Tonight on The Independents: Goodbye, USA Freedom and Keystone Pipeline! Hello, Executive Action, Weird Chinese Censorship, and Ferguson Build-up! Also, Anthony Fisher on Jerusalem Terror, and After-show

Tonight’s live episode of The
Independents
(Fox Business Network, 9 p.m. ET, 6 p.m. PT,
repeats three hours later) begins with a couple of nail-biting
Senate votes from this evening: The
narrow defeat
of an act legalizing the Keystone Pipeline, and
of the National Security Agency-reforming
USA Freedom Act
. Joining to discuss are Party Panelists
Charles W. Cooke
(National Review) and Joe DeVito (comedian).
The duo will also chew on the latest in
Grubergate
.

President Barack Obama is roiling the political waters by
threatening massive executive action on immigration; on to chew
over the wisdom and legality of that are Tamar Jacoby, president of
ImmigrationWorks USA, and Timothy Sandefur,
principal attorney of the Pacific Legal Foundation. Beloved Reason
TV writer/producer Anthony L.
Fisher
will talk about the terrorist attacks in Jerusalem, the
co-hosts will cogitate on
Radley Balko’s writing
about how cops should prepare for
potential riots. And we’ll talk about China’s weird hangups with

The Hunger Games
.

Online-only aftershow begins at http://ift.tt/QYHXdy
just after 10. Follow The Independents on Facebook at
http://ift.tt/QYHXdB,
follow on Twitter @ independentsFBN, hashtag
us at #TheIndependents, and click on this page
for more video of past segments.

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BTFTriple-Dip-Recession – Japanese Stocks Recover GDP Losses

3 days and 1400 NKY points roundtrip and all is once again well in the world according to Abe. The Nikkei 225 has just recovered all its losses from the dismal GDP downside ‘surprise’ thanks to a never-ending levitation in USDJPY back over 117.00. For now, the momentumn has stalled for stocks… but we are sure another regurgitated headline-full of Japanese policy-maker bullshit will send USDJPY to 120 and NKY back to 40,000 any day now – thus proving to all that Japan is indeed ‘recovered’.

USDJPY surges… NKY catches up somewhat… but has stalled for now…

 

JGBs remain lower in yield but yesterday’s ugly auction did not help confidence that the BoJ can keep a lid on this monkey-business…

 

Charts: Bloomberg




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Are “We The People” Useful Idiots In The Digital Age?

Submitted by John Whitehead via The Rutherford Institute,

Back in the heyday of the old Soviet Union, a phrase evolved to describe gullible western intellectuals who came to visit Russia and failed to notice the human and other costs of building a communist utopia. The phrase was “useful idiots” and it applied to a good many people who should have known better. I now propose a new, analogous term more appropriate for the age in which we live: useful hypocrites. That’s you and me, folks, and it’s how the masters of the digital universe see us. And they have pretty good reasons for seeing us that way. They hear us whingeing about privacy, security, surveillance, etc., but notice that despite our complaints and suspicions, we appear to do nothing about it. In other words, we say one thing and do another, which is as good a working definition of hypocrisy as one could hope for.

 

—John Naughton, The Guardian

“Who needs direct repression,” asked philosopher Slavoj Zizek, “when one can convince the chicken to walk freely into the slaughterhouse?”

In an Orwellian age where war equals peace, surveillance equals safety, and tolerance equals intolerance of uncomfortable truths and politically incorrect ideas, “we the people” have gotten very good at walking freely into the slaughterhouse, all the while convincing ourselves that the prison walls enclosing us within the American police state are there for our protection.

Call it doublespeak, call it hypocrisy, call it delusion, call it whatever you like, but the fact remains that while we claim to value freedom, privacy, individuality, equality, diversity, accountability, and government transparency, our actions and those of our government overseers contradict these much-vaunted principles at every turn.

For instance, we disdain the jaded mindset of the Washington elite, and yet we continue to re-elect politicians who lie, cheat and steal. We disapprove of the endless wars that drain our resources and spread thin our military, and yet we repeatedly buy into the idea that patriotism equals supporting the military. We chafe at taxpayer-funded pork barrel legislation for roads to nowhere, documentaries on food fights, and studies of mountain lions running on treadmills, and yet we pay our taxes meekly and without raising a fuss of any kind. We object to the militarization of our local police forces and their increasingly battlefield mindset, and yet we do little more than shrug our shoulders over SWAT team raids and police shootings of unarmed citizens.

And then there’s our love-hate affair with technology, which sees us bristling at the government’s efforts to monitor our internet activities, listen in on our phone calls, read our emails, track our every movement, and punish us for what we say on social media, and yet we keep using these very same technologies all the while doing nothing about the government’s encroachments on our rights. This contradiction is backed up by a recent Pew Research Center study, which finds that “Americans say they are deeply concerned about privacy on the web and their cellphones. They say they do not trust Internet companies or the government to protect it. Yet they keep using the services and handing over their personal information.”

Let me get this straight: the government continues to betray our trust, invade our privacy, and abuse our rights, and we keep going back for more?

Sure we do. After all, the alternative—taking a stand, raising a ruckus, demanding change, refusing to cooperate, engaging in civil disobedience—is a lot of work. What we fail to realize, however, is that by tacitly allowing these violations to continue, we not only empower the tyrant but we feed the monster. In this way, as I point out in my book A Government of Wolves: The Emerging American Police State, what starts off as small, occasional encroachments on our rights, justified in the name of greater safety, becomes routine, wide-ranging abuses so entrenched as to make reform all but impossible.

We saw this happen with the police and their build-up of military arsenal, ostensibly to fight the war on drugs. The result: a transformation of America’s law enforcement agencies into extensions of the military, populated with battle-hardened soldiers who view “we the people” as enemy combatants.

The same thing happened with the government’s so-called efforts to get tough on crime by passing endless laws outlawing all manner of activities. The result: an explosion of laws criminalizing everything from parenting decisions and fishing to gardening and living off the grid.

And then there were the private prisons, marketed as a way to lower the government’s cost of locking up criminals. Only it turns out that private prisons actually cost the taxpayer more money and place profit incentives on jailing more Americans.

Are you starting to notice a pattern yet? The government lures us in with a scheme to make our lives better, our families safer, and our communities more secure, and then once we buy into it, they slam the trap closed. Doesn’t matter whether you’re talking about red light cameras, DNA databases, surveillance cameras, or zero tolerance policies—they all result in “we the people” being turned into enemy #1.

In this way, the government campaign to spy on our phone calls, letters and emails was sold to the American people as a necessary tool in the war on terror. Instead of targeting terrorists, however, the government has turned us into potential terrorists, so that if we dare say the wrong thing in a phone call, letter, email or on the internet, especially social media, we end up investigated, charged and possibly jailed.

This criminalization of free speech, which is exactly what the government’s prosecution of those who say the “wrong” thing using an electronic medium amounts to, is at the heart of Elonis v. The United States, a case before the U.S. Supreme Court this term.

If you happen to be one of the 1.31 billion individuals who use Facebook or one of the 255 million who tweet their personal and political views on Twitter, you might want to pay close attention, because the case has broad First Amendment implications for where the government can draw the line when it comes to expressive speech that is protected and permissible versus speech that could be interpreted as connoting a criminal intent.

The case arose after Anthony Elonis, an aspiring rap artist, used personal material from his life as source material and inspiration for rap lyrics which he then shared on Facebook. For instance, shortly after Elonis’ wife left him and he was fired from his job, his lyrics included references to killing his ex-wife, shooting a classroom of kindergarten children, and blowing up an FBI agent who had opened an investigation into his postings.

Despite the fact that Elonis routinely accompanied his Facebook posts with disclaimers that his lyrics were fictitious, and that he was using such writings as an outlet for his frustrations, he was charged with making unlawful threats (although it was never proven that he intended to threaten anyone) and sentenced to 44 months in jail.

Elonis is not the only Facebook user to be targeted for the content of his posts. In a similar case making its way through the courts, Marine veteran Brandon Raub was arrested by a swarm of FBI, Secret Service agents and local police and forcibly detained in a psychiatric ward because of controversial song lyrics and political views posted on his Facebook page. He was eventually released after a circuit court judge dismissed the charges against him as unfounded.

Earlier this year, rapper Jamal Knox and Rashee Beasley were sentenced to jail terms of up to six years for a YouTube video calling on listeners to “kill these cops ‘cause they don’t do us no good.” Although the rapper contended that he had no intention of bringing harm to the police, he was convicted of making terroristic threats and intimidation of witnesses.

And then there was Franklin Delano Jeffries II, an Iraq war veteran, who, in the midst of a contentious custody battle for his daughter, shared a music video on YouTube and Facebook in which he sings about the judge in his case, “Take my child and I’ll take your life.” Despite his insistence that the lyrics were just a way for him to vent his frustrations with the legal battle, Jeffries was convicted of communicating threats and sentenced to 18 months in jail.

The common thread running through all of these cases is the use of social media to voice frustration, grievances, and anger, sometimes using language that is overtly violent. The question the U.S. Supreme Court must now decide in Elonis is whether this activity, in the absence of any overt intention of committing a crime, rises to the level of a “true threat” or whether it is, as I would contend, protected First Amendment activity. (The Supreme Court has defined a “true threat” as “statements where the speaker means to communicate a serious expression of an intent to commit an act of unlawful violence to a particular individual or group of individuals.”)

The internet and social media have taken the place of the historic public square, which has slowly been crowded out by shopping malls and parking lots. As such, these cyber “public squares” may be the only forum left for citizens to freely speak their minds and exercise their First Amendment rights, especially in the wake of legislation that limits access to our elected representatives. Unfortunately, the internet has become a tool for the government to monitor, control and punish the populace for behavior and speech that may be controversial but are far from criminal.

Indeed, the government, a master in the art of violence, intrusion, surveillance and criminalizing harmless activities, has repeatedly attempted to clamp down on First Amendment activity on the web and in social media under the various guises of fighting terrorism, discouraging cyberbullying, and combatting violence. Police and prosecutors have also targeted “anonymous” postings and messages on forums and websites, arguing that such anonymity encourages everything from cyber-bullying to terrorism, and have attempted to prosecute those who use anonymity for commercial or personal purposes.

We would do well to tread cautiously in how much authority we give the government to criminalize free speech activities and chill what has become a vital free speech forum. Not only are social media and the Internet critical forums for individuals to freely share information and express their ideas, but they also serve as release valves to those who may be angry, seething, alienated or otherwise discontented. Without an outlet for their pent-up anger and frustration, these thoughts and emotions fester in secret, which is where most violent acts are born.

In the same way, free speech in the public square—whether it’s the internet, the plaza in front of the U.S. Supreme Court or a college campus—brings people together to express their grievances and challenge oppressive government regimes. Without it, democracy becomes stagnant and atrophied. Likewise, if free speech is not vigilantly protected, democracy is more likely to drift toward fear, repression, and violence. In such a scenario, we will find ourselves threatened with an even more pernicious injury than violence itself: the loss of liberty. In confronting these evils, more speech, not less, is the remedy.




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Uber Executive Suggested Company Hire Team to Dig up Dirt on Journalists

Screen Shot 2014-11-18 at 5.07.16 PMFirst there was Grubergate. Now we have Ubergate.

Reports of questionable behavior emanating from the executive suite at ridesharing company Uber are nothing new. My antennae first shot straight upward when I read that the company had hired one of Barack Obama’s chief political strategists, David Plouffe, as a senior vice president of policy and strategy. The Washington Post covered this in the articleUber hired David Plouffe when it realized ‘techies’ can’t do politics.

Around the exact same time, The Verge reported on the company’s playbook for sabotaging its competitor, Lyft. You can read that article here. Something seemed a little fishy, but I pretty much forgot all about it.

Well the latest revelation is simply something I can’t ignore. Thanks to a piece published yesterday at Buzzfeed, we now have an idea of the sick mindset of one of the company’s senior executives. Even worse, this guy sits on a board that advises the Department of Defense.

continue reading

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Keystone Pipeline Fails to Build Enough Senate Support

This circus is far from over.As predicted
earlier in the day
, embattled Democratic Sen. Mary Landrieu of
Louisiana was unable to get enough votes to push Keystone XL
pipeline construction support through the Senate. It came up one
vote short. From
USA Today
:

Landrieu, the lead Democratic sponsor of the bill, is locked in
a Dec. 6 runoff against GOP Rep. Bill Cassidy. The pipeline vote
has become a political issue in the race, where the state’s oil and
gas industry is supportive of the pipeline’s construction. The
proposed crude-oil pipeline would run nearly 1,200 miles from
Canada to the Gulf Coast.

Both lawmakers are using the pipeline vote to flex their
legislative muscle and clout on Capitol Hill ahead of the
runoff. “The race is not over in Louisiana. She has not given
up, we have not given up on her behalf,” said Senate Majority
Leader Harry Reid, D-Nev.

Landrieu was confident she could secure the 60 votes necessary
to pass the bill, but public vote counts had the bill stalled at 59
votes Tuesday afternoon. “I don’t expect it to fail,” Reid said,
cautioning: “I don’t know what’s going to happen.”

The House passed mirror legislation last week, sponsored by
Cassidy, who is favored to win the Senate race because of the
conservative lean of the state.

It will, of course, come up again in the next Senate next term
and will almost certainly pass. Whether Landrieu will be there to
try to push it through again is another question.

A reminder: A majority of Americans
support building the pipeline
.

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Despite Record Highs, These 5 ‘People’ Are Still Flipping Out

Despite the apparent economic and profit news improvements recently, JPMorgan CIO Michael Cembalest notes there are a few instances where people are still flipping out. It’s worth reviewing them, he suggests, as they're indicative of risks and opportunities in financial markets heading into 2015, and of the continued presence of central banks affecting asset prices.

 

Flipping out: Oil company investors. Oil prices have fallen by 30% since June 2014. What’s not to like about an effective tax cut for consumers? Well, there’s the issue of the world’s largest oil companies which took on a trillion dollars of debt in recent years to find and develop new fields, usually with the expectation that oil prices would be higher than they are now. Biggest borrowers: Petrobras (by far), PetroChina, Total, Shell and BP. Even before this year’s oil price decline, only a little more than half of the top 100 had positive free cash flow (see 1st chart below). If WTI prices remain at ~$80, which oil futures markets are pricing in until 2018, the positive free cash flow universe will probably fall further.

 

 

Investors have flipped out about this turn of events, driving valuations of energy and oil service stocks lower (see above), and driving credit spreads wider on HY energy issues, 50% of which are rated B or CCC. Lower oil prices reflect weaker global GDP growth, a supply shock from the US shale boom and decreased energy intensity in places like China, whose oil demand per unit of GDP has fallen by 35% since 2005. Given this backdrop, S&P 500 profit forecasts for 2015 have come down ~3%, with energy-related reductions outweighing increases in consumer discretionary forecasts so far.

The bottom line: lower oil prices help consumers (see below), but cut into US energy-related investment and production, and may also result in disruptions and distressed stock/bond opportunities in a highly leveraged global energy sector.

*  *  *

Oil price declines and GDP growth

 

Benefits from lower oil prices are greatest in countries whose energy spending as a % of consumption is high; where energy taxes are lower, passing on more of the oil price decline to consumers; where savings rates are lower, so more of the increase in disposable income gets spent; and where energy intensity (barrels of energy equivalent per unit of GDP) is high. Many of these conditions are true for the US, at least relative to other countries. However, these growth benefits are partially offset when the dollar is rising, which encourages more imports and less exports. As per a recent note from Goldman Sachs, a 10%-15% decline in oil prices when combined with a stronger dollar would boost US GDP growth by just 0.10%-0.15%.

*  *  *

 

Flipping out: the Bundesbank. While the Eurozone is not falling back into recession, growth and inflation are stuck at ~1% and unemployment is still high outside Germany. There are signs of rising voter discontent, particularly given better outcomes in European countries not using the Euro. There’s pressure on the ECB to purchase government bonds, since its loans and purchases of private sector securities may only result in 1/3 of its EUR 1 trillion balance sheet expansion target. The prospect of ECB  government bond purchases is reportedly causing current and former Bundesbank leaders to flip out; the Bundesbank prefers productivity-enhancing measures by member states instead. However, my sense is that Draghi and his allies will continue to squelch Bundesbank opposition, and that we will see ECB purchases of Eurozone government bonds next year.

The bottom line: if the ECB buys gov’t bonds, markets will probably take it positively, but ECB balance sheet expansion is not having nearly the same multiplier effect on growth or profits that it had in the US/UK.

*  *  *

Draghi: Hast Du nicht mehr alle Tassen im Schrank?

 

Former ECB chief economist Jurgen Stark called existing ECB unconventional policy measures “an act of desperation” and described its purchases of asset-backed securities as adding “incalculable risks”. Current Bundesbank President Weidmann cautions that ECB government bond purchases “would raise legal questions, set wrong incentives and may not produce desired results.”

*  *  *

 

Flipping out: Brazilian manufacturers. The combination of rising interest rates, rising inflation and falling demand/prices for Brazilian commodity exports has caused Brazilian manufacturers to flip out: their confidence levels are close to the lows of the global recession. Even with all the bad news, the Bovespa was up 20% for the year in September since markets were pricing in the possibility of a new government. After the recent election, however, the Bovespa is down for the year as markets price in a continuation of the status quo. Too much optimism was probably priced in even if there were a change in governance, since the choices are all difficult at this point.

 

The bottom line: Brazil (and Turkey) remain EM question marks given rising inflation, weak growth and large reliance on foreign capital. We prefer EM manufacturers like Mexico, Poland and South East Asia instead.

*  *  *

 

Flipping out: Some Japanese economists. In Japan, inflation and inflation expectations are now above zero, and employee compensation and full-time employment are growing at +2%, their highest levels in years. So despite the bad Q3 GDP result, there are some signs that “Abenomics” is having its desired impact, although it has taken a 30% Yen decline vs the US$ since mid-2012 to get here.

However, not everyone is a fan of the Bank of Japan’s almost total monetization of government debt issuance and its purchases of Japanese equities and real estate investment trusts. In fact, some Japanese economists are flipping out:

In the Nikkei Asian Review, Izuru Kato from Totan Research highlights that little is being done to address Japan’s structural problems (i.e., Japan used to rank in the top ten in the World Bank’s Ease of Doing Business Index; Japan is now 27th, and 120th in “starting a business”). Negotiations have stalled on the Trans-Pacific Partnership4, a centerpiece of government plans to increase productivity and GDP growth. Kato is nervous about the BoJ’s massive balance sheet growth (2nd chart above) and criticizes the BoJ’s “monetary shamanism” resulting from its private sector asset purchases.

 

Former BoJ chief economist Hayakawa believes the government should “quit while it’s ahead”, and start shrinking the balance sheet. The risk of current policies: cost-push inflation in which prices go up mostly due to a weak Yen, but without boosting growth, exports or employment enough.

 

As per economist Richard Koo at Nomura, that’s exactly what’s happening: “Most of the price increases reported in Japan recently have been imported inflation fueled by the weak Yen. The resulting decline in the nation’s terms of trade implies an outflow of income, which naturally depresses domestic final demand.” Koo’s latest report shows almost no growth (yet) in bank lending or in the money supply despite growth in base money. Furthermore, the rise in corporate profits in Japan is almost entirely a result of translation effects of a weaker Yen on foreign sourced revenues.

On Halloween, the Bank of Japan announced even more purchases of Japanese government bonds, and a tripling of its purchases of Japanese stocks. To augment the forced march to higher asset prices, government-controlled Japanese pension funds are being brought along for the ride: mandated equity allocations have been doubled. The Bank of Japan vote was 5-4, with 5 bureaucrats and academics voting in favor, and 4 board members with private sector experience voting against. I imagine that at some point soon, holding cash in Japan without the intention of investing it will qualify as some kind of misdemeanor.

The bottom line: there are some signs that Japan is reflating and BoJ purchases are good news for investors in Japanese equities (if you hedge the Yen exposure), but what if a perpetually weakening Yen is needed to keep Abenomics moving? This is without question the world’s greatest Central Bank High Wire Act.

*  *  *

 

Flipping out: Voters in highly indebted US states. A surprise from the mid-term elections: the blue states of Massachusetts, Maryland and Illinois flipped governors from blue to red (how blue are they? See table below). There are a lot of factors involved in elections, and it’s difficult to pinpoint why things turned out the way they did. But in looking at the shift in these states, it brings to mind an analysis we did earlier this year on the fully loaded funded and unfunded debt of US states:

What percentage of state tax collections is needed to pay interest on funded debt and amortize the state’s unfunded pension and retiree health care obligations, assuming a 30 year amortization period and a 6% return in the pension plan?

Our estimates are shown in the chart. The higher the percentage, the greater the pressure on the governor and the state legislature to increase state tax collections and/or reduce discretionary spending. There’s a big difference between the states, making national generalizations misleading.

What’s notable is that three states that flipped from blue to red this year (Massachusetts, Maryland and Illinois) ranked in the top ten according to our computations.

 

It’s hard to say for sure, but it is possible that the difficult choices on mandatory spending, discretionary spending and state taxes are starting to play a role in US gubernatorial elections.

*  *  *

Source: JPMorgan Eye On The Market




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Treasury Market Liquidity From Lehman To The October 15 Crash In A 1 Minute Video

It is now just over a month since the infamous Treasury flash crash of October 15, which has by now surpassed the May 2010 stock market crash in terms of causative mystery as well as again exposing the SEC’s inability do its job and police such future market calamities simply because the culprit – the SEC’s most lucrative lobby comprised of high frequency and other algorithmic traders – is by now far too embedded in the market structure that its withdrawal would cause a crash as pervasive as a halt of liquidity injection by the central banks. Which is why as Michael Lorizio, senior trader at Boston-based Manulife told Bloomberg, “The way the market is set up right now, we’ll see instances like we did on that day. There’s going to be a learning curve as to how to handle that.” Also, a whole lot of praying.

We covered the epic October 15 collapse in rates in the past but for those who missed it, here it is again:

What began on Oct. 15 as another day in the U.S. Treasury market suddenly turned into the biggest yield fluctuations in a quarter century, leaving investors worrying there will be turbulence ahead.

 

The episode exposed a collision of forces — the rise of high-frequency trading and the decline of Wall Street dealers — that are reshaping the world’s biggest and most important bond market. Money managers say the $12.4 trillion Treasury market is becoming less liquid, meaning securities can no longer be traded as quickly and easily as they used to be, thanks in part to the Federal Reserve’s bond-buying program.

 

The shift came all at once. The sentiment that the Fed would raise rates reversed. Traders who’d bet against, or shorted, Treasury bonds had to buy as many as they could as quickly as they could to limit their losses. By 9:38 a.m., 10-year Treasury yields plunged 0.34 percentage point, the most in five years

We warned about precisely this over a year ago. What happens next will be even worse, but here is Bloomberg with the more politically correct, PG-17 version:

The influence of high-frequency traders in the Treasury market is growing. About 60 percent of Treasury securities trades are expected to be transacted on electronic platforms by the end of next year, an increase from 40 percent in 2013, according to Tabb Group LLC, a New York-based research firm. Of those trades, 10 percent were executed by robots in 2010, a share that will probably grow to 20 percent next year, according to Tabb.

 

At least one electronic trader, Charles Comiskey, the head Treasury dealer at Bank of Nova Scotia, said he unplugged his computer for half an hour during the height of the frenzy. That may help explain why yields plummeted so fast without sellers to stem the fall.

 

It may also explain why an unprecedented $946 billion of U.S. government debt ended up changing hands on ICAP’s BrokerTec trading platform on Oct. 15, breaking the record by 43 percent. Once sellers stepped in and the plunge was arrested, there was plenty of liquidity.

Of course, when it comes to stocks, it’s the other way round: every flash crash needs buyers, which is where the Citadel-NY Fed Joint Venture “memontum reversion and ignition” team comes into play.

As for the reasons why the 10Y will increasingly pennystock, there are two culprits. First and foremost, the Fed:

“In the old days, the dealers could carry inventory and it acted like a shock absorber,” said David Breazzano, who manages $8.2 billion in high-yield bonds and loans as Waltham, Massachusetts-based DDJ Capital Management LLC’s chief investment officer. New regulations create “opportunities for other institutions to fill the gap,” he said. One result is a narrowing of the market. Average daily turnover in the U.S. bond market shrank to $809 billion last year from $1.04 trillion in 2008, according to Securities Industry & Financial Markets Association data.

 

The Fed has bought so many bonds — $3.5 trillion worth since 2008, including $1.86 trillion of Treasuries — that big individual trades matter more now. The amount of U.S. debt available to trade at one time without moving prices as of October has plunged 48 percent to $150 million since April, according to JPMorgan Chase & Co.

And then old faithful: algos, or rather their idiot programmers. Jim Bianco said it best when describing the herd mentality of electronic traders. “A lot of these guys are focused on speed,” Bianco said. “They’re all uncreative and write the same program. When the stimulus comes in a certain way, every one of them comes to the same conclusion at exactly the same moment.

Who’d a thunk it that a math Ph.D. would be insufficient to analyze and trade the largest market in the world?

Naturally, the CFTC – the same CFTC that found no sign of precious metals rigging until first Barclays and then UBS were charged for precisely that – has found nothing wrong.

Timothy Massad, chairman of the Commodity Futures Trading Commission, which oversees the Treasury futures market, told reporters in Chicago Nov. 5 that his agency “took a look at” the price fluctuations of Oct. 15. “Basically we didn’t see any break in liquidity,” Massad said. “I think it was just a high volume day. But let me just add that’s based on our preliminary look. New evidence might come to our attention that suggests otherwise.”

And they will keep repeating until the next crash, when as Icahn warned, there may be no rebound to “normal” levels:

In certain markets, “there’s a facade of liquidity,” said Jon Duensing, a money manager at Amundi Smith Breeden, the U.S. unit of the French asset-manager Amundi that oversees about $1 trillion. “It’s possible that the mechanisms that investors thought were in place to facilitate capital flow may break down.”

Not possible. Certain.

And just to put the events of October 15 in context, here is a 1-minute clip courtesy of Nanex showing the daily history of bond market liquidity starting just before Lehman and going through November 2014, with an emphasis of what happened during both the stock flash crash in May 2010 and the bond crash in October 2014.

As Nanex explains, each line represents the sum of top 3 depth levels in the active 10 Year CME T-Note futures contract (ZN) for each second between 3:00 and 16:00 Eastern time. Each frame is one trading day. The level of the line indicates approximately how many contracts could be immediately bought or sold without moving the price more than 3 ticks or price levels. Basically, the higher the line, the more liquidity in the market at that time.

The downward spikes occurring at regular times are from scheduled news releases, the most common being at 8:30 and 10:00 AM. Some 3.3 billion records from 1,708 trading days covering January 3, 2008 through November 5, 2014 were processed in creating this animation. The final frame is composed from about 1.3 million individual line segments.

The animation pauses on two dates, May 6, 2010 (the flash crash) and October 15, 2014 (the Treasury flash crash).




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Senate Now Voting On Keystone Pipeline: Live Feed

Today’s primetime Congressional spectacle has begun, with the Senate now voting to pass a bill to approve the Keystone Pipeline. In largely a moot vote, in which 60 Ayes are needed to pass the bill, there will certainly not be enough support for the bill to prevent an Obama veto, which he is certain to impose and reignite the animosity between the GOP and Democrats once again. Ultimately, the only outcome will be whether Mary Landrieu’s political career will be terminated as a result of a failure to pass the legislation: with one vote said to make all the difference, it will be a nailbiter, if for nobody else, then for the Louisiana senator.

As Reuters says, with the 100-member chamber one vote short of the needed 60 to pass a version of a bill that sailed through the House of Representatives last week, Senator Mary Landrieu of Louisiana, who co-sponsored the bill, urged fellow Democrats to support it during a long luncheon in the Capitol.

“It was painful. Landrieu was kind of begging for votes, and some Democrats would say ‘no’ and then argue with her and with each other,” said a Senate Democratic aide who did not want to be identified.

 

The aide said that Landrieu had been “calling senators all week, texting them every other hour” to try to get votes.

 

 

If Keystone does not pass, Hoeven plans to reintroduce the bill in January or February, when it has a better chance of obtaining 60 votes after Republicans picked up seats in the midterm elections. Next year Hoeven could also attach a Keystone measure to a wider bill that Obama would find hard to veto.

 

Obama has not indicated whether he would veto. But he raised new questions about the project during a trip to Asia late last week, saying Keystone would not lower gas prices for U.S. drivers but would allow Canada to “pump their oil, send it through our land, down to the Gulf, where it will be sold everywhere else.”

Don’t worry: he will veto it.

Watch the vote live after the jump.




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Investors’ Demand For ‘Sane-Subprime’ Debt Is “Out Of Control”

As Kyle Bass once eloquently noted, the brevity of financial memory is about two years; and nowhere is that more clear than in the explosive resurgence of demand for new subprime-mortgage-backed products. As Scotsman Guide reports, some subprime lenders are reporting strong investor appetite for the once-reviled mortgage products (for borrowers with credit scores as low as 500 and with debt-to-income (DTI) ratios as high as 50 percent). "It's out of control; it seems like there’s 10 times the amount of demand to buy this paper as there are borrowers that want the loans," said one lender. As Bass may have also said "proceed with caution."

 

As Scotsman Guide reports,

Although a number of people still cringe at the term subprime, some subprime lenders are reporting strong investor appetite for the once-reviled mortgage products.

 

 

Investors are interested in recent subprime loans for their better returns than traditional mortgages.

 

Depending on the risk of the borrower, these mortgages carry interest rates between 5 percent and 9 percent. Hutchens said that all types of investors are after the Angel Oak subprime products, from hedge funds to large mortgage lenders — “anyone who’s looking to participate in the mortgage business at higher coupons besides agency modes.”

The reach for yield – and ignorance of risk – but this time it's different…

Angel Oak Mortgage Solutions offers a “non-prime" product on a wholesale basis for borrowers with credit scores as low as 500 and with debt-to-income (DTI) ratios as high as 50 percent, while the company's “recent housing event” product offers similar terms for borrowers one day out from a short sale or foreclosure. Borrowers, however, are required to put down at least 20 percent.

 

“This is the new subprime,” Angel Oak Senior Vice President of Sales and Marketing Tom Hutchens told Scotsman Guide News. “Everyone has preconceived notions about what subprime means. This really resembles how subprime first began — [the borrowers] have equity in the transactions, and fully documented incomes.”

 

 

Athas Capital Group Inc., one of the first companies to reenter the subprime space several years ago, is keeping almost all its mortgages on the books, stopping to sell about 10 percent to 20 percent of production to investors per year. Athas CEO Brian O’Shaughnessy calls the products “sane subprime.”

 

There were investors asking about Athas subprime products from the beginning, O’Shaughnessy said, but lately investors have been seeking subprime with fervor.

 

“It’s out of control; it seems like there’s 10 times the amount of demand to buy this paper as there are borrowers that want the loans,” O’Shaughnessy told Scotsman Guide News. “There is a line outside the door to buy our paper.”

 

One reason, O’Shaughnessy said, is because Athas has has had no defaults and has no current 30-, 60- or 90-day late payments on its subprime loans (there was one 60-day late payment last year, but that borrower caught up, O’Shaughnessy said). Typical borrowers, he said, come to Athas because they can close on a mortgage quickly. The average credit score is 702 on its subprime products, even though Athas goes as low as 550.

 

“Probably the biggest reason [borrowers] come to us is alternative proof of ability to repay, or if they have a past foreclosure or bankruptcy that’s too recent for a bank to consider,” he said.

 

 

"The people investing in this understand that these are well thought out mortgages for people who can actually pay," Perl told Scotsman Guide News. "We're having no problem selling it."

 

 

“We’ve known since 2008 that it’s not the subprime borrower that went away, it’s the product availability,” Hutchens said. “I think we’re going to continue to grow. It’s hard for us to say which year it’s going to hit and at what level, but we know it’s going to be significant.”

*  *  *

Now, what happened the last time that investor demand for a product massively outweighed the supply that lenders could provide? That could never happen again, right?




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Japan Is Dying And We Still Don’t Get It?!

Submitted by Raul Ilargi Meijer via The Automatic Earth blog,


Dorothea Lange Miserable poverty, Hooverville, Elm Grove, Oklahoma County, OK Aug 1936

What is it with us? Don’t we WANT to understand? Japan announced on Monday that its economy is in hopeless trouble and back in recession (as if it was ever out). And what do we see? ‘Experts’ and reporters clamoring for more stimulus. But if Japan has shown us anything over the past years, and you’re free to pick any number between 2 and 20 years, it’s that the QE-based kind of stimulus doesn’t work. Not for the real economy, that is.

The land of the setting sun has during that time thrown so much stimulus into its financial system that Krugman-esque calls for even more of the same look even more ludicrous today than they did all along. Abenomics is a depressing failure, just as we knew it would be since it started almost two years ago. It’s not complicated, and it never was.

Japan’s stimulus has achieved the following: banks get to pretend they’re healthy and stocks rise to heights that are fundamentally disconnected from underlying real values. On the flipside of that, citizens are being increasingly squeezed and ‘decide’ not to spend (not much of a decision if you have nothing to spend). Since Japan’s ‘consumer’ spending makes up about 60% of GDP, things can only possibly get worse as time passes. If ‘consumers’ don’t spend, deflation is the inevitable result – and that has nothing to do with the much discussed sales tax, it’s been going on for decades -.

Therefore, the sole thing QE stimulus has achieved is a wealth transfer from poorer to rich. And that’s not only the case in Japan. Mario Draghi yesterday hinted – again – at all the stuff he could start buying next year, including sovereign bonds, even though that would violate EU law. And whether or not Germany will let him in the end, the fact that he keeps the option alive even if only in theory, tells us plenty about the mindset at the ECB.

That is, it’s the same as in Japan. And doing the same can only lead to the same results. A poorer population, a richer toplayer and an economy that continues to shrink, which will and must lead to the same deflationary trend. The idea that an economy can be rescued by pushing public funds into its finance system and stock markets has been forever thrown out by Japan’s experiences.

Draghi said yesterday that ‘monetary policy has done a lot’, and while that may be correct, it says nothing about WHAT it has done. From where I’m sitting, Germany’s recent drift into negative territory and the ongoing record unemployment rates around the Mediterranean certainly tell us a lot about what it has NOT done. QE, no matter how big and how crazy, doesn’t heal real economies, it makes them sicker.

If consumer spending makes up 60% of GDP, as in Japan, or even 70%, as in the US, then you need to boost that spending. And you don’t do that by handing over what financial wiggle room you have left, to banks so they can pile it on to the reserves they hold at central banks.

It is accepted as gospel that it’s a good thing to give banks free money, but it would be the devil’s work to give it to consumers. Instead, the latter must be squeezed from all sides, through austerity, the loss of services, benefits, wages and jobs, in order to prop up the financial system. How and where is it not clear what that will result in? There’s only one possible outcome.

The reason why all governments and central banks keep following the failed QE stimulus path regardless lies in the relative political powers that different parts of a society have. In today’s world, saving the banks, which equals saving the rich, is not only the priority, it’s the only deliberation.

And if you might be under the impression that what is true in Japan and Europe does not hold in the US, why not start with this graph from Doug Short, and take it from there.

If and when an economy is as deep in the doldrums as all major economies today are, you can’t rescue it by taking from the poor to save the rich. It’s fundamentally impossible. You need the bottom 90%’s spending in order to generate enough GDP to stay out of deflation. Money must move through an economy for it to stay sufficiently ‘lubricated’. And the only people who can keep that money moving are the bottom 90%. It’s Catch-22.

Any stimulus must be directed at the bottom, or it must of necessity fail. Nothing commie or socialist about it, but simply the way economies work. And it’s not just some difference of ideal or insight or something, it’s very simply that an economy cannot function without its poorer 90% of citizens spending.

Anything else is simply Grand Theft Auto. Both Japan and Europe are preparing for more of it.




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