Month: March 2019

Some of Facebook’s largest data deals are under federal criminal investigation following a nightmare year of scandals, reports the New York Times, which reveals that a New York grand jury has subpoenaed records from at least two leading manufacturers of smartphones and other devices which gained access to personal data of hundreds of millions of users. 

The companies were among more than 150 firms, including Amazon, Apple, Microsoft and Sony, that had cut sharing deals with the world’s dominant social media platform. The agreements, previously reported in The New York Times, let the companies see users’ friends, contact information and other data, sometimes without consent. Facebook has phased out most of the partnerships over the past two years. –New York Times

Facebook – known for its occasional mistakes, said in a statement that they are “cooperating with investigators” and assured the Times that they “take those probes seriously.” 

It is unclear when the grand jury probe started, nor has the scope or focus of the inquiry been disclosed. It is being overseen by prosecutors in the Eastern District of New York. 

The company is simultaneously facing investigations by the Securities and Exchange Commission (SEC) and the Federal Trade Commission (FTC), while the Justice Department’s fraud division began investigating the social media giant following reports that political consulting firm Cambridge Analytica had improperly harvested the Facebook data of up to 87 million people for political purposes. 

The investigation into the Cambridge Analytica scandal by both the DOJ and FBI is ongoing in the Northern District of California, with one former Cambridge employee reporting that he was questioned by investigators as recently as several weeks ago, while three other witnesses in the case said that much of the questioning revolved around Facebook’s claims that it was misled by Cambridge. 

In public statements, Facebook executives had said that Cambridge told the company it was gathering data only for academic purposes. But the fine print accompanying a quiz app that collected the information said it could also be used commercially. Selling user data would have violated Facebook’s rules at the time, yet the social network does not appear to have regularly checked that apps were complying. Facebook deleted the quiz app in December 2015.

The disclosures about Cambridge last year thrust Facebook into the worst crisis of its history. Then came news reports last June and December that Facebook had given business partners — including makers of smartphones, tablets and other devices — deep access to users’ personal information, letting some companies effectively override users’ privacy settings. –New York Times

Facebook’s orgy of data sharing allowed companies such as Microsoft map out the friends of virtually every Facebook user over Bing without their explicit consent, while Amazon was able to harvest users’ names and contact information through their friends. 

In fact, thanks to the United States having no general consumer privacy laws regarding data, up to 400 million people’s private information was freely shared with the likes of Google, Netflix, Spotify and other partners – and Facebook didn’t sell it; they gave everyone’s information away for free throughout the tech community in order to foster industry relationships and advance their own interests. 

China’s Huawei and Russian search giant Yandex – accused last year by Ukraine of funneling user data to the Kremlin – also had access to Facebook’s unique user IDs.

Facebook records show Yandex had access in 2017 to Facebook’s unique user IDs even after the social network stopped sharing them with other applications, citing privacy risks. A spokeswoman for Yandex, which was accused last year by Ukraine’s security service of funneling its user data to the Kremlin, said the company was unaware of the access and did not know why Facebook had allowed it to continue. She added that the Ukrainian allegations “have no merit.” –NYT

Facebook was able to circumvent a 2011 consent agreement with the Federal Trade Commission (FTC) which barred the company from sharing user data without explicit permission, because Facebook considered the partners extensions of itself – “service providers that allowed users to interact with their Facebook friends.” 

“This is just giving third parties permission to harvest data without you being informed of it or giving consent to it,” said former FTC consumer protection bureau chief David Vladeck. “I don’t understand how this unconsented-to data harvesting can at all be justified under the consent decree.”

Facebook has defended itself aggressively – claiming that the partnerships were permitted under a provision in the FTC agreement covering service providers as “extensions” of the social network. 

Perhaps they were, once again, mistaken? 

via ZeroHedge News https://ift.tt/2EZdQNH Tyler Durden

Authored by Danielle DiMartino Booth via LinkedIn.com,

In the decade between “60 Minutes” interviews, the central bank has sparked a recovery without inflation but not much else.

Friday marks the 10-year anniversary of the Federal Reserve Chairman Ben S. Bernanke’s groundbreaking “60 Minutes” interview. To listen to current Fed Chairman Jerome Powell on the same show a decade later, the central bank’s best laid plans since then would seem to have played out according to script with one glaring exception: the Fed’s balance sheet.

When “60 Minutes” reporter Scott Pelley asked Bernanke if the Fed was printing money, his reply was,

“Well, effectively. And we need to do that, because our economy is very weak, and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation.”

If the primary goal was recovery without inflation, the Fed delivered. Since the onset of recovery in June 2009, the core personal consumption expenditures index, which measures the prices paid by consumers for goods and services net of food and energy prices that tend to be more volatile, has been above 2 percent in in just five months in 2018, four in 2012 and one in 2011.

Critics of the central bank suggest that the massive surge in financial assets over the past decade starkly illustrates the need for the Fed to incorporate inflation gauges that take into account price gains of real estate and securities. One such gauge, the Underlying Inflation Gauge (UIG) created at the Federal Reserve Bank of New York, has hovered around the 3 percent level since last February. In other words, the UIG has been running north of the Fed’s 2 percent inflation target since November 2016. The justification for raising interest rates thus depends on the gauge used to guide policy.

As for Bernanke’s commitment to unwind unconventional monetary policy, it’s looking increasingly as if only a small portion of his promise can be fulfilled. Since last meeting in January, Fed officials have been publicly unified in their intention to present a road map to end quantitative tightening (QT) at next week’s Federal Open Market Committee meeting. The 16 percent to 17 percent of GDP estimate Powell offered Congress as the terminal size of the balance sheet implies QT will end with the Fed holding about $3.5 trillion in securities, compared with the peak of about $4.52 trillion in January 2015. (The Fed held less than $1 trillion of balance sheet assets before the financial crisis.)

Running monetary policy looser than need be for such a protracted period has benefited global asset prices. Even after the Fed began tapering its bond purchases, its central banking peers more than took up the slack. As of February, the collective balance-sheet assets of the Fed, European Central Bank, Bank of Japan and Bank of England stood at 36.3 percent of their countries’ total GDP, little changed over the past two years.

When Pelley asked Bernanke about banks that had paid perks and bonuses after taking bailout money, Bernanke replied:

“The era of this high living, this is over now. And that they need to be responsible and use the money constructively. I’d say that their job right now is to find a way to make loans to creditworthy borrowers, to get their banks back on the path of making good loans, safe loans, and to have a reasonable sense of humility based on, you know, what’s happened in the last 18 months.”

But at the National Association for Business Economics recent annual conference, University of California-Berkeley economics professor Gabriel Zucman presented his findings on the widening divide between the “haves” and “have nots” in the U.S. His conclusion:

“Both surveys and tax data show that wealth inequality has increased dramatically since the 1980s, with a top 1 percent wealth share around 40 percent in 2016 vs. 25 – 30 percent in the 1980s.”

Zucman also noted that increased wealth concentration has become a global phenomenon, albeit one that is trickier to monitor given the globalization and increased opacity of the financial system.

That is not to say the most powerful players in finance haven’t had to adapt to a post-crisis world. The inability to undertake risky lending under tightened regulation has pushed business to an increasing degree out of the conventional banking system into the shadow banking industry. Private equity presides over more than $2.1 trillion in committed capital to be deployed outside the purview of regulators’ watchful eyes, according to research firm Preqin.

While, Powell acknowledged that risks had built up among highly leveraged companies, he said the scale is not “the kind of thing that we saw in the…subprime mortgage crisis. It doesn’t seem to be like that, generally. But at the same time, it could be an amplifier in a downturn.”

As for any notion that Fed policy has elevated asset prices and left behind those without the means to benefit, circumstances that have skewed both wealth and income inequality, Pelley asked, “Where are we headed in this country in terms of income disparity?” Echoing his predecessors, Powell replied,

“Well, the Fed doesn’t have direct responsibility for these issues.”

Except that the Fed does have direct responsibility. If the “wealth effect” used to justify a generation of quantitative easing hasn’t kicked in yet, trickling down to those who need it most, it’s past time the Fed acknowledged its failings and opened the door to a new policy framework.

via ZeroHedge News https://ift.tt/2F3UI1b Tyler Durden

The parents involved in yesterday’s widely reported college admission reported  could have even more bad news coming their way in the form of tax penalties and civil tax fraud charges, as  the parents involved in the scheme were able to take tax deductions on purported “donations” that were doubling as bribes in order to get their children into elite colleges like Stanford and Yale.

The Key Worldwide Foundation has been declared a tax exempt organization and fronted/brokered many of the bribes that were paid out to University administrators. The Internal Revenue Service declared the foundation tax-exempt under code Section 501(c)(3) around 2013. If parents decided to “double dip” and write their bribes off, they could eventually be charged with tax crimes.

As long as the statute of limitations has not expired, the IRS has the option to audit the parents involved in the scheme, potentially resulting in deficiency notices, according to Sam Brunson, a professor of law at Loyola University Chicago.

If the IRS then finds out they took deductions on fake charitable contributions, parents could be hit with “large penalties” under “tax code Section 6601 and Section 6662, which cover interest payments and penalties for underpayment of taxes.” The IRS’s audit of the charity was one of the key parts of the Federal investigation that uncovered the scandal.

The IRS has the option to impose a penalty of 20% of the underpayment, on top of the original tax payment owed. Some parents that paid as much as $75,000 to the foundation could wind up having to pay an additional $15,000, plus interest. The IRS also has the option to impose penalties for civil tax fraud, according to Lloyd Hitoshi Mayer, a professor at the University of Notre Dame law school.

The tax fraud that occurred was a key part of the government’s case. One family said in court documents that they had reported charitable gifts of more than $1 million, which included a payment to the Key Worldwide Foundation.

“You can send to my foundation as a donation/write off or if you have your own company we can invoice you as a business consulting fee from our profit business and you write off as an expense,” William Rick Singer is reported to have told a family in an e-mail. We recently profiled Singer as the “man behind the largest college admissions scam ever”. 

via ZeroHedge News https://ift.tt/2TDs6pq Tyler Durden

Authored by Jonathan Tepper via The American Conservative blog,

Intended to be open, free, and decentralized, it’s now dominated by a handful of companies that control what we see and what we can say.

The internet was meant to be open, free, and decentralized, but today it is controlled by a few companies with grave consequences for society and the economy. The internet has become the opposite of what it was intended to be.

In the early 1960s, Paul Baran was an engineer at the RAND Corporation when he began thinking about the need for a communications network that could withstand a nuclear strike. RAND was contracted by the Pentagon to create a system that could continue operating even if parts of it were destroyed by an atomic blast. It was supposed to be the ultimate decentralized system.

Baran went on to publish a paper in 1964 titled “On Distributed Communications,” which was influential in establishing the concepts behind the architecture of the internet.

Vint Cerf and Robert Kahn put these concepts into practice at the Department of Defense’s Advanced Research Projects Agency in the late 1960s, and created the communication methods that make the internet possible. The principles of freedom and openness were at the heart of the design—packet switching made the system robust in the face of nuclear attacks and Internet Protocol allowed for open interconnection.

Years later, Cerf said, “The beauty of the internet is that it’s not controlled by any one group.” In his view, “this model has not only made the internet very open – a testbed for innovation by anyone, anywhere – it’s also prevented vested interests from taking control.”

The principle of decentralization went directly against the business models of technology giants like AT&T and IBM. Until AT&T’s monopoly was broken up in the early 1980s, communications were extremely centralized and traveled through dedicated, point-to-point channels. The use of third-party devices on the network was prohibited.

The internet would have remained an obscure channel for government and scientists to communicate had it not been for Tim Berners-Lee. In the late 1980s, he created a way for information to be shared easily using hypertext via the World Wide Web.

Berners-Lee could have become fabulously wealthy, but instead he released the source code for free, embodying the democratic spirit of the internet. Berners-Lee wanted “an open platform that would allow everyone, everywhere to share information, access opportunities, and collaborate across geographic and cultural boundaries.”

In recent years, the great hope of an open and free internet has given way to a dystopia where a few big companies control what we see, how we communicate, and what we can say online.

Today, Berners-Lee thinks the internet is broken. In a 2018 interview with Vanity Fair, he recalled its early days.

“The spirit there was very decentralized,” Berners-Lee said. “The individual was incredibly empowered. It was all based on there being no central authority that you had to go to to ask permission. That feeling of individual control, that empowerment, is something we’ve lost.”

Berners-Lee is taking a break from his work at Massachusetts Institute of Technology to launch Inrupt, a startup that he has been working on for the past nine months. His mission is to decentralize the internet, reclaim power from tech giants like Google, Facebook, and Amazon, and allow individuals to control their own data.

Although the architecture of the internet is still decentralized, the ecosystem of the World Wide Web is not. A few giant companies have near-monopolistic control of traffic, personal data, commerce, and the flow of information.

If you had to choose a date for when the internet died, it would be in the year 2014. Before then, traffic to websites came from many sources, and the web was a lively ecosystem. But beginning in 2014, more than half of all traffic began coming from just two sources: Facebook and Google. Today, over 70 percent of traffic is dominated by those two platforms.

The internet was meant to be open, anarchic, decentralized, and above all free. In the 1990s, America Online helped people connect and discover content, but it failed to meet the internet’s founding ideals because it was ultimately a “walled garden.” AOL determined and curated the user experience, which was contrary to the spirit of the web. Once users started going online with their local cable companies, and Google began helping them find the information they needed on the web, people began to leave AOL.

Facebook has since become AOL 2.0, a centrally designed internet for its users. You discover only what the company wants you to. It is about as uncool as AOL, but it won’t die the same death because personal Facebook accounts contain so much of a user’s life history, photos, and friend and family connections. Many articles and videos only appear behind Facebook’s walled garden, and many apps and sites will not even let a user join without a Facebook account.

Vint Cerf, the father of the internet, decries Facebook’s walled garden. Cerf, however, now works at Google and is the firm’s chief internet evangelist. He fails to see how Google also is swallowing up the internet.

Google started out as a search engine that helped users quickly find the information they needed. It’s since gone from directing people to content to directing traffic inwards to itself, according to Rand Fishkin, the world expert on search engine optimization.

Even though competitors like Yelp might have superior local reviews, Google Reviews are given preferential placement in search results. Even though shopping comparison websites like Foundem in Europe might offer better results, Google can effectively blacklist them. Increasingly, Google offers snippets and previews of Wikipedia and Getty Images. Traffic to these websites has subsequently collapsed. Far from directing users to other sites, Google today starves content creators of traffic.

As Fishkin notes, “Google’s behavior over the last few years away from an engine that drives searchers to other websites for the answers to their problems and toward self-hosted answers and solutions. That’s made SEO much more difficult, as Google, for the first time in its history, is sending less outbound traffic.”

Google is eating the web through its new technologies. Pages load faster with tools like Accelerated Mobile Pages or Firebase. Both are like Facebook’s Instant Articles. They sound great, until you realize that the faster pages run on Google’s and Facebook’s servers, displacing third-party advertising networks and further centralizing the web into their ecosystem where they exercise control.

Google also kills off technologies that would reduce the need to search using Google. In 2013, the company announced they were discontinuing Google Reader, which relied on RSS. An RSS feed was a way for publishers to reach their readers directly without using Google Search. But the death of Google Reader in 2013 marked the end of interoperable web services like RSS from large organizations like Google, Facebook, and Twitter.

The current configuration of the web’s ecosystem advances Google’s business model. Google’s Android mobile operating system powers most smartphones in the world with a whopping 85 percent market share. It has integrated the Android OS into its own search engine, and has integrated Android into its own app store, effectively becoming the gatekeeper to what websites, apps, and companies consumers can access.

It uses its dominance in browsers to its own advantage as well. Its Chrome browser has a 60 percent market share globally, and comes with a new ad-blocking feature, which it claims is the work of a collective, industry-wide effort to get rid of annoying ads. Yet the software only blocks certain types of online advertisements. Mysteriously, the ads that are blocked are ones its competitors use, not its own.

Confronted with a closed web controlled by two private companies, users are increasingly demanding that Facebook and Google fix themselves. As journalist Matt Taibbi has succinctly put it, “For Google and Facebook to be the cause of and the solution to problems tells you how irrelevant governments and regulators have become.”

There is currently a vast imbalance of power between individuals and private companies. The web is not free and open if two companies control the flow of information. André Staltz, a computer programmer, has noted that that the tech giants can ban users and “don’t need to guarantee you access to their networks. You do not have a legal right to an account in their servers, and as societies we aren’t demanding for these rights.”

Conservatives who love democracy should prefer decentralization, as it allows each user to make their own choices. In a centralized system, users have no control over what standards Google or Facebook deem acceptable—someone else makes those choices on our behalf.

Jennifer Granick, the director of civil liberties at the Stanford Center for Internet and Society, has noted that techno-utopians once said things like “the Internet treats censorship as damage and routes around it.” Today, that is no longer possible. The centralization of the internet by monopolies “increasingly facilitates surveillance, censorship, and control.”

It’s a sad irony that the internet, intended to be decentralized and free, is dominated by monopolies with ever-increasing control of our lives.

via ZeroHedge News https://ift.tt/2F4iTw7 Tyler Durden

Russian President Vladimir Putin will likely sign new legislation which will punish online media outlets for spreading “fake news” – or material that insults state officials, according to Bloomberg. 

The new laws were passed by the upper house of parliament on Wednesday in a near-unanimous vote – which Kremlin spokesman Dmitry Peskov said were “undoubtedly” necessary and “well thought-out.” 

“One can hardly agree with the view that this is some sort of censorship,” suggested Peskov. 

Under the new laws, prosecutors will be able to complain about online publications to the state communications watchdog, which can order access to the websites to be blocked if editors fail to remove the material promptly. Publications found guilty of spreading “unreliable socially-significant information” may face fines of as much as 1.5 million rubles ($23,000).

People will also face fines and up to 15 days in jail, as well as a ban on their publications, if they distribute material expressing “clear disrespect for society, the state, the official state symbols of the Russian Federation, the Constitution of the Russian Federation and bodies exercising state power.” –Bloomberg

The Presidential Human Rights Council criticized the new legislation as it worked its way through Parliament – however the group says that it will monitor how the laws are used (or abused) to stop them from becoming an “instrument of repression,” according to state-run RIA Novosti, citing Ekaterina Shulman – a political scientist who sits on the Kremlin body. 

The bills were passed amid a massive controversy over Kremlin plans to establish a “Sovereign internet” which would route online traffic through domestic servers and exchanges – a proposal which led to thousands of people protesting in Moscow against the Kremlin. 

Opponents of the measure say the Sovereign internet would allow the Kremlin to disable access to tech giants such as Facebook and Google – along with anti-government outlets, during periods of political unrest. 

Russia has also demanded that social media services store data on Russian users inside the country and give access to encryption keys so that officials can monitor what people are doing online. Telegram, the encrypted messaging app that’s prized by those seeking privacy, lost a bid before Russia’s Supreme Court in March to block security services from getting access to users’ data. –Bloomberg

The Kremlin has said that they need to wall off their internet to protect against potential cyber attacks from the United States. 

via ZeroHedge News https://ift.tt/2UAzGO3 Tyler Durden

Authored by Daniel Cayne via The College Fix,

Traditional pronouns are fine again…

A few years ago Haverford College took on the enterprising task of purging its campus of gendered language. 

The school “adopted the use of gender-neutral pronouns referring to unspecified community members when referenced in College text and official policies” and also abolished the term “freshman” in favor of “first-year.” Most notably, the school encourages community members to report any gendered language they encounter in official campus documents so that it can be “updated.”

Well. The dialectical trend in American life for some time now has been to move away from any sort of gendered language; where once “he” served as a perfectly acceptable generic pronoun, “they” has, confusingly, taken its place.

In very recent years even more bizarre forms have arisen: Where before we referred to “pregnant women” (or, the saints preserve us, “mothers”), it is now increasingly fashionable to say “pregnant person,” just in case there’s a pregnant man lurking somewhere in the concrete noun. In the near future we can probably expect to be dining on personwiches.

Here is a simple fact: It’s okay to say “he” and “she.”

Using “he” as a generic noun is perfectly fine; very few people will be offended by it. If one is dealing with a particularly sensitive population, it is perfectly fine to use “she” as a stand-in; “he or she” is also acceptable, if slightly more cumbersome. Assuming that a man standing in front of you is a man, and a woman a woman, is also fine. There’s nothing at all subversive about any of this; it’s just normal and acceptable. Don’t worry about it.

Gender ideology, particularly on campus, has done a great deal of damage to the everyday normal conventions and habits that once facilitated smooth and productive discourse. It is very silly that we now have to worry that saying “he” or “she” might grievously offend someone. This fad will very likely pass in short order; in the meantime, it’s best not to play into it. Just say “he” if you want, and move on with your life.

via ZeroHedge News https://ift.tt/2HilkPq Tyler Durden

“Nothing lasts forever…”

The economic history of the world in one minute. pic.twitter.com/prs374HIKD

— Gold Telegraph (@GoldTelegraph_) March 7, 2019

via ZeroHedge News https://ift.tt/2J7YLyr Tyler Durden

Submitted by Philip Grant of Grant’s Almost Daily, courtesy of Grant’s Interest Rate Observer

Patent pending

A new chapter in financial innovation.  From Barron’s yesterday:

Salt Financial, an exchange-traded fund shop with less than two years under its belt, filed on Tuesday to launch an ETF that will actually pay investors for investing in it, at least at the start. The negative-fee ETF is finally here, making online lender Social Financial or SoFi’s zero-fee ETFs old news. 

Like SoFi’s zero-fee ETFs, Salt’s ETF will effectively zero out the cost and then some via what is called a management fee waiver. Salt’s investment advisor has pledged to add 0.05% [five basis points] of assets to the ETF, but only on the first $100 million in assets or until April 30, 2020. Once the ETF crosses that level or hits that date, it will charge its true fee of 29 basis points.

Negative-fee investment products may be the hot new thing, but a more familiar, if equally confounding, phenomenon persists: Lenders paying borrowers for taking their money.  After falling below $6 trillion last year, the Bloomberg Barclays Global Aggregate Negative Yielding Debt Index has seen its market capitalization jump back above $9 trillion.  On the authority of Sidney Homer and Richard Sylla, negative interest rates had not been seen in substantial size during 3,000 years of financial history prior to this cycle. 

Arc of the covenant

An analysis from S&P’s LCD unit yesterday calculated that the trailing 12-month default rate for leveraged loans has fallen to just 0.93%, down from 1.62% in February and from a long-term average of 3.1%. The sharp sequential decline is the result of iHeartMedia, Inc., which defaulted last March, being removed from the trailing 12-month calculation.  

The low default rate provides another enticement to lend and borrow.  LCD reports that institutional loans outstanding in the U.S. now total a record $1.17 trillion, up from $1 trillion last May. Across the U.S. and Europe, total term loans outstanding have doubled in the last 10 years to $2.65 trillion, according to the Bank for International Settlements.

That breakneck growth pace is making regulators nervous. Last Thursday, the Financial Times reported that the Financial Stability Board is investigating components of the leveraged loan market, particularly the practice of bundling loans into collateralized loan obligations (according to LCD, CLOs now account for 50% to 60% of U.S. leveraged loans).  On Feb. 28, Bloomberg reported that Japan’s Financial Services Agency has been questioning local lenders about their CLO concentration, particularly Norinchukin Bank, which itself holds a nearly $62 billion CLO portfolio (roughly 9% of global supply) and bought one-third of all U.S. and European issuance in the fourth quarter (Almost Daily Grant’s, Feb. 21).

A Sept. 7 cautionary Grant’s CLO analysis, noting that the securities are divided into tranches based on risk profile and recovery potential, called attention to the acute cyclical risks that reside in the lower-rated and higher-yielding tranches:

It’s not quite true that a CLO is only as good as its loans. What is true is that a portion of a CLO is only as good as its loans, that portion being the junior one, equity and mezzanine debt. Deterioration in the quality of late-boom debt puts those segments at risk. 

Late-boom conditions are on full display. Yesterday brought word that Moody’s covenant quality indicator reached a record-worst in February, eclipsing the prior nadir set in August 2015.  The deterioration is comprehensive, as the agency notes that “weak covenant packages are clearing the market in all rating categories.” 

Meanwhile, high profile deals continue to push the envelope. Yesterday, Bloomberg reported that a $10 billion loan and bond syndication financing Brookfield Asset Management, Inc. and Caisse de dépôt et placement du Québec’s leveraged buyout of Johnson Controls International plc is attracting strong bidding interest, “even after Xtract Research categorized its covenants, terms that protect investors, as some of the weakest and ‘most aggressive’ the firm’s analysts have seen.”  Yield indications are now below initial guidance, even though some investors “had balked in particular at terms related to how easily the company can pay itself dividends.” 

via ZeroHedge News https://ift.tt/2Uw00sF Tyler Durden

After a quiet January, Chinese small caps (ChiNext) soared a stunning 46% since the start of February…

However, Wednesday’s 4.5% drop in the ChiNext index following a 7.2% rally in the preceding two days confirms the massive rise in volatility that Chinese markets have seen – a very different relationship to US markets (which tend to see vol collapse as stocks surge).

As Bloomberg details, average intraday swings this month are now the widest since early 2016.

The index has swung at least 2% for nine straight days, as some have argued the desperation of China’s “National Team” rescuing investors day after day amid the US-China trade negotiations – thus weaponizing their stock market.

So, the question for investors is simple – is the 6% tumble in the last two days enough to spook the maniacal momentum-chasers out of the market as they are finally forced to reduce exposure in the face of spiking risk?

Some insiders are taking no chances – a growing number of companies have announced plans to trim holdings this week, including investor favorite Wangsu Science & Technology Co.

“Risks are rising as stocks reach relatively high levels,” said Ken Chen, a Shanghai-based analyst with KGI Securities Co.

“Upward momentum has weakened and investors are less willing to go long than before. Some retail investors are running for the exit as more listed firms are announcing shareholders’ plans to cut stakes.”

Or is it the dip that you buy – on margin – because Xi told you to? It seems The National Team have stepped away – for now.

via ZeroHedge News https://ift.tt/2FaeNUs Tyler Durden

Authored by Charles Hugh Smith via OfTwoMinds blog,

The promises cannot be met, and so society decays into warring elites and competing constituencies.

There is a grand, majestic tragedy in the inevitable collapse of once-thriving states and empires: it all seemed so permanent at its peak, so godlike in its power, and then slowly but surely, too many grandiose, unrealistic promises were made to too many elites and constituencies, and then as growth decays to stagnation, the only way to maintain the status quo is to appear to meet all the promises by creating money out of thin air, i.e. debauching the currency.

This political expediency works most wonderfully for a time: people don’t realize the silver content of their coinage is being cut to near-zero, or there’s nothing holding up the value of their currency but trickery and vague allusions to past glory.

Trust in the state/empire’s currency suddenly collapses in a phase shift: all seems well until the moment the avalanche sweeps it all away.

It’s a simple progression: during the permanent-growth-is-our-birthright phase of self-reinforcing virtuous cycles, when everything is expanding rapidly–credit, resources, jobs, capital, profits, state tax revenues, etc.–promises are made to elites and constituencies that look easy to meet as the economy is projected to expand rapidly essentially forever.

But virtuous cycles decay to unvirtuous cycles of bureaucratic sclerosis and corruption, systemic friction, declining productivity and resource depletion, and the rise of parasitic elites who contribute nothing but skim plenty saps the surplus available for productive reinvestment.

Every elite under pressure to satisfy the demands of those who were over-promised in the good times reverts to the same two financial fixes: debt and currency debasement. First the state borrows and borrows and borrows, all under the belief that “the government can’t go broke because it issues its own money.”

Any rationalization will do in the phase of stagnation, but the reality is it’s all political expediency: lacking the resources to pay all the promises, the state borrows from the future to maintain the illusion of stability.

Alas, the future arrives, and the interest on the debt begins stripmining tax revenues needed to fund the essential responsibilities of the state/empire. At this point, the ruling elites pursue two equally fatal fixes: they raise taxes on the remaining productive class while the parastic elites pay little or nothing, and they devalue the currency so they can continue to pay the promised sums with less actual wealth.

The productive class either escapes to other climes, goes underground or opts out. As tax revenues fall, the ruling elites turn in desperation to debauching the state currency, in effect issuing 10 units of currency for every 1 unit of actual purchasing power.

This maintains the fiction that the promises are being met, but the purchasing power of the currency erodes so drastically that the parasitic elites and the constituencies eventually catch on and demand a full payment of what was promised back in good times.

This demand cannot be met, and so society decays into warring elites and competing constituencies. The only real solution–to make severe sacrifices in order to live within the modest means available and jettison the parasitic elites–is politically and culturally unpalatable to a citizenry steeped in a belief that good times should be forever and it’s the fault of the ruling party of the moment rather than a failure of the entire system.

Then the “free” distribution of bread and circuses ramps up and the silver shipped to phantom legions defending the borders ends up in the quartermasters’ pockets. The delusional state of the ruling elite infects the general populace, and magical thinking abounds, as do vague claims to future greatness based on the mythologies of previous eras that had earned prosperity with sacrifice and thrift.

The entire global status quo is in the stagnation phase, and the promises that cannot be met are looming large. And so the politically expedient ruling elites turn to debt and financial trickery to stave off the reckoning. This works for a few years but it guarantees the coming collapse.

Expansion, maturation, stagnation and collapse:

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via ZeroHedge News https://ift.tt/2HwShaf Tyler Durden