Are we reaching the inflection point on this bull journey, with last week’s great bull run? Some historic observations by Charles Hugh.
The recent stock market rally’s manic force is deeply suspect.
According to my research, last week’s stock market rally was the sharpest such surge since 1644, just before the Ming Dynasty collapsed and Europe was decimated by an epidemic of plague. Perhaps that is coincidence, perhaps not. The Status Quo always tries to brighten the outlook just before things fall apart, and nothing cheers flagging spirits more than a sudden rise in wealth.
The rally in barley in Babylon during the last week of December 1748 BCE was almost as robust, a peculiar coincidence given the next sharpest rally on record was the rebound in Dutch tulip bulb contracts which also occurred in the month of December, 1636.
Shares in the South Seas Company recovered much of their initial losses in a similar rebound in London, September, 1720, a welcome respite for all the investors who were about to be wiped out by the 80% decline in share value when that bubble popped.
More recently, condos in Florida saw a sharp uptick of sales and prices fetched in August, 2007, just before that market collapsed in a great heap.
You see the pattern: the sharper the rally, the closer the market is to the bubble’s end-game. The South Seas Company is the closest analog financially to today’s Fed-goosed stock rally; massive insider profiteering and official intervention pushed share prices up, fueling a frenzy of buying and forecasts of rising profits forever. In another eerie parallel, the South Seas Company’s entire raison d’etre was to offload government debt onto a proxy entity to evade the perception that government debt was out of control. (Funding various wars tends to do that to national debt.)
What happened to that great recovery? The middle class is diminishing, while the rich get richer. Welcome to the new normal.
A lot of people say they are deeply puzzled by the slow recovery in the U.S. economy. They look at the 9+% unemployment rate and the mediocre growth in national output, and they scratch their heads and wonder: Where is the boom that inevitably follows a deep bust, such as we experienced in 2008 and 2009?
But there is no mystery. What other result would you expect from the financial ruin of the once-great American middle class?
And make no mistake, the middle class has been ruined: Its wealth has been decimated, its income isn’t even keeping pace with inflation, and its faith in the American economy has been shattered. Once, the middle class grew richer each year, grew more comfortable, enjoyed a higher living standard. It was real progress in material terms.
But that progress has been halted and even reversed. In some respects, the middle class has made no progress in a generation, or two.
This isn’t just a sad story about a few losers. The prosperity of the middle class has been the chief engine of growth in the economy for a century or more. But now our mass market is no longer growing. How could it? The middle class doesn’t have any money.
There are a hundred different ways of looking at the economy, and a million different statistics. But if you wanted to focus on just one number that explains why the economy can’t really recover, this is the one: $7.38 trillion.
That’s the amount of wealth that’s been lost from the bursting of housing bubble, according to the Federal Reserve’s comprehensive Flow of Funds report. It’s how much homeowners lost when housing prices plunged 30% nationwide. The loss for these homeowners was much greater than 30%, however, because they were heavily leveraged. (market watch)
Full article, How the bubble destroyed the middle class.
The various settlements with some of the banks caught in manipulation and rigging scams, have passed with not that much noise. The banksters are settling huge rigging schemes, having made enormous profits, with peanuts settlements deals. The legal stealing continues, without anybody having to answer for the actions. Taibbi on the Financial Mafia,
Courtesy of my good friend Eric Salzman comes this latest outrage – SEC Enforcement Director and former Deustche Bank general counsel Robert Khuzami boasting about the latest slap on the wrist directed at a major bank, this time a $228 million fine of JP Morgan Chase for a bid-rigging scheme involving municipal bonds. The Chase ruling is the latest to come down in a series of fines involving a number of banks, including Bank of America and UBS.
This is one of the best examples we’ve had yet of the profound difference in the style of criminal justice enforcement for the very rich and connected, versus the style of justice for everyone else. This scam that Chase, Bank of America and UBS were involved with was no different in any way, really, from old-school mafia-style bid-rigging scams.
What these banks did is they got together and carved up territory between them, arranging things so that they wouldn’t be bidding against each other in municipal debt auctions. That means the 18 different states involved in these 93-odd deals all got screwed out of the best prices, leaving the taxpayers in those places severely overcharged for their public borrowing.
This is absolutely no different from what mafia groups in New York used to (and probably still do) do for public contracts – the proverbial five families would get together, divide up the boroughs and neighborhoods between them, and each family would individually buy or intimidate their way into the bidding process, corrupting the game so that the public had to overpay for their garbage collection or their construction labor or whatever. The only difference here is that we’re talking about debt, not garbage. But the concept is exactly the same; it’s the same crime.
The trader has written extensively on the HFT Algo subject for some time. Unfortunately, the regulators don’t understand what the quote stuffing Algos actually do to the market. It all sounds great, “they provide liquidity, just look at how many trades/orders they do in a day”. This is the biggest fallacy of today’s market micro structure, and will be, together with the huge derivatives market, the single most important factor in the next collapse in the financial markets. There will be no circuit breakers to stop the next Splash Crash, as it will ripple through all asset classes. All moves will be magnified with Algos going crazy, and short vol/gamma hedgers not being able to hedge their risks accordingly.
Regulators simply don’t understand what they are regulating, the exchanges what they are providing, nor the supervisors what they are supervising. Maybe Bank of England is starting to see the problems at least. For full BOE report, click link 59611257-BOE-On-HFT.
The Flash Crash left market participants, regulators and academics agog. More than one year on, they remain agog. There has been no shortage of potential explanations. These are as varied as they are many: from fat fingers to fat tails; from block trades to blocked lines; from high-speed traders to low-level abuse. From this mixed bag, only one clear explanation emerges: that there is no clear explanation. To a first approximation, we remain unsure quite what caused the Flash Crash or whether it could recur.1
That conclusion sits uneasily on the shoulders. Asset markets rely on accurate pricing of risk. And financial regulation relies on an accurate reading of markets. Whether trading assets or regulating exchanges, ignorance is rarely bliss. It is this uncertainty, rather than the Flash Crash itself, which makes this an issue of potential systemic importance.
Below we present the third Article on Algos from World Complex.
In a recent article Nanex has shown that quote stuffing can slow down the updating of series of stock prices, bids and asks. The article was less clear about why one might do that. There could be arbitraging opportunities.
One of the first games these clowns got into was latency arbitrage. HFTer offers a number of shares for sale at one price, and at the first sign of interest, pulls all of the offers and resubmits them at a higher price. The latency comes into play because as another player send his orders in to fill HFTer, and these orders all find their ways to the market via differing routes, each of which has a different latency (lag time)–so instead of all arriving at once, they arrive singly, giving HFTer time to pull the rest of his bids.
Early this year, Royal Bank of Canada (RBC) launched a new trading program called Thor, which was designed to avoid latency arbitrage. The gist of the program was that the system would monitor the various latencies to all the different exchanges to which orders would be routed, and artificially delayed the submission along the fastest route so that all the orders would arrive simultaneously on all exchanges. While perfection did not occur, the early claims were that the various latency would me measured in microseconds, which at the time seemed reasonable.
Basel III evolved after the last financial crisis. The new rules are to make banks and financial institutions more stable by increasing the capital ratios. From Wikipedia;
BASEL III is a new global regulatory standard on bank capital adequacy and liquidity agreed by the members of the Basel Committee on Banking Supervision. The third of the Basel Accords was developed in a response to the deficiencies in financial regulation revealed by the global financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. The OECD estimates that the implementation of Basel III will decrease annual GDP growth by 0.05 to 0.15 percentage point.
Imposing capital requirements is easy, but what is capital and what are real risk assets? Those who remember the last crisis where Bear Sterns, Fannie, Freddie and other institutions went bust, realize what untamed over leverage can cause. Basel III wants to strengthen banks capital ratios, but seems rather slack regarding what is a risky asset.
Since Fannie and Freddie guaranteed more than half of the U.S. market, its overleveraging set the tempo for the entire housing market during the bubble years. Pinto notes, “In order for the private sector to compete with Fannie and Freddie, it needed to find ways to increase leverage.” And so they did, increasing the likelihood that when the market fell, there would be a meltdown.
Basel III, by categorizing sovereign debt as risk-free, is doing precisely the same thing. Except instead of the $10 trillion U.S. mortgage market, now we’re talking about the more-than $50 trillion of sovereign debt worldwide. That does not include the untold trillions of sovereign debt credit default swaps, insurance policies bondholders buy against default.
What happens if sovereign debt risks start blowing up, while people see them as risk free? Welcome to some real Black Swans.
Further reading on the Next Financial Crisis.
El Erian on differences vs similarities in tackling the Economic problems in US and UK.
Many have set it up as an economic competition: Britain’s austerity versus America’s dash for growth. And, not surprisingly, strong views have been expressed on which approach is better for restoring sustained employment creation and financial stability.
It is a good setup. Unfortunately, it is also incomplete as it fails to distinguish between desirability and feasibility. As such, it will not provide definitive answers to an important question: the best way to safely de-lever an economy so that it can grow and prosper in a lasting fashion. Instead, the two countries’ initially contrasting situations will end up with them adopting rather similar approaches!
America and Britain share many things in common. Among the less pleasant similarities is the unfortunate experience of having gone way too far in embracing the “Great Age” of leverage, credit and debt-entitlement.
Both countries behaved as if “finance” was a legitimate stage in the economic maturation of a society – coming after agriculture and industry. In the process, they lost sight that the “financial industry” is not a stand-alone that can be sustained by clever financial engineering. Instead, its legitimacy depends on how well it facilitates real economic activity.