Some self explanatory charts on the Great Recovery and some possible hick ups in Greece below;

Above Charts John Mauldin,

and don’t forget the Joker;

It is back, the anger on naked short seller. Italy is not happy with the bank stocks falling, so they now start the blame game of the naked short sellers. Could it be Italy’s Economy is in total chaos, while the bunga bunga man is enjoying himself? Whoever responsible, the naked short sellers now need to disclose their positions. We ask ourselves, does anybody care about when these short sellers loose money, when the markets go parabolic?

For those interested in the man who screwed an entire nation (Italy), please read full report on Silvio.

Below from Bloomberg,

Italy’s financial-market watchdog, Consob, is requiring investors who sell equities short to disclose their positions in an effort to increase market transparency.

The measure, which takes effect starting tomorrow, follows similar action take in other European countries, including Germany, Rome-based Consob said in a statement posted on its website.

Consob’s commissioners met today after shares of Italy’s biggest banks fell to the lowest in more than two years on July 8, and government bonds dropped, driving 10-year yields to a nine-year high.

Short selling involves the sale of securities borrowed from the owner, and generates profit when the trader repurchases them at a lower price and returns them to the owner. The amount of shorting is limited by the willingness of owners to lend.

On July 5, European lawmakers voted in favor of a ban on short selling of government bonds in the EU unless traders have at least “located and reserved” in advance the securities they intend to sell. The European Union Parliament in Strasbourg, France, also called for restrictions on traders’ use of credit- default swaps to profit from defaults on sovereign debt they don’t own.

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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.)

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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.

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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.

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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.^[1] 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.^[2][3]

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.

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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.

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Some points below on fiat money, the USD and where we are heading. Prior to reading check out Long’s Fiat Money chart below. The wheels are still spinning, until….

Before proceeding, welcome to the great Recovery;

Post by Hmmmm;

Throughout its history, the United States has avoided hyperinflation by continually shifting between a fiat currency and a gold standard. As we have already discussed, from 1785 to 1861 the dollar was backed by gold after the disastrous experiment with ‘Continentals’ ended in 1785 (in fact, it was very soon after this episode that Thomas Jefferson wrote his famous ‘standing armies’ letter to John Taylor):

“I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a money aristocracy that has set the government at defiance. This issuing power should be taken from the banks and restored to the people to whom it properly belongs. If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered. I hope we shall crush in its birth the aristocracy of the moneyed corporations which already dare to challenge our Government to a trial of strength and bid defiance to the laws of our country”

- Thomas Jefferson, Letter to John Taylor, May 28, 1816

The fiat Greenback lasted 17 years before a return to a gold standard in 1880 brought stability and virtually no inflation until the outbreak of WWI necessitated a fiat currency again in order to pay for the cost of the conflict.

1926 saw the reintroduction of a gold standard once more and this lasted until The Great Depression fostered a run on gold that forced the dollar back to its fiat ways and culminated in FDR’s now infamous Executive Order 6102 and the confiscation of gold (right). This version of a fiat dollar reigned supreme – for 14 years, until the huge economic dislocations that became evident in the lead-up to (and in many ways resulted in) WWII.

In 1944 the Bretton Woods Accord was signed and this time, the gold standard thrived for 26 years (although during that time, the first Federal Reserve Notes with no promise to pay in ‘lawful money’ quietly appeared, the $1 silver certificate disappeared for good and all coins save the Kennedy half-dollar saw their silver content wiped out – the Kennedy half-dollar being reduced to 40% on the orders of President Lyndon Johnson who went one step further in 1968 when he proclaimed that all Federal Reserve Silver Certificates were merely fiat legal tender and could not really be redeemed in silver).Then came Tricky Dicky.

Five months after Nixon closed the gold convertibility window to (cough) “protect the position of the American dollar as a pillar of monetary stability around the world” (cough) from those (cough) ‘evil speculators’ (cough), a new and ingenious plan was hatched as the Smithsonian Agreement was passed, pegging the world’s fiat currencies to ….. ANOTHER fiat currency in the shape of – you guessed it – the dollar.

Problem solved.

A mere two years later though, in 1973, as it became clear that a fiat peg to a fiat currency was just not going to work in the longer term, the signing of the Basel Accord ushered in the current status quo.

So now we’re up to date, “what the hell is the point of this seemingly random trip through the history of the dollar?” I hear you asking.

Well, I’ll tell you.

Full report, Hmmm Jul 09 2011

EU Debt Crisis, Wall Street and IMF. How do they cooperate in stealing the assets of Europe. Welcome to Neofeudalism. Keiser reports, and check especially Hudson starting 14 minutes into the interview.