Viernes 11/09/15 Precios de los productores

[admin]

Investigadores brasileños buscan interrogar a Lula por caso de corrupción Petrobras

Por Maria Carolina Marcello y Leonardo Goy

BRASILIA (Reuters) - La Corte Suprema de Brasil informó el viernes que recibió una petición de investigadores federales para interrogar al ex presidente Luiz Inácio Lula da Silva por una trama de sobornos que afecta a la petrolera estatal Petrobras.

De acuerdo a una moción presentada ante el tribunal, la Policía Federal sospecha que el ex mandatario "podría haber sido beneficiado" por el esquema de sobornos políticos en Petrobras .

Lula podría haber obtenido "ventajas para sí mismo, para su partido (...) o para su Gobierno, al mantener una base de apoyo partidista sustentada a costa de negocios ilícitos" en la compañía, indicaron los investigadores en la moción.

El pedido añade más combustible a una crisis que ya redujo el apoyo a la actual presidenta, Dilma Rousseff, sucesora de Lula, su ex ministra de Energía y presidenta de Petrobras durante el tiempo en que ocurrió la mayor parte de la trama de corrupción.

Un portavoz del ex mandatario, que gobernó Brasil de 2003 a 2010, declinó comentar la situación.

La petición fue elevada a la Corte Suprema porque el caso, que ya implicó al ex jefe de gabinete de Lula y a decenas de líderes políticos y empresariales, también generó acusaciones contra funcionarios actuales, incluido el presidente de la cámara baja del Congreso.

Según la ley brasileña, la Corte Suprema es la única autorizada para juzgar a funcionarios federales electos. Se espera que el tribunal responda al pedido de la Policía Federal en una semana.

En la moción, los investigadores dijeron que es necesario interrogar a Lula porque las pesquisas, además de las pruebas obtenidas en testimonios de funcionarios ya condenados por el escándalo, "alcanzan al núcleo político y partidista de su gobierno".

La investigación está centrada en los miles de millones de dólares en sobornos pagados a algunos ejecutivos de la firma petrolera, funcionarios del partido gobernante y otros a cambio de contratos empresariales y apoyo político.

En la moción, los investigadores citaron el testimonio de Paulo Roberto Costa, un ex ejecutivo de Petrobras que ya se declaró culpable por el caso.

Al ser consultado sobre si Lula o Rousseff conocían los sobornos, Costa aseguró que es "muy improbable" que no lo supieran.

[admin]

El socialista Jeremy Corbyn, elegido líder de los Laboristas británicos

LONDRES (Reuters) - Jeremy Corbyn, declarado socialista y admirador de Karl Marx, fue elegido el sábado líder del Partido Laborista en Reino Unido, un resultado que podría hacer más probable una salida británica de la UE.

Ganó con el 59,5 por ciento de los votos emitidos, o 251.417 votos, en la primera ronda. Cuando se anunciaron los resultados, fue ovacionado y abrazado, incluso por algunos de sus rivales.

Corbyn, de 66 años y barba canosa, que sólo recibió el respaldo para participar en la contienda para garantizar un amplio debate y nunca esperó ganar, derrotó a dos ex ministros laboristas, Yvette Cooper y Andy Burnham, y a Liz Kendall, considerada como la representante de las políticas defendidas por el exprimer ministro Tony Blair.

Corbyn, un izquierdista y veterano parlamentario con un largo historial de votar en contra de su propio partido, triunfó con un mensaje en el que prometió aumentar la inversión gubernamental mediante la impresión de dinero y la renacionalización de vastos sectores de la economía.

[Fenix]

The Human Cost Of Socialism In Power
09/11/2015 20:40 -0400
Submitted by Richard Ebeling

The attempt to establish a comprehensive socialist system in many parts of the world over the last one hundred years has been one of the cruelest and most brutal episodes in human history.

Some historians have estimated that as many as 200 million people may have died as part of the dream of creating a collectivist “Paradise on Earth.” Making a better “new world” was taken to mean the extermination, the liquidation, the mass murder of all those that the socialist revolutionary leaders declared to be “class enemies,” including the families, the children of “enemies of the people.”

The Bloody Road to Making a New Socialist Man

We will soon be marking the hundredth anniversary of the Bolshevik Revolution in Russia (November 1917) under the Marxist revolutionary leader, Vladimir Lenin. In Soviet Russia, alone, it has been calculated by Russian and Western historians who had limited access to the secret archives of the Communist Party of the Soviet Union and the KGB (the Soviet secret police) in the 1990s, that around 68 million innocent, unarmed men, women and children were killed over the nearly 75 years of communist rule in the Soviet Union.

The communist revolutionaries in Russia proudly declared their goal to be destruction and death to everything that existed before the revolution, so as to have a clean slate upon which to mold the new socialist man.

The evil of the Soviet system is that it was not cruelty for cruelty’s sake. Rather it was cruelty for a purpose – to make a new Soviet man and a new Soviet society. This required the destruction of everything that had gone before; and it also entailed the forced creation of a new civilization, as conjured up in the minds of those who had appointed themselves the creators of this brave new world.

In the minds of those like Felix Dzerzhinsky, Lenin’s close associate and founder of the Soviet secret police, violence was an act of love. So much did they love the vision of a blissful communist future to come that they were willing to sacrifice all of the traditional conceptions of humanity and morality to bring the utopia to fruition.

Thus, in a publication issued in 1919 by the newly formed Soviet secret police, the Cheka (later the NKVD and then the KGB), it was proclaimed:

“We reject the old systems of morality and ‘humanity’ invented by the bourgeoisie to oppress and exploit the ‘lower classes.’ Our morality has no precedent, and our humanity is absolute because it rests on a new ideal. Our aim is to destroy all forms of oppression and violence. To so, everything is permitted, for we are the first to raise the sword not to oppress races and reduce them to slavery, but to liberate humanity from its shackles . . .



“Blood? Let blood flow like water! Let bloodstain forever the black pirate’s flag flown by the bourgeoisie, and let our flag be blood-red forever! For only through the death of the old world can we liberate ourselves from the return of those jackals.”



Wiping out Class Enemies

Death and Torture as Tools of Winning Socialism

The famous sociologist, Pitirim A. Sorokin was a young professor in Petrograd (later Leningrad, and now St Petersburg) in 1920 as the Russian Civil War that firmly established communist rule in Russia was coming to its end. He kept an account of daily life during those years, which he published many years later under the title, Leaves from a Russian Diary – and Thirty Years After (1950).

Here is one of his entries from 1920:

“The machine of the Red Terror works incessantly. Every day and every night, in Petrograd, Moscow, and all over the country the mountain of the dead grows higher . . . Everywhere people are shot, mutilated, wiped out of existence . . .



“Every night we hear the rattle of trucks bearing new victims. Every night we hear the rifle fire of executions, and often some of us hear from the ditches, where the bodies are flung, faint groans and cries of those who did not die at once under the guns. People living near these places begin to move away. They cannot sleep . . .



“Getting up in the morning, no man or woman knows whether he will be free that night. Leaving one’s home, one never knows whether he will return. Sometime a neighborhood is surrounded and everyone caught out of his house without a certificate is arrested . . . Life these days depends entirely on luck.”

This murderous madness never ended. In the 1930s, during the time of the Great Purges instituted by Soviet dictator Josef Stalin to wipe out all “enemies of the revolution” through mass executions, there were also sent millions to the GULAG prisons that stretched across all of the Soviet Union to be worked to death as slave labor to “build socialism.”

Before being sent to their death or to the forced labor camps, tens of thousands would be interrogated and cruelly tortured to get confessions out of people about non-existent crimes, imaginary anti-Soviet conspiracies, and false accusations against others.

Stalin personally sent instructions to the Soviet secret police that stated that in obtaining confessions from the accused, “the NKVD was given permission by the Central Committee [of the Communist Party] to use physical influence … as a completely correct and expedient method” of interrogation.

When Stalin was told that this method was bringing forth the desired results, he told the NKVD interrogators, “Give them the works until they come crawling to you on their bellies with confessions in their teeth.” Then, in another purge, this one after World War II, Stalin simplified the instructions even more: “Beat, beat and, once again, beat.”

Thousands of the victims wrote letters to Stalin from their exile and hardships in the labor camps, all of them persuaded that it had all been a terrible mistake. If only Comrade Stalin knew, he would set it all right and they would be freed and restored as good, loyal Soviet citizens ready to once again work to “build socialism.”

Soviet Political Prisoners

Stalin’s Personal Hand in Building Socialism Through Blood

But Stalin knew. He personally signed off on tens of thousands of death warrants and orders for tens of thousands more to be sent to their horrifying fate in the GULAG camps.

Domitri Volkogonov, a Soviet general-turned-historian, gained access to many of the closed Soviet archives in the 1980s, and wrote a biography of Stalin, entitled, Triumph and Tragedy (1991), meaning Stalin’s “triumph” to power and the resulting “tragedy” for the Soviet people. Volkogonov told a Western correspondent at the time:

“I would come home from working in Stalin’s archives, and I would be deeply shaken. I remember coming home after reading through the day of December 12, 1938. He signed thirty lists of death sentences that day, altogether about five thousand people, including many he personally knew, his friends . . .



“This is not what shook me. It turned out that, having signed these documents, he went to his personal theater very late that night and watched two movies, including “Happy Guys,” a popular comedy of the time. I simply could not understand how, after deciding the fate of several thousand lives, he could watch such a movie.



“But I was beginning to realize that morality plays no role for dictators. That’s when I understood why my father was shot, why my mother died in exile, why millions of people died.”

Soviet central planning even had quotas for the number of such enemies of the people to be killed in each region of the Soviet Union as well as the required numbers to be rounded up to be sent to work in the labor camps in the frigid waste lands of the Siberia and the Arctic Circle or the scorching deserts of Soviet Central Asia.

A Russian lawyer who had access to some of the formerly closed Soviet archives of the Central Committee of the Communist Party of the Soviet Union in the 1990s told at the time:

“Recently I read a Central Committee document from 1937 that said the Voronezh secret police, according to the ‘regional plan,’ repressed in the ‘first category,’ nine thousand people – which means these people were executed. And for no reason, of course.



“Twenty-nine thousand were repressed in the ‘second category – meaning they were sent to labor camps. The local first secretary [of the Communist Party], however, writes that there are still more Trotskyites and kulaks who remain ‘unrepressed.’



“He is saying that the plan was fulfilled but the plan was not enough! And so he asked that it be increased by eight thousand. Stalin writes back, ‘No increase to nine thousand!’ The sickness of it. Its’ as if they were playing poking [and upping the ante in tragic human lives].”



GULAG Guard Tower

The Victims of Socialism Literally Reduced to Burnt Ash

In the last years of the Soviet Union, a Russian historian took The New York Times correspondent, David Remnick, to the Donskoi Monastery in Moscow, which in the 1930s was used as a burial ground for the thousands regularly killed on Stalin’s orders in the capital of the Red Empire. In his book, Lenin’s Tomb: The Last Days of the Soviet Empire (1993), Remnick told what the Russian historian explained:

“See this gate? . . . Well, every night trucks stacked with bodies came back here and dumped them in a heap. They’d already been shot in the back of the head – you bleed less that way . . . They stacked the bodies in old wooden ammunition crates.



“The workers stoked up the underground ovens – right in through the doors – to about twelve thousand degrees centigrade. To make things nice and official they even had professional witnesses who counter-signed the various documents.



“When the bodies were burned they were reduced to ash and some chips of bone, maybe some teeth. They then buried the ashes in a pit . . . When the purges [of the 1930s] were at their peak . . . the furnaces worked all night and the domes of the churches were covered with ash. There was a fine dust of ash on the snow.”

The Kalitnikovsky Cemetery in Moscow also served as dumping ground for thousands of tortured and executed bodies in the 1930s. That same Russian historian told David Remnick:

“In the purges, every dog in town came to this place. That smell you smell now was three times as bad; blood was in the air. People would lean out of their windows and puke all night and the dogs howled until dawn. Sometimes they’d find a dog with an arm or a leg walking through the graveyard.”



GULAG map 1

Enemies of Socialism Sent to Torture in the Mental Ward

The nightmare of the socialist experiment, however, did not end with Stalin’s death in 1953. Its form merely changed in later decades. As head of the KGB in the 1970s, Yuri Andropov (who later was General Secretary of the Communist Party of the Soviet Union after Leonid Brezhnev’s death in 1982), accepted a new theory in Soviet psychiatry that said that opposition to the socialist regime was a sign of mental illness.

Why? Because only the mentally disturbed would resist the logic and the truth of Marxian dialectical determinism and its “proof” that socialism and communism were the highest and most humane stage of social development. Those who criticized the system, or who wanted to reform or overthrow the Soviet socialist regime were mentally sick and required psychiatric treatment.

In his book, Russia and the Russians (1984), former Moscow correspondent for the Washington Post, Kevin Klose, told the story of Alexei Nikitin, a coal mine worker who complained to the Soviet government about the safety and health environment in the mines of the Soviet Union. He was arrested, tried, and found guilty of subversion and committed to a Soviet mental institution.

Various drugs were proscribed as treatment to bring him to his proper socialist senses. Explained Kevin Klose:

“Of all the drugs administered [at the mental institution] to impose discipline, sulfazine stood at the pinnacle of pain . . . ‘People injected with sulfazine were groaning, sighing with pain, cursing the psychiatrists and Soviet power, cursing with everything in their hearts,’ Alexei told us. ‘The people go into horrible convulsions and get completely disoriented. The body temperature rises to 40 degrees centigrade [104 degrees Fahrenheit] almost instantly, and the pain is so intense they cannot move from their beds for three days. Sulfazine is simply a way to destroy a man completely. If they torture you and break your arms, there is a certain specific pain and you somehow can stand it. But sulfazine is like a drill boring into your body that gets worse and worse until it’s more than you can stand. It’s impossible to endure. It is worse than torture, because, sometimes, torture may end. But this kind of torture man continue for years.’



“Sulfazine normally was ‘prescribed’ in a ‘course’ of injections of increasing strength over a period that might last up to two months . . . The doctors had many other drugs with which to control and punish. Most of them eventually were used on Alexei . . . At the end of two months, Nikitin was taken off sulfazine but regular doses of . . . other disorienting drugs continued the entire time he was imprisoned.”

The significance of these accounts is not their uniqueness but, rather, their monotonous repetition in every country in which socialism was imposed upon a society. In country after country, death, destruction, and privation followed in the wake of socialism’s triumph. Socialism’s history is an unending story of crushing tyranny and oceans of blood.

Building the White Sea-Baltic Canal

Socialism as the Ideology of Death and Destruction

As the Soviet mathematician and dissident, Igor Shafarevich, who spent many years in the GULAG slave labor camps for his opposition to the communist regime, said in his book, The Socialist Phenomenon (1980):

“Most socialist doctrines and movements are literally saturated with the mood of death, catastrophe, and destruction . . . One could regard the death of mankind as the final result to which the development of socialism leads.”

That twentieth century socialism would lead to nothing but this outcome was understood at the time of the Bolshevik victory in Russia. It was clearly expressed by the greatest intellectual opponent of socialism during the last one hundred years, the Austrian economist, Ludwig von Mises.

Near the end of his famous 1922 treatise, Socialism: An Economic and Sociological Analysis, Mises warned that:

“Socialism is not in the least what is pretends to be. It is not the pioneer of a better and finer world, but the spoiler of what thousands of years of civilization have created. It does not build, it destroys. For destruction is the essence of it. It produces nothing, it only consumes what the social order based on private ownership in the means of production has created . . . Each step leading towards Socialism must exhaust itself in the destruction of what already exists.”

When voices are raised today calling for socialism in America, including by those attempting to win a major party candidacy to run for the presidency of the United States, it is important – no, it is crucial – that the history and reality of socialism-in-practice in those parts of the world in which it was most thoroughly imposed and implemented be remembered and fully understood. If we do not, well, history has its own ways of repeating itself.

[Fenix]

To Hike Or Not To Hike (Fed, Economists, & Market Divided)
Submitted by Tyler D.
09/11/2015 17:00 -0400


No matter what, it's going to be a close-call...

Fed members notably split


And investors’ conviction of rate hikes in 2015 has been drifting...

Market pricing of the timing of lift-off has fluctuated in a wide range this year:

* Market has priced 20-100% hike odds by Sept.
* Odds of 2015 hike fluctuated between 50-100%

Key data releases have led to big shifts in market pricing as Fed emphasised data dependence

* Strong January employment data led markets to fully price hike by September
* Dovish March and June FOMC meetings led to lower odds of a hike this year

Current market pricing suggests 30% odds of a hike in September and 75% chance of lift-off this year

Low market pricing likely lowers chances of a hike in September

* Fed would like to avoid surprising the market
* Hiking against market expectations in September means greater volatility and more tightening of financial conditions than desired

Economisseds remain split...


But then again - they have been clueless...



And as Ransquawk notes, the various banks are also split down the middle on whether The fed should hike or not next week...

NO HIKE: BarCap, BNP, Credit Ag, Credit Suisse, HSBC, GS


HIKE: BoFA, Deutsche Bank, JPM, RBS, Wells Fargo

Here's why Deutsche Bank thinks they should raise rates in September...

* * *

Finally, this is the most important chart for the next few days...

h/t @Not_Jim_Cramer



Simply put - The more you buy stocks, the higher the probability of a turmoil-creating rate-hike next week - that's the Dow-Data-Dependent Fed at work folks!!

[Fenix]

Nine Liberties Lost Since 9/11
09/12/2015 11:02 -0400
Submitted by Carey Wilder

Every year, “NEVER FORGET” echoes through the neighborhoods, cities, and Facebook statuses of America. 14 years after 9/11, Americans still bear the cross of a nation victimized and scorned after the brutal attacks on the World Trade Center in 2001. While Americans — and politicians who are still intent on capitalizing on the tragedy — vow never to forget the fateful day, far too many citizens forget the liberties they have relinquished as a result. Lest yesterday’s valiantly waving flags, government ceremonies, and TV news specials replaying the plane crashes coax you into forgetting, these nine essential freedoms have been usurped since 9/11:

1. The liberty to not be spied upon: Essential to a free society — at least as the founders of the United States saw it — was the freedom to be left alone. In the not too distant past, government agencies suspicious of citizens had to obtain warrants to investigate private citizens. They had to prove to a judge why they deserved to violate a person’s sacrosanct privacy from the State. Though surveillance programs were in place long before 9/11, the tragedy enabled much more far-reaching impositions. Multiple federal agencies — most notably the NSA — are enabled to surveil citizens, all the time — all around the world. The government’s paranoid desire for total surveillance has only grown since 9/11. The FBI, which built the NSA’s foundation for dragnet spying, continuously throws temper tantrums over its inability to spy on encrypted communications. The Department of “Justice” argued just this week that it should have access to all Americans’ emails. A separate court recently ruled that a case challenging NSA bulk data collection could not move forward because the plaintiff could not prove — due to government secrecy — that he was being surveilled.

2. The liberty to not be harassed by law enforcement: The federal government’s total surveillance state is a direct consequence of 9/11 — or rather, the political exploitation of it. However, at the local level, police departments not only conduct their own invasive spying with secret technology provided by the federal government — they pose a far greater danger. Where police officers were once trusted to protect life, they now threaten it. Currently, the risk of being killed by a police officer is anywhere from eight to 55 times greater than being killed by a terrorist. In 2015, police are on track to kill 1,100 Americans — and since 9/11, have killed more than died that day. This year, it was revealed that Chicago’s Homan Square operated as a black site without due process but replete with torture. Other violations by police, constitutionally speaking, include a basic protection against unwarranted searches and seizures. This makes unauthorized cavity searches on the side of the road and civil asset forfeiture — a policy by which police have stolen millions of dollars from unaccused citizens — an egregious seizure of the freedoms Americans still drunkenly celebrate on national holidays. Checkpoints, anyone?

3. The freedom of movement and travel without being treated like a criminal: Considering how traumatized the collective American populace continues to be by incessant, repeated clips of two planes flying into the World Trade Center, it is unsurprising that the Transportation Security Administration (TSA), formed after 9/11, is accepted as a vital element of modern society. Millions of Americans routinely huddle in cramped airport security lines, removing their shoes and flashing their private parts to security agents via X-ray machines so as to avoid more invasive gropings. Recently, two agents were caught tag-teaming to grope attractive women. Theft of passenger belongings runs rampant among officers. Racial profiling is allowed by the Department of Homeland Security, which oversees the TSA. Unsurprisingly, these practices fail to find terrorists 95% of the time. Meanwhile, children in wheelchairs, the elderly, and otherwise innocent Americans are forced to endure what would amount to sexual harassment in any other environment. But rest assured, if travelers pay a special fee, they can bypass security lines. For your safety.

4. Freedom of Speech: While no one (that the government admits to) has been black-bagged for criticizing the government yet, the State has spent years incrementally criminalizing this fundamental right. In addition to designating anti-government activists, hippie communes, and Americans with seed libraries as potential terrorists, the federal government has made a habit of punishing individuals who attempt to shed light on the government’s crimes. From Bradley (Chelsea) Manning to Edward Snowden and countless others, those who attempt to inform the American people of the atrocities their government commits are promptly silenced. Though the story received little mainstream attention, the military’s new operating procedures condone killing journalists. Further, the people’s right to free speech has been widely suppressed. During the Bush years, protesters were cordoned off into “free speech zones” to air their grievances. Today, protests are heavily patrolled by police, who do not shy away from pestering — if not abusing — people peacefully exercising their most essential constitutional right.

5. The liberty to simply know what the government does: When President Obama campaigned for the presidency in 2008, he decried George W. Bush’s cloak of secrecy shrouding government actions. Obama vowed to be more transparent, to make the government truly work for the people by allowing them to know what it does. His presidency is almost over, but any echo of that sentiment has been silenced. His administration, self-designated the “most transparent in history,” is one of the least transparent and denies more Freedom of Information Act requests than ever. Lawmakers refuse to reveal details of foreign policy, surveillance, and more, citing “national security” as a blanket excuse. This justification is how they perpetuated continued warrantless spying even after the Patriot expired. It is how they have instigated perpetual war with little explanation beyond “grave threats” to the American people. To say more would be to endanger the people further, of course. Whenever politicians feel threatened by real questions, they need only parrot the need for “public safety” and drum up memories of 9/11 to shirk accountability.

6. The liberty to not be harassed by the military in your own home: Many people view the third amendment as archaic. The Revolutionary War is long over and soldiers are no longer “quartered.” However, one specific program — mutated after 9/11 — allows this violation on a daily basis. Following last year’s protests in Ferguson against police brutality, the Pentagon’s 1033 program has faced intense scrutiny for arming local police with high-powered military gear, from armored vehicles to battle regalia. This program has emboldened SWAT teams and other local police — paramilitary wings of law enforcement armed to the teeth — to increasingly raid the homes of private citizens. “But they’re criminals!” loyalists might cry. But what about when they aren’t? Often, SWAT teams raid the wrong addresses, but even when they are in the right place, they inflict everything from beatings and murder on non-violent, often innocent citizens to shooting family pets. The 1033 program, intended to help fight the Drug War, increased in power after 9/11 — when its stated goal shifted toward preventing terrorism.

7. The right to a fair trial: When the near-mythical “founding fathers” crafted the Constitution, one of their greatest revolutions was ensuring fair trials to the accused. This banned cruel and unusual punishment while ensuring a speedy trial where the defendant was considered innocent until proven guilty — not the other way around, as had been practiced by despotic regimes throughout human history. However, this right to a fair trial has been increasingly eroded by autocratic elements within the so-called justice system, especially since 9/11. An Irish judge recently refused to extradite a terror suspect to the United States, citing fears he would endure cruel and unusual punishment. “Death by firing squad!” many patriots mourning 9/11 might chant. He is a terrorist, after all, and “innocent until proven guilty” is a moniker of the weak and those hell-bent on seeing Americans murdered.

But what about the American citizens presumed guilty before an actual verdict is reached? Prosecutors have been criticized for exercising racism in jury selection, biasing courts in favor of conviction. One mentally ill black man died languishing away in prison for months — awaiting a (non-speedy) trial for allegedly stealing less than five dollars worth of snacks from a convenience store. In more high-profile cases, the government and media go out of their way to ensure defendants are presumed guilty long before their trials start. Such was the case with Ross Ulbricht (where FBI agents were found to have committed criminal acts during investigations and key evidence was suppressed). Chelsea Manning and others have faced similar fates. The government also actively campaigns against activists attempting to educate jurors about their rights. None of these violations of due process compete with the indefinite detention provision of the 2012-present National Defense Authorization Act (NDAA). Language found in Section 1021(b)(2) of the NDAA allows the president to order the indefinite detention of U.S. citizens without charge or trial, merely for being suspected of being a threat to national security.

8. The liberty of owning your body: Though not codified in the Constitution, a basic premise of liberty is self-ownership — that free individuals may choose what they want to do with and put in their bodies. Though the Drug War has been in full swing for decades, the events of 9/11 allowed the government to regulate people’s body chemistry more heavily. While the Patriot Act is widely associated with unwarranted surveillance — as it should be — it was used overwhelmingly to prosecute non-violent drug “crimes” and has helped to create the world’s largest prison population, because…freedom?

9. Economic liberty: While the state places many restrictions on economic freedom, it has done so for centuries through taxation, fees, fines, and regulations that favor corporations (such as the recent Trans-Pacific Partnership). Still, these policies have not been contingent on the 9/11 terror attacks. What 9/11 has allowed, however, are increased piles of tax dollars to fund military adventures throughout the world. Though the military chronically eats up trillions of dollars, every year it demands more money — and nearly every year it gets it. Without the jarring images of 9/11 branded into Americans’ brains, the military would have a much more difficult time securing funding. Those who disagree with such expenditures (whether out of fiscal responsibility or outrage at endless violence) must square off with the IRS — an entity more terrifying to most Americans than the government’s more murderous agencies.

While the events that transpired on 9/11 should never be forgotten — and should be commemorated — often, the nationalistic grandstanding that comes along with mourning the dead removes any possibility to mourn the freedoms lost — or the very literal lost and tortured lives of individuals around the world subjected to the aggressive foreign policy enabled by 9/11. While the government is categorically to blame for these violations, it is an unfortunate fact that Americans are guilty of creating an environment where crimes against humanity go unchecked and nearly every element of American life is regulated and surveilled. By allowing themselves to be manipulated by constant fear-mongering, Americans have allowed — if not applauded — this confiscation of their freedoms.

[Fenix]

From Miracle To Cataclysm: Why The Commodity Bust Will Last For Years
09/12/2015 09:34 -0400
Submitted by Eugen von Bohm-Bawerk of Bawerk.net

From Miracle To Cataclysm - Why The Commodity Bust Will Last For Years

The Chinese J?ngjì qíj?, wirtschaftswunder, keizai no kiseki, milagro económico or whatever you want to call it, is neither a miracle nor distinctly Chinese. A basket case like Argentine managed to pull off a similar feat, albeit with more volatility, over a 42 year timespan beginning in 1870. Germany did even better between 1945 and 1970. And Japan had its own miracle from 1950 to 1990.

Giving the Beijing consensus, whatever that may be, credit for creating an unprecedented economic miracle is naïve and hse led pundits all over the world to make disastrously optimistic forecasts for what the future will bring. Commodity producers as far away as Latin America, Africa and Australia have poured money into capacity expansions with a very simple strategy; can’t sell it? Dump it in China, they’ll take it.

We have seen this, admittedly expressed more eloquently, first hand.


Source: Angus Maddison, International Monetary Fund, Bawerk.net

China is several countries centrally governed by a ruthless power elite with vested interest in maintaining the status quo. To expand their own power, wealth and status all they had to do was open up their borders to foreign capital and supplying it with slave labour. It is not very difficult, even a communist can figure it out. However, as the economy evolved it needed investments in infrastructure which was easily funded by stealing workers savings (financial repression on a scale the Yellen’s and Draghi’s of the world can only dream off) and funnelling it into state owned enterprises with lucrative government contracts. They didn’t even have to pay lip service to property rights as all property was and still is held by the state. In short, this stage of economic development involves resource allocation from the centre. As Michael Pettis argues in The Four Stages of Chinese Growth centralised capital allocation gets a tremendous support from the rent-seeking elite and are thus easy to implement.

There are obviously limits to this kind of growth and China’s exponentially increasing debt load suggest they have more or less exhausted the easy route toward “progress”. The next stage, based on social capital accumulation, efficient (individualised) capital allocation, limited political and elite interference and human ingenuity and creativity, all tied together into an objective, law-abiding incentive structure is an impossible task for the current political structure. Making the leap usually fails, despite all the talk off the effectiveness stemming from centralised dictatorship, the only true source of economic growth comes from the individual.

We have seen it before, several times. It is exceedingly hard to manage the transition from a top-down economy based on foreign demand to one that grows organically from the individual level. It usually ends in a massive bust, before moving forward at a third of the speed experienced prior to the crisis.

How the aftermath of the coming crisis plays out depends on how the elite reacts. Accept the inevitable, let the system reset and loosen the iron grip or desperately try to cling on to old ideas and power structures by bailing out every undeserving crony. In the first case the crisis is deep, but short lived. In the second it’s shallow, but everlasting.

Note that “Great Moderations” are the very antithesis to social systems. These systems need volatility to prosper. The Soviet Union had only one recession – in 1991.

China is probably at T-1 already. With electricity production/consumption, freight volumes and export all confirming a contracting manufacturing sector, substantiated by the PMI index and deflating producer prices the Chinese leadership is faced with a decision which will color the Chinese economy for decades.

Optimists point to the increased share of services in the Chinese GDP mix as proof positive things are jolly good and no change in course necessary. Even assuming services constituting 50 per cent of total GDP and growing at 7 per cent a year (both highly generous assumptions) a contracting manufacturing sector still leaves overall Chinese GDP at a modest 2 – 3 per cent annual growth; as opposed to the touted 7% propaganda.


Source: Angus Maddison, International Monetary Fund, Bawerk.net

As the deflationary excessive capacity kills every chance of ever repaying the mountain of bad debt piling up on the Chinese balance sheet the most tempting thing for the elite do is to double down on failed policies, such more infrastructure investment spending (paid for by the workers toil) and obviously suppress bankruptcies by bailing out failed industries (owned by the elite).

While this will cushion the blow in the short term, it is destined to lower the overall growth for a long time to come. Japan’s clumsy handling of the bust in the 1990s is a perfect example. The European and American response to the GFC are also textbook examples of how not do deal with a crisis.

As China faces it’s most important crossroad since Deng Xiapoing opened up the country we more or less know the path they will take and by extension we know real (as in not the numbers provided by the Ministry of Truth) growth rates will disappoint sell-side analysts for years to come.

But it gets even worse. China also faces a demographic tax that alone is enough to reduce growth rates considerably. The potential labor force is already growing at a slower pace than the overall population and will even shrink from 2017. In 2015 the median age in China was 37 years, and will move steadily upwards, to 39 in 2020 and 41 in 2025. See appendix for details on Chinese population and aging.


Source: United Nations, Bawerk.net

It is also interesting to note that Japan went through the exact same demographic shift just as its bubble burst and the need to adjust the economy toward one of aging as China is about to undergo. Japan failed miserably, China will too.

So where does all this leave us? The Chinese economy will soon move into contraction, its leaders will panic and jump in with both feet. Fiscal and monetary stimulus, bail-outs, more political control, increased use of censorship, talk about patriotic duty and who know what else.

What we do know is that it will look like this.


Source: International Monetary Fund (IMF), Bawerk.net



The Glasenbergs of the world will all be greenspaned*

* greenspaned; losing credibility overnight “The pro-cyclist got caught using drugs and was greenspaned”

[Fenix]

Forget The Greek Crisis, Immigration Will Divide Europe Against Itself
Submitted by Tyler D.
09/12/2015 - 12:30

Europe has complex immigration rules. But, as the recent influx of refugees and economic migrants has shown, the EU government is able to flex its muscle in an ad hoc fashion in the service of compelling member states to accept the migrants and refugees. Ultimately, however, the imposed "solutions" to the migrant and refugee crisis may be a signal to many members that the EU isn't quite what they thought it was.

[Fenix]

Ex-NYSE Chief Admits "It's Not A Fair Market... It's Bad For The Country"
Submitted by Tyler D.
09/12/2015 13:15 -0400

When a digital dickweed exposes the reality "the equity markets are broken," it can be shrugged off as the rantings of a kid in his mom's basement. When an experienced investigative writer claims "the markets are rigged," it is drowned out with mainstream media propaganda forcing words like liquidity and cost-effective-ness to hide the truth. But when Dick Grasso, the former head of the NYSE says Black Monday's flash-crash exposes the reality that "it's not a fair market," it is going to be hard to regain the collapsed confidence of an investor-class multiple-times-burned by an ever more arrogant group of 'operators' on Wall Street.



Here is what we have been saying for years (and most recently here)...

If HFTs did anything, it was merely to frontrun the buy orders once the selling wave - halted thanks to limit downs being hit - had exhausted itself, and the buying scramble was unleashed around 9:35am leading to a 5% move in less than 10 minutes! It was here that Virtu made its colossal profits, however not from taking the least amount of risk, but merely from frontrunning order flow into a stil chaotic market with gargantuan bid-ask spreads, which incidentally not only does not provide liquidity, but reduces it as it competes with other buy offers for any market offers, also known as "providers" of liquidity, only to immediately flip the transaction to those buyers which Virtu knew with 100% certainty were just behind it. In any other market this would be illegal, except for one in which Reg NMS has made such frontrunning perfectly legal (courtesy of billions spent by the same HFTs who now benefit from it).

And, as The Wall Street Journal reports, former NYSE head Dick Grasso agrees...

Regulation NMS, which stands for national market system and was designed to link all the U.S. markets, was a “sad, sad experiment.”



The regulation, which was passed by the Securities and Exchange Commission in 2005 and implemented in 2007, was designed to ensure investors got the best price available on any public U.S. market. It knitted together all the exchanges and trading venues across the country to create a single, though disparate, market. It required transactions be conducted at the “national best bid or offer,” meaning each venue had to continuously check the prices available at competitors to verify a transaction was compliant. It also meant the NYSE no longer had a monopoly on trading in its own listed stocks, helping spur a host of competitors.



The rules contributed to market hiccups like last month’s swings because they allowed for a major expansion in the number of places where stocks could trade, he said.



“No one anticipated 60 different venues where an IBM or a Microsoft trades,” he said during the television interview.

Mr. Grasso told the Journal that he recommends a broad-based review of the markets as a first step toward addressing the problems he sees...

“A fast market is not necessarily a fair market, as evidenced by that Monday open,” he said in a clip of the interview viewed by The Wall Street Journal, referring to the tumultuous early trading on Aug. 24.



The action that day has drawn scrutiny from regulators, exchanges, institutions and everyday investors—and sparked discussions about how to tweak the market to prevent similar problems. There were nearly 1,300 trading halts, most of them in the first part of the day, and some stocks dropped rapidly before recouping losses in a matter of minutes.



“Frankly, some of the things that went on that day need very close scrutiny,” Mr. Grasso said in an interview Friday with the Journal. “A day like that, where Facebook’s shares go from $86 to $72 to $84 in a matter of minutes will cause the public to lose confidence in the markets.”

We leave it to Mr. Grasso to conclude, rather more honestly and ominously than we are used to for anyone 'in' the club...

“Creating an advantage to an institutional user or a particular type of trader that disadvantages the retail investor is bad for the country, bad for the markets and bad for your business."

[Fenix]

Why Risk Parity Funds Are Unprepared For A Rate HIke
Submitted by Tyler D.
09/12/2015 13:52 -0400

Next week, Janet Yellen has a tough decision to make.

If the “diminutive” chairwoman dares to raise rates by a “massive” 25bps, she risks tightening into a tightening, so to speak. China’s bungled attempt to find an elusive middle ground between a free floating currency and a centrally managed currency has created a veritable nightmare scenario where market expectations for further devaluation are forcing the PBoC to stabilize the yuan by burning through FX reserves which, all things equal, should be generally expected to tighten global liquidity and put upward pressure on UST yields. Meanwhile, slumping commodity prices held down by a global economy that’s careening headlong into the deflationary doldrums have served to put enormous pressure on commodity currencies and that, combined with depressed Chinese demand and (ironically) long-running speculation about an imminent Fed hike, have emerging markets on the precipice of a meltdown, a decisively undesirable eventuality that will be virtually assured if the Fed hikes.

On the other hand, if the Fed doesn’t hike, it loses any last shred of credibility it had, and indeed, to the extent the conundrum described above was in part created by the Fed missing its window to normalize policy, failing to hike next week will only make the situation more acute as emerging markets will be even more confused as to when or even if the Fed will ever actually rip the band-aid off, and that confusion and uncertainty could make the situation worse even if the initial knee-jerk reaction to a hold would be a relief rally.

And then there’s the ever-present issue of just what the market will read into the decision. That is, a hold risks conveying the Fed’s concerns about the nascent “recovery” which, as we’ve seen, certainly isn’t up to par from an inflation expectations perspective even if fabricated BLS and BEA data paint a pretty picture from a jobs and output perspective, respectively.

So what - and this of course is all anyone will care about next week - is a Fed chair to do, you ask? According to Deutsche Bank, the most likely scenario is a “hawkish hold”, in which Yellen will telegraph the FOMC’s readiness to start the normalization process while admitting (if only tacitly) that circumstances have recently conspired to take September off the table. Here’s more:

The most likely alternative is the dirty relent or hawkish hold, whereby the Fed passes in September but October or December remain on the table. One potential signal of a hawkish hold is an announcement that the Fed will hold press conferences at all off-cycle meetings – this would significantly raise risks for an October hike. Additionally, a hawkish hold is less likely to generate dissents than a clean relent because the former leaves October and December as “live” meetings The dirty relent should keep flattening pressure on the curve with risk off dynamics – lower equities and commodities.

Then there’s the “clean relent” or, as we would characterize it, the “admission of being screwed” scenario in which Yellen holds, at which point nervous, erratic markets will be forced to determine whether Yellen is i) worried about the economy, which could trigger curve-flattening risk-off behavior or ii) confident in the data but just waiting on inflation expectations to stop doing the exact opposite of what they’re supposed to be doing, in which case everyone cheers more can-kicking and an equity rally ensues:

The Fed [could adopt] a clean relent or dovish hold, in which the [FOMC] makes an explicit commitment to when they will hike, presumably in 2016, and presumably because of increased focus on inflation ex-shelter and international conditions. Even a clean relent will require careful communication - a clean relent could communicate concerns over the health of the expansion, or it could indicate a Fed that is reasonably confident on the data but is waiting for inflation dynamics to improve. The former would put equities at risk and would likely produce bullish flattening. The latter case is clearly a steepener, and would be bullish for equities. The Fed will be trying to fall somewhere in between such that rates remain stable and equities are stable to higher. A clean relent is likely to produce dissents. Lacker is a likely candidate for a dissent, but if, for example, Lockhart were to dissent as well the implication would be that Yellen and the doves are dominating – and dividing – the committee.

Of course the Fed could also say to hell with it, throw caution to the wind, hike, and see what happens although, as Deutsche points out, expecting the market to take solace in the fact that any hike would likely be accompanied by a dovish bias is wishful thinking at best:

Finally the Fed could raise rates. We remain skeptical that the market would quickly digest a “dovish hike”, whereby the FOMC raises rates but changes the dots to illustrate a lower rate trajectory, and would argue the market is more, not less, likely to increase pricing for December given a September hike. This would remove the anchor to short rates and opens scope for a rapid move to 1.25% 2s with the 2s5s curve flattening, equities lower, and short-dated implied volatility much higher and feeding back into cheaper risk.

And then there's China, whose adjustment the Fed could, theoretically try to wait out in an effort to avoid exacerbating the dynamics associated with managing the new currency regime. That, Deustche Bank says, isn't likely a good idea because as we've been at pains to explain since the yuan deval and actually since the petrodollar began to die, this is all just a global linked liquidity regime meaning it's all inextricably connected:

We have our doubts that the Fed can “wait out” China and hike once the currency and equity markets stabilize. This is because China’s currency adjustment and equity performance are in part functions of the Fed – a hike would put further upward pressure on the dollar and could cause an intensification of capital flight, additional intervention, and as a result a more rapid reduction in global liquidity.

So ultimately, the punchline is that in reality, the Fed can really never hike. That is, at this point, hiking will always end up being a "policy error" where "error" means making a move that reverberates exponentially through centrally planned and increasingly interdependent and correlated markets. But while no time is a "good" time to make a mistake, some times are worse than others and as Deutsche Bank concludes, a September hike would be an example of really, really bad timing:

There might never be a good time to hike, but there are definitely bad times, and this is one. September month-end marks not only quarter end, but the last reference date in determining capital charges for global systemically important banks from wholesale funding exposures. Liquidity is poor and unlikely to improve until the beginning of Q4. Liquidity is an important additional impediment to a hike, particularly because markets settled last week with the implied probability of a September move at just under 30%. We think that the taper tantrum of 2013 is a reasonable point of reference for how financial conditions might tighten given a hawkish surprise – they could get much worse. Our simulations of risk-parity strategies suggest rebalancing away from equities and commodities, due to both increased volatility in these asset classes and elevated correlation between them. The implication is that risk- parity strategies could amplify underperformance of these assets given a shock from the Fed, China, or both.

Finally, if you read all of the above carefully and came away suspecting that if the Fed does hike, everything might sell off at once, you'd be correct, which brings us to Deutsche Bank's rather disquieting conclusion, namely that there will be nowhere to hide in a market where everything has become correlated and thanks to the growing role of risk-parity in perpetuating selloffs, that correlation could send funds fleeing to the only thing not moving in the "wrong" direction, namely the dollar and that, in turn, would only serve to exacerbate the deleterious effects of Yellen's "error":

A “policy error” rate hike might well result in positive correlations among equities, commodities and bonds, due to a combination of risk off and higher rates. In this case it is not entirely clear how risk-parity funds would rebalance: A potential candidate for inflows would be currencies, and in particular the dollar, which could be the only game in town. Of course, this would only put additional upward pressure on the dollar, reinforcing the “policy error” nature of the hike via additional traded goods price deflation (including commodities), weakness in net exports, and exacerbating pressure on dollar peggers.

[Fenix]

The 20-Year Stock Bubble - Its Origin In Wholesale Money
09/12/2015 15:30 -0400
Submitted by Jeffrey Snider
As doubts surrounding QE have grown, there has been a somewhat detectable if still small trend in central banker repentance. Alan Greenspan to an extent has embraced a more decentralized and market framework in his public comments even though he has yet, to my knowledge, actually repudiate his own work more directly. As noted a few days ago, former BoE governor Mervyn King has been far more open and alarming. While that may seem to indicate that monetarists only find free market “religion” once out of the drudgery of their professional office, I think Zhou Xiaochuan, head of the PBOC, performs the exception.

The direction the Chinese central bank has taken since late 2013 seems to confirm that idea more and more. Viewed as a repudiation of textbook monetary tactics and even basic justifications, the PBOC has become if not more “market” oriented at least drastically shifting priorities from the conventional, QE definitions of “growth at all costs” to something like managing that past mistake (as the PBOC took orthodox monetarism to new levels of insanity from 2009 through 2012). Last April, really at the outset of what China was about to do, Zhou issued a warning that looks to have been quite appropriate:

“If the central bank is not a part of the government, it is not efficient in coordinating policies to push forward reforms,” [Zhou] said.

“Our choice has its own rational reasons behind it. But this choice also has its costs. For example, whether we can efficiently cope with asset bubbles and inflation is questionable.”

That certainly seems to be a damning repudiation of the monetary illusion. Faith in the QE world is waning everywhere and with very good reason; it just doesn’t work in anything outside of dangerous financial imbalance and asset price inflation. Even Krugman appears to have wavered:

“I’m still really, really worried,” Krugman said at a conference in Tokyo on Wednesday. A big problem remains building enough momentum in the economy to escape deflation, he said.

Krugman said he is concerned that Abenomics is getting bogged down as the Bank of Japan fails to spur inflation to a 2 percent target, hampered by falling oil prices. The economy is struggling to rebound after a contraction last quarter, while the central bank’s main gauge of inflation fell to zero for a third time this year in July.

One former central banker and academic economist (redundant) who is not contrite in the slightest degree is Ben Bernanke. Bernanke has been writing consistently about how he not only believes QE’s work, they did work (to some qualified extend) and further that there aren’t any bubbles – not even a stock bubble. In dealing with the leftward sting of “income inequality”, the former Fed chair wrote on June 1:

Stock prices have risen rapidly over the past six years or so, but they were also severely depressed during and just after the financial crisis. Arguably, the Fed’s actions have not led to permanent increases in stock prices, but instead have returned them to trend. To illustrate: From the end of the 2001 recession (2001:q4) through the pre-crisis business cycle peak (2007:q4), the S&P500 stock price index grew by about 1.2 percent a quarter. If the index had grown at that same rate from the fourth quarter of 2007 on, it would have averaged about 2123 in the first quarter of this year; its actual value was 2063, a little below that. There are of course many ways to calculate the “normal” level of stock prices, but most would lead to a similar conclusion.

From this view, the Fed acted quite appropriately with regard to stock prices in order to get them back to their own established trend; therefore no bubble. It isn’t surprising that his math works out, as you can plot his figures on a chart of the S&P 500 and see his reasoning painted forth.

ABOOK Sept 2015 Bernankes Trend

Starting at the end of the dot-com recession sometime in the last quarter of 2001, a 1.2% per quarter trend nicks the top of the market in 2007. Ignoring the implications of panic and crash through March 2009, as he does, filling out the rest of the chart puts the current (before August 24) stock index directly within the path of his trend.

ABOOK Sept 2015 Bernankes Trend2

It is a ridiculously weak argument for obvious reasons, not at all unlike his defense of QE in the real economy via the unemployment rate without mentioning the denominator. It isn’t clarified in his post, but it seems equally evident that he picked the end of the dot-com recession as a start date because that is when Greenspan’s Fed brought forth “ultra-low” interest rates (see below). So if you believe that “ultra-low” interest rates are responsible for the current stock bubble, there you go.

ABOOK Sept 2015 Bernankes Trend EFF

Of course there is already something missing from this intentionally narrow review, namely that the dot-com bubble had already occurred; it was that process that seems to have led to “permanent increases in stock prices”, but only intermittently. Thus ultra-low interest rates were not at all its source but rather the FOMC’s belated attempt to minimize the damage from the inevitable. Many people have instead extrapolated interest rates into just the housing bubble (which that was certainly a factor, but clearly not the true bubble source) but without explanation for the dot-coms. Bernanke is trying to be clever here by using that vagueness on the first part to his advantage.

In fact, the housing bubble did not begin in 2003 when Greenspan got the FOMC down to 1% on the EFF, it had already been under way for nearly a decade by then. His efforts, such that there might have been any effect, was only to partially aid unleashing the true mania (though I would argue that even here the federal funds rate is given an overstated role as I have little doubt the housing bubble was going where it was going no matter what Greenspan did or did not do; the evidence for that is how rising interest rates in 2004 had so very little impact, as dark leverage in especially CDS just exploded at that very moment). Put together, the stock bubble (or repeated stock bubble) dates to around the same time as the housing bubble, which should not in any way be unexpected.



ABOOK Sept 2015 Bernankes Trend 1995 SP500

ABOOK June 2015 Bubble Risk Housing Bubble

We don’t even have to search very hard for the commonality of 1995, either. It was at that time, developed throughout the late 1980’s and early 1990’s, the JP Morgan “sold” its RiskMetrics platform widely to Wall Street and London. The torrent of dark leverage and wholesale “banking” that would be unleashed through the mathematical effects on balance sheet leverage, extended and received, was simply obvious. That counted, too, for the global effects upon the eurodollar stage, as the surge of the “dollar” coincided with the end stage of pure economic financialization. Greenspan believed, as did almost everyone else, he was controlling the economy through minute fine-tuning of the federal funds rate, a quarter point here, quarter point there, as if those made any true difference. Instead, the “dollar” was surging everywhere but especially Europe (this is Bernanke/Greenspan’s mysterious “global savings glut”; not “savings” at all but balance sheet expansion across multiple dimensions).

ABOOK March 2015 Curve Swiss Participation

If the eurodollar takeover was instead responsible for the serial asset bubbles of the past two decades, then it would make far more sense to extrapolate stock trends from that point rather than the irrelevant and overstated federal funds monkeying. So where Bernanke’s stock trend aligns the peaks as if that were “fair” and of the real market, the troughs instead just as easily conform traced back to the plainly obvious eurodollar deviation.

ABOOK Sept 2015 Bernankes Trend Dollar Trend

In this context, the panic in 2008 makes perfect sense as it was a total failure of the eurodollar/wholesale system which not only reversed in total the prior bubble levels it crushed the global economy with it. The failure of the eurodollar standard to heal or rebuild to its prior upswing (ended on August 9, 2007) was seen more so in the real economy (the 2012 slowdown) but also in the stock market in 2010 and again in 2011; both those outbreaks appeared to revert back to that “dollar baseline.”

The fact that asset inflation can continue on its own apart from any financial contribution of the wholesale “dollar” is due to partially separate liquidity and funding sources. Liquidity isn’t everything always, but when it is failing it takes over for the dominant marginal direction. In other words, corporate repurchases and retail flows might be sufficient for stock prices to rise and rise rapidly where the “dollar” isn’t as supportive, but those are easily overwhelmed where the “dollar” is acutely retreating (as August 24).

When we plot Bernanke’s 1.2% per quarter benchmark at a start date of January 1995, that compounding growth works out to a “target” S&P 500 level of 1236.09 for Q3 2015.

ABOOK Sept 2015 Bernankes Trend Dollar Trend Compounded

Where his 1.2% per quarter within the bubble mechanics calculates to 2123 (as of June) for the S&P 500, applying the same idea to starting outside the serial bubbles is vastly different (-42%).

I’m not making any claims about whether 1236.09 is “fair value” for the S&P 500, only realizing the true nature of the stock bubble makes a huge difference. He isn’t quite taking the full weight of the Yellen Doctrine here (I define that as her notion that a bubble isn’t really a bubble unless it doesn’t “work” in the real economy) but you can see how he is, by the construction of his trend narrative, thinking in at least that direction. Both are attempts to justify asset inflation by moving the perspective to within the bubble period so as not to have to explain how it all arrived in the first place (inferring from Bernanke’s intent: since the dot-com bubble predates “ultra-low” interest rates it can’t possibly be the Fed’s fault, and therefore the Fed has been successful in simply re-establishing what the “market” did on its own beforehand).

I think that is true but only in the narrow view that interest rate targeting didn’t actually do much of anything – which was and remains the whole problem. If interest rate targeting didn’t directly cause the asset bubbles, it didn’t restrain them either. This is not a small or trivial reflection, as the whole point of controlling the liquidity rate was to not just “stimulate” but also to restrict where “necessary.” To say that there was no limitation upon the eurodollar advance is an understatement since banks simply wrote their own, to the point that they even manufactured their own currency (collateral) far outside of what these economists considered to be well-aligned financial behavior.

ABOOK June 2015 Bubble Risk Eurodollar Standard2



The relevant point to consider for stocks is which trend is closer to the “truth” of asset inflation. That is, of course, amplified in 2015 by the revisiting of eurodollar decay in much more strained and openly chaotic fashion. If the “dollar” is again to fail, what might that do to stocks? While that isn’t knowable we do have some methods of gaining insight, for which only certain central bankers will provide useful perspective.

[Fenix]

A Recipe For The Mother Of All Short Squeezes?
Submitted by Tyler D.
09/12/2015 16:15 -0400

Positioning across the world's most-levered financial instruments has never been this extreme.

There has never been a bigger net long VIX futures position.



As My401k's Dana Lyons notes, however,

The behavior of the COT positioning in VIX futures has completely changed in recent years. This is no doubt due to the proliferation and increasing popularity of volatility ETF’s, which access the futures market, either directly or indirectly. A simple glance at the chart will tell you that the volatile post-2012 period bears very little resemblance to the 2004-2011 regime.



The rise in demand for volatility ETF products has necessitated the increased liquidity in the VIX futures. Therefore, we are now seeing extremes in COT positions that are much greater, even multiples, of those seen prior to 2012. Thus, what was once considered extreme is now pedestrian. Now, the current Speculator net long position is still a record, even compared to readings in the post-2012 world. Therefore, we’re not going as far as to say this reading is irrelevant. We think it is relevant and, on the margin, a bearish data point for the VIX and a bullish data point for stocks.



What we are saying is that, in this new derivative-based ETF regime, we still don’t know exactly what the related metrics are capable of. While the current COT reading is a record, it could still get record-er…and by a lot. Consider the extreme positions we’ve pointed out over the past year in Crude Oil futures, Dollar futures, etc., that have gone well beyond prior “normal” bounds. Or simply look at the Speculator net short position in this VIX contract starting in 2012. After a pretty reliable floor in the -20,000 range for nearly a decade, the Speculator net short position exploded in 2012, nearly moving 100,000 contracts beyond that level by 2013.



We just don’t know how this dynamic is ultimately going to play out – and I don’t think we will for many years.

But piling on, we also see the Put/Call Ratio is at a serious extreme as well, the highest since 2007.



And while the aggregate positioning in US equity futures is extremely short the chart below suggests that sometimes the crowd is right.



So while it would appear the world is positioned bearishly extreme in stocks; bonds appear no better. As shown below, the shorter-dated bond net positioning is its shortest since 2007/08 - and we know what happened next.



And there has never been a larger short position in the Ultra Long Bond Contract.

Charts: Bloomberg

Given the weight of all these extremes (and the implicit leverage from the ETF markets), this week's FOMC decision may be more turmoil-er than normal by an order of magnitude.

With such extreme positioning across the equity, vol, and bond complex, it would seem no matter what The Fed does in September, there will be blood.

[Fenix]

Crossing Borders With Gold And Silver Coins - A Glimpse Of Things To Come
09/12/2015 17:00 -0400
Submitted by Doug Casey

It’s well-known that you have to make a declaration if you physically transport $10,000 or more in cash or monetary instruments in or out of the US, or almost any other country; governments collude on these things, often informally.

Gold has always been in something of a twilight zone in that regard. It’s no longer officially considered money. So it’s usually regarded as just a commodity, like copper, lead, or zinc, for these purposes. The one-ounce Canadian Maple Leaf and US Eagle both say they’re worth $50 of currency.

But I’ve recently had some disturbing experiences crossing borders with coins. Of course, crossing any national border is potentially disturbing at any time. You might find yourself interrogated, strip searched, or detained for any reason or no reason. But I suspect what happened to me in three of the last four borders I crossed could be a straw in the wind.

I’ve gradually accumulated about a dozen one-ounce silver rounds in my briefcase, some souvenirs issued by mining companies, plus others from Canada, Australia, China, and the US. But when I left Chile a couple of months ago, the person monitoring the X-ray machine stopped me and insisted I take them out and show them to her. This had never happened before, but I wrote it off to chance. Then, when I was leaving Argentina a few weeks later, the same thing happened. What was really unusual was that the inspector looked at them, took them back to his supervisor, and then asked if I had any gold coins. I didn’t, he smiled, and I went on.

What really got my attention was a few weeks later when I was leaving Mauritania, one of the world’s more backward countries. Here, I was also questioned about the silver coins. A supervisor was again called over and asked me whether I had any gold coins. Clearly, something was up.

I haven’t seen any official statements about the movement of gold coins, but it seems probable that governments are spreading word to their minions. After all, $10,000 in $100 bills is a stack about an inch high; it’s hard to hide, and clearly a lot of money. But even at currently depressed prices, $10,000 is only nine Maple Leafs, a much smaller volume. Additionally, the coins are immune to currency-sniffing dogs, are much less likely to be counterfeit, and don’t have serial numbers. And if they’re set aside for a few years, they won’t be damaged by water, fire, insects, currency inflation, or the complete replacement of a currency. Gold coins are in many ways an excellent way to subvert capital controls. And I think they’ll become much more popular in that role.

That’s because, all over the world, paper cash is disappearing. People are moving away from paper cash. That’s partially because there are fewer and fewer bank branches where you can cash a check, and ATM machines are costly to use. And partially because everybody has a cell phone and they’re starting to use them for even trivial purchases, like a cup of coffee. Governments are encouraging this because if all purchases, sales, and payments are made electronically, they’ll know exactly what you’re doing with your money.

From their point of view, the elimination of cash will have several major benefits: It decreases the opportunity for tax evasion, it decreases the possibilities of “money laundering,” it eliminates the expense of printing currency, it obviates counterfeiting, and it gives the state instant access to all of any individual’s cash. From an individual’s point of view, however, the safety and freedom offered by a stack of paper cash will disappear.

Much of the safety and freedom offered by foreign banks and brokerage accounts has already disappeared. Few people seem aware of the fact that not so long ago, there was no limit to the amount of cash you could transfer in or out of the US without reporting. Or that you didn’t have to report the existence of offshore bank or brokerage accounts (although you did have to report taxable income from them).

That changed in 1970, first with the passage of USC 3156, and then the perversely-named Bank Secrecy Act. The 1986 Tax Reform Act made it highly inconvenient, and largely uneconomic, to invest in passive foreign investment companies (PFICs). In 2010, the Foreign Account Tax Compliance Act (FATCA) required every foreign financial institution in the world to report info on US persons to the US government. The enormous regulatory burdens and potential penalties it imposes now make it very hard to find a foreign institution that will even open an account for an American.

These are all de facto capital controls. In the US, banks are starting to notify customers that they’re not responsible for the storage of cash, or gold, in their safe deposit boxes. When I was in New Zealand a couple of months ago, I was taken aback to see that the suburban branch of a major bank was closing down its substantial safe deposit box department.

When I inquired why, the manager only knew that it was a new policy and if I wanted a box, I’d have to go to the main branch. This seems to be another worldwide trend. If there isn’t a safe place to store paper cash or gold, then people will be less likely to possess them.

But it’s getting worse. Over the last couple of years, there have been efforts to pass a bill that would allow the US to deny issuance, or cancel, the passport of anyone who is simply accused of owing $50,000 or more in taxes. I expect this will become law at some point. After all, it clearly states on your passport that it’s government property and it must be turned in on request. People are actually the most valuable form of capital. Emigration has always been nearly impossible from authoritarian regimes.

So what’s next? I expect, as the subtle war on both cash and the transfer of capital across borders gains momentum, that gold coins are going to become the next focus of attention. So I suggest you act now to beat the last minute rush.

Have a meaningful percentage of your net worth in gold coins.



Have a significant number of those coins stored outside the country of your citizenship.



Concentrate your future purchases in small coins that are indistinguishable from loose change. Things like British sovereigns (.23 oz of gold) or their continental equivalents (French, Swiss, German, Danish, Russian, etc., pieces of generally .18 oz of gold). Not only is gold cheap now, but all of these are currently at only a few percent above melt. Happily, they have collectible value, and they resemble common pocket change to an X-ray machine.

Also, do this: Put a bunch of silver Eagles in your brief case the next time you travel internationally and let us know if your experience resembles our own.

[Fenix]

Shale Oil's "Dirty Little Secret" Has Been Exposed
Submitted by Tyler D.
09/12/2015 11:45 -0400

On Friday, on the way to diving into Goldman’s $20 crude call, we recapped our characterization of low crude prices as a battle between the Fed and the Saudis, a battle which is now manifesting itself in budget troubles in Riyadh and a concurrent FX reserve burn. Here’s what we said:

When Saudi Arabia killed the petrodollar late last year in a bid to bankrupt the US shale space and secure a bit of leverage over the Russians, the kingdom may or may not have fully understood the power of ZIRP and the implications that power had for struggling US producers. Thanks to the fact that ultra accommodative Fed policy has left capital markets wide open, the US shale space has managed to stay in business far longer than would otherwise have been possible in the face of slumping crude. That’s bad news for the Saudis who, after burning through tens of billions in FX reserves to help plug a yawning budget gap, have now resorted to tapping the very same accommodative debt markets that are keeping their competition in business as a fiscal deficit on the order of 20% of GDP looms large.

Still, as we went on to point out, it looks like the Saudis have dug in for the long haul here and the strain on non-OPEC production is starting to show as the IEA now says “the latest tumble in the price of oil is expected to cut non-OPEC supply in 2016 by nearly 0.5 million barrels per day (mb/d) – the biggest decline in more than two decades, as lower output in the United States, Russia and North Sea is expected to drop overall non-OPEC production to 57.7 mb/d.”

“US light tight oil, the driver of US growth, is forecast to shrink by 0.4 mb/d next year,” the agency adds.

Still, the Saudis know that the war is still far from won, which again is why the kingdom is now borrowing to supplement the use of their petrodollar reserves. But as we’ve documented in great detail, the Saudis face a unique set of challenges when it comes to managing fiscal spending. The cost of maintaining the average Saudi’s lifestyle as well as the cost of financing one (and soon two) proxy wars translates to a tremendous amount of budget pressure. Add in defending the riyal peg and you have yourself a problem. So even as the Saudis have ample room to borrow (debt-to-GDP is negligible at present), Riyadh would rather US production fold sooner rather than later and with the next round of revolver raids coming up in October, and with the bond market set to cast a wary eye towards HY going forward, the kingdom just might get its wish. Citi has more on shale’s “dirty little secret”:

Easy access to capital was the essential “fuel” of the shale revolution. But too much capital led to too much oil production, and prices crashed. The growth of North American shale a critical underlying factor in the oil market “regime change” from a $100/bbl world until 2014 to a sub-$50/bbl world today (see Oil and Trouble Ahead in 2015 ). Saudi Arabia’s shift to defending market share rather than price decisively confirmed this new reality. Above $100/bbl, returns to shale investment are so attractive that the kingdom realized it could not sustain its historical strategy of propping up prices or shale would simply erode its market share. As a result, the oil markets returned to competitive economics not seen for decades. And the economics of shale in particular are now set to be a decisive factor in balancing global oil markets and setting global prices.



The shale sector is now being financially stress-tested, exposing shale’s dirty secret: many shale producers depend on capital market injections to fund ongoing activity because they have thus far greatly outspent cash flow. In the aggregate North American crude producers do not generate positive free cash flow (Figure 1), although some stronger producers do.



Capex has consistently exceeded cash flow, causing some prominent critics to argue the business model of shale production is fundamentally unsustainable.





Capital markets plugged shale’s “funding gap” from 2009 through the first half of 2015, but they are now tightening, reducing access to liquidity for some producers and shaping their ability to drill. With eight bankruptcies already announced this year, weaker producers may live or die by the whims of capital providers. The sector is by no means homogenous, but those producers with poor asset quality, high leverage, little hedging protection, and/or dwindling free cash flow look most exposed.





If OPEC traditionally set the marginal supply and served as a coordinated price setting mechanism, capital markets are becoming a new balancing mechanism: a set of highly dynamic, diffuse investment decisions that shape shale production and a large portion of the global marginal supply. Shale oil financing and production is different from what the oil market had become accustomed to over the past few decades. In particular, shale 1) is produced by many smaller, innovative producers who depend on capital markets for financing; 2) is a faster drilling process with smaller, more discrete investment decisions that respond more quickly to market conditions. These factors accelerate the classic commodity cycle of high prices leading to over-investment, which crashes prices, then leading to underinvestment, which raises prices, starting the cycle again.



So what's the endgame, you ask? According to Citi, "two things become clear in an analysis of the financial health of US hydrocarbon production: 1) the sector is not at all homogenous, exhibiting a range of financial health; 2) some of the sector indeed looks exposed to distress [and] lifelines for distressed producers could include public equity markets, asset sales, private equity, or consolidation. If all else fails, Chapter 11 may be necessary."

Got it. So essentially, with HY all but closed, banks re-evaluating credit lines, and the cost of funding set to rise, there are essentially only three options: liquidation of assets, tap the dumbest of the dumb money by selling more shares, or else throw in the towel.

Of course there's another possibility: oil prices rise sharply. And while everyone seems to think that's highly unlikely, the irony of ironies here is that if Saudi Arabia continues to beat the war drums in Yemen and Syria, Riyadh could end up being shale's savior.

[Fenix]

Chronicling History's Greatest Financial Bubble
09/12/2015 14:25 -0400
Submitted by Doug Noland

Let’s this week begin with a cursory glance at the world through the eyes of the bulls. First, the global backdrop provides the Fed convenient cover to delay “liftoff” at next week’s widely anticipated FOMC meeting. Even if they do move, it’s likely “one and done.” While on a downward trajectory, China’s $3.5 TN international reserve hoard is ample to stabilize the renminbi. Chinese officials clearly subscribe to their own commanding version of do “whatever it takes” to control finance and the economy. One way or another, they will sufficiently stabilize growth – for now. The U.S. economy enjoys general isolation from China and EM travails. Investment grade bond issuance – the lifeblood of share buybacks and M&A – has already bounced back robustly. The U.S. currency, economy and securities markets remain the envy of the world. “Money” fleeing faltering EM will continue to support U.S. asset markets along with the real economy.

September 10 – Financial Times (Netty Idayu Ismail): “The European Central Bank will ensure its policy stance remains as accommodative as needed amid financial-market turbulence, according to Executive Board member Peter Praet. ‘The Governing Council will remain vigilant that recent volatility does not materially affect the broad array of financial conditions and therefore lead to an unwarranted tightening of the monetary-policy stance,’ Praet said… ‘It has emphasized its willingness and ability to act, if warranted, by using all the instruments available within its mandate.’”

The ECB’s “unwarranted tightening of the monetary-policy stance” comes from the same playbook as Bernanke’s (the Fed’s) “push back against a tightening of financial conditions.” In a world where financial markets dictate general Credit Availability as never before, central bankers have essentially signaled open-ended commitment to liquidity injections as necessary to counteract risk aversion. Such extraordinary market exploitation underpins the fundamental bullish view that global policymakers have things under control.

On a near-term basis, policymakers retain tools to stabilize markets, though officials at the troubled Periphery are rapidly running short of policy flexibility. September’s “triple-witch” expiration of options and futures is now only a week away. Between the passing of time and the pull back in put premiums (“implied volatility”), bearish hedges and directional bets have lost tremendous value over the past two weeks.

The apparent stabilization in China has been integral to calmer global markets. Clearly, Chinese officials are in full-fledged crisis management mode. A series of measures and determined official support have stabilized the wobbly Chinese currency. Wednesday from Reuters:

“Chinese Premier Li Keqiang said… that the recent adjustment in the yuan was ‘very small’ and that there is no basis for continued devaluation in the currency.”

And Thursday from the Financial Times (Jamil Anderlini):

“Chinese Premier Li Keqiang… sought to reassure investors over the health of China’s economy… ‘China is not a source of risk but a source of growth for the world,’ Mr Li said in a speech to the World Economic Forum… ‘Despite some moderation in speed, the performance of the Chinese economy is stable and it is moving in a positive direction.’ …In a meeting with global business leaders at the forum, Mr Li dismissed the suggestion that China had been the trigger for instability in global markets in recent months. ‘The fluctuations in global financial markets recently are a continuation of the 2008 global financial crisis… Relevant Chinese authorities took steps to stabilise the market to prevent any spread of risks. Now we can say we have successfully forestalled potential systemic financial risks … what we did is common international practice and is in keeping with China’s national conditions.’”

“Steps to stabilize the market” have included arresting journalists and other rumor mongers accused by the central government of “destabilizing the market.” There has been a hard crackdown on hedge funds and other “manipulators”. Beijing has imposed a series of onerous measures against currency and securities markets derivatives trading. The Chinese government has also put in place controls to help impede financial outflows. Meanwhile, the state-directed “national team” has spent over $200bn buying stocks. The central bank has cut rates, slashed reserve requirements and injected enormous amounts of liquidity.

The bullish viewpoint holds that economies dictate market performance. As such, draconian measures from Chinese officials support the perception that Chinese policymakers have regained control over their markets and economy – in the process removing a major potential catalyst for global systemic dislocation. Though appalling, most take quiet comfort that Chinese-style “whatever it takes” works in the best interest of U.S. markets and the economy. The long-term rather long ago lost much of its relevance within the bull camp.

For me, it boils down to fundamental disagreement with the bulls on how the world actually works.

For starters, finance is king. Credit and the financial markets drive economic activity – and not vice versa. My bursting global government finance Bubble thesis rests on the premise that global finance has by now suffered irreparable harm. Confidence is being broken and faith is being shattered. A difficult new era has begun, and it will be a long time before confidence returns to EM. De-risking/de-leveraging has taken hold, with contagion gaining momentum. And China can use all the duct tape in the world – including strips to silent the mouths of naysayers – to try to holds its stock market and Credit system together. The damage is done.

For a while now, global investors and speculators have been willing to ignore China’s shortcomings. In general, a world of over-liquefied markets tends to disregard risk while allowing a sanguine imagination to run absolutely wild. And the more finance that flooded into China and EM the more the optimists reveled in the “developing” world’s pursuit of the fruits of Capitalism. The Chinese talked a good commitment to steady free-market reform. Their aspirations for global financial and economic power seemed to ensure that they would adhere to the rules of Western finance.

In the past I gave Chinese officials too much Credit. They devoted a lot of resources to the endeavor, and at one time I believed the Chinese had gleaned valuable insight from the study of the Japanese Bubble experience. But Bubbles are both seductive and incredibly powerful, especially at the hands of authoritarian communist regimes. Massive post-2008 stimulus stoked runaway Bubble excess. Later, Chinese markets scoffed at timid little central bank measures meant to tenderly rein in excess. And the longer the Bubble inflated the greater the financial, economic, social and political risks.

In the end, the major lesson drawn from Japan’s experience was the wrong one. It was much belated, but the Japanese actually moved to pierce their Bubble. Chinese officials not only let their Credit Bubble run, they adopted the Fed’s approach to using the stock market as an expedient for system-wide inflation. That policy blunder was the Chinese Bubble’s proverbial nail in the coffin.

I’ll assume that after priority number one – stabilizing its currency – the Chinese will implement even more aggressive fiscal and monetary stimulus. EM policymakers notoriously lose flexibility at the hands of faltering currencies and attendant financial outflows (“capital flight”). Contemporary finance also ensures that deflating Bubbles entice bearish hedges and speculations that can so swiftly overwhelm already liquidity-challenged markets. The Chinese were confronting just such a scenario, before abruptly changing the course of policymaking. The adoption of onerous derivative market regulations and other measures are akin to loose capital controls – punishing measures to take pressure off the Chinese currency. After initially seeking benefits associated with greater currency market flexibility, market tumult instead forced the Chinese into a rigid yuan peg to the dollar.

So long as the peg to the dollar holds, China retains significant control over state-directed finance. It will run big fiscal deficits, print “money” and dictate lending and spending by the huge banks, financial institutions, local governments and industrial conglomerates. But can it at the same time somehow harness all this finance and keep it from fleeing the faltering Bubble? Only through capital controls.

The Shanghai Composite rallied 6.1% this week. There were some spectacular short-squeezes as well, certainly including the Nikkei’s 7.7% Wednesday surge, “The Biggest Gain Since 2008.” Copper jumped 6.3% this week. U.S. tech and biotech bounced hard. In the currencies, the Australian dollar jumped 2.7%, the South African rand 2.2%, and the euro 1.7%.

It was not, however, an encouraging week for EM’s troubled economies. Brazil’s real slipped further after last week’s 7% plunge. The Indonesia rupiah declined another 1.1%, and the Malaysian ringgit fell 1.3%. The Turkish lira dropped 1.2%. On the back of weak crude prices, the Goldman Sachs Commodities Index slipped 0.4% this week.

The crisis is taking a decisive turn for the worse in Brazil. On the back of S&P downgrading Brazilian debt to junk, the country’s CDS surged to multi-year highs. The Brazilian banking and corporate sectors have been in a six-year debt fueled borrowing binge. It’s all coming home to roost.

September 10 – Bloomberg (Michael J Moore): “Banco Bradesco SA and state-owned Banco do Brasil SA were among 13 financial-services firms in Brazil that had their global scale ratings lowered by Standard & Poor’s after the nation’s credit grade was cut to junk. The two banks were reduced to speculative grade with a negative outlook, S&P said… Itau Unibanco SA and Banco BTG Pactual also were among lenders that faced downgrades.”



September 10 – Bloomberg (Denyse Godoy): “A plunge in Petroleo Brasileiro SA, the world’s most-indebted oil producer, to a 12-year low put the Ibovespa on pace for a second week of losses. The state-controlled company extended a three-day slide to 11% after Standard & Poor’s cut its credit rating to junk, adding to speculation it will struggle to shore up its balance sheet.”

Many question how an EM crisis could possibly have a significant impact on U.S. markets. Well, for starters, Brazil has big financial institutions. The Brazilian financial sector has issued large amounts of dollar-denominated debt, while borrowing significantly from international banks. Enticing Brazilian yields have been a magnet for “hot money” flows. Now, Brazil faces the terrible prospect of a disorderly run from its currency, its securities market and its banking system. Market dislocation would have global ramifications for investors, derivative counterparties, multinational banks and the leveraged speculating community.

The degree of market complacency remains alarming. The bullish view holds that Brazil, China and others retain sufficient international reserves to defend against crisis dynamics. But with EM currencies in virtual free-fall and debt market liquidity disappearing, it sure looks and acts like an expanding crisis.

So far, it’s a different type of crisis – market tumult in the face of global QE, in the face of ultra-low interest rates and the perception of a concerted global central bank liquidity backstop. It’s the kind of crisis that’s so far been able to achieve a decent head of steam without causing much angst. And it’s difficult to interpret this bullishly. If Brazil goes into a tailspin, it will likely pull down Latin American neighbors, along with vulnerable Indonesia, Malaysia, Turkey and others. And then a full-fledged “risk off” de-risking/de-leveraging would have far-reaching ramifications, perhaps even dislocation and a collapse of the currency peg in China. China does have a number of major trading partners in trouble. Hard for me to believe the sophisticated players aren’t planning on slashing risk.

[Fenix]

Market Risk, Model Smash
09/12/2015 18:29 -0400
Submitted by Salil Mehta

Market Risk, Model Smash

Seeing the market crash from a few weeks ago, it is clear how quickly the market can ferociously hurdle in front of one's risk models. Risk models that failed to safeguard against risk when it mattered the most. Models that left many large hedge funds hemorrhaging - top funds which by definition were supposed to protect their investors in the August tumult. Instead when markets broke bad, a lot of things "went wrong"; and stayed that way.

In this article, we explore a number of the large U.S. market crashes since the mid-20th century, and show how the recent bust compares. We learn why relying on tail risk models whose approximations presume to work consecutively at all times, can lead to failure. The key for investors (if they must be active) is to always remain vigilant. Professor Nassim Taleb recently expressed it nicely:

The *only* way to survive is to panic & overreact early, particularly [as] those who "don't panic" end up panicking & overreacting late.

And there were many who wound up in panic in recent weeks. Expeditiously selling at a loss, under record volume on August 24 (China's Black Monday). Let's first consider what an overall market crash look like. We quickly show a symmetrical V-shaped illustration here. This illustration also shows a rise in fear on the way down, with peak panic near the bottom (the orange star), then followed by up-moves that mirror the previous down-moves. We will need to review this overall shape in a future article. But for now we discuss simply the left side of the illustration (the solid brown down-arrows).

In developing upon the numerous ways in which a market crash can occur, we apply a non-parametric probability approach that explores an initial brutal decline. Then a peak in market fear, and then an "aftermath". We'll also tabulate and focus our attention on 10 largest crashes since 1950. Each one we measure up against these 3 crash patterns below.

Of course we can debate to some extent over what the 10 largest crashes are, but that would be losing the forest through the trees. It's more important that we simply agree on a respectable overlap of what constitutes a decent sample of market busts, and when the peak jitters were felt by investors and observants. Now for fun, which of the following 3 patterns do you think generally represents the nature of these large crashes?
A. a slow collapse into maximum fear, then followed by a torrid fall

B. a rapid drop into maximum fear, then subsiding into a slow and chaotic recovery with retests

C. a straightforward drop terminating in maximum fear, then a shallow and jerky rebound back (perhaps temporarily) to "stability"

Most would erroneously assume (and this is also how it is generally portrayed by business leaders through the media) that market crashes frequently occur in the order shown. That is, more are of pattern A than of pattern C. We'll see however, even if counter-intuitive, that the precise reverse has been true.

We show below, the 10 large market wrecks, in addition to the recent August 24. We use a probability template as well that shows vertically compounded day of "greater severity" price moves versus the previous day (example follows the 11 graphs here). If a daily market move is not more severe in direction (lacks acceleration), then we shift the data to the right. We start each time graph where markets were previously quite stable, and terminate each graph at the first equal period of stability. And we use the same lightly shaded boxes, similar to those shown above, to show the market price changes in relation to the time of ultimate scare (the performance of which we bold below).

June 23, 1950:


September 26, 1955:



May 28, 1962:




October 19, 1987:


October 13, 1989:

October 27, 1997:

August 31, 1998:


April 14, 2000:

October 15, 2008:

August 8, 2011:

August 24, 2015:


So in the first case of 1950, the returns prior to August 26 of that year were:

August 21 +0.9%
August 22 +0.8% (positive price move though less severe versus +0.9% so shift up and to the right)
August 23 -0.1% (negative price move is a directional change so shift to the right)
August 26 -5.5% (negative price move and more severe versus -0.1% so just show it vertically below the August 23 result)
Etc.

Again this is not meant to show (by the visual scale) the actual distances traveled in percentage points. But it gives us a non-parametric feel for the direction (and the colored bars green and red show the magnitude) of the daily price movements. Even including the horizontal shifting of the price changes, one can see whether there is extraordinary acceleration or deceleration in price changes.

Now in the table below we encapsulate the statistics for the daily prices changes and time duration before (first shaded box in the graph), as well as after (everything after the first shaded box in the graph) the time of ultimate panic. We also state which of the 3 market crash styles noted previously apply.

1950: crash of -4% over 4 days; then -3% over following 5 days. Pattern A
1955: crash of -6% over 2 days; then +1% over following 7 days. Pattern B
1962: crash of -14% over 5 days; then +5% over following 7 days. Pattern C
1987: crash of -35% over 8 days; then +9% over following 20 days. Pattern C
1989: crash of -7% over 2 days; then +2% over following 2 days. Pattern C
1997: crash of -10% over 3 days; then +7% over following 6 days. Pattern C
1998: crash of -13% over 4 days; then +3% over following 2 days. Pattern C
2000: crash of -10% over 3 days; then +6% over following 4 days. Pattern C
2008: crash of -27% over 15 days; then -2% over following 46 days. Pattern B
2011: crash of -14% over 5 days; then +6% over following 7 days. Pattern C
2015: crash of -10% over 4 days; then +5% over following 4 days. Pattern B

Notice that the 10 initial crashes account for a total of only 157 trading days (~1% of the days!) We also witness the frequency of these crashes as roughly once every 6-7 years (about the duration of an economic cycle). Also note that you can not simply take the ratios of the price changes over time, in order to measure "speed" of changes, since the second box (when applicable) and the balance of the price graph have been combined into one.

What's more important for our probability investigation here is that we can visually see that of the 10 initial crashes, only one most fits pattern A. While 2 fit pattern B, and 7 fit pattern C. We then created a probability matrix to show the categorical placement of the data above. For example for the 10 years, up through the day of ultimate fear, we see the following:

less severe more severe
daily price increase 15% 0%
daily price decrease 51% 33%

And following this day of paramount scare:

less severe more severe
daily price increase 46% 8%
daily price decrease 34% 11%


Now repeating this exercise for the recent August 2015 crash alone, here are the statistics, through the day of ultimate fear:

less severe more severe
daily price increase 0% 0%
daily price decrease 25% 75%


And following this day of paramount scare:
less severe more severe
daily price increase 75% 0%
daily price decrease 25% 0%

A ?2-test shows that the recent 2015 crash (so far) looks slightly (<25% probability) similar to the 2 pattern B years of 1955 and 2008. We state "so far" because we are clearly not yet in a stabile period, similar to what we finally saw from prior crashes, though the likelihood is strong at this point that the pattern B identified is firm. Again this is the pattern where there is severe market turmoil, then subsiding into a rather mediocre recovery with multiple retests.

Additionally the ?2-test strongly evidences that the probability matrix results thusfar (>95% probability) are quite different from the 7 crashes that make up pattern C (either before peak fear, after peak fear, or combined). Noting again that this is the pattern that few people above would a priori feel represents how crashes "normally" occur. Yet it account for roughly 2/3 of the crashes we've discussed here. Meaning no one type of hedge can cheaply and universally protect from all crashes since they vary in styles.

Given the large portion of crashes -particularly in the past decade- which do not fit the typical mold for how risk models would anticipate market crashes to occur, relying on them at all times is imprudent. Understand that market tail risk models can change in this period, subsequent top maximum jitters. Eventually when it wreaks havoc, it is sometimes too late to appropriately hedge or know how to speculate in order to stay long with leverage in the hopes for spike in rebound days. We may see this all unfold again, at a later point, but instead with bonds. Then we'll again overly exposed funds and investors, in a hysteria once more.