Archive - Jun 24, 2011

The third part of the series on information theoretic methods of analysis for dynamic systems is taking longer than anticipated. Crunching the numbers is killing me. So I'll take a break from it and look a little farther forward--how we can use the methods I have been describing so far to forensically examine the algorithms used in various high-frequency trading events of the recent past. As seen on Nanex and Zero Hedge, there has recently been a lot of strange, algorithmically driven behaviour in the pricing of natural gas and individual stock prices on very short time frames. In an earlier article I pointed out that the apparent simple chaos we observe in the natural gas price appeared to be an emergent property of at least two duelling algorithms. In this series of articles we will begin analysis of the algorithms involved. Today's discussion will mostly focus on framing the issues that must be addressed in order to study unknown algorithms on the basis of their time-varying outputs. Future articles will present results from the various analyses.

American Electric Power (AEP) sent shock wave last week by suggesting consumers could see their electricity bills jump an estimated 40-60% in the next few years due to new air regulations by the EPA.

With the resurgence of Greece back to the top of global news, incompetence and labor strikes charts (just like back in 2010 at roughly this time, which is to be expected since 2011 has been following the 2010 script to the dot) there has been far too little focus in the mainstream media on the family whose actions were responsible for Greece's rise to glory and subsequent collapse into default. As Associates Press notes in its report the ruling family, "One family has dominated Greek politics for more than half a century: the Papandreous." For all those who are wondering who the men behind the curtain, or as the case may be, front and center, are, the following expose is for you.

Whereas Paulson has been scrambling recently to put out PR flames now that it has been made clear that the hedge fund skimps on due diligence when it comes to Chinese fraudcaps (and who knows what else now that the ability to reverse engineer the creation of "made to explode" CDOs is taken away), and his latest attempt at mitigating investors is to use cost basis accounting to account for massive investment failures, the sad truth for investors is that just as Zero Hedge predicted, the firm just announced that its has lost $468 million on the Chinese investment in June and $574 million in 2011 (we are unclear if this is only for the Advantage Plus equity exposure or also for the fund's credit position in Sino as well). But not to worry, "net realized losses were C$105 million" claims Paulson. Too bad that fact is completely irrelevant when observing daily and YTD P&L (a loss of over 20% YTD), which Paulson knows all too well is the only metric that is relevant for a hedge fund (unless of course Paulson cares about his tax basis as well for investor pitches, and/or plans on becoming a private equity fund now that his stint as a mutual fund is over). Perhaps Paulson also needs a reminder that some other far more critical concepts to a hedge fund are the high water mark and terminal redemption requests. So what is next for up for Paulson's remaining LPs: maybe they can look forward to letters explaining how the fund's $450 million YTD loss in Bank of America (and we won't even touch Citigroup), is really an unrealized profit of $75 million since inception.

Lee: Think like a criminal. Look, it’s a matter of knowing what the Fed’s next move is going to be, and knowing the investment implications.

My position has long been that the driver of house price appreciation in Canada over the past decade has been primarily the result of the unprecedented expansion in debt caused by the loosening of CMHC mortgage insurance requirements and the removal of the maximum insurable mortgage ceiling....facilitated by a falling interest rate environment, a new mass perception of the 'investment worthiness' of real estate as an asset class, and the emergence of housing as a form of conspicuous consumption. But if we boiled them all down into one word, it would be this: DEBT! And the pace of debt accumulation is not sustainable... ergo, the pace of house price appreciation is not sustainable. Nor are house prices at current levels relative to underlying fundamentals. Not convinced? Behold!....presented without further commentary...

Is it a coincidence that the government announced the release of crude from the SPR just days after it was disclosed that Dodd-Frank will make trading in OTC spot products illegal? Perhaps. On the other hand if there is indeed a concerted and very politicized effort by the government to encroach and "centrally plan" yet more industries, the implications for precious metals trading could be substantial. FMX Connect summarizes these as follows: "Our two cents are as follows. It does not pay to fight the government right now. Even though Bernanke can’t print more oil it is clear that we are entering into a new phase of a centrally planned economy. To us this smacks of price controls. When you combine it with the Dodd-Frank bill prohibition of OTC gold trading, you might see that we are setting up for something worse. Tin Foil Hat Alert: All gold will trade through exchanges and while we don’t think ownership will be prohibited it may be taxed to death."

Identify the common characteristic of these three statements:

1. The Federal Reserve will never let the stock market decline, i.e. the "Bernanke put"

2. The Chinese government will never let property prices decline

3. The European Central Bank will never let Greece default

The answer of course is moral hazard: a person who is insulated from risk will have an insatiable appetite for risky bets because any gains will be theirs to keep but any losses will be covered by the central bank or government. The global financial authorities’ success in propping up assets (stocks in the U.S., real estate in China, banks in Europe, etc.) over the past three years has strengthened this asymmetric disregard for systemic risk into a dangerously quasi-religious faith that central banks and governments have essentially unlimited power to keep asset prices aloft via printing money, manipulation of markets and financialization of their economies.

The most concise summary of this week's bullish and bearish events.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 24/06/11

It is time to restart the clock on the number of consecutive weeks decline in stocks. After last week broke the trend, the just finished one closed slightly down, as three days of taking the escalator higher on vapor volume then reverted to taking the express elevator down on a spike in panicked trading. Net result: about 10 million E-mini contracts in which billions in wealth was transferred, the overall market did not move, and nothing at all has been resolved regarding the global ponzi scheme.

Following what appears to be just the beginning of a major market flush which could well bring the S&P to triple digits in order to serve as a catalyst for QE3, the word inflation has become taboo: after all, it is expected that Bernanke will have snapped his fingers, and the 15 minute count down to deflation will start. Alas, no. There are at least three products in which inflation has proven to be particularly stubborn, all due to a unique set of factors. The first one is Coke (the drink, although probably not isolated thereto), which just announced plans to hike prices 3 yo 4% due to still surging commodity costs. The second is pasta, whose prices are also set to soar, this time due to adverse climatic conditions. Per Bloomberg, "Unrelenting rainfall may have slashed U.S. planting of durum wheat to the lowest level in more than 50 years, fueling a surge in the price of pasta and noodles as mills scramble for supply of the grain." And the last, and possibly most perverse price spike, is the one which will actually hike the CPI, due to an increase in the shelter, or rents, component, as more and more Americans forgo owning a home in exchange for renting, in the process pushing up the one component that accounts for 41% of core CPI. In this way we see three completely unrelated channels in which inflation will continue to push through even as stocks plunge: an event which most MMT theorists always perceive as inherently deflationary.

The Fourth Turnings that centered upon an external threat ended with a glorious High. The Civil War Fourth Turning resolution felt more like defeat, with the country exhausted, bitter and angry. All indications are this Fourth Turning will be mainly an internal struggle between the ruling class of bankers, business elites, and politicians and the downtrodden middle class. The lying, cheating, fraud, theft and other wrongs committed by those in power will need to be atoned for. The generational dynamics in place will drive the reactions of the country moving forward. We have been badly led. A vast swath of the populace has lived beyond their means. The existing system is unsustainable. The Boomer generation does not want to yield on their perceived entitlements. The Millenial generation will be saddled with un-payable debts. Generation X is caught in the middle of this generational struggle. The huge imbalances in our society have built up over decades like flood waters behind a weakening levee. When the levee breaks the existing order will be swept away in the raging torrent that will follow.

Just out:

• HOUSE REJECTS MEASURE TO ALLOW ONLY SOME SUPPORT ACTIONS
• HOUSE VOTES NOT TO RESTRICT U.S. MILITARY ROLE IN LIBYA

The vote was  238 to 180. So does this mean the president is now implicitly violating the War Powers Act? It is getting impossible to follow all the strands of the 5 war fronts that America is successfully finding itself into. Also, does it mean America is now officially at war with Libya? Or does it mean simply that America has unlimited funding to continue its pursuit of "humanitarian" light sweet?

Well not quite the CIA, but close enough. The good ex-spies of BIA Behavioral Intelligence Analysis have conducted another behavioral assay, this time targeting global overlord Ben Bernanke and specifically his Wednesday press conference, focusing not on the script but what was left unsaid between the lines. For those unfamiliar, "The BIA team represents a diverse mix of highly accomplished professionals from the national intelligence and business communities, who came together to create and deliver BIA’s ground-breaking solutions for our clients. Our intelligence experts average more than 20 years experience in interviewing, evaluating and collecting information across the globe and have been working with premier firms since 2001 to improve investing and business outcomes through application of our unique methodologies." In lieu of a lie detector being hooked up to the Chairman (Simpsons scene comes to mind), this may be one of the better analyses in interpreting what was said... and unsaid.