Month: September 2014

Yet More IRS Employees Busted for Stealing Taxpayers’ Identities

HackerIt’s hard to keep up with the
privacy-threatening shenanigans at the Internal Revenue Service,
but let’s give it a try. Just days after revealing that the tax
agency’s failure to follow its own rules
put the private data of 1.4 million people at risk, the
Treasury Inspector General for Tax Administration publicized the
sentencing of Tax
Examining Technician Missy Sledge for aggravated identity theft
and mail fraud, and IRS employee
Monica Hernandez for making and subscribing a false income tax
return, wire fraud, and aggravated identity theft.

According to the Inspector General’s Office, “as part of her
official IRS duties, Sledge had access to taxpayers’ personal
identifiers, including names, Social Security Numbers (SSN), dates
of birth, and addresses, as well as information about tax
professionals. Sledge used this access in furtherance of an
identity theft scheme which included the filing of fraudulent tax
returns and the subsequent theft of refunds.”

For her part, “Hernandez regularly handled and processed tax
returns on behalf of the IRS by entering taxpayers’ tax information
into the IRS computer system. During the course of her IRS
employment, Hernandez stole tax information in order to file
fraudulent tax returns and claim large tax refunds.”

Sledge received 57-months imprisonment, followed by five years
of supervised release. Hernandez got 53-months imprisonment,
followed by three years of supervised probation. Both have to pay
restitution to the IRS.

But that was last month. This month, we hear about former IRS
employee Taylor
Knight who “inappropriately accessed information maintained by
the IRS for three taxpayers, in each case for her personal reasons
and not for official Government business. The defendants then used
the identifications of these three taxpayers to fraudulently induce
the IRS into issuing tax refund payments.”

Knight hasn’t ben sentenced yet, but faces up to five years in
prison.

Again, IRS records prove themselves to be a bonanza of personal
information for identity thieves who trawl through the less than
securely maintained data looking for a dishonest payday.

Have I mentioned that people signing for health coverage under
the Affordable Care Act are supposed to
update the government on any major life changes, including
marriage status, employment, finances…? Oh wait,
yes I have.

I wonder if that information will be better protected.

from Hit & Run http://ift.tt/1DSvGLu
via IFTTT

Yet More IRS Employees Busted for Stealing Taxpayers' Identities

HackerIt’s hard to keep up with the
privacy-threatening shenanigans at the Internal Revenue Service,
but let’s give it a try. Just days after revealing that the tax
agency’s failure to follow its own rules
put the private data of 1.4 million people at risk, the
Treasury Inspector General for Tax Administration publicized the
sentencing of Tax
Examining Technician Missy Sledge for aggravated identity theft
and mail fraud, and IRS employee
Monica Hernandez for making and subscribing a false income tax
return, wire fraud, and aggravated identity theft.

According to the Inspector General’s Office, “as part of her
official IRS duties, Sledge had access to taxpayers’ personal
identifiers, including names, Social Security Numbers (SSN), dates
of birth, and addresses, as well as information about tax
professionals. Sledge used this access in furtherance of an
identity theft scheme which included the filing of fraudulent tax
returns and the subsequent theft of refunds.”

For her part, “Hernandez regularly handled and processed tax
returns on behalf of the IRS by entering taxpayers’ tax information
into the IRS computer system. During the course of her IRS
employment, Hernandez stole tax information in order to file
fraudulent tax returns and claim large tax refunds.”

Sledge received 57-months imprisonment, followed by five years
of supervised release. Hernandez got 53-months imprisonment,
followed by three years of supervised probation. Both have to pay
restitution to the IRS.

But that was last month. This month, we hear about former IRS
employee Taylor
Knight who “inappropriately accessed information maintained by
the IRS for three taxpayers, in each case for her personal reasons
and not for official Government business. The defendants then used
the identifications of these three taxpayers to fraudulently induce
the IRS into issuing tax refund payments.”

Knight hasn’t ben sentenced yet, but faces up to five years in
prison.

Again, IRS records prove themselves to be a bonanza of personal
information for identity thieves who trawl through the less than
securely maintained data looking for a dishonest payday.

Have I mentioned that people signing for health coverage under
the Affordable Care Act are supposed to
update the government on any major life changes, including
marriage status, employment, finances…? Oh wait,
yes I have.

I wonder if that information will be better protected.

from Hit & Run http://ift.tt/1DSvGLu
via IFTTT

Despite Late-Day Buying Panic, Stocks Close Red

Heavy volume and volatile price action early in stocks and high-yield credit markets subsided later in the day as despite several big stocks in the red, the indices jammed higher in the last hour desparate to get positive (on terrible volume) but failed. Treasury yields fell 3-4bps early on and stuck near the lows of the day (ignoring equity's exuberance). High-yield credit rallied back off early spike wides at 380bps (with desks noting heavy demand for protection) but remains worse than stocks. VIX tested above 17 and crashed back below 15.5. The USD ended the day unchanged (AUD weakness notable) but gold and silver slipped lower with oil (back over $93) and copper up on the day. Camera-on-a-stick smashed over 11% higher to $91.50 as the 41% float short continues to get squeezed out.

 

Credit and stocks diverged early once again as selling was heavy and protection well bid…

 

And despite equity exuberance, Treasuries rallied then ignored stocks…

 

Even USDJPY decoupled from the exuberance…

 

As VIX ran the market once again…

 

As stocks scrambled lat eon to try and get green (with only Trannies successful)

 

All that matters for tomorrow is keeping the quarter green… (aint gonna happen for the Russell 2000)

 

 

Financials stocks continue to decouple from credit…

 

Investors continued to find safe harbor in camera-on-a-stick-or-dog…

 

Ford was monkey-hammred after "a disastrous commentary during analyst presentations"

 

Charts: Bloomberg




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Is This “The Age of the Comedown”? Some Millennials Think So

Over at Splice
Today, millennial Nicky Smith announces that the future is only
so bright because of the likely nuclear flash that’s going to
happen before 2100. He’s responding to novelist Bret Easton Ellis’
recent Vanity Fair jeremiad against millennials as “Generation
Wuss.” Ellis is right, says Smith. “Millennials are
over-sensitive, narcissistic, unrealistic and anxious. No mystery
why: we grew up in the midst of an unprecedented end-of-the-century
party in the Western World.”

Smith
continues:

What Ellis cannot comprehend is the unspoken certainty amongst
people my age that the world will not make it to 2100. There is
just absolutely no way—climate change, earthquakes, massive
expulsions of methane, radioactive fallout, dramatic terrorist
attacks—and the human experiment is nearing its end. It’s not
pessimism, but it’s easy to forget that the Cuban Missile Crisis
was only 52 years ago next month. That’s a blip of human history,
and it only takes one loon, or a group of organized and legitimate
loons and psychopaths in positions of power to orchestrate mass
death or total annihilation. Let’s assume we all behave ourselves
and refrain from blowing or mutating everything away: there’s a
consensus in the scientific community that climate change is at too
advanced a stage to stall, and its effects will be irreversible and
make coastal cities uninhabitable very, very soon.

Ellis is 50; he’s in the September of his years. He’ll most
likely be fine, and he doesn’t have to worry about what the air in
Los Angeles will be like in 2067. When pressed, Boomers blow it off
as sophomoric fatalism and go on about the sanctity and durability
of life. They can’t help it—that was their world, their narrative.
We’re living in the Age of the Comedown, and very soon everyone
will be feeling it worse than they could’ve ever imagined.

As someone who turned 50 a year ago, I prefer to
think of Ellis as being in the June of his years (if not
late May).

But wow, what a Debbie Downer Young Goodman Smith is! Doesn’t he
read Reason.com enough to know that we not only survived the Cuban
Missile Crisis but we won the Cold War to boot (for god’s sake, the
25th anniversary of the destruction of the Berlin Wall is coming up
this fall); ISIS and assorted Islamist-themed jackasses need to be
taken out, but they’re not an existential threat to the civilized
world. 

Climate change isn’t the bugaboo he seems to think,
either. To paraphrase Reason‘s Science Correspondent
Ronald Bailey, it’s happening; humans are involved; and we’ll
figure out how to cope with anything that gets thrown our way, just
like we’ve been doing for thousands of years. The air in Los
Angeles today is vastly cleaner than it was in 1967 and there’s
absolutely no reason to believe it will be dirty again in 2067.
Indeed, the air in Bejing, which is dirtier than it was 40 years
ago due to the sort of economic production that has lifted millions
of Chinese up from subsistence, will be cleaner in 2067 than it is
now.

As the parent of millennials myself—and the
younger brother of a sibling who graduated college in the grim year
of 1981—I feel sympathy for young adults these days due to economic
malaise and looming fiscal issues. But if the past is prologue and
if the political class does the bare minimum to rein in
entitlements and the like (yes, a big if), even the
near-future will be upbeat. When I graduated college just four
years after my brother, things had already turned the corner.

While it will take a lot of effort to make sure that politicians
give in to the Libertarian Moment and start enacting the sort of
common-sense reforms to right the ship of state and allow economic
markets to get cranking again, there’s every reason to believe
things are going to be all right. For god’s sake, the Libertarian
Moment is so happening that conservative-types are
hauling out Hitler arguments to combat it. In the meantime,
Nicky Smith, take a moment to talk to your elders about how shitty
things were for them at various times back in the day.

For a different perspective on millennials, check out
Reason.com’s incredible
landing page dedicated to the subject.

from Hit & Run http://ift.tt/1ryMpOZ
via IFTTT

Is This "The Age of the Comedown"? Some Millennials Think So

Over at Splice
Today, millennial Nicky Smith announces that the future is only
so bright because of the likely nuclear flash that’s going to
happen before 2100. He’s responding to novelist Bret Easton Ellis’
recent Vanity Fair jeremiad against millennials as “Generation
Wuss.” Ellis is right, says Smith. “Millennials are
over-sensitive, narcissistic, unrealistic and anxious. No mystery
why: we grew up in the midst of an unprecedented end-of-the-century
party in the Western World.”

Smith
continues:

What Ellis cannot comprehend is the unspoken certainty amongst
people my age that the world will not make it to 2100. There is
just absolutely no way—climate change, earthquakes, massive
expulsions of methane, radioactive fallout, dramatic terrorist
attacks—and the human experiment is nearing its end. It’s not
pessimism, but it’s easy to forget that the Cuban Missile Crisis
was only 52 years ago next month. That’s a blip of human history,
and it only takes one loon, or a group of organized and legitimate
loons and psychopaths in positions of power to orchestrate mass
death or total annihilation. Let’s assume we all behave ourselves
and refrain from blowing or mutating everything away: there’s a
consensus in the scientific community that climate change is at too
advanced a stage to stall, and its effects will be irreversible and
make coastal cities uninhabitable very, very soon.

Ellis is 50; he’s in the September of his years. He’ll most
likely be fine, and he doesn’t have to worry about what the air in
Los Angeles will be like in 2067. When pressed, Boomers blow it off
as sophomoric fatalism and go on about the sanctity and durability
of life. They can’t help it—that was their world, their narrative.
We’re living in the Age of the Comedown, and very soon everyone
will be feeling it worse than they could’ve ever imagined.

As someone who turned 50 a year ago, I prefer to
think of Ellis as being in the June of his years (if not
late May).

But wow, what a Debbie Downer Young Goodman Smith is! Doesn’t he
read Reason.com enough to know that we not only survived the Cuban
Missile Crisis but we won the Cold War to boot (for god’s sake, the
25th anniversary of the destruction of the Berlin Wall is coming up
this fall); ISIS and assorted Islamist-themed jackasses need to be
taken out, but they’re not an existential threat to the civilized
world. 

Climate change isn’t the bugaboo he seems to think,
either. To paraphrase Reason‘s Science Correspondent
Ronald Bailey, it’s happening; humans are involved; and we’ll
figure out how to cope with anything that gets thrown our way, just
like we’ve been doing for thousands of years. The air in Los
Angeles today is vastly cleaner than it was in 1967 and there’s
absolutely no reason to believe it will be dirty again in 2067.
Indeed, the air in Bejing, which is dirtier than it was 40 years
ago due to the sort of economic production that has lifted millions
of Chinese up from subsistence, will be cleaner in 2067 than it is
now.

As the parent of millennials myself—and the
younger brother of a sibling who graduated college in the grim year
of 1981—I feel sympathy for young adults these days due to economic
malaise and looming fiscal issues. But if the past is prologue and
if the political class does the bare minimum to rein in
entitlements and the like (yes, a big if), even the
near-future will be upbeat. When I graduated college just four
years after my brother, things had already turned the corner.

While it will take a lot of effort to make sure that politicians
give in to the Libertarian Moment and start enacting the sort of
common-sense reforms to right the ship of state and allow economic
markets to get cranking again, there’s every reason to believe
things are going to be all right. For god’s sake, the Libertarian
Moment is so happening that conservative-types are
hauling out Hitler arguments to combat it. In the meantime,
Nicky Smith, take a moment to talk to your elders about how shitty
things were for them at various times back in the day.

For a different perspective on millennials, check out
Reason.com’s incredible
landing page dedicated to the subject.

from Hit & Run http://ift.tt/1ryMpOZ
via IFTTT

China Housing Bubble Bursts: Q3 Land Sales Crater 50%

China may be doing everything in its power to divert attention from the simple fact that its housing bubble, the largest in the world in terms of both assets comprising it as well as divergence from fair value, has burst. But while there is no clear threshold of what constitutes a bursting bubble when it comes to housing, the latest data out of Soufun, China’s largest real-estate website, which said that land sales have dropped a massive 22% to 1.7 trillion Yuan in 2014 so far, is likely as clear an indication as any that Beijing is about to panic.

And if that was not enough Bloomberg adds that land sales in 300 cites followed by Soufun fell almost 50% Y/Y to 415.9 billion yuan in 3Q, while residential land sales declined more than 50% to 265.3b yuan in 3Q.

So why, aside from the obvious, is this relevant? Because recall as we reported two weeks ago when looking at US household net worth, in the US it is all about (record) financial assets. So much so, in fact, that financial assets as a percentage of total household assets have never been higher at 70.3%, which also means that real estate as a percentage of total is as low as it has ever been.

Meanwhile, in China few households care as much about financial assets (the ones that do are largely a part of the Politburo or the ultra-rich oligrachy). Instead, the largest Chinese household asset is Real Estate, which at 74.7% of total household assets, is by far the most valuable asset that China’s population has.

 

And once a few hundred million Chinese wake up and realize that the “wealth effect” portrayed by the blue bar above has been obliterated, the riots currently taking place in Hong Kong will be a gentle warm up for what the People’s Liberation (sic) Army will be about to face.




via Zero Hedge http://ift.tt/1vq6mH5 Tyler Durden

Gross To Have Final Laugh? Whopping Two-Thirds Of PIMCO’s Flagship Fund May Be Withdrawn

The reason why the first article we wrote on Friday after news hit that PIMCO co-founder was shockingly leaving the firm on Friday, was listing the massive bond fund’s biggest holdings, was because it was only a matter of time: it, being of course, the massive redemptions that would follow Gross’ departure by people that his 30+ tenure at the bond fund made very rich, and who couldn’t care less about a brief central planning-inspired flame out. After all Gross isn’t the first person who has lost the plotline due to the Fed’s manipulation of every market.

So just how bad is it? Not for Gross of course: he has made his billions and is simply doing what he and Icahn do in their age: what they love. No, for Pimco, where the redemptions requests are already flooding in. According to the WSJ, just two days after the Gross announcement (both of which non-workdays), already some $10 billion has been withdrawn. And that is just the beginning:

Pacific Investment Management Co. suffered roughly $10 billion of withdrawals following the Friday departure of co-founder Bill Gross, a person familiar with the matter said, a sign of how quickly Mr. Gross’s surprise move is reshaping the bond-investing landscape.

 

Pimco is bracing for more outflows on the heels of the veteran investor’s departure after months of internal strife over his leadership. At the same time, some managers say they remain committed to the firm.

 

Some within the Newport Beach, Calif., investment firm are projecting it will lose at least $100 billion or more in assets due to withdrawals, the person familiar with the matter said, and some analysts peg the estimate higher.

 

Pimco Chief Executive Douglas Hodge said in a statement his firm “manages nearly $2 trillion in assets, and we are confident that the vast majority of our clients will continue to stand with us.”

Will they? Remember: it wasn’t Allianz, or Pimco, or some bond manager that was unknown until the El-Erian shake up earlier this year, that gave the Newport Beach bond manager $2 trillion in AUM. It was Bill Gross. And it would be a fitting farewell for Gross, who departed his former employer in what some say was a bout of rage, that his departure would also lead to the effective closure or outright liquidation of a bond fund which is forced to dump more than half of its holdings… at firesale prices in a bidless market!

The flight of $100 billion, more assets than many mutual funds hold, could roil some parts of the bond market with limited trading activity, experts say, as Pimco sells assets to meet investor redemptions and other managers put new money to work.

Rivals are trying to position themselves to attract some of the Pimco outflows.

“There is a good chance that Pimco will lose its dominant position as a fixed-income manager as assets find their way into other investment managers, thereby leveling the playing field in fixed income,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading in New York at Deutsche Bank’s private wealth-management unit.

So far the biggest winner is the man many have coined the next bond king: “Competitor DoubleLine Capital saw its biggest inflow of the year Friday, taking in “hundreds of millions of dollars,” said Jeffrey Gundlach, chief executive.”

In the meantime, PIMCO, now ex-Gross is celebrating:

Even as Pimco prepared for some investors to follow Mr. Gross, Mr. Hodge said executives at the firm felt an “overwhelming” sense of excitement at the giant asset manager, which has been besieged with negative publicity, spotty performance in its flagship fund that Mr. Gross managed and investor outflows in that and other funds in recent months.

Sadly, the celebrations may end quickly if Kepler Cheuvreux ‘s take on the situation is proven correct.

Earlier today the French bank said that investors may withdraw a gargantuan $150 billion of Total Return Fund’s $221 billion AUM, which is also more than 10% of Pimco’s $1.44 trillion 3rd party AUM.  The report said that Pimco operating profit may drop almost 15% on withdrawals following CIO Bill Gross’s departure. Translated: no bonuses for anyone celebrating today. Of course, the shareholders were already hit when the stock of Allianz tumbled by 6% on Friday.

And if the liquidations accelerate, especially considering the woeful state of bond market liquidity these days when PIMCO suddenly becomes such a major player on the offer side the Fed may have to launch QE just to absorb what PIMCO has to sell so as to not crush the bond market, it is none other than Bill Gross who will have the final laugh, especially if he is able to pick off the bonds his former employer is liquidating in a blue light special.




via Zero Hedge http://ift.tt/ZleTkE Tyler Durden

Gross To Have Final Laugh? Whopping Two-Thirds Of PIMCO's Flagship Fund May Be Withdrawn

The reason why the first article we wrote on Friday after news hit that PIMCO co-founder was shockingly leaving the firm on Friday, was listing the massive bond fund’s biggest holdings, was because it was only a matter of time: it, being of course, the massive redemptions that would follow Gross’ departure by people that his 30+ tenure at the bond fund made very rich, and who couldn’t care less about a brief central planning-inspired flame out. After all Gross isn’t the first person who has lost the plotline due to the Fed’s manipulation of every market.

So just how bad is it? Not for Gross of course: he has made his billions and is simply doing what he and Icahn do in their age: what they love. No, for Pimco, where the redemptions requests are already flooding in. According to the WSJ, just two days after the Gross announcement (both of which non-workdays), already some $10 billion has been withdrawn. And that is just the beginning:

Pacific Investment Management Co. suffered roughly $10 billion of withdrawals following the Friday departure of co-founder Bill Gross, a person familiar with the matter said, a sign of how quickly Mr. Gross’s surprise move is reshaping the bond-investing landscape.

 

Pimco is bracing for more outflows on the heels of the veteran investor’s departure after months of internal strife over his leadership. At the same time, some managers say they remain committed to the firm.

 

Some within the Newport Beach, Calif., investment firm are projecting it will lose at least $100 billion or more in assets due to withdrawals, the person familiar with the matter said, and some analysts peg the estimate higher.

 

Pimco Chief Executive Douglas Hodge said in a statement his firm “manages nearly $2 trillion in assets, and we are confident that the vast majority of our clients will continue to stand with us.”

Will they? Remember: it wasn’t Allianz, or Pimco, or some bond manager that was unknown until the El-Erian shake up earlier this year, that gave the Newport Beach bond manager $2 trillion in AUM. It was Bill Gross. And it would be a fitting farewell for Gross, who departed his former employer in what some say was a bout of rage, that his departure would also lead to the effective closure or outright liquidation of a bond fund which is forced to dump more than half of its holdings… at firesale prices in a bidless market!

The flight of $100 billion, more assets than many mutual funds hold, could roil some parts of the bond market with limited trading activity, experts say, as Pimco sells assets to meet investor redemptions and other managers put new money to work.

Rivals are trying to position themselves to attract some of the Pimco outflows.

“There is a good chance that Pimco will lose its dominant position as a fixed-income manager as assets find their way into other investment managers, thereby leveling the playing field in fixed income,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading in New York at Deutsche Bank’s private wealth-management unit.

So far the biggest winner is the man many have coined the next bond king: “Competitor DoubleLine Capital saw its biggest inflow of the year Friday, taking in “hundreds of millions of dollars,” said Jeffrey Gundlach, chief executive.”

In the meantime, PIMCO, now ex-Gross is celebrating:

Even as Pimco prepared for some investors to follow Mr. Gross, Mr. Hodge said executives at the firm felt an “overwhelming” sense of excitement at the giant asset manager, which has been besieged with negative publicity, spotty performance in its flagship fund that Mr. Gross managed and investor outflows in that and other funds in recent months.

Sadly, the celebrations may end quickly if Kepler Cheuvreux ‘s take on the situation is proven correct.

Earlier today the French bank said that investors may withdraw a gargantuan $150 billion of Total Return Fund’s $221 billion AUM, which is also more than 10% of Pimco’s $1.44 trillion 3rd party AUM.  The report said that Pimco operating profit may drop almost 15% on withdrawals following CIO Bill Gross’s departure. Translated: no bonuses for anyone celebrating today. Of course, the shareholders were already hit when the stock of Allianz tumbled by 6% on Friday.

And if the liquidations accelerate, especially considering the woeful state of bond market liquidity these days when PIMCO suddenly becomes such a major player on the offer side the Fed may have to launch QE just to absorb what PIMCO has to sell so as to not crush the bond market, it is none other than Bill Gross who will have the final laugh, especially if he is able to pick off the bonds his former employer is liquidating in a blue light special.




via Zero Hedge http://ift.tt/ZleTkE Tyler Durden

The Last Time Traders Were This Short 2Y Notes, Rates Collapsed

As rates fell last week, speculators in 2Y Treasury Notes added aggressively to their short positions. Positioning in 2Y Notes is now at its most short since mid-2007 (as 10Y Bond positioning surged to its most long in over a year), and if history is any guide to what happens next, rates are set to tumble.

 

The last time 2Y Note speculators were this short was mid-2007 and rates utterly collapsed soon after…

 

and as BofA notes, 10Y positioning is its most long in a year…

 

BofA is Bullish.

2yr yields are set to stall and correct lower after the test and hold of 58.9bps/61.1bps.

 

Immediate downside targets seen to the mid-Apr pivot at 47.8bps before renewed stabilization

Charts: Bloomberg and BofA




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The Hong Kong Protest: What It’s All About

Considering that as recently as 3 weeks ago the leader of the Occupy Central movement in Hong Kong decided to throw in the towel, after admitting that his civil disobedience movement’s pursuit of democracy had “failed” as a result of waning public support, many are shocked by how aggressively Hong Kong’s students took up the baton: almost as if the mystery sponsor behind the ISIS blitz-ascent from obscurity had decided to “destabilize” yet another region. Tongue-in-cheek kidding aside, for everyone confused about the context of this weekend’s at time very violent student protests, here is Evergreen GaveKal with its wrap up of the “Hong Kong Democracy Protests.”

By Tom Holland, of Evergreen GaveKal

The inhabitants of Hong Kong were treated over the weekend to the unusual spectacle of police battling political protesters in the city’s streets. Baton charges and volleys of tear gas might be common enough tactics in New York or London, but not in Asia’s leading international financial center. The rapid escalation of the protests over the weekend and the police’s strong-arm response shocked locals, and triggered a -2% fall in the city’s benchmark Hang Seng stock index on Monday morning as investors worried about the impact of continued unrest on Hong Kong’s markets, its economy and its future as Beijing’s laboratory of choice for China’s financial liberalization.

Only a few weeks ago it seemed that Hong Kong’s pro-democracy movement was a spent force. After Beijing ruled out open elections for the chief executive of the territory’s government, the leader of Occupy Central admitted that his civil disobedience movement’s pursuit of democracy had “failed”. However, Hong Kong’s students and high school pupils failed to take heed. Last Friday a group of around 200 stormed security fences blocking off the ‘Civic Square’ outside the government’s headquarters to stage a sit-down protest against official obduracy. The heavy-handed police response prompted thousands more protesters to descend on the site over the weekend and on Monday morning the city woke up to find a civil disobedience campaign dismissed as irrelevant just weeks before had paralyzed the area surrounding Hong Kong’s government headquarters. With the mood highly febrile ahead of a public holiday on Wednesday to mark the Communist Party’s assumption of power in China, the fear is that the crowds of protesters could swell further over the course of the week, prompting an even more uncompromising response from the city’s Beijing-backed government.

The worst case scenario—that the Beijing government will deploy the People’s Liberation Army to restore order at the barrel of a gun—is extremely improbable. It would be a public relations disaster for China’s leaders. However, it is equally hard to envisage any lasting rapprochement between Hong Kong’s pro-democracy movement and the city’s government. Indeed, although the protesters’ overt cause may be their campaign for free and open elections, many are motivated by underlying grievances both towards the mainland, which they fear is swamping Hong Kong’s unique identity and culture, and towards the city’s own administration, which they believe to favor the interests of property and business tycoons over the aspirations of  local people.

As a result, even if this week’s protests end peacefully, the discontent will rumble on. And if slowing Chinese growth and rising US interest rates inflict economic hardship on the city, the dissatisfaction is only likely to mount. In recent years the combination of mainland money flows and rock-bottom mortgage rates—Hong Kong’s currency is pegged to the US dollar, so local borrowing costs follow US rates—have propelled the city’s property prices to record highs, up 300% from their 2003 low. While any slump would make property more affordable, it would also hammer the balance sheets of the city’s middle class property-owners, many of whom are inclined to sympathize with the weekend’s demonstrators.

Against that backdrop, an extended campaign of civil disobedience is likely to weigh further on Hong Kong’s stock market, already down -8.3% since early September. A new equity trading link between the Hong Kong and Shanghai market, which is due to go live towards the end of October, may not help much. With the valuations on Hong Kong listed-stocks bang in line with their mainland peers, there are currently few arbitrage opportunities to be exploited. And with Beijing’s ‘mini-stimulus’ to support the mainland economy running out of steam and the People’s Bank of China resisting pressure for a full-scale monetary easing, the chances that a continued rally in mainland stock prices will support the Hong Kong market look slim.

Finally, some critics have suggested that the weekend’s pro-democracy demonstrations could prompt Beijing to choose Shanghai’s Free Trade Zone over Hong Kong as the favored venue for its financial liberalization program. Possibly, but one year after it was opened with great fanfare, progress at drawing up rules to govern capital flows in and out of Shanghai’s new zone is glacially slow and almost entirely opaque. The mainland city still looks decades away from mounting a credible challenge to Hong Kong.

Even so, hopes that Hong Kong investors will benefit from a new spate of mainland liberalization measures look exaggerated. With China’s growth rate now slowing towards 7%, exposing the vulnerabilities of China’s financial system, complete interest rate liberalization and a full opening of the capital account are receding further into the future. That may preserve Hong Kong’s pole position. But along with the gathering momentum of pro-democracy protests, it will also limit future opportunities for growth.




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