On Friday, in the aftermath of the historic pound sterling flash crash, we presented Citi’s forensic take of how in just 30 seconds, bid/ask spreads in cable exploded as wide 600 pips.

Today, we provide another take, that of JPM’s Nikolaos Panigirtzoglou, who looks at the “gapping market” that emerged on Friday morning Asia time, and shares some color on the role of high frequency traders behind the sudden, dramatic plung in sterling.

Below is his full note:

Friday’s flash crash in sterling reinvigorates the debate about market liquidity and the role of High Frequency Traders (HFTs) as providers of liquidity. Similar to previous flash crashes such as the August 24th 2015 flash crash in US equities or the October 15th 2014 flash crash in USTs, market gapping, a step change in prices from one level to another without much trading in-between, raises questions about market structure and liquidity in FX markets. This is also because FX markets are perceived to be a lot more liquid than equity or bond markets, so the conventional view is that FX markets are unlikely to experience flash crashes or market gapping in the absence of high impact news.

The flash crash in a major currency like sterling questions the above perception and perhaps shows there are liquidity vulnerabilities in FX markets that are more similar to those seen in equity or bond markets. A step change following a significant event such the Brexit referendum or the SNB’s abandonment of its peg is not problematic as it represents a natural market resetting. But a step change triggered by an order flow is more problematic and in our opinion reflective of how vulnerable market liquidity is in FX markets also.

Liquidity vulnerabilities in equity or fixed income markets as a result of changing market structures are well documented. In equity markets the shift away from principal trading towards agency trading, where markets makers simply match buyers with sellers without holding inventory beyond a short period of time, took place well before the Lehman crisis. But the Lehman crisis caused a similar shift within fixed income markets. Regulatory and other forces have made it a lot more costly for traditional dealers to act as principal traders in fixed income markets, inducing them to change towards a more order-driven trading model of matching buyers and sellers with minimal inventory risk, or to retrench and be replaced by agent traders.

At the same time electronic trading and advances in technology has encouraged the emergence of HFTs as liquidity providers in the most liquid segments of equity, FX and to some extent income markets. These HFTs use sophisticated quantitative models coupled with speed and high trading frequency, to exploit small price moves. They do so by arbitraging price differences across venues or by detecting and taking advantage of order shifts or imbalances or by simply exploiting very short term momentum or mean reversion signals.

However, different to traditional market makers, HFTs tend to operate with a much shorter inventory cycle, meaning that they conduct offsetting trades within seconds or even shorter, in order to neutralize  their original position. As a result they tend to quote for smaller sizes and for a very short period of time. This in turn reduces market depth, i.e. the ability to trade in size in markets, especially in those markets where HFTs are important liquidity providers like equity markets. So we note that while the emergence of HFTs has been beneficial for bid ask spreads and small investors, it has likely had a negative impact on the ability of big institutional investors to trade in size. This is one of the reasons big institutional investors have resorted to dark pools for implementing large equity trades.

More importantly, because HFTs’ models are typically adapted to exploit small price moves, HFTs have a higher incentive to withdraw from their market making role in periods when volatility rises abruptly as  they are reluctant to subject themselves to the risk of large price moves. In addition, there is a similar incentive to withdraw from market making when they detect a big order imbalance, i.e. when they detect markets becoming one-sided, as they are reluctant to subject themselves to the risk of not being able to close their position in a very short period of time.

In addition, given HFTs employ similar models, this creates the risk of a simultaneous withdrawal by HFTs in periods of high volatility or stress or in periods when market become more one-sided. A simultaneous withdrawal by HFTs not only amplifies the initial market move, but also creates step changes or gapping markets as liquidity provision gets impaired and quotes are withdrawn.

How big is the role of HFT in FX markets relative to other markets? A previous report by the BIS “Highfrequency trading in the foreign exchange market”, September 2011 concluded that around a quarter to one third of spot FX trading volumes are due to HFTs. But given that this study was conducted five years ago, we suspect that this share has risen since then.

Indeed, the latest 2016 Euromoney FX rankings survey is consistent with a rising share by HFTs as liquidity providers. The biggest change in this year’s rankings has been the advent of non-bank liquidity providers led by XTX Markets who was ranked third for electronic spot FX trading with a market share of more than 10% and third for FX trading platforms. In contrast, the combined market share of the top five global banks dropped to just 44.7% for overall FX trading in this year’s survey. This market share had peaked in 2009 at 61.5% and was above 60% as recently as 2014.

Moreover, many of the banks ranked outside the top 10 for overall FX trading are understood to be sourcing liquidity from non-bank liquidity providers. According to Euromoney, these non-bank liquidity providers or HFTs are set to gain more market share in the future, helped by advances in technology, more defined business models and a lower-cost infrastructure base than traditional FX banks. HFTs are already very important in FX spot markets as mentioned above, but they look to build capability in forwards and other products in the near future.

In all, the FX market appears to be going through structural changes similar to those experienced by equity markets in the past. The advent of non-bank liquidity providers such as HFTs has reduced bid ask spread and increased market efficiency in FX markets, but at the cost of lower market depth and withdrawal of liquidity provision in periods of stress.

 

via http://ift.tt/2dY83IX Tyler Durden

If the pre-debate intro was dramatic, the actual debate was right out of Rocky IV, when in an unprecedented moment, Hillary and Trump both refused to shake hands, leading to a social media frenzy as “no handshake” promptly became what may have been the most tweeted phrase on twitter. 

This is what it looked like.

.@HillaryClinton and @realDonaldTrump do not shake hands at the start of the second presidential #debate http://pic.twitter.com/zgRl5aWfwp

— POLITICO (@politico) October 10, 2016

via http://ift.tt/2d1vk0U Tyler Durden

Update: As we noted previously, Willey, Broaddrick, Jones and Shelton will be in the debate audience…

As we detailed earelier, tonight's town-hall style presidential debate from St.Louis promises to be an eyeball-scorcher. With the bout scheduled for 90 minutes with questions from the web, the crowd, and moderators, parents are strongly advised to lock up small chidren (and pets) as the chances of the words 'pussy', 'liar', 'monica', and 'rape' emerging during the battle are high. Luckily CNN's Anderson Cooper and ABC's Martha Raddatz are moderating so everything should be 'fair'.

The War Of The Noses escalates…

One thing to watch will be whether Clinton, an audience member or one of the moderators addresses the Trump tape first.

Some of the questions "you" want answered, include:

The body language between the two will also be scrutinized — some liberal voices on social media have suggested that Clinton should decline to shake hands with Trump.

As we noted earlier, previewing a hard-line attack on Clintons' sexual past, Trump on Sunday morning tweeted an interview given by Juanita Broaddrick, who claimed Mr. Clinton sexually assaulted her in the late 1970s…. Ms. Broaddrick tearfully recounts the episode in the videotaped interview and said "I'm afraid of him."

As the WSJ adds, "Trump, facing fierce blowback for his lewd comments about women, is signaling that he will target Mr. Clinton's behavior as he tries to stabilize a campaign coping with its biggest crisis to date."

In weekend apologies for his remarks, the Republican nominee invoked Mr. Clinton repeatedly, saying he had "abused women" and talked about them in ways that were more offensive than his own in a 2005 video in which he boasted of sexual aggression.

 

He also claimed Mrs. Clinton attacked the women who accused her husband of sexual misconduct.

 

"I've said some foolish things, but there's a big difference between the words and actions of other people," Mr. Trump said in a Saturday morning video. "Bill Clinton has actually abused women and Hillary has bullied, attacked, shamed and intimidated his victims. We will discuss this more in the coming days."

 

That line of attack threatens to yank Mr. Clinton directly into the campaign scrum, a space the former two-term president has largely avoided since his wife launched her campaign a year and half ago.

The WSJ notes that according to strategists in both parties, a tactic where Trump goes for Clinton's past infidelities may backfire… but then again, what's his downside?

*  *  *

Live Feed:

*  *  *

Bring your popcorn…

*  *  *

Finally, the drinking game… (via DebateDrinking.com)

 

And the scorecard…

via http://ift.tt/2ehoYdV Tyler Durden

We predicted that Trump "Signalled an Attack On Bill Clinton" and sure enough, that's precisely what Trump confirmed is now in store for tonight's debate, because his "final debate prep" included the following press conference featuring a number of Bill Clinton’s rape accusers, as well as the woman who – at 12-years-old – was the rape victim who Hillary Clinton smeared in her effort to get the perpetrator a light sentence. Most hideously, Hillary famously laughed about her success in doing so:

As Politico reports, seated beside four women — including Juanita Broaddrick, Paula Jones, Kathleen Willey and Kathy Shelton — Trump addressed viewers ahead of the debate, making an issue of Bill Clinton’s own sexual history as the GOP nominee faces a mass defection from within his own party.

"These four very courageous women have asked to be here, and it was our honor to help them,” Trump said of the women who then excused his comments caught on tape and released on Friday.

 

“Actions speak louder than words,” said Broaddrick, who alleged in 1999 that Clinton raped her in 1978 — a claim that Clinton has denied. “Mr. Trump may have said some bad words, but Bill Clinton raped me and Hillary Clinton threatened me. I don’t think there’s anything worse.”

 

“I think they should all look at the fact that he is a good person,” Jones said of Trump.“He's not what other person have been saying he has been, like Hillary."

*  *  *

 

And just as it was revealed that Broaddrick, Jones, Willey and Shelton were present at the debate, the Clinton campaign immediately released its response to the presence of Bill's accusers as follows:

And Trump's campaign quickly snapped back…

We agree @HillaryClinton. Does that go for Juanita, Kathleen, Kathy and Paula? If so, acknowledge them from the stage tonight. #girlpower https://t.co/hqvij2DPjA

— Kellyanne Conway (@KellyannePolls) October 10, 2016

RT if you agree. "Every" the operative word here. https://t.co/hqvij2DPjA

— Kellyanne Conway (@KellyannePolls) October 10, 2016

via http://ift.tt/2dEHsCH Tyler Durden

By Chris at http://ift.tt/12YmHT5

My friend’s neighbor came home early one day to find his house being burgled. The burglar, caught by surprise, pulled a gun, fired at him, luckily missing him, and then ran from the house.

In turn, he chased the guy and shot at him. He got two shots away, one hitting the guy in the leg and the other shot killing him. He immediately called the police and here is what happened next.

Upon arriving on the scene the police officer inspected the crime scene. He turned to my friend’s neighbor and told him to drag the body back from the footpath where he was currently lying and place him on the property. Preferably in the house. The conversation went something like this:

Cop: “You don’t want this guy dead on the footpath. Get him onto the property quickly, now!”

Neighbor: “Why?”

Cop: “You can’t kill the guy if he was running away. You’ll go to jail.”

Neighbor: “But he was shooting at me and robbing my house.”

Cop: “Yeah, I know, we both want the guy dead but the police report can’t say he was killed this way. He needs to be on the property where you can justify you were acting in self defence. Understand?”

This took place in the early 90’s in Johannesburg which, while not in as bad a shape as its sister city Cape Town with respect to the crime, still has one of the highest homicide rates in the world.

I chose the chart above because it shows the timeframe up until when I left the country so you can see the dramatic rise in crime around the time that the above story took place. It’s since gotten much worse.

This story, and I (as well as any South African) could tell you dozens more just like it, is important because of why this takes place and how a society gets to the point where vigilante violence is considered acceptable. I assure you it’s not a place you want to be, though I believe it is where certain countries are headed.

So today we’re going to pull out the shovels and dig into the process by which a society can move towards condoned violence.

————————————–

————————————–

I’ve witnessed this process firsthand growing up in South Africa, just as everyday crime and violence exploded. And last week I mentioned Rodrigo Duterte, the leader of the Philippines, and his rise to power as well as his incredible popularity. I believe that, though Mr. Duterte may mean well, he risks a process where he can quickly lose control.

For those of you living elsewhere in the world my hope is that by understanding the process I’m about to describe, you’ll at the very least be able to identify the warning signs, should they arise wherever you live and understand what is taking place and why.

How It Begins

When violence is pervasive we’ll accommodate in ways which we wouldn’t otherwise accommodate.

The Philippines for example, like South Africa, is riddled with crime and corruption. The crime is sickening, continuous, pervasive, and changes the very character of normal law abiding people.

When Duterte came to power on June 30 of this year he promised to kill so many criminals that the “fish would grow fat in Manila bay from feasting on their corpses”. Note he said kill, not detain, imprison, or bring to justice. Kill!

Leaders before him had promised to bring criminals to justice, which would have been hard since corruption is endemic and quite literally half of the cabinet (I’m probably being generous) would have been indicted and locked up.

So Duterte offered his own domestic version of “shock and awe”.

He’s since been living up to his promises with over 2,000 dead and the body count doesn’t appear to be falling anytime soon. Many of these killings are extrajudicial, meaning they’re vigilante killings condoned by the government. If you’re a drug dealer or drug user you’re dead or at the very least you have a target on your back.

No trials, no courts. Just a bullet.

Extrajudicial murders are accepted and condoned by the government with “he was a drug user/dealer”. Now you don’t need me to point out to you that this is fertile ground for scores to be settled, drugs or no drugs.

While this is taking place Duterte’s popularity is soaring.

Now for those of us fortunate enough to live in relatively free, safe, and peaceful societies it’s easy to dismiss this with the following:

• “This is cultural. It’s not in our culture to do that, they’re just animals.”
• Or, “They have no rule of law. We can trust our police and government to provide law and order.”

The truth is more complex.

With the right set of circumstances human beings will do the most extraordinary things, so let’s take a look at what those circumstances are.

A Weak Political System

A weak political system causes a loss of faith in the abilities of those who are meant to “serve and protect”, and an acceptance of alternative methods gaining credence.

Citizens become frustrated with politicians whose self interest clearly overrides those of the citizens.

This is where the Philippines is at after decades of corrupt ineffective politicians who, despite promises, never delivered. In turn they voted in Duterte who promised radical and violent measures. A man of action. This rhetoric landed well with a citizenry exhausted and frustrated by a revolving door of the elite who promised much but simply ensured they got rich instead.

If any of this sounds familiar to you then you’ll understand why Donald Trump’s rhetoric resonates with the citizenry. In “Why A Politically Correct West Ensures A Trump Victory” I mentioned:

A populace, increasingly distrustful of the establishment and horrified by the consequences of the actions already taken by the ruling class, look around them in search of someone who will say out loud what they whisper to each other behind closed doors.

When citizens no longer trust the system, especially the judicial system, they see the ruling elite as part of the problem, not part of the solution. This is very dangerous as it legitimises extrajudicial vigilante violence.

Corruption

When the citizens of the United States watched the Justice Department grant immunity to the guy hired by Hillary Clinton to delete the emails which she’d lied about, it’s hard not to see how one loses faith in the justice system. In a recent issue of “World Out Of Whack” we looked at another example in the US.

It’s not just the select few in the private sector who are protected by a corrupt establishment, but the establishment itself which is increasingly seen as untrustworthy.

The Iraq war did an enormous amount of damage to the US reputation as the then Secretary of State Colin Powell admitted to deceiving the world in order to garner support for the war.

Adding fuel to the fire that burns trust in a society are weekly, if not daily exhibits of a breach in fiduciary duties by those in power such as the recent revelation that the US Government manufactured “news” in order to gain public support for the war on terror.

The next inevitable step for citizens is to search for a solution.

History as a Guide

Surveying data from across Latin America to see what leads people to support lynchings, vigilante killings, and other forms of extrajudicial violence, professor Gema Santamaria at the Mexico Autonomous Institute of Technology in Mexico City and José Miguel Cruz, the research director at Florida International University’s Latin American and Caribbean Center, came to a curious conclusion.

The data told a very similar story across all of the countries in their sample. People who didn’t have faith in their country’s institutions were more likely to say vigilante violence was justified. By contrast, in states with stronger institutions people were more likely to reject extrajudicial violence.

People turn to vigilante violence as a replacement for the formal justice system, Ms. Santamaria said. That can take multiple forms: lynch mobs in Mexico or paramilitary “self-defense” forces in Colombia. But the core impulse is the same.

“When you have a system that doesn’t deliver, you are creating, over a period of time, a certain culture of punishment,” she said. “Regardless of what the police are going to do, you want justice, and it will be rough justice.”

In addition to the above what the research indicated was the link between social inequality, a topic I covered recently in a “World Out Of Whack” issue:

If you look at the above chart from the study you will find that the Gini inequality index correlates with the support of extra judicial violence.

Basically, money always matters, and when you follow the money (or lack of it) you’re better able to understand what is likely to take place in societies and position your portfolio accordingly.

There are multiple factors which cause a breakdown in societal trust. The combination of a weakening middle class due to financial repression by central banks with a weakening judicial system poses increasing risks in society. Not something the current clutch of central bankers seem to be even remotely aware of.

Political Support for Extrajudicial Violence

This is where things can get really hairy. Let’s think this through for a minute.

When it’s clear that extrajudicial killings are sanctioned by the state, anyone with a grudge and a gun can get away with murder, and the society – in order to protect itself from what is in essence a new threat – bands together to do so. Gangs are formed and private security forces crop up.

As these groups vie for control they turn into paramilitary groups and the government of the day is forced to begin dealing with large well armed and largely sanctioned groups. The entire power structure in society shifts.

The Philippines is currently trying to wipe out anyone associated with the drug trade. In Germany in the 1930’s it was Jews, and in Rwanda 1994 it was Tutsis where an estimated 70% of the Tutsi population and 20% of the Rwandan population was slaughtered in just 100 days. Now I’m not suggesting that drug dealers should be compared with Jews or Tutsis but rather that there is a political and societal will to eradicate a particular class. Furthermore I find it hard to believe that all of the 2000 odd killed to date in the Philippines are drug dealers.

The thing with unchecked and justified violence is not just the violence but how society alters the rules of conduct and what is considered acceptable, often simply in order to do what is necessary to survive.

Regaining Control

It becomes increasingly difficult for a state to regain control in a society where multiple factions carry out killings.

The State has lost legitimacy and a society often has to go through a period of reorganisation before it will find the extrajudicial violence to be worse than the state’s version of law and order. And that period can last a long time. It’s not a set of circumstances favourable to economic growth, capital investment and rising living standards.

Colombia has been through that process and is now coming out the other side which is one reason I’m long term bullish on it.

The Philippines has been one of the biggest Asian growth stories for the last decade. It was in fact THE fastest growing Asian economy in Q2 of this year. Time will tell if Duterte’s policies derail the country’s economic growth and prospects and it bears watching closely.

The most concerning lesson from the research I mentioned is that a society can destroy itself from within. That natural human desire for security and safety, when coupled with a corrupt and increasingly weak legal and political institutions, can lead to a country escalating into very dark territory indeed.

What to Do About It?

Let me just say that there are always going to be bright spots and dark spots.

Look for the bright ones while being aware of the dark ones. Nobody should live as a grumpy pessimist. On the other hand, being wilfully blind is a terribly bad idea.

Here are some takeaways which I expect will be useful because as capital moves, money can be made by positioning accordingly:

• In countries exhibiting the traits listed above expect greater volatility as investment capital moves from long dated (risk) to short dated, from illiquid to liquid, and investment time horizons narrow.
• Expect the velocity of money to fall as collateral in the system is no longer manufactured or indeed withdrawn altogether.
• Expect consumer consumption in those countries exhibiting any of the traits I’ve just mentioned to change as new realities are factored in.
• For a more detailed thought process on that consumption behaviour please read my post on security as a profitable trend.

Have a good weekend!

– Chris

 “An eye for an eye will only make the whole world blind.” — Mahatma Gandhi

————————————–

Liked this article? Don’t miss our future missives and podcasts, and

get access to free subscriber-only content here.

————————————–

via http://ift.tt/2ehixaN Capitalist Exploits

By Keith Decker of IceCap Asset Maangement

We’re gonna need a bigger boat

Jaws (Stephen Spielberg, 1975) – This iconic movie single-handedly scared the crap out of beach goers everywhere. The combination of the music and the mere presence of a gigantic man-eating fish still haunts swimmers and boaters to this day.

In the end, the shark, the boat and Quint meet their demise setting up an endless cycle of shark themed terrors forevermore.

The Shining (Stanley Kubrick, 1980) – Talk about slowly scaring the pants off you. Many movie aficionados are adamant that this Stephen King adaptation is the scariest film in the history of the world.

After all, the slow burn that transformed Jack Nicholson’s character into an unpredictable psychopath was scary indeed.

In the end, Jack’s character and the audience got what they deserved – a very chilling finale.

The Rise of the Interest Rate (central banks, 2016) – This real-life suspense thriller has bond investors, home owners and bankers wetting their pants.

It’s bound to happen. Sooner or later, long-term interest rates will rise. And when they do, fear will be unleashed across the money world.

The ending will be gruesome and gory. Yet investors who properly understand the plot, can comfortably sit back, grab some pop corn and enjoy the show.

Interest Rates

When it comes to investing, practically everyone is quick to know stuff about the stock market. Investment advisors routinely rhyme off fancy anecdotes about “investing for the long haul”, “never time the market”, and the grand daddy of them all – “no one saw this coming”.

Of course, what is missing here is perspective or most importantly – an impartial perspective.

We speak with people across Europe, Asia and North America and continue to be amazed about the lack of depth emanating from the very large banks who control the majority of investment funds around the world.

The reason you are hypnotized with such creative expressions as “Enriched Thinking”, “Calmly Create Wealth” and “Be a Smarter Investor” is for one reason and one reason only – investment firms want your money. Yes, it is fact. All investment firms need clients.

Yet the difference between asset gathering focused firms and deep thinking focused firms is as wide as Jack Nicholson’s grin.

Many say there’s a direct negative correlation between the amount of assets managed by a firm and their success in correctly navigating the risk-return waters of the investment world.

Which of course, leads to the number 1, the biggest, and the most feared risk in today’s investment universe – a rise in interest rates. And what happens next with interest rates will have an incredible effect on all investments and strategies.

At this point you’re asking why is IceCap sounding the alarm bell for bond investors, home owners, and bankers.

The reason is simple – a rise in long-term interest rates is devastating for all of them.

First off all, you must know and understand that the upcoming rise in long-term interest rates will not be of your “let’s hold hands and go for a nice walk in the park” variety.

Instead, when it happens (and it will) long-term interest rates will surge upward in several quick, sudden jolts enough to scare Jaws out of the water.

And, when long-term rates rise by as much and as quickly as we expect, the price of bonds drop like a stone with many never recovering. This will have three effects on the market place:
1. Everyone holding bonds of any type, will experience significant losses. This means pension funds, balanced mutual funds, and especially the flaw-fully designed Target Dated mutual funds will give all investors nightmares.

2. Mortgage interest rates shoot upward as well, which means housing markets weaken.

3. Banks around the world are required to hold sovereign bonds as regulatory capital. As this crisis develops, banks everywhere will begin to experience weakness in their investment portfolios which is akin to having the rug pulled out from underneath you.

Yes, this is very frightful and you should be afraid.

However – for every bad there is a good. And when this crisis accelerates, investors will run away from the bond market and seek safety in stocks, USD currency and gold.

It will be a scene, unlike any you’ve seen before and understanding why it will happen and having the correct investment strategies will not only make you happy and calm – it will also make you the star at dinner parties.

And when others ask you how did you know, you begin with the least talked about factor in the investment world – interest rates.

Admittedly, the entire interest rate complex is complex. But once you understand this rather nebulous concept, all clouds of confusion will part and you’ll see clearly for miles.

To get started, the first thing you have to do is to ignore most everything you are hearing, reading and seeing about interest rates.

The unfortunate truth is that those who really understand the dynamics of the entire interest rate spectrum are tucked very far away from the average investor.

And since most people do not have access to this very defined group, all perspectives about interest rates and their impact on markets is being signed, sealed and delivered mostly by industry personnel who either do not understand the entire picture, or worse still – by industry personnel who’s firm is unable or unwilling to share the entire picture.

Either way – you are watching a bad movie with out even knowing it.

The next thing you have to know is this: when interest rates are declining, they create a very powerful wind in the sails of all fixed income and bond investments. In fact, there’s nothing else in the entire universe that comes close to helping your bond investments soar in value.

Mind you, there is one other important factor that while not as powerful as interest rates, can also help your bonds do well and that is a strong economy – we’ll take a closer look at global economic growth starting on page 12.

One of our primary observations is that the investment industry tends to suffer from long-term memory loss. Today most analysis grips onto several months of data.

Even the longer dated back-tested products gravitate to only 10 years of data. Worse still, most research cherry-picks it’s start date to do one thing and one thing only – prove it’s point.

And yet, the longest dated research models only begin after WWII. This is based upon the false belief the world entered a wonderful new financial paradigm and that everything that occurred before the end of the war has somehow become irrelevant.

This is wrong.

The world’s economy and financial markets move in cycles. Some cycles are quite short and often difficult to see and discern. While others are super long, also making them difficult to see and discern.

We share this with you because the current risk with interest rates and bond markets has reached extreme levels, yet due to the interest rate cycle being so long, most of the industry cannot see the risk.

To help you see better, our Chart 1 (next page) shows how long-term interest rates have moved over time.

First notice how rates increased from the early 1960s to a high in 1982, and then proceeded to decline to today’s level.

This is normal, it is a part of a cycle.

Next, notice how quickly rates increased from 1980 to 1982.

It’s important to see and understand how the upward move was explosive. Regardless of the reason for the move (at that time, it was inflation driven), long-term interest rates never move gradually. There is always a troubling reason that causes long-term rates to sky rocket higher.

Now, part of the reason for confusion about interest rates is that most people (industry professionals AND regular investors) only talk about the interest rate set by the central banks. This would be the rate set by the US Federal Reserve, the Bank of Canada, the Bank of England, the European Central Bank and the Bank of Japan (to name a few).

Yes, this is an important interest rate number, but it is only the rate for borrowing/lending money for 1 single day.

Interest rates for borrowing/lending for periods greater than 1 day are then set by the financial market place.

This is the first step in understanding the horror level risks that are currently in the bond market. When IceCap talks about the severe risk in the bond market, we are referring to long-term interest rates – not the interest rate set by the central banks.

* * *

Continue reading in the slideshow below  (pdd link)

via http://ift.tt/2ehiFqC Tyler Durden

Submitted by Nick Giambruno via InternationalMan.com,

According to Webster’s Dictionary, an economic depression is “a period of time in which there is little economic activity and many people do not have jobs.”

Italy has had virtually no productive growth since it joined the euro in 1999.

Today, the Italian economy (real GDP per person) is smaller than it was at the turn of the century.

That’s almost two decades of economic stagnation.

The economy today is 10% smaller than it was before its peak prior to the 2008 financial crisis. More than 25% of Italy’s industry has been lost since then.

Unemployment is around 12%. Youth unemployment is around 36%. And these are only the official government statistics, which almost certainly understate the true numbers.

The International Monetary Fund (IMF) predicts it will take at least until 2025 for the Italian economy to return to its 2008 peak. Since nobody can accurately predict what’s going to happen next year, let alone nine years from now, the IMF is basically saying it has no idea how or when the Italian economy could ever recover.

The mass media and establishment economists don’t dare call it a depression. But a depression it is.

Italy’s populist Five Star Movement—or M5S, as it’s known by its Italian acronym—is now the country’s most popular political party. M5S blames Italy’s economic malaise squarely on the euro. I’d say a large plurality of Italians agree, and they have a point. They claim that, under the euro, Italian industry and exports have become uncompetitive. M5S believes a return to the lira could be the remedy.

Prior to joining the euro, Italy would regularly post large trade surpluses with Germany. Since joining, it has posted large trade deficits.

Because of Italy’s structural economic problems, it should have a significantly weaker currency. But since Italy is wrapped in the euro straightjacket, it gets monetary conditions that are far too tight than appropriate for the country.

Personally, I don’t think there should be such a thing as a central bank or “monetary policy.” That’s a discussion for another day. But that being said, it’s clear to me that the euro doesn’t suit the Italian economy.

In any case, nearly two decades of no economic growth have had consequences for Italian banks, which are now woefully undercapitalized.

The Italian economy is made up of many small and medium-sized businesses. Those businesses have taken out loans from Italian banks. But as the economy is in a depression, many of those loans have gone bad or will go bad.

This has created a crisis in the Italian banking system. It took years to build up, but now the situation is coming to a head. The Italian banking system is insolvent, and now everyone knows it. Shares of Italian banks have plummeted more than 50% so far this year.

Italian banks combined have a staggering $400 billion-plus worth of loans that are 90 days past due and unlikely to be repaid in full. These nonperforming loans (NPLs) account for over 18% of all outstanding bank loans and add up to over 20% of the Italian GDP.

By comparison, 5% of all outstanding loans in France are nonperforming… the figure is 1.5% in the UK… and 2% in the U.S. Italy’s NPLs are an enormous problem.

Founded in 1472, Banca Monte dei Paschi di Siena is the oldest surviving bank in the world. Today, it’s the third-largest Italian bank and the one that is by far in the worst shape.

It has the highest ratio of NPLs of any Italian bank. In the past 10 years, its market cap has collapsed, falling more than 90%. It really shows how unsound modern banking is that a bank that has survived everything since before Columbus discovered America is about to fail.

The only reason Banca Monte dei Paschi di Siena is still barely alive today is because it has been bailed out by Italian taxpayers… twice. Unsurprisingly, the bailouts were to no avail. They didn’t address the fundamental problem of economic stagnation. It was like putting a Band-Aid on a gunshot wound. The bank quickly found itself in trouble again.

The Italian government then banned short selling of the bank’s shares, which has done nothing to improve the bank’s prospects for survival. All of these attempts to prop up the bank are just delaying the inevitable.

Making the problem worse with Italian banks is their financially incestuous relationship with the Italian government and its debt.

Italy’s government has borrowed over $2.4 trillion. Its debt-to-GDP ratio is north of 130%, one of the highest in the world. In Europe, only Greece has a higher ratio.

As bad as it seems, the situation is actually worse.

GDP is a highly flawed statistic. Mainstream economists count government spending as a positive in calculating a country’s GDP. A more honest measure would count government spending as a big negative.

In Italy, government spending accounts for a whopping 50%-plus of GDP. But a more accurate debt ratio would exclude government spending from economic output and only include the productive economy. In that case, I believe the ratio would reveal that the Italian government is hopelessly insolvent.

I don’t see how it’s at all possible for the government to extract enough in taxes from the productive part of the Italian economy to ever conceivably pay back what it has borrowed.

Despite this, Italian government bonds are trading at record-low yields. It’s a bizarre and perverse situation.

This is because the European Central Bank (ECB) is intervening in the market through a money-printing program, though the financial media prefers to euphemistically call it “quantitative easing.”

The ECB is printing money to buy all sorts of assets in Europe, especially government bonds, including those of Italy.

They’re bidding up the price of these toxic assets, bringing yields down much lower than they would be in a free market.

Around $1.6 trillion of Italian bonds actually have negative yields. It’s completely insane. It shows the enormous degree to which the ECB has distorted the sovereign bond market. It’s a financial Alice in Wonderland.

Given the huge risks associated with lending money to the bankrupt Italian government, the yields on Italian sovereign bonds should be near record highs, not record lows.

The only way bankrupt European governments like Italy’s are able to service their mountains of debt is with artificially low interest rates. The situation is so dangerous that even raising rates by a token amount could make paying the interest for the debt impossible. It would collapse the entire system.

The ludicrous mismatch between risk and reward is a sign of desperation. I think it’s a sign that we are near the endgame.

These artificially low yields on Italian bonds are another thorn for Italian banks.

Of the more than $2.4 trillion in outstanding Italian government bonds, over $440 billion are sitting on the balance sheets of Italian banks.

In the past, these bonds provided a somewhat reliable stream of income. But with the artificially low rates, that income, and the banks’ profitability, has been drastically reduced.

A former IMF official speaking to the media put it this way:

Both the public debt and the banking sector are on a powder keg, being maintained by a process of non-recognition of accumulated losses in the system that they keep rolling over. The real problem is that somebody has to take the losses eventually.

Central bankers and finance ministers are making behind-the-scenes preparations for a major crisis, all the while publicly promising that “everything is under control.”

They’re fully aware of the severity of the situation. They urgently enacted new bail-in rules earlier this year.

I think it’s quite clear the Italian banking system is headed for collapse.

via http://ift.tt/2dCprpG Tyler Durden

The following article by David Haggith was first published on The Great Recession Blog:

via http://ift.tt/2dConSP Knave Dave

It is no secret that the mainstream media has a “slight” left-leaning bias in their political reporting.  But newly leaked emails from Guccifer 2.0, obtained exclusively by The Intercept, reveal just how “cozy” and pervasive the Clinton campaign’s relationship is with the press.  From “off-the-record dinners with the key national reporters” to feeding pre-written propaganda pieces to “friendly” journalists, the new leaks reveal startling coordination between the Clinton campaign and the mainstream media.

The first revelation comes from a January 2015 strategy document written by Hillary’s press secretary, Nick Merrill, about how the campaign should approach reporting on Hillary’s decision to run for president.  The memo identifies “Maggie Haberman” of Politico as someone who had a “very good relationship” with the campaign and who had “teed up stories” for Hillary in the past.

 

Other documents revealed by The Intercept, listed those whom the campaign regarded as their most reliable “surrogates” – such as CNN’s Hilary Rosen and Donna Brazile, as well as Center for American Progress President Neera Tanden.  The list also included “David Brock” as a “Progressive Helper”…of course, Brock has made headlines this weekend as the latest WikiLeaks dump of the “Podesta Emails” revealed that the Hillary campaign potentially coordinated directly with Brock’s “Correct the Record” Super PAC, which is technically a felony (see “Podesta Emails Reveal Illegal Coordination With David Brock Super PAC“)

 

The next memo comes from Clinton’s deputy press secretary, Jesse Ferguson, who helped setup an “off-the-record dinner with key national reporters.”  The memo lists the goals of the dinner, one of which is to “give reporters their first thoughts from team HRC in advance of the announcement”…certainly wouldn’t want anyone to form and/or report their independent, unbiased thoughts now would we?

 

And, of course, the guest list included the who’s who of national reporters.

 

Finally, another document reveals the Clinton strategy to constantly feed stories to the traveling press to prevent them from saying something that might be “unhelpful”…they do say that offense is the best defense.

“Give reporters who must cover daily HRC news something to cover other than the unhelpful stories about the foundation, emails, etc.”

 

While none of these revelations are particularly shocking, they are yet another startling reminder of just how corrupt and irrelevant the mainstream media has become in delivering independent, unbiased news to the American public.

via http://ift.tt/2dYjohF Tyler Durden

Authored by Mark St.Cyr,

Remember way back in the glory days when the combination of “everything social” and “IPO” meant near instant stardom and riches? For those who might be having a little trouble remembering; it was way back in days past just a little under 24 months ago. Yes, that’s months, not years.

Yet, as far as the many still clinging to IPO cash-outs, or stock option redemption in lieu of salary? It’s bordering on an eternity. And, believe it or not, that waiting game may have just been extended. The reason?

Look no further than the once hailed songbird of both “social,” and in a larger context, much of what being a tech firm in “Silicon Valley” encapsulated: Twitter™

Twitter has truly morphed into the literal “canary in the coalmine” of what I believe portends in the not so distant future for much of “The Valley” and “social media” in general. i.e., Laying on their backs, in the bottom of their cages, with nothing more than rumors and innuendo of either an offer to buy, or worse, an offer to just look. The latter having the worst of consequences once the “Thanks, but no thanks!” formality becomes public.

It would seem, in my opinion, Twitter™ received the equivalent of both in the very same week. Can anyone say (or should I say tweet?) Ouch!

As I stated earlier: “way back” was just under 24 months ago. And what truly took place as to hinder, or tarnish the implied “genius” status of founders, or the brilliance of the “it’s different this time” defense as it pertained to actual fundamental business metrics was The Fed’s ending of QE (quantitative easing.)

And with that has come the realization (albeit very slowly) that “unicorn and rainbow” thinking belongs where it should – in fairy-tales and folklore.

Want proof? Just look back to the ancient texts circa 1990-2000 in the “dot-com mania and crash section” via your search engine of choice. And for those of you old enough to had been “invested” back then? Just remember to have a tissue at the ready is all I’ll say.

For those not familiar, or those painfully trying to forget, the condensed version is this…

First there were cracks in the meme (think “it’s different this time”) then, one by one, once heralded IPO high flyers (think Twitter, LinkedIn™, etc.) began losing value from their peaks. At first it was slowly, then suddenly, and all at once, where they never regained their former lofty valuations. Till finally, the revenue models (think “eyeballs for ads”) along with their assumptions (think “billions upon billions of potential customers!”) were completely destroyed, taking even the largest of players down only a few years later of what was seen at that time as “unimaginable” with the demise of the then king of “new media” AOL™, yesterday’s equivalent of Facebook™ today.

But not too worry, after all, it’s different this time, yes?

Although I’m not as old as Methuselah (if you don’t ask the kids) I penned an article way back when in Sept. of 2014 titled “The Shot Heard Round The Valley World.”  right before the official ending of QE. And in it I made the following argument. To wit:

“But, one shouldn’t read into this as “confirmation” the risk appetite story is not only alive but growing. For that is all about to change.

 

Once the Fed shuts down the section of QE that has been pumping Billions upon Billions of dollars every month – it’s over for a great many of today’s Wall Street darlings.

 

Think of it this way: Who is going to fund your next round when they no longer have access to the Fed.’s piggy bank? Let alone pump more money into older start-ups that just haven’t produced any real money (as in net profit,) but have produced nothing more than great new employee digs or benefits?

 

Tack along side this the culture shock in what will seem near instantaneous with the shunning that will take place of any business resembling the, 3 employee, menial customer base, Zero if not negative profit margin businesses formed with the implicit intent as to be bought up or “acquired” for Billion dollar pay days.

 

These will be the first to go. That formulation is going way of the now infamous Pets dot-com sock puppet. This will be the first true shock to Silicon Valley culture that hasn’t been seen in many years. And it will be far from the only one.”

Along with this assertion:

“And that won’t be the only monumental shift coming. Maybe, one at an even faster pace: The meaning of IPO.

 

IPO is not going to have the same term of endearment it now has. I believe it will turn into the last and most dreaded three-letter acronym no one ever imagined in Silicon Valley.

 

The IPO screams of joy will turn into wails of terror when those VC “angels” meet at many “treps” desk and state – they’re IPO-ing.

 

No, not getting one set up for the big pay-day. No IPO will mean: “I’m pulling out.” i.e., “Have a nice day. Where’s the rest of my money?”

 

The once renowned purchases of “Billion dollar babies” will prove out not to be worth two cents in this environment.

 

Valuations will get crushed and people will be shocked at just how fast a company touted across the financial channels and other media as “fantastic buys” are flogged and fleeced when Wall Street comes back for their “investment.”

 

If the story or the numbers aren’t there – neither will these once darlings of Wall Street. Regardless of size or stature.”

You saw the ensuing cracks begin during the initial months of 2015 as the IPO market began drying up faster than a puddle in the Sahara as once Wall Street IPO darling stock prices went from “high flyer” to “dropped like a lead balloon” status – and never, repeat, never ascended within earshot of those once “totally worth it!” valuations.

Twitter is just the latest, LinkedIn showed just how much “hype” there was to all these valuation metrics. For without a Microsoft™ buy-out? It appeared when it came to getting more LinkedIn shares? There were more people looking to Link-out.

But not too worry! 2016 was said to be “The year for a rebirth of the IPO market.” That was said during the closing months of 2015. It’s now mid October 2016. How’s that all working out? (insert crickets here)

However, many will state this is all a bunch of “hyperbole” or “uninformed assertions” or better yet, as is portrayed among the main stream financial media crowd as “the doom and gloom-ers looking only to be proved wrong again, i.e., “For just look at these markets!” I leave you with 2 words that were near unconscionable over the last few years.

Two very small words that have monumental implications and should bring panic to anyone in tech, “Silicon Valley,” or still holding dreams of cashing out large on the basis of an IPO built on the “Eyeballs for ads” model. And it’s right there in Palo Alto, California for all to see. That is – if one dares look.

Those two words?

“Price Reduced!”

And no, that’s not in reference to a Silicon Valley darling such as a start-up. No, those two words belong to that other seemingly invincible meme which was seen as far more stable than the IPO’s that afforded them.

Real estate.

via http://ift.tt/2dp5JuJ Tyler Durden