Submitted by Daniel Drew via,

After the carnage of the 2008 crash, former Federal Reserve Chairman Paul Volcker proposed a rule that would prevent banks from making short-term proprietary trades with financial instruments. In other words, no gambling allowed. This rule would become known as The Volcker Rule, and it went into partial effect on April 1, 2014. Full compliance is required by July 21, 2015. Of course, the bank lobbyists were hard at work, and numerous exceptions and loopholes were created. The definition of "financial instruments" did not include currencies, despite the fact that currencies are the basis of the modern financial system and should be considered the ultimate financial instrument. Also, banks were allowed to "hedge" their risks. As JPMorgan demonstrated in 2012, apparently, it is possible to lose $6 billion while hedging risks with credit derivatives.

JPMorgan is at it again – this time, with the Swiss franc. On January 15 of this year, the Swiss Central Bank sent shockwaves around the financial world when they abruptly abandoned the 1.20 EURCHF floor.

CHF/USD Futures

The Wall Street Journal reported that JPMorgan made up to $300 million in the ensuing trading chaos. With the FX market facing a severe shortage of liquidity, JPMorgan stepped in. However, as with any illiquid market, the dealers call the shots. Bid/ask spreads can explode, creating enormous transaction costs for anyone who has to trade. These parties included desperate retail FX brokers and small clients who were bankrupted by the Swiss central bankers. As the WSJ reported,

J.P. Morgan filled client orders at a certain rate, allowing them to quickly assess their position and continue trading when liquidity dried up in the market, this person said. The bank told clients it would fill orders at 1.02 francs per euro while the Swiss currency grew from 1.20 francs per euro to nearly .85 on Jan. 15, the person said. It is unclear how long the bank offered this rate to clients.

By setting the fill 15% away from the last price, JPMorgan was able to lock in any gains from a long franc position instantly. It also gave the firm's traders an anchor so they knew where they were at. What if the clients could get a more advantageous rate at another bank? It didn't matter. 1.02 was the price. If JPMorgan's traders saw a better rate elsewhere, they could trade with that third party and effectively arbitrage the market against their own clients. Of course, it was all transparent. You knew you were getting 1.02, but if your bankrupt broker is margin calling you at any price, there's not much you can do. It was JPMorgan's market.

The chaos of the Swiss bank bluff showed up in JPMorgan's first quarter report. In the trading section that reports the firm's value at risk, January 15 stands out like LeBron James in his 5th grade class picture.

JPMorgan VAR

With free reign to trade currencies and under the guise of "market making," JPMorgan raped the accounts of retail FX brokers and small clients who never could have imagined that the Swiss Central Bank would turn the stable franc into one of the most volatile currencies of the decade. It also appears that The Wall Street Journal overstated the $300 million headline number. According to JPMorgan, they made about $200 million that day.

The fact that JPMorgan still takes value at risk (VAR) seriously is another irony. Wall Street anti-hero Nassim Taleb has made multiple fortunes betting on improbable events via out-of-the-money put options, and he remains one of the most steadfast critics of VAR. Taleb has an arcane style of communication, but the summary of his criticism is that VAR is based on the normal distribution, which underestimates the effects of extreme price moves. Furthermore, the very idea that wild events can be predicted by any model is an arrogant assumption, according to Taleb. A white paper by the Chicago Board Options Exchange (CBOE) verifies Taleb's assertions.

S&P 500 Skew

The chart shows the type of statistical distribution that Taleb described as "Extremistan" in his popular book "The Black Swan." The frequency is heavy in the middle and higher than expected in the "tails," or the far extremes of the distribution. What this means is that wild events like the Swiss Central Bank bluffing the entire world happen more frequently than risk models suggest.

In their 10-Q filing, JPMorgan boasts that there were no VAR band breaks. Translation: They never had a 1-day loss that exceeded their estimates of about $50 million – although they did come uncomfortably close in March. Just like a typical swashbuckling bank that throws around billions of depositors' FDIC-insured money on convoluted derivative bets, JPMorgan is only concerned about downside volatility while ignoring upside volatility. Yes, they didn't have any downside VAR breaks, but anyone can look at the chart and see there were multiple instances where they made more than $50 million in a single day, with the Swiss bank debacle being the most notable one. Veteran traders know that this kind of wild upside can be just as great of a risk as unexpected downside. If you can make $200 million in a single day, you can also lose the same amount – especially when the P/L comes from linear non-derivative sources like the spot currency market. In this case, JPMorgan happened to be on the right side of the tidal wave. However, Citigroup, Deutsche Bank, and Barclays got caught in the crossfire, and they lost a combined $400 million on the franc. Just another day in casino capitalism.


Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero |

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Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Wishing it was true doesn't make it true–it makes you a chump who fell for the con.

Once upon a time in America, no adult could survive without possessing a finely tuned BS detector. Herman Melville masterfully captured America's fascination with cons and con artists in his 1857 classic The Confidence-Man, which I discussed in The Con in Confidence (October 4, 2006).
An essential component of the American ethos is: don't be a chump. Don't fall for the con. And if you do, it's your own fault. The Wild West wasn't just thieves shooting people in the back (your classic "gunfight" in the real West)–it was a simmering stew of con artists, flim-flammers and grifters exploiting the naive, the trusting and the credulous.
We now inhabit a world where virtually everything is a con. That "organic" produce from some other country–did anyone test the soil the produce grew in? It could be loaded with heavy metals and be certified "organic" because no pesticides were used during production. But what about last year? And the year before? What's in the water used to irrigate the crops?
The employment/unemployment statistics are obviously BS. 93 million people aren't even counted any more–they're statistical zombies, no longer among the living workforce. If the unemployment rate were calculated on the number of full-time jobs and the true workforce (everyone ages 18 – 70 that isn't institutionalized or in prison), the unemployment rate would not be the absurdly delusional 5.6% claimed by the bureaucratic con artists.
The corrupts-everything-it-touches bribe vacuum known as Hillary Clinton is still disgracing the national stage, 24 years after she first displayed her con-artist colors. Hillary's most enduring accomplishment is the Clinton Foundation–a glorification of bribery, chicanery, flim-flam and cons so outrageously perfected that it serves up examples of every con known to humanity in one form or another.
And as she learned from hubby Bill–if the smarmy charm-con fails, quickly revert to veiled threats. "You'll never work in this town again!"
Hillary would fit right into Melville's river boat teeming with con-artists. The accent she uses on the marks–oops, I mean audience–changes as readily as the camouflage on a chameleon. Upper Midwest, Noo Yawk, Fake-Southern–what you hear depends on the credulity of her marks.
The entire American political system is a con, a sleazy mix of legalized bribes, auctioning off of favors, revolving doors between government agencies and the corporations they enrich and the blatant hypocrisy of snake-oil salespeople who know the marks (voters) face a false choice between two parties that are the same poison sold under different labels.
Which brings us to China, one of the greatest credit bubble and financial cons ever. Please examine this chart of the Shanghai Stock Exchange (SSEC). Clearly, there is no upper limit to the Chinese stock market: 5,000 today, 10,000 next week, 50,000 the following month and 100,000 shortly thereafter. The sky's the limit, Baby!
That China's credit machine is now dependent on a stock market bubble for its very survival speaks volumes about the true health of China's economy. This dependence was recently explained in Why China Is So Desperate To Blow The Most Epic Stock Bubble.
Everybody who thinks China's economy is healthy because its stock market is soaring has been suckered. Every good con-man/ con-woman knows that the con only works if the chump/mark wants to believe the impossible is true–that the snake-oil remedy will actually cure their ailments, that the "hope" candidate will actually change the corrupt system from the inside (ha-ha, they fell for it), and that China's economy is on its way to becoming the world leader in everything.
Many people want to believe this fantasy because it suits their agenda: For American pundits, China isn’t a country. It’s a fantasyland.
But wishing it was true doesn't make it true–it makes you a chump who fell for the con. We want to believe our political system isn't an unreformable cesspool, that our economy is a vibrant creator of new middle class jobs and that China will manage the greatest credit bubble in history without a hitch. But these are all cons put over to protect the wealth and power of those benefiting from the con.

If your BS detector isn't shrieking, it's broken. You've been conned. Wake up.


Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero |

oil wells sunset ventura county california

Oil is hovering around $60 a barrel, a 40% decrease in price since the height of summer. This is widely thought to be a supply issue, with the US producing far more oil than it traditional has, and OPEC refusing to cut production to stabilize prices.

US Trust’s chief market strategist Joseph Quinlan sent out a note this week showing just how much US energy production has expanded in the last five years.

He writes:

The ingredients of the U.S. energy revolution were threefold: (1) Pro-market policies at the state and local levels, combined with (2) revolutionary technologies like horizontal drilling and hydraulic fracturing, and (3) good old American entrepreneurship and risk taking that upended the energy patch. By combining the three, the United States became the largest natural gas producer in 2013 and is on its way to becoming the world’s leading oil producer.

Here are six key charts showing how this is unfolding:

This is the four-week moving average of total US production (in thousands of barrels per day). Note the steep slope in the last two years.

Screen Shot 2014 12 11 at 9.27.32 AM

Here are America’s shale super fields since 2011. North Dakota’s Bakken and south Texas’ Eagle Ford are both now producing more than 1 million barrels a day, up from practically nothing just a few years ago.

Screen Shot 2014 12 11 at 9.27.25 AM

Natural gas production has increased along with oil. From US Trust: “According to the EIA, more than 50% of new wells in production in 2011 and 2012 produced both oil and natural gas. In 2012, of the number of wells drilled nationwide, 56% produced both oil and gas; the comparable figure in 2007 was 37%.”

Screen Shot 2014 12 11 at 9.28.17 AM

This new production has driven down the cost of energy in the US. Here’s how the cost of natural gas has changed since 2006 (it’s indexed such that 100 = January 2006) in the US, Germany, and Japan.

Screen Shot 2014 12 11 at 9.29.39 AM

 This is how much crude oil production changed between 2008 and 2013. The US is way out front, disrupting the global oil game.

Screen Shot 2014 12 11 at 9.27.45 AM

Finally, the US is moving closer to energy independence. This chart shows the net imports of crude and petroleum products as a percentage of consumption.

Screen Shot 2014 12 11 at 9.28.30 AM

SEE ALSO: An OPEC Minister Made A Surprising Statement About Who Controls Oil Prices

Join the conversation about this story »


Original source at: Finance |

Excerpted from John Hussman’s Weekly Market Comment,

Is this time different? I’ve often characterized our approach to the financial markets as a value-conscious, historically-informed, evidence-driven discipline. In recent years, we’ve often been asked whether the world has changed in a way that makes historical evidence an inadequate guide to investing.

In some cases, those learnable regularities can be derived on the basis of clear theoretical relationships that describe how the world works with reasonable accuracy.

For example, every long-term security is fundamentally a claim on a very long-duration stream of cash flows that can be expected to be delivered into the hands of investors over time. For a given stream of expected cash flows and a given current price, we can quickly estimate the long-term rate of return that the security can be expected to achieve (assuming the cash flows are delivered as expected). Likewise, for a given stream of expected cash flows and a “required” long-term rate of return, we can calculate the current price that would be consistent with that long-term rate of return. The failure to understand the inverse relationship between current prices and future returns is why investors frequently argue that rich equity valuations are “justified” by low interest rates, without understanding that they are really saying that dismal future equity returns are perfectly acceptable.

We also observe the very regular tendency for profit margins to increase during economic expansions (presently corporate profits are close to 11% of GDP), and to contract during softer periods. Corporate profits as a share of GDP have always retreated to less than 5.5% in every economic cycle on record, even in recent decades. Since stocks are most reliably priced on the basis of long-term cash flows, and not simply Wall Street’s estimate of next year’s earnings, we find that valuation measures that are either relatively insensitive to profit margin swings, or that correct for their variation over the economic cycle, are much better correlated with actual subsequent market returns than measures such as price/forward operating earnings that don’t do so.

Our valuation concerns don’t rely on any requirement for earnings or profit margins to turn down in the near term. Valuations are a long-term proposition that link the price being paid today to a stream of cash flows that, for the S&P 500, have an effective duration of about 50 years. In evaluating whether “this time is different,” it should be understood that current valuations are “justified” only if 1) the wide historical cyclicality of profits over the economic cycle has been eliminated, 2) the average level of profit margins over the next five decades will be permanently elevated at nearly twice the historical norm, 3) the strong historical advantage of smoothed or margin-adjusted valuation measures over single-year price/earnings measures has vanished, and 4) zero interest rate policies will persist not just for 3 or 4 more years, but for decades while economic growth proceeds at historically normal rates nonetheless. Believe all of that if you wish. Without permanent changes in the way the world works, on valuation measures that are best correlated with actual subsequent market returns, stocks are wickedly overvalued here.

The chart below show several of the measures that have the strongest relationship (correlation near 90%) with actual subsequent 10-year S&P 500 total returns, reflecting data from the Federal Reserve, Standard & Poors, Robert Shiller, and valuation models that we have published over the years.

As of last week, based on a variety of methods, we estimate likely S&P 500 10-year nominal total returns averaging just 1.5% annually over the coming decade, with negative expected returns on every horizon shorter than about 8 years. The chart above shows the historical record of these estimates (in percent) versus actual subsequent 10-year S&P 500 total returns. What’s notable is not only the strong correlation between estimated returns and actual subsequent returns, but also that the errors are informative.

Given the full weight of the evidence, it should be clear that one can’t just say “well, look, the S&P 500 has done better than these models would have projected a decade ago,” and use that as a compelling argument that this time is different and historical regularities no longer hold. Quite the opposite – the overshoot in S&P 500 total returns since 2004 – relative to the prospective returns one would have estimated at the time – is highly informative that stocks are strenuously overvalued at present. That conclusion has strong statistical support. In fact, when we examine the historical evidence, we find that there’s a -68% correlation between the error in the projected return over the past decade and the actual subsequent total return of the S&P 500 in the following decade. That is, the more actual 10-year S&P 500 returns exceeded the return that was projected, the worse the S&P 500 generally did over the next 10 years. Notably, the “Fed Model” has a correlation of less than 48% with actual subsequent 10-year returns. It’s sad when a valuation measure that is so popular is outperformed even by the errors of better measures.

Last week, however, the market re-established conditions extreme enough to place the present instance among what I’ve often called the “who’s who of awful times to invest.” Importantly, and in contrast to a few similarly extreme conditions we’ve seen in recent years, we presently observe both widening credit spreads and – at least for now – deteriorating internals and unfavorable trend uniformity on our measures of market action.

In short, our views will shift as the evidence shifts, but here and now, the market has re-established overvalued, overbought, overbullish conditions that mirror some of the most precarious points in the historical record such as 1929, 1937, 1974, 1987, 2000 and 2007. That syndrome is now coupled with continued evidence of a subtle shift toward more risk-averse investor psychology, primarily reflected by internal dispersion and widening credit spreads. I’ve often emphasized that the worst market outcomes have historically been associated with compressed risk premiums coupled with a shift toward risk aversion among investors. In those environments, risk premiums typically don’t normalize gradually – they do so in abrupt spikes. We’ll continue to respond as the evidence changes, but under current conditions, we view the investment environment for stocks as being among a handful of the most hostile points in history.


Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero |

An Abandoned, Moss-Covered Shed Has Sold For $880,000 In London’s Bonkers Housing Market


A disused, moss-covered shed in London has sold for £550,000 ($880,000) in a testament to the capital’s insane property market, The Telegraph notes.

House price growth in London is officially cooling according to new figures out today. But even as rate growth slows, record prices in the UK are still being set. 

British house prices rose 9% in October, down a bit from 9.4% in September, according to Nationwide Building Society’s monthly index. The Financial Times reported:

The average price of a house rose by 0.5 per cent month on month to £189,333, beating the previous high of £189,306 in August.

But  £190,000 — about $304,000 — won’t get you very far in London, where prices have spiraled upward in a way that most people regard as slightly crazy.

To be fair to the shed — a garage in Chelsea hemmed in by existing buildings — it’s in a great neighborhood and sits on approximately 0.005 hectares (0.013 acres) of land. 

This Google Earth map (below) shows you why it’s worth so much.

It’s on the fancy King’s Road, near to the Marco Pierre restaurant and Vivienne Westwood’s store. The trendiest neighborhood in London, in other words:


And while the garage looks a bit gloomy now, look at these imaginary architect renderings of what it could look like after you’ve built a 1,000-square foot 2 bedroom house on the site:


The plot already has planning permission, which is why the sale was so expensive:


SEE ALSO: UK Property Prices Suffer ‘Largest Decrease Ever’ As London Real Estate Goes Into Full-Scale Collapse

Join the conversation about this story »


Original source at: Finance |

Saudi Arabia wants to use lower oil prices to pressure Russia to change its stance on Syria, to antagonize Iran, and to force US shale gas out of the market, Pepe Escobar explains the possible blowback

Via RT,

RT: Russia’s economy is surely being hit by the falling oil prices. But what about other oil producers like the OPEC states?

Pepe Escobar: A lot of people are being hurt. There are more or less 20 nations that need oil at least for 50 percent of their budget. Among these nations we’ll find especially a mix of African countries and Persian Gulf countries, that includes Saudi Arabia and Iraq as well, Venezuela and Ecuador. So it’s very complicated, it’s not only to hurt Russia…

RT: Saudi Arabia is one of the OPEC members and it is supposed to collaborate its oil price policy with other members. Why it is acting like this?

PE: OPEC is not a moralistic organization. There has been a lot of speculation about what Saudi Arabia has been doing. In fact, their strategy is still faulty – they want lower oil prices to pressure Russia vis-à-vis Syria, change their stance vis-à-vis Damascus and they want to more or less price shale gas from the US out of the market, and also pressure Iran vis-à-vis what’s going on in the Middle East, the famous Saudi-Iranian antagonism. This is not going to work in the long run because even Saudi Arabia will be in trouble if we have a barrel of oil like it was projected for the first quarter of 2015 between $70 and $80, now it’s a round $86-87. So they will be in trouble as well, their strategy in the long run is going to backfire.

RT: So, how long are these major oil exporting countries going to follow this strategy? When will they think of their own economic interests?

PE: When we look at the breakeven for most of these countries in terms of their state budget – how much they need a barrel of oil to cost if they can more or less even their expenses? When we look at the latest table – which is a composite of indexes from the Economist, Wall Street Journal, Bloomberg, Reuters – Venezuela and Ecuador need oil at $120 a barrel, they are going to be in a deep trouble. Iraq, for instance, needs around $106-116 – they are in trouble. The problem with Iran is that we don’t have very exact figures.

According to these indicators, Iran will need a barrel of oil between $130 and $140. That’s too much because oil is less than 20 percent of Iran’s revenues, so it’s not essential for them. Gas is much more important. In terms of Russia, we know how Russia may [be] hurt because for the State Budget of Russia for 2015 it’s around $100 a barrel. So if we have next year, according to the best projecting so far, between $70 and $80 and maybe even going down to $65-70 in the next few years, all of these countries are going to suffer. But the market is very volatile. In one year from now we could be talking about a completely different situation if we have more demands, especially from China, from the US, from Europe, supposing there is some sort of economic realignment in Europe. So this could change not just in a matter of not only days and weeks or years but very fast.

RT: Why aren’t the OPEC-states reducing the production volumes, like they normally do when prices drop?

PE: There are a lot of back-door consultations among OPEC members at the moment. Sooner or later we can expect less oil in the market, so the prices will go up. Especially, I would say from Venezuela, Ecuador… Iran – they need the revenue, so at the moment they are just starting the market flows. Obviously they have very good customers in Asia, even if they are buying less like China, they still buy Iranian oil. We have to see the US point of view, in fact, because the US doesn’t want very low oil prices to price their shale gas exploration out of the market. So there are going to be counter-moves by many OPEC and non-OPEC players as well.


Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero |

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At a global aggregated level deflation has been non-existent over the last 80 years. Prior to the twentieth century, Deutsche Bank notes that years of deflation were almost as common as years of inflation. However this all changed over the last 100 years or so as global currency links to precious metals broke down periodically and then collapsed as of 1971. Furthermore, since then inflation has had an upward bias relative to most of prior history, and as such, Deutsche warns, the longer-term investor has evidence that they must approach the current low levels of bond yields with extreme caution.

Via Deutsche Bank,

Future inflation is clearly crucial to understanding the future performance of assets and the health of underlying economies. It is also critical to working out whether bond markets are in a bubble or simply reflecting low activity including low inflation.

Looking at the results so far it’s a measure of the level of intervention of central banks since the GFC that nominal yields are close to all time lows in many countries whilst inflation is at more ‘normal’ levels for most countries, albeit starting to get very low in some. Looking forward, given that we live in a fiat global monetary system (and have done since the Bretton Woods regime effectively collapsed in 1971), there is no theoretical constraint on money creation. Since 1971 inflation has had an upward bias relative to most of prior history where the most common system was some kind of precious metal currency peg. In particular deflation should be very rare in a fiat currency system, especially with modern day high levels of debt as central banks would likely be forced to intervene if there was the threat of a run on a country’s debt due to any deflation risk and implied solvency issues. The peripheral of Europe is slightly different in that individual countries have lost control of their own monetary policy. However even here the ECB is unlikely to allow deflation to persist for major economies for fear of debt funding problems and damaging contagion to the wider euro area project.

Figure 11 illustrates the positive inflation bias seen in the modern era by showing the percentage of countries (in our progressively increasing sample of up to 103 countries) with negative annual YoY inflation through time (back over 200 years). Before the last 70 years it was quite common to see periods of annual deflation for over 50% of countries in the sample. Over the last 40-50 years this number has rarely been above 10% of the population.

At a global aggregated level deflation has been non-existent over the last 80 years. Figure 12 uses the same gradually increasingly cohort as analysed above but shows the median global YoY inflation back to 1210 (left) and over the shorter period since 1800 (right).

Prior to the twentieth century, years of deflation were almost as common as years of inflation. However this all changed over the last 100 years or so as global currency links to precious metals broke down periodically and then collapsed as of 1971. Indeed we haven’t seen a year of deflation on this median Global YoY measure since 1933, meaning we’ve now had over 80 years without a global year on year fall in prices even if the annual rate of inflation has been falling fairly consistently since the mid-1970s.

The point being that the longer-term investor has evidence that we live in a world with a positive inflation bias and as such must approach the current low levels of bond yields with extreme caution.


Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero |

For those just catching up on the main news event of the weekend, namely the sudden surge in Scotland “Yes” vote polling surpassing 50% for the first time, here is a complete round up of the background, updates and expert reactions from RanSquawk, Bloomberg and AFP.


  • Recent polling shows the ‘Yes’ campaign overtaking the unionists for the first time, just 10 days ahead of the final vote on September 18th
  • Independent Scotland runs the risk of limited currency options and fiscal uncertainty
  • UK debt ratings hang in the balance as worst-case scenario sees Westminster shouldering an estimated extra GBP 140bln in former Scottish debt


The “No” party – the unionists – are led by Alistair Darling, former Chancellor of the Exchequer, previously held a lead over the nationalists but this has reversed in the most recent polling, with the ‘No’ vote holding 49%.

The “Yes” party – the nationalists – are led by Alex Salmond, Scotland’s First Minister, and harbour hopes of swinging the referendum in their favour as latest polls suggest they have been overtaken the ‘No’ camp by 2ppts.

Serious doubts remain over the future of Scotland’s currency if the nationalists win. Salmond has repeatedly stated his intention of keeping the GBP, but all 3 main UK parties have made clear they would not be willing to share their currency and central bank with a foreign state. Also, a potential use of the GBP without a currency union would not be compatible with EU membership, as the EC requires member states to have a monetary authority of their own.


No” Victory – Given the somewhat complacent attitude market participants have had towards the vote indicates that the upside in riskier assets is limited in case the unionists win the referendum with a large majority. Nevertheless, expect to see some tightening in spreads of the shorter-dated implied volatilities which have widened heading into the risk event.

However, a close vote could lead to a second referendum in 5-10 years and as such, changes to UK regional governance would take place as a result of more devolution, with additional powers going to Scotland such as more autonomy over taxation. In turn, business leaders, including the head of Standard Life and RBS, will have to decide as to whether to relocate their headquarters to the UK or stay in Scotland depending on what type of policies Scotland decides to pursue with its additional powers.

Yes” Victory – Great uncertainty revolves around an independent Scotland, specifically due to the lack of clarity over the potential new fiscal arrangements such as interest rates, taxation, investor protection, financial stability and monetary policy.


There is a considerable downside asymmetry between potential gains from a resounding victory for the “No” party and a close vote or surprise victory for the “Yes” party. If polls continue to suggest a narrowing of the unionists’ lead, markets should become more sensitive. GBP should weaken in the run-up to the vote and fall sharply if Scotland vote for independence. More specifically, analysts at Societe Generale expect that on the actual date of the referendum, a Scottish “Yes” vote would trigger an immediate fall in GBP, between 3 – 5%.

The question of whether a go-it-alone Scotland will be able to keep the GBP in partnership with the remaining parts of the U.K. has dominated the independence debate with all the major parties in London saying they would oppose it. Scottish First Minister Alex Salmond has argued they would change their view once negotiations began after a Yes vote and has said Scotland would refuse to pay its share of the U.K. national debt (some see this as high as GBP 140bln) if they didn’t give in.


Scottish equities should suffer, with the effect on UK stocks expected to be mixed. Analysts at Barclays believe a “Yes” vote would have a minor negative impact on the UK stock market. However, they say independence would pose significant difficulties to both economies and hit several London-listed companies such as BG Group, RBS, Lloyds, Diageo and BAE Systems. The adverse impact would come through considerable uncertainty over the scale of potential currency fluctuations, the increased risk premium associated with a new, independent currency, and the limited belief in a Scottish central bank’s ability to act as a lender of last resort. Conversely, airline stocks such as easyJet, Ryanair and IAG should benefit as the “Yes” party have already committed to slashing Passenger Duty and possibly eliminating it altogether.

* * *

Media take, via AFP:

Supporters of the United Kingdom began a fightback on Monday to stop Scotland voting for independence in next week’s referendum after an opinion poll put the separatists ahead for the first time. The shock survey put the “Yes” campaign two points ahead after months of a strong lead by unionists, causing the pound to slump to a 10-month low on fears that a break-up of the 300-year-old union was now a real possibility.


The leader of the Better Together campaign, Alistair Darling, insisted that other polls put the unionist campaign ahead but admitted it was “clearly very tight” ahead of the September 18 vote.


“We’re in the position now where every voter in Scotland could potentially tip the balance in this referendum. But I am confident that we will win,” the former finance minister told BBC radio.


‘Ten days to save UK’


This weekend’s poll has shaken up a campaign that until just a few weeks ago looked almost certain to end in defeat for the independence campaign. The YouGov poll in The Sunday Times newspaper gave the “Yes” camp 51 percent support compared to the “No” camp’s 49 percent, excluding undecided voters. Six percent said they had not made up their minds. The two-point gap is still within the margin of error but Peter Kellner, the president of the YouGov pollsters which carried out the survey, said it was a major development.


“The ‘Yes’ campaign has not just invaded ‘No’ territory; it has launched a blitzkrieg,” he wrote in a blog posting.


The poll finding was front-page news on British newspapers on Monday, with many running the same headline: “Ten days to save the union.”


Queen ‘horrified’ by break-up


The poll has increased the pressure on British Prime Minister David Cameron, who agreed to a referendum but has been accused of failing to fight hard enough to keep Scotland in the UK.


Media reports suggest that some lawmakers in his Conservative party are discussing whether to call a vote of no confidence in the premier in the event of a “Yes” vote.


However, Cameron has insisted he has no intention of resigning and will lead the Tories into the next British general election in May next year.


Cameron spent the weekend with Queen Elizabeth II at her Scottish summer retreat in Balmoral, where the referendum is likely to have been a topic of discussion.


Officially the monarch has remained neutral, although some newspapers quoted royal sources as saying she is “horrified” at the prospect of a break-up of the UK.

* * *

Market Reaction

  • Sterling drops most in 14 months vs USD to hit 1.6103, lowest since Nov. 2013
  • European traders say no strong bids seen until 1.6000
  • GBP/USD 1-mo volatility jumps most since Oct. 2008 to 13-mo high
  • U.K. money markets pricing delay to BOE rate hike; with first full 25bps of tightening priced in July 2015 vs April 2015 on Friday
  • Spike in GBP front-end rates stop out of short positions
  • RBS and Lloyds shares extend decline; Z-spreads widen; both banks lend most to Scotland


  • Sept. 8 – U.K. Govt Not Making Contingency Plan for Scottish Independence
  • Sept. 8 – Former Chancellor Darling says confident ‘No’ campaign will win at Scots referendum
  • Sept. 7 – Queen Elizabeth has “great deal of concern” about possible Scottish independence, Sunday Times reports
  • Sept. 7 – U.K. Chancellor Osborne says says “there will not be a currency union”
  • U.K. has action plan to give more power to Scotland
  • Sept. 6 – Coalition policies help scots independence campaign, Brown Says
  • Sept. 6 – Scottish independence backed by 51% in YouGov poll, Sunday Times reports
  • Sept. 6 – A Panelbase poll shows the independence campaign still need to overcome a four-point deficit to triumph
  • Sept. 6 – Cameron warns Scotland will be more vulnerable to terrorist attacks if it votes for independence
  • Aug. 13 – BOE Governor Carney says Scottish independence could cause financial stability issues and BOE has contingency plans in place to address them during any potential transition

BBG Traders’ Notes from Richard Breslow

  • For all the huge movement in cable overnight, ranges elsewhere surprisingly small, if you read the headlines on flight to safety, haven buying, bonds up, not huge, stocks down, not huge; apart from the obvious pain points in currencies
  • EUR/GBP 0.7900 we pointed out last Thursday as a huge chart level which we have now gapped well above, that’s become the big kahuna to trade against, I don’t think anyone knows what to do with this, what the polls really mean at the end; will certainly remain on top of market attention list over next 10 days or so

Research Roundup:

JPMorgan (fx strategists incl. John Normand)

  • Between more ECB easing, tightening of Scottish referendum polls and rise in U.S. 2-yr rates, FX turnover spiked from depressed to almost normal level
  • Trades remain highly tactical; take profits on long USD vs JPY, GBP and SEK; stay short EUR/USD and add limited euro-funded carry (EUR/BRL) and sell GBP/AUD
  • GBP isn’t bearish at least vs EUR if Scotland votes no; prefer short on crosses like EUR and add to shorts vs AUD as polls on Scotland referendum tighten; bearish 1.63  GBP/USD one-touch triggered

Credit Suisse (strategists incl. Ric Deverell)

  • EUR/USD downside likely limited near term in absence of more  clarity on potential for broad-based QE from ECB; 3-mo forecast at 1.29
  • Continued improvement in U.S. data and increasingly dovish ECB to drive bullish stance on USD
  • Prefer shorting EUR/EM crosses such as EUR/ZAR, EUR/TRY, EUR/BRL and EUR/MXN
  • Among U.K. data this week, expect July industrial production to grow 0.1% m/m vs 0.3% m/m in June, below consensus of 0.2%
  • GBP may continue to come under pressure in near term; EUR/GBP to be biased lower

Citigroup (strategists incl. Steven Englander)

  • Advanced retail sales most important U.S. data this wk; a strong print will continue to weigh on bonds
  • NFIB small business survey potentially important; continued increases in 3-mo forward hiring trends will reinforce fears of inflation and higher U.S. rates
  • Small risk from Fed speakers Plosser and Tarullo
  • GBP may be supported if U.K. July industrial/manufacturing production shows economic activity expansion at start of 3Q even as concerns about Scottish referendum may weigh
  • BOJ’s Kuroda not expected to give hints of additional easing
  • Disappointment in Machinery orders would probably make markets factor the possibility of further BOJ action
  • Australian employment report could prove a major factor in setting the tone for AUD; bigger shock would be on the strength
  • Like short EUR/AUD into the release

Morgan Stanley (team incl. Hans Redeker)

  • GBP/USD may fall to 1.46 in 12 months if event of Yes vote at Scottish referendum; cuts GBP/USD end-4Q forecast to 1.65 vs 1.73 prev, citing moderation in BOE rate hike expectations and cooling off in pace of U.K. recovery
  • As monetary conditions normalize, traditional relationships between currencies and oil prices could return; may pressure NOK, COP, RUB and CAD
  • NOK decline looks set to accelerate as economic support from high oil prices and oil sector investment falters
  • Add AUD/NZD longs; weakening fundamentals, both domestically and internationally, now appear to work against the NZD; short vs AUD to reduce carry costs in current environment
  • Dovish ECB policy does little to support EMFX; U.S. funding costs being of greater importance to the asset class
  • Some exception found in EUR/CEE, though Russia/Ukraine tensions may weigh on CEE performance
  • Await rebound in EUR/USD to re-enter bearish strategies given likely near-term constraints from extreme short positioning; forecast 1.20 in 2015

BNP Paribas (Michael Sneyd)

  • Data and yields to continue supporting a strong USD
  • Remain long USD/JPY from 103.20, with stop trailed to 104
  • Enter short AUD/USD at 0.9345, target 0.9050, stop at 0.9510; AUD strength vulnerable from both extended positioning and relative fundamentals
  • Norwegian CPI, quarterly regional network report have scope to support NOK ahead of Sept. 18 Norges Bank meeting; elevated long NOK positioning is a limiting factor

What To Watch

  • Sterling may drop further ahead of Sept. 18 Scottish referendum, analysts say; see research roundup
  • Market Should Price 50% Chance Scotland Says Yes: Deutsche Bank
  • CEBR says an independent Scotland would begin with a budget deficit of at least 6.4% to GDP
  • Scotland independence may halt work on renewable power projects that support GBP14b of investment and 12,000 jobs
  • BOE Governor Carney due to speak at trade union congress in Liverpool tomorrow and will testify on Inflation Report the day after

Source: RanSquawk, Bloomberg, AFP


Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero |

ricky bobby

America now boasts the strongest manufacturing sector in the world.

Earlier today, we learned the U.S. purchasing manager’s index (PMI) for manufacturing hit 57.9, the highest level since April 2010.

Any reading above 50 signals growth, while anything below signals contraction.

Export sales climbed at the fastest rate in three years, and manufacturing payrolls increased at the steepest pace since March 2013. The Institute for Supply Management’s U.S. manufacturing index also hit a multi-year high this morning.

“The U.S. manufacturing sector has gone from strength to strength this summer, with August’s improvement in business conditions the sharpest for over four years,” Markit senior economist Tim Moore said. “Impressive new business and output gains were matched by a solid rebound in employment growth. The latest survey points to the fastest upturn in payroll numbers for around a year-and-a-half, highlighting that the manufacturing sector continues to have a positive impact on overall labor market conditions.”

So who has the weakest manufacturing sector in the world? That would be France, whose purchasing manager’s index for manufacturing fell to 46.9, shrinking at the fastest rate in 15 months.

“Sharply falling output led firms to cut back employment, purchasing and stock levels further in August,” Markit’s Jack Kennedy said of the France PMI report. “This sort of across-the-board weakness has been a common theme in recent months and there remains very little to suggest any turnaround in fortunes will be imminent.”

This puts it below even Greece, not to mention Australia, Denmark and Poland.

Nothing seems to be working out for France lately. French finance minister Michel Sapin just warned his country would miss its budget targets because of low inflation. “The inflation figures in the Euro zone have created a shock,” he said.

Here’s a chart comparing the August manufacturing PMIs from Markit and JPMorgan. 

markit jpmorgan pmi

SEE ALSO: The True Story Of How McDonald’s Conquered France

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Original source at: Finance |

warren buffett

When Warren Buffett started his investing career, he would read 600, 750, or 1,000 pages a day.

Even now, he still spends about 80% of his day reading. 

“Look, my job is essentially just corralling more and more and more facts and information, and occasionally seeing whether that leads to some action,” he once said in an interview

“We don’t read other people’s opinions,” he says. “We want to get the facts, and then think.”

To help you get into the mind of the billionaire investor, we’ve rounded up his book recommendations over 20 years of interviews and shareholder letters. 

“The Intelligent Investor” by Benjamin Graham

When Buffett was 19 years old, he picked up a copy of legendary Wall Streeter Benjamin Graham’s “Intelligent Investor.” 

It was the one of the luckiest moments of his life, he said, because it gave him the intellectual framework for investing. 

“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information,” Buffett said. “What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. This book precisely and clearly prescribes the proper framework. You must provide the emotional discipline.”

Buy it here >>

“Security Analysis” by Benjamin Graham

Buffett said that “Security Analysis,” another groundbreaking work of Graham’s, had given him “a road map for investing that I have now been following for 57 years.”

The book’s core insight: If your analysis is thorough enough, you can figure out the value of a company — and if the market knows the same. 

Buffett has said that Graham was the second-most influential figure in his life, after only his father. 

“Ben was this incredible teacher; I mean he was a natural,” he said

Buy it here >>

“Common Stocks and Uncommon Profits” by Philip Fisher

While investor Philip Fisher — who specialized in investing in innovative companies — didn’t shape Buffett in quite the same way as Graham did, he still holds him in the highest regard. 

“I am an eager reader of whatever Phil has to say, and I recommend him to you,” Buffett said

In “Common Stocks and Uncommon Profits,” Fisher emphasizes that fixating on financial statements isn’t enough — you also need to evaluate a company’s management.

Buy it here >>

See the rest of the story at Business Insider


Original source at: Finance |