While he does have some new philosophy (at X% off MSRP of course, coming to a Kindle near you) to preach, Nassim Taleb's re-emergence from the darkness of the media spotlight starts with a bang: "I realized that something wrong is going on, and only one candidate 'Ron Paul' seems to have grasped the issues and is offering the right remedies". He was given quite a lengthy period to proselytize as he outlines the Big Four problems he sees with the USA (and for that matter the world): Deficits (metastatic governments), The Fed, Militarism, and non-Bailouts (what is fragile should break early). As Ron Paul notes, "It's an illusion that the USD can bailout the world", Taleb makes many interesting, though a little murmur-some for our liking, points like "you don't gamble with hyperinflation" and his comparison between the US and the Soviet Union will surely raise some headlines as he rants of the growing divide between public and private employees standards of living, our "need to do something drastic about it" and on Obama/Government and deficit reduction that "the whole thing is rotten".
The coming years will be marked by a seismic change in the economic landscape in the US. Firstly and most importantly, we are going to see economic growth slow down dramatically. The reasons for this slow down are myriad but the most important are: 1) Age demographics: a growing percentage of the population will be retiring while fewer younger people are entering the workforce. 2) Excessive debt overhang.
Folks, this is a DE-pression. And those who claim we’ve turned a corner are going by “adjusted” AKA “massaged” data. The actual data (which is provided by the Federal Reserve and Federal Government by the way) does not support these claims at all. In fact, if anything they prove we’ve wasted money by not permitted the proper debt restructuring/ cleaning of house needed in the financial system.
Over the weekend, the BIS released its latest quarterly review of financial organizations, which despite being chock full of assorted data, merely summarizes what banks already report. As such, it completely avoids the potentially black swan areas, such as derivative, off-balance sheet and shadow banking exposure. In other words, it is largely a waste of time. One section, however, that is useful,is the analysis by Morten Bech on "FX volume during the financial crisis and now" which has created a constant time series to evaluate FX trading volumes all the way through October 2011, as opposed to the traditional BIS Triennial survey, the next of which is due in April 2013. Morten's finding: "I estimate that in October 2011 daily average turnover was roughly $4.7 trillion based on the latest round of FX committee surveys."
Germany just launched a €480 billion fund that it will use to backstop its banking system should a Crisis hit. And in the fine print, which no one has caught,... the fund will also allow German banks to dump their EU sovereign bonds... as in German banks' PIIGS/ EU exposure disappearing in an instant. So... why would Germany do this?
Some of these 15 swans are blacker than others....
For those who are in a hurry today, the bottom line is that Japan is in serious trouble right now and is a top candidate to be the next black swan. Here are the elements of difficulty that concern me the most, each one serving to reduce Japan's economic and financial stability:
- The total shutdown of all 54 nuclear plants, leading to an energy insufficiency
- Japan's trade deficit in negative territory for the first time in decades, driven largely by energy imports
- A budget deficit that is now 56% larger than revenues (!!)
- Total debt standing at a whopping 235% of GDP
- A recession shrinking Japan's economy at an annual rate of 2.3%
- Renewed efforts underway to debase the yen
As I wrote a shortly after the earthquake in March 2011, Japan is facing an economic meltdown. If it is not careful, it may well face a currency meltdown, too. These things take time to play out, but now almost exactly a year after the devastating earthquake of 2011, the difficulties for Japan are mounting -- as expected.
Today's Black Gold Swan - Presenting The Reason Why The CME's Crude Market Was Halted For Over One HourSubmitted by Tyler Durden on 02/13/2012 19:49 -0500
Earlier today, we reported on the extended halt of the CME Globex crude market, which following an errant trading pattern, did not quite crash, but did the next best thing - go offline for a full 75 minutes. Why did this happen? Our initial speculation was that this "may have been an algo gone berserk in advance of what may or may not have been a block order.... Someone take quote stuffing a little too far today?" It turns out we were not too far off. Below is Nanex visualization of just what occurred in those seconds between 13:59:57 and 14:04:55 when "a blast of quotes corrupted a memory queue causing the software to believe the queue was full all the time." In other words just under two years after the May 2010 flash crash, another algo may have been the reason for the halt in one of the world's most important markets. At least this time there was no 10% "correction." How long until there is, and when it does happen again, will it be limited to just 10%? Oh, and whatever you do, most certainly don't expect this little incident to be brought up ever again by those in control, for any precautionary measure to be taken, or for the SEC to ever get involved. Any of those three would immediately imply something is very wrong with the market. And that's simply not allowed.
With everything from stocks and bonds to 'roo bellies rising as one trade, it may be a good time to ask: what's priced into the market's uptrend? We say "bad news is priced in" when negative news is well-known and the market has absorbed that information via the repricing process. When the market has absorbed all the "good news," then we say the market is "priced to perfection:" that is, the market has not just priced in good news, it has priced in the expectation of further good news. Markets that are priced to perfection are fiendishly sensitive to unexpected bad news that disrupts the expectation of continuing positive news. So what have global markets priced into this uptrend across virtually all markets?
One reason for the severity of the financial crisis, and the losses incurred by banks, is that bankers and financial analysts were using linear tools in a non-linear, highly complex environment otherwise known as the financial markets.The models didn’t work. The problem we face now as investors will end up being existential for some banking institutions and sovereigns. Our (uncontentious) core thesis is that throughout the west, more debt has been accumulated over the past four decades than can ever be paid back. The question, effectively to be determined on a case-by-case basis, is whether bondholders are handed outright default (which looks increasingly like the case to come in Greece) or whether the authorities, in their understandable but misguided attempts to keep the show on the road, resort to a policy of inflation that could at some point easily spiral out of control. As Rothbard wrote, “The longer the inflationary boom continues, the more painful and severe will be the necessary adjustment process… the boom cannot continue indefinitely, because eventually the public awakens to the governmental policy of permanent inflation, and flees from money into goods, making its purchases while [the currency] is worth more than it will be in future.” “The result will be a ‘runaway’ or hyperinflation, so familiar to history, and particularly to the modern world. Hyperinflation, on any count, is far worse than any depression: it destroys the currency – the lifeblood of the economy; it ruins and shatters the middle class and all ‘fixed income groups;’ it wreaks havoc unbounded… To avoid such a calamity, then, credit expansion must stop sometime, and this will bring a depression into being.”
So, who're you gonna believe, your NYC broker or your lyin' eyes???? Another Reggie Middleton "I told 'ya so" exclusive...
There is a little for everyone in Marc Faber's latest appearance on CNBC. The infamous boomer (and doomer) believes (as we do) that today's downgrades are less significant for stocks (at least until the realization that banks and more importantly insurance companies are about to be cut as well - keep a close eye out on Allianz and Generali (of ASSGEN fame) - it is not incidental that they are abbreviated to A&G, just one letter away from our own AIG) as it is largely priced in but the equity market's rally of the last few weeks (with its lack of breadth and volume) is strongly suggestive of a bear-market rally (as opposed to the decoupling bull market that so many hope for). His view quite simply is that the ECB has undergone a backdoor monetization and without this the EUR would be significantly stronger especially given the huge short-interest (though he sees the trend for EUR is down). Some highlights include: EUR weakness may help exports but the debt servicing costs of major European firms with huge US denominated debt wil suffer greatly, most European nations should be CCC-rated, nominally European stocks will outperform and holding quality dividend paying companies is preferred, valuation is practically impossible given ZIRP, and finally noting the irony, the worse the global economy gets (and the Chinese economy suffers), the more money printing will occur lifting nominal equity prices while real economies stumble and standards of living drop, so hold gold.
A REAL “black swan event” - an event that deviates by 180 degrees from what is “normally expected” - would be a political debate over root causes and basic principles. The great merit of Ron Paul - and the great service he is giving to his own and every other nation - is the fact that he is doing everything he can to raise the debate to that level. That makes Dr Paul a unique politician, a man who tells people what most of them DON’T want to hear or understand. Or at least they don’t think they want to understand it. Dr Paul’s great and merited attractiveness to a growing number of admirers has a very simple source. He is that rarest of creatures - a FREE man. He is beholden to nobody. He has developed his ideas and his convictions over a long and fruitful life of independent thinking. He does not compromise. He homes in on the fundamental issue and principle of any political issue and serves it up without salt or other “seasoning”. He says what he means and he means what he says. He is the living embodiment of the “dream” that most Americans have long since given up on as they saw it slip further and further beyond their grasp.
If we had to summarize the Status Quo's confidence that no black swans will threaten its control in 2012, we might begin with its faith that the system's self-regulation will resolve all systemic challenges. Just as the Status Quo has placed all its chips on a single bet--that "growth" from debt-based consumption can be resumed with vast public borrowing and saving the predatory financial sector--it also bases its confidence on the system's self-regulation. If the banking sector is riddled with fraud and embezzlement, then some minor tweaking of regulation will solve all issues. If demand for debt has collapsed, then the solution is for the Federal Government to borrow 10% of GDP every year to compensate for the decline of private debt and spending. The faith is that extending and pretending will magically restore the "growth" the Status Quo needs to support its ballooning debt. Extending and pretending offers up the compelling illusion that the system's broken self-regulation is up to the task of fixing systemic problems. In the darkness overhead, we can hear the beating of unseen wings that promise to make a mockery of the Status Quo's supreme Imperial hubris.
In a must read Op-Ed in the WSJ, Mark Spitznagel, founder of "fat tail" focused hedge fund Universa, where Nassim Taleb has been known to dabble on occasion, explains the fundamental flaw with central planning, and specifically why "moral hazard" or the attempt to avoid the destructive part of natural cycles, is the greatest unnatural abomination ever conceived by man. His visual explanation should be sufficient for even such grizzled academics who have no clue how the real world works, as the Chairsatan, to comprehend why what he is doing is an epic abomination of every law of nature: "Suppressing fire, creating the illusion of fire protection, leads to the wrong kind of growth, which then invites greater destruction. About 100 years ago, the U.S. Forest Service took a zero-tolerance approach to forest fires, stamping them out at the first blaze. Fast forward to 1988 when a massive wildfire at Yellowstone National Park wiped out more than 30 times the acreage of any previously recorded fire." Another way of calling this, is what we have been warning about for years: delaying mean reversion does nothing but that. And when the Fed finally fails to offset the inevitable, and it will - it is a 100% certainty - the collapse and destruction will be unprecedented. Ironically, the only way the system could have been saved would be by letting it fail in 2008. Now, we are sorry to say, it is too late.