Archives for September 2014

Stunning Drone Clip Reveals Massive Size Of Hong Kong Protest

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Ferguson was for amateurs.

For those curious why the Hong Kong protests over the weekend have sent shivers across the world's capital markets, pushed the Hang Seng 2% lower, and impacted both European and US futures, not to mention leading to worries that China may get involved any second and result in another Tiananmen square event, the following clip from HK's Apple Daily, taken by a drone, shows just how massive the demonstrations, which according to some estimates involved just shy of 100,000 people, taking place in Hong Kong are.

As Mashable adds, "far from a small protest by a limited number of outspoken citizens, the video shows just how large the movement to preserve Hong Kong's democratic elections has become. Currently, the protests have grown so large that parts of Hong Kong's business district have been brought to a standstill, prompting the temporary closure of 17 local banks.

In addition to the drone footage, Apple Daily has also posted a live video stream of the protests, allowing the world to watch as events develop in real time."

Carmen Segarra: Wall Street’s Spy Vs Spy

Pam Martens writes about the Segarra Tapes released last week. These tapes show how the regulation of Wall Street is a complete failure, a farce, with only punishment waiting for those who speak out as Carmen Segarra did.

William D. Cohan noted that the Segarra Tapes didn't reveal much we didn't already know. Sadly, this is true. Carmen Segarra provided solid evidence to what we probably suspected anyway (Why the Fed Will Always Wimp Out on Goldman). However, solid evidence may mean something still. 

In spite of our jaded attitude that corruption at the "regulating authority" New York Fed is well-known, and won't be fixed, EVER (because that's how powerful the bankers and regulators are!), perhaps there is hope. The tapes contain clear-cut, understandable proof of conflicts, regulatory capture and self-dealing.

With some luck, the tapes could prompt a little public fury, further investigations (by entities other than the NY Fed…), greater oversight and some real reforms to our Wall Street managed banking system. As a start, Senators Elizabeth Warren and Sherrod Brown are calling for Senate Banking hearings on the conflicted dealings of the New York Fed.   

Carmen Segarra: Wall Street's Spy Vs Spy

Courtesy of Pam Martens

If you missed our coverage in 2012 of the Lower Manhattan Security Coordination Center where Wall Street sleuths from those serially charged firms like Goldman Sachs and JPMorgan dunk donuts alongside New York’s finest in a $150 million spy center, keeping tabs on the comings and goings of their own Wall Street employees as well as innocent pedestrians, then you may not fully appreciate why Carmen Segarra has been celebrated all weekend for her temerity in taping her boss and colleagues at the New York Fed, as well as employees inside the cloistered bowels of Goldman Sachs.

While Wall Street was spying on everyone else in lower Manhattan in a high tech center funded by the taxpayer, Segarra strolled over to a Spy Store, plunked down a modest sum and walked out with a tiny tape recorder. She then proceeded to capture the essence of the quintessential captured regulators who didn’t see the 2008 crash coming and won’t see the next one coming either – because their job is not to see too much. (We called the Spy Store on Saturday to ask if they had experienced an upsurge in sales of the tiny recorder. We were informed that sales were brisk but not unusual.)

The Spy Store

[There are three Spy Stores, two in NY and one in NJ. One is on corner of Christopher St & 7th Ave., with the entrance conveniently next to Bank of America. It's the place for you if you have someone who needs spying on–your babysitter, lover, husband, boss, employee. Get the edge on your situation When You Need to Know. When is that? Face it, you ALWAYS need to know.]

Back to Pam:

Segarra is a lawyer and former bank examiner at the Federal Reserve Bank of New York, one of Wall Street’s key regulators, who charged in a lawsuit filed in October 2013 that she was told to change her negative examination of Goldman Sachs by colleagues, who also obstructed and interfered with her investigation. According to her lawsuit, when she refused to alter her findings, she was terminated in retaliation and escorted from the Fed premises.

After having her case tossed by a Judge whose husband was representing Goldman Sachs, Segarra turned over her 46 hours of tape recordings to ProPublica’s Jake Bernstein and public radio’s This American Life. ProPublica and This American Life released their stories on the tapes this past Friday, creating a media frenzy.

The hubbub has reached the ears of the U.S. Senate, with Senators Elizabeth Warren and Sherrod Brown calling for Senate Banking hearings on the deeply conflicted New York Fed.

Over the years, Wall Street On Parade has written about a raft of conflicts of interests at the New York Fed that would not be tolerated at any other financial regulator. During 2007 and 2008, as Citigroup entered an intractable death spiral from off balance sheet debt bombs and obscene executive pay, New York Fed Chief Tim Geithner was busy hobnobbing – enjoying 29 breakfasts, lunches, dinners and other meetings with Citi execs.

Continue here > 

Read Pam's past coverage of the Carmen Segarra story and the deeply conflicted New York Fed at these links:

Blowing the Whistle on the New York Fed and Goldman Sachs

The Carmen Segarra Case: Welcome to New York, Wall Street and McJustice

A Mangled Case of Justice on Wall Street

Is the New York Fed Too Deeply Conflicted to Regulate Wall Street?

New Documents Show How Power Moved to Wall Street, Via the New York Fed

Intelligence Gathering Plays Key Role at New York Fed’s Trading Desk

Relationship Managers at the New York Fed and Citibank: The Job Function Ripe for Corruption

As Citigroup Spun Toward Insolvency in ’07- ’08, Its Regulator Was Dining and Schmoozing With Citi Execs

At Last We Know the Real Purpose of the Federal Reserve Bank of New York: It’s a Confessional for Traders Gone Rogue

New York Fed’s Strange New Role: Big Bank Equity Analyst

As Criminal Probes of JPMorgan Expand, Documents Surface Showing JPMorgan Paid $190,000 Annually to Spouse of the Bank’s Top Regulator

New York Fed’s Answer to Cartels Rigging Markets – Form Another Cartel

 

Elephant in the Room Minsky Moment

Courtesy of Mish.

The "elephant in the room" is debt. Try as they might, central bankers have not been able to spur credit, hiring, or much business expansion because of the elephant. Things are even worse in Europe.

Via email, this is a guest post from Steen Jakobsen, chief economist of Saxo bank.

Debt – The Elephant in the Room

Interest on debt grows without rain’ – Yiddish proverb

This proverb explains most of what goes on in policy circles these days. We are now watching Extend-and-Pretend, Episode VI: Promises for improvement amid ever growing debt levels.

Short put, we’re still working with the same dog-eared script we were introduced to all of five years ago, when markets had stabilized in the wake of the financial crisis: maintain sufficiently low interest rates to service the debt burden. Pretend to have credible plan, but never address the structural problem and simply buy more time. But while we were able to get away with this theme for an awfully long time, the dynamic is now changing as the risk of low inflation (and even deflation) is a brick wall for the extend-and-pretend meme. Yes, interest does grow without rain, and the cost of maintaining and servicing debt grows especially fast in a deflationary regime.

Mads Koefoed, Saxo Bank’s macro economist projects US growth at around 2.0% for all of 2014. That will be the sixth year with US growth near 2.0% – so despite lower unemployment, despite a record high S&P500, the economy has a hard time escaping that 2.0% level. Any talk of higher interest rates is hard to take seriously when US growth is going nowhere and world growth is considerable weaker than expected in January or as recently as July, for that matter. It seems everyone has forgotten that even the US is a part of the global economy.

The fourth quarter is always the most politically interesting time of year. Countries need to get their new budgets in order. The EU, IMF and World Bank will need to pretend they agree or accept the weaker data, which has to mean bigger deficits. It’s a tiresome exercise to watch denial-in-action as EU governments and other policymakers try to make something so obviously unpalatable go down easy in their internal reporting. It’s obvious that buying more time (extending) is always the number one priority, followed by projecting (pretending) the forward looking growth will reach an ever higher trajectory in order to make the budget fit within the supposed constraints. Or in France’s case, the recent unilateral abandonment of meeting budget targets for the next two years is already a fait accompli.

Who’s next?

Such behavior would cost you your job in the private sector, but in the economic model of 2014, which reminds us more of Soviet Union than a market based economy, its par for the course. But, many would protest, it would be even worse if we hadn’t done so much to “save the system”, right?

Well maybe, except for the fact that those economies where belief in State Capitalism is strongest:  Russia, China and France, are all at the end of the line. Time has caught up. Negative productivity, capital flight and a system built on protecting the elite is failing. France is now moving from recession to depression. China is moving quickly from denial towards a mandate for change, Russia’s future has not looked this bleak since the late 1990’s.  Meanwhile the US continues on sluggish 2.0% growth. Investors and pundits seem to have forgotten that we were promised 2014 would be the end of the crisis. Instead, we are speeding towards the inflection point at which debt becomes harder to service because pretend-and-extend policy making have created a depression in investment and consumption.

The public debt loads continue to inflate across Europe: Portugal’s public debt has ramped to a staggering 130% of GDP – up from about 70% in 2007. Greece’s public debt load, even after the restructuring of Greek debt a few years ago, has swelled to 175% of GDP. The EU now has far more systemic risk than at the beginning of the crisis. With zero growth or as our economist Mads sees it, 0.6% with the arrow pointing down, debt levels continue to rise relative to GDP. And most importantly, the current flirt with deflation will make servicing the growing debt even more expensive. The nightmare for ECB and world is deflation as it’s a tax on debtors and a boon to net savers. The new reality is that we currently stand face-to-face with the very deflation risk that just about everyone denied could ever happen when Q1 outlooks were written….

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Picture:  Banksy’s stenciled elephant from “Barely Legal,” 2006.

 

“Do we need to fire Pimco?”

“Do we need to fire Pimco?”

bw coverCourtesy of 

This weekend, thousands of institutional investors, financial advisors and wealth managers are faced with one of the most uncomfortable questions imaginable:

Do we need to fire Pimco? 

Pimco’s flagship fund, Total Return, can be found in allocations everywhere. From pensions to endowments, from 401(k) sponsors to retirement plans, in the accounts of private investors and insurance companies, wirehouse FAs, bank branch brokers, RIAs – Total Return is ubiquitous. It’s got one of the only mutual fund ticker symbols that brokers call out as though it were a stock, as in “Why don’t you just buy the guy some P-Tax”, a shorthand for PTTAX, the call letters of the fund’s A class shares. As the second largest bond fund on earth and largest active one, it’s also extraordinarily widely held, and this is why the news of Bill Gross leaving the firm (or being pushed out) is such a huge story for the industry.

How did Pimco Total Return get so entrenched in the first place?

Our story begins, as it often will, with an amazing track record of outperformance. Put simply, whatever Pimco was doing, for a long time, was working. A potent mixture of market-beating returns, marketing savvy, intellectual leadership for the industry and outsized personality fostered a devotion to the firm and its best-known product. The cult of personality surrounding Bill Gross is unlike anything we’ve seen in this industry since the heydays of Peter Lynch and Bill Miller. The bond fund and its manager have been sold to clients with impunity for two decades. Pimco Total Return has become the IBM of mutual funds, in that “No one ever gets fired” for recommending it.

This reliance on Pimco on the part of asset allocators worked very well for years, and, as a result, it became a standard inclusion into portfolios around the world. The regular investor letters and commentaries from Mr. Gross kept professionals up to date with their designated manager’s ongoing take on the markets and the economy. The ubiquity of Mr. Gross in the media was reassuring for the retail investor and more casual shareholders who were invested through a retirement account somewhere. And once the Harvard endowment’s Mohamed El-Erian re-joined in 2007 to become the second face of the firm, it was almost a fait accompli that Pimco would become gigantic.

The system worked perfectly – Gross would make wagers on the bond markets and interest rate curves while always having something clever or insightful to say about it publicly. And so long as he was delivering an annual return near or slightly above the benchmark Aggregate Bond Index, the money kept rolling in. Gross delivered a 13% total return in 2000, a year during which the Boomers experienced the first real stock market losses of their adult lives. During the next five years, he delivered above-index returns and cemented the franchise’s industry dominance. Pimco’s orders had grown so large that the Wall Street desks who executed them began to refer to the firm as The Beach, as in, “The Beach wants another $16 million in 5-year swaps at one-spot-nine-three.”

So what happened?

In hindsight, of course, the first crack in the Pimco story becomes a glaring one when we look back at it.

In February of 2011, Gross loudly proclaimed his newest big bet to anyone who would listen: Pimco Total Return had taken its allocation to US Treasury bonds down to zero. As recently as the previous December, Pimco Total Return had been carrying as much as 22 percent of its AUM in Treasurys, so this was a radical shift for such a large fund. Gross compounded the move by being extremely vocal about his rationale – he went so far as to call Treasury bonds a “robbery” of investors given their ultra-low interest rates and the potential for inflation. He talked about the need for investors to “exorcise” US bonds from their portfolios, as though the asset class itself was demonic. He called investors in Treasury bonds “frogs being cooked alive in a pot.” The rhetoric was every bit as bold as the fund’s positioning.

It’s really hard to pound the table like this and then be flexible in the aftermath when evidence to contrary begins to surface. Once the market starts to go against a famous manager, and he’s become associated with the wrong trade so publicly, there’s a obvious temptation to dig in deeper or to hunker down. To throw people out of one’s office when they voice dissension. To view the movement of the market as an affront to one’s intelligence or as a debate adversary that must be talked out of its obvious wrongness. For a private investor, this mindset can be dangerous, but for a highly-visible professional investor becomes utterly debilitating. And in 2011, no one was more visible on the rate question than Bill Gross.

Or more wrong.

Gross’s directional bet on bond yields going higher and bond prices going lower was a disaster. In fact, the exact opposite of what he had called for is what ended up happening. Treasury bond yields plummeted from that February 2011 flag-planting moment. Yields on the 10-year Treasury bond had dropped from an earlier year high of 3.75 percent to as low as 2 percent in the summer. By August, Bill Gross was forced to defend himself in public. He admitted to the Wall Street Journal that he had been “losing sleep” over the bet. He called it a “mistake” in the Financial Times a few days later. By that point in the year, Pimco Total Return had underperformed 84 percent of its peers. For the first time in a long time, the Bond King of Newport Beach had begun to look extremely fallible.

This moment is captured in the chart I made below:

pttrx

As you can see, Total Return has pretty much never recovered from this bet, with the brief exception of a fleeting moment in the fourth quarter of 2012. In 2013, Total Return had its worst year ever, a negative 2 percent return, which trailed the performance of nearly three quarters of its peers.

Since the Taper Tantrum last spring, things have gotten tougher for the bond management business in general, but the bleeding of this fund has been especially pronounced: Some $70 billion in net outflows have left Pimco Total Return since its peak AUM of $293 billion in April of 2013. As performance suffered and rate fears began to take hold, the outflows at Pimco Total Return began last spring – and they never stopped.

See the below chart from the LA Times:

pimco total

Finger-pointing is the constant companion of outflows in this industry. Lower AUM means smaller bonuses which mean stressful conversations at home and belt-tightening at work. Everyone at an investment organization is miserable when this cycle begins, everybody feels it. That’s when the in-fighting begins and stress fractures within a culture start to show.

Rumors of tensions within the firm began to make their way into the press and it became harder to sort out which were true and which were exaggerations. In February of 2014, things came to a head when the Wall Street Journal’s Gregory Zuckerman and Kirsten Grind ripped the facade away and put out an extensively-sourced piece about the personality clashes within the firm. These arguments over strategy and communication had chased out El-Erian and turned Bill Gross into a sort of King Lear figure within the company. For the first time ever, we were hearing specific snippets of dialog from within the firm and it wasn’t pretty:

“I have a 41-year track record of investing excellence,” Mr. Gross told Mr. El-Erian, according to the two witnesses. “What do youhave?”

“I’m tired of cleaning up your s—,” Mr. El-Erian responded, referring to conduct by Mr. Gross that he felt was hurting Pimco, these two people recall.

For investors who had assumed Pimco’s stewardship was rock-solid and its process was unimpeachable, this was a wake-up call. All of a sudden, the $1.9 trillion asset manager looked vulnerable and human. The psychological impact this revelation had on the investing public cannot be overemphasized. Faith in a manager, once shaken, becomes as fragile as any belief system in the presence of too much scrutiny.

Bill Gross’s appearances began to take on an almost performance-art caliber of surrealism. By this time things had come to a head internally in the wake of El-Erian’s departure. The bleeding from Pimco continued. BusinessWeek’s cartoonish Bill Gross cover this April, along with the bizarre keynote speech he did while wearing sunglasses at June’s Morningstar conference were the final straws (see below):

bw cover

BusinessWeek, April 2014

gross sunglasses

Bill Gross deliver his keynote speech at this summer’s Morningstar Conference in Chicago

Advisors who had been (reluctantly) recommending the fund company to their clients and telling people to “stay the course” finally had the excuse to hit the sell button. Firing a manager is extremely difficult for financial intermediaries to justify, the longer that manager has been a part of the recommended strategy the harder it is to do an about-face. But turmoil at the top or a change in PM almost always gives advisors the cover they need to make a change while maintaining the guise of discipline. “Mr. Jones, as you know, we are long-term oriented, patient investors most of the time. However…”

It’s been estimated by Morningstar and others that the events of this past week will lead to Pimco outflows on the order of 15 to 30 percent of the firm’s total assets. Some of the money is expected to follow Bill Gross to his new unconstrained bond fund at Janus. Jeffrey Gundlach’s Total Return product at DoubleLine should also get a big bump, as advisors trade one cult for another and assure their people that Jeff is the real Bond King, the one who got the post-crash period right and with a smaller, more agile fund to boot.

But I think a lot of this fleeing cash will find its way to Vanguard (home of the world’s largest bond fund) or to the iShares / State Street cohort of fixed income index funds. Increasingly, investors will reach the conclusion that whatever alpha a manager may generate, it’s not worth the potential drama.

By recommending a bond manager, even a bond king, asset allocators are inherently putting their stamp of approval on that manager, come what may. And while firing a manager is not the end of the world, there is a limit to how many times you can actually do it. How many times can you call a client and repudiate your own fund picks before the client begins to second guess your expertise? Believe it or not, billions of dollars are currently allocated to bad funds or products because of the very “agency problem” I’ve laid out here. With a bond index fund, this issue goes away immediately.

Many investors will opt to do nothing of course. They’ll point to the new CIO and manager of Total Return, Daniel Ivascyn, and the depth of Pimco’s bench as reasons to stay. “The worst is over and finally the firm can focus on performance again with Gross out of the picture.” They may end up being rewarded for this loyalty in terms of future performance, even if they have to go to great lengths to justify sticking around in the near-term. They may be pilloried for neglectfulness and fired by their clients should the fund continue to falter. Anything can happen.

And so the question of “Do we have to fire Pimco?” will be the predominant topic at financial firms across the country and around the world. Virtually no large pool of assets in this industry is completely Pimco-free, whether we’re talking about Total Return or any of their other funds and SMAs. The issue cannot be ignored because the end-customers of these investors will have read plenty on the topic this weekend and will have questions and concerns of their own. No amount of reassurance from Pimco can change this fact right now.

This is the item that will lead off almost every investment committee meeting on earth tomorrow.

Eric Cartman’s Startup: The 4 Point Plan

Eric Cartman’s Startup: The 4 Point Plan

Courtesy of 

This week’s season premier of South Park was note perfect – weaving together a narrative involving ISIS, the Washington Redskins, Kickstarter and the excesses of a venture-backed economy where funding is the endpoint rather than the start of a business, Matt and Trey absolutely crush it once again.

Below, Eric Cartman lays out his 4 point plan for his fellow entrepreneurs, who seek to kickstart a company that will allow them to do absolutely nothing, in style.

cartman

The full episode is can be seen at the link below!

Go Fund Yourself  (South Park Studios)

Why the Fed Will Always Wimp Out on Goldman

William D. Cohan notes that the Segarra Tapes didn't reveal much we didn't already know. Sadly, this is true. Carmen Segarra provided proof to what we probably suspected anyway, but she didn't likely surprise anyone. ~ Ilene 

Why the Fed Will Always Wimp Out on Goldman 

By William D. Cohan, POLITICO Magazine

Excerpt:

The sudden appearance of Segarra’s tape recordings in the news this week was reminiscent of the way that the NFL was embarrassed by the videotape that showed Rice, the now-suspended Baltimore Ravens running back, knocking out his girlfriend in an elevator – all of which suggested the NFL knew about the abuse but gave Rice kid-gloves treatment, as it does in many cases of abuse. The truth is, although both incidents do reveal something about the way the powerful and famous get away with more stuff than the rest of us, there’s no real comparison. The Segarra Tapes actually reveal little or nothing that was not already known, assuming you have a shred of understanding how the Federal Reserve banks actually work. Nor is William Dudley, the president of the Federal Reserve Bank of New York, about to get pilloried in public like NFL Commissioner Roger Goodell.

Sorry, folks, but this is simply the way the New York Fed was designed to behave. The system of 12 Federal Reserve banks, established about 100 years ago by an act of Congress following secret meetings presided over by J.P. Morgan himself at an island off the coast of Georgia, has always existed for the benefit of the commercial and investment banks that created the system, that own the banks and that control their boards of directors. To think that these banks exist for any other reason than to serve their Wall Street masters is complete folly. It has never been so and it will never be so – as long as the current system remains intact – despite what Segarra captured her bosses talking about on tape, without their knowledge.

Full article: Why the Fed Will Always Wimp Out on Goldman – William D. Cohan – POLITICO Magazine.

William D. Cohan is the author of Money and Power: How Goldman Sachs Came to Rule the World (2011).

Picture by William Banzai 7. 
 

The US Has No Banking Regulation, And It Doesn’t Want Any

Courtesy of The Automatic Earth.


Marjory Collins Traffic jam on road from the Bethlehem Fairfield shipyard to Baltimore April 1943

It is, let’s say, exceedingly peculiar to begin with that a government – in this case the American one, but that’s just one example -, in name of its people tasks a private institution with regulating not just any sector of its economy, but the richest and most politically powerful sector in the nation. Which also happens to be at least one of the major forces behind its latest, and ongoing, economical crisis.

That there is a very transparent, plain for everyone to see, over-sized revolving door between the regulator and the corporations in the sector only makes the government’s choice for the Fed as regulator even more peculiar. Or, as it turns out, more logical. But it is still preposterous: regulating the financial sector is a mere illusion kept alive through lip service. Put differently: the American government doesn’t regulate the banks. They effectively regulate themselves. Which inevitably means there is no regulation.

The newly found attention for ProPublica writer Jake Bernstein’s series of articles, which date back almost one whole year, about the experiences of former Fed regulator Carmen Segarra, and the audio files she collected while trying to do her job, leaves no question about this.

What’s going on is abundantly clear, because it is so simple. The intention of the New York Fed as an organization is not to properly regulate, but only to generate an appearance – or illusion – of proper regulation. That is to say, Goldman will accept regulation only up to the point where it would cut into either the company’s profits or its political wherewithal.

What the ‘Segarra Files’ point out is that the New York Fed plays the game exactly the way Goldman wants it played. Ergo: there is no actual regulation taking place, and Goldman will comply only with those requests from the New York Fed that it feels like complying with.

In the articles, the term ‘regulatory capture’ pops up, which means – individual – regulators are ‘co-opted’ by the banks they – are supposed to – regulate. But the capture runs much larger and wider. It’s not about individuals, it’s a watertight and foolproof system wide capture.

The government picks a – private – regulator which has close ties to the banks. The government knows this. It also knows this means that its chosen regulator will always defer to the banks. And when individual regulators refuse to comply with the system, they are thrown out.

In one of the cases Segarra was involved in during her stint at the Fed, the Kinder Morgan-El Paso takeover deal, Goldman advises one party, has substantial stock holdings in the other, and appoints a lead counsel who personally has $340,000 in stock involved. Conflict of interest? Goldman says no, and the Fed complies (defers).

The lawsuit Segarra filed against the NY Fed and three of its executives was thrown out on technicalities by a judge whose husband was legal counsel for Goldman in the exact same case. No conflict of interest, the judge herself decides.

This is not regulation, it’s a sick and perverted joke played on the American people, which it has been paying for it through the nose for years, and will for many years to come. Sure, Elizabeth Warren picks it up now and wants hearings on the topic in Congress, but she’s a year late (it’s been known since at least December 2013 that Segarra has audio recordings) and moreover, it was Congress itself that made the NY Fed the regulator of Wall Street. Warren has as much chance of getting anywhere as Segarra did (or does, she’s appealing the case).

The story: In October 2011, Carmen Segarra was hired by New York Fed to be embedded at Goldman as a risk specialist, and in particular to investigate to what degree the company complied with a 2008 Fed Supervision and Regulation Letter, known as SR 08-08, which focuses on the requirement for firms like Goldman, engaged in many different activities, to have company-wide programs to manage business risks, in particular conflict-of-interest. Some people at Goldman admitted it did not have such a company-wide policy as of November 2011. Others, though, said it did.

Let’s take it from there with quotes from the 5 articles Bernstein wrote on the topic over the past year. To listen to the Segarra files, please go to The Secret Recordings of Carmen Segarra at This American Life.

One last thing: Jake Bernstein’s work is of high quality, but I can’t really figure why he syas things such as teh audio files show: “a New York Fed that is at times reluctant to push hard against Goldman and struggling to define its authority”. Through his work, and the files, it should be clear that just ain’t so. Both the Fed’s policy and authority are crystal clear and ironclad.

Does Surging Demand For Gold & Silver Coins Signal a Bottom?

Courtesy of John Rubino.

Reports of individuals snapping up near-record numbers of gold and silver coins are coming in from around the world:

U.S. Mint American Eagle gold coin sales set to rise sharply in Sept

(Reuters) – The U.S. Mint has sold nearly 50,000 ounces of American Eagle gold coins so far in September, almost double its total in August, as a sharp pullback in gold prices and geopolitical tensions boosted interest for physical products from retail investors.

With only six business days left until the end of September, sales of American Eagle bullion gold coins made for investors were 46,000 ounces, up 84 percent from August sales of 25,000 ounces, the latest U.S. Mint data showed on Monday.

Record highs in U.S. equities also prompted some retail investors to buy precious metal products to diversify their portfolios, said David Beahm, vice president at New Orleans coin dealer Blanchard & Co.

German Bullion Dealers Report Major Increase in Sales

(Gold Reporter) Bullion dealers from all regions report that gold sales in the German bullion trade market surge since last week. Suppressed prices for gold and silver are obviously considered buying rates by German investors. The German precious metals trade reports a surge in sales.

“For about a week we record considerably increased turnover again, which is now on previous year’s level, so it doubled compared to the recent months.”, Rene Lehman from the internet dealer Münzland in Dresden told Goldreporter.

“We can confirm that customer demand has considerably increased in the recent days.“, said Dominik Kochmann, CEO of ESG Edelmetalle in Rheinstetten.

Daniel Marburger, Director of Coininvest GmbH in Frankfurt/Main also stated that “In the past seven working days we have seen an extreme surge in demand.”

Christian Brenner, Chief Executive of Philoro Edelmetalle GmbH: “Already in August we noticed an increase on orders compared to the previous months, but September… September beats it all. From a German viewpoint it’s the strongest month of 2014.”

Perth Mint Gold and Silver Bullion Sales Surge in August

(Coin News) Australian sales of bullion gold and silver surged in August after falling to a three-month low in July, new figures from the Perth Mint of Australia show.

August sales of Perth Mint gold coins and gold bars at 36,369 ounces rallied 44.9% from July and jumped 19.5% from the same time last year. Gold sales were the highest since June. Sales of Perth Mint silver coins and silver bars at 818,856 ounces in August advanced 41.7% from the prior month and grew 18.5% from August 2013. They were the strongest since January. In July, gold and silver bullion sales retreated from the previous month and from year-ago levels.

Individual buyers aren’t the dominant players in precious metals but they do make a difference. And their renewed enthusiasm is matched by some recent national trends:

China imports more gold for holiday; Indian demand set to climb

SINGAPORE (Reuters) – Top bullion consumer China has been importing more gold in September than in the previous month due to demand from retailers stocking up for the upcoming National Day holiday, market sources said.

Demand in India – the second biggest buyer of the metal – is also set to pick up as the festival and wedding season kicked off this week.

With gold trading close to a key psychological level of $1,200 an ounce, markets are keenly watching physical demand in Asia – the top consuming region – to see if it could lend support to prices.

“The physical volumes have been high this month compared to August. I would say imports could be at least 30 percent higher than last month,” said a trader with one of the 15 importing banks in China.

Russia Boosts Gold Reserves by $400M to Highest Since ’93

(Bloomberg) Russia added about 9.4 metric tons of gold valued at $400 million to reserves in July as it expanded holdings for a fourth consecutive month to the highest in at least two decades.

The country’s stockpile, the fifth-biggest, increased to 35.5 million ounces (1,104 tons) last month from 35.2 million ounces at the end of June, data posted on the central bank’s website showed. The amount of gold now held is the most since at least 1993, according to International Monetary Fund data.

Central banks may add as much as 500 tons to reserves this year, the World Gold Council said on Aug. 14. Nations increased holdings by 409 tons last year and 544 tons in 2012.

There’s no guarantee that this buying, encouraging as it seems, is anything more than a blip. But in the aggregate it does seem like a lot of buyers, old and new, are finding current prices to be attractive. That’s how bottoms form and new bull markets begin.

Visit John’s Dollar Collapse blog here >

Ebola vs. Us

Ebola vs. Us

By Ilene

Ebola is spreading too quickly for Ebola-vaccine makers to conduct typical studies of safety and efficacy on experimental vaccines. Instead, vaccines will be tested for basic safety, but then deployed with protocols devised now in order to test for efficacy essentially on the field. Testing has to be expedited because the situation in West Africa gets worse every day while there are no approved vaccines or other treatments.

The chart below is from a paper in the New England Journal of Medicine showing estimates of the virus’s trajectory projecting out to November 1, 2014. If current trends continue, the number of confirmed and probable cases will reach 20,000 by November (Business Insider).

Almost half of the 20,000 cases of Ebola will be in Liberia, a country whose medical care infrastructure was destroyed by fourteen years of civil war. During the war, 90% of health care workers fled and 80% of health care facilities were shut down. Andy Sechler M.D., associate medical director at Last Mile Health and physician at Brigham and Women’s Hospital and Boston Children’s Hospital, describes health care in Liberia:

…At the time of the peace accord in 2003, there were just 50 doctors serving a population of 4 million, leading to some of the worst maternal and child health statistics in the world; 1 in 8 women there die from childbirth complications.

Over the last decade Liberia’s Ministry of Health and Social Welfare has made laudable strides with available resources, but only so much can be expected in 10 years for a nation emerging from civil conflict and requiring (to this day) the presence of U.N. peacekeepers. It still ranks 175th out of 187 on the world development index, with neighboring Guinea and Sierra Leone coming in at 179th and 183rd, respectively.

What should be done? Liberian President Ellen Johnson Sirleaf, during a meeting with international partners, said it best: “Many people are coming to help us deal with Ebola, and that is fine. But they will disappear. The real issue is our health care system.” (Hell hath no fury like an Ebola virus out of control)

In addition to the inadequate health care systems of poor countries such as Liberia, the failure of developed nations to respond quickly to the emerging threat has aggravated the outbreak and increased the potential for worst-case scenarios.  In April, Ebola had killed less than 100 people in West Africa. Doctors Without Borders warned that failure to act could result in an “unprecedented epidemic.”

Lauren F. Friedman at the Business Insider reports that we are now facing the consequences of our earlier failure to respond appropriately:

[T]he world responded with what Nicholas Kristof of The New York Times called “a global shrug.” Over the summer, as residents of the developed world comforted themselves with the knowledge that an outbreak on our home turf was highly unlikely, the death toll in one of the poorest corners of the world climbed sharply.

The “unprecedented epidemic” went from dire prediction to on-the-ground reality, and now the Centers for Disease Control and Prevention has said that — worst-case scenario — there could be 1.4 million cases of Ebola in West Africa by January.

[…]

“The international response to the disease has been a failure,” [said Ken Isaacs of Christian relief organization Samaritan’s Purse]. “The international community allowed two relief organizations [Samaritan’s Purse and Doctors Without Borders] to provide all of the clinical care for Ebola victims in three countries.”

On their own, Liberia, Sierra Leone, and Guinea “simply do not have the capacity to handle the crisis in their countries,” Isaacs said. “The world will effectively be relegating the containment of this disease to three of the poorest countries in the world.”

That assessment was echoed by Daniel Bausch, an American doctor who talked to Business Insider in August about his experience on the ground in Guinea and Sierra Leone. “You have a very dangerous virus in three of the countries in the world that are least equipped to deal with it,” Bausch told us. “The scale of this outbreak has just outstripped the resources. That’s why it’s become so big.” (We Screwed Up On Ebola, And Now The Crisis Is Getting Much Worse)

The chart below (from Business Insider) shows when developed nations should have responded forcefully vs. when we actually began to seriously intervene.

In Scientists grapple with ethics in rush to release Ebola vaccines, Kate Kelland discusses the need to abandon the usual time-consuming and expensive protocols for bringing new drugs to market. Researchers and health care officials will need to test vaccines at the same time they are deploying them. Infused with the ethical issues, there are procedural issues that make the deployment of experimental vaccines within high-risk and vulnerable populations especially complicated.

LONDON (Reuters) – Normally it takes years to prove a new vaccine is both safe and effective before it can be used in the field. But with hundreds of people dying a day in the worst ever outbreak of Ebola, there is no time to wait.

In an effort to save lives, health authorities are determined to roll out potential vaccines within months, dispensing with some of the usual testing, and raising unprecedented ethical and practical questions.

“Nobody knows yet how we will do it. There are lots of tough real-world deployment issues and nobody has the full answers yet,” said Adrian Hill, who is conducting safety trials on healthy volunteers of an experimental Ebola shot developed by GlaxoSmithKline.

Hill, a professor and director at the Jenner Institute at Britain’s University of Oxford, says that if his results show no adverse side-effects, GSK’s new shot could used in people in West Africa by the end of this year.

Even if a drug is shown to be safe, it takes longer to prove it is effective – time that is simply not available when cases of Ebola infection are doubling every few weeks and projected by the World Health Organization to reach 20,000 by November.

[…]

GSK is one of several drug firms that have either started or announced plans for human trials of candidate Ebola vaccines. Others include Johnson & Johnson, NewLink, Inovio Pharmaceuticals and Profectus Biosciences. (Scientists grapple with ethics in rush to release Ebola vaccines – Yahoo News.)

While humans struggle to decide what measures to take and how to successfully and ethically launch untested drugs among populations of people already dying, Mother Nature doesn’t care. The virus spreads with no concern for our questions or our answers.

The world will be judged in the coming years on how it responds to the Ebola epidemic. To date, we should be judged harshly. ~ Andy Sechler

Related Stories

Reflections on Catalonia, Crimea, Iraq, California, Nation Building

Courtesy of Mish.

Catalonia Independence Vote to Proceed on Schedule 

Arthur Mas, president of Catalonia declared today that the vote for independence of that region will go as scheduled on November 9. Spain contends the vote is illegal and vows to stop it.

El Economista reports Arthur Mas Calls for Vote on Independence of Catalonia.

President of Catalonia, Artur Mas nationalist, officially called for a vote on the independence of this rich region of Spain for the November 9, challenging the Spanish government began the process to prevent it.

In a ceremony at the gallery Gothic Palace of the Generalitat, the seat of regional government in Barcelona, ​​Artur Mas, supported by his executive and representatives of other nationalist parties, signed the decree of convocation of this non-binding referendum.

“This is the way democracies are expressed and political projects are born. Voting it is the responsibility of the Democrats do not circumvent it,” then said in a brief speech.

“Catalonia wants to talk, want to be heard, want to vote,” he said Mas, who continues to ask Madrid to allow the query as London did in Scotland, where the “no” won Sept. 18 in a referendum with broad participation.

The proposal flew like a lead balloon in Madrid. Prime Minister, Mariano Rajoy Initiated a Process to Suspend the Referendum.

Reflections on Catalonia, Crimea, California

There is a lot of puffery in Spain given the resolution is nonbinding, unlike the vote for Scottish independence.

In the US, if California wanted to cede from the union and form its own country, look on the bright side: California independence would be a huge upside for the rest of us.

Such a referendum, if allowed to stand, would take a lot of socialist votes out of the US House of Representatives. That would be a good thing. Unfortunately, there will never be support in California to cede from the union.

Crimea Votes Overwhelming to Join Russia

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The Plunge Protection Team is Opening an HFT-Focused Chicago Office

Zero Hedge's take on the Fed's search for new employees in Chicago. The cool thing about this is that if the market plunges, the Fed employees will be right there in Chicago to try to counteract the selling. Yea! ~ Ilene

The Plunge Protection Team is Opening an HFT-Focused Chicago Office

Courtesy of ZeroHedge

For several days we had heard a persistent rumor, that one of the most famous members of the New York Fed's Markets Group, also known as the Plunge Protection Team, Kevin Henry was moving to the HFT capital of the world, Chicago. We refused to believe it because, let's face it, when the trading desk on the 9th floor of Liberty 33 needs to get its hands dirty in stocks, it simply delegates said task using just a little more than arms length negotiation, with the world's most levered HFT hedge fund: Ken Griffin's Citadel. Why change the status quo?

And then, it turned out to be true because as the Chicago Fed announced just a few days ago:

The Markets Group at the Federal Reserve Bank of New York manages the size and composition of the Federal Reserve System’s balance sheet consistent with the directives and the authorization of the Federal Open Market Committee (FOMC), supports debt issuance and debt management on behalf of the U.S. Treasury, provides foreign exchange services to the U.S. Treasury and provides account services to foreign central banks, international agencies and U.S. government agencies.

 

Markets Group is establishing a presence at the Federal Reserve Bank of Chicago and has openings for both experienced professionals and recent graduates.

So instead of interacting with the HFT momentum ignition algos using the microwave line of sight towers from NY all the way to Chicago, the NY Fed has decided it needs to be present on location in the windy city to buy up every ES contract and reverse the selling momentum when the day of reckoning finally hits.

But what does that mean for Citadel? Well, considering Ken Griffin has more pressing issues on his mind, we can understand why Bill Dudley is suddenly concerned the NY Fed's orders may get less than optimal "best practice" execution, and thus the need to finally get the Fed's hands wet. After all, by now everyone knows the Fed is directly and indirectly manipulating and intervening in markets on a daily basis, so why not.

As to just what specific skills the NY Fed is seeking as it builds out its HFT practice on the ground in Chicago, here are the two indicated positions with which the expansion is set to start:

Primary Location: IL-Chicago
Full-time / Part-time:  Full-time
Employee Status:  Regular
Overtime Status:  Exempt
Job Type:  Recent Graduate
Travel:  Yes, 5 % of the Time
Shift:  Day Job
Job Sensitivity Not Evaluated

Job Title: Policy & Markets Analysis Associate – Cross Market Monitoring
Group:  Markets Group
Location: Chicago, IL
Start Date: Summer 2015
 
The Markets Group at the Federal Reserve Bank of New York consists of multiple business areas that fulfill a range of responsibilities, from planning and executing open market operations, monitoring and analyzing financial market developments, to managing foreign customer accounts.

Through its analytical and operational areas, the Markets Group:

  • Manages the size and composition of the Federal Reserve System's balance sheet consistent with the directives and the authorization of the Federal Open Market Committee (FOMC);
  • Monitors and analyzes financial market developments for key stakeholders and policymakers within the Federal Reserve System;
  • Monitors and analyzes developments related to financial stability;
  • Supports debt issuance and debt management on behalf of the U.S. Treasury;
  • Provides foreign exchange services to the U.S. Treasury; and
  • Provides account services to foreign central banks, international agencies, and U.S. government agencies.

RESPONSIBILITIES:

  • Monitors, analyzes and reports to policy makers on global financial market developments:

     

    • Tracks intra-day and longer-term global asset price movements;
    • Interfaces with market participants to obtain context for asset price movements;
    • Analyzes findings and identifies themes relevant to the monetary policy process;
    • Prepares detailed written analysis and presents oral briefings on market developments to officials in the Federal Reserve, the Treasury, and other institutions;
    • Relates developments in financial markets to issues pertaining to financial stability; and
    • Assumes responsibility over time as a Markets Group specialist for a specific aspect of financial markets.
  • Plans and executes transactions in foreign exchange or fixed income markets on behalf of the U.S. monetary authorities, foreign central banks, and other customers
  • Participates in projects within the Markets Group related to increasing the effectiveness and efficiency of transactional business areas
  • Performs related duties as required

REQUIREMENTS:

  • Master’s degree in Business Administration, Economics, or Public Policy and a minimum of one year relevant work experience in an analytical capacity related to global financial markets
  • We will consider recent graduates/current students and those with up to 5 years of relevant work experience
  • Demonstrated analytical skills, including knowledge of financial instruments and financial market structure, macroeconomic theory and monetary policy
  • Proven ability to provide concise, articulate and insightful economic analysis in written and verbal form.
  • Ability to analyze complex market issues, make sound decisions and respond under pressure
  • Ability to work productively in a high-performance team atmosphere and as an independent analyst
  • Must adhere to area specific financial disclosure requirements

… and a European-focused plunge protector:

Primary Location: IL-Chicago
Full-time / Part-time: Full-time
Employee Status: Regular
Overtime Status: Exempt
Job Type: Experienced
Travel: Yes, 10 % of the Time
Shift Day: Job

The Markets Group at the Federal Reserve Bank of New York is responsible for the implementation of monetary and foreign exchange policy, providing payments and custody services to foreign central banks, and auctioning and issuing Treasury debt as the fiscal agent for the U.S. Treasury.  As part of these duties, the Market Operations Monitoring and Analysis Function (MOMA) within the Markets Group executes transactions in the open market and conducts detailed analysis of financial market developments in support of the monetary policy decision-making process.

The International Market (IM) Directorate within MOMA is responsible for providing in-depth analysis of global financial market developments and international policy matters that contributes directly to the broader analytical work conducted by the Markets Group specifically and the Federal Reserve System more broadly. The Directorate also has many operational responsibilities, including executing U.S. foreign exchange policy and foreign exchange customer transactions, managing the U.S. foreign exchange reserves, and managing foreign exchange swap lines with foreign central banks.

The IM Directorate is currently seeking a Policy and Markets Associate to produce high quality analysis on global policy and financial market developments that contributes directly to the broader analytical work conducted by the Markets Group specifically and Federal Reserve System more broadly.  This position will focus specifically on the euro area, but may include some coverage for other regions.  Applicants should be familiar with matters relating to international economic policy frameworks and global financial markets analysis, and should be able to develop and convey their views in a concise manner, both verbally and in writing, to senior policy makers throughout the Federal Reserve System and U.S. Treasury.  The candidate will also be expected to participate in the myriad of operations under the Directorate’s purview.

Responsibilities

  • Prepare analysis of global financial market developments with a focus on the euro area.
  • Convey and develop views to senior policy makers on such topics through daily and/or weekly written and/or oral briefings.
  • Collaborate with other Groups within the Federal Reserve Bank as well as other Federal Reserve Banks within the system as well as the U.S. Treasury in related areas.
  • Collaborate with other central banks on relevant policy initiatives, information exchange on financial markets, domestic policy developments and reserve management.
  • Remain current on relevant economic and finance literature and financial markets and developments pertaining to monetary and foreign exchange policy frameworks and approaches.
  • Develop contacts within the global financial community, including with investment banks, central banks and other policy institutions such as the U.S. Treasury and IMF.
  • Learn and conduct the broad range of the Directorate’s operations, including related to foreign reserves management, foreign exchange transaction and foreign exchange swaps.

Requirements

  • Post-graduate degree in economics, finance or a related field.
  • Minimum of 3 years’ experience analyzing financial market developments and/or international policy issues.
  • Strong written and oral communication skills that will enable the candidate to convey their views to senior policy makers in a clear, concise and consistent manner.
  • Strong interpersonal skills to interact and collaborate effectively with peers, subordinates, senior management and external parties.
  • Operational experience not required, but candidate should have strong attention to detail.
  • Ability to represent effectively the business area and the Bank, as appropriate, on issues related to global financial markets.

Finally, and we assume this was done in very good humor, the Fed is also hiring a Risk Management Specialist.

About time?

Sick Man of Europe is Europe; Blame the Socialists, Progressives, Greens, and the Euro Itself

Courtesy of Mish.

Joel Kotkin writing for New Geography hits the nail smack on the head with his assessment Sick Man of Europe is Europe.

Throughout the continent, public support for a united Europe fell sharply last year. Opposition to greater integration has emerged, with anti-EU parties gaining support in countries as diverse as the United Kingdom, Greece, Germany and France.

The new reality is epitomized by France’s ascendant far-right political figure, Marine Le Pen, who is now leading in many polls to win the next presidential election.

These attitudes suggest that the EU could be devolving from a nascent super-state to something that increasingly resembles the Holy Roman Empire, a fragmented landscape of small, unimportant states wrapped in a unitary, but ephemeral crepe. This challenges the view of some Americans, particularly but not only on the left, who see Europe as a role model for the U.S. 

Some pundits, such as Paul Krugman, routinely describe Europe’s approach to economic, environment and social policy as more enlightened than America’s. Wherever possible, progressives push for European-style action in areas such as curbing carbon emissionsand rapidly converting to “green” energy.

Several years ago Germany and the Netherlands were exemplars as opposed to the much-disdained PIGS (Portugal, Italy, Greece and Spain). But German growth rates have plummeted, going negative in the last quarter, along with France and Italy. More stagnation is likely as energy costs surge and key export markets, notably in Russia and China, begin to contract. Today, the “sick man” of Europe is not any one country, or collection of countries; the “sick man of Europe” is Europe.

Europe’s poor economy stems in large part from policy. The strong welfare state so admired by progressives here has also made Europe a very expensive place to do business. High taxes and welfare costs, long tolerable in an efficient economy like Germany, have a way of catching up with companies and countries. This has been particularly notable after the financial crisis; since 2008 the unemployment rate has shot up 5 percentage points while dropping steadily in the Untied States.

All this suggests that Americans would do better than look to Europe for future solutions to our own problems. However attractive the European model may seem to our pundit class, the reality on the ground shows something more to be avoided than embraced.

Blame the Socialists, Progressives, Greens, and the Euro

The socialists ruined France and Italy. And the Euro which was supposed to be a uniter has been anything but.

There is more bickering than ever before on what constitutes sound fiscal policy. Germany wants one thing,  France and Italy another. Some countries want something in between and others waver back and forth.

More importantly, what the people want, is not what the politicians want. The result has been the rise of Marine Le Pen in France, Beppe Grillo in Italy, and Golden Dawn in Greece. Unstable governments and alliances exist in several countries.

The founders of the Euro project thought fiscal matters would unify over time. Instead, politics and policies diverged….

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Michael Lewis Still Says It Better Than Anyone

Michael Lewis Still Says It Better Than Anyone

By The Banker 

Microphone-Trophy-psd86307

When Bankers Anonymous hands out its annual awards for the best “recovering banker” essays of the year, the black tie crowd typically goes on chattering amongst themselves, unheeding the speaker at the stage holding the golden microphone trophies.

Why? Becuase they know that Michael Lewis will win the best essay trophy once again. Like clockwork. It’s so unfair.

If you’re at all sympathetic to what I’ve been trying to do for the past few years then – like those unheeding black-tie guests – you’ll not be surprised in the least that I’ve linked to his article in Bloomberg again, lamenting the Occupational Hazards of Working On Wall Street. Read this, its good.

Damn him for taking the trophy again this year.

Michael-Lewis

Please see related posts:

Michael Lewis reviewing John Lanchester’s Capital

Michael Lewis’ Liar’s Poker

Michael Lewis’ The Big Short

Michael Lewis’ Boomerang

Michael Lewis’ Flash Boys

 

Thanks for visiting Bankers Anonymous. Be sure to sign-up for my newsletter so you never miss what's happening on my site. 

Wasted Money: Delegation of Governors Make Surprise Trip to Afghanistan

Courtesy of Mish.

Ways to waste money in Afghanistan are endless. Here’s another case in point: Cuomo Makes Surprise Trip to Afghanistan.

Gov. Andrew M. Cuomo of New York arrived in Afghanistan on Saturday as part of a delegation of governors and Defense Department officials to visit troops and receive briefings on counterterrorism and security issues, the governor’s office said.

Also among the group were Gov. Bill Haslam of Tennessee, Gov. Jay Nixon of Missouri and Gov. Brian Sandoval of Nevada.

This is the second trip abroad for Mr. Cuomo in recent weeks. He traveled to Israel in August in what his office called an effort to show support for the country in its conflict with Hamas.

Are Missouri and Tennessee prime terrorist targets? Even if any of those states are terrorist targets, is there anything any of the governors can learn in Afghanistan that they cannot learn right here?

Of course not.

This is a political grandstanding stunt for all involved.

In the grand scheme of things, this trip wastes a trivial amount compared to the trillions of dollars we have already wasted.

Curiously, the boondoggle does have one useful aspect: It highlights the massive over-inflated egos of the three of them. Then again, we probably did not need to waste money to figure that out.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

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Russia Discovers Massive Arctic Oil Field Which May Be Larger Than Gulf Of Mexico

Russia Discovers Massive Arctic Oil Field Which May Be Larger Than Gulf Of Mexico

Courtesy of ZeroHedge

In a dramatic stroke of luck for the Kremlin, this morning there is hardly a person in the world who is happier than Russian president Vladimir Putin because overnight state-run run OAO Rosneft announced it has discovered what may be a treasure trove of black oil, one which could boost Russia's coffers by hundreds of billions if not more, when a vast pool of crude was discovered in the Kara Sea region of the Arctic Ocean, showing the region has the potential to become one of the world’s most important crude-producing areas, arguably bigger than the Gulf Of Mexico. The announcement was made by Igor Sechin, Rosneft’s chief executive officer, who spent two days sailing on a Russian research ship to the drilling rig where the find was unveiled today.

The oil production platform at the Sakhalin-I field in Russia,
partly owned by ONGC Videsh Ltd., Rosneft Oil Co., Exxon Mobil
Corp. and Japan's Sakhalin Oil and Gas Development Co. on June 9, 2009.

Well, one person who may have been as happy as Putin is the CEO of Exxon Mobil, since the well was discovered with the help of America's biggest energy company (and second largest by market cap after AAPL). Then again, maybe not: as Bloomberg explains "the well was drilled before the Oct. 10 deadline Exxon was granted by the U.S. government under sanctions barring American companies from working in Russia’s Arctic offshore. Rosneft and Exxon won’t be able to do more drilling, putting the exploration and development of the area on hold despite the find announced today."

Which means instead of generating billions in E&P revenue, XOM could end up with, well, nothing. And that would be quite a shock to the US company because the unveiled Arctic field may hold about 1 billion barrels of oil and similar geology nearby means the surrounding area may hold more than the U.S. part of the Gulf or Mexico, he said.

For a sense of how big the spoils are we go to another piece by Bloomberg, which tells us that "Universitetskaya, the geological structure being drilled, is the size of the city of Moscow and large enough to contain more than 9 billion barrels, a trove worth more than $900 billion at today’s prices."

The only way to reach the prospect is a four-day voyage from Murmansk, the largest city north of the Arctic circle. Everything will have to shipped in — workers, supplies, equipment — for a few months of drilling, then evacuated before winter renders the sea icebound. Even in the short Arctic summer, a flotilla is needed to keep drifting ice from the rig.

Sadly, said bonanza may be non-recourse to Exxon after Obama made it quite clear that all western companies will have to wind down operations in Russia or else feel the wrath of the DOJ against sanctions breakers. Which leaves XOM two options: ignore Obama's orders (something which many have been doing of late), or throw in the towel on what may be the largest oil discovery in years. 

And while the Exxon C-suite contemplates its choices, here is some more on today's finding from Bloomberg:

“It exceeded our expectations,” Sechin said in an interview. This discovery is of “exceptional significance in showing the presence of hydrocarbons in the Arctic.”

The development of Arctic oil reserves, an undertaking that will cost hundreds of billions of dollars and take decades, is one of Putin’s grandest ambitions. As Russia’s existing fields in Siberia run dry, the country needs to develop new reserves as it vies with the U.S. to be the world’s largest oil and gas producer.

Output from the Kara Sea field could begin within five to seven years, Sechin said, adding the field discovered today would be named “Victory.”

Duh.

The Kara Sea well — the most expensive in Russian history — targeted a subsea structure named Universitetskaya and its success has been seen as pivotal to that strategy. The start of drilling, which reached a depth of more than 2,000 meters (6,500 feet), was marked with a ceremony involving Putin and Sechin.

The importance of Arctic drilling was one reason that offshore oil exploration was included in the most recent round of U.S. sanctions. Exxon and Rosneft have a venture to explore millions of acres of the Arctic Ocean.

But what's worse for Exxon is that now that the hard work is done, Rosneft may not need its Western partner much longer:

“Once the well is plugged, there will be a lot of work to do in interpreting the results and this is probably something that Rosneft can do,” Julian Lee, an oil strategist at Bloomberg First Word in London, said before today’s announcement. “Both parties are probably hoping that by the time they are ready to start the next well the sanctions will have been lifted.”

And here is why there is nothing Exxon would like more than to put all the western sanctions against Moscow in the rearview mirror: "The stakes are high for Exxon, whose $408 billion market valuation makes it the world’s largest energy producer. Russia represents the second-biggest exploration prospect worldwide. The Irving, Texas-based company holds drilling rights across 11.4 million acres in Russia, only eclipsed by its 15.1 million U.S. acres."

Proving just how major this finding is, and how it may have tipped the balance of power that much more in Russia's favor is the emergence of paid experts, desperate to talk down the relevance of the Russian discovery:

More drilling and geological analysis will be needed before a reliable estimate can be tallied for the size of the oil resources in the Universitetskaya area and the Russian Arctic as a whole, said Frances Hudson, a global thematic strategist who helps manage $305 billion at Standard Life Investments Ltd. in Edinburgh. Sanctions forbidding U.S. and European cooperation with Russian entities mean that country’s nascent Arctic exploration will be stillborn because Rosneft and its state-controlled sister companies don’t know how to drill in cold offshore conditions alone, she said.

“Extrapolating from a small data sample is perhaps not going to give you the best information,” Hudson said in a telephone interview. “And because of sanctions, it looks like there’s going to be less exploration rather than more.” In addition, the expense and difficulty of operating in such a remote part of the world, where hazards include icebergs and sub-zero temperatures, mean that the developing discoveries may not be economic at today’s oil prices.

Maybe. Then again perhaps the experts' time is better suited to estimating just how much longer the US shale miracle has left before the US is once again at the mercy of offshore sellers of crude.

In any event one country is sure to have a big smile on its face: China, since today's finding simply means that as Russia has to ultimately sell the final product to someone, that someone will almost certainly be the Middle Kingdom, which if the "Holy Gas Grail" deal is any indication, will be done at whatever terms Beijing chooses.

 

Peak Debt – Why the Keynesian Money Printers are Done

Courtesy of David Stockman via Contra Corner blog,

Bloomberg has a story today on the faltering of Draghi’s latest scheme to levitate Europe’s somnolent socialist economies by means of a new round of monetary juice called TLTRO – $1.3 trillion in essentially zero cost four-year funding to European banks on the condition that they expand their business loan books. Using anecdotes from Spain, the piece perhaps inadvertently highlights all that is wrong with the entire central bank money printing regime that is now extirpating honest finance nearly everywhere in the world.

On the one hand, the initial round of TLTRO takedowns came in at only $100 billion compared to the $200 billion widely expected. It seems that Spanish banks, like their counterparts elsewhere in Europe, are finding virtually no demand among small and medium businesses for new loans.

Many small and medium-sized businesses are wary of the offers from banks as European Central Bank President Draghi prepares to pump more cash into the financial system to boost prices and spur growth. The reticence in Spain suggests demand for credit may be as much of a problem as the supply.

The monthly flow of new loans of as much as 1 million euros for as much as a year — a type of credit typically used by small and medium-sized companies — is still down by two-thirds in Spain from a 2007 peak, according to Bank of Spain data.

On the other hand, Spain’s sovereign debt has rallied to what are truly stupid heights – with the 10-year bond hitting a 2.11% yield yesterday (compared to 7% + just 24 months ago). The explanation for these parallel developments is that the hedge fund speculators in peripheral sovereign debt do not care about actual expansion of the Spanish or euro area economies that is implicit in Draghi’s targeted promotion of business lending (whether healthy and sustainable, or not). They are simply braying that  “T” for targeted LTRO is not enough; they demand outright sovereign debt purchases by the ECB – that is, Bernanke style QE and are quite sure they will get it. That’s why they are front-running the ECB and buying the Spanish bond. It is a patented formula and hedge fund speculators have been riding it to fabulous riches for many years now.

But don’t call these central bankers crooked patsies – they are just dimwitted public servants trying to grind jobs and growth out of the only tool they have. Namely, buying government debt and other existing financial assets in the hopes that the resulting flow of liquidity into the financial markets and the sub-economic price of money and debt will encourage more borrowing and more growth. This is the core axiom of today’s unholy alliance between financial speculators and central bank policy apparatchiks.

Stated differently, today’s Spanish anecdote is just another proof that central banks are pushing on a string; that is, aggressively and incessantly pumping money into financial markets even though the result is wildly inflated asset prices, not expanded business activity. But as is always the case with central bank created financial bubbles, the beneficiaries are happy to pocket the windfalls while the apparatchiks blunder on – pretending not to notice the drastic financial distortions, malinvestments and mis-pricings all around them.

Admittedly, Draghi is one of the dimmer tools in the shed of today’s central banking line-up. But surely even this monetary marionette might possibly wonder about a 2% Spanish bond yield.  After all, virtually nothing has changed there since Spain’s 2012 fiscal and economic crisis. The nation’s unemployment rate is still above 20%, national output is still 7% below where it was six years ago and soaring government debt will soon slice through the 100% of GDP mark.

 

Moreover, Spain is still saddled with the wreckage of a massively bloated development and construction industry, its government is led by corrupt fools who apparently believe their own lies about “recovery”, and its most prosperous province is next for secession voting.

 

 

Needless to say, Draghi and his compatriots in Frankfurt have no clue that they are being played for fools by the carry trade gamblers who have piled into peripheral debt ever since the ECB chairman’s foolish “anything it takes” pronouncement. Yet it is only a matter of time before the growing German political revolt triggers a day or reckoning. When it becomes clear that Germany has vetoed once and for all a massive spree of government debt buying by the ECB, it will be katie-bar-the-door time. The violent scramble of speculators out of Spanish, Italian, Portuguese etc. debt will be a day of infamy for the ECB and today’s destructive central banking regime generally.

But pending that it might also be wondered why the apparatchiks who run our central banks seem to believe that the capacity of households and businesses to carry debt is virtually unlimited—–that there is no such thing as “peak debt” or a law of diminishing returns with respect to the impact of cumulative borrowing on economic activity. Thus, the Bloomberg article notes that the total stock of Spanish business loans (above $1m) is almost 470 billion euros or 25% below the 2008 record of 1.87 trillion euros. The implication is that there is plenty of room for lending to “recover”—-the exact predicate behind Draghi’s program.

But as shown below, that glib assumption simply ignores the history of what has gone before—-namely, that the temporary prosperity leading up to the 2008 financial crisis was a one-time Keynesian parlor trick that used up the available balance sheet headroom and then some. It resulted in a collision with “peak debt” that has fundamentally changed the macro- economic dynamics.

In the case of non-financial business debt, for example, the balance outstanding soared by a factor if 4X in Spain during the 9-year construction and investment boom that preceded the crash. About one-fourth of that unsustainable debt explosion has been liquidated since 2009, but even then business debt has grown at a CAGR of 8.0% since 2000—-a rate significantly higher than Spain 3.5% rate of nominal GDP growth over that 14-year period.

 

Likewise, household debt nearly doubled as a share of GDP in the 7 year boom before the financial crisis. The household debt ratio has now backed off marginally, but relative to history and the rest of the world it is still unsustainably high. The idea that there is major headroom for a robust recovery of household borrowing is simply wrong. Indeed, Spanish household debt today would amount to $14 trillion on a US scale GDP—a level that is 20% higher than the unsustainable burden still being lugged around by main street households in shop-until-you-drop America.

 

Needless to say, Spain is but a microcosm of a worldwide condition under which maniacal money printers in the central banks are smacking up against peak debt in their domestic economies. As shown in the graph below, outside of Germany the debt disease has been universal. During the eight years after the turn of the century, the leverage ratio for all industrial economies combined ex-Germany—-that is, total public and private credit outstanding relative to GDP—rose from 260% to 390% of GDP. That incremental debt burden in round terms amounted to about $50 trillion.

And despite all the official palaver about how economies have sobered up and begun to delever—-the data make clear that nothing of the kind has happened. Owing to massive expansion of government borrowing and debt ratios since 2009, total credit outstanding has now soared to 430 percent of GDP for the ex-Germany industrialized world. This figure is so far off the historical charts that it could not have even been imagined 15 years ago when worldwide central banks went all-in for money printing.

Embedded image permalink

Nevertheless they have continued to push on a string. At the turn of the century, the six major central banks had combined balance sheets of $2 trillion. Today the figure is $16 trillion and is therefore 8X larger. That compares to world GDP growth of about 2X during the same period.

Self-evidently, all the major economies are saturated with debt. Accordingly, central bank balance sheet expansion has lost its Keynesian magic entirely. Now the great sea of freshly minted liquidity simply fuels the carry trades as gamblers everywhere load up with any asset that generates a yield or short-run capital gain, and fund these bloated positions with cheap options and repo style finance.

But here’s the obvious thing. Central banks can’t normalize interest rates – that is, allow the money markets to rise off the zero-bound – without triggering a violent unwind of the carry trades on which today’s massive asset inflation is built. On the other hand, they can no longer stimulate GDP growth, either, because the credit expansion channel to the main street economy of households and business is blocked by the reality of peak debt.

So they end up like the pathetic Mario Draghi – energetically pounding square pegs into round holes without a clue as to the financial conflagration lurking just around the corner. Yes, the era of Keynesian money printing is over and done. But don’t wait for the small lady at the Fed to sing, either.

Picture source here. 

Debt Rattle Sep 26 2014: Can Money Save The Climate?

Courtesy of The Automatic Earth.


Harris & Ewing Staircase in the Capitol, Albany, New York 1905

So PIMCO was going to fire Bill Gross over the weekend, and he chose to leave on his own accord and work for Janus. So what? Gross is 70 years old and still joins another firm geared towards making money, and nothing else at all. As if making money, and nothing else, is a valid goal in a human life.

As if someone who’s done nothing else his entire life, and who’s richer than Croesus, should have nothing else to do with the times that remains him, and is somehow right and justified about not being able to find anything more worthwhile.

As if that singular focus does not make his life a useless one, or the man an empty shell. And yeah, I’m sure he gives away some cash from time to time to make himself feel even better. Though I doubt he ever feels truly fine. Perhaps the disappointment of being a billionaire and still feel like he’s wasted his life is what drives him on. Or maybe his wife beats him. And he enjoys it.

And it’s not just Bill Gross, it’s just as much the way the mainstream press covers the ‘event’ of Gross’ departure, the fact that they bother to cover it in the first place, and the details they focus on, that shine a chillingly clear cold and revealing light on what we have become, as individuals and as societies.

The hollow single-minded worshipping of money, which Gross can be said to embody, is the single biggest scourge on each and every one of us, on all the bonds we form between each other, on the communities and nations we live in, and the planet they’re located on. The bible is full of allusions to this, and the world is full of people who call themselves Christians, but the twain are like ships passing in the night.

if you would want to prevent a war, or you want to stop the destruction of rivers and seas through pollution, or for the earth’s climate from entering a cycle that neither we nor the climate itself can control, would you think first of people like Bill Gross when you’re looking for support? If you do, that would not be wise. Nevertheless, at every single climate conference it’s people just like him, such as Bill Clinton and Bill Gates, who made sure they’re in the spotlight.

People who’ve never done anything in their lives that was not directed at self-gratification. People who cause, not prevent, the mayhem. Even the big demonstrations last week were shrouded in a veil of corporatism, not unlike the one Greenpeace has been enveloped in for many years.

And of course you can argue that it serves a purpose, because it’s the only way to get people pout on to the street. But still, if millions of dollars have to be spent to make a few hundred thousand people in New York leave their homes, what exactly are we doing?

Where does that money come from? Does anyone want to deny that in general the richer people in the world are the ones responsible for the destruction? That we ourselves cause more damage than the average Bangla Deshi or Senegalese, and that the richest and most powerful people in our own societies do more harm than the poorset?

If you don’t want to deny that, why do you walk in a heavily sponsored protest march? Or does anyone think those marches are spontaneous eruptions of people’s true feelings anymore? Why then do they feel scripted, in a way the anti-globalization ones (Seattle) absolutely did not?

There is no doubt that there are well-meaning people involved, and a lot of grass-roots identity, but isn’t there something wrong the very moment money becomes a factor, if and when we can agree that the pursuit of money is the 8 million ton culprit in the room in the first place? Do we really feel like we can’t achieve anything without money anymore? And moreover, shouldn’t we, as soon as we feel that way, start doing something about it?

There’s a nice interview in Slate with Naomi Klein, who says capitalism is the bogey man. I find that a little easy; in the end man him/herself is the bogey man. Klein sits on the board of Bill McKibben’s 350.org, which I have no doubt is full of people full of best intentions, but which also sees money as way to achieve things:

Naomi Klein Says We Must Slay Capitalism to Fight Climate Change

Everybody that’s trying to get anything progressive done in this country knows that the biggest barrier is getting money out of politics. Climate can be a shot of adrenaline in the pre-existing movement to get money out of politics. So, it’s not a brand-new movement. [..] All these new reports say that the transition to that next economy will be cheap. So why isn’t it happening? Elites like to think of everything as a win-win, but it’s not true.* It’s the wealthiest corporations on the planet that will win; everyone else will lose. No number of reports is going to change that. You actually need a counter-power.

[..] we need to finance this transition somehow. I think it needs to be a polluter-pays principle. It’s not that we’re broke, it’s just that the money is in the wrong place. The divestment movement is a start at challenging the excesses of capitalism. It’s working to delegitimize fossil fuels, and showing that they’re just as unethical as profits from the tobacco industry. Even the heirs to the Rockefeller fortune are now recognizing this. The next step is, how do we harness these profits and use them to help us get off fossil fuels?

Exxon needs to pay—it’s the most profitable company on the planet. It’s also the descendent of Standard Oil. In the book, I talk a lot about Richard Branson’s pledge to donate all the profits from his airline to fight climate change. When he made that announcement, it was extraordinary. The problem is, no one held him accountable—well, besides me and my underpaid researcher. But at least Branson’s heart was in the right place. These profits are not legitimate in an era of climate change. We can’t leave this problem to benevolent billionaires.

‘Getting money out of politics’, but ‘we need to finance this transition somehow’. There’s a grand contradiction in there somewhere. Now, I’m a big admirer of Naomi, her Shock Doctrine is one of the greatest books in the past 25 years or so. But I have my questions here.

I don’t think you can argue that capitalism itself is the issue. This is about the erosion of checks and balances, laws and regulations, the erosion of a society’s ability to hold people responsible for what they do, whether they operate in the political field or in private business.

And those same issues are just as relevant in any communist or socialist society. Unless you’re very careful day after 24/7 day, all political systems tend towards ceding control to ever more psychopatic individuals. In the exact same way that bad money drives out good. In short, it’s not about ‘them’, it’s about us. It’s the psychos who want that power and that money more than anyone else, but it’s us who let them have it. While we’re watching some screen or another.

It’s about how we can keep the most money- and power hungry individuals amongst us from ruling over us. An obviously daunting task if you look at most countries, corporations and organizations today. I mentioned the three Bills already, Bill Gross, Bill Clinton and Bill Gates, and they epitomize as fittingly as any threesome where and how we go wrong, and how hard it is to keep ourselves from doing that.

If you want a better world, A) stop listening to the crazy clowns, and B) stop telling yourself you care and then just keep doing what you always did. Get real. Pursue truth, not money.

Argentina running out of options

Argentina running out of options

Courtesy of SoberLook.com

With Argentina's private sector in disarray, Cristina Fernandez de Kirchner's government has been forced to increasingly bail out failing businesses, particularly importers that are critical to Argentina's stability. The nation's fiscal problems are escalating rapidly as it undertakes what amounts to a form of nationalization.

Source: Goldman Sachs

 

A great deal of hard currency now goes to support domestic importers (that are forced to sell at a loss to keep prices under control) and the country is becoming desperate for dollars needed to import the products the population needs. In the past, some of the greatest sources of foreign currency for Argentina have been grain exports, particularly soy. Except now there is a problem …
 

Cash soy prices (source: barchart)

 

With fiscal deficit growing rapidly and access to international markets shut off due to the recent default, Argentina's central bank has been doing the only thing a central bank can do in this situation – monetize the deficit by printing more pesos. This has resulted in inflation levels of over 36% this summer and probably even higher currently. Not quite Zimbabwe levels yet, but moving in that direction.

In response to such inflationary pressures and fully aware that further currency devaluation by the Fernandez regime is inevitable, businesses and households are hoarding dollars. One US dollar now trades at over 15 pesos in the unofficial ("blue") exchange market – some 80% premium to the official exchange rate.

 

Source: Dolar Blue

 

There are no easy answers at this juncture. With foreign reserves expected to dwindle and risks rising of foreign bondholders accelerating full debt repayment – which they can do now that they are no longer receiving their coupon payments – Argentina is running out of options. The authorities are becoming increasingly desperate as Fernandez, in search of someone to blame other than her own failed policies, turns on Argentina's private sector. New legislation that resembles Venezuela's heavy handed socialist style has now made strong corporate profit margins in Argentina illegal.

The Washington Post: – One of South America's largest countries has passed new measures to cap consumer prices of goods, set profit margins for private businesses and levy fines on companies found to be making "artificial or unjustified" profits.

If that sounds like something they would do in Venezuela, well, that's because they already have.

Now it's Argentina that wants to use the heavy hand of the state to grip the invisible hand of the market.

Earlier this year hopes were rising for a better future in the post-Fernandez Argentina (see post). Those hopes have now been dashed.

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Taliban Storm Afghanistan, Beheadings Galore

Courtesy of Mish.

Having spent well over $3 trillion dollars in Iraq and Afghanistan what do we have to show for it?

  1. Shias aligned with Iran rule Baghdad
  2. ISIS took over parts of over Iraq
  3. ISIS threatens to take over Syria
  4. The average Pakistani hates the US for drone policy
  5. Taliban threatens to take over Afghanistan

Taliban Storm Afghanistan

Please consider Taliban Storm Afghan District Southwest of Capital, 100 Killed

Hundreds of Taliban fighters have stormed a strategic district in an Afghan province southwest of the capital and are on the verge of capturing it after killing dozens of people and beheading some in days of fighting, officials said on Friday.

The Ghazni provincial government has lost contact with police in the province’s western district of Ajrestan, said Asadullah Safi, deputy police chief of the area. An army unit reported that fighting was raging late on Friday afternoon, another provincial official said.

“If there is no urgent help from the central government, the district will collapse,” Safi said earlier.

No longer pinned down by U.S. air cover, Taliban fighters are attacking Afghan military posts in large numbers with the aim of taking and holding ground.

The attack by an estimated 700 Taliban fighters began about five days ago and early reports were that more than 100 people had been killed, including 15 who were beheaded by the militants, said provincial deputy governor Ahmadullah Ahmadi.

“Without international support it will be hard to provide security … The example of Ajrestan district shows that without international commitment of troops, it will be difficult to handle the Taliban.”

War on Multiple Fronts

Every instance of US meddling has made matters worse. Tens of thousands of innocent civilians are dead and the economy of Iraq is destroyed.

Our policy is no so tangled we are bombing our friends and protecting those we seek to depose.

Can it get still more convoluted? Of course it can. Just add Israel, Pakistan, or Russia to the mix….

Continue Here

Are Cars About to Crash?

Courtesy of John Rubino.

New car sales have been one of the bright spots of the US recovery. And they’re still at it:

September U.S. auto sales to rise 10 percent: JD Power, LMC

(Reuters) – Strong demand drove U.S. new car and truck sales 10 percent higher in September, adding momentum to the industry’s best August in more than a decade, consultants LMC Automotive and J.D. Power said on Thursday.

Sales rose to 1.248 million new vehicles, or a seasonally adjusted annualized rate of 16.5 million vehicles. This follows a 17.5 million annualized rate in August.

“The strength in automotive sales is undeniable, as August sales performance was well above expectations and there is no evidence of a payback in September, suggesting that the auto recovery still has some legs,” LMC forecaster Jeff Schuster said.

LMC raised its full-year forecast for 2014 to 16.4 million vehicles from 16.3 million vehicles

Why have cars been so strong when housing in particular and consumer spending in general have been relatively limp? Two reasons. First, subprime lending has found a home in this market:

In a Subprime Bubble for Used Cars, Borrowers Pay Sky-High Rates

(New York Times) – Rodney Durham stopped working in 1991, declared bankruptcy and lives on Social Security. Nonetheless, Wells Fargo lent him $15,197 to buy a used Mitsubishi sedan.

“I am not sure how I got the loan,” Mr. Durham, age 60, said.

Mr. Durham’s application said that he made $35,000 as a technician at Lourdes Hospital in Binghamton, N.Y., according to a copy of the loan document. But he says he told the dealer he hadn’t worked at the hospital for more than three decades. Now, after months of Wells Fargo pressing him over missed payments, the bank has repossessed his car.

This is the face of the new subprime boom. Mr. Durham is one of millions of Americans with shoddy credit who are easily obtaining auto loans from used-car dealers, including some who fabricate or ignore borrowers’ abilities to repay. The loans often come with terms that take advantage of the most desperate, least financially sophisticated customers. The surge in lending and the lack of caution resemble the frenzied subprime mortgage market before its implosion set off the 2008 financial crisis.

Auto loans to people with tarnished credit have risen more than 130 percent in the five years since the immediate aftermath of the financial crisis, with roughly one in four new auto loans last year going to borrowers considered subprime — people with credit scores at or below 640.

The explosive growth is being driven by some of the same dynamics that were at work in subprime mortgages. A wave of money is pouring into subprime autos, as the high rates and steady profits of the loans attract investors. Just as Wall Street stoked the boom in mortgages, some of the nation’s biggest banks and private equity firms are feeding the growth in subprime auto loans by investing in lenders and making money available for loans.

The extra demand generated by allowing (apparently) anyone with a heartbeat to buy has supported the price of used cars, making new cars more attractive by comparison. Which in turn makes leasing seem like a good deal for all concerned:

The Mystery Behind Strong Auto “Sales”: Soaring Car Leases

(Zero Hedge) – When it comes to signs of a US “recovery” nothing has been hyped up more than US auto companies reporting improving, in fact soaring, monthly car sales. On the surface this would be great news: with an aging car fleet, US consumers are surely eager to get in the latest and greatest product offering by your favorite bailed out car maker (at least until the recall comes). The only missing link has been consumer disposable income. So with car sales through the roof, the US consumer must be alive and well, right? Wrong, because there is one problem: it is car “sales” not sales. As the chart below from Bank of America proves, virtually all the growth in the US automotive sector in recent years has been the result of a near record surge in car leasing (where as we know subprime rules, so one’s credit rating is no longer an issue) not outright buying.

From BofA:

Leasing soars: Household outlays on leasing are booming at a 20% yoy pace – a clear sign that demand for vehicles is alive and kicking. With average lease payments lower than typical monthly ownership costs and with a down-payment not typically required to enter into a lease, the surge in vehicle leasing is likely a sign that financial restraints are still holding back some would-be buyers. Thus, as the economy improves, bottled-up household demand for vehicles could translate to higher sales.

Chart 1: Households go for the low capital option: leasing soars
(yoy growth rate, inflation-adjusted)

Car leasing

It could also translate into even higher leases, which in turn bottlenecks real, actual sales.

Of course, the problem is that leasing isn’t buying at all. It is renting, usually for a period of about 3 years. Which means that at the end of said period, an avalanche of cars is returned to the dealer and thus carmaker, who then has to dump it in the market at liquidation prices, which in turn skews the ROA calculation massively. However, what it does do is give the impression that there is a surge in activity here and now… all the expense of massive inventory writedowns three years from now.

Which is precisely what will happen to all the carmakers as the leased cars come home to roost. But what CEOs know and investors prefer to forget, is that by then it will be some other management team’s problem. In the meantime, enjoy the ZIRP buying, pardon leasing, frenzy.

The above prediction is already coming true:

Falling used-car prices roil the auto market

(USA Today) – Used-car prices are sliding, a boon to penny-pinchers, but troubling for new-car sales.

The auto industry sales recovery in recent years means millions of used cars, many coming off lease, are starting to flood the market. The result is a decline in used-car prices that zoomed sky-high after the recession. And the decline is leading to talk that new-car auto sales growth may be peaking.

“We’re going to see a tremendous increase in used-car supply over the next couple of years,” says Larry Dominique, an executive vice president of auto-pricing site TrueCar.

That used-car cascade could dampen new-car sales in three ways:

•Less valuable trade-ins. Car shoppers may find their trade-ins are worth less than they expected when they go to buy new vehicles. That means they’ll have to shoulder larger new-car loans or forgo the purchases.

•More expensive leases. Lease rates for new vehicles are based on predicted resale value. As resale prices fall, automakers adjust predicted depreciation schedules and have to raise lease prices.

Wholesale prices were down 0.4% in August vs. a year ago, down 1.6% from July and “prices should continue to trend down as supply outpaces demand,” writes Tom Kontos of Adesa Analytical Services, which tracks wholesale prices for used cars, in a note to the industry.

At retail, the average used car sold at a franchised auto dealership went for $10,883 last month, down 1.6% from a year ago and 2.4% from July, says CNW Research.

So falling used car prices will lead to massive write-downs by the auto companies now being forced to take back all those leased vehicles. Which means the currently rosy earnings projections for GM, Ford and the other automakers playing these games are wildly overoptimistic and will have to be scaled back in an, um, unruly fashion during the next couple of years.

This sudden unpleasant surprise will come just as the Fed has ended its last round of debt monetization and is hoping that the economy economy will be able to grow without help. But housing, the main linchpin of the consumer economy, is already flatlining in much of the country (see Why Isn’t Housing a Bubble?). Add the auto industry to the negative column and there won’t be many bright spots by the end of 2015. And the Fed, no matter what it says today, will have no choice but to open the spigot once more.


Visit John's Dollar Collapse blog here >

Picture from WikiImages via Pixabay

Gross To Janus – Wait, What?!?!

Gross To Janus – Wait, What?!?!

Courtesy of Michael Taylor of Bankers Anonymous

one does not simply

This makes zero sense.

PIMCO founder Bill Gross will join Janus Funds? 

If you founded and built the largest bond fund company in the world,

If your name is synonymous with that company,

If you are the rockstariest rockstar of bond managers (if such a thing can exist),

Why would you ever quit that firm and join someone else’s mutual fund company?

Lots of people leave their jobs all the time, and especially talented and notable people can demand great terms from a new employer by leaving their old employer.

But Gross is not an employee of PIMCO. He’s the founder, the brand, the face of PIMCO.

One does not simply found the largest bond fund in the world, and then turn around and join Janus Funds.

This would be like George Washington stepping down from being the first President of the United States mid-term to become Secretary of Transportation for British Guiana.

This would be like Steve Jobs quitting Apple in 2011 abruptly to take over the accounts receivable department at Nokia.

This would be like Howard Shultz quitting Starbucks to become Northwest regional sales manager for Dunkin’ Donuts.

This would be like Michael Jordan quitting basketball at the height of his talents to play minor league baseball. Well, that actually happened. But it was insane.

Short of temporary insanity in Gross, or a legal investigation of PIMCO, this does not compute.

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PIMCO About to Fire Gross for “Erratic Behavior”; Janus Picks up Gross, Shares Jump 40%

Courtesy of Mish.

Global macro news this is not, but here's an interesting story.

Bond Guru and PIMCO co-founder Bill Gross Was Going to Be Fired for ‘Erratic Behavior,’ Says CNBC.

Barron's reports Gross Leaves Pimco for Janus; Knew He Was Being Shown the Door.

CNBC’s Andrew Ross Sorkin said on air ago the fund world was experiencing “shock and surprise” at Gross’s move, which was highly unexpected to most.

Dow Jones is running headlines that “Gross’s move pre-empted his dismissal,” citing an unnamed source.

Sorkin’s colleagues Jim Cramer and David Faber joked on the channel about how Gross will be giving up the trillions of fixed income investments he controlled at Pimco Total Return for a mere $12 billion or so invested by Janus in fixed income.

Sorkin reported that one factor may have been that Janus’s CEO, Richard Weil, used to be COO of Pimco, and that he left on a not-so-happy note from Pimco, which may mean there’s something personal for him in luring away Gross.

Gross is quoted as saying “I look forward to returning my full focus to the fixed income markets and investing, giving up many of the complexities that go with managing a large, complicated organization.”

Janus Intraday

Shares of Janus (JNS) soared from 11 to as high as 15.58 on the announcement. That's a 41.68% move. How much of that gain holds remains to be seen. Janus is currently up about 31.50%.

Anyone pick up any cheap options yesterday?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 


Visit Mish here for more > 

3 Things Worth Thinking About

Courtesy of Lance Roberts of STA Wealth Management

No Bubble Here

Yesterday, I reviewed some the longer term macro trends of the markets noting some deterioration that should give rise to some concern. However, the bullish trends currently remain intact which suggests that portfolios remain more heavily tilted towards equity exposure for the time being.

Shortly after posting my analysis, I received an email of the following chart with a title that simply stated: “I do not know why anyone is talking about bubbles…”

Nasdaq-Biotech-NoBubble-092514

There are a couple of important points to consider:

First, a quick scan of the entire biotech sector gives me 262 companies with a total outstanding share float of 15.8 billion shares. The average daily trading volume of all of these companies combined is just a bit more than 190 million shares a day. Consequently, if a major correction begins and sellers emerge, more than 50% of all shares are owned by institutions, it will take approximately 83 days to clear all of the outstanding shares.

In other words, the “meltdown” in the biotech sector could be extremely large given the current “parabolic” extremes that exist.

Secondly, is the ongoing bullish spin that the current market is in no way similar to (insert previous crash year here.) This is something that I have addressed in the past stating:

“This ‘time IS different’ only from the standpoint that the variables are not exactly the same as they have been previously. Of course, they never are, and the result will be ‘…the same as it ever was.’”

It is true that valuations for the broad markets are not as high as they were in 2000 or 2007, but they are pushing overvalued territory.

What is clear is that the stage is set for a major market reversion that will most likely coincide with the next economic recession. The question that we must answer is “when will it occur and what will be the trigger?” Unfortunately, we will only know those answers in hindsight.

For the majority of investors who have a fairly short time horizon to retirement, it is naïve to think that a “buy and hold” passive approach to portfolio management will serve you well. The risks are clearly rising and simply ignoring those risks will not make the result any less painful.

Everyone Is A Genius In A Fed-Induced Stock Rally

That last point brings me to Michael Sincere’s always brilliant work wherein he states:

“At market tops, it is common to see what I call the “high-five effect” — that is, investors giving high-fives to each other because they are making so much paper money. It is happening now. I am also suspicious when amateurs come out of the woodwork to insult other investors."

Michael’s point is very apropos. When markets go into a relentless rise investors begin to feel “bullet proof” as investment success breeds confidence.

The reality is that strongly rising asset prices, particularly when driven by artificial stimulus, will “hide” investment mistakes in the short term. Poor, or deteriorating, fundamentals, excessive valuations and/or rising credit risk is often ignored as prices rise. Unfortunately, it is only after the damage is done that the realization of those “risks” occurs.

As Michael states:

“Most investors believe the Fed will protect their investments from any and all harm, but that cannot go on forever. When the Fed attempts to extricate itself from the market one day, that is when the music stops, and the blame game begins.”

In the end, it is crucially important to understand that markets run in full cycles (up and down). While the bullish “up” cycle last twice as long as the bearish “down” cycle, the damage to investors is not a result of lagging markets as they rise, but in capturing the inevitable reversion. This is something I discussed in “Bulls And Bears Are Both Broken Clocks:”

“In the end, it does not matter IF you are ‘bullish’ or ‘bearish.’  The reality is that both ‘bulls’ and ‘bears’ are owned by the ‘broken clock’ syndrome during the full-market cycle. However, what is grossly important in achieving long-term investment success is not necessarily being ‘right’ during the first half of the cycle, but by not being ‘wrong’ during the second half.”

The markets are indeed in a liquidity-driven up cycle currently. With margin debt near peaks, stock prices in a near vertical rise and “junk bond yields” near record lows, the bullish media continues to suggest there is no reason for concern.  

 SP500-MarginDebt-Yields-092514

However, as the support of liquidity is being extracted by the Federal Reserve, they are simultaneously getting closer to tightening monetary policy by raising interest rates. Those combined actions have NEVER been good for asset prices over the long term.

Housing Sales Closely Tied To Mortgage Rates

There was quite a bit of “hoopla” yesterday over the rise in new home sales as a sign that “economic recovery” was still intact. However, it is important to remember that people buy “payments” rather than “houses” and as a consequence the direction of interest rates has much to with the demand to buy new or existing homes.

First, let me provide just a brief bit of context about yesterday’s data point on “new home” sales. The headline release of 504,000 new one-family homes sold is a bit misleading as it is an annualized number. In actuality, it was just 41,000 which isn’t nearly as exciting of a number. More importantly, let’s put this number into some context to history.

Homes-New-092514

The number of new homes sold is currently at levels that have historical been near recessionary lows, not six years into the economic recovery. This is particularly disappointing when you consider the billions of dollars thrown at housing through HAMP, HARP and other bailout initiatives.

With that context in place let’s take a look at the recent surge in new home sales with respect to the level of mortgage rates.

Housing-Activity-MortgageRates-092514

As you can see when interest rates have moved up, the demand for “buying” has quickly evaporated for a couple of reasons.

  1. Psychology – buyers have been trained that abnormally low-interest rates are now the norm so if mortgage rates rise much above 4% they pull back on purchases to await a lower interest rate.
  1. Ability – as stated above buyers are very sensitive to the level of payment. If rates rise, so do their monthly obligations which impair the ability to “afford” the payment. This is why subprime auto loans are now back to 2006 levels as buyers can only afford cars that are stretched out to more than 70 months.

The recent decline in mortgage rates “sucked” buyers off of the sidelines to purchase a home. However, as I discussed at length in “Bulls Should Hope Rates do not Rise” the impact of the Federal Reserve hiking interest rates could have an exceptionally quick negative impact on economic growth.

The is little argument that the current trends could last longer than reasonably believed, which is why we currently remain invested in the markets. However, it is inevitable that things will change. The problem for most is that by they time they recognize that the underlying dynamics have changed it will be too late to be proactive, only reactive. This is where the real damage occurs as emotional behaviors dominate logical processes.

How Goldman Controls The New York Fed: 47.5 Hours Of “The Secret Goldman Sachs Tapes” Explain

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

When nearly a year ago we reported about the case of "Goldman whistleblower" at the NY Fed, Carmen Segarra, who alleged she was wrongfully terminated after she flagged "numerous conflicts of interest and breaches of client ethics [involving Goldman] that she believed warranted a downgrade of Goldman's regulatory rating" and which were ignored due to the intimate, and extensively documented on these pages, proximity between Goldman and either one-time NY Fed Chairman and former Goldman director Stephen Friedman or current NY Fed president and former Goldman employee Bill Dudley, we said:

as everyone knows, both Bill Dudley and Stephen Friedman used to be at Goldman, and as we noted Dudley and Goldman chief economist Jan Hatzius periodically did and still meet to discuss "events" at the Pound and Pense. 

So while her allegations may be non-definitive, and her wrongfful termination suit is ultimately dropped, there is hope this opens up an inquiry into the close relationship between Goldman and the NY Fed. Alas, since the judicial branch is also under the control of the two abovementioned entities, we very much doubt it.

There was hope, but as we said: we doubted it would lead to much more. It didn't: in April, the NY Fed won the dismissal of her lawsuit:

U.S. District Judge Ronnie Abrams in Manhattan ruled that the failure by the former examiner, Carmen Segarra, to connect her disclosure of Goldman's alleged violations to her May 2012 firing was "fatal" to her whistleblower lawsuit. Abrams also said Segarra could not file an amended lawsuit.

"Congress sought to protect employees of banking agencies … who adequately allege that they have suffered retaliation for providing information regarding a possible violation of a 'law or regulation,'" the judge wrote. "Plaintiff has not done so."

Segarra's findings that Goldman's conflict-of-interest practices may have violated merely an "advisory letter" that did not carry the force of law did not entitle her to whistleblower protection under the Federal Deposit Insurance Act, Abrams said.

The fact that the judge on the case was conflicted, and had a close relationship to Goldman which was represented by her husband also a lawyer, clearly was "irrelevant":

In her ruling on Wednesday, Abrams also rejected a move by Stengle for greater disclosure by the judge about her husband's relationship with Goldman Sachs. Abrams disclosed on April 3 that she had just learned that her husband, Greg Andres, a partner at Davis Polk & Wardwell, was representing Goldman in an advisory capacity.

Stengle said at the time she would not seek Abrams' recusal, the judge said, and went ahead the next day with scheduled oral arguments on the defendants' bid to dismiss the case.

But on April 11, Stengle made a written request for a "more complete disclosure" of Andres' relationship with Goldman, and Abrams' own working relationship with another defense lawyer.

Abrams said that was too late, given that Segarra by then would have had a chance to "sample the temper of the court" and perhaps anticipate she would lose unless Abrams recused herself. "The timing of plaintiff's requests suggests that she is engaging in precisely the type of 'judge-shopping' the 2nd Circuit has cautioned against," Abrams wrote, referring to the federal appeals court in New York. "Such an attempt to engage in judicial game-playing strikes at the core of our legal system."

One has to either laugh, or weep, because that statement alone merely confirmed what we said a year ago when we said that "the judicial branch is also under the control of the two abovementioned entities", namely the NY Fed and Goldman.

In any event, the Segarra case disappeared from the public eye, and was promptly forgotten by the just as corrupted media and the public.

At least until this morning, when ProPublica's Jake Bernstein revealed something quite stunning: "Segarra had made 46 hours of secret audio recordings to bolster her case about what was happening at Goldman and with her bosses.

In a partnership with This American Life, Bernstein dissects the tapes, which portray a New York Fed that is at times reluctant to push hard against Goldman and struggling to define its authority. For example, in a meeting recorded the week before she was fired, Segarra's boss asks her at least seven times to change her finding that Goldman was missing a policy to handle conflicts of interest, saying,  "Why do you have to do this?"

The full ProPublica story can be found here.

And for those who are time-constrained, and would rather just read the Cliff Notes (the ending should be known to everyone by now), here is Michael Lewis with an op-ed in Bloomberg summarizing the banker-controlled farce the entire US system has devolved to:

"The Secret Goldman Sachs Tapes"

Probably most people would agree that the people paid by the U.S. government to regulate Wall Street have had their difficulties. Most people would probably also agree on two reasons those difficulties seem only to be growing: an ever-more complex financial system that regulators must have explained to them by the financiers who create it, and the ever-more common practice among regulators of leaving their government jobs for much higher paying jobs at the very banks they were once meant to regulate. Wall Street's regulators are people who are paid by Wall Street to accept Wall Street's explanations of itself, and who have little ability to defend themselves from those explanations.

Our financial regulatory system is obviously dysfunctional. But because the subject is so tedious, and the details so complicated, the public doesn't pay it much attention.

That may very well change today, for today — Friday, Sept. 26 — the radio program "This American Life" will air a jaw-dropping story about Wall Street regulation, and the public will have no trouble at all understanding it.

The reporter, Jake Bernstein, has obtained 47½ hours of tape recordings, made secretly by a Federal Reserve employee, of conversations within the Fed, and between the Fed and Goldman Sachs. The Ray Rice video for the financial sector has arrived.

First, a bit of background — which you might get equally well from today's broadcast. After the 2008 financial crisis, the New York Fed, now the chief U.S. bank regulator, commissioned a study of itself. This study, which the Fed also intended to keep to itself, set out to understand why the Fed hadn't spotted the insane and destructive behavior inside the big banks, and stopped it before it got out of control. The "discussion draft" of the Fed's internal study, led by a Columbia Business School professor and former banker named David Beim, was sent to the Fed on Aug. 18, 2009.

It's an extraordinary document. There is not space here to do it justice, but the gist is this: The Fed failed to regulate the banks because it did not encourage its employees to ask questions, to speak their minds or to point out problems.

Just the opposite: The Fed encourages its employees to keep their heads down, to obey their managers and to appease the banks. That is, bank regulators failed to do their jobs properly not because they lacked the tools but because they were discouraged from using them.

The report quotes Fed employees saying things like, "until I know what my boss thinks I don't want to tell you," and "no one feels individually accountable for financial crisis mistakes because management is through consensus." Beim was himself surprised that what he thought was going to be an investigation of financial failure was actually a story of cultural failure.

Any Fed manager who read the Beim report, and who wanted to fix his institution, or merely cover his ass, would instantly have set out to hire strong-willed, independent-minded people who were willing to speak their minds, and set them loose on our financial sector. The Fed does not appear to have done this, at least not intentionally. But in late 2011, as those managers staffed up to take on the greater bank regulatory role given to them by the Dodd-Frank legislation, they hired a bunch of new people and one of them was a strong-willed, independent-minded woman named Carmen Segarra.

I've never met Segarra, but she comes across on the broadcast as a likable combination of good-humored and principled. "This American Life" also interviewed people who had worked with her, before she arrived at the Fed, who describe her as smart and occasionally blunt, but never unprofessional. She is obviously bright and inquisitive: speaks four languages, holds degrees from Harvard, Cornell and Columbia. She is also obviously knowledgeable: Before going to work at the Fed, she worked directly, and successfully, for the legal and compliance departments of big banks. She went to work for the Fed after the financial crisis, she says, only because she thought she had the ability to help the Fed to fix the system.

In early 2012, Segarra was assigned to regulate Goldman Sachs, and so was installed inside Goldman. (The people who regulate banks for the Fed are physically stationed inside the banks.)

The job right from the start seems to have been different from what she had imagined: In meetings, Fed employees would defer to the Goldman people; if one of the Goldman people said something revealing or even alarming, the other Fed employees in the meeting would either ignore or downplay it. For instance, in one meeting a Goldman employee expressed the view that "once clients are wealthy enough certain consumer laws don't apply to them." After that meeting, Segarra turned to a fellow Fed regulator and said how surprised she was by that statement — to which the regulator replied, "You didn't hear that."

This sort of thing occurred often enough — Fed regulators denying what had been said in meetings, Fed managers asking her to alter minutes of meetings after the fact — that Segarra decided she needed to record what actually had been said. So she went to the Spy Store and bought a tiny tape recorder, then began to record her meetings at Goldman Sachs, until she was fired.

(How Segarra got herself fired by the Fed is interesting. In 2012, Goldman was rebuked by a Delaware judge for its behavior during a corporate acquisition. Goldman had advised one energy company, El Paso Corp., as it sold itself to another energy company, Kinder Morgan, in which Goldman actually owned a $4 billion stake, and a Goldman banker had a big personal investment. The incident forced the Fed to ask Goldman to see its conflict of interest policy. It turned out that Goldman had no conflict of interest policy — but when Segarra insisted on saying as much in her report, her bosses tried to get her to change her report. Under pressure, she finally agreed to change the language in her report, but she couldn't resist telling her boss that she wouldn't be changing her mind. Shortly after that encounter, she was fired.)

I don't want to spoil the revelations of "This American Life": It's far better to hear the actual sounds on the radio, as so much of the meaning of the piece is in the tones of the voices — and, especially, in the breathtaking wussiness of the people at the Fed charged with regulating Goldman Sachs. But once you have listened to it — as when you were faced with the newly unignorable truth of what actually happened to that NFL running back's fiancee in that elevator — consider the following:

1. You sort of knew that the regulators were more or less controlled by the banks. Now you know.

2. The only reason you know is that one woman, Carmen Segarra, has been brave enough to fight the system. She has paid a great price to inform us all of the obvious. She has lost her job, undermined her career, and will no doubt also endure a lifetime of lawsuits and slander.

So what are you going to do about it? At this moment the Fed is probably telling itself that, like the financial crisis, this, too, will blow over. It shouldn't.