Tag: finance

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The essence of crony-capitalism is the merger of state and corporate power–the definition of fascism.

When it comes to the real world, the difference between fascism, communism and crony-capitalism is semantic. Let's start with everyone's favorite hot-word, fascism, which Italian dictator Benito Mussolini defined as "the merger of state and corporate power." In other words, the state and corporate cartels are one system.

Real-world communism, for example as practiced in the People's Republic of China, boils down to protecting a thoroughly corrupt elite and state-owned enterprises (SOEs). The state prohibits anything that threatens the profits (and bribes) of SOEs–for example, taxi-apps that enable consumers to bypass the SOE cab companies.

What A Ban On Taxi Apps In Shanghai Says About China's Economy
 

The Chinese mega-city of Shanghai has been cracking down on popular taxi-booking apps, banning their use during rush hour. Until the apps came along, the taxi companies, which are government owned, set the real price for fares and collected about 33 cents each time someone called for a cab. That can add up in a city the size of Shanghai. Wang says the apps bypassed the old system and cut into company revenues.

Much has been made of China's embrace of capitalism, but — along with transportation — the government still dominates key sectors, including energy, telecommunications and banking. Wang says vested government interests won't give them up easily.

How else to describe this other than the merger of state and corporate power? Any company the state doesn't own operates at the whim of the state.

Now let's turn to the crony-capitalist model of the U.S., Japan, the European Union and various kleptocracies around the globe. For PR purposes, the economies of these nations claim to be capitalist, as in free-market capitalism.

Nothing could be further from the truth: these economies are crony-capitalist systems that protect and enrich elites, insiders and vested interests who the state shields from competition and the law.

The essence of crony-capitalism is of course the merger of state and corporate power. There are two sets of laws, one for the non-elites and one for cronies, and two kinds of capitalism: the free-market variety for small businesses that are unprotected by the state and the crony variety for corporations, cartels and state fiefdoms protected by the state.

Since crony-capitalism is set up to benefit parasitic politicos and their private-sector cartel benefactors, reform is impossible. Even the most obviously beneficial variety of reform–for example, simplifying the 4 million-word U.S. tax code–is politically impossible, regardless of who wins the electoral equivalent of a game show (i.e. Demopublicans vs. Republicrats).

The annual cost of navigating the tax code comes to about $170 billion:

Since 2001, Congress has enacted about one new change to the tax law per day. Pathetic, isn’t it? This tax code is a burden and a fiasco and deeply unpatriotic. As Olson’s Taxpayer Advocate Service notes, this code helps tax evaders; hurts ordinary, honest taxpayers; and corrodes trust in our system.

Here's why the tax code will never be simplified: tax breaks are what the parasitic politicos auction off to their crony-capitalist benefactors. Simplify the tax code and you take away the the intrinsically corrupt politicos' primary source of revenue: accepting enormous bribes in exchange for tax breaks for the super-wealthy.

You would also eliminate the livelihood of an entire industry that feeds off the complexities of the tax code. Tax attorneys don't just vote–they constitute a powerful lobby for the Status Quo, even if that Status Quo is rigged, unjust, wasteful, absurd, etc.

It's not that hard to design a simple and fair tax code. Setting aside the thousands of quibbles that benefit one industry or another, it's clear that a consumption-based tax is easier to collect and it promotes production rather than consumption: two good things.

As for a consumption tax being regressive, i.e. punishing low-income households, the solution is very straightforward: exempt real-food groceries (but not snacks, packaged or prepared foods such as fast-food), rent, utilities and local public transportation–the major expenses of low-income households.

1. A 10% consumption tax on everything else would raise about $1.1 trillion, or almost 2/3 of total income tax revenues, not counting payroll taxes (15.3% of all payroll/earned income up to around $113,000 annually, paid half-half by employees and employers), which generate about one-third of all Federal tax revenues and fund the majority of Social Security and a chunk of Medicare.

As for the claim that a 10% consumption tax would kill business–the typical sales tax in California is 9+%, and that hasn't wiped out consumption.

2. The balance could be raised by a progressive tax on unearned income, collected at the source. Most of the income of the super-wealthy is unearned, i.e. dividends, investment income, interest, capital gains, stock options, etc. As a result, a tax on unearned income (above, say, $10,000 annually to enable non-wealthy households to accrue some tax-free investment income) will be a tax on the super-wealthy who collect the vast majority of dividends, interest, capital gains and investment income.

A rough estimate would be 20% of all unearned income.

This would "tax the rich" while leaving all earned income untaxed, other than the payroll tax, which is based on the idea that everyone should pay into a system that secures the income of all workers. This would incentivize productive labor and de-incentivize speculation, rentier skimming, etc.

The corporate tax would be eliminated for several reasons:

1. It is heavily gamed, rewarding the scammers and punishing the honest

2. All income from enterprises is eventually distributed to individuals, who would pay the tax on all unearned investment income.

But such common-sense reform is politically impossible. That's why the answer to the question, what's the the difference between fascism, communism and crony-capitalism is nothing.

via Zero Hedge http://ift.tt/1l2BV99 Tyler Durden

Markets will be hanging on every word of what is likely Janet Yellen’s first monetary policy speech and even more so the Q&A afterwards as she suggests that a considerable time is more than 6 months, and the delicate balance she has to play between admitting the economy is ugly while admitting that QE is over no matter what… all the while maintaining some semblance of credibility. One has to wonder if the ripfest rally of the last 24 hours is a buy the rumor ramp ahead of a sell the Yellen news event as once again she is tested…

The 3 key factors will be:

• her jobs (economy) dashboard – just what does she look for and how does she use them…?
• her view of inflation – transitory dip, weather? or rip she’s afraid of…?
• Financial stability – nope, no bubbles here…?

Headlines:

• *YELLEN SAYS FED COMMITTED TO ACCOMMODATION TO SUPPORT RECOVERY
• *YELLEN SAYS NEW GUIDANCE RELIES ON `WIDE RANGE OF INFORMATION’
• *YELLEN SAYS CHANGE IN GUIDANCE DIDN’T MEAN ALTERED POLICY PATH
• *YELLEN: POLICY NEEDS TO REACT TO ECONOMY’S `TWISTS AND TURNS’
• *YELLEN: WEATHER CAUSED `SIGNIFICANT PART’ OF RECENT SOFTNESS
• *YELLEN: QUITE PLAUSABLE FED HITS JOBS, INFLATION GOALS END-2016

 

 

Janet Yellen is speaking at The Economic Club of New York:

Live Feed:

 

 

 

(click image below for Bloomberg feed)

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

One of the more bullish “fundamental” theses discussed in recent weeks, perhaps as an offset to the documented record collapse in mortgage origination – because without debt creation by commercial banks one can kiss this, or any recovery, goodbye – has been the so-called surge in loans and leases as reported weekly by the Fed in its H.8 statement. Some, such as the chief strategist of retail brokerage Charles Schwab, Liz Ann Sonders, went so far as to note that this is, to her, the “most important chart in the world.”

This is indeed notable because as we have shown in the past, for nearly five years, total loans and leases within the US commercial system remained virtually unchanged from a level of about $7.3 trillion, first attained when Lehman filed for bankruptcy. And it doesn’t take a PhD in monetary theory to figure out that this lack of credit revival (alongside the historic collapse in shadow bank liabilities) is precisely what the Fed’s endless QE programs had been, at least on paper, trying to avert.

Of course, if the data represented by the Fed which supposedly is a sample of call reports distributed to commercial banks, is accurate, then it would be a welcome development to the economy as it would indicate that finally lending conditions are easing, and demand for money is rising at the retail level as opposed to just the institutional (where it is merely used to buy risk assets). In other words, it would slowly allow the elimination of the Fed’s artificial conditions and removal of the central-planning umbrella.It would also indicate inflation may finally be returning to the economy (as opposed to just food and energy prices).

And logically, since the Fed’s data is sourced by the banks themselves, what the Fed is representing and what the banks report quarterly should be in rough alignment.

Unfortunately it isn’t.

Now that the Big 4 commercial banks – JPM, Wells, Bank of America and Citi – have reported their March 31 numbers, we can compile not only what the total amount of outstanding loans was as of the end of Q1, but more importantly, what the change in the quarter was. After all, for Liz Ann Sonders it is this change that is “the most important” data in the world.

What we learn is that the Top 4 banks held some $3.14 trillion in loans and leases at March 31.

So far so good. But what is not so good is that the change of this number in the first quarter is not an increase even remotely comparable to what the Fed makes those who read its H.8 statement believe it is. Quite the opposite.

As the chart below shows, in the first quarter, of the Big 4 banks, only Wells Fargo reported an increase – a tiny $4 billion to be exact – in its loans and leases portfolio. All the other banks… saw a decline in their loans and leases holdings.

We show this on the chart below.

We admit that we have taken a sampling of banks, even if it is the four biggest banks in the US, those which account for 42% of all loans outstanding, and a complete analysis would require complete data from not only regional banks, but also foreign banks operating in the US. However, if the four best capitalized banks, flush with trillions in Fed excess reserves, are indicating on their own that they are nowhere near lending at the level the Fed is telegraphing, and are in fact reducing their loans outstanding, why should the others be more generous in their lending activities?

Which brings us to the question: is the Fed fabricating loan level data?

Or, less dramatically, is the Fed merely once again goalseeking its weekly “data” to account for a world in which deposit expansion is no longer running at the pace seen in pre-taper days. It would be logical that the one “plug” the Fed would adjust to balance off its model is to boost lending activity, which would explain why the Fed is suggesting lending is surging.

Unfortunately, lending is not only not surging, it is contracting, if only among the Big 4 banks in the first quarter.

So whether the Fed has an ulterior motive, or is simply fudging for a lowered Fed reserve creation growth trendline, we believe the people deserve an answer: just what is really going on here?

Source: Fed, BofA, JPM, Wells, Citi

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

"While the music is playing, you keep dancing," seems the only possible explanation for the fanatical demand for peripheral European bonds as everyone and their pet rabbit front-runs the ECB (or merely rushes to the 'yieldiest' thing given Draghi's implicit guarantee). At 3.1%, it beggars belief how 'risk' is mispriced in these sovereigns should any capital regulations ever mark sovereign debt as anything but riskless.

 

 

Remember what happened the last time Draghi did any bond-buying (the SMP) – we saw bonds sell off into the actual actions of the central bank… so it seems the market continues to trade on the promise (and yet hope it never comes true)…

 

Well that plan didn't work so well eh? It would appear that during the 2010 period spreads doubled from 100bps to 200bps and once again during the 2011 period, spreads almost doubled from 260bps to over 500bps in Spain.

 

Charts: Bloomberg

via Zero Hedge http://ift.tt/1pafW1D Tyler Durden

In one of his more vitriolic speeches, UKIP MEP Nigel Farage lashes out at the terrible deja vu being ‘imposed’ on supposedly democratic nations across Europe. “The whole European project is based on a falsehood… and it’s a dangerous one.. because if you try to impose a new flag, a new anthem, a new president, a new army, a new police force; without first seeking the consent of the people you are creating the very nationalisms and resentment that the project was supposed to snuff out.” Farage concludes, he is not against Europe but is “against this Europe,” and this year’s European elections will mark the turning point.

 

 

via Zero Hedge http://ift.tt/1l2ib5x Tyler Durden

Many commentators consider what the Fed has done to be akin to providing stimulus, morphine, juice to an ailing economy.

 

We believe Fed’s actions would be more appropriately described as permitted cancerous beliefs to spread throughout the financial system, thereby killing Democratic Capitalism which is the basis of the capital markets.

 

Today we’re going to explain what the “final outcome” for this process will be. The short version is what happens to a cancer patient who allows the disease to spread unchecked (death).

 

In the case of the Fed’s actions we will see a similar “death” of Democratic Capitalism and the subsequent death of the capital markets.

 

We are, of course, talking in metaphors here: the world will not end, and commerce and business will continue, but the form of capital markets and Capitalism we are experiencing today will cease to exist as the Fed’s policies result in the market and economy eventually collapsing in such a fashion that what follows will bear little resemblance to that which we are experiencing now.

 

The focus of this “death” will not be stocks, but bonds, particularly sovereign bonds: the asset class against which all monetary policy and investment theory has been based for the last 80+ years.

 

Indeed, basic financial theory has proposed that sovereign bonds are essentially the only true “risk-free” investment in the world. While history shows this theory to be false (sovereign defaults have occurred throughout the 20^th century) this has been the basic tenant for all investment models and indeed the financial system at large going back for 80 some odd years.

 

The reason for this is that the Treasury (US sovereign bond) market is the basis of the entire monetary system in the US and the Global financial system in general. Indeed, US Treasuries are the senior most assets on the Primary Dealers’ (world’s largest banks) balance sheets. To understand why this is as well as why the Fed’s policies will ultimately destroy this system, you first need to understand the Primary Dealer system that is the basis for the US banking system at large.

 

If you’re unfamiliar with the Primary Dealers, these are the 18 banks at the top of the US private banking system. They’re in charge of handling US Treasury Debt auctions and as such they have unprecedented access to US debt both in terms of pricing and monetary control.

 

The Primary Dealers are:

 

1. Bank of America
2. Barclays Capital Inc.
3. BNP Paribas Securities Corp.
4. Cantor Fitzgerald & Co.
5. Citigroup Global Markets Inc.
6. Credit Suisse Securities (USA) LLC
7. Daiwa Securities America Inc.
8. Deutsche Bank Securities Inc.
9. Goldman, Sachs & Co.
10. HSBC Securities (USA) Inc.
11. J. P. Morgan Securities Inc.
12. Jefferies & Company Inc.
13. Mizuho Securities USA Inc.
14. Morgan Stanley & Co. Incorporated
15. Nomura Securities International Inc.
16. RBC Capital Markets
17. RBS Securities Inc.
18. UBS Securities LLC.

 

You’re bound to recognize these names by the mere fact that they are the exact banks that the Fed focused on “saving” thereby removing their “risk of failure” during the Financial Crisis.

 

These banks are also the largest beneficiaries of the Fed’s largest monetary policies: QE 1, QE lite, QE 2, etc. Indeed, we now know that QE 2 was in fact was meant to benefit those Primary Dealers in Europe, not the US housing market. The same goes for QE 3 and QE 4.

 

The Primary Dealers are the firms that buy US Treasuries during debt auctions. Once the Treasury debt is acquired by the Primary Dealer, it’s parked on their balance sheet as an asset. The Primary Dealer can then leverage up that asset and also fractionally lend on it, i.e. create more debt and issue more loans, mortgages, corporate bonds, or what have you.

 

Put another way, Treasuries are not only the primary asset on the large banks’ balance sheets, they are in fact the asset against which these banks lend/ extend additional debt into the monetary system, thereby controlling the amount of money in circulation in the economy.

 

When the Financial Crisis hit in 2007-2008, the Fed responded in several ways, but the most important for the point of today’s discussion is the Fed removing the “risk of failure” for the Primary Dealers by spreading these firms’ toxic debts onto the public’s balance sheet and funneling trillions of dollars into them via various lending windows.

 

In simple terms, the Fed took what was killing the Primary Dealers (toxic debts) and then spread it onto the US’s balance sheet (which was already sickly due to our excessive debt levels). This again ties in with my “cancer” metaphor, much as cancer spreads by infecting healthy cells.

 

When the Fed did this it did not save capitalism or the Capital Markets. What it did was allow the “cancer” of excessive leverage, toxic debts, and moral hazard to spread to the very basis of the US, indeed the entire world’s, financial system: the US balance sheet/ Sovereign Bond market.

 

These actions have already resulted in the US losing its AAA credit rating. But that is just the beginning. Indeed, few if any understand the real risk of what the Fed has done.

 

The reality is that the Fed has done the following:

 

1)   Set itself up for a collapse: at $4 trillion, the Fed’s balance sheet is now larger that the economies of Brazil, the UK, or France. And with capital of only $54 billion, the Fed is leveraged at over 50 to 1 (Lehman was at 30 to 1 when it failed).

 

2)   Called the risk profile of US sovereign debt into question: foreign investors, now fully aware that the US’s balance sheet is suspect (the US has lost its AAA credit rating), are dumping Treasuries (see China and Russia). This has resulted in the Fed now being responsible for the purchase of up to 91% of all new long-term (20+ years) US debt issuance.

 

3)   Put the entire Financial System (not just the private banks) at risk.

 

The Financial System requires trust to operate. Having changed the risk profile of US sovereign debt, the Fed has undermined the very basis of the US banking system (remember Treasuries are the senior most asset against which all banks lend).

 

Moreover, the Fed has undermined investor confidence in the capital markets as most now perceive the markets to be a “rigged game” in which certain participants, namely the large banks, are favored, while the rest of us (including even smaller banks) are still subject to the basic tenants of Democratic Capitalism: risk of failure.

 

This has resulted in retail investors fleeing the markets while institutional investors and those forced to participate in the markets for professional reasons now invest based on either the hope of more intervention from the Fed or simply front-running those Fed policies that have already been announced.

 

Put another way, the financial system and capital markets are no longer a healthy, thriving system of Democratic Capitalism in which a multitude of participants pursue different strategies. Instead they are an environment fraught with risk in which there is essentially “one trade,” and that trade is based on cancerous policies and beliefs that undermine the very basis of Democratic Capitalism, which in the end, is the foundation of the capital markets.

 

In simple terms, by damaging trust and permitting Wall Street to dump its toxic debts on the public’s balance sheet, the Fed has taken the Financial System from a status of extremely unhealthy to terminal.

 

The end result will be a Crisis that makes 2008 look like a joke. It will be a Crisis in which the US Treasury market and sovereign bonds in general implode, taking down much of the US banking system with it (remember, Treasuries are the senior most assets on US bank balance sheets).

 

We cannot say when this will happen. But it will happen. It might be next week, next month, or several years from now. But we’ve crossed the point of no return. The Treasury market is almost entirely dependent on the Fed to continue to function. That alone should make it clear that we are heading for a period of systemic risk that is far greater than anything we’ve seen in 80+ years (including 2008).

 

The Fed is not a “dealer” giving “hits” of monetary morphine to an “addict”… the Fed has permitted cancerous beliefs to spread throughout the financial system. And the end result is going to be the same as that of a patient who ignores cancer and simply acts as though everything is fine.

 

That patient is now past the point of no return. There can be no return to health. Instead the system will eventually collapse and then be replaced by a new one.

 

This concludes this article. For a FREE investment report outlining how to protect your portfolio from a market collapse, swing by http://ift.tt/RQfggo.

 

Best

Phoenix Capital Research

 

 

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

One glance at the 'ticks' surrounding this morning's so-called "fat finger" in EURCHF and it is clear that this was anything but a human trader falling asleep on his keyboard or accidently selling 100 yards and not 100 million CHF… Welcome to the 'unrigged' markets… (in FX also)… where stop-hunting algos rip to a 50-day moving-average in milliseconds to remove all stops before fading back ingloriously to unchanged. As Nanex suggests, this started in the CHF futures market…

 

The ramp took EURCHF up to its 50DMA before fading back…

 

And appears from the adjusting bids and offers to be anything but a fat finger error…

 

and here is Nanex with the close up in the CHF futures market…

On April 16, 2014 at 10:35:24, about 1800 Swiss Franc Futures contract suddenly dropped prices in 1 second. Prices mostly recovered over the following 12 seconds.

1. June 2014 Swiss Franc (6S) Futures on April 16, 2014

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2. Zooming in

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Fat finger – or algos gone wild?

via Zero Hedge http://ift.tt/1j0r0pn Tyler Durden

Having been stopped out of his “long punt” in copper futures (which are, we remind readers, levered via margin and not a simple cash percentage loss of capital), world-renowned (for something) Dennis Gartman has issued his latest missive – ultimate contrarian call – advice… “we are sellers this morning of copper and buyers of crude oil, one relative to the other, with the problems in China weighing upon the former while crude has held impressively as other commodity prices have fallen.” Crude oil longs beware… prepare to be Gartman’d.

 

Via Dennis Gartman,

We were stopped out of our copper position yesterday, losing 1.2% on the position, which when compared to the 10-15% movements we’ve seen recently in NFLX or TSLA or others such as that seems rather inconsequential but is important nonetheless. Those not out should be out… now.

[deflecting the futures-contract – and thus 10-20x levered via margin – 1.2% loss in copper with a 10-15% gain in unlevered risk positions in NFLX and TSLA (a magical catch we suppose) seems a little disingenous to us – but we digress]

NEW RECOMMENDATION: Indeed, we are sellers this morning of copper and buyers of crude oil, one relative to the other, with the problems in China weighing upon the former while crude has held impressively as other commodity prices have fallen. As we write, June WTI crude is trading 103.79 and July copper is trading $3.0010. We’ll have stops in tomorrow’s TGL, but we’d not wish to risk more than 2% on this rather unusual spread position.

 

++++++

Of course, there is no discussion of beta differentials… relative tick sizes, or capital allocations to this 2-legged strategy that a real-world trader would have to undertake – but then at $29.99 you get what you pay for…

As a reminder this long oil, short copper trade is the most consensus trade that exists currently (as we noted here)…

Oil spec longs at record highs… 

 

Copper spec shorts at record highs…

via Zero Hedge http://ift.tt/1j0cj71 Tyler Durden

Not much to add here that we haven’t already said before about the state of demand for housing by the ordinary American.

First it was Wells Fargo:

 

Then it was JPMorgan:

 

Then it was Citigroup:

 

And now, it is Bank of America.

Remember when bank success (and profitability) depended on them lending such trivial things as mortgages so they could arb the Net Interest Margin (which incidentally also tumbled to a record low for Bank of America)? Good times…

In other news, the “housing recovery” is now complete.

via Zero Hedge http://ift.tt/1j06aro Tyler Durden