Taking an exit from the labor force: Over the last ten years 16 million Americans have dropped out of the labor force.
I will tell you there has only been one false signal from Dow Theory (DT) over the past 15 years and that was a false “sell signal” generated by the Flash Crash in May of 2010; and, that was quickly reversed with a “buy signal.”
U.S. President Barack Obama said recently that he had no strategy as yet toward the Islamic State but that he would present a plan on Wednesday. It is important for a president to know when he has no strategy.
Tech bloggers and reporters have written so much about the “internet of things” (IoT) that the phrase is beginning to get tired. However, we believe the IoT is one of the most significant investment-related technology themes.
As Russia’s direct incursion in Ukraine’s Southeast elevates the conflict to a new and more dangerous level, the clash in the Eastern Europe is nowhere near its conclusion. As a result, Washington and Brussels may impose further sanctions on Russia, with potentially dire effects.
While Uber faces lawsuits and blockades around the world, it appears Toronto just took the Taxi 2.0 experience to a whole new level. Deadmau5, the famous Canadian DJ, is the latest to become an Uber X driver, and as Jalopnik shows below, he turns up in his brand new Mclaren 650S to pick up a few fares...
in toronto? need a lift? I'm working for @uber tonight, downtown toronto. get lucky.
— deadmau5 (@deadmau5) September 11, 2014
— deadmau5 (@deadmau5) September 9, 2014
Deadmau5 Drives for UberX
Picking up a fare...
And some images...
— Ciara Mc Donnell (@ciara_mc_d) September 11, 2014
— Frederique Dame (@fffabulous) September 11, 2014
Despite promises that inflation is "contained," the dollar ain't quite what it used to be...
First it was the 'broad coalition' that appeared a little narrower than President Obama explained to the world last week. Today, 2 more crucial aspects of the 'strategy' appear to be faltering. Despite the promise of $500 million to train "moderate" Syrian terrorist/rebels to fight ISIS, GlobalPost reports Syrian rebels and jihadists from the Islamic State have agreed a non-aggression pact for the first time. Under the deal, "the two parties will respect a truce until a final solution is found and they promise not to attack each other because they consider the principal enemy to be the Nussayri regime." Not exactly what Obama and Kerry had in mind. But it is John Kerry's trip to Iraq that appears to have had blowback already as Reuters reports the newly installed US-friendly PM al-Adadi ordered his air force to halt strikes on civilian areas, "even in those towns controlled by ISIS," just a day after Kerry's visit (which left Turkey explaining how it would not support US airstrikes either). So far, so good?!
So, to sum up...
Germany and the U.K. on Thursday ruled out carrying out air strikes on Islamic State militants in Syria, a day after President Barack Obama authorized the start of U.S. air strikes there.
"We haven't been asked, nor will we do it," German Foreign Minister Frank-Walter Steinmeier told reporters when asked about German participation in air strikes against the Islamic State, known as ISIL or ISIS, in light of Mr. Obama's speech.
"We need to be honest with ourselves in the current situation, we don't yet have a final, blanket strategy which guarantees that we'll be successful against ISIS and similar groups," the German minister said in Berlin.
His U.K. counterpart Philip Hammond explicitly ruled out air strikes in Syria, after the U.K. parliament struck down such a move last year.
* * *
Second, Turkey - the USA's closest ally in NATO among the Middle East - denies them its airbases for use as launch sites of airstrikes and will not support airstrikes in Syria (after John Kerry visits)
US Secretary of State John Kerry arrived in Ankara Friday for talks aimed at building a coalition against Islamic State jihadists, a visit that comes after Turkey said it would not allow its air bases to be used for strikes on the extremists.
The top US diplomat, touring the Middle East to establish a coalition of more than 40 countries, is to meet with Turkey's leaders including President Recep Tayyip Erdogan for talks on measures to defeat the militants in Iraq and Syria.
Turkey, a NATO member and Washington's key ally in the region, is reluctant to take part in combat operations against Islamic State militants, or allow a US-led coalition to attack jihadists from its territory.
On the eve of the visit, a Turkish official told AFP: "Our hands and arms are tied because of the hostages."
The official added that Turkey will "not be involved in any armed operation but will entirely concentrate on humanitarian operations."
IS militants hold 49 Turks hostage, including diplomats and children, abducted from the Turkish consulate in Mosul in Iraq in June.
Turkey is the only Muslim country in a coalition of 10 countries who agreed to fight ISIS at the NATO summit in Newport.
Turkey can open Incirlik Air Base in the south for logistical and humanitarian operations in any U.S.-led operation, according to the official who stressed that the base would not be used for lethal air strikes.
“Turkey will not take part in any combat mission, nor supply weapons,” he said.
* * *
As Reuters reports,
Iraq's Shi'ite Prime Minister Haider al-Abadi said on Saturday that he had ordered his air force to halt strikes on civilian areas.
"I have ordered the Iraqi Air Force to halt shelling of civilian areas even in those towns controlled by ISIS," Abadi said on his official Twitter account, using the former name for militant group Islamic State.
U.S. Secretary of State John Kerry has been touring the Middle East to coordinate a response to Islamic State's growing power in eastern Syria and western Iraq.
Abadi said his order to protect civilians had been issued on Thursday, a day after he held talks with Kerry in Baghdad.
* * *
Finally, The USA's proxy boots-on-the-ground - Syria's "moderate" rebels - have signed a non-aggression truce with ISIS.
Syrian rebels and jihadists from the Islamic State have agreed a non-aggression pact for the first time in a suburb of the capital Damascus, a monitoring group said on Friday.
The Syrian Observatory for Human Rights said the ceasefire deal was agreed between IS and moderate and Islamist rebels in Hajar al-Aswad, south of the capital.
Under the deal, "the two parties will respect a truce until a final solution is found and they promise not to attack each other because they consider the principal enemy to be the Nussayri regime."
But apart from that, everything is going great...
* * *
We're gonna need a new strategy.
Submitted by Simon Black via Sovereign Man blog,
What’s the easiest way to make a 500x return on investment?
You might be inclined to say, “Buy silver” or “invest in a successful startup while it’s still a privately held company.”
But if you’re a major Fortune 500 company, you generate a 500x return on investment by buying off politicians.
A prime example of this is H.R. 4950: Protecting American Jobs and Exports Act, which aims to reauthorize the US Export-Import Bank for another seven years.
First, some background. The little-known Export Import bank in the Land of the Free (Ex-Im Bank) was created during the Great Depression by Presidential executive order under FDR.
Few people have ever even heard of this bank, let alone have a clue what it does.
Officially, Ex-Im Bank is a banking corporation organized under the laws of the District of Columbia, and its capital stock is held by the United States of America.
The bank’s primary mission is to finance trade. More specifically, it provides loans to foreigners who want to buy American products.
So if you’re a Malaysian company that wants to buy a bunch of vehicles from GM, Ex-Im Bank might just float you a loan, funded and guaranteed by the US taxpayer.
The intention was to make American goods cheaper for foreign companies to buy, thus encouraging American exports. And of course, to create jobs. Always the jobs.
(In fact, there’s a bill on the floor of Congress right now to change the name of the bank to the “Made-In-America Bank”. Ufff. Cheesy.)
But who is Ex-Im really helping? Let’s look at the numbers.
Ex-Im Bank brags that they have financed exports worth nearly $200 billion over the last five years.
That certainly sounds like a lot. But at $40 billion per year, it’s a drop in the bucket compared to the $1.57 trillion that was exported from the US last year alone.
That said, research by George Mason University’s Mercatus Center showed that an astounding 76% of Ex-Im Bank’s loan portfolio directly benefited fewer than 10 huge corporations, including familiar favorites like General Electric and Boeing.
Even the government’s own Congressional Research Service found that in FY 2010, “more than 60% of Ex-Im Bank’s loan guarantees, by dollar value, supported the sale of Boeing airplanes in foreign countries.”
In fact, last year alone, Boeing received $8.3 billion in financing for its products from the Ex-Im Bank. This translates directly into sales worth roughly 10% of the company’s 2013 revenue.
So while Ex-Im doesn’t really do jack squat for the economy, they’re really moving the needle for a handful of favored companies. Especially Boeing, the bank’s #1 beneficiary.
And Boeing’s getting a pretty fantastic deal for it. According to OpenSecrets.org, Boeing spent $15.2 million on lobbying in 2013. For the $8.3 billion they received, that’s a 54,539% return on investment. Not too shabby.
Needless to say, Boeing has a huge incentive to maintain this special relationship.
That would likely explain why just in the second quarter of 2014, Boeing spent over $4.18 million on lobbying for this bill to be passed.
You see, Ex-Im Bank’s charter is due to expire at the end of this month. And HR 4950 ensures that the bank will keep operating for seven more years.
More importantly, if this bill gets passed, Ex-Im Bank’s funds will be increased by an additional $5 billion each year for at least the next seven years. Naturally the taxpayer is on the hook for all of this.
So each penny that Boeing has spent on lobbying is looking like a smarter and smarter investment.
This is how the system works, plain and simple. It’s rigged for the benefit of politicians and corporations at the expense of the individual.
Politicians get money to finance their campaigns and keep themselves in power.
Corporate leaders get their fat bonuses for hitting the numbers.
Even the bureaucrats at Ex-Im Bank have managed to line their pockets (prompting a Congressional corruption probe into the bribery of several bank employees, and Board of Director ‘conflicts’.)
As you can see, it’s a win-win situation! Except for the little guy, of course.
This is reality in the Land of the Free.
When the Buffalo Bills play their home opening game, the team will be without its cheerleading squad -- the Buffalo Jills, for the first time since 1967. The squad has been suspended because some former cheerleaders are suing the team claiming wage theft. What does an NFL cheerleader cost? Bloomberg Businessweek's Ira Boudway looks at the math.
* * *
Remember, $15 per hour for burger-flippers is considered a 'fair' livable wage by the President... so how much is "fair" for these talented young ladies?
Rather disturbingly, ISIS had just announced the execution of another captive:
- *ISLAMIC STATE RELEASES VIDEO SHOWING BEHEADING OF DAVID HAINES
As Bloomberg reports,
Video is similar to ones in which James Foley, Steve Sotloff were killed, SITE says.
Jihadist monitoring website comments on today’s beheading in statement on its website
British captive David Haines, who SITE says is beheaded in video, addresses U.K. PM Cameron in video
Video purportedly shows David Haines saying he holds David Cameron "entirely responsible" for his "execution" before being murdered
“You entered voluntarily into a coalition with the United States against the Islamic State, just as your predecessor Tony Blair did, following a trend amongst our British prime minister who can’t find the courage to say no to the Americans,” SITE quotes Haines as saying
SITE says executioner appears to be same as in previous videos.
“IS Beheads Briton David Haines, Threatens to Execute Another Briton, Alan Henning,” SITE Intel Group says on Twitter.
- *ISLAMIC STATE THREATENS TO EXECUTE BRITISH HOSTAGE HENNING:SITE
- *SITE SAYS BEHEADING VIDEO ENTITLED `A MSG TO ALLIES OF AMERICA'
- *SITE SAYS VIDEO SIMILAR TO BEHEADINGS OF FOLEY, SOTLOFF
- *SITE COMMENTS ON TODAY'S BEHEADING IN STATEMENT ON ITS WEBSITE
- *HAINES ADDRESSES U.K.'S CAMERON IN VIDEO, SITE SAYS
- *SITE SAYS EXECUTIONER APPEARS TO BE SAME AS IN PREVIOUS VIDEOS
* * *
* * *
Isis photos appear to show murder of british hostage. Same Desert location. Masked man. Beheading. Disgusting.
— Richard Engel (@RichardEngel) September 13, 2014
Sounds like same british accented voice of masked militant in isis beheading video of british hostage.
— Richard Engel (@RichardEngel) September 13, 2014
In London, the Foreign Office has said it is aware of the video and “working urgently to verify” its content.
Haines, who was 44, was kidnapped last year. He had been in Syria for just three days when he was kidnapped and handed over to Isis militants.
The aid worker was taken while working for Acted in Syria in March 2013.
* * *
The 44-year-old Haines has a teenage daughter in Scotland from a previous marriage and a four-year-old daughter in Croatia from his present marriage.
Educated at Perth Academy secondary school, he has worked for aid agencies in some of the world's worst trouble spots.
He was in Libya during its civil war in 2011, working as head of mission for Handicap International, which helps disabled people in poverty and conflict zones around the world.
* * *
British PM Cameron responds:
- *DAVID HAINES MURDER ’ACT OF PURE EVIL’: CAMERON ON TWITTER
- *’WE WILL DO EVERYTHING TO HUNT DOWN THESE MURDERERS’: CAMERON
- *U.K.'S CAMERON SAYS ACT WAS `DESPICABLE AND APPALLING MURDER'
- *CAMERON SAYS CABINET MEETING ON MATTER TO BE HELD SUNDAY
Ever since the Lehman bankruptcy, one of the main reasons given by the perpetual apologists about why i) the so-called "recovery" has been the worst in US history and ii) the Fed has been "forced" to conduct 6 years of wealth transferring policies, boosting the stock market to all time highs and creating a record wealth split in US society between the super rich and everyone else (one that surpasses even that seen during the roaring 20s) is that the US consumer, scarred by the economic crash, has been rushing to deleverage and dump as much debt as possible.
There are two problems with that story:
- First, as we first pointed out in 2012, US households are not deleveraging, they are defaulting, a huge difference which goes to motive and intent, and shows that instead of actively paying down debt households are instead loading up on as much debt as they can, which at some point they simply stop servicing (for a detailed analysis of this disturbing trend, read our series on the student loan bubble).
- Second, when it comes to the poorest quartile of US society, some 14 million people, it is dead wrong. In fact, as the Fed's triennial Survey of Consumer Finances, released last week showed, America's poorest have never been more in debt!
As usual, the full story is one of nuances. As Bloomberg reports, as a result of the first point - mass defaults - US household debt has indeed declined on an average basis. Indeed, average debt burden for all families stood at about 105% of pretax income in 2013, down from about 125% in 2010 and the lowest level since the 2001 survey.
Of course, since economists are unable to grasp the difference between default and deleveraging, one look at the chart above gives them reason for hope. As Bloomberg summarizes:
The improved finances, along with more recent signs that consumers are feeling comfortable about borrowing again, has given some economists cause for optimism: The more progress households make in getting out from under their debts, the logic goes, the greater the chances that renewed spending will boost growth.
In reality, the "improved finances", namely those tens of trillions in financial assets that have been artificially reflated courtesy of the Fed's monetary policies, have benefited the tiniest sliver of US society - about 1% or less depending on whose calculations one uses. Everyone else, the bulk of US society, was forced to simply stop paying down their credit card and thus "delever."
But for a good perspective of what the part of society that is at the opposite end of the 1%, namely those 14 million or so Americans who comprise the poorest quartile of households, look no further than the chart below, which shows just what Americans are really doing up until that point where default does equal "deleveraging", even if it means loss of access to all credit for a period of several years:
From Bloomberg: "The poorest quartile of families is the only group that owes more than it owns. Thanks to declines in the value of assets, the group's average leverage ratio -- debt as a percent of assets -- increased to 137.5 percent in 2013, the highest on record since the survey started in 1989."
And there you have it - not only is America not actively delveraging, on the contrary, it is loading up on as much debt as it possibly can (or banks will allow it judging by the decline in mortgage-type debt, driven mostly by supply constraints and qualification factors) until the band snaps and in a perverse circle of illogic, releveraging becomes default becomes deleveraging.
Bloomberg has some ideas here, including commenting on the one observations we have been making since 2011: the relentless rise in installment debt, i.e., student and car loans:
There are various possible explanations for the poorest families' financial predicament. Incomes have declined, making debt burdens look worse. Some previously wealthier people probably migrated into the group as the value of their homes fell below what they owed on mortgages. More ominous is a steady increase in installment debt, a category that includes both student and auto loans -- areas that have recently seen a lot of questionable lending to lower-income borrowers.
Whatever the drivers, the data suggest that the 2008 crisis and subsequent economic malaise have left a troubling legacy: A group of the poorest families, numbering roughly 14 million, whose precarious finances make them vulnerable to shocks and limit their ability to contribute to future growth. That's hardly a strong foundation for a healthy recovery.
But mass "deleveraging" is good, they said. It means tons of pent up releveraging and recovery, they said...
While the lying is understandable - after all confidence must be rebuilt at all costs - what is worse is that the Fed believes it can withdraw from QEasing because it is convinced that US society as a whole is able to take on more debt, when in reality a record number of Americans are locked out of the debt market (due to recent or imminent defaults) for years. As a result the Fed's entire logic for pulling out of the market is based on an epically flawed assumption. Which is why, as we explained back in late 2013, we give the Fed a few months of POMO-ess shock and awe for the S&P500 mixed with fears of what a rate hike will do to the market, pardon economy, before the Untaper and the reZIRP fully enter the financial lexicon.
Finally, while we have shown this chart in the past, here it is again. It really does explain everything.
Presented with no comment...
Courtesy of Finanz und Wirtschaft, interview by Christoph Gisiger
Wall Street veteran Art Cashin does not fully trust the record levels at the stock market and draws worrisome parallels between the geopolitical tensions over Ukraine and the Cuban missile crisis.
From the assassination of President Kennedy via the stock market crash of 1987 and the Fall of the Berlin Wall through to the burst of the dotcom bubble, the terror attacks of 9/11 and the collapse of Lehman Brothers: Art Cashin has experienced all the major world events of the last half century at the floor of the New York Stock Exchange. Currently, the highly respected Wall Street veteran keeps a close eye on the geopolitical tensions in the Middle East and on the situation in Ukraine which reminds him of the Cuban missile crisis «The markets are edgy and nervous», says the Director of Floor Operations for UBS Financial Services while constantly checking the quotation board. Like many traders here, he is somewhat skeptical of the huge stock market rally that started in March 2009. «I think it is a question of the extraordinarily low interest rates», he explains.
Mr. Cashin, September is historically the most difficult month of the year for equities. What is your take on September 2014 so far?
It is strange that September still lingers as a particularly weak month. It goes back to when America was more of an agrarian society and we depended on what would happen with the crop cycles. If a cooking factory for example had to buy wheat from the farmers it would send a check out drawn on an account at a city bank and the country bank would then cash it and put the money in the farmer’s account. Before the Federal Reserve was created, there was a wide spread between the time that money was asked for and when it was replaced. For centuries, this caused bank panics around this time of the year, most notably the panic of 1907. You would think that now that we are no longer an agrarian society, those changes would ease up on the financial pressures. But the market has kind of an echo.
So what are traders talking about at the present time here at the New York Stock Exchange?
We are concerned about two questions. First, how will the Fed do in keeping money reasonably easy without causing inflation? Second, where do we stand with the current geopolitical challenges? For now, these challenges seem to be short term concerns. But should we begin to see a financial contagion and pressure building on banks in Europe, perhaps out of the Ukraine situation, things could theoretically turn into what I call a «Lehman moment». That is when markets come under pressure but seem to be under control, and then things change suddenly.
How do you handle these concerns in your daily business as stock market operator?
Having done this over half a century now, the market tends to have recurring cycles of some type or other. For example, at the beginning of the Cuban missile crisis no one thought that it would turn into a major event. Yet, as time went on and neither side relented, it began to look like we might be on the verge of a nuclear war. That had great reverberations in the financial markets. Then, finally the Russian convoy that was going to resupply the Cuban missiles turned and headed back. Immediately, the stock market began to rally on that sense of relief and that rally continued for months. So you can have these theoretical events – whether they are geopolitical or not – and you get two sweeping changes: First, you can get further and further pressure on prices. And then suddenly, when it releases, you can get almost a rocket shot to the upside.
What are the signals you are looking for to stay on top in such a market?
Over the years, we on the floor have taken to look at what we call the risk monitors. For instance, the yield on the 10-year Treasury note is usually an indicator for the flight to safety. People are looking to get over to the United States protected by the two large oceans. You also look at the gold market where people invest who are concerned that things are changing radically and who think they need some currency protection. And then, particularly in situations like this, you look at things like oil because that is inextricably involved with Russia and with the Middle East and what is going on with the Islamic terror organization ISIS.
And what are the risks monitors signaling?
Right now, it almost looks like peace is breaking out. The price of oil is sharply lower, both Texas West Intermediate and Brent. That indicates a lot less stress there. Although traders can be believers in conspiracies too. There is some wonder if perhaps Saudi Arabia and the United States are encouraging downward pressure on oil prices which would in turn put pressure on Russia and limit the availability to finance what they are doing. So there may be either market forces or government forces behind this.
And how stable is the situation on the stock market? Equities have stalled somewhat lately. Nevertheless, at the End of August the S&P 500 closed over 2000 for the first time and so far equities have performed quite well this year again.
I think it is a question of the extraordinarily low level of interest rates. There are very few places that investors can go to and get some return. So some people are using historic yard sticks and they are saying: «If rates are this low and the economy is this okay then the value of stocks should go higher.» But some of us question that since rates are artificially low.
So what is your take on those super low rates?
I think it means that there are still deflationary pressures out there and that the central banks all around the world are fighting off that deflation risk by keeping rates low. Rates are incredibly low in Europe, they are incredibly low in Japan, they are incredibly low in England and in the United States. That drives people to look at some other avenue to get a return and they have been driven into the stock market.
With the looming end of the QE3 program, the stock market soon will have to pass an important test. But surprisingly, in contrast to the end of QE1 and QE2 investors do not seem to be so nervous this time.
But we are seeing a rather similar reaction in the bond market. Perversely, when they ended the earlier QEs, treasury yields went down instead of going up. So we are seeing a little of that. I think the reaction of the stock market has to do with something that is referred to as the Greenspan put, and later as the Bernanke put. Investors believe that the Fed is concerned about its own independence and therefore it cannot let anything drastic happen. Our government has not been able to do anything on a fiscal basis. So the Fed has gone out and developed tons and tons of access free reserves. If that fails the central bankers know that it will be quite convenient for all the politicians to point the finger at the Fed. Hence, not only is the Fed interested in maintaining the economy but also in its own independence.
During your career on Wall Street, you have seen the coming and going of several Fed chiefs. How would you grade Janet Yellen so far?
I think it is a little too early to tell because she has not been fully able to implement her policies. We have not been done with the taper and she has not clearly defined what yardsticks or mileposts she is using. She is a scholarly woman and has done a great deal of studying, like Mr. Bernanke. Also, I have a new person to look at in the Fed and that would be Stanley Fischer. He brings a lot of experience in as vice chairman. As we begin to look at his speeches and comments, we will see that he is going to have an enormous influence and we may be begin to see him helping Ms. Yellen. He is not going to confront her but helping her to, perhaps, understand why things have to change a little.
With the end of QE3 and the return to a somewhat more traditional monetary policy, investors will likely put their focus more on the fundamentals like revenues, profit margins and earnings. In what shape is Corporate America?
That is one of the great debates here. It really breaks down to on what do you view the stock market is based on. On one side, there are the skeptics. They look at macroeconomics like the GDP numbers, the unemployment rate and a variety of other things. Those people tend to have been skeptical all the way through this rally. On the other side, there are the believers in the stock market and the recovery. They have seen the earnings go up and have been spot on so far. But there is a couple of asterisks that you have to put in. Thanks to the low interest rates, companies are finding that they can improve their balance sheets and they are buying back their own shares. So even when you are earning a little less money, if there are fewer shares around, than the price earnings ratio looks pretty good. That is why the critics of the stock market say that it is all part of financial engineering. Nevertheless, the supporters will respond: «Well, here is the earnings and we are at seventeen times earnings and that is very good for us.»
On what side of this debate are the traders here on the floor at?
The view of the traders is a slight degree of skepticism. As I say, having done this over fifty years, traders are always making sure they know the way out. When I go into a room, the first thing I look for is the exit sign. So when things turn bad I know which way to go.
Also, some skeptics argue that you cannot trust this really since it is based on unusually low trading volumes. Especially at the end of August we have seen some of the lowest volume days over the past seven years.
Over the years, I was always thought that volume equals validity. Just as you would not want to elect a president with only ten or twelve people voting. You want to see a broad consensus. Likewise, you would like to see a broad consensus on what is going on at the stock market. But these days, some of that lack of volume is structural. We have new products like Exchange Traded Funds. So you can with one purchase buy the five hundred stocks in the S&P 500 instead of the five hundred transactions that would have taken place in the past. That contributes to a lower volume, too.
How did the trading business change over the last few years in general?
We are going through a transition into automated electronic trading and we are still adapting to that. The new owners of the New York Stock Exchange, the Intercontinental Exchange, said that they would like to revamp what is going on, change some of the rules and perhaps produce a little more visible activity. I for one miss some of the old trading, especially the simple things. When there was a big crowd, noise would tell me things. When the noise level picked up I would know the activity is picking up. And if you are doing it as long as I am, you could almost tell by the pitch of the noise whether they were buyers or sellers: The buyers sound a little more like a Russian chorus. The sellers, on the other hand – I guess because they were nervous – would have a higher pitch when they shout «Sell! Sell! Sell!»
Today, the silent machines of high frequency traders do most of the trading. How do you cope with those superfast computers and highly sophisticated algorithms?
They may be faster but they are not necessarily smarter. Sometimes an old dog can still learn variations of new tricks and get things done. They might get the first step out of the building but you have to think on behalf of your clients what other impact will that have. If they are doing something in General Motors, what does it mean to Ford or someone else? So in this business, your clients expect you to be able to relate something that is happening in a particular stock with something in the rest of the market.
In May of 2010, the Flash Crash made the world suddenly aware of what can happen when robots are in charge in the trading arenas. How vulnerable is the US stock market today to a similar threat?
I am, of course, prejudiced. I prefer the trading system that we have had through the years. Here on the floor, not one stock traded at a penny during the Flash Crash. That was only in the electronic markets. And that was because here were humans who looked at each other and said: «That does not make any sense. There is no news out, there is no event. Let’s slow down and see where things are going.» As a consequence, the prices here on the floor tended not to be distorted in a manner that they were in other places. So as far as market structure is concerned, I think it is very helpful to have humans around. I prefer that somebody is watching the market as trades are being executed – just as I would not want to fly in an airplane with no pilot.
Submitted by Raul Ilargi Meijer via The Automatic Earth blog,
The topic of potential interest rate hikes by central banks is no longer ever far from any serious mind interested in finance. Still, the consensus remains that it will take a while longer, it will take place in a very gradual fashion, and it will all be telegraphed through forward guidance to anyone who feels they have a need or a right to know. Sounds like complacency, doesn’t it?
Now, it seems obvious that the Bank of Japan and the ECB are not about to hike rates tomorrow morning. In Europe, dozens of national politicians wouldn’t accept it, and in Japan, it would mean an early end to many things including Shinzo Abe.
But the Bank of England and the Fed are another story. Though if the Yes side wins in Scotland next week, the narrative may change a lot of Mark Carney and the City. That leaves the Fed. And it’s important to realize and remember that, certainly after Greenspan entered the scene, speaking in tongues, the Fed has become a piece of theater. The Fed is about perception. About trying to make people believe something, and make them act a certain way that they choose for them.
That’s why after the Oracle left they pushed first a bearded gnome and then a grandma forward as the public face. The kind of people nobody would perceive as a threat. Putting a guy who looks like second hand car salesman in charge of the Fed wouldn’t work.
Not when a big financial crisis looms, and then continues on for a decade and counting. That makes keeping up appearances the no. 1 priority. That’s when you want a grandma, or you’d lose your credibility real fast. You need grandma for your theater, for the next play you’re going to stage.
That market volatility today is at record lows is part of a big play, or a big scene in a play if you will. And the goal is not to make markets look good, as many people think. Making markets look good, making the economy look good, is just an intermediate step designed to lure everyone in.
You make people believe you got their back. All the big investors. Because they make tons of money, while they thought maybe the crisis could have really hurt them. Even the public at large feels you got their back. Because they don’t understand what the sleight of hand is.
The big investors understand, but you got them believing you will play that hand forever, or let them know well ahead of time when you intend to fold. The big investors think you will skim the public, but not them. They think you’re all on the same side. And the public thinks you’re healing the economy, and saving their jobs and homes and pensions.
When rate hikes are discussed, like I did two weeks ago in This Is Why The Fed Will Raise Interest Rates, most people have similar initial reactions. ‘They can’t do that, it would kill the economy, or at least the recovery’.
But the truth is, there is no recovery. It’s just a scene in a play. And the economy is completely shot, it only appears to be left standing because the Fed poured oodles of money into it. Or rather, into a part of the economy that it can control, that it can get the money out of again easily: Wall Street banks. And Wall Street equals the Fed.
Charles Hugh Smith, in What If the Easy Money Is Now on the Bear Side?, notices that there are hardly any bears left in the market, and that shorts are disappearing as a source of revenue for bulls. Interesting, but he doesn’t yet connect all the dots. CHS thinks big money managers can make ‘the play’, that they can fool the rest of the market and unleash a tsunami that will bury the bulls.
I don’t think so. I think what goes on is that the Wall Street banks, many times bigger than the biggest money managers, see their revenues plunge. As they knew they would, because free money and ultra low rates are not some infinite source of income, since other market participants adapt their tactics to those things as well.
Which is what Charles Hugh Smith points to, but doesn’t fully exploit. And it’s not as Wolf Richter presumes either:
After years of using its scorched-earth monetary policies to engineer the greatest wealth transfer of all times, the Fed seems to be fretting about getting blamed for yet another implosion of the very asset bubbles these policies have purposefully created.
The Fed doesn’t fret. The Fed has known for years that the US economy is dead on arrival. They’ve spent trillions of dollars backed, in the end, by American taxpayers, knowing full well that it would have no effect other than to fool people into believing something else than what reality says loud and clear.
Philip Van Doorn, who I quoted two weeks ago, got quite a bit closer in Big US Banks Prepare To Make Even More Money
For most banks, the extended period of low interest rates has become quite a drag on earnings. Net interest margins – the spread between the average yield on loans and investments and the average cost for deposits and borrowings – are still being squeezed, since banks realized the bulk of the benefit of very low interest rates years ago …
That is the essence, and that is why grandma will announce higher rates, against a backdrop of 4% GDP growth numbers and a plethora of other ‘great’ economic data and military chest thumping abroad.
The US economy is dead. The Fed has known this for a long time, but pumped it up to where it is now to draw in all the greater fools, the so-called big investors who have made money like honey from QE and ZIRP. They are the greater fools. The American real economy ceased being a consideration long ago.
We’re in for big surprises, and they won’t be pretty, they’ll be pretty nasty. There are far too many people who think of themselves as smart who don’t see the difference between a theater play and a reality show. And I don’t mean CHS or Wolf, they’re much more clever than your average investment advisor.
The Fed will raise rates because that will make the biggest banks the most money. There’s nothing else that matters. The Fed can’t revive the US economy, that’s just a foolish notion. But it can suck a lot of wealth out of it.
Just when we thought that the Fed is pulling an Obama and has "no strategy" to deal with what not some fringe blog but Deutsche Bank itself proclaimed was the bubble to end, or rather extend, all bubbles, when it said that "the bubble probably needs to continue in order to sustain the current global financial system" they surprise us once again when they report that, drumroll, the Fed has formed a committee led by the former head of the Bank of Israel - best known for using de novo created fiat money to buy AAPL stock as part of "prudent monetary policy" - Vice Chairman Stanley Fischer, to monitor financial stability, which according to Bloomberg is "reinforcing the Fed's efforts to avoid the emergence of asset-price bubbles."
Because contrary to what even five-year-olds know by now, the Fed is supposedly not promoting the emergence of bubbles but is actually "avoiding" them. No, really.
From Bloomberg on the Fed's committee for the prevention of asset bubbles:
Joining Fischer on the Committee on Financial Stability are Governors Daniel Tarullo and Lael Brainard, according to the central bank’s latest Board Committee list.
Fed officials want to ensure that six years of near-zero interest rates don’t lead to a repeat of the excessive risk-taking that fanned the U.S. housing boom and subsequent financial crisis.
“They’re putting the varsity team on it, but whether or not they’re going to be able to call bubbles better than anyone else is really is an open question,” Drew Matus, deputy U.S. chief economist at UBS Securities LLC in New York, said in an interview yesterday.
Sharpening the issue, measures of volatility across stocks, bonds and currencies worldwide have declined to record or multi-year lows this year, in a potential sign of investor complacency.
Fischer’s committee joins the Fed’s Office of Financial Stability Policy and Research, led by Nellie Liang, a senior Board economist, on the lookout for signs of market excess.
The creation of the new committee was reported earlier by the Wall Street Journal.
One purpose of the committee is to help ensure that staff working on financial stability issues can easily flag their findings at the Fed’s highest level.
Well, that explains it: all Bernanke needed when he infamously said in March 2007 that "subprime was contained", days after New Century imploded, was a "committee" - clearly then the biggest financial crash in history would have been avoided, and the Fed would have been on top of things.
Which it is now.
On top of things, that is.
Thanks to a committee.