With Europe, the BBA, and virtually everyone shocked,
shocked,
that the global bank cabal schemed and colluded for years to
manipulate interest rates, so far only America appears relatively
blase, and totally ignorant, about the issue. Perhaps it is because the
first bank exposed in the manipulation scheme so far is European,
perhaps because it is just tired of all the endless crime coming out of
the criminal complex known as Wall Street. It is unclear. Then again,
America will soon have its own manipulation scandals to deal with: and
if it is not the US BBA member banks, all of whom were just as guilty
as Barclays, and the only question is which bank will be the
sacrificial scapegoat whose CEO will have to demonstratively depart (to
warmer, non-extradition climes), it will be the following story from
Bloomberg which will likely pick up much more steam over the next weeks
and months, detailing how the bank which just barely avoided a triple
notch downgrade (wink wink) has had previous dealings with the very
same rating agencies seeking to, picture this,
artificially inflate ratings!
So to summarize: Fed manipulates capital markets, HFT manipulates bid
ask spreads, "self-policing" CDS pricing market groups fudge the prices
on trillions in Credit Default Swaps, bank cabals collude and
manipulate short-term interest rates, and now banks are confirmed to
have manipulated the ratings on tens of billions of bonds using
monetary incentives and threats. Is there
anything in
this "market" that was fair over the past several decades, and was
actual price discovery ever actually possible? Because by now it should
be very clear going forward all the things that actually make a free
and fair market are forever gone, and that without endless fraud and
manipulation by all the market participants who realize that anyone
defecting the ponzi group means immediate and terminal losses for all,
and all those calls for an S&P 400 would actually prove to be
overly optimistic.
Let’s face it – Europe is a cool place. In addition to being cool,
Europe is also without a doubt the most creative and imaginative place
outside of Middle Earth. Its ability to consistently baffle itself
certainly warrants valuable space in IceCap’s global market outlooks.
Financially speaking, Europe is broke - it no longer works. Figuratively
speaking, Europe has entered its golden age. Unworkable solutions
dreamt by an unworkable political system is consuming all real and
electronic ink known to mankind. A day doesn’t go bye where local
newspapers are not bursting with news on Greece, Spain and their
Euro-cousins. This sudden love-in with Europe has surely removed America
from the global spotlight. But, be patient as this will change later
during the year. To demonstrate the absurdity of this place called
Europe, one has to understand nothing else except the legalities behind
Europe’s rules for selling cabbage to each other.
Here’s a really wild hypothesis: if the LIBOR rate was under
manipulation in 2008, is it not possible that the inter-bank lending
rate spike (and resultant credit freeze) was at least partly a product
of manipulation by the banking cartel?
Could the manipulators have purposely exacerbated the freeze, to get a bigger and quicker bailout? After all, the banking system sucked
$29 trillion
out of the taxpayer following 2008. That’s a pretty big payoff. LIBOR
profoundly affects credit availability — and the bailouts were directly
designed to combat a freeze in credit availability.
If market participants were manipulating or rigging LIBOR, they were manipulating a variable directly tied to the bailouts.
Good
evening Ladies and Gentlemen:
I will be away for a week with limited access to a computer. I will try
and give you all the highlights on the comex at least accompanied by a
few major stories. I will resume comprehensive reports next Monday.
The price of gold closed down by $1.60 to $1597.70 whereas silver rose
by 10 cents to $27.54
The total comex gold rose approximately by 1600
Joe Saluzzi, expert on algorithmic trading -- also known as
high-frequency trading, or HFT -- returns as a guest this week to
explain how the players behind this machine-driven process act as
parasites that are destroying our financial markets (and, increasingly,
even themselves). Since Joe
first spoke with us
last year, HFT firms have only increased in size and share of market
activity. Here are some staggering statistics on how influential they
have become:
- HTFs make up between 50-70% of the volume seen across market exchanges today
- 2% of the traders on many exchanges (HFTs, specifically) represent 80% of the volume
- a single large HFT firm (referred to as a Direct Market Maker) can account for 10%+ of a market's volume on a given day
- Large HFT firms make between $8 to $21 billion a year
- HFT trades occur in milliseconds (i.e. a small fraction of the time it takes your eye to blink)
With such scale, speed and profitability, HFTs have turned the market
away from being an efficient price-setting mechanism and perverted it
into a casino where the clientele (i.e. human investors) gets fleeced.
And our regulators are so outmatched by the scope, complexity and
funding of these titanic HFT players that at moment, there are pretty
much zero consequences for bad actors.
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High-frequency trading became so competitive that on a truly level
playing field no one could make money operating at high volumes.
Starting in 2008, there had been a frantic rush into the high-frequency
gold mine at a time when nearly every other investment strategy on Wall
Street was imploding. That competition was making it very hard for the
firms to make a profit without using methods that Bodek viewed as seedy
at best. And so a complex system evolved to pick winners and losers. It
was done through speed and exotic order types. If you didn’t know which
orders to use, and when to use them, you lost nearly every time. To
Bodek, it was fundamentally unfair—it was rigged. There were too many
conflicts of interest, too many shared benefits between exchanges and
the traders they catered to. Only the biggest, most sophisticated,
connected firms in the world could win this race.
Three weeks ago we noted
that Goldman Sach's Global Leading Indicator (GLI) and its Swirlogram
had entered a rather worrying contraction phase. Today's update to the
June GLI data suggests things got worse and not better as momentum is
now also dropping as well as the absolute level. This continued
deterioration in momentum suggests further softening in the global
cyclical picture. Of particular concern is the broad-based deterioration in the GLI’s constituent components in June. Nine of ten components weakened last month, only the second time this has occurred since the depths of the recession in 2008Q4. The June Final GLI confirms the pronounced weakening in global activity in recent months. Goldman has found elsewhere (as we noted here) that this
stage of the cycle, when momentum is negative and decelerating, is
typically accompanied by deteriorating data and market weakness.
Who
cares about healthcare? Thanks to the SCOTUS decision, Little Suzie
Newsykins decided on her Summer job working for Democracy and
'Free-Speech' as there are plenty of jobs there. Free-speech is such a growth industry, "its on track to hit two billion 'speech-units' this campaign". The delightful young lady in this brief cartoon got her dream summer job because corporations are people; money is free-speech; and some people have more free-speech than others.
"Shocking." Just "Shocking."
In the first of its kind action, Twitter has unveiled its first Twitter Transparency Report, in which it says that as "inspired by the great work done by our peers @Google, the primary goal of this report is to shed more light on: government
requests received for user information, government requests received
to withhold content, and DMCA takedown notices received from copyright
holders." Is it something Americans should be concerned about?
Well, with 679 out of a total of 849 user information requests by
various governments, or the most by a margin of nearly 700% belonging to
the US, we would say so. This also translates into 948 of all
users/accounts specified. But most troubling is that Twitter has folded
on a 75% of all such demands when it comes to the US government
demanding information. It has provided information to only 6 other
governments: Australia, Canada, Greece, Japan, Netherlands and the UK,
but at a far lower "hit rate." You gotta give it to Uncle Sam: he sure
can be persuasive.
Last week's bond auctions have finally settled and the numbers are in. As of the last day of June, the US had a record $15,856,367,214,324.44 in debt, a $75 billion increase overnight, and a post World-War II high Federal debt/GDP ratio of 101.5%.* That is all.
The NYSE volume today was abysmal. According to BBG data, this was the lowest volume day in over a decade and even compared to other July 1st
(or holiday weeks) this was the lowest volume print. Average trade size
for the S&P 500 e-mini futures was also very small - almost the
lowest of the year as low volumes and the narrowest high-to-low range for ES in over two months
still managed to hold on to small gains for the day. In the face of
this relative exuberance, Treasury yields dumped down 5 to 6 bps across
the board remaining the most cognitively dissonant of risk assets on
the day. HYG underperformed (as HY and IG credit
indices were very quiet and reracked along with ES for most of the
day). HYG did end Friday notably rich to intrinsics so this makes some
sense but is unusual for a positive close in ES (as we note that 16
of the 24 times in the last year that HYG has closed red and SPY
closed green, SPY has gone on to lose more in the next few days). EURUSD lost quite a bit of ground
(again seemingly ignored by US equities) as USD rise 0.35% from
Friday's close (albeit with AUD rallying modestly along with JPY). Oil
retraced almst 50% of its spike gains from Friday but then pushed back
up over $83.50 into the close and while Silver and Gold flatlined
ending practically unchanged, Copper also lost a little ground (2x beta
of USD) on growth slowing from China's data we assume.As with pretty
much any rally, financials, energy and tech were the higher-beta winners
all gathered perfectly correlated around 0.6% gains on the day (but we
note that JPM and Citi remain negative from Friday's opening print). VIX ended the day below 17% (down a measly 0.25 vols)
- its lowest close in two months - and while implied correlation
managed to make modest gains (to around 65%) risk assets in general were
only moderately correlated as equities outshone CONTEXT on the day.
As
the squeeze-fest from Friday's oil-spike wears off a little, it is
perhaps worth noting just how astronomically insane the world gets when
the terrible triumvirate of 'green' energy needs, defense spending, and
government largesse come together. Why should we worry about 5c or 10c
on a gallon of fuel down the local gas station when the US Navy (in all her glory) is willing to pay a staggering $26-a-gallon for 'green' synthetic biofuel (made we assume from the very same unicorn tears and leprechaun nipples that funded the ESM). As Reuters reports,
the 'Great Green Fleet' will be the first carrier strike group powered
largely by alternative fuels; as the Pentagon hopes it can prove the
Navy looks just as impressive burning fuel squeezed from seeds, algae,
and chicken fat (we did not make this up). The story gets better as it
appears back in 2009, the Navy paid Solazyme (whose strategic
advisors included TJ Gaulthier who served on Obama's White House
Transition team) $8.5mm for 20,055 gallons on algae-based biofuel - a
snip at just $424-a-gallon. While this is of course stirring
all kinds of Republican rebuttal, Navy secretary Ray Mabus believes it
vital to diversify as the Navy has been at the forefront of energy
innovation for over 100 years (from sail, to coal, to oil, and then to
nuclear from the 1850s to 1950s). Indeed, "Of course it costs more," he
told the climate conference. "It's a new technology. If we didn't pay a little bit more for new technologies, we'd still be using typewriters instead of computers." Easy when it's other people's money eh?
There
is a saying that it is better to remain silent and be thought a fool
than to speak out and remove all doubt. Today, the San Fran Fed's John
Williams, and by proxy the Federal Reserve in general, spoke out, and
once again removed all doubt that they have no idea how modern money
and inflation interact. In a speech titled, appropriately enough, "Monetary Policy, Money, and Inflation", essentially made the case that this time is different and that no matter how much printing the Fed engages in, there will be no inflation.
To wit: "In a world where the Fed pays interest on bank reserves,
traditional theories that tell of a mechanical link between reserves,
money supply, and, ultimately, inflation are no longer valid. Over
the past four years, the Federal Reserve has more than tripled the
monetary base, a key determinant of money supply. Some commentators have
sounded an alarm that this massive expansion of the monetary base will
inexorably lead to high inflation, à la Friedman.Despite these dire
predictions, inflation in the United States has been the dog that didn’t
bark." He then proceeds to add some pretty (if completely irrelevant)
charts of the money multipliers which as we all know have plummeted and
concludes by saying "Recent developments make a compelling case that
traditional textbook views of the connections between monetary policy,
money, and inflation are outdated and need to be revised." And actually,
he is correct: the way most people approach monetary policy is 100%
wrong. The problem is that the Fed is the biggest culprit, and while
others merely conceive of gibberish in the form of three letter economic
theories, which usually has the words Modern, or Revised (and why note
Super or Turbo), to make them sound more credible, they ultimately
harm nobody. The Fed's power to impair, however, is endless, and as
such it bears analyzing just how and why the Fed is absolutely wrong.
The
long-term importance of the dependency ratio (which at its most base
represents the ratio of economically inactive compared to economically
active individuals) is at the heart of many of our fiscal problems (and
policy decisions). Not only have they and will they become a larger and
larger burden on the tax-paying public but as a voting block will be
more and more likely to vote the more socialist wealth-transfer-friendly
way in any election (just as we see extreme examples in Europe). The
following chart provides some significant food for thought along these
lines as by 2016, for the first time ever, developed world
economies will have a higher dependency ratio than emerging economies
and it rises dramatically. How this will affect budget deficits
(food stamps) and/or civil unrest is anyone's guess but for sure, it
seems given all the bluster, that we are far from prepared for this
shift.
Ah
Moldova… the poorest country in Europe, which just so happens to have
had a Communist party majority in its parliament since 1998. These two
points are not unrelated. Despite having achieved its independence from
the Soviet Union over 20 years ago, the state is still a major part of
the Moldovan economy…from setting prices and wages to media,
healthcare, agricultural production, air transport, and electricity.
Under such management, it’s no wonder, for example, that Moldova has
to import 75% of its electricity. It is the exact opposite
of self-sustaining. The government does a reasonable job of chasing away
foreigners as well. Agriculture is the mainstay of Moldova’s economy…
and while on one hand they say “we welcome foreign investment in
agriculture,” on the other they say “foreign investors cannot own
agricultural property.” It’s genius.
The
colossal size (and growth) of the US government's budget deficit is a
problem that seems to remain on the sidelines all the time the Fed is
buying and maintaining interest rates at an acceptable level. As we noted last night,
nothing points to investor concern (yet) aside from an increasing
diversification from the USD as a trade currency. Many have suggested
raising taxes on the rich to cover the difference between what the
government collected in revenue and what it spent. Professor Antony
Davies takes on this thorny issue and demonstrates that taxing-the-rich
will not be sufficient tyo make the budget deficit disappear as he
notes: "the budget deficit is so large that there simply aren't enough rich people to tax to raise enough to balance the budget"; instead we should work on legitimate solutions like cutting spending.
The
broad theme of buying stocks because they are cheap - as evidenced by
the dividend yield's premium to US Treasury yields - seems to fall
apart a little once one look at a long-run history of the behavior of
these two apples-to-unicorns yield indications. Forget the risky vs
risk-free comparisons, forget the huge mismatch in mark-to-market
volatility, and forget the huge differences in max draw-downs that we
have discussed in the past; prior to WWII, the average S&P 500 dividend yield was 136bps over the 10Y Treasury yield
and while today's 'equity valuation' is its 'cheapest' since the 1950s
relative to Bernanke's ZIRP-driven bond market; the 'old' normal
suggests that this time is no different at all and merely a reversion to
more conservative times - leaving stocks far from cheap.
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