Back in April, China was flying high. The stock market had reached dizzying heights on the back of an unprecedented surge in margin debt, creating billions in paper profits for millions of farmers and housewives turned day traders. Around the same time, Beijing had accidentally pulled off a major diplomatic coup. The China-led Asian Infrastructure Investment bank had just wrapped up a wildly successful membership drive after a surprise decision by the UK to back the new venture opened the floodgates and emboldened other US allies who, despite Washington’s best efforts to convince them otherwise, decided to join up.
The effort to recruit members was in fact so successful, that Beijing went out of its way to dispel the notion that the new bank represented an attempt on China’s part to usher in a new era of yuan hegemony and rewrite the rules of the post-War global economic order.
Despite the Politburo’s best efforts to toe the line between acknowledging the bank’s early success and unnerving Western members who, although happy to participate, are still acutely aware that a dying hegemon is still a hegemon and therefore would prefer it if Beijing didn’t rub the whole thing in Washington’s face, it was abundantly clear to everyone involved that the AIIB represented no less than a changing of the guard and a revolution against the US-dominated multilateral institutions that many emerging countries believe have failed to respond to seismic shifts in the global economy.
Unfortunately for China, the AIIB was forced to take a back seat in terms of media coverage to the country’s dramatic equity market meltdown and, subsequently, to the devaluation of the yuan which, you’re reminded, will play an outsized role in any financing extended by the new lender. But as the carnage in financial markets grabs the headlines, the AIIB is quietly making preparations to officially commence operations and as Reuters notes, China is set to “rewrite the unwritten rules of global development finance” by doing away with certain conditionalities required by Western multilateral lenders. Here’s Reuters with the story:
The Asian Infrastructure Investment Bank (AIIB) will require projects to be legally transparent and protect social and environmental interests, but will not ask borrowers to privatize or deregulate businesses for loans, four sources with knowledge of the matter said.
By not insisting on some free market economic policies recommended by the World Bank, the AIIB is likely to avoid criticism leveled against its rivals, who some say impose unreasonable demands on borrowers.
It could also help Beijing stamp its mark on a bank regarded by some in the government as a political as much as an economic project, and reflects scepticism in China about the virtues of free market policies advocated in the West.
"Privatization will not become a conditionality for loans," said a source familiar with internal AIIB discussions, but who declined to be named because he is not authorized to speak publicly on the matter.
"Deregulation is also not likely to be a condition," he added. "The AIIB will follow the local conditions of each country. It will not force others to do this and do that from the outside."
A reduced focus on the free market could give the AIIB greater freedom to run projects, said a banker at a development bank who declined to be named.
For example, development banks that finance a water treatment plant may require the price of treated water to be raised to recoup costs, even if local conditions are not conducive to higher prices.
The AIIB, on the other hand, could avoid hiking prices and rely instead on other sources of financing, such as government subsidies, to defray costs, he said.
A successful AIIB that sets itself apart from the World Bank would be a diplomatic triumph for China, which opposes a global financial order it says is dominated by the United States and under-represented by developing nations.
Criticism of international development lending is not new, said Susan Engel, a professor at Australia's University of Wollongong who has studied the impact on the World Bank of free market ideas often referred to as the Washington Consensus.
"It's a religion - this commitment to the involvement of the private sector even in sectors where, in fact, their involvement is shown to do harm," Engel said of the U.S.-based lender.
By not insisting on privatization for funds - which has recently manifested itself in the auctioning of Greek state assets in exchange for loans from Brussels and ultimately, from the IMF - the AIIB will give borrowers a choice, which will in turn allow them to select the financing option that they believe best fits their particular circumstances. This echoes comments made by Nomura's Rich Koo in July. Recall:
Until now the IMF was the only choice for countries in need of financial assistance, which meant they had no choice but to accept the economic and fiscal reforms it demanded.
But if the IMF has competition, countries in need of help will most likely shop around for the institution offering the easiest terms.
While that choice may, as Koo goes on to note, lead some countries to "delay necessary reforms," it may also allow everyone involved to avoid the type of mistakes that are inevitable when decisions are made unilaterally. That is, to the extent the IMF is fallible (and if they are anything, it's fallible), the existence of an alternative could prove invaluable in a crisis scenario. We go briefly back to Koo:
There is something to be said for the US argument that there should be only one refuge for economically troubled nations which takes responsibility for ensuring they carry out necessary reforms. However, that view is based on the underlying assumption that the US and the IMF will correctly diagnose the problems it encounters.
In reality, the US and the IMF completely misread the Asian currency crisis that began in 1997, and their errors caused tremendous damage to crisis-struck countries in the region.
The decision of many Asian countries to participate in the AIIB is probably due in part to a distrust of the US born during the currency crisis.
And with that, we will conclude with the following question: How ironic will it be when the first loans China makes through the AIIB are to the very same Asian countries who supported the new lender because of their negative experience with US-led institutions during the last Asian Financial Crisis, but whose descent into a replay of that crisis is the direct result of China's move to devlaue the yuan?
Understand this now. As Jim Quinn explains, YOU are the enemy of the state. They don’t give a shit about you. They treat you as sheep and cows to be sheared and milked. If you start questioning them, they will slaughter you. They have militarized the police forces and put you under 24 hour surveillance because they fear an uprising. There only a few hundred thousand of them and there are millions of us. A conflict is looming.
As Armstrong Economics' Martin Armstrong details, government talks about Islamic terrorists, but their number one fear is YOU.
The internment camps are for you, not Islamic extremists. Government CANNOT honor its promises so it will not even try.
They are confiscating money everywhere, doubling fines, and punishing people for insane things.
A neighbor received a ticket and a $200 fine for using a cell phone while driving. The use? Looking at the Google Maps. She even went to court with her phone records to prove she was not on the phone. The judge declared that she should have looked at that BEFORE she left. I suppose if you write down the directions and look at the piece of paper that is OK, you just can’t look at it on your phone. That applies to even looking at the time on your phone.
The government claims it wants to eliminate guns to protect society. The problem will be that the criminals do not buy their guns at a store. They want to disarm the public because you are their number one fear as outlined in this discussion paper.
Make no mistake, the writing has been on the wall for quite some time and we haven't been shy about pointing it out.
Central banks are losing control.
Trillions upon trillions in post-crisis asset purchases haven’t given the global economy the defibrillator shock the world’s central planners were depending on to bring about a sustained and robust recovery.
Indeed, the opposite appears to have materialized.
Subdued demand and trade looks to have become structural and endemic rather than cyclical and rather than create "healthy inflation", seven years of accommodative monetary policy has only served to bury the world in a global deflationary supply glut. And that’s just the big picture. The more granular we get, the more apparent it is that central banks are no longer in the driver's seat.
Inflation expectations across the eurozone have collapsed despite Mario Draghi’s best efforts to assure the public that PSPP has been an overwhelming success and similarly, inflation expectations have tumbled in the US ahead of a expected rate hike which looks less likely by the day. Meanwhile, in Sweden, the Riksbank has sucked so much high quality collateral from the system that QE has actually reversed itself, giving the world its first look at what happens when QE demonstrably fails. And let’s not forget Japan, where the world’s most hilariously absurd example of central bankers gone stark raving mad has done exactly nothing to pull the country out of the deflationary doldrums.
And so here we stand, on the precipice of crisis with central banks having run out of both ammunition and credibility. In short, it’s time to ask if central banks have officially lost control. For the answer, and for the "QE end-game decision tree", we go to BNP.
Note that if CB's do lose it, the likely scenario is: "deflation, vicious cycle... economic depression".
* * *
Not "IF" but "WHEN central banks lose control?"
The global financial repression pushed investors to invest cash in risky assets, such as property and equity. The scale of global policy interventions is trumping all fundamental factors for now. Investors should keep in mind that the road is never straight and next month should be full of potentially disruptive events impacting sharply overcrowded assets and trades. History shows that such misallocation of resources creates bubbles that can last before fully blowing; the question is not if, but when.
Risk assets and risk parameters would be massively affected in the event central banks lose control; in the meantime, EDS Asia believes that central bank maturities that use forward guidance matter more than the QE process itself. The Fed and the ECB have been providing guidance which partly explains the low short-term volatility. The BoJ is moving toward this behaviour, managing the news flow: therefore there is a case for the NKY index going up slowly with a lower upfront volatility and a term structure closer to the US one: in that sense, we have started to observe an "SPX-isation of the NKY Index" in the past few months before this summer’s risk-off, as short dated volatility was trading lower. In China, the PBoC intervention learning curve is steep; this is the reason we believe the next equity leg up will be accompanied by an elevated volatility regime.
The quantitative easing started in the US more than six years ago and the SPX index, as well as selective risky assets, are now hovering at the high end of their valuation histories. Recent price actions are testimony of the fragility of imbalances built over the years. Investors may recall the Japan easing experience in 2005 and 2006; an early exit, together with a global financial crisis, caused a Japanese equities meltdown (between mid-2007 and late-2008).
In the decision tree, EDS Asia addresses the potential "QE end-game scenarios" [attempting to] answer the question "Are central banks losing control?" and providing a time horizon and probabilities affecting each path, which should allow investors to get a clearer overview.
In case you haven’t noticed, the world’s central banks are locked in an epic race to the devaluation bottom in desperate pursuit of a post-crisis economic recovery that never came despite trillions in worldwide QE and on August 11, in the currency war equivalent of the United States entering World War II, China devalued the yuan, serving notice that, to quote Xi Jinping, "the lion has woken up."
China’s move has sent shockwaves through the emerging market world and caused the Fed to reconsider the timing of the ever elusive "liftoff" and now, with the sputtering engine of global growth and trade set to export its deflation across the globe, countries like India and South Korea must decide how to respond.
Because we know the mechanics of the currency war and the endless loop of competitive easing can be a bit confusing at times, we present the following simplified, circular flow chart from Morgan Stanley which should serve as a helpful guide to the never ending "beggar thy neighbor" loop.
At the beginning of the game, the global economy is at an arbitrary point of equilibrium, similar to a chess board, with the pieces representing policy tools that are used to achieve one’s goal—growth and inflation—the king. Once a central bank makes an initial move to achieve a new equilibrium, it sets in motion a sequence of moves from other central banks, which we refer to as the opening repertoire. Suddenly, the game becomes unbalanced and requires more policy changes until a new equilibrium is achieved.
“The most effective way to destroy people is to deny and obliterate their own understanding of their history. […] He who controls the past controls the future. He who controls the present controls the past.” – George Orwell, 1984
Common Core and similar corporate-driven efforts to alter education are starting to have some serious consequences.
Rewriting history is a major part of the silent takeover that is and has been underway for some time.
The powers that be are interested in control, not in freedom. That much is understood.
As such, American history – as ugly and bloody as it has been – cannot be told. Knowledge about the U.S. Constitution, the critical Bill of Rights and the revolution for independence are inconvenient facts to the new social engineering.
Incredibly, public schools are now actually beginning to rewrite history by omitting this pivotal chapter from classrooms.
According to EAGnews.org, South Dakota – which is a Common Core state – is literally leaving it untaught:
Important topics like the Declaration of Independence, the Revolutionary War and the framing of the U.S. Constitution may simply be ignored by teachers under new history standards approved by the state’s board of education last Monday, the Argus Leader reports.
Current standards do not allow history teachers to delve into topics before the Civil War, so the new standards open up the door but don’t require teachers to cover early American history, as many would have preferred. The recently adopted history standards are set to take effect in 2016-17 school year and whittle the current standards from 117 pages to 44.
“Our current history standards do not even give an option as to whether it’s comprehensive or modern,” board president Don Kirkegaard told the news site. “It’s strictly modern.”
No, this is not hyperbole. These South Dakota schools are literally talking about leaving out lessons on the founding of the United States, to instead focus most of the school year on the last century, which can only be properly understood in the context of what has happened in the last 500 years… and beyond.
This should be alarming to everyone, whether you love America and what it stands for, or not!
The net effect of keeping kids ignorant of history is, of course, passed down the line to society who must endure “low information voters” and malleable sheep in many areas.
Already, college professors – with their own problems concerning academic standards – are complaining that students are arriving woefully ignorant and unprepared either to face history or the wider world. According to the Argus Leader:
Ben Jones, dean and associate professor of history at Dakota State University, has said he and his colleagues are “astounded by the level of ignorance” of U.S. history that they see in freshmen.
But there are other important reasons to teach high school students about our nation’s early history.
Constitutional topics are common in today’s political debate and students without a solid understanding and who do not have the appropriate level of context for these discussions are at a disadvantage. As citizens, we need to understand our rights and duties as well as appreciate how they came to be.
It is time for a comprehensive audit of Janet Yellen ’s Federal Reserve - and not just for the reasons presidential candidate Rand Paul and others have given.
The Fed needs to be audited to see if its ruling body has broken the law by manipulating financial markets that are outside its jurisdiction. A thorough investigation of the Fed will show once and for all if its former chief Ben Bernanke and current Chairwoman Yellen should go to jail.
I know, that’s a bold statement coming as it does on Sept. 1, 2015, with Wall Street still in half-bloom. But it won’t be so preposterous some day in the future if the stock market suffers a full-blown economy-busting collapse and Congress and everyone else are looking for scalps.
The Fed should be audited as a brokerage firm would be — its financial holdings, its transactions, market orders, emails and phone calls. Special attention should be given to what is called the “trade blotter” at the Federal Reserve Bank of New York, which handles all market transactions for the Fed.
The Fed’s dealing with foreign central banks — especially at times of market stress — should be given special attention. Trades in the wee hours of the morning should be in the spotlight.
Not surprisingly, the Fed is strongly opposed to an audit and sees it as an intrusion into its autonomy. Washington shouldn’t be intimidated.
Autonomy? Hah! That ended when the central bank started playing footsie with Wall Street.
Let’s look at what happened to the stock market last week, and it’ll explain what I think those who audit the Fed need to look for.
As you probably remember, stocks were headed for oblivion on Monday, Aug. 24. The Dow Jones industrial average was down 1,089 points early in the day before the index rallied for a close that was “only” 588 points lower.
China’s problems. Weak US economic growth. Greece. The possibility of an interest-rate hike. Those and other issues were the root causes of last Monday’s woe.
But Wall Street’s real problem is that there is a bubble in stock prices created by years of risky monetary policy by the Fed. Quantitative easing, or QE — the experiment in money printing that has kept interest rates super-low — hasn’t helped the economy (and even the Federal Reserve Bank of St. Louis concluded that). But QE did force savers into the stock market whether they wanted to take the risk or not.
None of that is illegal.
But the Fed now finds itself in the awkward position of having to protect the stock market bubble it created. So Yellen and her board of governors must have been pretty nervous when the Dow and other market indexes fell by an unprecedented amount on Aug. 24.
Then, overnight, there was massive buying of Standard & Poor’s 500 Index futures contracts. This was the remedy proposed by a guy named Robert Heller back in 1989 just after he left the Fed board. The Fed, Heller proposed, should rig the stock market in times of collapse.
Were those contracts being bought overnight by some Wall Street cowboy for whom potential losses in the disastrous market were of no concern? Or was it the Fed propping up the market?
Stock prices initially reacted well to the mysterious overnight buying on Tuesday, and the Dow was up 442 points — until it wasn’t anymore. The blue-chip index finished Tuesday, Aug. 25, with a loss of more than 200 points.
Then the same magical buying of S&P futures contracts happened Tuesday night and early Wednesday morning. Stocks again went up at the opening on Wednesday, but this time the gain held.
Credit was given to William Dudley, the head of the NY Fed I mentioned above, who offered his soothing opinion that interest rates probably wouldn’t be raised by the Fed at its September meeting.
“Once again, the Federal Reserve helped save the day for investors,” the New York Times wrote in a front-page article that cited Dudley’s speech.
But that wasn’t true — not unless Dudley’s speech leaked ahead of time. Stocks were up before Dudley’s talk and actually fell when he began speaking. That was probably due to the fact that Dudley pooh-poohed the idea of another dose of QE.
Wall Street got lucky the rest of the week ahead of this past weekend’s St. Louis Fed annual conference in Jackson Hole, Wyo. Plus, the month of August was coming to an end — usually a time when traders pretty up their books.
Money managers don’t want stocks to go down right before their performance is locked in and reported to clients.
The Fed has certain mandated responsibilities. It is supposed to keep inflation within a certain range. It is also charged with protecting the US dollar. Plus — and this is a modern-day responsibility — the Fed is supposed to help the economy and keep unemployment low.
Even if you agree with Heller that the market sometimes needs help, there is an enormous risk in doing this too often.
First, traders come to think that there is no risk in the stock market — a belief that has been proven wrong time and again.
Second, investors have no way of telling what the real value of stocks is.
And third, certain well-placed people on Wall Street will always know what the Fed is doing and benefit from it. And when the financial elite benefit, regular folks suffer.
It’s time to find out what the Fed has been up to. In this case, ignorance isn’t bliss — it’s costly.
EMOTION MOVING MARKETS NOW: 10/100 EXTREME FEAR
PREVIOUS CLOSE: 9/100 EXTREME FEAR
ONE WEEK AGO: 5/100 EXTREME FEAR
ONE MONTH AGO: 22/100 EXTREME FEAR
ONE YEAR AGO: 42/100 FEAR
Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 25.22% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.
Market Volatility: NEUTRAL The CBOE Volatility Index (VIX) is at 26.09. This is a neutral reading and indicates that market risks appear low.
Stock Price Strength: EXTREME FEAR The number of stocks hitting 52-week lows is slightly greater than the number hitting highs and is at the lower end of its range, indicating extreme fear.
MEME OF THE DAY – DUBAI GOLD DEALER OLYMPICS
MU SEP 20 CALL ACTIVITY @$.11 on OFFER 2400+ Contracts
FAST SEP 38 PUT ACTIVITY ON OFFER @$.70 2500+ Contracts
TWTR DEC 50 CALLS 1500+ @$.15 .. also activity in the DEC 40 calls
APLE EVP, Chief Legal Counsel P 5,592 A $ 17.88
MTZ 10% Owner Purchase 10,000 A $15.98 and Purchase 5,000 A $15.63
Fed's Beige Book: Economic activity continues to expand modestly
US ADP Employment Change Aug: 190K (est 200K; rev. 177K, prev 185K)
Gross Says Fed Move May Be Too Little Too Late Amid Turmoil
EU's Moscovici calls for comprehensive debate in Eurozone reform
Greece to miss 2015 privatisation sales target: agency chief
Obama secures Iran nuclear deal with Barbara Mikulski vote
DOE US Crude Oil Inventories (WoW) Aug-28: 4667K (est 900K; prev -5452K)
Baxalta Said to Abandon Takeover Talks With Drugmaker Ariad
Spielberg's DreamWorks to split from Disney
One of the best ways for the general public to take power back is to develop alternative currencies — both local and global — that allow people to trade outside of the corporate-government banking systems and central bank notes.
In London, an interesting alternative currency bearing the face of pop singer David Bowie has recently come into circulation. According to Market Watch, the local currency is specialized for the Brixton community in southwest London. It is officially called the “Brixton Pound.”
Tom Shakhli, manager of the Brixton Pound effort, said:
“They are using it because they want to feel connected to the local area. Every time you use it, you’re like a financial activist. You’re taking part in this act which is subverting the norm, which is to hand over your £10 note very passively.”
Shakhli pointed out that the project is intended to make a statement about the foundation of money, as well as provide an alternative to the current monopoly.
Shakhli said that his main goal with the project is to ask:
“What is money? Does it have to be either printed by the state or created by the banks? Why can’t money be localized? Why can’t money feature a pop star or a black historian? Does it have to feature establishment figures?”
So far, there are currently 200 local businesses that have signed up to participate in the Brixton Pound program.
The increasingly popular Brixton Pound is making central banks nervous — and rightly so. Following the success of the Brixton Pound, new alternative local currencies are now popping up all over the U.K. The Oxford Pound, Kingston Pound, and Palace Pound are just a few of the currencies that have been recently introduced. The Bank of England has been forced to respond to these local currencies because of their popularity, deeming them “voucher schemes” and warning the public that they are unprotected when using them.
A document released by the Bank of England claims that:
“Local currency schemes lead to significant and unanticipated impacts on aggregate economic activity.”
According to the document, the Bank of England will also attempt to delegitimize local currencies by
“Design[ing] features and marketing material [to] help users recognise that local currency paper instruments are like vouchers and not banknotes.”
* * *
For the economy to really be in the hands of the people, it is necessary to decentralize the currency and to have an open-source network of competing currencies that are community based and easily exchangeable. While it is impossible to predict how we will trade a century or even five years from now, we can still observe how people are innovating within their own areas and take those lessons into account for when state and bank issued currencies finally diminish in value to the point where they are unusable.
While many continue to debate if what with every passing day increasingly looks like a global recession, one from which the US will not decouple no matter how many "virtual portfolio" asset managers claim the contrary, there are those who without much fanfare are already taking proactive steps to avoid the kind of fallout that the markets have hinted in the past month of trading, is inevitable. Some such as Calstrs: the nation's second largest pension fund with $191 billion in assets (smaller only than Calpers), which as the WSJ reports is "considering a significant shift away from some stocks and bonds amid turbulent markets world-wide."
The move represents "one of the most aggressive moves yet by a major retirement system to protect itself against another downturn." A downturn which the pension fund implicitly suggests, is now inevitable.
According to the WSJ, the top investment officers of the California State Teachers’ Retirement System will move as much as $20 billion, or 12% of the fund’s portfolio, into "U.S. Treasurys, hedge funds and other complex investments that they hope will perform well if markets tumble, according to public documents and people close to the fund."
Actually considering the relative underperformace of hedge funds, which have largely underperformed the market both during the upcycle, and have fared no better during the volatility of the past month, Calstrs may want to just buy whatever Treasurys China has to sell. Which, incidentally, also answers a suddenly very pertinent question: if China is selling US paper, who will buy it? Well, pension funds for one - the same entities who have had an abnormally heavy allocation to stocks in recent years, and now are seeking to cash out. Which while favorable for bond yields, is hardly good news for stocks - because in this illiquid market, and painfully thin tape, just who will buy the tens of billions of stocks that pension funds will decide to sell.
And it will certainly be more than just Calstrs: once one fund announces such a dramatic shift in strategy, most tend to follow.
So when will the Calstrs reallocation take place? According to WSJ," the board is expected to discuss the proposal at a meeting later today in West Sacramento, Calif. A final decision won’t be made until November. The new tactic—called “Risk-Mitigating Strategies” in Calstrs documents posted on its website—was under discussion for several months as the fund prepared for a scheduled three-year review of how it invests assets for nearly 880,000 active and retired school employees. But the recent volatility around the world has provided a fresh reminder of how exposed Calstrs’ investments are when markets swoon."
Furthermore, as the WSJ points out, the question is now that the market appears to have topped out (at least until the next QE), what will be the proper distribution between stocks and bonds in a typical pension fund portfolio.
Pension funds across the U.S. are wrestling with how much risk to take as they look to fulfill mounting obligations to retirees, and the fortunes of most are still heavily linked with the ebbs and flows of the global markets despite efforts to diversify their investments. State pension plans have nearly three-quarters, or 72%, of their holdings in stocks and bonds, according to Wilshire Consulting.
That number is certain to decline in the coming months.
What is also notable is that while Calstrs’ is at least considering investing in hedge funds, its cousin, the California Public Employees’ Retirement System, decided last year to exit all hedge-fund investments. Other pensions seeking to become more conservative have beefed up stakes in bonds or international stocks. "Calstrs Chief Investment Officer Christopher Ailman said in an interview he hopes the potential shift could help stub out heavy losses during gyrations because the investments don’t generally track as closely with market swings."
Actually they do: if the past few years have shown anything, it is that not only do "hedge" funds not hedge, in broad terms, they are merely highly levered beta chasers, who will gate their LPs at the first sign of abnormal market turbulence. Which is why we wouldn't be surprised if Calstrs ends up reallocating entirely in plain vanilla Treasurys.
As for the punchline, as usual it is saved for last: "Calstrs has not made any major moves in recent weeks amid the turmoil in China and the U.S. markets. Mr. Ailman said he knew there would be turbulence after Asian markets tumbled last month, but he said Calstrs chose to stay put because it views itself as a long-term investor and because its largess means it has limited countermoves when stock prices fall."
Ah, "a long-term investor" - the legendary words every asset managers uses when they have a position that is so underwater, they have no choice but to hold on. Who can possibly forget Norway's sovereign wealth fund which was investing in Greek bonds for "infinity"...
* * *
And while a US pension fund is at least doing the prudent thing, and preparing to rotate out of the riskiest asset just as the market tops out, here comes Japan where things traditionally are upside down, and where we read that with the largest pension fund in the world, the GPIF, having maxed out its allocation "dry powder", another massive pension funds is set to start selling bonds to buy stocks, even as the Nikkei continues to flirt with decade highs. Bloomberg reports:
As the world’s biggest pension fund nears the end of its switch from sovereign bonds into stocks, investors are looking at Japan Post Bank Co. as the next actor big enough to move markets.
The postal lender, the biggest holder of Japanese government bonds after the central bank, sold 5.1 trillion yen ($42 billion) in JGBs in the three months ended June, after offloading a record amount of the debt last fiscal year. The $1.2 trillion Government Pension Investment Fund, known as the whale, said last week stock and fixed-income holdings were all within 3 percentage points of their targets, suggesting it has almost completed a planned shift into riskier assets including global bonds and shares.
The Bank of Japan needs to find about 45 trillion yen in JGBs from the market to meet its annual goal for boosting money supply to stimulate the economy. Japan Post Bank, with 49.2 percent of its 206.5 trillion yen held in domestic debt, fits the profile and needs to seek higher profits ahead of a possible public share sale this year.
The postal bank said in April it plans to increase investments in assets aside from JGBs, such as foreign securities and corporate bonds, by 30 percent to 60 trillion yen in the fiscal year ending March 2018.
Like GPIF, Japan Post Bank has been reducing its dependency on domestic government bonds. The bank owned 101.6 trillion yen in sovereign debt at the end of June, with the ratio falling below 50 percent of holdings for the first time. Unlike GPIF, however, Japan Post Bank hasn’t been increasing domestic stocks. It held just 900 million yen of local equities at the end of the first quarter, unchanged from March.
It will be soon. So good luck Japanese pensioners: nothing screams fiduciary responsibility quite like your asset manager dumping a safe, government backed asset (even if there are 1.1 quadrillion of them) and buying a risky one which is trading at the highest price and valuation since the dot com bubble.
Then again, with Japan's demographic crisis where more adult than infant diapers are sold every year, a little proactive culling of the top-heavy pyramid - courtesy of a few million "so sorry, all your pension funds have vaporized" letter - may be just what the deranged Keynesian doctor ordered.
This seemed appropriate after last night's BOJ and PBOC efforts and today's oil idiocy...
And then this utter farce...a 1% surge in the S&P and 4 point crash in VIX in the last 30 minutes!!
The VIX front-end term-structure "normalizes" out of backwardation - but back-end remains stressed...
As this was the longest period of backwardation since 2011's plunge
On NO VOLUME!
So let's start with stocks - which CNBC reflected on as "back to normal" with today's 275 point rally in The Dow
Thank you very much-o, Mr. Kuroda... As the media began their pre-open jawboning this morning they had the backdrop of a triple-digit gain in The Dow to support any and every bullish - everything's fine - mantra - all thanks to a 120 point rip the moment Japan opened... Until the l;ast 30 minute spanic buying onmthe back of VIX clubbing, stocks went nowhere...
But of course, no one cares - its tonight's news headlines that count - and Trannies are up 2% as
But on the week, it all remains red...
Which dragged Nasdaq barely into the green year-to-date!
Do not get too excited...
VIX dropped 15% today - its biggest drop in almost 2 months
20 minutes to eVIXerate
— zerohedge (@zerohedge) September 2, 2015
We note VIX was crushed around the market break mid-afternoon and VXX was presured to the lows of the day (first non-short-squeeze in a few days...)
After Europe closed, HY bonds were not loving it...
Bonds were battered again during the US session leaving 30Y 6bps higher on the week (even as stocks remain well red)...
but we note the collapse on 2Y swap spreads (and 5Y) continues...
The US Dollar drifted higher on the day but remains lower on the week - notably quiet day in FX markets (especially JPY anchored at 120)...
Gold was modestkly weaker but silver jumped. Crude and Copper were joined at the hip in this morning's melt-up...
Silver was an illiquid mess....
So let's just have a look at the day in Crude!!! (just like yesterday we ripped into the NYMEX close then faded)...
With China closed for the rest of Parade Week, we wonder what market gets monkeyhammered tonight? (Don't forget FTSE A50 Futures trade in Signapore ;-)
Submitted by John Murphy,
What Difference Does It Make?
There's a debate in professional circles as to whether the stock market is in a correction or a bear market. It makes a difference. Let's define what they are. A stock market "correction" is a drop of more than 10%. Most corrections average about -15%. A bear market is a drop of 20% or more. Bear market losses have averaged -30%, and last longer than corrections. The last two bear markets between 2000 and 2002 and 2007 to 2009 lost -50%. Those losses were much bigger than most bear markets. Those precise definitions can lead to problems however. The price bars in Chart 1 show the S&P 500 losing -21% during 2011 from May to the start of October. That qualified as a bear market.
Closing prices, however, lost -19% which signaled a correction. I recall a debate at the time as to whether or not that qualified as a bear market. As it turned out, 2011 was only a correction. Moving averages "death crosses" often signal a bear market, but not always. Chart 2 shows the (blue) 50-day average falling below the red 200-day average during 2010 and 2011 for the SPX. [50 and 200day EMAs also turned negative both years].
The SPX lost -17% in 2010 before turning back up. That was also a correction. Bear markets don't always last a long time either. Bear markets in 1987, 1990, and 1998 lasted only three months, and bottomed during October.
A LONGER-RANGE LOOK AT THE S&P 500...
The monthly bars in Chart 3 show the last two bear markets in the S&P 500 starting in 2000 and 2007 which lost -50% and 57% respectively; and the SPX reaching a new record in spring 2013 which ended the "lost decade" of stocks that started in 2000. The horizontal line drawn over the 2000/2007 peaks should act a solid floor beneath the price bars. A drop to that flat line would represent a drop of 26% which would qualify as a bear market. But that would still leave the SPX in a secular uptrend.
The rising trendline drawn under the 2009/2011 lows shows potential support near 1700. A retest of that support line would represent an SPX lost of 20% which qualifies as a bear market. Chartwise, however, an SPX drop into bear market territory (-20% to 26%) would still be within its long-term uptrend. So it might not matter that much after all whether we're in a "correction" or "bear market" as long as the secular uptrend remains intact.
S&P 500 RUNS INTO SELLING...
Last week, I used Fibonacci retracement lines over the Dow Industrials to identify levels where more selling was likely. Chart 4 applies those (red) lines to the S&P 500 measured from its July high to its August low.
The SPX has already run into selling near 2000 which was a 50% bounce. It has lost ground since then, but remains above last week's climactic low. The SPX will probably "back and fill" for a month or two in an attempt to repair recent technical damage. That would take us into October which has marked the bottom of most previous corrections. In the meantime, a retest of the August low wouldn't be surprising. That would be an important test. As long as last October's low remains intact, I will continue to lead toward the "correction" camp. But there are enough negative warnings to justify a very cautious stance.
The parents frantically jumped in after her. But she was lost beneath the surface for thirty minutes before they finally found her on the pond bottom. They pulled her to the surface and got her to the shore. Following instructions from an emergency response team reached on their cell phone, they began cardiopulmonary resuscitation.
Rescue personnel arrived eight minutes later and took the first recordings of the girl’s condition. She was unresponsive. She had no blood pressure or pulse or sign of breathing. Her body temperature was just 66 degrees. Her pupils were dilated and unreactive to light, indicating cessation of brain function. She was gone.
But the emergency technicians continued CPR anyway. A helicopter took her to the nearest hospital, where she was wheeled directly into an operating room, a member of the emergency crew straddling her on the gurney, pumping her chest. A surgical team got her onto a heart-lung bypass machine as rapidly as it could.
The surgeon had to cut down through the skin of the child’s right groin and sew one of the desk-size machine’s silicone rubber tubes into her femoral artery to take the blood out of her, then another into her femoral vein to send the blood back. A perfusionist turned the pump on, and as he adjusted the oxygen and temperature and flow through the system, the clear tubing turned maroon with her blood. Only then did they stop the girl’s chest compressions.
Between the transport time and the time it took to plug the machine into her, she had been lifeless for an hour and a half. By the two-hour mark, however, her body temperature had risen almost ten degrees, and her heart began to beat. It was her first organ to come back.
After six hours, the girl’s core reached 98.6 degrees, normal body temperature. The team tried to shift her from the bypass machine to a mechanical ventilator, but the pond water and debris had damaged her lungs too severely for the oxygen pumped in through the breathing tube to reach her blood. So they switched her instead to an artificial-lung system known as ECMO–extracorporeal membrane oxygenation. To do this, the surgeons had to open her chest down the middle with a power saw and sew the lines to and from the portable ECMO unit directly into her aorta and her beating heart.
The ECMO machine now took over. The surgeons removed the heart-lung bypass machine tubing. They repaired the vessels and closed her groin incision. The surgical team moved the girl into intensive care, with her chest still open and covered with sterile plastic foil. Through the day and night, the intensive care unit team worked on suctioning the water and debris from her lungs with a fiberoptic bronchoscope. By the next day, her lungs had recovered sufficiently for the team to switch her from ECMO to a mechanical ventilator, which required taking her back to the operating room to unplug the tubing, repair the holes, and close her chest.
Over the next two days, all the girl’s organs recovered–her liver, her kidneys, her intestines, everything except her brain. A CT scan showed global brain swelling, which is a sign of diffuse damage, but no actual dead zones. So the team escalated the care one step further. It drilled a hole into the girl’s skull, threaded a probe into the brain to monitor the pressure, and kept that pressure tightly controlled through constant adjustments in her fluids and medications. For more than a week, she lay comatose. Then, slowly, she came back to life.
First, her pupils started to react to light. Next, she began to breathe on her own. And, one day, she simply awoke. Two weeks after her accident, she went home.”
As Atul Gawande goes on saying in his book The Checklist Manifesto (fascinating read by the way), what makes this recovery astounding “isn’t just the idea that someone could be brought back after two hours in a state that would once have been considered death. It’s also the idea that a group of people in a random hospital could manage to pull off something so enormously complicated.”
To save this one child, dozens and dozens of people had to carry out thousands of steps correctly: “placing the heart-pump tubing into her without letting in air bubbles; maintaining the sterility of her lines, her open chest, the exposed fluid in her brain; keeping a temperamental battery of machines up and running. The degree of difficulty in any one of these steps is substantial. Then you must add the difficulties of orchestrating them in the right sequence, with nothing dropped, leaving some room for improvisation, but not too much.”What made this rescue possible?
It was made possible by a certain strategy for overcoming failure, which I’ve spoiled in the title of this article. Though it will seem almost ridiculous in its simplicity, maybe even crazy to those who have spent years carefully developing ever more advanced skills and technologies.
It is a checklist.
Checklists and standard operating procedures are today used by doctors, pilots, engineers, and other highly specialized professions to minimize failure and get better at what they do.
Checklists is the reason why central line infections in hospital patients dropped from affecting 11% of patients to zero at one hospital. In this hospital the checklist had prevented forty-three infections and eight deaths and saved two million dollars in costs. And that’s just from a single checklist targeting a single problem.
Checklists and more effective procedures is also the reason why buildings, now more complex and sophisticated than ever in history, with higher standards expected for everything from earthquake proofing to energy efficiency, take a third less time to build than they did a couple of decades ago.Checklists work – and here’s how you can use them
Far from every endeavor takes advantage of checklists. What’s clear to me, is that when it comes to pursuing self-reliance and creating a life of freedom we’ve not even started exploring the potential of systems-thinking, checklists and standard operating procedures.
What if we could grow our own food with a third of the efford of previous generations? Or build our own home mortgage free? Or harvest all the fresh water we could ever use on our own properties?
What’s needed to take self-reliance, and the freedom of every individual, to the next level is simple…
- We need systems…
- We need checklists…
- We need “cheat sheets”…
- We need standard operating procedures…
And specifically, we need ones that show us the best ways for producing healthy food, abundant energy, clean water, affordable shelter, personal protection and education for our kids on a local level, right in our own communities.
What if virtually every aspect of self-reliance; growing your own food, generating your own energy off-the-grid, heating your house for free with passive solar heat, planting a food forest, earning an income from home… was documented in step-by-step detail for anyone to follow.
What if you could hand these checklists over to less-experienced individuals or even complete beginners on the other side of the globe, and they could follow the steps in these plans and achieve similar results?
And what if we could improve these checklists constantly so that we can produce our food, water, energy and homes with a fraction of the effort, maintenance and resources that previous generations had to use?
I don’t know about you, but I sure get excited about that idea. I’m sure Atul Gawande would say the same. As he says…
“There is no other choice…we recognize the same balls being dropped over and over, even by those of great ability and determination. We know the patterns. We see the costs. It’s time to try something else. Try a checklist.”
Let’s stop dropping the same balls as previous generations have dropped. It’s time to try something else, and that “something else” is systems-thinking.
Now, checklists used to be reserved for big corporations with thousands of employees, e.g. McDonalds or international organizations such as the World Health Organization. But no more.
Personal power is rising around the world, and I started Walden Labs because I wanted to be at the forefront of this trend.
That’s why I’m excited to announce a new project that I’ve had in the works for the past couple of months.
It’s called Self-Reliance 365, and it’s all about going through the strategies and projects for self-reliance, step-by-step, and documenting them in detail. The end result is a checklist, or Execution Plan as we call them here at Walden Labs HQ.
We’ve already had our first members join, and right now they have access to the very first Execution Plans, with many more in the pipeline.
For example, you’ll find one Execution Plan that’s called How To Figure Out The Optimal Size For Your Off-Grid Solar PV System (in 5 Steps) and I’m excited to release The 6-Part Rural Property Purchase Checklist within the next two weeks.
Now, if you think this sounds the least bit interesting please take a minute to check out the details of Self-Reliance 365, right here.
To your self-reliance,
The post Checklists Saves Lives – Can They Also Free You From The Rat Race? appeared first on Walden Labs.
Lies, Damn Lies, and Political speech... It appears little white lies matter.. and so do blatant black ones...
Following China's adoption of Nasdaq surveillance technology (to catch those malicious sellers), it appears 'Murica decided to borrow The National Team for the last 30 minutes of the day today.
We need stock higher, so dump VIX, ramp AAPL, and all is well.
As AAPL vol was crushed: a 5 vol crash in the last 30 minutes!
... all to get The Nasdaq Green for 2015:
Open, daily manipulation - it's not only for the Chinese.
Below is a letter that we think the stock exchanges should be sending to investors:
The last few weeks have exposed that our equity markets are not as liquid as we have long claimed mainly due to market fragmentation and the lack of diverse liquidity pools.
Mini flash crashes and larger events like the ETF flash crash of August 24th are proof that our current stock exchange model which has formed in the wake of Reg NMS has been a failure. High speed traders have been able to game this model largely with our assistance. We have developed a two tier market and have given special advantages to those that are willing to pay for services like colocation, private gateways and proprietary data feeds. We have also given out billions of dollars in rebates over the past few years to entice more high speed volume. Essentially, we have courted speed at the expense of price discovery.
The rise of dark pools is another sign that our model has failed. Institutional investors who have sought alternatives to our visible markets (which have become infested with predators looking for any signal to pick off an institutional or even retail order) have been led into a much murkier and even more predatory market. Recent record setting, multi-million dollar fines against brokers and banks who run these dark pools have proven that they are far from the safe alternative.
The August 24th ETF flash crash was a dramatic liquidity event that shocked many investors. Unfortunately, we’ll continue to have these type of events until regulators realize that we have a market design problem. On August 24th, there were numerous trades which received inferior prices and were not broken. Most likely many of these were caused by market orders that might have been activated by stop-loss orders placed by retail investors. Since most brokers didn’t file a clearly erroneous trade report within thirty minutes of the trade, many investors were stuck with fills that were far away from the implied value of the ETF. We didn’t break any of these trades because we didn’t know where to draw the line like we arbitrarily did after the May 6, 2010 Flash Crash. We also didn’t want to leave our market makers with a one sided position that was unhedged. Sorry about that.
We think many of today’s market structure problems were actually caused by poorly designed regulations, most notably Reg NMS. Prior to Reg NMS, the NYSE relied on specialists to provide a fair and orderly market in return for the right to have a franchise for a particular stock at the exchange. Reg NMS made this model obsolete and a new competing DMM model was developed. This DMM model does not rely on customer orders and has very few obligations leaving the market vulnerable in times of stress. To make matters worse, on the recent volatile days of the past few weeks, the NYSE has chosen to invoke Rule 48 since they do not have enough employees to effectively handle the opening process which is one of their most important functions.
Signs of stress are also building within our own stock exchange community. Just like when the SIP crashed a few years ago, we in the exchange community are once again pointing fingers at each other. Chris Conacannon, CEO of BATS, is not a fan of the quasi-human model that NYSE employs and told the WSJ that “NYSE Group’s process for opening trading on stocks listed at the exchange was “broken” and that major changes needed to be made to protect investors from future problems. He said:
“No one on the planet operates that way, and no one should operate that way,” he said in an interview, adding that he sees “very limited value” in the use of humans on the trading floor.
NYSE shot back and reminded everybody that BATS couldn’t even trade their own IPO:
“As BATS experienced with its IPO, relying exclusively on technology for opening stocks and IPOs can have disastrous consequences,” she said, referring to BATS’ decision to cancel its IPO in 2012 because of a glitch in its trading system.”
So what do we do now? We’re really not sure. We’ve already tried the “Grand Bargain” but that seems to be a bust now since so many dark pools are being fined by the SEC. We doubt the regulators are going to help much since, to borrow a phrase from Bloomberg’s Mike Regan, they are more akin to “mall cops on Segways trying to chase after high speed Maserati’s”. We wish we could offer an alternative but our short-term, for-profit model leads us to support the status quo.
In the meantime, try not to enter any market orders and be sure to file that clearly erroneous trade report within 30 minutes of the next liquidity event.
The Stock Exchanges
We have already mocked the so-called marquee "hedge" funds for their deplorable August performance to the point where there is little to add, suffice to repeat that one really should i) scrap the phrase "hedge funds" entirely and just call these formerly insider trading and colluding vehicles "massively beta-levered funds who pray every day that the Fed does not lose control" and ii) stop paying 2 and 20 for underperforming the S&P for seven years in a row.
Because after August one thing is clear: nobody actually hedges (and why should they: the LP already has collected all the upside, while the downside loss is all other people's money) and if the market crashes, hedge fund LPs funds will not only suffer outsized losses (while underperforming stocks on the way up) but also be promptly gated and have no access to any funds until the Fed (hopefully) bails out the financial system once again.
Of course, not every asset manager falls in the above generalization; only about 98%. There are some outliers, such as Mark Spitznagel's Universa which as we reported last week made a whopping $1 billion profit on the one day when the market crashed and countless hedge funds not only lost billions but were margined out on their profitable positions.
Another hedge fund that actually hedges against the kind of fat tail event that nobody else had even remotely considered, is Artemis Vega Fund, whose exemplary writings and market analyses have repeatedly appeared on these pages.
In Artemis most recent letter from July 18, the founder Christopher Cole when discussing "the greatest collapse in the history of the VIX index" said:
I can only point to government intervention as the core reason. I firmly believe that this moral hazard produces a hidden leverage and “shadow market gamma” that at some point will result in a sustained volatility outlier event in the opposite direction.
One month later, he was proven to be 100% correct, and the result was a monetay, literally: as the following letter to investors released earlier today reveals, the fund made a whopping 15.5% on September 1, 2015, the day the S&P dropped 3%. Which, for those who have forgotten, is what is really known as hedging.
The full letter from Artemis Capital Management below:
September Mid-Month 2015 Market Update and Commentary (Confidential to Artemis Investors)
As markets continue to experience significant volatility I wanted to provide an update as to the performance of the Artemis Vega Fund LP. As discussed in my August 26th letter to investors convergence in the forward volatility curve has been highly beneficial for Artemis.
Artemis Vega Fund LP and associated institutional managed accounts gained approximately +15.49% gross of fees on September 1, 2015 on a day the S&P 500 index lost -2.96%. Please note this performance was for the day. Overall, Artemis is up approximately +18.11% (before fees) from August 1 to September 1 including an estimated +2.27% increase in August (all final numbers subject to change and review by administrator). The S&P 500 index has fallen -9.03% over this time frame. This is your crisis alpha in action.
In my Sunday, August 23 letter to investors (prior to the VIX spike), I indicated that our machine learning models were on their highest risk warning registering a 29% probability the VIX would spike above 40 in the immediate future. While this warning proved prescient what should be noted is that we do not see any considerable change in the fundamental and technical conditions that generated the initial warning. Our models currently register a 30% probability the VIX will re-test highs above 40 in the next 21 days.
We continue to see excellent opportunity in positive carry and positive convexity positions and will continue to hold positions so long as those conditions persist. Our dynamic volatility portfolio has held up well into this morning’s minor market rebound, however markets remain in flux and September performance numbers are subject to change. Any volatility persistence above 30 will be highly advantageous to the fund (I would urge investors to re-read my August 23 and August 26 letters for the full rationale on our current positioning). To this effect you still have substantial crisis alpha coverage to buy equity beta into further weakness in markets.