The Legends Are Abandoning the Markets

The legends are abandoning the markets.


Stanley Druckenmiller founded his hedge fund Duquesne Capital in 1981. From 1986 onward he maintained average annual returns of 30%. He also managed George Soros’ Quantum Fund from 1988-2000. During that latter period he famously facilitated Soros’ “breaking of the Bank of England” trade: the legendary trade which netted over $1 billion in a single day.


Druckenmiller closed Duquesne Capital in 2010, stating that he was no longer able to meet his investment “standard[s]” in the post-2008 climate (he made money in 2008 before the Fed began to alter the risk landscape).


Druckenmiller’s key strength has always been macro-economic forecasting. That he would feel the capital markets were not offering him the opportunities he needed says a lot.


Seth Klarman is another investment legend who is returning capital to clients. Widely considered to be the Warren Buffett of his generation, Klarman recently cited a lack of “investment opportunities” as the cause for his decision to downsize his legendary Baupost Group hedge funds.


Other legends or market outperformers who have returned capital to investors or closed their funds to outside investors are Carl Icahn and Michael Karsch. Indeed, even value legend Warren Buffett is sitting on the single largest amount of cash in the history of his 50+ year career as an investor, stating that stocks are “fully valued” at current levels (Buffett largely does not believe in shorting the market, so his decision to be in cash is a strong indicator of opportunities).


These men are masters of the capital markets. They are voting with their feet and pulling their capital out of them. Given that their personal compensation is closely linked to assets under management and profit sharing, this decision is akin to the choice to forego additional wealth that could be made quite easily (none of these individuals would have trouble raising several billion more in capital) rather than trying to find opportunities in a challenging market.


If they’re bailing on the market… what are the odds trouble is approaching?


For a FREE Special Report outlining how to set up your portfolio from the next bear market collapse, swing by:


Best Regards

Phoenix Capital Research 





via Zero Hedge Phoenix Capital Research

China Currency Plunges Most In Over 5 Years, Biggest Weekly Loss Ever: Yuan Carry Traders Crushed

And just like that the Chinese yuan devaluation has shifted away from the merely “orderly.”

In the past few hours of trading, China, which as we reported two days ago has started intervening aggressively in the Yuan market, has seen its currency crash by nearly 0.9%, which may not seem like much, but is in fact the largest drop since December of 2008, and at last check was trading at around 6.18, even as the PBOC fixed the CNY reference rate 0.02% higher from the last official close to 6.1214, erasing pivot support point at 6.1346 and 6.1408.  Naturally this means that the obverse, the CNYUSD, has crashed to as low as 0.1620. Should this move sustain without reverting, this will be the biggest weekly loss ever! The dramatic move is shown on the chart below.


There isn’t much commentary on this most recent dramatic move aside from this commenbt by Zhou Hao, a Shanghai-based economist at ANZ, who said “CNY movements indicate that the authorities are determined to deter capital inflows and there were likely stop-losses triggered when the CNY broke key psychological levels.”

What is more notable is that the move, while certainly intending to shake out the carry traders bent on riding the USDCNY ever lower, is starting to appear borderline erratic. As a reminder, and as we posted yesterday before the FT picked up the story earlier today, there is a lot of pain potentially in store for those trading the Yuan, because while the move may not seem massive, the reality is that the carry trade positions have massive, massive leverage associated with them, with the pain level starting at $500 billion in losses once the Yuan enters the 6.15-6.20 gap, and rises exponentially from there.

This is what we warned yesterday:

The total size of the carry trade is hard to estimate although even just looking at some of the onshore CNY positions accumulated, DB Asia FX strategist Perry Kojodjojo estimates that corporate USD/CNY short positions are around $500bn. The size of the carry trade and the fact that China saw significant capital outflows during the last period of substantial Renminbi depreciation in the summer of 2012 has led to concerns over what this might mean for both the Chinese economy and financial markets as well as broader global financial implications.

Morgan Stanley believes that one such carry-trade structured product that will be the “pressure point” for this – should the Yuan continue to depreciate – is the Target Redemption Forward (TRF) which has a payoff that looks as follows…

While this is just an example of a product payoff matrix to the holder, the broader point is that the USD/CNH market has a particular level (or range of potential levels) at which three factors can create non-linear price action. These are:

1. Losses on TRF products will (on average) crystallize if USD/CNH goes above a certain level. This has implications for holders of TRF products, who are mostly corporates;

2. The hedging needs of writers of TRF products (banks) mean that there is a point of maximum vega for banks in USD/CNH. Below this level banks need to sell USD/CNH vol; above this level banks need to buy USD/CNH vol;

3. The delta-hedging needs of banks are complex. As we approach the average strike (the 6.15 in the theoretical point of Exhibit 1), banks need to buy spot USD/CNH. Above this point but below the European Knock-in (EKI) (i.e., between 6.15 and 6.20 in Exhibit 1), banks need to sell spot. Then above the EKI, banks don’t need to do anything in spot.

From internal Morgan Stanley data, we estimate that the point of maximum vega is somewhere in the range of 6.15-6.20, and that the 6.15-6.20 in Exhibit 1 is reasonably indicative of the average strikes and EKIs in the market.

In other words, so long as the TRF products remain in place (i.e., are not closed out) and we remain below the maximum vega point (somewhere between 6.15 and 6.20), there is natural selling pressure by banks in USD/CNH vol. When we get above that level, there is natural vol buying pressure.



Of course, in the scenario that USD/CNH keeps trading higher and goes above the average EKI level, the removal of spot selling flow by banks and the need to buy vol means the topside move may accelerate.

Simply put, if the CNY keeps going (whether by PBOC hand or a break of the virtuous cycle above), then things get ugly fast…

How Much Is at Stake?
In their previous note, MS estimated that US$350 billion of TRF have been sold since the beginning of 2013. When we dig deeper, we think it is reasonable to assume that most of what was sold in 2013 has been knocked out (at the lower knock-outs), given the price action seen in 2013.

Given that, and given what business we’ve done in 2014 calendar year to date, we think a reasonable estimate is that US$150 billion of product remains.

Taking that as a base case, we can then estimate the size of potential losses to holders of these products if USD/CNH keeps trading higher.

In round numbers, we estimate that for every 0.1 move in USD/CNH above the average EKI (which we have assumed here is 6.20), corporates will lose US$200 million a month. The real pain comes if USD/CNH stays above this level, as these losses will accrue every month until the contract expires. Given contracts are 24 months in tenor, this implies around US$4.8 billion in total losses for every 0.1 above the average EKI.

Deutsche Bank concludes…

Looking forward it’s possible that the PBOC is not attempting to actively engineer a sustained depreciation of the Renminbi but rather is attempting to increase the level of two-way volatility in the market to discourage the carry trade and also excessive capital inflows. In terms of the broad risk going forward the sheer scale of the challenge the PBOC has set out to tackle likely means they will have to move with restraint. This is certainly a story to watch…

As Morgan Stanley warns however, this has much broader implications for China

The potential for US$4.8 billion in losses for every 0.1 above the average EKI could have significant implications for corporate China in its own right, as could the need to post collateral on positions even if the EKI level is not breached.


However, the real concern for corporate China is linked to broader credit issues. On that, it’s worth reiterating that the corporate sector in China is the most leveraged in the world. Further loss due to structured products would add further stress to corporates and potentially some of those might get funding from the shadow banking sector. Investment loss would weaken their balance sheets further and increase repayment risk of their debt.


In this regard, it would potentially cause investors to become more concerned about trust products if any of these corporates get involved in borrowing through trust products. In this regard, this would raise concerns among investors, given that there is already significant risk of credit defaults to happen in 2014.

Remember, as we noted previously, these potential losses are pure levered derivative losses… not some “well we are losing so let’s greatly rotate this bet to US equities” which means it has a real tightening impact on both collateral and liquidity around the world… yet again, as we noted previously, it appears the PBOC is trying to break the world’s most profitable and easy carry trade – which has created a massive real estate bubble in their nation (and that will have consequences).


The bottom line is the question of whether the PBOC’s engineering this CNY weakness is merely a strategy to increase volatility and thus deter carry-trade malevolence (in line with reform policies to tamp down bubbles) OR is it a more aggressive entry into the currency wars as China focuses on its trade (exports) and keeping the dream alive? (Or, one more thing, the former morphs into the latter as a vicious unwind ensues OR the market tests the PBOC’s willingness to break their momentum spirit).

It appears, as Bloomberg notes, the PBOC is winning: “Yuan has gone from being most attractive carry trade bet in EM to worst in 2 mos as central bank efforts to weaken currency cause volatility to surge. Yuan’s Sharpe ratio turned negative this yr as 3-mo. implied volatility in currency rose in Feb. by most since May, when Fed signaled plans to cut stimulus.”

So far the PBOC’s “shock and awe” has impressed currency traders. Hopefully, the PBOC knows what it is doing because if indeed it causes the carry trade to unwind, the unwind could send the currency plunging well beyond the central bank’s intended limits. What happens then nobody knows.

Curious for more? Read our first post in this series: Welcome To The Currency Wars, China (Yuan Devalues Most In 20 Years)


via Zero Hedge Tyler Durden

President Of China’s Marine Institute For Security: “Glory Drenched In Blood Will Pave China’s Road To Revitalization”

Some very disturbing thoughts are laid out in this blog post written by Dai Xu. He is a Chinese author, social commentator, and the president of Marine Institute For Security And Cooperation, he also a professor at the National Defense University. First posted in the US China Perception Monitor.

China Not Afraid of Conflict

The year 2013 was a year without fighting, but there was a strong potential for conflict. This year, the impact of local wars on the world situation is much more serious than in previous years.

This year, the U.S. behaved very arrogantly, and Obama’s intentions were unclear; the Middle East retreated, East Asia rallied.

In the 20th century, as a challenger of empires built on hegemonies, America’s national strategy was to break up and surround Eurasia and its three big political powers: the Middle Eastern Islamic world, Russia, and China. America also wanted to make further steps toward the fragmentation of these empires and complete their establishment of a global empire.

Throughout the presidencies of George H.W. Bush, Clinton, and George W. Bush, the last 20 years of military campaigns, and especially America’s current three front war, the U.S. has made several important advances: anti-U.S. powers are about to disappear in the Middle East, the Russian strategic space has already been reduced to Georgia and the Ukraine, and their strategic “C-shaped” encirclement of China is basically completed.

When Obama took office, he faced several strategic options. The first was to resolve the Middle East’s final two encirclements, and isolate the two anti-U.S. nations, namely Syria and Iran, in order to complete the “Greater Middle East Reform Initiative.” The second was to admit Georgia and the Ukraine into NATO and continue to put pressure on Russia. The third was to tighten up the strategic encirclement of China and wait for an opportunity to mobilize their secret ideological allies inside China, in an attempt to complete the final assault from both inside and outside.

Russia’s war against Georgia and its decision to cut off gas to the Ukraine have made the U.S. realize that the polar bear means what it says and it is difficult to break through the frontline in Central Asia . After deliberation, Obama and his team of official advisors chose to reset Russian-U.S. relations. As a result, Hillary Clinton recommended “smart power,” and America decided that it would make advances on the other two strategic fronts. (As a result, the strategic justification for keeping troops in Afghanistan was not sufficient, which caused Obama to declare that he would withdraw U.S. troops in 2014.)

During Obama’s first term in office, his most important strategic move was to publically declare a shift toward the East. The U.S. State Department pushed for the exclusion of China in Trans-Pacific Partnership, in order to diplomatically and economically isolate China. The Pentagon declared they would implement an air-sea war strategy. They initiated projects that by 2020, will result in over 60% of U.S. air and sea assets being located in the Asia-Pacific region. Their political, economic, and military fists swing repeatedly against China, a nation that has committed itself to peaceful development

Lines are being drawn, with various other countries choosing sides. For example, the Philippines and Japan are taking aggressive stances in order to cause trouble, with Japan being the most provocative. In spite of efforts to instill a Chinese-Japanese diplomatic consensus, Shinzo Abe, the Japanese Prime Minister, has adopted a stubborn stance of not afraid of being accused as “a re-militarized nation” and is preparing for confrontation with China. The Philippines wants the U.S. to return to the Subic Bay. India and Vietnam are flirting with each other to cook up anti-China schemes.

The U.S. initially used the plot to make noise in the East, but actually impacted the West. Having deployed smaller nations in the Asia-Pacific region to distract China, Washington has reached out to Tunisia and Egypt and knocked out Libya. Taking advantage of the Jasmine Revolution, the U.S. wanted to “set fire” to Syria and Iran. Americans issued numerous ultimatums to Syria. Paris and London eagerly joined the chorus. At the crucial moment, China and Russia put out a full-force effort to mediate the crisis, and Syria has, for the time being, avoided calamity. This certainly is not America accepting Russia’s offer; instead, it is due to America’s inability  to find a suitable agent in the anti-Syrian government mob. At the same time, explosions and rampages occured in Iraq and Libya, both of which were baptized with American democracy. Moreover, the military has jailed the popularly elected president in Egypt. The American government being embarrassed and upset by Edward Snowden was another factor that has caused heartburn to members of the Obama  team. Snowden’s explosive revelations have exposed America’s dark secrets of global eavesdropping and forced Washington off their high ground, having always made moralistic accusations against others.  Evidently, if the U.S. decided to take military action against Damascus alone, it would not win praise from the media, popular support at home, or allies’ help from abroad. American threats against Syria were designed to divert attention away from its own dilemma. Moscow’s plan of destroying Syrian chemical weapons was too good of a face-saving way out for the U.S. to reject it. China is huge with nuclear weapons and it cannot be defeated by conventional forces. Syria is too messy for an easy solution. Iranians are wise and are willing to make a deal. As a result, Obama decides to play the role of a nice guy, taking the olive branch extended by Tehran, despite angry denunciation from Israel and Saudi Arabia—two of its diehard allies in the Middle East. The region that has been buried in war talks suddenly becomes very quiet. This demonstrates again that the world will be able to embrace peace if the U.S. does not make trouble. In the first year of his second term, Obama has been unable to act decisively to accomplish his goals, but this doesn’t mean that the Nobel Peace Prize winner has been able to sit still and appreciate his medal. In modern times, driven by the ambition to expand its empire, one of the top priorities for American Presidents is to engage in military conquests. Not totally satisfied with toppling Gaddafi during his first term, Obama is planning something even bigger. After pulling back in Central Asia, the U.S. may do the same in the Middle East. It is training its gun at China. The year 2014 is the 100th anniversary of World War I. American strategists discovered a long time ago (and actually facilitated the outcome) that “Modern circumstances share many interesting qualities with pre-1914 circumstances” and both Chinese and American governments will be unwilling to show weakness in front of their former opponents and current rivals. American strategists believe that China could come to replicate some of the conditions that made Europe so volatile a hundred years ago, and use this idea as a motivation to not voice a position on the Senkaku Islands dispute.

The year 2014 is the centennial of the outbreak of World War I. Some American strategists have discovered that the situation in Asia is similar to the situation in Europe before the outbreak of the war. Neither the government of China nor the government of Japan has any intention to engage in any compromise. Therefore, American strategists come up with the idea to replicate the script of World War I in which all European nations were crippled. This is the fundamental motive of not taking a position on the dispute over the Diaoyu Islands between Beijing and Tokyo.

2014 is also the 120th anniversary of the first Sino-Japanese War, which has remained prominent in the minds of both the Chinese and the Japanese. After a comprehensive study of America’s pivot in Asia, Japan chose September 11, 2012 to announce its “purchase” of the Diaoyu Islands. This is a huge national decision. From this point on, the rivalry between China and Japan has changed from territorial and resource rivalry to strategic competition. The strategic layout in East Asia has truly become a chess gameinvolving three nations. The U.S. hopes to see Sino-Japan confrontation, which will result in power reduction of China and Japan, as was the case of the U.K. and Germany. Japan desires to provoke a war between the U.S. and China, which will lead to its rearming and rise as a new power in the West Pacific. Many Japanese naval and air force officers have made this preference very public.

At the present time Japan does not have the strength to declare war on China. However, if the U.S. and China get into a war, China will suffer and Japan can seize the opportunity to gain power and eventually finish China off—repeating what it did during the first Sino-Japanese War and disrupt China’s attempt at modernization.

The ulterior motives of both America and Japan are on full display after China adopted its air defense identification zone. Japan is consistently arrogant, but the U.S. is a double dealer. It sent up a B-52 into the ADIZ to calm down Japan but also sold out Tokyo by instructing commercial airlines to file their flight path with China. Americans provoke while also simultaneously attempting to curry favor from China.

December 1, 2013 is the 70th anniversary of the Cairo Declaration that established the international political order in the wake of World War II. There was national silence in Japan on this occasion. It has deliberately chosen to forget the core contents of its surrender. Taking into consideration the annual historical controversy, we see a Japan that clearly attempts to overthrow the outcome of World War II. This is similar to what Germany tried to do after its defeat in World War I.  The United States, Australia, and the Philippines “understand” Japan’s efforts at re-arming itself. Even Great Britain is in support of the Japanese position on the ADIZ. This reminds us of the Anglo-Franco Appeasement in the 1930’s. The fact that Russia refuses to take a position on Sino-Japan territorial dispute shows how successful Tokyo’s diplomacy has been. 2013 saw major leadership changes in China, America, Japan, Russia, and North and South Korea. New changes have also led to new policies.

Despite the bottomless financial crisis, America continues to conduct experiments on developing aircrafts armed with electromagnetic launching capabilities. Following the entrance of F-22 “V-22 “Osprey, the “Global Eagle” is beginning to enter Japan. The frequency of American military exercises in the Pacific Ocean has increased. In this noisy atmosphere, Japan has begun to export arms, which is the first step in converting its strong industries into facilities that can mass manufacture military equipment. 2013 also saw the commissioning of what will be Japan’s third aircraft carrier, “Izumo.” Izumo was the name of an armored cruiser built by Japan using Chinese reparation and was the flagship when Japan invaded China. Using this name for the new aircraft carrier is certainly provocative in nature.

China has formed the F-15 wing and its first aircraft carrier “Liaoning” has undertaken a battle group tour in the South China Sea.  President Xi inspects troops often and asks the PLA to be ready to fight and able to win. At the same time, F-20 has entered the test flight phase and even F-31 made an appearance. China’s three fleets have sailed to the first island chain and conducted joint exercises with the Russian Navy.

North Korea does not want to play the second fiddle. It conducted the third nuclear test in 2013 and attempted to send a satellite into orbit. An arms race is unfolding in the Asia Pacific region. Since the end of World War II, fighter jets from China, the U.S., Japan, and Russia have descended upon the Western Pacific en mass. The world is holding its breath as statesmen from Asia-Pacific nations are assessing each other’s situation and trying to determine an action plan.

2013 was the prelude that will determine the fate of East Asia and the political and military focus of the world in the near future. Due to America’s global strategy and the implementation of Japan’s strategies, there will be further deterioration of military status in East Asia, if not the entire Asia-Pacific region. Other parts of the world appear to be relatively quiet because the United States is too busy to get involved. Russia is taking advantage of this situation to ram through integration of the region that used to be the former Soviet Union.

As a new round of military, political, and economic reshuffle unfolds the Asia-Pacific region, which experienced the most bloody and the largest casualties in recent history, it will once again be the main battleground.

What is the mode of war that can “destroy” China?

Since the end of WWII, every American strategy shift is triggered by a new technology that gives rise to a military revolution. For the Cold War, it was nuclear weapons; for the Gulf War,  it was information; this time, America’s pivot to Asia is led by the Internet technology that has produced a mixture of cyberspace electronic warfare and ideological information warfare. The first kind of warfare is limited to conventional military areas, but the second kind of warfare has invisibly formed a different kind of fighting that defies all military concepts. In 2013, manipulated by a mysterious force outside China, a few Chinese language websites controlled by foreign capitals have manufactured a few anti-military and anti-patriotic incidents. The anti-Communist, anti-Chinese government, and anti-China forces have joined hands in stirring up these incidents. In response, the broad masses of patriotic netizens have launched a counter offensive. With collaboration from relevant agencies of the Chinese government, a victory was achieved in this pitched cyberspace battle similar to the battles fought during the Korean War.

Although one does not see smoke in cultural fighting, ideological struggles, or cyber warfare, they are equally destructive and shocked and enlightened Chinese military thinkers. The Soviet Union used to possess thousands of nuclear warheads and 4 million troops, but they were all fragmented by the invisible and ubiquitous informational and ideological warfare. It makes one shudder to think that countries like Tunisia, Libya, and Egypt could be overthrown overnight by Twitter in the age of social media. Deep rivers run quieter. The new features of this kind of warfare have revealed themselves after China’s effort to clamp down on Internet rumors have caused harsh criticisms from non-civil forces outside China. John Huntsman’s public speech calling hundreds of millions of Chinese cell phone internet users to begin regime change, has proven that China’s military researchers should pay more attention to the fifth column inside China. Military affairs, politics, economics, culture, ships, keyboards, history, and the present, have combined to form a new battleground where battles are going to be epic. Television and informational and psychological warfare in the age of dollars were the mode of warfare that could defeat the Soviet Union. The Internet and informational and ideological warfare will the mode of warfare that will defeat China. The eyes of the Chinese military cannot train on the visible enemy and their metal weapons. The era of the Internet demands all new knowledge on wars and anti-wars.

The Sino-Japanese War in 1894, World War I, World War II, the collapse of Eastern Europe, the chaos of the Middle East—all of these historical tragedies are in front of China and serve as the background behind the China dream. The world is brutal, military affairs are changing fast, and the strategies are interactive. Will the ghostlike war in East Asia take place? When will it take place? It is determined by both the actors and the reactors. The answers lie in historical common sense and wise judgment.

In 2013, China embarks on a new road after the conclusion of the Third Plenum of the 18th National Congress of the Chinese Communist Party. On December 26, China solemnly commemorated the 120th anniversary of the birth of Mao Zedong. On this same day, Japanese Prime Minister Shinzo Abe provoked China by visiting the Yaksukuni Shrine in Tokyo. In response, the Chinese Foreign Ministry spokesman quoted Mao Zedong’s “On Protracted War,” and implied that the final victory will belong to China. The new China is born in blood and fire, and is not only unafraid of war, but also courageous in welcoming reasonable and lawful conflict, because defending the country from aggression serves to further boost the development of the state’s power. The Chinese nation loves peace, but there is little doubt that glory drenched in blood will pave China’s road to revitalization. This is the glory that generations to come will treasure.  Sound the alarms for war preparation, remold our firm convictions, wake up the fearless people, and revive our strategic industries—our country is moving forward and our future is bright!


via Zero Hedge Tyler Durden

Let Them Eat Grilled Cheese! Retired Gen. Wesley Clark Gets Paid a Quarter-Mil for Flogging Food Trucks to Vets

Ha ha, wut? ||| San Antonio Express-NewsWas it really so long ago that Gen. Wesley Clark
was, for a millisecond at least, the Democratic Party’s presidential front-runner?
Last time I paid attention to the co-architect
of America’s war to detach Kosovo from Serbia, he was busy making
one of the
craziest arguments yet
in favor of bombing Syria. But it turns
out the blue-eyed former general has been leveraging his military
career to make bank in the private sector, through a series of
increasingly bizarre stunts.

First came Clark’s involvement in
the ethanol business
. Then came a chairmanship of a Canadian
energy company desperate to wheedle foreign coal-mining contract
in–wait for it!–Kosovo.
After a detour into a reality TV show called
Stars Earn Stripes
, now Clark is…well, you try to figure
it out:

Yes, that’s right: Your next big
penny stock
is a company shelling out at least $240,000 a
(with various warrants and lucrative performance bonuses)
to a mediagenic pitchman who can turn the untested field of
into a heartwarming if hard-to-follow story about
Helping Our Vets. (Sample
: “The company has 14 of its own trucks in California,
Arizona and Texas, and is looking to offer the first 100 franchised
trucks to veterans. Franchising fees are $25,000, but Lee and Clark
say the company will subsidize them if vets qualify to own a truck
but can’t afford it.”)

Best of luck to the vets and food trucks, anyway. As for Clark,
he’ll certainly need it if he’s going to get anywhere near that
goal of topping off his military career with a
cool $40 million

(Thanks to O’Leary for the tip.)

from Hit & Run

Eric Sprott On The “Golden Opportunity”

Submitted by Eric Sprott of Sprott Asset Management

Don’t Miss this Golden Opportunity

Gold declined from $1,900 in September 2011 to $1,188 on December, 19, 2013. Silver declined from $48.50 to $18.50 over approximately the same time frame. Precious metal equities declined by approximately 70% over this period.1 This move down played out exactly as was scripted. However, let us review the causes of this decline. We start out with the most important words ever written by a regulator: BaFin, the German equivalent of the SEC, said that precious metals prices were manipulated worse than LIBOR.2 What are we to read into this, particularly the word “worse”? Obviously, worse than LIBOR could not mean that more money was fraudulently earned since the LIBOR markets are many orders of magnitude larger than the precious metals markets. Then it must mean that the egregiousness of the pricing dysfunction was materially larger in precious metals.

The chronology goes as follows:

  • November 27, 2013, BaFin announces an inquiry into precious metals manipulation on the London Bullion Market Association (LBMA).3
  • Mid-December 2013, BaFin is reported to have seized documents from Deutsche Bank (DB).4
  • January 17, 2014, BaFin announces that the manipulation is “worse” than LIBOR.1 On the same day, DB also announces its withdrawal from the LBMA gold and silver price fixings.5

Let’s imagine how this played out. Our guess is that BaFin, having reviewed DB’s trading practices, reported their findings to DB’s senior management. They are horrified at the findings (cough, cough) and decide a retreat from LBMA is required. This seems logical to us.

Let’s now discuss why bank traders get involved in price manipulation. In the most simple of all analyses, they don’t do it for the bank, but they do it to fraudulently receive higher bonuses. Otherwise, why take such personal risk? If we assume that manipulation of precious metal prices was the reality, as a bonus seeking trader, when do you want the price to be the most favorable? The answer is simple: by year-end and mid-year periods, when bonuses are calculated.

Figure 1: Gold Price Bottoms at Mid-Year and Year-End
Source: Bloomberg, Sprott Asset Management LP

If we look at what happened in 2013, the two lowest gold prices were on June 27th and December 19th (Figure 1).

Perfect! And perfectly obvious…

Now let’s deal with some reality in the real physical gold market in 2013. As we discussed in 2013, the supply/demand data suggests to us that physical demand was overwhelmingly greater than mine supply (Figure 2. See Markets at a Glance January 2014, October 2013, July 2013, May 2013 and February 2013 for more information on the shortage of physical gold).

Figure 2: World Gold Supply and Demand 2013, in Tonnes6

It is obvious to us that precious metals markets were manipulated in 2013. It is also obvious that demand far exceeded annual mine supply. Now let’s analyze what should happen, going forward, with these revelations. If gold prices are back on their long-term trend, ex-manipulation, a linear progression of the gold chart from 2000 to 2014 would suggest a price of $2,100 now (62% higher than the current $1,300 level) and $2,400 by year-end (Figure 3).

Figure 3: Gold Price is far from its Long-Term Linear Trend
Source: Bloomberg and Sprott Estimates

Figure 4 shows estimates of cash flow per share (CFPS) for different sized gold miners under gold prices at both $1,300 and a $2,000 per ounce. As you will note, the potential returns vary from 180% for the lumbering seniors to 420% for some of the smaller producers.

Figure 4: Upside Scenarios For Different Types of Gold Miners
Assumed Cash Flow multiple: 10. All Figures in US dollars. Estimates are for FY2014.
Source: Sprott Estimates and RBC Capital Markets. For illustrative purposes only. Eric Sprott and/or Sprott Asset Management Funds beneficially (directly or indirectly) may own in excess of 1% of one or more classes of the issued and outstanding securities of the above issuer). 

Are these gains likely to materialize? So far in 2014, the senior miners are up 27%1, while the junior miners are up 42%7. Not a bad year. But, we are only seven weeks into the year.

Gold and silver have broken their downtrends and have surpassed their 200 day moving averages. The golden cross (i.e. the fifty day rising through the 200 day) still awaits, but it is most likely to happen within weeks.

When was the last time that an obvious reversal of an anomalous, yet explicable market dysfunction allowed you to imagine that you could expect multi-hundred per cent returns over a short time period?

Again, don’t miss this Golden Opportunity!


1 NYSE Arca Gold Miners Index.
6 GFMS data comes from the WGC’s “Gold Demand Trends” publications for 2013 Q1, Q2, Q3 & Q4. Chinese mine supply comes from the China Gold Association for 2013. Russian mine supply comes from the Union of Gold Producers and is up to 2013 Q4. Chinese data is taken from the Hong Kong Census and Statistics Department and covers the period Jan.-Dec. 2013. Changes in Central Bank gold reserves are taken from the IMF’s International Financial Statistics, as published on the World Gold Council’s website for 2013 Q1, Q2, Q3 & Q4 and include all international organizations as well as all central banks. Net imports for Thailand, Turkey and India come from the UN Comtrade database and include gold coins, scrap, powder, jewellery and other items made of gold. The data is for 2013. ETFs data comes from GFMS as well.
7 MV Junior Gold Miners Index.


via Zero Hedge Tyler Durden

Yes, The Government is Spying on You Through Your Webcam – Another “Conspiracy Theory” Proven True

Submitted by Mike Krieger of Libertyblitzkrieg

Yes, The Government is Spying on You Through Your Webcam – Another “Conspiracy Theory” Proven True

I still remember how many years ago in response to becoming aware of the possibility that my computer webcam could be accessed remotely I decided to put a piece of duct tape over the camera. I also remember the look on some of my friends’ faces upon seeing this and asking me why. They thought I was nuts. It wasn’t even a conversation I was comfortable having since the idea that the government or NSA could or would peep on innocent Americans through their webcams was beyond preposterous for the vast majority of people

This topic is exactly new, and I addressed it last April in my piece: A Look into the Malware the FBI Uses to Spy Through Webcams.

Now, thanks for Edward Snowden, we know more. Much, much more.

From the Guardian:

Britain’s surveillance agency GCHQ, with aid from the US National Security Agency, intercepted and stored the webcam images of millions of internet users not suspected of wrongdoing, secret documents reveal.

GCHQ files dating between 2008 and 2010 explicitly state that a surveillance program codenamed Optic Nerve collected still images of Yahoo webcam chats in bulk and saved them to agency databases, regardless of whether individual users were an intelligence target or not.

In one six-month period in 2008 alone, the agency collected webcam imagery – including substantial quantities of sexually explicit communications – from more than 1.8 million Yahoo user accounts globally.

GCHQ does not have the technical means to make sure no images of UK or US citizens are collected and stored by the system, and there are no restrictions under UK law to prevent Americans’ images being accessed by British analysts without an individual warrant.

The system, eerily reminiscent of the telescreens evoked in George Orwell’s 1984, was used for experiments in automated facial recognition, to monitor GCHQ’s existing targets, and to discover new targets of interest. Such searches could be used to try to find terror suspects or criminals making use of multiple, anonymous user IDs.

Rather than collecting webcam chats in their entirety, the program saved one image every five minutes from the users’ feeds, partly to comply with human rights legislation, and also to avoid overloading GCHQ’s servers. The documents describe these users as “unselected” – intelligence agency parlance for bulk rather than targeted collection.

While the documents do not detail efforts as widescale as those against Yahoo users, one presentation discusses with interest the potential and capabilities of the Xbox 360?s Kinect camera, saying it generated “fairly normal webcam traffic” and was being evaluated as part of a wider program. 

Interesting that they were considering abusing the Kinect camera, something I wrote about last spring in my post: What’s in Your Xbox? A Lot of Surveillance Capabilities.

Documents previously revealed in the Guardian showed the NSA were exploring the video capabilities of game consoles for surveillance purposes.

Beyond webcams and consoles, GCHQ and the NSA looked at building more detailed and accurate facial recognition tools, such as iris recognition cameras – “think Tom Cruise in Minority Report”, one presentation noted.

Don’t forget: Your Government Loves You. Particularly your nude webcam pics.

Full article here.


via Zero Hedge Tyler Durden

Guest Post: The Stock Market’s Shaky Foundation

Submitted by Chris Martenson of

The Stock Market’s Shaky Foundation

According to the stock markets in the US and in Europe, the world’s economy is not just in good shape, but is in the best shape it’s ever been

The S&P 500 hit an intraday new record high of 1,858.71 on Feb 24, 2014, and is now 18.6% above the peak it hit in 2007, a moment everybody now recognizes was heavily overvalued.

An almost 19% gain above the prior all time high is an enormous and unusual event. Surely, you are thinking, there must be an equally compelling story and loads of fundamental data to support such a bull market?

Well, there really isn’t. 

Not a lot has changed between the prior 2007 peak and today. From a fundamental standpoint, not much at all. Per capita income is only up 8.1% between now and then, and yet the equity markets are rallying like the biggest income boom in all of history has occurred. 

Worse, the per capita income data is obscuring the fact that what little income gains have been recorded went almost entirely to the top ten percent of the population. So there’s no broad prospering middle class to drive an economic expansion of the sort that stocks seem to be pricing in.

Of course, the main narrative right now has nothing to do with anything fundamental. Rather, it centers on the idea that as long as the central banks of the west and Japan continue to print, everything financial will just continue to go up in price while — somehow — price inflation will remain tame.

Our view here at Peak Prosperity is that this narrative is wrong in every respect; except, perhaps, for those using a highly compressed speculation timeline that ignores both fundamentals and history.

In the immediate term, stock prices gyrate based on various assumptions that are often completely disconnected from reality.

But over the medium and longer terms, fundamentals drive prices; as it is ultimately corporate income and ultimately dividends that determine the value we ascribe to equities, and it’s the prospect of future earnings growth that drive the price multiple.

We’ll show in a moment just how far equity prices have diverged from the fundamentals.

But First, The Big Picture

Over the long haul, which we think needs to be kept front and center at all times, equities are nothing more than a means of sharing the wealth that companies create, which itself is a product of the extraction and processing of real things from the real world. 

Everything we think we know about the ‘fair value’ of equities was developed over a period of time when the future could always be counted upon to expand exponentially. 

You know, sayings like “Over the long haul equities return 10%”.

Such a statement can only be true in an exponentially-expanding world where exponentially more things are being extracted from the real world as time goes on.  In a world where there is only so much ‘stuff,’ it’s not possible for said ‘stuff’ to always be present in expansive and expanding quantities.

[Wonk note:  Equities could also advance via productivity gains, assuming more utility was derived from the same amount of resources. Perhaps we might assume a world where productivity climbs by 10% per annum to deliver our desired equity gains – but that’s never happened, and certainly will never happen for very long because it implies a 100% improvement every 7 years.]

A huge enabler of the economic expansion of the past century has been oil. Without a doubt, petroleum is the master resource for a global economy. And it is no longer cheap.  The reason why it is no longer cheap, and never will be again, is a larger story than we have time for here, but recent data should suffice to show that global oil has averaged more than $100 per barrel for more than three years. That’s 4x higher than the 1987-2004 average of $23 per barrel:


To me, the anemic economic growth in the OECD countries, with their horrible job creation statistics and generally tepid recoveries (at best), is the very predictable result of what you get when oil becomes expensive.

If you hold the view, as we do at, that the future economy cannot possibly grow at the same rates as it did in the past (and that likely someday all growth will cease), then equities are in for a serious correction at some point.

Perhaps that day is still far in the future. But there must always be an eventual reckoning between the number of claims on the world’s wealth world and the actual wealth itself.

Further increasing the risk for equities is the fact that, as claims on wealth, they are the least senior of the lot.  The holders of bonds and preferred shares come first.  So when we wander over to that other, and much larger, corner of the financial universe where debt resides and note that all forms of debt, but especially corporate debt, have continued to grow exponentially both before and after the great 2008 credit crisis, we see that equities are whistling past this part of the story too.

Of course, a huge proportion of all the new corporate debt taken on since that little hiccup in 2009 has been used to buy back shares and thereby goose (through accounting, not by value creation) the earnings per share numbers so widely reported by the financial press. 

Eventually, though, all that corporate debt will have to be paid back, and that activity will drain future cash flows and earnings. Again, steadily rising – nay, exponentially rising – levels of corporate debt are a massive collective bet that the future will be exponentially larger than the present.

The only narrative I can imagine that can accommodate a long-term decline of per capita resources coupled to steadily worsening net energy from petroleum, AND simultaneously support the continued exponential expansion of claims against those resources, is one that steadily transfers this wealth into fewer and fewer hands.

After all, if relatively few people end up owning most of the remaining wealth, does it really matter to them that there’s less of it to go around on a per person basis?  No, not if they have plenty for themselves.

As the recent travails in Ukraine have showed us, there’s only so far that such a deranged, kleptocratic view can go before it breaks down.

Alternatively, and far more likely, there’s no actual rational narrative of any sort in play right now — and so the center mass of the investing world is simply operating off of untested and unexamined beliefs that mainly rest on the notion that a prompt and perpetual return to exponential growth is what the future holds.

Again, we see this as dangerously myopic. But sadly, this view is not only rampant on Wall Street, but it’s also prevalent with our government as well as endowments, pensions, and insurance pools — entities with long-term fiduciary responsibilities that really aught to be asking themselves some hard questions these days.


In summary, over the long haul — by which we mean the next ten to twenty years — current equity prices are making a colossal bet that exponential economic growth (which itself is linked to cheap oil) is going to quickly resume and persist long into the future. Are you comfortable making that bet? I’m not.

Of course there are a lot of variables in this story; but one could do worse than to simplify one’s economic prediction down to this: Until and unless the global supply of oil gets a heck of a lot cheaper, anemic economic growth will persist and therefore the holders of expensive financial assets that are priced for perfection will be badly disappointed.

Spoiler alert:  There are no new sources of cheap oil. We’ve already tapped the easy stuff.

So, there’s lots to be concerned about for those holding stocks for the long term. But what about the short term?

In Part 2: The Time To Short The Market Is Approaching, we explain why 2014 is beginning to look an awful lot like 2008; only worse. The ability of stock prices to deviate further from the fundamentals appears to be topping, and a heck of a mean-reversion looks in the cards. 


via Zero Hedge Tyler Durden

Ukraine: A Deep State Analysis

Submitted by Charles Hugh Smith from Of Two Minds

Ukraine: A Deep State Analysis

Some preliminary thoughts on a complex situation.

It doesn’t take any special insight into the situation in Ukraine to conclude that no one narrative illuminates all the dynamics. Various contesting Grand Narratives have emerged in the media–neofascist coup, rampant corruption, east versus west, to name a few–but these only describe a few of the regional fault lines and complexities.

At my request, correspondent A.C. offered a preliminary Deep State analysis of the situation. A.C.’s perspective is informed by decades of experience in Eastern Europe, Russia and the Baltic region.

I recently discussed the Deep State in The Dollar and the Deep State, and offered this definition by Mike Lofgren:

The term “Deep State” was coined in Turkey and is said to be a system composed of high-level elements within the intelligence services, military, security, judiciary and organized crime.

The Deep State is a hybrid association of elements of government and parts of top-level finance and industry that is effectively able to govern the nation without reference to the consent of the governed as expressed through the formal political process.

I describe the U.S. Deep State as the National Security State which enables a vast Imperial structure that incorporates hard and soft power–military, diplomatic, intelligence, finance, commercial, energy, media, higher education–in a system of global domination and influence.

One key feature of the Deep State everywhere is that it makes decisions behind closed doors and the surface government simply ratifies and implements the decisions. I have covered various aspects of geopolitics and the Deep State for years, for example:

The Great Game: Geopolitics and Oil (October 19, 2010)

The Banality of Evil and Imperial Over-Reach (December 14, 2010)

Speaking of Iraq–let’s start with the obvious Deep State agenda in Ukraine: energy. Nations with a strategic “vital interest” in the region’s energy mix include Ukraine, Russia, Poland, Germany (and the rest of the Europen Union, which currently depends on natural gas piped through Ukraine from Russia), Romania and (of course) the United States, which maintains a strategic interest in every square meter of the planet (including the seas and ice caps).

It’s not much of a stretch to say that Russia’s fiscal health and geopolitical influence are based on hydrocarbons–specifically gas and oil delivered to other nations for cash and/or political favors.

The maturation of fracking technologies have led to the exploration of western Ukraine, Poland and Romania by super-major oil companies such as Chevron: Where We Operate – Chevron

Chevron holds four shale concessions in Poland—Frampol, Grabowiec, Krasnik and Zwierzyniec—which total approximately one million acres. In the Grabowiec concession, drilling of the first well was completed in March 2012, followed by a diagnostic fracture integrity test in December 2012. A first well also was drilled in the Frampol concession in 2012. In the Zwierzyniec concession, drilling began in December 2012. Continued exploration drilling is planned for 2013.


Chevron holds more than 2 million acres in Romania, including a 1.6-million-acre concession in the Barlad Shale. We plan to drill an exploration well in 2013. We hold three additional concession agreements covering 670,000 acres in southeast Romania. Acquisition of 2-D seismic data across these concessions is expected to begin in 2013.


Chevron successfully bid for the right to exclusively negotiate with the government of Ukraine for the Oleska Block. The company is expected to operate and hold a 50 percent interest in the 1.6 million-acre concession.

Ukraine holds promise for shale gas despite uncertainty

The development of gas fields in these regions poses a direct competitive threat to the near-monopoly currently held by the Russian national oil company, Gazprom. This sets up a scramble for energy, where western Ukraine, Poland, Romania and the EU have powerful financial incentives to develop energy sources outside of Russian control, while Russia has an incentive to secure energy resources and assets in Eastern Ukraine and Crimea.

Here is A.C.’s outline of some of the key dynamics:

This gas pipeline map graphically illustrates Gazprom’s real problem. A major competing gas field is appearing literally underneath a major existing east-west gas pipeline running into central Europe. Drill wells and immediately begin selling to Germany and other existing Gazprom customers. And also undercut Gazprom’s pricing by a touch.


The extent to which US-based multinational oil and gas firms are directly displacing Russian enterprises in supplying the EU is remarkable. Chevron and Exxon are very prominent in the emerging offshore and shale plays.


I think the imminent threat of Ukrainian shale gas development is a factor in forcing Putin’s hand over the EU trade deal. Putin’s regional Great Power ambitions are backed entirely by strong arm hydrocarbon diplomacy. Putin’s domestic political position equally rests on stable and elevated hydrocarbon prices to fund the state budget.


He has no revolutionary ideology with mass appeal in religion, politics or economics. Nor does he possess a large internationally recognized sphere of dominance like Stalin obtained at Yalta in 1945.


Nor does he have a large land army with which to intimidate and subdue neighboring states. He’s only managed to convert a portion of the shrunken Army to “kontraktniki” (well-paid professional volunteers). These guys are the ones suppressing the Muslim insurgents in the Caucasus. If Putin attempted to openly intervene in the Ukraine with the available and virtually untrained conscript military forces it would produce a political explosion in Russia’s own internal politics. This is addition to the surge of Ukrainian nationalist opposition that would ensue.


Putin’s risk arises not just from the example being set for Russian domestic opponents. If Putin is seen to be responsible for alienating and finally “losing” the Ukraine he’ll find himself in trouble with the Russian Deep State.


What’s Happening in Kiev Right Now Is Vladimir Putin’s Worst Nightmare (New Republic)


Will Ukraine Break Apart (New Yorker)


As this piece notes, modern Ukraine in its present form is an artifact of the 1945 Yalta Conference and the post World War II order. Just like Yugoslavia. Unfortunately for all concerned, this latent instability is now compounded by a happenstance of geology and the recent maturation of the technology for exploiting shale gas reserves. Adjoining neighbors like Poland now have motives that were missing when the Ukraine was a poor and primarily agrarian land.


The gas pipeline map shows the major incentives and rational objectives of a partition strategy from Putin’s perspective. He can’t stop development in Polish Lublin or near Lviv. He at least needs to keep control of infrastructure in the eastern Ukraine. Offshore Black Sea oil and gas tract concessions are also at stake.

This suggests that the interests of all parties align in supporting a de facto partition rather than a civil war in Ukraine in which neither side could establish stable, long-term control of the other.

I asked A.C. for his view of the U.S. Deep State’s goals in the region.

The short two-part answer is:


1. Frustrate Moscow’s ambitions to dominate Eurasia. The operative strategic analyses employed are MacKinder’s World-Island Theory as subsequently and heavily modified by modern hydro-carbon fuel economics: The Geographical Pivot of History.


2. Continue to improve the EU’s Central European position with respect to its hydrocarbon fuel supplies. The Neocons were already deeply worried about the growth of NATO dependence on Gazprom and the eastern pipelines in the mid-1980s. This has been on their radar for decades.


The overall objective is to destroy Putin’s capacity to set marginal natural gas prices in Europe. If pipelines under the Baltic and Black Seas are feasible so are pipelines under the Mediterranean Sea from North Africa to France, and from the eastern Mediterranean and Aegean to Greece and southeastern Europe. Add some LPG terminals and European shale gas operations and this is achieved.


There may be a third goal in trying to set an example for domestic Russian opponents, which exist in great numbers. I think it’s more likely the Russian Federation’s Deep State will find another leader first.

Thank you, A.C., for your perspective on this complex, fast-evolving situation. Sometimes strategic goals can be met not by establishing overt control (i.e. becoming a target) but by indirectly thwarting the goals of competing Deep States.


via Zero Hedge Tyler Durden

Bitcoin: If It Ain’t Dead, It Should Be Because It’s All About “White Privilege”

Bitcoin is naught but a toy for rich white libertarian men,

says Annie-Rose Strasser at Think Progress
, as she
thinks about the ways she doesn’t like progress if she doesn’t like
the type of people she associates with it, or the ideas she thinks
are behind it, no matter what its actual uses are or might be, for
rich, poor, or in-between.

I guess I can be sure Bitcoin
isn’t really dead
if attacks like this are still being produced
and assume they still have an audience. (I blogged back in December
about actually more thoughtful such attacks, in “The
‘It’s Libertarian So It’s Bad’ Argument Against Bitcoin

Strasser starts off with some irrelevant facts–new weird
digital tools, techniques, and trends with a libertarian
philosophical bent might tend to skew toward having lots of white
man as their most active and obvious users and boosters–and a few
things that just aren’t true at all–“there’s a fair amount of
privilege built directly into the currency: In order to buy the
sometimes wildly expensive currency, Bitcoin users need to be

In fact, for years the price of a bitcoin remained under $10,
not quite the sign of something meant to block the less well to do
by design. Maybe she meant to say that if you were smart enough to
get involved in Bitcoin early, that you are now

The article as a whole ends up implying that it just doesn’t
matter how useful the tool might be to poor, blacks, woman, the
underprivileged, etc, as a (likely) noninflationary way to store or
transmit value, because she doesn’t like libertarians.

In fact, it is the very “unbanked” who she goes on to discuss
and who she seems to think only government can help that will
likely, as awareness and stability in digital currencies spread,
benefit from it the most. But it seems to Strasser all that matters
is that people she can associate with the tool have ideas she
doesn’t like, and might disapprove of some government programs she
is sure other people need.

They may or may not need them; but to take the time to poke at
the valuable-to-all tool of digital currency seems a strangely
retrograde use of one’s time and attention. I get that progressives
think the world’s less well-off need government, and lots of

That needn’t imply being hostile to technical advances that
allow anyone with a wired computer to do interesting things more
easily and cheaply. The
manifold benefits to the third world
of the spread
of mobile phone technologies
, for example, should teach us
that. But I’m afraid no amount of reality is enough to teach people
not to get really annoyed with anything they associate with

For what some of those advantages might be, for prince or for
pauper (yes, as long as said pauper has access to the Internet,
which many do), as I’ve written before:

What seems easy to say is that for anyone who has ever tried to
transfer money, nationally or internationally, that the values in
ease, speed, and cost of digital currency means that it will have
the same leveling effect on industries like banking and finance
that depend largely on their middleman function that already we’ve
seen happen in book sales, video rentals, and travel agents.

People who doubt this are letting their ability to write Bitcoin
and other digital currencies off as “libertarian” blind them to
economic trends of the past 20 years in the digital age. If you can
understand the value of, say, PayPal, then you already understand
the value of Bitcoin; except Bitcoin doesn’t have a middleman

I could close by making the argument that attacking
Bitcoin is clearly and obviously just for insanely privileged and
wealthy westerners on the side of the most rich and powerful force
in the world, the U.S. government and U.S. banking and finance
interests, but I’m not that type.

Left-leaning folk having problems with libertarian implications
of digital age
is not uncommon

from Hit & Run