Jueves 19/03/15 Indicadores lideres, economia Philadelphia

[Fenix]

Government Admits It Can't Fully Guarantee 51% Of Insolvent Pension Plans
Tyler D.
03/12/2015

Earlier this month we outlined why it is a bad time to be a pensioner. Among the issues we identified were the 18% increase in EU corporate pension deficits occasioned by the use of a lower discount rate in the calculation of the present value of liabilities (thank you Mario Draghi), US public sector pension plans’ shift away from fixed income and towards more risky investments due to an express unwillingness to adopt more realistic investment rate assumptions (because that would mean lowering the liability discount rate), and a rumor (which just today was confirmed as fact) that Greece will indeed look to their plunder pensions in order to stay afloat.

In the most recent example of why pensioners in the US should perhaps be a bit concerned about the security of their benefits, a new report suggests that the government agency in charge of backstopping private-sector pension plans (the Pension Benefit Guaranty Corporation) isn’t entirely optimistic about its own ability to provide an effective safety net for multiemployer plans.

Via Pensions and Investments:

More than half of multiemployer plan participants will have their benefits reduced if their plans become insolvent and rely on government guarantees in the near future, said a study released Wednesday by the Pension Benefit Guaranty Corp.

That compares to 21% of participants now in plans that have already run out of money and rely on PBGC guarantees.

As the following chart shows, the agency is doing a fairly decent job when it comes to participants in plans that are currently insolvent and receiving assistance, but when it comes to backing up plans that are “likely to need assistance in the future,” the outlook is not good, with more than half of participants suffering a reduction in benefits...

Worse still, of the 51% who will have their benefits cut, 54% will see cuts of 10% or more…

Importantly, the PBGC only looked at currently insolvent plans or terminated plans. It did not take into account plans which it believes will be insolvent sometime within the next decade. Were those numbers included, the agency says that “the risk and magnitude of benefit loss increases dramatically [and] the gap between promised benefits and guarantees widens further.”

Here’s why (via Pension Investments again):

Many of the plans headed toward insolvency or projected to do so within 10 years represent plans with larger populations or more generous benefits. “That by implication suggests that as the benefit amounts get bigger, the current level of the guarantee will cut a lot more participants and the cuts will be a lot higher,” said a PBGC official involved with the study who declined to be identified. “Future insolvencies are going to be generally less well protected than the current system.”

We’ll leave you with the following from the PBGC’s 2014 annual report:

The multiemployer program’s net position declined by $34,176 million, increasing its deficit to $42,434 million, an all-time record high for the multiemployer program…

Some plans, even an improving economy will not be sufficient to maintain their solvency...

The FY 2013 Projections Report found that, at current premium levels, PBGC’s multiemployer program is itself on course to become insolvent with a significant risk of running out of money in as little as five years. The risk of insolvency rises rapidly, exceeding 50 percent in 2022 and reaching 90 percent by 2025. When the program becomes insolvent, PBGC will be unable to provide financial assistance to pay guaranteed benefits for insolvent plans.

[Fenix]

The West's Plan To Drop Russia From SWIFT Hilariously Backfires
Tyler D.
03/12/2015

The economic nuclear option is to kick Russia out of the international banking system. And the US government has been vociferously pushing for this.

Specifically, the US government wants to kick Russia out of SWIFT, short for the Society of Worldwide Interbank Financial Telecommunications.

That’s a mouthful. But SWIFT is an important component in the global banking system because it lays the foundation for banks to communicate and transfer funds with one another.

It’s a network protocol of sorts. Whenever a bank in Pakistan does business with a bank in Portugal, the funds will clear through the SWIFT network.

According to the SWIFT itself, they link over 9,000 financial institutions worldwide in over 200 countries, which transact 15 million times per day.

Bottom line, being part of SWIFT is critical to conducting business with the rest of the world. And if Russia gets kicked out of SWIFT, it would be a disaster.

Now, SWIFT is technically organized as a ‘Cooperative Society’ and governed by a board of directors.

There are 25 available board seats, and each seat is allocated for a three-year term to a specific country.

The United States, Belgium, France, Germany, UK, and Switzerland each hold two seats. A handful of other countries hold just one seat. And of course, most countries don’t hold any seats at all.

Here’s what’s utterly hilarious—

On Monday afternoon, not only did SWIFT NOT kick Russia out… but they announced that they were actually giving a BOARD SEAT to Russia.

This is basically the exact opposite of what the US government was pushing for.

Awkward…

But this story is even bigger than that.

Because at the same time that the US government isn’t getting its way with SWIFT, the Chinese are busy putting together their own version of it called CIPS.

CIPS stands for the China International Payment System; it’s intended to be a direct competitor to SWIFT, and a brand new way for global banks to communicate and transact with one another in a way that does NOT depend on the United States.

We’ll talk about CIPS in more details in a future letter. But in brief, it addresses some serious weaknesses, inefficiencies, and technological challenges of SWIFT.

And it should be ready to go later this year.

[Fenix]

15:57 Los gestores de fondos creen que Wall Street está sobrevalorada
Una encuesta reciente de Bank of America Merrill Lynch entre los gestores de fondos muestra que el 23% de los encuestados cree que las acciones estadounidenses están sobrevaloradas, la mayor cantidad desde el pico de la burbuja de las puntocom en la primavera de 2000.

Un increíble 35% de los encuestados está buscando reducir sus tenencias acciones estadounidenses hasta una ponderación por debajo del benchmark.

Entonces, ¿qué están comprando? Las dos respuestas más populares fueron acciones de Europa y Japón, de las que tienen un exceso de peso el 60% y el 40% de los administradores de fondos, respectivamente.


The New London Gold Fix And China's Gold Strategy
Tyler D.
03/12/2015

This month the physical gold market will undergo radical change when the four London fixing banks hand over the twice-daily fix to the International Commodity Exchange's trading platform on 20th March.

From 1st April the Financial Conduct Authority will extend its powers from regulating the participants to regulating the fix as well. This will transfer price control away from the bullion banks allowing direct access to the fixing process for all direct participants and sponsored clients.

From this flow two important consequences. Firstly, the London market is changing from an unregulated to a partially regulated market, reducing room for price manipulation. And secondly, the major Chinese state-owned banks, assuming they register as direct participants, have the opportunity to dominate the London physical market without having to deal through one of the current fixing banks. No announcement has been made yet as to who the direct participants will be, but it is a racing certainty China will be represented.

Implications of becoming a regulated market

Under the current regime a buyer or seller on the fix has to deal through one of the four fixing bullion banks. The information gained by them from seeing this business is crucial, giving them a quasi-monopolistic trading advantage over all the other dealers. Instead, buyers and sellers will be anonymous during the auction process.

The new platform should, therefore, ensure equal opportunity, eliminating the advantage enjoyed by the fixing banks. Crucially, it will change market domination from the privileged fixing members in favour of the deepest pockets. These are almost certain to be China's through the state-owned banks which already control the largest physical market in Asia, the Shanghai Gold Exchange (SGE).

China's gold strategy

China actually took its first deliberate step towards eventual domination of the gold market as long ago as June 1983, when regulations on the control of gold and silver were passed by the State Council. The following Articles extracted from the English translation set out the objectives very clearly:

* Article 1. These Regulations are formulated to strengthen control over gold and silver, to guarantee the State's gold and silver requirements for its economic development and to outlaw gold and silver smuggling and speculation and profiteering activities.
* Article 3. The State shall pursue a policy of unified control, monopoly purchase and distribution of gold and silver. The total income and expenditure of gold and silver of State organs, the armed forces, organizations, schools, State enterprises, institutions and collective urban and rural economic organizations (hereinafter referred to as domestic units) shall be incorporated into the State plan for the receipt and expenditure of gold and silver.
* Article 4. The People's Bank of China shall be the State organ responsible for the control of gold and silver in the People's Republic of China.
* Article 5. All gold and silver held by domestic units, with the exception of raw materials, equipment, household utensils and mementos which the People's Bank of China has permitted to be kept, must be sold to the People's Bank of China. No gold and silver may be personally disposed of or kept without authorisation.
* Article 6. All gold and silver legally gained by individuals shall come under the protection of the State.
* Article 8. All gold and silver purchases shall be transacted through the People's Bank of China. No unit or individual shall purchase gold and silver unless authorised or entrusted to do so by the People's Bank of China.
* Article 12. All gold and silver sold by individuals must be sold to the People's Bank of China.
* Article 25. No restriction shall be imposed on the amount of gold and silver brought into the People's Republic of China, but declaration and registration must be made to the Customs authorities of the People's Republic of China upon entry.
* Article 26. Inspection and clearance by the People's Republic of China Customs of gold and silver taken or retaken abroad shall be made in accordance with the amount shown on the certificate issued by the People's Bank of China or the original declaration and registration form made on entry. All gold and silver without a covering certificate or in excess of the amount declared and registered upon entry shall not be allowed to be taken out of the country.

Additionally, China has deliberately developed her gold production regardless of cost so that she is now the largest producer by far in the world today. State-owned refineries process this gold along with doré imported from elsewhere. None of this gold leaves China.

The regulations quoted above formalise the State's monopoly over all gold and silver which is exercised through the People's Bank, and they allow the free importation of gold and silver but keep exports under very tight control. On the basis of these regulations and as subsequently amended the People's Bank established the SGE, which remains under its total control. The intent behind the regulations is not to establish or permit the free trade of gold and silver, but to control these commodities in the interest of the state.

This being the case, the growth of Chinese gold imports recorded as deliveries to the public since 2002 is only the most recent evidence of a deliberate act of policy embarked upon thirty-two years ago. China had been accumulating gold for nineteen years before she allowed her own nationals to buy any when private ownership was finally permitted. Furthermore, the bullion was freely available, because in seventeen of those years gold was in a severe bear market fuelled by a combination of supply from central bank disposals, leasing, scrap, rapidly-increasing mine production and investor selling, all of which I estimate totalled about 76,000 tonnes in all. The two largest buyers for all this gold for much of the time were the Middle East and China. The breakdown from these sources and the likely demand are identified in the table below taken from my article for GoldMoney on the subject published last October, where a more detailed discussion of global bullion distribution during those years can be found.

Put in another context the cost of China's 25,000 tonnes of gold equates to roughly 10% of her exports over the period, and the eighties and early nineties in particular, also saw huge capital inflows when multinational corporations were building factories in China. However, the figure for China's gold accumulation is at best informed speculation, but given the determination expressed in the 1983 regulations and subsequent events it is clear she had deliberately accumulated a significant undeclared stockpile by 2002.

So far China's long-term plans for the acquisition of gold appear to have achieved some important objectives. Deliveries to the public through the SGE since only 2008 totalled 8,459 tonnes, gross of returned scrap, probably more than 9,500 tonnes since 2002 given estimated domestic mine production of 1,352 tonnes between2002-2007.

With such a large commitment to this market, we must now anticipate the next stage for China's gold policy, which is why the changes in London may be important.

China now has the opportunity to take a dominant role in London, without having to direct its order flows through the fixing banks. Therefore, it is no exaggeration to say that from 20th March, China will be able to control the global physical gold market, which will permit her to manage the price. She has the deepest pockets, backed by the largest single stockpile.

China's motives

China's motives for taking control of the gold bullion market have almost certainly evolved. The regulations of 1983 make sense as part of a forward-looking plan to ensure that some of the benefits of industrialisation would be accumulated as a counterparty risk free national asset. This reasoning is similar to that of the Arab nations capitalising on the oil-price bonanza only ten years earlier, which led them to accumulate their hoard for the benefit of future generations. However, as time passed the world has changed both economically and politically.

2002 was a significant year for China, when geopolitical considerations entered the picture. Not only did the People's Bank establish the SGE to facilitate deliveries to private investors, but this was the year the Shanghai Cooperation Organisation (SCO) formally adopted its charter. This merger of security and economic interests with Russia has bound Russia and China together with a number of resource-rich Asian states into an economic bloc. When India, Iran, Mongolia, Afghanistan and Pakistan join (as they are committed to do), the SCO will cover more than half the world's population. And inevitably the SCO's members are looking for an alternative trade settlement system to using the US dollar.

At some stage China with her SCO partner, Russia, will force the price of gold higher as part of their currency strategy. You can argue this from an economic point of view on the basis that possession of properly priced gold will give her a financial dominance over global trade at a time when we are trashing our fiat currencies, or more simply that there's no point in owning an asset and suppressing its value for ever. From 2002 there evolved a geopolitical argument: both China and Russia having initially wanted to embrace American and Western European capitalism no longer sought to do so, seeing us as soft enemies instead. The Chinese public were then encouraged even by public service advertising to buy gold, helping to denude the west of her remaining bullion stocks and to provide market liquidity in China.

What is truly amazing is the western economic and political establishment have dismissed the importance of gold and ignored all the warning signals. They do not seem to realise the power they have given China and Russia to create financial chaos by simply hiking the gold price. If they do, which seems to be only a matter of time, then London's fractional reserve system of unallocated gold accounts would simply collapse, leaving Shanghai as the only major physical market.

Therefore the failure of the London bullion market to see strategically beyond its short-term interests has opened the door to China's powerful state-owned banking monopoly to control the gold bullion market. This is probably the final link in China's long-standing gold strategy, and through it a planned domination of the global economy in partnership with Russia and the other SCO nations.

[Fenix]

Flash Boys' Michael Lewis Warns "The Problem's Not Just HFT, The Problem Is The Entire System"
Tyler D.
03/13/2015

As HFT shops begin to turn on each other, it seems appropriate to reflect on the impact that Michael Lewis' Flash Boys book had on exposing the ugly truth that many have been discussing for years in US (and international) equity (and non-equity) markets. As Lewis concludes, after explaining the attacks he has suffered from the HFT industry, "If I didn't do more to distinguish 'good' H.F.T. from 'bad' H.F.T., it was because I saw, early on, that there was no practical way for me or anyone else... to do it. ... The big banks and the exchanges [have] been paid to compromise investors’ interests while pretending to guard those interests. I was surprised more people weren’t angry with them."



Authored by Michael Lewis, originally posted at Vanity Fair,

When I sat down to write Flash Boys, in 2013, I didn’t intend to see just how angry I could make the richest people on Wall Street. I was far more interested in the characters and the situation in which they found themselves. Led by an obscure 35-year-old trader at the Royal Bank of Canada named Brad Katsuyama, they were all well-regarded professionals in the U.S. stock market. The situation was that they no longer understood that market. And their ignorance was forgivable. It would have been difficult to find anyone, circa 2009, able to give you an honest account of the inner workings of the American stock market—by then fully automated, spectacularly fragmented, and complicated beyond belief by possibly well-intentioned regulators and less well-intentioned insiders. That the American stock market had become a mystery struck me as interesting. How does that happen? And who benefits?

By the time I met my characters they’d already spent several years trying to answer those questions. In the end they figured out that the complexity, though it may have arisen innocently enough, served the interest of financial intermediaries rather than the investors and corporations the market is meant to serve. It had enabled a massive amount of predatory trading and had institutionalized a systemic and totally unnecessary unfairness in the market and, in the bargain, rendered it less stable and more prone to flash crashes and outages and other unhappy events. Having understood the problems, Katsuyama and his colleagues had set out not to exploit them but to repair them. That, too, I thought was interesting: some people on Wall Street wanted to fix something, even if it meant less money for Wall Street, and for them personally.

Of course, by trying to fix the stock market they also threatened the profits of the people who were busy exploiting its willful inefficiencies. Here is where it became inevitable that Flash Boys would seriously piss off a few important people: anyone in an established industry who stands up and says “The way things are being done here is totally insane; here is why it is insane; and here is a better way to do them” is bound to incur the wrath of established insiders, who now stand accused of creating the insanity. The closest thing in my writing life to the response of Wall Street to Brad Katsuyama was the response of Major League Baseball to Billy Beane after Moneyball was published, in 2003, and it became clear that Beane had made his industry look foolish. But the Moneyball story put in jeopardy only the jobs and prestige of the baseball establishment. The Flash Boys story put in jeopardy billions of dollars of Wall Street profits and a way of financial life.

Two weeks before the book’s publication, Eric Schneiderman, the New York attorney general, announced an investigation into the relationship between high-frequency traders, who trade with computer algorithms at nearly light speed, and the 60 or so public and private stock exchanges in the United States. In the days after Flash Boys came out, the Justice Department announced its own investigation, and it was reported that the F.B.I. had another. The S.E.C., responsible in the first place for the market rules, known as Reg NMS, that led to the mess, remained fairly quiet, though its enforcement director let it be known that the commission was investigating exactly what unseemly advantages high-frequency traders were getting for their money when they paid retail brokers like Schwab and TD Ameritrade for the right to execute the stock-market orders of small investors. (Good question!) The initial explosion was soon followed by a steady fallout of fines and lawsuits and complaints, which, I assume, has really only just begun. The Financial Industry Regulatory Authority announced it had opened 170 cases into “abusive algorithms,” and also filed a complaint against a brokerage firm called Wedbush Securities for allowing its high-frequency-trading customers from January 2008 through August 2013 “to flood U.S. exchanges with thousands of potentially manipulative wash trades and other potentially manipulative trades, including manipulative layering and spoofing.” (In a “wash trade,” a trader acts as both buyer and seller of a stock, to create the illusion of volume. “Layering” and “spoofing” are off-market orders designed to trick the rest of the market into thinking there are buyers or sellers of a stock waiting in the wings, in an attempt to nudge the stock price one way or the other.) In 2009, Wedbush traded on average 13 percent of all shares on NASDAQ. The S.E.C. eventually fined the firm for the violations, and Wedbush admitted wrongdoing. The S.E.C. also fined a high-frequency-trading firm called Athena Capital Research for using “a sophisticated algorithm” by which “Athena manipulated the closing prices of thousands of NASDAQ-listed stocks over a six-month period” (an offense which, if committed by human beings on a trading floor instead of by computers in a data center, would have gotten those human beings banned from the industry, at the very least).

On it went. The well-named BATS group, the second-largest stock-exchange operator in the U.S., with more than 20 percent of the total market, paid a fine to settle another S.E.C. charge, that two of its exchanges had created order types (i.e., instructions that accompany a stock-market order) for high-frequency traders without informing ordinary investors. The S.E.C. charged the Swiss bank UBS with creating illegal, secret order types for high-frequency traders so they might more easily exploit investors inside the UBS dark pool—the private stock market run by UBS. Schneiderman filed an even more shocking lawsuit against Barclays, charging the bank with lying to investors about the presence of high-frequency traders in its dark pool, to make it easier for the high-frequency traders to have the pleasure of trading against the investors. Somewhere in the middle of it all a lawyer—oddly, named Michael Lewis—who had devised the successful legal strategy for going after Big Tobacco, helped file a class-action suit on behalf of investors against the 13 public U.S. stock exchanges, accusing them of, among other things, cheating ordinary investors by selling special access to high-frequency traders. One big bank, Bank of America, shuttered its high-frequency-trading operation, and two others, Citigroup and Wells Fargo, closed their dark pools. Norway’s sovereign-wealth fund, the world’s largest, announced that it would do what it needed to avoid high-frequency traders. One enterprising U.S. brokerage firm, Interactive Brokers, announced that, unlike its competitors, it did not sell retail stock-market orders to high-frequency traders, and even installed a button that enabled investors to route their orders directly to IEX, a new alternative stock exchange opened in October 2013 by Brad Katsuyama and his team, which uses technology to block predatory high-frequency traders from getting the millisecond advantages they need.

One fund manager calculated that trading on U.S. stock exchanges other than IEX amounted to a $240 million tax a year on his fund. © Simon Belcher/Alamy.

On October 15, 2014, in a related development, there was a flash crash in the market for U.S. Treasury bonds. All of a sudden the structure of the U.S. stock market, which had been aped by other markets, seemed to implicate more than just the market for U.S. stocks.

In the past 11 months, the U.S. stock market has been as chaotic as a Cambodian construction site. At times the noise has sounded like preparations for the demolition of a hazardous building. At other times it has sounded like a desperate bid by a slumlord to gussy the place up to distract inspectors. In any case, the slumlords seem to realize that doing nothing is no longer an option: too many people are too upset. Brad Katsuyama explained to the world what he and his team had learned about the inner workings of the stock market. The nation of investors was appalled—a poll of institutional investors in late April 2014, conducted by the brokerage firm ConvergEx, discovered that 70 percent of them thought that the U.S. stock market was unfair and 51 percent considered high-frequency trading “harmful” or “very harmful.” And the complaining investors were the big guys, the mutual funds and pension funds and hedge funds you might think could defend themselves in the market. One can only imagine how the little guy felt. The authorities evidently saw the need to leap into action, or to appear to.

The narrow slice of the financial sector that makes money off the situation that Flash Boys describes felt the need to shape the public perception of it. It took them a while to figure out how to do this well. On the book’s publication day, for instance, an analyst inside a big bank circulated an idiotic memo to clients that claimed I had “an undisclosed stake in IEX.” (I’ve never had a stake in IEX.) Then came an unfortunate episode on CNBC, during which Brad Katsuyama was verbally assaulted by the president of the BATS exchange, who wanted the audience to believe that Katsuyama had dug up dirt on the other stock exchanges simply to promote his own, and that he should feel ashamed. He hollered and ranted and waved and in general made such an unusual public display of his inner life that half of Wall Street came to a halt, transfixed. I was told by a CNBC producer that it was the most watched segment in the channel’s history, and while I have no idea if that’s true, or how anyone would even know, it might as well be. A boss on the Goldman Sachs trading floor told me the place stopped dead to watch it. An older guy next to him pointed to the TV screen and asked, “So the angry guy, is it true we own a piece of his exchange?” (Goldman Sachs indeed owned a piece of the BATS exchange.) “And the little guy, we don’t own a piece of his exchange?” (Goldman Sachs does not own a piece of IEX.) The old guy thought about it a minute, then said, “We’re fucked.”
Thinking, Fast and Slow

That feeling was eventually shared by the BATS president. His defining moment came when Katsuyama asked him a simple question: Did BATS sell a faster picture of the stock market to high-frequency traders while using a slower picture to price the trades of investors? That is, did it allow high-frequency traders, who knew current market prices, to trade unfairly against investors at old prices? The BATS president said it didn’t, which surprised me. On the other hand, he didn’t look happy to have been asked. Two days later it was clear why: it wasn’t true. The New York attorney general had called the BATS exchange to let them know it was a problem when its president went on TV and got it wrong about this very important aspect of its business. BATS issued a correction and, four months later, parted ways with its president.

From that moment, no one who makes his living off the dysfunction in the U.S. stock market has wanted any part of a public discussion with Brad Katsuyama. Invited in June 2014 to testify at a U.S. Senate hearing on high-frequency trading, Katsuyama was surprised to find a complete absence of high-frequency traders. (CNBC’s Eamon Javers reported that the Senate subcommittee had invited a number of them to testify, and all had declined.) Instead they held their own roundtable discussion in Washington, led by a New Jersey congressman, Scott Garrett, to which Brad Katsuyama was not invited. For the past 11 months, that’s been the pattern: the industry has spent time and money creating a smoke machine about the contents of Flash Boys but is unwilling to take on directly the people who supplied those contents.

On the other hand, it took only a few weeks for a consortium of high-frequency traders to marshal an army of lobbyists and publicists to make their case for them. These condottieri set about erecting lines of defense for their patrons. Here was the first: the only people who suffer from high-frequency traders are even richer hedge-fund managers, when their large stock-market orders are detected and front-run. It has nothing to do with ordinary Americans.

Which is such a weird thing to say that you have to wonder what is going through the mind of anyone who says it. It’s true that among the early financial backers of Katsuyama’s IEX were three of the world’s most famous hedge-fund managers—Bill Ackman, David Einhorn, and Daniel Loeb—who understood that their stock-market orders were being detected and front-run by high-frequency traders. But rich hedge-fund managers aren’t the only investors who submit large orders to the stock market that can be detected and front-run by high-frequency traders. Mutual funds and pension funds and university endowments also submit large stock-market orders, and these, too, can be detected and front-run by high-frequency traders. The vast majority of American middle-class savings are managed by such institutions.

The effect of the existing system on these savings is not trivial. In early 2015, one of America’s largest fund managers sought to quantify the benefits to investors of trading on IEX instead of one of the other U.S. markets. It detected a very clear pattern: on IEX, stocks tended to trade at the “arrival price”—that is, the price at which the stock was quoted when their order arrived in the market. If they wanted to buy 20,000 shares of Microsoft, and Microsoft was offered at $40 a share, they bought at $40 a share. When they sent the same orders to other markets, the price of Microsoft moved against them. This so-called slippage amounted to nearly a third of 1 percent. In 2014, this giant money manager bought and sold roughly $80 billion in U.S. stocks. The teachers and firefighters and other middle-class investors whose pensions it managed were collectively paying a tax of roughly $240 million a year for the benefit of interacting with high-frequency traders in unfair markets.

Anyone who still doubts the existence of the Invisible Scalp might avail himself of the excellent research of the market-data company Nanex and its founder, Eric Hunsader. In a paper published in July 2014, Hunsader was able to show what exactly happens when an ordinary professional investor submits an order to buy an ordinary common stock. All the investor saw was that he bought just a fraction of the stock on offer before its price rose. Hunsader was able to show that high-frequency traders pulled their offer of some shares and jumped in front of the investor to buy others and thus caused the share price to rise.

The rigging of the stock market cannot be dismissed as a dispute between rich hedge-fund guys and clever techies. It’s not even the case that the little guy trading in underpants in his basement is immune to its costs. In January 2015 the S.E.C. fined UBS for creating order types inside its dark pool that enabled high-frequency traders to exploit ordinary investors, without bothering to inform any of the non-high-frequency traders whose orders came to the dark pool. The UBS dark pool happens to be, famously, a place to which the stock-market orders of lots of small investors get routed. The stock-market orders placed through Charles Schwab, for instance. When I place an order to buy or sell shares through Schwab, that order is sold by Schwab to UBS. Inside the UBS dark pool, my order can be traded against, legally, at the “official” best price in the market. A high-frequency trader with access to the UBS dark pool will know when the official best price differs from the actual market price, as it often does. Put another way: the S.E.C.’s action revealed that the UBS dark pool had gone to unusual lengths to enable high-frequency traders to buy or sell stock from me at something other than the current market price. This clearly does not work to my advantage. Like every other small investor, I would prefer not to be handing some other trader a right to trade against me at a price worse than the current market price. But my misfortune explains why UBS is willing to pay Charles Schwab to allow UBS to trade against my order.

The Best of Times, the Worst of Times

As time passed, the defenses erected by the high-frequency-trading lobby improved. The next was: the author of Flash Boys fails to understand that investors have never had it better, thanks to computers and the high-frequency traders who know how to use them. This line has been picked up and repeated by stock-exchange executives, paid high-frequency-trading spokespeople, and even journalists. It’s not even half true, but perhaps half of it is half true. The cost of trading stocks has fallen a great deal in the last 20 years. These savings were fully realized by 2005 and were enabled less by high-frequency market-making than by the Internet, the subsequent competition among online brokers, the decimalization of stock prices, and the removal of expensive human intermediaries from the stock market. The story Flash Boys tells really doesn’t open until 2007. And since late 2007, as a study published in early 2014 by the investment-research broker ITG has neatly shown, the cost to investors of trading in the U.S. stock market has, if anything, risen—possibly by a lot.

Finally there came a more nuanced line of defense. For obvious reasons, it was expressed more often privately than publicly. It went something like this: O.K., we admit some of this bad stuff goes on, but not every high-frequency trader does it. And the author fails to distinguish between “good” H.F.T. and “bad” H.F.T. He further misidentifies H.F.T. as the villain, when the real villains are the banks and the exchanges that enable—nay, encourage—H.F.T. to prey on investors.

There’s some actual truth in this, though the charges seem to me directed less at the book I wrote than at the public response to it. The public response surprised me: the attention became focused almost entirely on high-frequency trading, when—as I thought I had made clear—the problem wasn’t just high-frequency trading. The problem was the entire system. Some high-frequency traders were guilty of not caring a great deal about the social consequences of their trading—but perhaps it’s too much to expect Wall Street traders to worry about the social consequences of their actions. From his seat onstage beside Warren Buffett at the 2014 Berkshire Hathaway investors’ conference, vice-chairman Charlie Munger said that high-frequency trading was “the functional equivalent of letting a lot of rats into a granary” and that it did “the rest of the civilization no good at all.” I honestly don’t feel that strongly about high-frequency trading. The big banks and the exchanges have a clear responsibility to protect investors—to handle investor stock-market orders in the best possible way, and to create a fair marketplace. Instead, they’ve been paid to compromise investors’ interests while pretending to guard those interests. I was surprised more people weren’t angry with them.

If I didn’t do more to distinguish “good” H.F.T. from “bad” H.F.T., it was because I saw, early on, that there was no practical way for me or anyone else without subpoena power to do it. In order for someone to be able to evaluate the strategies of individual high-frequency traders, the firms need to reveal the contents of their algorithms. They don’t do this. They cannot be charmed or cajoled into doing this. Indeed, they sue, and seek to jail, their own former employees who dare to take lines of computer code with them on their way out the door.
Rookie Season

In the months after the publication of Moneyball, I got used to reading quotes from baseball insiders saying that the author of the book couldn’t possibly know what he was talking about, as he was not a “baseball expert.” In the 11 months since the publication of Flash Boys, I’ve read lots of quotes from people associated with the H.F.T. lobby saying the author is not a “market-structure expert.” Guilty as charged! Back in 2012, I stumbled upon Katsuyama and his team of people, who knew more about how the stock market actually worked than anyone then being paid to serve as a public expert on market structure. Most of what I know I learned from them. Of course I checked their understanding of the market. I spoke with high-frequency traders and people inside big banks, and I toured the public exchanges. I spoke to people who had sold retail-order flow and people who had bought it. And in the end it was clear that Brad Katsuyama and his band of brothers were reliable sources—that they had learned a lot of things about the inner workings of the stock market that were unknown to the wider public. The controversy that followed the book’s publication hasn’t been pleasant for them, but it’s been fun for me to see them behave as bravely under fire as they did before the start of the war. It’s been an honor to tell their story.

The controversy has come with a price: it has swallowed up the delight an innocent reader might have taken in this little episode in financial history. If this story has a soul, it is in the decisions made by its principal characters to resist the temptation of easy money and to pay special attention to the spirit in which they live their working lives. I didn’t write about them because they were controversial. I wrote about them because they were admirable. That some minority on Wall Street is getting rich by exploiting a screwed-up financial system is no longer news. That is the story of the last financial crisis, and probably the next one, too. What comes as news is that there is now a minority on Wall Street trying to fix the system. Their new stock market is flourishing; their company is profitable; Goldman Sachs remains their biggest single source of volume; they still seem to be on their way to changing the world. All they need is a little help from the silent majority.

[Fenix]

Race To The Bottom" In Oil Continues: ENI (Europe's "Chevron") Halts Buyback, Raises Production, Slashes Capex
Tyler D.
03/13/2015

Oil prices legged lower in the last few minutes as Italy's largest energy company ENI has made a series of rather major announcements (following Chevron's decision in January). The company plans to sell EUR8bn in assets, slash capex by 17%, and suspends buybacks. But perhaps most worryingly for the oil-patch, ENI plans to increase production 3.5% each year until 2018 as the race to the bottom in energy markets continues.

* *ENI PLANS TO SELL $8BLN IN ASSETS OVER NEXT 4 YEARS
* *ENI WILL CUT CAPEX OVER NEXT 4 YEARS BY TOTAL OF 17%
* *ENI SAYS NEW PROJECTS AVERAGE BREAKEVEN AT $45/BBL (BRENT)
* *ENI SEES E&P PRODUCTION INCREASING 3.5% A YR IN 2015-2018

The buy-back plan is suspended. It will assess its reactivation when the strategic progress and the market scenario allow.

Full presentation here

It appears the presentation was leaked early, which tumbled the shares and was halted... when it re-opened it was down over 6%...

And crude oil prices also began tyo fall as the production raise was leaked...

As Reuters reports,

Italy’s Eni cut its dividend and suspended a share buyback programme on Friday as part of moves to offset the slump in oil prices and fund growth in its core business of looking for oil and gas.

In the first major business plan of CEO Claudio Descalzi, Italy's biggest listed company said it would pay a 2015 dividend of 0.8 euros per share compared to the 1.12 euros per share it paid on 2014 results.

The state-controlled oil major said it would cut investments by 17 percent in the 2015-2018 period to around 48 billion euros ($50 billion) and sell assets worth 8 billion euros. At 1437 GMT Eni shares were down more than 6 percent.

The slump in oil prices since June is testing the ability of listed oil companies to support cash flows and has sparked a rush to cut costs across the sector.

Many big oil firms have announced cuts of 10 to 15 percent to their spending budgets and some have suspended share buybacks or revived dividend payment via company stock, known as scrip shares.

Eni, which is shifting its focus increasingly to upstream exploration and production activity, said it was targeting annual output growth of 3.5 percent, up from the 3 percent growth in its previous 2014-2017 plan.

ENI is currently Italy's largest industrial company with a market capitalization

The Italian government owns a 30.303% golden share in the company, 3.934% held through the state Treasury and 26.369% held through the Cassa Depositi e Prestiti.

Another 2.012% of the shares are held by People's Bank of China

And just as European stock valuations were getting absolutely idiotic.

[Fenix]

Rig Count Drops For 14th Week In A Row, Fastest Rate In 29 Years
Submitted by Tyler D.
03/13/2015 - 13:09

For the 14th week in a row, the US rig count fell 67 rigs to 1125, (a 5.6% drop to 41.4%, bigger than March 09's previous record 14-week decline of 41%). The decline in rigs contionues to tyrack the lagged oil price perfectly but has shown absolutely no impact on production levels as firms push for cashflows in a race to the bottom. As one analyst rightly noted, while rig counts continue to drop, companies are high-grading (shifting to more efficient wells), "the real thing that needs to change is U.S. production and that is not happening at the moment." April WTI Crude tested $45.01 before the data and bounced very modestly on the data.

How The ECB Is Distorting Euro Money Markets
Tyler D.
03/13/2015 12:19 -0400

As we continue to pound the table about the effects central bank asset purchases are having on market liquidity, it’s nice to know that there are at least a handful of people out there who agree that maybe — just maybe — depriving the market of high quality collateral by monetizing everything that’s not tied down could serve to destabilize markets and may indeed introduce systemic risk. The list of those speaking out on the issue has grown with the size of central bank balance sheets and has recently come to include SEC officials, BoJ officials, and investment banks. Here’s what we said on Thursday:

As central banks work to monetize all net (and sometimes gross) government bond issuance in their respective jurisdictions [they destabilize] markets by sapping liquidity which in turn inhibits price discovery and creates volatility. This is on display in Japan, where 2 out of 3 dealers think the JGB market is impaired thanks to BoJ asset purchases and where many officials are beginning to get more vocal about the possibility that a lack of liquidity could have “dire consequences.” Similarly, market financing via shadow banking conduits has declined by nearly half since 2008 in the US, and with dealers unwilling to hold inventory of corporate paper thanks to tougher capital requirements, the stage is set for what the Center for Financial Stability recently called “an accident.” As a reminder, here’s what the SEC's Daniel Gallagher had to say recently about liquidity in the US corporate bond market (via Bloomberg): “Lack of liquidity in corporate bond market is ‘systemic risk’ not addressed by regulators, SEC Commissioner Daniel Gallagher says in public remarks.”

Even as the Fed has wound down asset purchases in the US and may be set to raise rates later this year (which, as UBS recently noted, may cause corporate spreads to widen against a backdrop of limited liquidity in the corporate bond market), the ECB is set to inject more than €1 trillion across the eurozone on the way to monetizing three times net euro fixed income issuance. Here, courtesy of Barclays, is what this means for euro money markets:

The ECB’s liquidity bazooka will push the surplus to more than €1trn by the end of the programme next year and cause a scarcity of high quality collateral in the repo market. We see still room for a further decline in euro short rates into negative territory. This would be very challenging for Euro Money Markets investors…

The development of the repo rates would be very interesting as, in addition to the massive increase in liquidity, the collateral scarcity effect owing to the displacement of government bonds caused by the ECB’s QE should exacerbate the downward pressure on GC rates. Importantly, banks’ need of high quality collateral to meet the LCR requirement should increase the demand/supply imbalances. In particular, this applies to core paper that should be affected also by the expected very low net supply of government bonds. In such a context. even if the ECB set the depo facility rate (currently at -20bp) as a threshold for its purchases of bonds with negative yield, we would expect core GC to richen vs. Eonia and to trade even below the depo facility rate. Peripheral GC should decline as well, and we would expect them to continue to trade flat vs. Eonia, with some spreads vs. core paper. Importantly, the shortage of government bonds would reduce the liquidity of the repo as well as cash markets. In the legal act of its public sector purchase programme (PSPP) the ECB stated that securities purchased under the PSPP are eligible for securities lending activity, including repos. This will be very important, in our view, to mitigate any negative implications of QE purchases on the repo market’s functioning.

...the ECB’s liquidity bazooka will likely create the conditions for all rates money markets to stay in negative territory. This would represent a very challenging environment for investors, especially those focusing on the euro money markets, whose resilience to negative rates has not fully tested yet. Indeed until the beginning of this year, with the liquidity surplus not big enough to fuel significant downward pressure on the Eonia fixing and with high uncertainty of the size of the ECB’s QE, investors were able to manage the negative rates environment and get some positive yields thanks to the increase in duration/credit risks. This year we would expect it to be much tougher as the opportunities to invest at positive yields/rates are much more limited, as also peripheral t-bills are likely to move gradually into negative territory. It is hard to predict how much yields/rates could go negative in the current context. The ECB’s depo facility rate represents a floor for Eonia and Euribor rates, but not for GC rates and bills/short-term bonds yield, as supply/demand imbalances exacerbated by the ECB’s QE-induced displacement would create potentially unlimited room for reaching vs. Eonia.

Euro Money market funds are likely to be severely hurt as regulation and rating agencies force them to focus on the very front end of the money market curves and limit their exposure to issuer/asset classes. So, to some extent, they are being forced to continue investing in euro-denominated assets at negative yields.

In a nutshell: short-end core paper will trade below -0.20%, extreme supply/demand imbalances will cause general collateral rates to trade through the depo rate, money market fund yields will turn decisively negative testing investor patience, and central banks had better make good on promises to make some of their inventory available for lending or risk impairing the functioning of the repo market (never a good idea).

Barclays also notes that PSPP purchases will have a “very large displacement effect”:

The key takeaway for the EGB market is that c.€45bn per month in EGB purchases for at least 19-months is a very large number for the EGB market and its investors to absorb. Therefore, the portfolio squeeze effect of the purchases could be quite large. Taking into account our estimated monthly average net issuance for EGB issuers, we conclude that ECB buying will outweigh net issuance for each of the sovereigns and displace investors. Indeed, in aggregate terms the ECB is aiming to buy up to €850bn cash in EGBs during the whole programme in the eligible QE bucket (2-30y). This, together with our estimated €290bn net EGB issuance in this bucket over the course of the programme, means that the if ECB’s QE is to meet its balance sheet expansion target, it will potentially displace c.€560bn from the EGB investors. In comparison, the Fed purchases of Treasuries never exceeded net issuance. Even in the recent purchase operations, where the Fed has focused on the long end, private investors did not have to lower their holdings of long end Treasuries. As such, the ECB’s purchase programme is more likely to resemble the Japan experience under QQE, where annual purchases of ¥50trn (later scaled to ¥80trn) far exceeded annual net issuance of around ¥38trn.

That’s just the EGB portion of the program. In total, some €840 billion of bondholders will be displaced...

What should be clear from the above is that while central banks’ ability to alter inflation expectations and/or stimulate aggregate demand may be limited, their ability to distort markets, inhibit price discovery, and create systemic risk is alive and well.

[Fenix]

Lumber and Lumber Liquidators Liquidated
Submitted by Tyler D.
03/13/2015 - 13:42

When the chairman of your company comes on CNBC to defend its reputation and the stock drops 11%... perhaps it's time to reconsider the strategy. Lumber liquidators is plunging lemming-like and Lumber futures are being liquidated at the fastest rate in over a year...


Why The Dollar Is Rising As The Global Monetary Bubble Craters
Tyler D.
03/13/2015

Contra Corner is not about investment advice, but its unstinting critique of the current malignant monetary regime does not merely imply that the Wall Street casino is a dangerous place for your money. No, it screams get out of harms’ way. Now!

Yet I am constantly braced with questions about the US dollar and its impending demise. The reasoning seems to be that if America is a debt addicted dystopia—-and it surely is—- won’t the US dollar sooner or later go down in flames as the day of reckoning materializes? Won’t you make money shorting the doomed dollar?

Heavens no! At least not any time soon. The reason is simply that the other three big economies of the world—Japan, China and Europe—are in even more disastrous condition. Worse still, their governments and central banks are actually more clueless than Washington, and are conducting policies that are flat out lunatic—–meaning that their faltering economies will be facing even more destructive punishment from policy makers in the days ahead.

Indeed, Draghi, Kuroda and the commissars of red capitalism in Beijing make Janet Yellen and Stanley Fischer (Fed Vice-Chairman) appear to be slightly sober. So as trite as it sounds, the US dollar is the cleanest dirty shirt in the laundry. And on a relative basis, its is going to look even cleaner as two decades of monetary madness around the world finally hit the shoals.

You have to start with a stark assessment of the other three major economies.To hear the Wall Street analysts and economists tell it, Japan, China and Europe are just variants of the US economy with different mixes of pluses and minuses, experiencing somewhat different stages of the economic cycle and obviously shaped by their own diverse brands of domestic politics and economic governance. Yet despite these surface difference, the non-US big three economies are held to be just part of a global economic convoy heading for continued economic growth, rising living standards and higher stock market prices.

Actually, not so. Japan is a bankrupt old age colony. China is the most monumental credit and construction Ponzi in human history. Europe is a terminal victim of socialist welfare and statist dirigisme. All three are attempting to defer the day of reckoning via resorting to a final spasm of money printing and central bank manipulation that is so desperate and crazy that it can only end in disaster.

So there is no global convoy of inexorable economic growth and progress. Instead, we are entering a new era of spectacular financial disorder and credit fueled booms turning into unprecedented deflationary busts. And it is the three big economies outside the US which will hit the wall first, causing the US dollar to thrive on a relative basis.

Consider the absolute monetary madness in Japan—-where the current policy of the BOJ is to expand its balance sheet each month by what would amount to one-quarter trillion dollars on a US scale GDP. Yet this madcap money printing cannot possibly help the Japanese economy because it already has essentially zero interest rates and has had them for nearly two decades. So Kuroda can’t possibly induce Japanese households and business to borrow more money and stimulate growth because they have long been at “peak debt” and couldn’t borrow more if you paid them.

At the same time, the BOJ’s massive bond buying campaign is sucking up 100% of the supply of new government debt—–and Japan’s fiscal deficit is still massive—-and actually eating into the existing float. As a result, the Japanese government bond market is dead as a doornail; the only “bid” comes from the BOJ.

Here’s the thing. The Japanese government is hands-down the largest debtor in the world, with its gross public debt currently at 240% of GDP. Accordingly, it needs a healthy public debt market more than anything else, but its monetary policy has actually killed what remained of it on the eve of Abenomics.

The consequences for fiscal policy and Japan’s ability to finance its immense public debt as its collective old age home steadily fills up is simply mind-boggling. If it continues to monetize the public debt at current rates, it will destroy the yen—sending into free-fall from today’s 121/ dollar to 200, 300 or even worse.

By contrast, if it sends the madmen who are currently running the BOJ packing, installs new central bankers and allows interest rates to normalize, debt service on Japan’s public debt will skyrocket. As it is, more than 40% of Japan’s current tax receipts go to interest on the public debt and that’s with the 10-year bond yield at 0.4%. Under normal rates, debt service would absorb all of Japan’s current tax revenues, causing welfare and retirement spending to be slashed on upwards of 40% of its population, which will soon be retired, while raising tax burdens on its shrinking labor force to truly brutal levels.

So Japan’s fiscal equation is calamitous and terminal. Its governments will resort to increasingly dangerous and destructive expedients as they wrestle with its impossible nature. Indeed, the built-in financial, fiscal, demographic and economic trends are so powerful that there is virtually no set of policy measures that could reverse Japan’s headlong tumble into old age bankruptcy.

As shown below, its debt to GDP ratio and the size of the BOJ balance sheet have been exploding for decades. Yet these maneuvers have only made matters worse. As also shown below, Japan’s nominal GDP in dollar terms is no higher today than in was in 1996:

Historical Data Chart

Historical Data Chart

Historical Data Chart

Notwithstanding the perennial bullish expectations of Wall Street Keynesians, the BOJ’s mad money printing campaign has accomplished nothing. In fact, after the downward revision to Q4 GDP it is absolutely evident that its economy is still sputtering. Real GDP is barely higher than it was in December 2012 before Abenomics launched its truly monstrous money printing spree

Yet, the Abe government and BOJ does not hesitate to threaten even more monetary carnage—even as the abysmal failures of current policies are reported month after month. So the yen is heading down, down, down. Not because the dollar is inherently strong, but because it is currently being traded against a slow-motion trainwreck.

Historical Data Chart

In China the scene is even more tortured. As McKinsey’s charts so dramatically document, the overseers of red capitalism in Beijing have driven China into a monumental debt trap.

Its massive spree of construction and fixed asset investment has created an utterly deformed economy that will literally implode unless its keeps building empty luxury apartments, phantom cities, silent shopping malls and hideously redundant roads, bridges, subways and airports. Yet whenever the short-term indicators stumble, the government finds some new, convoluted way to release more credit into the system.

This too is reaching the farcical stage. During the six-short years since the financial crisis, China has boosted it credit market debt outstanding by the staggering sum of $20 trillion or by 4X the growth of GDP during the same period. How in the world could any one believe that China’s tottering house of cards can be rescued by piling on even more debt financed construction and fixed asset acquisition?

Source: McKinsey

The rate at which the China Ponzi is falling apart is now accelerating. In a nearby post this morning, Mish Shedlock provided a devastating survey of the excess capacity which looms in nearly every industry and the massive overbuilding of public infrastructure and housing based on debt that cannot be serviced and customers and users who are non- existent.

But now things are heading into the theatre of the economic absurd. Government officials are forcing the restart of idle steel and aluminum plants so that the can produce unwanted supplies to dump on the world market in order to generate enough cash to pay interest.

In a similar vein, the whole phony bullish thesis about the growth wonders to come from China’s highly touted “urbanization” campaigns are being revealed for what they are—-a monumental Ponzi of borrowing from Peter to pay Paul.

Millions of peasants have had their land taken over by local governments which borrowed huge sums to pay inflated compensation for the land—-so the displaced farmers could buy newly built high-rise apartments, also built with borrowed money. That was called “urbanization”, but what it means is that former peasants have been stranded literally high and dry without incomes and without farms, while the local development agencies which borrowed all this money have no possible way to repay it.

Needless to say, as China veers ever closer to a crash landing, the China-dependent EM economies are rapidly faltering. It now appears that Brazil will suffer back-to-back years of GDP decline for the first time since 1930-1931. Indeed, the China-led global commodities and industrial production boom is cooling so fast that global CapEx in mining and energy, materials processing, manufacturing and shipping is on the verge of a huge downward correction. And that will hit the high end machinery and engineering exporters like Germany and the US, creating a further negative loop in the gathering deflationary crisis.

And these ricocheting impacts from the China implosion will drive the dollar higher as well. That’s because Chinese companies have borrowed something like $1.5 trillion in external dollar markets, and the EM economies which boomed from the China trade also borrowed trillions in dollar markets—– owing to the cheap dollar interest rates manufactured by the Fed, and the global scramble for “yield” by dollar based money managers.

While it lasted, the tsunami of cheap dollar based capital which flowed into China and the EM appeared to fuel economic miracles. The socialists of Brazil, the crooks of Indonesia and corrupt crony capitalist of Turkey all feasted on the capital markets deformations emanating from the Eccles Building.

But now the financial boomerang is flying back at them at devastating speed. As China and the EM struggle against global deflation, their economies are faltering and exchange rates are sinking. Accordingly, they are desperately trying to hedge their immense dollar exposures—a process which drives the greenback steadily higher.

Finally, the madness in Europe speaks for itself. The ECB is now literally destroying the Euro in a disastrous quest to restart economic growth by monetizing $1.2 trillion of mostly European government debt. But Europe’s stagnation is not due to insufficient private sector borrowing or interest rates that discourage it.

The problem is a state sector that has reached nearly 50% of GDP and is thereby smothering entrepreneurs and investment everywhere on the continent. And it also means a public debt burden so high that prohibitive levels of taxation are unavoidable.

Stated different, Europe’s economic growth problem is structural and was the result of statist policies over many decades. The only thing Draghi will accomplish with his massive bond buying campaign is to drive the Euro to par and below; and enable Europe’s government —–all of which can now borrow long-term money at 1% or less—-to kick the can down the road, thereby insuring that Europe’s eventual day of fiscal reckoning will be cataclysmic.

Euro Area Government Debt As % of GDP

quick view chart

Historical Data Chart

So there is a reason why the dollar is soaring. The other shirts in the laundry are not just dirtier. They are actually disintegrating.

[Fenix]

US Attacks "Closest Ally" UK For "Constant Accommodation" With China
Tyler D.
03/13/2015 13:24 -0400

On the heels of a diplomatic spat between Hanoi and Washington regarding Russia’s use of a former US air base in Vietnam to refuel nuclear-capable bombers on the way to conducting “provocative” runs in the Pacific, we get yet another, larger, sign that it may indeed be the US that’s isolated and not (as Western media would have you believe) the Kremlin. The UK (Washington’s “special” friend) has announced it’s joining the Asian Infrastructure Investment Bank, which is essentially China’s answer to the Asian Development Bank over which Beijing feels the US has undue influence.

The bank, which will fund infrastructure projects across the region and may indeed be part and parcel of China’s implicit attempt to establish a Sino-Monroe Doctrine, represents “an unrivaled opportunity for the UK and Asia to invest and grow together,” according to Britain’s George Osborne. Unsurprisingly, the US doesn’t see it that way and although Washington was generously willing to concede that this was the UK’s decision to make for itself, US officials are clearly perturbed that Britain didn’t ask for permission:

A spokesman for the National Security Council says the US will allow the UK to make its own decisions...

“This is the U.K.’s sovereign decision.”

...but the next time David Cameron thinks about appeasing a country that is a possible threat to US hegemony, he really needs to ask first...

“[The decision was made with] virtually no consultation with the US.”

“We are wary about a trend toward constant accommodation of China, which is not the best way to engage a rising power.” — From FT, quoting a senior US Official

Washington was also quick to make clear just what the US’s “expectations” are going forward now that London has made a misguided decision to support an effort to improve infrastructure in Asia:

“We hope and expect that the U.K. will use its voice to push for the adoption of high standards.”

Because this really is all about standards, as the US made clear last year when Washington may or may not have operated behind the scenes to discourage Australia, South Korea, and Japan from joining the bank.

From NY Times:

Washington has expressed reservations about the new institution, on the grounds that it would not meet environmental standards, procurement requirements and other safeguards adopted by the World Bank, the International Monetary Fund and the Asian Development Bank for their lending projects.

But fundamentally, Washington views the Chinese venture as a deliberate challenge to those postwar institutions, which are led by the United States and, to a lesser extent, Japan, and the Obama administration has put pressure on allies not to participate…

South Korea and Australia, both of which count China as their largest trading partner, have seriously considered membership but have held back, largely because of forceful warnings from Washington, including a specific appeal to Australia by President Obama.

But as one official from the rival Asian Development Bank told The Times: “This horse is out of the barn.”

And that means in short order Australia and South Korea will likely be on board and at that point, the stigma the US has created around membership will have completely disappeared (if it hasn’t already), opening the door for other US “allies” to join despite the bank’s alleged “low” standards.

So again we ask: “Who’s really isolated?”

[Fenix]

Peak Crony Capitalism: First Citi Writes US Financial Laws, Now Boeing Tells Ex-Im Bank What To Do
Tyler D.
03/13/2015 14:56 -0400

Back in December, the US population was briefly but dramatically shaken, when it was revealed that none other than Citigroup - a Wall Street firm - had drafted the Congressional language for the Derivatives swaps push-out provision, the add on that assured that taxpayers/depositors would be on the hook for any future derivatives fiasco at the TBTF banks (whose total derivative holdings amounted to $303 trillion with a T) component of the Omnibus funding bill.

Screen Shot 2014-12-05 at 3.32.12 PM

Confirming that cronyism in Congress is alive and has never been better, was the further discovery that the main backer of the bill is notorious Wall Street lackey Jim Himes (D-Conn.), a former Goldman Sachs employee who has discovered lobbyist payoffs can be just as lucrative as a career in financial services.

Subsequently Z H first exposed just why Citi was so intent on making sure taxpayers would be saddled with the bill: while all other banks were actively deleveraging their derivative exposure, Citi was piling in, and just in Q3, had boosted its derivative holdings by a record $9 trillion in just the third quarter to a whopping $70 trillion, surpassing even JPM. Worse: all of these derivatives would be housed precisely in the FDIC-insured silo, so when (not if) this leveraged house of cards explodes, it will be US taxpayers picking up the pieces.

The people were outraged, Elizabeth Warren screamed on a few occasions and... nothing changed. By then the oh so shallow US attention span was focused on the next scandal, so things promptly reverted back to normal and Wall Street was again in charge of telling Congress how to set the stage for the next upcoming financial sector bailout.

This was crony capitalist capture of Congress at its best. But it wouldn't end there.

Today's most under the radar news, just as Citigroup was to Congress, and the swaps push out language, so Boeing, that primary recipients of the generosity of America's Export-Import (Ex-Im) Bank, has been caught red-handed drafting the rules of none other than the Ex-Im bank itself! According to the WSJ: "when the Export-Import Bank sought to respond to critics with tighter rules for aircraft sales, it reached out to a company with a vested interest in the outcome: Boeing Co., the biggest beneficiary of the bank’s assistance."

Or nothing more than a criminal conflict of interest, which, once again, is at the expense of America's infinite bailout piggybank: it's taxpayers.

For months in 2012, according to about 50 pages of emails reviewed by The Wall Street Journal, the bank worked with Boeing to write rules that would satisfy critics in Congress and the domestic commercial airline industry—while leaving most sales of Boeing’s airplanes to foreign carriers unscathed.

Ex-Im Bank, which helps finance the purchase of U.S. exports through loans and guarantees, is the target of Republicans who want to kill it, in part because they say it mostly provides subsidies to America’s largest companies. The Boeing emails will add fuel to that fight.

The previously unreported documents, obtained through an open-records request, show how the two sides swapped ideas, drafts and data on sales of wide-body airplanes. Ex-Im Bank officials pushed their Boeing counterparts for information. Boeing suggested changes to the bank’s draft proposal.

They reveal an extraordinary level of coordination between public officials and corporate executives. In a message one Saturday morning, Bob Morin, then the bank’s head of aircraft financing, sent a plea: “If Boeing expects Ex-Im Bank to continue supporting wide-body aircraft, we need to get this right.”

This is how Boeing explained, or rather didn't, yet another corporate crony capture: "Officials at Boeing declined to comment on the emails. In general, said Tim Myers, president of Boeing Capital Corp., Boeing’s aircraft-financing unit, “it would be only natural” for the bank to ask for input since Boeing is the only U.S. maker of wide-body commercial aircraft."

Yes: it is only natural that the firm that benefits the most from the Ex-Im bank's generosity, be consulted, write the rules and regulations, and generally assure it continues to benefit, unsupervised and unchecked, from the same bank.

Much more in the full WSJ piece, but those who are easily disgusted or with high blood pressure are advised to stay away.

[Fenix]

Parasite Turns On Parasite: HFT Sues Other HFTs For "Egregious Manipulation" Of Treasury Securities
Submitted by Tyler D.
03/13/2015 - 16:43

The beginning of the end of high frequency trading has arrived, and it has done so in a most unexpected fashion: with an HFT turning on other HFTs and revealing on the record, for the entire world to see, just how truly parasitic, manipulative and "market-rigging" the algorithms truly are.

Speculation In This Sector Will End "Very Badly," Canada's Warren Buffett Says
Tyler Durden's picture
Submitted by Tyler D.
03/13/2015 20:05 -0400

Whether it’s subprime auto lending, Janet Yellen’s “stretched” biotech sector, or corporate credit, bubbles abound in today’s fragile market and like Mark Cuban, Prem Watsa thinks the valuations investors are placing on private tech companies are simply ludicrous. But the insanity isn’t confined to private companies, Canada’s Warren Buffett says. “Speculation” is rampant in publicly traded shares as well.

From Fairfax Financial’s shareholder letter:

I am always amazed at the speculation that can take place in the stock market, as shown in the table below, and how long it can last:

The continuing speculation reflected in the stock prices of public high tech companies has moved to private high tech companies, as shown in the table below:

The Wall Street Journal says that worldwide there are 73 companies that are valued at more than $1 billion by venture capital investors, versus half that number prior to the dot.com crash. The third column of the table above shows the ratio of the latest valuation of each company to its total cumulative equity funding raised from inception. So Uber has a valuation of $41.2 billion as compared to the cumulative equity capital raised of $2.8 billion – i.e., the valuation is a hefty 14.7 times all of the money that was raised by the company.

We’re confident that most of this will end as other speculations have – very badly!

Of course this time is always different, but when it comes to multibillion dollar valuations and tech startups, count us among those who think the following warning from Mark Cuban will one day prove to be particularly prophetic:

"The only thing worse than a market with collapsing valuations is a market with no valuations and no liquidity."

[Fenix]

Is This The Catalyst For The Next Big Leg Down In Oil Prices & Energy Stocks?
Tyler Durden's picture

03/13/2015 20:40 -0400

Submitted by Emad Mostaque via ECStrat.com,

There is a possibility of a nuclear deal being agreed between the P5 + 1 nations and Iran next Friday, 20th March. This may be the precursor for energy stocks to recouple to downside and for spending cuts to spread from capex to dividends for majors.

The Iranian nuclear program and its ultimate intent is something that periodically hits the headlines, with views ranging from it being for peaceful use only to the Iranians being a "messianic, apocalyptic cult of zealots" who would try to annihilate Israel even if they were nearly annihilated in return to accelerate the advent of the Day of Judgement.

Our view, based on studying and translating internal Iranian legal judgments and discussions with a range of informed parties, is that Iran wishes to have a nuclear program as a matter of national pride and having nuclear weapons breakout capability as a deterrent against potential externally-catalyzed regime change.

Negotiations have dragged on for years, from Iran's offer to Bush to freeze the number of centrifuges they had at 164 in 2003 to today's position of Iran having almost 20,000, more efficient centrifuges and full nuclear weapons capability.

A confluence of political factors makes a deal highly likely at this point however.

Firstly, the USA has a stated policy of pivoting from the Middle East and Europe toward Asia. There are a number of reasons for this, but the major one is that the rebalancing of China is likely to be a fraught affair and nobody can forsee the outcome. As such, the USA would prefer a balance of power stabilising the Middle East, of which Iran and Iraq form an important part.

Second, a number of traditional Middle Eastern alliances such as have been frayed in recent years due to certain conflicts and clashes on a leadership basis. This is not to say that Iran, who are leading the fight against ISIS, are a prospective ally, but they may no longer be part of a defined Axis of Terror.

Third, President Obama is a final term President looking for some final wins. The recent letter from 47 letters in which they claimed to have the power to rewind any Iran deal ironically highlighted his ability to push through a deal if he chose on the response, with a range of parties, from Iranian lead negotiator Zarif to US government officials pointing out that any agreement would be bilateral and binding and that Obama has the power to put this in place. This has been our view for some time as the persistence of multilateral agreements, particularly those likely endorsed by the UN security council is huge, with sanctions also only working if one has assistance from a wide range of parties. Any future US leader could theoretically renege on the agreement, but this is something almost unprecedented and with minimal upside given the agreement will have clauses in case Iran steps out of line.

Fourth, the interim deal extensions which have rolled back Iran's nuclear breakout capability (they had lots of 20% enriched Uranium, which has now been converted to 5%, which takes longer to build a bomb from) have an initial end point at the 28th March for a preliminary deal (to be finalized end of June), with, from our sources, the technical details having already been worked out last year of how monitoring etc would work, but the political side not quite there. The Iranian new year celebrations of Nowruz start on the 21st March, putting pressure on the Iranian side to get a deal done by the 20th as the period after this is one where reaction locally will be minimal and it is generally difficult to get anything done for a while. The P5 + 1 parties are scheduled to start their latest talks on the 15th.

Fifth, the Iranian government has changed to a more moderate Rouhani from the more populist Ahmedinejad and the Iranian economy has stabilised dramatically, something likely to continue as they increase their influence in Iraq. It is notable that there are more American educated PhDs in the Iranian cabinet than the whole of Senate and Congress.

Finally, sanctions are already breaking apart on Iran as Russia has been pushed out in the cold due to what I believe is the true Clash of Civilizations. There have been numerous moves for increased co-operation between the two countries as part of Russia's push to increase its soft power in the Middle East as it fills the gap left by the departing USA and Russia is also set to sell Iran Antey-2500 anti-aircraft missiles, an upgrade on the already agreed S300 system. This is an interesting system as it offers anti-ballistic missile protection as well as anti-aircraft protection, effectively hardening Iranian nuclear sites against Israeli attack (the US could still overwhelm it)

So, with these factors it seems we are heading to a deal perhaps next week, or if not in June of this year when the interim deal officially subsides. After June given the political environment in the US and likely developments in Iran, it will become considerably more difficult.

This deal will likely involve export of Iranian uranium hexaflouride gas to a third party, perhaps Russia, for conversion into fuel plates, which are difficult to turn back into nuclear weapons grade uranium. Other nuclear activities will be frozen and European and SWIFT sanctions removed, as well as oil export sanctions. US sanctions will remain, subject to a 2-3 year monitoring period, but US-Iranian trade is likely to remain minimal and the SWIFT sanction removal will allow Iran to trade actively once more. There will be a 10 year "sunset" provision at which point the deal will have to be renegotiated, but the Nuclear Non-proliferation Treaty will stay in place past that, along with the Additional Protocol of increased inspections Iran is likely to agree to.

The market impact of an Iranian nuclear deal would be most immediately anticipating the return of 1mbpd of Iranian exports that disappeared a few years ago to be priced back into the market, along with expectations of rising Iranian production given they can access the market for much needed infrastructure investment (Iran still imports gasoline!).

This is likely to put pressure on a fragile oil price and set the stage for a second bottom before the much higher levels of oil price we have predicted in the coming years (my two year target remains $130 spot Brent, JP is considerably more bearish), particularly as Cushing inventories fill to the max in the next few months thanks to the contango still in place as we noted in January when predicting a sharp spike following the ascension of King Salman before the oil price subsided once more.

This presents an interesting short-term play as the likelihood of a spike on no deal is minimal as the market is not expecting one as this point in time, but the downside risk could be substantial as classical data like inventory build continues to mount and we are still a few months away from meaningful shale production slowdown.

Oil stocks have disassociated from oil prices given the steep oil contango, but as consensus expectations continue to drop and US companies in particular are forced to revalue reserves due to accounting rollover next quarter at $50 versus $90/barrel, we should expect to see increased pressure on dividends, with majors like ENI perhaps the first to go, destroying a key support for these stocks.

Gulf stock markets are likely to be relatively unaffected, although we could see some move in Dubai property as capital is repatriated to Iran. The Iranian stock exchange is a massive beneficiary at 10x the size of Nigeria and once SWIFT sanctions are removed, there are paths to invest in this at mid-single digit PEs and dividends in the teens, offering huge potential upside..

The markets that will be hit are likely Russia, which is one of the top performers year to date but has a currency that is basically pegged to oil now and Nigeria, where crunch elections are coming at the end of March and the central bank has simply run out of resources to stabilize the currency, which I still see going to 240 or so. The new budget in Nigeria is meant to balance at $50-60, but the leakage in the system still remains immense. There is some danger of political fracas during the elections and even worse if they are delayed once more.

[Fenix]

si vas para Chile....
_______________

You Too Can Make Millions With Unregulated, Leveraged Derivatives In Chile
Tyler D.
03/13/2015 21:15

On Thursday we learned that becoming a millionaire is surprisingly easy. All you need to do is raise some startup capital, find a dying company whose stock is still fairly liquid, then loan the company money on the condition they allow you to convert the receivable into common at a discount to where it trades in the market. Somehow that’s legal even if, as Bloomberg noted (completely missing the irony of course), it’s too “sketchy” for Wall Street investment banks.

On Friday, we got the story of ForexChile, an outfit out of Santiago that makes money on a similarly straight forward business model. According to Bloomberg, the company is Chile’s largest purveyor of CFDs. The concept is very simple. I sell you a contract that obligates me to pay you the difference between the current price of something, and the price of that something when you close the contract. That’s assuming you guess right on the direction of the price change. Of course in most cases you won’t (the house always wins) and if you guess wrong that means you pay me, and because you were leveraged in the first place, the market doesn’t have to move against you by much to wipe you out. Here’s more via Bloomberg:

It’s noon inside the offices of ForexChile in Santiago, and dozens of salespeople are working the phones, talking up investments linked to everything from Facebook stock to copper futures. They hold out tantalizing prospects to those on the other end of the line: potential returns of 20 percent, 30 percent, even 40 percent.

Familiar, yes -- and illegal if this were the U.S. Because what these people are selling are neither stocks nor bonds nor futures nor funds. They are offering contracts for difference, financial derivatives that are off-limits to retail investors in the U.S. and highly regulated elsewhere…

How CFDs became a hot investment game in Chile is a story of savvy marketing and nonexistent oversight. Such contracts are allowed in two dozen other countries and are particularly popular in the U.K., where the value of annual trading is estimated to exceed $900 billion. There, as in Chile, these investments tend to draw small-time speculators. As with get-rich investments everywhere, most investors lose money most of the time…

But in most places, regulators police the market somehow. In Chile, no one does. Virtually anyone can sell or buy CFDs, regardless of their financial means or experience.

Most CFDs employ one of the most powerful forces in investing: leverage. In Chile, leverage sometimes stretches as high as 100 to 1.

As you might imagine, marketing unregulated, highly leveraged derivative instruments to Chilean retail investors via radio ads is a business that is not generally conducive to client success, as Bloomberg found out when they spoke with Loyola, who apparently did not have a good read on how Cisco, JPM, and Hewlett-Packard were likely to trade over the short-term:

Amira Loyola, says she had no idea what she was getting into when, responding to a radio ad, she deposited 4.5 million pesos ($7,400) into a ForexChile account in 2011. She said her broker recommended CFDs linked to shares of Cisco Systems Inc., JPMorgan Chase & Co. and Hewlett-Packard Co…

Six months later, Loyola, a 52-year-old information technology specialist, was down 92 percent.. The underlying stocks had fallen by a third, but her leveraged investment had magnified the losses.

ForexChile certainly doesn’t constrain the Amira Loyolas of the world when it comes to what they can bet on. The company’s website features CFDs on currencies, shares, indices, commodities, and ETFs. To be sure, there are a lot of advantages to trading CFDs with ForexChile, including (but certainly not limited to): the ability to look at a price quote, the freedom to make your own uniformed decisions with no meddling from anyone who knows what they’re doing, the leeway to bet 100 times the amount of money you actually have instead of only 15 times, access to charts that aren’t outdated, and importantly, the ability to maximize your chances of failure by day trading.

From the company:

Advantages of Investing With CFD

“The investor can see the prices completely online.”

“As an investor, you are who manage your own money with just a click. You must not make or rely on third parties to enter or exit positions. Open your terminal determines the price at which you want to enter the market and then enter the operation. It's that simple.”

“With ForexChile you can apalancarte up to 100 times your initial warranty. This means if you have $ 1,000,000 in your account, you could open a position of $ 100 million of the base currency, unlike other markets where leverage can be up to 15 times the initial amount deposited.”

“Additionally, allows to apply technical analysis studies such as Moving Averages, MACD, Bollinger Bands, RSI, ATR, etc. With these powerful features you can decide safer operation. In other markets the information is poor and outdated.”

“The vast majority of operations are performed as intraday. That is, as an investor you can open and close positions within minutes, as several hours or even days.”

If all of that isn’t enough to get you excited about trading CFDs in Chile, then you may want to check your pulse, but in the event a prospective client comes along and doesn’t think leveraged derivatives are the right choice, CEO Cristobal Forno has some advice: “If you want less risk, then put your money in a mutual fund.” And that may be the best advice because when asked by Bloomberg how many of ForexChile’s customers lose money, Forno estimated the figure was around 70%.

The real punchline here is that Forno and ForexChile have actually asked, on several occasions apparently, to be regulated:

Cristobal Forno, the 33-year-old chief executive of ForexChile and one of its founders, says regulation would give investors more confidence. His firm, which employs about 180 people in Chile, has met with regulators multiple times to ask for oversight, he says.

In other words: the more legitimate we appear to be, the more people will hand us their money.

[Fenix]

The Coming Chinese Crackup
Tyler D.
03/13/2015 21:50 -0400

Authored by David Shambaugh, originally posted at The Wall Street Journal,

On Thursday, the National People’s Congress convened in Beijing in what has become a familiar annual ritual. Some 3,000 “elected” delegates from all over the country—ranging from colorfully clad ethnic minorities to urbane billionaires—will meet for a week to discuss the state of the nation and to engage in the pretense of political participation.

Some see this impressive gathering as a sign of the strength of the Chinese political system—but it masks serious weaknesses. Chinese politics has always had a theatrical veneer, with staged events like the congress intended to project the power and stability of the Chinese Communist Party, or CCP. Officials and citizens alike know that they are supposed to conform to these rituals, participating cheerfully and parroting back official slogans. This behavior is known in Chinese as biaotai, “declaring where one stands,” but it is little more than an act of symbolic compliance.

Despite appearances, China’s political system is badly broken, and nobody knows it better than the Communist Party itself. China’s strongman leader, Xi Jinping, is hoping that a crackdown on dissent and corruption will shore up the party’s rule. He is determined to avoid becoming the Mikhail Gorbachev of China, presiding over the party’s collapse. But instead of being the antithesis of Mr. Gorbachev, Mr. Xi may well wind up having the same effect. His despotism is severely stressing China’s system and society—and bringing it closer to a breaking point.

Predicting the demise of authoritarian regimes is a risky business. Few Western experts forecast the collapse of the Soviet Union before it occurred in 1991; the CIA missed it entirely. The downfall of Eastern Europe’s communist states two years earlier was similarly scorned as the wishful thinking of anticommunists—until it happened. The post-Soviet “color revolutions” in Geo rgia, Ukraine and Kyrgyzstan from 2003 to 2005, as well as the 2011 Arab Spring uprisings, all burst forth unanticipated,

China-watchers have been on high alert for telltale signs of regime decay and decline ever since the regime’s near-death experience in Tiananmen Square in 1989. Since then, several seasoned Sinologists have risked their professional reputations by asserting that the collapse of CCP rule was inevitable. Others were more cautious—myself included. But times change in China, and so must our analyses.

The endgame of Chinese communist rule has now begun, I believe, and it has progressed further than many think. We don’t know what the pathway from now until the end will look like, of course. It will probably be highly unstable and unsettled. But until the system begins to unravel in some obvious way, those inside of it will play along—thus contributing to the facade of stability.

Communist rule in China is unlikely to end quietly. A single event is unlikely to trigger a peaceful implosion of the regime. Its demise is likely to be protracted, messy and violent. I wouldn’t rule out the possibility that Mr. Xi will be deposed in a power struggle or coup d’état. With his aggressive anticorruption campaign—a focus of this week’s National People’s Congress—he is overplaying a weak hand and deeply aggravating key party, state, military and commercial constituencies.

The Chinese have a proverb, waiying, neiruan—hard on the outside, soft on the inside. Mr. Xi is a genuinely tough ruler. He exudes conviction and personal confidence. But this hard personality belies a party and political system that is extremely fragile on the inside.

Consider five telling indications of the regime’s vulnerability and the party’s systemic weaknesses.

First, China’s economic elites have one foot out the door, and they are ready to flee en masse if the system really begins to crumble. In 2014, Shanghai’s Hurun Research Institute, which studies China’s wealthy, found that 64% of the “high net worth individuals” whom it polled—393 millionaires and billionaires—were either emigrating or planning to do so. Rich Chinese are sending their children to study abroad in record numbers (in itself, an indictment of the quality of the Chinese higher-education system).

Just this week, the Journal reported, federal agents searched several Southern California locations that U.S. authorities allege are linked to “multimillion-dollar birth-tourism businesses that enabled thousands of Chinese women to travel here and return home with infants born as U.S. citizens.” Wealthy Chinese are also buying property abroad at record levels and prices, and they are parking their financial assets overseas, often in well-shielded tax havens and shell companies.

Meanwhile, Beijing is trying to extradite back to China a large number of alleged financial fugitives living abroad. When a country’s elites—many of them party members—flee in such large numbers, it is a telling sign of lack of confidence in the regime and the country’s future.

Second, since taking office in 2012, Mr. Xi has greatly intensified the political repression that has blanketed China since 2009. The targets include the press, social media, film, arts and literature, religious groups, the Internet, intellectuals, Tibetans and Uighurs, dissidents, lawyers, NGOs, university students and textbooks. The Central Committee sent a draconian order known as Document No. 9 down through the party hierarchy in 2013, ordering all units to ferret out any seeming endorsement of the West’s “universal values”—including constitutional democracy, civil society, a free press and neoliberal economics.

A more secure and confident government would not institute such a severe crackdown. It is a symptom of the party leadership’s deep anxiety and insecurity.

Third, even many regime loyalists are just going through the motions. It is hard to miss the theater of false pretense that has permeated the Chinese body politic for the past few years. Last summer, I was one of a handful of foreigners (and the only American) who attended a conference about the “China Dream,” Mr. Xi’s signature concept, at a party-affiliated think tank in Beijing. We sat through two days of mind-numbing, nonstop presentations by two dozen party scholars—but their faces were frozen, their body language was wooden, and their boredom was palpable. They feigned compliance with the party and their leader’s latest mantra. But it was evident that the propaganda had lost its power, and the emperor had no clothes.

In December, I was back in Beijing for a conference at the Central Party School, the party’s highest institution of doctrinal instruction, and once again, the country’s top officials and foreign policy experts recited their stock slogans verbatim. During lunch one day, I went to the campus bookstore—always an important stop so that I can update myself on what China’s leading cadres are being taught. Tomes on the store’s shelves ranged from Lenin’s “Selected Works” to Condoleezza Rice’s memoirs, and a table at the entrance was piled high with copies of a pamphlet by Mr. Xi on his campaign to promote the “mass line”—that is, the party’s connection to the masses. “How is this selling?” I asked the clerk. “Oh, it’s not,” she replied. “We give it away.” The size of the stack suggested it was hardly a hot item.

Fourth, the corruption that riddles the party-state and the military also pervades Chinese society as a whole. Mr. Xi’s anticorruption campaign is more sustained and severe than any previous one, but no campaign can eliminate the problem. It is stubbornly rooted in the single-party system, patron-client networks, an economy utterly lacking in transparency, a state-controlled media and the absence of the rule of law.

Moreover, Mr. Xi’s campaign is turning out to be at least as much a selective purge as an antigraft campaign. Many of its targets to date have been political clients and allies of former Chinese leader Jiang Zemin. Now 88, Mr. Jiang is still the godfather figure of Chinese politics. Going after Mr. Jiang’s patronage network while he is still alive is highly risky for Mr. Xi, particularly since Mr. Xi doesn’t seem to have brought along his own coterie of loyal clients to promote into positions of power. Another problem: Mr. Xi, a child of China’s first-generation revolutionary elites, is one of the party’s “princelings,” and his political ties largely extend to other princelings. This silver-spoon generation is widely reviled in Chinese society at large.

Finally, China’s economy—for all the Western views of it as an unstoppable juggernaut—is stuck in a series of systemic traps from which there is no easy exit. In November 2013, Mr. Xi presided over the party’s Third Plenum, which unveiled a huge package of proposed economic reforms, but so far, they are sputtering on the launchpad. Yes, consumer spending has been rising, red tape has been reduced, and some fiscal reforms have been introduced, but overall, Mr. Xi’s ambitious goals have been stillborn. The reform package challenges powerful, deeply entrenched interest groups—such as state-owned enterprises and local party cadres—and they are plainly blocking its implementation.

These five increasingly evident cracks in the regime’s control can be fixed only through political reform. Until and unless China relaxes its draconian political controls, it will never become an innovative society and a “knowledge economy”—a main goal of the Third Plenum reforms. The political system has become the primary impediment to China’s needed social and economic reforms. If Mr. Xi and party leaders don’t relax their grip, they may be summoning precisely the fate they hope to avoid.

In the decades since the collapse of the Soviet Union, the upper reaches of China’s leadership have been obsessed with the fall of its fellow communist giant. Hundreds of Chinese postmortem analyses have dissected the causes of the Soviet disintegration.

Mr. Xi’s real “China Dream” has been to avoid the Soviet nightmare. Just a few months into his tenure, he gave a telling internal speech ruing the Soviet Union’s demise and bemoaning Mr. Gorbachev’s betrayals, arguing that Moscow had lacked a “real man” to stand up to its reformist last leader. Mr. Xi’s wave of repression today is meant to be the opposite of Mr. Gorbachev’s perestroika and glasnost. Instead of opening up, Mr. Xi is doubling down on controls over dissenters, the economy and even rivals within the party.

But reaction and repression aren’t Mr. Xi’s only option. His predecessors, Jiang Zemin and Hu Jintao, drew very different lessons from the Soviet collapse. From 2000 to 2008, they instituted policies intended to open up the system with carefully limited political reforms.

They strengthened local party committees and experimented with voting for multicandidate party secretaries. They recruited more businesspeople and intellectuals into the party. They expanded party consultation with nonparty groups and made the Politburo’s proceedings more transparent. They improved feedback mechanisms within the party, implemented more meritocratic criteria for evaluation and promotion, and created a system of mandatory midcareer training for all 45 million state and party cadres. They enforced retirement requirements and rotated officials and military officers between job assignments every couple of years.

In effect, for a while Mr. Jiang and Mr. Hu sought to manage change, not to resist it. But Mr. Xi wants none of this. Since 2009 (when even the heretofore open-minded Mr. Hu changed course and started to clamp down), an increasingly anxious regime has rolled back every single one of these political reforms (with the exception of the cadre-training system). These reforms were masterminded by Mr. Jiang’s political acolyte and former vice president, Zeng Qinghong, who retired in 2008 and is now under suspicion in Mr. Xi’s anticorruption campaign—another symbol of Mr. Xi’s hostility to the measures that might ease the ills of a crumbling system.

Some experts think that Mr. Xi’s harsh tactics may actually presage a more open and reformist direction later in his term. I don’t buy it. This leader and regime see politics in zero-sum terms: Relaxing control, in their view, is a sure step toward the demise of the system and their own downfall. They also take the conspiratorial view that the U.S. is actively working to subvert Communist Party rule. None of this suggests that sweeping reforms are just around the corner.

We cannot predict when Chinese communism will collapse, but it is hard not to conclude that we are witnessing its final phase. The CCP is the world’s second-longest ruling regime (behind only North Korea), and no party can rule forever.

Looking ahead, China-watchers should keep their eyes on the regime’s instruments of control and on those assigned to use those instruments. Large numbers of citizens and party members alike are already voting with their feet and leaving the country or displaying their insincerity by pretending to comply with party dictates.

We should watch for the day when the regime’s propaganda agents and its internal security apparatus start becoming lax in enforcing the party’s writ—or when they begin to identify with dissidents, like the East German Stasi agent in the film “The Lives of Others” who came to sympathize with the targets of his spying. When human empathy starts to win out over ossified authority, the endgame of Chinese communism will really have begun.

[Fenix]

US Upset At West's Lack Of War Preparedness
Submitted by Tyler D.
03/14/2015

The Washington Post notes that "many Western countries are cutting their defense budgets, while military spending in Russia and China surges," leading some US and UK officials to question whether the West is prepared to counter the "greatest threats to global security."


New York Fed Propaganda: "The Story Of Monetary Policy" In Cartoons
Submitted by Tyler D.
03/14/2015
To truly understand monetary policy, we go to the source... Sounding supremely self-righteous, the New York Fed concludes, "making monetary policy is a complicated job but it's necessary in order for our economy to enjoy continued growth along with stable prices." And besides, if you lot are allowed to think for yourselves, who knows what could happen?

From Bubble-Blower To Energy Expert, Alan Greenspan Warns "Oil Hasn't Bottomed Yet"
Tyler D.
03/14/2015 12:33 -0400

Having recently explained why the stock market is extremely overvalued (in his own words by Fed-driven multiple expansion alone), Alan Greenspan - seemingly brimming over with the need to remedy his years of lies/mistruths with some uncomfortable truthiness - is now taking on the US Dollar ("it is not from a strong US economy but a weak rest of the world") and oil prices (America has a massive surplus of oil and there may soon be nowhere to store all of it, "we'll be lucky if we can get $40 for it.")

Greenspan told Betty Liu that oil hasn't hit bottom yet:

"We are at the point now where, at the current rate of fill, we’re going to run out of room [at our domestic facility in Cushing, Oklahoma] by next month. And then the question is -- where does the crude go? Because everyone's forecast as to what was going to happen when prices collapsed was a sharp curtailment in shale oil production. That has not happened. The weekly figures, which are produced by the Energy Information Agency through March the 6, show a continued rise in domestic crude production and it has got no place to go, because we can’t legally export the way we would for most products. We can do a little exporting and Canada, but essentially, we’re bottling up a huge amount of crude oil in the United States."

On the stronger U.S. dollar, Greenspan said:

"A stronger dollar tends to suppress general domestic price level. But the problem here is that we are not quite certain where the problem on the exchange rate comes from, whether it is a strong U.S. economy, which is a questionable issue, or a weak rest of the world, which is a little more credible."

Bloomberg TV interview with Alan Greenspan...

Partial Transcript:

BETTY LIU: Chairman Greenspan, thank you so much for joining me this morning. We're hoping you can solve some of this mystery as to why we are adding jobs, and it looks great, but we are not spending? What is going on here?

ALAN GREENSPAN: Well, it's unfortunately very simple but not a good story. It's turning out that we're using more and more people at the margin to produce less and less. Productivity, which is output for man hours as we conventionally measure it, is running at a very low rate of increase. And that's the critical variable in the economy over both the short-term and the long-term.

So what we are confronted with right now is a very serious problem caused by the fact that capital investment is falling far short of the requirements necessary to keep the capital stock growing, and therefore productivity. It is not working.

LIU: So how do we reverse that? What exactly is behind that, Chairman?

GREENSPAN: Well, I've on many occasions indicated that the best way to standard this is to track it backwards. There's a very tight relationship between the stock of nonresidential, private stock and output per hour. They move together parallel all the time for very good reasons. But that capital stock requires capital investment. And capital investment, in turn, is being crowded out by a very substantial increase in government expenditures. Basically, entitlements -- because both parties, both the Republicans and the Democrats, don't want to talk about it largely because it is considered the third rail of American politics. You touch it and you lose.

LIU: Well, so that makes perfect sense. So it might come down to cutting some costs, right, to cost controls, Chairman. Top of your list, I know you've mentioned entitlement spending. You know, you've got Medicare, Social Security. The No. 1 thing that you think that we need to cut our costs on is what?

GREENSPAN: Well, the basic issue is the entitlements and the reason it's a problem is that people put money in their own funds and their employers' funds plus interest and that is what they perceive they et back , and therefore they are entitled to it because it is their money.

The only problem is that's not what we are doing. We're not creating enough funding for the Social Security trust funds, and the same thing goes for Medicare Part A. And we're not funding this. So long as we are not funding this, we are dollar for dollar crowding out capital investment.

LIU: Dr. Greenspan, some look at these numbers though, I mean noot just jobs, but the lack of productivity, as you just pointed out. Also, the spending decline that we are seeing. But also the strength of the dollar, as perhaps delaying the Fed policy on raising interest rates. I know that you don't speculate, you don't want to interfere on Janet Yellen's job, but all those factors combined -- do they foreshadow a longer wait on moving on monetary policy?

GREENSPAN: Well, you're merely repeating what is probably going on in the internal discussions of the Federal Open Market Committee. And I won't comment on that.

LIU: OK. Understood. The higher dollar, though, Dr. Greenspan, is that going to have - or do you belive it's going to keep the lid on inflation?

GREENSPAN: What do you mean? As productivity or what' going to keep a lid?

LIU: The higher U.S. dollar. OK, so we just talked about how the higher U.S. dollar should be reducing import cost for many companies. It's not so far. But if it does, is that going to help alleviate some of the inflationary pressures and, possibly, the need - again, not forecast raising interest rates or not -- but the need to tighten?

GREENSPAN: Yes, there's no question. A stronger dollar tends to suppress general domestic price level. But the problem here is that we are not quite certain where the problem on the exchange rate comes from, whether it is a strong U.S. economy, which is a questionable issue, or a weak rest of the world, which is a little more credible.

Remember, we're -- the exchange rates in the global economy are a zero sum game. As the dollar goes up, someone else goes down. What we are seeing is a significant weakening obviously in the euro. We are seeing it in the ruble; we're seeing it in the yuan. So it's a very, very complex problem of international trade and international capital flows. And it's not altogether clear that the U.S. can readily make major changes in the dollars exchange rate, because it's such a critical currency that the types of actions that we would have to take are probably are outside the realm of where we would think it's good policy.

LIU: All right, well, Dr. Greenspan, we're going to approach another topic that has effect on inflation. That is oil prices. Dr. Greenspan, stay with me for a moment. We've got to just take a commercial break.

LIU: You're watching IN THE LOOP live on Bloomberg Television and streaming on mobile and bloomberg.com. Good morning, I’m Betty Liu.

America has a massive surplus of oil and there may soon be nowhere to store all of it. That’s according to the International Energy Agency. And inventories are at a record 485 million barrels, skyrocketing in the last few months as demand has fallen. At the same time, the volume of oil at America's largest storage facility in Cushing, Oklahoma, has a most tripled since October. What does this mean? Possibly lower prices yet still.

Still with me is former Fed chairman Alan Greenspan. And Chairman, I know that oil is something that you have been watching very closely. You say it’s extremely important for us to be watching what happens to oil. You believe we still haven’t hit rock bottom here, right?

GREENSPAN: That’s correct, Betty. If you look at the data, as you just pointed out, our major domestic facility is in Cushing, Oklahoma, which is delivery point for West Texas Intermediate crude contracts. We are at the point now where, at the current rate of fill, we’re going to run out of room in Cushing by next month.

And then the question is -- where does the crude go? Because everyone's forecast as to what was going to happen when prices collapsed was a sharp curtailment in shale oil production. That has not happened. The weekly figures, which are produced by the Energy Inter-Nation (sic) Agency through March the 6, show a continued rise in domestic crude production and it has got no place to go, because we can’t legally export the way we would for most products. We can do a little exporting and Canada, but essentially, we’re bottling up a huge amount of crude oil in the United States.

So that the West Texas Intermediate price is running $10 a barrel on the Brent crude, which is the global price. And that basically means that we are creating great abnormalities in the system. And unless and until we find a way to get out of this dilemma, prices will continue to ease because there’s no place for that oil to go except for into the markets. And spot crudes are especially vulnerable because of so-called contango is a very high level, and that implies that there’s a very, very significant set of pressures on the spot price.

LIU: But, Dr. Greenspan, what about this theory though? When it seems inevitable that we’re going to see this huge oversupply and oil prices come down even more, isn’t that eventually going to hit U.S. production? It might be a very sharp crash in the number of rigs that get closed down but eventually the market will adjust?

GREENSPAN: Well, remember, the rigs that have been closing down have not been affecting the capacity to produce crude yet. And the reason is that most of them -- the ones which are not multiple well related, you’re getting the inefficient ranks shutting down but the capacity to basically build an oil expansion remains there. And frankly, I had expected it to turn down or ease a number of weeks ago and these numbers keep rising.

Now, it is perfectly credible that, because the cost of crude, especially I should say for shale crude which is more expensive than standard old-fashioned crude, those numbers are high -- $55 or $65 a barrel. There is some, Eagle Ford shale, which going under $50 a barrel. But there's not much room under there before cash flow turns negative. At that point, they shut down and it could be quite abrupt, as you point out.

LIU: Right, that’s right. It could be very abrupt. Then, Chairman Greenspan, if nothing is done here short of, let's say, a lift of our export ban on crude, what could we expect from OPEC?

GREENSPAN: Well, I think that OPEC is no longer the price leader. I wrote a long editorial -- op-ed piece last week or so in which I pointed out that essentially what is happening is that, because of the advent of shale, which is a very much more flexible type of facility to expand and contract crude, that the marginal global price-making mechanism has moved to the United States away from OPEC. And I think that that’s going to continue unless and until prices fall below the cost of crude production from shale, which is very significantly above where, for example, the Saudi crudes. There’s some Saudi crudes which can be lifted at less than $1a barrel in the Ghawar fields, the huge Ghawar field in Saudi Arabia. We're lucky if we can get $40

LIU: That’s incredible. That is a great point; it’s incredible and it sort of brings to light just how complicated the situation is.

[Fenix]

Bonds Or Stocks: Which Bubble Is Bigger? SocGen Answers
Tyler Durden's picture
Submitted by Tyler D.
03/14/2015 15:51

One of the more vocal debates of the past several years is whether the bubble in bonds is greater than that in stocks, or vice versa. While it will hardly resolve the ideological debate, in its latest "Risk Premium" report, SocGen presents a matrix showing the relative cheapness, or rather lack thereof, of various asset classes and what returns one may expect.

The conclusion, which will hardly come as a surprise to anyone who has observed the past 7 years and $13 trillion in central bank liquidity injections, is that everything is overvalued.

Quote SocGen's Alain Bokobza:

Rich valuations point to the likelihood of low returns across asset classes. [W]e develop a cross-asset approach to risk premia and implement it across the asset classes. The results show that valuations are rich across the board. This indicates markets may become shaky as we get closer to the first Fed rate hike in nine years.

That's putting it mildly, but perhaps more notable is that when looking at US Treasurys and US equities, at least according to SocGen, both asset classes are equally bubbly, and assure nearly identical negative long-term returns (something Jeremy Grantham also noted about a year ago when he said that the S&P will likely rise to 2250 at which point the bubble will finally burst).

One final thing to note in the chart above: the only asset class which does not appear massively overbought and expensive, are Asian government bonds, equities and junk. Which means that as the world wonders where the last source of monetization will come from for the final buying burst, in the central banks' "all-in" gamble to reflate the final bubble, everyone will soon be looking at the PBOC, just as we suggested last week.

And of course, once China is also monetizing, and in the process exporting epic deflation across the globe, the final reflation burst will also be the simplest one and one Bernanke hinted at long ago in "Deflation: Making Sure "It" Doesn't Happen Here." This one: