Payroll day, wholesale inventories, and one Fed speech….
A couple trillion here, a couple trillion there adds up to real money ...
The globalization of Keynesian economic policy will destroy capital and harm economies worldwide. The days of refuge from economically oppressive states by fleeing to America or some other relatively free capitalist country are gone. This is Part I of a two part article.
On Labor Day, President Obama announced a new $50-billion infrastructure plan next year as a way of a second stimulus for job creations as well as for the faltering economic recovery. However, in light of the fact that the Democrats are losing a bunch of congressional seats, and their majority, this new plan would seem more of a last-ditch effort with little substance. So far, the Obama administration has demonstrated very little understanding of the economy, markets, and business.
Last week, the assorted regulatory freaks were busy patting themselves on the back, and our intrepid printer-in-chief himself made the rounds Thursday morning with appearance no. 2 of his Whip Deflation Now tour. Stay tuned to learn which deceased Fed Governor stated at the Sep *2002* FOMC meeting in no uncertain terms that there was in fact a housing bubble underway.
The ongoing retail abandonment of stocks is well into record territory, which may occur for any of a variety of reasons (need for cash via redemptions, focus on return of capital than on and shift into fixed income, market distrust, etc.), yet the resulting increasing relative participation by electronic feedback loop chasers and by beta levered players, and the subsequent increase in implied and absolute stock correlations may be a vicious circle that will make future retail participation increasingly more difficult. We have been warning about the threat of lack of stock diversification for many months, although have not been able to explain it as succinctly as BNY's Nicholas Colas succeeds in a recent note, titled "Looking for diversification in all the wrong places", in which he concludes: "If you cannot use diversification to manage incremental risk, then why would you take on risk in the first place?" This hits the nail on the head in terms of the ongoing and future lack of stock inflows, since in simple terms in makes the ever greater correlations between various asset classes a barrier to entry for all those very rational investors who seek to diversify bullish or bearish bets with a matched trade. In other words, the market is receptive only to those who blindly wish to bet it all on black or red (with or without leverage). And with ever more people chasing ultra short term return horizons (think numerous underperforming hedge funds that only have one month left to generate some returns in Q3 before their LPs send in the redemption notices), and placing all their bets on just one side of the line, those who wish to pursue rational trades, and generic long-short funds, increasingly obsolete and redundant. All in all, this is a perfect storm for a feedback loop that selects only for those who are willing to bet on an ever more one-sided, and thus unstable, market. Have we gotten to the point where only another market crash will provide retail with suitable speculative entry points?
The tide is suddenly heading out to sea for aspiring hedge fund traders. A torrent of talent pouring into the marketplace fleeing the onerous restrictions of FinReg. Hedge funds, have crimped new hiring, their own modest first half returns keeping new investors at bay. Could we be setting up for a bonus draught like the one we saw in 2008?
For all those who have been hoping for someone to condense Donk's 2000+ pages into something that does not induce a coma, below is FRBNY's favorite law firm, Davis Polk, attempted summary of financial regulation... in 130 pages. Davis Polk estimates that 243 new rules, and 67 new reports have to be created before Donk is fully enacted. Which simply means that it probably will not be before 2018 (when Basel III's full guidebook becomes policy) that even the current version of financial reform is close to full implementation. And as Christine Harper slams the farce that was signed by Obama to much pomp and circumstance with the pen of each corrupt politician who was instrumental in the creation of this act of weapons grade stupidity, the crash of 2015 will occur long before any realistic reform is implemented. Of course, realistically speaking now that HFTs have free reign over the market and the SEC has given up regulating every and anything, the next crash will occur much, much sooner.
What can we say: it would be flagrantly criminal if the most incompetent and corrupt organization in the world was allowed to be unaccountable to anyone, least of all the US citizen. Our respect to Senators Leahy, Cornyn and Kaufman and Grassley for doing what is so obviously right, we are stunned only four senators ended up sponsoring legislation proposed by the Senate Judiciary Committee to strike the FOIA exemption for the SEC. Full press release below.
- SEC Says New Financial Regulation Law Exempts it From Public Disclosure, in other words the SEC did not reply to your FOIA before, when it was busy watching porn, it surely won't reply now, when it is again busy watching porn (Fox Business)
- Fannie Mae, Freddie Mac Still Too Big to Nail (Bloomberg)
- Moody's says US needs debt plan to keep rating (Reuters)
- Niall Ferguson: Sun Could Set Suddenly on Superpower as Debt Bites (Australian)
- Europe economic confidence rises as exports benefit from record low EUR (Bloomberg), and now that the regime has changed, expect Europe to plunge again as US exports pick up, and so forth, and so forth, with the capital flow from Europe to the US becoming a daily occurrence
- Europe Follows Misguided U.S. Policy: The Stress Tests Conducted in 2009 Were a Disaster (Forbes)
- Renminbi Peg: On Again, Off Again - Cleveland Fed says depegging CNY will not help US trade deficit (Cleveland Fed)
Scientific Proof That High Frequency Trading Induces Adverse Changes In Market Microstructure And Dynamics, And Puts Market Fairness Under QuestionSubmitted by Tyler Durden on 07/13/2010 00:46 -0400
Up until recently, any debate between proponents and opponents of High Frequency Trading would typically be represented by heated debates of high conviction on either side, with discussions rapidly deteriorating into ad hominem attacks and the producer screaming 'cut to commercial' to prevent fistfights. Luckily, all this is about to change. In a research paper by Reginald Smith of the Bouchet Franklin Institute in Rochester titled "Is high-frequency trading inducing changes in market microstructure and dynamics?" the author finds that he "can clearly demonstrate that HFT is having an increasingly large impact on the microstructure of equity trading dynamics. Traded value, and by extension trading volume, fluctuations are starting to show self-similarity at increasingly shorter timescales. Values which were once only present on the orders of several hours or days are now commonplace in the timescale of seconds or minutes. It is important that the trading algorithms of HFT traders, as well as those who seek to understand, improve, or regulate HFT realize that the overall structure of trading is influenced in a measurable manner by HFT and that Gaussian noise models of short term trading volume fluctuations likely are increasingly inapplicable." In other words, the author finds ample evidence that during the past decade (on the NASDAQ) and especially since the 2005 revision of Reg NMS (on the NYSE), stock trading increasingly demonstrates "self similar" fractal patterns, resulting in volatility surges, recursive feedback loops, and a market structure which is increasingly becoming a product of the actual trading mechanism. In the process, as demonstrated by a Hurst Exponent gravitating increasingly further away from 0.5 (i.e., Brown Noise territory), the Markov Process nature of stock trading is put under question, and thus the whole premise of an efficient market has to be reevaluated. Simply said: HFT has been shown to affect the fairness of trading.
Some interesting developments in the mutual fund arena, where a trailblazer, the Appleseed Fund, has announced that beginning July 1 it will no longer invest in Too Big To Fail banks: "Given the failure of regulators to prevent the previous credit crisis
and the subsequent failure of legislators to break up the massive and
very much interconnected banks that helped to create the crisis, it is
incumbent on depositors and investors to vote with their wallets. Until
the financial system is truly restructured, the Appleseed Fund will
avoid investments in too-big-to-fail banks, choosing instead to invest
in regional banks, community banks, and credit unions which lend money
to families and businesses that operate in the productive sectors of our
The IMF has issued a less than stellar outlook of the US economy after consultations with US government authorities, in which it cautions that even as the outlook has generally improved, major downside risks remain: "On the downside, the backlog of foreclosures and high levels of negative equity, combined with elevated unemployment, pose risks of a double dip in housing; the continued deterioration in commercial real estate poses risks for smaller banks; and financing conditions remain tight, especially for smaller firms reliant on bank finance. Most recently, and tipping the balance of risks to the downside, sovereign strains in Europe have become an increasing concern, potentially impacting the United States through financial market and, in a tail risk scenario, trade links." Also notable is the fund's warning on the state of the US consumer and the perceived overvaluation of the dollar: "It follows, as also emphasized in last year’s Article IV, that the United States can no longer play the role of global consumer of last resort, underscoring the importance of measures to boost growth and demand in current account surplus countries. With the U.S. dollar now moderately overvalued from a medium term perspective, this will need to be accompanied by greater exchange rate flexibility/appreciation elsewhere."
... to Johns who have insatiable lusts.