The causal relationship between scarcity, demand, and price is intuitive. Whatever is scarce and in demand will rise in price; whatever is abundant and in low demand will decline in price to its cost basis. The corollary is somewhat less intuitive, but still solidly sensible: the cure for high prices is high prices, meaning that as the price of a commodity or service reaches a threshold of affordability/pain, suppliers and consumers will seek out alternatives or modify their behaviors to lower consumption. Much of the supposedly inelastic demand for goods is based on the presumptive value of ownership. For many workers, there simply won’t be enough income to indulge in the ownership model. The cost in cash and opportunity are too high. This leads to a profound conclusion: What will be scarce is income, not commodities.
The empirical data is in. And it turns out that as we have been suggesting for a very long time — yes, shock horror — helicopter dropping cash onto the financial sector does disproportionately favour the rich. Here are four simple questions to the venerable Bank of England (just as applicable to any and every Central Banker); and sadly, we expect to see the announcement of more quantitative easing to the financial sector long before we expect to see answers to any of these questions.
Debt offers a compelling fantasy: there is no need for difficult trade-offs or sacrifices, everything can be bought and enjoyed now. If income is flat and interest rates already near zero, then where is the leverage for additional debt going to come from? The answer is the game of relying on ever-expanding debt is over. You can claim phantom assets and income streams as collateral for a while, but eventually the market sniffs out reality, and the phantom assets settle at their real value near zero. Once the collateral is gone, the debt is also revalued at zero, and the debtor is unable to borrow more. This is the position Greece finds itself in; the collateral and income steams have been discounted, the credit lines have been pulled, and so the reality of living within one's means is reasserting itself. Living within one's income (household or national income) requires making difficult trade-offs and sacrfices: either current consumption is sacrificed for future benefits, or the future benefits are sacrificed for current consumption. You can't have it both ways once the collateral and credit both vanish.
The purpose of the list is to expose current partisan debate as corrupt and off-point. Economic policy makers across the political spectrum, including some commonly labeled “extreme” by more centrist politicians, are unwilling to acknowledge that fractionally reserved banking systems are the true source of the past generation’s credit build-up, the economic malaise it necessitated, the growing economic hardship it is creating, and the inescapability from deteriorating economic conditions through conventional policy means. The list challenges American policy makers to publicly identify and make illegal fractional-reserve banking, and further challenges them to lead the world in adopting sound money and credit practices that returns economic power to global economic actors following commercial rather than financial incentives.
It may come as a surprise to some of our younger readers, that the Eurozone, and its associated currency, is merely the latest in a long series of failed attempts to create a European currency union and a common currency. Three of the most notable predecessors to the EUR include the Hapsburg Empire, the Soviet Union, and Yugoslavia. Obviously, these no longer exist. Just as obvious, all of these unions, having spent time, energy, money, and effort to change the culture and traditions of member countries and to perpetuate said unions, had no desire, just like Brussels nowadays, to see these unions implode. The question then is: what happened after these multi-nation currency unions fails. VOX kindly answers: "they all ended with disastrous hyperinflation."
The deleveraging trap is a catch-22; while debt remains excessive, economic activity remains subdued, and while economic activity remains subdued, generating more production than consumption to pay down debt is extremely difficult. As we have seen in Japan — where the total debt load remains above where it was 1991 — fundamentals can remain depressed for years or even generations. Certainly, the modern debt jubilee isn’t going to cure the culture that led to the excessive debt. Certainly, it won’t wash away the vampiristic TBTF megabanks who caused the GFC and live today on bailouts and ZIRP. Certainly, it won’t fix our broken political or financial systems where whistleblowers like Assange are locked away and fraudsters like Corzine roam free to start hedge funds. And certainly it won’t wash away the huge mountain of derivatives or shadow intermediation that interconnect the economy in a way that amplifies small shocks into greater crises.
Like all systems that follow an S-curve of growth and decay, financialization cannot return to its growth phase. But there is another dynamic at play: a self-destruct sequence triggered by central bank and Central State efforts to reflate asset and credit/leverage bubbles. All central bank and State policies aimed at driving capital into risk assets boil down to reflating phantom assets purchased with debt by issuing more debt that is based on newly issued phantom assets. Phantom assets purchased with debt cannot be reflated by issuing more debt that is based on newly issued phantom assets. Piling more debt/leverage on a sandpile of phantom assets (CDS, bonds that cannot possibly be paid back, empty condos in the middle of nowhere, etc.) only heightens the probability that the unstable pile will collapse. The implicit Central Planning campaign to trigger "mild" inflation is part of the self-destruct sequence. Central planners metaphorically fight the last war, or at best the last two wars, and so they remain blind to any dynamics that did not exist in their case studies.
41 Years After The Death Of The Gold Standard, A Look At "How We Ended Up In This Economic Purgatory"Submitted by Tyler Durden on 08/15/2012 20:53 -0400
As we await the latest developments out of the Eurozone and Washington, JPMorgan's Kenneth Landon takes a moment to look back on this very important day in history. If you want to understand current events, then you first have to understand history. How did we get here? More specifically for financial markets, how did we end up in this mess -- this economic purgatory? This being August 15, 2012, students of the history of monetary economics no doubt are aware that this is the 41th Anniversary of the breakdown of Bretton Woods. It was on this day 41 years ago that President Nixon defaulted on the promise to exchange gold for paper dollars presented for exchange by foreign central banks. The crisis in confidence that we observe today resulted from cumulative effects of those measures.
Since 1990, across the four 'major' emerging markets and the advanced economies, UBS estimates a point estimate of a 29% increase in the number of “well-off” households in these economies. This sounds like a new age of affluence. But before we get carried away by the rise of what might be termed the upper middle class, economist Paul Donovan notes that the number of well off households having increasing 29% from 1990 to 2010 needs to be compared against a rise in the global population of 30% over the same period. In other words, the number of “well-off” households has risen broadly in line with demographics. This then begs the question – why has income inequality increased, if the number of "well-off" households is rising proportionate to the increase in overall population? The answer, quite simply, is that in relative terms, the “well-off” are not as “well-off” as they used to be.
It is important to consider how beneficial a debt reset — so long as society comes out of it in one piece — will be in the long run. As both Friedrich Hayek and Hyman Minsky saw it, with the weight of excessive debt and the costs of deleveraging either reduced or removed, long-depressed-economies would be able to grow organically again. This is obviously not ideal, but it is surely better than remaining in a Japanese-style deleveraging trap. Yet while most of the economic establishment remain convinced that the real problem is one of aggregate demand, and not excessive total debt, such a prospect still remains distant. The most likely pathway continues to be one of stagnation, with central banks printing just enough money to keep the debt serviceable (and handing it to the financial sector, which will surely continue to enrich itself at the expense of everyone else). This is a painful and unsustainable status quo and the debt reset — and without an economic miracle, it will eventually arrive — will in the long run likely prove a welcome development for the vast majority of people and businesses.
What is high-frequency trading? We will never exhaustively address this issue here. We recommend that you do your own research on the subject. There are numerous articles on this topic. High-frequency trading (HFT) consists in using sophisticated technology to trade securities. It is highly quantitative, employing algorithms to analyze incoming market data. HF investment positions are held only very briefly, with HF traders trading in and out of positions intraday tens of thousands of times. The important feature is that at the end of a trading day there is no net investment position. Processing speed and access to the exchanges are critical.
I am sickened by the vast sums I see households squandering on hopelessly marginal "investments" in expensive higher education, healthcare and housing. I too am caught in the crony-capitalist/State cartel web of waste, skimming and fraud: we have paid tens of thousands of dollars on no-frills healthcare insurance (no eyewear, no dental, no meds, $50 co-pay) in the past decade, and received perhaps 3% of this sum in care. But to not have health insurance in America is to invite financial ruin should we suffer some serious illness. The same "must-have" argument supports the conventional wisdom about education: a young person "must have" a college degree if they hope to escape a lifetime of poverty. The issue isn't education per se, it's the ever-rising cost of an education that has arguably lost value in a global job market that faces a vast surplus of educated workers and a scarcity of secure, high-paying jobs. Simply put, minting 10,000 PhD chemists (for example) does not magically create 10,000 jobs for PhD chemists. Yes, education and healthcare are necessary, but cartels have leveraged this necessity into vast skimming operations that yield marginal returns even as their costs balloon without limit. Housing is also a necessity, but it does not follow that it is a high-yield investment. Rather, it has become a sinkhole for hard-earned, scarce cash.
Why Hedge Funds Hate Stocks In A World Where "Tulip Trend" Is Top Performer: Complete July Performance SummarySubmitted by Tyler Durden on 08/10/2012 11:35 -0400
July was not a bad month for most hedge funds. There is, however, one big problem: virtually all of them underperformed the S&P. As they did in June. As they did in May. Etc. Etc. And that has been the theme this whole year: hedge funds, which account for over $2 trillion in unlevered purchasing power, and between $4-6 trillion levered, are not doing badly, they are simply underperforming the S&P very badly, in many cases by more than 2 standard deviations. And as all those fund managers who wake up and go to bed with two words on their minds: "career risk", underperforming the benchmark, or in this case the broad stock market, which does not demand 2 and 20, is the surest way to extinction. Then again, in a centrally planned market in which a hedge fund called Tulip Trend is the best performer Year To Date (and in which Paulson's Disadvantage Minus continues to be the worst), nothing can really surprise any more.
In attempting to stimulate risk appetite by taking “safe” assets out of the market, the Fed has actually achieved precisely the opposite of stimulating productive investment. First, it has turned bond markets into a race to the bottom as bond flippers end up piling into the very assets that the Fed is trying to discourage ownership of — because who care about low yields when the Fed will jump in at an even lower price floor, thus assuring the bond flippers a profit? Second it has energised other safe asset markets (such as gold) as longer term investors look for alternatives to preserve their purchasing power in the context of a global economic depression. The Fed is firing at the wrong target; the real problem — the thing that is causing investors to scramble for safe assets — is an economic depression brought on by (among other non-monetary causes) the deleveraging costs of an unsustainable debt bubble.
While we already presented, courtesy of Nanex, the modus operandi of the Knight berserker algo, there was one outstanding question. What was the bottom line. And no, not how much the loss on Knight's Income Statement would be as a result of this glimpse into what really happens in the market: we already knew that would be $440 million. The question is what is the notional amount of stock that this algo bought in the 45 minutes in which it was operational. We now know: $7 billion. Or $155 million per minute. Or $2.6 million per second. Or, assuming the algo impacted just 150 stocks as previously reported, it was buying on average $17,333 in each name every second. Or, assuming an average stock price of the universe of 150 stocks of $30/share, the Knight algo lifted the offer roughly 600 times each second. For 45 minutes straight! That's right - the market making algorithm of a designated market maker which is responsible for 10% of the order flow in the US stock market, entered a pre-programmed mode (because the computer was told to do whatever it did by someone, and not without reason) that saw it buy up $2.6 million worth of stock every second.