Archive - Sep 2012 - Story

Mark Twain once wrote that "History doesn't repeat itself, but it does rhyme."  While this is a statement that is often thrown around by the media, economists and analysts - few of them actually heed the warning.  It has been even worse for investors.  Over the past 800 years of history we have watched one bubble after the next develop, and bust, devastating lives, savings and, in some cases, entire countries.  Whether it has been a bubble created in emerging market debt, rail roads or tulip bulbs - the end result has always been the inevitable collapse as excesses are drained from the system.

Between quarter-end, quad-witching, and the index-rebalancing, activity at the NYSE soared today. More than triple the average of the last few weeks, today's volume was the highest since the US downgrade last August - over 13 months ago - and given the downward pressure in prices into the close it seems more motivated sellers than buyers locking in anticipated Fed/ECB gains.

Moments ago we saw the following amusing headline crossing the BBG:

ILLINOIS TEACHERS' PENSION FUND CUTS RATE OF RETURN TO 8% FROM 8.5%

It's amusing because these are the same teachers who were demanding, and received, higher pay - 17% higher over four years in fact - following a several day strike. It is even more amusing considering that in a fiscal year in which we saw QE2, Operation Twist 1 and 2, and LTRO 1 and 2, the nation's largest pension fund, Calpers, managed to eek out a measly 1% gain (and this is including the end of June surge following the then announced European bailout which turned out to be yet another dud). It is, however sadly, most amusing, because it may be a harbinger of something truly sad: the advent of the "PIIG bailout" to America, when a US state demands a Federal bailout. We have seen how eager Europe has been to bailout its insolvent nations. We are next about to see just how "united" the US is when its own solidarity is tested as state after state repeat the European bailout experience. But hey: at least we have the dollar so all should be well.

With the combination of a strong quarter (week or two) for stocks, futures rolls (and CDS yesterday) and the OPEX / index re-weighting it seems we had a modest case of small doors, large crowds into the close today (S&P futures end 1pt above FOMC-day close). Volume picked up dramatically (NYSE highest in a year) as the Dow closed lower on a Friday for the first time in nine weeks! Treasuries outperformed - ending near the low yields of the week (having retraced all the post-QE move - down 10-15bps on the week) but Gold remained relatively bid ($1775) and Oil also rose in the last couple of days. VIX was unch but noisy thanks to OPEX (and remember it's still at a high premium to realized vol - not entirely complacent). Credit underperformed as risk-assets in general led stocks lower. On the quarter, Silver was the big winner (up ~26%) followed by Gold (up ~11%) both beating all the major US equity indices.

Back in 2009 Zero Hedge was first the only, and shortly thereafter, one of very few non-conformist voices objecting to pervasive high frequency trading and other type of quantitative market manipulation in the form of Flash Trading (which has recently reemerged in yet another form of frontrunning known as "Hide not Slide" practices) quote stuffing, and naturally latency arbitrage: one of the most subversive means to rob the less than sophisticated investor blind, due to an illegal coordination between market markers, exchanges and regulators, which effectively encouraged a two-tier market (one for the ultra fast frontrunning professionals, and one for everyone else). A week ago we were amused to see that the SEC charged the NYSE with a wristslap, one for $5 million dollars and where the NYSE naturally neither admitted nor denied guilt, accusing it of doing precisely what we said it, and all others, had been doing for years: namely getting paid by wealthy traders, those using the prop data feed OpenBook Ultra and other paid systems, to create and perpetuate a two-tiered market, all the while the regulator, i.e., the SEC was paid to look the other way. This action was nothing but a desperate, and futile, attempt to regain some investor confidence in the market. It has failed, and since said "enforcement" action has done nothing to restore confidence, expect to see more exchanges slapped with fines for actively perpetuating latency arbitrage opportunities for "some" clients. Well, since the SEC will be desperate to come up with more means of "restoring credibility" of both the market and its regulator, another exchange it may want to look at is the NASDAQ, which as Nanex demonstrates, may well have been engaging in comparable (most likely not pro-bono) latency arbitrage benefiting some: those paying for its direct feed aka TotalView, and thus not harming others, or those relying on the Consolidated Feed (UQDF) for data dissemination.

Everyone will be chasing high-beta? QEternity 'fixes' our problems? HHhhmm, not so much. While the fact that Utilities are undrperforming makes some sense, the fact that Healthcare is the clear winner (and Goldman Sachs and Morgan Stanley the big losers) is fascinating...

Saving the banks by dumping trillions into housing is classic marginal return. Since the mechanism is broken--housing as the "wealth effect" generator and the source of billions in profits for banks--every $1 trillion in subsidies, give-aways, guarantees and mortgage purchases by the Fed yield fewer benefits to the real economy. Once again the question arises: rather than loan $16 trillion to banks at 0%, why doesn't the Fed just buy all residential mortgages for $10 trillion and charge 0.25% interest on the lot? That would cut out the banks, and that is the point here: the Fed's policies are not aimed at "helping housing," they're aimed at protecting the banks' income streams, assets and political power. Since the banks own $10 trillion in mortgages, housing is a key concern of the Fed's "save and enrich the banks" campaign.

Here's the Fed's policy in plain English: Debt-serfdom is good because it enriches the banks. All hail debt-serfdom, our goal and our god!

While InTrade did not exactly 'nail' the Obamacare odds, the surge in the odds of Obama winning the election has been incredible since the announcement of QEternity. Admittedly it has coincided with some general 'foot-in-mouth'-edness by his opponent, but the record high levels over 70% are not behaving how one would expect given equity movements. In fact it appears that rather than 'the market' being the main factor in his re-election, it seems inflation expectations are more critical - especially given the huge volume rise. It seems implicitly that Meyer Rothschild's famous quote: "Let me control a peoples' currency and I care not who makes their laws" has never been more true. Or perhaps, the odds can be gamed to become self-confirming (just as with HFT in stocks) - especially given the volume surge?

Everyone has been desperately waiting for this. At 3:00 pm it will be publicly released. Hopefully, shortly thereafter we can proceed with the discussion of important things such as the complete economic collapse of not only America, but the entire world (which is apparently now hooked into voting for Obama as disclosed earlier). For those strapped for time here is the summary: Romneys 2011 tax rate 14.1%, Charity donations: 30%; Obamas tax rate: 20.5%, Charity donations: 22%. And going back, "Over the entire 20-year period, the average annual effective federal tax rate was 20.20%."

Highlights:

• In 2011, the Romneys paid $1,935,708 in taxes on $13,696,951 in mostly investment income.

• The Romneys’ effective tax rate for 2011 was 14.1%.

• The Romneys donated $4,020,772 to charity in 2011, amounting to nearly 30% of their income.

• The Romneys claimed a deduction for $2.25 million of those charitable contributions.

• The Romneys’ generous charitable donations in 2011 would have significantly reduced their tax obligation for the year. The Romneys thus limited their deduction of charitable contributions to conform to the Governor's statement in August, based upon the January estimate of income, that he paid at least 13% in income taxes in each of the last 10 years.

"This time it's different" and "Ugly is contained"

Between CNBC's Rick Santelli and PIMCO's Mohammed El-Erian, this brief clip succinctly sums up the 'less than ideal' reality of Bernanke's all-in bet and how the world is trying to 'trade' it. Santelli analogizes: "Visualize the biggest fire hose in the world, 20 miles away from a little Geranium plant? Now this hose is going and going and going, and ultimately, that Geranium plant gets a little bit of water but everything around it and leading up to it for miles around is just underwater. That's QE, in my opinion." To which El-Erian retorts: "at what point do you tell investors stop focusing on the benefits and make the collateral damage the investment theme?" It seems, given gold's outperformance, that this is exactly what is occurring as the hose-pipe's flood spills out everywhere.

Our quote of the week award recipient is none other than Atlanta Fed's Dennis Lockhart for the following pearl of wisdom:

• LOCKHART SAYS FED WILL BUY BONDS UNTIL U.S. EMPLOYMENT IMPROVES.

Considering that employment is bad because of Fed "bond buys", which are preventing price clearing and discovery, and perpetuating the worst capital misallocation environment in the history of the world (if not for Apple's professional line waiters), one should just replace "buy bonds" with "continue beatings" and "U.S. employment" with "morale."

We won't even pretend to claim we have any idea what is going on here. We know it's pretty and very detailed, so some intern definitely wasted lots of hours to plug goalseeked fund flow data (which is never accurate and is merely an estimated plug using actual calculated private fund flows) into this schematic demonstrating how the Japanese economy performed in the most recent quarter. We also know that while largely irrelevant, it would be useful for our own Federal Reserve to come out with something comparable.

The single most often broached argument that Liberty Movement writers, analysts, and strategists are confronted with by skeptics alongside well meaning but cynical newcomers is the assertion that while we happen to be very effective at pointing out the dangers of globalism and centralization, we rarely seem to take the initiative to offer “solutions” to the problem.  This same argument is also used by establishment shills as a way to distract the public’s attentions from the very real despotic enterprises of their elitist employers. In reality, the contention that the Liberty Movement offers no solutions is entirely false.  We have constructed many.  The problem is that these solutions are not the kind that the general American public wants to entertain. The bottom line is that there is little time left for top-down political fairytale dreams, and little utility left in standard street actions.  The real solutions require blood, sweat, and tears, starting with a method I have discussed for quite some time:  Decentralization.