We Shouldn’t Be Shocked By This New Proposal… But We Are

Submitted by Simon Black of Sovereign Man blog,

Prof. Ken Rogoff’s book ‘This Time is Different: Eight Centuries of Financial Folly; is one of the best researched public works on the subject of sovereign debt.

And Rogoff’s conclusions (though hotly contested due to an ‘Excel error’) were that, sensibly, governments which accumulate too much debt get into serious trouble.

Duh. Not exactly a radical idea.

But in an article published yesterday afternoon on the Financial Times website (based on a recently published academic paper), Rogoff did propose a new idea that is radical: ban cash. All of it.

Rogoff begins asking the question: “Has the time come to consider phasing out anonymous paper currency, starting with large-denomination notes?”

He goes on to explain that getting rid of paper currency would provide two critical benefits:

1) It would reduce crime and tax evasion;

2) It would allow central banks to drop interest rates BELOW ZERO.

I was stunned. Though given the status quo thinking we have to put up with today, I really shouldn’t have been.

In fairness, Mr. Rogoff is an academic. It’s his job to dispassionately analyze data and render conclusions, whatever they may be. What’s scary is that some dim-witted politician will likely jump all over this.

People have been deluded into believing that only criminals and tax cheats hold cash in large denominations. And the conclusion is that if we ban cash, criminals will simply quit their craft because they’ll no longer have an officially-sanctioned medium of exchange.

This is total baloney, obviously. Banning cash doesn’t eliminate crime. It just creates a new cottage industry for cash alternatives.

Drug deals can just as easily go down swapping share certificate of Apple. Or title to a new car. Any number of things.

Perhaps the more important point, however, is the notion that eliminating cash frees up central bankers to force interest rates into negative territory.

The contention is that the official data tells us that inflation is tame. Consequently, central banks should be free to expand the money supply and ratchet down interest rates even more.

There’s just one problem: interest rates are basically at zero already.

Technically a central banker could drop interest rates to below zero.

But if they did that, who in his/her right mind would hold their savings at a bank where they would have to PAY THE BANK to make wild bets with their money?

People would just go to physical cash instead.

Solution? Eliminate cash! Then people would be forced to suffer NEGATIVE interest rates… and thus have a HUGE INCENTIVE to spend as much as they can as quickly as they can. Forget about putting something aside for a rainy day.

But hey, at least the stock market would probably rise.

Now, I highly doubt that physical cash is going to be sucked out of the system… tomorrow. But the War on Cash is very real indeed.

As I travel around the world, I’ve seen with my own eyes– CASH has become the #1 hot button item for customs agents everywhere. They even have highly trained cash sniffing dogs now.

It’s becoming more and more obvious that people should divorce themselves from this system and consider holding at least a portion of their savings in something other than fiat currency.

And of all the options out there, it’s hard to beat the convenience and tradition of precious metals.

Even if you’re looking to move large sums of money, it’s possible to buy a rare coin and walk out of the country with a single nickel worth $50,000 in your pocket. More on that another time.

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The U.S. Job Market is Gaining Traction

By EconMatters  



Claims Data


The Jobless claims data came out on Thursday and the trend is still in place and bodes well for the May Employment Report coming out next Friday as jobless claims fell sharply in the May 24 week, down 27,000 to 300,000. The 4-week average is down a significant 11,250 to a new recovery low of 311,500. Continuing claims are also down, falling 17,000 in data for the May 17 week to a new recovery low of 2.631 million. The 4-week average is down 33,000 to 2.655 million, also a recovery low. The unemployment rate for insured workers, also at a recovery low, came in at 2.0 percent. Notice a pattern here, new recovery low, new recovery low, and new recovery low. 


Headhunters Buzzing Right Now


I can tell the job market is really on fire through a couple of the measures I interact with in my daily life which shows a couple of things, first that wages are going up, and second that headhunters are really calling a bunch of my colleagues in Corporate America with multiple job opportunities. 


But it is just not corporate jobs as the businesses in my area post job openings along with wage info on their billboards when they really need people, like cashiers, installers, and Car Wash Sales positions and going by the rise in wages posted on these billboards the job market is tightening for workers at this level as well. 


Albeit we reside in an area that outperforms the overall economy, and in some cases economies are subject to local pressures, but this area has always outperformed, and the level of increased activity is quite noticeable, which means business is picking up relative to previous levels. 


Strong Employment Report


We expect a strong Employment report next week for another new recovery record for consecutive months of jobs added at these levels of 200k plus, and we expect the unemployment rate to drop below 6% sooner than most believe at this pace. 


I know the doom and gloom crowd will focus on those who have left the workforce, and sure that is an area for improvement, but it starts by employing as many people who are in the workforce first, and then as conditions tighten further in the job market, enticing people to work and come back into the job market. This is related to a tightening job market where employers lower some of their standards and wages rise, both of which we anticipate coming down the pike over the next six months as the job market continues to strengthen.



Wage Pressures & Inflation


But from an inflation standpoint if those workers never come back to the workforce for various reasons, the pool of talent available who are looking for a job is fought over by employers needing to fill positions, and in some cases attracting workers to switch jobs or companies, we also have seen an uptick in this area in the Corporate world. 


Consequently what really matters for jobs is the pool who are in the market looking for work, and if this is shrinking that is bullish for workers’ opportunities and salaries, bad for inflation and companies needing to fill those positions, but overall leads to a tightening job market where the Fed will need to start normalizing interest rates to avoid runaway inflation. 


Elevated inflation would be fueled by wages rising substantially all along the wage continuum for the first time in the post recovery world, and the inflation numbers start trending well above the Fed`s target, we anticipate this occurring once these wage pressures start showing up in the data set.



Labor Starting to Gain Negotiating Power


Tightening in the job market carries over to all types of positions, if an employer who used to get away with hiring contract workers to lower costs, now has to change these positions to full-time hires and raise the salaries to attract the talent they need to complete projects, contract salaries end up going higher as well. 


This is the area we haven`t seen a significant spike since the recession, and we feel the entire market and employers are behind the curve on and have become too complacent with the status quo. Employers and HR are in for a real shock when they need to start refining their budgets and raising wages to fill positions, they are used to always negotiating from a position of strength, we see the tables turning in this area as the labor market continues to tighten.


The Employment Trend is Bullish


Despite all the doom and gloom in the market, we would have loved to have these employment numbers three years ago, jobs and the economy are trending higher, and better times are ahead for those looking for work, and those not looking for work, don`t be surprised if you find your services in demand once again, as companies reach out of their comfort zone to fill positions.


© EconMatters All Rights Reserved | Facebook | Twitter | Post Alert | Kindleese positions to full-time hires and raise the salaries to attract the talent they need to complete projects, contract salaries end up going higher as well. 


This is the area we haven`t seen a significant spike since the recession, and we feel the entire market and employers are behind the curve on and have become too complacent with the status quo. Employers and HR are in for a real shock when they need to start refining their budgets and raising wages to fill positions, they are used to always negotiating from a position of strength, we see the tables turning in this area as the labor market continues to tighten.


The Employment Trend is Bullish


Despite all the doom and gloom in the market, we would have loved to have these employment numbers three years ago, jobs and the economy are trending higher, and better times are ahead for those looking for work, and those not looking for work, don`t be surprised if you find your services in demand once again, as companies reach out of their comfort zone to fill positions.


© EconMatters All Rights Reserved | Facebook | Twitter | Post Alert | Kindle

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Stocks Surge To Record Highs On Worst Economic Growth In 3 Years

One supremely smart CNBC talking head summed it all up, "today's negative GDP number was excellent news," and sure enough, thanks to someone's multi-billion-dollar bid at the all-time-highs mid-afternoon, we went to the moon, Alice. Trannies are on target for their best month since October (+5.7%). The dash-for-trash has a new life as "most shorted" have now risen 6 days in a row – the biggest squeeze in over 3 months. This all happened as bonds rallied (though yields rose modestly on the day), VIX rose, USDJPY would not play along and aside from the spike in volume, on a total lack of liquidity. Gold and silver were monkey-hammered early on but limped back off their lows as WTI crude rallied from the GDP print on. The S&P 500 is now only 30 points short of Goldman Sachs June 2015 target.


Here's the day in S&P futures land… GDP hits and volume bumps, US opens and volume bumps… and 1436ET hits and volume explodes on an entirely newsless, dataless, co-ordinated asset-class move-less shift…


Artist's rendering of anyone who was short into today's manufactured stop-run at 1436ET…


Another day, another short-squeeze…as the dash for trash continues… 6-days in a row up and the best run in 3.5 months…


As a reminder, things are a little decoupled in bonds…short-term


And medium-term…


and VIX…




But here is the week in the cash equity indices…


And a birght green month of May – Trannies are set for their best month in 7 months!


Commodities saw early weakness (with gold and silver slammed once again) but all rallied post-GDP…


FX markets went nowehere fast…


Bond yields dipped and ripped around the GDP print…



Charts: Bloomberg

Bonus Chart: Recovery…

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The Bobler: Watch As An HFT Algo “Trades” German Bunds

For the longest time it was thought that high frequency traders and their algos were mostly focused on equities due to the ease of accessing equity markets and getting priority data feeds which permit a certain class of traders to scalp and/or frontrun order blocks all the while hiding in the guise of providing liquidity (liquidity disappears the moment there is a major market shock and when it is needed more than ever).

Curiously, in the past year it has became very clear that the asset class where the growth of HFT has been most pronounced is not in equities but in FX – perhaps linked to the tidal departure of all carbon-based FX traders all of whom it now appears were engaging in gross “chat room” mnaipulation – and to a lesser extent, options. But one place that seemed somewhat immune from the ravages of the constant millisecond back-and-forth churn and quote stuffing known as high frequency “trading” were bonds. No longer.

As the following several charts from Nanex document conclusively, HFT has now officially entered the bond trading house, in this case the German Bund treasury house: earlier today, May 29, just after 9:45 am EDT, an algo ran on 3 futures contracts on the Eurex exchange impacting the June 2014 contract in both the Bund (GBL), the Bobl (GBM) and Schatz (GBS). 

1. Bund (GBL) Trades and quote spread over 30 seconds of time.

Each trade at the offer is followed by a trade at  the bid. There are 1,445 trades representing 1,468 contract shown in this 30 second period of time.

2. Bund (GBL) quote spread – zoomed out to 17 minutes of time.

The lower panel shows a count of trades each second. Note how it remains constant during each of the 3 or 4 instances.

3. Trades in the most active Eurex Futures.

Three contracts stick out – GBL, GBS and GBM.

4. Showing GBL, GBS and GBM.

Note the constant 150 trades per second during the 3 (or 4) groups.

5. Zooming in on 6 minutes of time.

In the first and last groups, only GBL and GBM were active, while the middle group (starting at 9:47) includes GBS.

6. Zooming in on about 30 seconds of time. 

7. Zooming in on 4 seconds of time. 

8. Zooming in on 1 second of time.

* * *

And as more and more bond trading is dominated by HFT, we can all look forward to a May 2010 flash crash event taking place not in the S&P500, but in the sovereign bond market.

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CNBC Confused As To Why Interest Rates Are Falling

Submitted by Lance Roberts of STA Wealth Management,

It was interesting over the last couple of days to watch a series of both hosts and analysts scratching their heads and fumbling for answers over the recent decline in interest rates.  After all, how could this be with inflation creeping up due to much stronger economic growth? More importantly, asset prices are clearly telling investors to get out of bonds as the "great rotation" is upon us as we launch into this new secular bull market, right? IF they asked me, here would be my answers to their questions.  First, a little history.

In June of last year, as interest rates were spiking, there were many calls stating that the "great bond bull market was dead." Those calls even included the great Bill Gross.  The idea of the "great rotation" was born and spread through the media and the financial industry like wildfire. However, at that time I wrote an article entitled: "5 Reasons To Buy Bonds Now" stating:

"For all of these reasons I am bullish on the bond market through the end of this year.


However, the catalysts needed to create the type of economic growth required to drive interest rates substantially higher, as we saw previous to the 1980's, are simply not available currently. While there is certainly not a tremendous amount of downside left for interest rates to fall in the current environment – there is also not a tremendous amount of room for them to rise until they begin to negatively impact consumption, housing and investment.  It is likely that we will remain trapped within the current trading range for quite a while longer as the economy continues to 'muddle' along."

Of course, since then housing has rolled over, growth of consumption has slowed, and economic growth has remained quite anemic with first quarter growth coming in at a negative 1% annualized rate.

But despite the evidence, mainstream analysis continued to err to the side of flawed analysis.  I have continued to revisit this issue over the last several months reiterating my belief that interest rates remain "trapped" at lower levels due to an inability for the economy to absorb higher borrowing costs.

Reiterating Bond "Buy" – 35 Years Of History Confirms

"Bonds are currently exhibiting some of the best valuations that we have seen in the last couple of years with the technical indicators stretched to extremes.  Exactly the opposite is true with the stock market with valuations (based on trailing reported earnings – the only true measure of valuations) pushing levels normally associated with bull market peaks, prices at extreme extensions and earnings peaking.  This is the time when investors should be thinking about taking some profits by 'selling stocks high' and adding some relative safety by 'buying bonds low.'  After all – it is what we are supposed to be doing as long term investors."

Interest Rate Predictions Meet Bob Farrell's Rule #9

"Interest rates are not just a function of the investment market, but rather the level of "demand" for capital in the economy.

However, in the current economic environment this is not the case. The need for capital remains low, outside of what is needed to absorb incremental demand increases caused by population growth, as demand remains weak. While employment has increased since the recessionary lows, much of that increase has been the absorption of increased population levels. Many of those jobs remain centered in lower wage paying and temporary jobs which does not foster higher levels of consumption."

The recent breakdown in interest rates is simply a continuation of the thesis that I have been laying out over the course of the last year.  However, let's look at a few of the most common arguments to see if they are supported by the data.

"Stronger Economic Growth Will Lead Interest Rates Higher"

That statement is only true if there is a sustainable AND INCREASING rate of economic growth over time to offset the drag caused by rising interest rates.  The chart below clearly shows this to be the case.


It is important to notice that even during the rising economic growth of the 50's and 60's that increasing interest rates led to a slowdown in economic activity.  This is ALWAYS the case which debunks the entire argument of most mainstream analysis that the economy can handle higher interest rates. It may appear to do so in the short term, but higher borrowing costs erode the economic underpinnings.

"Rising Inflation Will Pull Interest Rates Up"

This is another "cart before the horse issue." Inflation is a function of stronger economic growth which leads to rising wage growth which allows consumers to buy "more" stuff which leads to higher prices. Let's add to the chart above to see the relationship between all of these variables.


As you can see, wage and salary growth has the highest correlation to economic growth. With a sustainable trend in rising economic growth which leads to a corresponding trend to higher wage growth, inflation and interest rates will be remain subdued. As stated above, interest rates are a function of demand for credit.  The demand for credit comes from increased levels of aggregate demand that leads to the need for higher production. Increased demand for credit by businesses increases monetary velocity through the economy which leads to rising inflation.  Currently, those variables do not exist.

"The Stock Market Can Weather Higher Rates"

While asset prices can rise in the short term, particularly when fueled by massive Central Bank liquidity injections, in the longer term stock prices are a reflection of the value of the stream of future cash flows. Rising interest rates increase borrowing costs for businesses which reduces future profitability.  This is why there is a very high correlation between increasing interest rates and falling asset prices as shortterm "exuberance" eventually meets "economic reality."  (Read More On Chart & Table Below)



"Interest Rates Will Rise When The Fed Stops QE"

This is simply wrong. Interest rates rise when the Fed is intervening in the markets as money rotates out of "safety" and into "risk." This rotation is primarily a function of the "carry trade" as recently discussed by Jeff Saut:

"Hedge funds have been borrowing money in Japan (again) at very low Japanese interest rates, obviously denominated in yen. They then convert those yen to, say, the Brazilian real, Argentine peso, Turkish lira, etc. and buy Brazilian bonds or Turkish bonds using 10:1+ leverage. Accordingly, when such countries jacked up interest rates overnight, their bond markets collapsed. Concurrently, their currencies swooned, causing the 'hot money' investors to not only lose on their leveraged bond positions, but on the currency as well.  If you are leveraged when that happens, the losses add up quickly and those positions need to be sold. So the bonds were sold, and the pesos/lira/real that were freed up from those sales had to be converted back into yen (at currency losses) to pay back the Japanese loans. And as the bonds/currencies crashed, the 'pile on' effect exaggerated the downside dive."

The chart below shows clearly that interest fall as the Fed begins extracting liquidity from the markets not vice-versa.


It is also important to notice that the deviation between stock prices and falling interest rates is soon corrected as well. While stocks have not seen a correction as of yet, the fall in interest rates suggests that the underpinnings of the financial market is weakening, and the risk of a decline has risen.

The recent decline in interest rates should really not be a surprise as there is little evidence that current rates of economic growth are set to increase markedly anytime soon. Consumers are still heavily levered, wage growth remains anemic, and business owners are still operating on an "as needed basis." This "economic reality" continues to constrain the ability of the economy to grow organically.

This is a point that seems to be lost on most economists who forget that the Federal Reserve has been pumping in trillions of dollars of liquidity into the economy to pull forward future consumption. With the Fed now extracting that support, it is very likely that economic weakness will resurface since the "engine of growth" was never repaired. The point here is that as a contrarian investor, when literally "everyone" is piling on the same side on any trade it is time to step back and start asking the question of "what could go wrong?" 

One other point to consider. As investors, we are supposed to buy when investors are fearful and sell when investors are greedy. This is advice passed on by every great investor of our time. If that is the case, then what does this really say about the quality of advice from mainstream sources that continues to espouse the chase of stocks and shunning of bonds?

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Silicon Valley Billionaire Who Blocked Public Access to Popular Beach Claims: “He Owns the Road, the Beach and the Tides”

Earlier this month, I highlighted the fact that one of Obama’s closest billionaire buddies, Silicon Valley oligarch, Vinod Kholsa, had aggressively moved to block access to the very popular Northern California destination Martins Beach. The post was titled, Silicon Valley Billionaire Buys Popular Beach and Then Blocks Public Access, in which I wrote:

Vinod Kholsa, co-founder of Sun Microsystems and well known Silicon Valley venture capitalist, is at the center of a lawsuit revolving around the popular Northern California destination Martins Beach, located six miles south of Half Moon Bay. The beach has always been popular with families and surfers alike, and the prior owners had always provided access for a $5 fee. Mr. Kholsa has taken a different approach, which has consisted of putting up a locked gate to block the beach’s only road access point and painting over a billboard welcoming people to the beach.

At the time, some expressed disbelief that such a good so-called “liberal” would take this action, but it is now clear these people were in serious oligarch denial. We now learn from the SF Gate that:

There had, until now, been a note of uncertainty about why beach owner Vinod Khosla decided to kick people off Martins Beach, but the billionaire venture capitalist made his motives pretty clear, according to this Chronicle story by Melody Gutierrez.

The green tech titan does not want the hoi polloi touching what he believes is his sand, tidelands or surf.

“Martin’s beach is private property, including the sandy beach and the submerged tidelands seaward of the mean high tide,”  argued lobbyists hired by Khosla in a letter to state lawmakers. “There are no existing ‘public’ lands to which access is needed.”

continue reading

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Someone Decided To Buy $1 Billion eMinis In 1 Second At The All Time High

Someone decided that 1436ET was the perfect time to buy $1bn worth of S&P 500 futures (10k contracts) in 1 second (and $1.8 billion in that minute)… this flush if volume is the largest minute of the day and lifted allequity indices and ETFs in one magical move. Bonds… rallied…





10k contracts in 1 second and 18.6k contracts in that minute…


and Bonds rallied…


Charts: Bloomberg

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No Holders Barred: DOJ Slams BNP With Multi-Billion Dollar Penalty

Francois Hollande is not having a good week – disastrous elections over the weekend, followed by record high numbers of jobseekers (destroying his promise to deliver jobs), and now his banking system is under attack; as the WSJ reports:


A final resolution (and a guilty plea) of the years long investigation of the French bank is likely weeks away, WSJ notes but it does remain ironic that in flexing his enforcement muscles, DoJ’s Eric Holder is about to crucify yet another non-US bank.


As The WSJ reports,

The U.S. Justice Department is pushing BNP Paribas SA  to pay more than $10 billion to resolve a criminal probe into allegations it evaded U.S. sanctions against Iran and other countries for years, which would represent one of the largest penalties ever imposed on a bank, according to people familiar with the negotiations.


A final resolution of the yearslong investigation of the French bank is likely weeks away, and it’s possible the ultimate settlement amount could total far less than $10 billion. BNP is looking to pay less than $8 billion, according to the people familiar with the settlement discussions, although a person close to the bank said its negotiators have never mentioned the $8 billion figure in talks with U.S. authorities.


BNP and the U.S. authorities also remain locked in negotiations over whether the bank will temporarily lose the ability to transfer money into and out of the U.S., the people said.


Prosecutors are continuing to try and extract a guilty plea from the bank and, in recent negotiations, have pointed to the muted market reaction in the wake of Credit Suisse AG’s admission to conspiring to aid tax evasion as evidence that a guilty plea by BNP would not be disastrous, according to a person familiar with prosecutors’ thinking.

So to get some context, DOJ’s Eric Holder, frustrated at allegations he refuses to take legal action against banks, is doing his best to destroy one particular bank: a French one, not to be confused with an American bank of course. After all those still pull all the strings at the Department of “Justice.” However, over in Europe, where first it was Credit Suisse and now French BNP is about to get crucified, US enforcement has never been stronger.

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Bush’s Anti-Terror Chief: Bush, Cheney and Rumsfeld Committed War Crimes In Iraq

Bush’s top counter-terrorism official for his first year as president – Richard Clarke – tells Democracy Now that Bush, Cheney and Rumsfeld committed war crimes in Iraq … and that they can be tried at the Hague:


(Clarke retired in protest at the start of the Iraq war.)

Clarke is right:

  • Indeed, it is not too late to charge Bush, Cheney or Rumsfeld for war crimes even under American law

And – as odd as it may sound – it’s not too late to impeach Bush, Cheney or Rumsfeld … even though they have are no longer in office.

Of course, Obama is also committing war crimes.  For example, the Obama administration has ordered numerous indiscriminate drone strikes … which are war crimes (more here and here).  And torture is also apparently continuing under Obama. See this and this.

And Obama should also be impeached.

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Spot The Odd Job Market Out

When the BLS reports the May job number in one week’s time, it will mark a historic threshold: this will be the report when the total number of jobs lost during the financial crisis at the national level is finally recovered, and the US has the same number of people employed as it did during the last peak in January 2008 (even if the number of Americans not in the labor force has increase by 13.5 million since then). However, as is always the case in a as diverse as the US, what happens as the national level is very distinct from regional developments.

In this case we bring our readers’ attention to a chart from a recent NY Fed presentation showing the “recovery” in the employment both at the national level where as noted the thick red line is about to cross the X axis, as well as three distinct MSA: 1) New York City, 2) Upstate New York so very different from Manhattan, and 3) Northern New Jersey.

Which brings us to today’s rhetorical pop quiz: spot the odd labor market out, one dominated by the financial industry, also known as the place which has benefited by far the most from QE, which may have failed most of America, but certainly has unfailed America’s financial industry, where things have never been better.

Source: NY Fed, h/t @RudyHavenstein

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