Author: admin

With the numbers of ‘real’ enrollees in Obamacare looking dismal relative to government expectations, and the deadline for the first official details of the health law’s enrollment figures due later this week, the administration has decided – in an oh so US Government-esque move – to change the rules. An enrollee is now defined as people who have purchased a plan (normal health insurance plan protocol) as well as those who have a plan sitting in their online shopping cart but have not yet paid. As The Washington Post notes, the disparity in the numbers is likely to further inflame the political fight especially in light of the fact that – for context – the average e-commerce shopping cart abandonment rate is 67%.

 

Via The Washington Post,

The fight over how to define the new health law’s success is coming down to one question: Who counts as an Obamacare enrollee?

 

Health insurance plans only count subscribers as enrolled in a health plan once they’ve submited a payment. That is when the carrier sends out a member card and begins paying doctor bills.

 

When the Obama administration releases health law enrollment figures later this week, though, it will use a more expansive definition. It will count people who have purchased a plan as well as  those who have a plan sitting in their online shopping cart but have not yet paid.

 

“In the data that will be released this week, ‘enrollment’ will measure people who have filled out an application and selected a qualified health plan in the marketplace,” said an administration official, who requested anonymity to frankly describe the methodology.

 

The disparity in the numbers is likely to further inflame the political fight over the Affordable Care Act. Each side could choose a number to make the case that the health law is making progress or failing miserably.

 

read more here

So, yet again, the baffle em with bullshit propaganda machine that was once beholden only to the Chinese is now ubiquitous with political factions ‘picking’ – or manufacturing – the numbers that suit them – as opposed to ever facing up to the reality of unintended consequences and the end of the free lunch…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/4obsaZGcwk8/story01.htm Tyler Durden

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Actions create consequences, and not necessarily the consequences that were planned or expected.

A central tenet of propaganda is that the Big Lie repeated often enough is accepted with greater ease than small lies. Thus it is no surprise that the leadership and propaganda organs of the Fed, Federal government and the Keynesian cargo Cult of fellow travelers all repeat our era's Big Lie: There is a free lunch after all.

The common-sense saying that "there's no free lunch" has been refuted, according to the Fed and our political "leadership" (if you call bought-and-paid-for toadies, lackeys and apparatchiks for the monied classes "leaders").

There are two free lunches, according to our financial and political leaders: free money, in the form of money created out of thin air by the Fed, and almost-free money borrowed into existence by the Federal government.
With the Fed's free lunch, trillions of dollars are created and distributed to banks and those who can borrow this free money for next to nothing.

In the Federal government's almost free lunch (it is almost free as a result of the Fed's financial repression of interest rates to zero, the infamous ZIRP – zero interest rate policy), the central state borrows and blows essentially limitless sums on favored cartels and constituencies: sickcare, global empire, bridges to nowhere, etc.

We are constantly reassured that the Fed can print (and distribute to its banker buddies) $1 trillion a year with nothing but positive consequences for the bottom 99.9%. On the fiscal side, the Federal government borrowing and squandering $1+ trillion a year is heralded as equally positive for everyone–especially the 49% of the populace drawing a direct cash benefit from the Federal government: Census: 49% of Americans Get Gov’t Benefits; 82M in Households on Medicaid.

Possible blowback? None, or so we're told. If anything, the Keynesian parrots squawk, we need to borrow and blow $2 trillion a year rather than a paltry $1+ trillion. (We're running out of cartels, quasi-monopolies, foreign wars, spy agencies and other ratholes to pour trillions down; yikes, what a problem for Krugman et al. Maybe the Martians can supply us with some more rapacious cartels or a planetary war.)

These two charts raise doubts about the sustainability of the Fed and government's free lunch. The first is the monetary base, which just hit $3.5 trillion.

The second one is Federal external debt, i.e. the Federal debt not including "intergovernmental holdings," what is "owed" to the fictitious Social Security Trust Funds. Total national debt is $17 trillion, debt we actually have to roll over is $12 trillion and rising by $1 trillion a year. Debt to the Penny (U.S. Treasury site).

At the start of 2008, before the global financial meltdown gathered momentum, debt owed to the public was $5.1 trillion. Now it is $12.2 trillion, an increase of $7 trillion in less than six years. According to the Big Lie, this is no problem, and entirely sustainable: here's your Free Lunch, America, enjoy!

Big Lie, meet unintended consequences. The problem with Big Lies is reality has not been disappeared; it still exists. Actions create consequences, and not necessarily the consequences that were planned or expected.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/n4FUS296uUM/story01.htm Tyler Durden

A few hours ago, the “historic” and “most important ever” (just like ever payrolls report) Chinese plenum concluded. And like everything out of China, it was big on promises and scant on details. Among the numerous assurances of reform, the plenum promised: to deepen reform of the medical system and in the education sector, to speed up free trade zone development, to clear barrier in markets, to deepen national defense and military reform, to reform the income distribution system, reiterated the main role of public ownership and said there would be reform of government-market relations. And all of this would yield results by 2020. Essentially, words so hollow one can’t help but doubt this was merely the latest smokescreen to justify the perpetuation of the status quo, investment-based economy which as the BBG Brief chart below shows, instead of becoming more consumption driven which is what China has been feverishly attempting to achieve, has instead become ever more reliant on consumption.

Perhaps the most notable (and we use the term loosely) result from the plenum, was a shift in language, when the Communist Party acknowledged the market’s “decisive” role in allocating resources, as opposed to just “basic” according to a communique issued after its key session about reform. Xinhua has more:

China will deepen its economic reform to ensure that the market will play a “decisive” role in allocating resources, according to the communique after the Third Plenary Session of the 18th CPC Central Committee, which closed here Tuesday.

 

The market had been often defined as a “basic” role in allocating resources since the country decided to build a socialist market economy in 1992.

 

While following its basic economic system and improving it, the country will work to improve the modern market system, macro-regulatory system and an open economy, the document said.

 

To let the market decide the allocation of resources, the primary task is to build an open and unified market with orderly competition, according to the document.  Land in cities and the countryside, which can be used for construction, will be pooled in one market, it said.

 

Under a modern market system, businesses should be allowed to operate independently and compete fairly while consumers should be free to choose and spend. Also, merchandise can be traded freely and equally, the document said.

 

In the document, the CPC pledged to clear barriers in the market and improve the efficiency and fairness in the allocation of resources. It will also create fair, open and transparent market rules and improve the market price mechanism.

So does this mean that China is now officially more capitalist than the US, whose market has devolved to having a very basic, centrally-planned, and manipulated role of preserving the wealth effect, and the illusion that the US economy is now cratering with each passing day?

Alas, no. This is merely more jawboning to give the impression that China is serious about market reform. Why? Because with the various local stock markets having not increased their depth in the past 5 years, all the excess liquidity ends up in the housing sector and makes housing inflation a huge issue for the CPC. What China would prefer is to have its stock market act like that of the US, and provide the liquidity buffer that absorbs all those trillions in annual liquidity injections by central banks. Good luck with that.

As for everything else, Reuters explains why the Plenum was nothing but another dud on China’s path to non-reform.

The party did not issue any bold reform plans for the country’s state-owned enterprises (SOEs), saying that while both state firms and the private sector were important and it would encourage private enterprise, the dominance of the “public sector” in the economy would be maintained.

 

While the statement was short on details, it is expected to kick off specific measures by state agencies over the coming years to reduce the role of the state in the economy.

 

Historically, such third plenary sessions of a newly installed Central Committee have acted as a springboard for key economic reforms, and this one will also serve as a first test of the new leadership’s commitment to reform.

 

Among the issues singled out for reform, the party said it would work to deepen fiscal and tax reform, establish a unified land market in cities and the countryside, set up a sustainable social security system, and give farmers more property rights – all seen as necessary for putting the world’s second-largest economy on a more sustainable footing.

 

President Xi Jinping and Premier Li Keqiang must unleash new growth drivers as the economy, after three decades of breakneck expansion, begins to sputter, burdened by industrial overcapacity, piles of debt and eroding competitiveness.

 

Out of a long list of areas that the meeting was expected to tackle, most analysts have singled out a push towards a greater role of markets in the financial sector and reforms to public finances as those most likely to get immediate attention.

 

As part of that, Beijing is expected to push forward with capital account convertibility, and the 2020 target date for making significant strides on reform could set off expectations that the government will be looking to achieve breakthroughs on freeing up the closely managed yuan by then.

 

Few China watchers had expected Xi and Li to take on powerful state monopolies, judging that the political costs of doing so were just too high. Many economists argue that other reforms will have only limited success if the big state-owned firms’ stranglehold on key markets and financing is not tackled.

Bottom line: as former Fed bond market manipulated Andrew Huszar admitted, no government will ever engage in difficult, voluntary reforms (which by definition will infuriate the population), until they have no choice but to do so. Which means only after central banks lose control of risk assets, and Mr. Chairmen around the world are no longer able “to get to work” and make the politicians’ lives easier. Until then, it is just smoke and mirrors.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/-NCwqa9YIkU/story01.htm Tyler Durden

A few hours ago, the “historic” and “most important ever” (just like ever payrolls report) Chinese plenum concluded. And like everything out of China, it was big on promises and scant on details. Among the numerous assurances of reform, the plenum promised: to deepen reform of the medical system and in the education sector, to speed up free trade zone development, to clear barrier in markets, to deepen national defense and military reform, to reform the income distribution system, reiterated the main role of public ownership and said there would be reform of government-market relations. And all of this would yield results by 2020. Essentially, words so hollow one can’t help but doubt this was merely the latest smokescreen to justify the perpetuation of the status quo, investment-based economy which as the BBG Brief chart below shows, instead of becoming more consumption driven which is what China has been feverishly attempting to achieve, has instead become ever more reliant on consumption.

Perhaps the most notable (and we use the term loosely) result from the plenum, was a shift in language, when the Communist Party acknowledged the market’s “decisive” role in allocating resources, as opposed to just “basic” according to a communique issued after its key session about reform. Xinhua has more:

China will deepen its economic reform to ensure that the market will play a “decisive” role in allocating resources, according to the communique after the Third Plenary Session of the 18th CPC Central Committee, which closed here Tuesday.

 

The market had been often defined as a “basic” role in allocating resources since the country decided to build a socialist market economy in 1992.

 

While following its basic economic system and improving it, the country will work to improve the modern market system, macro-regulatory system and an open economy, the document said.

 

To let the market decide the allocation of resources, the primary task is to build an open and unified market with orderly competition, according to the document.  Land in cities and the countryside, which can be used for construction, will be pooled in one market, it said.

 

Under a modern market system, businesses should be allowed to operate independently and compete fairly while consumers should be free to choose and spend. Also, merchandise can be traded freely and equally, the document said.

 

In the document, the CPC pledged to clear barriers in the market and improve the efficiency and fairness in the allocation of resources. It will also create fair, open and transparent market rules and improve the market price mechanism.

So does this mean that China is now officially more capitalist than the US, whose market has devolved to having a very basic, centrally-planned, and manipulated role of preserving the wealth effect, and the illusion that the US economy is now cratering with each passing day?

Alas, no. This is merely more jawboning to give the impression that China is serious about market reform. Why? Because with the various local stock markets having not increased their depth in the past 5 years, all the excess liquidity ends up in the housing sector and makes housing inflation a huge issue for the CPC. What China would prefer is to have its stock market act like that of the US, and provide the liquidity buffer that absorbs all those trillions in annual liquidity injections by central banks. Good luck with that.

As for everything else, Reuters explains why the Plenum was nothing but another dud on China’s path to non-reform.

The party did not issue any bold reform plans for the country’s state-owned enterprises (SOEs), saying that while both state firms and the private sector were important and it would encourage private enterprise, the dominance of the “public sector” in the economy would be maintained.

 

While the statement was short on details, it is expected to kick off specific measures by state agencies over the coming years to reduce the role of the state in the economy.

 

Historically, such third plenary sessions of a newly installed Central Committee have acted as a springboard for key economic reforms, and this one will also serve as a first test of the new leadership’s commitment to reform.

 

Among the issues singled out for reform, the party said it would work to deepen fiscal and tax reform, establish a unified land market in cities and the countryside, set up a sustainable social security system, and give farmers more property rights – all seen as necessary for putting the world’s second-largest economy on a more sustainable footing.

 

President Xi Jinping and Premier Li Keqiang must unleash new growth drivers as the economy, after three decades of breakneck expansion, begins to sputter, burdened by industrial overcapacity, piles of debt and eroding competitiveness.

 

Out of a long list of areas that the meeting was expected to tackle, most analysts have singled out a push towards a greater role of markets in the financial sector and reforms to public finances as those most likely to get immediate attention.

 

As part of that, Beijing is expected to push forward with capital account convertibility, and the 2020 target date for making significant strides on reform could set off expectations that the government will be looking to achieve breakthroughs on freeing up the closely managed yuan by then.

 

Few China watchers had expected Xi and Li to take on powerful state monopolies, judging that the political costs of doing so were just too high. Many economists argue that other reforms will have only limited success if the big state-owned firms’ stranglehold on key markets and financing is not tackled.

Bottom line: as former Fed bond market manipulated Andrew Huszar admitted, no government will ever engage in difficult, voluntary reforms (which by definition will infuriate the population), until they have no choice but to do so. Which means only after central banks lose control of risk assets, and Mr. Chairmen around the world are no longer able “to get to work” and make the politicians’ lives easier. Until then, it is just smoke and mirrors.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/-NCwqa9YIkU/story01.htm Tyler Durden

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The EU may have many worries and woes that are slapping it around its face right now (and it could be said for a number of years), but there is one thing that is worrying economists more than the sovereign-debt crisis and that’s the fact that prices are not increasing enough. Economists at the European Central Bank have been demanding an increase in prices and for the ECB to react. If only they would ask the people what they actually thought, it would be certain that Europeans might well answer that the rise in prices is the last thing they need.

While Europeans have trouble finding enough money to pay the bills and eking out your salary is the order of the day for most people these days (and not just in Athens), it seems just a little far-fetched to ask for a rise in prices that is quicker today. As France gets a drop in the ratings by Standard and Poor’s and falls to AA (with a stable outlook).

The result for France was an increase in 10-year borrowing costs and bond yields that increased to 2.389% at the end of last week. Standard and Poor’s stated: “We believe the French government’s reforms to taxation, as well as to product, services and labor markets, will not substantially raise France’s medium-term growth prospects”. The statement went on to say: “ongoing high unemployment is weakening support for further significant fiscal and structural policy measures. Moreover, we see France’s fiscal flexibility as constrained by successive governments’ moves to increase already-high tax levels, and what we see as the government’s inability to significantly reduce total government spending.”

Prices in France for example rose in September by just 0.9%. Admittedly, inflation is bad, but no inflation is just as bad. Why get your savings out of the bank when the prices will probably drop in the future anyhow? Borrowing money is hardly going to be on the agenda since in times of normal inflationary pressure, the repayments would decrease over time as a percentage of the income. In times of deflation the repayments remain considerably higher than they should be.

But, who in the EU believes that they have enough money to put up with another increase in prices? Perhaps if they hadn’t played about with the prices so much when they brought in the euro, they wouldn’t be in the mess they are in now. According to the ECB and Eurostat, while they admit that prices for everyday products rose considerably (without actually stating by how much), they have stated that prices rose on average only by 0.3% when the euro was introduced in 2002, which was added on to the inflation that year of 2%.

• The annual average increase in prices was just 0.7% for the Eurozone according to economists by the end of October 2013.
• Spain had an annual average increase in prices calculated at 0.5% in September and -1% in Greece.
• Ireland was at 0%.

What is true is that countries with high levels of debt will have greater difficulty seeing that burden decrease over time if there is no inflation. Greece has a debt of 169.1% of GDP and Italy has a public debt of 133.3% of its GDP.

How many Europeans actually felt only an average price increase of ‘0.3% above normal’? Statistics can tell any old story we like really.

The Cost of Living

The Cost of Living Index for 2013, which is updated every year in Q1, uses New York City as the relative comparison and the base figure of 100%. All countries are shown as comparisons to that base figure.

• The Groceries Index provides a comparison of grocery prices for daily products. The US as a whole has a weighting of 80.74%, which means that the cost of groceries over the entire country are nearly 20% cheaper than in NYC.
• The UK has a weighting of 93.06%
• France stands at 97.75%.
• Germany comes in at 80.74%.
• The most expensive country in the world for groceries is Switzerland, standing at 153.05%.

Local Purchasing Power

Local Purchasing Power in the Index of the Cost of Living shows the relative purchasing power and the ability to purchase goods or services with the average wage of that country.

• Again NYC is the base rate of 100% with all other countries being compared to that.
• The United States has an overall country-wide local purchasing power of 136.5% this year, meaning that the US as a whole can purchase on average wages of the country 36.5% more than New Yorkers can.
• Everything is relative however, since the average wage can be largely bought into question.
• Figures for the UK stand at 89.07%.
• That means that the British can buy just under 11% less than New Yorkers.
• France is at 98.11% and therefore stands on par with those in New York.
• Germany stands at 117.58%, meaning that Germans make their euros go further than the dollar in New York, but way under what the average for the US is able to get for their money.

Average Wages in the World

The average monthly wage was published last year by the United Nations’ International Labour Organization and it averaged out to $1, 480 per month. It was the first time that such a figure had been published by the UN (2012 for 72 countries). Firstly, the figure is largely open to criticism because it is an average and secondly because it is for 72 countries in the world and therefore cannot be representative. Surely, at least the median wage would be a better starting point if we were going to compare anything. Averages are bad simply because they don’t take into account the excessively high or low income in some countries.

• The average wage in the US is supposedly meant to be $3, 263.
• In the UK (which is just one place behind the US in the listing, in 5th position) stands at an average wage of $3, 065 per month.
• France has an average monthly salary of $2, 886.
• Germany has an average monthly wage of $2, 720.

Maybe you can compare your own salaries to those averages and either see where you are or whether you believe it or not. We can do anything we like with statistics, it has to be admitted.

The ECB decided that their answer to deflation in the EU was to decrease interest rates to record lows.  ECB benchmark interest rates were decreased last week to 0.25%, from 0.5%. The euro fell against the dollar immediately by 1% and that may help the Eurozone become a better buy in the months to come.

In the meantime however, whatever good it may do to the Eurozone, the people there are hardly going to be happy that they have to have another increase in their prices yet again.

 

Originally posted: Cost of Living Not High Enough in EU

 

You might also enjoy: Record Levels of Currency Reserves Will Hit Hard | Internet or Splinternet | World Ready to Jump into Bed with China

 Indian Inflation: Out of Control? | Greenspan Maps a Territory | Gold Rush or Just a Streak? | Obama’s Obamacare: Double Jinx | Financial Markets: Negating the Laws of Gravity  |Blatant Housing-Bubble: Stating the Obvious | Let’s Downgrade S&P, Moody’s and Fitch For Once | US Still Living on Borrowed Time | (In)Direct Slavery: We’re All Guilty | The Nobel Prize: Do We Have to Agree? | Revolution Costs | Petrol Increase because Traders Can’t Read | Darfur: The Land of Gold(s) | Obamacare: I’ve Started So I’ll Finish | USA: Uncle Sam is Dead | Where Washington Should Go for Money: Havens | Sugar Rush is on | Human Capital: Switzerland or Yemen? |

Technical Analysis: Bear Expanding Triangle | Bull Expanding Triangle | Bull Falling Wedge | Bear Rising Wedge | High & Tight Flag

 

Average:

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/nxiJs_1Ooyw/story01.htm Pivotfarm

The US Federal Reserve Bank has been easing quantitatively (QE) for 4 years now, since 2009.  Over this period, average daily trading volume in the US Treasury market has reduced from 500bln 10yr equivalents per day to 350bln 10yr equivalents.  350bln 10yr equivs may still seem like a big number…but this is a 30% decrease in trading volumes, and that is a reduction not only in volume, but liquidity.  Some readers out there might think”so what?” or “whats the big deal if the US Treasury market is less liquid than it used to be?”  The answer rests in the ultimate lenders of capital, and the structure of the Treasury market which is of great concern to participants of this market.  Investors (yes, a rarely used word these days) prefer to invest in assets that are liquid, especially when that asset is designated as a “risk free” asset.  Liquidity = ability to enter / exit at tight spreads without affecting the market price for the security.  The US treasury market used to be the deepest most liquid bond market in the world.  This characteristic of the UST market has significantly faded as QE has run its course, and the result is a reduction in actual “investors” of US government debt.  This is partly why the US Fed is still doing QE.  If the Fed doesn’t buy US govt bonds…who will?  The value of the USD has been cheapened by QE, and that significantly increases the risk in holding UST debt.  Think about that for a moment..the US Fed’s actions have increased the risk of holding UST paper.  UST paper is supposed to be the “risk free” asset against which everything else is judged.  If the “risk” of holding the “risk free asset” increases…how are investors to measure “risk.”

 I will leave it to the reader to draw parallels to the situation as it is currently playing out in Japan.

The Fed engaged in QE for 4 specific goals.

1)  Push investors out the credit curve (from UST –> corp bonds –> Stocks)
2)  Reduce / keep down interest rates to fund US Govt spending
3)  Increase inflation (for example, prop up the housing market)
4)  Decrease unemployment

Of these 4 goals, #s 1-3 are credible.  #4 is not so clear.

#5 is not a “goal” but an unintended side effect.
5) Reduced secondary market net supply while increasing supply of the currency  = reduced trading volume = reduced liquidity

I suppose i could repeat the phrase, “when the only tool you have is a hammer…every problem looks like a nail”

Here is a direct example of #5

This week is the refunding for long term UST debt (10yr notes and 30yr bonds).

With the QE induced reduction in trading volume and liquidity, expect the remaining market trading participants to continue selling UST’s ahead of the auctions…to “make room” before bidding on bonds in the upcoming auctions (remember, primary dealers are required to bid for their pro-rata share of every auction…so about 5% each).   As the US Fed continues to print USD to buy UST, the world incrementally loses trust in the value of the USD. Think of the tipping point (currently taking place in Japan as well).

Of course, there has been talk and speculation of the Fed reducing / ending their QE program.  Unfortunately, there is no way for the US Fed to “exit” their QE program.  The only exit option is to wait for the debt to mature and swap IOU’s with the US Treasury.

The market is a discounting function, in that it discounts future expected values in the current price of assets.  This means that ultimately, when the market realizes that the Fed cannot exit its QE position (i’m amazed this hasn’t happened yet), the discounting function requires the price of UST debt to drop, yields to rise, and the currency to cheapen.  And here is where the Fed holding a sizable portion of all outstanding UST debt becomes both a problem, solution, and problem again.

1) Problem:  QE reduces value of the currency, and thus (reduces desire / increases risk) of holding long term US govt debt.
2) Solution: the central bank steps in and buys the long term debt, inflating financial assets
3) Financial asset inflation translates into consumer price inflation
4) Problem:  –> see problem #1

5) The modern world hasn’t figured out #5 yet, however Japan is on the path to experience #5 before the US.

It is hard to imagine life in the US falling over due to financial failure, as happened in Greece and Cyprus.  Of course in the US it would be slightly different, as the US can print money and inflate away certain problems.  The scary part is when those who have been inflated out of being able to survive get hungry enough to riot…that is when chickens in the US will come home to roost.  This is a slowly building phenomenon…it does not happen overnight.  And every slowly building phenomenon has a “tipping point.”

Back to the markets….

As volume and liquidity decrease with the path of QE, we continue to get closer to the moment when the market actually discounts this reality.  This is the only reason US bond yields are as low as they are (the same could be said for European Govt bonds).  The market hasn’t fully discounted this “non-exit exit.”  Similar statements could be said about the situation in Spain, France and Italy.  Amazing our ability for cognitive dissonance, no?

While this all sounds oddly familiar to a ponzi scheme (the kind that goes along fine until one day it implodes)…the effect today is a reduction in both liquidity and trading volume which has created “volatility gaps” or “bifurcated volatility”  This is simply recognizing the path that we are currently on.  I don’t expect the govt (US, Europe, China or Japan) to reverse course…its just important to recognize where we are on the path.

Here is the real purpose of this article….how should i change my trading strategy to adapt to this new volatility regime?

Until recently, the average daily trading range for 10yr note futures (the most liquid UST security) was 20 ticks or about 8 bps (a tick here is 1/32nd of 1 USD of face).  Of course when we say “average” that implies some daily vol ranges are bigger than 20 ticks…and some are smaller.  Days with significant ECO data (NFP, FOMC, large duration auctions, Housing data,  CPI, ect..) expect larger than average trading ranges and volatility.  Days with less significant ECO data expect less volatility and smaller trading ranges.  This basic concept still holds true today…but the gap in average volatility between a big vol day and a small day has increased (much like the gap between the rich and the poor).   In today’s market, a large vol day might see a 12-16bp range…and a “normal” small vol day might see only 3-5bp trading range.  5 years ago, these vol range were more like 5-8bps and 10-18 bps.  The result is that during the intermittent “slow periods” the market is extraordinarily slow..and during high vol events, the market reprices so fast that large entities do not have the ability to change their position before the market has significantly repriced.  This is what we call a reduction in liquidity.  As a small individual trader, you may think this does not have a significant impact on your day-to-day life.  But as an investor in the institution (do you have a bank account?  do you have a pension fund?…then you do have a stake here) this affects us all as the cost of hedging interest rate risk has significantly increased.

So, as a day trader, how do we respond to this change in the structure of market volatility?  It means that the average mean reversion trades have much smaller ranges.  If you “need” to make X dollars per day trading…and intraday vol is reduced, then you must therefore trade larger size, with more
leverage to make up for the reduction in average volatility.  This poses a problem to our internal risk manager.  Increased size / leverage on your account means tighter stops in terms of price ranges (for example, risking 5k to make 15k).  With larger size you will lose 5k faster if the market moves against you.  So, this increases the probability that you will get stopped out, and thus decreases the expected value of your mean reversion trading strategy.  An option is to not increase your trading size / leverage.  However, with the smaller vol ranges, this implies that you will not be able to hit your revenue targets, and this has caused banks and hedge funds to look elsewhere for their trading / liquidity providing business.  This is why trading volatility has decreased…market participants have simply gone elsewhere…which reduces not only trading volume but liquidity.

These conditions are what drive traders (liquidity providers) out of an illiquid market, and into a different, more liquid market.  Illiquid Markets tend to be “sticky” when trading volumes are small..and “gap” when trading volumes increase.

So, what is my advice?  You could either take your stake, pull out and go find another more liquid venue to trade (FX perhaps?).  Trust me….you would not be the first.  For the remaining traders…there is still opportunity..but that opportunity comes with increased risk.  This is the hallmark of an emerging market (yes, we are still talking about the US Treasury market).   This all sounds reminiscent of stories about traders who blew up when volatility “gapped.”  LTCM is the most famous, but there are numerous others.

To be clear, i’m not advocating traders leave the UST market..i’m simply pointing out that market structure has changed…and in order to survive, we as traders (intraday liquidity providers) must either change with it….or be pushed into insolvency.

So how do we change our trading strategy with this decreased average volatility?  We need to be more aggressive.  This applies both during the slow mean reversion trading days, as well as the trending trading days.  Gone are the days where you can sell a good pop…or buy a good dip.  Now, you need to figure out your intended direction, and initiate trade closer to the middle.  This of course increases the risk that you will get stopped out if you are making such decisions on a random basis.  You have to “know” what will happen next.  Does this describe how you “feel” about the US Treasury market?

Yup…still talking about the US Treasury market here.  Surprised??

-GovtTrader

 

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