Classic FX

[Depth Trade]

Goldman Sachs sold $250 million of BP stock before spill

By John Byrne
Wednesday, June 2nd, 2010 -- 10:12 am

goldman sachs logo Goldman Sachs sold $250 million of BP stock before spill

Firm's stock sale nearly twice as large as any other institution; Represented 44 percent of total BP investment

The brokerage firm that's faced the most scrutiny from regulators in the past year over the shorting of mortgage related securities seems to have had good timing when it came to something else: the stock of British oil giant BP.

According to regulatory filings, RawStory.com has found that Goldman Sachs sold 4,680,822 shares of BP in the first quarter of 2010. Goldman's sales were the largest of any firm during that time. Goldman would have pocketed slightly more than $266 million if their holdings were sold at the average price of BP's stock during the quarter.

If Goldman had sold these shares today, their investment would have lost 36 percent its value, or $96 million. The share sales represented 44 percent of Goldman's holdings -- meaning that Goldman's remaining holdings have still lost tens of millions in value.

The sale and its size itself isn't unusual for a large asset management firm. Wall Street brokerages routinely buy and sell huge blocks of shares for themselves and their clients. In light of a recent SEC lawsuit arguing that Goldman kept information about a product they sold from their clients, however, the stock sale may raise fresh concern among Goldman's critics. Goldman is also a frequent target of liberals and journalists, including Rolling Stone's Matt Taibbi, who famously dubbed the firm a "vampire squid."
Story continues below...

Two calls placed to Goldman Sachs' media office in New York Wednesday morning after US markets opened were not immediately returned, though Raw Story decided to publish the story quickly after the calls since the stock sale had been already noted online.
Others also sold stock

Other asset management firms also sold huge blocks of BP stock in the first quarter -- but their sales were a fraction of Goldman's. Wachovia, which is owned by Wells Fargo, sold 2,667,419 shares; UBS, the Swiss bank, sold 2,125,566 shares.

Wachovia and UBS also sold much larger percentages of their BP stock, at 98 percently and 97 percent respectively.

Wachova parent Wells Fargo, however, bought 2.3 million shares in the quarter, largely discounting Wachovia's sales.

Those reported buying BP's stock included Wellington Management, a large asset firm, and the Bill and Melinda Gates Foundation.

BP is struggling to cap a massive oil leak at one of its drill sites in the Gulf of Mexico. The firm's myriad safety violations over the years have come to light in lieu of the Gulf disaster.

BP traded on average at $56.86 in the first quarter, according to GuruFocus, a site that monitors the major trading moves of prominent investors. A list of major institutions' sales of BP stock are available at the market research website Morningstar.

It's certainly unknown as to why the firms sold their holdings. In its analysis of the company in mid-March, Morningstar, the market research site, gave the company an average rating of three out of a possible five stars.

"BP's valuation carries more uncertainty than ExxonMobil's or Shell's because the firm is less integrated, with more of its earnings coming from the [exploration and production] business than from potentially offsetting refining operations," the site's analyst wrote. "Like its peers, a sustained drop in oil and gas prices can hurt upstream earnings. Lower crude-oil feedstock costs could help refining margins, but refined product pricing lags could quickly swing refining profits to losses. BP's global business faces potential disruptions caused by political risks, particularly with its heavy exposure to Russia. Disruptions caused by environmental and operational constraints could further limit earnings potential."

The transnational oil company, like other energy giants, was hit with lower oil and gas prices in the past year after the price of oil surged in 2008.

"BP's fourth quarter marked another quarter of year-over-year production gains, with a 3% increase thanks to new field startups," Morningstar's analyst wrote in another note, after BP turned in better than expected fourth quarter results in February. "BP reported fourth-quarter replacement cost profit of $3.4 billion, up 33% from year-ago earnings of $2.6 billion, as upstream earnings growth was more than enough to offset downstream weakness. For the full year, BP's earnings of $14 billion were 45% below year-ago earnings of $26 billion, in part because of lower oil prices earlier in the year. We're encouraged by BP's sequential earnings gains as new projects and cost-cutting efforts drive upstream results."

The SEC filed a civil lawsuit against Goldman Sachs and one of its vice presidents in April, asserting that the firm had committed fraud by misrepresenting a mortgage-investment product inherently designed to fail. The company helped a hedge fund trader create a mortgage investment that gained value as mortgage borrowers defaulted en masse.

In response, Goldman said the SEC's charges were “completely unfounded in law and fact” and averred that it would “vigorously contest them and defend the firm and its reputation.”

The firm has also faced criticism over giant bonuses paid to staff amidst the US financial crisis. Goldman reduced the sizes of its staff bonuses this year to $16.9 billion, and said it would pay its chief executive $9 million, far less than the previous year.

Goldman also announced it would create a $500 million program to help small businesses. Critics noted that the figure represented just 3% of the bonus pool.

 

[Depth Trade]

Have entered the following positions.


Gbp/usd: long
1.4468

Usd/jpy: short
91.34



Banking System Collapse: Wake Up America Your Banks Are Dying

U.S. banks are being shut down by federal regulators at a staggering pace this year, and yet most Americans seem completely oblivious to it. In fact, federal officials have already shut down 81 U.S. banks this year, which is about double the number that were shut down at this time last year. So why aren't more people upset about this? Well, part of the reason is because the FDIC is doing it very, very quietly. The bank closings for each week are announced every Friday, which means that they pass through the news cycle over the weekend almost unnoticed. For example, banks in Nebraska, Mississippi and Illinois with total deposits of almost $2.3 billion were shut down by federal regulators on Friday. So did you hear about it before now? If not, why not? Shouldn't the fact that we are experiencing a banking system collapse be headline news? But most Americans are more than happy to remain blissfully ignorant of what is going on. In fact, most Americans seem far more interested in what is happening on American Idol or Dancing With The Stars. But when the American Dream starts dying for tens of millions of Americans as the economy collapses perhaps more people will start to care.

So just how bad is the banking system crisis?

Well, FDIC Chairman Sheila Bair says that 775 banks (approximately ten percent of all banks in the United States) are now on the Federal Deposit Insurance Corporation's list of "problem" banks.

So should we be alarmed by that?

Well, there were only 252 U.S. banks on the FDIC's problem list at the end of 2008.

There were 702 U.S. banks on the FDIC's problem list at the end of 2009.

Now there are 775.

Do you know if your bank is on the verge of failing?

You might want to check.

But even if all of our banks fail the FDIC has plenty of money to cover our federally-insured banking accounts, don't they?

Unfortunately, they do not.

The FDIC is backing nearly 8,000 U.S. banks that have a total of $13 trillion in assets with a deposit insurance fund that is pretty close to flat broke.

It was recently reported that the FDIC's deposit insurance fund now has negative 20.7 billion dollars in it, which actually represents a slight improvement from the end of 2009.

But the bank failures on Friday drained another $313.6 million from the FDIC’s deposit-insurance fund.

And the way things are trending, the banking crisis could get a whole lot worse?

Why?

Well, Americans are simply not doing a very good job of paying their bills.

During the first quarter of 2010, the total number of loans at U.S. banks that were at least three months past due increased for the 16th consecutive quarter.

16 quarters in a row.

Just let that sink in.

If that is not a trend, then what is?

Oh, but the U.S. government will never let the entire banking system fail, right?

Well, they won't let the "too big to fail" banks go under, we have seen that.

But the small and mid size banks?

They fall into the "not big enough to bail out" category.

And where in the world is the U.S. government going to get more money to bail anyone out?

The reality is that the U.S. government is now over 13 trillion dollars in debt.

To give you an idea of just how horrific that is, if you started spending a million dollars a day on the day that Christ was born, you still would not have spent a trillion dollars by now.

That is how big a trillion is.

But for this year alone it is being projected that the U.S. government will have a budget deficit of approximately 1.6 trillion dollars.

So, yes, pretty much wherever you turn we are facing a financial nightmare.

 

[Depth Trade]

Have entered the following positions.


Gbp/usd: long
1.4468

Usd/jpy: short
91.34

Am still holding previous positions. Was stopped out of Gbp/usd for a -1% loss, but re-entered long again.

Gbp/usd long: +83 pips

Usd/jpy short: + 7 pips


Gold breaks record as investors fear recession, currencies

By Claudia Assis, MarketWatch

SAN FRANCISCO (MarketWatch) -- Gold futures advanced to a record Tuesday as investors sought out an alternative to currencies amid lingering fears of a worldwide slide into recession.

Gold for August delivery, the most active contract, rose $4.80, or 0.4%, to settle at $1,245.60 an ounce on the Comex division of the New York Mercantile Exchange, the highest price since gold futures started trading in the 1970s.

That supplanted the previous record of $1,243.10 reached May 12.
Obama's new oil plan

Joe Rago and James Taranto discuss President Obama's moratorium on deepwater off-shore oil drilling and the political and economic havoc the spill has wreaked on coastal areas.

"We see people buying gold for safety. Gold is in effect trading as a currency," said Frank Lesh, a broker and analyst at FuturePath Trading in Chicago. "Every couple of weeks you hear about more [sovereign] debt problems from a different country."

Gold also has set fresh record prices in euros, the British pound, the Indian rupee, the South African rand and the Chinese yuan, among others.

"The strength of investment demand has offset weakness in physical supply and demand flows. ... The motives to support continued interest in gold remain intact for now, thus prices are likely to retain their recent gains barring short-term corrections amid profit-taking," Barclays analysts wrote in a note to clients Tuesday.

Any dips, however, are likely to be met with more buying, said Wayne Atwell, a managing director with Casimir Capital in New York. "I've never seen gold this strong, this long," said Atwell, who has four decades of experience in metals and mining analysis.
TODAY'S TOP MARKET STORIES

Debt levels in the U.S. and Europe have reached levels not seen in decades, Atwell said. "The profile of finances is the worst in 60, 70 years ... these are pretty good reasons why people are turning to gold."

A short-term catalyst for gold's run may have been recent weakness in U.S. equities, said James Cordier, portfolio manager at OptionSellers.com in Tampa, Fla. "A lot of money came out of securities and into gold in these last couple of days," he said.

Gold futures overcame a weak start on Monday to close just $2.30 an ounce short of the May 12 record, but surpassed that mark overnight and traded above record levels throughout the floor trading session on Tuesday.

U.S. stocks traded in a choppy pattern Tuesday, initially drawing support from comments made late Monday by Federal Reserve chief Ben Bernanke before gains faded into losses.

Bernanke said he didn't expect to see a double-dip recession in the U.S. That was tempered, however, by more concerns about Europe's economic health as Fitch Ratings warned that the U.K. faces enormous budget problems.

Gold is set to benefit whether or not financial markets stabilize, OptionSellers.com's Cordier said. "Gold rallies either way," benefiting from inflation concerns if markets do manage to straighten out and from safe-haven buying if they don't, he said.

Most metals tracked gold's advance, with palladium leading the way and silver also up strongly.

Silver for July delivery rose 32 cents, or 1.7%, to $18.47 an ounce. Silver rallied 5% on Monday.

Palladium for September delivery, the most active contract, advanced $11.80, or 2.7%, to settle at $442.15 an ounce. July platinum added $11.50, or 0.8%, to $1,528.80 an ounce.

Copper settled marginally higher after opening lower Tuesday. July copper rose a penny, or 0.5%, to $2.77 a pound.

The SPDR Gold Trust /quotes/comstock/13*!gld/quotes/nls/gld (GLD 120.23, -0.77, -0.64%) , the largest exchange-traded fund backed by gold, declined 0.4%. The world's top gold miners, however, were mostly on positive territory despite a generally weak stock market.

Barrick Gold Corp. /quotes/comstock/13*!abx/quotes/nls/abx (ABX 42.58, -0.76, -1.75%) rose 0.6% and Goldcorp. Inc /quotes/comstock/13*!gg/quotes/nls/gg (GG 43.50, -0.82, -1.85%) advanced 0.3%, while AngloGold Ashanti Ltd. /quotes/comstock/13*!au/quotes/nls/au (AU 42.13, -0.26, -0.61%) retreated 2.1%. Newmont Mining Corp. /quotes/comstock/13*!nem/quotes/nls/nem (NEM 55.41, -1.04, -1.84%) was up 2.1%.

Casimir's Atwell recommends smaller gold mining operations as a riskier -- but potentially more rewarding -- play on gold's record prices. Smaller companies are nimbler, an important characteristic as the big names in gold mining usually focus on larger mines.

He cited St. Andrew Goldfields Ltd and Capital Gold Corp. /quotes/comstock/14*!cgc/quotes/nls/cgc (CGC 3.66, -.00, -.00%) as his top picks among small miners. St. Andrew shares rose 2.5%, while Capital Gold's advanced 0.3%.

 

[Depth Trade]

Still holding previously entered Gbp/usd and Usd/jpy positions.

Gbp/usd long: + 210 pips

Usd/jpy short: + 25 pips

+ 2.15%



Big Risk: $1.2 Quadrillion Derivatives Market Dwarfs World GDP

By PETER COHAN
Posted 10:45 AM 06/09/10 Economy, Investing, Investing Basics

One of the biggest risks to the world's financial health is the $1.2 quadrillion derivatives market. It's complex, it's unregulated, and it ought to be of concern to world leaders that its notional value is 20 times the size of the world economy. But traders rule the roost -- and as much as risk managers and regulators might want to limit that risk, they lack the power or knowledge to do so.

A quadrillion is a big number: 1,000 times a trillion. Yet according to one of the world's leading derivatives experts, Paul Wilmott, who holds a doctorate in applied mathematics from Oxford University (and whose speaking voice sounds eerily like John Lennon's), $1.2 quadrillion is the so-called notional value of the worldwide derivatives market. To put that in perspective, the world's annual gross domestic product is between $50 trillion and $60 trillion.

To understand the concept of "notional value," it's useful to have an example. Let's say you borrow $1 million to buy an apartment and the interest rate on that loan gets reset every six months. Meanwhile, you turn around and rent that apartment out at a monthly fixed rate. If all your expenses including interest are less than the rent, you make money. But if the interest and expenses get bigger than the rent, you lose.

You might be able to hedge this risk of a spike in interest rates by swapping that variable rate of interest for a fixed one. To do that you'd need to find a counterparty who has an asset with a fixed rate of return who believed that interest rates were going to fall and was willing to swap his fixed rate for your variable one.

The actual cash amount of the interest rates swaps might be 1% of the $1 million debt, while that $1 million is the "notional" amount. Applying that same 1% to the $1.2 quadrillion derivatives market would leave a cash amount of the derivatives market of $12 trillion -- far smaller, but still 20% of the world economy.

Getting a Handle on Derivatives Risk

How big is the risk to the world economy from these derivatives? According to Wilmott, it's impossible to know unless you understand the details of the derivatives contracts. But since they're unregulated and likely to remain so, it is hard to gauge the risk.

But Wilmott gives an example of an over-the-counter "customized" derivative that could be very risky indeed, and could also put its practitioners in a position of what he called "moral hazard." Suppose Bank 1 (B1) and Bank 2 (B2) decide to hedge against the risk that Bank 3 (B3) and Bank 4 (B4) might fail to repay their debt to B1 and B2. To guard against that, B1 and B2 might hedge the risk through derivatives.

In so doing, B1 and B2 might buy a credit default swap (CDS) on B3 and B4 debt. The CDS would pay B1 and B2 if B3 and B4 failed to repay their loan. B1 and B2 might also bet on the decline in shares of B3 and B4 through a short sale.

At that point, any action that B1 and B2 might take to boost the odds that B3 and B4 might default would increase the value of their derivatives. That possibility might tempt B1 and B2 to take actions that would boost the odds of failure for B3 and B4. As I wrote back in September 2008 on DailyFinance's sister site, BloggingStocks, this kind of behavior -- in which hedge funds pulled their money out of banks whose stock they were shorting -- may have contributed to the failures of Bear Stearns and Lehman Brothers.

It's also the sort of conduct that makes it extremely difficult to estimate the risk of the derivatives market.

How Positive Feedback Loops Crash Markets

Another kind of market conduct that makes markets volatile is what Wilmott calls positive and negative feedback loops. These relatively bland-sounding terms mask some really scary behavior for investors who are not clued into it. Wilmott argues that a positive feedback loop contributed to the 22.6% crash in the Dow back in October 1987.

In the 1980s, a firm run by some former academics came up with the idea of portfolio insurance.

Their idea was that if investors are worried about their assets losing value, they can buy puts -- the option to sell their investments at pre-determined prices. They can sell everything -- which would be embarrassing if the market then started to rise -- or they could sell a fixed proportion of their portfolio depending on the percentage decline in a particular stock market index.

This latter idea is portfolio insurance. If the Dow, for example, fell 3%; it might suggest that investors should sell 20% of their portfolio. And if the Dow fell 20%, it would indicate that investors should sell 100% of their portfolio.

That positive feedback loop -- in which a stock price decline leads to more selling -- boosts market volatility. Portfolio insurance causes more investors to sell as the market declines by, say 3%, which causes an even deeper plunge in the value of investors' holdings. And that deeper decline leads to more selling. Before you know it, many investors are selling everything.

The portfolio insurance firm started off with $5 billion, but as its reputation spread, it ended up managing $50 billion. In 1987, that was a lot of money. So when that positive feedback loop got going, it took the Dow down 22.6% in a day.

The big problem back then was the absence of a sufficient number of traders using a negative feedback loop strategy. With a negative feedback loop, a trader would sell stocks as they rose and buy them as they declined. With a negative feedback loop strategy, volatility would be far lower.

Unfortunately, data on how much money has been going into negative and positive feedback loop strategies is not available. Therefore, it's hard to know how the positive feedback loops have gained such a hold on the market.

But it is not hard to imagine that if a particular investor made huge amounts of money following a positive feedback loop strategy, other investors would hear about it and copy it. Moreover, the way traders get compensated suggests that it's better for them to take more and more risk to replicate what their peers are doing.

Traders Make More Money By Following the Pack

There is a clear economic incentive for traders to follow what their peers are doing. According to Wilmott, to understand why, it helps to imagine a simplified example of a trading floor. Picture yourself as a new college graduate joining a bank's trading floor with 100 traders. Those 100 traders each trade $10 million: They "win" if a coin toss lands on heads and "lose" if it lands on tails. But now imagine you've come up with a magic coin that has a 75% chance of landing on heads -- you can make a better bet than the other 100 traders with their 50-50 coin.

You might think that the best strategy for you would be to bet your $10 million on that magic coin. But you'd be wrong. According to Wilmott, if the magic coin lands on a head but the other 100 traders flip tails, the bank loses $1 billion while you get a relatively paltry $10 million.

The best possible outcome for you is a 37.5% chance that everyone makes money (the 75% chance of you tossing heads multiplied by the 50% chance of the other traders getting a head). If instead, you use the same coin as everyone else on the floor, the probability of everyone getting a bonus rises to 50%.

When Traders Say 'Jump,' Risk Managers Ask 'How High?'

Traders are a huge source of profit on Wall Street these days and they have an incentive to bet together and to bet big. According to Wilmott, traders get a bonus based on the one-year profits of those on their trading floor. If the trading floor makes big money, all the traders get a big bonus. And if it loses money, they get no bonus -- but at least they don't have to repay their capital providers for the losses.

Given that bonus structure, a trader is always better off risking $1 billion than $1 million. So if the trader, who is the king of the hill at the bank, asks a lowly risk manager to analyze how much risk the trader is taking, that risk manager is on the spot. If the risk manager comes back with a risk level that limits how big a bet the trader can take, the trader will demand that the risk manager recalculate the risk level lower so the trader can take the bigger bet.

Traders also manipulate their bonuses by assuming the existence of trading profits before they are actually realized. This happens when traders get involved with derivatives that will not unwind for 20 years.

Although the profits or losses on that trade have not been realized at the end of the first year, the bank will make an assumption about whether that trade made or lost money each year. Given the power traders wield, they can make the number come out positive so they can receive a hefty bonus -- even though it is too early to tell what the real outcome of the trade will be.

How Trader Incentives Caused the CDO Bubble

Wilmott imagines that this greater incentive to follow the pack is what happened when many traders were piling into collateralized debt obligations. In Wilmott's view, CDO risk managers who had analyzed a future scenario in which housing prices fell and interest rates rose would have concluded that the CDOs would become worthless under that scenario. He imagines that when notified of that possible outcome, CDO traders would have demanded that the risk managers shred that nasty scenario so they could keep trading more CDOs.

Incidentally, the traders who profited by going against the CDO crowd were lone wolves whose compensation did not depend on following the trading floor pack. This reinforces the idea that big bank compensation policies drive dangerous behavior that boosts market volatility.

What You Don't Understand, You Can't Properly Regulate

Wilmott believes that derivatives represent a risk of unknown proportions. But unless there is a change to trader compensation policies -- one which would force traders to put their compensation at risk for the life of the derivative -- then this risk could remain difficult to manage.

Unfortunately, he thinks that regulators aren't in a good position to assess the risks of derivatives because they don't understand them. Wilmott offers training in risk management. While traders and risk managers at banks and hedge funds have taken his course, regulators so far have not.

And if regulators don't understand the risks in derivatives, chances are great that Congress does not understand them either.

 

[Depth Trade]

Still holding previously entered positions.

Gbp/usd long: + 86 pips

Usd/jpy short: - 36 pips

Have entered the following positions.

Xau/usd: long 1227.94

Xag/usd: long 18.317

Have the following open orders.

Gld: long at market open

Slv: long at market open



Chaos, Anarchy To Reign If Paterson Shuts Down NY
Monday Could Be Doomsday If Budget Deal Can't Be Reached
Shutdown Would Mean Closing Of State Parks, DMV, Courts, N.Y. Lottery

ALBANY (CBS)Chaos and anarchy. That's what New York Gov. David Paterson is warning if he's forced to shut down the government in a few days.

The clowns in the state Legislature, now deadlocked for 71 days on the budget, are ready to take down the "big tent" and bring state government to a standstill. At least that's what Paterson thinks.

"No one knows the full ramifications of a government shutdown," said Paterson. "It would create unimaginable chaos around the state and the greater metropolitan areas."

Such chaos includes closing all state parks, motor vehicles offices, courts, and even the lottery. Public assistance payments would not be made and unemployment payments might also be held up.

The governor is in this pickle, in part, because wild cards like Sen. Ruben Diaz Sr. (D-Bronx) and possibly scandal-scarred Sen. Pedro Espada (D-Bronx) might not go along.

Sources said the next emergency bill from Paterson will have up to $350 million in cuts to human services and mental health. But Republicans, who could become Paterson's new allies in the budget battle, aren't satisfied with that.

They want $750 million in new cuts like:


Delaying the 10 percent welfare grant increases
Withholding welfare from those who don't comply with employment requirements
Reducing the personal needs allowance of people in drug and alcohol programs

Diaz will not go along with that.

"I am not voting for any more cuts. I understand that it is painful," said Diaz. "But the governor is leaving me no choice."

The other renegade, Espada, thinks there might be a budget deal in the offing, but, he said, "I would vote no if such a massive cut were included because the state needs a fiscal plan.

Paterson called both men "thugs."

Espada, like some in both houses of the Legislature, thinks lawmakers will find a way to avoid bringing the government to a grinding halt.

"There will not be a shutdown on Monday. We've never wanted a shutdown," he said.

It's really too early to tell what is going to happen. Will Espada and Diaz back down? Will Paterson make a deal with the Republicans? Or will pigs fly?

 

[Depth Trade]

Still holding previously entered positions.

Gbp/usd long: + 86 pips

Usd/jpy short: - 36 pips

Have entered the following positions.

Xau/usd: long 1227.94

Xag/usd: long 18.317

Have the following open orders.

Gld: long at market open

Slv: long at market open

Have just closed Gbp/usd trade, still holding other positions.

Gbp/usd Long: closed +282 pips
+2.8%


PONZI Finance Recipe for Economic Catastrophe, Gold Not a Bubble

Jun 11, 2010 - 04:26 AM

By: Ty_Andros


The “When hope turns to Fear” moment (See 2010 Outlook “When hope turns to Fear” in Tedbits archives) is unfolding as we speak, as the tides of insolvency sweep over the social welfare states and financial systems of the developed world. It is the next leg down in the global financial crisis and what will come to be known as the greatest depression ever is commencing -- we are fascinated and astonished at what the main stream media is reporting and failing to report.


No amount of PONZI finance or money printing will rescue the Western world from its immorality masquerading as morality. SOCIALISM is IMMORAL and that is why it always FALLS into BANKRUPTCY. As Margaret Thatcher once said:

“The problem with socialism is that eventually you run out of OTHER PEOPLE’S MONEY” - Margaret Thatcher

Of course they now have. The idea that asset values (malinvestments) or economies are going to resume growth or achieve pre-2008 levels is FALSE. Extend and pretend is DEAD, political lies are being exposed for what they are: Deception of the dumbest among us who swallow them hook, line and sinker and who then place their trust in government to solve problems they themselves should be solving. Let’s look back at a chart of the percentage of GDP the West’s social welfare states CONSUME and then MISALLOCATE to the unproductive and crony capitalist elites:



Simple math tells you that if budget deficits approach 10% of GDP these freeloaders, socialist redistributionists and misallocations of capital must cut government spending by 20% to restore ANY CHANCE for a private-sector recovery. FAT chance; but even a reduction of 1/3rd of that will bankrupt many of the crony capitalists and their LENDERS.

Instead they are implementing another power grab in the name of reform and believe that when it comes to spending they only know one word: MORE. The more public serpents and elites try to preserve the absurd in the name of JUSTICE and FAIRNESS, the farther recovery becomes the horizon.

Authors note: The world is AWASH on a sea of FIAT currency and credit creation. The only places where there is no cash are (1) welfare-state government coffers, as economic activity collapses tax receipts, and (2) on the balance sheet of the largest players in the financial system who are choking on the toxic assets they themselves created and borrowed money to buy.

At no time in history have assets -- stocks, bonds, real estate, etc. (malinvestments inflated by cheap credit) been more MISPRICED, and since the value of fiat currency as a unit of exchange is unknowable (not measured in GOLD or silver), prices are set to REPRICE and create VOLATILITY rarely seen in history -- other than previous “CURRENCY EXTINCTION” events such as Argentina, Weimar Germany and unfolding in VENEZUELA right now. Volatility is exploding and set to increase, creating HUGE opportunities as these markets zoom up and down. Learn how to fix your paper currencies and diversify into absolute return alternative investments with the potential to thrive in UP and down markets! This is what I do, contact me!

Keep the corner of your eye on Venezuela; this is where the developed world is headed! It is fascinating see Comrade Hugo torpedo his own economy to implement SOCIALISM, also known as MISERY spread WIDELY. He is following in the footsteps of Comrade Bob in Zimbabwe. Just look at the BOLIVAR currency, it says it all. You know, many in the BELTWAY are BIG supporters of Comrade Hugo.

Comrades Merkel and Sarkozy are now proposing BANNING short selling on stocks and sovereign debt throughout the Euro zone; obviously they do not like the opinions of the public and institutions that SEE the folly of current policy and who rationally want to vote against it, and so their solution is: OUTLAW anyone with whose opinions they DISAGREE and OUTLAW the mechanisms with which they do so. Not one short selling ban has halted a crash, as holders of the poor assets are just plain old sellers exercising RISK management.

Wealth creation (producing more than you consume and fostering rising incomes) is the only solution to preserving wealth in societies which practice credit-based FIAT currencies. FIAT currency based financial systems ALWAYS fall into insolvency, bond market collapses, serial quantitative easing and then hyperinflation, without exception throughout history. THIS TIME WILL BE NO DIFFERENT. I DEFY any analyst to show me one exception….

The destruction of the productive to feed the unproductive is cannibalism of the worst sort. In the name of social justice, public servants in something-for-nothing societies REFUSE to reform the welfare states of the west and implement polices of growth. Such REFORMS spell DOOM for their futures, economies and their constituents. IMPLEMENTING more wealth redistribution and taxes WILL FAIL to revive anything and sets the next deepening of the unfolding crisis and depression.

Over forty years of borrowing and spending to substitute for the policies of growth are now FAILING and the bills are now coming due. Only there is NO MONEY, and unfortunately, economic growth and wealth creation is something the Western world’s fathers and grandfathers knew about, but for current leaders they are but a footnote in the history books. Let me repeat: The IDIOTS at the wheel of economic and political power are implementing policies which have NO CHANCE of fostering economic and income growth.

The idea that a handful of brilliant minds can somehow steer an economy is fatal to economic growth and stability. The Soviet Union's economy failed because of its central economic planning, and the U.S. economy will suffer the same fate if we continue down the path toward more centralized control. We need to bring back sound money and free markets – yes, even in healthcare – if we hope to soften the economic blows coming our way. -Ron Paul

As interest rate spreads continue to BLOW OUT, private-sector -- and some public bond market issuance collapses -- and G-10 economies edge toward blowing up. Their political leaders, crony capitalists and banksters are all in a panic. Bond markets are shutting down, overnight markets are as well. Credit is collapsing again. Every measure of credit risk is below the worst levels of last month! As outlined in the May 6th edition of Tedbits, Black swans have taken flight and in their wake FAT tail events are emerging on the horizon.

In Amerika terrorists inside the Beltway have implemented the policies of an impending economic collapse. Health care reform (nothing of the sort, it’s a takeover, see video below), financial reform (before they even have the report from the financial crisis commission, once again this is not reform it is a politicization of the financial and banking industry), expiring Bush tax reforms and soon ENERGY legislation (collapsing US energy production in the name of saving you) are going to collapse the economy. All mostly ENSHRINED into law, set to unfold and be implemented in the next several years.

Reconciliation of the financial reform bill is going on, WHERE ELSE? Behind closed doors with four of the most incompetent corrupt public officials on the earth doing the DEALINGS:



Or should I say political STEALING and fleecing of the public. Let’s see, (1) a bagman for Government, … er Goldman Sachs, (2) a retiring senator who is retiring because he has no chance of reelection (so he has nothing to lose and can commit any crime) with (3) his gangster boss, and (4) the leader of the finance committee which fathered Fannie and Freddie’s insolvency. A more competent crew to REGULATE the financial system couldn’t be found anywhere. HA HA. Be afraid, be very afraid.

Keep in mind, the developed world’s banks and financial institutions have over $17 TRILLION of debt they have to ROLL in the next three years, and the assets they bought have lost up to 40% of their values. Do you think that money will rollover or demand payment? Or perhaps demand higher rates?

Next month some of the money (almost 500 billion Euros) the EU offered banks for during the financial crisis must roll, unfortunately it will be the seeds of the next down leg of the EU crisis, as European banks borrowed the money from the ECB at 1% and bought SOVEREIGN debt which is almost unsellable. Talk about a carry trade BLOWING UP. July will be a severe test of crisis management as these banks are increasingly SHUT out of the short-term lending markets or have to pay up to roll. Can you say another year of unlimited borrowing from the ECB?

In a recent Wall Street Journal entitled: Deutsch Bank Deserves Bite Bair Gave it, Peter Eavis reported:

“Was that Deutsche Bank that recently took a mauling from the Bair?

In a letter last month to an industry group called the Institute of International Bankers, Sheila Bair, chairman of the Federal Deposit Insurance Corp., went to considerable lengths to defend a part of the Senate's financial-overhaul bill that aims to strengthen capital regulations.

To support her case, Ms. Bair noted that the consolidated U.S. operations of an unnamed foreign bank have "negative Tier 1 capital." In other words, after regulatory adjustments, these banking operations have an actual capital deficit. Ms. Bair may have been talking about Deutsche, whose U.S. bank holding company, Taunus Corp., has a Tier 1 risk-based capital ratio of negative 7.58%, according to a regulatory filing. With $364 billion of assets, Taunus isn't a bit player.” - Peter Eavis

NEGATIVE tier-one capital? It is not isolated to these two; it is an epidemic amongst the biggest players.

In the a previous Tedbits (May 20, 2010) I outlined the NEW special-purpose vehicle to RESCUE/bailout and how special-purpose vehicles are only used for DECEPTION; let’s look at a graphic of the deal from a recent wall street journal:


This is being done to keep the NEW debt off their individual balance sheets and circumvent the Euro zone rules which prohibit buying the debt of individual EU countries.

This is a picture of public-sector deception in the light of day. When will the markets call their bluff? When they try to issue the first tranche of that debt is my guess. Let’s see nothing from the respective EU governments except guarantees for the special-purpose vehicle (all the guarantees are from morally and fiscally bankrupt nations and public serpents), virtually none of the governments have budget deficits less than 6% of GDP (see graphic above) and their countries are not GROWING, so the debts are compounding at an inconceivable rate.

All have OTHER OFF BALANCE-SHEET obligations which are many multiples of GDP (which are unpayable as growth is ZERO), and of course, the ratings agencies will rate them AAA. Politicians will lean on them to do so, this is also known as creating “Fairy tales”. Anyone who buys these offerings will get what they deserve: NOTHING.

All of the countries are raising taxes, directly or indirectly on what few places in the private sector actually have profits or incomes and they are refusing to cut the public sectors in any meaningful manner. I will now take you back to a quote from Bill Gross of PIMCO, the world’s largest bond manager:

"If core sovereigns such as the U.S., Germany, U.K., and Japan 'absorb' more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee. The Kings, in other words, in the process of increasingly shedding their clothes, begin to look more and more like their subjects. Kings and serfs begin to share the same castle."- Bill Gross

Bingo, and it actually is a SAND castle at this point. The waves of history are about to wash over them like the tides. Hanging like Damocles’ sword over these FRAUDSTER’s, they shall soon learn history’s lessons, as will investors who have placed their faith in banksters and Big wire houses (investment banks). Developed world governments and their financial systems are operating in BANKRUPTCY; I hope you are not on the other side of this trade as you are now a creditor, not an investor….. Although there is one thing you can count on them to do… PRINT the MONEY out of thin air and hand it back to you…

No entrepreneur or business owner in their right mind would hire an employee or plan an expansion without knowing the cost of their labor, new healthcare mandates, availability of credit or the cost of energy and unreported tax increases (VAT taxes, Medicare surcharges, the destruction of capital gains taxes, etc., the list is too long to cover, but be assured there are dozens of new taxes). When those issues are UNKNOWABLE uncertainty reigns SUPREME and the willingness to take risks vanishes, because there is no way to calculate the odds of success with those VARIABLES. There will be no jobs or small business growth until these things are dealt with.

Investors are in the same BOAT. They are confused and misled by banksters, main stream media and Investment banks; knowing past advice has failed and seeing that the prescriptions for future investing are no different than previously in a world of RELATIVE returns. This is the road to disaster and poverty for people trying to store capital and wealth in paper assets.

How many years will it be before they emerge again is the question? The answer is as long as it takes for these changes to be knowable. Take a look at this on- minute video of Glen Beck: www.youtube.com/watch?v=0PE4b0VFzYI It outlines FDR’s New Deal and its regulatory straightjackets, and then compares them to the current healthcare legislation; from the looks of it, the current lawmakers are dwarfing what took place then. THIS IS A MUST SEE VIDEO to gain perspective. Then think about FINANCIAL reform (2,000 pages of NEW LAWS) and energy legislation which will inevitably emerge from the accident in the gulf. Cloaks of complexity, regulatory buffoonery and corruption are descending on the social welfare states of the G10.

It will be years, if not a decade or more, to get over the destruction caused by this legislation. It took over 20 years for the destruction implemented by the Roosevelt administration’s NEW DEAL to be repealed and for growth to resume. These idiots are dwarfing those mistakes so you can expect it to take at least equally as long this time around.

The only businesses expanding are those on the GOVERNMENT GRAVY train. They are about to hit a brick wall just as Greece has done. Crony capitalists and public-sector unions are the only beneficiaries -- and the private sectors of the respective countries are on the menu, as the something-for-nothing societies eat the productive to FEED the welfare state. When they hit the BRICK wall then the fun really begins, political assumptions built up since 1971 are about to meet REALITY and it will BITE. Have you ever heard a politician ADMIT a MISTAKE and correct it? I know I haven’t.

The present leadership inside the Beltway and G10 capitals has engineered the perfect storm of destruction. In 1982, Margaret Thatcher and Ronald Reagan had reduced taxes and regulation and dismantled much of the Welfare State, thus setting the table for growth and wealth creation. Conversely, since 2008: socialists have implemented the largest intrusion into the private sector in history, they are politicizing the financial sector even more, radically expanding entitlements, taxes and the social safety net. One approach -- the road to recovery, the other -- road to RUIN. Public serpents and their special interest supporters have chosen the latter.

I am tired of hearing misinformation in the mainstream press. Is gold a bubble? No. I will provide a few graphs to illustrate the history of other bubbles in comparison and the fundamentals versus paper creation. First let’s look at a chart illustrating some recent bubbles (from Bruce Pile of www.goodstockinvesting.blog) and compare the present move in gold:





‘Now let’s look at them numerically, from Clusterstock:

Now let’s take a look at gold prices in context to money supply creation (courtesy of www.qbamco.com) versus the real gold stock. This is the fundamental illustration of what is unfolding IN FRONT OF US:



This is a fabulous illustration, thanks again to www.qbamco.com . What is it saying? The fundamentals are in place to match any of the previous outlined bubbles!!! But also that we are in the infancy of the coming move. Remember, currencies don’t float they just SINK in purchasing power at different rates, take a look at the uniformity of the theft of purchasing power by MAJOR central banks and their public serpent partners in crime who are printing money OUT OF THIN AIR to fund their redistributionist schemes, stealing the purchasing power of your money while it sits in the bank:

Those gains are the reciprocal of how much purchasing power your money has lost while it sits in SAFE cash and US Treasuries. In other words: put negative signs in front of those numbers to see how you have been FLEECED in terms of purchasing power. The purchasing power of paper FIAT currencies is in FREEFALL.

Technically, the gold charts IN ALL CURRENCIES show ORDERLY long-term, secular bull markets commencing over 10 years ago. Take a look at this chart of gold since 2006:

This is the picture of an orderly advance, where gold spends long periods consolidating its gains and building corrective technical formations, then the pattern becomes active and the market goes higher in an orderly manner. Based upon the last two technical patterns (in this chart, the reverse head and shoulders), both of which are active, they project gold’s next price move to the $1,350 - $1,450 area. Question: Can gold back and fill and then go down before going higher? Of course it can. That is the very definition of an orderly market advance.



Let’s keep in mind another fundamental fact: Emerging-world central banks are sitting on 6.3 TRILLION (Dollars, Euros, British Pounds, and Swiss Francs etc.) of reserves in soon-to-be increasingly worthless developed world currencies, and less than $100 billion of it is in gold. Then, think of the $200 TRILLION sitting in financial assets around the world and the percentage of them in gold, (illustrated by this fabulous chart by www.agorafinancial.com):



Do you think they might increasingly want to exchange progressively-worthless FIAT paper money (IOU’s of bankrupt countries) for TIMELESS, real money sometime soon? I do! In addition to this fundamentally bullish picture, add the fact of the GARGANTUAN short positions held by the biggest banks in the world; they will soon face their waterloo, as they are overwhelmed by a tsunami of cash seeking safety and lighting a short covering bonfire to their balance sheets as well. That’s a mighty small door to safety, the sooner you arrive the better you will fare. At this point, GOLD IS NOT A BUBBLE. The bubble is in front of us, not in the rear view mirror. Remember:

The greatest transfer of wealth from those that hold it in paper to those that don’t is under way…Wait until the BIG money PANICS. When will they WAKE UP? A Crack- up boom looms…

Look no further than these two charts of the ECRI economic index (from David Rosenberg www.Gluskinsheff.com), you can easily see the wolf waves (whipsawing megaphone formations) signifying the wild and EXPANDING oscillation in the economy caused by fiat currency and credit creation (either too hot or too cold):


Wolves eat people and these Wolves will eat economies. You can expect this to be coming true, heading into the last half of 2010; the economy of the US is heading into freefall right behind the EURO ZONE. An economic bloodbath approaches.

In conclusion: Black swans are firmly in flight and the FAT lady is singing. Catastrophe looms, courtesy of the chosen one and his minions in congress. The potential opportunities to profit from this unfolding maelstrom are infinite. This is not DOOM and Gloom, it is reality, learn to deal with it and prosper, fail too and learn the lessons of history in REAL time.

Everything is mispriced and will move UP and DOWN to price in unfolding REALITIES. Buy and hold is DEAD, and paper is poison. Applied Austrian economics is the recipe for success. Learn how to diversify your portfolio and create absolute return alternative investments and put gold behind your cash as it used to be. This is what I do. contact me if you wish…



Public servants in G10 capitals are destroying your futures and implementing the death of their economies ON PURPOSE to use the crisis to SEIZE power and what’s left of their respective private sectors. It is the something-for-nothings eating their own future. It’s going to be a HOT summer with lots of FIREWORKS.

Job and income growth? What job growth? Incentives matter as does the ability to take a calculated risk in hiring a new employee or starting a new business. Why take a risk when there is no reward for doing so?

There is no reward and there will be none; socialists never understand human behavior except at the lowest levels of society where people are desperate to escape POVERTY, thus becoming the mob which populous politicians prey upon, even though they are the culprits of the economic malaise. The consequence of their economic illiteracy and insatiable greed for power over others, along with their progressive policies.

The problem does not lie with your small-business-owner neighbors, aka the RICH, as your public serpents tell you. But don’t worry, they will just pull back their animal spirits and wait for better economic weather.

Battles loom between the public and private sectors to see who serves who. The policies of Insolvency are firmly in place in the social welfare states and are being added by the day, and it spells ECONOMIC doom. Global growth is falling off a cliff in the developed world and the structural reform REQUIRED will not be considered until the economic collapse is complete.

Thank you for reading Tedbits. If you enjoyed it...

If you enjoyed this edition of Tedbits then subscribe – it's free , and we ask you to send it to a friend and visit our archives for additional insights from previous editions, lively thoughts, and our guest commentaries. Tedbits is a weekly publication. By Ty Andros

 

[bevok]

Firstly, totally agree that the US is continuing to follow the extremely fiscally imprudent policies of the past ten years, and needs desperately to enter a period of austerity and get on track to paying back debt. The unfortunate reality is that most politicians and economists couldn't balance a cheque book.

I question the accusation of socialist against Obama. A huge amount of money was given to banks to avoid a banking crisis. The so-called 'capitalist pigs' have been the ones with their snouts in the trough far more than ordinary Americans. Sure, the only thing to do in the circumstances was to avoid a banking crisis - anyone who said otherwise needs to study their history. That said the spineless lack of immediate regulation and change to break up the banks, and dramatically increase their reserve requirements is unforgivable. Capital Hill/The White House need to hop out of bed with Wall Street lobbyists and start acting with some credibility.

Disclaimer: I don't live in the US.

 

[Depth Trade]

Firstly, totally agree that the US is continuing to follow the extremely fiscally imprudent policies of the past ten years, and needs desperately to enter a period of austerity and get on track to paying back debt. The unfortunate reality is that most politicians and economists couldn't balance a cheque book.

I question the accusation of socialist against Obama. A huge amount of money was given to banks to avoid a banking crisis. The so-called 'capitalist pigs' have been the ones with their snouts in the trough far more than ordinary Americans. Sure, the only thing to do in the circumstances was to avoid a banking crisis - anyone who said otherwise needs to study their history. That said the spineless lack of immediate regulation and change to break up the banks, and dramatically increase their reserve requirements is unforgivable. Capital Hill/The White House need to hop out of bed with Wall Street lobbyists and start acting with some credibility.

Disclaimer: I don't live in the US.

Hello Bevok and good day. I guess we can agree that the situation is extremely complicated and it does not help having people that neither care nor understand the dynamics involved.

Please feel free to post your commentary here any time.

 

[Depth Trade]

Still holding previously entered positions.

Gbp/usd long: + 86 pips

Usd/jpy short: - 36 pips

Have entered the following positions.

Xau/usd: long 1227.94

Xag/usd: long 18.317

Have the following open orders.

Gld: long at market open

Slv: long at market open

Still holding the Usd/jpy and Metal positions. Gbp/usd position has been closed as updated in previous post.


Classic FX Intraday 2.0
Calmar ratio (compounded annual return / max draw down) 51.205 %
Compounded annual return / Expected Shortfall lognormal 46.305 %
Sharpe ratio (Glass type estimate) 3.218
Sharpe ratio (Hedges UMVUE) 2.858




"Lure People Into That Calm and Then Just Totally F--k 'Em": How All of Us Pay for the Derivatives Market
Derivatives are a hotbed of abuses and bailouts. So why are taxpayers footing the bill?
June 11, 2010
http://www.alternet.org/economy/147...how_all_of_us_pay_for_the_derivatives_market/

For the Wall Street reform package currently making its way through Congress to work, it has to accomplish two broad goals: It must take a huge bite out of banking profits and end the too-big-to-fail oligopoly that encourages megabanks to take megarisks and stick taxpayers with the tab. Neither of these goals can be accomplished without taking on derivatives -- the wild, unregulated market that brought down AIG. Right now, the U.S. government pays big banks for operating derivatives casinos. If we're going to clean up the derivatives mess, we have to move taxpayer money out of the market.

"The dirty little secret here is that the American government has been subsidizing the derivatives market through the Fed and other avenues since its inception," says Adam White, director of research for White Knight Research and Trading. "That's crazy."

What kind of business is the American taxpayer subsidizing? One with a history of deception and abuse that dates back to its earliest years. Back in 1993 when derivatives casino was first getting off the ground, a Wall Street titan called Bankers Trust Co. sold a derivatives package to drug and chemical giant Procter & Gamble. At the time, Bankers Trust was a powerful, well-respected financial player, which was how it scored big-time clients like P&G. But P&G ultimately took a huge loss on the deal with Bankers Trust, and took the bank to court, where it obtained more than 6,500 tape recordings of horrific derivatives strategizing.

The public release of those tapes was not enough to compel Congress to actually do anything as a matter of public policy, but it was more than sufficient to utterly ruin Bankers Trust. One quote from the tapes, in particular, has become infamous among the nation's financial establishment, but remains obscure to the general public. It's a Bankers Trust salesman, describing the Procter & Gamble deal:

"Funny business you know? Lure people into that calm and then just totally **** 'em."

To this day, such techniques remain a central part of the derivatives business, as the SEC's recent fraud suit against Goldman Sachs has made clear. These operations are ugly enough as purely private-sector enterprises. But the real disgrace is that ordinary taxpayers are actually helping to fund it. That taxpayer payout, in turn, creates market distortions that encourage fraud, abuse and bailouts.

"In the fall of 2008, when the derivatives market-making of the five big banks lead to a systemic catastrophe, the banks all proudly walked back to the Fed window to get assistance to prop up their derivatives market-making," says Michael Greenberger, who served as the chief deputy to Commodity Futures Trading Commissioner Brooksley Born during her unsuccessful attempt to rein in the derivatives market in 1998. "The central question is whether we want this to be part of the basic business of derivatives. That seems insane."

As the Wall Street reform bill moves into its final stage of negotiations, the only proposal still on the table that would actually move taxpayer money out of the derivatives sinkhole comes from the unlikely source of Sen. Blanche Lincoln, D-Ark., a career corporatist who has never shown much interest in regulating anything. But it's a whopper of a proposal, one that comes free of any loopholes and goes straight to the heart of Wall Street's bubble machine.

 

[Depth Trade]

Still holding previously entered positions.

Usd/jpy short: - 36 pips

Have entered the following positions.

Xau/usd: long 1227.94

Xag/usd: long 18.317

Have the following open orders.

Gld: long at market open

Slv: long at market open

Update
Still holding Usd/jpy short position along with metal longs.

Usd/jpy short: + 10 pips

Xag/usd long: + $0.12

Xag/usd long: + $5.60

Classic FX 2.0
Calmar ratio (compounded annual return / max draw down) 87.647 %
Compounded annual return / Expected Shortfall lognormal 82.678 %
Sharpe ratio (Glass type estimate) 4.747
Sharpe ratio (Hedges UMVUE) 4.285


From The Times June 15, 2010
Economy may never recover from banking crisis, warns OBR
Francis Elliott, Gráinne Gilmore

The economy, more damaged by the banking crisis than previously admitted, will grow more weakly and may never fully recover, the new Office for Budget Responsibility (OBR) said yesterday.

The conclusion adds billions of pounds to the total that George Osborne must find if he is to restore the public finances to health.

Public sector workers were warned yesterday that taxpayers could no longer afford their “unreformed, gold-plated pension pots” as the Lib-Con coalition Government used the first OBR forecasts to step up efforts to prepare voters for next week’s Budget.

Growth is forecast at 2.6 per cent next year and 2.8 per cent in 2012, far below Alistair Darling’s predictions for 3.25 and 3.5 per cent respectively. This leaves Britain’s structural deficit — which is impervious to the economic cycle — bigger than feared over the next five years. It will hit 8.8 per cent of GDP, or £123.7 billion this year, compared with Mr Darling’s forecast of 8.4 per cent of GDP. By 2014-15 it will have fallen only to 2.8 per cent of GDP, the budget office said, rather than the 2.5 per cent anticipated by Labour.

The Chancellor will outline a week today how much he intends to raise in new taxes and spending cuts over the next five years. The coalition is committed to “significantly accelerate the reduction of structural deficit”. Treasury sources indicated that Mr Osborne was determined to set an ambitious target despite the higher-than-expected total.

Experts calculate that the OBR’s forecasts mean that he must find £85 billion if he is to balance the books by the end of the Parliament — the commitment he made in January. The Chancellor is likely to want to “spread the pain” between welfare cuts, deeper-than-planned reductions to spending and new tax rises, the Institute for Fiscal Studies said yesterday.

Aides insisted that Mr Osborne remained committed to raising about 80 per cent of the cash through spending cuts and the rest in tax. But with the structural deficit increasing by about £12 billion this year against previous estimates, there was speculation that a further £2.4 billion would be needed from new taxes.

Nick Clegg became the latest senior figure to prepare the ground with a warning on the need for reform of public sector pay and pensions. “Private sector workers have already seen final salary schemes close, while returns from defined contribution schemes fall. So can we really ask them to keep paying their taxes into unreformed, gold-plated public sector pension pots? It’s not just unfair, it’s not affordable,” the Deputy Prime Minister said.

The task of convincing voters was made harder by the OBR’s finding that the Government would have to borrow £23 billion less than feared. Higher tax receipts and less cautious predictions on unemployment and VAT payments helped to trim the projections. The budget office said that the Government would borrow £155 billion — or 10.5 per cent of GDP — this year, down from Mr Darling’s forecast for borrowing of £163 billion, or 11.1 per cent of GDP. But by 2014, it expects borrowing to be £71 billion, down from Mr Darling’s prediction of £74 billion.

That led the former Chancellor to demand an apology from David Cameron for his remarks that Labour had left the country’s finances in a “worse state than we had thought”. The OBR report “far from providing the cover for the Conservatives and Liberal Democrats for cuts and tax rises next week” was a reminder that “growth is still fragile”, Mr Darling said. “Confidence is being affected by the scaremongering that we see from the Prime Minister and the Chancellor,” he added.

Mr Osborne said that Sir Alan Budd’s OBR panel had “understated” the deterioration in the nation’s finances and that borrowing was less bad than feared, in part because interest rates had fallen as markets became convinced that the deficit would be properly addressed by the coalition.

Economists warned that the Budget was likely to be tough. Howard Archer, the chief UK and European economist at IHS Global Insight, said that policymakers were preparing taxpayers for “the nasty medicine that the UK economy has to take for a long time”.

But the budget office said that the financial crisis had taken a bigger toll on the economy than the Treasury had admitted, calculating that the economy’s trend rate of growth — the growth that it can achieve before stoking inflation — would be 2.1 per cent in 2014, down from the previous assumption of 2.75 per cent. This is expected to drag total economic output down by £122 billion by 2014-15, making the hole left by the financial crisis about £30 billion bigger than Mr Darling estimated.

The OBR forecasts included official data never before released. Spending on public sector pensions is due to more than double over the Parliament, from £4 billion this year to about £9.4 billion in 2014-15.

Social security is expected to climb by more than £20 billion, from £169 billion this year to £192 billion in 2014-15, and the cost of servicing the country’s debt is due to rise from £42 billion to £67 billion in four years, — slightly under the £70 billion of which Mr Cameron gave warning. Britain’s EU contribution will rise from £8 billion this year to £10 billion a year by 2015.

Q&A

So, more economists and more opinions. How will that help?
The idea is that the Office for Budget Responsibility (OBR) will give much more credible forecasts for growth and government finances than the Treasury. There will be “less politically motivated wishful thinking”, the Institute for Fiscal Studies said. The OBR will impose hard discipline on the Chancellor by setting the basic framework upon which he builds his tax and spending plans. It may also provide the material to shield governments from public attack when they have to make unpopular financial decisions.

Will the OBR forecasts be any more accurate than Darling’s?
Probably not. Sir Alan Budd, OBR chairman, emphasised the fallibility of the new organisation, only promising: “Our best shot at an impossible task.” Uncertainties in the real world usually make a mockery of the most careful predictions. But ministers have to start somewhere when making policy.

Don’t the IMF, OECD and City banks already supply outside forecasts?
Yes, but the OBR’s forecasts will be used by the Government to shape policy. The new body will also have a potential weapon — it will be able to cast doubt publicly on government policy. One job of the OBR will be to regularly issue a formal opinion on whether the Chancellor has a better than even chance of meeting his own fiscal mandate. However, the mandate has yet to be spelt out.

Who’s calling the shots at the OBR?
There is a three-man team. Sir Alan Budd served as an economic adviser to the Treasury between 1970 and 1974, returning in 1991 as chief economic adviser until 1997 when he became a founder member of the Bank of England’s interest rate-setting committee. His lieutenants are Geoffrey Dicks, a former economist at Royal Bank of Scotland, and Graham Parker, a retired veteran from the Inland Revenue and Treasury.

What does yesterday’s report say?
That the OBR thinks the British economy will grow more slowly than Labour predicted and that the deficit will be cleared a bit more quickly.

But if the economy is more sluggish, won’t public finances be worse?
Normally, yes. But Sir Alan has made less conservative assumptions than the old Treasury team. He believes the Treasury was too pessimistic about evasion and collection of VAT. This alone means the taxman will over five years collect £10 billion more than predicted, he says.

A bit convenient, isn’t it?
The old Treasury team built prudent cushions into their assumptions. Sir Alan believes his central forecast should reflect the most likely outcome. His figures are also due to projecting the better-than-expected income tax receipts of the past two months into the future — he says only a minor portion of this unexpected windfall was due to people bringing forward income to dodge the higher tax rates.

How did it play in Westminster?
Labour seized on the improvement to the public accounts compared with three months ago. The coalition pointed to the much slower economic growth predictions and to Sir Alan’s view that the structural deficit — the underlying shortfall which won’t be corrected by a return to growth — is worse. George Osborne, the Chancellor, still has enough ammunition to justify some harsh austerity measures next week.

 

[Depth Trade]

Update
Still holding Usd/jpy short position along with metal longs.

Usd/jpy short: + 10 pips

Xag/usd long: + $0.12

Xag/usd long: + $5.60

Classic FX 2.0
Calmar ratio (compounded annual return / max draw down) 87.647 %
Compounded annual return / Expected Shortfall lognormal 82.678 %
Sharpe ratio (Glass type estimate) 4.747
Sharpe ratio (Hedges UMVUE) 4.285

Have just exited Usd/jpy position. Still holding metal positions.

Usd/jpy short: out 90.83
+ 0.50%

Xag/usd long: + $0.42
+ 0.33%

Xau/usd long: + $19.93
+ 1.9%


Classic FX 2.0
Calmar ratio (compounded annual return / max draw down) 231.783 %
Compounded annual return / Expected Shortfall lognormal 210.197 %
Sharpe ratio (Glass type estimate) 7.449
Sharpe ratio (Hedges UMVUE) 6.808



Wednesday, June 16, 2010
Bank Run in Spain and Its Destabilizing Ramifications for the Entire EU

Spanish banks are borrowing record amounts from the European Central Bank.

According to FT, Spanish banks borrowed €85.6bn ($105.7bn) from the ECB last month. This was double the amount lent to them before the collapse of Lehman Brothers in September 2008 and 16.5 per cent of net eurozone loans offered by the central bank.

“If the suspicion that funding markets are being closed down to Spanish banks and corporations is correct, then you can reasonably expect the share of ECB liquidity accounted for by the country to have risen further this month,” said Nick Matthews, European economist at RBS.

Bottom line: This is nothing but a sign of a run on Spanish banks. They can't get funding in the markets and there is a steady withdrawal of funds from the banks. For all practical purposes, the ECB is supporting the Spanish banking system with life support measures. This means that the ECB will have to drain funds from elsewhere in the system to sterilize this rescue operation. Without sterilization the effort becomes very inflationary, with sterilization the effort distorts the entire EU economy. It's all destabilizing.

The only reasonable alternative is to allow the Spanish banks to go into bankruptcy and restructure.
Posted by Robert Wenzel at 10:08 AM

 

[Depth Trade]

Still holding previously entered positions.

Gbp/usd long: + 86 pips

Usd/jpy short: - 36 pips

Have entered the following positions.

Xau/usd: long 1227.94

Xag/usd: long 18.317

Have the following open orders.

Gld: long at market open

Slv: long at market open

All remaining Metal positions have been closed. Holding zero positions.

Xau/usd long out at: $1260.76

Xag/usd long out at: $19.192

Gld and Slv exited at corresponding prices.

Classic FX 2.0
Calmar ratio (compounded annual return / max draw down) 228.781 %
Compounded annual return / Expected Shortfall lognormal 237.168 %
Sharpe ratio (Glass type estimate) 8.23
Sharpe ratio (Hedges UMVUE) 7.702



U.S. home building craters after tax break expires

By Rex Nutting , MarketWatch
WASHINGTON (MarketWatch) -- As expected, U.S. home builders sharply reduced construction as a federal tax break for home buyers expired, according to estimates released Wednesday by the Commerce Department.

Housing starts fell 10% to a seasonally adjusted annual rate of 593,000 in May, the lowest level since December. The details were even worse, as starts of single-family homes plunged 17% to a seasonally adjusted rate of 468,000, the lowest in a year.

It was the largest percentage decline in single-family starts since 1991.

Housing starts were up 7.8% compared with May 2009, but are down more than 70% from the peak. Read the full report on the Census Bureau's website.

The tax credit and low mortgage rates have helped revive home sales and construction from the worst downturn since World War II. But with the credit expiring, builders face tough competition from foreclosures of existing homes, and buyers remain cautious about the job market. In some areas, prices are still falling. "Read "Welcome to the post-tax-credit housing malaise."

Most economists expect the weakness to persist for the next several months. "The tax credit pulled housing transactions and construction activity forward into the spring from the summer, so the next few months will see activity remaining at a very low level," wrote Ian Shepherdson, chief U.S. economist for High Frequency Economics. "We expect activity to begin reviving, gradually, in the fall.

"We think that rising employment will lead to a gradual improvement in housing activity over the second half of the year," wrote Nigel Gault, chief U.S. economist for IHS Global Insight. But "the payback has further to run first." Read more from Amy Hoak about the link between jobs and housing.

The report was worse than expected. Economists surveyed by MarketWatch were forecasting a 7% drop to 623,000. April's starts were revised lower to a 659,000 rate from 672,000 previously estimated. See our complete economic calendar and consensus forecast.

Building permits fell sharply in May for the second straight month, with total authorizations falling 5.9% to a 574,000 annual pace after falling 10% in April. Single-family permits fell 10% for the second month in a row to a 438,000 pace.

Permits for single-family homes -- considered by many analysts to be the best gauge of the health of the building market -- stood at the lowest level in a year.

Permits and starts had risen smartly earlier in the year, as builders rushed to meet the deadline for the federal home buyers' subsidy. To qualify for the credit, buyers had to sign a sales contract by April 30 and close the sale by June 30.

It would be rare to start construction in May and complete it by June 30.

Starts on multifamily dwellings jumped 33% in May, while permits for apartments and condos rose 10%.

The number of homes under construction fell 2.3% in May to a record-low 475,000, with the data beginning in 1970. The number of homes under construction has fallen for 48 straight months.

The government cautions that its monthly housing data are volatile and subject to large sampling and other statistical errors. In most months, the government can't be sure whether starts increased or decreased. In May, for instance, the standard error for starts was plus or minus 10.3%. Large revisions are common.

The standard error for monthly building permits data is much lower at plus or minus 2.2%.

It can take three months for a new trend in housing starts or permits to emerge from the data. In the past three months, housing starts have averaged 629,000 annualized, down modestly from 633,000 in the three months ending in April. Building permits have averaged 623,000 over the past three months, down from 648,000.

The immediate future for home building doesn't look bright. A survey of home builders released on Tuesday showed sentiment falling in June. Read our full story on the home builders' index.

Although builders have cut back their production and inventories of unsold homes have been slashed, new construction is hobbled by a glut of existing homes for sale and by high unemployment.

In other economic news, the Federal Reserve reported that industrial production jumped 1.2% in May, the largest gain since August, boosted by broad-based gains from most manufacturing industries. See full story on the surging industrial sector.

 

[Depth Trade]

Have entered the following position.

Eur/jpy long: 112.507
s/l: 112.074

Classic FX 2.0
Calmar ratio (compounded annual return / max draw down) 228.781 %
Compounded annual return / Expected Shortfall lognormal 237.168 %
Sharpe ratio (Glass type estimate) 8.23
Sharpe ratio (Hedges UMVUE) 7.702


Gold prices hover near all-time highs as physical gold holdings rise

Prices of the yellow metal were also supported by a weaker dollar and continued concerns about the state of the European economy

Author: Lewa Pardomuan
Posted: Friday , 18 Jun 2010

SINGAPORE (Reuters) -

Gold held steady near an all-time high on Friday after a rise in physical gold holdings supported by a weaker dollar and persistent worries about Europe's fiscal outlook.

Holdings in the world's largest bullion-backed Exchange Traded Fund rose for the first time in a week to a record as investors built up positions due to uncertainty in the global economy.

Spot gold rose as high as $1,248 an ounce in early trade, lifted by the firming euro. Gold stood at $1,243.60 an ounce at 10:28 p.m. ET, barely changed from New York's notional close on Thursday.

Silver was steady, while platinum group metals edged down alongside industrial base metals.

"I would expect a little bit of volatility in the week ahead. But I don't, at this stage, see any reason why gold will sell off, certainly not below $1,200," said Darren Heathcote, head of trading at Investec Australia in Sydney.

"Looking at it technically, we could be aiming toward $1,260, but on support side, probably somewhere around toward $1,225-ish."

Gold hit an intraday high around $1,250 on Thursday, coming within sight of a record high of $1,251.20 struck June 8, when investors poured money into gold due to worries the euro zone debt crisis was spreading.

U.S. gold futures for August delivery fell $2.6 an ounce to $1,246.1 an ounce.

The world's largest gold-backed exchange-traded fund, SPDR Gold Trust (GLD.P) said its holdings rose to a record high at 1,307.963 tonnes as of June 17 from 1,306.137 tonnes on June 10.

Europe's fiscal problems are a risk that will have some effect on U.S. growth during the rest of this year and 2011, U.S. Federal Reserve vice chairman Donald Kohn said in an interview with the Wall Street Journal.

Traders said volumes were thin, making it easier to move prices.

"I think the market is bit thin, so it's easy to push it up. It's the same old story, ... the euro zone is still struggling and the interest rates are low in many big nations," said a dealer in Hong Kong.

"There was light physical buying yesterday but we don't hear anything now," the dealer said, referring to purchases from jewelers.

The euro held steady near three-week highs on Friday, as investors liquidated short positions after a robust response to Spanish bond auctions, while the U.S. dollar appeared vulnerable to a sell-off.

U.S. data showed a decline in the Philadelphia Federal Reserve's mid-Atlantic manufacturing index while there was a rise in first-time jobless claims.

The Nikkei edged up 0.2 percent on Friday, climbing back toward a one-month high hit earlier in the week after U.S. stocks inched higher on momentum gained after the S&P 500 index broke through its 200-day moving average. .T .N

U.S. crude futures extended losses on Friday as sluggish economic indicators raised doubts about the sustainability of a recent acceleration in demand growth by top oil consumer the United States.

(Editing by Nick Trevethan)

 

[Depth Trade]

Have entered the following position.

Eur/jpy long: 112.507
s/l: 112.074

Classic FX 2.0
Calmar ratio (compounded annual return / max draw down) 228.781 %
Compounded annual return / Expected Shortfall lognormal 237.168 %
Sharpe ratio (Glass type estimate) 8.23
Sharpe ratio (Hedges UMVUE) 7.702

Eur/jpy position has been closed at the following price.

Eur/jpy long: out at 113.124
+ 2.02%


Classic FX 2.0
Calmar ratio (compounded annual return / max draw down) 232.384 %
Compounded annual return / Expected Shortfall lognormal 241.931 %
Sharpe ratio (Glass type estimate) 8.309
Sharpe ratio (Hedges UMVUE) 7.777

 

[Depth Trade]

Holding zero positions.
Flat.

Classic FX 2.0
Sharpe ratio (Glass type estimate) 9.040
Sharpe ratio (Hedges UMVUE) 8.579
Calmar ratio (compounded annual return / max draw down) 261.292 %
Compounded annual return / average of 25% largest draw downs 261.292 %
Compounded annual return / Expected Shortfall lognormal 286.397 %



T-Minus 7 Days To A LIBOR-Induced Liquidity Crunch?
Submitted by Tyler Durden on 06/22/2010 19:02 -0500

Zero Hedge has been discussing the ongoing liquidity constriction around the world over the past month, focusing on Europe and China, where conditions range from icy to outright frozen. One country that has been largely ignored, is our very own USA, where despite the Fed's ongoing liquidity flood, the last few days have seen short-term secured funding in the form of Top Tier Commercial Paper once again jumping to near 2010 highs at 0.43% (see chart). This is in stark contrast with ultra short-dated Treasuries, where 30 Day Bills are just barely yielding 0.05% (and were as low as 0.02% a few days prior).

Yet for all domestic jitters, it appears that the next source of an (il)liquidity crunch will once again come from Europe. As Barclays' Joseph Abate notes, there is one event is on the horizon which could send Libor rates as high as 50% higher. And that event will occur on July 1 - the 1 year anniversary of the ECB's Long-Term Refinancing Operation.

This 371 Day LTRO was created just under a year ago by the ECB to add €442 billion in liquidity to front-end markets. It is precisely this LTRO that facilitated not only the decline in the FRBNY's FX swaps, but the gradual drop in dollar Libor to all time lows. The program was so successful that the ECB followed it up with two other one-year LTROs, yet both much smaller: one for €75 and one for €97 billion. Yet the Halcyon days of well over half a trillion in excess CB-provided liquidity are ending on July 1, and the roll off will be a critical event, which could set off yet another liquidity crunch first in Europe, and then everywhere else.

The first consideration is that the facility will not roll into a comparable unlimited 1 Year tender, but instead into a much shorter 3 month operation. As Abate points out: "Market attention is focused on how much of the €442bn stays at the ECB and how much leaves the program: currently there is about €300bn “surplus” liquidity in the euro area market, and so a full rollover is not theoretically needed."

And as nobody but JCT really knows what quality collateral is pledging any one euro of circulating money, especially post the complete loosening of A-rating triggers to pledging sovereign debt post the Greece bankruptcy (unlike the broader media, we don't mind calling a spade a spade), the willingness to unwind the facility will speak volumes about Europe's banks:

[Barclays] European analysts reckon that based on the level and regional composition of the liquidity on deposit at the ECB, perhaps as much as € 150bn could leave in search of cheaper financing in the market. Unfortunately, the ECB’s balance sheet figures are less transparent than the Federal Reserve’s, so analysts do not have a strong sense of what types of collateral have been pledged into the facility. Obviously, the more government securities pledged, the more likely it is the 3m replacement LTRO will be considerably smaller than the €442bn rolling off.

Yet no matter how much of the full amount rolls off, there will be an immediate "cliff" event in liquidity needs as the public funding market will be replaced by the private: sorry, Jean-Claude, you can't have your public cake and have the private sector eat it (the cake, not the sector).

Any paper leaving the ECB will need to be funded in the market – which given the global reach of many participating banks, should put upward pressure on Eonia as well as dollar Libor. All things equal, however, the smaller the replacement LTRO is relative to the €442bn roll-off, the more likely it is Libor will increase from 53bp currently.

Another way of looking at why Libor is set to surge is based on expectations of what is happening behind the scenes, as nobody still have any idea what is really held by the ECB, either in its LTRO, or any other Operational facilities:

Assuming that most of the collateral pledged in the LTRO is lower quality, there might not be much of an exodus out of the facility. Instead, the replacement 3m LTRO could be nearly as large as the original €442bn. Not only would this indicate that banks still have lower quality assets on their balance sheets – but that the decline in market rates since last July has not been broad or deep enough to enable institutions to leave the security of the ECB. Market participants could interpret this as an indication of still high counterparty credit risk. In turn, this would raise FRA-OIS rates – in both Europe and the US as investors reassess credit exposure.

And the piece de resisance is that the imminent disclosure of the European "Stress Tests" will backfire, as they will be announced at a time when liquidity tensions are soaring, and Libor is starting to surge once again.

Credit concerns could also be reignited next month with the release of the EU’s bank stress test results. To the extent that financial markets interpret these results negatively, FRA-OIS might get an additional push higher.

Will all this be sufficient to cause an interbank lending crisis in the US, comparable to that enveloping Spain and soon other European countries? At this point it is still difficult to make a determination, although the two opposing forces of Fed reliquification, and private market stress escalation, will once again certainly be locked in a duel, which will definitely have an impact on all risk assets. Perhaps it is this that tension that has been keeping the market on edge. Either way, keep an eye out on Libor, CP (both US and European), and ultra short dated Bills: despite the Fed's interventions, the broader market will overwhelm a liquidity intervention any day, and the Fed may soon find itself with little if any options to restore liquidity in the broader capital markets, increasingly losing any and all credibility, precisely courtesy of seemingly endless Central bank intervention.

 

[Depth Trade]

I completely missed my trades for this week.
My computer is infected with a virus that is constantly insisting I purchase anti-virus software and it does not allow me to use my computer at all. By the time I finally got online last night and was able to open my trade platform using a backup laptop, it was already 11:30pm and I decided I would be able to enter positions in the morning. To my dissatisfaction the Eur/chf, Eur/Gbp, Eur/Jpy had already made a huge move in the direction of my original bias for the week, leaving me frustrated and dropping my statistics lower then they should be

Classic FX 2.0
28/06/10
Sharpe ratio (Glass type estimate) 7.648
Sharpe ratio (Hedges UMVUE) 7.357
Calmar ratio (compounded annual return / max draw down) 154.973 %
Compounded annual return / average of 25% largest draw downs 154.973 %
Compounded annual return / Expected Shortfall lognormal 181.618 %
Maximum drawdown -1.9%



RBS tells clients to prepare for 'monster' money-printing by the Federal Reserve
As recovery starts to stall in the US and Europe with echoes of mid-1931, bond experts are once again dusting off a speech by Ben Bernanke given eight years ago as a freshman governor at the Federal Reserve.

By Ambrose Evans-Pritchard, International Business Editor
Published: 5:11PM BST 27 Jun 2010

Entitled "Deflation: Making Sure It Doesn’t Happen Here", it is a warfare manual for defeating economic slumps by use of extreme monetary stimulus once interest rates have dropped to zero, and implicitly once governments have spent themselves to near bankruptcy.

The speech is best known for its irreverent one-liner: "The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost."

Bernanke began putting the script into action after the credit system seized up in 2008, purchasing $1.75 trillion of Treasuries, mortgage securities, and agency bonds to shore up the US credit system. He stopped far short of the $5 trillion balance sheet quietly pencilled in by the Fed Board as the upper limit for quantitative easing (QE).

Investors basking in Wall Street's V-shaped rally had assumed that this bizarre episode was over. So did the Fed, which has been shutting liquidity spigots one by one. But the latest batch of data is disturbing.

The ECRI leading indicator produced by the Economic Cycle Research Institute plummeted yet again last week to -6.9, pointing to contraction in the US by the end of the year. It is dropping faster that at any time in the post-War era.

The latest data from the CPB Netherlands Bureau shows that world trade slid 1.7pc in May, with the biggest fall in Asia. The Baltic Dry Index measuring freight rates on bulk goods has dropped 40pc in a month. This is a volatile index that can be distorted by the supply of new ships, but those who watch it as an early warning signal for China and commodities are nervous.

Andrew Roberts, credit chief at RBS, is advising clients to read the Bernanke text very closely because the Fed is soon going to have to the pull the lever on "monster" quantitative easing (QE)".

"We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable," he said in a note to investors.

Roberts said the Fed will shift tack, resorting to the 1940s strategy of capping bond yields around 2pc by force majeure said this is the option "which I personally prefer".

A recent paper by the San Francisco Fed argues that interest rates should now be minus 5pc under the bank's "rule of thumb" measure of capacity use and unemployment. The rate is currently minus 2pc when QE is factored in. You could conclude, very crudely, that the Fed must therefore buy another $2 trillion of bonds, and even more if Europe's EMU debacle goes from bad to worse. I suspect that this hints at the Bernanke view, but it is anathema to hardliners at the Kansas, Richmond, Philadephia, and Dallas Feds.

Societe Generale's uber-bear Albert Edwards said the Fed and other central banks will be forced to print more money whatever they now say, given the "stinking fiscal mess" across the developed world. "The response to the coming deflationary maelstrom will be additional money printing that will make the recent QE seem insignificant," he said.

Despite the apparent rift with Europe, the US is arguably tightening fiscal policy just as hard. Congress has cut off benefits for those unemployed beyond six months, leaving 1.3m without support. California has to slash $19bn in spending this year, as much as Greece, Portugal, Ireland, Hungary, and Romania combined. The states together must cut $112bn to comply with state laws.

The Congressional Budget Office said federal stimulus from the Obama package peaked in the first quarter. The effect will turn sharply negative by next year as tax rises automatically kick in, a net swing of 4pc of GDP. This is happening as the US housing market tips into a double-dip. New homes sales crashed 33pc to a record low of 300,000 in May after subsidies expired.

It is sobering that zero rates, QE a l'outrance, and an $800bn fiscal blitz should should have delivered so little. Just as it is sobering that Club Med bond purchases by the European Central Bank and the creation of the EU's €750bn rescue "shield" have failed to stabilize Europe's debt markets. Greek default contracts reached an all-time high of 1,125 on Friday even though the €110bn EU-IMF rescue is up and running. Are investors questioning EU solvency itself, or making a judgment on German willingness to back pledges with real money?

Clearly we are nearing the end of the "Phoney War", that phase of the global crisis when it seemed as if governments could conjure away the Great Debt. The trauma has merely been displaced from banks, auto makers, and homeowners onto the taxpayer, lifting public debt in the OECD bloc from 70pc of GDP to 100pc by next year. As the Bank for International Settlements warns, sovereign debt crises are nearing "boiling point" in half the world economy.

Fiscal largesse had its place last year. It arrested the downward spiral at a crucial moment, but that moment has passed. There is a time to love and a time to hate, a time for war and a time for peace. The Krugman doctrine of perma-deficits is ruinous - and has in fact ruined Japan. The only plausible escape route for the West is a decade of fiscal austerity offset by helicopter drops of printed money, for as long as it takes.

Some say that the Fed's QE policies have failed. I profoundly disagree. The US property market - and therefore the banks - would have imploded if the Fed had not pulled down mortgage rates so aggressively, but you can never prove a counter-factual.

The case for fresh QE is not to inflate away the debt or default on Chinese creditors by stealth devaluation. It is to prevent deflation.

Bernanke warned in that speech eight years ago that "sustained deflation can be highly destructive to a modern economy" because it leads to slow death from a rising real burden of debt.

At the time, the broad money supply war growing at 6pc and the Dallas Fed's `trimmed mean' index of core inflation was 2.2pc.

We are much nearer the tipping today. The M3 money supply has contracted by 5.5pc over the last year, and the pace is accelerating: the 'trimmed mean' index is now 0.6pc on a six-month basis, the lowest ever. America is one twist shy of a debt-deflation trap.

There is no doubt that the Fed has the tools to stop this. "Sufficient injections of money will ultimately always reverse a deflation," said Bernanke. The question is whether he can muster support for such action in the face of massive popular disgust, a Republican Fronde in Congress, and resistance from the liquidationsists at the Kansas, Philadelphia, and Richmond Feds. If he cannot, we are in grave trouble.

 

[Depth Trade]

Holding zero positions. Flat.


Classic FX 2.0
28/06/10
Sharpe ratio (Glass type estimate) 7.250
Sharpe ratio (Hedges UMVUE) 6.999
Calmar ratio (compounded annual return / max draw down) 132.527 %
Compounded annual return / average of 25% largest draw downs 132.527 %
Compounded annual return / Expected Shortfall lognormal 159.517 %
Maximum drawdown -1.9%



Time to shut down the US Federal Reserve?
By Ambrose Evans-Pritchard Economics Last updated: June 29th, 2010

Like a mad aunt, the Fed is slowly losing its marbles.

Kartik Athreya, senior economist for the Richmond Fed, has written a paper condemning economic bloggers as chronically stupid and a threat to public order.

Matters of economic policy should be reserved to a priesthood with the correct post-doctoral credentials, which would of course have excluded David Hume, Adam Smith, and arguably John Maynard Keynes (a mathematics graduate, with a tripos foray in moral sciences).


Adam Smith didn't have an economics PhD

“Writers who have not taken a year of PhD coursework in a decent economics department (and passed their PhD qualifying exams), cannot meaningfully advance the discussion on economic policy.”

Don’t you just love that throw-away line “decent”? Dr Athreya hails from the University of Iowa.

“The response of the untrained to the crisis has been startling. The real issue is that there is an extremely low likelihood that the speculations of the untrained, on a topic almost pathologically riddled by dynamic considerations and feedback effects, will offer anything new. Moreover, there is a substantial likelihood that it will instead offer something incoherent or misleading.”

You couldn’t make it up, could you?

“Economics is hard. Really hard. You just won’t believe how vastly hugely mind-boggingly hard it is. I mean you may think doing the Sunday Times crossword is difficult, but that’s just peanuts to economics. And because it is so hard, people shouldn’t blithely go shooting their mouths off about it, and pretending like it’s so easy. In fact, we would all be better off if we just ignored these clowns.”

I hold my hand up Dr Athreya and plead guilty. I am grateful to Bruce Krasting’s blog for bringing this stinging rebuke to my attention.

However, Dr Athreya’s assertions cannot be allowed to pass. The current generation of economists have led the world into a catastrophic cul de sac. And if they think we are safely on the road to recovery, they still fail to understand what they did.

Central banks were the ultimate authors of the credit crisis since it is they who set the price of credit too low, throwing the whole incentive structure of the capitalist system out of kilter, and more or less forcing banks to chase yield and engage in destructive behaviour.

They ran ever-lower real interests with each cycle, allowed asset bubbles to run unchecked (Ben Bernanke was the cheerleader of that particular folly), blamed Anglo-Saxon over-consumption on excess Asian savings (half true, but still the silliest cop-out of all time), and believed in the neanderthal doctrine of “inflation targeting”. Have they all forgotten Keynes’s cautionary words on the “tyranny of the general price level” in the early 1930s? Yes they have.

They allowed the M3 money supply to surge at double-digit rates (16pc in the US and 11pc in euroland), and are now allowing it to collapse (minus 5.5pc in the US over the last year). Have they all forgotten the Friedman-Schwartz lessons on the quantity theory of money? Yes, they have. Have they forgotten Irving Fisher’s “Debt Deflation causes of Great Depressions”? Yes, most of them have. And of course, they completely failed to see the 2007-2009 crisis coming, or to respond to it fast enough when it occurred.

The Fed has since made a hash of quantitative easing, largely due to Bernanke’s ideological infatuation with “creditism”. QE has been large enough to horrify everybody (especially the Chinese) by its sheer size – lifting the balance sheet to $2.4 trillion – but it has been carried out in such a way that it does not gain full traction. This is the worst of both worlds. So much geo-political capital wasted to such modest and distorting effect.

The error was for the Fed to buy the bonds from the banking system (and we all hate the banks, don’t we) rather than going straight to the non-bank private sector. How about purchasing a herd of Texas Longhorn cattle? That would do it. The inevitable result of this is a collapse of money velocity as banks allow their useless reserves to swell.

And now the Fed tells us all to shut up. Fie to you sir.

The 20th Century was a horrible litany of absurd experiments and atrocities committed by intellectuals, or by elite groupings that claimed a higher knowledge. Simple folk usually have enough common sense to avoid the worst errors. Sometimes they need to take very stern action to stop intellectuals leading us to ruin.

The root error of the modern academy is to pretend (and perhaps believe, which is even less forgiveable), that economics is a science and answers to Newtonian laws.

In any case, Newton was wrong. He neglected the fourth dimension of time, as Einstein called it, and that is exactly what the new classical school of economics has done by failing to take into account the intertemporal effects of debt – now 360pc of GDP across the OECD bloc, if properly counted.

There has been a cosy self-delusion that rising debt is largely benign because it is merely money that society owes to itself. This is a bad error of judgement, one that the intuitive man in the street can see through immediately.

Debt draws forward prosperity, which leads to powerful overhang effects that are not properly incorporated into Fed models. That is the key reason why Ben Bernanke’s Fed was caught flat-footed when the crisis hit, and kept misjudging it until the events started to spin out of control.

Economics should never be treated as a science. Its claims are not falsifiable, which is why economists can disagree so violently among themselves: a rarer spectacle in science, where disputes are usually resolved one way or another by hard data.

It is a branch of anthropology and psychology, a moral discipline if you like. Anybody who loses sight of this is a public nuisance, starting with Dr Athreya.

As for the Fed, I venture to say that a common jury of 12 American men and women placed on the Federal Open Market Committee would have done a better job of setting monetary policy over the last 20 years than Doctors Bernanke and Greenspan.

Actually, Greenspan never got a Phd. His honourary doctorate was awarded later for political reasons. (He had been a Nixon speech-writer). But never mind.

 

[donaldcollins]

i dont like classic forex... maybe im stuped, but i lost money on this program.
free forex robot better becouse it is stable and it works 24 hours..support always answered...
What do you think?

 

[Depth Trade]

i dont like classic forex... maybe im stuped, but i lost money on this program.
free forex robot better becouse it is stable and it works 24 hours..support always answered...
What do you think?

I think you're a genius.

 

[Depth Trade]

Have entered the following positions.

Eur/chf: long 1.3335 8

Eur/gbp: long .8265 7

Eur/usd: long 1.2531 7

Usd/chf: short 1.0644 8

Usd/jpy: short 87.94 4

Have the following orders open.

Gld: long at market open

Slv: long at market open

Classic FX 2.0
Sharpe ratio (Glass type estimate) 6.435
Sharpe ratio (Hedges UMVUE) 6.255
Calmar ratio (compounded annual return / max draw down) 95.985 %
Compounded annual return / average of 25% largest draw downs 95.985 %
Compounded annual return / Expected Shortfall lognormal 122.819 %



Time runs out for 1.2 million on unemployment
By Christina Zdanowicz, CNN
July 1, 2010 9:30 a.m. EDT

(CNN) -- With her unemployment benefits coming to a halt, Miriam Cintron is forced to make a difficult choice between health insurance and daily expenses.

Signing into her unemployment benefits account last week, the New Yorker was horrified to see she hadn't received any money for three weeks, she says.

What would the four-year cancer survivor do if she couldn't afford to pay her $650 monthly COBRA payment? Her health insurance helped pay for life-saving treatment before, so giving it up is not an option, she says.

When Cintron was laid off from her job as a case worker at a homeless shelter in late 2008, she never imagined she'd go on unemployment. But even with 17 years experience, she's been unable to land a new job.

Cintron isn't alone. Unemployment benefits are set to run dry for 1.2 million people nationwide Friday after the U.S. Senate decided not to extend a deadline to file for these benefits last week, according to the National Employment Law Project.

Come Saturday, the number of people cut from unemployment benefits will surge to 1.63 million, according to U.S. Department of Labor estimates. By mid-July, about 2 million unemployed Americans could lose their benefits.
It's very hard for me to get into this feeling sorry for myself. ... But I am getting there.
--Miriam Cintron, unemployed American

Before last month, out-of-work Americans were eligible for extensions once they maxed out at 26 weeks of state benefits. Depenging on the state, people could qualify for up to 73 weeks of federal benefits -- a total of 99 weeks. But, Senate Republicans blocked the extension with a 57-14 vote last week.

Senate Republicans filibustered the bill Wednesday night and the House could vote again as soon as Thursday.

"The reality is that we have the worst job market on record going back to the Great Recession," says Maurice Emsellem, policy co-director at National Employment Law Project.

"There's only one job available for every five unemployed workers."

For people who are apt to say, "Go find a job," Emsellem says the predicament of the unemployed isn't easy to escape.

"For anybody that has a thought in their head that unemployed workers are to blame for their situation, the reality is that workers are struggling hard to find work, but the jobs are just not there."

National Employment Law Project resources for the unemployed

While Cintron has been struggling to make ends meet for the last year-and-a-half, she worries about other people in the same predicament.

"My story is one story and it's unique," she says. "But, there are so many people with children, other issues, that are in dire situations."

Are you one of the 1.2 million? Share your unemployment story

"I'm just shocked that more attention isn't being paid to this story."

She's thankful she doesn't have any children relying on her for support right now. But, she does care for her mother. Part of Cintron's unemployment checks have been going toward her mother's expenses since she moved in with her a few months before Cintron lost her job.

Cintron's $425 unemployment check each week -- or $1,700 each month -- has to stretch a long way. She pitches in for appliances, groceries and whatever else her mother needs. Health insurance payments burn a hole in her wallet at a whopping $650 per month. And then there's the storage fee of $300 she pays for all her excess furniture from her old apartment.

If Congress fails to pass the bill granting the unemployment benefit extensions this week, Cintron says she will only be able to stay afloat for a month. She will have to dip into her 401(k) retirement plan to continue to pay for health care, she says.

As to what happens after that, Cintron says she just doesn't know.

"I will try to survive and see what I can do for paying the health insurance for at least another few months with my 401(k)."

"I don't qualify for Medicaid, I make too much money. I have to pay the $650 to a private health insurer."

Finding the income to support her expensive health insurance hasn't been an easy task. For the last year-and-a-half, Cintron has been applying to jobs at homeless shelters in New York. Even though she has landed several interviews, they haven't amounted to anything.

"The agencies where I'm applying to, they're all cutting back too," she says, citing city funding cutbacks.

Cintron is considering part-time or customer service work as a last resort, but she's worried she may be worse off.

"I certainly don't want to live on unemployment," she says. "The customer service jobs don't pay well, don't have health insurance. I really need insurance because I'm a cancer survivor."

For now, Cintron keeps logging into the unemployment benefits website, typing in her account number and trying to claim benefits.

Cintron says the New York State Department of Labor has instructed her to keep logging in as normal, even though she's not getting a dime. Cintron says the website is confusing and she's unsure of how many extensions she's had.

With all the stress and lack of income, Cintron's been relying on hobbies to try to keep her spirits up.

Ever since she lost her job, she's been an active iReporter, scouting events and stories in her native New York. Videography and photography have become her focus. In this digital age, it's free for her to upload her images, so it's a cheap hobby.

See Cintron's iReports over the years

Her other passion is music. She's sad she's had to nix going to concerts, but says she's lucky to live in a city where so many free shows are going on at any time.

Even though she's found ways to lead a semi-normal life, her time being unemployed is starting to wear her down.

"I'm a glass half-full kind of person. I'm a very positive person. It's very hard for me to get into this feeling sorry for myself, what-am-I-going-to-do mode," she says.

"But I am getting there."