough about Europe. He wrote the book on the EU, penning papers on how to intensify the union when Merkel was still only a freshly-minted member of the cabinet. She, by contrast, has often been confronted by accusations that her EU policy is austerity-driven and nothing else. In terms of Europe, she lacks Schäuble’s street cred..
Merkel has never been overly bothered about going down in the history books. But if she does end up hounding Greece out of the euro, the development will certainly be more than a footnote. Which is one possible reason for her hesitancy. She, not Schäuble, will be the one who has to deal with the inevitable criticism and attacks.
Speigel goes on to say that Schaeuble could “easily” stage a rebellion against Merkel if he chose but, at least for now, that doesn’t seem likely and indeed may not be necessary if Greece’s creditors can remain resolute in their insistence on pension cuts and VAT hikes for another week or two.
It still remains to be seen how Tsipras will respond once Greece’s back is truly against the wall. So far, the Greek PM has remained defiant, but that may be because pensions have still been paid (albeit hours late on at least one occasion), there’s still money in the ATMs (even if the lines are getting longer), and Greece has managed to pay creditors (even if the payments have been made using creditors’ own money). All of that changes at the end of the month and that is when Tsipras’ resolve will truly be tested.
In other words, unless Greece decides to chance a default and a euro exit, a showdown between Merkel and Schaeuble will likely be averted, but should Tsipras decide to go down with the ship, there may come a time in July when Merkel is called upon to intervene and pull Greece back from the brink in order to avoid what she views as unacceptable geopolitical consequences. If it comes to that, she may have to go through Schaeuble which, as the above makes clear, could prove politically challenging.
In the mean time, Schaeuble is said to be drawing up plans for a Greek default. Here’s Bloomberg, citing Spiegel, with more:
German Finance Minister Wolfgang Schaeuble has asked his staff to conceive a mechanism by which a euro-area state in the future could default on its debt in an orderly way that would ensure the continuity of currency union, Der Spiegel reported, without saying how it obtained the information.
Schaeuble also looking at ways to limit aid from member states and put the brunt of the burden on bondholders of the country in question: Spiegel
Roadmap is intended to prevent countries in healthy financial state being held to ransom by states unable to repay their debt: Spiegel
Academics also participating in the discussions: Spiegel
Once again we see that in the final analysis, this is all about being careful to send a strong message to Europe: the troika will not be held hostage by debtor countries seeking to win austerity concessions by threatening to shatter the idea of euro indissolubility. This is essentially the negotiating tactic Syriza has employed as Athens attempts to preserve Greeks’ right to decide for themselves how they want to be governed. We will see, in a matter of weeks, whether Tsipras was bluffing or is in fact all-in.
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