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Wednesday, November 26, 2014

David Stockman on the Credit Bubble: About as clear as you can get:

David, can you explain how the ‘Fed put’ works on the stock markets and bond markets? How exactly does it translate into artificially higher stock prices and lower interest rates?

The Fed injects massive amounts of liquidity into Wall Street through the dealer system – that is, the 21 authorized treasury-bond dealers. The liquidity comes in the form of new credits to their bank accounts supplied by the Fed in return for the governments bonds, notes and bills, and even the GSE (Government-sponsored entity) obligations that it buys from them. The credit that the Fed supplies to the dealers is manufactured out of thin air; therefore it expands total credits and liquidity in the system. The dealers use it to buy other types of securities – stocks, bonds, derivatives positions and so forth.
Historically, the purpose of the Fed’s open-market intervention in this form was to encourage the banking system to extend credit to the business and household sectors, thereby stimulating economic growth, as predicated by the Keynesian model. That was always a one-time parlor trick, however, because with each cycle of easing leverage ratios in the business and household sectors were ratcheted steadily higher. Household debt ratios, for example, went from 80 percent of wage and salary income prior to 1975 to 220 percent by 2007.
The problem today is that we have reached ‘peak debt.’ The household sector has $13.3 trillion of debts1, even after the modest post- crisis deleveraging; the ratio is still sky-high at 180 percent of wage and salary income.
Consequently, the household sector has been unable to borrow more money, no matter how much credit the Fed has injected through the dealers. That’s very different from where this whole Keynesian financial bubble started 40 years ago when we had, more or less, clean household balance sheets.
Underlying this domestic debt spree is the crucial fact that Nixon fundamentally changed the monetary rĂ©gime in 1971; he closed the gold window, letting the Fed operate in an unfettered way. Household credit began to rise inexorably with each of the Fed’s easing cycles, until it reached the 2007 peak.
Stockman Graph
Today, money printing is not working in the traditional sense. It is not stimulating additional credit, spending, or ratcheting up the borrowing of the household sector because we have reached a condition of “peak debt”. In essence, the credit channel is now clogged and broken. Accordingly, the Fed’s injections of liquidity never leave the ‘canyons of Wall Street,’ to use a metaphor. Instead, it has essentially fuelled more carry trades and speculative buying of financial assets – stocks, bonds, derivatives, commodity futures, and so forth.
That creates overvaluations and financial bubbles that eventually break and smash the entire mainstream economy in the process. We have seen it two times now during this century alone; we are on the verge of seeing it a third.
The most dangerous element in our economy is the Fed, which I call a rogue central bank. It’s following a Keynesian model that was never valid but that now is not effective at all. It simply fuels enormous financial bubbles that are ultimately destructive in the long run when they burst. In the short-run, they lead to massive windfall gains for speculators and the ‘1 percent,’ undermining public perception of what capitalism is all about.

Monday, November 17, 2014

Christopher Foley Collection at Woolley and Wallis Auctions

The recent auction of British Historical Medals included some of the most amazing portrait medals ever engraved.  This portrait medal of Queen Elizabeth I, by Simon De Passe, is surely one of the most remarkable works of art of the early 17th Century.  It is one of eleven specimens known in silver and it hammered at $27000 including hammer fee.  

Compare this to the price of a nice but crude Elizabeth gold Pound, of which hundreds exist, and you get the idea of the value represented by this gem:

The process of engraving employed that yielded the near-photographic image (Two centuries before the invention of the camera)  is a mystery to this day.

A specimen in gold was presented to Queen Elizabeth II. The "Armada" dress was that worn to the service of Thanksgiving at St. Paul's Cathedral. Simon de Passe (c. 1574-c.1644), the youngest son of Crispin Passe, an eminent artist from Utrecht, who taught him the art of engraving. He came to England in about 1613, living here some 10 years mostly in the employment of Nicholas Hillard to engrave counters of the Royal Family of England. He later moved to the service of the King of Denmark.

Other portraits included James I ($14000) and James with Queen Anne and Prince Charles, of which nine examples are known ($28,000)

Many other rare and exceptional medals were sold at this small regional British Auction.  I would venture to guess that the prices paid for these under-appreciated numismatic gems will appear to be genuine bargains in years to come.

Compare the Elizbeth medal to the price of a nice but crude Elizabeth gold Pound, of which hundreds exist, and you get the idea of the value represented by this gem.


Saturday, November 15, 2014

The Sheik is dead.... Long live the Sheik

Qatar's Sheikh Saud Died of Complications Related to Heart Condition

Sheikh Saud Al-Thani, 2002 Photo: B. Pietro Filardo via Wikimedia Commons
Sheikh Saud Al-Thani, 2002
Photo: B. Pietro Filardo via Wikimedia Commons
Sheikh Saud bin Mohammed Al-Thani of Qatar, once considered the world's biggest art collector, who died on November 9 (see "World's Biggest Art Collector Sheikh Saud bin Mohammed Al-Thani Dies at Age 48"), died of complications related to a heart condition, artnet News has learned from a source with connections to the Qatar Museums Authority. Sheikh Saud was reportedly in London for treatment but died before his scheduled procedure. The Qatar Museums Authority was not immediately available for comment but has maintained that Sheikh Saud died of natural causes since the news of his passing broke on Monday.

"The Sheik" as he had been referred to in coin circles, shook up the world of Ancients back in 2012 when he sent prices skyward for top material, routinely paying hundreds of thousand for coins that had previously sold for a fraction of the price.   At times, after ringing up bills into the millions, he took possession of merchandise, and then was slow to pay.  All this was settled to the seeming satisfaction of both the sheik and the auction houses earlier this year and he had begun to buy again, before dying from heart complications.

But what the Sheik proved beyond contradiction was that top material in the ancient coin world is thin enough that one single buyer with both motivation and means is able to move prices dramatically.  In a world now dominated by billionaires, it's only a matter of time until the Sheik is replaced by another similarly motivated plutarch - or an entire coterie of plutarchs, and prices for top material will be moved out of the range of ordinary collectors.

Thursday, November 13, 2014

"free" markets aren't so free:

In ‘Cartell’ Chat Room Traders Boasted of Whacking FX Market (1)
2014-11-13 11:40:28.503 GMT

By Gavin Finch and Liam Vaughan
Nov. 13 (Bloomberg) -- In an early morning chat, three
senior currency traders at some of the world’s biggest banks
weighed the pros and cons of admitting a fourth member to their
private instant-message group.
The traders -- from Citigroup Inc., JPMorgan Chase & Co.
and UBS AG -- had worked together for years to manipulate the
$5.3 trillion-a-day currency market by sharing details of client
orders and coordinating trading strategies, two people with
knowledge of a global investigation into the foreign-exchange
market said last year. While adding a new recruit would bolster
their strength, they worried he couldn’t be trusted to put the
group’s interests ahead of his firm’s.
“Will he tell the rest of desk stuff,” Richard Usher,
JPMorgan’s chief London-based dealer, wrote in the chat
published yesterday by the U.S. Commodity Futures Trading
Commission. “Or god forbid his nyk,” he said, referring to the
New York trading desk.
“That’s the really imp[ortant] q[uestion],” replied
Citigroup’s London-based head of European spot trading, Rohan
Ramchandani. “Don’t want other numpty’s to know. Is he gonna
protect us like we protect each other.”
The undated conversation and hundreds of others form the
bedrock of investigations that yesterday saw regulators penalize
six banks, including Citigroup, JPMorgan and UBS, a record $4.3
billion for rigging foreign-exchange benchmarks. The transcripts
show traders boasting about “whacking” and “double teaming”
the market and congratulating one another when plans paid off.
The fines are the first wave of sanctions against banks and
could be followed by criminal charges.

Core Attack

“It was an attack at the core of what the markets are
about,” John McFall, a Labour member of the U.K. House of
Lords, said today. “It should be about transparency and serving
the public, and on both of those grounds it was rigged. You’re
talking about culture and change. It shows we haven’t seen that
The three traders at Citigroup, JPMorgan and UBS eventually
agreed to let the newcomer join because he would “add huge
value to this cartell,” one wrote. He was admitted for a month-
long trial and told “mess this up and sleep with one eye open
at night.”
While Usher and Ramchandani weren’t named in the document
released by the CFTC, their identities were confirmed by two
people with knowledge of the probes who asked not to be named
because some details of the settlement remain private. The other
traders couldn’t be identified. Ramchandani, who was fired by
Citigroup earlier this year, and Usher, who left JPMorgan after
being put on leave in 2013, declined to comment. They haven’t
been accused of wrongdoing by authorities.

3 Musketeers

The traders, and others at banks including HSBC Holdings
Plc and Royal Bank of Scotland Group Plc, would congregate in
chat rooms an hour or so before benchmark rates are set to
discuss their aggregate trading positions and how to execute
them to their mutual benefit, according to statements and
transcripts released yesterday by U.S., U.K. and Swiss
regulators. The groups dubbed themselves “the 3 musketeers,”
“1 team, 1 dream” and “the A-team,” Britain’s Financial
Conduct Authority said.
“The trader at the center of this investigation, very
disappointing behavior, very serious on his part,” JPMorgan’s
commercial bank chief Doug Petno said at a conference in New
York yesterday hosted by Bank of America Corp. “It’s a reminder
that the behaviors of a single individual define a company and
so it’s something that we’re super focused on as a business.”

‘The Oxygen’

A lawyer for Usher didn’t immediately respond to an e-mail
seeking comment on Petno’s remarks.
The fines arose from traders’ attempts to manipulate the
WM/Reuters currency benchmark, which is used to determine the
value of $3.6 trillion in index tracker funds around the world.
The rate, known as the fix, is set for more than 130 currencies
by taking a snapshot of trades in the 30 seconds before and
after 4 p.m. in London.
“Foreign exchange is the oxygen for international trade,”
Bill Michael, head of Europe, Middle East and Africa financial
services for KPMG LLP in London, said today. It’s “a betrayal
of the notion that banks will act in the best interest of the
From at least January 2008 through early 2012 traders
adopted an array of strategies to maximize their profits at the
fix, regulators said. If one of them had orders that ran counter
to the rest of the group, he would attempt to offload his
position with an unsuspecting counterpart at another bank to
avoid clashing with co-conspirators.

Traders’ ‘Ammo’

If the traders all had orders in the same direction, they
would seek to turbocharge any price moves. In the minutes before
the fix, they would attempt to sniff out any banks with large
orders in the other direction and trade with them in advance, a
process known in the market as “taking out the filth.” At
other times they would trade with third parties outside the chat
room with the intention of giving them orders in the same
direction to execute at the fix.
Sometimes they would transfer their orders, known as
“ammo,” in a particular currency pair to one trader, or divvy
up the orders between two traders who worked together to
maximize their impact on the fix, regulators said.
After establishing that they both had a lot of euros to
sell in exchange for dollars at the fix one day, Usher and
Ramchandani agreed to join forces, according to a transcript
published by the CFTC without a date. Usher, a former RBS
trader, was the moderator of the chat room known as “The
Cartel,” people with knowledge of the matter said in December.
Ramchandani joined Citigroup’s trading desk after graduating
from the University of Pennsylvania with a degree in economics.

‘Double Team’

“Tell you what, lets double team it. How much you got,”
Usher asked about eight minutes before that day’s fix.
“ok. 300. U?” his counterpart at Citigroup replied. “ok
ill give you 500 more,” said Usher.
Even colluding with one another was no guarantee traders
would succeed in moving the rate. The market moved against
Ramchandani and Usher that day, and they lost money, according
to the transcript. On other occasions they boasted of making
hundreds of thousands of dollars on a trade.
“The traders put their own interest ahead of their
customers, they manipulated the market -- or attempted to
manipulate the market -- and abused the trust of the public,”
FCA CEO Martin Wheatley told reporters at a briefing in London
yesterday, without identifying which traders he was talking
about. The regulator will press firms to review their bonus
plans and claw back payments already made.
The fines were the largest the British regulator has
imposed and mark the first time it has entered into a group bank

‘Murkier Side’

Some foreign-exchange traders became concerned that their
own communications could be problematic as their banks prepared
to settle with regulators over allegations of rigging another
benchmark, the London interbank offered rate, in 2012. In March
of that year, an unidentified JPMorgan trader asked the bank’s
compliance team what procedures they had in place about sharing
information in chat rooms with traders at other firms ahead of
the fix, the FCA’s settlement with the bank shows.
That same month Niall O’Riordan, UBS’s co-chief currency
dealer, called Bank of England official Martin Mallett to
discuss how banks communicated ahead of the fix to seek his
advice about whether the chats would raise concerns by
regulators, according to a report released yesterday by the
central bank. Mallett described the practices as “the murkier
side of our business” and raised the issue at a meeting of
senior foreign-exchange dealers in April 2012.
Mallett was dismissed Nov. 11 for “failure to adhere to
the bank’s internal policies,” not as a result of the
investigation, the BOE said.

Citigroup Fine

Citigroup, the world’s top currency dealer, was ordered to
pay the biggest fine at about $1.02 billion, according to
statements from the CFTC, FCA, the Swiss Financial Market
Supervisory Authority and the Office of Comptroller of the
Currency. JPMorgan will pay $1.01 billion, followed by UBS with
$800 million.
RBS was fined about $634 million, HSBC $618 million and
Bank of America $250 million. Barclays Plc, which had been
in settlement talks, said it wasn’t ready for a deal.
More than 30 dealers have been fired, suspended, put on
leave or resigned since the probes began last year. Banks are
overhauling how they trade currencies to regain the trust of
customers. They have capped what employees can charge for
exchanging currencies, limited dealers’ access to information
about customer orders and banned the use of online chat rooms,
people familiar with the moves said in September.
Despite the impact their behavior had on the value of
trillions of dollars of investments around the world, the
traders regularly congratulated each other for successfully
manipulating the market.
“Well done gents,” said one trader after one day’s fix,
according to the CFTC settlement document.
“Hooray nice team work,” a trader at another bank

Wednesday, November 5, 2014

The elections and gold: The inevitable

With the advent of the new Republican Government the markets and the dollar are rallying.  This will be interpreted by most as a sign that the US economy loves the idea of conservative fiscal governance.

Nothing could be farther than the truth.  First, the Republicans have never been fiscally conservative.  But, more important, what the markets really love  is Gridlock.  Gridlock means No Oversight.  No Oversight means Massive Leverage.  Massive Leverage in a financial sector that has never bothered to de-lever after the last crisis means Massive Asset Bubbles - especially in  the stock market and the dollar - and real estate.

Massive Asset Bubbles will be interpreted as Prosperity due to US Financial Genius.

It will last about a year.  During this time Gold will suffer, Savers will suffer, the middle class will begin to crater under the pressure of the costs generated by the asset bubbles.  Education, Health Care, food, rents will all soar even as the CPI and salaries remain dormant.

As long as the Asset Bubbles remain a one way bet everything is fine.  The moment one of the markets turns - everyone who is levered and betting the same way will race to unwind their massively levered bets - all at once.

Then the massive Web of Asset Bubbles will deflate.

And the entire edifice will look just like 2008 - only with many times the leverage.

Then we'll really see what de-levering looks like.

On a scale never before seen.

And then gold - and all other hard assets with intrinsic value will be the only things that retain their value.

Not Again! US Trained Syrian “Moderates” Surrender To Jihadists—–Hand Over Heavy Weapons

By  at The Guardian 

Two of the main rebel groups receiving weapons from the United States to fight both the regime and jihadist groups in Syria have surrendered to al-Qaeda.

The US and its allies were relying on Harakat Hazm and the Syrian Revolutionary Front to become part of a ground force that would attack the Islamic State of Iraq and the Levant (Isil).
For the last six months the Hazm movement, and the SRF through them, had been receiving heavy weapons from the US-led coalition, including GRAD rockets and TOW anti-tank missiles.
But on Saturday night Harakat Hazm surrendered military bases and weapons supplies to Jabhat al-Nusra, when the al-Qaeda affiliate in Syria stormed villages they controlled in northern Idlib province.

The development came a day after Jabhat al-Nusra dealt a final blow to the SRF, storming and capturing Deir Sinbal, home town of the group’s leader Jamal Marouf.
The attack caused the group, which had already lost its territory in Hama to al-Qaeda, to surrender.
“As a movement, the SRF is effectively finished,” said Aymen al-Tammimi, a Syria analyst. “Nusra has driven them out of their strongholds of Idlib and Hama.”

The collapse of the SRF and attacks on Harakat Hazm have dramatically weakened the presence of moderate rebel fighting groups in Syria, which, after almost four years of conflict is increasingly becoming a battle ground between the Syrian regime and jihadist organisations.
For the United States, the weapons they supplied falling into the hands of al-Qaeda is a realisation of a nightmare.

It was not immediately clear if American TOW missiles were among the stockpile surrendered to Jabhat al-Nusra on Saturday. However several Jabhat al-Nusra members on Twitter announced triumphantly that they were.

Also the loss of a group that had been held up to the international media as being exemplary of Western efforts in Syria is a humiliating blow at the time that the US is increasing its military involvement in the country, with both air strikes and training of local rebels.
In Idlib, Harakat Hazm gave up their positions to Jabhat al-Nusra “without firing a shot”, according to some reports, and some of the men even defected to the jihadists.
In Aleppo, where Harakat Hazm also has a presencethe group has survived, but only by signing a ceasefire agreement with Jabhat al-Nusra, and giving up some of their checkpoints to the group.

Activists circulated the ceasefire document on social media last week.

Jabhat al-Nusra reportedly attacked the groups in part because of personal skirmishes between units, in part because of its ambition to build an Islamic emirate that rivals that of Isil, and in part because they feared that the groups’ closeness to the United States would pose a threat, analysts told The Telegraph.
Mr Tammimi said: “One of the conditions for giving Harakat Hazm weapons was that they did not work with Jabhat al-Nusra. The Western bolstering of these groups posed a threat to them.”

The United States has been extremely cautious in how it supplies weapons to Syrian rebels in the civil war.

But it is this caution that has hampered the efforts of Syria’s moderate rebels, and ultimately resulted in dominance of well-funded jihadist groups, analysts and local rebel commanders have said.
President Obama recent announced a new program, run by the US, Turkey and other allies to train and equip 5000 Syrian rebels to fight Isil.

But rigorous procedures to vet Syrian candidates for the programme mean it will be several months before military tuition can get under way, and up to one year before they have a force ready to fight the jihadists.

Last month one state department official said they would move “quickly” to initiate the program by sourcing men from groups the US already works with, including Harakat Hazm, but that it would still be three months before the programme got under way.
“We are sourcing men from brigades who we have already helped with logistical supplies. We have 16 groups so far, but that list is fluid andand it can grow,” the official said.
Now that process is likely to take even longer.

Meanwhile, a lack of weapons supplies have rendered moderate groups on the ground in Syria largely irrelevant.

Past efforts to build a fighting force on the ground who could fight the regime of President Bashar al-Assad collapsed in skirmishes between the rebels over the very limited weapons supplies.
The effort was also hampered by nations backing the opposition, including Saudi Arabia and Qatar, who would circumvent the military council established to supply arms and instead directly back the rebel groups they believed were most loyal to them, creating further divisions.
These efforts have since been revamped with new operations rooms in Turkey, to manage the north of Syria, and in Jordan, to manage rebel operations in the south including Deraa and Damascus suburbs. The operations rooms are manned by representatives from Turkey, the US, Britain, France, Saudi Arabia and the UAE, a Syrian source involved in the arms supplies told The Telegraph.
Qatar was reportedly thrown out over suggestions that it had been helping Jabhat al-Nusra, but is about to rejoin the effort.

“The operations rooms have been supplying anti-tank missiles, and individual GRAD rockets to rebel groups,” the source said. “There are 11 groups that they are helping.”

Rebel commanders apply for weapons directly to the operations rooms and state their case as to why they want the arms. “They have to apply for arms for individual missions,” the source said.
 The operations room member states then discuss the need and decide how many to give. “They never give more than six or seven anti-tank missiles in one go,” the source said.Then, if the commander wishes to continue to receive supplies, he has to return the used cartridges of the weapons to the operations room, thus proving that they used them and did not sell them on to another group.The programme has given donor countries the confidence to arm the Syrian rebels, but it has created a “rubber stamp” system that is unwieldy, and too slow to keep up with the pace of the war in Syria and the needs of the men they are backing.It has allowed better, privately, fundedjihadist groups who focus less on fighting the Syrian regime than on taking control of territory already in opposition areas to grow in power.And, in the face of infighting between rebel groups, and a weakened moderate opposition, the Syrian regime has continuedto be able to bombard territory – including civilian neighbourhoods – with impunity.Dozens of civilians were killed when regime planes bombed a refugee camp in Idlib last week.
 It also means that any fighters trained by the United States and allies to fight Isil will be battling the jihadists whilst also contending with attacks by the Syrian regime.

“How can we successfully attack Isil, when the regime is bombing our rear bases and the homes of our families at our backs?” said one Syrian rebel about to be enrolled in the training.
Mr Tammimi said of the US-led efforts in Syria: “This attempt to cultivate groups includes such a thorough vetting process that it slows down the operation. Maybe it would have worked in the Syrian war 2012. Now it really is too little, too late.”