Today’s News September 13, 2015

• "Tick… Tock"

  Via Golem XIV's blog,

  8 years to fix the malfunctioning heart of the world’s financial and legal systems but nothing was actually done … and now the clock is ticking and  there is hardly any time left.

  The number of red lights now blinking at us, largely ignored by those who are supposed to be flying this thing, is growing all the time.  It is not that any one of them is a clear harbinger of the end but taken together they paint a dismal and coherent picture – of a system eating itself.

  What I mean is that every political and financial system, every bureaucracy, public or private is originally set up to do a necessary job. And the duty of those who work in it is to make sure the system doe that job. But when the challenges facing the system change so that the system begins to no longer be able to do its job, those in it have two choices: they can work for the greater good and help change the old system into a new one better fit to the new challenges, or they can ignore the problems, and forget the reason they and the system were created in the first place and instead seek merely to get as much as they can from the failing system before it implodes.

  It seems obvious to me that is where we are today,  both politically and financially. We are living in the End Times not because some angry supernatural being is coming to punish us, but because we are living in a system, a machine, which we built and therfore can change, but we have forgotten this. Some time in the recent past we crawled inside our machine, closed the last hatch to the outside behind us, and then forget there was an outside.  Our leaders are the worst of us. They are the lords of the machine and they are sure outside there is only chaos.  We must all save the machine. Their power and wealth demands it.

  And yet they do not know how.

  “Something Happened”  but “Nothing appears to be breaking” 

  So said JPM’s chief economist Bruce Kasman. He was refering to the recent extreme ‘turbulence’ on the stock markets and the continuing drop in global market values.  All I can say is that only  a person who lives resolutely in a linear world, despite it being over a 100 years since we discovered that our world in not linear but non-linear, could say such a thing. In a linear world effects tend to follow their causes quickly and clearly. When things are  non-linear, however, effects can surface long after and far away from their cause.

  Mr Kasman, I suspect, held his breath, waited for everything to fall down and after a couple of days, when they didn’t he concluded nothing had broken after all. He looked at the on-going trend in events and saw they were much as before the inexplicable ‘turbulence’ and concluded that all was as before and the ‘turbulence’ was just ‘one of those things’.

  He could be right. But I doubt it. Ours is a non-linear world and we should remember that. Think back to August 9th 2007. That was the day when BNP Paribas suddenly closed three large sub-Prime mortgage finds. The world at large had not even heard of sub-prime. To little fanfare the ECB pumped €95 billion in to the markets to steady nerves. It was not enough. The next day, August 10th The ECB pumped in another €156 billion, the FED injected $43 Billion and the BoJ a trillion Yen.

  Five days later Countrywide Financial haemorrhaged 13% of it value. 16 days later Ameriquest the largest specialist sub-prime lender in the US collapsed and on September 14th there was a bank run on Norther Rock. It was a turbulent time.

  And then do you know what happened? Nothing. Something had happened but nothing appeared to be broken.  The linear pundits went about their crooked business. Six whole months later Bear Stearns collapsed. Its a non-linear world.

  And I think we are going to be reminded … again.

   

  ETF’s

  ETF’s – have grown to the point where any prolonged large scale exit will exceed the funds available to those who control the funds and make the markets. I think they know this and some time ago those market makers and fund controllers began to boost the credit they could draw upon.  Problem is the very banks they are agreeing larger credit lines with, are drawn from the same group of financial companies who make the ETF markets.

  I have written about this before – ETFs – A warning  which contains links to the posts in which I explain how ETFs work  and why they are The Next Accident Waiting to Happen. In short the liquidity choke built in to the ETF market is that the ETF market depends very heavily on a very few financial firms who run the funds and make the markets.

  We have already seen in the recent ‘turbulence’ that the ETF market is not so much liquid as fragile. When there is a scare people want out. They withdraw their money  which quickly leads to zero liquidity, which leads on to forced selling and as we have already seen prices will dump to far below what the assets in the underlying market are nominally worth. Leading to an even greater pressure to get out.

  The ETF market with its promise of easy withdrawal means when there is an event which spooks people and they want out it happens in seconds not days or even hours,

  What it means is that this time around I think it very likely the Central Banks will have even less time than they had back in 07-09, to act before the bomb goes off.  Which means in turn I expect no creative thought, only a knee-jerk reaction to do again the only things they know how to do despite the fact they have not worked.

  Today it is not a bank run that will amplify some large local event in to a global wave, but a fund run.

  Where might that trigger be?

  *  *  *

  The world in which and for which our old system was built is now changing around it in fundamental ways.

  

  

  

  

  

• The Impressive Scale Of The U.S. Air Force In 3 Charts

  In the war against the Islamic State, the United States has relied heavily on support from the skies. It’s for this reason that more than two-thirds of the $9 million-per-day of military spending on the war has been allocated to the Air Force.

  Total spending on the war, according to data released by the Department of Defense in June 2015, has been $2.74 billion. Of this, $1.83 billion has gone to the Air Force, with the rest being divided between the Army ($274 million), Navy ($438 million) and Special Ops ($204 million).

  But what is the actual scope of the U.S. Air Force? These three charts tell the story.

  Make sure to click on the below charts to get the full size versions of each.

  Combat and Combat-Support Squadrons

  

  The first graphic shows aircraft involved with combat, either directly or for support purposes. This includes seven squadrons of the world’s most expensive fighter jet, the F-22 Raptor, which ultimately cost taxpayers a hefty $412 million each.

  Bomber and Refueling Squadrons

  

  In the second graphic, bombing and refueling squadrons are covered. There are 11 dedicated bomb squadrons, and 30 aerial-refuel squadrons that help top up other jets in mid-air.

  Airlift Squadrons

  

  Lastly, airlift squadrons include everything from the Presidential Airlift Group (89th Airlift Wing) to squadrons that can carry tanks or Humvees.

  Original graphics by: CI Geography

  

  

  

  

  

• "Psychopaths Are Running The World" Former US Marine Blows Whistle On Syrian False Flag, Exposes Real Agenda

  Submitted by Sophie McAdam via TrueActivist.com,

  "All of these players, these politicians are nothing more than puppets, they don't serve the people there is no real democracy, they serve the rich and powerful who run the world and that would be the bankers who control the money supply. The bankers make huge amounts of money….wars are great for them and ultimately they control the politicians.

   

  Psychopaths are running the world."

  Ken O’ Keefe is a former US Marine turned anti-war campaigner who appeared on a Press TV debate called Syria: War of Deception, and absolutely owned his opponent in such an awesome way that you’ll be cheering at his every comment.

   

  Recorded in August 2013, this interview is now two years old, but in light of the current European refugee crisis it’s more relevant today than ever before. Passionate, articulate and knowledgeable about the subject matter, O’Keefe is the perfect guy to step up and tell these home truths- and boy, does he do a good job. 

  This guy nails so many crucial points about the Syria situation in one interview, he’ll have you jumping around and punching the ceiling.

  “We have tortured and killed and maimed and raped around this planet; who in their right mind would consider the United States or the West in general to be in any position to punish anybody?” the veteran begins angrily, going on to outline the evidence for Syria being a false flag attack (Note: leaked emails showing how Assad was framed by the USA are detailed in this cached Daily Mail report from January 2013, which was published online briefly before being removed).

  He rightly points out that the USA dropped more bombs in Vietnam than during the whole of WW2 combined, that it regularly arms terrorists (but the mainstream press refer to them as ‘freedom fighters’ when it suits them) and the former marine also points out how the so-called ‘War on Terror’ is nothing more than a well-planned strategy to be in a “perpetual state of war to destabilize the region for the Greater Israel plan.”

  “We don’t operate under international law; we have the law of the jungle in which the rich and powerful basically determine what goes and what doesn’t go.” O’Keefe shouts. He correctly points out that Bush and Blair would be “rotting in prison cells” if the law were administered equally to all, or even “executed if their own rules were applied to their own crimes“. He also acknowledges that these men are nothing more than puppets who “serve rich and powerful bankers who control the money supply.”

  O’Keefe rants about the hypocrisy of the West, who are arming terrorist organizations in the name of ‘freedom’ for civilians in geo-politically strategic countries while turning a blind eye to vile human rights abuses in countries like Saudi Arabia. The only people who still fall for all this crap, O’Keefe passionately points out, are “bought-off prostitutes [our politicians] or the dumbest of the dumb.”

  In short, this is a video you should consider sharing with anyone you know who is still under the illusion that the USA and Britain are doing good in the world, anyone who doesn’t believe the ‘conspiracy theory’ that 9/11 (or Syria, or Libya, or Afghanistan or Iraq) were not orchestrated attacks to further a sinister long-term goal of controlling the Middle East, and anyone who believes that the desperate refugees fleeing these countries we have systematically destroyed have no right to seek help from their oppressors in Europe and North America- after all, without Western imperialism, we wouldn’t have any refugees in the first place (more on that here).

  Ken O’Keefe renounced US citizenship in 2001 and now holds Irish, Hawaiian & Palestinian citizenship. He says on his blog: “My ultimate allegiance is to my entire human family and to planet Earth.”

  Well said.

  

  

  

  

  

• Is Yellen About To Shock Everyone: Goldman Says The "Fed Should Think About Easing"

  What a difference a little over a year makes.

  Back in January 2014, just after the Fed announced the tapering of QE (because, you know, the “date-dependent” Fed would never be tapering if the economy wasn’t improving, right?) the propaganda machine went into overdrive, with Wall Street’s pet economist, not to mention the NY Fed’s key “outside advisor”, Goldman Jan Hatzius preaching that the long awaited recovery had finally arrived.

  This is how the tabloid pseudo-finance website Business Insider characterized his call at the time: “Goldman’s top economist, Jan Hatzius, just said the words we’ve been wanting to hear for five years. He believes the economy is now growing at an above-trend pace.”

  What exactly did he say? This:

  Despite the 1% drop in real GDP in the first quarter, we believe that the US economy is now growing at an above-trend pace. The best way to see this is via our current activity indicator (CAI), which grew at an annualized rate of 3.4% in May, similar to the average of the prior two months. Although an estimated ½ percentage point of this sequential growth is due to a bounceback from the weather distortions of the first quarter, even the year-on-year CAI now stands at 2.7%, the fastest pace of the expansion so far and above our estimate of potential growth of 2%-2½%. In our view, the CAI is a far more reliable indicator of economic activity than real GDP because it is more timely, more broadly based, less noisy, and less subject to revision. One key reason why we expect a further pickup in the underlying growth pace to 3%+ is an improvement in the housing sector.

  To be sure, the US economy would have literally cratered just a year later after another first quarter debacle was blamed on cold weather, and only a double seasonal adjustment saved what little was left of “growth” purely on the back of an absolute whopper in record inventory accumulation.

  Back then, Joseph Wisenthal, then with Business Insider, and currently in charge of Bloomberg’s hyperbole division, said “For what it’s worth, we agree with Hatzius.”

  For what it was worth, we disagreed with Hatzius, noting that this would simply be the second time in five years Goldman has jumped the “recovery” shark after its dramatic reversal in December 2010 when as QE 2 was ending, Goldman once again sought to boost wholesale confidence by going fundamentally bullish and saying “This outlook represents a fundamental shift in the thinking that has
  governed our forecast for at least the last five years.”

  Fast forward a little over a year when we learn that Goldman was once again wrong (for what it’s worth, naturally Business Insider was too).

  First it was in April of 2015 – some 16 months after his “bold” prediction – that the same “above trend growth”-forecasting Hatzius said we “do not have much confidence in the inflation outlook and believe that the right policy would be to put hikes on hold for now.”

  But… what happened to above trend growth?

  Then in the first week of June, Hatzius once again hedged saying “Our forecast remains that the Fed policy committee will hike rates at the September meeting, but …this remains a close call. There is a strong risk management case for delaying liftoff.” In other words, the market determines Fed policy, not the economy, despite the reflexive lies to the opposite.

  Then just two weeks later, on June 18, Hatzius having long given up on his “above trend growth” forecast changed his tune again, and now said he expected a December rate hike instead.

  “In large part this reflects the fact that seven FOMC participants are now projecting zero or one rate hike this year, a group that we believe includes Fed Chair Janet Yellen…. We had viewed a clear signal for a September hike at the June meeting as close to a necessary condition for the FOMC to actually hike in September, because we did not believe that the FOMC would want to surprise markets on the hawkish side when they raise the funds rate.”

  Of course, if the economy had grown at an “above trend pace” since his January 2014 call, the Fed would have to be at 1% or higher by now.

  Just to make sure nobody is surprised next week when Yellen does not hike and unleashes a massive relief rally, Hatzius added that a September rate hike announcement this Thursday “shouldn’t be close”, and as we showed previously, unveiled 7 reasons why. Amazing how Goldman’s narrative changes with every month.

  And then, the humiliation was complete last night when the same Jan Hatzius, having long-forgotten his January 2014 prediction, in a note previewing the US economy in “September and Beyond” had this to say:

  In our view, the recent events have largely sealed the case against a rate hike next week. Fed officials have made clear that “data dependent” policy refers to incoming economic news as well as factors that could impinge on the outlook—including changes in financial conditions…. The news on wage and price inflation, however, has been softer than generally expected a few months ago…. most of the inflation shortfall relative to the Fed’s 2% target is due to more persistent factors, including continued labor market slack.

   

  …

   

  We expect modest downward revisions to GDP growth in 2016 and 2017 in light of tighter financial conditions.

  Hm… maybe Jan meant below-trend growth?

  And here we get to the punchline, because Goldman which originally expected a September rate hike, then pushed it to December in June, is now fairly confident that there may not be a 2015 rate hike at all!

  Perhaps the biggest question for next week’s meeting will be whether Chair Yellen continues to signal rate hikes later this year, or whether she hints at a lengthier delay.

   

  We see two arguments for why the first rate hike may be delayed beyond December. First, the Taylor rules above do not take into account risk management considerations. We have long seen a persuasive case for delaying rate increases until 2016 on risk management grounds, and recent communication suggests this may be weighing more heavily on Fed officials’ thinking.

  That’s that phrase again: just like in June, by “risk management” Hatzius simply means not to crash the market.

  And then, now that a September rate hike has been made painfully clear will not be coming (trade accordingly), Goldman pulls out a whopper of an Easter egg:

  Although the purpose of raising the funds rate is to tighten financial conditions, markets have already done much of the Fed’s “dirty work.” Indeed, our latest analysis suggests that the recent tightening—if maintained going forward—would be equivalent to around three hikes in the funds rate. Similarly, the GSFCI is now much too tight relative to our “FCI Taylor Rule”, which compares the current level of financial conditions with the “appropriate” level based on inflation and job market slack (Exhibit 11). The easiest way to ease financial conditions—and thereby better align the stance of policy with the dual mandate objectives—would be to signal a later liftoff than markets currently expect.

  * * *

  we may hear a bit more about risk management in the press conference, and Chair Yellen may make it clear that financial conditions need to improve for the committee to actually hike this year.

  The punchline comes from Goldman’s Financial Conditions Index which is now screaming for QE4 or NIRP, pick one:

  

  And there you have it: the “above trend growth” is dead and buried – because 24 months after Goldman’s prediction that the economy is now roaring, Goldman admits the Fed can’t hike even 25 bps.

  Which is why one can, and should, ignore all Goldman forecasts about the economy.

  What one should most certainly pay attention to, however, is what Goldman says the Fed will do – you know, for “risk management” purposes – because as we have shown countless times in the past, Goldman runs the Fed. 

  As such, forget a September rate hike. Or perhaps Yellen will listen too carefully to Hatzius and instead of a rate hike, shock absolutely everyone, and instead of a rate hike the Fed will join the ECB, SNB and Riksbank in the twilight zone of negative rates. That, or QE4.

  And why not: after both the Swiss National Bank and the Chinese central bank crushed investors who thought the banks would never surprise them, why should the Fed not complete the 2015 trifecta of central bank turmoil? After all, the money printers are already running on “faith” and credibility fumes. Might as well go out with a bang.

  

  

  

  

  

• A Major Bank Just Made Global Financial "Meltdown" Its Base Case: "The Worst The World Has Ever Seen"

  When it comes to the epic bubble in China’s economy, it really boils down to one – or rather two – things: a vast debt build up (by now everybody should be familiar with McKinsey’s chart showing China’s consolidated debt buildup) leading to a just as vast build up of excess capacity, also known as capital stock accumulation. And/or vice versa.

  It is how China resolves this pernicious, and self-reinforcing feedback loop, that is a far greater threat to the global economy than even what happens to China’s bad debt (China NPLs are currently realistically at a 10-20% level of total financial assets) or whether China successfully devalues its currency without experiencing runaway capital flight and a currency crisis.

  One bank that is now less than optimistic that China can escape a total economic meltdown is the Daiwa Institute of Research, a think tank owned by Daiwa Securities Group, the second largest brokerage in Japan after Nomura.

  Actually, scratch that: Daiwa is downright apocalyptic.

  In a report released on Friday titled “What Will Happen if China’s Economic Bubble Bursts“, Daiwa – among other things – looks at this pernicious relationship between debt (and thus “growth”) and China’s capital stock.  This is what it says:

  The sense of surplus in China’s supply capacity has been indicated previously. This produces the risk of a large-scale capital stock adjustment occurring in the future.

   

  Chart 6 shows long-term change in China’s capital coefficient (= real capital stock / real GDP). This chart indicates that China’s policies for handling the aftermath of the financial crisis of 2008 led to the carrying out of large-scale capital investment, and we see that in recent years, the capital coefficient has been on the rise. Recently, the coefficient has moved further upwards on the chart, diverging markedly from the trend of the past twenty years. It appears that the sense of overcapacity is increasing.

   

  Using the rate of divergence from past trends in the capital coefficient, we can calculate the amount of surplus in real capital stock. This shows us that as of the year 2013, China held a surplus of 19.4 trillion yuan in capital stock (about 12% of real capital stock).

   

  Since China is a socialist market economy, they could delay having to deal directly with the problem of capital stock surplus for 1-2 years through fiscal and financial policy. However, there is serious risk of a large-scale capital stock adjustment occurring in the mid to long-term (around 3-5 years).

   

  
  

  Daiwa then attempts to calculate what the magnitude of the collapse of China’s economic bubble would be. Its conclusions:

  Even in an optimum scenario China’s economic growth rate would fall to around zero

  We take a quantitative look at the potential magnitude of the collapse of China’s economic bubble to ensure that we can get a good grasp of the future risk scenario. If a surplus capital stock adjustment were to actually occur, what is the risk for China and how far would its economy fall?

   

  Chart 7 shows a factor analysis of China’s potential growth rate. The data here suggests that (1) China’s economy has gradually matured in recent years, and this has slowed progress in technological advancement, (2) Despite this fact, it has continued to depend on the accumulation of capital mainly from public spending to maintain a high economic growth rate, and (3) As a result, this has done more harm than good to technological advancement. Between the years 2012-15 China’s economy declined, yet still was able to maintain a high growth rate of over 7%. However, 5%pt of the growth rate was due to the increase in capital stock. Labor input and total factor productivity contributed only 2%pt.

   

  The major decline in the rate of contribution from total factor productivity is especially noteworthy, as it had maintained an annualized rate of 5% for thirty years straight since the introduction of the reform and opening-up policy and on through the era of rapid globalization.

   

  According to a DIR simulation, if a capital stock adjustment were to occur under such circumstances, China’s potential growth rate would fall to around 4% at best. This adjustment process is shown in the bottom left Chart 7. As far as can be determined from the capital stock circulation diagram, capital spending at the level seen in 2014 should not have been allowable without an expected growth rate of over 10%. Hence if adjustment progresses to the point where the potential growth rate is only 4%, the situation for capital spending will continue to be harsh. If the adjustment process lasts from the year 2016 to 2020, capital spending will likely continue in negative numbers on a y/y basis. If this scenario becomes a reality, the real economic growth rate will hover at around zero as is shown in the  lower right portion of Chart 7.

   

  

  All of this is well-known by most (or at least those who are willing to accept reality at face value instead of goalseeking it away with Keynesian theories that serve to merely perpetuate fallacious groupthink). It does, however, underscore the severity of China’s economic situation and the follow-through linkages to the rest of the world.

  But where the Daiwa stands out from every other report we have read on this topic, and where it truly goes where no other research has dared to go before, is quantifying the probability of China’s worst case scenario. Here is what it says:

  Meltdown scenario: World economy sent into a tailspin

  We have already stressed that the scenario discussed in the previous section is the optimum or bestcase scenario. What is just as likely or possibly more likely to occur is the following. If the expected growth rate declines and the progress of the capital stock adjustment causes the bad debt problem to become even more serious, the economy could spiral out of control, lapsing further into a meltdown situation.

  The stunning punchline:

  “Of all the possible risk scenarios the meltdown scenario is, realistically speaking, the most likely to occur. It is actually a more realistic outcome than the capital stock adjustment scenario.  The point at which the capital stock adjustment is expected to hit bottom is at a much lower point than in the previously discussed capital stock adjustment scenario (see Chart 8). As shown in the bottom right portion of this chart, the actual economic growth rate will continue to register considerably negative performance. If China’s economy, the second largest in the world, twice the size of Japan’s, were to lapse into a meltdown situation such as this one, the effect would more than likely send the world economy into a tailspin. Its impact could be the worst the world has ever seen.”

   

  

  Translated: Daiwa just made a Chinese “meltdown” and global economic “tailspin” its “realistically speaking, the most likely”, base case scenario.

  And here we were thinking our calls (since 2011) that China’s debt and excess capacity bubble would negatively impact global growth, are audacious.

  The question, now that Daiwa has broken the seal on Chinese and global doomsday scenarios, is whether and how soon other banks will follow in Daiwa’s path, and predict an armageddon scenario which sooner or later, becomes a self-fulfilling prophecy even without the help of China’s increasingly clueless micromanagers.

  Source: Daiwa

  

  

  

  

  

• Market Risk, Model Smash

  Submitted by Salil Mehta of Statistical Ideas

  Market Risk, Model Smash

  Seeing the market crash from a few weeks ago, it is clear how quickly the market can ferociously hurdle in front of one’s risk models. Risk models that failed to safeguard against risk when it mattered the most.  Models that left many large hedge funds hemorrhaging – top funds which by definition were supposed to protect their investors in the August tumult.  Instead when markets broke bad, a lot of things “went wrong”; and stayed that way.  

  In this article, we explore a number of the large U.S. market crashes since the mid-20th century, and show how the recent bust compares.  We learn why relying on tail risk models whose approximations presume to work consecutively at all times, can lead to failure.  The key for investors (if they must be active) is to always remain vigilant.  Professor Nassim Taleb recently expressed it nicely:

  The *only* way to survive is to panic & overreact early, particularly [as] those who “don’t panic” end up panicking & overreacting late.

  

  And there were many who wound up in panic in recent weeks.  Expeditiously selling at a loss, under record volume on August 24 (China’s Black Monday).  Let’s first consider what an overall market crash look like.  We quickly show a symmetrical V-shaped illustration here.  This illustration also shows a rise in fear on the way down, with peak panic near the bottom (the orange star), then followed by up-moves that mirror the previous down-moves.  We will need to review this overall shape in a future article.  But for now we discuss simply the left side of the illustration (the solid brown down-arrows).

  In developing upon the numerous ways in which a market crash can occur, we apply a non-parametric probability approach that explores an initial brutal decline.  Then a peak in market fear, and then an “aftermath”.  We’ll also tabulate and focus our attention on 10 largest crashes since 1950.  Each one we measure up against these 3 crash patterns below.

  Of course we can debate to some extent over what the 10 largest crashes are, but that would be losing the forest through the trees.  It’s more important that we simply agree on a respectable overlap of what constitutes a decent sample of market busts, and when the peak jitters were felt by investors and observants.  Now for fun, which of the following 3 patterns do you think generally represents the nature of these large crashes?

  A. a slow collapse into maximum fear, then followed by a torrid fall

  

   

  B. a rapid drop into maximum fear, then subsiding into a slow and chaotic recovery with retests

  

   

  C. a straightforward drop terminating in maximum fear, then a shallow and jerky rebound back (perhaps temporarily) to “stability”

  

   

  Most would erroneously assume (and this is also how it is generally portrayed by business leaders through the media) that market crashes frequently occur in the order shown.  That is, more are of pattern A than of pattern C.  We’ll see however, even if counter-intuitive, that the precise reverse has been true.

   

  We show below, the 10 large market wrecks, in addition to the recent August 24.  We use a probability template as well that shows vertically compounded day of “greater severity” price moves versus the previous day (example follows the 11 graphs here).  If a daily market move is not more severe in direction (lacks acceleration), then we shift the data to the right.  We start each time graph where markets were previously quite stable, and terminate each graph at the first equal period of stability.  And we use the same lightly shaded boxes, similar to those shown above, to show the market price changes in relation to the time of ultimate scare (the performance of which we bold below).

   

  June 23, 1950:

   

  

  September 26, 1955:

  

   

  May 28, 1962:

   

   

  

  October 19, 1987:

   

  

  October 13, 1989:

  

  October 27, 1997:

  

  August 31, 1998:

   

  

  April 14, 2000:

  

  October 15, 2008:

  

  August 8, 2011:

  

  August 24, 2015:

   

  

   

  So in the first case of 1950, the returns prior to August 26 of that year were:

  August 21 +0.9% 
  August 22 +0.8% (positive price move though less severe versus +0.9% so shift up and to the right)
  August 23 -0.1% (negative price move is a directional change so shift to the right)
  August 26 -5.5% (negative price move and more severe versus -0.1% so just show it vertically below the August 23 result)
  Etc.

  Again this is not meant to show (by the visual scale) the actual distances traveled in percentage points.  But it gives us a non-parametric feel for the direction (and the colored bars green and red show the magnitude) of the daily price movements.  Even including the horizontal shifting of the price changes, one can see whether there is extraordinary acceleration or deceleration in price changes.

  Now in the table below we encapsulate the statistics for the daily prices changes and time duration before (first shaded box in the graph), as well as after (everything after the first shaded box in the graph) the time of ultimate panic.  We also state which of the 3 market crash styles noted previously apply.

  1950: crash of -4% over 4 days; then -3% over following 5 days.  Pattern A
  1955: crash of -6% over 2 days; then +1% over following 7 days.  Pattern B
  1962: crash of -14% over 5 days; then +5% over following 7 days.  Pattern C
  1987: crash of -35% over 8 days; then +9% over following 20 days.  Pattern C
  1989: crash of -7% over 2 days; then +2% over following 2 days.  Pattern C
  1997: crash of -10% over 3 days; then +7% over following 6 days.  Pattern C
  1998: crash of -13% over 4 days; then +3% over following 2 days.  Pattern C
  2000: crash of -10% over 3 days; then +6% over following 4 days.  Pattern C
  2008: crash of -27% over 15 days; then -2% over following 46 days.  Pattern B
  2011: crash of -14% over 5 days; then +6% over following 7 days.  Pattern C
  2015: crash of -10% over 4 days; then +5% over following 4 days.  Pattern B

  Notice that the 10 initial crashes account for a total of only 157 trading days (~1% of the days!)  We also witness the frequency of these crashes as roughly once every 6-7 years (about the duration of an economic cycle).  Also note that you can not simply take the ratios of the price changes over time, in order to measure “speed” of changes, since the second box (when applicable) and the balance of the price graph have been combined into one.

  What’s more important for our probability investigation here is that we can visually see that of the 10 initial crashes, only one most fits pattern A.  While 2 fit pattern B, and 7 fit pattern C.  We then created a probability matrix to show the categorical placement of the data above.  For example for the 10 years, up through the day of ultimate fear, we see the following:

                                  less severe   more severe
  daily price increase        15%             0%
  daily price decrease        51%            33%

  And following this day of paramount scare:

                                  less severe   more severe
  daily price increase        46%             8%
  daily price decrease       34%            11%

   

  Now repeating this exercise for the recent August 2015 crash alone, here are the statistics, through the day of ultimate fear:

                                 less severe   more severe
  daily price increase          0%             0%        
  daily price decrease        25%            75%

   

  And following this day of paramount scare:

                                 less severe   more severe
  daily price increase         75%             0%           
  daily price decrease        25%             0%

   

  A ?²-test shows that the recent 2015 crash (so far) looks slightly (<25% probability) similar to the 2 pattern B years of 1955 and 2008.  We state “so far” because we are clearly not yet in a stabile period, similar to what we finally saw from prior crashes, though the likelihood is strong at this point that the pattern B identified is firm.  Again this is the pattern where there is severe market turmoil, then subsiding into a rather mediocre recovery with multiple retests.

  Additionally the ?²-test strongly evidences that the probability matrix results thusfar (>95% probability) are quite different from the 7 crashes that make up pattern C (either before peak fear, after peak fear, or combined).  Noting again that this is the pattern that few people above would a priori feel represents how crashes “normally” occur.  Yet it account for roughly 2/3 of the crashes we’ve discussed here.  Meaning no one type of hedge can cheaply and universally protect from all crashes since they vary in styles.

  Given the large portion of crashes -particularly in the past decade- which do not fit the typical mold for how risk models would anticipate market crashes to occur, relying on them at all times is imprudent.  Understand that market tail risk models can change in this period, subsequent top maximum jitters.  Eventually when it wreaks havoc, it is sometimes too late to appropriately hedge or know how to speculate in order to stay long with leverage in the hopes for spike in rebound days.  We may see this all unfold again, at a later point, but instead with bonds.  Then we’ll again overly exposed funds and investors, in a hysteria once more.

  

  

  

  

  

• Mount(ing) Denial

  “What me?”

   

  

  
  

  Source: Townhall.com

  

  

  

  

  

• Crossing Borders With Gold And Silver Coins – A Glimpse Of Things To Come

  Submitted by Doug Casey via InternationalMan.com,

  It’s well-known that you have to make a declaration if you physically transport $10,000 or more in cash or monetary instruments in or out of the US, or almost any other country; governments collude on these things, often informally.

  Gold has always been in something of a twilight zone in that regard. It’s no longer officially considered money. So it’s usually regarded as just a commodity, like copper, lead, or zinc, for these purposes. The one-ounce Canadian Maple Leaf and US Eagle both say they’re worth $50 of currency.

  But I’ve recently had some disturbing experiences crossing borders with coins. Of course, crossing any national border is potentially disturbing at any time. You might find yourself interrogated, strip searched, or detained for any reason or no reason. But I suspect what happened to me in three of the last four borders I crossed could be a straw in the wind.

  I’ve gradually accumulated about a dozen one-ounce silver rounds in my briefcase, some souvenirs issued by mining companies, plus others from Canada, Australia, China, and the US. But when I left Chile a couple of months ago, the person monitoring the X-ray machine stopped me and insisted I take them out and show them to her. This had never happened before, but I wrote it off to chance. Then, when I was leaving Argentina a few weeks later, the same thing happened. What was really unusual was that the inspector looked at them, took them back to his supervisor, and then asked if I had any gold coins. I didn’t, he smiled, and I went on.

  What really got my attention was a few weeks later when I was leaving Mauritania, one of the world’s more backward countries. Here, I was also questioned about the silver coins. A supervisor was again called over and asked me whether I had any gold coins. Clearly, something was up.

  I haven’t seen any official statements about the movement of gold coins, but it seems probable that governments are spreading word to their minions. After all, $10,000 in $100 bills is a stack about an inch high; it’s hard to hide, and clearly a lot of money. But even at currently depressed prices, $10,000 is only nine Maple Leafs, a much smaller volume. Additionally, the coins are immune to currency-sniffing dogs, are much less likely to be counterfeit, and don’t have serial numbers. And if they’re set aside for a few years, they won’t be damaged by water, fire, insects, currency inflation, or the complete replacement of a currency. Gold coins are in many ways an excellent way to subvert capital controls. And I think they’ll become much more popular in that role.

  That’s because, all over the world, paper cash is disappearing. People are moving away from paper cash. That’s partially because there are fewer and fewer bank branches where you can cash a check, and ATM machines are costly to use. And partially because everybody has a cell phone and they’re starting to use them for even trivial purchases, like a cup of coffee. Governments are encouraging this because if all purchases, sales, and payments are made electronically, they’ll know exactly what you’re doing with your money.

  From their point of view, the elimination of cash will have several major benefits: It decreases the opportunity for tax evasion, it decreases the possibilities of “money laundering,” it eliminates the expense of printing currency, it obviates counterfeiting, and it gives the state instant access to all of any individual’s cash. From an individual’s point of view, however, the safety and freedom offered by a stack of paper cash will disappear.

  Much of the safety and freedom offered by foreign banks and brokerage accounts has already disappeared. Few people seem aware of the fact that not so long ago, there was no limit to the amount of cash you could transfer in or out of the US without reporting. Or that you didn’t have to report the existence of offshore bank or brokerage accounts (although you did have to report taxable income from them).

  That changed in 1970, first with the passage of USC 3156, and then the perversely-named Bank Secrecy Act. The 1986 Tax Reform Act made it highly inconvenient, and largely uneconomic, to invest in passive foreign investment companies (PFICs). In 2010, the Foreign Account Tax Compliance Act (FATCA) required every foreign financial institution in the world to report info on US persons to the US government. The enormous regulatory burdens and potential penalties it imposes now make it very hard to find a foreign institution that will even open an account for an American.

  These are all de facto capital controls. In the US, banks are starting to notify customers that they’re not responsible for the storage of cash, or gold, in their safe deposit boxes. When I was in New Zealand a couple of months ago, I was taken aback to see that the suburban branch of a major bank was closing down its substantial safe deposit box department.

  When I inquired why, the manager only knew that it was a new policy and if I wanted a box, I’d have to go to the main branch. This seems to be another worldwide trend. If there isn’t a safe place to store paper cash or gold, then people will be less likely to possess them.

  But it’s getting worse. Over the last couple of years, there have been efforts to pass a bill that would allow the US to deny issuance, or cancel, the passport of anyone who is simply accused of owing $50,000 or more in taxes. I expect this will become law at some point. After all, it clearly states on your passport that it’s government property and it must be turned in on request. People are actually the most valuable form of capital. Emigration has always been nearly impossible from authoritarian regimes.

  So what’s next? I expect, as the subtle war on both cash and the transfer of capital across borders gains momentum, that gold coins are going to become the next focus of attention. So I suggest you act now to beat the last minute rush.

  Have a meaningful percentage of your net worth in gold coins.

   

  Have a significant number of those coins stored outside the country of your citizenship.

   

  Concentrate your future purchases in small coins that are indistinguishable from loose change. Things like British sovereigns (.23 oz of gold) or their continental equivalents (French, Swiss, German, Danish, Russian, etc., pieces of generally .18 oz of gold). Not only is gold cheap now, but all of these are currently at only a few percent above melt. Happily, they have collectible value, and they resemble common pocket change to an X-ray machine.

  Also, do this: Put a bunch of silver Eagles in your brief case the next time you travel internationally and let us know if your experience resembles our own.

  

  

  

  

  

• A Recipe For The Mother Of All Short Squeezes?

  Positioning across the world's most-levered financial instruments has never been this extreme.

  There has never been a bigger net long VIX futures position.

  

   

  As My401k's Dana Lyons notes, however,

  The behavior of the COT positioning in VIX futures has completely changed in recent years. This is no doubt due to the proliferation and increasing popularity of volatility ETF’s, which access the futures market, either directly or indirectly. A simple glance at the chart will tell you that the volatile post-2012 period bears very little resemblance to the 2004-2011 regime.

   

  The rise in demand for volatility ETF products has necessitated the increased liquidity in the VIX futures. Therefore, we are now seeing extremes in COT positions that are much greater, even multiples, of those seen prior to 2012. Thus, what was once considered extreme is now pedestrian. Now, the current Speculator net long position is still a record, even compared to readings in the post-2012 world. Therefore, we’re not going as far as to say this reading is irrelevant. We think it is relevant and, on the margin, a bearish data point for the VIX and a bullish data point for stocks.

   

  What we are saying is that, in this new derivative-based ETF regime, we still don’t know exactly what the related metrics are capable of. While the current COT reading is a record, it could still get record-er…and by a lot. Consider the extreme positions we’ve pointed out over the past year in Crude Oil futures, Dollar futures, etc., that have gone well beyond prior “normal” bounds. Or simply look at the Speculator net short position in this VIX contract starting in 2012. After a pretty reliable floor in the -20,000 range for nearly a decade, the Speculator net short position exploded in 2012, nearly moving 100,000 contracts beyond that level by 2013.

   

  We just don’t know how this dynamic is ultimately going to play out – and I don’t think we will for many years.

  But piling on, we also see the Put/Call Ratio is at a serious extreme as well, the highest since 2007.

  

   

  And while the aggregate positioning in US equity futures is extremely short the chart below suggests that sometimes the crowd is right.

  

   

  So while it would appear the world is positioned bearishly extreme in stocks; bonds appear no better.  As shown below, the shorter-dated bond net positioning is its shortest since 2007/08 – and we know what happened next.

  

   

  And there has never been a larger short position in the Ultra Long Bond Contract.

  

  Charts: Bloomberg

  Given the weight of all these extremes (and the implicit leverage from the ETF markets), this week's FOMC decision may be more turmoil-er than normal by an order of magnitude.

  With such extreme positioning across the equity, vol, and bond complex, it would seem no matter what The Fed does in September, there will be blood.

   

  

  

  

  

  

• Behind The Media Propaganda: Father Of "Drowned Syrian Boy" Was People Smuggler

  To a certain extent, the old adage “out of sight, out of mind” is unavoidable for anyone, but we don’t think it’s an exaggeration to say that Western society and especially the American public, exhibit a generalized ignorance to events taking place beyond their borders that’s completely out of synch with the degree to which most Westerners have easy access to information. That is, if the US public cared to know what was going on outside of suburbia and beyond the Starbucks drive-throughs and the strip mall Targets they most certainly could find out, but that would likely mean discovering all manner of really inconvenient and often disturbing things and so, at the end of the day, willful ignorance allows everyone to perpetuate the myth that everything is fine. For its part, the media is more than happy to expose harsh realities as long as they’re conducive to ratings so, for instance, “unarmed black teen shot 18 times by angry white police officer” works well, while “Syria’s bloody civil war continues unabated” does not because to the largely ignorant public, Syria might as well be Mars and if for some inexplicable reason, life or death ended up coming down to being able to correctly identify Syria on an unlabeled map, well, it would be time to start praying. 

  Sometimes, however, the media stumbles across or, more likely, is fed an image or a series of images that are so indelible that they’re forced to run them, and the public consciousness is, if but for a fleeting moment, jarred out of its perpetual stupor. That’s what happened in 2013 when YouTube videos appeared to show the victims of a so-called “gas attack” that Bashar al-Assad decided, apparently out of the clear blue sky, to launch on his own people even though were the story true, it would seem to have been a rather peculiar strategy given that the strongman was fully aware that the US was just waiting on an excuse to launch a few cruise missiles. Then, a little more than two years later, we got another example of imagery powerful enough to focus the public’s attention on a far-away civil war when the body of a drowned toddler washed up on a beach in Turkey. 

  

  And even though connecting the proverbial dots isn’t something everyday Westerners are particularly adept at, it wasn’t too difficult for the media to paint the picture: 1) drowned toddler was a refugee, 2) there’s a refugee crisis thanks largely to a war going on in a place called Syria which isn’t on Mars but is in fact in the Middle East, 3) this place called Syria is where ISIS is, 4) the Russians are there too. It would be difficult to come up with a narrative more conducive to rallying public support for an invasion if you were trying. And indeed, maybe someone was trying, because as Reuters reports, the drowned child’s father might not have been a fleeing migrant after all, but rather a people smuggler and Aylan might have been on the boat not because his family intended to save their child from the horrific violence escalating daily in Syria, but rather because profiting off of other people’s misery was his father’s chosen profession and he often brought his family along for the ride. Reuters has the story, excerpts from which are presented below.

  Via Reuters:

  The father of drowned Syrian toddler Aylan Kurdi was working with smugglers and driving the flimsy boat that capsized trying to reach Greece, other passengers on board said, in an account that disputes the version he gave last week.

   

  Ahmed Hadi Jawwad and his wife, Iraqis who lost their 11-year-old daughter and 9-year-old son in the crossing, told Reuters that Abdullah Kurdi panicked and accelerated when a wave hit the boat, raising questions about his claim that somebody else was driving the boat.

   

  A third passenger confirmed their version of events, which Reuters could not independently verify.

   

  “The story that (Aylan’s father) told is untrue. I don’t know what made him lie, maybe fear,” Jawwad said in Baghdad at his in-laws’ house on Friday. “He was the driver from the very beginning until the boat sank.”

   

  He said Kurdi swam to them and begged them to cover up his true role in the incident. His wife confirmed the details.

   

  Jawwad said his point of contact with the smugglers was called Abu Hussein. “Abu Hussein told me that he (Kurdi) was the one who organized this trip,” he said.

   

  Amir Haider, 22, another Iraqi who said he was on the same boat, confirmed Jawwad’s account and identified Kurdi as the driver. He told Reuters by telephone from Istanbul that he initially thought Kurdi was Turkish because he was not speaking, but later heard him talking to his wife in Syrian Arabic.

   

  A photo of Aylan Kurdi’s body in the surf off a popular Turkish holiday resort prompted sympathy and outrage at the perceived inaction of developed nations in helping thousands of refugees using dangerous sea-routes to reach Europe, many of whom have fled Syria’s four-year civil war.

  And more from The Daily Telegraph:

  THE father of the three-year-old boy whose lifeless body washed up on a Turkish beach, rocking the whole world to its core, has been accused of being a people smuggler who captained the fateful voyage.

   

  A woman who lost two of her three children on the vessel made the stunning claims to Network Ten via her cousin, who lives in Sydney, on Friday night.

   

  It was claimed on Friday night that his ­father Abdullah was a people smuggler who captained the dodgy boat for its entire voyage, capsizing in heavy seas and killing at least 12 people.

   

  Iraq-based Zainab Abbas, via her Sydney-based cousin Lara Tahseen, told Ten News she paid $10,000 for the voyage and Aylan’s father was in charge of the boat.

   

  “He was a smuggler, yes, he was the one driving the boat,’’ she said.

   

  She claimed a separate people smuggler to whom they paid the money had told them the captain was taking his own children on the voyage.

   

  “He said ‘don’t worry, the captain of the boat, the driver, is going to bring his two kids and his wife,” she said.

   

  The woman claimed the boat was travelling faster than its capabilities and had too many desperate asylum seekers on board.

   

  The family of five was told there would only be six on the boat but when they got on there were 14.

   

  “He was going crazy, like speed,” she said.

   

  “He was the one driving the boat right from the start. When they set off five minutes in he was looking left and right, worried, then he was speeding. Even his wife was screaming at him to slow down,” she said.

   

  Ms Tahseen said when the family arrived in Istanbul they phoned a number they were told was Mr Kurdi’s but another man answered.

   

  They paid this man the money and he told them when they arrived at the island they were heading for, on which they would move to another boat to go to Greece, to phone him.

   

  He and Mr Kurdi would then split the money, Ms Tahseen claimed. The trip was only supposed to take 15 minutes.

  Now obviously, what happened to Aylan (and to an untold number of other refugees fleeing the Mid-East) is a tragedy and whether or not his father was the man driving the boat and profiting from the refugee crisis or was in fact a victim fleeing war like everyone else doesn’t change that (and in many ways, if the above account is true, Aylan’s fate is actually even more tragic), but what is does change is the narrative being fed to the public.

  It also seems – again, assuming the story outlined above is accurate – that it’s possible Kurdi brought his family on the trip in order to make those paying him for the ride more confident in his ability to get them from Turkey to Greece safely. “If I was a people smuggler, why would I put my family in the same boat as the other people?” Kurdi asked MailOnline. That’s a good question, but one (admittedly macabre) explanation is that it was a kind of people smuggling marketing ploy, something along the lines of this: “you know you can trust me because I have my own family on board.” A less conspiratorial take on that theory would be that he did intend to get his family out of the Mid-East and so he simply overloaded the boat because the collective safety of the passangers was secondary to getting his family out of harm’s way, but even if that’s the case, the exact opposite ended up happening because by putting too many people on the boat, he inadvertently doomed Aylan, and besides, anyway you look at it, he was looking to make $5,000 off of the other passengers’ desperation.

  Coming full circle, the greatest tragedy here is that the entire episode will be used as an excuse to drop still more bombs on Syria and eventually to justify a ground invasion and because the public can’t see past the various smokescreens being employed here, Americans and Europeans will end up tacitly accepting the patently ridiculous idea that the best way to stem the flow of refugees is to bomb the place from which the refugees are fleeing. 

  Of course the entire thing is made even more absurd by the verifiable fact that it was the West which destabilized Syria in the first place meaning Washington along with its European allies are now set to use a massive refugee crisis of their own making to create a still more massive refugee crisis by effectively doubling down on efforts to destabilize the country on the way to ousting Assad. And with that bolded passage in mind, we bring you what is quite possibly the most ironic statement to ever come from the mouth of a sitting US president:

  Obama on Friday: “We are going to be engaging Russia to let them know that you can’t continue to double down on a strategy that’s doomed to failure in Syria.”

  

  

  

  

  

• The 20-Year Stock Bubble – Its Origin In Wholesale Money

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  As doubts surrounding QE have grown, there has been a somewhat detectable if still small trend in central banker repentance. Alan Greenspan to an extent has embraced a more decentralized and market framework in his public comments even though he has yet, to my knowledge, actually repudiate his own work more directly. As noted a few days ago, former BoE governor Mervyn King has been far more open and alarming. While that may seem to indicate that monetarists only find free market “religion” once out of the drudgery of their professional office, I think Zhou Xiaochuan, head of the PBOC, performs the exception.

  The direction the Chinese central bank has taken since late 2013 seems to confirm that idea more and more. Viewed as a repudiation of textbook monetary tactics and even basic justifications, the PBOC has become if not more “market” oriented at least drastically shifting priorities from the conventional, QE definitions of “growth at all costs” to something like managing that past mistake (as the PBOC took orthodox monetarism to new levels of insanity from 2009 through 2012). Last April, really at the outset of what China was about to do, Zhou issued a warning that looks to have been quite appropriate:

  “If the central bank is not a part of the government, it is not efficient in coordinating policies to push forward reforms,” [Zhou] said.

  “Our choice has its own rational reasons behind it. But this choice also has its costs. For example, whether we can efficiently cope with asset bubbles and inflation is questionable.”

  That certainly seems to be a damning repudiation of the monetary illusion. Faith in the QE world is waning everywhere and with very good reason; it just doesn’t work in anything outside of dangerous financial imbalance and asset price inflation. Even Krugman appears to have wavered:

  “I’m still really, really worried,” Krugman said at a conference in Tokyo on Wednesday. A big problem remains building enough momentum in the economy to escape deflation, he said.

  Krugman said he is concerned that Abenomics is getting bogged down as the Bank of Japan fails to spur inflation to a 2 percent target, hampered by falling oil prices. The economy is struggling to rebound after a contraction last quarter, while the central bank’s main gauge of inflation fell to zero for a third time this year in July.

  One former central banker and academic economist (redundant) who is not contrite in the slightest degree is Ben Bernanke. Bernanke has been writing consistently about how he not only believes QE’s work, they did work (to some qualified extend) and further that there aren’t any bubbles – not even a stock bubble. In dealing with the leftward sting of “income inequality”, the former Fed chair wrote on June 1:

  Stock prices have risen rapidly over the past six years or so, but they were also severely depressed during and just after the financial crisis. Arguably, the Fed’s actions have not led to permanent increases in stock prices, but instead have returned them to trend. To illustrate: From the end of the 2001 recession (2001:q4) through the pre-crisis business cycle peak (2007:q4), the S&P500 stock price index grew by about 1.2 percent a quarter. If the index had grown at that same rate from the fourth quarter of 2007 on, it would have averaged about 2123 in the first quarter of this year; its actual value was 2063, a little below that. There are of course many ways to calculate the “normal” level of stock prices, but most would lead to a similar conclusion.

  From this view, the Fed acted quite appropriately with regard to stock prices in order to get them back to their own established trend; therefore no bubble. It isn’t surprising that his math works out, as you can plot his figures on a chart of the S&P 500 and see his reasoning painted forth.

  

  Starting at the end of the dot-com recession sometime in the last quarter of 2001, a 1.2% per quarter trend nicks the top of the market in 2007. Ignoring the implications of panic and crash through March 2009, as he does, filling out the rest of the chart puts the current (before August 24) stock index directly within the path of his trend.

  

  It is a ridiculously weak argument for obvious reasons, not at all unlike his defense of QE in the real economy via the unemployment rate without mentioning the denominator. It isn’t clarified in his post, but it seems equally evident that he picked the end of the dot-com recession as a start date because that is when Greenspan’s Fed brought forth “ultra-low” interest rates (see below). So if you believe that “ultra-low” interest rates are responsible for the current stock bubble, there you go.

  

  Of course there is already something missing from this intentionally narrow review, namely that the dot-com bubble had already occurred; it was that process that seems to have led to “permanent increases in stock prices”, but only intermittently. Thus ultra-low interest rates were not at all its source but rather the FOMC’s belated attempt to minimize the damage from the inevitable. Many people have instead extrapolated interest rates into just the housing bubble (which that was certainly a factor, but clearly not the true bubble source) but without explanation for the dot-coms. Bernanke is trying to be clever here by using that vagueness on the first part to his advantage.

  In fact, the housing bubble did not begin in 2003 when Greenspan got the FOMC down to 1% on the EFF, it had already been under way for nearly a decade by then. His efforts, such that there might have been any effect, was only to partially aid unleashing the true mania (though I would argue that even here the federal funds rate is given an overstated role as I have little doubt the housing bubble was going where it was going no matter what Greenspan did or did not do; the evidence for that is how rising interest rates in 2004 had so very little impact, as dark leverage in especially CDS just exploded at that very moment). Put together, the stock bubble (or repeated stock bubble) dates to around the same time as the housing bubble, which should not in any way be unexpected.

   

  

  

  We don’t even have to search very hard for the commonality of 1995, either. It was at that time, developed throughout the late 1980’s and early 1990’s, the JP Morgan “sold” its RiskMetrics platform widely to Wall Street and London. The torrent of dark leverage and wholesale “banking” that would be unleashed through the mathematical effects on balance sheet leverage, extended and received, was simply obvious. That counted, too, for the global effects upon the eurodollar stage, as the surge of the “dollar” coincided with the end stage of pure economic financialization. Greenspan believed, as did almost everyone else, he was controlling the economy through minute fine-tuning of the federal funds rate, a quarter point here, quarter point there, as if those made any true difference. Instead, the “dollar” was surging everywhere but especially Europe (this is Bernanke/Greenspan’s mysterious “global savings glut”; not “savings” at all but balance sheet expansion across multiple dimensions).

  

  If the eurodollar takeover was instead responsible for the serial asset bubbles of the past two decades, then it would make far more sense to extrapolate stock trends from that point rather than the irrelevant and overstated federal funds monkeying. So where Bernanke’s stock trend aligns the peaks as if that were “fair” and of the real market, the troughs instead just as easily conform traced back to the plainly obvious eurodollar deviation.

  

  In this context, the panic in 2008 makes perfect sense as it was a total failure of the eurodollar/wholesale system which not only reversed in total the prior bubble levels it crushed the global economy with it. The failure of the eurodollar standard to heal or rebuild to its prior upswing (ended on August 9, 2007) was seen more so in the real economy (the 2012 slowdown) but also in the stock market in 2010 and again in 2011; both those outbreaks appeared to revert back to that “dollar baseline.”

  The fact that asset inflation can continue on its own apart from any financial contribution of the wholesale “dollar” is due to partially separate liquidity and funding sources. Liquidity isn’t everything always, but when it is failing it takes over for the dominant marginal direction. In other words, corporate repurchases and retail flows might be sufficient for stock prices to rise and rise rapidly where the “dollar” isn’t as supportive, but those are easily overwhelmed where the “dollar” is acutely retreating (as August 24).

  When we plot Bernanke’s 1.2% per quarter benchmark at a start date of January 1995, that compounding growth works out to a “target” S&P 500 level of 1236.09 for Q3 2015.

  

  Where his 1.2% per quarter within the bubble mechanics calculates to 2123 (as of June) for the S&P 500, applying the same idea to starting outside the serial bubbles is vastly different (-42%).

  I’m not making any claims about whether 1236.09 is “fair value” for the S&P 500, only realizing the true nature of the stock bubble makes a huge difference. He isn’t quite taking the full weight of the Yellen Doctrine here (I define that as her notion that a bubble isn’t really a bubble unless it doesn’t “work” in the real economy) but you can see how he is, by the construction of his trend narrative, thinking in at least that direction. Both are attempts to justify asset inflation by moving the perspective to within the bubble period so as not to have to explain how it all arrived in the first place (inferring from Bernanke’s intent: since the dot-com bubble predates “ultra-low” interest rates it can’t possibly be the Fed’s fault, and therefore the Fed has been successful in simply re-establishing what the “market” did on its own beforehand).

  I think that is true but only in the narrow view that interest rate targeting didn’t actually do much of anything – which was and remains the whole problem. If interest rate targeting didn’t directly cause the asset bubbles, it didn’t restrain them either. This is not a small or trivial reflection, as the whole point of controlling the liquidity rate was to not just “stimulate” but also to restrict where “necessary.” To say that there was no limitation upon the eurodollar advance is an understatement since banks simply wrote their own, to the point that they even manufactured their own currency (collateral) far outside of what these economists considered to be well-aligned financial behavior.

  

   

  The relevant point to consider for stocks is which trend is closer to the “truth” of asset inflation. That is, of course, amplified in 2015 by the revisiting of eurodollar decay in much more strained and openly chaotic fashion. If the “dollar” is again to fail, what might that do to stocks? While that isn’t knowable we do have some methods of gaining insight, for which only certain central bankers will provide useful perspective.

  

  

  

  

  

  

• Bank Caught Using Fake Gold As Reserve Capital In Russia

  Over the past several years, incidents involving fake gold (usually in the form of gold-plated tungsten) have emerged every so often, usually involving Manhattan’s jewerly district, some of Europe’s bigger gold foundries, or the occasional billion dealer. But never was fake gold actually discovered in the form monetary gold, held by a bank as reserve capital and designed to fool bank regulators of a bank’s true financial state. This changed on Friday when Russia’s “Admiralty” Bank, which had its banking license revoked last week by Russia’s central bank, was reportedly using gold-plated metal as part of its “gold reserves.“

  According to Russia’s Banki.ru, as part of a probe in the Admiralty bank, the central bank regulator questioned the existence of the bank’s reported quantity of precious metals held in reserve. Citing a source, Banki.ru notes that as part of its probe, instead of gold, the “regulator found gold-plated metal.”

  

  The Russian website further adds that according to “Admiralty” bank’s financial statements, as of August 1 the bank had declared as part of its highly liquid assets precious metals amounting to 400 million roubles. The last regulatory probe of the bank was concluded in the second half of August, said one of the Banki.ru sources. Another source claims that as part of the probe, the auditor questioned the actual availability of the bank’s precious metals and found gold-painted metal.

  The website notes that shortly before the bank’s license was revoked, the bank had offered its corporate clients to withdraw funds after paying a commission of 30%. This is shortly before Russia’s central bank disabled Admiralty’s electronic payment systems on September 7.

  Admiralty Bank was a relatively small, ranked in 289th place among Russian banks in terms of assets. On August 1 the bank’s total assets were just above 8 billion roubles, while the monthly turnover was in the order of 40-55 billion rubles. The balance of the bank’s assets was poorly diversified: two-thirds of the bank’s assets (4.9 billion rubles) were invested in loans. The rest of the assets, about 30%, were invested in highly liquid assets.

  Or at least highly liquid on paper: according to Banki.ru the key reason for the bank’s license revocation was the central bank’s insistence that the bank had insufficient reserves against possible loan losses.

  The Russian central bank has not yet made an official statement.

  The first question, obviously, is if a small-to-mid level Russian bank was using gold-plated metal to fool the central bank about the quality of its “gold-backed” reserves, how many other Russian banks are engaged in comparable fraud. The second question, and perhaps more relevant, is how many global banks – especially among emerging markets, where gold reserves remain a prevalent form of physical reserve accumulation – are engaging in comparable fraud.

  Finally, what does this mean for gold itself, whose price on one hand is sliding with every passing day (thanks in part to what is now a record 228 ounces of paper claims on every ounce of physical gold as reported before), even as it increasingly appears there is a major global physical shortage. If the Admiralty bank’s fraud is found to be pervasive, what will happen to physical gold demand as more banks are forced to buy the yellow metal in the open market to avoid being shuttered and/or prison time for the executives?

  

  

  

  

  

• Chronicling History's Greatest Financial Bubble

  Submitted by Doug Noland via Credit Bubble Bulletin,

  Let’s this week begin with a cursory glance at the world through the eyes of the bulls. First, the global backdrop provides the Fed convenient cover to delay “liftoff” at next week’s widely anticipated FOMC meeting. Even if they do move, it’s likely “one and done.” While on a downward trajectory, China’s $3.5 TN international reserve hoard is ample to stabilize the renminbi. Chinese officials clearly subscribe to their own commanding version of do “whatever it takes” to control finance and the economy. One way or another, they will sufficiently stabilize growth – for now. The U.S. economy enjoys general isolation from China and EM travails. Investment grade bond issuance – the lifeblood of share buybacks and M&A – has already bounced back robustly. The U.S. currency, economy and securities markets remain the envy of the world. “Money” fleeing faltering EM will continue to support U.S. asset markets along with the real economy.

  September 10 – Financial Times (Netty Idayu Ismail): “The European Central Bank will ensure its policy stance remains as accommodative as needed amid financial-market turbulence, according to Executive Board member Peter Praet. ‘The Governing Council will remain vigilant that recent volatility does not materially affect the broad array of financial conditions and therefore lead to an unwarranted tightening of the monetary-policy stance,’ Praet said… ‘It has emphasized its willingness and ability to act, if warranted, by using all the instruments available within its mandate.’”

  The ECB’s “unwarranted tightening of the monetary-policy stance” comes from the same playbook as Bernanke’s (the Fed’s) “push back against a tightening of financial conditions.” In a world where financial markets dictate general Credit Availability as never before, central bankers have essentially signaled open-ended commitment to liquidity injections as necessary to counteract risk aversion. Such extraordinary market exploitation underpins the fundamental bullish view that global policymakers have things under control.

  On a near-term basis, policymakers retain tools to stabilize markets, though officials at the troubled Periphery are rapidly running short of policy flexibility. September’s “triple-witch” expiration of options and futures is now only a week away. Between the passing of time and the pull back in put premiums (“implied volatility”), bearish hedges and directional bets have lost tremendous value over the past two weeks.

  The apparent stabilization in China has been integral to calmer global markets. Clearly, Chinese officials are in full-fledged crisis management mode. A series of measures and determined official support have stabilized the wobbly Chinese currency. Wednesday from Reuters:

  “Chinese Premier Li Keqiang said… that the recent adjustment in the yuan was ‘very small’ and that there is no basis for continued devaluation in the currency.”

  And Thursday from the Financial Times (Jamil Anderlini):

  “Chinese Premier Li Keqiang… sought to reassure investors over the health of China’s economy… ‘China is not a source of risk but a source of growth for the world,’ Mr Li said in a speech to the World Economic Forum… ‘Despite some moderation in speed, the performance of the Chinese economy is stable and it is moving in a positive direction.’ …In a meeting with global business leaders at the forum, Mr Li dismissed the suggestion that China had been the trigger for instability in global markets in recent months. ‘The fluctuations in global financial markets recently are a continuation of the 2008 global financial crisis… Relevant Chinese authorities took steps to stabilise the market to prevent any spread of risks. Now we can say we have successfully forestalled potential systemic financial risks … what we did is common international practice and is in keeping with China’s national conditions.’”

  “Steps to stabilize the market” have included arresting journalists and other rumor mongers accused by the central government of “destabilizing the market.” There has been a hard crackdown on hedge funds and other “manipulators”. Beijing has imposed a series of onerous measures against currency and securities markets derivatives trading. The Chinese government has also put in place controls to help impede financial outflows. Meanwhile, the state-directed “national team” has spent over $200bn buying stocks. The central bank has cut rates, slashed reserve requirements and injected enormous amounts of liquidity.

  The bullish viewpoint holds that economies dictate market performance. As such, draconian measures from Chinese officials support the perception that Chinese policymakers have regained control over their markets and economy – in the process removing a major potential catalyst for global systemic dislocation. Though appalling, most take quiet comfort that Chinese-style “whatever it takes” works in the best interest of U.S. markets and the economy. The long-term rather long ago lost much of its relevance within the bull camp.

  For me, it boils down to fundamental disagreement with the bulls on how the world actually works.

  For starters, finance is king. Credit and the financial markets drive economic activity – and not vice versa. My bursting global government finance Bubble thesis rests on the premise that global finance has by now suffered irreparable harm. Confidence is being broken and faith is being shattered. A difficult new era has begun, and it will be a long time before confidence returns to EM. De-risking/de-leveraging has taken hold, with contagion gaining momentum. And China can use all the duct tape in the world – including strips to silent the mouths of naysayers – to try to holds its stock market and Credit system together. The damage is done.

  For a while now, global investors and speculators have been willing to ignore China’s shortcomings. In general, a world of over-liquefied markets tends to disregard risk while allowing a sanguine imagination to run absolutely wild. And the more finance that flooded into China and EM the more the optimists reveled in the “developing” world’s pursuit of the fruits of Capitalism. The Chinese talked a good commitment to steady free-market reform. Their aspirations for global financial and economic power seemed to ensure that they would adhere to the rules of Western finance.

  In the past I gave Chinese officials too much Credit. They devoted a lot of resources to the endeavor, and at one time I believed the Chinese had gleaned valuable insight from the study of the Japanese Bubble experience. But Bubbles are both seductive and incredibly powerful, especially at the hands of authoritarian communist regimes. Massive post-2008 stimulus stoked runaway Bubble excess. Later, Chinese markets scoffed at timid little central bank measures meant to tenderly rein in excess. And the longer the Bubble inflated the greater the financial, economic, social and political risks.

  In the end, the major lesson drawn from Japan’s experience was the wrong one. It was much belated, but the Japanese actually moved to pierce their Bubble. Chinese officials not only let their Credit Bubble run, they adopted the Fed’s approach to using the stock market as an expedient for system-wide inflation. That policy blunder was the Chinese Bubble’s proverbial nail in the coffin.

  I’ll assume that after priority number one – stabilizing its currency – the Chinese will implement even more aggressive fiscal and monetary stimulus. EM policymakers notoriously lose flexibility at the hands of faltering currencies and attendant financial outflows (“capital flight”). Contemporary finance also ensures that deflating Bubbles entice bearish hedges and speculations that can so swiftly overwhelm already liquidity-challenged markets. The Chinese were confronting just such a scenario, before abruptly changing the course of policymaking. The adoption of onerous derivative market regulations and other measures are akin to loose capital controls – punishing measures to take pressure off the Chinese currency. After initially seeking benefits associated with greater currency market flexibility, market tumult instead forced the Chinese into a rigid yuan peg to the dollar.

  So long as the peg to the dollar holds, China retains significant control over state-directed finance. It will run big fiscal deficits, print “money” and dictate lending and spending by the huge banks, financial institutions, local governments and industrial conglomerates. But can it at the same time somehow harness all this finance and keep it from fleeing the faltering Bubble? Only through capital controls.

  The Shanghai Composite rallied 6.1% this week. There were some spectacular short-squeezes as well, certainly including the Nikkei’s 7.7% Wednesday surge, “The Biggest Gain Since 2008.” Copper jumped 6.3% this week. U.S. tech and biotech bounced hard. In the currencies, the Australian dollar jumped 2.7%, the South African rand 2.2%, and the euro 1.7%.

  It was not, however, an encouraging week for EM’s troubled economies. Brazil’s real slipped further after last week’s 7% plunge. The Indonesia rupiah declined another 1.1%, and the Malaysian ringgit fell 1.3%. The Turkish lira dropped 1.2%. On the back of weak crude prices, the Goldman Sachs Commodities Index slipped 0.4% this week.

  The crisis is taking a decisive turn for the worse in Brazil. On the back of S&P downgrading Brazilian debt to junk, the country’s CDS surged to multi-year highs. The Brazilian banking and corporate sectors have been in a six-year debt fueled borrowing binge. It’s all coming home to roost.

  September 10 – Bloomberg (Michael J Moore): “Banco Bradesco SA and state-owned Banco do Brasil SA were among 13 financial-services firms in Brazil that had their global scale ratings lowered by Standard & Poor’s after the nation’s credit grade was cut to junk. The two banks were reduced to speculative grade with a negative outlook, S&P said… Itau Unibanco SA and Banco BTG Pactual also were among lenders that faced downgrades.”

   

  September 10 – Bloomberg (Denyse Godoy): “A plunge in Petroleo Brasileiro SA, the world’s most-indebted oil producer, to a 12-year low put the Ibovespa on pace for a second week of losses. The state-controlled company extended a three-day slide to 11% after Standard & Poor’s cut its credit rating to junk, adding to speculation it will struggle to shore up its balance sheet.”

  Many question how an EM crisis could possibly have a significant impact on U.S. markets. Well, for starters, Brazil has big financial institutions. The Brazilian financial sector has issued large amounts of dollar-denominated debt, while borrowing significantly from international banks. Enticing Brazilian yields have been a magnet for “hot money” flows. Now, Brazil faces the terrible prospect of a disorderly run from its currency, its securities market and its banking system. Market dislocation would have global ramifications for investors, derivative counterparties, multinational banks and the leveraged speculating community.

  The degree of market complacency remains alarming. The bullish view holds that Brazil, China and others retain sufficient international reserves to defend against crisis dynamics. But with EM currencies in virtual free-fall and debt market liquidity disappearing, it sure looks and acts like an expanding crisis.

  So far, it’s a different type of crisis – market tumult in the face of global QE, in the face of ultra-low interest rates and the perception of a concerted global central bank liquidity backstop. It’s the kind of crisis that’s so far been able to achieve a decent head of steam without causing much angst. And it’s difficult to interpret this bullishly. If Brazil goes into a tailspin, it will likely pull down Latin American neighbors, along with vulnerable Indonesia, Malaysia, Turkey and others. And then a full-fledged “risk off” de-risking/de-leveraging would have far-reaching ramifications, perhaps even dislocation and a collapse of the currency peg in China. China does have a number of major trading partners in trouble. Hard for me to believe the sophisticated players aren’t planning on slashing risk.

  

  

  

  

  

• Dollar Outlook Ahead of the FOMC Meeting

  There is much data that will be reported in the week ahead.  The US reports consumer prices, retail sales and industrial output figures. The eurozone reports industrial production and the final August CPI.  Germany’s ZEW will be released.  The UK reports consumer prices, the latest labor market readings and retail sales. Japan reports industrial production and trade figures.  

   

  However, the data is pales in comparison to the central bank meetings.  The focus is of course on the Federal Reserve, but the Bank of Japan and the Swiss National Bank also meet.   The general view in the market is that none of the central banks act.   Yet the risks abound.  

   

  The Swiss National Bank is the least likely to surprise.  Without much fanfare, the euro has steadily risen against the Swiss franc, and before the weekend reached its highest level (~CHF1.1050) since the franc’s cap was lifted back in January.  The SNB will say it is ready to act if needed but there is not sense of urgency at the moment.  Moreover, the record paper losses the SNB reported in H1 14 is being pared this quarter.  The Swiss franc has depreciated about 3.5% against the dollar since the end of June and 5.2% against the euro.  

   

  There is only a slightly greater chance that the BOJ moves.  Most who expect additional monetary stimulus see it coming next month rather than now.  With deflationary forces not convincingly defeated, inflation far from the goal, and economic growth patchy, many think the BOJ has to step up its unorthodox monetary easing.    If boosting the monetary base by JPY80 trillion a year is not sufficient, will growing it by JPY90 trillion really do the trick, as member of parliament and an adviser to Abe suggested last week?  

   

  BOJ Governor Kuroda is still sounding relatively upbeat.  He seems to be playing down the official core measure of CPI (which excludes fresh food), and seems to be placing more emphasis on the measure that excludes food and energy.   After spending the last few months on his controversial political agenda, Abe appears to returning to economic issues, and fiscal support for the economy, which could include a supplemental budget as early as next month.  Pending fiscal stimulus also argues against more monetary easing.  

   

  The Federal Reserve is really center stage.  The issues have been debated ad nauseum.  The Fed had seemed to be edging toward a hike next week before the recent Chinese developments, and the jump in capital market volatility.   Indeed the subsequent tightening of financial market conditions, and the slide in the US stock market, has been more associated with easing monetary policy, not tightening it.  

   

  What interests us here is the dollar’s technical condition ahead of the FOMC meeting. Simply stated, that technical condition is soft.  After losing against all the major currencies but the Japanese yen last week, the dollar’s heavy tone looks set to carry over into the week ahead. 

   

  The US Dollar Index retraced 38.2% of the rally from the August 24 low (~92.62) to the September 3 high (~96.62) at the end of last week.  The RSI and MACDs are pointing lower and the five-day moving average is poised to fall below the 20-day average.   A break of 95.00 now warns of a move to 94.60 and possibly 94.15.  

   

  This is similar to the euro, which has the largest weight in the Dollar Index.  The euro actually finished last week above a similar retracement (38.2%) , which came in a little above $1.1325.  The five-day average will likely cross above the 20-day average at the start of the new week.  The next immediate target is $1.1400, and then $1.1475.  A loss of the $1.1220-$1.1250 area signal a loss of the upside momentum.  

   

  The dollar is more clearly in a trading range against the yen.  Of note, the dollar has not closed above its 20-day moving average since August 18.  It is found now near JPY120.95. A move above there needs to overcome the JPY121.30 area to be important.   A minor shelf has been carved near JPY120, but better support may be found near JPY119.60. 

   

  Sterling snapped a nine-day losing streak and rallied 1.7% last week.  It tested the 20-day moving average (~$1.5465).  It too has retraced a little more than 38.2% o the losses from the last August spike (~$1.5420) and the early September low (~$1.5165).  The next objective (50% retracement) is just above $1.5492.  The 50- and 100-day moving averages around found in the $1.5515-$1.5525 range.   Soft inflation and retail sales data next week may be mitigated by an uptick in average weekly earnings and a generally healthy labor market report.  However, if the $1.5340 level goes, sterling may retest its recent lows.  

   

  The Australian dollar was the strongest of the major currencies last week.  It rose about 2.65% against the US dollar, and resurfaced above the monthly trend line that had been convincingly violated (~$0.7030 before slipped a little through $0.6900 at the start of last week).  It closed firmly and the technical indicators are favorable.  The 20-day moving average is near $0.7135, but there is potential toward $0.7170-$0.7200.  

   

  The Canadian dollar is not particularly interesting from a technical point of view.  The US dollar reached a multi-year high in late August (~CAD1.3555) and has moved sideways near is peak over the last couple of weeks.  This has neutralized the technical tools on which we rely.   The two current exogenous drivers are oil prices, which were net-net heavier last week, and the two-year interest rate differential, which saw the US premium narrow a couple basis points last week.  While this does not seem like much, according to Bloomberg it closed at its lowest level since late July (a little the than 24 bp).  Only a break of CAD1.3550 or CAD1.3120 would be noteworthy,  

   

  We would not expect 10-year US Treasuries to move much ahead of the outcome of the FOMC meeting.  Last week’s range of roughly 2.12%-2.25% will likely remain intact, barring a significant data surprise or a sharp increase in stock market volatility.  

   

  The November light sweet crude oil futures contract retraced 50% of its late-August through early-September run-up.  A break of the $44 are could spur another quick dollar drop to the 61.8% retracement that is found just below $43.   The November contract has not closed below its 20-day moving average (~$44.25) since August 27.   On the upside offers will likely come in around $47 the upper end of the recent range.  

   

  The technical condition of the S&P 500 looks encouraging.  The pre-weekend close was on the highs and the MACDs have turned higher.   However, it has failed to close above its 20-day moving average (~1979) since August 18.  Above there, re-establishing a foothold above 1985-2000 would encourage ideas that the correction is complete.   Initial support is seen near 1937.  

  

  

  

  

  

• Why Risk Parity Funds Are Unprepared For A Rate HIke

  Next week, Janet Yellen has a tough decision to make. 

  If the “diminutive” chairwoman dares to raise rates by a “massive” 25bps, she risks tightening into a tightening, so to speak. China’s bungled attempt to find an elusive middle ground between a free floating currency and a centrally managed currency has created a veritable nightmare scenario where market expectations for further devaluation are forcing the PBoC to stabilize the yuan by burning through FX reserves which, all things equal, should be generally expected to tighten global liquidity and put upward pressure on UST yields. Meanwhile, slumping commodity prices held down by a global economy that’s careening headlong into the deflationary doldrums have served to put enormous pressure on commodity currencies and that, combined with depressed Chinese demand and (ironically) long-running speculation about an imminent Fed hike, have emerging markets on the precipice of a meltdown, a decisively undesirable eventuality that will be virtually assured if the Fed hikes. 

  On the other hand, if the Fed doesn’t hike, it loses any last shred of credibility it had, and indeed, to the extent the conundrum described above was in part created by the Fed missing its window to normalize policy, failing to hike next week will only make the situation more acute as emerging markets will be even more confused as to when or even if the Fed will ever actually rip the band-aid off, and that confusion and uncertainty could make the situation worse even if the initial knee-jerk reaction to a hold would be a relief rally. 

  And then there’s the ever-present issue of just what the market will read into the decision. That is, a hold risks conveying the Fed’s concerns about the nascent “recovery” which, as we’ve seen, certainly isn’t up to par from an inflation expectations perspective even if fabricated BLS and BEA data paint a pretty picture from a jobs and output perspective, respectively. 

  So what – and this of course is all anyone will care about next week – is a Fed chair to do, you ask? According to Deutsche Bank, the most likely scenario is a “hawkish hold”, in which Yellen will telegraph the FOMC’s readiness to start the normalization process while admitting (if only tacitly) that circumstances have recently conspired to take September off the table. Here’s more: 

  The most likely alternative is the dirty relent or hawkish hold, whereby the Fed passes in September but October or December remain on the table. One potential signal of a hawkish hold is an announcement that the Fed will hold press conferences at all off-cycle meetings – this would significantly raise risks for an October hike. Additionally, a hawkish hold is less likely to generate dissents than a clean relent because the former leaves October and December as “live” meetings The dirty relent should keep flattening pressure on the curve with risk off dynamics – lower equities and commodities. 

  Then there’s the “clean relent” or, as we would characterize it, the “admission of being screwed” scenario in which Yellen holds, at which point nervous, erratic markets will be forced to determine whether Yellen is i) worried about the economy, which could trigger curve-flattening risk-off behavior or ii) confident in the data but just waiting on inflation expectations to stop doing the exact opposite of what they’re supposed to be doing, in which case everyone cheers more can-kicking and an equity rally ensues:

  The Fed [could adopt] a clean relent or dovish hold, in which the [FOMC] makes an explicit commitment to when they will hike, presumably in 2016, and presumably because of increased focus on inflation ex-shelter and international conditions. Even a clean relent will require careful communication – a clean relent could communicate concerns over the health of the expansion, or it could indicate a Fed that is reasonably confident on the data but is waiting for inflation dynamics to improve. The former would put equities at risk and would likely produce bullish flattening. The latter case is clearly a steepener, and would be bullish for equities. The Fed will be trying to fall somewhere in between such that rates remain stable and equities are stable to higher. A clean relent is likely to produce dissents. Lacker is a likely candidate for a dissent, but if, for example, Lockhart were to dissent as well the implication would be that Yellen and the doves are dominating – and dividing – the committee.

  Of course the Fed could also say to hell with it, throw caution to the wind, hike, and see what happens although, as Deutsche points out, expecting the market to take solace in the fact that any hike would likely be accompanied by a dovish bias is wishful thinking at best:

  Finally the Fed could raise rates. We remain skeptical that the market would quickly digest a “dovish hike”, whereby the FOMC raises rates but changes the dots to illustrate a lower rate trajectory, and would argue the market is more, not less, likely to increase pricing for December given a September hike. This would remove the anchor to short rates and opens scope for a rapid move to 1.25% 2s with the 2s5s curve flattening, equities lower, and short-dated implied volatility much higher and feeding back into cheaper risk. 

  And then there’s China, whose adjustment the Fed could, theoretically try to wait out in an effort to avoid exacerbating the dynamics associated with managing the new currency regime. That, Deustche Bank says, isn’t likely a good idea because as we’ve been at pains to explain since the yuan deval and actually since the petrodollar began to die, this is all just a global linked liquidity regime meaning it’s all inextricably connected:

  We have our doubts that the Fed can “wait out” China and hike once the currency and equity markets stabilize. This is because China’s currency adjustment and equity performance are in part functions of the Fed – a hike would put further upward pressure on the dollar and could cause an intensification of capital flight, additional intervention, and as a result a more rapid reduction in global liquidity.

  So ultimately, the punchline is that in reality, the Fed can really never hike. That is, at this point, hiking will always end up being a “policy error” where “error” means making a move that reverberates exponentially through centrally planned and increasingly interdependent and correlated markets. But while no time is a “good” time to make a mistake, some times are worse than others and as Deutsche Bank concludes, a September hike would be an example of really, really bad timing:

  There might never be a good time to hike, but there are definitely bad times, and this is one. September month-end marks not only quarter end, but the last reference date in determining capital charges for global systemically important banks from wholesale funding exposures. Liquidity is poor and unlikely to improve until the beginning of Q4. Liquidity is an important additional impediment to a hike, particularly because markets settled last week with the implied probability of a September move at just under 30%. We think that the taper tantrum of 2013 is a reasonable point of reference for how financial conditions might tighten given a hawkish surprise – they could get much worse. Our simulations of risk-parity strategies suggest rebalancing away from equities and commodities, due to both increased volatility in these asset classes and elevated correlation between them. The implication is that risk- parity strategies could amplify underperformance of these assets given a shock from the Fed, China, or both.

  Finally, if you read all of the above carefully and came away suspecting that if the Fed does hike, everything might sell off at once, you’d be correct, which brings us to Deutsche Bank’s rather disquieting conclusion, namely that there will be nowhere to hide in a market where everything has become correlated and thanks to the growing role of risk-parity in perpetuating selloffs, that correlation could send funds fleeing to the only thing not moving in the “wrong” direction, namely the dollar and that, in turn, would only serve to exacerbate the deleterious effects of Yellen’s “error”:

  A “policy error” rate hike might well result in positive correlations among equities, commodities and bonds, due to a combination of risk off and higher rates. In this case it is not entirely clear how risk-parity funds would rebalance: A potential candidate for inflows would be currencies, and in particular the dollar, which could be the only game in town. Of course, this would only put additional upward pressure on the dollar, reinforcing the “policy error” nature of the hike via additional traded goods price deflation (including commodities), weakness in net exports, and exacerbating pressure on dollar peggers.

  

  

  

  

  

• Ex-NYSE Chief Admits "It's Not A Fair Market… It's Bad For The Country"

  When a digital dickweed exposes the reality "the equity markets are broken," it can be shrugged off as the rantings of a kid in his mom's basement. When an experienced investigative writer claims "the markets are rigged," it is drowned out with mainstream media propaganda forcing words like liquidity and cost-effective-ness to hide the truth. But when Dick Grasso, the former head of the NYSE says Black Monday's flash-crash exposes the reality that "it's not a fair market," it is going to be hard to regain the collapsed confidence of an investor-class multiple-times-burned by an ever more arrogant group of 'operators' on Wall Street.

   

  Here is what we have been saying for years (and most recently here)…

  If HFTs did anything, it was merely to frontrun the buy orders once the selling wave – halted thanks to limit downs being hit – had exhausted itself, and the buying scramble was unleashed around 9:35am leading to a 5% move in less than 10 minutes! It was here that Virtu made its colossal profits, however not from taking the least amount of risk, but merely from frontrunning order flow into a stil chaotic market with gargantuan bid-ask spreads, which incidentally not only does not provide liquidity, but reduces it as it competes with other buy offers for any market offers, also known as "providers" of liquidity, only to immediately flip the transaction to those buyers which Virtu knew with 100% certainty were just behind it. In any other market this would be illegal, except for one in which Reg NMS has made such frontrunning perfectly legal (courtesy of billions spent by the same HFTs who now benefit from it).

  And, as The Wall Street Journal reports, former NYSE head Dick Grasso agrees…

  Regulation NMS, which stands for national market system and was designed to link all the U.S. markets, was a “sad, sad experiment.”

   

  The regulation, which was passed by the Securities and Exchange Commission in 2005 and implemented in 2007, was designed to ensure investors got the best price available on any public U.S. market. It knitted together all the exchanges and trading venues across the country to create a single, though disparate, market. It required transactions be conducted at the “national best bid or offer,” meaning each venue had to continuously check the prices available at competitors to verify a transaction was compliant. It also meant the NYSE no longer had a monopoly on trading in its own listed stocks, helping spur a host of competitors.

   

  The rules contributed to market hiccups like last month’s swings because they allowed for a major expansion in the number of places where stocks could trade, he said.

   

  “No one anticipated 60 different venues where an IBM or a Microsoft trades,” he said during the television interview.

  Mr. Grasso told the Journal that he recommends a broad-based review of the markets as a first step toward addressing the problems he sees…

  “A fast market is not necessarily a fair market, as evidenced by that Monday open,” he said in a clip of the interview viewed by The Wall Street Journal, referring to the tumultuous early trading on Aug. 24.

   

  The action that day has drawn scrutiny from regulators, exchanges, institutions and everyday investors—and sparked discussions about how to tweak the market to prevent similar problems. There were nearly 1,300 trading halts, most of them in the first part of the day, and some stocks dropped rapidly before recouping losses in a matter of minutes.

   

  “Frankly, some of the things that went on that day need very close scrutiny,” Mr. Grasso said in an interview Friday with the Journal. “A day like that, where Facebook’s shares go from $86 to $72 to $84 in a matter of minutes will cause the public to lose confidence in the markets.”

  We leave it to Mr. Grasso to conclude, rather more honestly and ominously than we are used to for anyone 'in' the club…

  “Creating an advantage to an institutional user or a particular type of trader that disadvantages the retail investor is bad for the country, bad for the markets and bad for your business."

  

  

  

  

  

• Forget The Greek Crisis, Immigration Will Divide Europe Against Itself

  Submitted by Ryan McMaken via The Mises Institute,

  Europe has complex immigration rules. As the EU web site shows, there are multiple layers of immigration regulations encompassing both the local national level and the EU level.

  But, as the recent influx of refugees and economic migrants has shown, the EU government is able to flex its  muscle in an ad hoc fashion in the service of compelling member states to accept the migrants and refugees. The "quota plan" being forwarded by the EU government would divide up migrants and refugees among the EU member states, and, of course, over time, these migrants would qualify for those member states' taxpayer funded public benefits. In Germany, for example, officials "estimate that as many as 460,000 more people could be entitled [next year] to social benefits."

  Big Countries vs. Little Ones 

  The proposal could become a mandate if approved by a "qualified majority" of EU member governments, a type of majority that is weighed in favor of the larger members. Most of those larger members are in favor. If adopted, however, one doesn't need to be exceptionally perceptive to see how mandates apposed on dissenting member states could be a source of significant division among member states, and especially, their populations.

  Writing in the UK independent yesterday, John Lichfield avers:

  North vs south; east vs west; Britain vs the rest; German leadership or German dominance. The refugee crisis is like a diabolical stress test devised to expose simultaneously all the moral and political fault lines of the European Union.

  Germany leads to way in calling for more migrants. While part of it is no doubt Germany's ongoing attempt to rehabilitate itself from its fascist past,  there may be other considerations as well. Claire Groden in Fortune notes:

  Germany has one of the world’s most rapidly aging and shrinking populations. With one of the world’s lowest birthrates, the country relies on immigration to plug a growing workforce hole. According to one expert quoted in Deutsche Welle last year, the German economy needs to attract 1.5 million skilled migrants to stabilize the state pension system as more Germans retire…According to current official estimates, every third German could be over 65 by 2060, leaving two workers to support each retiree.

  Indeed, demographic issues such as these are surely part of the calculus for member states.The German government has likely weighted the benefits of new young workers against the possibility against the cost of those 460,000 new residents. But for other countries less desperate to save an overextended public pension system,  they see mostly costs when it comes to more migrants and refugees.There is a real divide here between Western Europe (especially Germany and Italy) and Eastern Europe (especially Poland and Slovakia) in terms of the percentage of the population that is over 65.

  But the divide between different member states, as described by Lichfield, surely goes well beyond this. There are issues of relative wealth to deal with as well. The Germans are rich compared to the Poles, for example, who have already announced they will take refugees but no economic migrants.

  The British, who have never gone all-in on the EU seek to maintain control over their own immigrant policy.

  But in all these cases, those who are less powerful within the EU are likely to resent taking orders from politicians in Brussels who assert they can direct local policy more effectively than the locals. Yes, the Germans, French, and Italians, who from the largest voting blocs, feel they can reach an agreement that will be good for "everyone." The smaller, less powerful countries — with good reason — aren't so sure. And were each country free to set its own policy, conflict among the member states would be minimized, but problems arise when Germany, which sees benefits (whether intangible or otherwise) can impose obligations on other member states.

  Local vs. Supranational

  This isn't to say that national/local policy will always be superior to EU policy. However, there is also no reason to assume national/local policy will be worse.
   
  From a laissez-faire perspective, there are good practical reasons to guess that locally based policy will most reflect local realities. Yes, ideally, only private owners will have say over how property is used. That is, refugees and migrants would only have places to go if private owners, including churches and civic organizations, provided a place for them to live and work. This is what the "blue card" option is designed to maximize.

  The private-sector situation is complicated by the presence of a state, but government policy tends to become most untenable the farther it gets from the the most localized level possible. An immigration policy decided at the municipal level, for example, is more likely to reflect the local needs and economic realities of the population. As we move upward, however, policy becomes ever more un-moored from the local economic, geographic, and demographic realities. Once you've reached the supra-national level of an organization like the EU, you're now dealing almost solely in the abstract and dealing with only a tiny number of representatives standing in for an immense population that will be affected by policy decisions. In other words, you've massively centralized and aggregated the knowledge necessary to assess the situation. Thus, good assessments become unlikely.

  As I (and many others) have noted before, countries with waiting migrants should try the "blue card" experiment.  Make the border open to anyone who agrees to never be eligible for social benefits. If he (or she) agrees, he may forever work or live anywhere the private sector will accept him. Then we'll see how long the line remains.  Of course, I won't be holding my breath until the EU endorses that one. Rather than turn to the private sector, the EU will simply insist on racheting up centralized control and top-down regulation of the workforce and population.

  In this situation, then, some member states may decide they are being bullied by Germany and other large states, which have not considered the true reality on the ground in the member states are are subject to the whims of policymakers in Brussels.  And the perception will arise that costs (in the form of new migrants) are being imposed on other member states. Economists will argue over the true tangible or intangible cost or benefit of new migrants, but what will be important here will be the perception of powerlessness among the smaller member states and their populations.

  The locals then become likely to push back. As Lichfield notes:

  And yet this crisis seems more profound, more acute, more tangled, more poisonous, than any that has gone before. It is not about currencies or net contributions or farm subsidies but about the core issues of common humanity and solidarity that the EU claims to epitomise…

  As it struggles with its greatest ever humanitarian test, the EU is in danger of being wrenched apart. Outright break-up is improbable. More likely there will be an acrimonious acceleration of the existing trend towards scission into a “core” and “periphery” – with Britain and Eastern Europe left in an outer or second division.

  Ultimately, the imposed "solutions" to the migrant and refugee crisis may be a signal to many members that the EU isn't quite what they thought it was.

  

  

  

  

  

• Shale Oil's "Dirty Little Secret" Has Been Exposed

  On Friday, on the way to diving into Goldman’s $20 crude call, we recapped our characterization of low crude prices as a battle between the Fed and the Saudis, a battle which is now manifesting itself in budget troubles in Riyadh and a concurrent FX reserve burn. Here’s what we said:

  When Saudi Arabia killed the petrodollar late last year in a bid to bankrupt the US shale space and secure a bit of leverage over the Russians, the kingdom may or may not have fully understood the power of ZIRP and the implications that power had for struggling US producers. Thanks to the fact that ultra accommodative Fed policy has left capital markets wide open, the US shale space has managed to stay in business far longer than would otherwise have been possible in the face of slumping crude. That’s bad news for the Saudis who, after burning through tens of billions in FX reserves to help plug a yawning budget gap, have now resorted to tapping the very same accommodative debt markets that are keeping their competition in business as a fiscal deficit on the order of 20% of GDP looms large.

  Still, as we went on to point out, it looks like the Saudis have dug in for the long haul here and the strain on non-OPEC production is starting to show as the IEA now says “the latest tumble in the price of oil is expected to cut non-OPEC supply in 2016 by nearly 0.5 million barrels per day (mb/d) – the biggest decline in more than two decades, as lower output in the United States, Russia and North Sea is expected to drop overall non-OPEC production to 57.7 mb/d.” 

  “US light tight oil, the driver of US growth, is forecast to shrink by 0.4 mb/d next year,” the agency adds.

  Still, the Saudis know that the war is still far from won, which again is why the kingdom is now borrowing to supplement the use of their petrodollar reserves. But as we’ve documented in great detail, the Saudis face a unique set of challenges when it comes to managing fiscal spending. The cost of maintaining the average Saudi’s lifestyle as well as the cost of financing one (and soon two) proxy wars translates to a tremendous amount of budget pressure. Add in defending the riyal peg and you have yourself a problem. So even as the Saudis have ample room to borrow (debt-to-GDP is negligible at present), Riyadh would rather US production fold sooner rather than later and with the next round of revolver raids coming up in October, and with the bond market set to cast a wary eye towards HY going forward, the kingdom just might get its wish. Citi has more on shale’s “dirty little secret”:

  Easy access to capital was the essential “fuel” of the shale revolution. But too much capital led to too much oil production, and prices crashed. The growth of North American shale a critical underlying factor in the oil market “regime change” from a $100/bbl world until 2014 to a sub-$50/bbl world today (see Oil and Trouble Ahead in 2015 ). Saudi Arabia’s shift to defending market share rather than price decisively confirmed this new reality. Above $100/bbl, returns to shale investment are so attractive that the kingdom realized it could not sustain its historical strategy of propping up prices or shale would simply erode its market share. As a result, the oil markets returned to competitive economics not seen for decades. And the economics of shale in particular are now set to be a decisive factor in balancing global oil markets and setting global prices.

   

  The shale sector is now being financially stress-tested, exposing shale’s dirty secret: many shale producers depend on capital market injections to fund ongoing activity because they have thus far greatly outspent cash flow. In the aggregate North American crude producers do not generate positive free cash flow (Figure 1), although some stronger producers do.

   

  Capex has consistently exceeded cash flow, causing some prominent critics to argue the business model of shale production is fundamentally unsustainable.

   

  

   

  Capital markets plugged shale’s “funding gap” from 2009 through the first half of 2015, but they are now tightening, reducing access to liquidity for some producers and shaping their ability to drill. With eight bankruptcies already announced this year, weaker producers may live or die by the whims of capital providers. The sector is by no means homogenous, but those producers with poor asset quality, high leverage, little hedging protection, and/or dwindling free cash flow look most exposed.

   

  

   

  If OPEC traditionally set the marginal supply and served as a coordinated price setting mechanism, capital markets are becoming a new balancing mechanism: a set of highly dynamic, diffuse investment decisions that shape shale production and a large portion of the global marginal supply. Shale oil financing and production is different from what the oil market had become accustomed to over the past few decades. In particular, shale 1) is produced by many smaller, innovative producers who depend on capital markets for financing; 2) is a faster drilling process with smaller, more discrete investment decisions that respond more quickly to market conditions. These factors accelerate the classic commodity cycle of high prices leading to over-investment, which crashes prices, then leading to underinvestment, which raises prices, starting the cycle again. 

   

  

  So what’s the endgame, you ask? According to Citi, “two things become clear in an analysis of the financial health of US hydrocarbon production: 1) the sector is not at all homogenous, exhibiting a range of financial health; 2) some of the sector indeed looks exposed to distress [and] lifelines for distressed producers could include public equity markets, asset sales, private equity, or consolidation. If all else fails, Chapter 11 may be necessary.” 

  Got it. So essentially, with HY all but closed, banks re-evaluating credit lines, and the cost of funding set to rise, there are essentially only three options: liquidation of assets, tap the dumbest of the dumb money by selling more shares, or else throw in the towel. 

  Of course there’s another possibility: oil prices rise sharply. And while everyone seems to think that’s highly unlikely, the irony of ironies here is that if Saudi Arabia continues to beat the war drums in Yemen and Syria, Riyadh could end up being shale’s savior.

  

  

  

  

  

• Two Clear Signs That the Political/ Financial Elite Know Another Crisis is Coming

  The Powers That Be know another Crisis is coming.

   

  Behind the veneer of “all is well” being promoted by both world Governments and the Mainstream Media, the political and financial elite have begun implementing moves to prepare for the next Crisis.

   

  One of the clearest is the decision to accept physical Gold bullion as collateral for “paper trades.”

   

  The vast majority of “wealth” in the financial system is digital in nature. Because of this, when the next Crisis hits, there will be a scramble for actual “money” because the fact of the matter is a lot of the derivatives and other digital forms of currency are in fact worthless.

   

  Consider that the large clearing houses (ICE, CEM and LCH which oversee the trading of the $700+ trillion derivatives market) ALL began accepting Gold as collateral back in 2012.

   

  From 28 August 2012 unallocated Gold (Loco London) will be accepted by LCH.Clearnet Limited (LCH.Clearnet) as collateral for margin cover purposes.

   

  This addition to acceptable margin collateral will be subject to the following criteria;

   

  Available for members clearing OTC precious metals forwards (LCH EnClear Precious Metals division) or precious metals contracts on the Hong Kong Mercantile Exchange. Acceptable to cover margin requirements for all markets cleared on both House and ‘Segregated’ omnibus Client accounts.

   

    Source: LCH Clearnet.

   

  CME Clearing Europe will accept physical gold as collateral, extending the list of assets it’s prepared to receive as regulators globally push more derivatives trading through clearing houses.

   

  CME Group Inc. (CME)’s European clearing house, based in London, appointed Deutsche Bank AG (DBK), HSBC Holdings Plc and JPMorgan Chase & Co. as gold depositaries. There will be a 15 percent charge on the market value of gold deposits and a limit of $200 million or 20 percent of the overall initial margin requirement per clearing member based on whichever is lower, Andrew Lamb, chief executive officer of CME Clearing Europe, said today.

   

  “We started with a narrow range of government securities and are now extending that,” Lamb said in an interview today. “We recognize there will be a massive demand for collateral as a result of the clearing mandate. This is part of our attempt to maintain the risk management standard and to offer greater flexibility to clearing members and end clients.”

   

  Source: Bloomberg.

   

  China just joined this strategy last week:

   

  China's Shanghai Gold Exchange said it will allow physical gold to be used as collateral on futures contracts from Sept. 29, according to a statement posted on its website on Thursday.

   

  Physical gold will be permitted to be used for up to 80 percent of margin value, according to the statement. (Reporting by Meng Meng and Aizhu Chen; Editing by Subhranshu Sahu)

   

              Source: Reuters

   

  These are clear signals that the large financial firms are aware that most derivtiuves (futures, options etc) will be worthless during the next Crisis.

   

  Another sign that the Powers That Be know something nasty is approaching comes from recent legislation being implemented to make it much harder to move money into physical cash.

   

  If you find difficulty in taking my word for this, consider the recent regulations implemented by SEC to stop withdrawals from happening should another crisis occur.

   

  The regulation is called Rules Provide Structural and Operational Reform to Address Run Risks in Money Market Funds. It sounds relatively innocuous until you get to the below quote:

   

  Redemption Gates – Under the rules, if a money market fund’s level of weekly liquid assets falls below 30 percent, a money market fund’s board could in its discretion temporarily suspend redemptions (gate).  To impose a gate, the board of directors would find that imposing a gate is in the money market fund’s best interests.  A money market fund that imposes a gate would be required to lift that gate within 10 business days, although the board of directors could determine to lift the gate earlier.  Money market funds would not be able to impose a gate for more than 10 business days in any 90-day period…

   

  Also see…

   

  Government Money Market Funds – Government money market funds would not be subject to the new fees and gates provisions.  However, under the proposed rules, these funds could voluntarily opt into them, if previously disclosed to investors.

   

  Source: Sec.gov

   

  In simple terms, if the system is ever under duress again, Money market funds can lock in capital (meaning you can’t get your money out) for up to 10 days. If the financial system was healthy and stable, there is no reason the regulators would be implementing this kind of reform.

   

  This is just the start of a much larger strategy of declaring War on Cash.

   

  Indeed, we've uncovered a secret document outlining how the Fed plans to incinerate savings to force investors away from cash and into riskier assets.

   

  We detail this paper and outline three investment strategies you can implement

  right now to protect your capital from the Fed's sinister plan in our Special Report

  Survive the Fed's War on Cash.

   

  We are making 100 copies available for FREE the general public.

   

  To lock in one of the few remaining copies…

  Click Here Now!!!

   

  Best Regards

  Phoenix Capital Research

   

   

   

   

   

   

  

  

  

  

Digest powered by RSS Digest