Why “Margin Debt” Is Meaningless In The New Shadow Banking Normal

Everyone who has followed this website since 2009 will know that we firmly believe that the “magic plumbing” of the modern financial system is not what is seen on the surface, in terms of declared “on the books” assets and liabilities, but what happens beneath it – in the shadow banking system, a place where trillions in liabilities are created and destroyed via the repo market, to provide short-term funding for all sorts of financial intermediaries, frequently with zero actual exposure in bank Ks and Qs due to regulatory loopholes that allow the “netting” of hundreds of billions of offsetting repo exposure and keeping them off the books, exposure which than can be rehypothecated countless numbers of times. In theory, this works fine. In practice, when a collateral chain is broken and net suddenly becomes gross, you end up with near systemic collapse (especially when the underlying collateral is found to have never existed in the first place – see China).

This is precisely what happened following the failure of Lehman when in addition to all other credit risks, maturity, credit and liquidity, one also had to add counterparty risk. Suddenly, the realization that any and every bank can fail caused a sudden and epic rush on repo, in the process truncating collateral chains and smashing the velocity of collateral. This is also why the Fed had to step in and take over virtually the entire financial system: after all the Fed can’t fail, or so the conventional wisdom goes. And with this backstop in place, the US financial system has been moving slowly since 2009, as counterparty risk has never been mitigated, In fact, for all its confusion, the Fed doesn’t realize that because it has onboarded countarparty risk exposure as one of its primary functions, there is no hope that a return to normalcy will ever be achieved. In brief: counterparty risk – one where the overnight funding market may freeze up at any given moment in a world without the Fed – is now a staple of the financial system. It also explains why the Fed will never be able to exit the market, as the second it does there will be sweeping repo runs of the kind that crushed Lehman and the money market system in 2008.

Long-winded introduction aside, the reason why bring up the repo market is because in recent years there has been much attention on one specific metric: securities margin debt as reported monthly by the NYSE, and which recently peaked at a record $465 billion. Some look at margin debt as an indication of how stretched investors are and further point to record margin debt peaks as inflection points in the market as the likelihood of margin calls surges and even the smallest drop in asset prices can result in an avalanche of liquidations and a self-fulfilling prophecy of selling.

In theory (again) this is correct. In practice (again) this is very much an anachronism of what the market used to look like. Unfortunately, in the New Normal, NYSE margin debt is completely useless in demonstrating just how stretched investors, especially sophisticated investors like hedge funds are (which in a day and age when retail has thrown in the towel on the manipulated, rigged market, are all the matters).

So where should one look for hints on the true leverage of market participants? Why the shadow banking system of course, and the repo market in particular.

Luckily, since the topic of shadow banking is quite complicated (virtually none of the regulators, auditors, enforcers or even central-bankers understand its nuances), one of the most erudite sources on the repo market, the IMF’s Manmohan Singh, has just released his annual primer on shadow banking, this time titled “Financial Plumbing and Monetary Policy” which touches on all the salient points we have covered in the past several years: offsetting shadow banking liability contraction, the Fed’s Reverse Repo initiative, collateral velocity, the ZLB impact on unsecured overnight funding markets, and high quality assets. It is a worthy read for anyone curious about how the financial system really works because we firmly believe that Singh along with Zoltan Pozsar, Peter Stella and Citi’s Matt King are some of the very few people who actually “get it.”

But aside from his extensive discussion on the intricacies of how funding works in a New Normal which has been mangled beyond recognition by central banks, Singh has a Box aside on precisely the topic at hand: how hedge funds fund themselves, and why margin debt is completely irrelevant in a world in which funding needs are provided not by the exchange itself but by other interconnected financial intermediaries mostly Prime Brokers: a process which is preferred furthermore because the net exposure never has to be revealed to either bank shareholders or hedge fund LPs.

This is what Singh has to say about how hedge funds operate in repo space:

Hedge Funds (HF) largely finance their positions by either (i) pledging collateral to prime brokers (PB) to borrow money, or (ii) repurchase agreements (or repo) with either their PB or another dealer where the repo their collateral for funding. This box estimates the repo financing by HF with the key banks active in collateral markets, as of end-2007 and end-2013.


To estimate repo related collateral from HF for 2007, we take the assets under management (AUM) of $2 trillion and the 27 percent share of strategies that would use repo (i.e., primarily non-equity related strategies). Aggregate leverage is higher in fixed income, global macro strategies that are funded via repo relative to equity type strategies. Using the aggregate leverage of 4 (source FSA hedge fund surveys, United Kingdom), this would imply that approx US$540 billion times four or, US$2.2 trillion pledged collateral could have gone to the banks. However, about 60–70 percent of the strategies are hedged simultaneously so only one-third of US$2.2 trillion could reach the banks that can be re-pledged onwards—i.e., US$750 billion pledged collateral that came to the banks could be re-used onwards as of end-2007.


On the 60–70 percent threshold assumption—at the bottom of the rate cycle, there is more hedging so this threshold is higher when compared to top of the rate cycle. In other words, the threshold prior to Lehman’s demise maybe closer to 60 percent and thus more pledged collateral available (i.e., less simultaneous hedging) to the dealers. Present times are close to the bottom of the rate cycle; so threshold may now be over 70 percent (i.e., more simultaneous hedging) and thus, less pledged collateral for reuse passes to the dealers. Doing similar arithmetic for end-2013, with aggregate leverage, including derivative use, lower at 3.5 (relative to end-2007) but AUM much higher at US$2.6 trillion, and share of HF strategies using repo also higher (around 40 percent) relative to 2007, would put the estimate at US$900 billion (adjusted downward due to the higher threshold for hedging due to the bottom rate cycle). With collateral reuse factor between 2 and 3 (largely due to inter-dealer collateral moves that link the supply/demand collateral chain), the size of the bilateral global repo market is at par or larger than the TPR (tri-party repo) in the U.S. [although HFs play a  dominant role in bilateral repo, dealers also use collateral from primary issuance to cover shorts in their repo inventory].


To be technical, if about two-third strategies are hedged, the collateral from the remaining one-third may not all be reused/turned to cash by the banks—it depends on their balance sheet space and this issue is getting more traction as proposed regulations will take affect going forward. Also, banks can be very different with UBS bank curtailing balance sheet activities in pledged collateral area while others trying to enter this market.


In short, when it comes to funding, the most sophisticated market participants, hedge funds, have zero use for conventional cash exposure such as exchange margin, which is well below half a trillion, and instead obtain at least half of their funding needs in the shadow market via repo, to the tune of about $1 trillion (and likely more depending on one’s assumption about collateral reuse).

Which is why the next time someone says to pay attention to market leverage and points out the NYSE margin debt, feel free to correct them that this accounts for a tiny fraction of the overall leverage involved in the market – almost exclusively that attributed to retail investors who, as we know barely exist. For a real representation of market leverage one has to evaluate just how much repo funding the shadow banking system has afforded to hedge funds. Sadly, since there is no regulatory required reporting framework for disclosing this information on a consistent basis, one is largely stuck estimating what true leverage in the market is.

Actually, there is one loophole. As we showed in April, once a year hedge funds update their annual Form ARDs to show not only their net assets, which exclude shadow banking liquidity, but all regulatory assets, which capture all forms of funding.

For all those curious, here is where the hedge fund world truly stands when accounting for all sources of funding, in the current market. We leave it up to readers to decide if leverage as high as 9.3x is “high.”

And the change overtime:

It is mostly here where the largely undocumented credit unwind will take place once the relentless bubble finally pops, and to be sure, nobody will have possibly been able to see it coming.

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Where The World’s Biggest Worries Are

With US equity markets hovering near record-er highs, we thought a quick summary of the state of the world’s growing geopolitical risks would ‘help’ rationalize the BTFATH mentality. Here is Deutsche Bank’s map of the most potentially destabilizing risks around the world



Source: Deutsche Bank

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Mainstream Media Admits “The US Dollar’s Domination Is Coming To An End”

Submitted by Simon Black of Sovereign Man blog,

“Whoever is winning at the moment will always seem to be invincible.”


– George Orwell

Wise words indeed as they aptly describe misguided confidence in the US dollar.

The Society for Worldwide Interbank Financial Telecommunication (SWIFT), which helps manage the global banking system, tells us that US dollar settlement accounts for the vast majority of global trade.

And as Orwell suggests, many people take it for granted that just because the dollar is in the lead today, it will be that way forever.

They couldn’t be more wrong. There’s been a dominant reserve currency for thousands of years.

The Byzantine Empire’s gold solidus was the world standard for centuries; when they hit the reset button in the 11th century, it became the gold hyperpyron.

Eventually this was abandoned for Venetian ducats. Soon Spain’s silver pieces of eight became the dominant reserve standard to the point they were still legal tender in the United States until 1857.

By the 1860s, the British pound sterling was the world’s primary reserve currency, and over 60% of world trade was settled in pounds.

Reserve currencies come and go. So will the dollar. This is nothing new.

It’s bad enough that US debt is greater than any other nation’s in the history of the world. Or that the dollar is being rapidly debased by a tiny banking elite.

But what’s really driving the nail in the dollar coffin is the US government’s continued appalling arrogance, particularly in bullying around foreign banks.

Just one tiny example is the US government’s $10 billion threat against French bank BNP Paribas, which may even include criminal charges.

BNP’s bank in Geneva stands accused of financing deals with Iran. Never mind that it’s perfectly legal for a bank in Switzerland to do business with Iran. Iran, after all, is one of Switzerland’s largest trading partners in the Middle East.

The issue is that BNP violated a 2012 -executive order- from Barack Obama (#13622) that requires non-US companies to enforce US sanctions.

The arrogance is really overwhelming. This isn’t even an actual law. It’s just an executive order– a royal decree from King POTUS, first of his name.

And even if it were an actual law, on what possible grounds could the US government claim jurisdiction to regulate foreign banks? None. But this doesn’t stop them from doing so.

FATCA is another great example– a seismically destructive law passed in 2010 that mandates all sorts of US compliance requirements on foreign banks.

The only reason the US is able to get away with this is because the dollar (and hence the US banking system) is so important to their global business.

Their patience has run out, and things are starting to change.

The Chinese government has been rapidly loosening controls over the renminbi to increase its reserve status and compete with the dollar. And the rest of the world has quickly adapted to the opportunity.

The proof is clear. According to SWIFT, China’s renminbi is now the second most used currency in the world for global trade settlement, putting it ahead of even the euro.

In London, renminbi trade last year surged 50% to $25.3 billion per day. And there’s every indication that this growth will continue.

Singapore’s central bank is now offering overnight renminbi liquidity. Russian companies are preparing to pay for trade in renminbi. Even the World Bank’s IFC just issued its first renminbi-denominated bond.

It’s happening. And based on the data, it’s completely obvious… to just about everyone but the US government.

I was surprised to see an article in the Financial Times’ banking intelligence subsidiary (‘The Banker’) entitled “The US’s dollar domination is coming to an end.”

Shocking. This reality has become obvious to just about everyone… except for the US government.

And seeing it reminded me of another great Orwell quote– “[W]e have now sunk to a depth at which restatement of the obvious is the first duty of intelligent men.”

Orwell was right. Fortunately, intelligent people can choose to embrace this obvious reality and benefit from it… rather than ignore reality and be devastated by it.

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UMich Confidence Beats Modestly; Outlook Tumbles To 3-Month Lows

Following June’s initial largest miss in 18 months, UMich consumer confidence ‘final’ print inched higher to 82.5, modestly beating expectations – but well below April’s peak. In case you were confused at whether you should be exuberant (conference board confidence at highest since 2008) or dysphoric (Gallup survey at lowest in 2014), we don’t blame you. What is most worrisome about the UMich data, aside from the non-confirmation of exuberance offered by the government survey, is the tumble in the “outlook’ index to 3 month lows.


Initial June print –  big miss…


Final – small beat…




Charts: Bloomberg

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Weekly Wrap: Current News & Views from Ty Andros


TedBits Weekly Wrap  –  June 27, 2014 


This week has not been sleepy when it comes to the news. It feels like a firecracker out there just waiting for a match in my opinion. There have been too many issues to cover them all but here are a few TedBits for you:



GDP collapse

Explosive divergence between volume and price

MORAL HAZARD written large

Leverage peak in stocks?

SOME People aren’t DUMB

EU elites pull another FAST ONE





One hundred years ago this week World War I commenced and the specter of World War III is at our doorstep. Secretary of State John Kerry unilaterally surrendered to ISIS in Iraq by stating unequivocally to regional powers that the conflict will not be solved by military means. The very idea that ISIS will sit down at any table and peacefully resolve any issues is a fairytale. The ISLAMIC Caliphate is on a mission from GOD and will not be dealing with infidels in any manner other than their demise or the threat of their own demise. It is as simple as that. As I have said previously: World War III has commenced, it just hasn’t been publically admitted yet. Kerry’s statements are the height of irresponsibility to the American people.


GDP collapse


Yesterday’s revision to GDP was a nightmare on Main Street both on the headline number and internally looking at its components. Originally called at up 2%, then the first report of up .1%, first revision was down 1% and this revision taking it to down 2.9%. We were told over and over it was the weather. NOPE.



Look closely at the HORROR show the revision has been. It was a collapse in healthcare spending as a result of OBAMACARE (healthcare spending down over 6%), a collapse in private investment, a surge in imports (surge in liabilities) and a collapse in exports (collapse in income and sales). FOUR knock out blows to Keynesian linear thinking and highly questionable projections of a recovering economy. The economy is real terms is not recovering, in nominal terms the piles of debt and leverage keep expanding and then called GROWTH.


This is tens of billions of dollars economic activity that has disappeared. It foreshadows the coming bailout of the health insurance industry as its business is collapsing from the GOVERNMENT MANDATED policy cancellations in 2013 that HAVE NEVER RETURNED.  Obamacare is higher priced and delivers much less services. Private sector investment will not return as there is no reward for doing so. Why would a company or individual invest when there is no INCOME GROWTH after real inflation?  Incomes and revenues must rise for investment to become attractive. It’s why M&A is on FIRE, it is easy to buy existing business and customers rather than BUILD NEW ONES. Why would an entrepreneur risk his hard earned dollars, blood, sweat and tears to get to a level of success over $250,000 dollars a year when he or she can expect the taxman to confiscate it as soon as he reaches success? Washington has removed the incentives to produce. We are its vassals not its master.


Add to this, Dodd Frank restricting credit to the private sector, mandated health care benefits, EPA attacks on affordable energy and the hoax of climate change, the affordable care act and its 20 new taxes, runaway regulations of the small business sectors. Most readers don’t understand the damage done by the regulators. As Cicero once said:


“The more corrupt the state the more it legislates.”


You can extend that to regulation which is a result of the laws. This administration learned its craft at the knee of Richard Daly and the Chicago style of POLITICS. Everything in the United States has been on sale to the highest bidder for the last 6 years since the chosen one was elected in 2008 with supermajorities in Congress. Pay the right price and that business becomes the turf of the crony capitalist who PAID UP. The regulations regulate the demand to their cronies and place impossible hurdles in the path of the entrepreneurs who wish to knock off the crony’s by providing more for less. People aren’t stupid contrary to Washington’s belief. They can spend their money, choose what’s right for themselves and their families in a far wiser manner than a bureaucrat or would be mandarin in the District of Corruption.


So they try and pass a law or regulation removing your ability to choose for yourself. It is an epidemic of INCONSTITUTIONAL government.


The world is unraveling at an astonishing pace. Today I will call it chart porn day. That is a day when we look at charts. Make brief comments and thoughts about them and move on to the next thought and chart.


Explosive divergence between volume and price


The first chart is brought to us by www.Zerohedge.com and it is an overlay of the vix gauge which has become totally disconnected from an perception of risk by options writers and investors complacency levels about negative events impacting the stock market such as the rise of the caliphate in Iraq;



Talk about a bear market in trading volume since the peak before the financial crisis commenced. It should also be noted that as bad as the collapse in participation has been in reality it is much worse as High Frequency traders account for 50 to 70% of the trading on any particular day. I promise you that if the markets start to crash those programs will stop trading and liquidity will be reduced accordingly (50 to 70%). A mighty small door for weak handed investors that have entered late to exit. It doesn’t matter whether it is the bond markets or stocks the exits in event of a moment of panic appears very very small to me.


MORAL HAZARD written large


Moral Hazard and Complacency is at epidemic levels. Investors and Markets are TOTALLY DISCONNECTED from reality and potential risks in the global markets. They believe central banks will do anything NECCESARY to support asset values and stock markets. It is actually a correct assumption in my opinion. This is why the Middle East and ISIS taking over IRAQ dealt no blows to the markets? Let’s keep in mind that between the Federal Reserve and the Bank of Japan 110,000 million dollars is being printed each MONTH. QE is, has and will be the dominant investment theme for the foreseeable future from one central bank or another.


“The best way to destroy the capitalist system is to debauch the currency. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose.”    – John Maynard Keynes, 1920


The BIS has reported that Thirty Trillion dollars of new debt (30 million million) has been created since the Global Financial Crisis struck in 2008 and this is a picture of it in ACTION. Powerful medicine for insolvent sovereigns, financial and mortgage markets and that money now sits in accounts around the world looking for YIELD and opportunity. All in short supply in a world where growth is OUTLAWED by socialist governments disguised as DEMOCRACY.



The Federal Reserve has gone to great lengths over the last 3 years EMPHASIZING that financial system stability is firmly one of their mandates along with unemployment and inflation. We inhabit asset backed economies with Reserveless banking systems. A move similar to 2008 will BANKRUPT the biggest financial players in banking, institutions, pensions and insurance. This anomaly and perception of a goldilocks economy and market will get eaten by the three bears before this latest episode in runaway leverage resolves itself. When this leverage fails…. THEY WILL PRINT THE MONEY.


Leverage peak in stocks?


Margin debt has always peaked before major market tops and we are now into month five since the margin peak was seen. This chart was done by www.dshort.com;



Using data compiled by Lance Roberts of STA wealth advisors. Lance and Doug are some of the finest chart makers on the web and their work must always be kept in mind. Both are Keynesians and accept official numbers as accurate. The message at this time; be afraid, be very afraid. We are positioned out on a limb rarely seen in history and more extreme then the times preceding the last two crashes in 2000 and 2008. Do you really think it is different this time? Janet Yellen has yet to be challenged as the last several New fed chairs have. It is her turn for a trial by FIRE. Keep in mind the collapse in REAL TRADING volume shown above. The exits are quite SMALL….. Don’t yell fire in the theatre.


SOME People aren’t DUMB


The Gallup polling group has recently released an updated poll outlining just who people do and don’t have confidence in and the results are predictable, and signal the great disconnect between the elites which CONTROL our country and society and those that SERVE it. This poll gives me great HOPE! The public has nailed it:



Those are all time lows for the scoundrels in Washington DC (district of corruption). Right behind them are the scoundrels in the main stream media who have completely betrayed their responsibility to report on critical issues and keep the public informed. News on the internet I have to disagree with as I believe the internet news is covering the issues that are blacked out by the main stream media. To me the internet is a great big plus in exposing the bad boys and creating the means for the public to unite against them without being impeded by them. Social media I DESPISE, ultimately it is poison and is the modern version of bread and circuses of ancient Rome.  It is not social, it is anti-social in my opinion. Then we see CRONY CAPITALISTS and BIG LABOR, both ENEMIES of the public at large. In a capitalist economy the bottom line is more goods and service for less money. When those two groups are involved it is exactly the OPPOSITE: less goods and services for more money. Look at all the groups at the bottom of the list. These people know who the bad guys are. Banks and public schools: one creates debt slaves of us all and the other dumbing down the population so they can be victims of the system the elites have created.


The most trusted groups are under constant attack from those least trusted. The administration is completely aligned AGAINST small business, the military and the church. The police I will withhold comment on as I believe they have been DEEPLY compromised by the group at the bottom. Look no further than the Boston bombing when local police imposed MARTIAL LAW on the city of Boston. Thai is a glimpse of what has been PUT IN PLACE. Do they serve the public they are sworn to protect or central GOVERNMENT that no longer does so?   Regardless of what the headlines say social unrest lays directly ahead. The group at the bottom will both restore freedoms and allow people to prosper OUTSIDE their grasp or be DETHRONED!

In my opinion the greatest manmade disaster and OPPORTUNITY in history is unfolding in every corner of the world.  Are you diversified or operating with EYES WIDE SHUT?  Are you prepared to turn it into opportunity by properly diversifying your portfolio?  Adding absolute return investments which are designed with the potential to thrive (up and down markets) regardless of what unfolds economically or politically?  This is what I do for investors; help them diversify into investments which are created to potentially thrive in the storm.  For a personal consultation with me CLICK HERE!


EPA overreach and the Supreme Court


The Supreme Court yesterday stopped a large expansion of the EPA’S regulatory overreach but left in place existing expansions from the last 6 years GARANTEEING skyrocketing electric prices. The recent new EPA rules are the administration’s attempt to create laws without the support of congress. Check out this video of the president before he was elected in a rare moment of candor:




Who remains affected by his insanity?



The recent rule changes will dramatically escalate prices, rolling blackouts can be expected as coal powered electricity is OUTLAWED by EPA DECREE. Once in motion these regs will take on a life of their own. Where are our elected representatives? They stand in line for the campaign contributions while doing nothing to stop this UNCONSTITUTIONAL POWER GRAB!


Supporting them is another group of socialists in disguise and a predictable group of PREDATORS: Hank Paulson, Robert Rubin, Michael Bloomberg and Tom Steyer. FEAR PEDDLERS, we must do this to SAVE YOU. Their group calling themselves the RISKY BUSINESS report published the latest propaganda piece for the taxman in disguise. A group consisting of crony capitalists and politicians aligned against your freedom and prosperity to line their pockets with the money you will pay to prevent the HOAX of human caused climate change.


Here is there projection of the climate in America over the next 90 years based upon their MODELS:



They want to control location of facilities, create flood defenses and sell insurance to you and paid by you to themselves, crony capitalists of the worst sort. These people are politically correct and practically incorrect giving the intellectual underpinnings for morally corrupt politicians to SCREW YOU! Energy and electric prices are set to SKYROCKET and the president is keeping a campaign promise….


EU elites pull another FAST ONE


Most people don’t understand what the EU project is. It is a exercise in unaccountable government and imposition of socialism disguised as a blessing by the main stream media, crony capitalists, trade unions and public servants. The presidency of the EU is subject to heated debate as the UK wants to prevent arch federalist Jean Claude Juncker from ascending to power without the consent of the governed.



It is an inside job lead by Angela Merkel of Germany and Francois Hollande of France.



Cameron is in the hot seat as the UKIP independence party cleaned his and labours clock in recent European parliamentary elections. Powerful shots across the bows of politicians who bow to Brussels rather than look after the interests of the British people.  


“The Brits remain allergic to the idea of political union in Europe, believing that democratic legitimacy is rooted in the nation-state. The German political establishment – particularly on the centre-left – remains wedded to ever closer political union for Europe.”  – Gideon Rachman


EU commissars have placed the financial community in London firmly in their sites. Instituting laws and regulations which will FORCE banking business from the city to EUROPEAN capitals. All without one bit of input from the citizens of the UK or any other EU government they issue decrees to.   Can you say unaccountable bureaucrats/politicians/government? Loss of Freedom? Confiscation of income one way or another? Controlled by shadowy elites… This RAILROADING of Juncker into the leading role of the federalists is occurring as you read this.


In closing: Whenever you see or hear the word DEMOCRACY used by politicians substitute the word socialism/communism and then you can understand the REAL meaning of their words. Total dominance by central governments is the end zone for these would be socialists. Quoting Lady Thatcher:


Socialists cry "Power to the people", and raise the clenched fist as they say it. We all know what they really mean—power over people, power to the State.”


That is the dirty little secret of progressives throughout the developed world. They say they are for you, no, they are for power over you.  Government controlling every part of your lives especially YOUR MONEY. Totalitarians in drag.


Don’t miss the next WEEKLY Wrap and Tedbits commentary, subscriptions are free CLICK HERE


The world is kept afloat by one means and one means only: printing money and creating debt (pretending it is good as gold) out of thin air.And recycling the cash and adding more like every Ponzi scheme in history. It is actually the greatest opportunity in history if you know and can apply Austrian economics to your investing. Most people can’t and we are just waiting for the LEVERAGE to FAIL. It has never failed to do so in the past and it won’t fail to do so in the future. If you are a high net worth individual feel free to contact me CLICK HERE.


A perfect storm is brewing when it strikes only GOD knows. I hope you liked this roundup. It is posted daily on my AUSTRIAN blog at Tedbits.com along with thousands of other thought provoking articles for mental body builders. Check us out HERE.


DISCLAIMER AND TERMS OF USE: While TedBits strives to present accurate and useful information, we make no guarantee of accuracy or completeness. All information and opinion expressed herein is subject to change without notice. Opinions and recommendations contained herein should not be construed as investment advice. Under no circumstances does the information in this column represent a recommendation to buy or sell any securities or commodities. Do not assume that any recommendations, insights, charts, theories or philosophies will ensure profitable investment. The information contained herein is for personal use only. Any redistribution of this information is strictly prohibited.

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TedBits may include information obtained from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made to ensure its accuracy or completeness. Many of the statements and views made are the opinions of the author. Opinions expressed are subject to change without notice. This report is not a request to engage in any transaction involving the purchase or sale of futures contracts or options on futures. There is a substantial risk of loss associated with trading futures, foreign exchange and options on futures. This letter is not intended as investment advice, and its use in any respect is entirely the responsibility of the user. Past performance in never a guarantee of future results.


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“Dead Unbroke”: Bill Clinton Was Paid $105 Million For 542 Speeches Since 2001

In Hillary Clinton’s attempt to seem “one of the people”, she made the public relations debacle of portraying herself as “dead broke” at the time she and Bill Clinton left the White House. Of course, the reason this attempt at populist pandering backfired (certainly not helped by her daughter’s just as mistimed quote that she “Was Curious If She Could Care About Money And Couldn’t“, an expected outcome considering such boondoggles as a $600,000 NBC job for doing, well, something, and being married to a hedge fund manager) is because as is well-known, even the least educated American, the bulk of wealth American president families accrue is not while in office but after, when they hit the speaking/book publishing circuit.

This is just what WaPo found when it conducted a review of the Clintons’ federal financial disclosure: it found that Bill was paid $104.9 million for delivering 542 speeches around the world between January 2001 and January 2013, when Hillary left her job as secretary of state.

From WaPo:

Over seven frenetic days, Bill Clinton addressed corporate executives in Switzerland and Denmark, an investors’ group in Sweden and a cluster of business and political leaders in Austria. The former president wrapped up his European trip in the triumphant Spanish Hall at Prague Castle, where he shared his thoughts on energy to a Czech business summit.

His pay: $1.4 million.

That lucrative week in May 2012 offers a glimpse into the way Clinton has leveraged his global popularity into a personal fortune. Starting just two weeks after exiting the Oval Office, Clinton has delivered hundreds of paid speeches, lifting a family that was “dead broke,” as wife Hillary Rodham Clinton phrased it earlier this month, to a point of such extraordinary wealth that it is now seen as a potential political liability if she runs for president in 2016.

Visually (for the full interactive chart annotating each speech, click here).

Who paid?

Although slightly more than half of his appearances were in the United States, the majority of his speaking income, $56.3 million, came from foreign speeches, many of them in China, Japan, Canada and the United Kingdom, the Post review found.

The financial industry has been Clinton’s most frequent sponsor. The Post review showed that Wall Street banks and other financial services firms have hired Clinton for at least 102 appearances and paid him a total of $19.6 million.


Bill Clinton: Wall Street’s motivational speaker?

“He’s a stud,” said Anthony Scaramucci, founder of SkyBridge Capital, which paid Clinton $175,000 to address its annual investment conference in 2010. Clinton’s speech at the Las Vegas confab was so riveting, Scaramucci said, “there was nobody at the Bellagio cabana sunning himself when President Clinton was in the ballroom speaking.”

One of Clinton’s biggest fans: Goldman Sachs has hired Bill Clinton for eight speeches over the years totaling $1.35 million, many of them client meetings in such locales as Paris, Phoenix, and the South Carolina beach resort of Kiawah Island.

Goldman also has paid Hillary Clinton: She addressed tech entrepreneurs in Arizona last fall and women in finance in New York this year.


“President Clinton’s always interesting, but there’s a lot more demand right now for her because she just came out of government and people want to hear about that, whether it’s Iran or Russia or the big challenges she’s faced, and about the dysfunction in Washington,” said a Goldman executive who spoke on the condition of anonymity to discuss internal thinking.

Aside from money, what does Clinton get out of it?

“It makes me feel like I’m president again,” Clinton said in 2012 as he looked out at a large convention crowd at the National Retail Federation, which paid him $200,000. Clinton shared advice with the retailers passed down from his mother: “When I wanted to be a musician, I was not very good for years, and she just kept beating up on me and she said, ‘You just can’t quit.’ ”


In his addresses, Bill Clinton speaks about policy issues of the moment, domestic and foreign, and tailors his remarks to the business interests of his sponsors. He often speaks without notes and keeps his audiences in rapt attention, playfully answering questions and dispensing pearls of wisdom from his White House years or childhood in Arkansas.

The people willing to pay Clinton to speak surpasses even those happy to pay Bernanke some $200,000 per speech.

Although many former presidents hit the speaking circuit in retirement, Bill Clinton’s staying power has been unusual. His busiest year on record was 2012, when he gave 72 paid speeches and earned $16.3 million, according to The Post’s review.  “I’m shocked that people still want me to come give talks,” Clinton said this week, appearing to feign modesty in an interview with NBC’s David Gregory.

Curiously the older Clinton has gotten, the more he has been paid for every speech:

Clinton is hardly alone in milking the speaking tour:

Other former presidents also have stirred controversy with their paid speeches. Shortly after leaving office in 1989, Ronald Reagan received $2 million for addressing business executives in Tokyo at a time when the United States had an acrimonious trade dispute with Japan. George H.W. Bush made millions of dollars speaking to corporate groups around the world, as has George W. Bush, who in 2011 addressed, among others, financial firms caught up in scandal.

Which is great: after all this is what capitalism is all about – we would be the last to begrudge the Clintons their wealth if it was obtained legally and through hard speaking work (we certainly fail to see what insight one gleans from a Clinton speech for $200,000 but that’s a different story). However, with a bank account that is now well over the $100 million mark, a fact known by everyone, trying desperately to pass off as being “not truly well off” and one of the 99.9% simply won’t fly. The only question now is whether it is too late for Hillary to pivot back to the real world, where she and the person on the street, have absolutely nothing in common. Sadly for her, that may well mark the end of her presidential chances. That’s ok though: with several million to burn, we are confident she will find other well-paid distractions in which to bury her sorrows.

via Zero Hedge http://ift.tt/1wFuAyp Tyler Durden

The Most Unloved Rally Is In Bonds

Submitted by Scotiabank’s Guy Haselmann,

Most market pundits have predicted higher bond yields (for months), yet unloved global fixed income securities have traded well all year.  Even after the dovish FOMC reiterated its intent to maintain a highly-accommodative stance, bonds have stayed resilient. As a matter of fact, US junk bonds (aka high-yield) hit an all-time low yield this month, as did the sovereign debt of several European countries.  The spread between US high-yield and high-grade is approaching its narrowest all-time gap set in June 2007.

  • There are many scenarios for how the economy and financial markets will respond as the FOMC pivots toward a more ‘normal policy’.  In considering all the potential outcomes, I remain bullish on long dated Treasuries for the reasons outlined in earlier notes.  I expect a new low by the end of the summer and a sub 3% 30- year by the end of the year.

Despite the well-anticipated dovish FOMC message, Fed-head Yellen generated disquieting market unease. There could be several reasons for this.  It was certainly strange to hear the Fed Chair declare that stocks are fairly valued.  At best, equity valuations are ambiguous.  At worst, there are plenty of metrics to suggest bubble-like conditions, and a few indicating the most expensive levels in history.   

The main cause of market jitteriness might be that investors are beginning to sense the ‘time-inconsistency’ aspects of Fed policy.  Much has been written about how overly accommodative monetary policy aimed at short term benefits result in more unstable longer-term outcomes and have triggered repeated boom to bust cycles.  Under the current experimental policy it could be argued that the FOMC has either failed to learn from history or has the hubris to believe they can contain the fallout.

There is a less obvious ‘time-inconsistent’ aspect worth mentioning.  My paper “2014 and Beyond” stated that “holding interest rates at zero for a prolonged period is actually counter-productive to the Fed’s efforts of achieving either of its dual mandate.  This is because increasing productivity through modernization typically exposes redundancies: it allows firms to lay-off workers, while the improvement in competitiveness allows firms to drop prices.”

During the 6 years (and counting) of ZIRP (zero interest rate policy) the amount of corporate debt outstanding has more than tripled.  The proceeds have not gone into capital investment.  Rather, corporations have prudently chosen to engage in debt-financed share buybacks or the modernization of existing plant and equipment.  The short term impacts are as mentioned and counter-productive to the Fed’s mandates.  However, before I am labeled a Luddite, I admit that this is only half the story.  The other half of the story is the beneficial long-run aspects which forms the basis of one of the Fed’s time-inconsistency quandaries.

Plant modernization increases productivity.  It is widely acknowledged that jobs are more frequently being replaced by computers and robots.  Hewlett Packard, for instance, replaced 9000 people who were overseeing its computer systems with another set of computers to oversee those computers.   In the long run, however, the technological revolution has great benefits to the globe, providing almost unlimited access to information and education.  Such access will foment creativity, innovation and ever improving productivity.  (It also decreases inflation over time.)

The potential is great, making it easier to be bullish on the US in the long run (which I am).  The problem is that the benefits will take place over a long period of time, while the negative consequences are more immediate. Too many people are losing jobs to technology today without receiving retraining or the proper skill development necessary to evolve with the changing economic landscape.

Fed policies are accelerating this process and may, therefore, be counter-productive on several fronts.  The Fed tools being used are too limiting and have unintended consequences.  The latest tool appears to be trying to ‘buy time’ in the hope that new technologies will ‘catch-up’.   In the meantime, financial risks are aggregating.

BTW, why is the Fed so desperate to increase consumer inflation?  What does achieving optimal inflation look like?  How will they recognize it when they see it?

“What we know about the global financial crisis is that we don’t know very much.” – Paul Samuelson

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“America Deluded Us” Slams Angry Iraq PM, Will Buy Russian Jets Instead In Fight Against ISIS

It was a week ago when we learned that in yet another diplomatic masterstroke, Russia’s Vladimir Putin took advantage of the vacuum in relations between the US (which now wants its heretofore puppet prime minister in Iraq removed) and the Iraqi PM (who has been increasingly vocal against US allies in the region, namely Saudi Arabia, and US demands for a coalition government) and offered his “complete support” to the Iraqi leader. Yesterday the Iraqi leader has decided to take Putin up on his offer (especially since as we reported previously the Iraqi air force is currently made up of all of two “equipped” Cessna jets) and has announced he has bought used Russian jets which he will use instead of US fighter planes in his war against ISIS.

As BBC reports, citing Maliki, “Jets from Russia and Belarus will hopefully make a key difference in the fight against ISIS in Iraq.” He expressed regrets over Iraq’s contract with the US, saying their “jets are taking too long to arrive.”

“God willing within one week this force will be effective and will destroy the terrorists’ dens,” he told BBC Arabic.

Mr Maliki says Iraq has ordered Sukhoi fighter jets from Russia, possibly similar to the one pictured.

In the meantime, the prime minister took another chance to poke the US in the eye, which despite sending “weaponized consultants” or whatever Obama calls troops and special CIA agents these days, has so far failed to deliver on its promised fighter jets to the civil war-torn country. Maliki criticized the process of purchasing US jets as “long-winded,” adding that the radicals could have been repelled if Iraq had proper air defense.

“I’ll be frank and say that we were deluded when we signed the contract [with the US],” Maliki said. “We should have sought to buy other jet fighters like British, French and Russian to secure the air cover for our forces; if we had air cover we would have averted what had happened,” he went on.

Maliki said Iraq bought second-hand jet fighters from Russia and Belarus “that should arrive in Iraq in two or three days.” He was speaking to the BBC’s Arabic service in his first interview for an international broadcaster since Isis – the Islamic State in Iraq and the Levant – began its major offensive. 

The prime minister also confirmed that Syrian forces had carried out air strikes against Islamist militants at a border crossing between Iraq and Syria. He said Iraq had not requested the strikes but that it “welcomed” them. “They carry out their strikes and we carry out ours and the final winners are our two countries,” he said.

Ironically, this also means that, at least optically, the US is now alligned with Russia as well as Iran, Syria and Saudi Arabia in the “all against one” fight against ISIS which continued to consolidate its territory in Iraq and Syria.

What it really means is that Obama has asked, and is about to get $500 milllion more to arm ISIS and its al-Qaeda peers in Syria, which in turn the Iraq air force will now use Russian jets to bomb.

What is the definition of a proxy war again?

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Gazprom Ready To Drop Dollar, Settle China Contracts In Yuan Or Rubles

A little over a month ago, when Russia announced the much anticipated “Holy Grail” energy deal with China, some were disappointed that despite this symbolic agreement meant to break the petrodollar’s stranglehold on the rest of the world, neither Russia nor China announced payment terms to be in anything but dollars. In doing so they admitted that while both nations are eager to move away from a US Dollar reserve currency, neither is yet able to provide an alternative. This changed rather dramatically overnight when in a little noticed statement, Gazprom’s CFO Andrey Kruglov uttered the magic words (via Bloomberg):


In other words just as the US may or may not be preparing to export crude – a step which would weaken the dollar’s reserve status as traditional US oil trading partners will need to find other import customers who pay in non-USD currencies – the world’s two other superpowers are preparing to respond. And once the bilateral trade in Rubles or Renminbi is established, the rest of the energy world will piggyback.

But wait, there’s more. Because only now does Gazprom appear to be unveiling all those “tangents” that were expected to hit the tape in May. Among Kruglov’s other revelations were that Gazprom is in talks on a Hong Kong listing and is weighing the issuance of Yuan bonds. Gazprom is also considering selling bonds in Singapore dollars, the CFO said at briefing in Moscow. Wait, you mean that by alienating and embargoing Russia from western (USD, EUR-denominated) funding markets, it has pushed the country to turn to its pivoting partner, China and thus further cementing the framework for the next Eurasian strategic alliance?


But wait, there’s still more, because it is  not just Gazprom. As the PBOC announced overnight,  PBOC Assistant Governor Jin Qi and Russian central bank Deputy Chairman Dmitry Skobelkin led a meeting held yesterday and today in Shanghai.  The meeting discussed cooperating on project and trade financing using local currencies. The meeting discussed cooperation in bank card, insurance and financial supervision sectors.

In other words, central bankers of China and Russia discussed how to replace the dollar with Rubles and Yuan. From the PBOC:

In retrospect it will be very fitting that the crowning legacy of Obama’s disastrous reign, both domestically and certainly internationally, will be to force the world’s key ascendent superpowers (we certainly don’t envision broke, insolvent Europe among them) to drop the Petrodollar and end the reserve status of the US currency.

via Zero Hedge http://ift.tt/1nKIyIF Tyler Durden