Month: April 2016

Back in late 2014 and early 2015, this website soundly mocked any and every economist that suggested that plunging oil prices – in a globalized economy where oil has been financialized beyond recognition and impacts every asset class, the stock market, global trade flows, and international diplomacy – is “unambiguously good.” 

It wasn’t and it took a dramatic escalation in activist central banking to preserve market stability after collapsing oil prices dragged down energy stocks, and have led to a surge in bankruptcies, a US manufacturing recession, whose contagion is slowly spreading to the services sector.

Which, however, meant that now that lower oil prices have been exposed as “unambiguously bad” for the global economy, it was time for a “very serious economist” to take the lead in explaining just why it is higher oil prices that are good for the economy.

Over the weekend, Goldman did just that, when its economist David Mericle, wrote a note titled “Cheap Oil and the US Economy: Too Much of a Good Thing .”

In it, he first does a mea culpa, one which soon every other economist will have no choice but to parrot, because it is now critical for the broader public to “understand” why higher gas prices – which even economists realize are critical to push the overall market higher – are “good for them.” 

Here’s Goldman, proudly blazing a trail in this exciting narrative shift:

When oil prices first began to decline in mid-2014, most observers expected a boost to US and global growth as the windfall from lower energy prices raised consumer spending. But as oil prices continued to fall sharply to levels below the breakeven points of many US producers, the cost side of the growth ledger quickly became apparent. The response of US producers was swift, with energy sector capital spending falling to half its initial level, while the boost to consumption has seemingly been more gradual. Taken together, this has meant that the collapse in oil prices has had a disappointing and possibly even negative effect on the US economy. With oil prices now rebounding from their January lows, we revisit the impact of oil prices on the US economy and assess the outlook under various price scenarios with the help of rich new detail on the production cost schedules of domestic producers.

 

He then proceeds to goalseek and massage a whole lot of number, the same ones that two years ago “confirmed” that lower oil prices are absolutely great, to come up with the following observation: “Moderately Higher Oil Prices Would Boost US Growth.”

In short, our analysis implies that lower oil prices have become “too much of a good thing” for the US economy. Had the decline in oil prices stopped at $80, the consumption channel would have dominated and the net growth impact would have been quite positive. But in the sensitive range where oil prices now lie, the non-linear impact of oil prices on energy sector capital spending and the petroleum trade balance outweigh the steady per-dollar impact on consumption.

Get that: low oil prices…. but not too low oil prices. Goldilocks oil prices if you will. Ah, economists. Goldman continues:

Admittedly, our analysis does not exhaust all the possible channels through which oil prices affect the US economy. For example, lower energy input costs or transportation costs might lead non-energy companies to lower prices or increase capital spending. More indirectly, stable or higher oil prices could help to further reverse the widening in high-yield credit spreads, lessening the negative spillover effect on capital spending by non-energy companies that borrow in high-yield markets. But we view these effects as more uncertain, more diffuse and likely smaller than the three main channels discussed above.

However, because simply throwing out years of pseudo scientific economist canon would imply suggest that nobody really has any idea what is going on and the narrative changes at a whim to simply follow price action, Goldman felt compelled to provide an offsetting “bullish” angle to lower oil prices: its “yes but” conclusion is that “Lower Prices Would Be Better for Employment “

We conclude by considering the effect of oil price changes on total employment under each of our three scenarios. To estimate the impact on energy sector employment, we model energy sector payroll growth using energy capex, energy production, and oil prices. To estimate the impact on employment in other sectors associated with the boost to consumption from lower oil prices, we apply an Okun’s law relationship to convert the GDP effects estimated above into employment effects.

 

Exhibit 11 shows our estimates of the monthly net impact on payroll employment. The data through the present represent actual reported employment changes in the energy sector and estimates of the effect via consumption, while the figures thereafter reflect estimated employment effects from both channels.

 

 

For the remainder of 2016, our estimates imply that the rebound to $70 provides a larger boost to employment than the lower price scenarios. But by 2017-2018, the reverse is true. In contrast to the GDP impact, we find that the cumulative employment impact is higher in the $30 oil scenario than in the $70 scenario. The key reason for this opposite conclusion is that the energy sector is much less labor intensive than the economy as a whole. As a result, declines in oil prices even in the sensitive price range considered produce a larger impact on other industries via the consumption channel than on the energy extraction sector, which currently employs just 1 in 300 US workers.

Got it, so low oil is bad for economic growth, but good for jobs – what is missing here, of course, is the kind of jobs low oil is good for. The answer: bartender and waiter jobs, which is what some 200,000 former shale workers will soon become. And that’s why they are not laughing with you, dear economists.

Goalseeked “analysis” aside, Goldman’s overall conclusion is pure retroactive “we were wrong but…” comedy. It is as follows:

We draw three major conclusions from our analysis. First, the net effect of the oil price collapse on US GDP growth has probably been negative so far, with the sudden pullback in energy sector capital spending outweighing the boost to consumption. Second, going forward the net effect on growth is likely to be neutral at worst and would be significantly more positive if oil prices rebound to $70/barrel than if they fall to $30/barrel, reflecting the outsized impact of price changes in this crucial range on energy capex and production. Third, while cheap oil has become “too much of a good thing” from a growth perspective, the employment impact of lower oil prices is still positive, reflecting the more modest effect on employment of the capital-intensive energy sector.

And so the narrative has changed again.

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Last week, Reuters reported a development which should have surprised precisely nobody: while the Kremlin announced one month ago that it would begin withdrawing military forces from Syria at once, Putin was doing the opposite.

As Reuters explained “when Vladimir Putin announced the withdrawal of most of Russia’s military contingent from Syria there was an expectation that the Yauza, a Russian naval icebreaker and one of the mission’s main supply vessels, would return home to its Arctic Ocean port. Instead, three days after Putin’s March 14 declaration, the Yauza, part of the “Syrian Express”, the nickname given to the ships that have kept Russian forces supplied, left the Russian Black Sea port of Novorossiysk for Tartous, Russia’s naval facility in Syria. Whatever it was carrying was heavy; it sat so low in the water that its load line was barely visible.”

Its movements and those of other Russian ships in the two weeks since Putin’s announcement of a partial withdrawal suggest Moscow has in fact shipped more equipment and supplies to Syria than it has brought back in the same period, a Reuters analysis shows. It is not known what the ships were carrying or how much equipment has been flown out in giant cargo planes accompanying returning war planes.

 

But the movements – while only a partial snapshot – suggest Russia is working intensively to maintain its military infrastructure in Syria and to supply the Syrian army so that it can scale up again swiftly if need be. Putin has not detailed what would prompt such a move, but any perceived threat to Russia’s bases in Syria or any sign that President Bashar al-Assad, Moscow’s closest Middle East ally, was in peril would be likely to trigger a powerful return.

As part of our rhetorical conclusion to an article which suggested a Russian Iskander ballistic missile may have been spotted in Syria for the first time, we asked “how will John Kerry, the state department, and allied forces react once it becomes clear that not only did Putin not withdraw forces from Syria but may have added nuclear-capable ballistic missiles to the Russian arsenal in Syria?”

We now have the answer: according to a follow up report by Reuters, the U.S. administration is considering a plan to greatly increase the number of American special operations forces deployed to Syria “as it looks to accelerate recent gains against Islamic State.”

According to Reuters, this troop expansion would leave the U.S. special operations contingent many times larger than the around 50 troops currently in Syria, where they operate largely as advisors away from the front lines.

In other words, while Russia has been hinting at de-escalation while in reality it was building up a military presence, now it is the US’ turn.

The proposal is among the military options being prepared for President Barack Obama, who is also weighing an increase in the number of American troops in Iraq. A White House spokeswoman declined comment.

The proposal appears to be the latest sign of growing confidence in the ability of U.S.-backed forces inside Syria and Iraq to claw back territory from the hardline Sunni Islamist group.

As documented before, ISIS, which still controls the cities of Mosul in Iraq and Raqqa in Syria has been rapidly losing momentum in Iraq and Syria, where the tide of war has shifted against Islamic State. U.S. officials say the group is losing a battle to forces arrayed against it from many sides in the vast region it controls. In Iraq, the group has been pulling back since December when it lost Ramadi, the capital of the western province of Anbar. In Syria, the jihadist fighters have been pushed out of the strategic city of Palmyra by Russian-backed Syrian government forces.

U.S. forces have also had increased success in eliminating top ISIS leaders. Air strikes in recent weeks killed a top official called Abd al-Rahman Mustafa al-Qaduli, and an Islamic State commander described as the group’s “minister of war” — Abu Omar al-Shishani, or Omar the Chechen.

To be sure, now that the world is far more focused on ISIS’ Turkish source of funds, while Russian air strikes have decimated ISIS oil supply routes to Turkey, suddenly the money feeding the ISIS state has slowed to a crawl.

Nonetheless, the ISIS-controlled cities remain potent threat abroad, claiming credit for major attacks in Paris in November and Brussels in March.

As such, as we have written on previous occasions, there appears to be a scramble between Russia and US forces to be the first to gain control over these two cities. Here Reuters notes that the dozens of U.S. special operations forces now in Syria are working closely with a collection of Syrian Arab groups within an alliance that is still dominated by Kurdish forces. The United States has been supplying Arabs in the thousands-strong alliance with ammunition since October.

While the strategy is showing results so far, U.S. officials and Kurdish leaders agree that a predominately Arab force is needed to take Raqqa, a majority Arab city whose residents would consider Kurds as occupiers.

That is unless the Syrian army, supported by Russia, isn’t able to liberate the city first.

Meanwhile, in a separate report, the Daily Beast reports that there while there are currently only 5,000 U.S. troops in Iraq—about what a colonel usually commands. But for this ISIS war, as many as 21 generals have been deployed (to a war the US denies fighting). More:

In the war against the self-proclaimed Islamic State, the U.S. military is notably short on soldiers, but apparently not on generals.

 

There are at least 12 U.S. generals in Iraq, a stunningly high number for a war that, if you believe the White House talking points, doesn’t involve American troops in combat. And that number is, if anything, a conservative estimate, not taking into account the flag officers running the U.S. air war, the admirals helping wage the war from the sea, or their superiors back at the Pentagon.

 

At U.S. headquarters inside Baghdad’s fortified Green Zone, even majors and colonels frequently find themselves saluting superiors at a pace that outranks the Pentagon and certainly any normal military installation. With about 5,000 troops deployed to Iraq and Syria ISIS war, that means there’s a general for every 416 troops, give or take. To compare, there are some captains in the U.S. Army in charge of that many people.

 

* * *

 

But if the U.S. footprint is so small, why does the war demand so many generals?

Why so many generals to so few troops? Perhaps because, just like the Syrian “special forces” reinforcements, the U.S. troops are about to be deployed in Iraq as well where they will have more than enough generals to guide them.

Which begs the question: as the ongoing proxy war in the Middle East has been gradually pushed back from the front pages, are all these stealthy reinforcements indicative that something far bigger is about to be unleashed in the region.

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One month ago, when looking at the overall level of short interest across the market, we reported that according to JPM, the “most painful part of the short squeeze may be yet to come“, and sure enough, aided by an unprecedented amount of central bank intervention, the market has since surged, in no small part due to ongoing covering of short positions.

However, one look at the NYSE short interest data reveals something troubling: there are still many shorts out there.

 

What is JPM’s take? In a note released on Friday night, JPM’s Nikolaos Panigirtzoglou has several important observations, the main of which is that CTAs and risk parity funds – which appear to have driven March’s equity rebound – are both significantly overweight equities. As a result he points to figure 2 below as an indication of a “more vulnerable equity market relative to a month ago, with all of the above types of funds currently overweight equities apart from discretionary macro hedge funds which appear to be still close to neutral.”

However, “not all shorts are covered. The short base in US equity futures has yet to be covered by spec investors.”

He also notes that the short base in S&P500 stocks, i.e. number of shares shorted as % of total shares outstanding, remains elevated and unchanged from its mid February high. Finally, retail investors remain negative and that they sold equity mutual funds over the past two weeks and YTD.

Here is his full take:

The equity market continued to grind higher over the past month driven by further covering of short positions and by CTAs and risk parity funds in particular increasingly their equity exposure markedly intra month. This intramonth swing by CTAs and risk parity funds is best seen in Figure 1 and Figure 2. Figure 1 shows how close the CTA return index has been following the S&P500 index during the second half of March vs. the two indices moving in opposite direction during the first half. Figure 2 goes beyond CTAs and depicts the equity beta of various fund types during the first half of March, i.e. pre- FOMC vs. the second half of March, i.e. post FOMC.

 

Indeed, Figure 2 shows that it was CTAs and risk parity funds that exhibited the biggest increase in equity exposures intra month. CTAs in particular appear to have switched from a significant short equity exposure during the first half of March to a significant long equity exposure during the second half. Risk parity funds more than doubled their equity beta from around 0.4x to 1.1x. In contrast, balance mutual funds or discretionary macro hedge funds saw little change in their equity beta during March. Discretionary macro hedge funds were flattish before and after the FOMC. Balanced mutual funds, which benefited the most from March’s equity rally, were quite long equities before and after the FOMC meeting. Equity Long/Short hedge funds saw a modest only increase in their equity beta shifting from a rather neutral equity beta before the FOMC to a significant overweight post FOMC.

 

 

 

In all, the picture of Figure 2 points to a more vulnerable equity market relative to a month ago, with all of the above types of funds currently overweight equities apart from discretionary macro hedge funds which appear to be still close to neutral.

 

But not all of our position indicators have normalized. The short base in US equity futures has yet to be covered by spec investors. The short base in S&P500 stocks, i.e. number of shares shorted as % of total shares outstanding, remains elevated and unchanged from its mid February high (Figure 3).

 

This year’s previous outflows from equity ETFs have yet to fully reverse, as inflows stalled over the past two weeks. Retail investors sold equity mutual funds over the past two weeks and YTD. And the ammunition from retail investors is even larger than we mentioned a couple of weeks ago. With quarterly reporting funds now available for Q4, it appears that retail investors injected a significant $437bn into money market funds during the second half of 2015. One needs to go back to Lehman crisis to see such accumulation of money market funds. And an additional $16bn was injected into money market funds in the first two months of the year. This previously cumulated firepower could propel equities in the coming months assuming supporting macro and policy news.

His conclusion:

In all, the above evidence suggests that not all shorts have been covered. These prevailing shorts are perhaps the reason the equity market has been trading rather short despite elevated equity betas by the hedge fund types of Figure 2. We had argued before that an alternative way to gauge equity market positioning is to examine the response of equity markets to news, where we think of ‘news’ as surprises relative to expectations. In an idealized world, an environment where equity investor positions are heavily long should see equities responding by more to negative news than to positive news. In an environment where investors are short equities, we think the opposite should be happening, i.e. equity prices should be less responsive to negative news and more responsive to positive news.

 

Over the past six weeks, we had an equal amount of positive vs. negative economic surprises in both the US and Eurozone which in the absence of a position overhang should have been consistent with flat equity markets. Instead the MSCI World Index is up by 10% over the past six weeks.

 

Figure 5 suggests that the MSCI World index has been more responsive to positive economic news and less responsive to negative news in recent weeks, pointing to overhang of short equity positions. According to Figure 5, the equity market has been trading short since the  end of January but this negativity peaked in the third week of February.

 

In other words, while most program, quant and macro funds are no longer short, the question is whether the momentum higher will spook the last set of net shorts: those traders who remain short spec futures, and retail investors, who are more short the overall market than normal.

via Zero Hedge http://ift.tt/222hOaV Tyler Durden

Authored by Paul Craig Roberts,

Anyone who pays attention to American “news” can see how “news” is used to control our perceptions in order to ensure public acceptance of the Oligarchy’s agendas.

For example, Bernie Sanders just won six of seven primaries, in some cases by as much as 70 and 82 percent of the vote, but Sanders’ victories went largely unreported. The reason is obvious. The Oligarchy doesn’t want any sign of Sanders gaining momentum that could threaten Hillary’s lead for the Democratic nomination. Here is FAIR’s take on the media’s ignoring of Sanders’ victories:

 

We can observe the same media non-performance in the foreign affairs arena. The Syrian army aided by the Russian air force just liberated Palmyra from ISIS troops that Washington sent to overthrow the Syrian government. Although pretending to be fighting ISIS, Washington and London are silent about this victory on what is supposed to be a common front against the terror group.

It has been left to the Independent:

 

RT:

and the Mayor of London to break the silence.

What the Washington/London silence on the victory tells me is that Washington still intends to unseat Assad. The most likely reason for Secretary of State Kerry’s trips to Moscow is to try to work out a deal in which Washington accepts the defeat of ISIS in exchange for Moscow’s acceptance of Assad’s removal. The neoconservatives have not lost control of the Obama regime, and they remain committed to removing Assad for the benefit of Israel. Moscow wants to get along with Washington, and if Moscow is not careful about trusting Washington, Moscow will lose in diplomacy the war it has won.

Yesterday I was stuck in front of Fox “News” for some minutes on both sides of 1:00 PM US East Coast time. It was one of the blonds and some character presented as a terrorism or ISIS expert. It seemed to me that the purpose was to prepare Americans for the next false flag attack. ISIS, we were told, will be branching out and bringing its bombing attacks to America.

All of these bombing attacks have anomalies that the media never notices. Whatever officials say is reported as factual. How these bombings serve Washington’s agendas is never mentioned. The bombings often have the same pattern—brothers who conveniently leave their IDs on the scene. I suppose that having hit on an explanation that worked, the explanation is used repeatedly.

Liberalism has helped to make Western peoples blind by creating the belief that noble intentions are more prevalent than corrupt intentions. This false belief blinds people to the roles played by deception and coercion in governing. Consequently, the true facts are not perceived and governments can pursue hidden agendas by manipulating news.

via Zero Hedge http://ift.tt/1RY9jIe Tyler Durden

The Fed has backed itself into a corner.

For seven years now we’ve been told the US is in a recovery. However, if this were the case, the Fed would have started raising rates years ago (likely in 2012). No other recovery on record saw the Fed maintaining ZIRP for so long.

There is simply no factually credible argument for why rates should be ZIRP if the economy is expanding. You cannot have claims of a “recovery” or expansion while ZIRP is in place. ZIRP is meant to be an emergency policy meant to pull the economy out of a severe recession, NOT a long-term program.

In pictoral form, the red line in the chart below negates the blue line. There is simply NO WAY that GDP expansion is even close to accurate if rates have to be kept at zero for six years after the recession “ended.”

Indeed, even the CPI data suggest the Fed is deceptive. Core CPI is well above the Fed’s “target” rate of 2%. Even a child could look at this chart and see the breakout occurring. The Fed claims to be “data dependent” but all of the data has hit levels at which the Fed claimed it would raise rates again!

 

 

Let’s be blunt. The folks running the Fed are not idiots. They know the expansion is nowhere has nowhere near the strength that the official data claims. That’s why they’ve maintained rates at zero for so long.

However, while the expansion is weak, inflation is increasing dramatically. Which is the dreaded stagflation the US experienced in the 1970s.

Put simply, the inflation genie is out of the bottle. Core inflation is already moving higher at a time when prices of most basic goods are at 19-year lows. Any move higher in Oil and other commodities will only PUSH core inflation higher.

The Fed is cornered. Inflation is back. And Gold and Gold-related investments will be exploding higher in the coming weeks.

We just published a Special Investment Report concerning a secret back-door play on Gold that gives you access to 25 million ounces of Gold that the market is currently valuing at just $273 per ounce.

The report is titled The Gold Mountain: How to Buy Gold at $273 Per Ounce

We are giving away just 100 copies for FREE to the public.

To pick up yours, swing by:

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Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

 

 

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Submitted by Thad Beversdorf of First Rebuttal

Why FINRA’s Private Court Just Got Served

Lately I’ve had a lot people reaching out to me asking “Why do you provide all this research around the marketplace for free, what’s the catch?”, and so I’ve decided to tell my story.  I’m about to provide a very candid account of how I went from a seven figure banking career to effectively unemployable without ever having breached so much as an employee handbook rule.  But let me make it very clear this is not a victim piece.  This is a public awareness announcement.

While the story reads like a Hollywood movie, my hope is that it shines a light and ignites some much needed discussion on the oft hidden, and thus ignored, graft that permeates our most fundamental societal institutions.  In this intricate account I describe the incestuous relationship between FINRA and the Banks.  The affects of which can be seen in the cocksure culture of management across the entire sector and that is about to get far worse. However, this is but one root in a forest of consequences impacting everyday people.

FINRA chairman Richard Ketchum

The NY Times recently published an in depth exposé on the increasing use, by corporations, of private courts to handle customer and employee disputes.  The waiving of one’s right to civil litigation in lieu of these private courts is typically buried in the fine print within customer agreements and is simply a non-negotiable part of all financial services sector employee contracts.

As a prospective employee you either waive your right to civil litigation in lieu of a private court or you don’t work in finance.  It’s that simple.  The NY Times investigation highlighted the injustice of being forced into these private courts and the chill effect they create from litigating even the most egregious corporate behaviour.

Now The NY Times piece did a great job explaining the broad issues.  But the broad issue discussions never do the depth of depravity the justice it deserves.  To really expose the level of corruption one needs to expose the devil in the details. And so I’m going to invite you inside my story so that you can see it first hand.  It’s the only way to persuade you that a serious problem truly does exist.  I implore you, especially those of you in the financial sector, do yourself a favour and take the 20 minutes to read this piece in its entirety.  I can guarantee, the ending will have you questioning whether this is real or fiction.  I assure you, to my dismay, this is all too real.

And look I was a banker for 15 years, I know many of you are rolling your eyes and saying to yourself “There’s no crying in banking” and trust me, I agree.  But when I found myself in a situation where my business was being locked down, my relationships were being destroyed and I was being threatened with a lawsuit if I breached my non-compete I had to stand up to it.  I had nothing more to lose, or so I thought.  And in the only industry that is allowed to magically generate profit on 9x the capital it actually has, for a management team to risk additional public ire by underlining the injustices of its kangaroo court seems to me not only self-defeating but to be encouraging a fight.  Well, they got one.

How The Wheels Came Off:

It all started back in early 2012 when my boss, over lunch, said to me “Hey Thad what would you think about transitioning our group to a new house”?  Now at the time our desk was generating about $100M top line for a top tier investment bank.  My response was “Well what are the numbers”? “Pretty good”, he said.  And with that simple exchange I began my journey down the proverbial rabbit hole.  Where I ended up, however, was far from Wonderland.

After a series of negotiations with the new bank we transitioned a roughly 30 man desk. But on my first day in the new bank our old bank filed a suit against the new bank for poaching our group.  Now this was not totally unexpected, but what was unexpected is how the new bank’s management team decided to handle the situation.  Their strategy against the suit, which had the potential to award a significant sum of money, was to bury our desk’s profitability in an attempt to negate claims of damages, something the COO at the time let slip to a revenue analyst that worked on my desk.  And this situation quickly spiraled out of control.

Ultimately our desk was being buried in indirect costs to the tune of tens of millions of dollars; black box items like ‘regional and corporate allocations’ that were not a part of our contract cost structure.  When we disputed the charges we were told to sue if we didn’t like it.  Initially I just tried to leave the bank.  I was offered a spot back at the old bank and was ready to accept it.

However, when I informed my boss I was heading back to our old house the new bank refused to release me from my non-compete.  They were worried I would help the old bank with its poaching suit and so wanted to keep me locked in.  Feeling a bit awkward heading back as it were, I felt compelled to decline their offer when I knew there would be non-compete issues delaying my transition back.

So there I was having costs loaded up against us, middle and back office were being instructed by management to ice all our new business and they wouldn’t let me out of my non-compete.  So essentially I was dead in the water and not only that but our clients were being strung along and beginning to realize it.  At that point I set a meeting with HR to figure out just what in the hell was going on.  None of this made any sense, let me do my business or let me leave.  HR’s official response was “We cannot comment”.

And then the Vice Chairman called me on my personal phone and indicated that the bank wanted me to get a lawyer.  When I asked why in god’s name would they want me to do that, he simply said that’s how they handle these things.  As hard as that is to believe I was smart enough to record the call with an App I had on my iPhone.  So I have a wave file of that conversation, which I furnished the bank and that eventually led to the Vice Chair being fired due, in part, to him exposing some morally repugnant actions by the bank’s lawyers – at some point this call will be made public.  And so I got a lawyer.

Initially I had no intention of following through with a suit I was just taking the Vice Chairman’s instruction hoping that it would all get worked out through some civil discourse.  But that didn’t happen.  What did ultimately happen is I was told to leave the building one day and not go back to my desk.  Now they weren’t allowing me to book any trades at this point anyway.  I was also informed that I was still under a non-compete and that they would sue me if I breached it.

There were just so many standard compromises that would have prevented this situation from spiraling out of control but it seemed like this management team was hell bent on making the situation worse at every juncture.  Now, for some context, this was the same management team that paid $500M, a few years ago, for a 130 year old commodities firm (that had survived 2 world wars and the Great Depression) and within two years had run it into the ground, essentially having to write off that half billion investment not to mention all those jobs.  But I digress.

In any case, it was at this point that I had to seriously consider actually filing a suit.  Now this is not a decision to take lightly.  And so before filing a suit I had to really think about the long term impact.  Never a good thing to have a lawsuit with a former employer on your record and we are all, at least anecdotally, aware of the kangaroo court that are these private arbitrations.

All that digested, I figured I had an impressive record of rising through the ranks from an internal auditor to a global director of (arguably) the world’s premier base metals desk (running up to 17% of all LME volume through our desk on any given day) in less than 8 years.  To boot, I hold an MBA from the University of Chicago (with four concentrations) and so even if banking no longer wanted me, opportunities would surely knock, right?

Given I was being totally shut down by the bank, I felt that I had very little further downside and no other viable counter move.  This management team was starving our 30 man desk (literally guys were facing losing their homes) to protect their own bonuses.  And on top of it all, the bank’s board had just made the CEO the highest paid banker on Wall Street, with a $78M payout.  It was all becoming too much to swallow.

And look, I grew up in a small Canadian town fighting just about every Wednesday through Saturday night as a teenager.  You learn to stand up for yourself even if it means getting your teeth knocked out once in a while.  And so there I was facing the prospects of a David and Goliath type fight against an investment bank and I’d have to fight them inside FINRA, on their home turf.  In the end and perhaps against all better judgement I filed suit against the bank.  And it quickly became apparent I had miscalculated the risks.

Enter FINRA Arbitration:

So my lawyer, Neal Mcknight – an incredibly bright but also scrappy guy from a small but well respected law firm in Chicago filed my claim against the bank (my now former employer) with FINRA Dispute Resolution, Inc..  When you enter this arbitration process you actually sign a contract with FINRA’s subsidiary arbitration firm.  This becomes important to the story later on.  It’s also important to understand the bank’s strategy (and this is true for any David and Goliath type litigation), which is to draw the process out until David runs out of money or has a heart attack.

Now for anyone who has never been through litigation, the first stage after filing the claim is called ‘Discovery’.  This is where both sides exchange all relevant evidence and it is generally done on a good faith basis as the penalties to withholding relevant evidence from the Discovery process are meant to be severe, at least in public litigation.  The idea being that truth is ultimately the goal and so Discovery is the mechanism for getting all of the facts out so that both sides can make their best argument to an impartial judge or panel who then decides which side is right and which is wrong.

The enforcement of this process is extremely important because the bank owns all of your work related materials meaning you are legally prohibited from having these materials maintained outside of a work environment.  This means all of the items you know exist, exist on the bank’s servers and the only way you can prove they exist is through Discovery.  So right from the start we found ourselves beholden to a private court to enforce a fair Discovery process, without which, we could not argue our case.

Our Discovery process began in January of 2014 and as of last month, some two years later, we had yet to receive the documentation owed us by the bank.  Now if you are the bank and you know you can get away with not producing damaging evidence well that’s exactly what you’ll do.  And that’s what happened.

The bank refused to fulfill its good faith obligation on Discovery and so we were forced to motion for the arbitrators to compel the bank to provide all relevant materials.  Eventually in July of 2015 we were given a Discovery hearing, where we formally requested that the arbitration panel (a three member panel of assigned ‘judges’) demand the bank provide an exhaustive list of relevant materials.  To our surprise, the panel strongly sided with us and ruled by imposing an explicit and significant list of items that the bank would have to provide to satisfy their obligation of Discovery.

At this point I was beginning to feel like maybe I would get a fair shot.  The deadline for the bank to fulfill the panel’s ruling was September.  Well September came and went and while we received a few additional documents the bank had essentially ignored the panel’s ruling.  And so we motioned the panel to sanction (penalize) the bank for ignoring the panel’s own ruling.  However, before the panel ruled on this motion to sanction, the bank responded by indicating that they couldn’t produce some of the items because they had destroyed that evidence.  The bank disclosed this in a manner as though it was a viable defense.

Turns out the evidence they destroyed were all of the phone calls in and out of my trading desk.  Now, not only does the bank have a good faith obligation to maintain these calls for litigation as well as a regulatory requirement to maintain these calls but at the outset of this arbitration we sent a formal letter demanding the bank maintain those calls as they were such a key component of our case.  And so upon realizing the bank had destroyed these calls we motioned for further sanctions against the bank for not only refusing to fulfill the panel’s ruling on Discovery but now for destroying key evidence.

About a month later we received the panel’s response to our motions for sanctioning the bank; “Motion denied”.  That’s right, the arbitration panel of judges was refusing to hold the bank accountable for disregarding the panel’s own ruling on Discovery and additionally, for destroying key evidence.  And the panel had denied the motion without so much as a one sentence explanation.  With that, all hopes for a fair and equitable arbitration had just disappeared.

I’ll be honest, for a moment I was quite literally stunned when my lawyers told me of the panel’s decision.  But then it struck me like lightening, my fight wasn’t with the bank.  The behaviour of the bank is just a symptom of a much deeper problem.  This management team didn’t have the smarts to do anything other than paint by numbers.  That is to say, they were working within the system that actually rewards abhorrent behaviour by way of absolute impunity.  We see it so often we no longer pay it any mind.  At this point I decided my fight needed to focus on the system itself and I was going to use the system’s own foundation of corruption to bury it.   And so my lawyers pushed for a second Discovery hearing, which we got this past December.

In this hearing I wanted my lawyers to essentially force an up or down vote by the panel on allowing an outside third party to conduct independent electronic Discovery of the bank’s data and electronic communications (something FINRA itself commonly uses when it is targeting a bank for review).  Alternatively we would accept the bank certifying (essentially swearing under oath) that what they had produced in Discovery was a complete and exhaustive furnishing of materials under the panel’s ruling (a standard part of any public litigation and was also added to FINRA arbitration customer disputes in 2013 – but not employee disputes).

The idea was to force the panel to declare on record that they either could or couldn’t order the imposition of a third party for Discovery or a certification by the bank.  Without either there was absolutely no reasonable expectation that we would ever receive all of the materials owed us for Discovery.  Remember, the bank failed initially on its good faith obligation for Discovery and then on its adherence to the panel’s ruling on Discovery.  They then admitted to destroying key evidence and they did so because they knew there would be no consequence to any of it.

And so there was simply no way the arbitration panel nor I could have any reasonable confidence that the bank would ever fulfill its obligations on Discovery without receiving some assurance.  Regulators get that certainty via the imposition and use of a third party electronic discovery. In public courts and trials, certification of the completeness of Discovery is provided through a number of tools including oaths and affirmations.  We were looking for the same sense of assurance.  And this is where the arbitration moved to a new level of sit-com-esque slapstick humour.

During the December (second) Discovery hearing my lawyers pressed the panel for an up or down decision on assurances and the panel literally stopped the proceeding at that point, explaining they needed input from FINRA staff.  This is akin to a judge stopping a hearing and reaching out to legislators for clarification of the law.  Mind boggling.  But this circus was just getting started.

The FINRA staff, after some discussion, declared that what we were asking simply was not within the panel’s authority to impose.  And so we were at stalemate.  I was claiming that without one of these options of assurance the arbitration was failing in its mandated obligation to provide a fair and equitable process.  If I can’t receive a full production of Discovery I can’t argue my case.  If I can’t argue my case the matter cannot be resolved.  And this is where FINRA breaches not only its own contract with me but breaches the Illinois state constitution, which constitutes the right to resolution.

My lawyers responded to the FINRA staff that the panel doesn’t need the authority if the bank is willing to volunteer to certify that they have completed the Discovery ruling in full.  My lawyers suggested this knowing the bank was aware that we could prove they hadn’t done so and thus couldn’t provide the certification.  As we expected, the bank refused to certify that their production of Discovery was a complete production in accordance with the panel’s ruling.

Now the bank’s law firm actually sent a founding partner of their firm to represent the bank at this Discovery hearing (indicative that we were beginning to break some barriers not meant to be broken).  This was a four decade veteran of the law and a Harvard Law graduate.  And at this point, in what could only be described as a procedural debacle, this guy stands up and declares that it isn’t so much they didn’t fulfill the panel’s ruling on Discovery as much as it is they were confused by it.

That’s right, this high powered law firm that specializes in these types of disputes was claiming it was confused by the panel’s explicit ruling (a simple list of items) on what items needed to be furnished for Discovery.  Perhaps the only thing more incredulous than this Harvard Law veteran claiming confusion on something as complex as an adolescent’s weekend chore list was the panel accepting this explanation and immediately ruling that my lawyers would need to help the bank’s law firm understand the panel’s ruling.  What?! Specifically, the panel was forcing me to pay my lawyers to educate the bank’s high powered law firm on how to go about interpreting the private court’s ruling on Discovery but while still giving them the right to disagree with us.  I shit you not.

So after 2.5 years of getting absolutely nowhere except six figures deep in legal costs against a large investment bank and its high powered law firm, the FINRA panel had just ruled that the bank’s Discovery obligations were now effectively my obligation.  That’s right, it was on me to finance a process to un-confuse a high powered law firm that wasn’t actually confused in the first place.  So not only was I being run in circles I was now being forced to pay someone to run me in circles.

I was honestly waiting for Ashton Kutcher to walk out with a “You Got Punked” hat on.  When he didn’t I decided I had to file suit against FINRA Dispute Resolution, Inc., which my lawyers have now done in Illinois state court.  Again, having grown up in Canada I’d never even thought about suing anyone, it just isn’t part of the culture.  But, in for a penny in for a pound.  I felt this was all such an audacious act of injustice carried out with such undisguised arrogance I quite literally could not sleep at night if I didn’t at least try to fight back.

I don’t expect FINRA to roll over.  We fully expect that FINRA will try to claim SRO immunity (just in January they merged the private arbitration subsidiary into the actual regulatory entity I can only assume to make a case for immunity when their blatant disregard for justice becomes all too apparent).  But if truth and fundamental fairness, as mandated in its own by-laws and by the spirit of justice are the objective, then why would FINRA not own its failure in this case and look to amend their rules, as they did for customer disputes in 2013?  By doing so ensuring sufficient authority to impose the same procedural assurances as the public courts.

There is only one answer to that question.  They won’t because fundamental fairness is the last thing the banks, and thus FINRA, is looking to achieve.  As long as the banks can maintain an advantage within the system, they will.  Without assurance on Discovery, no claimant can ever get a fair and equitable process to argue its case against an employer inside a FINRA arbitration, a fact supported by statistics presented in the NY Times investigation.  It means the result of my case could have far reaching implications.  In effect, my case calls into question the validity of all FINRA arbitrated employee disputes.  And that is a discussion that needs to happen.

These systematic advantages to corporations and other members of the power class are the antithesis of capitalism and democracy.  Using fraudulent private courts to curate such systematic advantages is grossly unethical and encroaching on criminal, but brilliant; so pervasive and yet unnoticeable to the masses.  It is imperative, however, not to allow such corruption to go unchallenged.

Look, I’m but one small dagger in their side, I get that.  But death can come by a thousand small cuts.  And well I’ve made a small cut.  Yet it hasn’t come without a price and I don’t mean the legal costs.  While I did very well in banking, I’m far too young and intense a personality to retire.  But 2.5 years on and I can’t get beyond an HR departments initial screening process, in any industry (thank you Google).

The real cost of standing up to a system not meant to be stood against is perhaps giving up one’s natural path.  It is a loss far greater than money.  An opportunity for the camaraderie and wit of being part of a smart and highly competitive group of my peers and in an environment that shares my obsession for being brighter and righter, seems to be slipping away.

And so despite having a highly successful professional track record, a top 5 Business School MBA and choosing to continue providing value to the sector – without compensation – (having publicly predicted the August crash on Aug 2, the January crash on Jan 4 and on Feb 26 calling for a major decline in VIX accompanied by a higher S&P price level ranging between 2000 – 2030 until May, give or take – not to mention an average Zero Hedge contributor rating of 4.8/5, being a member of David Stockman’s Contra Club and being regularly published on a slew of financial and public policy publications) – I will in all likelihood end up being the world’s most financially sagacious, barista.  And maybe, just maybe, that ain’t such a bad life if I can sleep at night knowing I fought the good fight.

But all of this is what it is for me, I’ll be fine.  My point is really much bigger than any one individual story and reaches far beyond the financial sector.  A society in which impunity is assumed and realized by the banks and other members of the power class absolutely guarantees  bad behaviour by those segments of society.  And bad behaviour guarantees bad results (refer to Iraq war and credit crisis and their respective festering wounds, etc.) but not for the actor, just for everyone else.  And so lessons aren’t learnt and corrective actions aren’t implemented.  The fraudulent arbitration process discussed is no different than the bailouts, which are no different than any of the systematic advantages designed for the power class.  You incentivize bad behaviour by shifting the financial and legal risks of bad behaviour and so you get bad behaviour.

And in the end, despite rarely if ever being discussed in mainstream media, there are millions of untold stories of everyday citizens who get stuck with the tab in some form.  Until we stop focusing and really even giving a shit about the problems surrounding the Ackmans of the world (which have zero relevance to 99.9% of us) and begin focusing on the real people problems, society will continue to implode.  Step back and look at the world today.  Do you like what you see?  Then give yourself a pinch, it’s time to wake up.

Anyone interested in discussing any parts of my story further can reach out to me via email: TB@thechicagoeconomist.com

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From Morgan Stanley’s Matthew Hornbach

Unbeknownst to me at the time, I learned a valuable lesson at the start of my career that would resurface years later. Nearly 16 years ago, I began working in Tokyo as an analyst on the Japanese government bond trading desk at Morgan Stanley. It was August 2000 and the Bank of Japan raised its overnight policy rate by 25bp for the first time since initiating its zero interest rate policy, in February 1999.

The BoJ raised its policy rate by 25bp and 10-year JGB yields rose by a similar amount in the same month. But in the seven months that followed, I learned that what happens overseas sometimes matters more to the bond market and to the central bank than what happens at home. In those seven months, 10-year JGB yields proceeded to decline rather precipitously, by 100bp. The move to lower yields ended, temporarily, with the BoJ reversing course on its policy rate. The dot-com bubble had popped and equity markets began a multi-year decline.

 

Similar to the BoJ back then, the Fed is now finding itself subject to what is happening overseas. The outcome of the March FOMC meeting, with the median participant removing two rate hikes in 2016, and Fed Chair Yellen’s subsequent speech were much more dovish than expected by the market. Both referenced risks posed by global economic and financial developments. Presciently, our US economists had also removed two rate hikes from their 2016 outlook earlier that month. Their views on US growth and inflation are well below consensus – prompting us to deliver well below consensus Treasury yield forecasts.

We see 10-year Treasury yields ending 2016 at 1.75%, near current levels. But we see even lower yields catching investors off guard in the middle quarters of the year.

The lessons I learned in Japan leave me comfortable with this outlook. Years of staring at low JGB yields certainly immunized me from the sticker shock associated with low Treasury yields. And I know that investors tried to short JGBs mostly without success for years. But it wasn’t until I read Richard Koo’s tome, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession, that I began to understand why yields got and remained so low.

Koo’s book changed the way I viewed the world and the way I interpret the message from government bond markets. Koo laid out the concept of a balance sheet recession so clearly that anyone with such an understanding ex ante would have never dared short the JGB market. The idea that credit demand could become inelastic with respect to price struck me as novel. That the price of credit, even government credit, could fall without a commensurate increase in demand perfectly explained the way the JGB market evolved during Japan’s lost decades.

The idea also explains the way global sovereign bond markets have evolved since the world emerged from the Great Financial Crisis. As our economists have suggested before, the world is dealing with demand deficiency. The decline in government bond yields globally suggests simply that the deficiency is growing. If the private sector is not willing or able to borrow and spend enough to generate a sustainable inflation impulse, despite the increasingly lower costs to do so, then the public sector should step in to prevent deflation.

Ultimately, that is the message from government bond markets today. The public sector, to the extent it can control its own money supply, needs to borrow and spend because the private sector is not spending enough. The situation has gotten so extreme that investors are willing to pay certain governments to do just that. In Japan, with a negative yield on 10-year JGBs, investors are paying the government to borrow out to a 10-year term and spend. If the public sector ignores these types of messages on a global scale and private demand globally remains deficient, those same investors will accept still lower yields on government bonds outside of Japan – our base case for the rest of 2016.

* * *

For more, read our August 2015 post: “Japan’s Dire Message To Yellen: “Don’t Raise Rates Soon”

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via Zero Hedge http://ift.tt/1X94DDX williambanzai7