• Monetary Metals
    07/28/2014 - 02:38
    Notice the “icicles” dripping all over the place? They occur at different times of the day. What are they? Each one is a brief but dramatic price drop.

Purchasing Power

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It's Not Enough To Be 'Well-Off' Anymore





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.

 
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Guest Post: The Shape Of The Debt Reset





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.

 
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Guest Post: An Austrian View On High Frequency Trading





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.

 
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Guest Post: Money Down A Rathole: College, Healthcare, Housing





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.

 
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Why Hedge Funds Hate Stocks In A World Where "Tulip Trend" Is Top Performer: Complete July Performance Summary





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.

 
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Guest Post: A Step Towards Gold Confiscation





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.

 
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Knight's Berserk Algo Bought $2.6 Million Worth Of Stock Every Second





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.

 
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Guest Post: Does Easy Monetary Policy Enrich The Financial Sector?





The easing of credit conditions (in other words, the enhancement of banks’ ability to create credit and thus enhance their own purchasing power) following the breakdown of Bretton Woods — as opposed to monetary base expansion — seems to have driven the growth in credit and financialisation. It has not (at least previous to 2008) been a case of central banks printing money and handing it to the financial sector; it has been a case of the financial sector being set free from credit constraints. Monetary policy in the post-Bretton Woods era has taken a number of forms; interest rate policy, monetary base policy, and regulatory policy. The association between growth in the financial sector, credit growth and interest rate policy shows that monetary growth (whether that is in the form of base money, credit or nontraditional credit instruments) enriches the recipients of new money as anticipated by Cantillon. This underscores the need for a monetary and credit system that distributes money in a way that does not favour any particular sector — especially not the endemically corrupt financial sector.

 
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Guest Post: US Government Proposes Law Making It Illegal For Them To Kill You





Last Friday, US Congressman Dennis Kucinich introduced HR 6357, a bill which aims to ‘prohibit the extrajudicial killing of United States citizens’ by the federal government. In other words, in the Land of the Free, they need to pass a law to prevent the government from indiscriminately murdering its own citizens. Now if this doesn’t give one reason to pause and consider the distortions of liberty that have taken place in western civilization, I don’t know what will. Ask yourself, are you really living in a free society? Are you free? If not, why not? What else could possibly be more important? It takes courage to answer honestly.

 
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Guest Post: A Matter Of Trust - Part Two





Putting our trust and faith in a few unelected bureaucrats and bankers, who use their obscene wealth to buy off politicians in writing the laws and regulations to favor them has proven to be a death knell for our country. The captured main stream media proclaims these men to be heroes and saviors of the world, when they are truly the villains in this episode. These are the men who unleashed the frenzy of Wall Street greed and pillaging by repealing Glass Steagall, blocking Brooksley Born’s efforts to regulate derivatives, encouraging mortgage fraud, not enforcing existing regulations, and creating speculative bubbles through excessively low interest rates and making it known they would bailout recklessness. They have created an overly complex tangled financial system so they could peddle propaganda to the math challenged American public without fear of being caught in their web of lies. Big government, big banks and big legislation like Dodd/Frank and Obamacare are designed to benefit the few at the expense of the many. The system has been captured by a plutocracy of self-serving men. They don’t care about you or your children. We are only given 80 years, or so, on this earth and our purpose should be to sustain our economic and political system in a balanced way, so our children and their children have a chance at a decent life. Do you trust that is the purpose of those in power today? Should we trust the jackals and grifters who got us into this mess, to get us out?   

 
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Guest Post: The Cantillon Effect





Expansionary monetary policy constitutes a transfer of purchasing power away from those who hold old money to whoever gets new money. This is known as the Cantillon Effect, after 18th Century economist Richard Cantillon who first proposed it. In the immediate term, as more dollars are created, each one translates to a smaller slice of all goods and services produced. How we measure this phenomenon and its size depends how we define money....  What is clear is that the dramatic expansion of the monetary base that we saw after 2008 is merely catching up with the more gradual growth of debt that took place in the 90s and 00s. While it is my hunch that overblown credit bubbles are better liquidated than reflated (not least because the reflation of a corrupt and dysfunctional financial sector entails huge moral hazard), it is true the Fed’s efforts to inflate the money supply have so far prevented a default cascade. We should expect that such initiatives will continue, not least because Bernanke has a deep intellectual investment in reflationism.

 
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Guest Post: Gold, Price Stability & Credit Bubbles





Eventually — because the costs of the deleveraging trap makes organicy growth very difficult — the debt will either be forgiven, inflated or defaulted away. Endless rounds of tepid QE (which is debt additive, and so adds to the debt problem) just postpone that difficult decision. The deleveraging trap preserves the value of past debts at the cost of future growth. Under the harsh discipline of a gold standard, such prevarication is not possible. Without the ability to inflate, overleveraged banks, individuals and governments would default on their debt. Income would rapidly fall, and economies would likely deflate and become severely depressed. Yet liquidation is not all bad.  The example of 1907 — prior to the era of central banking — illustrates this. Although liquidation episodes are painful, the clear benefit is that a big crash and depression clears out old debt. Under the present regimes, the weight of old debt remains a burden to the economy.

 
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Guest Post: A Little Perspective On What Lies Ahead





Many finance-oriented critiques start from the position that our problems largely stem from the financial/political dominance of Elitist cartels and cabals. Clearly, the malinvestment, exploitation, predation and disregard for the law that characterizes the rule of political-financial Elites in both developed and developing nations have wreaked havoc on societies and economies around the globe. Implicit in this critique is a dangerously naive assumption: if all our problems can be traced back to Elitist cabals such as the Federal Reserve and the European Central Bank, then it follows that the subjugation or eradication of these concentrations of self-serving power would remove the cause of our problems. Alas, that would be a welcome step in the right direction, but that alone would not resolve the structural causes of our devolution. Freeing ourselves of self-serving Elites would certainly create an opening for structural transformation that is currently impossible, but the transformation will require changing much of what the average citizen takes for granted as a "given" or even "right."

 
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As a Reminder: The Private Sector is Doing Fine





As we were told by our President, the private sector economy is doing fine. Sometimes, however, facts get in the way of propaganda.

 
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Promises Of More QE Are No Longer Sufficient: Desperate Banks Demand Reserves, Get First Fed Repo In 4 Years





While endless jawboning and threats of more free (and even paid for those close to the discount window) money can do miracles for markets, if only for a day or two, by spooking every new incremental layer of shorts into covering, there is one problem with this strategy: the "flow" pathway is about to run out of purchasing power. Recall that Goldman finally admitted that when it comes to monetary policy, it really is all about the flow, just as we have been claiming for years. What does this mean - simple: the Fed needs to constantly infuse the financial system with new, unsterilized reserves in order to provide bank traders with the dry powder needed to ramp risk higher. Logically, this makes intuitive sense: if talking the market up was all that was needed, Ben would simply say he would like to see the Dow at 36,000 and leave it at that. That's great, but unless the Fed is the one doing the actual buying, those who wish to take advantage of the Fed's jawboning need to have access to reserves, which via Shadow banking conduits, i.e., repos, can be converted to fungible cash, which can then be used to ramp up ES, SPY and other risk aggregates (just like JPM was doing by selling IG9 and becoming the market in that axe). As it turns out, today we may have just hit the limit on how much banks can do without an actual injection of new reserves by the Fed. Read: a new unsterilized QE program.

 
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