- Japan's Nikkei 225 Just Gained 1000 Points In 20 Hours
Presented with little comment aside to ask, just what did The G-20 agree to behind the scenes?
After ripping 500 points instantly at Japan’s open yesterday, then crashing back 900 points lower, Nikkei 225 Futures have now soared over 1000 points off last night’s lows…
6% in 20 hours? makes perfect sense!!
Because – despite what G-20 said… China does not seem to have got the message…
- FORMER CHINA SAFE OFFICIAL SEES FOREX INTERVENTION NECESSARY
- "Give Me Liberty Or Give Me Death": The Loss Of Our Freedoms In The Wake Of 9/11
Submitted by John Whitehead via The Rutherford Institute,
“Since mankind’s dawn, a handful of oppressors have accepted the responsibility over our lives that we should have accepted for ourselves. By doing so, they took our power. By doing nothing, we gave it away. We’ve seen where their way leads, through camps and wars, towards the slaughterhouse.” ? Alan Moore, V for Vendetta
What began with the passage of the USA Patriot Act in October 2001 has snowballed into the eradication of every vital safeguard against government overreach, corruption and abuse. Since then, we have been terrorized, traumatized, and acclimated to life in the American Surveillance State.
The bogeyman’s names and faces change over time, but the end result remains the same: our unquestioning acquiescence to anything the government wants to do in exchange for the phantom promise of safety and security has transitioned us to life in a society where government agents routinely practice violence on the citizens while, in conjunction with the Corporate State, spying on the most intimate details of our personal lives.
Ironically, the 14th anniversary of the 9/11 attacks occurs just days before the 228th anniversary of the ratification of our Constitution. Yet while there is much to mourn about the loss of our freedoms in the years since 9/11, there is virtually nothing to celebrate.
The Constitution has been steadily chipped away at, undermined, eroded, whittled down, and generally discarded to such an extent that what we are left with today is but a shadow of the robust document adopted more than two centuries ago. Most of the damage has been inflicted upon the Bill of Rights—the first ten amendments to the Constitution—which has historically served as the bulwark from government abuse.
Set against a backdrop of government surveillance, militarized police, SWAT team raids, asset forfeiture, eminent domain, overcriminalization, armed surveillance drones, whole body scanners, stop and frisk searches, roving VIPR raids and the like—all sanctioned by a corrupt government run by Congress, the White House and the courts—a recitation of the Bill of Rights now sounds more like a eulogy to freedoms lost than an affirmation of rights we should possess.
As I make clear in my book Battlefield America: The War on the American People, the Constitution has been on life support for some time now and all efforts at resuscitating it may soon prove futile.
We can pretend that the Constitution, which was written to hold the government accountable, is still our governing document. However, the reality we must come to terms with is that in the America we live in today, the government does whatever it wants, freedom be damned, and “we the people” are seen as little more than cattle to be branded and eventually led to the slaughterhouse.
Consider the state of our freedoms, and judge for yourself whether Osama Bin Laden was right when he warned that “freedom and human rights in America are doomed,” and that the “U.S. government will lead the American people in — and the West in general — into an unbearable hell and a choking life.”
Here is what it means to live under the Constitution today.
The First Amendment is supposed to protect the freedom to speak your mind, assemble and protest nonviolently without being bridled by the government. It also protects the freedom of the media, as well as the right to worship and pray without interference. In other words, Americans should not be silenced by the government. To the founders, all of America was a free speech zone.
Yet despite the clear protections found in the First Amendment, the freedoms described therein are under constant assault. Increasingly, Americans are being arrested and charged with bogus “contempt of cop” charges such as “disrupting the peace” or “resisting arrest” for daring to film police officers engaged in harassment or abusive practices. Journalists are being prosecuted for reporting on whistleblowers. States are passing legislation to muzzle reporting on cruel and abusive corporate practices. Religious ministries are being fined for attempting to feed and house the homeless. Protesters are being tear-gassed, beaten, arrested and forced into “free speech zones.” And under the guise of “government speech,” the courts have reasoned that the government can discriminate freely against any First Amendment activity that takes place within a government forum.
The Second Amendment was intended to guarantee “the right of the people to keep and bear arms.” Yet while gun ownership has been recognized by the U.S. Supreme Court as an individual citizen right, Americans remain powerless to defend themselves against SWAT team raids and government agents armed to the teeth with military weapons better suited for the battlefield than for a country founded on freedom. Police shootings of unarmed citizens continue to outrage communities, while little is really being done to demilitarize law enforcement agencies. Indeed, just recently, North Dakota became the first state to legalize law enforcement use of drones armed with weapons such as tear gas, rubber bullets, beanbags, pepper spray and Tasers.
The Third Amendment reinforces the principle that civilian-elected officials are superior to the military by prohibiting the military from entering any citizen’s home without “the consent of the owner.” With the police increasingly training like the military, acting like the military, and posing as military forces—complete with military weapons, assault vehicles, etc.—it is clear that we now have what the founders feared most—a standing army on American soil. Moreover, as a result of SWAT team raids (more than 80,000 a year) where police invade homes, often without warrants, and injure and even kill unarmed citizens, the barrier between public and private property has been done away with, leaving us with armed government agents who act as if they own our property.
The Fourth Amendment prohibits the government from conducting surveillance on you or touching you or invading you, unless they have some evidence that you’re up to something criminal. In other words, the Fourth Amendment ensures privacy and bodily integrity. Unfortunately, the Fourth Amendment has suffered the greatest damage in recent years and been all but eviscerated by an unwarranted expansion of police powers that include strip searches and even anal and vaginal searches of citizens, surveillance and intrusions justified in the name of fighting terrorism, as well as the outsourcing of otherwise illegal activities to private contractors. Case in point: Texas police forced a 21-year-old woman to undergo a warrantless vaginal search by the side of the road after she allegedly “rolled” through a stop sign.
The use of civil asset forfeiture schemes to swell the coffers of police forces has also continued to grow in popularity among cash-strapped states. The federal government continues to strong-arm corporations into providing it with access to Americans’ private affairs, from emails and online transactions to banking and web surfing. Coming in the wake of massive leaks about the inner workings of the NSA and the massive secretive surveillance state, it was revealed that the government threatened to fine Yahoo $250,000 every day for failing to comply with the NSA’s mass data collection program known as PRISM. Meanwhile, AT&T has enjoyed a profitable and “extraordinary, decades-long” relationship with the NSA.
The technological future appears to pose even greater threats to what’s left of our Fourth Amendment rights, with advances in biometric identification and microchip implants on the horizon making it that much easier for the government to track not only our movements and cyber activities but our very cellular beings. Barclays has already begun using a finger-scanner as a form of two-step authentication to give select customers access to their accounts. Similarly, Motorola has been developing thin “digital tattoos” that will ensure that a phone’s owner is the only person who may unlock it. Not to be overlooked are the aerial spies—surveillance drones—about to take to the skies in coming years, as well as the Drive Smart programs that will spy on you (your speed, movements, passengers, etc.) while you travel the nation’s highways and byways.
The Fifth Amendment and the Sixth Amendment work in tandem. These amendments supposedly ensure that you are innocent until proven guilty, and government authorities cannot deprive you of your life, your liberty or your property without the right to an attorney and a fair trial before a civilian judge. However, in the new suspect society in which we live, where surveillance is the norm, these fundamental principles have been upended. Certainly, if the government can arbitrarily freeze, seize or lay claim to your property (money, land or possessions) under government asset forfeiture schemes, you have no true rights. That’s the crux of a case before the U.S. Supreme Court challenging the government’s use of asset forfeiture to strip American citizens of the funds needed to hire a defense attorney of their choosing.
The Seventh Amendment guarantees citizens the right to a jury trial. However, when the populace has no idea of what’s in the Constitution—civic education has virtually disappeared from most school curriculums—that inevitably translates to an ignorant jury incapable of distinguishing justice and the law from their own preconceived notions and fears. However, as a growing number of citizens are coming to realize, the power of the jury to nullify the government’s actions—and thereby help balance the scales of justice—is not to be underestimated. Jury nullification reminds the government that it’s “we the people” who can and should be determining what laws are just, what activities are criminal and who can be jailed for what crimes.
The Eighth Amendment is similar to the Sixth in that it is supposed to protect the rights of the accused and forbid the use of cruel and unusual punishment. However, the Supreme Court’s determination that what constitutes “cruel and unusual” should be dependent on the “evolving standards of decency that mark the progress of a maturing society” leaves us with little protection in the face of a society lacking in morals altogether. For example, a California appeals court is being asked to consider “whether years of unpredictable delays from conviction to execution” constitute cruel and unusual punishment. For instance, although 900 individuals have been sentenced to death in California since 1978, only 13 have been executed. As CBS News reports, “More prisoners have died of natural causes on death row than have perished in the death chamber.”
The Ninth Amendment provides that other rights not enumerated in the Constitution are nonetheless retained by the people. Popular sovereignty—the belief that the power to govern flows upward from the people rather than downward from the rulers—is clearly evident in this amendment. However, it has since been turned on its head by a centralized federal government that sees itself as supreme and which continues to pass more and more laws that restrict our freedoms under the pretext that it has an “important government interest” in doing so. Thus, once the government began violating the non-enumerated rights granted in the Ninth Amendment, it was only a matter of time before it began to trample the enumerated rights of the people, as explicitly spelled out in the rest of the Bill of Rights.
As for the Tenth Amendment’s reminder that the people and the states retain every authority that is not otherwise mentioned in the Constitution, that assurance of a system of government in which power is divided among local, state and national entities has long since been rendered moot by the centralized Washington, DC, power elite—the president, Congress and the courts. Indeed, the federal governmental bureaucracy has grown so large that it has made local and state legislatures relatively irrelevant. Through its many agencies and regulations, the federal government has stripped states of the right to regulate countless issues that were originally governed at the local level.
If there is any sense to be made from this recitation of freedoms lost, it is simply this: our individual freedoms have been eviscerated so that the government’s powers could be expanded, while reducing us to a system of slavery disguised as a democracy.
The film V for Vendetta is a powerful commentary on how totalitarian governments such as our own exploit fear and use mass surveillance, censorship, terrorism, and militarized tactics to control, oppress and enslave.
As the lead character V observes:
Where once you had the freedom to object, to think and speak as you saw fit, you now have censors and systems of surveillance coercing your conformity and soliciting your submission. How did this happen? Who’s to blame? Well certainly there are those more responsible than others, and they will be held accountable, but again truth be told, if you’re looking for the guilty, you need only look into a mirror. I know why you did it. I know you were afraid. Who wouldn’t be? War, terror, disease. There were a myriad of problems which conspired to corrupt your reason and rob you of your common sense. Fear got the best of you, and in your panic you turned to the now high chancellor, Adam Sutler. He promised you order, he promised you peace, and all he demanded in return was your silent, obedient consent.
How will you have it? Will you simply comply while the train heads down the track to a modern-day Auschwitz? Or will you become a free person and resist? To quote Patrick Henry, “Is life so dear, or peace so sweet, as to be purchased at the price of chains and slavery? Forbid it, Almighty God! — I know not what course others may take; but as for me, give me liberty or give me death!”
- "August Sucks" MIT Quant Warns New Strategies "Are Creating Volatility"
"August Sucks," concludes MIT Quant guru Andrew Lo, reflecting on the systematic-trading strategy effects on markets, and it's not going to get better any time soon. As he explains to Bloomberg, "algorithmic trading is speeding up the reaction times of these participants, so that’s the choppiness of the market. Everybody can move to the left side of the boat and the right side of the boat now within minutes as opposed to hours or days." As we have noted many time, Lo explains how "crowded trades have got to the point of alpha becoming beta," warning that volatility-targeting strategies (such as Risk-Parity) are not only "exaggerating the moves," but he cautions omniously reminiscent of the August 2007 quant crash, "I think they are creating volatility of volatility."
Bloomberg interviews MIT Quant guru and Chairman of AlphaSimplex Group LLC, Andrew Lo…
Question: What does this volatility look like to you? Is this another quant meltdown?
Lo: I’m not sure I’d characterize it as just a quant meltdown. I think that makes it a little bit too cut and dried. Probably there are a number of different factors, including algorithmic trading, that plays into it. We have a number of different forces that are all coming to a head. And because of the automation of markets and the electronification of trading, we’re seeing much choppier markets than we otherwise would have five or 10 years ago. But it’s many forces operating at different time scales, all coming to a head.
Question: Is systematic trading exaggerating the moves?
Lo: I think it’s doing two things. One it can be exaggerating the moves if it lines up with what the market wants to do. So if the market is looking to sell because of an impending recession, then I think we’re going to see a lot of the algorithmic trading going in the same direction. And if the time horizon matches, you will see that kind of cascade effect. At the same time, I think algorithmic trading can play the opposite role. They can dampen some of the market swings if they’re going opposite to the general trend… The one thing that is true, though, is that algorithmic trading is speeding up the reaction times of these participants, so that’s the choppiness of the market. Everybody can move to the left side of the boat and the right side of the boat now within minutes as opposed to hours or days.
Question: When you talk about exaggerating the effect, is that mostly CTAs and momentum players or is it not that simple?
Lo: I think that over the course of the last few weeks, that’s actually a pretty decent bet: That there are trend followers that are unwinding because of some underperformance and concerns about the change in direction of the market. But, for example, what happened in August 2007 was equity market neutral strategies that unwound. So I think it really varies depending on the nature of the strategies that are getting hit and the money going into and out of those strategies, and how that’s affecting market dynamics.
Question: A lot of focus has fallen on risk parity strategies. The notion that, as volatility picked up, there was a lot of deleveraging going on, especially with futures and ETFs. Does that make sense to you from what we’ve seen?
Lo: Well, it certainly looks that way. Part of the challenge of risk parity is that it ignores anything about expected returns. The idea behind risk parity is not a bad one, which is to focus on risk and to manage your portfolio so as to try to stabilize that risk. But the problem with equalizing it across all asset classes or investments is that not all investments are created equal at all points in time. So there are certain strategies that end up doing worse than others during periods of times. And if you end up equalizing your volatility across those strategies, you might end up getting hit pretty hard as some of the equity risk parity strategies got hit over the course of the last few weeks.
Question: Is risk parity looking like a crowded trade?
Lo: I think there’s definitely a case in point of the idea of alpha becoming beta. The idea that once you start popularizing a particular investment approach, and it becomes so popular, that in and of itself creates these kinds of shock waves. So for example if the strategy itself underperforms, now we have a larger number of investors that are going to be unwinding that strategy and that will create a kind of cascade effect where the strategy will underperform even more as people start to take money out of the strategy. There are a number of examples. Risk parity, of course, is the most recent. But before that trend following, before that value investing, growth investing, earnings surprise, earnings momentum, any kind of a strategy can become a crowded trade. And when it does you have to just make sure that the risk premium associated with that trade is commensurate with the potential risks of getting hit with these unwinds.
Question: Are volatility targeting strategies part of the story? Have they become so popular that they’re exaggerating the moves?
Lo: Not only are they exaggerating the moves, but I think they are creating volatility of volatility. So it’s making the market quite a bit more complicated and the dynamics now are much more different and much more difficult to manage if you’re not aware of how these dynamics play out.
Question: What about when you get a big rebound? What do you suppose that is? Is that actually value-type of investors seeing the drops and coming in, or is it just another systematic trading function?
Lo: These rebounds are a confluence of a number of phenomena. One, you’re seeing that once selling pressure declines, investors will naturally become more optimistic and will come back into the market. That’s a common phenomenon. But I think that a rather newer phenomenon is the fact that these algorithms, because they operate at such high frequencies, when the price moves beyond a certain threshold, the algorithms will kick around and flip and go the other way. It’s happening at a rate that’s faster than it’s been anytime in the past because we haven’t had the technology to be able to do that.
And finally what we’re seeing is expectations shifting more rapidly because unlike five or 10 years ago we now have very big players in the financial markets, actively trying to move markets. In particular, I’m thinking about central banks and governments that are trying to manage economies by engaging in quantitative easing or other kinds of financial market transactions. When you have a small number of very big players that are going to be trying to move markets for political or long-term economic reasons, it becomes much, much harder to understand what’s happening. So people are all sort of trigger happy when small pieces of information hit the market, they tend to start moving money very quickly and in large size.
Question: Is that type government intervention something that algos can’t anticipate? Is that sort of an Achilles heel of algo strategies?
Lo: Absolutely. That event risk is something most algorithmic trading strategies really can’t manage yet. I say "yet" because in five or 10 years maybe natural language processing and artificial intelligence will have allowed them to read the news, interpret it and make judgments the way George Soros or Warren Buffett can. But I think we’re still a few years away from that
Question: Are a lot of momentum strategies able to turn on a dime that quickly? We’ll see this intraday drop of several hundred points, then it turns on a dime…
Lo: I think that it’s hard for momentum strategies to be able to move that quickly. In fact, some of the strategies that do move that quickly end up getting whipsawed. The real challenge in operating in these markets is that risk management would have you cut risk in the face of losses. The problem is that if you cut risk too quickly and by too much, you may end up missing out on the rebound, in which case you’ve locked in your losses and you might be getting back in the market exactly at the worst time. So you’re getting hit on both ends. What this atmosphere creates is a much more complicated challenge to risk managers to figure out what is the right frequency with which they need to cut risk and put it back. And I think everybody is trying to figure out what that optimal frequency is. But until we get a sense of who’s involved in the markets and driving these frequencies, it’s going to be anybody’s guess. And as a result a lot of people are going to be surprised over the next few weeks and months.
Question: Any other observations you have from the last couple of weeks that you think people might be interested in?
Lo: Yeah. August sucks.
- China Panics: Calls On US To "Jointly Ensure Global Stability", Exclaims "Economic Outlook Is Very Bright"
Hot on the heels of The World Bank demanding The Fed not hike rates, China issued a statement "calling on US to jointly ensure global economic stability," tonight following a farcical intervention last night on record low volumes and a small devaluation of the Yuan. Foreign Minister Wang added "China and U.S. should also properly handle disagreements and safeguard current international order," just as another minister spewed forth "China’s economic outlook is very bright," – well apart from the record debt, collapsing asset values, and masssive over-capacity, you mean. Further measures detailing the new capital restrictions for forward FX transactions were announced (which will likely do for CNH what regulators did to Chinese index futures). Chinese stoicks are extending their gains in the pre-open on vapid volume as China leaves Yuan practically unchanged.
As a reminder, here is last night's (and Monday's) epic farce of a "market"… after dropping 100s of billion of Yuan to "stabilize" the market already, why not do some more…
On the lowest volume EVER!!!
And then have the balls to issue a ststement, demanding this…
- *CHINA CALLS ON U.S. TO JOINTLY ENSURE GLOBAL ECONOMIC STABILITY
China and the U.S. should jointly ensure global financial and economic stability, Chinese Foreign Minister Wang Yi said when meeting with a former U.S. National Security Council official.
China and U.S. should also properly handle disagreements and safeguard current international order, as China President Xi Jinping is scheduled to visit the U.S. later this month, Wang said Sept. 7
But the propaganda did not stop there…
Liu He, director at the Office of China’s Central Leading Group on Financial and Economic Affairs, said that China’s economic outlook is “very bright” and the country will overcome current difficulties, Zhejiang Daily reports, citing Liu who commented during a trip to Zhejiang province.
Middle class is on the rise and domestic demand is “huge”
China needs to stabilize market expectation while working on reforms
Margin Debt dropped – after rising yesterday for the first time in over 2 weeks.
But stocks are extending gains in the pre-market futures trading…
- *CHINA'S CSI 300 STOCK-INDEX FUTURES RISE 2.8% TO 3,364
As PBOC leaves Yuan practically unchanged…
- *CHINA SETS YUAN REFERENCE RATE AT 6.3632 AGAINST U.S. DOLLAR
Charts: Bloomberg
- US Aerial Surveillance Impaired Off The East Coast Until October 1st Due To "Military Activities"
Submitted by Mike Krieger via Liberty Blitzkrieg blog,
A notam issued Sept. 1 announced that, beginning Sept. 2, both ADS-B surveillance and TCAS may be unreliable in Virginia, North Carolina, South Carolina, Georgia, and Florida, as well as in airspace extending approximately 200 nautical miles off shore. The situation is expected to last through Oct. 1 as a result of military exercises in the area.
But similar military exercises in the past have caused no interference with civilian ADS-B or TCAS, and AOPA is asking the FAA to explain both why the notam was issued so late and what has changed to raise these new concerns.
“We are working to get answers for our members,” said Rune Duke, AOPA director of air traffic and airspace. “This notam has caused considerable alarm and much confusion, while giving pilots little time to prepare. The long duration, ambiguous language, and short notice of this notam are all cause for serious concern. We have spoken with representatives of the FAA and the Department of Defense and will continue to pursue this until we get the answers pilots need.”
– From the Aircraft Owners and Pilots Association release: AOPA Seeks Answers About ADS-B Notam
This is not my area of expertise, so I encourage readers to do their own research and decide for themselves whether or not this concerning. Given the fact so many people are extremely skittish about “something happening” this month, I thought it was curious enough to share.
In a nutshell, it appears that aerial surveillance across much of the East Coast will be impaired until October 1 due to “military activities.” We learn from the NBAA (National Business Aviation Association) that:
TCAS, ADS-B Unreliable in Southeast U.S. Beginning Sept. 2
Sept. 1, 2015
Due to military activities, the TCAS and ADS-B surveillance may be unreliable in the airspace over Virginia, North Carolina, South Carolina, Georgia and Florida, and extending approximately 200 nautical miles offshore, from 1 a.m. EDT (0500z) Sept. 2 until midnight EDT (0459z) on Oct. 1.
Pilots are advised that the traffic alert and TCAS may fail to establish tracks on nearby aircraft and may fail to receive traffic alerts (TA) or resolution advisories (RA). Operators should be aware that tracks may first appear within close proximity to their aircraft, and may immediately go into TA/RA status.
Pilots are advised to maintain an increased visual awareness in this area. If operators believe that an aircraft should have triggered an alert, the incident should be reported to air traffic control as soon as possible.
This is due to a late notice Department of Defense exercise, and NBAA has voiced its concern to the FAA that these sort of significant impact tests need much more notice to operators in the NAS.
The NOTAM numbers are as follows:
- 5/2817 New York Center (ZNY)
- 5/2818 Washington Center (ZDC)
- 5/2819 Jacksonville Center (ZJX)
- 5/2820 Miami Center (ZMA)
- 5/2834 NY Oceanic (ZWY)
Text from the ZNY NOTAM:
FDC 5/2817 (KZNY A0369/15) ZNY VA..SPECIAL NOTICE…DUE TO MILITARY ACTIVITIES ON 1030/1090 MHZ, THE TRAFFIC ALERT AND COLLISION AVOIDANCE SYSTEM (TCAS) AND AUTOMATIC DEPENDENT SYSTEM BROADCAST (ADS-B) SURVEILLANCE MAY BE UNRELIABLE IN THE AIRSPACE OVER THE STATES OF VIRGINIA, NORTH CAROLINA, SOUTH CAROLINA, GEORGIA, AND FLORIDA, AND EXTENDING APPROXIMATELY 200NM OFFSHORE. PILOTS ARE ADVISED THAT THE TRAFFIC ALERT AND COLLISION AVOIDANCE SYSTEM (TCAS) MAY FAIL TO ESTABLISH TRACKS ON NEARBY AIRCRAFT AND MAY FAIL TO RECEIVE TRAFFIC ALERTS (TA) AND/OR RESOLUTION ADVISORIES (RA). FURTHER, PILOTS ARE ADVISED THAT TRACKS MAY FIRST APPEAR WITHIN CLOSE PROXIMITY TO THEIR AIRCRAFT AND MAY IMMEDIATELY GO INTO TA/RA STATUS. FALSE ALERTS ARE NOT EXPECTED TO BE GENERATED BY THIS MILITARY ACTIVITY AND ANY ALERTS SHALL BE TREATED AS REAL. PILOTS ARE ADVISED TO MAINTAIN AN INCREASED VISUAL AWARENESS IN THIS AREA. IF THE PILOT BELIEVES THAT AN AIRCRAFT SHOULD HAVE TRIGGERED AN ALERT, THE INCIDENCE SHOULD BE REPORTED TO AIR TRAFFIC CONTROL AT THE EARLIEST OPPORTUNE MOMENT. SFC-FL500 1509020500-1510010459
Apparently, this is concerning enough that AOPA (Aircraft Owners and Pilots Association) is asking for answers. From AOPA.org:
September 4, 2015
By
AOPA is trying to get to the bottom of ambiguous notam language and determine why the aviation community was given just one day’s advance notice of military exercises that could make Automatic Dependent Surveillance-Broadcast (ADS-B) and TCAS unreliable along a significant portion of the East Coast for a month.
A notam issued Sept. 1 announced that, beginning Sept. 2, both ADS-B surveillance and TCAS may be unreliable in Virginia, North Carolina, South Carolina, Georgia, and Florida, as well as in airspace extending approximately 200 nautical miles off shore. The situation is expected to last through Oct. 1 as a result of military exercises in the area.
But similar military exercises in the past have caused no interference with civilian ADS-B or TCAS, and AOPA is asking the FAA to explain both why the notam was issued so late and what has changed to raise these new concerns.
“We are working to get answers for our members,” said Rune Duke, AOPA director of air traffic and airspace. “This notam has caused considerable alarm and much confusion, while giving pilots little time to prepare. The long duration, ambiguous language, and short notice of this notam are all cause for serious concern. We have spoken with representatives of the FAA and the Department of Defense and will continue to pursue this until we get the answers pilots need.”
The wording of the notam has led many general aviation pilots to believe that ADS-B-based traffic information might not be available to them. But the notam does not specify any interference with 978 MHz ADS-B systems, which are most commonly used by light GA aircraft.
As a result pilots should continue to have access to TIS-B and FIS-B services. The greatest impact will be on aircraft using 1090 MHz ADS-B systems or TCAS, which are primarily used by larger, faster aircraft operating in the flight levels. Air traffic controllers will help ensure separation between military and civilian traffic during the exercises, and no delays or reductions in ATC services are anticipated.
At the very least, this is certainly something to be aware of… especially inlight of Chinese warships in The Bering Sea for the first time ever.
- British Airways Boeing 777 Catches Fire On Take Off From Las Vegas
Prior to China’s “shocking” decision to devalue the yuan, the market was already set to subject the FOMC’s September meeting to an unprecedented amount of scrutiny.
Now that the consequences (i.e. $100 billion in UST liquidation over just two weeks) of Beijing’s near daily FX interventions are becoming clear, the world is now transfixed, as Janet Yellen attempts to determine what hundreds of billions in reverse QE entails for US monetary policy. As noted on Monday, there’s quite a bit of confusion in the market as everyone searches for clues as to what might happen should the Fed decide that despite mounting headwinds and unprecedented uncertainty, it is indeed time for “liftoff.”
On Tuesday, we got a sneak peak at what “liftoff” might end up looking like courtesy of British Airways:
More from The Guardian:
A British Airways jet has caught fire at Las Vegas airport, sending smoke billowing into the air.
The plane – a Boeing 777 – could be seen with flames around its fuselage.
There were 159 passengers and 13 crew on board. Two people were treated for minor injuries as a result of the fire, which involved a flight that was due to fly from the US city’s McCarran airport to Gatwick.
It was not immediately clear what had caused the blaze, which was quickly put out by emergency services.
Dramatic images of flight 2276 were shared on social media by members of the public at the airport, which is five miles south of downtown Las Vegas.
Thankfully, all passangers are apparently safe – we just hope, for the sake of investors the world over and especially for anyone still holding EM assets, that we’ll be able to say the same thing for markets should the Fed attempt to “take off” later this month.
VIDEO: Fire engulfs plane on Las Vegas runway. Minor injuries reported. @CNN‘s @jimsciutto has more. http://t.co/3jkxphWBL5
— OutFrontCNN (@OutFrontCNN) September 8, 2015
More visuals:
- The Fed Is About To Unleash Deflation: Deutsche Bank Shows How
When it comes to the Fed’s upcoming rate hike, only one simple shorthand matters: higher rates means less liquidity, and vice versa.
What does that mean for inflation/deflation and bond yields? According to the following simple and understandable analysis by Deutsche Bank, nothing good.
Here is the TL/DR version: “5y5y is well correlated with changes in global liquidity and based on recent trends should be closer to 2 percent.”
Here is the extended explanation:
Breaking down the breakeven and real yield components verifies that central bank liquidity has been more associated with real yields then breakevens, however the relationship is perverse! Real yields have tended to fall when balance sheet expansion is slowing while breakevens have generally been more sticky. This suggests that risk assets drive (real) yields and that breakevens anticipate a (delayed) liquidity injection.
This is corroborated by also considering the curve. Like real yields 5s10s is well correlated (positively) with real yields. Note that prior to the crisis the relationship looked more “normal” in that expanding liquidity drive yields lower and vice versa. So something has changed since the crisis—this we think is very important and again, will revisit below.
The relationship between 5s10s and 10s in real terms screams 5y5y! And indeed we overlay 5y5y to liquidity there is a very tight, almost scary, relationship. The relationship even predates the crisis. Tighter liquidity essentially forces the 5y5y nominal rate lower reflecting some combination of a flatter curve and higher yields with a steeper curve and lower yields. Fundamentally we think this ultimately speaks to a lower terminal policy rate so that it doesn’t really matter whether the term structure is trying to shift higher or lower but the curve will more than compensate so that if the trend is towards less central bank liquidity, the terminal rate is falling.
Right now the decline is central bank liquidity suggest 5y5y should be closer to 2 percent or below not 3 percent to above. And this is before the Fed has tightened and China has potentially “finished” its adjustment.
And of course the breakdown in 5y5y between real and inflation reinforces the story that it is the real rate not inflation expectations that drive this result. And this is again consistent with the risk asset concern that it is the lack of liquidity that undermines risk assets that in turn drives real yields lower, despite keeping breakevens relatively inflated. One conclusion is that if investors believe that liquidity is likely to continue to fall one should not sell real yields but buy them and be more worried about risk assets than anything else. This flies in the face of recent concerns that China’s potential liquidation of Treasuries for FX intervention is a Treasury negative and should drive real yields higher. It is possible that if risk assets do very well then maybe the correlation with interest rates is broken. But like all these relationships for us, it is easier to work with the correlations that currently persist rather than to predict random breaks. And the potential breaks should be more cheaply hedged rather than making for a core portfolio allocation. I.e. cheap SPX calls based on rates lower. More generally the simple point is that falling reserves should be the least of worries for rates – as they have so far proven to be since late 2014 and instead, rates need to focus more on risk assets.
Deutsche Bank’s summary (which we expanded upon over the weekend):
This reinforces our view that the Fed is in danger of committing policy error. Not because one and done is a non issue but because the market will initially struggle to price “done” after “one”. And the Fed’s communication skills hardly lend themselves to over achievement. More likely in our view, is that one in September will lead to a December pricing and additional hikes in 2016, suggesting 2s could easily trade to 1 ¼ percent. This may well be an overshoot but it could imply another leg lower for risk assets and a sharp reflattening of the yield curve.
To be sure, the Fed may be clueless when it comes to forecasting, but it certainly understands (or should) the relationship between liquidity and 5 Year, 5 Year forward inflation expectation rates. As a result, Yellen and company surely realize that a rate hike – a contraction in liquidity – will result in a further steep decline in forward inflation expectations, and the associated negative implications for risk assets, coupled with lower real and nominal yields, leading to further deflation and an even greater need for “unorthodox” policy measures, i.e., QE4.
Which is why, just like when we first presented this peculiar Fed conundrum over the weekend, the only question is whether the Fed is working to unleash deflation on purpose, or by accident?
- Social Security Disability Fund Will Be Broke Next Year
Submitted by Veronique de Rugy via Mercatus Center,
The 2015 annual report from the Social Security Board of Trustees shows that the program’s disability component is in immediate trouble. Data from the latest report show that the disability fund will be depleted as soon as next year and unable to pay full benefits to beneficiaries.
This week’s first chart uses that data to show total income, expenditures, and assets in the Social Security Disability Insurance (DI) trust fund going back to 1980. The chart shows that the trust fund has been operating under deficits since 2009, as shown by the decline in the trust fund (green bars) and ever-growing gap between the payments (red line) and receipts (blue line).
Those deficits have been financed by redeeming nonmarketable government securities that were accumulated over the years when the program was bringing in more revenue than was being paid out. The government spent the surpluses on other government programs and credited the fund with the securities. But because the securities are nonmarketable, the government had to use general federal revenues to “redeem” them once the DI fund started to run deficits in order to cover the difference. With the illusion of the DI trust fund about to disappear, policymakers have no choice but to finally confront the financial imbalance that actually began years ago.
That means confronting the growth in disability benefits, which have exploded over the past decade. The second chart shows the dramatic inflation-adjusted rise in benefits since the program’s inception, which have doubled in real terms (from $70 billion to about $142 billion) between 1998 and 2014.
It will be tempting for policymakers to avoid the politically difficult decision to rein in benefits by a temporary fix, like raising payroll taxes or shifting “assets” from the regular Social Security trust fund to the DI component. These short-term fixes would worsen the Social Security system’s long-term structural imbalance, while inflicting damage on the US economy.
- "Some People Just Don't Fit In The Economy" Buffett Explains: "We'll Send Them Off To Afghanistan"
Not to be outdone by his partner Charlie Munger (who offended many with his comments that “gold is a great thing to sew onto your garments if you’re a Jewish family in Vienna in 1939,”), Berkshire Hathaway’s Warren Buffett – having already taken on Europe, comparing Greece to a “dog peeing on the carpet” of Europe,
suggesting Germany stop “rewarding behavior you want to get rid of” – takes aim at the military. Speaking on Bloomberg TV, the octagenerian oracle of offense just unfriended every American veteran…“You want everybody educated to their potential. You want people to reach their potential. That still won’t work for some people in a highly developed market system.
I mean if this were a sports-based system, you could give me a PhD in football, and I could practice eight hours a day, and I might be able to carry the water from, not onto the field, but from the locker room to the bench. There’s just some people don’t fit well into a highly skilled market-based economy.
They’re perfectly decent citizens. We’ll send them off to Afghanistan, but they are not going to command a big price.”
* * *
So just the words of a funny old man who is losing his marbles, or an elitist “crony” oligarch who knows there are no consequences for his words or actions?On the bright side, at least he did not mention illegal immigrants.
Interview below:
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- "Desperate" Chicago Schools Need Half Billion To Avoid Mass Layoffs, Partial Shutdown
Last month, we noted with some incredulity that Illinois is now paying lottery winners in IOUs. Long story short, the state’s inability to pass a budget means big winners will have to wait on their prize money, a ridiculous situation which prompted one Illinoisan to remind state officials that “if we owed the state money, they’d come take it and they don’t care whether we have a roof over our head; our budget wouldn’t be a factor.” State Rep. Jack Franks agreed, noting that the “government is committing fraud on the taxpayers.”
The lottery debacle is just the latest example of Illinois’ deepening fiscal crisis which was catapulted into the national spotlight in May when a state Supreme Court decision that struck down a pension reform bid prompted Moody’s to cut the city of Chicago into junk territory. Since then, the media has been awash with tales of the labyrinthine, incestuous character of the state’s various state and local governments and the deplorable condition of the state’s pension system.
The fallout from the budget crisis is far-reaching in the state with the latest example being Chicago’s public school system (the third-largest in the country), which opened this week with a budget shortfall of nearly a half billion dollars. Here’s WSJ with the story:
Chicago Public Schools—with 394,000 students and nearly 21,000 teachers—has closed more than half of a projected $1.1 billion shortfall through cuts, borrowing and other means, but is looking to the state to come up with the rest. The school board warns of deep cuts later this year if Illinois, which faces its own fiscal crisis, doesn’t deliver an additional $480 million in the coming months, representing roughly 8% of annual district spending.
“It is like the board is a desperate gambler at the end of their run,” said Jesse Sharkey, vice president of the Chicago Teachers Union, in a recent speech.
“We are really now at a point where further cuts would reach deep into the classroom,” said Forrest Claypool, who was named chief executive of the city schools in July.
Since 2011, the school board has made nearly $1 billion in cuts—including $200 million this year that involved eliminating 1,400 positions, mostly through layoffs. Enrollment declines, due to shifting demographics and Chicago’s shrinking population, have led to school closings, including nearly 50 elementary schools in 2013 alone.
Mayor Rahm Emanuel has clashed with the teachers union, which went on strike three years ago and is currently without a contract. Another strike isn’t out of the question as the two sides are wrestling over the district’s effort to get teachers to pay more of their pension costs.
A group of parents, educators and activists with the support of union leaders launched a hunger strike Aug. 17 in a push to reopen a closed high school in a historically black neighborhood on the city’s South Side. The group argues the board concentrates money in Chicago’s wealthy, predominantly white neighborhoods. Hispanic and black students make up a vast majority of enrollment in city schools, and more than 85% of students are considered economically disadvantaged.
“There is a priorities crisis,” said Jitu Brown, a community organizer and parent who is participating in the hunger strike.
Of course one problem is a sharp increase in pension costs thanks to a “holiday” the board decided to take from 2011 through 2014:
The district’s pension costs have more than doubled in recent years after the board took a partial “holiday” for three years from paying the amount needed to put the retirement system on a path to long-term solvency.
And all the classic options – raising taxes, taking on new debt to payoff the old debt, etc. – have apparently been exhausted:
At first, the board drained reserves and paid off old debt with new, but those options are running out. The district also is raising property taxes as much as it can under a state cap. At the same time, Mr. Emanuel is weighing a much larger increase to confront the city government’s own pension problems, but that wouldn’t go to the schools.
Which means asking the ineffectual state legislature for $480 million, but thanks to gridlock in Springfield, there are no assurances that aid is forthcoming and that, in turn, means that once it’s all said and done, the third largest school system in the country will be forced to layoff thousands and implement what amounts to a partial shutdown.
Senate President John Cullerton, a Chicago Democrat who sponsored the legislation, said without it the schools would see the layoffs of 3,000 teachers, increased class sizes and a shortened academic year. “We have to resolve this,” he said.
Yes, this has to be resolved and because we want to help, we suggest Governor Bruce Rauner not do things like squander hundreds of thousands of dollars in taxpayer money on celebrity budget gurus like Donna Arduin, who, until she was dismissed two Fridays ago for not being very guru-ish when it came to Illinois’ budget, was making $30,000 a month or, more than half of what a Chicago public school teacher makes in a year.
- British Navy Admits "It Was Us, Not The Russians" That Damaged Irish Trawler In April
Back in April, European and US officials were quick to blame "The Russians" when a British fishing trawler's nets became entangled in a submarine. The incident, one of many, was rapidly escalated as further excuse to increase NATO forces across Europe and as evidence of Russia's aggression. There's just one small problem… As The Daily Mail reports, in this case, it wasn't the Russians – The Royal Navy has finally admitted one of its submarines damaged an Irish fishing trawler in April – five months after the Russian vessel was blamed for the incident.
From another incident in April blamed on The Russians, a bit more color from Live Leak:
Angus Macleod, who has fished Scottish waters for more than 30 years, told how crewmembers became alarmed when their nets began to “overtake” his 62-foot trawler, Aquarius.
Speaking to the Sunday Express last night, he said: “We were midway through a trip when the boat started to slow down by around two-thirds of a knot, which can happen when the pots start to collect.
“We started to haul the nets in, and suddenly there was an external force pulling our nets ahead of the boat with some considerable force. This is something we’ve never experienced before. We always have to be ahead of the nets to keep our propeller clear.
"We caught up with them, and we continued hauling, but the nets ran forward again. The starboard net continued to lead out aft. We had to do this several times, and the winches which were hauling in the nets were beginning to strain.”
Mr. Macleod, 46, added: “At the time we just went through what needed to be done to get out of that situation. We had to keep our propeller clear – that’s our main propulsion. But afterwards we sat down as a crew and we discussed what we’d seen. There is little doubt in our minds that this was caused by a submarine.”
But now, as The Daily Mail reports, another incident from April that was blamed on The Russians has now been admitted the fault of The Royal Navy…
The Royal Navy has finally admitted one of its submarines damaged an Irish fishing trawler in April – five months after a Russian vessel was blamed for the incident.
The Karen was towed at 10 knots during the April 15 incident 18 miles from Ardglass on the south-east shore of Northern Ireland and the vessel was left badly damaged, but the crew escaped unharmed.
Nato exercises were held that week in northern Scotland leading to speculation that the alliance's drills may have attracted Russian interest.
…
The 60-foot boat's captain Paul Murphy was pictured holding a snapped steel cable on board his boat following the alarming incident.
At the time the Navy said none of its submarines were in the Irish Sea and Armed Forces Minister Penny Mordaunt told Parliament a UK vessel was not responsible.
Now Ms Mordaunt has been forced to make a U-turn and revealed it was in fact a British submarine which snagged the boat.
Once again officials simply lied!
While we doubt any apologies for apportioning blame to the Russians wil be forthcoming, The Daily Mail does note some local politicians demanding justice…
South Down MP Margaret Ritchie said: 'Fishermen must be confident that their vessels will not be damaged by submarine activity and where incidents do take place, the Government will own up to it immediately.
Sinn Fein Stormont Assembly member Chris Hazzard said fishermen deserved to be able to work in an environment where they did not have to worry about submarines sinking their boats as fishing was already a dangerous occupation.
'The British Government and MoD must now explain their actions, if any disciplinary measures will be taken arising out of this incident and how it will avoid similar incidents in the future.'
- MI6 "ISIS Rat Line" & The Threat To India
Originally posted at GreatGameIndia.com,
The prosecution of a Swedish national accused of terrorist activities in Syria has collapsed at the Old Bailey after it became clear Britain’s security and intelligence agencies would have been deeply embarrassed had a trial gone ahead, the Guardian reported.
Bherlin Gildo was due to stand trial at London’s Old Bailey accused of attending a terrorist training camp between 2012 and 2013 and possessing information likely to be useful to a terrorist. But the case against him was dropped and he was cleared of the charges after a wrangle between lawyers and the British and Swedish security services.
On 1st June 2015, writes Seumas Milne the trial in London of a Swedish man, Bherlin Gildo, accused of terrorism in Syria, collapsed after it became clear British intelligence had been arming the same rebel groups the defendant was charged with supporting.
The prosecution abandoned the case, apparently to avoid embarrassing the intelligence services. The defence argued that going ahead with the trial would have been an “affront to justice” when there was plenty of evidence the British state was itself providing “extensive support” to the armed Syrian opposition. That didn’t only include the “non-lethal assistance” boasted of by the government (including body armour and military vehicles), but training, logistical support and the secret supply of “arms on a massive scale”.
Reports were cited that MI6 had cooperated with the CIA on a “rat line” of arms transfers from Libyan stockpiles to the Syrian rebels in 2012 after the fall of the Gaddafi regime.
Interestingly, a recently declassified secret US intelligence report, written in August 2012, uncannily predicts – and effectively welcomes – the prospect of a “Salafist principality” in eastern Syria and an al-Qaida-controlled Islamic state in Syria and Iraq. In stark contrast to western claims at the time, the Defense Intelligence Agency document identifies al-Qaida in Iraq (which became Isis) and fellow Salafists as the “major forces driving the insurgency in Syria” – and states that “western countries, the Gulf states and Turkey” were supporting the opposition’s efforts to take control of eastern Syria.
Raising the “possibility of establishing a declared or undeclared Salafist principality”, the Pentagon report goes on, “this is exactly what the supporting powers to the opposition want, in order to isolate the Syrian regime, which is considered the strategic depth of the Shia expansion (Iraq and Iran)”.
However this is only the latest in a string of such cases.
Psychological Warfare – How MI6 Controls ISIS
For months it was in the news that 400 Britons had joined the jihadis in Syria. Foreign Secretary William Hague himself said so. However, the number of these British jihadis is much larger and it has been revealed that some of them were trained to be Sunni jihadists by a jihad-seeking Saudi mullah in a British mosque under the watchful eyes of the MI6.
The Independent in June 2014 reported Birmingham MP Khalid Mahmood saying at least 1,500 Britons, if not more, have joined the terrorist-led jihad in Syria and Iraq, rejecting the 400 figure handed out by Hague, and 500 such jihadis referred to by U.K.’s anti-terror chief Sir Peter Fahy. “I imagine 1,500 certainly would be the lower end. If you look across the whole of the country, there’s been a number of people going across,” Mahmood said.
What is even more revealing is the report that some of these jihadis were trained by a Saudi preacher operating from within a Cardiff mosque.
The DailyMail in June 2104 pointed to Mohammed al-Arifi, who has called for holy war to overthrow Bashar al-Assad’s regime, spoke at the Al Manar center in Cardiff, Wales. Although banned from entering Switzerland because of his extremist views, al-Arifi has visited the U.K. several times. A Sunni Muslim, he has been accused of stirring up tensions with Shi’a Muslims, reportedly calling it evil and accusing adherents of kidnapping, cooking and skinning children. A source close to the Yemeni community in Cardiff told Mail Online:
“These boys were groomed [at Al Manar] to fight the Shi’as, fight these people, fight those that’s where it started. The teaching [at Al Manar] helped the people recruiting. If someone tried to recruit me, I wouldn’t go unless I’m convinced. But once they’re groomed, all it takes is someone to say ‘come and I’ll take you.’”
This reminds us of the teenage jihadist schoolboy from Coventry ‘fighting alongside ISIS terrorists in Iraq and Syria’ dubbed ‘Osama Bin Bieber‘.
Last year German officials in an operation raided two containers passing through Hamburg Port and seized 14,000 documents establishing that Osama bin Laden was funded by UK Queen’s bank Coutts, which is part of the Royal Bank of Scotland.
Following the accusations DailyMail in it’s 23 June 2014 report titled Queen’s bank forced to deny that Osama Bin Laden had an account there after 14,000 documents seized from Cayman Islands branch reports that the Queen’s bank has denied claims in European newspapers that Osama Bin Laden ever held an account with the organisation.
In 2012, Coutts was fined £8.75million for ‘serious and systematic’ failings when handling money from suspected criminals or foreign despots.
ISIS Leader a Psychological Operation
Hamid Dawud Mohamed Khalil al Zawi, most commonly known as Abu Abdullah al-Rashid al-Baghdadi was the leader of umbrella organizations composed of eight groups and its successor organisation, the Islamic State of Iraq – ISIS. However, in July 2007, the U.S. military reported that al-Baghdadi never actually existed. The detainee identified as Khaled al-Mashhadani, a self-proclaimed intermediary to Osama bin Laden, claimed that al-Baghdadi was a fictional character created to give an Iraqi face to a foreign-run terror group, and that statements attributed to al-Baghdadi were actually read by an Iraqi actor.
According to Brigadier General Kevin Bergner, Abdullah Rashid al-Baghdadi never existed and was actually a fictional character whose audio-taped declarations were provided by an elderly actor named Abu Adullah al-Naima as a form of psychological warfare as reported in the New York Times. Brigadier General Kevin Bergner currently serves with the National Security Council staff as Special Assistant to the President and Senior Director for Iraq. Prior to this assignment, he served as the Deputy Commanding General for Multi-National Forces in Mosul, Iraq. He also served as the Director for Political-Military Affairs (Middle East) on the The Joint Staff in the Department of Defense.
What about the ISIS threat to India?
At the Indo-UK Counter Terrorism Joint Working Group meeting held in London on January 15-16 this year the British officials warned their Indian counterparts of a possible terror attack by ISIS on Indian soil.
Than on July 28, USA Today revealed the end-of-days as according to the Islamic State (ISIS). The newspaper sourced a 32-page doomsday document to some “Pakistani citizen with connections inside the Pakistani Taliban.”
An investigative story published by the USA Today and reported by American Media Institute refers to a 32- page Urdu document obtained from a Pakistani citizen with connections inside the Pakistani Taliban.
“The document warns that ‘preparations’ for an attack in India are underway and predicts that an attack will provoke an apocalyptic confrontation with America,” the report said. The document, according to the report, was independently translated into English by a Harvard scholar and verified by several serving and retired intelligence official.
The document was reviewed by three US intelligence officials, who said they believe the document is authentic based on its unique markings and the fact that language used to describe leaders, the writing style and religious wording match other documents from the ISIS, USA Today added.
However, India’s Ministry of Home Affairs termed “rubbish” the alleged ISIS document which hinted that the terror group was preparing to attack India to provoke confrontation with the US. “It’s rubbish,” Joint Secretary, Internal Security-I, MA Ganapathy told reporters said.
If indeed the document was a fraud it raises serious questions given the MI6 & CIA links to ISIS; considering that the doomsday threat and the attack plan both emanated from the same source that is alleged to have created the threat in the first place. However, no explanation was provided by the Home Ministry as to why they chose to term it ‘rubbish’ nor an explanation sought from the western governments, intelligence agencies or the media for publishing such a sensitive and false report that took the entire global media in a whirl.
On the other hand last month, India’s Home Ministry announced it was working on a national anti-ISIS strategy. Many intelligence inputs followed after the publication of those reports and arrests made all across India. Reportedly, the appeal of ISIS radicalism had ramped up in ten Indian states.
Last month a British doctor was arrested in Jammu & Kashmir for planting IEDs. Police said Baba who is a physiotherapist has lived in London since 2006. He returned to the valley three months ago.
Why is it that from Al Qaeda to ISIS to terrorists in J&K, all links end up in Britain? More importantly, why such leads are not pursued by Indian Intelligence Agencies? Surprisingly enough even the intelligence inputs we so actively act upon are also provided by the same countries. How could we formulate a strategy to orient our security agencies to counter a threat that we choose to ignore or do not even attempt to understand?
As is the case with any of the terrorist group many of these groups are controlled not only by the states that sponsor terrorism but by the nations that sponsor the states that sponsor terrorism too. So though all evidence eventually leads to North Western frontier of India, we do not attempt to learn about who instigates these groups, their actions, their mode of acting and the previous track record that should guide us in doing what we as third neutral sovereign country should do. We totally ignored this angle and even the most rudimentary of forensic investigation in our approach to the Mumbai Train Blasts (a sequel to Spanish Train Bombings and the beginning of the 26/11 Mumbai Attacks). We hope we do a beginning in this new direction.
By the later years of the Reagan regime, a preferred nomenclature suited to U.S. interests became standardized for the Third World. In the case of nations to be rolled back (e.g., Nicaragua), governments were called terrorist and the insurgents were labeled democratic. In the case of countries to be supported against “communist” insurgencies (e.g., El Salvador and the Philippines), the governments were called democratic and the insurgents were labeled terrorists. “
– from the book Rollback by Thomas Bodenheimer and Robert Gould
One recent phenomenon emerging since dissolution of soviet era is, if there is more than one geo-political player involved in any target nation say Nigeria or Indonesia or India; then the turf war between the geo-political players is spilling in to the target countries. Just like in case of East India Companies whenever their parent countries (England, France, Holland etc) went to war in Europe, their representatives in African and Indian colonies also went to war. So whenever one geo-political player feels their turf is violated in any target countries then they do not hesitate to eliminate the others or their supporters in the target countries.
Depending on the theatre of concern these sabotage operations are called by various names and many governments in order to prevent them do various preventive actions. Unfortunately in India there is no comprehensive study of terrorism keeping the above perspective. Our excessive determination and focus on Islamic or Jihad terrorism though suits our emotional need it only comprises of less than one fourth of terrorist acts perpetuated on the soil of India since more than three decades. Subversion, sabotage, assassinations, abductions, facility bombings, symbolic target bombings though done by all terrorist groups we are confined and concerned only about Jihadi terrorism which is making our response to over all terrorism and its prevalence in India ineffective.
Seumas Milne writes this western habit of playing with jihadi groups, which then come back to bite them, goes back at least to the 1980s war against the Soviet Union in Afghanistan, which fostered the original al-Qaida under CIA tutelage. Infact, it’s not just a western habit and it dates far back than 1980s since before World War I where the roots to using modern fundamentalism as a tool of warfare lay.
- Goldman Explains Why Europe's Refugee Crisis Is Actually A Blessing
While it’s in no way out of the ordinary for a sitting Democrat to trumpet a set of beliefs that diverge markedly from the views espoused by the GOP frontrunner in the lead-up to an election, the extent to which the Obama administration’s position on immigration differs from Republican hopeful Donald Trump’s vision for border control is truly remarkable. The President has of course pushed for reforms which shield non-violent immigrants from deportation while Trump argues that anyone who didn’t come to the country via legal channels should be politely shown the door.
The fact that these two positions are so diametrically opposed underscores the extent to which immigration will likely be the most rancorous, contentious and divisive topic on the campaign trail on the way to elections in 2016 and make no mistake, this debate has very real implications for the US economy.
As we’ve shown, since December 2007, according to the Household Survey, only 790,000 native born American jobs have been added. Contrast that with the 2.1 million foreign-born Americans who have found a job over the same time period. In August, a whopping 698,000 native-born Americans lost their job. This drop was offset by 204,000 foreign-born Americans who got a job during the month.
The immigration debate in the US and the jobs data shown above highlight the extent to which demographics are critical if we want to understand social and economic outcomes. Looking beyond the American political circus and the US jobs market, Japan is staring down a well-documented demographic nightmare while, as discussed here previously, China faces the end of its “migrant miracle” as the country approaches its Lewis turning point. Meanwhile, migrant flows have become perhaps the most talked about issue across Europe.
The point: demogrpahic shifts, whether gradual or sudden, whether wholly domestic or emanating from some exogenous shock (like say a horrible US foreign policy outcome) matter – and they matter a lot.
It’s with that in mind that we turn to Europe, where a refugee crisis sparked in large part by Syria’s four-year old, bloody civil war recently reached a tipping point and the scramble to find a workable solution both in terms of allocating asylum seekers and finding the funds to accommodate them has become the single most pressing challenge facing European policy makers. Here’s the latest from BBC:
Germany can cope with at least 500,000 asylum seekers a year for several years, Vice Chancellor Sigmar Gabriel has said.
Germany expects more than 800,000 asylum-seekers in 2015 alone – four times the 2014 figure. Mr Gabriel reiterated that other EU states should share the burden.
The UN’s refugee agency, UNHCR, says a record 7,000 Syrian migrants arrived in Macedonia alone on Monday and 30,000 were on Greek islands.
The migrants, mainly Syrians, are engaged in a long trek which takes them from Turkey, across the sea to Greece, through Macedonia and Serbia, and then to Hungary from where they aim to reach Austria and Germany.
The migrant influx has unsettled European governments and prompted diverse responses.
Hungary’s conservative leadership is building a border fence to try to keep them out, but German politicians have expressed pride in crowds who welcomed new arrivals.
A Greek minister said on Monday that the island of Lesbos, which sits off the Turkish coast, was “on the verge of an explosion” due to a build-up of 20,000 migrants.
The EU is due to unveil proposals on Wednesday to distribute 160,000 refugees among member states on a mandatory basis.
And while it may be difficult for anyone to find the silver lining amid the chaos (especially when pictures of dead children are being trotted out as proof of why the West urgently needs to intervene further in Syria thus ensuring the situation becomes even more unstable than it was before), the implications of such a dramatic migration will be felt for generations to come and in some respects Goldman says more immigration may in fact be just what Western Europe needs. Here’s more:
Whichever way we slice the data, the growth in working age population stands out as a key driver of economic growth for most countries. A healthy dependency ratio, a skilled workforce, together with strong institutions and an absence of major resource imbalances is usually the formula for country-level success. But with most DMs weighed down by ageing populations, a key question is this – can people inflows can counter challenging demographics? The short answer is yes, but only up to a point…
The rising concerns on ageing have unsurprisingly been accompanied by more accommodative policies on immigration; the number of countries with stated plans to grow their populations via immigration has gone up to 22 as of 2013, from 10 in 2010 (note that immigrants also tend to have higher fertility rates).
But for many countries, people inflows are only part of the solution. In order to maintain current levels of retirees/working age population ratios in 2025, immigration rates in Western Europe need to be 7x-8x higher than current run rate (based on UN estimates), while in Japan and Korea, the requirement goes up to a highly improbable 26x and 58x current levels.
Now consider what was said above about the magnitude of Germany’s refugee accommodation (i.e. that the country is set to take in some 500,000 asylum seekers per year), and then consider the following from the same Goldman note:
Obviously, it’s far too early to draw any sort of concrete conclusions about what effect – positive or negative – the influx of Syrian refugees will have on Western Europe. Moreover, the societal and economic impact of people inflows is at least to some extent dependent upon what skills immigrants bring with them. To expand on Goldman’s discussion of the so-called “skill fill”, the question might be this: to what extent can immigrants help fill skills gaps in DM economies created by deteriorating demographics? Of course we must also consider what effect second- and third- generation immigrants may end up having on receiving countries’ economies (i.e. does the original migration end up vicariously conferring a substantial benefit on the society of the receiving country and if so, how?).
We’ll leave those questions to readers and simply close by pointing out (again) the tragic irony inherent in France’s suggestion that the proper response to the current refugee crisis is for the French military to bomb Syria. That either represents an utter inability on the part of the French government to understand the West’s role in destabilizing Syria in the first place, or, more likely, the latest example of how one way or another – via YouTube gas attack videos or via heart-wrenching pictures of desperate migrants fleeing the violence – the US and its allies are determined to find the right mix of propaganda to justify a ground incursion. And that’s the real tragedy here: the pitiable plight of Syria’s beleaguered masses will be used as an excuse to cause them still more pain and suffering.
- Mystery Buyer Of US Treasurys Revealed
Back in March 2014, we first revealed something quite stunning: a new, seemingly ravenous, and completely unexpected buyer of US Treasurys had emerged in the face of “Belgium” which was buying tens of billions in US paper at a weekly clip, without any explanation.
One year later, this website first confirmed that the identity of the “Belgian” buyer was none other than China, which had been using Belgian-based clearer Euroclear as an offshore venue for its bond purchases, and which starting in March 2015 had commenced dumping the US paper it accumulated so dramatically in 2013 and 2014, in advance of what has become the biggest story of the summer: China’s liquidation of its FX reserves, read US Treasury holdings, in defense of its devaluing currency.
And while we knew that China was selling – and following the record selling of FX reserves in August, so does everyone else – an even more interesting question emerged: who is buying?
Thanks to the WSJ we now have the answer: “A little-known New York hedge fund run by a former Yale University math whiz has been buying tens of billions of dollars of U.S. Treasury debt at recent auctions, drawing attention from the Treasury Department and Wall Street.“
The hedge fund in question, Jeffrey Talpins’ Element Capital Management, which according to the WSJ has become “the largest purchaser in dozens of government-bond auctions over the past 10 months, people familiar with the matter said. The buying is part of an apparent effort by the fund to use borrowed money to exploit small inefficiencies in the world’s most liquid securities market, a strategy that is delivering sizable profits, said people close to the matter.”
Jeffrey Talpins of Element Capital and his wife
For those unfamiliar, and Talpins certainly is not a household hedge fund name, “Mr. Talpins is an intense and reserved trader formerly at Citigroup Inc. and Goldman Sachs Group Inc. He is known for a tenacious style that can grate on rivals and once tested the patience of former Federal Reserve Chairman Ben Bernanke.”
According to the NYT, in 2005, Trader Monthly named Mr. Talpins one of the top 30 traders under 30, when he was still an employee of Vega Asset management. “Youth is not wasted on this crop, any of whom could be a billionaire by 40,” the magazine said. “Or, then again, they could be belly up and bust.”
Back in 2010 the FT profiled Element Capital, then at just $1.5 billion, saying that fixed-income relative value trading, “the hedge fund strategy pioneered – and made notorious – by Long Term Capital Management is returning to prominence amid one of its most successful years yet.” It added that “fixed-income relative value trading – shunned by investors after the collapse of LTCM in 1998 – has been one of the industry’s few outperformers this year, thanks to massive pricing anomalies caused by fiscal stimulus packages and unconventional central bank monetary policies around the world.”
As of the end of June, Element Capital, a $1.5bn relative value fund run by Jeffrey Talpins, was up 10.75 per cent. High returns have been driven by government bond markets flush with arbitrage opportunities, managers said.
By 2014, Element had grown substantially, and according to a Bloomberg note, last July it attracted the head of North America sales at RBS, Richard Tang: “Tang, who has spent almost two decades at the bank, is one of 16 members of the Treasury Borrowing Advisory Committee that the U.S. government consults with on its debt sales. His departure was confirmed by Sarah Lukashok, a Stamford, Connecticut-based spokeswoman for Britain’s largest state-owned lender. He will be joining New York-based Element Capital, which manages about $4.3 billion in its macro fund, said the people, who asked not to be named because the move wasn’t public.”
In other words, Element is not only growing its AUM exponentially, it now also employs a member of the TBAC, which we profiled in November 2011 as “The Supercommittee That Really Runs America.”
Not only that, but according to a November 2014 presentation to the Wharton Investment and Trading Group, the fund, then already at a $5 billion AUM, boasting it “has delivered exceptional returns to investors over its 9+ year track record, with annualized performance greater than 20% and a Sharpe ratio greater than 2.“
Quite an impressive performance for a smallish relative-value hedge fund, one that begs the question: just how much leverage is involved (an important question for later).
So why is this relatively obscrue hedge fund in the news? Well, it appears that the mystery buyer of all China’s bond sales is none other than Element:
Element has been the largest bidder in many of the 62 Treasury note and bond auctions between last November and July, these people said. At many recent auctions, some of which involved sales of more than $30 billion of debt, Element purchased about 10% of the issue, these people said. That is an unusually large figure, analysts said.
And while Element may have grown substantially, some wonder how its most recent AUM of $6 billion can sustain this ravenous buying spreed.
Element’s activity has raised questions because the cumulative purchases far exceed the hedge fund’s $6 billion in assets under management. Treasury officials, who frequently meet with large auction participants, have asked Element about its activity, said someone close to the matter.
“Their buying is eyebrow-raising,” said a trader who once worked for a firm that deals in government securities and witnessed Element’s bidding. These primary dealers often know the identity of other auction bidders. Element “never shared its strategy, but we often asked,” the trader said.
And this is where it gets tricky, because as the WSJ admits, the US Treasury “likes to know who is buying its bonds and why, partly because it prefers long-term holders such as pension funds, insurance companies and central banks. Treasury officials fear purchases by trading-oriented funds could result in sales that increase market swings and potentially drive up borrowing costs.
“If you’re issuing debt, your preference is those ‘sticky investors,’” said Scott Skyrm, a managing director at Wedbush Securities.
Which brings us back to the “how much leverage is involved” question, because one bad day for Element and suddenly the fund could be forced to unwind its giant Treasury book into what is already a very illiquid market.
Which leads to the question of just what is Element’s strategy: “Element had been shorting, or betting against, bonds in anticipation of higher interest rates but has been exiting from that wager, according to someone close to the matter. That is one reason the fund has been a big buyer of Treasurys lately.”
It appears that is not only macro considerations that drive Element’s trading strategy, but also market mispricings between the primary and secondary market: “people who have worked with the firm or are close to Mr. Talpins said there is another reason: Element is among the last to embrace “bond-auction strategies,” trading maneuvers that have become less popular since the financial crisis.”
These trades aim to take advantage of the effects of supply and demand in the $12.8 trillion Treasury market. Demand for these bonds often fluctuates based on factors including investor perceptions of economic growth and market risk, while supply can be affected by regular auctions of different-maturity Treasury securities. A burst of new supply tends to slightly depress prices for short periods, sometimes for less than an hour.
Element’s auction arbing strategy is relatively simple: “In the past, Wall Street dealers and hedge funds scored profits shorting “when-issued” bonds. These are contracts conferring the right to purchase Treasury securities when they are sold days later at auction. Then, these traders would buy bonds during Treasury auctions at the slightly lower prices and use these newly purchased bonds to close out their short sales.”
The difference between the higher price at which they sold the Treasurys and the lower price they paid at auction was their profit.
Which incidentally explains our “discovery” earlier this summer why Treasury auctions that took place at a time when the OTR was trading “special” led to dramatic outperformance during the actual auction: it was hedge funds like Element that did all in their power to squeeze the market and send the high yield deep inside the When Issued.
The reason why Element has become the dominant player in this market is because most of its competitors disappeared after 2008:
After the 2008 financial crisis, bank traders pulled back as regulators discouraged trading risks. Some hedge funds also began shying away from bond-auction strategies. Wall Street banks have significantly cut back their lending to hedge funds.
The pullback by rivals has left Element with a large presence in bond auctions to complement strategies such as in foreign-currency derivatives, people close to the matter said. In 2008, the firm gained 35%, these people say, even as financial markets crumbled. The next year, Element was up 79%. Last year it rose just 2.9%.
And with nobody left to compete, and the Treasury market as illiquid as it is, it meant huge potential profits for Element: sure enough, the hedge fund “was up 18.5% through July of this year, an investor said, beating most hedge funds and overall markets. Some recent gains came from bullish wagers on the U.S. dollar, according to the person.”
So can anything go wrong with this strategy? Yes, plenty.
Once in a while, the prices of bonds being auctioned jump, rather than fall, for reasons such as bad economic news that prompts an investor flight to safety. Hedges sometimes don’t work out. And the strategy relies on inexpensive borrowing because each trade usually yields minimal profits.
In the 1990s, hedge fund Long Term Capital Management used leverage to profit from small discrepancies in the Treasury market before a market reversal swamped the firm. LTCM used much more leverage than Element does.
Only problem is nobody knows just how much more leverage, and whether Element’s leverage isn’t slowly but surely creeping up to Merton and Merrywether levels.
Still, luminaries such as Yale professor Robert Schiller vouch for Talpins:
Mr. Talpins graduated in 1997 from Yale, where he was a research assistant for Robert Shiller, the Yale economist who later won a Nobel prize in economics. In a 1996 letter, Mr. Shiller wrote that in terms of overall performance, he “put Jeffrey first out of the 52 Yale undergraduates” who attended his course Economics 252, Finance, Theory and Application.
“I thought he was particularly bright,” recalls Prof. Shiller.
Others, however, were less than enthused about Talpins. Such as former Fed chairman Ben Bernanke:
A year or so ago, Mr. Talpins was among 20 investors invited by a Wall Street firm to a private meeting with Mr. Bernanke, after his departure from the Fed. Mr. Talpins peppered Mr. Bernanke with about 10 successive questions, according to several people in the room.
Mr. Talpins elicited some detailed answers, such as who is in the room during interest-rate discussions. But he also asked questions that exasperated some investors because they seemed irrelevant. Mr. Bernanke looked increasingly weary under Mr. Talpins’s barrage, one participant said. “Jeff was persistent and it got a little uncomfortable,” said another participant. “It was like, ‘Dude, let it go.’”
But the biggest risk by far is that now that the “mystery buyers” has been exposed, it won’t take long for the other, much bigger players – i.e., all the central banks who have been desperate to push yields lower to “confirm” the self-fulfilling narrative that the economy, and inflation, are growing – to inflict the proverbial “max pain” upon Element. In fact, if Talpins is indeed very long TSYs, and has lot of leverage embedded in the trade, one may expect a concerted shorting effort to find out just how much leverage is incorporate in the trades, and push it to the point of breaking. After all, hedge funds exposed with massive positions rarely survive an onslaught by their peers who seek to do just that – inflict “max pain” (see Ackman and Herbalife).
If so, China’s selling of TSYs may very soon inflict precisely the kind of damage on US paper not because it is selling, but because the biggest “mystery” buyer of US paper has just been revealed and whose continued ability to keep buying unimpeded is now suddenly very much in question.
What’s worse, if the result of a coordinated attack on Talpins leads to an LTCM-type blow up, hang on to your hats because the recent volatility in the equity market will be nothing compared to what is coming to the MOVE, TYVIX and US Treasurys…
- "The World Is Running Low On Interventionist Ammo" SocGen Warns "China Is The Dominant Black Swan"
When it comes to crisis, SocGen notes that there is an abundance of case studies; and against the backdrop of the uncertainty shock delivered by China and the subsequent market tumult, market participants have been looking to the history books for clues as to what could happen next. While individual crises create their own risks, SocGen warns, the overriding risk is that markets are taking less comfort today from the idea that central banks may step in with further QE-style liquidity injections to save the world.
Running low on monetary policy ammunition
Before considering the individual risk scenarios, an overriding risk is that markets are taking less comfort today from the idea that central banks may step in with further QE-style liquidity injections. We see this as a reflection of two factors.
First, the tremendous amounts of liquidity injected to date have produced less-than-spectacular economic results. This also fits the findings of academic literature suggesting diminishing returns from subsequent rounds of QE.
Second, central banks have clearly become more concerned about the potential risks to financial stability from indefinitely inflating asset prices, suggesting that they may be slower to step in.
This raises the important question of how policymakers would respond to new downside shocks. Fiscal expansion in the advanced economies, and not least infrastructure investment, would be our advice, but in a downside risk scenario, we fear that this tool is likely to be deployed all too slowly and central banks be further overburdened.
China is the dominant black swan
On the major risks that we see over the coming year, one positive is that we have taken Grexit off the chart. Medium-term, we still consider a Grexit a high risk scenario, but for now euro area policymakers seem content to have given the can a good kick further down the road.
China hard landing (30% probability): The recent market tumult offered a flavour of the type of market response a China hard landing might trigger. In such a scenario we would expect to see a further, and this time, sharp decline of the RMB. We defined a hard landing as a 2pp negative real growth shock to our baseline real GDP outlook. In 2015, that sets hard landing at 5%, in 2016 at 4%.
China’s financial integration into the global economy is low, making a replay of the 2008 crisis – that was transmitted primarily via financial channels – less likely. To our minds, such a scenario would bear a greater similarity to a “classic” EM crisis, such as the 1997 Asia crisis. However, today emerging economies account for around 40% of global GDP. This is twice the level that prevailed in 1997. The pullback in demand in emerging economies would make such a scenario the third deflationary shock of the past decade, following the 2007/08 subprime crisis and the 2011/12 euro area debt crisis.
New global recession (10% probability): A China hard landing or a much-deeper-thanexpected downturn in emerging economies in general, both have the possibility to trigger a global recession. How business, consumers and policymakers respond to such a shock would determine whether recession in the advance economies would follow or not. We see a 1-in-3 chance that a China hard landing would trigger global recession. Another critical assumption is that oil prices remain at the current very low level. If there were a positive oil price shock, this could also trigger a recession.
Advanced consumers save the energy windfall gain (25% probability): For the OECD economies, we estimate that the oil burden (price times demand divided by GDP) will decline by around 1.5pp compared to previous year averages. For energy consumers, this marks a windfall gain. Our baseline assumption is that the bulk of it will be spent. Should consumers prove more cautious, this would lower our growth outlook considerably, knocking 0.5-1.0pp off our baseline and pushing the major advanced economies back to “stall speed” levels.
Fed behind the dots (10% probability): When questioned about Fed policy in relation to the economic conditions in the rest of the world, Vice Chair Fischer noted that ensuring a stable US economy would be the Fed’s greatest contribution – we agree! Should the Fed keep rates too low for too long, the danger is that, once wages and inflation pick up, markets will do the job with a disorderly bear steepening of the yield curve delivering negative ramifications for financial markets globally and not least for emerging economies.
Brexit (45% probability): A date has yet to be set for the referendum and it is still unclear what concessions Prime Minister Cameron will obtain from his European Union partners. Striking is how little attention markets are paying to this topic. We see three possible explanations for this. First, markets believe Brexit would do no real harm. Second, markets see only a very low probability of such a scenario materialising. Third, it’s still too far away in terms of timing (the deadline is end-2017 but the UK government is hinting that it might be held next year) and too vaguely defined to focus on. In our opinion, the third explanation is the most likely. At some point, this will hit the radars and we see substantial volatility given our view that Brexit could take as much as 1pp off growth over the next decade and that the vote (as polls suggest) will be fairly close.
But on the bright side, US domestic demand dominates the white swans
Our previous white swan of higher-than-expected price multipliers described a scenario under which the multiplier effects that translate factors, such as lower oil prices, low interest rates and FX depreciation (where present) to the real economy turn out to be higher than we discount in our baseline scenario. In a nutshell, consumers and corporates decide not only to spend all the windfall gains of lower oil prices but take the opportunity of low interest rates to increase leverage to consume and invest. In our new GEO, we have split this risk of this positive outcome into several parts:
US invest more … and win productivity (20% probability): Investment, be it capex or residential, has generally disappointed forecasts including our own. Looking ahead, we expect a sharp pick-up in residential investment. Our forecast on capex, albeit positive, holds room for upside surprise. This would also underpin productivity gains and thus ultimately real wage growth.
Higher-than-expected price multipliers in Europe and Japan (15% probability): On the external front, euro and yen have failed to deliver any significant boost to export volumes. Accommodative credit conditions have yet to deliver a major boost to domestic demand. Finally, while lower oil prices have been a positive, the multiplier effect on consumption and investment remains lower than many had hoped. Should multipliers prove stronger then expected this could deliver upside surprise, notably to our still-below-consensus euro area growth forecast but also offers some potential upside to our above-consensus outlook for Japan.
Fast track reform (10% probability): At the risk of sounding like a broken record, we once again highlight the need for structural reform. We are in the good company of central bankers in making this call. Nonetheless, the probability of it actually materialising remains disappointingly low, all the more so given a busy electoral agenda ahead.
Source: Societe Generale Cross-Asset Research
- It Really Is As Simple As That
Six years after we first explained the only thing that matters for this “market”, JPMorgan finally figured it out, and in doing so proudly joined the ranks of the “tinfoil hat, conspiracy theorists” unable to grasp the finer nuances of the Magic Money Tree theory.
Now, who else can’t wait for the Fed’s first rate hike in nearly a decade?
- "Liar Loans" Are Back! 2008 Here We Come
Earlier this year, as the US auto sales miracle unfolded on the back of record loan terms and record high average monthly payments, we continually argued that underwriting standards were likely to deteriorate going forward as competition for the finite pool of creditworthy borrowers heats up.
Helping to drive (no pun intended) the shift towards looser lending standards is the proliferation of the originate-to-sell model – the same originate-to-sell model that helped steer the US housing market right off a cliff in 2007/2008. The concept is simple: if you’re making loans with the intention of carrying them on your books, you’re likely to care far more about the creditworthiness of the borrower than you are if you’re simply going to ship the loans off to Wall Street to be run through the securitization machine and then sold off to investors via MBS. That same dynamic is now at play in the market for car loans. Auto-backed ABS issuance should come in at around $125 billion this year – that’s up 25% from 2014 and accounts for more than half of total consumer loan-backed supply.
As was the case during the lead up to the housing market collapse, this dynamic embeds an enormous amount of hidden risk in the paper backed by the shoddy loans. This paper is very often highly rated because despite what happened in 2008, the idea still exists that although one risky loan may be properly viewed as a speculative investment, a whole bunch of pooled risky loans are somehow safe as can be.
But even as alarm bells are going off in the subprime auto market and also in the market for student loan-backed paper, there hasn’t been as much concern for the MBS market where apparently, everyone seems to think that market participants (lenders, borrowers, and Wall Street gamblers) have learned their lesson. Of course no one ever, ever learns which is why we weren’t at all surprised to hear that “liar loans” – a relic of the good old days – are back and, in keeping with everything said above, are creeping into mortgage-backed paper. Here’s Bloomberg with the story of Velocity Mortgage Capital LLC:
The pitch arrived with an iconic image of the American Dream: a neat house with a white picket fence.
But behind that picture of a $2.95 million home in Manhattan Beach, California, were hints of something darker: liar loans, those toxic mortgages of the subprime era.
Years after the great American housing bust, mortgages akin to the so-called liar loans — which were made without verifying people’s finances — are creeping back into the market. And, like last time, they’re spreading risks far and wide via Wall Street.
The Manhattan Beach story — how the mortgage on that house was made and subsequently packaged into securities with top-flight credit ratings — recalls a time when borrowers, lenders and investors all misjudged the potential danger.
The story begins earlier this year, when a TV producer bought the cream-colored home. His lender, Velocity Mortgage Capital LLC, says it writes mortgages for people buying homes only for business purposes, such as renting them out, and requires all customers to sign documents stating their intentions.
Soon Velocity was bundling the $1.92 million mortgage and hundreds of other loans into securities through Wall Street’s securitization machine. Kroll Bond Rating Agency featured a picture of the house in a report on the $313 million deal, most of which was rated AAA. Marketing documents for the offering, which was managed by Citigroup Inc. and Nomura Holdings Inc., characterized the buyer as an “investor.”
But when a reporter recently knocked on the door in Manhattan Beach, the buyer answered and said he never planned to rent out the place. Nor, he said, had he signed documents stating he would. He was living in the house with his family.
So he lied. Got it. Bloomberg goes on to explain that Velocity essentially takes advantage of the fact that mortgages made for “business purposes” are exempt from federal regulations designed to ensure that lenders are verifying borrowers’ finances.
But don’t worry, because there are safeguards in place. Velocity, for instance, ensures that borrowers are telling the truth by … taking their word for it. Here’s Bloomberg again:
Chris Farrar, Velocity’s chief executive officer, says his company takes steps to ensure customers really are buying homes for business purposes. These include having every borrower hand write and sign letters testifying to their plans.
And then there’s Kroll which, you’re reminded, also plays a rather large role in rating subprime auto deals, who doesn’t seem to be all that interested in knowing whether or not Velocity has done enough due dillegence:
In assigning AAA grades, Kroll partly relied on Velocity’s promise to buy back any loans that fell short of the standards, said Nitin Bhasin, a Kroll managing director.
“That’s a question for Velocity, I think: How do they make sure when they’re making a loan that it’s not owner-occupied,” Bhasin said.
Bhasin is correct. It is a question for Velocity. And one you’d think Kroll would want a very concrete answer to before assigning an AAA rating especially given what we learned in the lead up to the crisis about investors’ strange propensity to, you know, rely on ratings agencies to do their jobs before giving a deal the triple-A stamp of approval.
And because we wouldn’t want anyone to think that the problem is confined to a handful of “liars” taking out mortgages for “business purposes,” we’ll leave you with the following from FT who reports that the ZIRP-induced hunt for yield has opened the door for the triumphant return of subprime non-Agency RMBS:
For “subprime”, read “non-prime”.
Yield-hungry investors are ready to endorse a revival of bonds backed by riskier US residential mortgages, as lenders warm to housebuyers who do not meet strict borrowing guidelines introduced after the financial crisis.
But the now toxic label of subprime mortgages has been dropped. Instead, Angel Oak Capital is in the process of pricing a deal for a bond offering of so-called “non-prime mortgages” — a term funds are using to describe mortgages that do not meet government standards. Lone Star Funds completed a deal worth $72m in August.
- Sep 9 – World Bank Warns Fed to Delay Rate Rise
EMOTION MOVING MARKETS NOW: 13/100 EXTREME FEAR
PREVIOUS CLOSE: 10/100 EXTREME FEAR
ONE WEEK AGO: 9/100 EXTREME FEAR
ONE MONTH AGO: 10/100 EXTREME FEAR
ONE YEAR AGO: 47/100 NEUTRAL
Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 22.74% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.
Market Volatility: NEUTRAL The CBOE Volatility Index (VIX) is at 24.88. This is a neutral reading and indicates that market risks appear low.
Stock Price Strength: EXTREME FEAR The number of stocks hitting 52-week lows exceeds the number hitting highs and is at the lower end of its range, indicating extreme fear.
PIVOT POINTS
EURUSD | GBPUSD | USDJPY | USDCAD | AUDUSD | EURJPY | EURCHF | EURGBP| GBPJPY | NZDUSD | USDCHF | EURAUD | AUDJPY
S&P 500 (ES) | NASDAQ 100 (NQ) | DOW 30 (YM) | RUSSELL 2000 (TF) | Euro (6E) |Pound (6B)
EUROSTOXX 50 (FESX) | DAX 30 (FDAX) | BOBL (FGBM) | SCHATZ (FGBS) | BUND (FGBL)
MEME OF THE DAY – DUBAI GOLD DEALER OLYMPICS
UNUSUAL ACTIVITY
RHT @$.75 .. SEP 72.5 CALL Activity 3300+ Contracts
IP SEP WEEKLY2 42.5 CALLS @$.62 on offer 1300+ Contracts
KHC SEP 70 PUT ACTIVITY 2K+ @$.50 on offer
KRO Director Purchase 967 @$6.905 Purchase 1,033 @$6.909
TTS SC 13G/A .. Tremblant Capital Group .. 11.69%
HEADLINES
US LMCI Change (Aug): 2.1 (est 1.5, rev prev 1.8)
US NFIB Small business Optimism (Aug): 95.9 (est 96.0, prev 95.4)
US Consumer Credit (Jul): $19.1bn (est $18.6bn, prev rev 27.02bn)
World Bank warns Fed to delay rate rise
Democrats have enough Senate votes to stifle Iran opposition
OECD: Stable growth momentum in OECD area
UK FinMin Osborne: UK debt To GDP uncomfortably high
France to nominate former BNP banker as BOF governor
EZ GDP SA (QoQ) (Q2 P): 0.4% (Est 0.30%, Prev 0.30%)
GE Current A/c Balance (Jul): EUR 23.4 Bln (exp 21.5 Bln, prev 24.4 Bln)
GE Exports SA (MoM) Jul: 2.4% (exp 1.0%, prev rev -1.1%)
GE Imports SA (MoM) Jul: 2.2% (exp 0.7%, prev rev -0.8%)
Indonesia gets green light to rejoin OPEC
Global M&A hit the $3 trillion mark
GOVERNMENTS/CENTRAL BANKS
World Bank warns Fed to delay rate rise –FT
OECD: Stable Growth Momentum Confirmed In OECD Area
UK FinMin Osborne: UK Debt To GDP Ratio Uncomfortably High –MNI
France to nominate Francois Villeroy de Galhau as BOF governor –MNI
Riksbank’s Jochnick: Sees Rapid SEK Strengthening As A Risk To Inflation
Fitch: Euro Zone Ratings May Not Return To Pre-Crisis Levels –Rtrs
Greek cbank: Banks’ AQR to finish this month –Rtrs
GEOPOLITICS
Democrats have enough Senate votes to stifle Iran opposition
FIXED INCOME
US sells 3-year notes at 1.056% vs 1.055% WI –ForexLive
ECB Calls for Common EU Approach on Debt Write-Offs –NYT
ECB: German Law Disqualifies Bank Bonds as Collateral –BBG
Italian Bonds Rise as Traders Increase Odds for More QE From ECB –BBG
Credit ratings bolster risky bank bonds –FT
FX
USD: Dollar mixed as reviving risk appetite drags on yen, euro –Rtrs
EM currency defences hold against sell-off–FT
ENERGY/COMMODITIES
WTI futures settle 0.25% lower at $45.94 per barrel
Brent futures settle 4% higher at $49.52 per barrel
CRUDE: Indonesia gets green light to rejoin OPEC –FT
CRUDE: WTI, Brent diverge –WSJ
CRUDE: WTI Falls Again Due to Oversupply Concerns –MW
CRUDE: Brent rises on data, but oversupply concerns weigh –ET
METALS: Copper Prices Jump Higher on Supply Cuts, China Data –WSJ
METALS: Gold bounces after 4-day losing streak –FXstreet
EQUITIES
S&P 500 unofficially closes +2.5%
DJIA unofficially closes +2.4%
Nasdaq unofficially closes +2.7%
M&A: global M&A hit the $3 trillion mark –WSJ
M&A: Media General to buy media company Meredith for $2.34bn
M&A: Potash might be prepared to make hostile K+S bid –Handelsblatt
M&A: Mylan Says It Will Launch $27.14B Bid for Perrigo –ABC
M&A: GE wins EU approval to buy Alstom’s power unit –Rtrs
M&A: Microsoft finalizes Adallom deal –Forbes
M&A: Blackstone Agrees to Buy Strategic Hotels for About $4bn –WSJ
BANKS: European Banks May Face EUR26Bln Capital Shortfall On New Rules – JPMorgan
BANKS: Buffett banks BoA’s Moynihan –MW
TECH: Berkshire’s Buffett says bought some IBM shares in Q3 –ET
TECH: Verizon to test 5G in 2016 –FW
EMERGING MARKETS
PBOC: Forex Reserve Drop Partly Due to Intervention –WSJ
China Plans to Reform SOEs Through Mergers, Share Sales-Document
- Fed Hike Will Unleash "Panic And Turmoil" And A New Emerging Market Crisis, Warns World Bank Chief Economist
If it was the Fed’s intention to make the upcoming rate hike seem like a welcome event, one that presaged a new Golden Age in the US (and global) economy because, lo and behold, the wise Fed would never hike unless the economy is flourishing and thus create a self-fulfilling prophecy in which the rate hike itself – an event of tightening financial conditions even when inflation expectations are the lowest they have been in years – becomes a catalyst for growth, then it has failed spectacularly.
First, it was the IMF warning a rate hike would be a big mistake, then Larry Summer (who for some reason progressives thought was hawkish when it was a choice between him and Aunt Janet), then even China got into the fray saying the Fed should delay its rate hike as it could push emerging markets (such as China) into crisis.
But it wasn’t until today that we got the most glaring confirmation there had been absolutely zero coordination at the highest levels of authority and “responsibility”, when the World Bank’s current chief economist (a position previously held by such ‘luminaries’ as Larry Summers, Joseph Stiglitz and Stanley Fischer), Kaushik Basu warned that the Fed risks, and we quote, triggering “panic and turmoil” in emerging markets if it opts to raise rates at its September meeting and should hold fire until the global economy is on a surer footing, the World Bank’s chief economist has warned.
While apparently the World Bank economist is unfamiliar with the concept of reflexivity, and does not understand that the only reason the global economy is not on “surer footing” is because of the 12+ month , near endless pricing in of the Fed’s first rate hike since 2006, which has unleashed an unprecedented capital flight out of all emerging markets, a record series of rate cuts across the globe including NIRP in Europe, and China’s first official currency devaluation in years not to mention the first stock market correction in 4 years, what is critical is that by making this statement, Basu destroys with just two words the narrative that i) the Fed knows what it is doing and that ii) contrary to logic, a rate hike at a time when the world clearly and desperately needs, and is addicted, to global central bank liquidity, will lead to even further asset price plunges.
In fact, Basu may have just admitted, in not so many words, that Deutsche Bank’s sinking feeling that the Fed’s rate hike is nothing but a “controlled demolition” of the market, one which would send global equities 20-40% lower, is spot on.
This is what else Basu told the FT:
Rising uncertainty over growth in China and its impact on the global economy meant a Fed decision to raise its policy rate next week, for the first time since 2006, would have negative consequences.
His warning highlights the mounting concern outside the US over the Fed’s potential “lift-off”. It follows similar advice from the International Monetary Fund where anxieties have also grown in recent weeks about the potential repercussions of a September rate rise.
That means that if the Fed’s policymakers were to decide next week to raise rates they would be doing so against the counsel of both of the institutions created at Bretton Woods as guardians of global economic stability.
And just in case casually tossing the words “panic in turmoil” was not enough, Basu decided to add a few more choice nouns, adding a rate hike “could yield a “shock” and a new crisis in emerging markets… especially as it would come on the back of concerns over the health of the Chinese economy that have grown since Beijing’s move last month to devalue its currency.”
He said that, even though it had been well-advertised by the Fed, any rise would lead to “fear capital” leaving emerging economies as well as to sharp swings in their currencies. The likely strengthening in the dollar would also hamper US growth, he said.
Finally at least one person in a position of authority realized just what Quantitative Tightening means:
“I don’t think the Fed lift-off itself is going to create a major crisis but it will cause some immediate turbulence,” Mr Basu said. “It is the compounding effect of the last two weeks of bad news with that [China devaluation] . . . In the middle of this it is going to cause some panic and turmoil.
Precisely, and as a reminder between the Fed’s tightening and China’s QT, the world would suddenly find itself starting at a finacial liquidity abyss, and abyss which for Deutsche Bank means the S&P could trade at “half its value.”
His conclusion: “The world economy is looking so troubled that if the US goes in for a very quick move in the middle of this I feel it is going to affect countries quite badly,” he said.
And if someone should know (clearly not the Fed whose predictions have become the butt of all jokes even for tenured economists), that would be the chief economist of the World Bank.
But fear not: recall that over the weekend Goldman made it very clear that a September rate hike (and maybe December) is not coming. And what Goldman wants, Goldman always gets, even if it means the Fed ends up losing all credibility in the process.
Finally, just in case there is still any confusion what a Fed rate hike means, we repeat what Bank of America said last week:
Should the Fed decide to raise interest rates, it will be the first Fed hike since June 29th 2006. In the 110 months that have since past, global central banks have cut interest rates 697 times, central banks have bought $15 trillion of financial assets, zero [or negative] interest rates policies have been adopted in the US, Europe & Japan. And, following the Great Financial Crisis of 2008, both stocks and corporate bonds have soared to all-time highs thanks in great part to this extraordinary monetary regime.
As noted above, a rate hike with a stroke ends this era.
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