Submitted by Daniel Drew via Dark-Bid.com,

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.

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Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero | http://www.zerohedge.com/news/2015-06-15/what-volcker-rule-loophole-looks

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From GMO’s Edward Chancellor

The Typical Characteristics of a Stock Market Mania

1. This-time-is-different mentality. Throughout history, successive market manias have been rationalized with the argument that history is no longer a reliable guide to the future. Both the “new era” of the 1920s and “new paradigm” of the 1990s were marked by a “this-time-is-different” mentality. The same mode of thinking is evident again today. U.S. profit margins are currently at peak levels and the profit share of GDP in the United States is more than two standard deviations above its long-term mean (based on data going back to the 1920s). The U.S. profits dataset is the most reliably mean-reverting financial series available, claims Andrew Smithers of Smithers & Co. Most commentary, however, assumes that U.S. profits have reached, in Irving Fisher’s immortal phrase, a “permanently high plateau.” As John Hussman of Hussman Funds comments, “Believing that historical tendencies have evolved into a new paradigm will likely have the same results as playing leapfrog with a unicorn.” Painful.

2. Moral hazard. Speculative bubbles tend to form when market participants believe that financial risk has been underwritten by the authorities. The “Greenspan Put” appeared in the late 1990s after it became clear that the Fed was prepared to support falling markets but wasn’t going to act against the bubble in  technology stocks. Fed policy hasn’t significantly changed since then. Monetary policy in the aftermath of the financial crisis has aimed to put a floor under asset prices, encouraging investors to take on more risk. As a consequence, U.S. household wealth – comprising largely of home equity and stocks – has rebounded to a near-record level of 472% of GDP, nearly 100% above its long-term mean. Whenever a cloud appears over Wall Street, market participants have come to expect more quantitative easing and guarantees of perpetually low interest rates. The personnel may change at the Fed, but the Greenspan Put remains in place.

3. Easy money. Great speculative bubbles have generally been accompanied by periods of low interest rates. Greenspan’s easy money policies in the last decade inflated the U.S. housing bubble, along with numerous other bubbles around the world. Bernanke’s cure for the economy in the wake of the financial crisis has been more of the same. For more than five years, U.S. real interest rates have been maintained at negative levels. An avowed aim of the Fed’s quantitative easing has been to push down long-term interest rates in order to boost both the stock market and home prices. In particular, lowering the long-term discount rate has boosted the valuation of growth stocks.

4. Overblown growth stories. Another common feature of a bubble is the overblown growth story. We witnessed this during the Dotcom bubble, ad nauseam. In the late 1990s we were told that tech stocks were experiencing “S-curve” growth (which posits very rapid growth in the near term); investors were also encouraged to value the “real options” of Internet stocks from future income streams yet to be conceived. Many of today’s high profile growth stocks – operating in fields such as social networking, electric cars, biotechnology, and, of course, the Internet – have been boosted by similar wishful thinking. Just as there were serial railway bubbles over the course of the 19th century, Internet stocks in the age of Dotcom 2.0 appear to be experiencing what my colleague James Montier has termed a “bubble echo.”

5. No valuation anchor. The most speculative markets – from the 17th century Dutch tulip mania onwards – have been marked by the absence of any valuation anchor; when there’s no income to tether the speculator’s imagination, asset prices can become unbounded. Our electronic age has even come up with a digital version of the Semper Augustus tulip. The fact that Bitcoin – the best known among the dozens of competing crypto-currencies – soared by 5,500% during the course of 2013 is testimony to the strength of the recent speculative tempo.

Needless to say, most of the recent stock market darlings – Netflix, Facebook, Tesla, and Twitter – have little or nothing in the way of profits. Internet retailer Amazon.com, whose margins have deteriorated in recent years yet whose stock soared nearly 60% in 2013, is the poster child for a market that is more obsessed with growth than profitability.

6. Conspicuous consumption. Asset price bubbles are associated with quick fortunes, rising inequality, and luxury spending booms. Since the spring of 2009, not only has the Fed engineered a strong rebound in the level of household wealth, but the richest part of the population has enjoyed the greatest share of the gains. Luxury spending has surged globally since the crisis.

The art market provides an excellent barometer of the speculative mood, given art prices depend entirely upon what other people are prepared to pay. A bubble in modern and contemporary art, which was evident before the financial crisis, has returned. Last November, a sculpture by Jeff Koons – Balloon Dog (Orange) – fetched $58 million at auction, a record sum for a work by a living artist. The contemporary collector apparently isn’t fazed by the fact that this dog was one of five “unique” versions or that Koons himself didn’t produce the work by his own hand but had it made in a factory. The same month, a painting by Francis Bacon sold for $142 million, the highest price ever paid for any work at auction.

7. Ponzi finance. Manic markets are often marked by a decline in credit standards. In the last decade, subprime debt inflated the U.S. real estate bubble. The financial crisis may have had many unpleasant after-effects, but it hasn’t diminished the appetite for low quality U.S. credit. In fact, we have recently witnessed the lowest yields for junk bonds in history. The quality of debt issuance has been deteriorating. Last year, nearly two out of three corporate bond issues carried a junk rating. Last year, total issuance of high yield and leveraged loans exceeded $1 trillion. More than half of the 2013 vintage leveraged loans came without the traditional covenants to protect investors. The decline in the quality of credit has attracted the attention of Jeremy Stein, one of the more market-savvy Fed governors. Stein’s boss, Janet Yellen, has also expressed concern about the manic leveraged loan market.

8. Irrational exuberance. Valuation is the truest measure of speculative mood. There are other ways to take the market’s pulse, however. Most conventional measures of market sentiment have become very elevated over the past year. The IPO market in 2013 and into the first quarter of 2014 has become particularly speculative. New IPOs in 2013 rose on average by 20% on their first day’s trading (Twitter rose 74% on the day it came to the market last November). Nearly three-quarters of the IPOs, which were launched in the six months to March, produced no profits. A good portion of these profitless IPOs, in particular those of the biotech variety, hadn’t even got around to generating anything by way of revenue. They are story stocks, pure and simple.

Other sentiment measures have been telling the same story. The trading activity of corporate insiders is a reasonably good indicator of managements’ view on the intrinsic value of their companies. Recently, the ratio of insider sales to purchases has climbed to near record levels. Equity mutual fund flows – another commonly cited sentiment indicator – have also picked up lately, while household cash balances (as a share of total assets) have declined. Margin debt as a share of GDP is close to its peak level. Market volatility has been trending downwards, while the daily correlation of stocks – another useful gauge of the market’s fear level – has also come down.

* * *

And yes: we have all of the above right now, most of which in record amounts. So… buy, buy, buy.

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Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero | http://www.zerohedge.com/news/2014-05-05/eight-characteristics-stock-market-mania

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SocGen has published a fantastic, must read big picture report, which compares the world in the 1980/1985-2000/2005 time period and juxtaposes it to what the author, Veronique Riches-Flores predicts will happen over the next two decades years, the period from 2005/2010 to 2025/2030. Unlike other very narrow and short-sighted projections, this one is based not on trivial and grossly simplified assumptions such as perpetual growth rates, but on a holistic demographic approach to perceiving the world. At its core, SocGen compares the period that just ended, one in which world growth was driven by an expansion in supply, to one that will be shaped by an explosion of demand. And, unfortunately, the transformation from the Supply-driven to the Demand-driven world will not be pretty. Summarizing this outlook: “Over the last three decades strong growth in the working-aged population across Asia and the opening-up of world trade have led to considerable expansion in global production capacities. These factors created a highly competitive and disinflationary environment of plentiful supply, which was characterised by low interest rates, a credit boom and, in the financial markets, exuberant appetite for risky assets. As the demographic cycle progresses, we are seeing the emergence of an aging population, which is less favourable to productive investment. Meanwhile the rise in living standards among the emerging population heralds an unprecedented level of growth in demand. The world supply/demand balance is dramatically changing against a backdrop of resource shortages which are likely to favour shorter cycles, increased government intervention in economic affairs and inflation.” In other words, contrary to what you may have read elsewhere, the future is about to get ugly. And topping it all off is a Kondratieff cycle chart: what’s not to like. Read on.

Visually comparing the two proposed world paradigms:

The world was characterized by a very defined demographic transformation which served as the underpinning of a production capacity explosion:

A rise in the working age population, which provides labour and growth in demand and savings, has always coincided with economic prosperity. This trend, which economists describe as the “demographic dividend” of the first phase of transition from a primitive or  stationary demographic structure, with high birth and death rates, to a developed demographic structure, translates in economic terms into a very strong urge to invest, which is the main source of economic development. The countries of Asia excluding Japan reaped  spectacular rewards from this demographic transition: between the mid-1980s and the present their rate of investment has increase by the equivalent of more than 10% of the region’s GDP and industrial potential has considerably increased. The surge in investment that began in Southeast Asia has over the last 15 years focused predominantly on China.

Yet demographics must be taken in conjunction with the other core feature defining the world since 1980: the literal New World Order, predicated by the opening of the world to “free trade.”

This transition would not have been so great, nor would it have had the global implications it has had, if it hadn’t been accompanied by the opening-up of world trade due to progress in international negotiations which first brought the GATT agreement and then the WTO, with the aim of optimising resources by making better use of competitive advantages.

In a progressively open world, Asian countries drew increasing benefits from their comparative advantage. The sudden abundance of very low cost labour created the conditions for an unprecedented rise in competition on the world labour market which brought even more investment into the region. What these trends did was to bring about a profound shift in the world’s production and labour balance and a radical change in the economic model that was previously in force. Because, although there had always been cost differences from one country to another, access to a globalised market provided the opportunity of exerting more influence than ever before. The liberalisation of trade gave the Asian demographic transition a dimension comparable to that which brought about the same phenomenon in Europe a century earlier, albeit in Europe’s case the scale was far smaller.

Thus the population boom of recent decades triggered, not a substantial rise in demand, as one might at first expect, but a massive increase in supply as a result of the unprecedented expansion of the global production base. Given that the purchasing power of workers in the emerging Asian countries has, up until recently, been too limited to have any real influence on world demand, average global investment per capita continued to grow faster than real consumption in the region between the mid-1980s and 2007, with the gap peaking at almost 40% over the period.

Naturally, just these two drivers did not nearly come close to explaining the hospitable environment for global growth:

These fundamental characteristics have been reinforced by innumerable other economic, political and cultural revolutions which all aided the development of supply: the end of communism and consequently the expansion of the capitalistic model, privatisations and the widespread decline of state intervention, deregulation in most of the major sectors of economic life, the accelerated development of the financial markets, the revolution of communication technologies. All of these factors contributed to an environment shaped by abundant supply, where increasing competition meant that the least competitive were doomed to fail and all sustained prices rises were eradicated. While the central banks congratulated themselves for having kept inflation under control over the years, we can see that they had a good deal of help from the underlying economy. By restricting access to excess liquidity for the goods markets, the context made it a lot easier for the central banks to control the scourge of inflation. Meanwhile disinflation led to a structural weakening in interest rates which was highly beneficial for the conditions underlying global supply… until it eventually led to the financial excesses that caused the crisis in 2008.

This combination of factors created an environment that was particularly favourable for all asset classes, company assets in the first instance, and then credit, bonds and property assets.

While the expansion of the production platform took place primarily in Asia, it was the West that enjoyed the improvement in return on capital. In a hyper-competitive environment, productivity gains improved in proportion to job weakness and, in a context characterised by a structural decline in capital stock and weaker economic growth, this produced a marked improvement in yield on the latter.

Overall these shifts meant that in the universe of large corporations an increasing part of the added value went towards profits and this, combined with a very strong dividend distribution policy, goes a long way towards explaining the paradox of recent years where structurally weak economies and very strong capital market profitability lived alongside each other for so long.

So that was then. And it lead to what can only be described as log growth in all aset classes: we will not insult readers’ intelligence by showing a graph of the S&P from 1980 to 2005.

What is next?

SocGen does not sugarcoat it:

The unprecedented economic and financial crisis of 2008 has abruptly altered the course of history and there is no doubt that its effects will have a sustained influence on future developments. However, the crisis itself represents the expression of the end of the excess created by the previous situation and its consequences should play only a secondary role in comparison to the powerful structural changes that are currently sweeping across the globe, namely changing demographic trends, the explosion of demand in emerging countries and the resurgence of physical constraints to growth.

The shift in the global demographic structure that has characterised the last three decades is now coming to an end. Although the global population is expected to continue to grow significantly in the future, with the nine billion threshold likely to be reached in 2040  according to the UN’s latest projections, a third of this growth will be attributable to the expansion of the elderly population, in the developed countries of course, but also in a good number of emerging countries, and particularly Asia.

The biggest demographic change is without doubt the aging of global, both developing and developed, society. This also explains the special role insolvent entitlement structures which are supposed to ensure retirmenet and pensions for ever more people, have in the eyes of current governments:

By 2030, the portion of working age people in the industrialised countries is expected to have fallen by more than 5%, from more than 67% of the population today, to 62%. By contrast, the over-65s are expected to climb from 16% to 22.5%. In Asia excluding Japan, the over-65s are expected to account for 36% (277 million) of the population increase, after having accounted for less than 10% of the increase observed over the previous 30 years. In the region, the portion of working people in the total population will stop growing when the Chinese population embarks on a similar decline to the one projected for the developed countries starting in 2010.

The below should be the first refutation of any brainless idiotic argument which sees the Dow at 20,000 in the near future (absent  hyperinflation of course, in which case the Dow will be at 20 billion but be completely worthless).

The economic implications of population growth resulting from an increase in working aged adults in the first case and an increase in over-65s, in the second, are naturally not comparable. While in the first case, the demographic shift favours structural development, in the second case it weighs on development.

The causes are largely understood in the developed countries where the population has already aged considerably. In this case nevertheless, the negative effects that the aging population has on savings and the urge to invest are likely to be accompanied, or even preceded by at least a proportional decline in growth of structural demand, especially in the current context of widespread household/government over-indebtedness. With revenues at least a third lower than those of the working population, the retired population consumes considerably less than the average adult and is far more vulnerable to debt and asset depreciation than younger households. The combined effects of over-indebtedness, property market decline and widespread fiscal tightening are thus likely to be greater in terms of pressure on demand than the effect of demographic aging on supply.

A longer-term demographic snapshot:

By 2030 two-thirds of the needs of the global population will emanate from the emerging world, the population of which is expected to approach seven billion and the economic weight of which is set to double in comparison to today’s level.

The punchline:

So, while up until now less than one billion people have accounted for three-quarters of global consumption, over the course of the next two decades, the new Chinese, Indian, Indonesian, Latin American and African middle classes will bring an additional two billion consumers with similar needs and aspirations as today’s North American, European and Japanese consumers.

Summarized what does this mean: said simply, an explosion in needs manifesting in a huge demand, and shortage, for all sorts of products, both raw and finished.

The global auto market

In 2010 the global auto fleet stood at approximately one billion vehicles. However, based on the increase in revenues per capita and fairly conservative assumptions relating to the increase in equipment ratios in the main emerging countries, the level should  spontaneously double by 2030.

To satisfy these new needs, production is going to have to grow at an average rate of 3.5% per annum over the next 20 years, compared with an average annual growth rate of 2.5% over 2002-2008. Although this may not seem too far-fetched at first, we then have to add the renewal of the existing fleet which, based on an average vehicle lifespan that we estimate to be between 10 and 12 years, will have to be completely replaced over the next two decades. Thus, one billion expansion + 1.6 to two billion replacement, which means that, in comparison to the current level, production would actually have to triple rather than double in order to meet future demand, corresponding to an average annual growth rate of not 3.5% but potentially 4.4% (assuming a 10-year average lifespan of a vehicle) to 5.6% (10 year average lifespan) by 2030.

Metals and other inputs

Given that metal accounts for half of the weight of each new vehicle (54% exactly at present), the tripling of auto production between now and 2030 implies a threefold increase in demand for metals, steel alloys, light metals such as aluminium, and textiles, which are also used extensively in vehicle production.

Meanwhile in another field, namely construction, rapid urbanisation and the subsequent increase in tall buildings is also contributing to very strong growth in demand for steel. According to ENRC (Eurasian Natural Resources Corporation), buildings of over 16 floors, where steel intensity is twice as high as in buildings of less than six floors, are expected to account for more than half of all new Chinese constructions between now and 2020.

These few examples are not just the exceptions. At this stage many sectors are projected to encounter increased demand of similar proportions, as the change in lifestyles that accompanies the rise in living standards in the emerging countries affects demand for a considerable range of goods.

Beyond growth in demand for finished products, the most spectacular effect likely to be brought about by the stronger development of the emerging economies will be the enormous rise in demand for raw materials.

The full report (below) indicates the same squeeze in agircultural products and in energy. Yet the take home message is clear: resource shortages are coming back with a vengeance as physical limits on growth once again appear.

Having disappeared from the economic landscape over the last century, resource shortages are back. This will create a particularly unstable environment in the long term, some of the characteristics of which we can already anticipate:

Structural increase in the cost of raw materials. A structural increase in raw materials prices is in fact an inevitable consequence of chronic resource insufficiencies, whether we’re talking about industrial, energy or agricultural resources. Rather than asking which direction real raw materials prices are going, we must now ask how long it will take to erase the long period of price decline seen between 1980s and the 2000s.

Rise in cycle frequency and magnitude. Given that any sustained period of expansion would be likely to run into an ever increasing number of physical constraints as time goes by, cycle durations are likely to become significantly shorter. However, greater cyclicality doesn’t mean that the cycles will be smoother. On the contrary, in view of the factors underlying the increase in demand, the upward phases of the short cycles are likely to be particularly pronounced, triggering recurrent price swings which could act as an automatic stabiliser. Movements in the price of raw materials and their resistance and support points look likely to play a key role in the cyclical shifts of the period.

Rise in cost of capital and slowdown in productivity gains. For economic intermediaries and the investment community, a series of short cycles spells relative instability and reduced visibility. These characteristics are generally bad news for investment as risk-taking would need to be carried out against a backdrop of potential resource shortages. This observation raises questions over the future development of commodity supply despite the context of increasing demand, given that savings sources are declining due to population aging in wealthy countries and this is likely to lead to a shortage of capital supply and a proportional increase in cost of capital. None of this bodes well for company performance. The slowdown in productivity gains that has been observed in the developed countries for almost a decade now thus looks set to continue and to spread to the newly industrialised countries.

State intervention, regionalisation of trade. The underlying scarcity of resources could pave the way towards a resurgence in regulation, as already observed with the restrictions on the trade of raw materials recently imposed by a number of countries. A rise in tensions on the commodities market and a diminishing supply of capital will considerably increase the temptation for governments to become increasingly involved in the management of resources. While strong inter-dependence reduces the risk of a return to widespread protectionism, a significant shift towards the regionalisation of trade, as opposed to the globalisation seen over the last 20 years, seems highly likely. Given the level of interdependence and tension, developments in global governance will be vital, meaning that a stronger regulatory framework will be adopted in an increasing number of economic and financial domains.

And the two most important take home observations:

Return of inflation

The stage is set for the return of inflation. It is merely a question of time before the global inflationary movement gets underway. The realisation that the emerging countries will account for the bulk of the growth in demand does very little to change this conclusion in a world characterised by a high level of inter-dependence and one that is increasingly being driven by the rising influence of these new players. The fall in competition that has already been triggered by the asymmetric demand shock represents the most efficient catalyst for the proliferation of the global price rises that have already been evidenced by the rapid widespread increase in the international trade prices of manufactured goods.

Widespread increase in interest rates

The growing structural imbalance between supply and demand looks set to trigger a very pronounced rise in interest rates as time goes by. There is also a significant risk that this movement will be accentuated by the structural decline in savings capacities on a global level.

And nor for what everyone has been waiting for: what does this all mean for equity markets. Well, it’s not all that bad…

The rising power of the emerging economies comes at a high collective cost and raises many questions. To say that this picture does not evoke a scenario of harmonious growth would be an understatement. At the same time, neither does it necessarily evoke a depressive scenario.

Firstly, because as a result of these shifts many billions of people will gain access to an unprecedented level of development and revenues. Young countries with substantial natural resources will find themselves with a significant source of growth in a world of scant resources. Alongside the progress already made by Asia, this new environment will represent a powerful development platform for Africa, forming a trend that is already clearly under way.

Secondly, because long-term economic history shows that a certain level of constraint is needed to stimulate the innovation and transformation that has ultimately allowed mankind to progress. While it is clear that the innovation process is currently lagging behind the development of demand, it is the distortions created by this imbalance that should allow crucial progress to get the upper hand.

Finally, because the changes under way in the emerging world offer the developed world, with its aging and over-indebted population, the only true chance it has of avoiding the projected structural decline that it faces without this external impulsion. At the end of a 30-year process that began at the end of the 1970s with the realisation that, only by distributing wealth through the liberalisation of world trade could the global economy thrive in the long term, the circle is now complete and this is obviously welcome. The years of hyper-competition and flagging industrial employment are drawing to a close. While the decline in productivity gains may not bode well for corporate profitability, it nevertheless marks a radical shift in the environment for the employment markets of the developed countries which, combined with the growth opportunities offered by the emerging markets, provides them with a precious if not their sole support for future growth. What is more, the inflation that will accompany this global economic transition represents the only chance these countries have of reducing their enormous debt burdens in the long term.

The financial outlook for the coming years looks set to encounter all sorts of hurdles and sources of volatility, yet it is not irretrievably headed towards depression.

Alas, the sugarcoating quickly ends when one thinks realistically about things:

It is fair to say that shorter economic cycles, rising raw materials prices, the return of inflation and soaring interest rates undermine the medium-term outlook for the equity markets. Such conditions will no doubt cause continued uncertainty which will probably prevent the developed markets from finding their way for still several more years to come.

And the conclusion: the depression that the developed world lived through in the aftermath of Lehman is slowly shifting to the very same dynamo to carried the world across the abyss and has so far continued to push the global econmoy forward tirelessly.

Paradoxically it is the pressure that this new growth regime puts on the long-term performance of the emerging market capital markets that represents the biggest constraint to the development of the capital markets and their relative performance. The emerging markets have barely had time to absorb the changes that are currently taking place and, at this stage of their development, they would be far more vulnerable to problems created by high inflation.

However, if this were the case, then the characteristics of the Kondratien winter that should emerge in the developed world in the aftermath of the financial crisis could give way to a new Kondratief cycle dictated by the developments of the emerging world.

And yes, what look at the future would be complete without the good old Kondratieff cycle chart which sadly predict that we are now entering the last season of it all.

Indeed, winter will be marked by “concern, fear, panic and despair”; when there is virtually no credit following global credit crunch, when rates and vol fall due to a credit crisis, and when the only assets generating returns are gold, cash and bonds. This is the deflationary endgame, and the world’s central banks know it. Throughout history this terminal deflationary threat is what always forces money printing authorities to make their last stand against the end of the cycle, knowing full well the status quo would implode in a singularity of risk off‘ness, unless something is done. And that one something is always, without fail, the rampant printing of money to stave off deflation. Always. Without exception. Just open up a history book. And no. This time is never different.

Full SocGen report here:

When Demand Outstrips Supply – Copy

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Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero | http://www.zerohedge.com/article/coming-new-world-order-revolution-how-things-will-change-next-20-years-kondratieff-cycle-per

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Worries of a Lehman-like financial crisis spreading through Europe and the world has made Greece talk of the market lately. Not to let Greece dominate the spotlight, the U.S. debt ceiling debate is also getting to be as traumatic since a failure to raise the debt ceiling could mean imminent default and credit downgrades for the United States sovereign debt.

In the midst of all these different crises, global markets rise and fall in lockstep with news coming out of Europe and the U.S. The U.S. stock market, after suffering a correction phase since April, snapped back last week, scored the best week in two years, but only to retreat again after the long July 4th weekend. The commodity and currency markets are not immune either, with investors switching back and forth between risk-on and risk-off trades.

In this environment, one has to ask … are there other indicators signaling a global market doomsday?

According to Oxford Analytica, there are 15 “Global Stress Points” ranging from medium to extreme high impact to the entire world. These are listed below ranked by their potential impact by Oxford (see graph). Around 60% of the “stress points” are related to geopolitics, war or unrest, while only about five events could be classified as financial crises.

  1. Dollar Collapse
  2. Taiwan / China Armed Hostility
  3. Israel / Iran Armed Conflict
  4. Mexico State Hollowing
  5. Global Protectionism
  6. Latin America Hydrocarbon Disruption
  7. Iraq State Institutions Collapse
  8. Russia Military Aggression
  9. End of Euro
  10. India / Pakistan War
  11. Pakistan State Collapse
  12. Argentina Sovereign Default 2.0
  13. North Korea Military Conflict
  14. War in North Africa
  15. Lebanon Civil War


(Click to enlarge) Chart Source: Oxford Analytica

For all the rage in the press, the euro’s demise is surprisingly not as big a deal as, for instance, China making good on its 60-year threat to Taiwan, or even a much more mundane “global protectionism.” And I hate to disappoint China Bears, but it looks whatever problems China has, it is not the one that will tank the world like the dollar and the euro.

Since a U.S. dollar collapse is ranked as the greatest risk to the world, and dollar’s fate is largely dependent on if the bond market has faith in Uncle Sam, it might be helpful to add five additional warning signs that the bond market is freaking out (see chart):

  • Prices of bonds maturing start falling (i.e., investors start to demand higher interest rates to hold U.S. government debt).
  • A narrower spread between rates on Treasury bills and other short-term credit or near substitutes, e.g. LIBOR – This would be a sign of waning faith in the U.S. government.
  • A narrower spread between Treasuries and near substitutes – A sign of falling creditworthiness of Uncle Sam.
  • Price spikes in U.S. CDS (credit default swaps, insuring against a U.S. debt default) – According to Markit, the most noticeable movement has occurred in 1-year spreads, which have converged closer to 5-year spreads, and is up about 430% since early April, while 5-year CDS also has risen about 46%.
  • Higher volatility in the U.S. bond market – Another sign of lost confidence from bond investors.


(Click to enlarge) Chart Source: The Washington Post

So far, out of the 20 signs, there’s one that’s sending up a red signal flare – U.S. sovereign debt CDS, which is directly linked to the dollar (see chart above).

The U.S. does not have control over many of the indicators listed here, but at least the No. 1 risk factor — the U.S. dollar — is influenced by the national debt and by the monetary and fiscal policies set by the U.S. government and the Federal Reserve.

The longer the debt ceiling debate lingers, the more likely the bond market would start reacting and demanding higher interest rates. A sovereign credit downgrade as a result of missing the debt ceiling deadline would just translate into billions more in interest payments, piling on to the existing debt.

The United States is not like Iceland or Argentina, resorting to default as retorted by some could mean calamity not only to its citizens, but also to the rest of the world. Unless the government and this Congress get their act together, there will be no bailout, and instead of one lost generation to the Great Recession, there could be multi-generation missed in the next Grand Depression.

EconMatters.com

 

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Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero | http://www.zerohedge.com/article/20-warning-signs-global-doomsday

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In another case of purely coincidental serendipity, three days ago Zero Hedge informed readers that the “NYSE Boerse [sic] has just announced its purchase of Kingsbury International Ltd., which surveys managers for the Chicago Business Barometer, also known as the company that hosts the Chicago PMI data, in order to bring PMI data direct to feed subscribers. Net result: expect even more market volatility at each PMI release, now that the market is not two but three-tiered, and consisting of regular HFTs, HFTs with access to the Deutsche Boerse feed, and everyone else.” We concluded: “It is unclear if the ultra-speed, HFT friendly feed would be activated before its next release on June 30. That said, we will certainly coordinate with our friends at Nanex for any trading abnormalities, primarily in the critical ES futures, this Thursday at 9:42am, keeping a close eye on the tape, and indicating precisely when the tiered data release hits.” Well, as promised here is the Nanex data. As expected, it’s a stunner.

The shocker, however, resides not in the stock arena, but in what is now becoming the go to place for bulk frontrunning high frequency trading algorithms to chase what little volatility is left in the equity market: options, which, as previously noted, we now are confident will be the cause for the next big market wipe out.

Per Nanex:

Approximately 1/2 second before the 9:42 release of the Chicago PMI report, the option market exploded setting new records in quote rates, saturation, and delays. We have not yet determined why the equity market did not see a record explosion of quote traffic; rather it experienced the normal saturation/delay that happens all too frequently every trading day.

The electronic S&P 500 futures experienced a withdrawal of liquidity beginning about a minute before the release of the PMI number. At approximately 9:41:59.550, 1275 contracts cleared through 4 levels of the offer side of the order book. This coincided with the explosion in OPRA quote traffic.

The first image shows quote message rates for each of the 12 CQS data lines that carry data for NYSE, AMEX, and ARCA equities and ETFs in 2ms intervals. Notice how quickly activity drops after the peak compared to the OPRA images below it. Normally, options activity follows equity activity very closely.

The images that follow, show each of the 48 lines individually along with the total, so that you can clearly see the saturation events and estimate the duration and extent of the delay for each line. The flat-top areas you see on the charts are caused by something gating, or queuing the data. Since OPRA, like CQS, timestamps after data exits the queue — right before it’s transmitted to subscribers — it is impossible to know the exact duration of these hidden delays, but 500ms to well over 1 full second is a conservative estimate. We believe OPRA capacity would have to increase at least 3 times, to 12 million/second, in order to avoid these significant delays. However, at those message rates, a significant number of quotes would have already expired before they even left the exchange networks. (for all source images, please go to the Nanex site)

Several individual OPRA data lines show gaps which we believe are exhaustion events. These quiet periods of no quotes are common, can last 20 milliseconds, and almost always follow a spike in activity. We have verified that there were no drops in the data and that the charts accurately show the quote traffic rates. Several lines, noteably #37, show a period of fluttering between a high rate and zero which seem to appear during times of severe saturation.

While it is impossible to determine if this is indeed a case of broad embargo breach, it is imperative that Kingsbury International and the Deutsche Boerse immediately announce are precisely what moment they releasaed the PMI data to i) subscribers of Alpha Stream, and ii) to subscribers of the PMI service, who up until now thought they were getting a bargin by frontrunning the general population by three minutes courtesy of a public embargo, and now seems are themselves being frontrun by almost 500 milliseconds.

Furthermore, if no advance data release is confirmed, can OPRA please explain what the reason for this bizarro frontrunning activity is as traditionally a massive burst of trading action in advance of news dissemination indicates something is terminally broken with the checks and balances in the system. While we know that is the case, with the aid of Nanex, we will continue exposing each and every act of public data frontrunning going forward until every last retail investor is permanently out of the market and central banks and primary dealers can throw the hot ponzi grenade amongst themselves.

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Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero | http://www.zerohedge.com/article/caught-act-hft-option-algos-observed-frontrunning-todays-pmi-release

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With equities stuck in a range and long-term investors sidelined by high volatility, alternative trading strategies are set to make gains as long as the market zigzags.

See the article here: Alternative Trading Strategies Flourish for Range-Bound Equities …

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