Month: July 2014

Is this the reason for the blowout, on the surface, payroll number? In June the BLS reports that the number of full-time jobs tumbled by 523K to 118.2 million while part-time jobs soared by 799K to over 28 million!

 

Looking at the breakdown of full and part-time jobs so far in 2014, we find that 926K full-time jobs were added to the US economy. The offset: 646K part-time jobs.

 

Something tells us that the fact that the BLS just reported June part-time jobs rose by just shy of 800,000 the biggest monthly jump since 1993, will hardly get much airplay today. Because remember: when it comes to jobs, it is only the quantity that matters, never the quality.

 

… just in case there is any confusion why there is zero real wage growth (for two months in a row now), and why it will take a few more months before experts start tossing the word stagflation a little more casually.

Source: BLS

via Zero Hedge http://ift.tt/1ki8GJD Tyler Durden

Remember when in January 2010 Obama promised that he should double US exports in five years in a bid to collapse the US trade deficit? Not only that, but in his 2010 SOTU address, Obama doubled down by saying “It’s time to finally slash the tax breaks for companies that ship our jobs overseas and give those tax breaks to companies that create jobs in the United States of America.”

Back then, Jennifer R. Psaki who was still a simple White House spokesperson, said that the White House “had been working for several months on a policy to increase exports. She said the plans included the creation of an export promotion cabinet and steps to help small and medium-size businesses tap markets in other countries. “

Well, it isn’t quite five years later (he still has six months), but we doubt that anyone would have expected what the outcome of Obama’s export boosting campaign would be. We show it below in the following chart which captures the US trade deficit, excluding oil.

 

What this chart shows is that when it comes to core manufacturing and service trade, that which excludes petroleum, the US trade deficit hit some $49 billion dollars in the month of May, the highest real trade deficit ever recorded!

In other words, far from doubling US exports, Obama is on pace to make the export segment of the US economy the weakest it has ever been, leading to millions of export-producing jobs gone for ever (but fear not, they will be promptly replaced by part-time jobs). It also means that the collapse in Q1 GDP, much of which was driven by tumbling net exports, will continue as America appear largely unable to pull itself out of its international trade funk, much less doubling its exports.

What’s perhaps just as bad, is that the chart above shows that global trade continues to collapse: just recall the near standstill in Chinese trade, both exports and imports, that took place earlier this year. We wonder: is the fact that the world is trading with each other at the slowest pace since the Lehman collapse also due to harsh winter weather?

Yet while core trade is the worst ever, overall US trade is not all that bad. Why? Because of the shale revolution of course, and the fact that net US petroleum imports have plunged.

 

Note, the above chart does not imply the US is a net exporter of petroleum, especially considering the recent news surrounding the easing of the oil export ban. That simply won’t happen as was explained previously. What it does show is that oil imports as a percentage of the total US trade deficit continue to decline, even if the US still remains a net oil importer.  Which is curious because as Bloomberg reports, “the U.S. will remain the world’s biggest oil producer this year after overtaking Saudi Arabia and Russia as extraction of energy from shale rock spurs…  U.S. production of crude oil, along with liquids separated from natural gas, surpassed all other countries this year with daily output exceeding 11 million barrels in the first quarter, the bank said in a report today. The country became the world’s largest natural gas producer in 2010. The International Energy Agency said in June that the U.S. was the biggest producer of oil and natural gas liquids.”

So even with the world’s biggest crude production, the US still needs to import nearly $9 billion in petroleum goods every month? That is hardly enough to offset the massive loss of jobs experienced in other non-energy sectors of the economy which unlike oil, have never seen a worse trade deficit.

Furthermore, even as the energy sector soaks up some $200 billion in capex or some 20% of the total private fixed-structure spending, the US shale renaissance will only persist for another 5 or so years before the output rates peak and resume their downward direction:

U.S. oil output will surge to 13.1 million barrels a day in 2019 and plateau thereafter, according to the IEA, a Paris-based adviser to 29 nations. The country will lose its top-producer ranking at the start of the 2030s, the agency said in its World Energy Outlook in November.

Or sooner. Or later. The funny thing about petroleum production is how dependant on extraction technology it is. Still, while the shale revolution has been a blessing since the Lehman collapse, it may be on the verge of some serious disappointments: recall back in March when the Monterey Shale, whose reserves were said to account for two-thirds of all recoverable US shale oil resources, saw the EIA cuts these estimates by a whopping 96% overnight!

Furthermore, as we also reported back in March, the US may well have hit the tipping ROI point, as shale costs have exploded in recent months. In fact, the one thing that may be masking the increasing unprofitability of shale production in the US is that old standby: debt. Some of the choice fragments from the indepth look at the shale industry, from Shale Boom Goes Bust As Costs Soar:

The U.S. shale patch is facing a shakeout as drillers struggle to keep pace with the relentless spending needed to get oil and gas out of the ground.

Shale debt has almost doubled over the last four years while revenue has gained just 5.6 percent, according to a Bloomberg News analysis of 61 shale drillers. A dozen of those wildcatters are spending at least 10 percent of their sales on interest compared with Exxon Mobil Corp.’s 0.1 percent.

“The list of companies that are financially stressed is considerable,” said Benjamin Dell, managing partner of Kimmeridge Energy, a New York-based alternative asset manager focused on energy. “Not everyone is going to survive. We’ve seen it before.”

 

…

 

In a measure of the shale industry’s financial burden, debt hit $163.6 billion in the first quarter… companies including Forest Oil Corp. , Goodrich Petroleum Corp. and Quicksilver Resources Inc. racked up interest expense of more than 20 percent.

 

Drillers are caught in a bind. They must keep borrowing to pay for exploration needed to offset the steep production declines typical of shale wells. At the same time, investors have been pushing companies to cut back. Spending tumbled at 26 of the 61 firms examined. For companies that can’t afford to keep drilling, less oil coming out means less money coming in, accelerating the financial tailspin.

But one doesn’t need to look at the shale driller’s balance sheets to know that something is afoot: a quick glimpse at recent Bakken shale dynamics, shows that the well efficiency has topped out and the only offset is the exponentially rising number of wells: an exponential line which as the excerpt above shows is only sustainable courtesy of ZIRP and ultra cheap debt. If and when the Fed’s generosity ends, watch out as the shale day of reckoning finally arrives .

In any event, the above shale discussion is tangential – perhaps the US will uncover new technologies to tap even more oil, at lower prices and higher efficiencies. But probably not, as even the E&P industry is increasingly more focused on buybacks and cashing out here and now, than on capex and R&D spending.

Ironically, it is precisely the oil industry in general, and shale in particular, that Obama blasted as recently as 2011. As the NRO helps us recall, it was back in 2007, Obama said he wanted to free America from “the tyranny of oil.” In 2011, he called oil “yesterday’s energy.” He also decried the profits being made by the oil and gas sector and declared that it was time to repeal the tax preferences given to it (which cost taxpayers about $4 billion per year), calling them “oil-company giveaways.” How ironic is it, then, that it is precisely the oil companies which prevent the soaring US trade gap in all other goods and services to disintegrate the US economy completely.

In any event, in a world in which trade increasingly does not matter (because central banks supposedly can and will merely print “prosperity” to offset the lost wealth that comes with international trade and comparative advantage, a concept that has been around since the late 1700s), it is becoming clear that America has certainly adhered to the Fed’s mission of forcing capital misallocation worse than ever, by focusing not on being competitive in an increasingly more technological and sophisticated world, but merely pretending that an economy can achieve escape velocity almost exclusively through stock buybacks.

And yet somehow there are those who still vouch for 3% GDP growth any minute now, a renaissance in capital spending also any minute now, just, well, never now, and who believe that some 285K jobs can be created at a time when the US economy is freefalling and the M&A bubble is laying off tens of thousands every month left and right all in the name of the almighty EPS beat.

But then again, Obama still has 6 months to make good on his promise to “double US exports in 5 years.” We are confident that in retrospect, just like in all of his other public appearances, he will have spoken nothing but the truth…

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

Submitted by Lance Roberts of STA Wealth Management,

Alas, all good things must come to an end. As the kids summer vacation trip comes sadly to an end, it is only fitting that the final edition of "Thoughts From The Beach (TFTB)" would be this weekend's "5 Things To Ponder."

This week was very busy with economic data.  For the most part, the majority of the data came basically inline with expectations.  However, the internals of the various reports were much less encouraging. The most noteworthy report, and the least important from an investment standpoint, was the monthly employment report which came in at 288,000 jobs for the month. 

As with the bulk of other reports, the more important details were lost to the headlines.  The average number of hours worked made no gains, and hourly earnings growth remains muted. The bulk of the job creation remained focused in the lower wage paying areas of the economy such as retail and transportation.  Most importantly, full-time jobs fell by roughly 500k.

As I discussed in "Jobless Claims And The Issue Of Full Employment," there is only one analysis of employment that matters.  That is full-time jobs relative to the population. Full-time employment is what fosters household formation and long-term economic growth. As shown in the chart below, full-time employment relative to the working age population has remained primarily stagnant since the financial crisis and actually fell in the latest month. This is a key reason why economic growth continues to struggle.

However, I digress, and our plane is getting ready to board as we make our way back to reality.  Come Monday it is back to a dimly lit desk, stale coffee and the daily grind.  In the meantime, here is what I will be reading on the trip home.

1) The Next Financial Crisis Is Brewing Right Now by David Dayen via The Fiscal Times

"The Office of the Comptroller of the Currency (OCC), not typically seen as a strident regulator, is warning about risky lending as low interest rates drive a reach for higher yields. Both the OCC and the Federal Reserve have decried the slippage in underwriting standards on particular loan products. Fed Chair Janet Yellen cited 'pockets of increased risk-taking' in a speech yesterday. And the Bank for International Settlements (BIS), a consortium of the world’s central banks, cautioned this week about asset bubbles forming throughout the global economy."

2) BIS Warns Of Destabilizing Low Interest Rates by Yves Smith via Naked Capitalism

"Frameworks that fail to get the financial cycle on the radar screen may inadvertently overreact to short-term developments in output and inflation, generating bigger problems down the road. More generally, asymmetrical policies over successive business and financial cycles can impart a serious bias over time and run the risk of entrenching instability in the economy. Policy does not lean against the booms but eases aggressively and persistently during busts. This induces a downward bias in interest rates and an upward bias in debt levels, which in turn makes it hard to raise rates without damaging the economy – a debt trap. Systemic financial crises do not become less frequent or intense, private and public debts continue to grow, the economy fails to climb onto a stronger sustainable path, and monetary and fiscal policies run out of ammunition. Over time, policies lose their effectiveness and may end up fostering the very conditions they seek to prevent. In this context, economists speak of "time inconsistency": taken in isolation, policy steps may look compelling but, as a sequence, they lead policymakers astray."

Also Read:  Yellen To The BIS by Sigmund Holmes

3) It's Time To End "Crapitalism" by John Stossel via Reason

"But it's crapitalism when politicians give your tax money and other special privileges to businesses that are 'most deserving of help.' Often those businesses turn out to be run by politicians' cronies.

 

Many government agencies feed this crony capitalism. When there is scandal, such as when the Energy Department lost $500 million on Solyndra, we sometimes hear about it. But often we don't. You probably didn't know about the department's other fat losses on businesses like Solar One, the Triad ethanol plant, FutureGen, the Clinch River Breeder Reactor, and so on.

The biggest funder of this crony capitalism is the Export-Import Bank."

4) Is The IMF Looking To Expropriate Funds? By Martin Armstrong Via Zero Hedge

"Now the June 2014 report has a new, far-reaching proposal. This shows how lawyers think in technical definitions of words. There is no actual default if they extend the maturity. You could buy 30-day paper in the middle of a crisis and suddenly find under the IMF that 30 day note is converted to 30 year bond at the same rate.

 

The huge national debts could be reduced also according to the IMF by just expropriating all private pension funds."

5) The Failure Of Macro Economics by John Cochrane via The Wall Street Journal

"When models don't yield the spending policies they want, some Keynesians abandon models—but not the spending.

 

Sclerotic growth trumps every other economic problem. Without strong growth, our children and grandchildren will not see the great rise in health and living standards…Without growth, our government's already questionable ability to pay for health care, retirement and its debt evaporate… Without growth, U.S. military strength and our influence abroad must fade…

 

The 'demand' side initially cited New Keynesian macroeconomic models. In this view, the economy requires a sharply negative real (after inflation) rate of interest. But inflation is only 2%, and the Federal Reserve cannot lower interest rates below zero. Thus the current negative 2% real rate is too high, inducing people to save too much and spend too little…If you look hard at New-Keynesian models, however, this diagnosis and these policy predictions are fragile…

 

Where, instead, are the problems? John Taylor, Stanford's Nick Bloom and Chicago Booth's Steve Davis see the uncertainty induced by seat-of-the-pants policy at fault. Who wants to hire, lend or invest when the next stroke of the presidential pen or Justice Department witch hunt can undo all the hard work? Ed Prescott emphasizes large distorting taxes and intrusive regulations. The University of Chicago's Casey Mulligan deconstructs the unintended disincentives of social programs."

---

 

via Zero Hedge http://ift.tt/1q3DvWs Tyler Durden

While it is all too easy to show the massive outperformance of Russian stocks (even after Carney’s “sell” recommendation) as evidence that US sanctions were not ‘punishing’ as the mainstream media might suggest; this week’s release of trade data shows the utter farce that the so-called “costs” imposed on Putin actually are. As WSJ reports, despite all the scaremongery and sanctioning, US exports to Russia in May hit $1.2 billion – a record high (up 21% from pre-sanctions). That will certainly teach them!!

 

 

As WSJ reports,

U.S. efforts to penalize Russia for its actions in Ukraine appear to have done little to stem exports of U.S. goods to the country.

 

The U.S. announced targeted sanctions against several Russian companies and individuals in March, but U.S. trade data published Thursday shows exports to the country were the highest on record at $1.2 billion in May.

 

The sanctions, organized with Europe and other major industrialized nations over Moscow’s alleged actions to destabilize its former client state, sparked investor flight out of Russia, led the ruble to tumble and pushed the economy into a recession. Russian markets have since recovered somewhat, but investors have been wary of an escalation in the sanctions battle.

 

Demand for U.S. products apparently hasn’t been hit, however, and in fact jumped 21% from the previous month.

*  *  *

So much for those sanctions – need moar targeted sectoral ones to really teach them a lesson (oh wait – what about the boomerang?)

via Zero Hedge http://ift.tt/1q3y9ub Tyler Durden

All around Asia, PMIs are tumbling… except for China's government-sponsored Manufacturing PMI. This week saw Aussie Services PMI (linked significantly to China) tumbled to 2014 lows, Japan's PMI drop, and China's own Services PMI disappoint and fade to 2-month lows. So where is all this exuberance coming from in China's manufacturing industry (despite a 8-month in a row drop in employment)? We don't know; but the fact that China coal prices just hit a record low hardly supports the smog-choking industry of China being at 7-month highs… Hard data vs soft surveys? You decide.

One of these things is not like the other…

CHINA PRESS:

Domestic coal prices fell to another record low following recent price cuts by major coal producers. The Bohai-rim Steam-Coal Price Index, a benchmark used by the coal industry, fell 1.7% on-week, to CNY519 per ton on Tuesday, its lowest level since the index series started in 2010.

 

Major coal producers, including Shenhua and China Coal, slashed prices over the weekend with the price cuts coming earlier than market expectations, which are expected to boost domestic coal market share and hurt China's coal imports. (China Securities Journal)

*  *  *
Of course, not every manufacuring plant needs coal and there are other factors of supply and demand involved but it seems odd that the previously strong correlation between the two would collapse as the Chinese 'need' to show a better economy to hide the reality of collapsing real estate markets, a faltering shadow banking system, and lost trust in lending.

*  *  *

We leave it to BofA to destroy another hope-strewn mth with some facts…

Destroying the 'myth' of the exuberant PMI data…

Via BofAML,

While a bit more than half of the recent data have been weaker than expected, the manufacturing and nonmanufacturing purchasing manager’s indexes have been very strong, jumping 4.8 and 5.8 points, respectively, since June. By some accounts, these data are better indicators than the hard numbers that come out of the government. After all, they are released very early, they are raw unfiltered data (other than seasonal adjustment), they are never revised and they are simple to interpret. We disagree. In our view, they are useful as a rough and ready early read on the economy. However, once the corresponding official data are released, we put very little weight on these surveys.

It is important to understand how crude these surveys are. Each month, a few hundred purchasing managers are asked if a variety of activity variables are up, down, or the same relative to the prior month. Their responses are then converted into diffusion indexes: the sum of the number managers reporting activity is “increasing” and half of those reporting “the same.” Note that there is some guesswork involved: the survey is taken before the month is over and some of the questions cover areas of the firm that are difficult for a purchasing manager to get a timely read on. For example, a purchasing manager may not have a very precise idea of what is happening to hiring in a large, diverse firm. Moreover, since they don’t gather specific numbers for each series, they may have to make a rough guess, particularly if the trend is slightly up or down.

Fans of the two indexes point out that they are relatively stable, easy to interpret and never revised. However, in our view, the simplicity of the data is a drawback, not an advantage. It means no attempt is made to correct misreporting or to include late respondents. Moreover, the sample they use is not representative of the overall economy. They represent a broad cross-section of industries, but they oversample big firms and they make no attempt to adjust for the birth and death of firms. The US is a dynamic economy and these surveys will miss these compositional shifts. Indeed, a lot of the revisions to official data come from attempts to fix all these problems rather than ignore them.

A comparison with payroll employment underscores these drawbacks. The preliminary payroll report is based on data from 145,000 establishments with 557,000 individual worksites. Thus if the BLS wanted to, it could turn its raw data into simple up or down answers and then create hundreds of diffusion indexes just like the employment component of the ISM index. However, that would mean throwing out information on both the size of employment changes at each company and turning a big sample into a bunch of tiny samples.

One way to show the information advantage of the employment report is to show how it correlates with manufacturing output. Using data from 1990 to present, the employment component of the manufacturing ISM index has a correlation of 0.39 with monthly industrial production growth. How does the official data compare? First, using the Labor Department’s own diffusion index—based on 84 industries—the correlation improves to 0.46. Second, using the actual job growth data, the correlation improves to 0.60. And, finally, if we also take into account the length of the work week, the correlation for aggregate hours worked and industrial production is 0.69. Clearly, more information is better.

 

How do we interpret the latest ISM numbers? Table 2 above shows the results when we regress GDP growth on its own lags and then add the composite ISM. The results underscore the difficulty in forecasting GDP. Using the average ISMs for July and August, the model with just GDP lags predicts growth of 2% in 3Q, while the model with the ISM points to 4.0%. However, the error band for these forecasts is very high – the “standard error” for the first model is 2.4pp and the second model 2.1pp. In other words, using a two standard error confidence band, we can be “95% confident” that growth is somewhere between zero and 8%. On the other hand, it is encouraging that the ISM is statistically significant.

To recapitulate:

the US data mills churn out a lot of surveys. Since the last FOMC meeting, there have been four new ISM readings and a bunch of regional releases. A popular view is that these surveys are better than hard data. In our view, however, these data get way too much air time. They give a timely, rough read on the economy, but should get little weight once hard data are released.

via Zero Hedge http://ift.tt/1vGPzP0 Tyler Durden

 

The biggest problem with the epic Central Bank rig of the last five years is that propping up a bankrupt financial system by printing money only works for so long.

 

The reason for this is that no one, whether it be a country, company, or person, can defy mathematics.

 

A loan can be extended, it can be restructured, or it can be finagled in countless financial ways. But at the end of the day, if your creditors lost faith in your ability to repay it… it’s GAME OVER.

 

History has shown many times that countries try to inflate their debts away until the inevitable restructuring occurs. As Argentina is now showing us, when the “D” word becomes palpable, markets move quickly.

 

Anyone who is truly concerned about their wealth in the coming years needs to assess what has happened in Europe: higher taxes on top earnings and bail-ins (meaning your bank deposits are raided to fund bank bailouts).

 

Indeed, the IMF recently proposed a “global wealth tax” to “restore debt suatainability.”

 

Here’s the critical quote:

 

Recurrent taxes on net wealth (assets less liabilities) have been declining in Europe over the last 15 years (repealers include Austria, Denmark, Finland, Germany, the Netherlands, and Sweden). But this may be changing: Iceland and Spain reintroduced the tax during the crisis, and it is now actively discussed elsewhere. (There has been interest, too, in the possibility of a one-off wealth tax to restore debt sustainability, taken up in Box 6.)

 

The revenue potential is subject to considerable uncertainty (related, for instance, to the valuation of real estate) but is in principle sizable. Based on Luxembourg Wealth Study data, a 1 percent tax on the net wealth of the top 10 percent of households could, in principle, raise about 1 percent of GDP per year…

 

TAKEN FROM PAGE 49

 

The sharp deterioration of the public finances in many countries has revived interest in a “capital levy”—a one-off tax on private wealth—as an exceptional measure to restore debt sustainability.1 The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair)

 

TAKEN FROM PAGE 59

 

http://ift.tt/16AQfwF

 

Anyone who has assets worth over $200,000 should note that the Governments of the world WILL be coming for your money to prop up the insolvent banks. And they’re going to be taking MORE instead of less.

 

Indeed, in the case of Cyprus, the proposed wealth tax of 7% of all deposits over €100,000 quickly rose to an incredible 47%!  Those individuals whose deposits were seized received equity in the banks themselves.

 

This scheme has been used in Spain multiple times… though the press has yet to note that when the banks FAIL, that equity is worth ZERO.

 

Cyprus has since released some of these funds though they are subject to capital controls (READ: YOU CANNOT GET YOUR MONEY OUT OF THE COUNTRY).

 

So…

 

1)   Cyprus staged a bail-in, froze accounts, and took 47% of wealth over the first €100,000.

2)   EU Finance ministers announced this policy will be a “template” for bailouts going forward.

3)   The IMF hints that a global wealth tax might be a good thing.

 

Connect the dots…

 

This concludes this article. If you’re looking for the means of protecting your portfolio from the coming collapse, you can pick up a FREE investment report titled Protect Your Portfolio at http://ift.tt/170oFLH.

 

This report outlines a number of strategies you can implement to prepare yourself and your loved ones from the coming market carnage.

 

Best Regards

 

Phoenix Capital Research

 

 

 

via Zero Hedge http://ift.tt/1qG4Npm Phoenix Capital Research

Submitted by David Stockman of Contra Corner blog,

Just when you thought that nothing could be worse than bubble blindness of Greenspan and Bernanke – along comes the Yellen doctrine of “resilience”. Its dangerous Keynesian blather, and far worse than Greenspan’s feigned agnosticism which held that the Fed does not have the capacity to recognize financial bubbles in the making and should therefore mop them up after they burst. The Maestro never did say exactly what caused the massive and destructive dot-com and housing bubbles which occurred on his watch – except that Chinese factory girls stacked 12-to-a-dorm-room apparently saved way too much RMB.

By contrast, Yellen’s primitive Keynesian mind knows exactly what causes financial bubbles. She has now militantly asserted that bubbles are entirely an irrational impulse in the private market and that the price of money and debt has absolutely nothing to do with financial stability.  That’s right, if the Fed could find a way to peg the money market rate at negative 10% to further its self-defined dual mandate of just enough inflation and always more jobs – even then any speculative excesses would presumably be attributable to still another outbreak of the market’s alleged propensity for error, irrationality and greed.

Let’s see. If the central bank arranged to cause carry-traders to get paid 8% to borrow short-term money (i.e. on a negative 10% deposit rate) in order to fund the carry on junk bonds, Turkish construction loans and the Russell 2000, do ya think they might get a tad rambunctious? For crying out loud, when it comes to speculation, leverage, maturity transformation and re-hypothecation of financial assets the money market interest rates is “not nothing” as Yellen contends. Its everything!

That’s the heart of the matter and why Keynesian central banking is the most destructive and dangerous doctrine ever invented. In effect, it mandates central bankers to seize control of the single most important price in all of capitalism–the price of “carry” or gambling stakes in the financial markets – and then asserts that this drastic pre-emption will have no impact on the behavior of speculators, traders and investors.

That predicate is so perverse that it puts one in mind of the boy who killed his parents and then threw himself on the mercy of the courts on the grounds that he was an orphan! Keynesian central bankers like Yellen are doing exactly the same thing. Pegging the money market rate at zero for seven years amounts to killing all of the financial market’s inherent stability mechanisms.

That is to say, carry trades are made essentially risk free because the money market rate is officially pegged at zero. Moreover, the Fed has further promised to be utterly transparent in notifying gamblers as to when the spread between their funding cost and their asset yield will change, and with ample advance notice.

Furthermore, the downside risk on the asset side of the trade is also substantially removed. Owing to the long-standing Greenspan/Bernanke/Yellen “put” the cost of “protection” against sharp declines in the broad market (such as the S&P 500 index) has become dirt cheap. In effect, the Fed is massively subsidizing the cost of put options that allow speculators to insulate their risk asset positions.

Accordingly, momentum deals and carry trades are far more profitable than they would be on an honest free market because in the latter case market-priced insurance premiums would eat up far more of the winnings. Needless to say, out-sized and artificial profitability attracts massive excess capital and resources into the hedge fund and trading desk gambling arenas—–the very motor forces of financial instability.

Likewise, an essential ingredient of honest two-way financial markets is speculation from the short-side. Self-evidently, ZIRP, bond market repression and the Fed’s stock market put have driven the short interest out of the casino entirely. So now we have one-way markets that are inherently prone to powerful speculative excess.

Worse still, as one-way markets gain steam they are self-evidently prone to pro-cyclical acceleration and mania buying of anything going up solely on the grounds that rising prices beget even higher prices. Clearly that is what is happening in the C-suites today where companies are consuming all of their earnings in share repurchases in order to goose their share prices by attracting even more momentum chasers into their stock.

In this context of pro-cyclical acceleration of the bubble,  “price discovery” is lost entirely, fundamentals become irrelevant and the market becomes a pure gambling arena.  What all of this adds up to, of course, is massive, intensifying and dangerous financial instability.

At the end of the day, blaming the private market for financial instability is the most perverse form of statist lie that is imaginable. According to Yellen, the financial system should be made more “resilient” through strengthened “macro-prudential” policies. That’s Washington pettifoggery for more intrusive, extensive and arbitrary regulation of the financial markets.

But here’s the thing. When you sponsor a casino you should not be shocked to find that gambling is happening inside. And it is utterly naïve to assume that you can hire enough police to monitor, comprehend and regulate the amount of risk-taking that goes on among the gamblers.

Yellen has hinted, for instance, that the LBO market is getting frothy, and regulators are now proposing to limit leveraged loans to 6X EBITDA. Good luck with that! By the time regulators figure out all the “adjustments” to GAAP EBITDA, the next round of bankruptcies will already be underway.

So the clear and present danger is this: We now have two decades of financial instability and three bubble cycles that prove Keynesian central banking is the culprit.  Accordingly, the way to make financial markets more “resilient” is to eliminate the central bank’s price pegging and propping policies which fuel serial bubbles and the economy impairing boom and bust cycles which go with them.

A place to start would be to repeal Humphrey-Hawkins, abolish the FOMC and let the money market rate be set by the supply of savings and the demand for funding. Once today’s Fed enabled gamblers had been laid low and purged from the system, the financial markets would take care of their own “resilience”.

via Zero Hedge http://ift.tt/1qG4PgZ Tyler Durden

As American investors sit back in their chairs, watching parades, sipping Budweiser elegantly, and generally having a good day off… there are some ‘people’ that are working hard to ensure the status quo is sustained. In order to maintain the illusion of exuberance and lack of concern, we are used to the ubiquitous melt-up in stocks late on a Friday afternoon (always driven by an ‘odd’ collapse in VIX). Of course, no human would be silly enough to do that on a day when European stocks tumbled on banking contagion concerns and the fact that stock markets around the world are now totally closed… so –  we ask in all incredulity – WTF is going with VIX futures…

 

The July VIX Futures – which do not mature for another 10 days – have collapsed…

 

And it’s not some fat finger thin volume trade – it is massive algorithmic idiocy…

 

Someone tell the machines to take the day off

*  *  *

Unrigged?

via Zero Hedge http://ift.tt/1xsQ95x Tyler Durden

Not even we anticipated this particular “unintended consequence” as a result of the US multi-billion dollar fine on BNP (which France took very much to heart). Moments ago, in a lengthy interview given to French magazine Investir, none other than the governor of the French National Bank Christian Noyer and member of the ECB’s governing board, said this stunner at the very end, via Bloomberg:

• NOYER: BNP CASE WILL ENCOURAGE ‘DIVERSIFICATION’ FROM DOLLAR

Here is the full google translated segment:

Q. Doesn’t the role of the dollar as an international currency create systemic risk?

 

Noyer: Beyond [the BNP] case, increased legal risks from the application of U.S. rules to all dollar transactions around the world will encourage a diversification from the dollar. BNP Paribas was the occasion for many observers to remember that there has been a number of sanctions and that there would certainly be others in the future. A movement to diversify the currencies used in international trade is inevitable. Trade between Europe and China does not need to use the dollar and may be read and fully paid in euros or renminbi. Walking towards a multipolar world is the natural monetary policy, since there are several major economic and monetary powerful ensembles. China has decided to develop the renminbi as a settlement currency. The Bank of France was behind the popular ECB-PBOC swap and we have just concluded a memorandum on the creation of a system of offshore renminbi clearing in Paris. We have very strong cooperation with the PBOC in this field. But these changes take time. We must not forget that it took decades after the United States became the world’s largest economy for the dollar to replace the British pound as the first international currency. But the phenomenon of U.S. rules expanding to all USD-denominated transactions around the world can have an accelerating effect.

In other words, the head of the French central bank, and ECB member, Christian Noyer, just issued a direct threat to the world’s reserve currency (for now), the US Dollar.

Putting this whole episode in context: in an attempt to punish France for proceeding with the delivery of the Mistral amphibious warship to Russia, the US “punishes” BNP with a failed attempt at blackmail (recall that as Putin revealed, the BNP penalty was a used as a carrot to disincenticize France from concluding the Mistral transaction: had Hollande scrapped the deal, BNP would likely be slammed with a far lower fine, if any). Said blackmail attempt backfires horribly when as a result, the head of the French central bank makes it clear that not only is the US Dollar’s reserve currency status not sacrosanct, but “the world” will now actively seek to avoid USD-transactions in order to escape the tentacle of global “pax Americana.”

And, the biggest irony of all is that in “punishing” France for dealing with Russia, that core country of the Eurasian alliance of Russia and China, the US merely accelerated the gravitation of France (and all of Europe) precisely toward Eurasia, toward a multi-polar (sorry fanatic believers in a one world SDR-based currency) and away from the greenback.

Or shown visually (as we have ever since 20120).

Meanwhile, somewhere Putin is still laughing.

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