Viernes 18/09/15 Indicadores lideres

[Fenix]

Eurostoxx 50: Se apoya en el suelo del canal alcista
Viernes, 18 de Setiembre del 2015 - 11:22
El Eurostoxx 50 se está apoyando sobre el suelo del amplio canal que desarolla desde 2012. El momento es claramente bajista, por lo que se corre el riesgo de ruptura y de extensión de las caídas.

De cualquier forma, mientras la línea directriz alcista siga vigente, pueden mantenerse las posiciones largas.


"Los inversores están confundidos y preocupados por las palabras de la Fed"

Las bolsas europeas se derrumban y caen el 3%
Viernes, 18 de Setiembre del 2015 - 11:39:46

"Los inversores están confundidos y preocupados por las palabras de la Fed. Es la primera vez que es tan específica sobre los factores externos, a los que liga la subida de tipos", así se pronunciaba John Briggs, director de estrategia de RBS Securities, cuando explicaba el descalabro de hoy del mercado.

¿Pero qué es lo que preocupa tanto a los inversores?

Ayer la Fed rebajó sus estimaciones de crecimiento de EE.UU. para 2015 y 2016. Advirtió de las incertidumbres externas -economía china por ejemplo. Su presidenta afirmó que la subida de tipos podría producirse con una tendencia más plana de lo esperado. Esto que debería sonar bien en los oídos de los inversores, produjo el efecto contrario. "No subieron los tipos porque la economía no está para subirlos", nos comentaba un operador a media mañana. "Las proyecciones para la primera subida de tipos empiezan a pasarse a 2016 y eso no es bueno. A todo el mundo le gustaría que se empezara a normalizar la política monetaria pues sería una clara señal de la normalización económica en general. Pero la Fed no sugiere eso y preocupa", añadía.

En este escenario amanecían las bolsas europeas. Caídas ayer en Wall Street que se dio la vuelta bruscamente tras una segunda interpretación de las palabras de Yellen y de las previsiones de la Fed. Subidas sin embargo hoy en el cierre del mercado asiático.

Como decíamos, las bolsas del viejo continente caían moderadamente en apertura: Eurostoxx 50 -0,84%. Ibex 35 -0,87%. La constante presión vendedora incrementaba paulatinamente los descensos. A la hora el Eurostoxx 50 perdía ya más del 1%. A las dos horas más del punto y medio porcentual. A las tres horas más de los dos puntos porcentuales. A media sesión cerca de los dos puntos y medio de pérdidas. Antes de abrir Wall Street los descensos se acercaban al 3%. Porcentaje que fue superado tras la apertura de los mercados americanos.

Esta clara tendencia bajista sugiere que la fortaleza del lado vendedor es importante, por lo que es probable que independientemente de rebotes puntuales, los descensos sigan imponiéndose en el futuro cercano.

¿Pero están estas caídas justificadas? ¿Qué podemos esperar a partir de ahora? Hugo Anaya Tapia de JP Morgan fija el siguiente escenario:

· A corto plazo, la reunión de la Fed debería ayudar a que el Dólar afloje, y eso es bueno para el crecimiento global y los emergentes. A medio plazo, estrecha otro poquito el caminito en el que nos hemos movido durante estos últimos años: ese caminito en el que unos crecimientos tibios (malos pero sin riesgo de recesión), llevaban a inflaciones contenidas, que llevaban a que aumentaran los estímulos monetarios, que llevaba a una subida de los mercados a base de reducir primes de riesgo y aumentar múltiplos.


· A derecha del camino está el precipicio en el que podemos caer si la evolución tan buena del mercado laboral en US, junto con la reducción de capacidad productiva durante la recesión, terminan por llevar a un repunte importante de la inflación, que lleva a tener que devolver los estímulos monetarios que se han cogido prestados del futuro durante estos años de una forma rápida y problemática.

· A la izquierda el camino está el otro precipicio en el que caemos, si los crecimientos vuelven a torcerse bastante (por ciclo avanzado en US, por China, o porque simplemente toca), cuando no es fácil contrarrestar la desaceleración si tienes los tipos a 0% en los Desarrollados, el ciclo de US está muy avanzado, el de Europa demasiado poco, y los Emergentes han acumulado una barbaridad de deuda privada.

· Si seguimos mantenemos el equilibrio dentro de ese camino, el mercado seguirá también por el mismo camino que en los últimos años, subiendo y manteniendo o aumentando la expansión de múltiplos a pesar de los crecimientos tibios. Pero cuanto más tiempo pasemos por el mismo caminito, más se estrecha y aumentan las posibilidades de que caigamos hacia uno de los dos lados.

· Dicho eso, mantengo mi visión positiva para el fin de año, y como llevo diciendo desde que llegue de vacaciones de verano, aprovechar la volatilidad de septiembre para ir comprando y quedarse largo el último trimestre del año, creo que puede salir bien. Especialmente en sectores como Mining y Energía. El siguiente tema que debería ser clave para el mercado será el PMI preliminar manufacturero de China que se publica el 23 de septiembre. (mi recomendación desde principio de mes ha sido comprar un poco a principios de septiembre, otro poco tras la reunión de la Fed, y terminar de construir la posición tras el PMI de China el 23 de sept. Para estar largo el último trimestre del año, y tomar beneficios si nos acercábamos a los máximos del año, ya que no espero que tampoco se superen).

· Para el 2016, me da mucho miedo que caigamos a un lado o al otro del caminito. Es muy opinable, pero con el permiso de China, yo creo que US va a tener muy cerca el precipicio de la derecha (inflación fuerte en el 2H16), y eso llevará a acentuar los problemas del precipicio de la izquierda (caída del crecimiento global).

En resumen, caídas por encima del 3% en el Eurostoxx 50. El Ibex 35 pérdidas del 2,63%.

[Fenix]

Conclusiones de la reunión de la Fed y de la posterior rueda de prensa
Viernes, 18 de Setiembre del 2015 - 12:00
Principales conclusiones de la rueda de prensa.

En relación al “timing” de subidas de tipos, Yellen reconoce que la mayoría de los Consejeros entiende que los efectos negativos especialmente los que afectan a la apreciación del dólar, el precio de las materias primas y la volatilidad de los mercados de capitales impactarán todavía algún tiempo en las perspectivas de inflación, de ahí que varios miembros prefieran retrasar la fecha de la primera subida de tipos de interés. Incluso hay un miembro que entiende que los tipos de interés no deberían subir antes de 2017.

La evolución de la economía internacional refuerza la idea de que la inflación continuará a la baja durante los próximos meses aunque las perspectivas a largo plazo se mantienen en torno al objetivo de la Fed (en torno al 2,0%) al considerar que los efectos de los bajos precios de las materias primas y los bajos precios de importación son transitorios. Yellen vuelve a insistir en que el mercado laboral continúa mejorando y dicho impacto se reflejará en la tasa de inflación a largo plazo. La Fed resta importancia a la caída en las perspectivas de inflación implícitas en el mercado de bonos y recuerda que existen aspectos técnicos en la cotización de los bonos ligados a la inflación como la prima de riesgo que pueden explicar ciertas desviaciones en el precio de dichos bonos.

Opinión e impacto sobre el mercado.

El mensaje oficial de la Fed continúa siendo “dovish” e insiste en que los tipos de interés subirán en función de la evolución de los datos macro y del mercado laboral en particular aunque reconoce que actualmente las perspectivas de actividad económica son ligeramente inferiores y que el entorno económico internacional se ha deteriorado.

La Fed se muestra más preocupada que en anteriores ocasiones por la economía internacional, la caída del comercio internacional y el precio de las materias primas. J.Yellen reconoce que se han endurecido las condiciones financieras y las perspectivas de crecimiento de la economía global aunque las perspectivas de crecimiento a largo plazo siguen siendo favorables.


S&P sube el rating de Portugal
Viernes, 18 de Setiembre del 2015 - 11:54
La agencia de calificación S&P sube el rating de Portugal a BB+ desde BB, mantiene perspectiva estable.

S&P prevé el ratio deuda/PIB en el 124% en 2015. En 2018 caería hasta el 114%. Prevé déficit 3% del PIB en 2015.


Los traders prevén ahora que la primera subida de la Fed sea en diciembre
Viernes, 18 de Setiembre del 2015 - 12:02
Según la última encuesta realizada por CME FedWatch, el 52% de los traders consultados cree que la primera subida de tipos de la Fed será en la reunión de enero de 2016.


Yellen le ha dado la vuelta al escenario

JP Morgan
Viernes, 18 de Setiembre del 2015 - 13:06:00

· Cuando suben las expectativas de tipos en US, sube el Dólar, baja las expectativas de crecimiento global, y caen las commodities y sufren especialmente la renta variable Emergente.

· Este es el entorno en el que nos hemos movido en las últimas semanas. Pero Yellen le daba un poco la vuelta ayer, y recordaba a lo que hizo en septiembre del 2013, cuando agarrándose también a los miedos sobre la economía global y los acontecimientos en los mercados financieros retrasaba el Tapering.

· Con la reunión de la Fed de ayer debería, el Dólar debaría reaccionar negativamente como paso especialmente tras las tres reuniones que tuvieron un mensaje similar: Sept13 (el $ cayo 3% es 6 semanas), la de Marzo15 (el dólar cayó 4% en 8 semanas) y la de Junio15 (1.5% de caída en 1 semana).

· Y aunque lo más probable es que el dólar caiga más de lo que lo ha hecho esta noche en los próximos días, el movimiento está limitado por la continuidad en la mejora del mercado laboral en US limitan la caída en los yields de la parte corta de la curva de US, y lo flojos que están los Emergentes que pueden hacer que muchas divisas sigan cayendo contra el Dólar aunque la Fed no suba tipos. Importante será lo que pase con las commodities, cuando el exceso de oferta de commodities que puede durar hasta mediados del año que viene, presionando las inflaciones a la baja, y por tanto la expectativas de tipos.


· La visión oficial de JPMorgan es que la inflación en US terminará por llegar, la Fed cumplirá las estimaciones de tipos a las que ha llegado en la reunión de ayer, y como son superiores a lo que descuenta el mercado, el Dólar se acabará por ir hasta la zona del 1.05 en el medio plazo (si los crecimientos globales no se tuercen).


Apple: resistencia clave de corto plazo en 117,6
Trading Central

[ APPLE ]
Viernes, 18 de Setiembre del 2015 - 14:16
Punto pivote (nivel de invalidación): 117,6

Preferencia: Posiciones cortas debajo de 117,6 con objetivos en 102,1 y 92,35 en extensión.

Escenario alternativo: Arriba de 117,6 buscar mayor indicación al alza con 125 y 134,4 como objetivos.

Comentario técnico: Mientras la resistencia en 117,6 no sea sobrepasada, el riesgo de un quiebre debajo de 102,1 se mantiene alto.


Royal Dutch Shell: Nuestra apuesta dentro del setor petrolero

Viernes, 18 de Setiembre del 2015 - 13:45:00

El sector de Petróleo y Gas está cotizando a precios/valor en libros cerca de los mínimos post-1980 y aunque los fundamentales del sector son débiles, ya está descontado gran parte de este panorama tan sombrío. El colapso en el precio del petróleo y una presión sobre la rentabilidad del sector son los culpables.

Con las petroleras cotizando en mínimos de valoración de 40 años, el sector parece barato. Las compañías están mejorando su asignación de capital en medio de una mayor restricción del gasto. Esperamos que la rentabilidad del sector mejore en los próximos 2 o 3 años.

Royal Dutch Shell es una de las mayores compañías petroleras del mundo. Ofrece una rentabilidad por dividendo del 4,7% y se encuentra bien respaldado por los resultados. Es cierto que un nuevo descenso de los precios del petróleo sería un riesgo adicional, pero Royal Dutch es un productor de coste relativamente bajo y se encuentra entre las opciones más defensivas dentro del sector. Además de Royal Dutch, nos Repsol de la que ya hemos hablado en preguntas anteriores.



Los hombres ahorran mejor para la jubilación que las mujeres

Viernes, 18 de Setiembre del 2015 - 14:32:00

Financial Advisor dice que un estudio realizado por Financial Finesse determinó que hay una enorme diferencia entre la cantidad de dinero que ahorran los hombres y mujeres para la jubilación.

Según los datos, el hombre medio de 45 años quiere jubilarse a la edad de 65 años y tiene un déficit de 267.233 dólares, pero eso no es nada en comparación con el déficit de 522.262 dólares para la mujer media de 45 años de edad, con el mismo objetivo.

Financial Advisor señala que el estudio encontró que la diferencia en el ahorro puede al menos en parte atribuirse a que los hombres suelen tener un mayor conocimiento de la inversión y una mayor confianza en la asignación de activos. Además, "Hay desafíos adicionales que a las que se enfrentan las mujeres: una esperanza de vida más larga, mayores costos de salud, mayor tiempo fuera del mercado laboral", dijo Greg Ward, director del think tank Financial Finesse.


Los mercados no creen a la Reserva Federal
Viernes, 18 de Setiembre del 2015 - 14:58
Los mercados todavía no se creen a la reserva federal. Las proyecciones de la Fed sugieren que las tasas podrán subir al 3,4% en 2018, mientras que los swaps sugieren un 1,6% (ver gráfico adjunto, vía Bloomberg).


El número de "unicornios" se dispara y su valor sube un 3.000% desde 2009

Viernes, 18 de Setiembre del 2015 - 15:25:00

Una nota del banco de inversión Credit Suisse muestra hasta qué punto la valoración de muchas de las nuevas empresas más conocidas y exitosas se ha disparado en los años post-crisis financiera.

Los autores han rastreado el número y valor total de los "unicornios" durante los últimos siete años. Unicornios se definen como empresas privadas de nueva creación con un valor estimado de más de mil millones de dólares.




En 2009, la valoración total se situaba en sólo unos pocos millones de dólares, y había sólo cuatro empresas que se ajustaban a ese nombre. Ahora hay 124 unicornios, y la valoración combinada se encuentra en 468 mil millones de dólares frente a un valor total de 13 mil millones en 2009.

Esa es una expansión del 3.000% en el número de empresas y un aumento de casi el 3.500% en la valoración total.

[Fenix]

La importancia de las economías emergentes para la eurozona

Viernes, 18 de Setiembre del 2015 - 15:52:00

En su último Informe mensual el ECB actualiza las ponderaciones por el comercio exterior del área con el objetivo de calcular el tipo de cambio efectivo del EUR.

Este ejercicio se realiza trimestralmente, siendo la referencia última el periódo comprendido entre 2010/2012. ¿El resultado? Aquí lo tienen.

Las conclusiones son claras: creciente importancia del comercio exterior con las economías emergentes frente al resto de las desarrolladas, especialmente en el caso de China. De hecho, el peso del comercio con China supone ya cerca del 18 % del total (4 % en los noventa). Las economías de la Europa en desarrollo suponen el 12 %, doblandose desde 1995/97.

Mientras, el peso de USA se reduce ahora hasta un 12.7 % (13.5 % entre 2007/2009 y 16.8 % en 1995/97) y el de Japón hasta un 5.3 % (9.6 % en los noventa). También el peso comercial de UK se reduce, hasta niveles ahora de 10.3 % (18.4 % en los noventa).


Al final China se ha convertido en el principal socio comerciol del área absorbiendo el 21 % de nuestras compras y del 16 % de nuestras ventas.

Por cierto, el tipo de cambio efectivo real del EUR (deflactado por el IPC) ha bajado un 16.1 % entre 2010 hasta junio de este año.

José Luis Martínez Campuzano
Estratega de Citi en España


Clock Ticks On US Syria Strategy As Assad Pounds ISIS Targets, Russia Sends Fighter Jets
Submitted by Tyler D.
09/19/2015 - 09:57

For the second consecutive day, Bashar al-Assad pounded ISIS targets across Syria on Friday, serving notice that Russia's stepped up "technical" and "logistical" support may have turned the tide in the country's four-year civil war. With Moscow having called Washington's bluff, Obama instructs Defense Secretary Ashton Carter to liaise with the Russian military while in Tehran, Major General Qassem Soleimani lays bare America's ISIS strategy.



US Readies Battle Plans For Baltic War With Russia: Report
Submitted by Tyler D.
09/19/2015 - 17:05

As Foreign Policy reports, "the new plans, according to the senior defense official, have two tracks. One focuses on what the United States can do as part of NATO if Russia attacks one of NATO’s member states; the other variant considers American action outside the NATO umbrella. Both versions of the updated contingency plans focus on Russian incursions into the Baltics, a scenario seen as the most likely front."


The Fed's First "Policy Error" Was Not Yellen's "Dovish Hold" But Bernanke's Tapering Of QE3
Tyler Durden's picture
Submitted by Tyler D.
09/19/2015 16:29 -0400

Two days before the Fed confused everyone when it delivered neither a dovish hike nor a hawkish hold, but the most dovish possible outcome, we warned readers that the September FOMC announcement could be a carbon copy replica of what happened precisely two years ago, when everyone was expecting Bernanke to announce the Fed's taper - a sign the US economy was solidly improving and QE was a success and thus can start being unwound - only to get precisely the opposite when Bernanke said "no taper", leading some to wonder if this had been the Fed's first major policy, and communication, mistake.

Sept. 18, 2013: Fed shocks market when it "unexpectedly" refrains from QE taper http://t.co/nmEbVeSDrl


Fast forward to Thursday's Fed statement and subsequent market reaction which prompted many to ask if Yellen's own error did not just cost the Fed a substantial dose of credibility, because this may well have been the first time when a dovish Fed led to such a major market selloff.

And while there was no selloff in September 2013 when the Fed refrained from tapering, the market reaction in December 2013 when Bernanke did announce the tapering of QE3 was very clear: an initial drop followed by a massive surge.

Ironically, according to Deutsche Bank, it was not the Fed's Thursday announcement that was the Fed's most notable mistake, but Bernanke's 2013 Taper announcement, which the market perceived as an all clear signal for the economy, only to realize just how clueless the Fed truly has been all along.

Here is DB's Dominic Konstam explaining why for the Fed, the mistakes are starting to pile up, with the December 2013 tapering start being the first and foremost one.

At a recent investor gathering a question was asked, prior to the FOMC meeting, in the spirit of why the Fed should raise rates, whether or not anyone could argue that tapering itself was a “mistake”. It is an interesting question but the answer is surely a resounding “yes”. While a counterfactual is hard to prove, the impact of tapering in rates space is self evident. From the moment it began we saw a relentless fall in long term rates and a return to where those rates more or less stood around the onset of (endless) QE3. The cost of tapering should therefore be viewed in terms of what we have lost in rate space. If we think of 5y5y OIS as a terminal Funds rates, we have lost the best part of 200 bps in terminal funds and still counting. The Fed has managed to recognize about 75 bps of this so far in terms of dropping their terminal funds rate projections.


One conclusion from the taper mistake is that if the Fed wants a sustainable normalization of rates it needs to be considerably behind the curve. It can never raise rates if the market discounts lower rates. Our confident prediction is that the Fed will raise rates only when the market is begging for it and it should do it more slowly than the market discounts. That means the curve needs to be a lot steeper and the terminal rate priced a lot higher than currently. For the Fed to move otherwise, normalization is bound to fail i.e. be short-lived and partial. Recognizing this the Fed would do well to signal that by explicitly relinquishing any claim to higher rates through 2016. There might then be a chance that they could actually hike in 2016.

Just in case anyone is still harboring any hope that the Fed may hike in October or December, or even any time in early 2016, allow us to disabuse you of such a fallacy, thanks to the recent devaluation chaos out of China. DB continues:

For Yellen the uncertainty is that if the yuan is to fall further, it may not be now but perhaps year end or even later. There would need to be a clear shift positively in China’s fundamentals for that uncertainty to dissipate. Meanwhile any adjustment if and when it came would add to disinflation concerns at home and, presumably, at least initially adversely affect stocks, led by other Asian equities.

Confused by what all of the above means? Simple: forget any rate hike now or for the foreseeable future. The Fed just got its first major wake up call by the market that it made a policy error, a mistake which it can and will trace to the QE4 unwind. Which means one thing: if Yellen decides to undo the Fed's mistake, having not hiked on Thursday, she will next undo Bernanke's last error: the naive hope that the US can operate without a regime of epic liquidity, i.e., either printing money once more in the form of QE4, 5, etc... or, as Kocherlakota hinted, the arrival of NIRP.

One thing is certain: with the market tumbling, and with Bank of America admitting yesterday that a plunge in the S&P below 1870 to hint that QE4 is on the table, there is much more debasement of paper currencies on the horizon as the Fed grudgingly admits it is back to square one.

[Fenix]

Conspiracy "Fact" - VIX Manipulation Runs The Entire Market
Submitted by Tyler D.
09/19/2015 14:00 -0400


Ever since Simon Potter's 2012 arrival as head of The NYFed's trading desk, the manipulation of VIX (and thus its reflexive levered tail wagging the algo-driven dog of the indices) has been front-and-center day-after-day in the so-called US equity 'market'. Since the introduction of VIX ETFs there has been an almost inexhaustible supply of conspiracy theory coincidental evidence of a mysteriously well-capitalized market participant always willing to step on the neck of any volatility-spike, thus protecting poor market participants from any prospective plunge. While only fringe-blogs have noticed this in the past, now The FT admits that not only was recent volatility in markets exacerbated by VIX ETFs (thus confirming the tail-wagging-dog analogy), and further, the nature of the link between VIX ETFs and VIX Futures (rebalancing) enables frontrunning which serves to reinforce any trend into the close and thus manipulate the markets.



Since Simon Potter's arrival at The NY Fed in 2012... the rather amusing correlation between the collapse in net VIX futures non-commercial spec interest (yes, the traded VIX, which courtesy of the New Normal's relentless synthetic reflexivity has a huge impact on the trillions in underlying assets: think massive leverage) as per the CFTC's weekly commitment of traders report, and the arrival of Brian Sack's replacement as head of the NY Fed's trading desk, Simon Potter, the same former UCLA Econ PhD who recently delivered a very ornate speech explaining central bank interactions with financial markets "through the prism of an economist." Now at least we know how said "interactions" look outside of "Market Manipulation for Econ PhD Dummies" and in practice.



So-called VIX-terminations have bcome ubiquitous...

VIXtermination: Vol Banged To Lowest Close Since June 2007
VIXterminated - Fear Collapses By Most In 31 Months
Mickey Mouse Market Pops-n-Drops As Crude Carnage Follows VIXtermination
Volumeless VIXtermination Fuels Stock-Buying Frenzy To Record Highs
Biggest Short Squeeze Since 2008 Bank Bailout And Epic VIX Rigging Sends Stocks Green For The Week

Which all look - to some extent - like this...

VIX ETFs were screwed with...



To ensure S&P closed Green!!!



And notice the noise in VIX from this week...



But, this ability to exaggerate the upside of any momentum, has its downside.

As The FT reports, the upsurge in stock market turmoil during August was exacerbated by specialised exchange traded funds that track volatility and use leverage to magnify investor returns, according to some analysts.



Some analysts argue that the magnitude of the move in the Vix was fuelled by certain types of ETFs, and similar exchange traded notes, that track the index but use futures contracts to multiply investor’s returns.



There is rising concern over the bigger role played by passive or systematic trading strategies in equity markets — given the current uncertain global economic and financial backdrop — with some fund managers arguing that their techniques are aggravating market movements.



Four products, two run by ProShares and two run by VelocityShares, totalling $2.8bn in assets, bought close to 35,000 Vix futures contracts on August 24, according to calculations from public data by Macro Risk Advisors, a broker dealer. Total trading volume in the futures contracts that day reached 569,000.

Which explains the unprecedented record net longs in VIX Futures...

Speculative traders have never - ever - been this net long VIX futures... and traders have not been this net short S&P futures since Summer 2012.



It's all great when VIX is getting smashed lower - and implicitly stocks surged higher - but it appears the only "volatility" that gets any real attention is "downside" moves...

“It exacerbated the move higher in the Vix, and has contributed to high volatility in the Vix itself,” said Pravit Chintawongvanich, a strategist at MRA. “Volatility of Vix at one point reached 2008 levels. The effect of levered ETFs is one reason that the Vix is less useful as a barometer of financial stress than in the past.”



BlackRock, the largest mutual fund in the world, has previously warned about the risks of levered ETFs, and in a policy paper in July reiterated recommendations, “that these products not use the ETF label”.

And the manipulation is simple and cost-effective...

Futures contracts only require a small amount of money, or “margin”, to be paid up front to cover potential losses, rather than having to pay the full amount of the investment, allowing an ETF to buy a larger value of futures contracts than investors have paid into the fund.



For example, investing $100 in an ETF offering twice the returns of the Vix futures index will mean the ETF provider buys $200 worth of futures. If the price goes up 10 per cent then the investor receives 20 per cent back, or $20. The investment is now worth $120 and the ETF is worth $220, so at the end of the day it has to go out and buy another $20 worth of futures contracts to maintain the same leverage for the next day.

But here is the potential for froint-running and manipulation (especially from a deep-pocketed vol seller)...

It requires ETF providers to buy as prices rise and sell as prices fall, which critics claim exacerbates market movements, filtering back into the closely-related options markets that the Vix is priced from.

But providers of levered volatility products played down the relationship.

“There is a layer of separation between the Vix and Vix futures, and the ability to uncover any effect is challenging,” said Scott Weiner, head of ETP quantitative strategy at Janus Capital, which own VelocityShares. “It’s a small impact, if at all.”

The CBOE, which runs the Vix index, said that it allows investors, including ETFs, to agree trades during the day where the price is determined by the settlement price of a contract once the market closes, allowing ETFs to rebalance without having a significant impact on the price... and critics say this does not work...

because the amount ETFs need to rebalance each day is publicly disclosed. “If people know someone has to buy in large size at the end of the day, then they will simply buy the contracts ahead of them,” said Mr Chintawongvanich. “It has the same effect.”

So, whether by direct manipulation (sparking the most modest of momentum knowing that VIX ETF rebalancing into the close will extend any move), or learned rigging by the algos (following the same pattern), it appears yet another conspiracy theory become conspiracy fact.

* * *

But there is a silver lining to the recent smashing of fingers trapped trying to pick up pennies in front of steamroller...it appears The VIX Manipulation has begun to lose its mojo...

A 1.5 vol crush in VIX managed a mere 6 point rise in the S&P 500 (20% of what would have been expected!!)


Peter Schiff Explains The "External Threat" Justifying The Fed's Tyrannical Policies
Submitted by Tyler D.
09/19/2015 - 14:45

Every dictator knows that a continuous state of emergency is the best means to justify tyrannical policies. The trick is to keep the fictitious emergency from breeding so much paranoia that routine activities come to a halt. Many have discovered that its best to make the threat external, intangible and ultimately, unverifiable. In Orwell's 1984 the preferred mantra was "We've always been at war with Eurasia," even though everyone knew it wasn't true. In its rate decision this week the Federal Reserve, adopted a similar approach and conjured up an external threat to maintain a policy that is becoming increasingly absurd.



81% Of Syrians Believe US Is To Blame For ISIS
Submitted by Tyler D.
09/19/2015 - 15:55

“The poll also confirms a deteriorating environment. A majority in both countries say things are heading in the wrong direction... In Syria, just 21% prefer life now to what life was like under the full control of Bashar al Assad."

[Fenix]

Janet Yellen's "Fedspeak" Translated
09/19/2015 13:15 -0400

Submitted by Paul-Martin Foss

For those of you who don’t want to take the time reading through the ponderous 7000-word transcript of yesterday’s FOMC press conference, we bring you the shorter Janet Yellen, translated from Fedspeak into plain English. Enjoy!

YELLEN: Good morning. I realize that everyone in this room has already read our monetary policy statement, but for the boobs out there in the general public who weren’t tipped off by us two hours in advance about what our decision was going to be, let me explain it to you even though you’re perfectly capable of reading it for yourself. In summary, we don’t have any clue what we’re doing or what’s going on in the economy. We’ll continue foolishly targeting a 2% increase in prices, and we’ll blame all sorts of external factors when that target can’t be met. Our projections about the economy are complete shots in the dark, but we’ll make a few minuscule changes to our projections from the June meeting just so that it looks like we know what we’re doing and are reacting to market conditions. So now let’s turn it over to questions.

QUESTION: This idea of uncertainty in global markets, isn’t this going to play out over many months, so that the Fed isn’t ever going to hike rates?

YELLEN: Well, global uncertainty definitely is worrisome, and some FOMC members have pushed their projections for rate hikes into next year. But in the end, we expect all of this to be transitory. I mean, it’s not like we’ve created a huge bubble in the US economy, or that China is going to see a huge correction in its markets. Who would actually believe that?

QUESTION: Is the next meeting in play with regards to a rate hike? And what kind of data would you need to see in order to hike rates?

YELLEN: As I’ve said before, a rate hike is possible at every meeting. And we haven’t told anybody before, but we’ve brought you guys in to prep you on how to react if we hike rates at a non-press conference FOMC meeting. After all, we don’t want any journalists to stray from the party line and ignore our propaganda.

QUESTION: There have been some people protesting a Fed rate hike out of a concern that there still aren’t enough jobs. What impact has that had on you?

YELLEN: Yes, I hate those annoying little s***s, but I have to pretend that every peon’s opinion is important. But let’s the cut BS: we make the decisions and we’re going to do it regardless of what anyone on the outside thinks, okay? And we still don’t think the labor market has quite reached the amorphous goal we’ve pretended to set for ourselves, so until we hit that ever-changing goal, we’re not going to hike rates.

QUESTION: Do you think you’ve gotten closer to your inflation goals, and have you complied with the Congressional subpoena regarding the September 2012 leak?

YELLEN: B****. How dare you ask me about the subpoena. Do you remember what happened to the last guy who asked a question like that? He hasn’t been seen or heard from since. So I’m going to give you the longest, wordiest answer of the afternoon, repeating myself three or four times and basically rehashing everything I’ve already said about our inflation targets. That should give the Federal Reserve police enough time to identify which car in the lot is yours and install the tracking device. And now that I’m winding up my answer, the folks upstairs should have also had enough time to permanently revoke your press pass. Next question. Oh, wait, you asked about a subpoena? Yes, we are fully complying with Congress’ request for information, just like we always have throughout our history.

QUESTION: The projections you release basically show a low-inflation environment over the next three years, coupled with an unemployment rate that sits at your view of maximum unemployment. Doesn’t that seem a little unrealistic?

YELLEN: Look, as I’ve said before, we really don’t have a clue what maximum employment looks like. And we can’t predict the future. But we have to keep up a facade of knowing what it looks like we’re doing. So we’re going to keep pulling numbers out of our a** for as long as we can and hope for the best.

QUESTION: I want to piggyback on the last guy and point out that your old targets for the unemployment rate and the inflation rate were both higher. What has changed?

YELLEN: Well, we decided that 2 sounded like a nice number. We don’t like decimals and fractions. So our target is 2%. 2, 2, 2, 2, 2. Got that? But that’s not our ceiling. We don’t really care what the ceiling is, but we want to break through that 2% ceiling. The sky’s the limit, but if we can’t break 2% then it makes us look incompetent, as though we can’t actually cause prices to rise. There hasn’t been a central bank in history that’s been incapable of causing a hyperinflationary crisis, and we don’t intend to be the first.

QUESTION: So, like, you mentioned uncertainty, and, like, uncertainty caused you not to hike rates this month. And, like, so, what are the kinds of uncertainty that cause you not to raise rates, and what kind of uncertainty can you ignore?

YELLEN: That’s a tough question. But you should trust us that we’re carefully evaluating all the data. But the most important data are the unemployment rate and the inflation rate, and everything is viewed through how it’s going to affect those rates. Or at least that’s what we want the public to believe.

QUESTION: Could you talk a little bit more about the foreign developments that you’re discussing? We’re assuming it’s China, so are you concerned about the Chinese markets? And how about US markets, what do you think about them?

YELLEN: Yes, we’ve focused on China, but we’re convinced that their central planners know what they’re doing. After all, our central planning here is working wonders, right? But we’re also looking at declining oil prices and how that’s going to affect a number of countries and what the spillover effects might be. And yes, we s*** bricks every time the Dow drops a few hundred points. That’s why we have the Plunge Protection Team, but we can’t admit that we intervene to prop up markets, so I’ll just give you a BS statement about how we’re purely focused on the US economy and not at all reacting to market turbulence. Oh, and the economic outlook is peachy keen.

QUESTION: Given global interconnectedness and low inflation rates around the world, are you concerned about not being able to escape the era of zero interest rates?

YELLEN: No, of course not. We don’t take into account the possibility or likelihood of any extreme scenarios, and I can guarantee you that when the s*** hits the fan we will be completely blindsided and unprepared.

QUESTION: If the economy improves along the lines of your projections, and you still predict low inflation, what’s the big hurry in raising rates?

YELLEN: We’re going to keep printing goo-gobs of money, and we’re hoping that will start driving prices up. We know every central bank in history that has tried to engage in monetary policy has had to deal with lags in response to monetary policy, and we don’t want to engage in a pattern of trying to fine-tune by tightening, then loosening, etc. Despite the fact that that’s what’s going to end up happening anyway, because there’s no way for 12 people to possibly plan an entire economy, we’re going to pretend that we can do things smoothly and just try to bluster our way through any difficulties.

QUESTION: One of your colleagues wanted negative interest rates. I’m more interested in the cute reporter chick sitting next to me than I am in listening to anything President Kocherlakota says, so I was completely blindsided by something this obvious. Is the Fed going to move to negative interest rates?

YELLEN: Well, we’re a little embarrassed about Kocherlakota too, so we tried to ignore him. And even though the whole world knows that we’re going to have to launch QE4 at some point in the future, we want to publicly state that we would never need any extra stimulus. But in the event that we do need some more stimulus, we would carefully evaluate all the tools in our toolbox, even something as stupid as negative interest rates.

QUESTION: Do you still expect a rate hike before the end of the year? And some people have blamed global turbulence on the possible Fed rate increase. What do you think of that?

YELLEN: I don’t want to give you my own personal opinion, but I think it’s fair to say that the Committee as a whole expects a rate hike before the end of the year. And I think global turbulence is due to concerns about the global economy, not due to anyone getting upset that the Fed might hike rates.

QUESTION: You talked about the strong dollar, do you see your policy decisions affecting the dollar?

YELLEN: Despite the fact that our policy actions are the strongest factor influencing the dollar’s value, I’m going to downplay it and redirect the focus of your question by stating that monetary policy doesn’t necessarily affect the exchange rate? See what I did there? Yes, we devalue the dollar and reduce its purchasing power, but if other countries do the same to there currencies and exchange rates stay relatively constant, then we can say that we’re not really devaluing the dollar. I love the floating fiat money regime.

QUESTION: Can you talk about the housing market? How much are you counting on the housing market for future growth?

YELLEN: We’re hoping it continues to rebound, because there’s still some weakness. But it’s a very small sector of the economy. I mean, if you got rid of the entire housing sector and nobody had a place to live, the effects would be minuscule, right? We’re really focused on boosting consumer spending. Come on people, start buying cars that you don’t need and ringing up tons of debt on your credit cards. That’s the path to prosperity.

QUESTION: There are some people who think that ultra-low interest rates have exacerbated economic inequality and mainly benefit the wealthy, what do you say about that?

YELLEN: I disagree. Sure, savers and people on fixed incomes are hurt by low interest rates. Sure, low interest rates benefit capital-intensive industries, big banks, and hedge funds. Sure, the interest paid on excess reserves is lining the pockets of Wall Street. Sure, quantitative easing has boosted stock prices. Sure, easy money allows big banks to borrow and buy up all sorts of assets that they can then try to sell or rent at exorbitant prices to the hoi polloi. Sure, the continued devaluation of the dollar drives up the cost of living, leading to price increases that hurt the poor more than the rich. But we paid some Fed economists to produce a paper showing that the Fed’s monetary policy doesn’t worsen income inequality, so that proves that we’re not doing anything harmful.

QUESTION: What role did a possible government shutdown play in your decision today? And what would you say to Congress about “shutting down” the government?

YELLEN: Thank you for that softball that allows me to deflect blame from the Fed and redirect it to Congress. Ignore the $4.5 trillion balance sheet we’re carrying, ignore the continued easy money we funnel to Wall Street, ignore the fact that we’re going to drive this country into the ground. Congress is doing really bad stuff. If they don’t increase the debt ceiling and spend trillions more dollars that they don’t have, how are we supposed to monetize that debt by funneling trillions of dollars to the primary dealers?

QUESTION: If you delay rate hikes, doesn’t that also mean that you’re going to delay reducing the size of your balance sheet?

YELLEN: Yes, we can’t start reducing the size of the balance sheet until we start to hike rates. But who are we trying to kid? Does anybody really think we’re going to reduce the size of our balance sheet down to a more “reasonable” level? Come on, people, we’re in perma-QE mode here. Turn down for what?



China's Latest Craze: Sperm For iPhone
Submitted by Tyler D.
09/19/2015 - 10:58

For China's middle class, whose dreams of market bubble riches just went up in a margin call, there is still hope to pretend to be richer than one's neighbor courtesy of a faux rose gold cell phone. The answer: a tablespoon of sperm. As Xinhua reports, "technophiles may not have to reach far to find the cash for Apple's latest model. According to an advertisement with the Shanghai Sperm Bank - all you have to do is donating." "No need to sell a kidney...Shanghai sperm bank can make your iPhone 6s dream come true," says the ad which has gone viral on China's most popular social networking app WeChat this week.

[Fenix]

Mark Spitznagel Warns: If Investors Thought August Was Scary, "They Ain't Seen Nothin' Yet"
Submitted by Tyler D.
09/18/2015 23:45 -0400

The man who made a billion dollars on Black Monday sums up his strategy perfectly in this excellent FOX Business clip with the money-honey, "I'm a hedge fund manager that actually hedges for his clients. This is something of an old fashioned idea in this day of just gambling on the next Fed bailout." Spitznagel, who is wholly unapologetic in his criticism of The Fed (and any central planner), unleashes eight minutes of awful truthiness on what is going on under the surface of the so-called 'market', concluding ominously, "if August was scary for people, they ain't seen nothin’ yet."



Grab a beer and relax...



Some key excerpts:

On Universa's tail-risk strategy..

"We tend to lose or draw—most of the time—these small battles or skirmished. But, ultimately, we win the wars."

On the Great Myth of centrally planned economies..

"Great myths die hard. And I think what we're witnessing today is the slow death of one of the great myths of human history: this idea that centrally planned command economies work, that they're even feasible, and that they can be successful.



It's one of these enigmatic mythologies of the last hundred years in particular that we've been grappling with, and here we are today yet again thinking about this. Let's remember that in the last hundred years a lot of blood has been shed over this mythology. And here we are today, how did we get here again?

On today's "all alpha is beta" hedge fund community...

There was this notion not long ago of the Bernanke put, the Greenspan put. It was sort of a dirty thing to admit that it was part of our investment strategy. But today, it's everyone’s investment strategy."

On "it's different this time"...

"I think that another generation will look back and say 'how could you have made that mistake all over again? How could you have failed to understand Hayek's notion of the fatal conceit, that central planners can't do better than the dispersed knowledge and signals of free market processes?'"

On the crazy world in which we live...

"There's something self-fulfilling about this mythology, only in the short run.


But in the long run we know that it is ultimately self-defeating. When bureaucrats mandate low interest rates it doesn't spawn long term productive investment. What it spawns is this short term gambling, punting on momentum-driven moves, on levered buybacks. This is the world we're in today."


Deep State America
Submitted by Tyler D.
09/18/2015 - 22:25

Ordinary Americans frequently ask why politicians and government officials appear to be so obtuse, rarely recognizing what is actually occurring in the country. That is partly due to the fact that the political class lives in a bubble of its own creation, but it might also be because many of America’s leaders actually accept that there is an unelected, unappointed, and unaccountable presence within the system that actually manages what is taking place behind the scenes. That would be the American deep state. America’s deep state is completely corrupt: it exists to sell out the public interest, and includes both major political parties as well as government officials.


It Begins: Australia's Largest Investment Bank Just Said "Helicopter Money" Is 12-18 Months Away
Submitted by Tyler D.
09/18/2015 21:30 -0400

Just over two years ago, when the world was deciding who would be Bernanke Fed Chair replacement, Larry Summers or Janet Yellen (how ironic that Larry Summers did not get the nod just because a bunch of progressive economists thought he would not be dovish enough) we wrote about a different problem: with the end of QE3 upcoming and with the inevitable failure of the economy to reignite (again), we warned that there remains one option after (when not if) QE fails to stimulate growth: helicopter money.

While QE may be ending, it certainly does not mean that the Fed is halting its effort to "boost" the economy. In fact... the end of QE may well be simply a redirection, whereby the broken monetary pathway, one which uses banks as intermediaries to stimulate inflation (supposedly a failure according to the economist mainstream), i.e., "second-round effects", is bypassed entirely and replaced with Plan Z, aka "Helicopter Money" mentioned previously as an all too real monetary policy option by none other than Milton Friedman and one Ben Bernanke. This is also known as the nuclear option.

Today, one day after the Fed according to some finally lost its credibility, none other than Australia's largest investment bank, Macquarie, just made the case that helicopter money is not only coming, but has a "very high" probability of commencing its monetary paradrops over the next 12-18 months.

Time for a policy U-turn? Back to the future: British Leyland



From conventional QEs to more unorthodox policies…



As discussed (here and here), we do not believe that investors are likely to benefit from acceleration in growth rates, trade or liquidity and indeed on the contrary, negative feedback loops from EMs to DMs imply that neither would be able to support global growth. Secular stagnation is the key explanatory variable (here). The deflationary pressures from overleveraging, overcapacity and technology shifts can be either allowed to work through economies or public sector needs to continue resisting via expansionary policies.



Since ’08, monetary policies were doing most of the lifting with limited participation by fiscal authorities (bar China). In other words, in the absence of either private or public sectors driving higher velocity of money, it was CBs that were supplying incremental liquidity to preclude contraction of nominal GDP and avoid stronger deflationary pressures. However, marginal utility of incremental injections has been declining (witness much lower impact of recent ECB’s QE and increase in BoJ accommodation since Dec ’14).



Part of the reason for monetary stimulus fading is that supply of US$ remains low. Global economy continues to reside on a de-facto US$ standard and current incremental supply is almost non-existent (depending on definition growing at +2%/-1% clip vs. average since ‘01 of ~15%). In other words, due to lack of recovery in the US velocity of money and lack of QEs, global economy is not getting enough US$ to continue leveraging.



…as efficacy of conventional monetary QE is questioned



At the same time efficacy of continuing with conventional QE policies is being challenged and not just by independent observes but also ‘insiders’ (such as recent SF Fed paper). As velocity of money globally continues to fall, conventional QEs have to become exponentially larger, as marginal benefit declines. If public sector is not prepared to step aside, what other measures can be introduced to support nominal GDP and avoid deflation?



There are several policies that could be and probably would be considered over the next 12-18 months. If private sector lacks confidence and visibility to raise velocity of money, then (arguably) public sector could. In other words, instead of acting via bond markets and banking sector, why shouldn’t public sector bypass markets altogether and inject stimulus directly into the ‘blood stream’? Whilst it might or might not be called QE, it would have a much stronger impact and unlike the last seven years, the recovery could actually mimic a conventional business cycle and investors would soon start discussing multiplier effects and positioning in areas of greatest investment.



British Leyland failed, but it might work at least for a while



British Leyland (formed from nationalized British car companies in the late ’60s) destroyed its automotive industry but for a time it provided employment and investment. CBs directly monetizing Government spending and funding projects would do the same. Whilst ultimately it would lead to stagflation (UK, 70s) or deflation (China, today), it could provide strong initial boost to generate impression of recovery and sustainable business cycle. It could also significantly shift global terms of trade (to the benefit of commodity producers) and cause a period of underperformance by our ‘Quality & Stability’ portfolio and improve performance of ‘Anti-Quality’ screen. What is probability of the above policy shift? Low over next six months; very high over the longer term.

What's most disturbing about the above assessment is that Macquarie realizes this last ditch attempt to preserve the status quo will fail, but will - if nothing else - buy another 12-18 months.

So is that the event horizon countdown: 1-2 years... and then?

And just like last week's Daiwa report broke the seal on unprecedented economic bearishness (Citi promptly made a global recession its 2016 base case) will the Macquarie report become the benchmark which the other penguins will ape as suddenly calls to bypass the banks become the norm and suddenly every "authority" on the topic, which so vehemently advocated for QE, admits it never worked from day one, and instead recommends that the only option left to save the world is the "nuclear" one?

Which, incidentally, is precisely what we said would be the endgame on March 18, 2009 - the day the Fed announced the full-blown first QE1.

[Fenix]

Yellen's "New" Mandate - Why We Are All Fed-Watchers Now
Submitted by Tyler D.
09/18/2015 - 21:15

Perception is everything in contemporary economics and the Fed is the center of perception; the medium has become the message. The truth is more this: the Fed no longer reacts to the waxing and waning of animal spirit-led demand. In the current monetary regime it exists to create and maintain animal spirits with a secular policy centered on ever-expanding credit, but it is very aware that admitting it’s centrality would defeat its purpose.



Interbank Credit Risk Soars To 3 Year Highs - Is This Why Janet Folded?
Submitted by Tyler D.
09/18/2015 - 20:40

Last week we warned of the ominously rising risks evident under the surface in US financials. Following Yellen's decision to chicken-out yesterday, it appears interbank counterparty risk is even ominous-er. With bank stocks prices tumbling, catching down to credit market's concerns, the TED Spread - implicitly measuring interbank credit risk - jumped over 21% yesterday - to its highest in 3 years.


Austrian Economics, Monetary Freedom, & America's Economic Roller-Coaster
09/18/2015 20:05 -0400

Submitted by Richard Ebeling
For over a decade, now, the American economy has been on an economic rollercoaster, of an economic boom between 2003 and 2008, followed by a severe economic downturn, and with a historically slow and weak recovery starting in 2009 up to the present.

Before the dramatic stock market decline of 2008-2009, many were the political and media pundits who were sure that the “good times” could continue indefinitely, including some members of the Board of Governors of the Federal Reserve, America’s central bank.

When the economic downturn began and then worsened, many were the critics who were sure that this proved the “failure” of capitalism in bringing such financial and real economic disruption to America and the world.

There were resurrected long questioned or rejected theories from the Great Depression years of the 1930s that argued that only far-sighted and wise government interventions and regulations could save the country from economic catastrophe and guarantee we never suffer from a similar calamity in the future.

The Boom-Bust Cycle Originates in Government Policy

Not only is the capitalist system not responsible for the latest economic crisis, but all attempts to severely hamstring or regulate the market economy out of existence only succeeds in undermining the greatest engine of economic progress and prosperity known to mankind.

The recession of 2008-2009 had its origin in years of monetary mismanagement by the Federal Reserve System and misguided economic policies emanating from Washington, D.C. For the five years between 2003 and 2008, the Federal Reserve flooded the financial markets with a huge amount of money, increasing it by 50 percent or more by some measures.

For most of those years, key market rates of interest, when adjusted for inflation, were either zero or even negative. The banking system was awash in money to lend to all types of borrowers. To attract people to take out loans, these banks not only lowered interest rates (and therefore the cost of borrowing), they also lowered their standards for credit worthiness.

To get the money, somehow, out the door, financial institutions found “creative” ways to bundle together mortgage loans into tradable packages that they could then pass on to other investors. It seemed to minimize the risk from issuing all those sub-prime home loans, which we viewed afterwards as the housing market’s version of high-risk junk bonds. The fears were soothed by the fact that housing prices kept climbing as home buyers pushed them higher and higher with all of that newly created Federal Reserve money.

At the same time, government-created home-insurance agencies like Fannie Mae and Freddie Mac were guaranteeing a growing number of these wobbly mortgages, with the assurance that the “full faith and credit” of Uncle Sam stood behind them. By the time the Federal government formally took over complete control of Fannie and Freddie 2008, they were holding the guarantees for half of the $10 trillion American housing market.

Highway Free Market vs. Highway Bailout cartoon

Easy Money and Lower Interest Rates Led to the Bust

Low interest rates and reduced credit standards were also feeding a huge consumer-spending boom that that resulted in a 25 percent increase in consumer debt between 2003 and 2008, from $2 trillion to over $2.5 trillion. With interest rates so low, there was little incentive to save for tomorrow and big incentives to borrow and consume today. But, according to the U.S. Census Bureau, during that five-year period average real income only increased by at the most 2 percent. Peoples’ debt burdens, therefore, rose dramatically.

The easy money and government-guaranteed house of cards all started to come tumbling down 2008, with a huge crash in the stock market that brought some indexes down 30 to 50 percent from their highs. The same people in Washington who produced this disaster then said that what was needed was more regulation to repair the very financial and housing markets their earlier actions so severely undermined.

That included, at the time, a shotgun wedding between the U.S. government and the largest banks in America, when in October of 2008, the heads of those financial institutions were commanded to come to Washington, D.C. for a meeting with, then, Secretary of the Treasury, Henry Paulson and former Federal Reserve Chairman, Ben Bernanke.

They were told the Federal government was injecting cash into the banking system with a purchase of $245 billion of shares of bank stocks in the financial sector. The banking CEOs present – some of who made it clear they neither needed nor wanted an infusion of government money – were basically told they would not be allowed to leave the Treasury building until they had signed on the dotted line. (The money was eventually returned to the Treasury, with bank buybacks of the shares in which the government had “invested.”)

Opening the Monetary Spigot Again

The Federal Reserve, in the meantime, turned on the monetary spigot, increasing the monetary base (cash and bank reserves) between 2007 and 2015 from $740 billion to around $4 trillion, brought about through a series of monetary creation policies under the general heading of “quantitative easing.”

A variety of key interest rates, as a consequence, when adjusted for inflation, have been in the negative range most of the time for seven years. Nominal and real interest rates, therefore, cannot be considered to be telling anything truthful about the actual availability of savings in the economy and its relationship to market-based profitability of potential investments.

Interest rates manipulation has worked similar to a price control keeping the price of a good below its market-determined and clearing level. It has undermined the motives and abilities of some people to save on the supply-side, while distorting demand-side decision-making in terms of both the types and time-horizons of possible investments to undertake, since the real scarcity and cost of borrowing for capital formation has been impossible to realistically estimate and judge in a financial market without market-based interest rates.

Markets have been distorted, investment patterns have been given wrong and excessive directions, and labor and resources have been misdirected into various employments that will eventually be shown to be unsustainable.

Keep Printing that Paper Money cartoon

Low Inflation and Faulty Price Indexes

Keynesians and other supporters of “stimulus” policies have argued that there has been no need to fear “excesses” in the economy because price inflation has been tame – running less than two percent a year practically the entire time since 2008.

First, it needs to be remembered that this measurement of price inflation is based upon one or another type of statistical price index. This by necessity hides from view all the individual price changes that make up the statistical average, and which has seen in the last few years significant price increases in subsectors of the market.

Second, the full impact of the massive monetary expansion has been prevented from having its full effect due to a policy gimmick that the Federal Reserve has been following since virtually the start of its quantitative easing policies. The central bank has been paying banks a rate of interest slightly above the interest rate it could earn from lending to borrowers in the private sector.

Thus, it has been more profitable for many banks to leave large amounts of their available reserves unlent as “excess reserves” that have been totaling almost $2.8 trillion of the nearly $4 trillion that Federal Reserve as created. Having created all this additional lending potential, the Fed has been manipulating interest rates, again, this time to keep a large amount of it from coming on the market.

Third, particularly since 2014, the world has been increasingly awash in expanding oil supplies that has resulted in dramatically lower prices for refined oil products of all types, and most visibly to the average consumer in the form of falling prices to fill up one’s car with gasoline.

Greater supplies of useful and widely used raw materials and resources at significantly lower cost should be considered a boon to all in the economy, in making production and finished goods less expensive, and thereby raising the standards of living of all demanding such products.

Instead, the Federal Reserve worries about “price deflation” as a drag on the economy, rather than as a market-based stimulus through supply-side plentifulness that, in the long run, reduces the scarcity and cost of desired goods and services.

Central banks around the world have all gravitated to the idea that the “ideal” rate of price inflation that assures economic stability and sustainability is around two percent a year. Fixated on averages and aggregates, the central bankers continue to give little or no attention to the really important influence their monetary policies have on economic affairs: the distortion of the structures of relative prices, profit margins, resource uses and capital investments.

The “Austrian” Theory of Money and the Business Cycle

In my new book, Monetary Central Planning and the State, which will be published in October 2015 by the Future of Freedom Foundation in a eBook format available from Amazon, I explain the “Austrian” theory of money and the business cycle in contrast to both Keynesian Economics and Monetarism.

Developed especially by Ludwig von Mises and Friedrich A. Hayek in the 20th century, the Austrian theory uniquely demonstrates the process by which central bank-initiated monetary expansion and interest rate manipulation invariably sets the stage for both an artificial boom and an eventual, inescapable bust.

Their theory is explained in the context of an analysis of the most severe economic downturn of the last one hundred years, the Great Depression. The crash of 1929 and the depression that followed was the outcome of Federal Reserve monetary policy in the 1920s, when the goal was price level stabilization – neither price inflation nor price deflation. But beneath the apparent stability of the statistical price level, monetary expansion and below-market rates of interest generated a mismatch between savings and investment in the American economy that finally broke in 1929 and 1930.

But the depth and duration of the Great Depression through the greater part of the 1930s was also not due to anything inherent in the market economy. Rather than allow markets to find their new, post-boom market-clearly levels in terms of prices, wages, and resource reallocations, governments in America and Europe undertook a wide variety of massive economic interventions.

The outcome was rising and prolonged unemployment, idle factories, unused capital and vast amounts of economic waste caused by wage and price interventions, large government budget deficits and accompanying accumulated debt, uneconomic public works projects, barriers to international trade due to economic nationalism and protectionism, and introduction of forms of government planning and control over people’s lives and market activities.

Monopoly Game Bailout cartoon

Faulty and Misguided Keynesian Ideas

Many of these rationales for “activist” monetary and fiscal policy emerged and took form under the cover of the emerging Keynesian Revolution as first presented by British economist, John Maynard Keynes. In Monetary Central Planning and the State, I also offer a detailed critique of the fundamental premises of the Keynesian approach and why its policy prescriptions in fact lead to the very boom-bust cycle the Keynesians claim to want to prevent.

Furthermore, it is shown why it is that every essential building-block of the Keynesian edifice is based on faulty economic premises, superficial conceptions of how markets actually function, and why its end result is more government control with none of the benefit of economic stability that the Keynesians say is their goal.

Also, in spite of Milton Friedman’s valuable contributions to an understanding of the superiority of competitive markets in general, his own version of activist monetary policy through a “rule” of monetary expansion and “automatic” fiscal stabilizers was more an “immanent criticism” within the Keynesian macroeconomic framework, rather than a fundamental alternative such as the “Austrian” economists have offered.

Private Free Banking, Not Central Banking

What, then, is to be done, in terms of the workings and the institutions of the monetary system? A good part of Monetary Central Planning and the State is devoted to explaining the inherent economic weaknesses and political shortcomings of all forms of central banking.

In a nutshell, central banking suffers from many of the same problems as all other forms of central planning – the presumption that monetary central planners can ever successfully manage the monetary and banking system better than a truly competitive private banking system operating on the basis of market-chosen forms of money and media of exchange.

It is shown how systems of private competitive banking could function if government central banking were brought to an end. This is done through a critical analysis of the proposals for a private monetary and banking system as found in the writings of Ludwig von Mises, Friedrich A. Hayek, Murray N. Rothbard, and the “modern” proponents of monetary freedom: Lawrence H. White, George Selgin, and Kevin Dowd.

Monetary Central Planning and the State ends with a brief list of the steps that could and should be taken to begin the successful transition from central banking to a free market monetary and banking system of the future.

If the last one hundred years has shown and demonstrated anything, it is that governments – even when in the hands of the well intentioned – have neither the knowledge, wisdom nor ability to manage the social and economic affairs of multitudes of hundreds of millions, and now billions, of people around the world. The end result has always been loss of liberty and economic misdirection and distortion.



Wanting Gold in Monopoly Game cartoon

It is the Time for Monetary Freedom

A hundred years of central banking in the United States since the establishment of the Federal Reserve System in 1913 has equally demonstrated the inability of monetary central planners to successfully direct the financial and banking affairs of the nation through the tools of monopoly control over the quantity of money and the resulting powerful influence on money’s value and the interest rates at which savers and borrowers interact.

It is time for a radical denationalization of money, a privatization of the monetary and banking system through a separation of government from money and all forms of financial intermediation.

That is the pathway to ending the cycles of booms and busts, and creating the market-based institutional framework for sustainable economic growth and betterment.

It is time for monetary freedom to replace the out-of-date belief in government monetary central planning.

[Fenix]

"Activists" Misleading Ownership Stakes & Suspect "Positioning" Strategies
Submitted by Tyler D.
09/18/2015 - 18:20

"Activist Investors", the relatively new classification for corporate agitators, want you to believe that their intellectual tactics/ strategies improve both corporate governance and shareholder returns. That may be true but they also seem to be involved in another, less savory, tactic, that is, inflating their company “ownership” claims with extremely large derivatives positions as outlined in SEC disclosure filings.


Fed Opens Negative Interest Rate Pandora's Box: What Happens Next
Submitted by Tyler D.
09/18/2015 18:01 -0400

As we already commented extensively, while the Fed's dovish non-hike was a violent surprise for the market, and has led to what may be the first thoroughly unanticipated (at least by the market) policy mistake by the Federal Reserve (judging by the market), the biggest news was the very symbolic, yet all too ominous, negative interest rate forecast in the Fed's projection materials by one FOMC member.

This was the first time in Fed history that an FOMC member has on the record predicted NIRP in the US.

Janey Yellen's subsequent non-denial during the press conference did not exactly inspire hope that the Fed was just "joking":

I don’t expect that we’re going to be in a path of providing additional accommodation. But if the outlook were to change in a way that most of my colleagues and I do not expect, and we found ourselves with a weak economy that needed additional stimulus, we would look at all of our available tools. And that would be something that we would evaluate in that kind of context.

Furthermore, when considering that virtually all of Europe is already flooded by NIRP, and earlier Bank of England's Andy Haldane, one of the otherwise more rational members of the central bank, advocated negative rates in the UK, one can be virtually certain that unless there is a dramatic rebound in the global economy, the next step by Yellen will not be a rate hike, but easing (just as Goldman predicted) right into negative interest rate territory.

What would NIRP in the US mean in practical terms?

For the answer we go straight to, drumroll, the Fed itself whose New York economists discussed precisely this topic just three years ago and issued a very stark warning (which apparently the Fed itself decided to ignore), saying "If Interest Rates Go Negative . . . Or, Be Careful What You Wish For."

This is what the New York Fed said in August 2012:

If Interest Rates Go Negative . . . Or, Be Careful What You Wish For



One way to push short-term rates negative would be to charge interest on excess bank reserves. The interest rate paid by the Fed on excess reserves, the so-called IOER, is a benchmark for a wide variety of short-term rates, including rates on Treasury bills, commercial paper, and interbank loans. If the Fed pushes the IOER below zero, other rates are likely to follow.



Without taking a position on either the merits of negative interest rates or the Fed's statutory authority to fix the IOER below zero, this post examines some of the possible consequences. We suggest that significantly negative rates—that is, rates below -50 basis points—may spawn a variety of financial innovations, such as special-purpose banks and the use of certified bank checks in large-value transactions, and novel preferences, such as a preference for making early and/or excess payments to creditworthy counterparties and a preference for receiving payments in forms that facilitate deferred collection. Such responses should be expected in a market-based economy but may nevertheless present new problems for financial service providers (when their products and services are used in ways not previously anticipated) and for regulators (if novel private sector behavior leads to new types of systemic risk).



Cash and Cash-like Products



The usual rejoinder to a proposal for negative interest rates is that negative rates are impossible; market participants will simply choose to hold cash. But cash is not a realistic alternative for corporations and state and local governments, or for wealthy individuals. The largest denomination bill available today is the $100 bill. It would take ten thousand such bills to make $1 million. Ten thousand bills take up a lot of space, are costly to transport, and present significant security problems. Nevertheless, if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances.



If rates go negative, we should also expect to see financial innovations that emulate cash in more convenient forms. One obvious candidate is a special-purpose bank that offers conventional checking accounts (for a fee) and pledges to hold no asset other than cash (which it immobilizes in a very large vault). Checks written on accounts in a special-purpose bank would be tantamount to negotiable warehouse receipts on the bank’s cash. Special-purpose banks would probably not be viable for small accounts or if interest rates are only slightly below zero, say -25 or -50 basis points (because break-even account fees are likely to be larger), but might start to become attractive if rates go much lower.



Early Payments, Excess Payments, and Deferred Collections



Beyond cash and special-purpose banks, a variety of interest-avoidance strategies might emerge in connection with payments and collections. For example, a taxpayer might choose to make large excess payments on her quarterly estimated federal income tax filings, with the idea of recovering the excess payments the following April. Similarly, a credit card holder might choose to make a large advance payment and then run down his balance with subsequent expenditures, reversing the usual practice of making purchases first and payments later.



We might also see some relatively simple avoidance strategies in connection with conventional payments. If I receive a check from the federal government, or some other creditworthy enterprise, I might choose to put the check in a drawer for a few months rather than deposit it in a bank (which charges interest). In fact, I might even go to my bank and withdraw funds in the form of a certified check made payable to myself, and then put that check in a drawer.



Certified checks, which are liabilities of the certifying banks rather than individual depositors, might become a popular means of payment, as well as an attractive store of value, because they can be made payable to order and can be endorsed to subsequent payees. Commercial banks might find their liabilities shifting from deposits (on which they charge interest) to certified checks outstanding (where assessing interest charges could be more challenging). If bank liabilities shifted from deposits to certified checks to a significant degree, banks might be less willing to extend loans, because certified checks are likely to be less stable than deposits as a source of funding.



As interest rates go more negative, market participants will have increasing incentives to make payments quickly and to receive payments in forms that can be collected slowly. This is exactly the opposite of what happened when short-term interest rates skyrocketed in the late 1970s: people then wanted to delay making payments as long as possible and to collect payments as quickly as possible. Some corporations chose to write checks on remote banks (to delay collection as long as possible), and consumers learned to cash checks quickly, even if that meant more trips to the bank, and to demand direct deposits. However, if interest rates go negative, the incentives reverse: people receiving payments will prefer checks (which can be held back from collection) to electronic transfers. Such a reversal could impose novel burdens on payment systems that have evolved in an environment of positive interest rates.



Conclusion



The take-away from this post is that if interest rates go negative, we may see an epochal outburst of socially unproductive—even if individually beneficial—financial innovation. Financial service providers are likely to find their products and services being used in volumes and ways not previously anticipated, and regulators may find that private sector responses to negative interest rates have spawned new risks that are not fully priced by market participants.

Yes, the conclusion is staggering: the Fed itself previewed the complete debacle that the Fed itself is now preparing to unleash with NIRP which will lead to "an epochal outburst of socially unproductive—even if individually beneficial—financial innovation." Not only that but the Fed, in a moment of rare lucidity, admitted that "private sector responses to negative interest rates have spawned new risks that are not fully priced by market participants."

Tell that to Europe, Sweden, Switzerland where NIRP already reigns supreme, and all other countries where NIRP is coming.

But what may be missed between the lines is the Fed's explicit observation that in a world of NIRP, cash will reign supreme, as everyone rushes to withdraw their "taxed" bank deposits and keep the funds in the form of paper cash, hidden safely somewhere where the bank has no access, and where no bank can collect an interest rate for the "privilege" of being funded with a negative rate liability.

Furthermore, as the Fed correctly observes, "the usual rejoinder to a proposal for negative interest rates is that negative rates are impossible; market participants will simply choose to hold cash. But cash is not a realistic alternative for corporations and state and local governments, or for wealthy individuals."

So what is the alternative?

The answer was hinted during Andy Haldane's speech earlier today in which he not only urged the banning of cash but the implementation of negative rates, two concepts which, after reading the note above, should intuitively go hand in hand: as we commented "one idea, Haldane told an audience of business owners in Northern Ireland, could be to scrap cash and adopt a state-issued digital currency like Bitcoin. Although widely reviled as the currency for drug dealers and criminals, Haldane said Bitcoin’s distributed payment technology had ‘real potential’. Which may explain the Fed's sudden fascination in the virtual currency."

And fascination it is. Below are some examples of recent Fed research on a topic which as recently as 2011 it held as a heretic taboo, and which the ECB considered a Ponzi scheme as recently as November 2012:

* Chicago Fed on Bitcoin: A Primer, December 2013
* Boston Fed on Bitcoin as Money, September 2014
* St. Louis Fed on "Bitcoin and Beyond: The Possibilities and the Pitfalls of Virtual Currencies", March 2014
* Federal Reserve on Bitcoin: Technical Background and Data Analysis, October 2014
* The Federal Reserve Bitcoin Strategy

Last but not least:

* Research: Federal Reserve Needs Power Over Bitcoin

Of course it does. Why? For two simple reasons:

* First, as noted above, cash and NIRP simply do not mix as cash provides the general population a handy way of circumventing the intentionally punitive implications of negative rates, which as a tax on all savers, would force everyone to spend savings the moment these were created. The thinking here, of course, would be that with savings immediately converted to consumption, the velocity of money would surge and boost economic growth in the process even if it was conducted under punitive rate duress.
* Second, and even more important, is the blockchain basis of bitcoin, which is precisely why the Fed is so fascinated by it. With a perpetual and current ledger of every single transaction in the monetary domain, a digital currency such as bitcoin provides the Fed something cash never would - a constant database (or ledger) of every single transaction everywhere and any given moment.

It is the second aspect of bitcoin that has led to such recent headlines as "Big banks consider using Bitcoin blockchain technology" and, of course, Bloomberg's piece from September 1 in which "Blythe Masters Tells Banks the Blockchain Changes Everything."

Yes it does, and especially in a world in which the Fed regulates all blockchain transactions under a negative interest rate regime: quite simply, the combination of blockchain and NIRP give the Fed supreme control over all transactions.

Simply said: bitcoin under NIRP is a Fed match made in heaven.

There is just one small hurdle - eliminating cash as a transaction medium entirely. However, considering the US experience with confiscating monetary intermediates most recently observed with Executive Order 6102 when FDR confiscated all US gold, will the Fed allow such a little "problem" as "sequestering" available cash stand in the way of NIRP dominance? Of course not, especially if the alternative is the complete loss of central bank credibility.

Which, in a nutshell, is what Kocherlakota's negative interest-rate dot unleashed: a world in which the existing cash/ZIRP paradigm becomes blockchain/NIRP (and where the Fed is aware of every single transaction).

And, before you ask, will there be substantial - and violent - opposition to the Fed's mandatory conversion of cash to bitcoin? Of course. But that too certainly not stop the Fed, which fighting for the survival of trillions in legacy "wealth" would simply steamroll over anyone and anything courtesy of the US government's armed backing (which has conclusively proven in recent years its function has metastasized to serve only the wealthiest corporations and Wall Street interests) to preserve such wealth, if only for a little longer.

[Fenix]

Three Reasons Why The U.S. Government Should Default On Its Debt Today
09/18/2015 17:45 -0400
Submitted by Doug Casey

The overleveraging of the U.S. federal, state, and local governments, some corporations, and consumers is well known.

This has long been the case, and most people are bored by the topic. If debt is a problem, it has been manageable for so long that it no longer seems like a problem. U.S. government debt has become an abstraction; it has no more meaning to the average investor than the prospect of a comet smacking into the earth in the next hundred millennia.

Many financial commentators believe that debt doesn’t matter. We still hear ridiculous sound bites, like “We owe it to ourselves,” that trivialize the topic. Actually, some people owe it to other people. There will be big transfers of wealth depending on what happens. More exactly, since Americans don’t save anymore, that dishonest phrase about how we owe it to ourselves isn’t even true in a manner of speaking; we owe most of it to the Chinese and Japanese.

Another chestnut is “We’ll grow out of it.” That’s impossible unless real growth is greater than the interest on the debt, which is questionable. And at this point, government deficits are likely to balloon, not contract. Even with artificially low interest rates.

One way of putting an annual deficit of, say, $700 billion into perspective is to compare it to the value of all publicly traded stocks in the U.S., which are worth roughly $20 trillion. The current U.S. government debt of $18 trillion is rapidly approaching the stock value of all public corporations -- and that’s true even with stocks at bubble-like highs. If the annual deficit continues at the $700 billion rate -- in fact it is likely to accelerate -- the government will borrow the equivalent of the entire equity capital base of the country, which has taken more than 200 years to accumulate, in only 29 years.

You should keep all this in the context of the nature of debt; it can be insidious.

The only way a society (or an individual) can grow in wealth is by producing more than it consumes; the difference is called “saving.” It creates capital, making possible future investments or future consumption. Conversely, “borrowing” involves consuming more than is produced; it’s the process of living out of capital or mortgaging future production. Saving increases one’s future standard of living; debt reduces it.

If you were to borrow a million dollars today, you could artificially enhance your standard of living for the next decade. But, when you have to repay that money, you will sustain a very real decline in your standard of living. Even worse, since the interest clock continues ticking, the decline will be greater than the earlier gain. If you don’t repay your debt, your creditor (and possibly his creditors, and theirs in turn) will suffer a similar drop. Until that moment comes, debt can look like the key to prosperity, even though it’s more commonly the forerunner of disaster.

Of course, debt is not in itself necessarily a bad thing. Not all debt is for consumption; it can be used to finance capital goods intended to produce further wealth. But most U.S. debt today finances consumption -- home mortgages, car loans, student loans, and credit card debt, among other things.
Government Debt

It took the U.S. government from 1791 to 1916 (125 years) to accumulate $1 billion in debt. World War I took it to $24 billion in 1920; World War II raised it to $270 billion in 1946. Another 24 years were needed to add another $100 billion, for a total of $370 billion in 1970. The debt almost tripled in the following decade, with debt crossing the trillion-dollar mark in October 1981. Only four and half years later, the debt had doubled to $2 trillion in April 1986. Four more years added another trillion by 1990, and then, in only 34 months, it reached $4.2 trillion in February 1993. The exponential growth continued unabated. U.S. government debt stood at $18 trillion in 2015. Off-balance sheet borrowing and the buildup of massive contingent liabilities aren’t included. That may add another $50 trillion or so.

When interest rates rise again, even to their historical average, the U.S. government will find most of its tax revenue is going just to pay interest. There will be little left over for the military and domestic transfer payments.

When the government borrows just to pay interest, a tipping point will be reached. It will have no flexibility at all, and that will be the end of the game.

In principle, an unsustainable amount of government debt should be a matter of concern only to the government (which is not at all the same thing as society at large) and to those who foolishly lent them money. But the government is in a position to extract tax revenues from its subjects, or to inflate the currency to keep the ball rolling. Its debt indirectly, therefore, becomes everyone’s burden.

As I've said before, I think the U.S. government should default on not just some, but all of its debt.

There are at least three reasons for that. First is to avoid turning future generations into serfs. Second is to punish those who have enabled the State by lending it money. Third is to make it impossible for the State to borrow in the future, at least for a while.

The consequences of all this are grim, but the timing is hard to predict. Perhaps the government can somehow borrow amounts that no one previously thought possible. But its creditors will look for repayment. Either the creditors are going to walk away unhappy (in the case of default), or the holders of all dollars are going to be stuck with worthless paper (in the case of hyperinflation), or the taxpayers’ pockets will be looted (the longer things muddle along), or most likely a combination of all three will happen. This will not be a happy story for all but a few of us.



The Fed Is Trapped: The Naked Emperor's New "Reaction Function"
Submitted by Tyler D.
09/18/2015 17:09 -0400


When China transitioned to a new currency regime last month, what should have been immediately apparent to everyone, was that the Fed was, from there on out, cornered. Boxed in. Trapped. Screwed.

We reiterated this earlier today as the market still seems to be quite confused as to what exactly happened that caused Janet Yellen to resort to what many thought was the most unlikely option going into this week's meeting: the "dovish hold", or, as Deutsche Bank recently called it, the "clean relent."

What follows is a recap of just how we got to this point or, in other words, an explanation of how the FOMC missed its opportunity and became trapped in the wake of China's move to devalue the yuan. Following the recap, we present excerpts from Citi's take on the Fed's "new reaction function. For those familiar with the backstory and/or who have a good grasp on why it is that the Fed went the route they did, feel free to skip straight to the section from Citi and the subsequent discussion.

* * *

How did we get here?

Despite all the ballyhooing about moving to a more market-based exchange rate, the PBoC actually did the opposite on August 11. As BNP’s Mole Hau put it "whereas the daily fix was previously used to fix the spot rate, the PBoC now seemingly fixes the spot rate to determine the daily fix, [thus] the role of the market in determining the exchange rate has, if anything, been reduced in the short term." Obviously, a reduced role for the market, means a greater role for the PBoC, and that of course means intervention via FX reserve drawdowns (i.e. the liquidation of US paper). Of course no one believed that China’s deval was “one and done” which meant that the pressure on the yuan increased and before you knew it, the PBoC was intervening all over the place. By mid-September, PBoC intervention had cost some $150 billion between onshore spot interventions and offshore spot and forward meddling. The problem - as everyone began to pick up on some 10 months after we announced the death of the petrodollar - is that when EMs start liquidating their reserves, it works at cross purposes with DM QE. That is, it offsets it. Once this became suddenly apparent to everyone at the end of last month, market participants simultaneously realized - to their collective horror - that the long-running slump in commodity prices and attendant pressure on commodity currencies as well as the defense of various dollar pegs meant that, as Deutsche Bank put it, the great EM reserve accumulation had actually begun to reverse itself months ago. China’s entry into the global currency wars merely kicked it into overdrive.

What the above implies is that the Fed, were it to have hiked on Thursday, would have been tightening into a market where the liquidation of USD assets by foreign central banks was already sapping global liquidity and exerting a tightening effect of its own. In other words, the FOMC would have been tightening into a tightening.

But that’s not all. When China devalued the yuan it also confirmed what the EM world had long suspected but what EM currencies, equities, and bonds had only partially priced in. Namely that China’s economy was crashing. For quite a while, the fact that Beijing hadn’t devalued even as the yuan’s dollar peg caused the RMB’s REER to appreciate by 14% in just 12 months, was viewed by some as a sign that things in China might not be all that bad. After all, if a country with an export-driven economy can withstand a double-digit currency appreciation without a competitive devaluation even as the global currency wars are being fought all around it, then the situation can’t be too dire. Put simply, the devaluation on August 11 shattered that theory and reports that China is “secretly” targeting a much larger devaluation in order to boost export growth haven’t helped. For emerging markets, this realization was devastating. Depressed demand from China had already led to a tremendous amount of pain across emerging economies and the message the devaluation sent was that China’s economy wasn’t set to rebound any time soon, meaning global demand and trade will likely remain subdued, as will commodity prices.

That was the backdrop facing the Fed going into September’s meeting. Put simply, if the Fed hiked to maintain some semblance of credibility and to prove that it isn’t outright lying about being “data dependent” , it would have risked accelerating EM capital outflows, which would in turn prompt further FX reserve drawdowns and serve to amplify the effect of “liftoff”, in the process turning what should have been a merely “symbolic” move into something far more dangerous. Once that dynamic tipped the EM world into crisis, it would be only a matter of time before the Fed was forced to reverse course and, ultimately, to launch QE4 to offset the tightening of global liquidity it had unleashed by failing to realize that in a world operating under a massive, coordinated easing effort, the smallest policy “error” reverberates exponentially.

And then there was of course China's epic stock market meltdown which triggered a modern day Black Monday across global equity markets.

As if that wasn’t enough to think about going into this week’s meeting, the FOMC had also to consider whether not hiking would also have the effect of accelerating EM capital outflows and triggering the very same chain of events described above. The argument for that eventuality is simply that the Fed missed its window to hike and now, the market gets more nervous and more uncertain with each passing Fed meeting and so by failing once again to rip off the band-aid, the Fed has ensured that capital will continue to flow out of EMs as the market continues to anticipate what it assumes is inevitable but which, for all the reasons laid out above, may actually be impossible. As Vanguard’s senior economist Roger Aliaga-Diaz put it: "We are concerned with the Fed's acknowledgement of recent market volatility in its decision. The Fed runs the risk of being held captive to the markets as, paradoxically, much of that volatility is due to the anticipation and uncertainty around when the Fed will move."

Of course not everyone understand or took the time to consider all of this going into Thursday which is why some were confused about why it is that concerns centered around the global economy and global financial markets were sufficient to override employment gains when it came time for the Fed to make a decision. For those who are still confused, or who seek confirmation of the narrative laid out above and on numerous occasions in these pages over the past three weeks, consider the following from Citi who is out with a fresh look at the Fed’s “new reaction function."

* * *

From Citi

The Federal Open Market Committee (FOMC) decision to stay pat reveals a new monetary policy rule in place—one that amplifies the importance of international and financial market developments.

We did not believe the FOMC would take such a limited risk scenario involving China, which is not part of their baseline outlook, and delay a rate increase that arguably is warranted by domestic conditions. Indeed, we have noted that the last time international economic and market developments stopped the Fed from raising rates was in 1997-1998 when LTCM, Russia, and the Asian crisis caused disorderly markets that were global and systemic. Current volatility conditions are not at all similar to those of 1998.

The new FOMC reaction function—one that assigns greater importance to global and international financial market developments—will require some time to assess and understand.

Now what? China's growth uncertainty will not diminish quickly and the EM fallout will take time to assess. The Chinese authorities have no track record of successfully dealing with such a structural slowdown, nor a track record of not exacerbating such a well-anticipated economic weakness. Also, excess supply conditions in commodity markets depressing EM growth and US inflation likely will not dissipate quickly.

The September FOMC meeting was a real "bunker buster" insofar as it has challenged our understanding of Federal Reserve policymaking and the inputs that matter most. There is little evidence that an emerging markets-led global slowdown would be able to generate sufficient drag to warrant delaying normalization, unless it were severe and engaged the advanced economies as well. However, this risk alone should not have delayed normalization.

In light of the new Fed behavior, we tentatively have revised our forecast for the next interest rate increase to be sometime in the spring of 2016 (Figure 1). This delay would be required for market participants and the Fed to gather sufficient information to reduce the uncertainty surrounding the global growth outlook and to ease financial conditions. We believe that a gradual rate increase implied by such a cautious policy posture would bring the federal funds rate to 1 percent by end-2016, 1.5 percent by end-2017, and 2.25 percent by end-2018.

* * *

There are a few things to note here.

Citi seems to have not taken seriously the idea that a Fed hike would almost certainly serve to push EM over the edge. That is, when they say that "there is little evidence that an emerging markets-led global slowdown would be able to generate sufficient drag to warrant delaying normalization, unless it were severe and engaged the advanced economies as well," they seem to be ignoring the fact that hiking would have made just the type of slowdown they're talking about a virtual certainty which would have then fed back into DMs causing the Fed to immediately reverse course.

Second, the Fed isn't operating in a vacuum and as such, it should come as no surprise that developments in China played a prominent role in the FOMC's decision making. That said, Citi is probably correct to say that considering Beijing's track record of late, waiting on China to stabilize before hiking may be a fool's errand. Similarly, the fact that, as Citi says, "excess supply conditions in commodity markets depressing EM growth and US inflation likely will not dissipate quickly," means justifying a hike could be difficult for the foreseeable future.

The implications from all of this are that the world will now plunge further into the monetary Twilight Zone. That is, with the Fed on hold, the ECB may be forced to cut further, which, as we discussed on Thursday evening, means the Riksbank, and then the SNB will need to follow suit, diving further into NIRP as everyone scrambles to ensure that a foreign central bank's double-down-dovishness doesn't jeopardize their own domestic inflation targets.

Needless to say, the takeaway here is that the emperors (all of them) have no clothes and this is a never ending race to the NIRP bottom. For those interested in a preview of what comes next, see here (or ask Blythe Masters).

[Fenix]

Weekend Reading: Fed Rate Failure
09/18/2015 16:35 -0400
Submitted by Lance Roberts
Over the last year, I have written extensively about how despite the Fed's best intentions to raise rates, the real economic backdrop would likely impose a major impediment in doing so. However, I also suggested that with the Fed now caught in a liquidity trap, they would potentially hike rates to avoid being caught at zero during the next economic downturn. To wit:

"Currently, there is little evidence that is supportive of higher overnight lending rates. In fact, the current environment continues to support the idea of a 'liquidity trap' that I began discussing in 2013.



'...a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war.



Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in general price levels.'



Please review the chart on monetary velocity above. This is a major issue for the Federal Reserve, which remains firmly committed to a line of monetary policies that have had little effect on the real economy.



While the Federal Reserve clearly should not raise rates in the current environment, there is a possibility that they will anyway - 'data be damned.'(Which is ironic for a 'data dependent Fed.')



They understand that economic cycles do not last forever, and that we are closer to the next recession than not. While raising rates would likely accelerate a potential recession and a significant market correction, from the Fed's perspective if just might be the 'lesser of two evils.' Being caught at the 'zero bound' at the onset of a recession leaves few options for the Federal Reserve to stabilize an economic decline. The problem is that it already might be too late."

The current surge in deflationary pressures is not just due to the recent fall in oil prices, but rather a global epidemic of slowing economic growth. While Janet Yellen addressed this "disinflationary" wave during her post-meeting press conference, the Fed still maintains the illusion of confidence that economic growth will return shortly.

Unfortunately, this has been the Fed's "Unicorn" since 2011 as annual hopes of economic recovery have failed to materialize.

FOMC-Forecasts-GDP-031915

"The problem for the Federal Reserve is that they are still looking for that elusive economic recovery to take hold after more than five years. Unfortunately for the Fed, economic recovery cycles do not last forever, and the clock is ticking."

This weekend’s reading list is dedicated to the views surrounding the latest Fed announcement. What are they really saying? What impact does that potentially have for the markets? And what will they do if a recession rears its head?
THE LIST

1) Federal Reserve And Economy Stands Pat by Steve Forbes via Forbes

“THE FEDERAL RESERVE'S announcement that it will continue to suppress interest rates is going to harm the economy. We won't be breaking out of the rut we're in, which is bad news for us and the rest of the world.



The Federal Reserve thinks its zero-interest-rate policy stimulates the economy, but it's actually doing the opposite. It's the equivalent of bleeding an anemic patient.



In a nutshell, if a product can't be properly priced, you get less of it, and you get distortions in how that market operates. Alas, our central bank remains obtusely ignorant of this basic truth.”

Read Also: Fed Gives Economic Growth A Chance by Editorial Board via NY Times



2) Central Banks Missing What They Don't Know by Jeffrey Snider via Real Clear Markets

“It was no surprise the FOMC failed to find its own exit this week given that a few days earlier Deutsche Bank announced yet another restructuring including massive layoffs. It doesn't appear as if any of those job cuts will be applied to US operations, which seems to render this a quite curious correlation with domestic monetary policy. If you like, you can substitute Citigroup's 5% decline in FICC "revenue" this quarter, or Jefferies Group 50% collapse in fixed income losses (tied to the corporate bond bubble, no less). It's all one and the same.



On the surface, the relationship between banking and the Fed seems to be just that straightforward. In very general terms, interest rate targeting is supposed to reduce the "cost" of funds for banks so that they can "earn" a greater spread to the assets they hold or will hold. If only it were as easy as economists believe.”

Read Also: Janet Yellen Did The Right Thing by John Cassidy via The New Yorker



3) Negative Rates Coming To The U.S.? by Tyler Durden via ZeroHedge

“Of course, this should come as no surprise to our readers: just in January we wrote "Get Ready For Negative Interest Rates In The US", but for the Fed to admit this possibility just when it was widely expected to at least signal a rebound in the economy with the tiniest of rate hikes, or at worst a hawkish statement, was truly a shock.



This is what she [Janet Yellen] said:



'Let me be clear that negative interest rates was not something that we considered very seriously at all today. It was not one of our main policy options.'



'I don't expect that we're going to be in a path of providing additional accommodation. But if the outlook were to change in a way that most of my colleagues and I do not expect, and we found ourselves with a weak economy that needed additional stimulus, we would look at all of our available tools. And that would be something that we would evaluate in that kind of context.'”

FOMC-negative

Read/Watch Also: Ray Dalio Worried About Downturn by Katherine Burton via BloombergBusiness



4) Fed Delay's Interest Rate Lift-Off by Jon Hilsenrath via WSJ

"The decision left uncertain for a while longer just when the Fed would raise its benchmark rate, which has been near zero since December 2008. Most of the policy makers at the meeting, 13 of 17, indicated they still expect to move this year, but that was down from the 15 who held that view in June. The central bank has two more scheduled policy meetings this year, in late October and mid-December.



One reason for the shifting outlook: Officials have become a bit less optimistic about the economy's long-run growth potential. They projected the economy will grow at a rate between 1.8% and 2.2% per year in the long-run, down from their June estimate of growth of 2.0% to 2.3% in the long-run. A more lumbering economy has less capacity to bear much higher rates."

Read Also: Fed To Economy: Party On, Not So Excellent by Brian Doherty via Reason.com



5) A Roadmap For Stocks After No Rate Hike by Michael Kahn via Barron's

"Given the volatility levels today, it is important to step back to look at the bigger picture. After all, the major trend and structure of the market provides the framework within which the short-term condition operates.



For example, if the bull market is still intact, then the spin on the Fed news will be positive even if on the surface it seems it is not. And if this is a bear market, then the spin will most likely be bad. Stocks should fall further.



While the bull market seems to be over, thanks to a rather convincing breakdown of the major trendline and 2015 trading range, I do not yet see enough evidence to conclude this is a major bear market (see Chart 1). I need one more price breakdown to get there."

Kahn-Market-091815

Read Also: Fed Makes Same Mistakes As It Did In 1927 by Martin Armstrong via Armstrong Economics
Other Reading

* Fraud, Fools And Financial Markets by Robert Shiller via Project Syndicate
* Something's Askew In This Market by Dana Lyon via Dana Lyon's Tumblr
* The Future And How To Survive It by Dobbs, Koller and Ramaswamy via HBR
* It's Not Easy by Howard Marks via Oaktree Management
* The Fed Has No Control by Dr. John Hussman via Hussman Funds

“Nothing is more suicidal than a rational investment policy in an irrational world.” – John Maynard Keynes

Have a great weekend.



Wanna See The 'Trick' In Trickle-Down?
Submitted by Tyler D.
09/18/2015 - 15:50

The reality is that while most folks who are reading this may find it difficult to empathize, the vast majority of Americans are scratching for any extra $0.75 an hour they can find. At the same time CEO’s and highly paid bureaucrats continue to tout policies that have enriched themselves beyond the wildest dreams and comprehension of the average American. Yet they promote these
policies as being in the best interest of the working class.



And The NYSE Breaks 30 Minutes Before Quad-Witching Close
Submitted by Tyler D.
09/18/2015 15:37 -0400

Normally when the world needs an equity market boost, a broken market suffices to slam VIX and save the world. This time not so much.. and the carnage that this will cause into quad witch is frightening...

The Market Breaks...



But it doesn't work...



And...



It's Quadruple Witching Day. pic.twitter.com/MSkwcAXQnA

— Rudolf E. Havenstein (@RudyHavenstein) September 18, 2015

[Fenix]

Why The Fed's Credibility Is Crashing: The Market's Three Biggest Worries
Submitted by Tyler D.
09/18/2015 15:24 -0400

Early this week, when evaluating the likelihood of a Fed rate hike, we cited RBS' Alberto Gallo who said the "real reason to hike is another one: preventing the debt $-denominated overhangs from building up further – the burst of which would be, in turn, even more deflationary (and the same imbalances resulting from a financial boom can also reduce productivity, as discussed by the IMF). So if the Fed’s mandate is to worry about the medium-term and to target structural issues vs today’s asset prices, the right thing to do would be to hike. This is also what the majority of institutional investors think. But the Fed won’t."

Why not? Because the Fed itself realizes its credibility is fading fast and as RBS also showed as per a recent survey of its clients, a whopping 63% replied that the Fed is losing credibility. In other words, it has little to lose by doing what will erode its credibility that much more.

Yesterday the Fed confirmed this was the case when it once again chickened out of its first rate hike in 9 years and took the easy way out, one which however confirmed to everyone that the Fed is increasingly gambling with what precious little credibility it still has left. As a reminder, if and when the Fed loses all trust, its only recourse will be to print boxes of cash and paradrop them on the population. Pardon, boxes of paper because at that point the US reserve will be worthless.

We are not there yet, but as RBS notes in its follow up note today, "the price action in market today is negative, suggesting increasing worries."

According to Alberto Gallo, the biggest worries are the following:

1. The first is that by keeping rates lower for even longer, the EM imbalances the Fed is worrying about will grow even larger, making it harder to exit stimulus
2. The second is a question on the value of forward guidance, after the Fed has repeatedly called for a hike and then backed out
3. The third is that the Fed may have limited, or no ammunition to react to the next potential shock, and that financial booms and busts may grow even larger over time

Gallo's conclusion:

And as the IMF wrote recently in its World Economic Outlook, these booms and busts have structural – not cyclical – consequences on productivity, following misallocation of capital and human resources to leverage-heavy sectors (real estate, infrastructure), which following the bust create a drag on banks’ balance sheets and in the workforce.



Our US trading desk economist Michelle Girard says the Fed has missed its window, and now expects a first hike in March 2016. Together with our rates colleagues, we expect the ECB to react with more easing, increasing lengthening its QE programme, by year-end.



The world we are heading into is one of increasingly market-dependent central bank policy, and of decreasing returns for bondholders. The investor reaction function has clearly changed from QE-positive to worries about too much easing and its collateral effects.

Back in 2009 - when we commented on the arrival of global central planning - we warned this was coming. 6 years later, after the biggest transfer of wealth known to man with virtually no objections by those being pillaged blind, the cracks in the centrally-planned facade are finally appearing.

Additional thoughts from Gallo in the BBG TV clip below:



Europe's Ethnic (R)Evolution - It Will Never Be The Same Again
Submitted by Tyler D.
09/18/2015 - 15:10

Europeans are caught between being compelled to help - on what is truly a humanitarian catastrophe - and dealing with the uncertain consequences of bringing in such a large number of people. Part of that anxiety relates to the fact that the majority of those migrants adhere to Islam, where its relationship with Europe has been uneasy for many centuries. However, framing the debate in religious terms is too simplistic and overlooks some important facts. Whatever your view is, one thing is clear: Europe will never be the same again.


Russia Says It May Send Troops Into Combat In Syria As A Worried Netanyahu Heads To Moscow
Submitted by Tyler D.
09/18/2015 - 15:05

Foreign Minister Walid al-Moualem says Syria may officially request the support of Russian combat troops in the fight to take back the country, a move that would pave the way for the Kremlin to overtly declare that Russia has joined the war in support of Bashar al-Assad. Meanwhile, Israeli Prime Minister Benjamin Netanyahu will meet with Putin on Monday to discuss concerns that Russia's involvement could end up strengthening the military capabilities of Hezbollah. Lurking in the background: the man one CIA officer once called "the most powerful operative in the Middle East today"...


Martin Armstrong Warns: The Fed Just Made The Same Mistake As It Did In 1927

Submitted by Tyler D.
09/18/2015 14:55 -0400


Submitted by Martin Armstrong via ArmstrongEconomics.com,

1927-Secret-Banking-g4

The Federal Reserve yielded to international pressure making the very same mistake that it made during 1927.

Back then, there was a secret meeting and the Fed agreed to lower US rates to try to help Europe and thereby deflect capital inflows back to Europe.

The exact opposite unfolded in the aftermath and even more money abandoned Europe and flowed directly into the US share market.

Fed1920



In 1927, the Fed lowered US rates to try to help Europe which was then in the middle of an economic debt crisis the same as today.

It is very curious how history repeats and we have just witnessed the Fed yield to international pressure once again. In doing so, they are condemning US pension funds as well as the elderly to financial doom setting in motion the next financial crisis.

[admin]

17756.90 -22.62 -0.13%
Nasdaq 5074.30 -21.39 -0.42%
S&P 500 2089.39 -0.96 -0.05%
Russell 2000

[admin]

Reveal Navigation Options

1
LAST CHANGE % CHG
DJIA 17770.63 -8.89 -0.05%
Nasdaq 5077.85 -17.84 -0.35%
S&P 500 2090.93 0.58 0.03%
Russell 2000 1166.35 -12.37 -1.05%
Global Dow 2439.60 -14.59 -0.59%
Japan: Nikkei 225 18935.71 32.69 0.17%
Stoxx Europe 600 375.70 -0.13 -0.03%
UK: FTSE 100 6395.80 -42.00 -0.65%
CURRENCIES3:38 PM EDT 10/29/2015
LAST(MID) CHANGE
Euro (EUR/USD) 1.0976 0.0051
Yen (USD/JPY) 121.11 0.01
Pound (GBP/USD) 1.5313 0.0050
Australia $ (AUD/USD) 0.7076 -0.0037
Swiss Franc (USD/CHF) 0.9899 -0.0043
WSJ Dollar Index 89.06 -0.08
GOVERNMENT BONDS3:38 PM EDT 10/29/2015
PRICE CHG YIELD
U.S. 10 Year -21/32 2.176
German 10 Year -28/32 0.538
Japan 10 Year 0/32 0.294
FUTURES3:28 PM EDT 10/29/2015
LAST CHANGE % CHG
Crude Oil 45.74 -0.20 -0.44%
Brent Crude 48.49 -0.56 -1.14%
Gold 1146.6 -29.5 -2.51%
Silver 15.590

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Reveal Navigation Options

1
LAST CHANGE % CHG
DJIA 17770.63 -8.89 -0.05%
Nasdaq 5077.85 -17.84 -0.35%
S&P 500 2090.93 0.58 0.03%
Russell 2000 1166.35 -12.37 -1.05%
Global Dow 2439.60 -14.59 -0.59%
Japan: Nikkei 225 18935.71 32.69 0.17%
Stoxx Europe 600 375.70 -0.13 -0.03%
UK: FTSE 100 6395.80 -42.00 -0.65%
CURRENCIES3:38 PM EDT 10/29/2015
LAST(MID) CHANGE
Euro (EUR/USD) 1.0976 0.0051
Yen (USD/JPY) 121.11 0.01
Pound (GBP/USD) 1.5313 0.0050
Australia $ (AUD/USD) 0.7076 -0.0037
Swiss Franc (USD/CHF) 0.9899 -0.0043
WSJ Dollar Index 89.06 -0.08
GOVERNMENT BONDS3:38 PM EDT 10/29/2015
PRICE CHG YIELD
U.S. 10 Year -21/32 2.176
German 10 Year -28/32 0.538
Japan 10 Year 0/32 0.294
FUTURES3:28 PM EDT 10/29/2015
LAST CHANGE % CHG
Crude Oil 45.74 -0.20 -0.44%
Brent Crude 48.49 -0.56 -1.14%
Gold 1146.6 -29.5 -2.51%
Silver 15.590

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Chilena Codelco dice despedirá 8 pct de supervisores ante baja precio del cobre

SANTIAGO (Reuters) - La estatal chilena Codelco dijo el jueves que despedirá a un 8 por ciento de su planta de supervisores en medio de sus esfuerzos para reducir costos ante la persistente debilidad en los precios globales del cobre.

El anuncio se suma a la desvinculación del 15,6 por ciento de sus ejecutivos y la intención de profundizar sus ahorros para cumplir con exigencias del Gobierno en momentos que la empresa requiere ingentes recursos para financiar sus inversiones.

La decisión afecta a unos 350 supervisores.

"La medida significa una reducción de su dotación de supervisores en un 8 por ciento, considerando a todas las divisiones y centros de trabajo de la Corporación, lo que permitirá una disminución de sus costos en 48 millones de dólares anuales", explicó en un comunicado.

La firma ha asegurado que los recortes no afectarán sus llamados "proyectos estructurales", con los que busca contrarrestar el declive natural en las leyes minerales de sus depósitos.

En la víspera, el Gobierno anunció una capitalización a la firma por 600 millones de dólares en cumplimiento de una ley que prevé la entrega total de 4.000 millones de dólares en el quinquenio, ajustada al cumplimiento de metas de producción y reducción de costos.

Originalmente el plan de inversiones de Codelco alcanzaba los 25.000 millones de dólares en el período 2014-2018, lo que se reajustó a entre 21.000 a 22.000 millones de dólares por una ralentización anunciada por la empresa a la que se sumaron efectos cambiarios.