Category Archives: Economy and Meltdown

"Algos-Only" Tomorrow As NYSE Shuts Floor Trading Due To Sandy

The NYSE has just released a statement clarifying its hours tomorrow – due to the storm:


So, hold tight as all those low-lying humans will have left the building in the calm thoughtful hands of Johnny-5 and his friends.


Via Bloomberg:

Oct. 28 (Bloomberg) — The New York Stock Exchange said it will shut its trading floor starting tomorrow and invoke contingency plans to move all trading to NYSE Arca, its electronic exchange, as Hurricane Sandy heads toward the city.


“The re-opening of physical trading floor operations is subject to city and state determinations and local conditions; updates will be forthcoming,” NYSE Euronext said in a statement today.


NYSE Amex Options will open electronically and NYSE MKT, formerly known as NYSE Amex, will be suspended, the exchange operator said.


Full PR:

NYSE to Remain Open for Trading While Physical Trading Floor and New York Building Close in Accordance with Actions Taken By City and State Officials


  • NYSE Euronext invokes contingency plans to trade NYSE-listed securities on NYSE Arca
  • NYSE Arca Options and NYSE Liffe U.S. operational; NYSE Amex Options open electronically
  • Updates on re-opening physical trading operations to come


New York, Oct. 28, 2012  Respecting the actions taken by New York City and State officials to declare a state of emergency, suspend local New York City transportation beginning this evening, and issue evacuations orders in the proximity of the New York Stock Exchange (NYSE) building , NYSE Euronext (NYX) has decided to suspend physical trading floor operations and invoke its contingency plans to trade all NYSE-listed securities on NYSE Arca, the company’s fully electronic exchange, beginning Monday, Oct. 29, 2012. NYSE MKT will be suspended during this period. The re-opening of physical trading floor operations is subject to city and state determinations and local conditions; updates will be forthcoming.

We are open for business and at the same time acting in accordance with actions taken by the city and state of New York, said Duncan L. Niederauer, Chief Executive Officer, NYSE Euronext. We have been in discussions with government officials and regulators, our trading floor community, issuers and other customers.

We will continue to communicate and coordinate activities with regulators and government officials, other market centers, member firms and all of our customers. I would like to acknowledge everyone’s outstanding cooperation and singular focus on serving the best interests of people, safety and our capital markets. This is an extremely dangerous and unpredictable weather event, and we support the actions taken by city and state officials. On behalf of everyone at NYSE Euronext, our thoughts and prayers go to everyone impacted by the storm.

This NYSE contingency plan was most recently tested by the industry on March 31, 2012, and allows for uninterrupted trading in NYSE-listed securities in the event the physical trading floor is unavailable. In this scenario, pursuant to NYSE Rule 49 and NYSE Arca Equities Rule 2.100, NYSE-listed trades would be identified on the Consolidated Tape with the NYSE exchange designation N, and quotes would be identified as NYSE quotes on the Consolidated Quote stream. During such a contingency plan, NYSE member organizations will be permitted to enter orders in NYSE-listed securities directly on NYSE Arca, even if not approved as an NYSE Arca ETP Holder. NYSE MKT member organizations that are also Arca ETP Holders may send orders in NYSE MKT-listed securities to NYSE Arca. Quotes and executions in Tape B and Tape C securities on NYSE Arca will continue to be reported as P and there will not be a primary print for NYSE MKT-listed securities. While the NYSE Amex Options trading floor in New York will be closed, electronic trading on NYSE Amex Options will continue normally. NYSE Arca Options will also be operating normally, both electronically and on the physical trading floor in San Francisco, CA.

The NYSE last suspended physical trading floor operations on Friday, Sept. 27, 1985 due to Hurricane Gloria, during which all U.S. markets were closed. For a full list of NYSE market closures, go to:

On The Fullness And Boldness Of QE's Manipulation Of American's Behavior

With equity markets having reverted to pre-Draghi and pre-Bernanke levels, retail mortgage rates and MBS spreads now above pre-QEtc. levels, and the fundamental reality of the world’s credit-driven growth peeking through into the new normal ‘muddle-through’; it seems increasingly evident that central banks’ actions (or the anticipation of such) are all that keeps advanced economies from crumbling back onto their non-vendor-financed rational valuations. The question is – who are the central banks really trying to help? Baupost’s Seth Klarman provides the most clarifying and thought-provoking assessment of both the Fed’s actions (quantitative easings specifically) and the moral hazard implicit in their deeds (as well as words).


Via Seth Klarman of Baupost’s Q3 Letter:

Our Thoughts on QE3


On September 13 the Federal Reserve initiated QE3, a variation of the first two quantitative easings, involving the government buying back $40 billion per month of mortgage securities while maintaining the Fed’s near-zero interest rate policy through mid-2015, nearly a full seven years after the financial market collapse of 2008. The goal of QE3 is to drive interest rates on 30-year mortgages lower (they reached an all-time record low of 3.36% in early October) while concurrently lifting housing prices (and inevitably the stock market), triggering a theoretical wealth effect that would potentially bolster consumer spending.


While QEs 1 and 2 had no lasting impact, they did give a short-term boost to the stock market But because that effect was ephemeral, it’s hard to comprehend why anyone would believe that QE3 will turn out better. QE3 is bold in its apparently unlimited duration, which may be intended more to demonstrate the Fed’s determination rather than any actual conviction that it will work. Perhaps the oddest part of the ongoing QE scheme is that everyone can see in its fullness and boldness the attempted manipulation of Americans’ behavior. (If people know they are being manipulated, do they behave exactly the same as if they don’t know?)


While anyone would be glad to have a cheaper mortgage as a result of QE3, would they really believe this would make their home worth more? It’s more of a credit holiday, whereby the government offers you better terms than previously available. In addition to making explicit the implicit U.S. government guarantee of more and more of the U.S. residential mortgage market, the rousing stock market approval of this measure is seen as a free lunch. But of course it is not free. For one thing, buying mortgage securities with newly printed money has the same inflationary risk that QEs 1 and 2 posed. This probably explains why gold rose strongly in response to this announcement.


Also, artificially low interest rates have a cost to the government. As we know from the recent U.S. housing price collapse, mortgage lenders can indeed lose money. The guarantor of the U.S. housing market has a huge contingent liability. Moreover, the U. S. housing market was clearly overbuilt (by five million homes, according to some estimates) as of 2007, yet cheap financing may attract temporary incremental demand which home-builders might interpret to be permanent and thus overbuild all over again. This highlights the deleterious second and third order effects of well-intended but ill-conceived government programs.


It is clear that someday the Fed will decide that the economy has strengthened sufficiently to end and then potentially reverse QE and zero-rate policies. Any possible sale of trillions of dollars of securities owned by the Fed, at such time would most likely be at a substantial loss given that interest rates would likely have risen and bond prices have fallen. Also, when people with a 30 year, 3.5% mortgage seek to move at a time when new mortgages now cost 5% to 6% or more, buyers will pause, reducing demand and driving house prices lower. QE3 may deliver a dose of helium to housing prices, but eventually helium leaks out of balloons, and gravity pulls them to earth. What kind of policy is this: untested; inflationary; eroding free market signals; diverting more of the country’s resources toward housing at the expense of priorities such as infrastructure, technology, or science and medical research; and inevitably only a temporary fix with no enduring benefit?


Finally, we must question the morality of Fed programs that trick people (as if they were Pavlov’s dogs) into behaviors that are adverse to their own long-term best interest. What kind of government entity cajoles savers to spend, when years of under-saving and overspending have left the consumer in terrible shape? What kind of entity tricks its citizens into paying higher and higher prices to buy stocks? What kind of entity drives the return on retirees’ savings to zero for seven years (2008-2015 and counting) in order to rescue poorly managed banks? Not the kind that should play this large a role in the economy.


Moral Hazard and Financial Risk


Recently, a financial columnist wrote: “Four years after the fall of Lehman Brothers, and with-a presidential campaign in full swing, everyone can surely agree on one thing: we shouldn’t risk another financial crisis.” While I’m sure he is well-intentioned in this sentiment, this highlights a flawed notion held by too many of our country’s commentators and regulators. What does it even mean to risk or not risk a financial crisis? You don’t intentionally risk financial crises; they just happen. In fact, there is no way to not “risk them”. And they don’t usually provide fair warning. Financial crises are awful: they affect the lives of individuals and families; they can damage the economy, weakening it to the point of tearing the social fabric they often take years to overcome. It would be great if we could outlaw them, but unfortunately we cannot. Ironically, attempts to limit short-term pain, such as those in the four years did counting since the collapse of 2008, almost certainly make a future crisis much more, not less, likely.


The seeds for financial crises typically grow undetected from a variety of excessive behaviors and assumptions, to where they become almost inevitable. Financial crises are rooted in over leverage and excessive levels of valuation. If society wants to prevent crisis, it must take measures well in advance, before the storm clouds gather, before excesses build in the system and before unbridled optimism dominates investor and business thinking. Efforts to constrain incipient crises in order to avoid feeling their full wrath, such as propping up bankrupt institutions and bankrupt countries, merely result in stagnation and a protracted period of subdued economic activity. Proper regulation might make some difference, if it had the effect of limiting leverage and containing speculative bubbles; but so much of regulation is naïve, ill-considered, and poorly enforced, thereby rendering it ineffective.


Anyone who believes that government control and intervention will prevent problems of all sorts is living in a fantasy world where what we wish will happen always does. Go back to 2007 where the world was seemingly in a perpetual period of prosperity with low volatility while stock markets were hitting record highs. Few sniffed the possibility of any crisis on the horizon. Virtually no one imagined the magnitude of the crisis that erupted only one year later. Financial crises, sadly, will be with us forever. The idea that we can avoid one at our will only suggests both a dangerous naivete regarding how the world works and also the likelihood that when a crisis does arise, years of built up excesses will ensure that it will be far worse than it would otherwise have been.


An environment where financial crises are seen to be a regular part of the landscape is one where people might actually take more precautions. People would maintain a margin of safety in all their decisions. investment and otherwise, regulations would be well thought out and diligently enforced, and the unscrupulous and the incompetent would quickly fail and disappear from the scene. Modern day attempts to abolish failure only serve to ensure it, as moral hazard– the likelihood that people’s behavior changes in response to artificial supports or guarantees– surges. Attempts to prevent or wish away future crises only make them more likely. Only by allowing, even welcoming, episodic failure do we have a chance of reducing the likelihood and magnitude’ of future financial crises.


We wrote on Friday of the frailty of central bank independence and merging of fiscal and monetray policy:

Globally, central banks are edging down monetary policy paths that can be viewed as increasingly backstopping budget deficits as lawmakers of respective governments continue to fail to make progress toward fiscal consolidation. A progression down this road could lead to many unsavoury outcomes, as fiscal and monetary policies entwine themselves in an increasingly negative dynamic.

It seems Mr. Klarman agrees… and perhaps our recent discussion of “The Dark Age Of Money” clarifies exactly what is at stake.

The Bread Aisle In Manhattan's Upper West Side Is Now Empty

It seems like it was just yesterday that we were posting pictures of empty shelves at New York supermarkets ahead of the epic dud that was Hurricane Irene. It is now one year later, and it is time for the obligatory snapshots of empty shelves, such as this one showing the bread isle at the Food Emporium on 68th and Broadway. Many more coming as all local New York food stores and pharmacies finally sell out their expired and extended inventory.

The bread aisle in the Upper West Side, not to be confused with the bread aisle in post-hyperinflation Zimbabwe…

h/t Paulo

Guest Post: GDP – The Warning Signs From Exports

Via Lance Roberts of Street Talk Live,

Over the past several months we have been discussing that this is no longer your “father’s economy.”  What we have meant by this is the economic environment today is vastly different than that which most of our parents grew up in.  We recently discussed in “Debt: Driving Our Economy Since 1980” that: “From the 1950’s through the late 1970’s…the U.S. was the manufacturing and production powerhouse of the entire global economy post the wide spread devastation of Europe, Germany and Japan during WWII.  The rebuilding of Europe and Japan, combined with the years of pent up demand for goods domestically, led to a strongly growing economy and increased personal savings.  However, beginning in 1980 the world changed.  The development of communications shrank the global marketplace while the rise of technology allowed the U.S. to embark upon a massive shift to export manufacturing to the lowest cost provider in order to import cheaper goods.”

The importance of this shift in the U.S. from away from being the epicenter of global production and manufacturing to a service and finance based economy should not be overlooked.  This transition is responsible for the issues that are impeding economic growth in the U.S. today from structural unemployment, declining wage growth and lower economic prosperity.  The four-panel chart below gives you a visualization of this transition showing the year-over-year change in the data, with the exception of the personal savings rate which is linear, prior and post-1980.  



What does this have to do with GDP and exports?  Well, just about everything, as I will explain momentarily, but first let’s take a look at the recent release of the first estimate of third quarter GDP for 2012.  The headline release showed an increase in economic growth to an annualized rate of 2% which was an improvement from second quarter growth rate of 1.3%.  

For the third quarter the contributions to the percentage change in real GDP were:

  • personal consumption expenditures rose from 1.06 to 1.42
  • gross private investment (business investment) contracted from 0.9 to 0.7
  • government consumption exploded from a<span style="color: #ff0000;”> -.14 contraction to a .71 contribution 
  • net exports (exports less imports) declined from a .23 contribution to a <span style="color: #ff0000;”>-.18 detraction.

It is net exports that are most concerning.  Since 1980 the global community has become very small due to advances in technology and communications.  Globalization has made the U.S. very sensitive to changes in global economy due to the increasing demand for the products and services that we sell abroad.  As we said previously: “Exports have made up roughly 40% of corporate profits since the end of the last recession.  The recent announcements by CAT, FDX, NSC, UPS and others, all discussed the rising weakness with international trading partners – primarily in the Eurozone and China.  Not surprisingly we saw a decrease of $0.3 Billion in exports in 2Q GDP. This was a 110% decrease from the previous estimate of a $3.1 billion increase.  This decrease in exports is very important as it relates to current forward earnings estimates and the belief that the U.S. can remain decoupled from the rest of the world.

Since the first quarter of 2012 exports, as a percentage contribution to real GDP, has fallen from .60 to <span style="color: #ff0000;”>-.23.  As stated above, exports are a much more important share of economic growth than either housing or automobile manufacturing.  Furthermore, spending on equipment and software, which corporations have used to suppress employment and costs and increase profitability have been a significant contributor to the economic fabric as well.  The chart below shows exports, equipment and software spending, automobile manufacturing and residential investment as a percent of GDP.  



What is important to note here is that each time exports, as well as equipment and software spending, have turned down the economy has either been in, or was about to be in, a recession.

The continued drag on exports due to the worsening recession in the Eurozone, and the slowdown in China, is putting continued pressure on corporate profit margins.  In turn this keeps businesses on the defensive to protect profit margins which stifles employment and investment.  This is quite apparent as private domestic investment (business investment) has collapsed from a 3.72 percentage contribution in the fourth quarter of 2011 to a .07 percent contribution in the latest release.

While personal consumption expenditures showed a fairly strong gain in the latest report – it is very likely, given the latest retail sales report not being nearly as strong as reported, that the initial estimate of 2% growth in the third quarter will be revised down in the next two months. 

Furthermore, another sign that the headline may be quite ephemeral, is that real final sales in the third quarter shrank on an annual basis once again from 2.17% in the first quarter to 1.94% most recently.  Historically speaking, whenever real final sales has fallen below a 2% annualized growth rate, once again, the economy was either in, or about to be in a recession as shown in the chart below.



As David Rosenberg pointed out “In fact, netting out the government sector, real GDP came in at a 1.3% annual rate in the third quarter and on the same basis the pace was 1.4% in the second quarter.  Perhaps not a recession in the private sector but whatever cushion there is, it is extremely thin.  There is no margin for error here.”

That is an extremely important point.  With exports declining which is impacting corporate profit margins, employment conditions deteriorating, and business spending contracting – these are all the necessary ingredients to spin out a negative economic growth rate at some point in the not so distant future.  For investors this is becoming a much more critical issue as stock prices have already begun to revalue future profit growth expectations.  Our previous calls for a recession in early 2013 are beginning to look much more probable.