Transparency

The hullabaloo over the Fed’s communications should be the least of our concerns. It’s outranked by actual policies, which seem to be once again destabilizing markets, encouraging reckless behaviors, perpetuating global imbalances and enriching the parasitic practitioners of so-called financial innovation at the expense of the middle class. On the other hand, Chairman Bernanke claims that clear communications are a key part of his approach, forward guidance being one example of how he manipulates the economy by telling us what to expect. And yet, it sure seems like the more he and his colleagues talk, the less we know about what they’ll do next. In light of this, the best explanation for the Fed’s surprising untaper last week appears to be from Vince Reinhart’s musings and inside information about the Fed. He offers a short but interesting history on the FOMC’s attempts to increase transparency, and then goes on to share some thoughts on how the decision making has evolved and why it tends to confuse us.

As we wrap up a most interesting, and volatile, week there are some things that we have discussed previously that are now brewing, interesting points to consider and risks to be aware of.  In this regard we thought we would share a few things that caught our attention:

1) Angela Merkel Election No So Assured
2) The Debt Ceiling Debate
3) The "Taper" Indecision Is Back
4) In The "Economy Is Improving" Camp
5) Syria Already Set To Miss A Deadline
6) Everything Else...

Simply put, complacency is not an option; Stocks are overvalued, rates are rising, earnings are deteriorating and despite signs of short term economic improvements the data trends remain within negative downtrends.   Investors, however, have disregarded fundamentals as irrelevant as long as the Federal Reserve remains committed to its accommodative policies.  The problem is that no one really knows has this will turn out and the current assumptions are based upon past performance.

Reflecting on exactly what was said yesterday, Duquesne's Stanley Druckenmiller is initially perplexed as Bernanke explained 'financial conditions' - not interest rates - have prompted the decision to forestall any taper. His confusion is that financial conditions are actually slightly better than they were in June and "a stock market at an all-time high would suggest we don't have a problem with financial conditions." While he dismisses surveys, the big-money was betting that they were going to taper as is clear from the moves in gold, bonds, and stocks; and it appears the Fed "lost their nerve." In fact, Druck continues, the Fed "blew it... they had a freebie," they could have started the process to "get us off the dope." This action, or inaction, he warns "is going to make it so much harder for the next Chairman to start the process." In fact, he concludes, that from beginning to end - once markets adjust from these subsidized prices - that the wealth effect of QE will have been negative not positive.

We have discussed RINs a number of times in the past year - pointing out the surge in the price of these ethanol credit-related derivatives and how they are the gas-market's four-letter word. As we explain below, the NY Times notes that the recent surge in the price of this little-known financial instrument - which was in large part responsible for the rise in the price of gas at the pump - could have been manipulated by JPMorgan's alleged stockpiling. As they note, the market in ethanol credits is exactly the kind Wall Street loves: opaque, lightly regulated and potentially very lucrative; and the ability for a major player to build a stockpile of these credits (effectively cornering the market) is relatively straightforward given the lack of detailed regulation. As Senator Thomas A. Coburn, Republican of Oklahoma, notes "When you see something change as rapidly as this, somebody’s hoarding them, somebody’s buying them, somebody’s making big bucks."

First, Summers steps away; Second, Geithner politely declines; and now - just as his odds of becoming the next Fed Head begin to rise, Donald Kohn drops the following headline bomb-shells at a Brookings' event this morning

KOHN: BAIL-IN NEEDED TO PROTECT FINANCIAL SYSTEM FROM TOO BIG TO FAIL FIRMS
KOHN: VERY EASY MONETARY POLICY CAN CREATE DANGEROUS RISKS
Kohn: Problems can arise when one policy [monetary or financial regulation] is leaning so hard in one direction

That should be enough to effectively remove himself from the running... It seems we are back to the lowest common denominator Fed-head - so much for American exceptionalism again.

Privacy: the final frontier. These are the voyages of the NSA, as it enters every computer and pries whatever data can be stolen and recorded in perpetuity. Its ongoing mission: to explore the internet and all TCP/IP packets, to seek out new emails, phone records, backdoors, webcams and bank accounts, to boldly go where no man with or without a search warrant has gone before.

Starting two weeks ago, requests faxed to the Office of the Secretary of Defense (OSD) started coming back as undeliverable. After several subsequent attempts and troubleshooting on our end, MuckRock reached out to the OSD. Sure enough, their fax machine is down... possibly until November. Now, in 2013, you wouldn't think this would be an issue. But when an agency accepts FOIA requests by a) fax, b) mail or c) a clunky online request portal that doesn't play nice with other systems, suddenly that fax machine becomes a technical linchpin. It bears repeating: The office that oversees the most powerful military in history (not to mention the best-funded) is unable to project when its single fax machine will once again be operational.

Recent problems in Asia ex-Japan appear solvable. But the time for reform is now if the region's to take the next leap forward in its economic development.

During an extended interview with Bloomberg TV, billionaire investor Stanley Druckenmiller provided a seemingly fact-based (and non-status-quo sustaining, commission-taking, media-whoring) perspective on a very wide variety of topics. The brief clips below touch the surface, with the detailed annotated transcript below providing details, as Druckenmiller opines on the looming catastrophe in entitlement spending "when you hear about the National debt being $16tn; if you actually took what we promised to seniors and future taxes, present value to both of them, that number is $200tn," why the Fed exit will be a big deal for markets, "it is my belief that QE has subsidized all asset prices and when you remove that, the market will go down," and his changing views on Obama "I was drinking the hope and change Kool-aid... in hindsight, he probably needed more experience for this job." Looking back to the financial crisis, he warns, "...a necessary condition to have a financial crisis, in my opinion, is too loose monetary policy that encourages people to take undue risk and go on the risk curve and do silly things. We should have shut this down in 1998, 1999. The NASDAQ bubble, we should have raised rates, we didn’t. Then we got the implosion."

The 2013 German federal elections may bring about pretty complicated results. With Merkel's junior coalition partner's (FDP) support dropping below the mandated 5% to enter parliament (according to polls), as Deutsche Bank notes, there is no point in working through the numerous possible coalition scenarios and options. In that case, the task of governing Germany and providing joint leadership in European affairs will become much more complicated than it used to be in normal times of a clear-cut victory for one camp. All inter-camp coalitions may well have a built-in tendency towards paralysis and require special political tricks that allow the partners to show their true colors in clearly circumscribed policy issues while not rocking the boat. A few years from now, September 22, 2013, might be remembered as the day when German politics finally became normally complicated, as in other countries, too. There are two major political narratives that appear dominant currently.

The Labor Force Participation Rate - in English, the percent of the population that is either in a job or looking for a job - fell yesterday to fresh 35 year lows. This is not a new trend, in fact since the end of 1999 (the dot-com bust) it has trended lower from well over 67% to the current 63.2%; which means the current unemployment rate would be almost 11% if the labor force was constant from when Obama took office. There appear to be at least four reasons (excuses) put forth for this dismal 'structural' trend but chief among them - and propagandized by most in the mainstream (given its lack of 'blame') - is the so-called 'aging of America' or demographics. There is only one problem with that 'myth'; it's entirely inconsistent with other Western economies who are experiencing exactly the same demographic shift. The collapse in the US labor force is, in fact, due to excess credit having fueled artificial growth for 3 decades; and now a government throwing free money at the population in the form of disability insurance (which has surged) and student loans (which are exponentially exploded). So who (or what) is to blame for the US' collapsing workforce? Simple, the unintended consequences of government interference.

This is at least the 3rd country to take citizen and private corporation's money in order to make themselves whole after profligate spending. How many times must I warn before the message is taken seriously? Interest rates should be spike through the stratosphere, Bernanke or not!!!

Just when the market thought it had priced in a new equilibrium without (or with - it is not quite clear) a Syria war, here comes Thursday with a data dump that will make one's head spin. Central bankers are once again on parade starting overnight, when the BOJ announced no change to its QE program and retaining its monetary base target of JPY270 trillion. The parade continues with both the BOE and ECB, the latter of which is expected to address the recent pick up in Eonia rates and take praise for the recent very much unsustainable "recovery" in the periphery even as Germany continues to slide lower (this morning's factory orders plunged 2.7% on exp. -1.0%), which in turn lead the Bund to pass above 2.0% for the first time since March 2011. Speaking of bonds blowing out, the US 10Y is now just 6 bps away from 3.00%, the widest since July 2011, and likely to breach the support level, taking out a boatload of stops and leading to the next big step spike in rates as the second selling scramble ensues. And just to keep every algo on its binary toes, today we also get a NFP preview with the ADP private payrolls at 8:15 am (Exp. 180K, down from 200K), Initial Claims (Exp. 330K), Nonfarm Productivity and Unit Labor Costs (Exp. 1.60% and 0.9%), Factory Orders (Exp. -3.4%), Non-mfg ISM  (Exp. 55), Final Durable Goods, EIA Nat Gas and DOE Crude Inventories, oh and the G-20 meeting in St. Petersburg where Putin and Obama are not expected to share much pleasantries, and where John Kerry's swiftboat may not be allowed to dock.

• Mediterranean 'Ballistic Targets' Were Part of Israeli Test – Defense Ministry (RIA)
• Microsoft to Buy Nokia’s Devices Unit for $7.2 Billion (BBG)
• Long-Term Jobless Left Out of Recovery (WSJ)
• Swiss banks apologize for assisting tax cheats (Reuters)
• As Obama pushes to punish Syria, lawmakers fear deep U.S. involvement (Reuters)
• India Looking to Expand Rupee-Payment System (WSJ)
• Citigroup Dialing Back Its 'Alternative' Holdings (WSJ)
• Libya Seeks New Solutions to Oil Crisis (WSJ)
• Lenovo Chief Yang Shares Bonus With Workers a Second Year (BBG)

* * * We make no claims that any of the presented is in any way accurate or representative of the truth. It is sourced from a "hack" by €Wagn3r of what the hacker purports to be numerous emails of one Colonel Anthony James MacDonald, his wife, and various other "Pentagon officers." However, if accurate, the exposed data sheds some critical, if circumstantial, light on the events that transpired in the days ahead of the Wednesday, August 22 "nerve gas" chemical attack alleged to have been executed by Syria's president al-Assad, and presented "beyond a doubt" as such, and as the basis for full-scale military operations and "surgical strikes" targeting Syrian assets, which in the coming days will involve a Congressional vote to determine the fate of the Syrian government and ostensibly of ten of thousands of innocent civilians caught in the crossfire. While we doubt the Pentagon, the US Military, or any person in the administration will officially address these "hacked" emails, the world has a right to be aware of the existence of this information, and to come their own conclusions about the veracity of the official "case" for Syrian involvement * * *