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How HFT Destroys Markets: 50 Pages Of Evidence
Tyler D.
03/20/2015

Back in 2009, when aside from a few insiders, nobody had heard of HFT, Zero Hedge launched its crusade to expose the algorithmic scourge that has since then caused an equity, treasury and now US Dollar flash crash, and has been the subject of a Michael Lewis bestseller and resulted in countless market halts and failures.

More importantly, there is now roughly 50 pages of just bibliography citing the evidence-based, academic research that has shown just how pervasively, maliciously and premeditatedly HFTs manipulate, destabilize, impair and otherwise destroy every single market in which they participate, and what's worse: result in incremental costs to investors, debunking the biggest lie HFTs spread about themselves - that they, being the gregarious humanist vacuum tubes they are, make trading cheaper and more accessible for the small investor.

And the biggest paradox: despite all this proof - which we urge every readers to sent to their favorite SEC regulator - America's corrupt enforcers of securities laws continue to turn a blind eye to all the crime that takes place every single day. Why? Because they collect a portion of the proceeds, of course, and because they need a scapegoat to blame once the market crashes.

We are grateful to "R. T. Leuchtkafer" who put it all together.

Some of key excerpts and findings:

This is a bibliography of resources on the capital markets, particularly on some of the negative effects of high frequency trading (HFT). Since the December 2013 edition of this document there has been an explosion of fact-based evidence on the damaging effects of HFT. This year's bibliography highlights a wide variety of academic, government, and industry data-driven research from institutions around the world, including MIT, Harvard, Princeton, the Federal Reserve Bank, the Bank of England, the University of Chicago, BlackRock, Cornell, the SEC, the European Central Bank, Yale, Cambridge, the London School of Economics, the United Nations, and many others.

Research listed here also explores how the most common business model employed by today’s high frequency traders - unregulated or under-regulated market making, often called “scalping” - can be abusive and disruptive. Several of these studies even predate automation.

Along with evidence-based research, separate sections of this bibliography include press editorials, op-eds, other commentary, and a variety of statements from government bodies and government officials from around the world about high frequency trading.

The bibliography begins with a brief overview of the evidence-based research. A detailed research bibliography containing over 100 studies begins on page six. Please also note various industry, academic, and government definitions of high frequency trading listed in the final section of this document, and note the special section on Michael Lewis's "Flash Boys."

Manipulation

Egginton et. al. (2012) found systematic evidence of "quote stuffing," a term coined by the market data and research firm Nanex to describe the many events it found where exchange technology infrastructure was slowed by floods of order and order cancel activity. They wrote that "We find that quote stuffing is pervasive with several hundred events occurring each trading day and that quote stuffing impacts over 74% of US listed equities during our sample period," and found that "stocks experience decreased liquidity, higher trading costs, and increased short term volatility.” Direct Edge (2013) launched a service to help its customers "mitigate the risks" of quote stuffing. Tse et. al. (2012) "present a detailed study of a variety of negative HFT strategies including examples of Quote Stuffing, Layering/Order Book Fade, and Momentum Ignition to demonstrate what bad HFT 'looks like', how often it happens, and how we detect it." Ye et. al. (2013) analyzed U.S. stock market data from 2010 and found "that stocks randomly grouped into the same [technology] channel have an abnormal correlation in message flow, which is consistent with the quote stuffing hypothesis." Industry regulator FINRA (2014) alleged a firm's high frequency trading customers employed "aggressive, potentially destabilizing trading strategies in illiquid securities." The United States Securities and Exchange Commission (2014) sanctioned a high frequency trading firm for manipulating the closing prices of thousands of stocks over a six month period.


Market Quality

Baron et. al. (2014) studied U.S. futures data and found a "winner-takes-all market structure" where "HFTs have strong incentives to take liquidity and compete over small increases in speed in an industry dominated by a small number of incumbents earning high and persistent returns." Biais and Foucault (2014) "recommend developing trading mechanisms that cate specifically to slow traders" and said "This could require regulatory intervention to overcome exchanges' conflict of interests." Kim and Murphy (2013) examined more than a decade of U.S. stock market data and found that after controlling for changes in market dynamics in that time period, market spreads were much worse than have been reported. Kirilenko and Lo (2013) surveyed the research literature and concluded that "In contrast to a number of public claims, high frequency traders do not as a rule engage in the provision of liquidity like traditional market makers." Lee (2013) analyzed Korean futures data and found that "high frequency trading is detrimental to the price discovery process." Machain and Dufour (2013) investigated U.K. stock market data and found empirical evidence for "a minimum period of time a limit order should be kept on the order book to avoid speculative practices." McInish and Upton (2012) explored U.S. equity data and wrote that "the ability of fast liquidity suppliers to use their speed advantage to the detriment of slow liquidity demanders...unambiguously lowers market quality." Yildiz et. al. (2014) "provide empirical evidence to support the theoretical predictions...that HFTs may play a dysfunctional role in financial markets." Van Kervel (2014) studied U.K. data and found that "trades are followed by excessive cancellations of limit orders, and the magnitude depends on the fraction of traders who can access several venues simultaneously" and "high-frequency traders can observe the first part of the trade and quickly cancel outstanding limit orders on other venues before the second part of the trade arrives." After analyzing U.S. stock market data, Ye et. al. (2013) concluded that speed improvements do not improve spreads but do increase cancellations and volatility. Johnson et. al. (2013) "uncovered an explosion of UEEs [ultrafast extreme events] starting in 2006, just after new legislation came into force that made high frequency trading more attractive."

And much, much more in the entire document below (link).

h/t Themis Trading and Nanex

[Fenix]

12:30 Índices USA dentro de sus canales alcistas
M&G Valores
Los índices norteamericanos mantienen un tono más lateral en los últimos meses pero dentro de sus canales alcistas. En el caso del S&P 500 el soporte clave sería el 1.985. Mientras no lo pierda esperamos nuevas subidas más adelante con un posible objetivo en la zona del 2.250.

El Nasdaq por su parte se encuentra muy cerca de sus máximos históricos del año 2.000. Esperaría que en las próximas semanas vaya a tantear esa zona y habrá que ver si hay indicios de que se pueda formar una resistencia importante. De momento mientras no pierda el 4.550 la tendencia alcista sigue vigente.


Los mercados alcistas no mueren de viejos

Carlos Montero
Lunes, 30 de Marzo del 2015 - 13:30:00

Una larga expansión es un argumento convincente para comprar acciones a pesar de que el PER fuera históricamente alto. Los inversores tienden a estar dispuestos a pagar más por las acciones si perciben que la expansión económica podría durar algunos años más. Cuanto más tiempo tengamos hasta la próxima recesión, más tiempo habrá para que crezcan las ganancias y justifiquen las valoraciones. La exposición anterior fue realizada recientemente por el prestigioso analista y gestor Ed Yardeni.

Yardeni añadió que si una recesión es inminente, las acciones obviamente deben ser vendidas de forma inmediata, especialmente si tienen un PER alto desde el punto de vista históricos. Los mercados alcistas no mueren de viejos, son asesinados por las recesiones.

Yardeni analiza el índice de indicadores coincidentes (CEI) para tener una orientación histórica sobre la longevidad de las expansiones económicas. Los resultados son los siguientes:

- El CEI tardó 68 meses, desde enero de 2008 hasta octubre de 2013, en recuperarse de la severa caída anterior durante 2008 y principios de 2009. Los cinco períodos de recuperación anteriores promediaron 26 meses, en un rango de 19 a 33 meses.

- El incremento medio del CEI tras cada uno de esos períodos de recuperación fue del 18,6%. Si aplicamos ese promedio al ciclo actual, el CEI alcanzaría su máximo en 48 meses más en marzo de 2019. Una ganancia sustancial desde los actuales niveles.

- Los cuatro componentes del CEI (nóminas laborales, ingreso personal real menos los pagos de transferencia, producción industrial y ventas comerciales), están en niveles récord.

Cuáles son las conclusiones de Yardeni:

- Las acciones no están baratas.

- Hay buenas razones para comprar de todos modos.

- La expansión podría durar hasta marzo de 2019.

- Las valoraciones están dentro de los promedios históricos.

Lacartadelabolsa

[Fenix]

Tyler Durden's picture
China Warns Against Irrational Exuberance
Submitted by Tyler D.
03/20/2015

As Chinese stocks rise for an eigth straight day hitting their highest levels since the crisis, China's securities regulator sees signs of froth and warns investors against adopting a foolish mentality.


"Dólar bajista si Yemen no lo tensa"

Bankinter
Lunes, 30 de Marzo del 2015 - 13:45:00

Eurodólar (€/$).- La combinación de unos datos más débiles de lo esperado en EE.UU. (Pedidos Bs Duraderos y PIB 4T), con la mejora del IFO alemán y con el conflicto de Yemen provocaron un movimiento de ida y vuelta en el eurodólar. El enfriamiento de expectativas de subidas de tipos debería llevar el cruce hasta el entorno 1,10. Sin embargo, esta semana la tensión en Oriente Medio podría apreciar el dólar hasta un nivel próximo a 1,06. Rango estimado (semana): 1,061/1,102

Eurolibra (€/GBP): Tras tres semanas de depreciación neta, no cambiamos nuestra visión sobre la divisa ya que gran parte de esa depreciación ha venido por la fortaleza del Euro. Por ello, mantenemos que la tendencia a largo plazo es apreciatoria. Posiblemente la publicación del PIB el miércoles podría ser el impulso que necesita la divisa para volver a ganar valor. Rango estimado semanal: 0,720- 0,736.

Euroyen (€/JPY).- El Yen terminó la semana a niveles similares a la semana previa pero llegó a depreciarse hasta superar ligeramente el 131. Las noticias macro de la madrugada del viernes (ventas minoristas -1,8% a/a y -2,0% anterior) apenas repercutieron. Esta semana tendremos más macro (Produc. Industrial y Tankan), que se espera mala, lo que debería debilitar al Yen. Rango estimado semanal: 129,0-132,0.


Eurosuizo (€/CHF): Saldo apreciatorio para el franco la semana pasada que estimamos se mantendrá en las próximas sesiones ante la fuerza depreciatoria que el PSPP ejerce sobre el euro y el aumento de la tensión geopolítica, que favorecerá el rol como activo refugio de la divisa suiza. Rango para la semana: 1,03-1,05.

14:07 Accenture: alcista mientras no pierda los 90,3 dólares
CMC Markets
Punto de rotación se sitúa en 90.3.

Preferencia: la subida se mantiene siempre que el soporte se sitúe en 90.3.

Escenario alternativo: por debajo de 90.3, el riesgo es una caída hasta 87.4 y 85.7.

En lo referente al análisis técnico, el índice de fuerza relativa (RSI) se encuentra por encima de su zona de neutralidad de 50. El indicador de convergencia/divergencia de medias móviles (MACD) se sitúa por encima de su línea de señal y es positivo.

Asimismo, la acción se sitúa por encima de su media móvil de 20 y 50 días (se sitúa a 90.25 y 89.17 respectivamente).

[Fenix]

La próxima crisis crediticia será mucho peor que la de 2008

Lunes, 30 de Marzo del 2015 - 14:30:00

Sin duda estamos viviendo tiempos extraños. Un experimento monetario sin precedentes está llegando a su final y nadie sabe las repercusiones potenciales. Por el momento, los mercados siguen siendo optimistas, esperando, por ejemplo, un aumento suave de tipos de la Reserva Federal y el Banco de Inglaterra. Y, quién sabe, tal vez los mercados estén en lo cierto. Pero tal vez demasiado tranquilos.

La semana pasada, Ray Dalio, el famoso fundador del hedge fund Bridgewater Associates, que tiene un patrimonio de 165.000 millones de dólares, escribió una nota de amplia difusión advirtiendo a sus clientes de que la Reserva Federal de Estados Unidos corría el riesgo de provocar un crash parecido al de 1937 cuando empezó a subir las tasas de interés de nuevo.

Entonces, como ahora, el banco central había pasado años imprimiendo dinero con el fin de ayudar a la economía estadounidense a recuperarse de la crisis de 1929. Pero el efecto secundario fue una burbuja del mercado de valores, que estalló de inmediato cuando la Reserva Federal aumentó las tasas de interés antes de tiempo. Dalio está preocupado por una repetición.

Es cierto que la política monetaria y la respuesta normativa a la última crisis, a menudo siembra las semillas para la siguiente crisis. No es difícil trazar una secuencia de eventos que demuestra que esto es lo que está sucediendo ahora. Si así fuera, el desplome del mercado de valores podría ser el menor de nuestros problemas.

En 1937 Estados Unidos estaba, en términos económicos, en una isla. Hoy en día, gracias a la globalización, el poder del dólar y un largo período de política monetaria ultraflexible, es una gran parte de una economía global.

Christine Lagarde, la directora gerente del Fondo Monetario Internacional, elevó recientemente las preocupaciones sobre los países que se han endeudado fuertemente en dólares y cuyas economías aún en recuperación siguen siendo vulnerables a una subida de tipos por parte de la Reserva Federal.

Y en 1937 los mercados de renta variable eran el principio y el final de todo. Hoy en día son pequeños comparados con los mercados de deuda, que están, a su vez, empequeñecidos por los mercados de derivados.

El valor total de todas las acciones mundiales era de alrededor de 70 billón de dólares en junio del año pasado, según la Federación Mundial de Bolsas. Mientras tanto, el valor nocional de todos los contratos de derivados en circulación era de más de 690 billones de dólares. Vale la pena señalar que la gran mayoría (alrededor de cuatro quintas partes) de todos los contratos de derivados existentes tienen como base las tasas de interés.

Los mercados de derivados son instrumentos financieros que son esencialmente pólizas de seguro - diseñadas para proteger al titular de los movimientos adversos de los precios.

Si usted está preocupado por un euro más fuerte, o un petróleo más caro, o el aumento de las tasas de interés, usted puede comprar un contrato que se revaloriza si sus temores finalmente se plasman en los mercados. Bien manejados, las ganancias que otorgan estos derivados compensan las pérdidas de los movimientos de precios de los activos subyacentes.


Sin embargo, los argumentos empleados por la industria de los derivados a veces suenan similares a los empleados por el lobby pro-armas: los derivados no son peligrosos, son las personas que los utilizan. Eso no es muy reconfortante.

¿Qué podría salir mal? Digamos que las tasas de interés en Estados Unidos suben antes y más rápido de lo que el mercado espera, dice Ben Wright de The Telegraph. “Eso significa que los precios de los bonos, que siempre se mueven en la dirección opuesta a los rendimientos, se desploman. Los bonos del Tesoro son como un guía de montaña al que todos los otros valores mundiales están atados - si se caen, arrastran a todos los demás con ellos.

¿Quién saldrá mal parado? Todo el mundo. Pero serán los bancos del mundo, donde incluso pequeños errores pueden crear grandes problemas, serán los más perjudicados. La Autoridad Bancaria Europea estima que la entidad financiera media aún tiene 27 veces más activos que recursos propios. Esto significa que si los que hay en sus balances (incluyendo bonos y otros valores, con referencia en los precios de los bonos del Tesoro) resultan valer un tan sólo un 3,7% menos de lo que se supone, será el momento de volver a las noches eternas en las que se discuten los rescates bancarios.

Barclays ha pronosticado que si los rendimientos de los bonos del Tesoro a 10 años vuelven a la media histórica, eliminaría casi una quinta parte del valor libro tangible de los bancos europeos.

Sí, una quinta parte. Esto es lo que se entiende por riesgo de tipo de interés. Es grande y es real y los bancos saben todo al respecto. Su respuesta para cubrir el riesgo es con derivados de tipos de interés. Es una de las razones por las que hay tantos de esos contratos. Así que todo va bien entonces.

Sin embargo, sólo una pregunta: ¿a quién han comprado esos derivados? Por supuesto, a otros bancos. Esto crea lo que se conoce como riesgo de contraparte. El Banco A comercializa seguros al Banco B. Pero entonces el Banco A se mete en dificultades financieras (un deterioro significativo en su solvencia sería suficiente) y de repente el Banco B ya no está tan protegido como creía.

De hecho, el Banco A podría empezar a sufrir precisamente por el seguro que ha vendido al Banco B. ¿Y si no puede cumplir con el contrato? Esto crea una situación potencial de callejón sin salida: los derivados funcionan, siempre y cuando no se necesiten; haciendo que sean inútiles.

Este es precisamente el tipo de cosas que se produjo durante la crisis crediticia - los bancos dejaron de confiar unos en otros. Las nuevas reglas introducidas desde entonces exigen a los bancos gestionar activamente su riesgo de contraparte. En otras palabras, a los bancos se les pide cubrir sus propias coberturas.

No está nada claro si esto hace que el sistema tenga menor riesgo o simplemente complica aún más la interconexión financiera.

Los reguladores están claramente preocupados. Han aportado una mayor transparencia al mercado de derivados, exigiendo una mejor información y que una mayor proporción de contratos se enruten a través contrapartes centrales o cámaras de compensación, que se encajan entre los dos lados del comercio y reparan el desorden si alguien se declara en quiebra.

Pero, de nuevo, los riesgos no han desaparecido del todo. Las cámaras de compensación están diseñadas para hacer frente a uno o dos contrapartes. ¿Pero qué sucede si más entidades quiebran? Las cámaras de compensación en sí se verían arrastradas a un inevitable colapso, serán calificadas como demasiado grandes para caer y, bueno, ya sabe cómo termina esta historia.

No hace falta ser un adivino para predecir que los contribuyentes, una vez más, tendrían que limpiar el desastre.”

Fuentes: Ben Wright
Carlos Montero
Lacartadelabolsa

[Fenix]

15:26 S&P 500 futuro junio. Posible rebote al cuerpo medio de 2070
La salida del rango de corto plazo entre 128-08 y 128-22½ nos debería dar una tendencia para las próximas jornada.

Una ruptura bajista abogaría por un nuevo mínimo marginal a corto plazo por debajo de 128-05½ antes de volver al alza, mientras que una ruptura alcista nos daría un objetivo alcista en el máximo de la onda de 129- 02.

Resistencias 128-22 129-02 129-12½ 129-19½ 130-20½
Soportes 128-16 128-08 128-05½ 126-25 125-29½

14:58 Petróleo WTI. Soportes de largo plazo en 32,40 y 41,15
Análisis técnico Citi
El WTI ha probado la resistencia de corto plazo y desde 52,40 dólares se ha girado a la baja. Los niveles de resistencia posteriores se sitúan en 54.15-54.24 dólares y hasta que no veamos un cierre por encima de esta zona (preferiblemente un cierre semanal), no podemos confirmar ningún desarrollo alcista significativo.

El momentum diario está cerca de cruzarse a la baja desde niveles de sobrecompra y, por lo tanto, es probable que en los próximos días veamos que el WTI deriva hacia los mínimos de $42.03.

El gráfico adjunto destaca una serie de niveles de largo plazo entre $ 32.40 y $41.15.


Integración fiscal en el euro

Lunes, 30 de Marzo del 2015 - 15:52:00

Más flexibilidad fiscal no es la solución; hay demasiada liquidez y también demasiada deuda. Poco se puede añadir a lo que ya sabemos en términos de base monetaria y de la elevada deuda, privada y pública.

Pero, ¿qué pasa con el PEC? Volvamos al inicio: la Unión Monetaria no es óptima; para lograrlo hace falta: movilidad laboral, movilidad de capital y flexibilidad de precios y salarios, mutualización del riesgo y convergencia de ciclos. Al final, reformas estructurales y fiscales.

Ahora, miren el gráfico adjunto.

Demasiados amarillos y naranjas. Pocos azules, ningún verde. Inquietantes rojos.

La Comisión planteó en noviembre de 2011 un nuevo procedimiento relativo a los desequilibrios excesivos de los países del EUR.

En la siguiente tabla vemos las recomendaciones aplicadas a los países, entre 2014/2015


Cinco países registraban en 2015 desequilibrios excesivos: Francia, Italia, Portugal, Bulgaria y Croacia. Pero en ninguno de los casos la Comisión ha establecido el procedimiento de desequilibrios excesivos, con un marcado componente corrector. ¿A la espera de qué? Nunca se ha aplicado, un reflejo de la dificultad que existe en términos políticos. O por la mayor flexibilidad que se otorga al PEC. La cuestión de fondo, como diría el Ministro de finanzas alemán, es si esta flexibilidad no va en contra del carácter preventivo que se busca con este instrumento.

¿A cuenta de qué todo esto? Naturalmente, hoy debería (admito que esta posibilidad se reduce tras lo que vamos conociendo del difícil fin de semana) ser el día que cierra la reciente tensión entre las autoridades europeas y el Gobierno griego. El inicio del fin de la Crisis, en teoría. En mi opinión, el final del inicio.

José Luis Martínez Campuzano
Estratega de Citi en España

[Fenix]

One Last Look At The Real Economy Before It Implodes - Part 3
Tyler D.
03/20/2015

Submitted by Brandon Smith

One Last Look At The Real Economy Before It Implodes - Part 3

In the previous installments of this series, we discussed the hidden and often unspoken crisis brewing within the employment market, as well as in personal debt. The primary consequence being a collapse in overall consumer demand, something which we are at this very moment witnessing in the macro-picture of the fiscal situation around the world. Lack of real production and lack of sustainable employment options result in a lack of savings, an over-dependency on debt and welfare, the destruction of grass-roots entrepreneurship, a conflated and disingenuous representation of gross domestic product, and ultimately an economic system devoid of structural integrity — a hollow shell of a system, vulnerable to even the slightest shocks.

This lack of structural integrity and stability is hidden from the general public quite deliberately by way of central bank money creation that enables government debt spending, which is counted toward GDP despite the fact that it is NOT true production (debt creation is a negation of true production and historically results in a degradation of the overall economy as well as monetary buying power, rather than progress). Government debt spending also disguises the real state of poverty within a system through welfare and entitlements. The U.S. poverty level is at record highs, hitting previous records set 50 years ago during Lyndon Johnson’s administration. The record-breaking rise in poverty has also occurred despite 50 years of the so called “war on poverty,” a shift toward American socialism that was a continuation of the policies launched by Franklin D. Roosevelt’s 'New Deal'.

The shift toward a welfare state is the exact reason why, despite record poverty and a 23 percent true unemployment rate (as discussed here), we do not yet see the kind of soup lines and rampant indigence witnessed during the Great Depression. Today, EBT cards and other welfare programs hide modern soup lines in plain sight. It should be noted that the record 20 percent of U.S. households now on food stamps are still technically contributing to GDP. That’s because government statistics make no distinction between normal grocery consumption and consumption created artificially through debt-generated welfare.

This third installment of our economic series will be the most difficult. We will examine the issue of government debt, including how true debt is disguised from the public and how this debt is a warning of a coming implosion in our overall structure. National debt is perhaps one of the most manipulated fields of economics, and the layers surrounding what our country truly owes to foreign creditors and central banks are many. I believe this confusing array of disinformation is designed to discourage average Americans from pursuing the facts. Here are the facts all the same, for those who have the patience...

First, it is important to debunk the mainstream lies surrounding what constitutes national debt.

“Official” national debt as of 2015 is currently reported at more than $18 trillion. That means that under Barack Obama and with the aid of the private Federal Reserve, U.S. debt has nearly doubled since 2008 — quite an accomplishment in only seven years’ time. But this is not the whole picture.

Official GDP numbers published for mainstream consumption do NOT include annual liabilities generated by programs such as Social Security and Medicare. These liabilities are veiled through the efforts of the Congressional Budget Office (CBO), which reports on what it calls “debts” rather than on the true fiscal gap. Through the efforts of economists like Laurence Kotlikoff of Boston University, Alan J. Auerbach and Jagadeesh Gokhale, understanding of the fiscal gap (the difference between our government’s projected financial obligations and the present value of all projected future tax and other receipts) is slowly growing within more mainstream circles.

The debt created through the fiscal gap increases, for example, because of the Social Security program - since government taxes the population for Social Security but uses that tax money to fund other programs or to pay off other outstanding debts. In other words, the government collects "taxes" with the promise of paying them back in the future through Social Security, but it spends that money instead of saving it for the use it was supposedly intended.

The costs of such unfunded liabilities within programs like Social Security and Medicare accumulate as the government continues to kick the can down the road instead of changing policy to cover costs. This accumulation is reflected in the Alternative Financial Scenario analysis, which the CBO used to publish every year but for some reason stopped publishing in 2013. Here is a presentation on the AFS by the St. Louis branch of the Federal Reserve. Take note that the crowd laughs at the prospect of the government continuing to “can kick” economic policy changes in order to avoid handling current debt obligations, yet that is exactly what has happened over the past several years.

Using the AFS report, Kotlikoff and other more honest economists estimate real U.S. national debt to stand at about $205 trillion.

When the exposure of these numbers began to take hold in the mainstream, media pundits and establishment propagandists set in motion a campaign to spin public perception, claiming that the vast majority of this debt was actually “projected debt” to be paid over the course of 70 years or more and, thus, not important in terms of today’s debt concerns. While some estimates of national debt include future projections of unfunded liabilities in certain sectors this far ahead, the spin masters' fundamental argument is in fact a disingenuous redirection of the facts.

According to the calculations of economists like Chris Cox and Bill Archer, unfunded liabilities are adding about $8 trillion in total debt annually. That is $8 trillion dollars per year not accounted for in official national debt stats. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion of this amount.

Kotlikoff’s analysis shows that this annual hidden debt accumulation has resulted in a current total of $205 trillion. This amount is not the unfunded liabilities added up in all future years. This is the present value of the unfunded liabilities, discounted to today.

How is the U.S. currently covering such massive obligations on top of the already counted existing budget costs? It’s not.

Taxes collected yearly in the range of $3.7 trillion are nowhere near enough to cover the amount, and no amount of future taxes would make a dent either. This is why the Grace Commission, established during the Ronald Reagan presidency, found that not a single penny of your taxes collected by the Internal Revenue Service is going toward the funding of actual government programs. In fact, all new taxes are being used to pay off the ever increasing interest on current debts.

For those who argue that an increase in taxation is the cure, more than 102 million people are unemployed within the U.S. today. According to the Bureau of Labor Statistics and the Current Population Survey (CPS), 148 million are employed; about 20% of these are considered part-time workers (about 30 million people). Around 16 million full time workers are employed by state and local government (meaning they are a drain on the system whether they know it or not). Only 43 percent of all U.S. households are considered “middle class,” the section of the public where most taxes are derived. In the best-case scenario, we have about 120 million people paying a majority of taxes toward U.S. debt obligations, while nearly as many are adding to those debt obligations through welfare programs or have the potential to add to those obligations in the near future if they do not find work due to the high unemployment rate that no one at the BLS wants to acknowledge.

Looking at reality, one finds a swiftly shrinking middle class paying for an ever larger welfare class. Do the math, and an honest person will admit that no matter how much taxes increase, they will still never make up for the lack of adequate taxpayers.

Another dishonest argument given to dismiss concerns of national debt is the lie that Domestic Net Worth in the U.S. far outweighs our debts owed, and this somehow negates the issue. Domestic Net Worth is calculated using Gross Domestic Assets, public and private. It's interesting, however, that Domestic Net Worth counts 'Debt Capital' as an asset, just as GDP counts debt creation as production. Debt Capital is the “capital” businesses and governments raise by taking out loans. This capital (debt) is then counted as an asset toward Domestic Net Worth.

Yes, that’s right, private and national debts are “assets.” And mainstream economists argue that these debts (errr… assets) offset our existing debts. This is the unicorn, Neverland, Care Bear magic of establishment economics, folks. It’s truly a magnificent thing to behold.

Ironically, debt capital, like the official national debt, does not include unfunded liabilities. If it did, mainstream talking heads could claim an even vaster supply of “assets” (debts) that offset our liabilities.

This situation is clearly unsustainable. The only people who seem to argue that it is sustainable are disinformation agents with something to gain (government favors and pay) and government cronies with something to lose (public trust and their positions of petty authority).

With overall Treasury investments static for some foreign central banks and dwindling in others, the only other options are to print indefinitely and at ever greater levels, or to default. For decades, the Federal Reserve has been printing in order to keep the game afloat, and the American public has little to no idea how much fiat and debt the private institution has conjured in the process. Certainly, the amount of debt we see just in annual unfunded liabilities helps to explain why the dollar has lost 97 percent of its purchasing power since the Fed was established. Covering that much debt in the short term requires a constant flow of fiat, digital and paper. Not only does REAL debt threaten our credit standing as a nation, it also threatens the value and full faith in the dollar.

The small glimpse into Fed operations we received during the limited TARP audit was enough to warrant serious concern, as a full audit would likely result in the exposure of total debt fraud, the immediate abandonment of U.S. Treasury investment, and the destruction of the dollar. Of course, all of that will eventually happen anyway...

I will discuss why this will take place sooner rather than later through the issues of Treasury bonds and the dollar in the fourth installment of this series. In the fifth installment, I will examine the many reasons why a deliberate program of destructive debt bubbles and currency devaluations actually benefits certain international financiers and elites with aspirations of complete globalization. And in the sixth and final installment, I will delve into practical solutions - and practical solutions only. In the meantime, I would like everyone to consider this:

No society or culture has ever successfully survived by disengaging itself from its own financial responsibilities and dumping them on future generations without falling from historical grace. Not one. Does anyone with any sense really believe that the U.S. is somehow immune to this reality?

[Fenix]

The "Natural Interest Rate" Is Always Positive And Cannot Be Negative
03/21/2015

Submitted by Thorsten Polleit

The "Natural Interest Rate" Is Always Positive And Cannot Be Negative

Some economists have been arguing that the “equilibrium real interest rate” (that is the “natural interest rate” or the “originary interest rate”) has become negative, as a “secular stagnation” has allegedly caused a “savings glut.”1

The idea is that savings exceed investment, and that a negative real interest rate is required for bringing savings in line with investment. From the viewpoint of the Austrian school, the notion of a “negative equilibrium real interest rate” doesn’t make sense at all.2

To show this, let us develop the case step by step. To start with, one should make a distinction between two types of interest rates: There is the market interest rate, and there is the originary interest rate.

The market interest rate is the outcome of the supply of and demand for savings in the market place. It can be observed, for instance, in the deposit, bond, or loan market for different maturities and credit qualities.

The originary interest rate is a category of human action, saying that acting man values goods available at present more highly than goods available in the future. In other words: Future goods trade at a price discount relative to present goods. For instance, 1 US$ available today is preferred over 1 US$ available in one year’s time.

If 1 US$ to be received in one year’s time is valued at, say, 0.909 US$, the originary rate of interest is 10 percent. (1 US$ divided by 0.909 minus 1 gives you 0.10, or 10 percent, for that matter.) 10 percent is here the originary interest rate (disregarding any other premia).
The “Originary Interest Rate” Reflects a Value Differential

The originary interest rate is expressive of a value differential, which results from so-called time-preference.3 The term time-preference denotes that acting man prefers an earlier satisfaction of wants over a later satisfaction of wants.

Time-preference is always and everywhere positive, and so is the originary interest rate. This is, first and foremost, what common sense would tell us.

If the originary interest rate was near-zero, it means that you prefer two apples available in, say, 1,000 years over one apple available today. A truly zero originary interest rate implies that the actor's planning horizon or “period of provision” is infinitely long, which is another way of saying that he would never act at all but would continually push the attainment of his goals into the future.

The notion that time-preference and the originary interest rate could be zero, does not only sound absurd, it is also a logical impossibility: Positive time-preference and a positive originary interest rate are logically implied in the irrefutably true “axiom of human action.”

Human action is purposive behavior, implying the use of means to achieve ends. Action requires time (it is impossible to think otherwise). Thus, time is an indispensable and scarce means for achieving ends. As such, it must be economized, which necessarily implies that an earlier satisfaction of wants is preferred over a later satisfaction of wants.

For (praxeo-)logical reasons, therefore, time preference and the originary interest rate cannot fall to zero, let alone become negative. The implications of a negative originary interest rate cannot even be conceived by the human mind: A zero originary interest rate already implies no action ever into eternity.
Unconvincing Arguments

However, some argue that due to growing uncertainties related to longer life expectancy, people might increasingly prefer future consumption over present consumption; and that this could push time preference and the originary interest rate into negative territory.

No doubt, peoples’ time preference may decline over time, implying that savings out of current income increases while consumption declines. While time preference and thus the originary interest rate can fall, for logical reasons they cannot hit zero, though, let alone become negative.

Another argument refers to the issue of “saturation” and runs as follows: Let’s assume you have two apples, and you eat one of them. Your hunger is now saturated, so that you prefer eating the remaining apple tomorrow over eating it today. Doesn’t this prove that people may value future goods more highly than present goods, that time preference and the originary interest rate may be negative?

No it doesn’t. Non-consumption of the second apple today can easily be explained by the fact that the marginal utility of eating the apple now is lower than eating it tomorrow or the next day, even when the future marginal utility is discounted by a positive originary interest rate.

That said, the example above is misconstrued.4 It does not illustrate the relevant case, namely the case in which acting man considers alternative uses of one and the same good — and thus doesn’t prove at all that time preference and thus the originary interest rate can be negative.
The End of the Market Economy

What is the relationship between the market interest rate and the originary interest rate? In the loan market, for instance, the interest rate on loans is adjusted to the rate or originary interest. If, for instance, the originary rate of interest is 2 percent and the credit and inflation premia are 1 percent, respectively, the market interest rate would be 4 percent.

Market interest rates may become negative in real terms. In a “hampered market,” for instance, the central bank can push the real market interest rate into negative territory. However, this does not, and cannot, represent an equilibrium, as time preference and thus the originary interest rate cannot become negative.

Should a central bank really succeed in making all market interest rates negative in real terms, savings and investment would come to a shrieking halt: as time preference and the originary interest rate are always positive, “capitalistic saving” — the accumulation of goods designed for improving the production process — would come to an end. Capital consumption would ensue, throwing mankind back into poverty. It would be the end of the market economy.

It might be interesting to note in this context that, for instance, the German national socialists had called for the abolition, the prohibition of the interest rate. Now you know why: Without a positive (originary) interest rate, the market economy will cease to function.
The True Purpose of Negative-Interest-Rate Policy

For some reason, those who argue that the originary interest rate has become negative seem to overlook that the originary interest rate is a phenomena which is not confined to credit markets. It pervades all markets in which present goods are exchanged for future goods.5

For instance, the originary interest rate prevails at each stage of the economy’s time-consuming roundabout production. The originary interest rate also exists in the stock market, where investors exchange present money against a claim on future money (that is a firm’s dividend payment).

If they wanted to be consistent, the believers in a negative originary interest rate would have to call for a policy that does not only make interest rates negative in real terms in the credit market, but also in the markets for, say, stocks and housing.

However, a policy that advocates destroying firms’ values and peoples’ housing wealth wouldn’t be taken too kindly by the public at large; and those economists recommending it couldn’t expect being cheered.

The consequence of a policy of a negative real market interest rate should have become obvious by now: It is an actually perfidious policy for debasing the real value of outstanding debt; and it is a recipe for wreaking havoc on the economy.
Image source: iStockphoto

* 1. See, for instance, Gregory Mankiw, "It May be Time for the Fed to Go Negative," New York Times, 18 April 2009; or the talk given by Larry H. Summers at the IMF Economic Forum, 8 November 2013.
* 2. For important readings about the "pure time-preference theory of interest," see Jeffrey M. Herbener, ed., The Pure Time-Preference Theory of Interest (Auburn, Ala.: Mises Institute, 2011).
* 3. For a thoroughgoing explanation, see Ludwig von Mises, Human Action: A Treatise on Economics, The Scholar’s Edition (Auburn, Ala.: Mises Institute, 2008), Chapter XIX: “The Interest Rate,” pp. 521 – 534.
* 4. The correct example would be as follows: You are hungry and have an apple. In this case, no doubt, you would prefer eating the apple today over eating it tomorrow. In other words: You value the apple readily available today more highly than an apple readily available tomorrow.
* 5. See Murray N. Rothbard, Man Economy, and State (Auburn, Ala.: Mises Institute, [1962] 2001), chapter 6 “Production: The Rate of Interest and Its Determination,” pp. 313 – 386.

[Fenix]

Interstellar? Scientist Warns Earth Is Now Halfway To Being Inhospitable
Tyler D.
03/21/2015

"The planet has been our best friend by buffering our actions and showing its resilience, but for the first time ever," warns Swedish environmental professor Johan Rockstrom, "we might shift the planet from friend to foe." As RT notes, Rockstrom explains there are nine "planetary boundaries" in a new paper published in Science – and human beings have already crossed four of them.

As RT reports,

Environmental science professor Johan Rockstrom, the executive director of the Stockholm Resilience Centre in Sweden, argues that there are nine “planetary boundaries” in a new paper published in Science – and human beings have already crossed four of them.

Those nine include carbon dioxide concentrations, maintaining biodiversity at 90 percent, the use of nitrogen and phosphorous, maintaining 75 percent of original forests, aerosol emissions, stratospheric ozone depletion, ocean acidification, fresh water use and the dumping of pollutants.

Rockstrom’s planetary boundary theory was first conceived in 2007. His new paper reveals that because of climate stability, which began when the Ice Age ended 11,000 years ago, a planetary calm helped our ancestors to cultivate wheat, domesticate animals, and launch industrial and communications revolutions. But those advances have strained the stability of the planet, and Rockstrom says we have broken four boundaries: too much nitrogen has been added to ecosystems, too many forests have been cut down, the climate is changing too quickly and species are going extinct at too great a rate.

Speaking to RT’s Ben Swann, Professor of Ethics Bron Taylor from the University of Florida said that we have accelerated the extinction crisis through deforestation and ocean acidification, a development which is driving species to extinction.

“[Human] beings have increased, even from 1925, from 2 billion – which is considered to be a sustainable population for human beings, according to northern European consumption standards – to 7.2 billion at this point,” he said.

Where's Matthew McConaughey when we need him?



Near Perfect Correlation Between Wages And Spending Bodes Poorly For Economy
Submitted by Tyler D.
03/21/2015

The correlation between wage growth and consumer spending is now 0.93 according to RBC meaning that the 80% of the labor force who aren't seeing their pay increase will not be driving the US economic engine going forward.

[Fenix]

No Longer Quiet On The Eastern Front (Part 2)
03/21/2015

Submitted by Kevin Virgil
No Longer Quiet on the Eastern Front (Part 2)

This is the second of my three-part series that will explore the expanding fault line between the European Union and Russia, and the early stages of what I believe will eventually become known as the Second Cold War.

* * * * *

In the first part of this series we discussed Greece and its ongoing negotiations with the European Union – particularly with Germany – and how the complicated history between these two countries makes it exceedingly difficult for the Greek people to accept the terms on offer from the EU. The financial media’s reporting on the Greek saga has become quite dramatic (at least in comparison to other financial dramas); it has become one of the more memorable economic conflicts in recent years.

This time we will turn our attention north, to a different kind of conflict. This one has also wrought economic devastation to a European country, but of a much higher intensity. It is the first civil war that the European continent has seen since the Balkan Wars of the 1990s, when the regional superpower of Yugoslavia was ultimately broken up amidst a series of separatist and independence movements. Today’s conflict will almost certainly result in a similar outcome for its host country.

I’m talking, of course, about Ukraine. Let’s take a closer look.

A Very Bad Year For Ukraine

The past eighteen months have been cataclysmic for Ukraine. Its current descent into anarchy began in November 2013 with the Euromaidan protests, when pro-Western protestors denounced then-president Viktor Yanukovych and demanded closer integration with Europe. The protests endured until February 2014, when clashes between police and protestors descended into urban warfare. Police snipers used live ammunition against protestors and at least 88 people were killed within 48 hours.

Ukrainian politics are famously ruthless. Fistfights routinely break out in their parliament (gratuitous examples provided here and here). This is also the country where a former president was poisoned and disfigured by dioxin — and ultimately implicated the godfather of his own children as the culprit. Perhaps it’s no coincidence that Vitaliy Klitschko, a 200-cm world heavyweight boxing champion who has never been knocked out, is now the mayor of Kiev.

Yushchenko, before and after dioxin poisoning. Courtesy: Kiev News Blog

However, even the murder of unarmed protestors proved too much for arch-stooge Yanukovych to withstand and he was forced to flee Kiev within days. A media sideshow ensued when the public discovered their president-in-exile’s opulent dacha outside of Kiev, built with some of the billions that he had siphoned out of the country’s coffers. The ensuing “Marie Antoinette on the Dnieper River” moment, coupled with the rapidly increasing list of his former associates who have lately been found dead, ensures that he will not emerge from his current and undisclosed location anytime soon.

View from inside the humble Yanukovych country cottage. Courtesy: NY Times

In such a chaotic political climate, it is rather unsurprising that the leadership vacuum created by Yanukovych’s hasty exit ultimately led to civil war and a thinly-veiled Russian military invasion. The Ukrainian presidency (also known as “the world’s least desirable head of state position”) was ultimately claimed by oligarch Petr Poroshenko, the “chocolate king” of Ukraine. His Roshen Corporation is the world’s 18th-largest confectionery company, providing him with a net worth of approximately $1.5 billion. He managed to win elections in May 2014 with enough margin to avoid a run-off.

However, Poroshenko has not always enjoyed similar support from his foreign friends. Take US Assistant Secretary of State Victoria Nuland, for instance. Married to conservative foreign policy commentator Robert Kagan, Nuland is one-half of the perennial Washington neoconservative power couple. Her husband aggressively pushed for the Iraq War; she now aggressively lobbies for American military sales to Ukraine and other Eastern European countries. Tasked with managing US diplomatic relations in Europe, Nuland became famous after a phone conversation between her and the US Ambassador to Ukraine was leaked to the media. During that call, Nuland made several references to whom she thought should become the next prime minister of Ukraine after Yanukovych’s ouster. Her recommendation, Arseniy Yatseniuk (whom she referred to colloquially as “Yats”) became the PM on 27 February but was defeated by Poroshenko in elections. The call descended from creepy interventionist plot into a full-on diplomatic neutron bomb when she was quoted as saying “F*** the EU” in response to the continent’s leaders failing to join ranks with the US in enforcing sanctions against Ukrainian political leaders. Whether or not her interference played a role in the succession of “Yats”, the incident provided the Russian government with a golden opportunity to portray her as a villain, and to paint the pro-European Maidan protests as more of the usual American meddling.

The famous “Little Green Men” of eastern Ukraine. Courtesy: The Economist

All of this aside, it goes a bit beyond hypocritical when the Russians accuse the US of meddling in Ukraine’s affairs. In contrast to one diplomat’s ill-advised comments, Putin has spent the past twelve months taking the art of covert foreign intervention to a new level. When was the last time a foreign power sent armored columns of tanks and troop carriers into a neighboring country and denied that such an event was actually happening?

The Russian Angle

This week marks the one-year anniversary of Russia’s annexation of Crimea. Conveniently, Putin made the decision to send Russian troops into Sevastopol on the eve of the Olympic closing ceremonies in Sochi. Overall the past year has been quite peaceful if you live in Crimea. The same cannot be said of the eastern regions of Donetsk and Lugansk, where loss of confidence in Kiev’s government led to the establishment of separatist movements and new allegiances to Russia. Over 5,000 soldiers, partisans and civilians have died in the intense fighting that has taken place in those regions over the past year.

Western media has portrayed Russian incursions into eastern Ukraine as a “reign of terror” (a quote from none other than Victoria Nuland) where chaos abounds and no one is safe. One wonders how this can be true after reviewing poll counts from a March 2014 referendum where Crimeans voted on the issue of secession from Ukraine and annexation to Russia — 83% of the population cast a vote, and 96% of those voted in favor of annexation. A “reign of terror” might be under way against some hard-line ethnic Tatars who refuse to accept majority rule, but overall these facts appear to further undermine whatever shred of credibility Nuland and the US can still lay claim to on this topic. According to several polls, Crimeans overwhelmingly lost faith in the Yanukovych government and believed that the Maidan protests were orchestrated by the West. As shown below, nearly two-thirds of Crimean residents have Russian heritage and a collective decision was made to seek safety and security in their homeland.

Ethnic breakdown of Ukraine by region. Courtesy: The Economist

The battlegrounds of Donetsk and Lugansk are far more difficult to explain. These are the eastern provinces where the vast majority of conflicts has taken place. Over the past several months we have been shown images of high-intensity conflict from Ukrainian villages like Debaltseve and Mariupol. Over 5,000 have died in these conflicts since the two provinces declared themselves to be independent sovereigns (the Donetsk and Lugansk People’s Republics, naturally) that swore allegiance to Russia, who have had the diplomatic sense to stop short of recognizing their independence. To date the only foreign “country” to recognize their status is South Ossetia, another former battleground on Russia’s border that has remained in a state of suspended animation since it left the Geo rgian sphere of influence in 2008 (and Russia’s most recent foreign incursion).

Why Is This Important?

Before we answer that question, let’s take a quick look at Ukraine’s economy:

* Population: 44.2 million
* Population growth rate in 2013: -0.6% (lowest in Europe)
* GDP (2013 official): US$ 175B (purchasing power parity of US$ 377B)
* GDP per capita: US$ 7,400 (2nd lowest in Europe)
* GDP growth rate (2014): -7.5%
* GDP growth rate (2015E): -4.5%
* Trade deficit (2014): -6.9%

Ukraine's currency, the hryvnia, is the worst-performing currency in the world with a 40% loss against the USD in 2014 and another 40% drop reported so far this year. A drop of this magnitude has been enough to spark hyperinflation in the country — as high as 272%, according to one economist. Two weeks ago Ukraine raised its benchmark interest rate by 10.5 points, up to 30%, in an effort to stop the bleeding. The increased lending rate makes it all but certain that business activity will come to a screeching halt.

An emergency $17.5B rescue package was negotiated with the IMF earlier this month. The country is no stranger to the IMF’s lending officers; they have accepted eight loans since 1991, and only completed one program successfully. Even with an IMF bailout, the economy is in terrible shape. Foreign currency reserves have dropped below $10 billion, which is less than the interest payments that must be paid to service the Kiev government’s existing debt.

The IMF’s economic bailout is not the only aid package being discussed in Western policy circles. Calls for increased military aid to the Ukrainian government are coming from the usual Washington suspects: US secretary of defense Ashton Carter (who lobbied to bomb Iran in 2009), Senator Lindsey Graham (together with John McCain, the neocon wing’s “Odd Couple”), and, of course, Victoria Nuland of the US State Department who has led the push for regime change in Kiev since the Maidan protests last year.

Unsurprisingly, this contingent of (chicken)hawks is encountering resistance from their EU partners, who are wary of a proxy war on the European continent. Everyone involved knows that, if push comes to shove, Putin is the only player who is willing to send troops to fight in Ukraine. There is not a single NATO signatory that is willing to do the same. This became apparent in 2008, when the Ukrainian government applied to join NATO and was rebuffed by both France and Germany, who cited concerns about “the balance of power between Europe and Russia.” Ukraine has always known that it cannot count on European assistance in the event of a conflict with Russia, and in fact a 2008 poll found that over 40% of Ukrainians expressed suspicion and distrust toward NATO.

Both Ukrainians and Russians are well aware of the enormous power that Russia holds over the European continent. Eastern Europe is almost completely dependent upon reliable imports of Russian natural gas, and even the Germans and French are loth to shake the bear’s cage too much. In addition to gas imports, Russia remains one of Germany’s and France’s most significant trading partners; Russia is a reliable buyer of heavy mining and engineering equipment, and US-led sanctions have undoubtedly been a thorn in the side of the export-driven German economy of late. The US, whose exports to Russia are essentially non-existent (less than 0.2% of GDP), is quite content to sit back and push its European partners into supporting economically painful sanctions programs. It’s therefore a bit disingenuous to accuse the Europeans in going wobbly on sanctions when their interests clearly compel them to be much less aggressive toward Russia. That is exactly what is now happening, as the head of US sanctions policy just visited Brussels last week amidst mounting European opposition to an extension of anti-Russian sanctions when the EU is next scheduled to debate an extension, in June of this year.



None of this is meant to imply support of, or admiration for, Russia’s covert military campaign in eastern Ukraine which has led to widespread mayhem and loss of life over the past several months. However the endgame in Ukraine appears inevitable at this point. Crimea has peacefully and quite happily run the Russian tricolor up the flagpole, and two provinces from the country’s industrial heartland have seceded from Kiev. Several other disputed enclaves sit astride the Russian border - South Ossetia, Nagorno-Karabakh, Transdniestria — but Donetsk and Lugansk sit uncomfortably close to the heart of Europe.

The Kiev-based Ukrainian government has no choice but to accept the fact that its country is, and will continue to be, substantially smaller than it was 18 months ago. Its tax base has been reduced substantially, and its banks are going to have to write their number of ‘non-performing loans’ (currently approaching rates of 20%) substantially upward as they realize that most will never be repaid.

There is a story that was never confirmed, but has been widely reported: at a summit in Bucharest in 2008, Putin spoke to US President George W. Bush and told him, "You have to understand, George. Ukraine is not even a country.” This statement summarizes Moscow’s long-held view toward Ukraine — that it is an artificial state created in the wake of the Soviet Union’s demise. Putin has been quoted as saying that the USSR’s collapse ranks as the “greatest geopolitical catastrophe of the 20th century.” With that in mind, why should we be surprised at Russia’s aggressive moves into eastern Ukraine?

===================

I have been looking at the investment implications of the Ukrainian break-up. The obvious play is to search for deep-value opportunities on the Ukrainian stock exchange (also known as the UX), where 80% of the listings are heavy industrials and basic materials. The UX index seems to be finding a level, after a -35% selloff last year, and has rebounded slightly in 2015. Dragon Capital and Galt & Taggart (apparently Ayn Rand has fans in eastern Europe) are well-known equity brokers who can work with foreign investors.

If you decide to take a punt on Ukrainian stocks, take comfort in knowing that you won’t fare as poorly as Rinat Akhmetov has this year. Akhmetov, a Ukrainian oligarch, has lost as much as $5.8bn in the conflict. His SCM Group owns coal mines, steel mills, and power generation operations in the Donbas region of eastern Ukraine. His steel mills in other regions are now forced to import coal from Russia and South Africa. Dozens of his employees have been killed or injured in the fighting. Over 70,000 of his employees are located in Donetsk and Luhansk, which are now rebel-controlled. SCM Group has stated that these companies are still under their control and operating under Ukrainian law. (Good luck with that.) Akhmetov is well-known for carefully straddling the Moscow-Kiev divide, an exceptionally difficult act to perform in the current environment.

* * * * *

Next time, in the final part of this series, we will take a trip east to Moscow where we shall further explore Russia’s expected actions along the growing European fault line. We will also take a look at other potential regional hot-spots, and how we might all be surprised at where the next battleground of the Second Cold War kicks off.

One final note, on an update to my recent article on Greece. I was entertained to see that the intrepid Ms. Nuland (as mentioned above) decided to pay a visit to Greek Prime Minister Alexis Tsipras in Athens this week. It seems that the US has been watching Tsipras’ ongoing difficulties with EU debt negotiations, and has heard about his pending 8 April trip to Moscow where he almost certainly intends to explore alternatives to further austerity as prescribed by Herr Schäuble of the German Finance Ministry. It appears that Washington and Moscow may soon be climbing over each other to provide “aid packages” to the Greeks.

US diplomat Victoria Nuland, on a well-deserved Greek holiday after
months of hard work in Kiev. Courtesy: The Guardian

The world continues to become more interesting every day. See you in two weeks!

[Fenix]

The Next Move For The Fed: "Trial Balloning" QE4
03/22/2015

Submitted by Dominique Dassault

The Next Move For The Fed: "Trial Balloning" QE4

With the idea of a Federal Reserve interest rate hike quickly fading the only real question left to ponder is what is their next move…if any?

Before that question is answered let’s consider the current economic environment in the United States. First of all Q1 GDP is likely to be much softer than current expectations. Most of the economic data point to it i.e. throw a dart at the Q1 economic calendar and you are sure to hit a soft statistical series. Key to this trend is the $88B Q4 inventory build that is not being depleted. Wholesale and business inventory data from Q1 are sluggish which is not entirely unexpected. More importantly though, Q1 wholesale and business sales are dramatically lagging this anemic inventory growth suggesting a further bulging of finished goods for Q1. This is not a good recipe for Q1 economic growth…or the Q2 outlook.

* * * * *

Furthermore the dollar has launched in Q1 [perceived Fed tightening of rates], effectively, hamstringing exports [by making them more expensive] while importing deflation from around the globe. The continual jawboning, from the Fed’s own FOMC members and Treasury Secretary Lew, that a well bid dollar equates to signs of economic strength and confidence in the U.S. economy is totally bogus. The dollar’s strength can be primarily assigned to the currency diluting policies of both the ECB and the Bank of Japan…both of which are still at the early stages of open ended debt monetization strategies. Add to that the twenty-four separate central bank interest rate cuts in the first three months of 2015 and, ceteris paribus, the dollar strengthens…especially as the world’s reserve currency [at least for now].

Moreover, Wednesday’s Federal Reserve statement was littered with dovish language. Also referenced was a hint of frustration with the strong dollar and its negative impact on exports. Consider the following excerpts …Information received since the Federal Open Market Committee met in January suggests that economic growth has moderated somewhat…export growth has weakened. Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation remain low. And that The Fed’s internal projections for the federal funds rate, at the end of calendar 2015, were halved further demonstrates their unease.

The simplest short term fix, addressing all of these concerns, is to weaken the dollar. The current strength of the dollar truly cuts into both of The Fed’s bureaucratic Congressional mandates. Incrementally slower economic growth is never good for employment [although the data have, thus far in 2015, been very good…although income growth is non-existent] and, as mentioned earlier in this post, a stronger dollar is dis-inflationary by virtue of both less expensive imports and by depressing the value of commodities [almost all of which are dollar denominated]…the most important of many being petroleum.

The new paradigm in the domestic economic mosaic is that the U.S. economy cannot presently withstand the headwinds of an overly starched and strong dollar. Greenback strength also has a negative offshore impact as it increases the costs of dollar based liabilities held by foreign companies/countries – which are substantial. The Fed is well aware of this dilemma and, of course, will respond accordingly as they are hostage to the financial markets.

* * * * *

Sometime after the initially soft Q1 GDP “print” expect a “trial balloon” of more debt monetization [QE4] issued by some FOMC constituent. Naturally this will weaken the dollar and immediately suspend/reverse the Fed’s dollar based concerns articulated earlier in this post. However, this will also serve to “piss” off both Kuroda [BoJ] and Draghi [ECB]…as their heavily depreciated and shorted currencies will, at least initially, sharply reverse course…and the continual game as to which global economic zone can depreciate their currency the fastest is “on”…again.

In the end, however, this is a truly pointless game. Eventually one of these infinitely diluted currencies will certainly collapse [most likely the yen] as investors finally, and correctly, perceive these actions as economically destructive. This will mightily shake global economic confidence but may, perversely, be the necessary flash point to end the serial money printing illusions of global central bankers.

[Fenix]

Nearly 75% Of Biotechs Have No Earnings
03/22/2015

With the red-hot, and making new record highs every day, biotech index - which together with AAPL is the main driver behind the Nasdaq's surge back over 5,000 - seemingly all anyone can talk about, we decided to layout the simple facts.

* Below is a chart of the 150 companies that make up the Nasdaq Biotech Index (NBI), broken down by Net Income.
o Of the 150 companies, in the last 12 months only 41 had earnings, i.e., Net Income, amounting to just under $31 billion
o Of this $31 billion in earnings, just 5 companies - Gilead, Amgen, Shire, Biogen and Celgene - had net income over $1 billion
o Just these 5 biotechs represented 83% of all the earnings generated in the NBI
* 109 companies in the NBI lost money in the last 12 months.
* In summary: only 41 companies in the index were profitable, which means 72.5% of biotechs lost money
* 83% of Biotech earnings were generated by just 12% of the companies

Visually this is shown as follows:

If one excludes the companies with a market cap under $1 billion, the layout remains largely the same: of the 87 biotech companies that fall in this category, 68% lost money. Once again the "big five" accounted for 84% of the entire industry's Net Income.

So what does the market think? Well, adding across the entire NBI, the market cap is about $1.06 trillion. As for the Net Income, it was $21.1 billion in the LTM period.

In other words, the Nasdaq Biotech Index now trades with a P/E of 50x, with over 80% of the entire sectort's earnings concentrated in just 5 companies.

[Fenix]

The Biggest Threat To The Low And Middle Skilled Worker: Robots
Submitted by Tyler D.
03/22/2015

A study shows industrial robots' impact on economic growth is comparable to the impact of railroads, highways, and IT and given gains in labor productivity and aggregate growth, low- and middle-skilled workers could end up displaced.



The Perfect Storm For Oil Hits In Two Months: US Crude Production To Soar Just As Storage Runs Out
Submitted by Tyler D.
03/22/2015

Less than two weeks ago we warned that based on the current oil production trend, the US may run out of storage for crude as soon as June.

This is what we said back in early March when the BTFDers were hoping WTI in the low $40s would never again be seen:

Come June, when all available on-land storage is exhausted, each incremental barrel will have to be dumped on the market forcing prices lower and inflicting further pain on the entire US shale complex (just as Q1 results are released which will invariably show huge writedowns as companies will no longer be able to hide behind the SEC-mandated accounting trick that made Q4 results appear respectable). Here's Soc Gen: "...oil markets can be impatient and prices could drop considerably lower. As we have written previously, we are currently more concerned about downside risk than upside risk."

Since then, as expected, crude tumbled to new post-Lehman lows, confirming the global deflationary wave is raging (for more details please see China), and WTI only posted a rebound on quad-witching Friday as another algo-driven stop hunt spooked all those who were short the energy complex.

The problem is that despite the latest "dead oil bounce" we have since had to revise our forecast for full US oil storage, and pulled forward the date when this will happen in the aftermath of the latest API inventory data.

Recall that earlier this week API reported, and EIA later confirmed, that for the 10th week in a row there was a "massive 10.5 million barrels (far bigger than the 3.1 million barrel expectation) and a 3 million barrel build at Cushing. If this holds for DOE data tomorrow (and worryingly API has tended to underestimate the build in recent weeks) it will be the biggest weekly build since 2001."

The DOE indeed confirmed all of this:

It also means that at the current rate of record oil production, storage will be exhausted in under two months, some time in mid-May. At that point, with no more storage to buffer the record oil production, the open market dumping begins and prices of WTI will crater as every barrel will have to be sold at any clearing price, since the producers will have no other choice than to, literally, dump the oil.

In other words, a perfect storm is shaping up for oil some time in late May, early June.

And then we learned something even more startling.

As the Platts oil blog reports, even as oil prices continue to fall amid flat demand and near-record supply, "North Dakota is likely to see a “big surge” in production this June, potentially besting another supply record even if prices continue to crater, according to Lynn Helms, director of the state’s Department of Mineral Resources."

What make things worse is that this time the production "surge" will have nothing to do with game theory, or beggaring thy oil producing neighbor in hopes that the other, more levered guy goes bankrupt first.

This surge will be largely propelled by two factors: a state-mandated time limit on drilling and the expected trigger of a major oil tax incentive, Helms said.

Here is how Bakken production has looked like in recent months:

Helms, the state’s top oil and gas official, reported last week that North Dakota oil production fell about 3%, or about 37,000 b/d, to 1.190 million b/d from December’s all-time high of 1.227 million b/d. The reduction was expected as sweet crude prices averaged $31.41/barrel in January, down from $40.74/b a month earlier and the statewide rig count fell by 21 to 161.

But Helms said he doesn’t expect production to tumble dramatically, even as prices continue to fall, and even though he expects the statewide rig count to “bottom out” at about 100 rigs. Production, he said, will likely remain between 1.1 million b/d to 1.2 million b/d over the next few months.

Nothing surprising.

And then this will happen: "Bakken production could suddenly skyrocket, by nearly 10%, or an additional 75,000 b/d, to 100,000 b/d in June, Helms said." This means that despite low prices and production curtailments throughout much of North America, oil production in North Dakota could actually shatter a new record this summer!

This is mainly due to a backlog of between 800 to 1,000 uncompleted wells statewide, about 125 of which need to be completed by the end of June in order to comply with state requirements to complete drilling within a year.

At the same time, operators may wait until June, when a major oil tax incentive known as the “large trigger” is expected to go into effect. The large trigger, which is aimed at boosting Bakken production at times of low crude prices, enters into force when the WTI crude price averages below $55.09/b for five consecutive months.

If that incentive is triggered, which Ryan Rauschenberger, North Dakota’s tax commissioner, said he expects will happen, the majority of wells will be exempt from a 6.5% oil extraction tax for as long as two years.

With that tax break in effect and hundreds more wells running up against one-year state deadlines, production in North Dakota could continue to surge even beyond the summer.

“We’re going to ride these waves of production increases,“ Helms said.

And that, coming just as US spare oil capacity hits its limit, is precisely what all those BTFDers who bought first junk bonds, and most recently, a desperate scramble in follow-on equity offerings by the universe of cash burning US shale companies, is precisely what they did not want to hear. Because no amount of Fed ramblings about the ever weaker US economy will offset what is about to be a veritable oil tsunami.

The time to buy asset may be when there is blood on the streets, but the moment to dump crude (and buy deep OTM puts) will be precisely when the majority of investors and algo-programming math PhDs realize that in just about two months the streets are about to become black, covered entirely in oil.
At the current rate of record oil production, storage will be exhausted in under two months, some time in mid-May. At that point, with no more storage to buffer the record oil production, the open market dumping begins and prices of WTI will crater as every barrel will have to be sold at any clearing price, since the producers will have no other choice than to, literally, dump the oil. In other words, a perfect storm is shaping up for oil some time in late May, early June. And then we learned something even more startling.

[Fenix]

BIS Slams The Fed: The Solution To Bubbles Is Not More Bubbles, It Is Avoiding Bubbles In The First Place
03/22/2015

On one hand there are hard-core Keynesians who will wave the flag of inflation as the only cure to a world drowning in debt, even after the mushroom cloud results of their policies going off around the globe "assure" GDP hits +? once every window in the world is shattered and has to be replaced...

... on the other, you have the BIS which with every passing day is becoming the citadel of Austrian thought, the latest example thanks to the BIS' most recent quarterly review in which we read that not only is deflation not the "monster" the Bank of Japan and other Keynesian acolytes would like to make it appear...

The evidence from our long historical data set sheds new light on the costs of deflations. It raises questions about the prevailing view that goods and services price deflations, even if persistent, are always pernicious. It suggests that asset price deflations, and particularly house price deflations in the postwar era, have been more damaging. And it cautions against presuming that the interaction between debt and goods and services price deflation, as opposed to debt’s interaction with property price deflations, has played a significant role in past episodes of economic weakness.

... but more importantly and as Zero Hedge has said from day one, the BIS now says the solution to an asset bubble is not some incomprehensible jibberish of "macroprudential regulation" or a "bubble-busting" SWAT team at the Fed, not another asset bubble (especially not one which leads to house price deflation, the same that is slamming the Chinese economy at this moment), which by now has become clear to all is the only "tool" in a central banker's aresnal, and the remedy to debt is not even more debt.

How best to address financial cycles is a broader policy question that the specific analysis in this article obviously cannot answer. As discussed in detail elsewhere (see eg Borio (2014a,b)), there is a case that policy should first and foremost constrain the build-up of financial booms – especially in the form of strong joint credit and property price increases – as these are the main cause of the subsequent bust. And once the financial bust occurs, after the financial system is stabilised, the priority should be to address the nexus of debt and poor asset quality head-on, rather than relying on overly aggressive and prolonged macroeconomic accommodation through traditional policies. This would pave the way for a sustainable recovery. The idea would be to have macroeconomic policies that are more symmetrical across financial booms and busts so as to avoid a persistent bias that could, over time, entrench instability and chronic economic weakness as well as exhaust the policy room for manoeuvre.

The Fed's response: the S&P should hit new all time highs in the next few hours.

[Fenix]

Drowning In Liquidity But None In The Bond Market: The Spark Of The Next Financial Crisis?
Tyler D.
03/22/2015

Of all the themes we’ve been pounding the table on of late, the idea that a lack of liquidity in certain markets will eventually lead to an “accident” or “adverse event” (to use the Center for Financial Stability’s words) is perhaps the most pressing because with the Mario Draghis and Haruhiko Kurodas of the world intent on monetizing every bit of government paper they can get their hands on, “outlier” events such as the Treasury flash crash that occurred last October are likely to become far less outlier-ish as central banks discover that depriving the market of anything that even approximates high quality collateral can have a rather nasty destabilizing effect in a pinch. Two weeks back, we summarized the situation as follows:

As central banks work to monetize all net (and sometimes gross) government bond issuance in their respective jurisdictions, QE is destabilizing 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.” 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. Gallagher cites 80% decline in corporate bond inventories among dealers and impact of higher interest rates on future trading needs; 'that has accompanied a record level of issuance year after year since 2008 of $1 trillion-plus of corporate debt.'"

Building on this theme, we went on to highlight a UBS note which analyzed Fed rate hiking cycles for clues as to what the market should expect in terms of corporate spreads if and when a “diminutive” Janet Yellen decides to go ahead with a “liftoff.” What UBS found was rather disconcerting:

Historical parallels and correlations of spreads to shifts in monetary policy expectations can find environments where Fed tightening equates to spread widening. But aside from the direct linkages of rates to spreads, a more fundamental concept is at play. The economic cycle and asset price cycle have diverged, with asset prices looking more like 1999 than either 1994 or 2004...

...the late 1990s and late 1960s demonstrate that a higher Fed Funds can lead to wider spreads in the context of a strong economy, high asset prices, and a lengthened economic cycle.

The key takeaway is that recent short-term shifts in monetary policy alter risk premia more than expectations of credit fundamentals, leading to positive correlation spikes. The current divergence between market implied pricing of Fed Funds vs. Federal Reserve forecasts is then a clear risk for credit investors. A Fed that is more aggressive with respect to the pace of tightening will re-price credit spreads wider.

Here’s the visual:

All of this led us to wonder if in fact credit market carnage lies ahead:

We are left to wonder what happens in the event UBS is correct and a Fed rate hike triggers widening corporate credit spreads in a corporate bond market devoid of liquidity. Could it indeed be the case that the Fed’s highly anticipated “lift-off” will serve as the catalyst for credit market carnage?

It now appears some market participants indeed agree with our assessment. As The Telegraph reports,

Investors across corporate bond markets are finding it harder to buy and sell company debt. And some investors are beginning to fear that the lack of liquidity will be the spark that ignites the next crisis in financial markets.

Liquidity is generally taken to mean the ease with which an investor can quickly buy or sell a security without moving its price. As regulation of banks tightens, the liquidity, particularly of European and US credit markets, has evaporated, prompting a host of regulators and central banks to sound warnings about the difficult trading environment.

A rate hike by the US Federal Reserve, which would be the first since 2006, could trigger turmoil. Given the bond market is much larger than the equity market, and investors have piled into fixed income in recent years, fears are growing that when credit investors attempt to sell bonds en masse, the illiquidity in the market has the potential to cause a crisis of a similar magnitude to the credit crunch.

We concur and we would also like to take this opportunity to point out that this is a shining example of how a number of the “New Paranormal” themes we’ve been discussing of late all fit together. A worldwide effort to resurrect a global financial system dying of leverage-related injuries and a global economy teetering on deflation ended up centering on the wholesale purchase of bonds, which in turn drove down borrowing costs and simultaneously sapped liquidity. Corporates, lured by rock-bottom rates, began borrowing in record amounts even as new regulations aimed at promoting stability ended up discouraging banks from serving their traditional role as middlemen, causing liquidity in the secondary market to evaporate just as companies began issuing a record amount of debt. Meanwhile, HY rates began to look more like IG rates thanks to central bank largesse, which had the unfortunate effect of allowing insolvent companies to remain solvent by borrowing more money, contributing to overcapacity and ultimately, disinflation. Coming full circle, the combination of monetary policy and regulation that was intended to rescue the market from deflation and make the financial system safe from collapse has ironically ended up creating … wait for it … deflation and instability. Here’s more from The Telegraph:

Similarly, the violent and unprecedented “flash crash” in 10-year Treasury yields last October was blamed on faltering liquidity. The sudden drop in yields was all the more extraordinary given Treasuries are considered to be the most liquid market in the world.

But it is the corporate bond market where worries about trading conditions are most acute. The ultra-loose monetary policies pursued by the Fed, the Bank of England and the European Central Bank has resulted in a torrent of bond issuance in recent years from companies seeking to capitalise on rock bottom interest rates.

“Now is the perfect time to borrow if you’re a company,” says Gary Jenkins, a credit strategist at LNG Capital.

European and British companies, excluding banks, sold a combined $435.3bn (£291bn) of investment-grade debt last year, and $458.5bn in 2013, according to Dealogic. The level of issuance is much greater than before the financial crisis. In 2005, for example, $155.7bn was raised from corporate bond sales and $139.8bn the year before that.

Companies issuing riskier, high-yield debt have been similarly prolific. Last year, European businesses sold $131.6bn of so-called junk bonds, up from $104.4bn in 2013, the Dealogic data show. In 2005, they issued $20.4bn.

At the same time that issuance in the primary market has grown, trading of company bonds by investors in the secondary market has dried up, a liquidity shortage that ironically has been caused by regulators’ attempts to avert a repeat of the crisis that shook the financial system in 2008.

“Bank regulation is generally a good thing, but one of the unintended consequences has been the reduction in market liquidity,” says John Stopford, co-head of multi-asset investing at Investec Asset Management. “And that could come back to haunt us. People need to be aware of that risk and be prepared for it.”

This would be funny if it weren’t so tragically ridiculous because what it all boils down to is the fact that the world’s central banks have printed some $13 trillion over the course of five years and not only has it not had its intended effect, it’s actually made things immeasurably more precarious.

[Fenix]

Looks Like Germany May Have To Pay Up
Submitted by Tyler D.
03/22/2015

It appears clear that the war reparations 'issue' will not go away anymore. Either Berlin pays what legal experts determine should be paid, or it risks becoming a pariah in its own neighborhood. That the Germans in the 1950s and 1960s, at home and in schools, chose not to tell their children anything about their crimes cannot serve as an excuse to silence the children of its victims. It seems the only way to save the European Union, that Germany has made its economy so dependent on, is for Germany to pay up.



Is It Racist? Starbucks Gives Up Trying To Solve America's 'Other' Great Divide
Submitted by Tyler D.
03/22/2015 - 21:15

Just as The Fed folded this week on ending the nation's booming income inequality problem (by reinforcing the Yellen put for longer), so Starbucks has folded in its effort to fix the other growing divide in America - racism. Careful not to admit that it was due to pressure from the avalanche of less-than-positive social media reactions, AP reports Starbucks baristas will no longer write "Race Together" on customers' cups. "Nothing is changing," Starbucks claims it was all part "of the cadence" of the plan - hhmm. "Most people come to Starbucks for coffee," concludes one young African-American, adding "race is an uncomfortable thing to bring up, especially in a Starbucks."



The Web: Destroyer or Savior of Culture, Pay and Employment?
Submitted by Tyler D.
03/22/2015

"The web has enabled virtually anyone with Internet access to create a nearly-free global distribution network. Critics of this democratization feel that this has unleashed an avalanche of mediocrity that is judged on "likes" and pages views. The other side of the debate sees the demise of the gatekeepers, who could enforce their own view of what was valuable culturally and economically, as freeing all those who could never get past the gatekeepers.