- Going Back To What Works: Gold Is Money Again (Thanks To Utah)
As of today you really can pay your taxes, your credit cards, your mortgage, shop at Costco, and buy your groceries without so much as a bank account while using sound money.
As PopularLiberty.com explains,
The fact that Texas announced that it withdrawing its gold from Manhattan and is creating a state gold depository generated a good deal of interest because there would also be a way to transfer gold to others via said depository. So much interest that Texas received calls from all over the United States from folks that wanted to be part of such a system. The articles covering the future Texas depository cumulatively received millions of views. What was missed in all of this coverage is that a functional, and legal depository that allows anyone in the country to pay and save in gold dollars already exists. In Utah.
The United Precious Metals Association in Utah has gold and now separate silver accounts that act as checking accounts do at any bank or credit union. The way it works is that members deposit Federal Reserve Notes (or paper dollars) into their UPMA account which in turn translates them into golden dollars (or silver). The golden dollars are based off the $50 one ounce gold coins produced by the Treasury of The United States. They are legal tender under the law and are protected as such. So if I were to deposit $1,200 FRNs then I would have $50 golden dollars.
UPMA is the only institution in the country that I know of that doesn't have a buy/sell spread on their Golden Eagles or Silver Eagles. This means that all my $1,200 FRNs once converted to gold could be spent the next day without losing anything to any sort of premium. The price of a Gold Eagle is 5.8% above spot but when you 'cash out' you do so at 5.8% above gold spot. This effectively removes that barrier from sound money.
This year the UPMA released a gold backed debit card via American Express. The way it works is that a member may spend up to half of their gold or silver dollars in any given month period using the card. When I interviewed the founder of UPMA today, Larry Hilton, I learned that the way the card works is that they have made a contract with American Express so that UPMA members can use what are technically credit cards as a debit card anywhere American Express is accepted. The members are added on as 'employees'. Right now there are already hundreds of people around the country using this method of payment. They are literally spending gold on groceries without losing anything to premiums or in transaction fees to UPMA. In fact they get 1% cash back in gold.
This service is available to anyone in the United States and requires no credit check whatsoever. Using the billpay service online one can pay for what American Express can't such as credit card bills, property taxes, or your mortgage. The golden dollars are simply converted right back into FRNs and paid out. When asked Mr. Hilton affirmed that there are many people that don't store anything in the banks anymore thanks to this service. They are obsolete if you want to use sound money. There are no fees associated with the use of the card. Members that store more than $50 in golden dollars do pay a small storage/membership fee of 10 golden cents or $2.50 FRNs and an additional 0.25 FRNs for every additional $50. These $50 Golden Eagles can also be withdrawn and sent to you directly.
The United Precious Metals Association has the full backing of Utah Attorney General Sean Reyes who also uses the service. The legal foundation was set up in 2010 and 2012 here in Utah where the vault is located. Many members of the board including General Counsel Larry Hilton are lawyers that specialize in law regarding the use of legal tender.
An elected board of members makes regular audits to assure that all of the gold and silver is there and reports to the general membership every year at the monetary summit. This year it will be held on October 17 in Salt Lake City. The vault is insured from theft and fraud via the Llyods of London. They hold a 100% reserve ratio.
And as UPMA summarizes, this is nothing new and it is not different this time...In fact we are going back to what works…
All very unmodern? The gold standard is not up-to-date only if we have a yen for running away from economic success in the form of stable prices and major growth. After Nixon went off gold in 1971, abrogating the conversion agreement with the foreign nations, and keeping gold-holding illegal in the United States, inflation did things that were unheard of. The price level leapt by 200% from the late 1960s to the early 1980s, a period also bedeviled by the economic sluggishness known as “stagflation,” where double-dip recessions came every few years and the long term growth rate sunk below 2%. In the 1980s and 1990s, the Fed returned to conducting monetary policy in view of the gold price, and sure enough the consumer price index stabilized at one-third the stagflation level and growth rebounded past 3.5% per year. The verification just kept on coming: key on gold stability – effectively making the dollar convertible on demand to gold at a fixed price – and watch prices stay the same and growth shoot the moon.
In the 2000s, we are witness to a Fed that has disdained the gold price now for a decade. The result has been the loss of that decade to economic growth, as well as stirrings in key commodities such as oil and food, if not the brutal comprehensive arrival of inflation. If the Fed decided today to target the price of gold as the pole star in its monetary operations, there is no historically conversant reason to believe that we would have unfold before us anything but yet another era of price stability and maximal economic growth. For this is the only thing that has ever resulted from gold standards and their approximations throughout our history.
The arc of time has revealed connections that we have the opportunity to re-forge today. The United States became the largest economy in the world in the 1870s, was two-and-a-half times larger than the second-place nation in 1913, boomed along with everyone else in the Bretton Woods era, and in the 1980s and 1990s did not succumb to the “Eurosclerosis” or any “Japan disease” that afflicted its major economic partners. In every episode of fantastic economic performance – in terms of both price stability and major growth – there was a commitment to gold.
Choice in currency is being recognized as a basic human right around the world. Utah was the first State to make gold and silver coins legal tender alongside the U.S. dollar on March 25th, 2011.
- Summing It All Up (In 1 Sad Cartoon)
“It is true that income inequality has kind of gotten worse, but you can take the compensation of every CEO in America and make it zero and it wouldn’t put a dent into it. What really matters is growth. It’s not right to say we’re worse off … If you go back 20 years ago, cars were worse, the air was worse. People didn’t have iPhones.”
– Jamie Dimon
Main Street "doing God's work" for Wall Street…
- Guest Post: Safe Assets In A World Gone Mad
Submitted by Ton Chatham via Project Chesapeake,
Gold and silver are good assets to hold to insure the preservation of EXCESS wealth but there are other assets that are even more valuable longterm. Those things that can be used to produce a product are the elements that can be used to leverage your time, resources and talents to produce wealth. The ability to produce excess is the basis of the need for wealth preservation.
Physical goods in the form of equipment that can be used to create or produce goods needed by society are the basis of prosperity and wealth in the world. Gold and silver only become necessary when society begins to produce more products than the producer can use. This excess production is then traded for those things that can preserve the value of this excess production until it is needed by individuals.
Machines to build or repair such as saws and hammers, sewing machines, metal fabricating machines such as lathes and mills and machines to convert raw materials to value added products such as steel to I beams or pots and pans, wheat to flour or pasta, lumber to finished furniture and cotton to cloth are the assets that define how prosperous you are as a nation. A nation derives its wealth from having a product to sell. That will never change. It is true for nations as well as for individuals.
Individuals need to have the ability to produce something in excess of their needs to advance to the need to store that excess. This requires tools and equipment in most cases. You do not necessarily need to process your own resources to generate this excess. A miller can provide the equipment to grind grain for the community taking part of the production for his time and effort. This gives rise to the service economy where individual specialization is traded for other services and resources rendered. In most cases this service will require specialized equipment not possessed by the general population. This specialized equipment is an asset more valuable than gold and silver in many cases.
The goods need to exist before gold and silver can be traded for them and gold and silver need to exist to preserve this excess production for future use. Storing some of your excess production today in equipment that you can use to start a cottage industry will insure gold and silver will have useful value in the future. You cannot have one without the other.
When a person uses their wealth in such a way that allows them to employ several others, it will not only increase their wealth but insure prosperity for others. The ability to earn payment in return for their time and energy allows these employees to utilize these funds to provide income for the butcher, baker and woodsman. This is the basis for the economy small or large. The economy is what ultimately determines the value of any asset.
The ability of individuals to insure a functioning economy will determine the wealth and standard of living of everyone. A safe asset is one that contributes something to the ability of the economy to function properly. Without that, wealth is determined by what each individual can produce themselves for themselves insuring wealth will be limited for many and unequal as ability will determine what that wealth will be. Restricted access to resources and goods eventually leads to war. In war, no asset is completely safe.
When it comes to the next generation, the options are going to be very limited. If parents expect to pass on any of their hard earned wealth it must be done in a way that prevents government from devaluing or stealing it outright. The use of gold, silver, diamonds and some types of land will likely be the best options. If the government cannot find it or get their hands on it, it will make keeping it that much easier. Given the current situation even guns, ammo and reloading equipment might be seen as a good asset to hold for future use. Along these lines, tools and specialized equipment that can be used to produce some type of income will also be an advantage for youngsters that would otherwise have difficulty finding employment in the future. The greatest thing you could do for your children is to develop some type of business that can be handed down to them to give them the chance to make it in the future where government intervention has destroyed the economy and future job prospects.
Add to this a few small cottages that can be rented out for a modest price and maybe even a small industrial plant to process fibers such as cotton, wool or flax. Mini mills are now available that makes this a possibility today. A small store on site that can sell locally produced items such as soap, candles, food, clothing or medicinal herbs will all add to income opportunities to insure a decent standard of living. The number of products that can be locally made and sold are numerous and allows for many such farms in an area without fear of duplication.
To get by in the future people are going to have to learn to be creative once again in order to take care of themselves and their families. The west line has moved meaning Americans will be forced to live in a smaller economy with a lower standard of living than in the past. If you do not adjust to that now you will be forced to later under much more difficult circumstances. The assets you preserve during the coming years will determine how well you will live and how well your children will live. Nothing is guaranteed at this point so the future is entirely on you.
- Global Stocks, EM FX Extend Losses Despite China Saying "No Collapse Is Nigh"
US equity futures have retraced the late-day ramp from Friday with Dow down around 65pts. Asia is opening weaker (NKY -900 from Thursday highs) with EM FX appearing not to get the "but we didn't hike" message from The Fed with MYR the worst hit for now (after a few days of strength). EM outflows accelerated according to Morgan Stanley, down 6% AUM in 12 weeks. PBOC devalued the Yuan fix by 0.11% (the most in 2 weeks). While Fed uncertainty and fears about China have caused global derisking, PBOC chief Fan says "the economy is stable," and China's Beige Book suggests 'everything is awesome', as the survey summarizes, "perceptions of China may be more thoroughly divorced from facts on the ground than at any time in our nearly five years of surveying the economy." If that's the case, then why is Janet in panic mode?
Dow futures have retraced Friday's late-day ramp…
And Nikkei 225 is down 900 points from Thursday's peak BoJ manipulation highs…
EM FX continues to weaken..
- *MALAYSIA RINGGIT EXTENDS DROP, NOW DOWN 0.8% TO 4.2397/DOLLAR
- Baht declines 0.2% to 35.710 per dollar, set to snap two-day rally
EM equity fund outflows of $2.2b for week ended Sept. 16 mainly driven by Asia funds ($1.8b), compares with avg $6.5b outflow in last 4 weeks, Morgan Stanley analysts Jonathan Garner and Pankaj Mataney write in Sept. 18 note.
- Cumulative 12-week outflow reaches US$40.2b, or 5.6% of assets under management
- Taiwan, India, Korea had largest inflows
- Philippines had biggest weekly outflow since Oct. 2013
New Zealand Consumer Confidence tumbled to 3 year lows…
* * *
With China open, the propaganda ramps up.. It appears it is time for some central banker credibility to be lost…
China’s economy isn’t as weak as it may look, according to a private survey that says it’s a myth that the nation’s slowdown is intensifying.
“No collapse is nigh” in the aftermath of the stock market plunge and currency devaluation, according to the third-quarter China Beige Book, published by New York-based CBB International and modeled on the survey compiled by the Federal Reserve on the U.S. economy. Capital expenditure rebounded slightly in the period and the services sector showed strength, the report said.
“Perceptions of China may be more thoroughly divorced from facts on the ground than at any time in our nearly five years of surveying the economy,” CBB President Leland Miller wrote in the report.
And then The PBOC put everyone straight…
- *PBOC DEPUTY GOVERNOR SAYS CHINA ECONOMY IS STABLE: NEWS
Chinese central bank Deputy Governor Fan Yifei said the country’s economic structure continues to improve and trade surplus remains, providing solid foundation for stable yuan and financial market, Financial News reports, citing Fan’s comments at a forum Sept. 19.
- Fan called for strengthening currency swaps with Asean countries and pushing forward currency trade with these countries, including direct trading
So why did Janet blink then?
Margin debt declined…
- *SHANGHAI MARGIN DEBT BALANCE FALLS FIRST TIME IN THREE DAYS
And Chinese stocks open lower…
- *FTSE CHINA A50 INDEX FUTURES FALL 0.7% IN SINGAPORE
- *CHINA'S CSI 300 STOCK-INDEX FUTURES FALL 1% TO 3,107.4
- *SHANGHAI COMPOSITE INDEX FALLS 1.1% AT OPEN
- *HANG SENG CHINA ENTERPRISES INDEX FALLS 2.06%
The PBOC weakened the fix by the most in 2 weeks
- *CHINA SETS YUAN REFERENCE RATE AT 6.3676 AGAINST U.S. DOLLAR
- *CHINA WEAKENS ONSHORE YUAN FIXING BY 0.11% TO 6.3676/USD
Finally, on a sidenote, China Mobile reported its additional subscriber base grew at the slowest in 2015…
- *CHINA MOBILE ADDS 1.37MLN CUSTOMERS IN AUG.
But but but Tim Cook told Cramer everything was awesome?
Charts: Bloomberg
- Middle-East Migration – The Problem/Opportunity Dilemma
Pictures of migrant-exiles from the Middle East, not just Syrians but Iraqis and Afghanis as well, are currently being transmitted by CNN, Aljazeera English and other news giants to homes all over the world in customary repetition which most of us would agree exceeds the canons of proper news reporting.
Fodder news portraying human pain and misery are being presented to viewing masses, too often depicting unwarranted blame and/or lack of humanity from/by Europeans who are trying to cope with an inherited humanitarian crisis not entirely of their making. Rich sister Germany is somehow expected to offer leadership, and problem-solving direction, in managing this new crisis for Europe. Greece, Serbia, Hungary and Austria are becoming transit stations for this migrant humanity in the yellow-brick which extends from Turkey to the promised Oz: Germany.
Amid this crisis-in-progress, Viktor Orban’s racially-charged comments announcing a lack of desire by Hungary to increase its foreign-born population acquires the same timbre and tone as those of America’s presidential candidate, Donald Trump. But aren’t these self-exiles supposedly “political” migrants, not the economic migrants entering the US overwhelmingly from Mexico and elsewhere in Latin America? These migrant waves are branded, inaccurately perhaps, with the same umbrella term… whether their odyssey is motivated by economic, social or political reasons. And, truth be said, the economic reason does weigh heavily or you wouldn’t have Germany and the United States as the two major preferred destination points.
There is ample reason to believe that this recent flood of migrants is economically, not politically-rooted. Recent rumors in refugee camps heralded the strong probability that much of Europe was contemplating more restrictive policies for admittance. Thus the onrush to reach the promised land of opportunity: Germany; with any other EU nation as a second, third, or nth choice.
As for who or what is at fault for this current situation, pointing to Bashar al-Assad and his autocratic regime may seem as the politically correct answer to most Americans, and thus justify US’ role in the world as a “benign and orderly empire.” Except that this empire the US inherited from the Brits, and have transformed to its capitalist image and likeness, has proven to be neither benign nor orderly when it comes to Middle East matters as we evaluate historical American foreign policy towards each of the nations, or entities, in the region; but principally Palestine, Iraq, Syria and Iran during the past seven decades.
This long period of turmoil throughout the Middle East dates back to US’ ascendancy to the Anglo-American throne being vacated by post-Edwardian Britain in favor of its crown-princess daughter: young and prosperous America. Thus the UK surrendered its leading meddling role to the US in a region extending from the environs of Palestine to Persian lands and the northern Arabian Sea. But let’s back up to the “migrant issue”… whether resulting from political meddling, social, religious, or economic reasons.
Pope Francis is calling to the world’s attention this close to home crisis, asking for every parish to adopt a refugee family. Maybe we shouldn’t question Francis’ charitable and humane intentions of caring for those who are suffering, those who are reaching for help with a supplicant hand. The Vatican, however, as a trustworthy postulant to peace and social justice in the world, needs to voice not just a current remedy to the problem, a band-aid of sorts. It must, if to be credible, also point to blame so that likelihood of repetition is at least lessened; however, the Church has often found compelling reasons to remain silent, thus accommodating her survival.
Today’s migrant problem, if labeled as a problem, is of a secular nature, and it should be tackled in economic, secular ways. Angela Merkel appears to be an enlightened leader when she tries to calm the German citizenry in gladly receiving the current human avalanche from the Middle East. Being at the tail end of the world’s birthrate statistics (842 annual births per 100,000 population), Germany must be rejuvenated from without to cope with upcoming economic requirements (pensions, etc.). One could hardly find a better source for this rejuvenation than vibrant, educated Middle Easterners… from Syria (2,276 annual births per 100,000 population) or Iraq, with a similar birthrate, 2,695 per 100,000 – a more congruous and assimilable choice than trying to accommodate migrants from Sub-Saharan Africa.
Perhaps both Donald Trump and Viktor Orban should take notice. Hungary, with a low birthrate of 926 per 100,000 could harmoniously absorb a few thousands Muslims; and so could Italy, with a birthrate of 884 per 100,000. As for the United States, its rate of 1,342 per 100,000 is achieved in great part to the “propensity to have children” of a large, undocumented Hispanic population from Mexico and Central America.
A problem can turn into an opportunity if tackled with a clear mind and a kind heart; seldom can it be solved with fear; and never, ever with hate.
- Martin Armstrong Warns "Hell Is About To Break Loose"
Submitted by Martin Armstrong via ArmstrongEconomics.com,
Yellen has inherited a complete nightmare.
Thursday’s decision to delay yet again the long-awaited liftoff from zero interest rates is illustrating that the world economy is totally screwed.
There is a lot of speculation about why the Fed seems so reluctant to “normalize monetary policy”. There are of course the typical domestic issues that there is low inflation, weak wage gains in the face of strong job growth, a hike will increase the Federal deficit and then there is the argument that corporations that now have $12.5 trillion in debt. All that is nice, but with corporate debt, our clients are locking in long-term at these levels, not funding anything short-term. Those clients who have listened are preparing for what is to come unlike government which has been forced to shorten the average duration of their debts blind to what happens when rates rise, which will be set in motion by the markets – not Yellen.
The Fed is really caught between a rock and a very dark place. Yes, they have the IMF and the world pleading with them not to raise rates for it will hurt other debtors who borrowed excessively using dollars to save money.The Fed is also caught between domestic policy objectives that dictate they MUST raise rates of they will bankrupt countless pension funds and international where emerging markets will go into default because commodities have collapsed and they have no way of paying off this debt that has risen to about 50% of the US national debt.By avoiding the normalization of interest rates (hikes), the Fed has encouraged government to spend far more than they realize because money is cheap. This will eventually light the fire under the economy helping to fuel the Sovereign Debt Crisis. There appears to be no hope for the Fed and they will be forced to raise rates only when they see asset inflation in equities. Then they will have no choice.This is the worst possible mess and the longer they have waited to normalize interest rates, the worst the total crisis is becoming for they will have zero control over the economy and once that is seen, holy Hell will break loose.
- How The World Spends
Have you ever wondered how much money Russians spend on alcohol and tobacco compared to the rest of the world? Or how much households in Saudi Arabia allocate to recreation?
Today’s data visualization from The Economist shows how much people in households around the world allocate to different expenses such as food, housing, recreation, transportation, and education.
The first thing to note is that this looks at private spending only, and does not include any public spending that could be allocated to each household. As a result, in places like Canada or the EU, spending on healthcare is much smaller than in comparison to the United States, where households spend 20.9% of their money.
Here’s a few interesting stats:
In Russia, where housing is subsidized, people spend way less on housing, fuel, and utilities with only 10.3% of money allocated. At the same time, they are the biggest relative spenders on food, alcohol and tobacco, and clothing.Developed countries are more or less the opposite of Russia in this regard. In places like the United States, Canada, Japan, or the EU, about 20-25% of money is spend on housing, fuel, and utilities. Meanwhile, consumption of food, alcohol and tobacco, and clothing are on the lower ends of the spectrum. In fact, its actually the United States that spends the smallest portion on food altogether, at only 6.8%.Contrast that to India, where GDP per capita is by far the lowest at only US$1498.87. With little disposable income, Indians spend a much higher proportion of money on necessities such as food (about 30%), while using much less income on things like recreation (1.5%) or restaurants and hotels (2.6%).
- Game Over
When the Fed embarked on its mission to rescue the economy in 2009 it did so on the following premise: Save the banks by re-inflating the housing and stock markets via easy money and, as a result, companies would hire and the eventual scarcity of labor would produce wage growth with the end result that the resulting inflation would permit for a tightening cycle to normalize rates.
The problem: After 7 years and trillions of dollars in debt and balance sheet expansion there is no inflation nor is there any wage growth. And the reason for this is a structural one that central banks have been refusing to acknowledge and admit: The massive underlying shift in technology that is radically changing the global labor market. Not for the better, but for the worse.
And this shift has enormous implications for investors, the economy, society at large and the stock market. And these implications have the potential to signal Game Over for this bull market.
Before we get into this let’s briefly address the recent history in the stock market:
For years investing was easy. You just threw money at a market that never stopped going up. And when it occasionally fell, it was because the Federal Reserve had just ended a QE program. But not to worry, the next one was just around the corner. And sure enough every Federal Reserve press release or press conference produced an orgasmic buying feast every time the word “accommodative” was mentioned. Easy money, we have your back, the Bernanke put. You know the gig. Then we had the taper tantrum when Ben Bernanke merely mentioned the possibility of QE ending. Oh, but not to worry, we will stay at ZIRP. Free money for a long time to come and don’t worry we will let you know way in advance when we will raise rates. And even better: QE will be everywhere. In Japan, in Europe. And if things were to get really bad (i.e. the Ebola scare) we will bring QE4 back (Bullard, October 2014). But not to worry any issues are just transitory. Inflation is just around the corner don’t you know?
And for years the narrative worked. Markets went on to make ever new highs, even in 2015 after QE3 ended, spurred on by an unprecedented move of global QE and dozens of interest rate cuts. The ECB launched QE and the DAX even got to over 12K, the Nasdaq went over 5,000 and new highs and the news media and bloggers were giddily writing articles how it was different this time. But there was something odd about these new highs. Most stocks were not participating, in fact, most stocks started correcting while markets made new highs despite this negative divergence. It was a rally of the few, the big cap stocks, while the majority was left behind and we could see it in the charts:
But then something happened. Something symbolic at first. A young woman threw glitter at Mario Draghi in April and the DAX lost 12K and never saw it again. Then there was anxiety about Greece. The math didn’t work, but as we expected they found a way to kick the can. Then China numbers didn’t add up and its growth story began to implode.
In July we outlined the Big Bad Bear Case and pointed toward this structurally weakening $NYSE price chart:
Since then the August flash crash has reconnected price with the moving averages highlighted in the chart:
Price discovery took place in the course of only a couple of days and was stopped by circuit breakers during that flash crash day in August.
From a trading perspective it was a good time to pursue a “buy weakness” strategy as we had been outlining ( i.e. Navigating the next rally), but the next move was in Janet Yellen’s hands. Would she exude confidence and give markets certainty by raising rates finally or would she blink again and extend the uncertainty that markets had been struggling with.
We made our continued “buy weakness” stance very much contingent on this outcome. In “Biding Time Remix” we outlined:
If Janet Yellen doesn’t raise rates and chickens out it’s the same nonsense all over again as it indicates weakness and a worried Fed. So ironically not raising rates may be bearish.
We know the answer now and we promptly flipped bearish into the ramp toward 2020 $SPX as we discussed in Technical Charts on September 17.
So why didn’t the Fed raise rates and why has the reaction been so bearish this time around?
To start with the Fed propagated complete uncertainty again and markets don’t like uncertainty. The “when will they hike game” immediately restarted with predicable results:
Well done Janet, well done. pic.twitter.com/1ef9oLtxAo
— Northy (@NorthmanTrader) September 18, 2015
But this is the side show. The real issue, in my mind, is a global recognition that the next downturn may have already begun which brings us to the real meat of the issue here and one that the Fed is very well aware of, and indeed is reacting to: The destruction of middle class jobs.
In this context note that the most important news flashes this past week or so did not come from Janet Yellen, but rather came in the form of large scale mass layoff announcements:
HP -30,000, Deutsche Bank – 23,000, Johnson Controls -3,000, Qualcomm -1,300
My take is that these large layoffs are just the beginning. And in this new economy of little to no wage earnings power by employees coupled with ongoing technological advancements these trends will continue to erode the structural economic base as all these high wage workers will not be absorbed into other high paying jobs.
Read closely what HP’s CEO Meg Whitman stated justifying the layoffs:
It’s remarkable what’s happening to our services business. As new technologies come in, we’ve got to restructure that labor force to low-cost locations, to much more automation than we have today.
It’s all right there. Low cost and automation. Throw out people. So they save $2.7 billion a year and immediately spend another $1 billion on buybacks and of course won’t stop there:
Jim Cramer had an on point segment on this issue this week. He gets it and also understands that this is the primary reason the Fed did not raise rates. Money quote: “Hiring lower numbers of lower wage workers to do the remaining jobs that are not wiped out by automation”:
What an insult to these employees who now have to figure out how to make a living elsewhere. No, jobs are being destroyed globally through automation and fewer people are needed. The trend has been in place for years and is only accelerating:
35% of jobs to be taken by robots
So fewer people needed due to technological innovation. But it gets worse. While fewer people are needed rapid population growth is increasing the supply equation: Recent projections have been upped again and the latest stats have to make one wonder how there will be enough infrastructure, resources and jobs to sustain the ever increasing masses of people:
It’s no coincidence that global headlines are dominated these days by immigration and mass migration toward American and Europe. More and more people looking for better jobs and lives and wealthy societies looking for ways on how to deal with the influx of people.
This is the structural firewall all the central banks have been and continue to be up against and it’s rapidly coming to a head. For years and decades central bankers have sought to manage any bad news. Recessions, crashes, wars, economic cycles, etc. In the process of attempting to ward off any bad news they also created or helped foment one bubble after another. The tech bubble, the housing bubble and now the debt bubble.
The reality is all these bubbles and subsequent economic disasters have been managed by one primary tool: Long term reduction in interest rates:
But what has it produced with the Fed all in?
Here’s the brutal reality:
Bullish? I don’t think so, and this is before the next downturn has officially begun and with central banks all in.
So with this backdrop the Fed claims it wants to raise rates. Good luck.
Which brings me to the here and now. What I continue to see is a binary set-up. In order to avoid a massive bear market bulls need new highs. Full stop. That $COMPQ chart in my double top tweet the other day makes this perfectly clear:
The biggest double top ever? $COMPQ pic.twitter.com/YEg8XkCPqU
— Northy (@NorthmanTrader) September 16, 2015
The plainly observable fact remains that stock markets have not been able to sustain new highs without central bank intervention:
In lieu of any evidence to suggest that markets can make new highs on their own, one has to surmise that the Fed will, at some point, have to bring back QE. The trigger? Lower stock market prices. And this what it’s all about at the end of the day. In Europe an expansion of QE is already on the table:
- ECB’S COEURE SAYS GLOBAL GROWTH PROSPECTS HAVE DARKENED, HAVE WORSENED MARKEDLY IN EMERGING MARKET ECONOMIES
- ECB’S COEURE SAYS ECB CAN ADAPT QE ASSET PURCHASE PROGRAMME IF DOWNWARD RISKS TO INFLATION ENTRENCH
And in the UK there’s now talk of a rate CUT amidst signs of a signs that the third phase of global financial crisis is looming:
In a wide-ranging speech that called on central bankers to think more radically to fend off the next downturn – including the notion of abolishing cash – Haldane warned the UK was not ready for higher borrowing costs.
“In my view, the balance of risks to UK growth, and to UK inflation at the two-year horizon, is skewed squarely and significantly to the downside,” he said. “Against that backdrop, the case for raising UK rates in the current environment is, for me, some way from being made.”
Given the range of risks facing the economy, there is every chance the next rate move could be a cut instead of an increase.
“Were the downside risks I have discussed to materialise, there could be a need to loosen rather than tighten the monetary reins as a next step to support UK growth and return inflation to target”.
So central bankers know what’s up and so does Janet Yellen and hence they are staying all in and are ready to do more.
And hence the rest of 2015 and into 2016 is very much a binary battle for control with very different potential outcomes.
Technically markets are facing massive potential heads and shoulders patterns and broken trend lines with bearish price implications on confirmation on the one hand:
Yet on the other hand central banks are eager to right it all yet again by the time positive seasonality takes over by the end of the year paving the way for a 1998 like save and push to new all time highs:
In principle the stage is now set for a retest of lows and potential break of price into October. Remember the Fed is not data dependent as it claims, it is market dependent. And, for now, the market has sent a clear message with its price rejection at the monthly 5EMA this week:
The message: The game is over. The trend has changed. And the Fed knows it. The question is: What will it do about it? Roll-over or fight? But will it matter much if it fights? Janet Yellen clearly lost the crowd this week as “accommodative” was met with a resounding SELL as confidence has been shaken. Her job is now to win back confidence. Whether she can or not is now largely determined how the binary set-up we face here plays out. Bottom line: Bulls need a 1998 like repeat to save this year.
How did the Fed manage the big correction in the Fall of 1998: It cut rates of course:
Well, good luck with that this year.
- Dear America…
Presented with no comment..
h/t @noalpha_allbeta
- If You Live In These States You'll Soon Need A Passport For Domestic Flights
Submitted by John Vibes via TheAntiMedia.org,
To comply with the 2005 Real ID Act, which the U.S. government has been slowly implementing for the past decade, citizens in a number of different U.S. states will now be forced to obtain a passport if they want to board an airplane – even for domestic flights.
The Department of Homeland Security and representatives with the U.S. Customs and Border Protection have declined to comment on why certain states have been singled out, but starting in 2016, residents of New York, Wisconsin, Louisiana, Minnesota, New Hampshire, and American Samoa will need a passport to fly domestically. All other states will still be able to use their state-issued driver’s licenses and IDs — for now, at least.
According to the Department of Homeland Security’s guidelines on enforcement of the Real ID Act,
“The Department of Homeland Security (DHS) announced on December 20, 2013 a phased enforcement plan for the REAL ID Act (the Act), as passed by Congress, that will implement the Act in a measured, fair, and responsible way.
Secure driver’s licenses and identification documents are a vital component of our national security framework. The REAL ID Act, passed by Congress in 2005, enacted the 9/11 Commission’s recommendation that the Federal Government ‘set standards for the issuance of sources of identification, such as driver’s licenses.’ The Act established minimum security standards for license issuance and production and prohibits Federal agencies from accepting for certain purposes driver’s licenses and identification cards from states not meeting the Act’s minimum standards. The purposes covered by the Act are: accessing Federal facilities, entering nuclear power plants, and, no sooner than 2016, boarding federally regulated commercial aircraft.
States and other jurisdictions have made significant progress in enhancing the security of their licenses over the last number of years. As a result, approximately 70-80% of all U.S. drivers hold licenses from jurisdictions: (1) determined to meet the Act’s standards; or (2) that have received extensions. Individuals holding driver’s licenses or identification cards from these jurisdiction may continue to use them as before.
Individuals holding licenses from noncompliant jurisdictions will need to follow alternative access control procedures for purposes covered by the Act. As described below, enforcement for boarding aircraft will occur no sooner than 2016.”
According to the fine print, not all 50 states have driver’s licences that meet the Real ID requirements, which could possibly explain why the aforementioned regions will not qualify in 2016. However, there is no specific mention of what the requirements actually are.
The Real ID act has been controversial since its initial proposal over ten years ago and is seen by many as a massive violation of privacy. One of the primary reasons it has taken the government so long to roll this program out is that the program is wildly unpopular and creates heavy backlash every time it appears in the news.
The tightening of the Real ID restrictions are seemingly intended to push people towards attaining the newly issued “enhanced ID,” which adds more unnecessary paperwork and bureaucracy to the already tedious process involved in identification applications.
- For Hedge Funds, The Real Pain Is Only Just Starting
In the aftermath of the August hedge fund slaughter in which the most widely held by “smart money” stocks got pummeled leading to the marquee hedge fund names reporting their worst month in years, and leading others – such as us – to once again mock the concept of “hedging” (only a handful of funds actually were hedged against “black Monday” such as Mark Spitznagel, who had a billion dollar payday on August 24 and who has since warned that if investors thought August was scary “They Ain’t Seen Nothin’ Yet“), the consensus opinion was that the pain for the hedge fund “Hotel California” is over, and that the worst of the pain is behind us.
Once again consensus is dead wrong.
Presenting Exhibit A: Goldman’s latest YTD performance breakdown by strategy basket.
It reveals is that far from suffering even the most modest correction, the “Hedge Fund Hotel” strategy (aka the most concentrated holdings), is massively outperforming not only the broader market, but has returned double the second most profitable strategy – investing in companies with high revenue growth.
Exhibit B: for all the talk that names with high hedge fund concentration have been crushed, the reality is far different as the “smartest money” realizes that once the selling of the “hotel” names begins, it is every billionaire for himself.
Intuitively this makes sense: being some of the most ration market participants, the hedge funds who are among the holders of the most widely held stocks, realize that a strategy of selling the most concentrated names, will promptly waterfall into an all out liquidation of the benchmark market names (such as the FANGs and Apples) that have kept the S&P from a bear market YTD, even as the average stock is now approaching at 20% correction. As such nobody wants to “defect” from a game theoretical equilibrium in which nobody wants to be the first to sell, as nobody knows how profound the resulting tumble would be.
However, now that the Fed crushed its own confidence by not hiking by even a meager 25 bps, unless the Fed or other central banks step in and buy more E-Minis in the coming days to prop up both the market but general confidence (recall that the best paid hedge funder of the past few years, David “Balls to the Wall” Tepper himself is no longer bullish on stocks, instead predicting a 16x P/E multiple may be generous) the same hedge funds which have diligently kept the secret of the “hedge fund hotel prisoner’s dilemma”, will just as quickly remember that he who sells first sells best.
In fact, the tipping point of the next bear market will come precisely when the best performing strategy of 2015, buying companies just because other hedge funds bought them, stops working at which point the market will suffer far more dramatic losses than what was observed during the Black Monday week of August, when “only” risk parity strategies got forcibly margined out.
Source: Goldman Sachs US Weekly Kickstart
- "Dude, You're Getting A Degree"
Because it’s fair…
Source: Townhall.com
“I think College is good, therefore the state should subsidize it.” – People who want to help.
Why there’s a student loan bubble and how it will end.
- "What Does The Fed Know That We Don't" – Bridgewater's Ray Dalio Answers
In the aftermath of last week’s FOMC “dovish hold” disappointment, it is not only the Fed that has seen its credibility crushed; so have plain-vanilla tenured economists and Wall Street strategists. Recall that it was on August 13, one month before last week’s FOMC meeting, when 82% of economists said the Fed would hike in September.
Oops.
Post-mortem: more than four out of five economisseds were, as always, wrong. Hardly surprising: after all, when voodoo art pretends to be science, this is precisely the outcome one gets.
But while there is no surprise in everyone being wrong (because quite simply nobody realized that the only thing is what Goldman wants), one question remains: “what does the Fed know that we don’t.”
Of course, one has to clarify what “we” means, because Zero Hedge readers know precisely what the Fed knows – it knows that a recession is coming if not already here, as we won’t tire of showing week after week.
Here are some examples of what the Fed (if less than 20% of economists) “knows“:
1) Business Inventories-to-Sales are at recesssion-inducing levels…
1a) Sidenote 1 – Wholesale Inventories relative to sales have NEVER been higher
1b) Sidenote 2 – here is why that is a problem
2) Industrial Production is rolling over into recession territory
2a) Sidenote – as Empire Fed confirmed this morning for August – inventories are collapsing (and along with that Q3 GDP)
3) Retail Sales is not supportive of anything but a looming recession…
And finally,
4) The last 6 times Auto Assemblies collapsed at this rate, the US was in recession…
* * *
But for those who are unable to form an independent though and would rather ignore reality unwinding before their eyes, instead demanding an “authoritative” voice to crush their cognitive bias, here is Ray Dalio, head of the world’s biggest hedge fund Bridgewater, who explains what the recent 4% drop of his All Weather risk-parity fund means.
This is what he said: “different risk parity managers structure their portfolios somewhat differently to achieve balance, so we can’t comment on them all. But we can show you how this wealth effect has worked by showing you how our diversified portfolio mix (which simply represents a well-diversified portfolio of assets) would have led economic growth, which is shown in the below two charts, one of which goes back to 1950 and the other which goes back to 1915. These charts show how the excess returns (the returns of the portfolio over the return of the cash interest rate) led economic growth relative to potential (i.e., estimated economic capacity)… If a well-diversified mix of assets underperforms cash, there will be a negative wealth effect and negative incentives to invest in economic activity, which will be bad for the economy. The Federal Reserve and other central banks would be well-served to pay attention to this relationship to make sure that this doesn’t happen for long and/or happen too severely. The chart speaks for itself.
The chart in question:
And just in case it “does not speak for itself“, here is Ice Farm Capital’s Michael Green explaining what is says: “The recent weak performance of All Weather would suggest global growth six months from now will be running nearly 2% below its already reduced potential.“
In other words, while the rest of the levered-beta 2 and 20 chasers formerly known as “hedge funds” recently accused risk parity of blowing up their August returns (September is not shaping up much better) the biggest risk-parity fund in the world also found a scapegoat: the global economy, which according to Dalio, is the reason for All Weather’s dramatic August slump.
But while blaming the amorphous economy is a rather weak argument, Dalio already has a far more tangible scapegoat ready: the Fed itself, who as the Bridgewater letter cautions “would be well-served to pay attention” to the hedge fund’s sudden P&L drop. Because as Dalio goes, so goes the economy.
For now, however, the message is far simpler: absent far more easing, what the charts above signal is that the US economy is about to slam head-on into an economic recession… or rather depression, one which some would add, is only inevitable due to some 40 years of Fed easing starting with Greenspan’s great moderation, and continuing through three sequential credit-fuelled bubbles which merely delayed the inevitable “mean reversion” moment
- The Fed's A "Joke," Saxobank CIO Prefers Gold Amid Increased Uncertainty
“A joke” and “far from impressive”, both descriptions give you a sense of the frustration being felt by Saxo Bank’s Chief Economist Steen Jakobsen who analyses the decision not to raise rates in this brief clip. The Fed “missed opportunity to raise rates for first time since 2006” according to Steen who has been consistently arguing against what he calls the Fed’s “pretend-and-extend” culture. Volatility and uncertainty will remain high and there’s now little chance of a rate rise this year suggests Steen (expecting a big rally in gold), given that EM economies and China are unlikely to emerge from the doldrums in the near-term.
The last minute gets dark…
“…as always with The Fed is clearly shying away from taking any hard decisions, from actually taking any accountability ort responsibility for resetting the clock on this extremely easy monetary policy… they are just as likely to cut as to hike.”
- FBI Opens Investigation Into Malaysian PM's Goldman-Financed Slush Fund
On Friday, Malaysian authorities arrested Khairuddin Abu Hassan. According to WSJ, the charges were “attempting to undermine democracy.”
What Khairuddin – a former member of Malaysia’s ruling party – was actually “attempting” to do, was travel to New York and urge US authorities to investigate 1MDB, the infamous Goldman-backed development bank turned slush fund that’s become the subject of intense scrutiny after allegations that some $700 million was diverted to Prime Minister Najib Razak’s personal account surfaced earlier this year. Those allegations, along with the perception that Najib’s government has sought to stimy attempts to investigate the bank, have led to calls for the premier’s ouster and were the catalyst for street protests that swept through Kuala Lumpur last month.
For those who need a refresher on the backstory, here’s how we explained it last month:
1MDB was set up by Najib six years ago and has been the subject of intense scrutiny for borrowing $11 billion to fund questionable acquisitions. $6.5 billion of that debt came from three bond deals underwritten by Goldman, whose Southeast Asia chairman Tim Leissner is married to hip hop mogul Russell Simmons’ ex-wife Kimora Lee who, in turn, is good friends with Najib’s controversial wife Rosmah Manso.
You really cannot make this stuff up.
What Goldman did, apparently, is arrange for three private placements, one for $3 billion and two for $1.75 billion each back in 2013 and 2012, respectively. Goldman bought the bonds for its own book at 90 cents on the dollar with plans to sell them later at a profit (more here from FT). Somewhere in all of this, $700 million allegedly landed in Najib’s bank account and the going theory is that 1MDB is simply a slush fund.
The plot only thickens from there, and as we detailed in “Abu Dhabi Can’t Find $1.4 Billion It Supposedly Received From Malaysia PM’s Slush Fund,” when UAE went looking for a $1.4 billion payment Abu Dhabi’s International Petroleum Investment Co. supposedly received in exchange for guaranteeing some $3.5 billion in 1MDB bonds, the money was nowhere to be found, casting considerable doubt on IPIC’s manager who was fired earlier this year. Incidentally, IPIC was also involved in a rather nefarious looking deal in which one of its subsidiaries guaranteed $2.3 billion in 1MDB mystery money that may or may not be parked in the Cayman Islands in order to secure a sign-off from Deloitte after KPMG was dismissed as 1MDB’s auditor for asking too many questions.
Since then, another $993 million has turned up missing at IPIC and it’s certainly starting to look like the rabbit hole goes pretty deep on this one. Ultimately, the future of Najib’s political career will likely depend on how it all shakes out.
Unfortunately for the Prime Minister, it looks as though arresting Khairuddin Abu Hassan on his way to New York was too little too late because now, WSJ is reporting that the FBI has opened an investigation into the development fund. Here’s more:
The FBI has opened an investigation into allegations of money-laundering related to a Malaysian state investment fund, a person familiar with the matter said.
The scope of the investigation wasn’t known. It is the latest in a series of international investigations related to the fund that have been revealed in the past several weeks.
The international investigations center on entities related to 1Malaysia Development Bhd., which was set up by Prime Minister Najib Razak in 2009 to help drive the economy. The fund is having difficulty repaying more than $11 billion of debt and is at the center of investigations that are destabilizing the government.
Late Friday, a former member of Malaysia’s ruling party who had raised questions about money transfers to the Malaysian prime minister was arrested on charges of attempting to undermine democracy, his lawyer Matthias Chang said.
The arrest of Khairuddin Abu Hassan, who remained in custody on Saturday, prevented him from traveling to New York where he planned to urge U.S. authorities to investigate the transfers, Mr. Chang said.
A spokeswoman for the FBI’s New York office said that no agent in the office had arranged to speak with Mr. Khairuddin or had any previous contact with him.
Two of the transfers were made through the Singapore branch of a Swiss private bank and routed via Wells Fargo & Co. Wells Fargo declined to comment.
We’ll close with our assessment from earlier this month as it’s still the best way to sum up the situation as it stands today: The more information the public gets about corruption at 1MDB, the louder will be the calls for Najib’s head (figuratively speaking we hope), and the larger will be the street protests. Throw in the fact that the loudest calls for Najib’s exit come from former Prime Minister Mahathir Mohamad and it seems like a very good bet that the political (not to mention social) upheaval in Malaysia is just getting started and that is precisely what the country does not need as it desperately tries to hang on to its stash of hard fought FX reserves in the face of a plunging currency and looming financial crisis.
- This Is What Needs To Happen For Oil Prices To Stabilize
Submitted by Dan Doyle via OilPrice.com,
On September 10th the EIA reported a production decline in the Lower 48 – essentially shale production – of 208,000 BOPD. That is a staggeringly enormous number, approximately 10 percent of the estimated global over-supply. Additionally, it was a week-over-week number which makes it all the more impressive. Yet it received little attention through the week. Rather, Goldman Sachs was grabbing all the headlines with its $20 call on oil.
This week, I was looking for a possible correction in that number with a zero decline or possibly even a gain (remember, the EIA numbers are estimates). But instead we got another decline of 35,000 BOPD.
Back in June I wrote about the coming decline. Shale oil wells lose a lot of production up front, maybe 70 percent in the first year before tapering off at a 5 to 10 percent annual decline over the next few years until leveling off for the life of the well – maybe 20 years or so out. You can think of it as a slope. Once you crest it, the drop is precipitous and picks up speed before finding a bottom. We are undoubtedly now racing down that slope.
To date, we have lost about 500,000 BOPD in the Lower 48. We will lose that again before the year is out. Pundits will claim otherwise, suggesting that oil in the 50’s or 60‘s will spur activity. But if that activity is in drilling, we won’t see any effect for a half a year or so. If it is in fracking drilled but uncompleted wells (“DUC’s”), that won’t mean much either over time. DUC’s have been the story of 2015 though they have had little effect on stopping the declines being put in.
Back when the onslaught began, which I mark as Thanksgiving Day 2014—when OPEC declined to cut—Wall Street began talking of shale as being a switch; as in you can turn it on and off. Well, in the perspective of a remote offshore project and the 10 years that it takes to bear fruit, then the answer is yes. But shale is not a switch when it comes to controlling commodity prices, which are much more impatient. It took a full 6 to 7 months for the falling rig count to cast a shadow over production declines. And even then the initial declines were shallow, more of a cresting action really. So, going forward, we may have a new metric. That is, a sudden decline in rigs will take 6 to 9 months to show up in production in any meaningful way.
We also still have a somewhat uneducated media that continues to shrug off its homework. We’re about a year into this bear market and oil has been covered to death on the financial news but it is still being misreported. As I mentioned above, the thought that $60 causes a switch to be thrown is wrong.
Operators are battered and bruised. Sensible ones like EOG are holding onto their money. Others like Pioneer are thumping their chests claiming they can drill anywhere any time on their better prospects (but what company is going to claim holding mediocre acreage?). Full disclosure: I own stock in both, but should I stumble upon a few bucks (I run a frack company so these days I’m not counting on it) it would go to EOG.
But, for the most part, very few operators are going to run headlong into a drilling program on a modest recovery. There is also the matter of their banks. They won’t let them. The shine is officially off shale in the debt markets. There are the private equity folks and other bottom feeders that are finding their way into the market but for the most part they are spending money on distressed assets, not new oil and gas wells.
Then there are the service companies. If you imagine your worst enemy, someone that you wanted to see suffer some punishment, then let them run a service company right now.
When the work stops so does the income. All of it. That puts you in the position of watching receivables, which you begin staring at very, very closely, waiting for the cracks to develop. Back in the good old days—2012 or so—a single stage on a shale job was being priced at $125,000 or more. The money being made was giddy. In 2014, that same stage was running around $75,000+ because of heightened competition. As of September 2015, that same stage is now down into the $30,000’s. That’s underwater. Smaller pressure pumper’s are quietly accusing the goliaths of dumping. Wall Street pundits would have you believe that there are new efficiencies being uncovered, but the fact is that those who can are jostling for (a) market share and (b) are using their weight to crush and snuff out the newbies that have come on in recent years with all that private equity money.
When prices come back and operators are chomping at the bit to get back to work, idled service equipment will have to be brought back on-line, which is costly and time consuming. You can’t just turn a key to restart a mothballed blender or frac pump. Idled time always translates into repairs. This is when all the weak points in your equipment are suddenly and unexpectedly exposed. New crews will have to be hired and retrained because the old crews have either moved onto other industries under mass layoffs or will move on once their 6 months of unemployment benefits run out. It is time consuming to hire and re-train. And these are only some of the challenges, the biggest being the cost of ramping up without cash flow to rely on.
Consolidations in service providers are now well underway. We’ve seen Halliburton and Baker Hughes but that was pre-downturn. There’s a few other M&A deals but for the most part it has been a story of closings and consolidations. North American frack camps are being closed at an alarming rate. Equipment that could only be bought new last year is now plentiful at Richie Brother’s auctions. Frack sand trailers are parked in front yards and lots all across American’s oil and gas plays. Service yards that are normally empty in good times are stuffed right up to the chain link fence with trucks, trailers, pickups and assorted equipment.
So much has been made of new efficiencies in the media but there really aren’t any “new” efficiencies other than changes in frack designs, which continue to call for more sand per stage, closer spacing’s between stages (meaning more fracks per well), and some changes in additive chemistry. Sand pricing has come way down as have chemicals, but labor remains where it was. You still need the same number of crew on a well site. No one has come up with robotics to set trucks and hammer in the iron and hoses that connect them. Health insurance is going up. Vehicle, inland marine and general liability insurance are range-bound to up. Taxes don’t go away and then there’s debt. And that’s plentiful and likely increasing. There are some economies these days but the efficiency story should be ignored for the most part.
That’s just the United States. Then there’s the rest of the world. Truthfully, I don’t know what the hell is going on in the Saudi oilfields, but I’m assuming Ed Morse at Citibank does. Morse was the analyst who called the top. A few weeks ago he stated that Saudi production could go no higher. That was big and in my mind it likely also marked the bottom. The Saudis chose not to cut last November, restated their 30mm BOPD OPEC objective, then began pumping like hell. They did announce that a 200,000 BOPD increase would be coming and maybe it has, but if they can go no higher, then global production has plateaued. Factor in the States, and other areas in decline, and I can’t see many traders and speculators lining up on the short side when the IEA is seeing oil demand going above 96 MBPD next year and the EIA is throwing out staggering week-over-week declines.
But I’ve been wrong on this count before. I didn’t see the second leg down this summer and Goldman did. But this $20 bearish position is over-baked. It’s also too reliant on inventory numbers.
Inventories will remain high in some parts of the world and will be drawn down in others. But overall, rising global demand and shrinking U.S. production (and other areas as well) will begin to eat away at inventory. It just requires some patience. And markets won’t wait to adjust pricing until we hit a balance. There will be some foreshadowing in oil prices here.
Each of the 3 stages needed to move to a sustainable price have to be given time to play out. The rig count story has been told with a brutally fast 60 percent drop. Meaningful production declines are on. Next will be inventory draw downs; in that order. As to the latter, we’re just beginning to see the effects of the rig count. Cushing was down 2 million bbls this week, so no tank topping there. And non-strategic U.S. storage is off 30 million bbls from its high. That’s not even 10 percent but just wait. Large drawdowns will be here sooner than predicted.
- Carson Says "No Muslim Should Be In Charge Of America" As Fiorina Surges Into Second Place
Going into last Wednesday’s second GOP primary debate hosted by CNN at the Reagan Library, all eyes were again on frontrunner Donald Trump, but this time around, he was forced to share the spotlight with former Hewlett-Packard chief Carly Fiorina, whose polished responses and straightforward demeanor during the second tier debate last month won her a spot on the main stage this time around.
Perhaps sensing that Fiorina was set to go from also-ran to contender, Trump let the following slip in the presence of Rolling Stone’s Paul Solotaroff: “Look at that face! Would anyone vote for that? Can you imagine that, the face of our next president. I mean, she’s a woman, and I’m not s’posedta say bad things, but really, folks, come on. Are we serious?”
Well, say what you will about Fiorina but if there’s anything she is it’s serious, and when asked point blank about Trump’s comment at the debate, she turned The Teflon Don’s own attack on Jeb Bush against him:
Sadly (in terms of what this says about the state of American politics), that was just about the only notable thing to come out of what ultimately turned out to be a painful, hours-long circus but as you might have surmised from the post-debate punditry parroting, Fiorina managed to steal the show and now, according to the latest CNN/ORC poll released on Sunday, she’s rocketed from 3% all the way into second place as Trump slides hard, polling at 24% from 32% (via Reuters):
Billionaire Donald Trump remains in first place in the race to win the Republican presidential nomination for 2016, but his support has fallen to 24 percent from 32 percent previously, a CNN/ORC poll released on Sunday shows.
Former Hewlett-Packard chief executive Carly Fiorina, considered to have performed well in a CNN-sponsored debate of Republican candidates on Wednesday, shot up to second place with 15 percent from only 3 percent in early September, the poll showed.
The poll was conducted among 1,006 Americans from Sept. 17 to 19, and had a margin of error of plus or minus 3 percentage points.
As for the man who used to be in second place, neurosurgeon Ben Carson, well, he spoke to NBC’s “Meet the Press” on Sunday and offered his take on Muslims in American politics. We present Carson’s comments with no further comment.
Via WSJ:
The question was in the context of Donald Trump on Thursday not correcting a New Hampshire town hall questioner who asserted President Barack Obama is Muslim and proposed “getting rid” of purported Muslim “training camps” in the U.S.
“It depends on what that faith is,” replied Mr. Carson, a retired neurosurgeon who is a practicing Seventh-Day Adventist. “If it’s inconsistent with the values and principles of America, then of course it should matter. But if it fits within the realm of America and consistent with the Constitution, no problem.”
Mr. Todd asked if Mr. Carson believes Islam is “consistent with the Constitution.”
“No, I do not,” Mr. Carson answered. He then added: “I would not advocate that we put a Muslim in charge of this nation. I absolutely would not agree with that.”
Mr. Carson did allow that he could envision backing a Muslim candidate for Congress.
“Congress is a different story,” he said. “But it depends on who that Muslim is and what their policies are, just as it depends on what anybody else says, you know. And, you know, if there’s somebody who’s of any faith, but they say things, and their life has been consistent with things that will elevate this nation and make it possible for everybody to succeed, and bring peace and harmony, then I’m with them.”
- "We're All Dr.Evil Now"
Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,
DIY’s newest frontier is algorithmic trading. Spurred on by their own curiosity and coached by hobbyist groups and online courses, thousands of day-trading tinkerers are writing up their own trading software and turning it loose on the markets.
Interactive Brokers Group actively solicits at-home algorithmic traders with services to support their transactions. YouTube videos from traders and companies explaining the basics have tens of thousands of views. More than 170,000 people enrolled in a popular online course, “Computational Investing,” taught by Georgia Institute of Technology professor Tucker Balch. Only about 5% completed it.
– Wall Street Journal, "Algorithmic Trading: The Play at Home Version" August 9, 2015London day trader Navinder Sarao has been formally indicted by a U.S. federal grand jury on charges of market manipulation that prosecutors say helped contribute to the 2010 "flash crash," according to a Sept. 2 court filing made public on Thursday.
The Justice Department first announced criminal charges against Sarao in April and is seeking to have him extradited to the United States to stand trial.
Sarao is accused of using an automated trading program to "spoof" markets by generating large sell orders that pushed down prices. He then canceled those trades and bought contracts at lower prices, prosecutors say.
– CNBC, "US Federal Grand Jury Indicts 'Flash Crash' Trader" September 3, 2015Anxiety in the industry surged last week after Li Yifei, the prominent China chief of the world’s largest publicly traded hedge fund, disappeared and Bloomberg News reported that she had been taken into custody to assist a police inquiry into market volatility. Her employer, the London-based Man Group, did little to dispel fears, declining to comment on her whereabouts.
Ms. Li resurfaced on Sunday and denied that she had been detained, saying that she had been in “an industry meeting” and “meditating” at a Taoist retreat. But many in the finance sector are unconvinced.
– New York Times, "China's Response to Stock Plunge Rattles Traders" September 9, 2015I’ve written several Epsilon Theory notes about modern market structure (“Season of the Glitch”, “Fear and Loathing on the Marketing Trail, 2014”, “The Adaptive Genius of Rigged Markets”, “Hollow Men, Hollow Markets, Hollow World”), all of which have been very well received. I’ve also written several Epsilon Theory notes about Big Data and non-human intelligences (“Troy Will Burn – the Big Deal about Big Data”, “First Known When Lost”, “Rise of the Machines”), all of which have generated a yawn. This divergence in reader reaction has puzzled me, because it seems so obvious to me that the issues are two sides of the same coin. So why can’t I communicate that?
It’s only over the last few days, after listening to old-school luminaries like Leon Cooperman and Dick Grasso rail against systematic investment strategies, index derivative hedging, and algorithmic market making as if they were the same thing (!) … it’s only after reading press stories that praise the US indictment of Navinder Sarao, the London trader who supposedly triggered the “Flash Crash” from his home computer, but condemn the Chinese detention of Man Group’s Li Yifei as if they were different things (!) … it’s only after seeing 500 commercials for “DIY trading platforms” on TV today as if this were a thing at all (!) … that I think I’ve finally figured this out.
We’re all Dr. Evil today, thinking that one million dollars is a lot of money, or that one second is a short period of time, or that we are individually smart or capable in a systemically interesting way. We use our small-number brains to make sense of an increasingly large-number investment world, and as a result both our market fears and our market dreams are increasingly out of touch with reality.
There are a million examples of this phenomenon I could use (including the phrase “a million examples” which, if true, would take me a lifetime to write and you a lifetime to read, even though neither you nor I considered the phrase in that literal context), but here’s a good one. A few months ago I wrote an Epsilon Theory note on the blurry distinction between luck and skill, titled “The Talented Mr. Ripley”, where I pointed out that it was now quite feasible with a few million dollars and a few months to build a perfect putting machine, one that would put every professional human golfer to shame. Judging from the reader emails I received on this, you might have thought I had just said that the world was flat and the sun was a big candle in the sky. “Preposterous!” was the gist of these emails – sometimes said nicely and sometimes (actually, most of the time) not so nicely – as apparently I know nothing about golf nor about the various failed efforts in the past to build a mechanical putting device.
Actually, I know a lot about these mechanical putting devices, and to compare them to the non-human putting intelligences that are constructible today is like comparing Lascaux cave art to HD television. It’s relatively child’s play to build a machine today that can identify and measure the impedance of every single blade of grass between a golf ball and the cup, one that measures elevation shifts of less than the width of an eyelash, one that applies force within an erg tolerance that human skin would interpret as the faintest breeze. That’s what I’m talking about. Do you know how the most advanced surreptitious listening devices, i.e. bugs, operate today? By measuring the vibrations in the glass window of the room where the conversation is taking place and translating those vibrations back into the sound waves that produced them. That’s what I’m talking about. Now replace “blades of grass” with “individual stock trades”. Now replace “conversation” with “investment strategy”. Arthur C. Clarke famously said that any sufficiently advanced technology is indistinguishable from magic. Do you really think we bring to bear less powerful magic in markets with trillions of dollars at stake than we do in spycraft and sports?
And let’s be clear, the machines are here to stay. They’re better at this than we are. The magic is in place because the magic works for the people and institutions that wield the magic, and no amount of rending of garments and gnashing of teeth by the old guard is going to change that. Sure, I can understand why Dick Grasso would suggest that we should go back to a pre-Reg NMS system of human specialists and cozy market making guilds, where trading spreads were measured in eighths and it made sense to pay the CEO of a non-profit exchange $140 million in “retirement benefits.” And I almost sympathize with the nostalgic remembrances of a long list of Hero Investors recently appearing on CNBC, pining for a pre-Reg FD system of entrenched management whispering in the ear of entrenched money managers, where upstart quants knew their place and the high priests of stock picking held undisputed sway. But it ain’t happening.
And let’s also be clear, the gulf between humans and machines is getting wider, not narrower. Even today, one of the popular myths associated with computer science is that non-human intelligences are brute force machines and inferior to humans at tasks like pattern recognition. In truth, a massively parallel processor cluster with in-line memory – something you can access today for less money than a junior analyst’s salary – is far better at pattern recognition than any human. And I mean “far better” in the same way that the sun is far better at electromagnetic radiation than a light bulb. Much has been made about how robot technologies are replacing low-end industrial and service jobs. Okay. Sure … I guess I’d be worried about that if I were working in a Foxconn factory or a Bay Area toll booth. But far more important for anyone reading this note is how non-human intelligences are replacing high-end pattern recognition jobs. Like trading. Or investing. Or asset allocation. Or advising.
The question is not how we “fix” markets by stuffing the technology genie back into the bottle and we somehow return to the halcyon days of yore where, in Lake Wobegon fashion, all of us were above average stock pickers and financial advisors. No, the question we need to ask ourselves is both a lot less heroic and far more realistic. How do we ADAPT to a market jungle where human intelligences are no longer the apex predator?
I’ve got two sets of suggestions, depending on whether you see yourself as a trader or an investor. It’s a lot to digest, so let’s look at traders in the balance of this week’s note and at investors next week.
Every trader who ever lived believes that, like the Bradley Cooper character in “Limitless”, he or she has a recipe for grandeur. It doesn’t matter whether they find that recipe in prices or volumes or volatility or spreads or any other aspect of a security, all traders have an internalized pattern recognition system that they believe gives them a persistent edge. Most of them are wrong.
In modern large-number markets, any trading strategy based on naïve inference is certain to have zero edge, zero alpha. By naïve inference I mean selecting a strategy based solely on the econometric fit of a time series data matrix to some market outcome like price change. It’s a trading strategy that works because … it works. There’s no “why?” answered here, and as a result the strategy is certain to be derivative, non-robust, and quickly arbitraged. Or to put it in slightly different terms, whatever purely inductive trading strategy you think gives you an edge is already being used by thousands of non-human intelligences, and they’re using the strategy far more effectively than you are. To the degree a naïve inference strategy works at all, you’re just tagging along behind the non-human intelligences, picking up their crumbs.
What trading strategies have even a theoretical possibility of edge or alpha? Here are two.
Possibility 1: Find a market niche where your counterparties are non-economic or differently-economic market participants – like an oil futures market where a giant, lumbering integrated oilco seeks to hedge production, or where a sovereign wealth fund looks for inflation protection (Remember those happy days when giant allocators addressed inflation concerns in commodity markets? Me, neither.) – and scalp a few dimes by taking advantage of their very different preference functions. Traders who pursue this type of strategy have a name in biological systems. They’re called parasites. I call them beautiful parasites (see the Epsilon Theory note “Parasite Rex”), because they capture more pure alpha than any strategy I know.
Possibility 2: Find a market niche where you understand the impact of exogenous signals like news reports or policy statements on the behavioral tendencies of other human market participants, in exactly the same way that a good poker player “plays the player” as much as he plays the cards. These market niches tend to be sectors or assets that are driven less by fundamentals than they are by stories – think technology stocks rather than industrials – although here in the Golden Age of the Central Banker it’s hard to find any corner of the capital markets that’s not driven by policy and narrative. The game that these traders have internalized isn’t poker, of course, but is almost always some variant of what modern game theorists call “The Common Knowledge Game”, and what old-school game theorists like John Maynard Keynes called “The Newspaper Beauty Contest”.
What do these two examples of potentially alpha-generating trading strategies have in common? They operate in a world that a non-human intelligence – which is effectively a super-human inference machine – can’t figure out. Today’s effective alpha-generating trading strategies are based on a game (in the technical sense of the word, meaning a strategic interaction between humans where my decisions depend on your decisions, and vice versa) where you can have very different outcomes from one trade to another even if the external/measurable characteristics of the trades are identical. This is the hallmark of games with more than one equilibrium solution, which simply means that there are multiple stable outcomes of the game that can arise from a single matrix of descriptive data. It means that you can’t predict the outcome of a multi-equilibrium game just by knowing the externally visible attributes of the players. It means that the pattern of outcomes can’t be recognized with naïve (or sophisticated) inference techniques. It means that traders who successfully internalize the pattern recognition of strategic behaviors rather than the pattern recognition of time series data have a chance of not just surviving, but thriving in a market jungle niche.
Sigh. Look … I know that this note is going to fall on a lot of deaf ears. It’s an utterly un-heroic vision of what makes for a successful trader in a market dominated by non-human intelligences, as I’m basically saying that you should find some small tidal pool to crawl into rather than roam free like some majestic jungle cat. As such it flies in the face of every bit of heroic advertising that the industry spews forth ad nauseam every day, my personal fave being the “Type-E” commercials with Kevin Spacey shilling for E*Trade.
Generalist traders are some of my favorite people in the world. They’re really smart. But they’re not smart enough. None of us are. After all, we’re only human.
- Obama Will "Accept" 100,000 Refugees In The US Starting 2017
In a move 'spun' by John Kerry as "keeping with America’s best tradition as a land of second chances and a beacon of hope," NYTimes reports the Obama administration is willing to accept to 100,000 annually in 2017, a significant increase over the current worldwide cap of 70,000. Kerry further added that the US would explore ways to increase the limit beyond 100,000 in future years while carrying out background checks to ensure that the refugees have not been infiltrated by terrorists.
Ironically, just as Europe is shutting its doors to Syrian refugees, the US is opening its own.
Significantly, the countries that have generated most of the refugees are all places where the United States has invaded, overthrown governments, supported insurgencies, or intervened in a civil war. The invasion of Iraq created a power vacuum that has empowered terrorism in the Arab heartland. Supporting rebels in Syria has piled Pelion on Ossa. Afghanistan continues to bleed 14 years after the United States arrived and decided to create a democracy. Libya, which was relatively stable when the U.S. and its allies intervened, is now in chaos, with its disorder spilling over into sub-Saharan Africa.
Everywhere people are fleeing the violence, which, among other benefits, has virtually obliterated the ancient Christian presence in the Middle East. Though I recognize that the refugee problem cannot be completely blamed on only one party, many of those millions would be alive and the refugees would for the most part be in their homes if it had not been for the catastrophic interventionist policies pursued by both Democratic and Republican administrations in the United States.
It is perhaps past time for Washington to begin to become accountable for what it does.
On Friday, Obama said that the United States will admit 10,000 Syrian refugees for resettlement over the next 12 months, following criticism that America is not doing enough with Europe's migrant crisis. It now appears, as The NY Times reports, Washington is taking on more responsibility…
The Obama administration will increase the number of refugees the United States is willing to accept to 100,000 annually in 2017, a significant increase over the current worldwide cap of 70,000, Secretary of State John Kerry said on Sunday.
The announcement came as Mr. Kerry conferred here with German officials on the wave of migrants that has swamped Europe and met with Syrian refugees who are seeking asylum in Europe.
Under the new plan, the American limit on refugee visas would be increased to 85,000 in the fiscal year 2016. The cap would then rise to 100,000 the following year.
Mr. Kerry said that the United States would explore ways to increase the limit beyond 100,000 in future years while carrying out background checks to ensure that the refugees have not been infiltrated by terrorists.
“This step is in keeping with America’s best tradition as a land of second chances and a beacon of hope,” Mr. Kerry said in his prepared remarks. “And it will be accompanied by continued financial contributions to the humanitarian effort — not only from the U.S. government, but from the American people. The need is enormous, but we are determined to answer the call.”
Finally, as a reminder, The United States has taken in about 1,500 Syrian refugees since the conflict began more than four years ago, while Europe has been absorbing hundreds of thousands.
As we noted previously, here is where the current 10s of thousands of refugees will be placed… These 180 resettlement center? They are shown on the map below:
Perhaps this will wake Americans from their Snapchat and Caitlyn-inspired state of ignorance at what the blowback from 'the endless wars' really is…
We Americans are in something approaching complete denial about how truly horrible our nation’s recent impact on the rest of the world has been. We are universally hated, even by those who have their hands out to receive their Danegeld, and the world is undoubtedly shaking its head as it listens to the bile coming out of the mouths of our presidential candidates. Shakespeare observed that the “evil that men do lives after them,” but he had no experience of the United States. We choose to dissimulate regarding the bad choices we make followed up with lies to justify and mitigate our crimes. And still later the evil we do disappears down the memory hole. Literally.
Mr. Obama has the authority to increase the refugee cap, but Congress will need to approve additional funding. State Department officials have said that it would cost $1.1 billion to accept and resettle 70,000 refugees in 2015.
* * *One cannot help but wonder whether US "allies" threw down some ultimata as the Washington-created refugee crisis swamps resources from Germany to Saudi Arabia…
Digest powered by RSS Digest
Saving...