Category Archives: Economy and Meltdown

A Whole Lotta Something Going On

Sigh… Volume is around 50% of average. USD ends the day unchanged; Treasury futures imply an unchanged cash market; Equity indices close practically unchanged but there are some odd-ones-out on the day. Utilities were sold much more heavily that the rest of the S&P sectors (with Tech the only other red sector). Copper managed an outlier gain while oil/gold/silver all dropped. Individual stocks suffered from some exchange drama but all eyes were on JCP (which potentially lost Mr. Ackman $106mm today and ended with a $17 handle (-13%) – its lowest since March 2009; AAPL slid from ‘exciting’ opening highs to close -0.75% finding every ramp to VWAP was sold into. VIX was the story of the day as much was made of the collapse in front-end risk premia – this (as we explained earlier) was only half the picture as the longer-dated VIX rose relatively as the fiscal-cliff event risk is gradually priced in at year-end. Stocks were considerably more volatile intraday than broad risk-assets (thanks to Treasuries closure) especially after Europe’s close, but they ended the day pretty much recoupled.

The ETF Capital Structure (left) statyed relatively in sync after some early exuberance in stocks faded. Broad risk assets (green – right) statyed very quiet while stock meandered around with VWAP as an anchor…


S&P futures fell into the European close, ramped to run stops off the highs then drifted back to VWAP close very modestly green on the day… with 50% less than normal volume…


Commodities were mixed…especillay interesting given USD unch


JCP had a day…-13%


Utilities were the worst on the day by a long way – followed by Tech. Healthcare won as Indusrials slipped rapidly into the close…


10Y maybe rose 1bps (given where TSY futures traded) but 30Y was unch.


and here’s VIX term structure… not so bullish eh?


which steepened the most (inverted on the chart) in 8 months in the last 3 days… back to its 100 and 200DMA…


and Options implied skewness is rising – as complaceny gradually falls from its record highs…


Charts: Bloomberg and Capital Context


Bonus Charts: It would appear the world and his mum have grabbed downside protection on AAPL… as we have ripped from record levels of implied complacency to almost record levels of concern… This chart plots the amount of expectation for a downside distrbution of returns priced into AAPL options prices. We would note that this doesn’t mean going full bullish is required as we suspect that the funds that are massively over-exposed to this monster simply overlaid risk into year-end and are (as we see in the second chart below) selling as carefully as they can into every VWAP ramp… who knows but quite a swing…


and AAPL’s inexorable VWAP-based selling pressure…

Guest Post: The Smartest Investment Of The Decade

Via Simon Black of Sovereign Man blog,

Here’s something crazy to think about.

Roughly 200,000 people were born today. That’s net world population growth, births minus deaths.

Each one of them constitutes a new mouth to feed. And when they come of age, those 200,000 people will consume, conservatively, about 1,250 Calories per day. Collectively, that’s 91.25 billion Calories per year for the entire 200,000 people that were born today.

Where will they get that food from?

Consider that a cup of rice contains about 300 Calories. An average annual rice harvest yields about 150 bushels per acre, or about 6.7 million Calories per acre of rice grown each year.

In very simple terms, it will take 13,600 acres of cultivated, producing rice land to generate the necessary Calories to feed the 200,000 people that were born today. That’s roughly the size of Manhattan.

Tomorrow, another 13,600 acres will be required to feed the people born tomorrow. And the next day. And the day after that.

This is a conservative estimate. Obviously people eat other things besides rice. Corn has an even lower caloric yield per acre. And as people move up the food chain into dairies and meats, the amount of Calories per acre takes a huge nosedive.

Across Asia in particular, hundreds of millions of people are now being lifted out of abject poverty and into the middle class. As I’ve traveled around the world to more than 100 countries, I’ve seen this with my own eyes– people having disposable income for the first time ever.

As people’s individual wealth levels increase, their dietary habits tend to change as well. Suddenly they start consuming more expensive foods… ‘luxury’ foods like beef. And by comparison, beef yields only about 1.1 million Calories per acre.

Simultaneous to the rapid increase in demand for food, the world is also experiencing a declining trend in supply. Water shortages, loss of topsoil, weather disasters, land development, and insane government policy are all contributing to tightening food supplies.

Perhaps most importantly, though, is the effect of monetary policy. Central bankers around the world continue to print more money. That’s all they know how to do, as if the path to prosperity is paved with paper currency conjured out of thin air.

All of those trillions of dollars, euros, yen, and renminbi end up somewhere… and such monetary inflation has been a huge force in driving up food prices. In fact, just over the last few years, we’ve seen record prices from corn to wheat to sugar to ground beef to milk.

Increasing demand. Tightening supply. Destructive policy. All of these point to a long-term trend in food. And the trend is enormous. The best case scenario is steep food prices. The worst case scenario is severe shortages.

This makes agriculture probably THE place to be over the next ten years, perhaps seconded only by shorting major currencies like the dollar, euro, and yen.

There are a number of ways to invest in agriculture… ETFs, futures, food production companies, agriculture equipment companies, food technology companies, etc. But in my view, there is no better way to make a long-term agricultural investment than owning high quality, productive land.

Like owning physical gold, farmland gives you not only the financial upside of rising agricultural prices, but also the personal assurance of a guaranteed food supply.

Later this week, I’d like to discuss different places in the world where it makes sense to own farmland. Some of my recommendations may surprise you.

Guest Post: Is Democracy Possible In A Corrupt Society?

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Democracy is for PR purposes only in corrupt neofeudal nations.

Correspondent Chris rightly critiqued me for not mentioning democracy (or the lack thereof) in my recent entry on China: Do We Have What It Takes To Get From Here To There? Part 2: China. It is indeed vital to include democracy in any discussion of corruption, for it raises this question: is democracy possible in a corrupt society?
We can phrase the question as a corollary: in honor of my new book Why Things Are Falling Apart and What We Can Do About It (print $24) (Kindle $7.95), let's call it WTAFA Corollary #1:

If the citizenry cannot replace a dysfunctional government and/or limit the power of the financial Aristocracy at the ballot box, the nation is a democracy in name only.

In other words, if the citizenry cannot dislodge a parasitic, predatory financial Aristocracy via elections, then "democracy" is merely a public-relations facade, a simulacra designed to create the illusion that the citizenry "have a voice" when in fact they are debt-serfs in a neofeudal State.
When the Status Quo remains the same no matter who gets elected, democracy is a sham. We might profitably look to Japan as an example of a nation which replaced its dysfunctional dominant party via elections to little effect (Do We Have What It Takes To Get From Here To There? Part 1: Japan).
We can ask this question of Greece: in a pervasively corrupt neofeudal society, is democracy even possible?
Neofeudalism is characterized by a carefully nurtured facade of social mobility and democracy while the actual machinery of governance is corrupted at every level.
This corruption may manifest as first-order daily-life corruption such as buying entry to college, bribing officials for licenses, and so on, but the truly serious corruption is the second-order variety that functions behind the closed doors of central banks and financial/political Elites.
Here in the U.S., the people elected Barack Obama in 2008 on the implicit promise that the politically dominant financial sector would be limited in some meaningful fashion. Instead, President Obama immediately nixed any meaningful reform.
The progressive case against Obama: The president is complicit in creating an increasingly unequal and unjust society.

Many will claim that Obama was stymied by a Republican Congress. But the primary policy framework Obama put in place — the bailouts –took place during the transition and the immediate months after the election, when Obama had enormous leverage over the Bush administration and then a dominant Democratic Party in Congress.In fact, during the transition itself, Bush’s Treasury Secretary Hank Paulson offered a deal to Barney Frank, to force banks to write down mortgages and stem foreclosures if Barney would speed up the release of TARP money. Paulson demanded, as a condition of the deal, that Obama sign off on it. Barney said fine, but to his surprise, the incoming president vetoed the deal.


Yup, you heard that right– the Bush administration was willing to write down mortgages in response to Democratic pressure, but it was Obama who said no, we want a foreclosure crisis. And with Neil Barofsky’s book Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street, we see why.


Tim Geithner said, in private meetings, that the foreclosure mitigation programs were not meant to mitigate foreclosures, but to spread out pain for the banks, the famous “foam the runway” comment.

Here's how a sham democracy works: candidates are duly paraded in front of credulous voters in a "which is better, Bud or Bud Lite?" false-choice marketing blitz, while all the meaningful codifying of Aristocratic rule is directed or purchased by the financial and political Aristocracy (two sides of the same coin).
Consider the actions of the Federal Reserve, the dominant financial force in the nation. Though the Fed is nominally under the control of Congress, it is actually like an iceberg: its public pronouncements are the visible 10% above water. The real mass of the Fed’s actions lie beneath the surface, invisible to us mere debt-serf citizens.
The Fed’s public mandate, to “promote stable prices, maximum sustainable output and employment,” is solid public relations, of course (we're selflessly focused on the good of the nation, blah blah blah) but it’s also deeply disingenuous, as the Fed’s less PR-pretty agenda is rather transparently to preserve the banking sector’s profits and power at all costs.
We can find clues to the Fed’s real goals in its behind-closed-doors actions–the 90% of the iceberg that’s out of public view.
On the surface, the Fed increased its balance sheet by about $2 trillion since the 2008 global financial crisis. This electronically created money purchased about $1.1 trillion in mortgage-backed securities (MBS) to support the housing market and $1 trillion in Treasury bonds to keep interest rates low. These two goals–super-low interest rates, a.k.a. zero-interest policy (ZIRP), and supporting assets such as housing and stocks–are the core strategies the Fed is publicly deploying to boost growth and employment.
Supporting the banks is not mentioned, for obvious PR reasons. Yet a Government Accountability Office (GAO) audit found the Fed provided $16.1 trillion in “emergency program” loans to global banks from 2007 to 2010, and a Levy Institute study uncovered a total of $29 trillion in Fed support–roughly ten times larger than the Fed’s public programs. (For context, the annual U.S. gross domestic product is about $15 trillion.)
This suggests we should take the Fed’s assurances that its policies are all for the public good with a grain of salt roughly the size of the Fed’s headquarters at 20th and Constitution Avenue.
Did bailing out the banks truly serve the public good, or did it stymie a much-needed capitalist “creative destruction” of failed financial institutions that have grown so powerful that they are now “too big to fail”? How exactly did enabling the banks to draw upon trillions of dollars of Fed support, safe from public scrutiny, serve the public good?
The U.S. Status Quo is also like an iceberg: the visible 10% is what we're reassured "we" control, but the 90% that is completely out of our control is what matters.
There is another dynamic in a facsimile democracy: the Tyranny of the Majority. When the Central State issues enough promises to enough people, the majority concludes that supporting the Status Quo, no matter how corrupt, venal, parasitic, unsustainable and dysfunctional it might be, is in their personal interests.
Tyranny of the Majority, Corporate Welfare and Complicity (April 9, 2010): Please read this brief excerpt by James Madison to get a flavor for the Tyranny of the Majority:

"A pure democracy can admit no cure for the mischiefs of faction. A common passion or interest will be felt by a majority, and there is nothing to check the inducements to sacrifice the weaker party. Hence it is, that democracies have ever been found incompatible with personal security or the rights of property; and have, in general, been as short in their lives as they have been violent in their deaths."

The Tyranny of the Majority is the primary topic of the Federalist Number 10, in which Madison tackles the Achilles Heel of democracy: undesirable passions can very easily spread to a majority of the people, which can then enact its will through the nominally democratic government.
Put another way: the Power Elites of a nominal democracy can buy the complicity of the majority by showering them with government benefits and entitlements.
This document from the Congressional Budget Office (CBO) displays the Effective Tax Rates (CBO) for American households.
After including earned-income tax credits, the bottom 60% of households paid less than 1% of all Federal income taxes, and the households between 60% and 80% paid 13%.
The top 20% paid 68.7% of all Federal taxes: Income taxes, Social Security and Medicare, excise and corporate taxes. The top 10% of households paid fully 72.7% of all Federal income tax, the top 5% paid 60.7%, and the top 1% paid 38.8%.
In essence, this is a vote-buying scheme by the Status Quo: the top 1% control the policies of the State in alliance with the State's own Elites, and together they buy the complicity of the bottom 60% majority.
This is the worst of all possible simulacra of democracy. In the Wikipedia entry linked above, Mancur Olson is cited as arguing in The Logic of Collective Action that narrow, well-organized minorities are more likely to assert their interests over those of the majority.
In other words, the Financial Aristocracy asserts its interests over the 99% and then buys the complicity of the bottom 60% with largesse paid for by the top 19% of earners.
In Who Rules America?, Sociologist G. William Dumhoff draws an important distinction between the net worth held by households in "marketable assets" such as homes and vehicles and "financial wealth." Homes and other tangible assets are, in Dumhoff's words, "not as readily converted into cash and are more valuable to their owners for use purposes than they are for resale."
Financial wealth such as stocks, bonds and other securities are liquid and therefore easily converted to cash; these assets are what Dumhoff describes as "non-home wealth" on his website "Wealth, Income, and Power in America."
As of 2007, the bottom 80% of American households held a mere 7% of these financial assets, while the top 1% held 42.7% and the top 20% held fully 93%.
In a classic "divide and conquer" tactic, the State's Power Elites have sold a slew of new taxes to fund the guaranteed-to-implode "healthcare reform" (a.k.a. increased funding of sickcare cartels) on those earning $250,000 or more.
Everyone earning 25% of that sum loudly applauds "sticking it to the rich" (the Tyranny of the Majority in full flower) while failing to note that the truly wealthy–the ones who don't have any earned income because they don't work in salaried jobs, the ones who own roughly half the nation's productive assets–pay nothing but a slice of their unearned income, much of which is protected by various tax breaks.
The State is effectively operated as a fiefdom of the Financial Power Elites–and by that I mean the people earning not $300,000, but those earning $30 million or more annually– that buys the complicity of the lower 60% with enough largesse to keep them supportive of the Status Quo.
In this facsimile democracy, citizenship has devolved to advocacy for a larger share of Federal government swag. The U.S. Status Quo rules via the second-order corruption of financial Aristocracy and Tyranny of the Majority.
Is Democracy Possible in a Corrupt Society? No, it is not. Our democracy is a PR sham.
My new book Why Things Are Falling Apart and What We Can Do About It is now available in print and Kindle editions–20% to 30% discounts this week only.

Things are falling apart—that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

go to print edition1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economyComplex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).
We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Unintended Consequences Of Bailouts: Greece Gets Slammed

Wolf Richter

Bailouts, particularly those by central banks, have become known for their so-called “unintended consequences”—however intended they might have been. And now, unintended consequences strike again. The ECB’s massive purchases of decomposing Greek debt—an under-the-radar bailout of banks and insurance companies that were holding it—are making the favorite solution to the Greek crisis, namely another deep haircut, legally impossible, said Bundesbank President Jens Weidmann.

Weidmann, an outspoken opponent of the ECB’s bond purchasing programs who has likened them to a pact with the devil [Monetary Schizophrenia in Germany], has seen the writing on the wall. “Apparently,” he said during an interview, “the political world has decided to continue financing Greece.”

In theory, the next bailout payment of €31.5 billion is contingent on the big report that the Troika—the ever so successful bailout and austerity gang from the ECB, the IMF, and the EU—is putting together. They’ve been working on it since June. No money would be transferred to Greece unless the report would show that Greece is implementing to the last iota the agreed-upon reform program.

In practice, Weidmann questioned the independence of the report. Politicians have been dripping with admiration for Greece’s progress and have been expressing their intention to restart the aid flow, though the report isn’t even finished. And he wondered how you could objectively evaluate Greece’s performance in implementing the reform program, “when you’re too afraid of the consequences of a negative judgment?”

Political careers might be at stake, even in Germany, as Greece would be cut loose from the bailout pipeline, if the judgment were “negative.” The country would default and possibly walk away from the Eurozone. It would be messy. And it would happen before next year’s election in Germany. Unthinkable.

But Weidmann, in staying clear of political ramifications, worried about the Euro System—the ECB and the national central banks—that has become “one of the largest creditors” of Greece during the crisis. One of the solutions to the Greek debacle that has recently been pitched in all corners calls for another haircut, but this time on public-sector creditors, namely the Euro System. It would be a much deeper default. But it would grant debt relief to Greece.

Impossible. Weidmann objected to the comparison between the private-sector holders of Greek debt who were arm-twisted earlier this year into accepting a haircut. Banks and insurance companies had originally bought that debt to make a profit, he said, and they had to bear the risks associated with it. But the Euro System bought Greek debt during the crisis in its role as helper. “So the comparison is limping,” he explained.

That was just his warm-up for the unintended consequences of the attempted bailout via bond purchases: “The central banks must not cancel Greece’s debt,” he said, because that would be a “direct transfer and would be equal to the prohibited monetary funding of the government.”

In other words, if the private sector were still holding this debt, the solution would be another bout of arm-twisting, and another haircut. Greece would have gotten rid of most of its debt. That, Weidmann said, is no longer possible. By extension, it would apply to all other crisis states: once the ECB buys their debt to bail them out, any debt relief through a public-sector haircut is out of the question. Watch out, Spain, he seemed to say. You can’t get rid of your debt once the ECB is holding it.

But a haircut wouldn’t resolve the problems anyway, he said. “What good does it do to forgive Athens its debt if in ten years the country is back at the same point where it is today?” No, he said, Greece would have to fundamentally reform itself and become competitive.

The Eurozone has bigger problems than Greece: it seeped out that the German Finance Minister Wolfgang Schäuble broached an unprecedented topic with Germany’s Council of Economic Experts. Could they produce a reform concept for the troubled French economy? It revealed a threat that terrorizes the German government. Read….. Germany’s Fear And Desperation Leak Out.

And here is an almost regular guy who gets unhooked in Japan. “A funny as hell nonfiction book about wanderlust and traveling abroad,” a reader tweeted. BIG LIKE: CASCADE INTO AN ODYSSEY. Read the first few chapters for free on Amazon.