Archive - Sep 2010

It has been about a week since we have had a flash crash in our broken markets, and we were getting a little antsy. Then Nucor showed up and traded at $0.01. At 11:52:21 something broke, and as the QR chart below shows, it was basically precisely the same algo malfunction that either goes and hits all bids all the way to zero, or some HFT decided to shut down, and wipe out the entire bidside orderbook. The stock which had been trading at $39.58 literally milliseconds earlier, saw a SkyNet T-1 unit go berserk and take out the bids at $37.22, and $35.77 in sequential fashion, with the next trade being at at the residual stub quote of $0.01. Of course, circuit breakers were triggered, but not before even more irreversible damage to investor confidence was suffered. And those idiots 'upstairs' still wonder why tomorrow we will report another massive outflow from mutual funds.

Dylan Grice loves debunking popular delusions. Perhaps that is why he has picked precisely that phrase as the title of his periodic research piece at SocGen. In his latest piece Dylan asks a question so simple and profound that it should immediately force all Keynesians to provide a definitive answer, or else they should all be fired for being nothing else than card-carrying shamans of the world's most destructive religion (and if you thought the Catholic Inquisition was bad, you obviously have never been drawn and quartered by four of Bernanke's most vicious and bloodthirsty printers). Here it is: "For all I know, Keynesians might be even right in thinking policy makers can fiscally jolt economies back to life, allowing them to recover back to their ‘default mode.’ But their assumption is that ‘default mode’ is positive growth. But what if it isn’t? What if the ‘default mode’ is falling output because the population is declining? Japan might just have spent the best part of twenty years trying to fiscally stimulate its way out of a demographic compression. If this is correct, and population decline has blown the hole in Japan’s government balance sheet there’s still plenty of damage in store because the demographic compression isn’t over yet." Zero Hedge has long contended that Economists dwell so high up in their ivory towers of (flawed) theoretical construction, that they always ignore the simplest things that have the most profound systemic impact... such as demographics. Consider the creation of the Social Security Trust Fund, which would have been perfectly solvent in perpetuity... If only people died quietly as they were expected to do so in 1930s, some time in their mid- to late-60s. Now it is insolvent. Keynesianism, as an economic theory itself, is an anachronistic artifact of another time. As such, Dylan's question is arguably the most critical one that Krugman, Koo, and even the Kretins (sic) from the Fed should answer before they propose any additional and infinitely more destructive theories, and conduct any more failed experiments on a world population of roughly 7 billion people.

Computer hackers running US market structure? Check please. Or else, you can watch CNBC's fluff piece on how HFT is a little bad, but not all that bad. P.S. can CNBC disclose who provided the funding for its little forray into HFT coverage (which is just 1.5 years too late). "Python developer needed for math/trading applications and research at leading HFT firm. This company is a top-tier electronic, algorithmic trading firm, located in Chicago, IL. This firm is one of the most advanced high frequency electronic trading firms in the world and uses python throughout the company, as well as other languages. This firm has a culture that rewards creativity and hard work."

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 14/09/10

We apologize for pointing out the inevitable, but gold is now breaking out and the usual LBMA gimmicks to slam it down are no longer working. Is the price suppression regime over? And that worthless atavism of a bygone era, stocks, continue to surge on increasingly bad news, confirming that all trading is now driven on expectations of what the Fed will do next Tuesday. If Morgan Stanley is right, expect gold to hit $1,350 in under 7 days. Additionally, should this occur, it will merely confirm that the double dip is accelerating at an uncontrollable pace, and that without the Fed's intervention the economy will tumble. Time to end all this "is there or isn't there" a double dip bullshit already.

The FX fund manager, whose EUR/USD insights in 2010 have been spot on, is capitalizing on his calls: his fund, FX Concepts is the 6th best performing CTA/managed futures fund in 2010, with a return of 13.99%. We wish Mr. Taylor continued success, and to continue calling it like it is.

US retirees better pray that their Schwab accounts will rise forever and ever, because if they rely on defined benefit pension plans, they are fucked. According to actuarial and consulting firm Miliman, in August 2010, the funded status of the 100 largest defined benefit
pension plans sponsored by U.S. companies dropped by $108 billion to a
10-year low of 70.1%. Yes, that's a $100 billion + deterioration in one month! The culprit - Ben Bernanke - financial market performance was poor in August, but the main
reason for the decline in funded status was a large decrease in
corporate bond interest rates. Who would have thought that pushing all markets so far from equilibrium could possibly have an adverse side effect. Soon, once pension funds like the Illinois TRS and others fold, and tens of millions of people who have diligently saved all their lives only to wake up one day and find they have no money left at all, their anger may finally rise and be rightfully directed at its just source: the corrupt slaveocratic inhabitants of the Marriner Eccles building. Expect to hear much, much more about this worst side effect of the Fed's flawed Keynesian solution to all of life's problems.

Remember those days when the dollar plunging (and the yen surging) meant a daily unwind in the carry trade, and a plunge in stocks? Neither do wo. Stocks are valiantly trying to confirm they are the most useless instrument ever, with bonds surging, gold skyrocketting, and stocks... about to go green (which is only due to increased speculation by MS as we pointed out yesterday, that the Fed will announce QE2 in one week). In the meantime, implied correlation in FX is starting to follow that of stock, as global capital flows are now one.

Everyone's favorite N-11 expert is shifting to a new position as head of Goldman Sachs Asset Management. Alas, according to Absolute Return + Alpha, the man who pretty much coined the term decoupling has a substantial uphill climb. Based on the AR+A hedge fund score sheet, GSAM ranks almost dead last in the categories of Alignment of Interests and Alpha Generation (in the last category only beaten by quants AQR and RenTec, where Jim Simons praises the HFT role in the Flash Crash. We wonder if he will change his (swan) song once the SEC finally discovers that it was the HFT's fault all along... some time in 100 years).

UBS came out with a report expecting a hike by the SNB at their Thursday meeting by 25 bps to 50 bps. While most other banks expect no action from Phillip Hildebrand (who was last heard screaming in abject futility at his FX trading desk) one would think the Swiss bank has a better sense than most of what is happening in its home country. The result is an immediate collapse in the USDCHF pair to below parity. The flight to quality is on in full mode as stocks continue to be decoupled from everything. With nobody trading equities, this is to be expected.

A few articles for you to consider as global pension tension heats up...

Congratulations to longs. Also, small caps in the gold space have exploded.

John Williams, arguably one of the best trackers of real, unmanipulated government data via his Shadow Stats blog, has just released a note to clients in which he warns that hyperinflation may hit as soon as 6 to 9 months from today. With so many established economists and pundits seeing nothing but deflation as far as the eye can see, and the Fed doing all in its power to halt the deleveraging cycle, both in the open and shadow economies, what is Williams' argument? Read on. Incidentally, even if some fellow bloggers disagree with Mr. Williams' assesment, we believe it is in our readers' best interest to have them make up their own mind on this most critical economic development.

Expect a new record high in gold today: "October Gold settled at $1245.60 per 100 troy ounces on Monday, a net gain of of $.60 for the day. October gold was up an eye-brow raising $14 to $1259.60 per 100 troy ounces as of 9:00 AM EST, this morning. The September U.S. dollar index was up .044 to 82.23. October platinum was up $21.70 to $1571.60 per 50 troy ounces. December silver was up 19.4 cents to $20.07."

• 'Goldman Conspiracy' helps China defeat U.S. - China must be quietly cheering as America's "bloodsucking vampire squid" sucks the life out of our capitalism and democracy, as the Goldman Conspiracy's insatiable greed aggressively sabotages America from within. (MarketWatch)
• SEC Questions Trading Crusade as Market Makers Disappear (Bloomberg)
• Japan PM wins party leadership battle (FT)
• China to Introduce Credit-Default Swaps by Year-End (Bloomberg) - Goldman can not be very please about this
• The 1099 Insurrection - The White House fights an effort to ease a burden on small business (WSJ)
• Bankers Fear Race to Surpass Basel III (FT)
• Goldman Sachs: Bullies on the Block (Huffington Post)
• The Future Ain't What it Used to Be, So Borrow Now (Barrons)