Friday, May 30, 2014

Our "Make It Look Good" Economy Has Failed..........America is completely out of touch with reality!

Our "Make It Look Good" Economy Has Failed

The essence of the U.S. economy is make it look good: never mind quality or long-term consequences, just make it look good today, this week, this month, this quarter: make the pink slime look like meat, make the company look profitable, make the low-quality product look good enough to close the sale, make the unemployment rate low enough to justify re-electing the toadies currently in power, make the body count of bad guys look good, and on and on--just makes the numbers look good now, the future will take care of itself.

This is, of course, an attractive lie: the future is a direct consequence of present decisions and actions. It is remarkable how quickly we latch onto the notion that an endless parade of lies, manipulations and deceptions will magically produce a warm and fuzzy future of organic growth fostered by sound investments.
Alas, an economy that relies on an endless parade of lies, manipulations and deceptions has only one possible future: failure--abject, total, undeniable, devastating. Equally remarkable is the current conviction that absurd extremes in manipulation--the billions of dollars of corporate buybacks pushing stocks higher, the socialization of the U.S. mortgage market, where privately issued mortgages (unbacked by government guarantees) have virtually vanished, the ginned-up unemployment number (remove enough potential workers from the count and the unemployment rate is soon near-zero)--will magically lead to an economy that no longer needs extreme manipulations to sustain itself.
All these lies (if we are bold enough to call a lie a lie) and manipulations cannot possibly herald in an economy of honest reporting, market discovery of price and sound investments.
This is equivalent to doing nothing but eating junk food while playing martial-arts videogames for months on end and then expecting to beat Tony Jaa in a real-world sparring match. Only people who've lost touch with reality would think that getting fat and wheezy playing videogames while eating Happy Meals and Ho-Hos would create a future that required an entirely different set of decisions and disciplines.
America is completely out of touch with reality: gaming statistics and making credit free to financiers doesn't create jobs, any more than stuffing one's face with junk food and playing video 
games prepares one to avoid getting beaten to a pulp in a real martial arts match.
The misguided individual who reckons that foisting make it look good cons will magically create productive investments soon discovers that cons, lies and manipulations are all one-way streets: a make it look good con has only one future: a bigger con, to cover up the disastrous consequences of the initial con.

The U.S. economy won't fail in the future: it has already failed. 

Just as the delusional coach-potato who stuffs himself with Happy Meals and Ho-Hos to prepare for a real-world sparring match failed at the first bite, so too have we failed with the first lie, the first gamed statistic, the first Federal Reserve manipulation, the first fudged "profit."
Liars often entertain the fantasy that the initial make it look good illusion can eventually be replaced with real numbers and real integrity: but that too is a lie, a lie the liar tells himself. A house of cards constructed of lies, manipulations, fudged numbers, ginned-up statistics and cleverly constructed deceptions cannot suddenly become a structure built on integrity, accountability and honest reporting of facts; it will always be fragile, for a single truth and a single unvarnished fact can bring down the entire contraption.
This is where our endless parade of lies, manipulations and deceptions has led us: to a future of more lies, manipulations and deceptions because untruth is a black hole; once our first manipulation pushes us past the event horizon, there is no way back to honesty, accountability and factual reporting.
Officially sanctioned lies, manipulations and deceptions erode trust in institutions and the bedrock belief that honesty, integrity, accountability, hard work and productive investments are the keys to advancement.
Once a people have been trained to swallow an endless parade of lies, manipulations and deceptions in order to get their share of the system's swag, they lose the ability to practice accountability, integrity and honesty. Their own complicity renders them incapable of trusting the system or anyone else playing the make it look good game.
Eventually they lose the ability to even recognize accountability, integrity and honesty, much less live them.
America's economy has already failed. It failed when our leaders turned to lies and manipulation to make it look good, and it failed when we bought the lies because it was so much less risky than demanding a factual accounting.
When rigged numbers are the basis of our success, we have failed.

What does freedom really mean?..........A MUST READ!

What does freedom really mean?

In essence, freedom is the absence of state coercion. Nothing more, but certainly nothing less.

There is coercive reality behind those invoking freedom while advocating state action:

Few Americans understand that all government action is inherently coercive. If nothing else, government action requires taxes. If taxes were freely paid, they wouldn't be called taxes, they'd be called donations. If we intend to use the word freedom in an honest way, we should have the simple integrity to give it real meaning: Freedom is living without government coercion. So when a politician talks about freedom for this group or that, ask yourself whether he is advocating more government action or less.

Taking this definition a step further, a free society is the absence of aggression against one's body and property:

A society is free, if every person is recognized as the exclusive owner of his own (scarce) physical body, if everyone is free to appropriate or "homestead" previously un-owned things as private property, if everyone is free to use his body and his homesteaded goods to produce whatever he wants to produce (without thereby damaging the physical integrity of other peoples' property), and if everyone is free to contract with others regarding their respective properties in any way deemed mutually beneficial. Any interference with this constitutes an act of aggression, and a society is un-free to the extent of such aggressions.

In The Ethics of Liberty, Murray Rothbard similarly defined freedom as the "absence of invasion by another man of any man's person or property".

This encapsulates the critical libertarian concept of negative liberty, as opposed to the view of positive liberty in the form of mastery over one's person and surroundings generally favored by "progressives."

This definition of freedom is fundamental.  

It means free people should be able to use their minds, bodies, and talents to advance their well-being (whether material, intellectual, or spiritual) as they see fit. It does not mean they can demand freedom from material want, or scarcity, or illness, or unhappiness, or unpleasantness generally. It does not mean anyone owes them housing, medical care, food, or a "living wage." 

It means, in sum, the freedom to be left alone.  

And this is precisely what the political class of all stripes cannot abide. 


The USA Is Going Nowhere........A MUST READ!

The USA Is Going Nowhere

History is moving the furniture around in the house of mankind just about everywhere.Things have changed, people come and go through the rooms of state, and everything looks shabbier by the day, lethargy eats away at the upholstery like an acid fog, and the walls reverberate with meaningless oratory. 

The USA is going nowhere because it doesn't like the new place where history wants to take it.

That is, first of all, a place of far less influence on everybody else, in a new era of desperate struggle to remain modern. That fading modern world is the house that America built, the great post World War Two McMansion stuffed with dubious luxuries in a Las Vegas of the collective mind. History's bank has foreclosed on it and all the nations and people of the world have been told to make new arrangements for daily life. The USA wants everybody to stay put and act as if nothing has changed.

Therefore, change will be forced on the USA. 

It will take the form of things breaking and not getting fixed. Unfortunately, America furnished its part of the house with stapled-together crap designed to look better than it really was. We like to keep the blinds drawn now so as not to see it all coming apart. Barack Obama comes and goes like a pliable butler, doing little more than carrying trays of policy that will be consumed like stale tea cakes — while the wallpaper curls, and the boilers fail down in the basement, and veneers delaminate, and little animals scuttle ominously around in the attic.

Everybody I know is distressed by this toxic languor, this sense of being stuck waiting in a place they want desperately to move on from — like the prison of elder-care where so many find themselves hostage to the futility of staving off a certain ending, while all the family resources drain into various bureaucratic black holes. Do we care that the generations to come will have nothing left, nothing at all?

This Memorial Day the usual pieties are noticeably muted. Few politicians dare to utter sanctimonies about our brave soldiers maimed on far-flung battlefields, when so many of them are stuck waiting alone in dark rooms with only their wounds for company. If regular civilian medicine is a cruel, hopeless, quasi-criminal racket, imagine what medicine for army veterans is like — all that plus an overlay of profound government ineptitude and institutionalized ass-covering.

Even the idle chatter about American Dreaming has faded out lately, because too much has happened to families and individuals to demonstrate that people need more than dreams and wishes to make things happen. It's kind of a relief to not have to listen to those inane exhortations anymore, especially the idiotic shrieking that "We're number one!"

Others have got our number now. They are going their own way whether we like it or not. The Russians and the Chinese. The voters in Europe. The moiling masses of Arabia and its outlands. The generals in Thailand. Too bad the people of Main Street USA don't want to do anything but sit on their hands waiting for the rafters to tumble down. My guess is that nothing will bestir us until we wake up one morning surrounded by rubble and dust. By then, America will be a salvage operation.

There's a long and comprehensive To-Do list that has been waiting for us since at least 2008, when the nation received one forceful blow upside its thick head. We refused to pay attention.

First item on the list: restructure the banks.

Other items: 

Reinstate the Glass-Steagall Act; disassemble the ridiculous "security" edifice under the NSA; upgrade the US electric grid; close down most of our military bases overseas (and some of our bases in the USA); draw up a constitutional amendment re-defining the alleged "personhood" of corporations; fix the passenger railroad system to prepare for the end of Happy Motoring; rebuild Main Street commerce to prepare for the death of WalMart and things like it; outlaw GMO foods and promote local food production.

When will we step out of this rotting house into the sunshine?



"...But I'll tell you what they don't want. They DON'T want a population of citizens capable of critical thinking. They don't want well-informed, well-educated people capable of critical thinking. They're not interested in that, that doesn't help them. That's against their interests. That's right. They don't want people who are smart enough to sit around the kitchen table and figure out how badly they're getting F&^%$D by system that threw them overboard 30 years ago. They don't want that. You know what they want? They want OBEDIENT WORKERS. OBEDIENT WORKERS. People who are just smart enough to run the machines and do the paperwork, and just dumb enough to passably accept all these increasingly shittier jobs with the lower pay, the longer hours, the reduced benefits, the end of overtime, and the vanishing pension that disappears the minute you go to collect it..."

                                                                                                                                  George Carlin

Since the vast majority of people define themselves almost entirely by their level of consumption, or by some desired level of future consumption, their consciousness becomes easily controlled and their worldview easily managed and molded.

This mindset is very corrosive to a society.

They simply cannot see life in any other context and so they become trapped within a very sick and twisted form of human existence.

Consumerism is the religion of the United States!

There Is Evil, And Then There's Organized Evil.......A MUST READ!

There Is Evil, And Then There's Organized Evil

Large-scale evil requires surrender of autonomy, coercion by a central authority and a willingness to follow orders.

There is is a memorial outside a village in the south of France. It is a typical village, quite small, perhaps a few hundred residents. The memorial commemorates three young French civilians who were taken out and shot by Nazi soldiers, either for "crimes" of resistance or perhaps as a "lesson" to the restive civilian populace.

The German soldiers who pulled the triggers were of course "just following orders."

Evil must be resisted, corralled, vanquished...........

Interestingly, people don't need to be forced by a central authority to resist evil, though their efforts will prove more successful if they band together and submit to a competent authority of their own choosing. This is the basis of the "good war" or "just war."

But to be part of large-scale organized evil, people need to surrender their autonomy under threat, and be ordered by a central authority.

This is the origin of the Nuremberg Defense: I was only following lawful, Superior Orders when I murdered those French civilians. The soldiers who followed the orders would have been punished had they refused; coercion is always the backbone of central authority.

Hannah Arendt wrote about the Great Evil, Nazi Germany, and "The Final Solution" of death camps in Eichmann in Jerusalem: A Report on the Banality of Evil. The Nazi machine spewed plentiful opportunities to practice the banality of evil, and the death camps were simply one division of the daily grind of pressing one's palms on evil and passing it on to the next "good German."

The routine killing of civilians went on day after day; it was the "day job" of the occupying troops.

Those inside the central authority know, of course, but very few are telling, because the see-saw is just so imbalanced in a system which depends on lies and the distortion of truth to continue its domination.

Truth-tellers will lose their prestigious position, their generous salary and the acceptance of their peers, and perhaps their lives. In exchange for this sacrifice, the truth-teller receives only the glowing, ephemeral shards of his/her integrity: in the current zeitgeist, that literally has no value. The machine will grind on without them, impervious to the tiny pricks of truth; the machinery of propaganda, artifice, misdirection and misrepresentation is well-oiled and masterful in the reach and scope of its operation.

In this context, it is worth watching The Most Dangerous Man in America: Daniel Ellsberg and the Pentagon Papers. Daniel Ellsberg was only one of thousands of "good Americans" doing their job in a war machine built entirely on lies and propaganda. He was one of a handful of citizens out of those thousands, or tens of thousands, who was willing to trade his career for his integrity and conscience.

The Vietnam War was "sold" to the public as a "just and necessary war" that they had "chosen" via their elected representatives. But it was all lies, propaganda and coercion, crowned by the profound cowardice of an elected leadership unwilling to risk the loss of perquisites and power.

Ellsberg had given excerpts of The Pentagon Papers, the secret and oh-so-dangerous unvarnished truth about America's involvement in Vietnam, to various members of Congress; all but one did nothing. Only Rep. Pete McCloskey (R) thought the American people deserved the truth. McCloskey is a decorated U.S. Marine Corps veteran of combat during the Korean War, recipient of the Navy Cross, the Silver Star, and two awards of the Purple Heart. He published Truth and Untruth - Political Deceit in America in 1972.

Perhaps the American people would have chosen to sacrifice their youth and treasure on what it had concluded was a "just and necessary" in Vietnam, but it never got the chance to learn the truth which was the necessary foundation of any such decision.

That's how the banality of evil works. When truth becomes too dangerous to the Status Quo, it must be strangled every day, by tens of thousands of people, and its limp corpse hidden away. POLITICS, ECONOMICS, OUR MEDIA AND LEADERSHIP AT EVERY LEVEL IN AMERICA ARE STRUGGLING AND LOSING WITH THIS ISSUE TODAY.



The very worst mistake a nation can make is to forget the law of God in its national and political and social life. That nation which forgets God and lives as though His laws do not apply – as though God were not their King or Judge – that nation will eventually learn that whether they have recognized Him or not, God is their God, He is their King and Judge, and they are most certainly answerable to Him.

God holds us accountable on a national and societal level. His demand of righteousness does not apply to individuals alone. He holds nations responsible for the same and will deal with nations accordingly.

It does not matter, ultimately, how much or how little acquaintance with the gospel the nation has had; they knew better than what they had done, and so they are guilty. God is King over pagan Tyre or Egypt or Damascus or Ammon just as certainly as He is King over Judah. Difference in privilege there may be, and so difference in degree of guilt. But He is God over all, and all nations are accountable to Him and answerable to His law. There is no truly atheistic government. Some governments may acknowledge their duty to God, and others may deny it. But all are responsible to Him and will be judged accordingly.

In short, when a society ignores the law of God regarding decency, morality, justice, honesty, etc., it accumulates a debt of offense against God which cannot go forever unpaid. The time will come when God says, "Enough!" And in the words of Hosea, God will "remember the sin" of the nation and bring it all back upon them. The judge of all the earth will finally execute sentence. 

The first step toward national retribution seems to be that God removes restraint and allows a society to have things its own way. Giving them over to themselves they have what they want, and that is precisely the very worst thing that can ever happen to us. What we need is divine restraint from our sinfulness. When God gives us over to ourselves, we are hopelessly lost.

"Therefore, God gave them over" (Rom. 1:24, 26, 28). 

This is frightening, because it seems to describe exactly the condition of our society. 

How else can we explain the enormous pressure to tolerate homosexuality? How else can we explain the enormous pressure on politicians to condone the hideous practice of partial birth abortion? It should be easy to oppose such a dreadful thing. How else can we explain the societal condoning of leaders who abuse office, lie, perjure selves, and even commit treason? Do we not know better? Yes, we do, but it seems that we have been made to lie in the bed which we have made for ourselves. 

This principle seems to be in view in Isaiah 3:4 – "I will give children to be their princes, and babes shall rule over them." "Babies" ruling over us? We used to have Washingtons and Lincolns. Now we have Clintons and the current Obamination. In terms of statesmanship, the difference is staggering. 

Or look at this in relation to Amos 8:11 – "I will send a famine on the land, not a famine of bread, nor a thirst for water, but of hearing the words of the LORD." In one sense, we could argue that the gospel is still readily available in our society. But then again, how many churches are there which really expound the gospel? "Famine" is a word that fits very well.

Billy Graham was quoted to have said, "If God does not judge America, he will owe Sodom and Gomorrah an apology." 

It is not a question of if judgment will come – it has already begun. God seems to have given us over to ourselves.

We must see our society through this lens – to tolerate sin is to invite divine wrath from God the judge of all the earth. It is a sobering thought.

When the prophets warn of coming national judgment because of the sins of the society and / or its rulers there is a note of hope – a promise that one day God will send another King to establish God's rule the world over. He will rule in righteousness and with a rod of iron will enforce justice and morality. Indeed, the nations will be made to worship (Zech. 14). And we may be sure that when he comes there will be no homosexual lobby to influence his decisions, no radical feminist to scream for abortion rights. There will be no leaders allowed to twist the meanings of words for personal gain or harass the people. Instead, "the whole earth shall be filled with the knowledge of the Lord, as waters cover sea." And no enemy will be permitted to stand. And the righteous, who now find themselves in such minority, will then share in his glory and in his rule. And the name of Jesus, which for so long was banned from public use, will then be the name which every tongue will acknowledge to be the name above every name, and every knee will bow before Him in submission to his universal lordship. His rule will be universal, and it will be forever. "Even so, come! Lord Jesus!"

Psalm 89:32

I will punish their sin with the rod, their iniquity with flogging;
Proverbs 14:34

Righteousness exalts a nation, but sin condemns any people.

Proverbs 11:14

For lack of guidance a nation falls, but victory is won through many advisers.
Proverbs 29:16

When the wicked thrive, so does sin, but the righteous will see their downfall.

Proverbs 29:6

Evildoers are snared by their own sin, but the righteous shout for joy and are glad.

Leviticus 18:25

Even the land was defiled; so I punished it for its sin, and the land vomited out its inhabitants.

Jeremiah 5:29

Should I not punish them for this?" declares the Lord. "Should I not avenge myself on such a nation as this?
Isaiah 1:4

Woe to the sinful nation, a people whose guilt is great, a brood of evildoers, children given to corruption! They have forsaken the Lord; they have spurned the Holy One of Israel and turned their backs on him.


Thursday, May 29, 2014

Someone Decided To Buy $1 Billion eMinis In 1 Second At The All Time High.........VOLUME SPIKE

Someone Decided To Buy $1 Billion eMinis In 1 Second At The All Time High

Someone decided that 1436ET was the perfect time to buy $1bn worth of S&P 500 futures (10k contracts) in 1 second (and $1.8 billion in that minute)... this flush of volume is the largest minute of the day and lifted all equity indices and ETFs in one magical move. As a result of the order, bonds ralliedeven as and VIX is higher on the day.

10k contracts in 1 second and 18.6k contracts in that minute...

 and Bonds rallied...

The Trade of the Century............... When George Soros Broke the British Pound



The Trade of the Century: When George Soros Broke the British Pound

In 1992, George Soros brought the Bank of England to its knees. In the process, he pocketed over a billion dollars. Making a billion dollars is by all accounts pretty cool. But demolishing the monetary system of Great Britain in a single day with an elegantly constructed bet against its currency? That's the stuff of legends.

Though just two decades ago, Soros made his nation-shaking bet in a very different time. Back then, hedge funds hadn't yet entered the public consciousness, restrictions on capital flowing from one country to another were just lifted, and the era of the 24 hours a day news cycle had just begun.

To appreciate how Soros made a fortune betting against the British pound requires some knowledge of how exchange rates between countries work, the macroeconomic tools governments use to stimulate economies, and how hedge funds make money. 

And so here is the story of how George Soros led a group of traders to break the entire foreign currency system of Great Britain and profit handsomely at the expense of British taxpayers and others who were on the wrong side of the greatest financial bet of the 20th century.

Picking Up the Pieces in Europe

So let's start by laying out the historical backdrop for Soros' gambit. After Word War II, European countries wanted to integrate their economies more tightly with each other. The hope was that tighter relations would prevent catastrophic wars from breaking out every few decades and create a large Pan-European market that could compete with the United States. This culminated in the European Union (EU), which didn't assume its current form with a single currency until 1999.

A precursor to the EU was the European Exchange Rate mechanism (ERM), which was created in 1979. Countries weren't ready to give up their national currencies, but they agreed to fix their exchange rates with each other instead of "floating" their currency and letting capital markets set the rates. Since Germany had the strongest economy in Europe, each country set their currency's value in Deutschmarks. They agreed to maintain the exchange rate between their currency and the Deutschmark within an acceptable band of plus or minus 6% of the agreed upon rate.

With fixed exchange rates, countries can't just "set it and forget it." People trade currency every day, exchanging their currency to buy imports or sell exports, and the market applies pressure based on what it thinks the actual rate should be based on supply and demand for a currency. To keep the exchange rate fixed, governments need to participate in the market and nudge it in the agreed upon direction.

Governments can manage their currency in two main ways. First, they can take their reserves of foreign currency and buy up their own currency on the open market. That causes the currency to appreciate. Doing the opposite devalues the currency.

Alternatively, governments can influence exchange rates by setting interest rates. Want your currency to appreciate? Raise rates to entice people to buy your currency and lend that money at higher interest rates. Want your currency to depreciate? Cut interest rates so capital needs to go elsewhere in search of juicy profits.

Messing around with interest rates is a big deal, however, because interest rates affect the whole economy. Along with government spending, interest rates are the main lever governments can use to adjust the economy. If the country is experiencing a recession, the government might cut interest rates to spur investment and spending. If inflation is high, the government might raise rates to shrink the supply of money.

So, all this is to say that there are consequences to maintaining a fixed exchange rate. It's an external forcing function that ties governments' hands on monetary policy, which may limit or even contradict what they need to do to keep the domestic economy healthy.

Britain Enters the ERM

John Major, leading proponent of ERM while serving under Prime Minister Margaret Thatcher. Major was Prime Minister when the chickens came home to roost, so to speak.

In 1990, Britain was a country that arguably could use an external forcing function to tie its hands on monetary policy. Inflation was high, productivity was low, exports were uncompetitive, and no one really believed the government was capable of fixing the issues.

The Prime Minister at the time, Margaret Thatcher, had long opposed entering the ERM, insisting that the price of the pound be set by the markets. By 1990, however, Thatcher lacked the political power to oppose other members of her Conservative party that wanted to fix their exchange rates with the rest of Europe.

The decision to join the ERM was championed by John Major, who was the Chancellor of the Exchequer in Thatcher's cabinet.  In October 1990 Britain finally enter the ERM at an exchange rate of 2.95 Deutschmark (DM) for each British pound (GBP). The British government was obligated to keep the exchange rate within 2.78 DM to 3.13 DM.

Shorty thereafter, Major replaced Thatcher as the Prime Minister. The fixed exchange rate system was to be the centerpiece of his economic plan. Major thought that the ERM would serve as a sort of "autopilot" that kept the British monetary policy on proper course. The government couldn't play with the money supply willy-nilly because its hands were tied by the exchange rate agreement.

And to a certain extent, the policy worked. Between 1990 and 1992, inflation decreased, interest rates eased, and unemployment was low by historical standards. In 1992, however, England felt the impact of a massive global recession and unemployment spiked to 12.7% from just 7.7% two years prior.

And so we come to 1992. Ordinarily, Britain could spur investment and spending by cutting interest rates during an employment crisis. But in this case, doing so would push the pound's value below the agreed upon amount. So while the people of Great Britain dealt with a recession, the government's hands were tied; they'd just have to ride it out.

Meanwhile in New York City

In 1992, George Soros was 62 years old and led the Quantum Fund, a hedge fund he founded in 1970 that bet on macroeconomic trends. Soros was already a very rich guy, but he wasn't iconically rich, or the public figure he is today.

If hedge funds have an air of mystery about them today, this was especially true in 1992 -- it wasn't until then that the words even entered the popular vernacular.

What is a hedge fund exactly? Well, the word "hedge" provides a clue to their original purpose: investing capital to make a specific bet that something will happen. Hedge funds also use financial instruments to "hedge" against other risks in order to more clearly isolate the bet that they want to make.

Here's an example. Say you're a hedge fund that thinks AT&T's cell phone network stinks and you want to bet against it. You could "short" the stock (make money when the stock goes down), but the whole cell phone market is going gangbusters, so AT&T might get new customers even though it stinks. If that happens, AT&T's stock price could go up and you'd lose a lot of money. To "hedge" against this risk, you buy some Verizon stock as well because more precisely, you think that AT&T is crappy relative to Verizon.

Now, if cell phone carrier stocks increase in value, you still make money in the event that Verizon goes up more than AT&T does. Conversely, if cell phone stocks go down, you still make money if AT&T's stock goes down faster than Verizon's does. By creating a position like this, you've "hedged" a lot of the more general market and industry risks away and made a very specific bet -- that AT&T stinks compared to Verizon.

Another thing hedge funds do (if they're pretty sure about their wager) is borrow funds to put even more money behind the bet.  On the AT&T-Verizon trade they might make a little bit of money on each share. But if they used mostly borrowed money, they can buy a lot of shares without fronting that much capital. So if you're really sure a bet is right, you might borrow a lot of money to enhance your payday.

A final thing to note about hedge funds is how their managers get paid. The managers are typically investing other people's money (rich people, endowments, etc) and they receive management fees to cover the fund's expenses; this includes a salary. The standard is about 2% of the funds under management. So if you manage a very large hedge fund in terms of the amount of money being invested, you can earn some decent income regardless of how the fund performs. But not enough to make you a billionaire.

Hedge fund managers become billionaires by placing really successful bets. Managers earn around 20% of the returns that the fund creates (assuming the fund meets some minimum benchmark). So if your fund makes a bet that produces a billion dollar return, you and your partners make at least $200 million of that. Do that for a few years, especially if you place larger and larger bets, and voila! You're a billionaire.

So in short, hedge funds try to make isolated bets using financial instruments. They borrow money to make the potential rewards even sweeter, and hedge fund managers can make boatloads of money when they bet right. And that's exactly what Soros and his partners were about to do.

A Mis-priced Currency Means Big Opportunity 


By the spring of 1992, just a year and a half after Britain joined the ERM, the fixed exchange rate posed a serious problem. While putting on a cheery public face, internally the Exchequer (England's Treasury department) realized that the currency was mispriced relative to the Deutschemark. Jonathan Portes, an economist who was at the time a junior staff member there, wrote:

"In May 1992, the immediate problem was obvious. From a domestic point of view, the appropriate level of interest rates, given weak demand, was much lower than that necessary to maintain the sterling's position in the ERM.  

Moreover, it was becoming increasingly clear that sterling was overvalued; even in the depths of a recession, we still had a large current account deficit the country was importing more than it exported.

We argued that the fundamental problem was that we'd joined the ERM at the wrong rate; sterling was overvalued, meaning that we were stuck with a structural current account deficit."

The sterling was priced too high. The British government knew it, and the market knew it too as the pound was trading at the lower end of the agreed upon band with the Deutschemark.

What kept the pound from plummeting in value was the British government's guarantee that it would keep the value propped up, and the market believed that it would. As long as everyone believed that England would stay indefinitely committed to buying pounds for around 2.95 Deutschemarks, the status quo was maintained.

The Flashpoint

 "Markets can influence the events that they anticipate."

                                                                                             George Soros

Throughout the summer of 1992, the British pound held its position. That is, until Germany threw Britain under the bus and all hell broke loose.

For some time that year, German central bank officials made comments on and off the record that undermined the sterling's strength. The British paper The Independent documents the slights:

"On 25 August, for example, Reimut Jochimsen, a Bundesbank council member, issued a speech saying that there was potential for realignment within the ERM. Sterling weakened. On 10 September, an unnamed Bundesbank official was quoted as saying that a devaluation of sterling was inevitable. The pound fell."

The event that ultimately led to the undoing of the British pound's fixed exchange rate was an interview with the President of the German Bundesbank, Helmut Schlesinger. Schlesinger gave the interview to the Wall Street Journal and a German newspaper. He had one condition: If they wanted to directly quote him, they had to let him review the quotes. If they only indirectly paraphrased him, no such permission was necessary.

President of the German Bundesbank, Helmut Schlesinger

That night on September 16th, 1992, the following report paraphrasing Schlesinger's words went out over the newswires:

"The President of the Bundesbank, Professor Helmut Schlesinger, does not rule out the possibility that, even after the realignment and the cut in German interest rates, one or two currencies could come under pressure before the referendum in France. He conceded in an interview that the problems are of course not solved completely by the measures taken."

By the morning, the report landed on George Soros's desk. Soros and the entire financial markets took this to believe that the pound sterling was one of those currencies that could "come under pressure" and be devalued.

In just one day, this seemingly innocuous paraphrased quote would bring devastation to the Bank of England and net George Soros over a billion dollars in profit. The market ceased to believe that England would be able to maintain its current exchange rate and and that belief was all that was keeping the pound from falling.

The Trade of the Century

"There is no point in being confident and having a small position."

                                                                                                 George Soros

Since August, Soros and his Quantum Fund had been building a $1.5 billion position to bet that the price of Sterling would fall. Since the British government's full faith and credit was stating that it would not fall, this wasn't necessarily something that was going to happen. But Stanley Druckenmiller, a senior member of the fund, saw the report from Schlesinger and immediately realized its importance.

Sebastian Mallaby's book More Money Than God recounts the day's events. According to Mallaby, Druckenmiller noted that their $1.5 billion bet against the the pound was about to pay off and that they should consider adding to the position.

Soros retorted with a different strategy: "Go for the jugular."

If Schlesinger's quote could be used as the catalyst for the pound to devalue, why shouldn't today be the day it happened? Instead of slowly building up a short position against the sterling, the Quantum Fund could short sell sterling on an unprecedented scale today. Doing so would not only help hasten the tumble of the sterling, but also increase the fund's profit.

It was this decision to "go for the jugular"  that netted Soros's firm over a billion dollars, toppled the Bank of England's currency regime, and ultimately led to the disgrace of the Prime Minister. It also cost the British taxpayers billions.

Let's walk through Soros's trade to understand why it was so elegant. As we stated earlier, the trade was for the Quantum Fund to "short" the British pound, meaning they would make money if the currency's value went down.

Now, what exactly does it mean to "short" a currency, or anything for that matter? Let's say it's January 2009 and you think Apple's iPhone is over the hill and that the company's stock price (of $90) will decline. How do you benefit from this insight?

Well, you or your broker can go to someone that owns some Apple stock and ask to borrow a single Apple stock from them. You'll give them back the share later and of course pay them interest for the loan. But for now, you sell that stock for $90 in cash. Two days later, the stock price is $88, so you buy one share with your $90 in cash. That leaves you with $2 in profit! (Well almost two dollars -- you have to pay the person who loaned you the stock two days of interest.)

But what if you didn't sell your Apple stock when it hit $88 and instead decided to hold onto it until the stock plummeted further? Well, you'd be screwed because the stock went up from $90 to around $600; you would lose $510 on a the trade, plus interest!

If you buy a stock, the worst you can do is lose all your money. If you short a stock, your downside is limitless because the stock can always keep going up. You can possibly lose more than all your money, and that's a very bad thing. So if you want to take a short position in something like the British pound, you want to make sure your downside risk is hedged.

And what if you want to short a currency like the British pound? In this case, you'd go to a British person or company and ask to borrow money from them. They say, "Sure, here's 100 British pounds. Just give me back the pounds in a few days with some interest and we'll have some tea and crumpets." Now, you take those 100 British pounds and you convert them into 295 Deutschemarks at the agreed upon exchange rate.

At this point, you would really like the British pound to lose value relative to the Deutschmark. Why? Because if the British pound depreciates 10%, when you convert the 295 DM back to pounds to repay the loan, you'll have 110 pounds. You can pay back the 100 pounds and a little bit of interest, and you'll still clear about 10 pound in profit.

So you make money if the pound devalues. But what if the pound appreciates? You'll lose your shirt. Therein lies the brilliance of Soros's bet: if the pound tanked, they would make billions on their short. And if the pound increased in value? Well that scenario was impossible because everyone knew the the sterling was over priced. It already traded at the bottom of its trading band and the only thing that kept it propped up was government intervention. There was no scenario in which the pound would appreciate.

So, either the pound would stay about the same in value (in which case Soros's fund wouldn't make any money, but wouldn't lose that much money), or the pound would be devalued and the firm would make an obscene amount of money. There was no massive downside -- only a massive upside.

As The Handbook of Hedge Funds puts it:

"If speculators were to break the ERM, being short the pound could turn out to be a very profitable position. Even if the devaluation did not occur, the chances of seeing the pound strengthen were small -- it was more likely to stay at the bottom of its fluctuation band. The only downside for speculators was transaction costs."

And so that morning, Soros and his fund increased their short position against the British pound from $1.5 to $10 billion. It was the perfect bet with a mitigated downside and a limitless upside. It was like betting on a coin flip, were if the coin lands on heads (the pound devalues), they make a lot of money. If the coin lands on tails (the exchange rates remained fixed), they only lose a small amount of money on loan interest. That's the kind of bet Soros would pour money into all the day, even if he had to borrow billions.

Fighting off the Speculators

"Our total position by Black Wednesday had to be worth almost $10 billion. We planned to sell more than that. In fact, when Norman Lamont [the British finance minister] said just before the devaluation that he would borrow nearly $15 billion to defend sterling, we were amused because that was about how much we wanted to sell."

                                                         George Soros, 1992

As Europe slept, Soros borrowed and sold pounds from anyone that he could. The Quantum Fund's position exceeded $10 billion shorting the pound. Other hedge funds got wind of the the trade and the report from the Bundesbank and started following suit, also borrowing and selling pounds.

By the time London markets opened for business and British treasury officials started their day, tens of billions of pounds had been sold and the the pound was dangerously close to trading below the levels mandated by the ERM.

The Bank of England was about to have a very shitty day.

British officials first responded by buying one billion pounds at 8:40 AM. The purchase had no effect on the price of the pound. The whole world was selling, and the British government didn't have the buying power to fight it all off. It's estimated that the British government spent £27 billion of its reserves buying up pounds to no avail.

By 9AM, finance minister Norman Lamont contacted Prime Minister John Major and told him they couldn't possibly buy up enough pounds to keep the currency propped up. The only option left for the British government to keep their currency trading at the right level would be to increase interest rates dramatically and attract people to buy pounds. Major refused. Britain was in the midst of a recession and increasing rates would further shrink the economy. It would be political suicide.

Blood was in the water. Global capital continued to bet against the pound. An hour and a half later, Lamont called the Prime Minister to re-plead his case. The Prime Minister relented. At 11AM, the British government announced they would increase interest rates 200 basis points, from 10% to 12%.  

How did the value of the pound react to this enormous increase in interest rates? Nothing happened. The pound continued to plummet. Lamont headed to the Prime Minister's residence to figure out how to salvage the situation, which led them to announce an interest rate increase of another 300 basis points, from 12% to 15%.

What was the effect of this rate increase on the Sterling? Again, nothing. As Mallaby later documents in his book, Soros and the gang of speculators knew victory was near:

"At their desks on the other side of the Atlantic, Druckenmiller and Soros saw the rate hikes as an act of desperation by a dying man. They were a signal that the end was nigh--and that it was time for one last push to sell the life out of the British currency."

The market expected that Britain would have to devalue its currency and no amount of interest rate hikes or currency purchasing would change that. At this point, the sentiment that Britain would exit the ERM and devalue its currency was a self-fulfilling prophecy; if the speculators believed it enough to put their money behind it, it would eventually come true.

At 7:30 PM that night, Lamont held a news conference to announce that Britain would be be exiting the ERM and floating its currency on the market. Soros and the speculators won.

The Aftermath of Black Wednesday

British financial history now refers to September 17th, 1992 as "Black Wednesday;" George Soros, however, probably calls it something like "Awesome Wednesday." Once Great Britain floated its currency, the pound fell 15% versus the Deutschmark and 25% versus the US Dollar.

If you'll remember, Soros's Quantum Fund had approximately $15 billion betting that the pound would fall versus other currencies. They had borrowed billions to make this trade and they were right. Here's what happened to to the value of their fund versus the price of the pound:

Source: The Handbook of Hedge Funds

The value of the fund increased almost instantly from $15BN to $19BN when the pound floated; a few month later, the fund was worth almost $22 BN. Remember, this is hedge fund, so Soros and his partners made at least 20% of that $7 billion upside, which is at least $1.4BN. And that, my friends, is how you become a billionaire.

The nature of Wall Street trading is that if you win big, someone else must lose big. In this case, there was an enormous wealth transfer from the British taxpayers to Soros and other hedge fund managers. The Guardian recounts:

"Jim Trott, former chief dealer for the Bank of England, described the day as "stunningly expensive". He said that behind the scenes he bought more sterling in four hours that day than anybody had before or since. All of his purchases lost value during the day – and went down even more when the government pulled out."

In the run up to the devaluation, the British Treasury kept spending its foreign currency on British pounds that become much less valuable after the Treasury floated the exchange rate. To maintain the fiction that the pound was properly priced, it essentially paid a dollar for something everyone knew was going to be worth three quarters. The cost to British taxpayers was estimated at roughly £3.3 billion.

Losing billions of dollars of taxpayer money is so routine for politicians that they may not lose any sleep over the matter. They do, however, care about the political implications of publicly looking like a bunch of incompetents. You can't make multiple announcements in a single day that you're massively hiking interest rates in the middle of a recession or completely changing how foreign currency works without giving everyone the impression that you have no idea what you're doing.

John Major had made entering the ERM the centerpiece of his monetary policy and his plan to bring austerity to England. The events destroyed his credibility. Voters booted Major and his party from power in the next election. As it turns out, Margaret Thatcher was right: the UK had no business trying to artificially prop up its currency in an era when a handful of hedge funds could assemble more capital in a few hours than the Bank of England had at its disposal. RUSSIA, CHINA AND MANY OTHERS WILL AT SOME POINT PUT TOGETHER A PLAN TO BRING OUR CURRENCY AND MARKETS TO THEIR KNEES. THE LEVEL OF INCOMPETENCE AT THE FED AND WITHIN OUR POLITICAL STRUCTURE IS ONLY HELPING THOSE THAT SEEK TO DESTROY US. 

If you're looking for a take away from this story, that's one of them. The amount of money sloshing around global markets is so enormous that it can bring even the British government to its knees in one day. EVERY INVESTOR ON EARTH SHOULD KEEP THAT STATEMENT IN MIND FOR FUTURE USE! Another takeaway is that regulations like this can create unexpected loopholes, and someone more clever than the politicians will eventually spot it. THERE ARE AN AWFUL LOT OF FOLKS MORE CLEVER THAN POLITICIANS THESE DAYS! AND THE AMOUNT OF CAPITAL AT THEIR DISPOSAL IS ENORMOUS COMPARED TO WHAT SOROS HAD.  

But perhaps most importantly, this story shows the power of the one-sided bet. In 1992, the bet was a well-designed macroeconomic trade against fixed exchange rates, executed by George Soros and his team. If they were wrong, the downside was almost zero. But they were right, the upside was unfathomably high.

Bets like that almost never come along, but when they do, enormous transfers of wealth take place from the sheep to the wolves.

Magical Thinking,Not Truth Rules On Wall Street.....A MUST READ!

Magical Thinking,Not Truth Rules On Wall Street

Sadly, scientific reasoning isn't often practiced or is often ignored in the investment world because there isn't always money in it. The money is in magical thinking ("You can outperform in every environment!"). Since the primary goal of the vast majority of people in the investment industry is to make money (irrespective of what they tell their clients and customers), magical thinking carries the day.

It is difficult to get a man to understand something, when his salary depends on his not understanding it.

For example, it is clear that high fees are a huge drag on returns and hurt consumers. But they benefit those in the 
financial services industry. In fact, the higher they are the better it is (at least in the short-term). So they generally make their fees as high as they can get away with. Closet indexing keeps assets sticky while doing what is right for clients (value, small, concentration, low beta, momentum, low fees, etc.) risks under performance for significant periods and thus losing assets. 

Ignoring the facts we know is practically and effectively no different from not knowing. Ignoring the conclusions the data suggests are true isn't an analytical problem. It's much worse than that. It's a moral problem. Otherwise, how could such dreadful investment management performance be so commonplace?

The Wall Street culture is craven. Even worse the industry is organized around salesmanship rather than stewardship, and is the consummate example of capitalism gone awry. In the real world, money trumps reality and clients needs 
far too often.



Wednesday, May 28, 2014

The Retail Death Rattle Grows Louder..........MORE PESKY FACTS!

The Retail Death Rattle Grows Louder

Retail store results for the 1st quarter of 2014 have been rolling in over the last week. It seems the government reported retail sales results over the last six months are being confirmed by the dying bricks and mortar mega-chains. 

Here are the absolutely dreadful headlines:

Wal-Mart Profit Plunges By $220 Million as US Store Traffic Declines by 1.4%

Target Profit Plunges by $80 Million, 16% Lower Than 2013, as Store Traffic Declines by 2.3%

Sears Loses $358 Million in First Quarter as Comparable Store Sales at Sears Plunge by 7.8% and Sales at Kmart Plunge by 5.1%

JC Penney Thrilled With Loss of Only $358 Million For the Quarter

Kohl's Operating Income Plunges by 17% as Comparable Sales Decline by 3.4%

Costco Profit Declines by $84 Million as Comp Store Sales Only Increase by 2%

Staples Profit Plunges by 44% as Sales Collapse and Closing Hundreds of Stores

Gap Income Drops 22% as Same Store Sales Fall

American Eagle Profits Tumble 86%, Will Close 150 Stores

Aeropostale Losses $77 Million as Sales Collapse by 12%

Best Buy Sales Decline by $300 Million as Margins Decline and Comparable Store Sales Decline by 1.3%

Macy's Profit Flat as Comparable Store Sales decline by 1.4%

Dollar General Profit Plummets by 40% as Comp Store Sales Decline by 3.8%

Urban Outfitters Earnings Collapse by 20% as Sales Stagnate

McDonalds Earnings Fall by $66 Million as US Comp Sales Fall by 1.7%

Darden Profit Collapses by 30% as Same Restaurant Sales Plunge by 5.6% and Company Selling Red Lobster

TJX Misses Earnings Expectations as Sales & Earnings Flat

Dick's Misses Earnings Expectations as Golf Store Sales Plummet

Home Depot Misses Earnings Expectations as Customer Traffic Only Rises by 2.2%

Lowes Misses Earnings Expectations as Customer Traffic was Flat

The implications of this long and winding road to ruin are far reaching. Store closings so far have only been a ripple compared to the tsunami coming to right size the industry for a future of declining spending. Over the next five to ten years, tens of thousands of stores will be shuttered. Companies like JC Penney, Sears and Radio Shack will go bankrupt and become historical footnotes. Considering retail employment is lower today than it was in 2002 before the massive retail expansion, the future will see in excess of 1 million retail workers lose their jobs. As more stores go dark, this little game of extend and pretend will come to an end.

The following charts support retails demise:

The So Called Housing "Recovery" In Four Charts.....MORE VERY PESKY FACTS!

The So Called Housing "Recovery" In Four Charts

The unintended consequences of the Fed's unprecedented interventions will soon 
rip the heart and lungs out of the housing market.

The housing "recovery" since 2010 can be summarized in four phrases: 

Diminishing returns.

Unprecedented central state/bank intervention.

Unintended consequences.


Four Charts Tell The Story

Let's start with what we all know: declining mortgage rates, mortgage securitization, poorly regulated/unregulated no-document, no-down mortgages, easy credit policies of the Federal Reserve and massive Federal subsidies of housing and mortgages fueled an unprecedented housing bubble from 2001 to 2007.

The index of major housing markets rose from 80 to 227--a staggering 280% rise in a few years.
The housing bubble was a classic Ponzi Scheme. 

A recent article in Scientific American explains that Ponzi schemes do not require a fraud--all they require is the belief that another buyer will pay significantly more for an asset than we did: The Whole Economy Is Rife with Ponzi Schemes.

This bubble dynamic needs nothing more than a supply of greater fools willing to pay substantially more for assets that haven't changed qualitatively or quantitatively, and our expectation is that the supply of greater fools is endless. HOPE CERTAINLY CAN MAKE YOU A DOPE.

Alas, the number of people willing and able to borrow immense sums to buy more houses eventually falls below the number needed to sustain the bubble, and the bubble promptly implodes.

The Federal Reserve responded to the bubble collapse with unprecedented intervention to prop up housing values: the Fed dropped short-term interest rates to near-zero (i.e. ZIRP, zero-interest rate policy) and bought roughly $2 trillion of mortgage-backed securities in two waves. That's about 20% of the entire U.S. mortgage market.

In this chart, we see the original housing bubble and the echo bubble blown by the Fed's unprecedented interventions.

The home price index is now roughly 130% above its pre-bubble levels.

Not unsurprisingly, the housing market responded to the end of the Fed's first wave of mortgage buying by tanking. T

A decline of just over 2% in mortgage rates helped push the housing bubble to insane heights. The Fed's unprecedented interventions pushed mortgage rates lower by almost 3% at the bottom, and housing prices rose by about 20%.

That's called diminishing returns: The Fed has pulled out all the stops in its support of housing (as have the Federal housing agencies such as FHA), yet housing managed only a weak 20% expansion on the back of this extraordinary, multi-trillion-dollar manipulation (oops, I mean intervention).

The Fed's policies of unlimited liquidity and zero-interest rates have generated an unintended consequence: the super-wealthy financiers closest to the Fed's money spigot can borrow money to buy housing at absurdly low rates, while regular home buyers have been largely frozen out of the market as a result of 1) bidding wars with all-cash investors desperate for yield in a zero-rate environment and 2) banks that have tightened lending standards as rates have plummeted and risk has finally been priced into the housing market.

Recall that virtually the entire mortgage market is Federally backed/subsidized; in effect, the mortgage market in the U.S. has been fully socialized, with taxpayers on the hook for all the debt guaranteed by Federal agencies.

The echo bubble is entirely driven by all-cash purchases by investors desperately seeking some sort of yield in a Fed-engineered low-yield economy via rental housing. 

Investors driven to extremes by the Fed's interevention are the greater fools, and the supply of these greater fools is finally diminishing. Once the pool of greater fools evaporates, the echo bubble will burst, just like the initial bubble burst. WHO IS GOING TO PICK UP THE PIECES THIS TIME? THE FED? REALLY? WITH THEIR BALANCE SHEET?

Meanwhile, back in the real world where mortgages are serviced by earned income (wages and salaries), the ratio of mortgage debt to wages/salaries is still roughly double historical ratios. 

The debt/wages ratio rose in the go-go years of the dot-com stock market bubble, as rising wealth encouraged the belief that higher debt levels would be offset by rising income and stock market wealth.

But the current ratio is still 35% higher than the late 1990s.

Now we discern the end-game: the pool of greater fools is evaporating as prices reach nosebleed territory and newbie rental-housing investors discover houses and renters have all sorts of real-world issues that paper wealth doesn't have. In other words, that promised 6% net yield is not guaranteed, but is fraught with risks-- especially in a recession, where renters stop paying and the pool of renters able to pay sky-high rents dries up.

Since average wage earners are effectively frozen out of the market, that leaves current homeowners who are selling and "moving up". Oops: 20% of all homeowners are effectively underwater and cannot sell/buy another home. Housing debt still traps 10 million Americans.

The returns on the Fed's unprecedented interventions are diminishing, the pool of greater fools is shrinking, households are either underwater or frozen out of the market, and the economy is supposedly healthy.

So what happens when investors lose their appetite for housing? What happens when the economy slips into recession? What happens when the Fed's purchases of mortgages slacken or end?

The whole echo bubble is based on unsustainable extremes of interest rates, central-planning,intervention and investor fantasies that the supply of greater fools will never decline. If history is any guide, rates will rise (albeit modestly), the economy's "recovery" will end in recession, the Fed's manipulation will cease having any positive returns while the unintended consequences of the Fed's unprecedented interventions will rip the heart and lungs out of the housing market.  NOT TO MENTION ALL THE NEGATIVES THAT ARE EMBRACING COMMERCIAL REAL ESTATE AT THIS POINT IN TIME.


Signs Of An Aging Bull Market.......some important charts.

Signs Of An Aging Bull Market

The hypnotic chant of the "bullish mantra" will lull individuals from a momentary state of consciousness back into the dream world of complacency. It is from that place that investors have typically harbored the worst outcomes.

Bull markets do not historically "die of old age" but are killed by some infection that rapidly changes investor's attitudes and expectations. It is at this point, where the "rubber band" is stretched to its limits, that someone yells "free hotdogs" at a weight loss camp. The rush for the exits leads to a forced liquidation cycle that creates a"mean reverting" event. This is why bear markets are short, violent and generally extreme.

It is interesting that we are extremely skeptical of fortune tellers, palm readers and psychics but flock to Wall Street analysts and economists that are nothing more than "fortune tellers" in suits.

The current bull market cycle is now extremely long by historical measures.


The chart below shows the historical length of economic recoveries (number of months) which drives bull market cycles, as compared to the subsequent market drawdown (percent decline) during the following recession.


It should not be surprising that now six years into the current market boom that individuals are now jumping into the stock market. After all, the media has continually berated them for the last six years for "missing out."

This exuberance can also be seen in the two following charts of excessive bullish sentiment and extreme lows in bearish sentiment.


The following chart of the Volatility Index as compared to the S&P 500 is another case of excessive investor complacency. The volatility index is now at the lowest levels since the last financial crisis as the "fear" of a market correction is virtually non-existent.


The diversion of resources and profits from potentially productive real economy to the credit market casino has only become more deeply institutionalized. It's hard to see how this resolves, but the ending is unlikely to be happy for ordinary citizens.


Historically, it has not been the increase in margin debt that was the cause of concern. Rather, it is the unwinding of that leverage that weighs on asset prices. The decline in asset prices triggers a waterfall of selling as liquidations to meet margin calls are met by more liquidations to meet more margin calls.

It is important to understand that a "crisis" isn't necessary to create a leverage fueled market liquidation cycle. Just an "event" that spurs enough selling to trigger the first margin calls.


Moving averages exert a "gravitational pull" on asset price levels. The further from the average that prices deviate the stronger the gravitational pull. The chart below shows that current price levels are now extended to levels only witnessed four previous times in the past. None of them ended well for investors.


Two Charts........MORE PESKY FACTS!

Two Charts

The 2 words "collapsing" and "unsustainable" do not conjure images of confidence-inspiring animal spirits or all-time highs in stocks... and yet European earnings expectations have utterly collapsed from their exuberant early year levels and the gap between earnings growth in the US and revenues tumbling is entirely unsustainable. But then - none of this 'fundamental' malarkey matters: we've got the Fed 'put' and the Draghi 'promise'.

European Earnings expectations... 

Unsustainable US earnings-revenues gap...


Wanna get a sense of what's going with China and its neighbors?

Hint: It's not good.

The FT's Denise Law posted this screenshot from an FT email news update, giving the latest on China. There seems to be a pattern.

Screen Shot 2014 05 27 at 4.33.02 AM

Tuesday, May 27, 2014


Until an hour before the Devil fell, God thought him beautiful in Heaven.

                                                                          Arthur Miller, "The Crucible"

The individual or system that never experiences dissent, volatility or stress is systemically unhealthy and increasingly prone to sudden "gosh, I didn't see this coming" collapse.
The individual who walks daily (i.e. aerobic exercise) is healthier than the couch potato, but the individual who routinely engages in short bouts of strenuous activity has the added benefits of triggering rebuilding/repair responses. Political economies, government agencies, enterprises and communities are no different, as all systems respond the same way: either growing brittle and vulnerable by suppressing dissent and volatility or maintaining strength, resilience and adaptability by encouraging dissent and volatility.  Our centralized government and bank have spared no expense to ruthlessly suppress these essential forces of healthy systems at every turn. The cost of their gross incompetence has yet to be paid.

How long can this go on?

When does the market break?

Implicit and sometimes explicit in these questions is the belief that this – whatever this is – simply can't go on much longer, that there is some natural law being violated in today's markets that in the not-so-distant future will visit some terrible retribution on those who continue to flout it. 

There has never been a more unloved bull market or a more mistrusted stock market high.

Markets today are essentially hollow, what passes for volume and liquidity is primarily machines talking to other machines for portfolio "positioning" or ephemeral arbitrage rather than the human expression of a desire to own a fractional ownership share of a real-world company.

Today's price levels primarily reflect the greatest monetary policy accommodation in human history rather than the real-world prospects of real-world companies. 

The political risks to both capital market structure and international trade which are the twin engines of global growth, have not been this great since the 1930's. 

We are cognitively evolved to maintain our beliefs and behaviors far beyond what is "true" in an objective sense.

We are all being played like fiddles because our leaders understand that the average American is an ignorant fool.

The Fed's Worst Nightmare

With the Fed tapering and both China and Japan's currencies likely to weaken. 
The markets are not discounting what's really happening in China. The net impact on the U.S. will be deflationary. That trend will be accelerated by the improvement in the balance of trade for the U.S., which had its current account deficit shrink due to increased hydrocarbon production. The crucial moment will come when the U.S. reports a sub-6% unemployment rate, meeting the target it has set for normalizing its monetary policy by ending QE and raising rates. That will come in July. That will be the Fed's "worst nightmare. Raising rates would stifle growth and recreate unemployment problems, which would be disastrous politically.

The Retail Death Rattle Grows Louder

The inevitable shuttering of at least 3 billion square feet of retail space is a certainty. The aging demographics of the U.S. population, dire economic situation of both young and old, and sheer lunacy of the retail expansion since 2000, guarantee a future of ghost malls, decaying weed infested empty parking lots, retailer bankruptcies, real estate developer bankruptcies, massive loan losses for the banking industry, and the loss of millions of retail jobs.

China Attacks, Sinks Vietnamese Fishing Vessel, Situation "Very Tense"

China has escalated geopolitical tensions to 11 on the Spinal Tap amplifier of seriousness. With over 70 vessels in and around the Paracel Islands - where China has provocatively placed an oil rig in disputed Vietnamese territorial waters - it was only a matter of time before things got going.

Plausible Denial aka The Cancer Of Leadership

No matter the headline, no matter the scandal, no matter how few or how many might be involved, one thing will become crystal clear: nobody that should have known – will have known.

There was a time when this art form of creating circumstances as to protect people of influence had its place and was used sparingly and tactfully. However, as of today both the frequency along with how and where it is used has gone from "useful ruse" to a downright childish alibi. No one seems to be accountable today. And I mean nobody!

No one knows anything, and no one was aware such problems existed. Even if they were directly responsible for the organization.

Anything and everything that may have transpired dubious in nature happened without their knowledge even though many of these same people were hired exclusively to fix said problems. Absolutely amazing.

Suddenly they are shocked. Shocked! That such could be taking place under their tutelage. Ironic how so many so-called "brilliant" CEO's and politicians had no knowledge. Nope, they didn't want to know it seems.

Another country in peril

Thailand's twelfth coup since 1932 reveals both the sorry state of its democracy and the erosion of the monarchy. But as political tensions in Thailand have escalated, raising fears that the country could return to the unrest that followed the ouster in 2006 of Prime Minister Yingluck Shinawatra's brother. If Thailand negotiates successfully, if the country avoids further bloodshed, it will soon be back on track for a positive transformation. If it fails, the consequences will be disastrous.

China's "Gigantic Credit Bubble" Unwind, Is Just Beginning

Chinese growth figures are a fallacy and if one analyzes the data carefully it is clear that China is growing at most around 4% and given the "gigantic credit bubble the outlook is not hopeful.