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When $1.2 Trillion In Foreign ‘Hot Money’ Parked At The Fed Dissipates
Submitted by testosteronepit on 05/09/2014
Wolf Richter www.testosteronepit.com www.amazon.com/author/wolfrichter
It fits the pattern of gratuitous bank enrichment perfectly, but this time, the big beneficiaries of the Fed are foreign banks. A JPMorgan analysis, cited by the Wall Street Journal, figured that in 2014 the Fed would pay $6.74 billion in interest to the banks that park their excess cash at the Fed – half of that amount, so a cool $3.37 billion, would line the pockets of foreign banks with branches in the US.
This is where part of the liquidity ends up that the Fed has been handing to Wall Street through its bond purchases. Currently, the Fed requires that banks keep a minimum balance of $80.2 billion at the Fed. Banks can keep up to $88.2 billion at the Fed as part of the “penalty-free band.” In theory, as “penalty-free” implies, there’d be a penalty on balances above $88.2 billion.
But the total balance was $2.66 trillion in April, up from $2.62 trillion in March and from $1.83 trillion a year ago. The balances in excess of the “penalty-free band” have reached $2.57 trillion. The highest ever. The penalty on that?
Forget that. The Fed’s raison d’être is to enrich the banks regardless of what the costs to the economy, the rest of society, and savers. So instead of penalizing banks for these excess reserves, it pays the banks 0.25% interest not only on the required balances but also on all other balances. Spread over the year 2014, as JPMorgan estimated, interest payments on these balances would amount to $6.74 billion.
It’s a marvelous system. The banks’ cost of funds, given the heroic efforts the Fed has undertaken to repress interest rates, is near zero. Banks can borrow short-term from their depositors – that’s you and me – and from money-market funds – that’s you and me again – at near zero cost, so maybe 0.10%. Instead of lending it out, banks put that money on deposit at the Fed to earn 0.25%. It’s the laziest no-brainer in banking history. A pure gift from the Fed.
But there’s a kink. Non-US-charted banks with branches in the US benefit even more. The Bank for International Settlements, the umbrella organization for the world’s largest central banks, revealed how these non-US banks were taking advantage of the new FDIC insurance charges on wholesale funding (borrowing from other banks, short-term repos, or funding from affiliates outside the US). They’d figured out that these extra costs didn’t apply to them. They only applied to US-chartered banks.
The wider FDIC charge added 2.5 to 45 basis points to the costs of large and complex US chartered banks’ short-term wholesale funding. The calculation is complex and its result by bank is not disclosed, but the rate for the largest US bank was said to be 8 basis points.... With wholesale rates of 10 basis points or less, the new FDIC charge made bidding for such funds and parking them at the Fed at 25 basis points unattractive for many US-chartered banks but not to the US branches of foreign banks, which pay no FDIC fee.
These “seemingly small regulatory differences” at the FDIC, the report points out, turned the Fed into a special profit center for non-US banks. In this chart from the report, foreign banks’ balances parked at the Fed (blue area in dollars, and red line in percent) started shooting up at the end of 2008, and by mid-2013, reached about 50%. It resulted in “massive changes” in the balance sheets of internationally active banks.
As foreign banks took advantage of the laziest no-brainer in history, the Fed’s money-printing and bond buying regime led to an enormous inflow of money into the US – about $1.3 trillion so far. It’s the risk-free banking version of the hot money. And the $2.6 trillion in excess reserves that economists are expecting to flow into the US economy sooner or later to really stir things up? Half of it is that hot money. It won’t ever flow into the US economy. It won’t fuel the “escape velocity” that has been forecast for five years in a row. It’ll dissipate.
The Fed has an excuse for this banking gravy train: “eliminate effectively the implicit tax that reserve requirements used to impose on depository institutions,” it says. OK, I get it, concerning the “penalty-free” $80.2 billion that banks are required to deposit at the Fed. Fine. Pay them 0.25% on that. I don’t get paid that much on my money at the bank. But what the heck. Let’s not quibble over pocket change, which is what billions have become to these megabanks. But what about the annual interest on $2.6 trillion in excess reserves?
Ah, the Fed has an excuse for that too: it’s of course – I mean, how could I possibly not think of this on my own? – “an additional tool for the conduct of monetary policy.” A policy whose goal it is to fan reckless speculation, inflate asset bubbles, enrich the banks and those who run them at the expense of savers, and douse the entire neighborhood, namely Wall Street, with free money.
We don’t know what hedge fund manager Steven Cohen will do with the money he borrowed from Goldman Sachs. We don’t even know how much it is, though it's a lot; the personal loan is backed by his $1 billion art collection. But we know how he'll use it: cheap leverage. Read....
Explosive Hidden Leverage Threatens To Blow Up the Markets
http://www.zerohedge.com/contributed/2014-05-09/when-12-trillion-foreign-%E2%80%98hot-money%E2%80%99-parked-fed-dissipates
How Seattle Agreed to a $15 Minimum Wage Without a Fight
By Karen Weise
May 08, 2014
Businessweek
Illustration by Joren Cull
On May 1, Seattle Mayor Ed Murray announced he had brokered a deal to raise the city’s minimum wage for all workers from $9.32 to $15 an hour, the highest in the country. That in itself was remarkable. Even more so was that Murray did it without the anger and political bloodshed that’s pitted employers against workers in other cities and has stalled efforts in Congress to increase the federal minimum wage. In what may be a model for other cities and states, Murray put business leaders, union bosses, and community advocates in a room for months with simple instructions: work out your differences, or else.
The “or else” was that Murray and the city council would do it without them. He had the political momentum to back up the threat. When Murray, a Democrat, took office in January, the region seemed ready for a minimum pay bump. Voters in a small town to Seattle’s south, SeaTac, passed a measure to raise wages for transportation and hospitality workers to $15 an hour. Seattle elected a socialist to the city council on a living wage platform. Rather than push his own proposal through the city council, or risk outside groups bringing ballot initiatives that would likely turn ugly and draw the attention of special interest money, he appointed a 24-member group to reach an agreement. “If you want people to get here in the end, you need to bring them to the table,” he says.
To co-chair the group, Murray chose two men on opposite sides of the debate: Howard Wright, founder of Seattle Hospitality Group, an investor in the iconic Space Needle, and David Rolf, president of a local SEIU Healthcare union. The idea tested the widely held assertion put forth by business groups that employers can’t afford to pay workers more. It also offered an alternative to the confrontational battles employees have waged elsewhere, such as the coordinated strikes by fast-food workers in New York and dozens of other cities.
Murray gave the group four months to work out a deal. If they failed, he vowed to present the city council with his own proposal, which both sides were sure to hate. He chose April 30 as a deadline because May is when outside groups that propose ballot initiatives typically start gathering signatures.
Local business leaders decided that joining the effort was in their best interest. “There is no doubt in my mind that this $15 is coming to Seattle,” says Wright. “So if we accept that as a premise, let’s figure out how to do it well.” Labor leaders in the group wanted a pay increase to take effect quickly; business owners wanted to phase it in over many years. Labor insisted that tips and benefits not count as part of someone’s wages; businesses thought they should be able to pay lower hourly rates if they provided other compensation such as retirement contributions. Everyone thought small businesses should get extra time to comply, but no one agreed on how to define “small.”
A month before the deadline, Murray narrowed the group to eight negotiators. The G8, as they became known, took over several rooms in the mayor’s office. A breakthrough came on April 14, when someone—the person asked not to be named, Rolf says—sketched out a chart showing how a proposed compromise would let wages at different workplaces rise at different rates. Businesses could count tips and health care in calculating minimum pay for workers, but only temporarily. Eventually those concessions would phase out and every employer would have to pay the same minimum wage. “You could see the body language in the room change,” says Rolf.
The proposal divided businesses into four groups. Large employers, with 500 workers or more, would need to pay $15 an hour by 2017. But if they provide health insurance, like the local outdoor retailer REI, they could have an extra year. A small business such as a dry cleaner wouldn’t have to pay $15 until 2021, but a restaurant would have to ensure that workers’ pay, including tips, totaled $15 an hour by 2019. Those distinctions would phase out by 2025, when all employers would pay the same minimum. And it would be indexed to inflation, so they’d never need to go through a painful negotiation again.
The final plan came together late on April 30, just before Murray’s ultimatum expired. The proposal now goes to the city council, where Murray hopes to keep its nine members from taking it apart. “I imagine there will be tweaks,” he says. With too many changes, he warns, the delicate compromise could collapse.
Weise is a reporter for Bloomberg Businessweek in New York. Follow her on Twitter @kyweise.
http://www.businessweek.com/articles/2014-05-08/how-seattle-agreed-to-a-15-minimum-wage-without-a-fight#r=hpt-ls
Robbing Main Street to Prop Up Wall Street: Why Jerry Brown’s Rainy Day Fund Is a Bad Idea for California
By Ellen Brown
Posted on May 6, 2014
(special thanks to basserdan)
(please note: The underlined words are 'clickable' links when accessed via the link at the bottom of this page)
There is no need to sequester funds urgently needed by Main Street to pay for Wall Street’s malfeasance. Californians can have their cake and eat it too – with a state-owned bank.
Governor Jerry Brown is aggressively pushing a California state constitutional amendment requiring budget surpluses to be used to pay down municipal debt and create an emergency “rainy day” fund, in anticipation of the next economic crisis.
On the face of it, it is a sensible idea. As long as Wall Street controls America’s finances and our economy, another catastrophic bust is a good bet.
But a rainy day fund takes money off the table, setting aside funds we need now to reverse the damage done by Wall Street’s last collapse. The brutal cuts of 2008 and 2009 shrank the middle class and gave California the highest poverty rate in the country.
The costs of Wall Street gambling are being thrust on its primary victims. We are given the choice of restoring much-needed services or maintaining austerity conditions in order to pay Wall Street the next time it brings down the economy.
There is another alternative – one that California got very close to implementing in 2011, before Jerry Brown vetoed the bill. AB750, a bill for a feasibility study for a state-owned bank, passed both houses of the state legislature but the governor refused to sign it. He said the study could be done by the Assembly and Senate Banking Committees in-house; but 2-1/2 years later, no further action has been taken on it.
Having a state-owned bank can substitute for a rainy day fund. Banks don’t need rainy day funds, because they have cheap credit lines with other banks. Today those credit lines are at the extremely low Fed funds rate of 0.25%. A state with its own bank can take advantage of this nearly-interest-free credit line not only for emergencies but to cut its long-term financing costs in half.
That is not just California dreaming. There is already a highly successful precedent for the approach. North Dakota is the only state with its own state-owned depository bank, and the only state to fully escape the credit crisis. It has boasted a budget surplus every year since 2008, and its 2.6% unemployment rate is the lowest in the country. Contrast that to California’s, one of the highest.
In a 2009 interview, Bank of North Dakota President Eric Hardmeyer stated that when the dot-com bust caused North Dakota to go over-budget in 2001-02, the bank did act as a rainy day fund for the state. To make up the budget shortfall, the bank declared an extra dividend for the state (its owner), and the next year the budget was back on track. No massive debt accumulation, no Wall Street bid-rigging, no fraudulent interest-rate swaps, no bond vigilantes, no capital appreciation bonds at 300% interest.
California already has a surfeit of surplus funds tucked around the state, which can be identified in state and local Comprehensive Annual Financial Reports (CAFRs). Clint Richardson, who has made an exhaustive study of California’s CAFR, writes that he has located nearly $600 billion in these funds. California’s surplus funds include those in a Pooled Money Investment Account managed by the state treasurer, which currently contains $54 billion earning a mere 0.24% interest – almost nothing.
The money in these surplus funds is earmarked for particular purposes, so it cannot be spent on the state budget. However, it can be invested. A small portion could be invested as capital in the state’s own bank, where it could earn a significantly better return than it is getting now. The Bank of North Dakota has had a return on equity ranging between 17% and 26% every year since 2008.
California has massive potential capital and deposit bases, which could be leveraged into credit, as all banks do. The Bank of England just formally admitted in its quarterly bulletin that banks don’t lend their deposits. They simply advance credit created on their books. The deposits remain in demand accounts, available as needed by the depositors (in this case the state).
The Wall Street megabanks in which California invests and deposits its money are not using this massive credit power to develop California’s economy. Rather, they are using it to reap short-term profits for their own accounts – much of it extremely short-term, “earned” by skimming profits through computerized high-frequency program trading. Meanwhile, Wall Street is sucking massive sums in interest, fees, and interest rate swap payments out of California and into offshore tax havens.
Rather than setting aside our hard-earned surplus to pay the piper on demand, we could be using it to create the credit necessary to establish our own economic independence. California is the ninth largest economy in the world, and the world looks to us for creative leadership.
“As goes California, so goes the nation.” We can lead the states down the path of debt peonage, or we can be a model for establishing state economic sovereignty.
Ellen Brown is an attorney, founder of the Public Banking Institute, and a candidate for California State Treasurer running on a state bank platform. She is the author of twelve books, including the best-selling Web of Debt and her latest book, The Public Bank Solution, which explores successful public banking models historically and globally.
http://ellenbrown.com/2014/05/06/robbing-main-street-to-prop-up-wall-street-why-jerry-browns-rainy-day-fund-is-a-bad-idea/
The IMF goes to war in Ukraine
May 7, 2014
Pepe Escobar
Pepe Escobar is the roving correspondent for Asia Times/Hong Kong, an analyst for RT and TomDispatch, and a frequent contributor to websites and radio shows ranging from the US to East Asia.
The IMF has approved a $17 billion loan to Ukraine. The first $3.2 billion tranche has arrived on Wednesday.
It’s essential to identify the conditions attached to this Mafia-style “loan.” Nothing remotely similar to reviving the Ukrainian economy is in play. The scheme is inextricably linked to the IMF’s notorious, one-size-fits-all “structural adjustment” policy, known to hundreds of millions from Latin America and Southeast Asia to Southern Europe.
The regime changers in Kiev have duly complied, launching the inevitable austerity package – from tax hikes and frozen pensions to a stiff, over 50 percent rise on the price of natural gas heating Ukrainian homes. The “Ukrainian people” won’t be able to pay their utility bills this coming winter.
Predictably, the massive loan is not for the benefit of “the Ukrainian people.” Kiev is essentially bankrupt. Creditors range from Western banks to Gazprom – which is owed no less than $2.7 billion. The “loan” will pay back these creditors; not to mention that $5 billion of the total is earmarked for payments of – what else – previous IMF loans. It goes without saying that a lot of the funds will be duly pocketed – Afghanistan-style – by the current bunch of oligarchs aligned with the “Yats” government in Kiev.
The IMF has already warned that Ukraine is in recession and may need an extension of the $17 billion loan. IMF newspeak qualifies it as “a significant recalibration of the program.” This will happen, according to the IMF, if Kiev loses control of Eastern and Southern Ukraine – something already in progress.
Eastern Ukraine is the country’s industrial heartland – with the highest GDP per capita and home of key factories and mines, mostly in the Donetsk region, which happens to be largely mobilized against the neo-fascist/neo-nazi-aligned regime changers in Kiev. If the current conflagration persists, this means both industrial exports and tax revenues will go down.
So here’s the IMF prescription for the oligarch bunch – some of them actively financing Right Sector militias: As long as you’re facing a popular rebellion in Eastern and Southern Ukraine, relax; you will get additional IMF cash further on down the road. Talk about a crash course in disaster capitalism.
Supporters of the right wing party Pravyi Sector (Right Sector) protest in front of the Ukrainian Parliament in Kiev on March 28, 2014. (AFP Photo / Genya Savilov)Supporters of the right wing party Pravyi Sector (Right Sector) protest in front of the Ukrainian Parliament in Kiev on March 28, 2014. (AFP Photo / Genya Savilov)
We want you to invade
Meanwhile, the Obama administration’s juvenile delinquent school of diplomacy remains on track: the plan is to entice Moscow to “invade.” Benefits would be immense. Washington would destroy once and for all the emerging strategic partnership between the EU, especially Germany, and Russia, part of a more organic interaction between Europe and Asia; keep Europe perennially under America’s thumb; and boost Robocop NATO after its Afghan humiliation.
Well, they are not juvenile delinquents for nothing. Yet this brilliant plan forgets a key component: enough competent troops willing to apply Kiev’s designs. The regime changers dissolved the Berkut federal riot police. Big mistake – because they are pros; they are unemployed; and now, holding a monster grudge, amply supporting Ukrainians in favor of federalization.
What the Ministry of Truth script imposed on all Western corporate media insists on labeling “pro-Russian separatists” are in fact Ukrainian federalists. They don’t want to split. They don’t want to join the Russian Federation. What they want is a federalized Ukraine with strong, autonomous provinces.
Meanwhile, in Pipelineistan…
Washington is actively praying that the confrontation between the EU and Russia on the gas front spirals out of control. Natural gas will amount to 25 percent of the EU’s needs up to 2050. Since 2011 Russia is the number one supplier, ahead of Norway and Algeria.
The bureaucrat-infested European Commission (EC) is now concentrating its attacks on Gazprom on the South Stream pipeline – whose construction starts in June. The EC insists that the agreements already struck between Russia and seven EU countries infringe the laws of the EU (how come they didn’t find that out earlier?). The EC would like South Stream to become a “European,” not a Gazprom project.
Well, that depends on a lot of serious diplomacy and the internal politics of various EU member states. For instance, Estonia and Lithuania depend 100 percent on Gazprom. Some countries, such as Italy, import over 80 percent of their energy; others, such as the UK, only 40 percent.
Employees stand near pipes made for the South Stream pipeline at the OMK metal works in Vyksa in the Nizhny Novgorod region April 15, 2014. (Reuters / Sergei Karpukhin)Employees stand near pipes made for the South Stream pipeline at the OMK metal works in Vyksa in the Nizhny Novgorod region April 15, 2014. (Reuters / Sergei Karpukhin)
It’s like the EC suddenly woke up from its usual torpor and decided that South Stream is a political football. Günther Oettinger, the EU’s energy commissioner, has been blaring the horn of EU competition laws called “the third energy package” – which would essentially require Gazprom to open South Stream to other suppliers. Moscow filed a complaint to the World Trade Organization (WTO).
Rigorous application of recently unearthed EU law is one thing. Facts on the ground are another. South Stream may cost up to 16 billion euros – but it will be built, even if financed by Russia’s state budget.
Moreover Gazprom, in 2014 alone, has already signed extra deals with German, Italian, Austrian and Swiss partners. Italy’s ENI and France’s EDF are partners from the start. Germany, Italy, Bulgaria, Hungary and Austria are deeply involved in South Stream. No wonder none of them are in favor of more sanctions on Russia.
As for any substantial move by the EU to find new supply sources, that’s a process that should take years – and should involve the best possible alternative source, Iran, assuming a nuclear deal with the P5+1 is struck this year. Another possible source, Kazakhstan, exports less than it could, and that will remain the case because of infrastructure problems.
So we’re back to the Ukrainian tragedy. Moscow won’t “invade.” What for? The IMF’s structural adjustment will devastate Ukraine more than a war; most Ukrainians may even end up begging Russia for help. Berlin won’t antagonize Moscow. So Washington’s rhetoric of “isolating” Russia is just revealed for what it is: juvenile delinquency.
What’s left for the Empire of Chaos is to pray for chaos to keep spreading across Ukraine, thus sapping Moscow’s energy. And all this because the Washington establishment is absolutely terrified of an emerging power in Eurasia. Not one, but two – Russia and China. Worse: strategically aligned. Worse still: bent on integrating Asia and Europe. So feel free to picture a bunch of Washington angry old men hissing like juvenile delinquents: “I don’t like you. I don’t want to talk to you. I want you to die.”
The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.
http://rt.com/op-edge/157308-ukrainian-crisis-imf-loans/
The Drums Of War Are Beating: Prepare Your Portfolio For An Escalation In Ukraine
Apr. 26, 2014 9:55 AM ET
Hebba Investments
Includes: AG, CF, GG, GLD, IPI, NEM, PLG, POT, SGOL, SPPP
Disclosure: I am long SGOL, PLG, GOLD, PAAS, AG. (More...)
Summary
* Friday's escalation in the Ukrainian conflict leads us to believe that additional sanctions (and counter-sanctions) will begin as soon as Monday.
* Gold and gold stocks stand to benefit from both Russian counter-sanctions aimed at the US Dollar and general financial market chaos that may result.
* Platinum and Palladium ETFs and equities would benefit from the reduction in Russian supplies as they are the second largest global producer of both metals.
* Fertilizer stocks stand to benefit as both Ukraine and Russia are major players in the global fertilizer market.
The crisis in Ukraine has been ratcheting up over the last few weeks after Russia annexed Crimea (or invaded it - depends on which side you take). There was some hope last week of de-escalation as the so-called Geneva was signed, but on Friday it became apparent to even the most fervent supporters of the agreement that it was clearly a non-factor as both sides have accused the other side of breaking the agreement.
It first started with an S&P downgrade of Russia:
In our view, the tense geopolitical situation between Russia and Ukraine could see additional significant outflows of both foreign and domestic capital from the Russian economy and hence further undermine already weakening growth prospects," S&P wrote in its report
Source: Wall Street Journal
This was then followed by a furious Russian response that accused S&P of making the downgrade for political reasons, and then Russia promised that any sanctions would be met with a retaliatory response that would strike hard at Western and European interests. Finally, Germany's Prime Minister Angela Merkel admitted that the Geneva Accord has failed and that the G-7 was discussing joint action against Russia. All the while, Russia was increasing its large troop buildup on the Ukrainian border and begun advanced military drills which included fighter jets.
We don't know what will happen here, but investors should prepare their portfolios for a ratcheting up of sanctions on Russia and the Kremlin's retaliatory response. We think we've passed the point of no return as the West cannot back down without looking extremely weak, and Russia believes that this conflict is about the existential survival of Russia itself.
We've seen sanctions applied to a number of countries in the past decade (Iran, Iraq, North Korea, Syria, etc.) without much of an impact to global markets, but in this case true sanctions that have a bite would have a much more profound effect on global markets. Russia is capable of powerful counter-sanctions (especially in regards to Europe), but more importantly has a military to insure that physical sanctions cannot be applied - all sanctions must be financial in nature. The problem is financial war begets financial war and that means stock markets and possibly the dollar system itself - if Russia is intent on causing financial chaos in the markets, then investors must watch out especially with what can at best be labeled a "weak recovery."
There are a few things that stand to benefit in the case of sanctions and retaliatory sanctions, and investors should consider them for their portfolios well in advance.
Gold and Gold Mining Stocks
Gold is an investor's best friend in times of financial chaos as thousands of years of human history can attest to, and we've never heard of a war that resulted in people selling their gold - it does best during wars (and government bonds perform the poorest). But in this current conflict gold may provide a much more idiosyncratic benefit as it is a direct beneficiary of any attack on the US Dollar.
Gold is first and foremost a currency, and at its core it is the ultimate reserve currency that has directly backed world currencies before our current dollar reserve currency standard was implemented in 1971. If Russia attempts to retaliate by attacking the US Dollar (as Kremlin aide Sergei Glazyev has mentioned previously), gold is the clear beneficiary as it is the only true alternative reserve currency.
Add in the fact that the gold market has nowhere near the capacity to absorb even a small transition of financial assets (as seen in the chart below), and you have the potential a significant jump in prices.
(click to enlarge)
Source: FX Metals
Thus we believe that investors would be wise to maintain a strong exposure to gold with positions in physical gold and the gold ETF's (SPDR Gold Shares (GLD), PHYS, CEF). Investors looking for more leverage should consider gold miners such as Goldcorp (GG), Agnico Eagle (AEM), Newmont (NEM), or even some of the explorers and silver miners such as First Majestic (AG) and Pan American Silver (PAAS).
Platinum Group Metals
The argument for gold ownership is related to financial chaos and its nature as the ultimate currency reserve. Platinum and palladium, while highly correlated to gold, stand to benefit more from the fact that any sanctions on Russia will probably involve their large platinum and palladium mining industries.
According to the USGS, Russia produced around 15% of the world's platinum (the second largest producer behind South Africa's 70%) and 40% of the world's palladium (tied with South Africa's 40%). Add in the fact that many South African mines have been producing at much lower levels (or have been completely shut down) due to worker strikes, and you have the formula for platinum group metal shortages.
Investors can take advantage of this by buying the platinum and palladium ETFs like the Sprott Physical Platinum and Palladium Trust (SPPP), ETFS Physical Platinum Shares (PPLT), or the ETFS Physical Palladium Shares (PALL). There aren't too many options for investing in platinum or palladium miners, but our favorite is Platinum Group Metals (PLG), as it provides investors with exposure to two large potential platinum and palladium projects in South Africa without the risk of mine shutdowns (they are development not production projects).
Fertilizer Stocks
Ukraine is a key nitrogen producing country, and is an important exporter in the global markets and accounts for around 8.5% of globally exported Urea and around 6.5% of globally traded ammonia. Sanctions and a potential military conflict in Ukraine have the potential to take much of this production offline and increase tightness in world fertilizer markets. Add in the fact that Russia is also a major player in the fertilizer markets, and it should be pretty obvious that increased Western sanctions would hit the fertilizer supply pretty hard.
Finally, it wouldn't be only the physical supplies that would be affected, but also the price of those physical supplies. Ukraine has been a price setter of a number of important fertilizer components since its production costs are significantly below other competitors, Russia's recent price increase of natural gas for Ukraine would raise their costs of production and would probably have an impact on world prices.
Major Western producers should see some nice benefits as their production would be unaffected by sanctions even as world prices increase, and their competitors would see both their supplies drop and costs of production increase. This would include companies like CF Industries (CF), Potash Corporation (POT), and Intrepid Potash (IPI) - it isn't surprising that all three of those companies saw an increase in their stock prices even as the market dropped on Friday.
Conclusion for Investors
The conflict in Ukraine has the potential of having a significant effect on the financial markets and investors would be wise to prepare, or at least hedge their portfolios, with companies and sectors that stand to benefit from a ratcheting up of the conflict. Investors should remember that this particular conflict has the potential to tremendously influence the markets in a matter of hours or minutes as the situation can turn on a dime. We cannot emphasize enough that Russia does have the power and the desire to create significant chaos in the financial markets if sanctions are increased to levels that truly bite. This is very different than the financial crisis of 2008 because of the fact that the world was unified in its attempt to minimize the negative consequences - this would involve players actively trying to hurt each other.
Add in the fact that indicators such as margin debt and investor sentiment have reached all-time highs of complacency, and wise investors would be best served in preparing for the potential of negative consequences for the financial markets - expect the best and prepare for the worst.
http://seekingalpha.com/article/2167413-the-drums-of-war-are-beating-prepare-your-portfolio-for-an-escalation-in-ukraine?ifp=0
The Drums Of War Are Beating: Prepare Your Portfolio For An Escalation In Ukraine
Apr. 26, 2014 9:55 AM ET
Hebba Investments
Includes: AG, CF, GG, GLD, IPI, NEM, PLG, POT, SGOL, SPPP
Disclosure: I am long SGOL, PLG, GOLD, PAAS, AG. (More...)
Summary
* Friday's escalation in the Ukrainian conflict leads us to believe that additional sanctions (and counter-sanctions) will begin as soon as Monday.
* Gold and gold stocks stand to benefit from both Russian counter-sanctions aimed at the US Dollar and general financial market chaos that may result.
* Platinum and Palladium ETFs and equities would benefit from the reduction in Russian supplies as they are the second largest global producer of both metals.
* Fertilizer stocks stand to benefit as both Ukraine and Russia are major players in the global fertilizer market.
The crisis in Ukraine has been ratcheting up over the last few weeks after Russia annexed Crimea (or invaded it - depends on which side you take). There was some hope last week of de-escalation as the so-called Geneva was signed, but on Friday it became apparent to even the most fervent supporters of the agreement that it was clearly a non-factor as both sides have accused the other side of breaking the agreement.
It first started with an S&P downgrade of Russia:
In our view, the tense geopolitical situation between Russia and Ukraine could see additional significant outflows of both foreign and domestic capital from the Russian economy and hence further undermine already weakening growth prospects," S&P wrote in its report
Source: Wall Street Journal
This was then followed by a furious Russian response that accused S&P of making the downgrade for political reasons, and then Russia promised that any sanctions would be met with a retaliatory response that would strike hard at Western and European interests. Finally, Germany's Prime Minister Angela Merkel admitted that the Geneva Accord has failed and that the G-7 was discussing joint action against Russia. All the while, Russia was increasing its large troop buildup on the Ukrainian border and begun advanced military drills which included fighter jets.
We don't know what will happen here, but investors should prepare their portfolios for a ratcheting up of sanctions on Russia and the Kremlin's retaliatory response. We think we've passed the point of no return as the West cannot back down without looking extremely weak, and Russia believes that this conflict is about the existential survival of Russia itself.
We've seen sanctions applied to a number of countries in the past decade (Iran, Iraq, North Korea, Syria, etc.) without much of an impact to global markets, but in this case true sanctions that have a bite would have a much more profound effect on global markets. Russia is capable of powerful counter-sanctions (especially in regards to Europe), but more importantly has a military to insure that physical sanctions cannot be applied - all sanctions must be financial in nature. The problem is financial war begets financial war and that means stock markets and possibly the dollar system itself - if Russia is intent on causing financial chaos in the markets, then investors must watch out especially with what can at best be labeled a "weak recovery."
There are a few things that stand to benefit in the case of sanctions and retaliatory sanctions, and investors should consider them for their portfolios well in advance.
Gold and Gold Mining Stocks
Gold is an investor's best friend in times of financial chaos as thousands of years of human history can attest to, and we've never heard of a war that resulted in people selling their gold - it does best during wars (and government bonds perform the poorest). But in this current conflict gold may provide a much more idiosyncratic benefit as it is a direct beneficiary of any attack on the US Dollar.
Gold is first and foremost a currency, and at its core it is the ultimate reserve currency that has directly backed world currencies before our current dollar reserve currency standard was implemented in 1971. If Russia attempts to retaliate by attacking the US Dollar (as Kremlin aide Sergei Glazyev has mentioned previously), gold is the clear beneficiary as it is the only true alternative reserve currency.
Add in the fact that the gold market has nowhere near the capacity to absorb even a small transition of financial assets (as seen in the chart below), and you have the potential a significant jump in prices.
(click to enlarge)
Source: FX Metals
Thus we believe that investors would be wise to maintain a strong exposure to gold with positions in physical gold and the gold ETF's (SPDR Gold Shares (GLD), PHYS, CEF). Investors looking for more leverage should consider gold miners such as Goldcorp (GG), Agnico Eagle (AEM), Newmont (NEM), or even some of the explorers and silver miners such as First Majestic (AG) and Pan American Silver (PAAS).
Platinum Group Metals
The argument for gold ownership is related to financial chaos and its nature as the ultimate currency reserve. Platinum and palladium, while highly correlated to gold, stand to benefit more from the fact that any sanctions on Russia will probably involve their large platinum and palladium mining industries.
According to the USGS, Russia produced around 15% of the world's platinum (the second largest producer behind South Africa's 70%) and 40% of the world's palladium (tied with South Africa's 40%). Add in the fact that many South African mines have been producing at much lower levels (or have been completely shut down) due to worker strikes, and you have the formula for platinum group metal shortages.
Investors can take advantage of this by buying the platinum and palladium ETFs like the Sprott Physical Platinum and Palladium Trust (SPPP), ETFS Physical Platinum Shares (PPLT), or the ETFS Physical Palladium Shares (PALL). There aren't too many options for investing in platinum or palladium miners, but our favorite is Platinum Group Metals (PLG), as it provides investors with exposure to two large potential platinum and palladium projects in South Africa without the risk of mine shutdowns (they are development not production projects).
Fertilizer Stocks
Ukraine is a key nitrogen producing country, and is an important exporter in the global markets and accounts for around 8.5% of globally exported Urea and around 6.5% of globally traded ammonia. Sanctions and a potential military conflict in Ukraine have the potential to take much of this production offline and increase tightness in world fertilizer markets. Add in the fact that Russia is also a major player in the fertilizer markets, and it should be pretty obvious that increased Western sanctions would hit the fertilizer supply pretty hard.
Finally, it wouldn't be only the physical supplies that would be affected, but also the price of those physical supplies. Ukraine has been a price setter of a number of important fertilizer components since its production costs are significantly below other competitors, Russia's recent price increase of natural gas for Ukraine would raise their costs of production and would probably have an impact on world prices.
Major Western producers should see some nice benefits as their production would be unaffected by sanctions even as world prices increase, and their competitors would see both their supplies drop and costs of production increase. This would include companies like CF Industries (CF), Potash Corporation (POT), and Intrepid Potash (IPI) - it isn't surprising that all three of those companies saw an increase in their stock prices even as the market dropped on Friday.
Conclusion for Investors
The conflict in Ukraine has the potential of having a significant effect on the financial markets and investors would be wise to prepare, or at least hedge their portfolios, with companies and sectors that stand to benefit from a ratcheting up of the conflict. Investors should remember that this particular conflict has the potential to tremendously influence the markets in a matter of hours or minutes as the situation can turn on a dime. We cannot emphasize enough that Russia does have the power and the desire to create significant chaos in the financial markets if sanctions are increased to levels that truly bite. This is very different than the financial crisis of 2008 because of the fact that the world was unified in its attempt to minimize the negative consequences - this would involve players actively trying to hurt each other.
Add in the fact that indicators such as margin debt and investor sentiment have reached all-time highs of complacency, and wise investors would be best served in preparing for the potential of negative consequences for the financial markets - expect the best and prepare for the worst.
http://seekingalpha.com/article/2167413-the-drums-of-war-are-beating-prepare-your-portfolio-for-an-escalation-in-ukraine?ifp=0
Wall Street Greed: Not Too Big for a California Jury
by Ellen Brown
Posted on April 23, 2014
( special thanks to basserdan)
(please note: The underlined words are 'clickable' links when accessed via the link at the bottom of this page)
Sixteen of the world’s largest banks have been caught colluding to rig global interest rates. Why are we doing business with a corrupt global banking cartel?
United States Attorney General Eric Holder has declared that the too-big-to-fail Wall Street banks are too big to prosecute. But an outraged California jury might have different ideas. As noted in the California legal newspaper The Daily Journal:
California juries are not bashful – they have been known to render massive punitive damages awards that dwarf the award of compensatory (actual) damages.For example, in one securities fraud case jurors awarded $5.7 million in compensatory damages and $165 million in punitive damages. . . . And in a tobacco case with $5.5 million in compensatory damages, the jury awarded $3 billion in punitive damages . . . .
The question, then, is how to get Wall Street banks before a California jury. How about charging them with common law fraud and breach of contract? That’s what the FDIC just did in its massive 24-count civil suit for damages for LIBOR manipulation, filed in March 2014 against sixteen of the world’s largest banks, including the three largest US banks – JP Morgan Chase, Bank of America and Citigroup.
LIBOR (the London Interbank Offering Rate) is the benchmark rate at which banks themselves can borrow. It is a crucial rate involved in over $400 trillion in derivatives called interest-rate swaps, and it is set by the sixteen private megabanks behind closed doors.
The biggest victims of interest-rate swaps have been local governments, universities, pension funds, and other public entities. The banks have made renegotiating these deals prohibitively expensive, and renegotiation itself is an inadequate remedy. It is the equivalent of the grocer giving you an extra potato when you catch him cheating on the scales. A legal action for fraud is a more fitting and effective remedy. Fraud is grounds both for rescission (calling off the deal) as well as restitution (damages), and in appropriate cases punitive damages.
Trapped in a Fraud
Nationally, municipalities and other large non-profits are thought to have as much as $300 billion in outstanding swap contracts based on LIBOR, deals in which they are trapped due to prohibitive termination fees. According to a 2010 report by the SEIU (Service Employees International Union):
The overall effect is staggering. Banks are estimated to have collected as much as $28 billion in termination fees alone from state and local governments over the past two years. This does not even begin to account for the outsized net payments that state and local governments are now making to the banks. . . .
While the press have reported numerous stories of cities like Detroit, caught with high termination payments, the reality is there are hundreds (maybe even thousands) more cities, counties, utility districts, school districts and state governments with swap agreements [that] are causing cash strapped local and city governments to pay millions of dollars in unneeded fees directly to Wall Street.
All of these entities could have damage claims for fraud, breach of contract and rescission; and that is true whether or not they negotiated directly with one of the LIBOR-rigging banks.
To understand why, it is necessary to understand how swaps work. As explained in my last article here, interest-rate swaps are sold to parties who have taken out loans at variable interest rates, as insurance against rising rates. The most common swap is one where counterparty A (a university, municipal government, etc.) pays a fixed rate to counterparty B (the bank), while receiving from B a floating rate indexed to a reference rate such as LIBOR. If interest rates go up, the municipality gets paid more on the swap contract, offsetting its rising borrowing costs. If interest rates go down, the municipality owes money to the bank on the swap, but that extra charge is offset by the falling interest rate on its variable rate loan. The result is to fix borrowing costs at the lower variable rate.
At least, that is how they are supposed to work. The catch is that the swap is a separate financial agreement – essentially an ongoing bet on interest rates. The borrower owes both the interest onits variable rate loan and what it must pay on its separate swap deal. And the benchmarks for the two rates don’t necessarily track each other. The rate owed on the debt is based on something called the SIFMA municipal bond index. The rate owed by the bank is based on the privately-fixed LIBOR rate.
As noted by Stephen Gandel on CNNMoney, when the rate-setting banks started manipulating LIBOR, the two rates decoupled, sometimes radically. Public entities wound up paying substantially more than the fixed rate they had bargained for – a failure of consideration constituting breach of contract. Breach of contract is grounds for rescission and damages.
Pain and Suffering in California
The SEIU report noted that no one has yet completely categorized all the outstanding swap deals entered into by local and state governments. But in a sampling of swaps within California, involving ten cities and counties (San Francisco, Corcoran, Los Angeles, Menlo Park, Oakland, Oxnard, Pittsburgh, Richmond, Riverside, and Sacramento), one community college district, one utility district, one transportation authority, and the state itself, the collective tab was $365 million in swap payments annually, with total termination fees exceeding $1 billion.
Omitted from the sample was the University of California system, which alone is reported to have lost tens of millions of dollars on interest-rate swaps. According to an article in the Orange County Register on February 24, 2014, the swaps now cost the university system an estimated $6 million a year. University accountants estimate that the 10-campus system will lose as much as $136 million over the next 34 years if it remains locked into the deals, losses that would be reduced only if interest rates started to rise. According to the article:
Already officials have been forced to unwind a contract at UC Davis, requiring the university to pay $9 million in termination fees and other costs to several banks. That sum would have covered the tuition and fees of 682 undergraduates for a year.
The university is facing the losses at a time when it is under tremendous financial stress. Administrators have tripled the cost of tuition and fees in the past 10 years, but still can’t cover escalating expenses. Class sizes have increased. Families have been angered by the rising price of attending the university, which has left students in deeper debt.
Peter Taylor, the university’s Chief Financial Officer, defended the swaps, saying he was confident that interest rates would rise in coming years, reversing what the deals have lost. But for that to be true, rates would have to rise by multiples that would drive interest on the soaring federal debt to prohibitive levels, something the Federal Reserve is not likely to allow.
The Revolving Door
The UC’s dilemma is explored in a report titled “Swapping Our Future: How Students and Taxpayers Are Funding Risky UC Borrowing and Wall Street Profits.” The authors, a group called Public Sociologists of Berkeley, say that two factors were responsible for the precipitous decline in interest rates that drove up UC’s relative borrowing costs. One was the move by the Federal Reserve to push interest rates to record lows in order to stabilize the largest banks. The other was the illegal effort by major banks to manipulate LIBOR, which indexes interest rates on most bonds issued by UC.
Why, asked the authors, has UC’s management not tried to renegotiate the deals? They pointed to the revolving door between management and Wall Street. Unlike in earlier years, current and former business and finance executives now play a prominent role on the UC Board of Regents.
They include Chief Financial Officer Taylor, who walked through the revolving door from Lehman Brothers, where he was a top banker in Lehman’s municipal finance business in 2007. That was when the bank sold the university a swap related to debt at UCLA that has now become the source of its biggest swap losses. The university hired Taylor for his $400,000-a-year position in 2009, and he has continued to sign contracts for swaps on its behalf since.
Investigative reporter Peter Byrne notes that the UC regent’s investment committee controls $53 billion in Wall Street investments, and that historically it has been plagued by self-dealing. Byrne writes:
Several very wealthy, politically powerful men are fixtures on the regent’s investment committee, including Richard C. Blum (Wall Streeter, war contractor, and husband of U.S. Senator Dianne Feinstein), and Paul Wachter (Gov. Arnold Schwarzenegger’s long-time business partner and financial advisor). The probability of conflicts of interest inside this committee—as it moves billions of dollars between public and private companies and investment banks—is enormous.
Blum’s firm Blum Capital is also an adviser to CalPERS, the California Public Employees’ Retirement System, which also got caught in the LIBOR-rigging scandal. “Once again,” said CalPERS Chief Investment Officer Joseph Dear of the LIBOR-rigging, “the financial services industry demonstrated that it cannot be trusted to make decisions in the long-term interests of investors.” If the financial services industry cannot be trusted, it needs to be replaced with something that can be.
Remedies
The Public Sociologists of Berkeley recommend renegotiation of the onerous interest rate swaps, which could save up to $200 million for the UC system; and evaluation of the university’s legal options concerning the manipulation of LIBOR. As demonstrated in the new FDIC suit, those options include not just renegotiating on better terms but rescission and damages for fraud and breach of contract. These are remedies that could be sought by local governments and public entities across the state and the nation.
The larger question is why our state and local governments continue to do business with a corrupt global banking cartel. There is an alternative. They could set up their own publicly-owned banks, on the model of the state-owned Bank of North Dakota. Fraud could be avoided, profits could be recaptured, and interest could become a much-needed source of public revenue. Credit could become a public utility, dispensed as needed to benefit local residents and local economies.
Ellen Brown is an attorney, founder of the Public Banking Institute, and a candidate for California State Treasurer running on a state bank platform. She is the author of twelve books, including the best-selling Web of Debt and her latest book, The Public Bank Solution, which explores successful public banking models historically and globally
http://ellenbrown.com/2014/04/23/wall-street-greed-not-too-big-for-a-california-jury/#more-7537
To Whom Does the U.S. Government Owe Money?
April 25, 2014
by Craig Eyermann
(special thanks to gtsourdinis)
On Tax Day 2014, the U.S. federal government owed its lenders over $17.577 trillion. Our chart below reveals who Uncle Sam's biggest creditors are:
The biggest surprise in this edition of our chart (compared to the previous edition) is the appearance of Belgium on the list, which jumped ahead of several other nations by more than doubling the amount that is being lent to the U.S. government from the small European nation over the last six months. Since Belgium is a major international banking center, what this really represents is the accumulation of U.S. debt by other foreign entities through Belgium's banks in much the same way as London's banks have historically served this role for countries such as China.
Here though, it appears that Russia-based interests may be behind the apparent surge in the nation's holdings of U.S. government-issued debt, with the driving factor being the desire to avoid losing access to the holdings from economic sanctions. Much of the increase in holdings through Belgium took place in the several months preceding Russia's 23 February 2014 actions to seize control of the Crimea peninsula from Ukraine, which indicates the very premeditated nature of the action.
Meanwhile, the U.S. Federal Reserve continues to accumulate the share of the U.S. government's debt, having gone from accounting for 1 out of every 8 dollars lent to the U.S. government to now account for nearly 1 out of every 7 dollars.
Data Sources
Federal Reserve Statistical Release. H.4.1. Factors Affecting Reserve Balances. Release Date: 17 April 2014. [Online Document]. Accessed 23 April 2014. [Data through 16 April 2014].
U.S. Treasury. Major Foreign Holders of Treasury Securities. Accessed 23 April 2014. [Data through February 2014].
U.S. Treasury. Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2014 Through March 30, 2014. [PDF Document]. [Data through March 2014].
http://www.advisorperspectives.com/dshort/guest/Craig-Eyermann-140425-US-Government-Creditors.php
JOSE DELGADO, JR. COMPARES HIS $50 3D-PRINTED HAND TO HIS $42,000 MYOELECTRIC PROSTHESIS
APRIL 19, 2014
JEREMY@3DUNIVERSE.ORG
I would like to share a story with you about the power of 3D printing technology to transform lives.
I recently had the opportunity to work with a great guy named Jose Delgado, Jr., a 53-year old who was born without most of his left hand. Jose found his way to me and asked if I could help make a 3D printed prosthesis for him.
Jose has used multiple types of prosthetic devices over many years, including a myoelectric version that uses the muscle signals in his forearm to trigger closing or opening the fingers. The cost of this myoelectric device was $42,000. Only a portion of that was paid by insurance and the rest by Jose. The cost makes it an unaffordable option for many in similar situations.
The total cost of materials for a 3D printed e-NABLE Hand is about $50. This device (also referred to as the “Cyborg Beast”) is a completely mechanical design. There are a series of non-flexible cords running along the underside of each finger, connecting to a “tensioning block” on the top rear of the device (the “gauntlet”). Tension is caused by bending the wrist downward. With the wrist in its natural resting position, the fingers are extended with a natural inward curve. When the wrist is bent 20-30 degrees downward, the non-flexible cords are pulled, causing the fingers and thumb to bend inward. A second series of flexible cords run along the tops of the fingers, causing the fingers to return automatically when tension is released.
I was curious to see what sort of experience Jose would have with this mechanical hand design compared with his myoelectric device. My expectations were limited, however.
Jose works in an environment that involves a lot of box lifting and moving. I anticipated that the e-NABLE Hand, made of ABS plastic (same material as legos), might not hold up for long. To my surprise, however, Jose says it’s been doing very well. He actually prefers it to his far more expensive myoelectric prosthesis!
Jose and I got together again today so I could fine-tune the tension on the “tendon” cords. I asked Jose if he would be willing to talk with me on camera about his recent experience using the e-NABLE Hand and compare it to his experience with other prostheses. As a result of using a number of different prosthetic devices over many years, Jose has a unique perspective. He has extensive hands-on knowledge of what can or can’t be done in terms of day-to-day functionality.
Since the prosthetic devices Jose has used are completely different types, his statements do not represent an apples to apples comparison. The comparison here is simply in terms of how useful Jose has found each device to be on a day-to-day basis.
Here’s the video:
A Crisis vs. THE Crisis: Keep Your Eye On The Ball
Laurynas Vegys
April 21, 2014
Today I want to talk about crises. Two of the most notable ones that have been in the public eye over the course of the past 6-8 months are obviously the conflicts in Ukraine and Syria. The two are very different, yet both seemed to cause rallies in the gold market.
I say “seemed” because, while there were days when the headlines from either country sure looked to kick gold up a notch, there were also relevant and alarming reports from Argentina and emerging markets like China during many of the same time periods. Nevertheless, looking at the impressive gains during these periods, one has to wonder if it actually takes a calamity for gold to soar.
If so, can the yellow metal still return to and beat its prior highs, absent a major political crisis or a full-blown military conflict? My answer: Who needs a new crisis when we live in an ongoing one every day?
More on this in a moment. Let’s first have a quick look at what happened in Ukraine and Syria as relates to the price of gold. Here’s a quick look at the timeline of some of the major events from the Ukrainian crisis, followed by the same for Syria.
There seems to be a fairly clear pattern in both of these charts. Gold seems to rise in the anticipation of a conflict; once the conflict gets going, or turns out not as bad as feared, however, it sells off.
We see, for example, that as the news broke that chemical weapons were being used in Syria and Obama was threatening to intervene, gold moved up. But when the US did not wade into the bloodshed and Putin proposed his diplomatic solution, gold slid into a protracted sell-off, ending up lower than where it began.
It’s impossible to say with any degree of certainty how much of gold’s recent rise was due to anticipation of the Ukraine/Crimea crisis, but there were certainly days when gold seemed to move sharply in response to news of escalation in the conflict. And again, after it became clear that the US and EU would do little more than condemn Russia’s actions with words, gold retreated. As of this writing, it’s down about $85 from its high a little over a month ago. (We think many investors underestimate the potential impact of tit-for-tat sanctions, but they are not wrong to breathe a sigh of relief that a war of bullets didn’t start between East and West.)
In sum, to the degree that global crisis headlines do impact the price of gold, the effects are short-lived. Unless they lead directly to consequences of long-term significance, these fluctuations may capture the attention of day traders, but are little more than distractions for serious gold investors betting on the fundamentals.
You have to keep your eye on the ball.
The REAL Crisis Brewing
Major financial, economic, or political trends—the kind we like to base our speculations upon—don’t normally appear as full-fledged disasters overnight. In fact, quite the opposite; they tend to lurk, linger, and brew in stealth mode until a boiling point is finally reached, and then they erupt into full-blown crises (to the surprise and detriment of the unprepared).
Fortunately, the signs are always there… for those with the courage and independence of mind to take heed.
So what are the signs telling us today—what’s the real ball we need to keep our eyes upon, if not the distracting swarm of potential black swans?
The big-league trend destined for some sort of major cataclysmic endgame that will impact everyone stems from government fiscal policy: profligate spending, leading to debt crisis, leading to currency crisis, leading to a currency regime change. And not in Timbuktu—we’re talking about the coming fall of the US dollar.
The first parts of this progression are already in place. Consider this long-term chart of US debt.
Notice that government debt was practically nonexistent halfway through the 20th century, but has seen a dramatic increase with the expansion of federal government spending.
Consider this astounding fact: The government has accumulated more debt during the Obama administration than it did from the time George Washington took office to Bill Clinton’s election in 1992. Total US government debt at the end of 2013 exceeded $16 trillion.
Let’s put that in perspective, since today’s dollars don’t buy what a nickel did a hundred years ago.
Except for the period of World War II and its immediate aftermath, never before has the US government been this deep in debt. Having recently surpassed the threshold of 100% debt to GDP, America has crossed into uncharted territory, getting in line with the likes of…
* Japan, “leading” the world with a 242% debt-to-GDP ratio
* Greece: 174%
* Italy: 133%
* Portugal: 125%
* Ireland: 117%
The projection in the chart above is based on the 9.4% average annual rate of debt-to-GDP growth since the US embarked on its current course in response to the crash of 2008. If the rate persists, the US will be deeper in debt relative to its GDP than Ireland next year, deeper than Portugal in 2016, Italy in 2017, Greece in 2019, and even Japan in 2023 (and the US does not have the advantage of decades of trade surpluses Japan had).
Granted, the politicians and bureaucrats say they will slow this runaway train, but we’re not talking about Fed tapering here. Congress will have to embrace the pain of living within its means. We’ll believe that when we see it.
But let’s take a more conservative, 10-year average growth rate (an arbitrary standard many analysts use): 5.3%. At this rate, the US will still be deeper in debt than Ireland and Portugal in 2017, Italy in 2019, Greece in 2024, and Japan in 2030.
Either way, this is still THE crisis of our times; all of the countries mentioned above are undergoing excruciating economic and social pain. It’s no stretch to imagine the kind of social and political turmoil that has resulted from the European debt crisis coming to Main Street USA, as American debt goes off the charts.
It’s also important to understand that the debt charted above excludes state and local debt, as well as the unfunded liabilities of social entitlement programs like Social Security and Medicare.
This ever-growing mountain—volcano—of government debt is a long-term, systemic, and extremely-difficult-to-alter trend. Unlike the crises in Ukraine and Syria (at least, so far), it’s here to stay for the foreseeable future. While some investors have grown accustomed to this government-created phenomenon and no longer regard it as dangerous as outright military conflict, make no mistake—in the mid to long term, it’s just as dangerous to your wealth and standard of living.
Still think it can’t happen here? To fully understand how stealthily a crisis can sneak up on you, watch Casey Research’s eye-opening documentary, Meltdown America.
http://www.gold-eagle.com/article/crisis-vs-crisis-keep-your-eye-ball
SilverCrest Mines: A Leveraged Play On The New 'Petro-Ruble' System
Apr. 17, 2014 11:55 AM ET
Jason Bond
Seekingalpha.com
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SVLC, MUX over the next 72 hours. (More...)
Summary
* The five-year-long effort by central banks to support the U.S. dollar post-Lehman will most likely be trumped by much larger and meaningful geopolitical forces.
* We feel that the equities markets and precious metals will reach an inflection point in 2014, reversing the recent trend of higher equities prices and lower precious metals prices.
* Those traders seeking a higher alpha may be well served owning precious metals miners that are “in production,” such as SVLC.
While equities experience high volatility from a confluence of several dollar-negative events of the past few weeks - most notably due to the unprecedented financial events involving global trade since Bretton Woods - we feel it's time again to remind investors of the precious metals space and one of our favorite junior miner of gold and silver, in particular, SilverCrest Mines (SVLC).
In a previous SA article, entitled, SilverCrest Mines - Junior Mining Buy Of 2014, we estimated SVLC could earn between $0.13 and $0.17 per share for fiscal 2014. That projection is based on an average sales price of $1,400 per ounce and $24 per ounce for gold and silver, respectively.
In our article, we also estimated that the result of such earnings potential could take SVLC to a price of $3.88, a more than a double from today's $1.69. We predicated the $3.88 target price upon an average taken of multiple scenarios, which included a combination of potential spot bullion prices and a P/E ratio expansion.
Though it's impossible to predict future sentiment in the precious metals mining sector, we believe that the possibility of a rapid turnaround in sentiment toward the beleaguered junior mining sector could be in the offing sometime this year due to geopolitical events that most likely will affect the value of the US dollar.
If we are correct, rapidly rising gold and silver prices significantly above $1,500 and $25, respectively, will most likely change SVLC's 2014 earnings growth estimates, expand forward P/E ratios and lower PEG ratios substantially, justifying the possibility of a SVLC stock P/E multiple of at least 20-times and an all-time record high of more than $3.20 per share price.
In the interim, we see the possibility of a rather intense short-covering rally in the silver and gold markets above $1,400 and $22, providing the additional buyers needed for an assault on the psychologically-important $1,500 gold price and $25 silver price.
Buttressing our case for a potential all-time high for SVLC this year can be evidenced by the stock's price action during calendar year 2011.
On Apr. 10, 2012, SilverCrest reported fiscal 2011 earnings of $8.4MM, or $0.11 per share, on revenue of $41.8MM. As early as only six months prior to the report, on Oct. 4, 2011, SVLC had touched $1.00 as investors anticipated glowing Q4 earnings. Five months later, on Feb. 29, the stock had soared to $3.19, a more than 200% move within five months upon optimism of firm precious metals prices and relatively low all-in costs at the company's St. Elena project.
Given SVLC's historical performance, our earnings-per-share estimate range of $0.13 and $0.17 for fiscal 2014 could easily take SVLC to new all-time highs above $3.20. And that estimate includes the 7.5% EBITDA tax levied on SilverCrest and other mining enterprises as part of Mexico's new tax overhaul scheme.
Our telephone call to SilverCrest was promptly returned yesterday by the President and COO of SilverCrest, Eric Fier, who said that high-level staff members of the new Mexican government of President Enrique Peña Nieto assured him that the new tax on the mining industry was not a part of a political plan for a wider redistribution of wealth scheme down the road, as was the case in Venezuela during the nationalization of the country's oil supply, for example, but was instead part of an tax policy overhaul of Mexico.
Fier told us, that prior to the new tax scheme, only 16% of Mexico's population had contributed any tax to Mexico City, placing too much tax burden on too small of a portion of the nation's citizenry. The new tax scheme seeks to broaden the base of Mexico's tax structure, which includes a "trickle down" provision that would see tax revenue fund infrastructure projects at the municipality level.
After our phone conversation with Fier, we're confident that Mexico will most likely remain as one of the most mining-friendly jurisdictions of the world for the foreseeable future.
Why Do We Think SVLC May Rally Strongly in 2014?
THE NEW PETRO-RUBLE SYSTEM
Our urgency to recommend due diligence on SVLC has been prompted by the ongoing geopolitical events in Ukraine. What appeared at first glance as a swift and reasonably uneventful annexation of Crimea has escalated into a more complicated matter regarding the political future of the rest of Ukraine, as well as the dangerous implications for the U.S. dollar.
For those not familiar with the role of the dollar in U.S foreign policy may want to read one the best executive summaries on the subject at the Harvard International Review (HIR) website.
In short, HIR claims that as the U.S. dollar plays a lesser role in international trade, the value of the U.S. dollar against other currencies, commodities and precious metals diminishes. Therefore, prices of any asset quoted in U.S. dollar's rise inversely to the currency's weakness, taking gold and silver stocks even higher still (as a percentage) due to the leverage to spot bullion that producing miners offer investors.
According to the chart, above, SVLC outperformed smartly compared with the Global X Silver Miners ETF (SIL) and the more-followed mining company, Silver Wheaton (SLW), during the bullion rally of January and February. Of all the junior mining companies, SVLC is among only a handful of stocks that reach our threshold of consideration, of which include competent and proven management, jurisdiction, production levels and replacement rates. See SilverCrest Mines - Junior Mining Buy Of 2014
Also see our analysis of another well-run and producing junior, McEwen Mining, MUX: McEwen Mining: Best Performing Stock Of Any Junior Producer
CITATIONS TO OUR ANALYSIS
Among the top three most influential radio broadcasters of the world, Voice of Russia (VOR), reported on Apr. 4 that Russia and Iran are in the process of finalizing agreements to bypass the U.S. dollar as the medium of exchange to settle trade between the two countries.
"[T]he 'sanctions war' between Washington and Moscow gave an impetus to the long-awaited scheme to launch the petroruble and switch all Russian energy exports away from the US currency," the VOR stated.
"The main supporters of this plan are Sergey Glaziev, the economic aide of the Russian President and Igor Sechin, the CEO of Rosneft, the biggest Russian oil company and a close ally of Vladimir Putin," VOR added. "Both have been very vocal in their quest to replace the dollar with the Russian ruble. Now, several top Russian officials are pushing the plan forward."
The VOR went on to quote Valentina Matviyenko, the speaker of Russia's upper house of parliament (equivalent to the U.S. Senate), who inflamed the already-heated situation in the Ukraine to rhetoric not heard much even by Washington standards.
"Some 'hot headed' decision-makers have already forgotten that the global economic crisis of 2008 - which is still taking its toll on the world - started with a collapse of certain credit institutions in the US, Great Britain and other countries," she said. "This is why we believe that any hostile financial actions are a double-edged sword and even the slightest error will send the boomerang back to the aborigines."
The article added that Reuters had reported that Russia is negotiating a "goods-for-oil swaps transaction" with Iran. Under the preliminary agreement, Russia's oil energy company, Rosneft, will buy 500,000 barrels of Iranian oil per day ($18 billion per year) to sell in the global market. "Such a move will boost the chances of the 'petro-ruble' and will hurt the petro-dollar," according to VOR.
Other analysis of the dollar-negative implications due to tensions rising between Russia (along with other BRICS nations, Brazil, India, China and South Africa) and the West can be found here, here, here and here.
Former Assistant Secretary of Treasury, Paul Craig Roberts, believes that the implication of Russia's facilitation of a new petro-ruble system will offer Washington only two unpleasant choices.
"One of two things is likely: Either the US dollar will be abandoned and collapse in value, thus ending Washington's superpower status and Washington's threat to world peace, or Washington will lead its puppets into military conflict with Russia and China," Roberts told King World News. "The outcome of such a war would be far more devastating than the collapse of the US dollar."
Conclusion
The five-year-long effort by central banks to support the U.S. dollar post-Lehman will most likely be trumped by much larger and meaningful geopolitical forces that now weigh more heavily on the world's premiere reserve currency. Without the cooperation of Russia, China, India, Iran, Germany and other significantly large oil producing and consuming nations (Germany) to support the petrodollar system, gold and silver prices could eventually move to new highs as the U.S. dollar reaches new lows in the coming months and years.
We feel that the equities markets and precious metals will reach an inflection point in 2014, reversing the recent trend of higher equities prices and lower precious metals prices.
Though the precious metals mining sector, in general, will rise as the prices of gold and silver rally, SVLC has recently demonstrated a meaningful outperforming of nearly all of the more-widely-held and more-visible peers during a sector rally.
Investors who wish to diversify holding of precious metals miners can purchase any number of ETF's, but those traders seeking a higher alpha may be well served owning precious metals miners that are "in production," such SVLC. Our recommendation for due diligence on SVLC is primarily predicated upon the stock's performance during rallies in bullion prices and the underlying fundamentals of the company. See SilverCrest Mines - Junior Mining Buy Of 2014.
http://seekingalpha.com/article/2147173-silvercrest-mines-a-leveraged-play-on-the-new-petro-ruble-system?isDirectRoadblock=false&uprof=
Making Money the Measure of Politics – The US Supreme Court is Pushing Forward the Legalization of Bribery
By Prof. Lawrence Davidson
Global Research, April 15, 2014
Consortiumnews 14 April 2014
U.S. Chief Justice John Roberts, who led the majority in overturning more campaign finance laws in the McCutcheon decision.
U.S. pundits decry countries like Iran as undemocratic for having a screening process for candidates to high office. But U.S. politicians must pass muster with wealthy donors to be considered serious candidates, a system that the Supreme Court just made worse.
On April 2, the U.S. Supreme took another step toward the destruction of campaign finance reform with a five-to-four decision known as McCutcheon v. Federal Elections Commission.
One gets the feeling that this is part of a general campaign, waged by class-biased, ideologically committed conservatives, against government regulation, which they see as somehow a violation of their constitutional rights. As if to suggest that this is so, the Court majority rationalized its decision in the name of “free speech.”
What does this ruling do? First, the ruling removes limitations on overall campaign donations given in an election cycle. The wealthy can now sit down and write checks to unlimited numbers of candidates and political organizations and thereby make themselves indispensable in an electoral process dependent on the raising of large sums, particularly for television advertising.
Indeed, in this way the influence and demands of wealthy donors continue to be more powerful and persuasive than the solicitations of ordinary constituents whose interests the elected official is pledged to serve. In other words, McCutcheon vs. FEC pushed forward the process of legalizing bribery within our political system – a phenomenon which already is well along in its development.
Second, the ruling corrupts the notion of free speech by equating it with the use of money. Thus, the Court majority confuses free speech with that very act of bribery noted above. They seem to be pretending that we are dealing with the transparent efforts of constituents seeking to convince their political representatives of a certain point of view.
This is an illusion. We are dealing with donor individuals and organizations funneling millions of dollars to politicians in need of small fortunes just to maintain their professional positions, and to do so in exchange for political and legislative favors. That is the exercise of free speech only if you equate it with the suborning of elected officials.
It is hard to believe that the five Supreme Court justices who voted in the majority do not know this. And if they do, they are guilty of using the Constitution to rationalize criminal behavior.
Specific Flaws
Argument One - “Contributing money to a candidate is an exercise of an individual’s right to participate in the electoral process through both political expression and political association.”
In taking this line of argument the justices ignore an established principle that operates in the social (as well as physical) realm: that is, quantity can shape quality and in so doing “act as a causal mechanism in social behavior.” For instance, you can say that contributing of money to campaigns and parties is an inherent part of the right to political participation. But the quality of that right, that is its consequence, is dependent on the quantity of the donation and its source.
Thus, this form of political participation has different consequences if a multitude of citizens give small amounts to various candidates and parties than if a few citizens, cleverly bundling their donations, give millions. The former is unlikely to skew an election through overwhelming, and often distorting, media advertising or to compromise the integrity of the candidate once elected.
The latter is almost certain to do these things. In other words, so much money coming from a few sources into an electoral process dominated by the need for money transforms donations into bribes and payoffs. This transformation is exactly what effective campaign finance reform is designed to prevent.
Argument Two – Restricting contributions is like restricting the number of endorsements a newspaper can make. “Government may no more restrict how many candidates or causes a donor may support than it may tell a newspaper how many candidates it may endorse.”
The problem with this assertion is that newspapers do not usually trade in favors. Big donors almost always do. Newspapers usually do not expect those they endorse to change the regulatory environment in which the newspaper operates. Big donors almost always do.
By making the comparison between newspaper endorsements and the actions of large donors, the justices are making a false analogy. They are mixing apples and oranges.
Argument Three - “Spending large sums of money in connection with elections, but not in connection with an effort to control the exercise of an officeholder’s official duties, does not give rise to quid pro quo corruption. Nor does the possibility that an individual who spends large sums may garner ‘influence over or access to’ elected officials or political parties.”
This statement contains one dubious assumption and one misstatement of fact. First, assuming that “spending large sums of money in connection with elections” is not done in an “effort to control the exercise of an officeholder’s official duties” and therefore does not result in “quid pro quo corruption” is, at best, dangerously naive.
Do these justices really believe that the Koch brothers, Sheldon Adelson and a host of corporations and special interest organizations would spend millions of dollars in an election cycle apart from “an effort to control the exercise of an officeholder’s official duties”?
The claim that “an individual who spends large sums” does not “garner ‘influence over or access to’ elected officials or political parties” is just wrong. What do these justices think the American Rifle Association or the American Israel Public Affairs Committee is doing if not buying influence and access?
It is odd that these justices, who undoubtedly recognize that they live in a capitalist country where just about everything is up for sale, would so blatantly pretend that politicians and elections are not also available for purchase.
Formula for Disaster
Sen. John McCain, R-Arizona, one of the sponsors of the bipartisan Campaign Reform Act of 2002, predicts that the recent Supreme Court decision will result in “major scandals in campaign finance contributions” and these, in turn, “will cause reform.”
Scandals there are sure to be. But I am not sure about reform. Past “major scandals” have not necessarily led to reform. In the United States, numerous school shootings have shocked the public but not resulted in the reform of the nation’s gun laws. Recent financial crises have led to recession and government bailouts for savings and loans, banks and mortgage houses, but have not resulted in sufficient regulatory reform to prevent a recurrence of these problems.
Therefore, campaign finance scandals may not yield the reform Sen. McCain foresees. All these scandals do indicate one thing, though, and that is that the Supreme Court justices don’t know what they are talking about when they deny that big money contributions are not corrupting.
Let us keep in mind that the U.S. citizenry is largely estranged from politics and ignorant of the workings of their national economy. Such indifference and ignorance allows power to default to the minority who are unethical enough and wealthy enough to not only buy politicians, but to buy public opinion through the manipulation of the media – a particular specialty of people like Rupert Murdoch.
This concentration of power usually results in periods of wholesale deregulation of business and politics leading inevitably to political unrest and economic ruin of one degree or another. Yet it is only when these consequences become so disastrous (I am talking here on the scale of the 1929 depression or the race riots of the 1960s) that the public’s backlash brings about significant reform.
And even then the nature of such events is cyclical. We have forgotten the corruption of the Gilded Age and the hardship of the Great Depression. Some of us have even forgotten the racist nature of our politics prior to the Civil Rights Movement.
So you should let your children know they may see these troubles again in the near future. Maybe they will be able to handle them better than we are.
Lawrence Davidson is a history professor at West Chester University in Pennsylvania. He is the author of Foreign Policy Inc.: Privatizing America’s National Interest; America’s Palestine: Popular and Official Perceptions from Balfour to Israeli Statehood; and Islamic Fundamentalism.
http://www.globalresearch.ca/making-money-the-measure-of-politics-the-us-supreme-court-is-pushing-forward-the-legalization-of-bribery/5377920
The Global Banking Game Is Rigged, and the FDIC Is Suing
By Ellen Brown
on April 13, 2014
(special thanks to basserdan)
(please note: The underlined words are 'clickable' links when accessed via the link at the bottom of this page)
Taxpayers are paying billions of dollars for a swindle pulled off by the world’s biggest banks, using a form of derivative called interest-rate swaps; and the Federal Deposit Insurance Corporation has now joined a chorus of litigants suing over it. According to an SEIU report:
Derivatives . . . have turned into a windfall for banks and a nightmare for taxpayers. . . . While banks are still collecting fixed rates of 3 to 6 percent, they are now regularly paying public entities as little as a tenth of one percent on the outstanding bonds, with rates expected to remain low in the future. Over the life of the deals, banks are now projected to collect billions more than they pay state and local governments – an outcome which amounts to a second bailout for banks, this one paid directly out of state and local budgets.
It is not just that local governments, universities and pension funds made a bad bet on these swaps. The game itself was rigged, as explained below. The FDIC is now suing in civil court for damages and punitive damages, a lead that other injured local governments and agencies would be well-advised to follow. But they need to hurry, because time on the statute of limitations is running out.
The Largest Cartel in World History
On March 14, 2014, the FDIC filed suit for LIBOR-rigging against sixteen of the world’s largest banks – including the three largest US banks (JPMorgan Chase,Bank of America, and Citigroup), the three largest UK banks, the largest German bank, the largest Japanese bank, and several of the largest Swiss banks. Bill Black, professor of law and economics and a former bank fraud investigator, calls them “the largest cartel in world history, by at least three and probably four orders of magnitude.”
LIBOR (the London Interbank Offering Rate) is the benchmark rate by which banks themselves can borrow. It is a crucial rate involved in hundreds of trillions of dollars in derivative trades, and it is set by these sixteen megabanks privately and in secret.
Interest rate swaps are now a $426 trillion business. That’s trillion with a “t” – about seven times the gross domestic product of all the countries in the world combined. According to the Office of the Comptroller of the Currency, in 2012 US banks held $183.7 trillion in interest-rate contracts, with only four firms representing 93% of total derivative holdings; and three of the four were JPMorgan Chase, Citigroup, and Bank of America, the US banks being sued by the FDIC over manipulation of LIBOR.
Lawsuits over LIBOR-rigging have been in the works for years, and regulators have scored some very impressive regulatory settlements. But so far, civil actions for damages have been unproductive for the plaintiffs. The FDIC is therefore pursuing another tack.
But before getting into all that, we need to look at how interest-rate swaps work. It has been argued that the counterparties stung by these swaps got what they bargained for – a fixed interest rate. But that is not actually what they got. The game was rigged from the start.
The Sting
Interest-rate swaps are sold to parties who have taken out loans at variable interest rates, as insurance against rising rates. The most common swap is one where counterparty A (a university, municipal government, etc.) pays a fixed rate to counterparty B (the bank), while receiving from B a floating rate indexed to a reference rate such as LIBOR. If interest rates go up, the municipality gets paid more on the swap contract, offsetting its rising borrowing costs. If interest rates go down, the municipality owes money to the bank on the swap, but that extra charge is offset by the falling interest rate on its variable rate loan. The result is to fix borrowing costs at the lower variable rate.
At least, that is how it’s supposed to work. The catch is that the swap is a separate financial agreement – essentially an ongoing bet on interest rates. The borrower owes both the interest onits variable rate loan and what it must pay out on this separate swap deal. And the benchmarks for the two rates don’t necessarily track each other. As explained by Stephen Gandel on CNN Money:
The rates on the debt were based on something called the Sifma municipal bond index, which is named after the industry group that maintains the index and tracks muni bonds. And that’s what municipalities should have bought swaps based on.
Instead, Wall Street sold municipalities Libor swaps, which were easier to trade and [were] quickly becoming a gravy train for the banks.
Historically, Sifma and LIBOR moved together. But that was before the greatest-ever global banking cartel got into the game of manipulating LIBOR. Gandel writes:
In 2008 and 2009, Libor rates, in general, fell much faster than the Sifma rate. At times, the rates even went in different directions. During the height of the financial crisis, Sifma rates spiked. Libor rates, though, continued to drop. The result was that the cost of the swaps that municipalities had taken out jumped in price at the same time that their borrowing costs went up, which was exactly the opposite of how the swaps were supposed to work.
The two rates had decoupled, and it was chiefly due to manipulation. As noted in the SEUI report:
[T]here is . . . mounting evidence that it is no accident that these deals have gone so badly, so quickly for state and local governments. Ongoing investigations by the U.S. Department of Justice and the California, Florida, and Connecticut Attorneys General implicate nearly every major bank in a nationwide conspiracy to rig bids and drive up the fixed rates state and local governments pay on their derivative contracts.
Changing the Focus to Fraud
Suits to recover damages for collusion, antitrust violations and racketeering (RICO), however, have so far failed. In March 2013, SDNY Judge Naomi Reece Buchwald dismissed antitrust and RICO claims brought by investors and traders in actions consolidated in her court, on the ground that the plaintiffs lacked standing to bring the claims. She held that the rate-setting banks’ actions did not affect competition, because those banks were not in competition with one another with respect to LIBOR rate-setting; and that “the alleged collusion occurred in an arena in which defendants never did and never were intended to compete.”
Okay, the defendants weren’t competing with each other. They were colluding with each other, in order to unfairly compete with the rest of the financial world – local banks, credit unions, and the state and local governments they lured into being counterparties to their rigged swaps. The SDNY ruling is on appeal to the Second Circuit.
In the meantime, the FDIC is taking another approach. Its 24-count complaint does include antitrust claims, but the emphasis is on damages for fraud and conspiring to keep the LIBOR rate low to enrich the banks. The FDIC is not the first to bring such claims, but its massive suit adds considerable weight to the approach.
Why would keeping interest rates low enrich the rate-setting banks? Don’t they make more money if interest rates are high?
The answer is no. Unlike most banks, they make most of their money not from ordinary commercial loans but from interest rate swaps. The FDIC suit seeks to recover losses caused to 38 US banking institutions that did make their profits from ordinary business and consumer loans – banks that failed during the financial crisis and were taken over by the FDIC. They include Washington Mutual, the largest bank failure in US history. Since the FDIC had to cover the deposits of these failed banks, it clearly has standing to recover damages, and maybe punitive damages, if intentional fraud is proved.
The Key Role of the Federal Reserve
The rate-rigging banks have been caught red-handed, but the greater manipulation of interest rates was done by the Federal Reserve itself. The Fed aggressively drove down interest rates to save the big banks and spur economic recovery after the financial collapse. In the fall of 2008, it dropped the prime rate (the rate at which banks borrow from each other) nearly to zero.
This gross manipulation of interest rates was a giant windfall for the major derivative banks. Indeed, the Fed has been called a tool of the global banking cartel. It is composed of 12 branches, all of which are 100% owned by the private banks in their districts; and the Federal Reserve Bank of New York has always been the most important by far of these regional Fed banks. New York, of course is where Wall Street is located.
LIBOR is set in London; but as Simon Johnson observed in a New York Times article titled The Federal Reserve and the LIBOR Scandal, the Fed has jurisdiction whenever the “safety and soundness” of the US financial system is at stake. The scandal, he writes, “involves egregious, flagrant criminal conduct, with traders caught red-handed in e-mails and on tape.” He concludes:
This could even become a “tobacco moment,” in which an industry is forced to acknowledge its practices have been harmful – and enters into a long-term agreement that changes those practices and provides continuing financial compensation.
Bill Black concurs, stating, “Our system is completely rotten. All of the largest banks are involved—eagerly engaged in this fraud for years, covering it up.” The system needs a complete overhaul.
In the meantime, if the FDIC can bring a civil action for breach of contract and fraud, so can state and local governments, universities, and pension funds. The possibilities this opens up for California (where I’m currently running for State Treasurer) are huge. Fraud is grounds for rescission (terminating the contract) without paying penalties, potentially saving taxpayers enormous sums in fees for swap deals that are crippling cities, universities and other public entities across the state. Fraud is also grounds for punitive damages, something an outraged jury might be inclined to impose. My next post will explore the possibilities for California in more detail. Stay tuned.
~ ~ ~ ~ ~
Ellen Brown is an attorney, founder of the Public Banking Institute, and a candidate for California State Treasurer running on a state bank platform. She is the author of twelve books, including the best-selling Web of Debt and her latest book, The Public Bank Solution, which explores successful public banking models historically and globally.
http://ellenbrown.com/2014/04/13/the-global-banking-game-is-rigged-and-the-fdic-is-suing/
BRICS countries to set up their own IMF
April 14, 2014
Olga Samofalova, Vzglyad
Very soon, the IMF will cease to be the world's only organization capable of rendering international financial assistance. The BRICS countries are setting up alternative institutions, including a currency reserve pool and a development bank.
The BRICS countries have already agreed on the amount of authorized capital for the new institutions: $100 billion each. Source: Shutterstock
The BRICS countries (Brazil, Russia, India, China and South Africa) have made significant progress in setting up structures that would serve as an alternative to the International Monetary Fund and the World Bank, which are dominated by the U.S. and the EU. A currency reserve pool, as a replacement for the IMF, and a BRICS development bank, as a replacement for the World Bank, will begin operating as soon as in 2015, Russian Ambassador at Large Vadim Lukov has said.
Brazil has already drafted a charter for the BRICS Development Bank, while Russia is drawing up intergovernmental agreements on setting the bank up, he added.
In addition, the BRICS countries have already agreed on the amount of authorized capital for the new institutions: $100 billion each. "Talks are under way on the distribution of the initial capital of $50 billion between the partners and on the location for the headquarters of the bank. Each of the BRICS countries has expressed a considerable interest in having the headquarters on its territory," Lukov said.
It is expected that contributions to the currency reserve pool will be as follows: China, $41 billion; Brazil, India, and Russia, $18 billion each; and South Africa, $5 billion. The amount of the contributions reflects the size of the countries' economies.
Russia to launch domestic alternative to Visa and Mastercard
By way of comparison, the IMF reserves, which are set by the Special Drawing Rights (SDR), currently stand at 238.4 billion euros, or $369.52 billion dollars. In terms of amounts, the BRICS currency reserve pool is, of course, inferior to the IMF. However, $100 billion should be quite sufficient for five countries, whereas the IMF comprises 188 countries - which may require financial assistance at any time.
BRICS Development Bank
The BRICS countries are setting up a Development Bank as an alternative to the World Bank in order to grant loans for projects that are beneficial not for the U.S. or the EU, but for developing countries.
The purpose of the bank is to primarily finance external rather than internal projects. The founding countries believe that they are quite capable of developing their own projects themselves. For instance, Russia has a National Wealth Fund for this purpose.
"Loans from the Development Bank will be aimed not so much at the BRICS countries as for investment in infrastructure projects in other countries, say, in Africa,” says Ilya Prilepsky, a member of the Economic Expert Group. “For example, it would be in BRICS' interest to give a loan to an African country for a hydropower development program, where BRICS countries could supply their equipment or act as the main contractor."
If the loan is provided by the IMF, the equipment will be supplied by western countries that control its operations.
The creation of the BRICS Development Bank has a political significance too, since it allows its member states to promote their interests abroad. "It is a political move that can highlight the strengthening positions of countries whose opinion is frequently ignored by their developed American and European colleagues. The stronger this union and its positions on the world arena are, the easier it will be for its members to protect their own interests," points out Natalya Samoilova, head of research at the investment company Golden Hills-Kapital AM.
Having said that, the creation of alternative associations by no means indicates that the BRICS countries will necessarily quit the World Bank or the IMF, at least not initially, says Ilya Prilepsky.
Currency reserve pool
In addition, the BRICS currency reserve pool is a form of insurance, a cushion of sorts, in the event a BRICS country faces financial problems or a budget deficit. In Soviet times it would have been called "a mutual benefit society", says Nikita Kulikov, deputy director of the consulting company HEADS. Some countries in the pool will act as a safety net for the other countries in the pool.
The need for such protection has become evident this year, when developing countries' currencies, including the Russian ruble, have been falling.
The currency reserve pool will assist a member country with resolving problems with its balance of payments by making up a shortfall in foreign currency. Assistance can be given when there is a sharp devaluation of the national currency or massive capital flight due to a softer monetary policy by the U.S. Federal Reserve System, or when there are internal problems, or a crisis, in the banking system. If banks have borrowed a lot of foreign currency cash and are unable to repay the debt, then the currency reserve pool will be able to honor those external obligations.
This structure should become a worthy alternative to the IMF, which has traditionally provided support to economies that find themselves in a budgetary emergency.
"A large part of the fund goes toward saving the euro and the national currencies of developed countries. Given that governance of the IMF is in the hands of western powers, there is little hope for assistance from the IMF in case of an emergency. That is why the currency reserve pool would come in very handy," says ambassador Lukov.
The currency reserve pool will also help the BRICS countries to gradually establish cooperation without the use of the dollar, points out Natalya Samoilova. This, however, will take time. For the time being, it has been decided to replenish the authorized capital of the Development Bank and the Currency Reserve Pool with U.S. dollars. Thus the U.S. currency system is getting an additional boost. However, it cannot be ruled out that very soon (given the threat of U.S. and EU economic sanctions against Russia) the dollar may be replaced by the ruble and other national currencies of the BRICS counties.
Full text available on Vz.ru.
Source: Russia Beyond the Headlines - http://rbth.com/business/2014/04/14/brics_countries_to_set_up_their_own_imf_35891.html)
Russia’s New York Stocks in Peril as Kremlin Makes Plea
By Kasia Klimasinska and Halia Pavliva
Apr 10, 2014 8:18 AM ET
Bloomberg
When Russia’s first deputy prime minister urged companies to delist from overseas stock markets two days ago, he made a reference to concerns about the country’s “economic security.”
While Igor Shuvalov didn’t specify what the security issues are, there may be reasons for the Kremlin to be concerned about stock trading as the U.S. and Europe threaten to step up sanctions against Russia, according to Gibson, Dunn & Crutcher LLP. The New York-listed equities of any company that the Treasury Department adds to the sanctions list would become off limits to U.S. investors, said Judith A. Lee, a sanctions lawyer at Gibson Dunn in Washington.
“If a company is designated, then any shares of that company in the control or possession of a U.S. person are blocked,” Lee said by e-mail on April 8. “Those shares could not be sold. That would really put downward pressure on the stock price.”
The Bloomberg index of the biggest Russian companies traded in New York rose 0.2 percent yesterday, capping a decline of 19 percent this year. The measure has plunged almost twice as much as the benchmark Micex gauge of Moscow-traded equities, which has fallen 10 percent. The Micex rose 0.6 percent at 1,357.31 at 8:14 a.m. in New York today.
Treasury List
Average daily volume in 10 of the country’s biggest stocks was 46 percent higher in the U.K. than in Moscow over the past 30 days, according to data compiled by Bloomberg. Companies including Yandex NV (YNDX), VimpelCom Ltd. and Mail.ru Group Ltd. are only traded on exchanges abroad while OAO Lukoil, OAO Gazprom (OGZD) and OAO Sberbank, among others, have shares listed in Moscow, New York and London.
U.S. President Barack Obama imposed financial sanctions on Russian officials, including billionaires close to President Vladimir Putin, following the country’s takeover of Crimea last month.
The U.S. Treasury Department’s list includes Gennady Timchenko, who partly controls natural gas producer OAO Novatek, Yury Kovalchuk, who owns stakes in Bank Rossiya and CTC Media Inc., and Putin’s former judo partner Arkady Rotenberg, an investor in road builder OAO Mostotrest. European Union leaders agreed on March 17 to impose sanctions on 21 individuals.
Delisting Russian companies from overseas exchanges is “a question of economic security,” Shuvalov told reporters after a government meeting near Moscow on April 8. Speaking later in a telephone interview, he said the move isn’t mandatory and that companies should make independent decisions.
Company Sanctions
Chris Hamilton, a spokesman for the U.K. Financial Conduct Authority declined to comment on how deeper sanctions against Russia could affect holders of Russian stocks listed in London. Hagar Chemali, a Treasury spokeswoman, also declined to comment.
“So far sanctions have been imposed on individuals and their assets,” Charles Hecker, the global research director at Control Risks Group in London, said by phone yesterday. “What we could move to next are companies and those companies’ assets.”
State-owned Russian companies or “Russian companies that have a great deal of political exposure” could be on a new sanctions list, Hecker said.
OAO Bank Rossiya, a St. Petersburg-based lender owned by associates of Putin, is so far the only company designated by the U.S., which sanctioned 31 individuals.
Joe Ailinger, a spokesman for Bank of New York Mellon Corp., declined to comment on whether the bank is taking actions in case sanctions are imposed on stock trading of some Russian companies. The New York-based bank is the world’s largest depositary for American and global depositary receipts.
’Caught Unaware’
Elizabeth Rosenberg, director of the Energy, Environment and Security Program at the Center for a New American Security in Washington, agrees with Gibson Dunn’s Lee that U.S. trading in Russian companies may be at risk.
“This measure is signaling that Russia doesn’t plan to be caught unaware, should there be a ramp-up in sanctions that would target its nationals or corporations,” Rosenberg said yesterday.
It’s unlikely that a U.S. embargo of Russia would go so far as affecting the rights of overseas investors, according to Ivan Manaenko of Veles Capital in Moscow.
“I can’t imagine U.S. sanctions would hurt U.S. investors,” Manaenko, who is head of research at Veles Capital, said by phone yesterday. “That would hurt market sentiment overall, meaning that the negative impact from such a step would not be limited to the Russian segment of the market only. It makes no sense to me.”
Russian ETF
Investors have returned to Russian stocks on prospects sanctions imposed by the West won’t go much further. A record $574 million was deposited in March in the Market Vectors Russia ETF (RSX), the largest U.S.-based exchange-traded fund investing in Russian shares, according to data compiled by Bloomberg.
Deeper Russia sanctions could resemble moves by Western governments in the past against regimes such as Iran and South Africa. America and Iran haven’t had diplomatic and relations since Islamic revolutionaries deposed the U.S.-backed shah in 1979. South Africa was under trade sanctions beginning in 1986 during the apartheid era which ended in 1994.
“Sanctions could become broader,” HSBC Holdings Plc analysts led by Garry Evans, Hong Kong based global head of equity strategy at the bank, said in an April 1 report. “The U.S. honed the use of financial sanctions against Iran -- some degree of replication is plausible.”
To contact the reporters on this story: Kasia Klimasinska in Washington at kklimasinska@bloomberg.net; Halia Pavliva in New York at hpavliva@bloomberg.net
To contact the editors responsible for this story: Tal Barak Harif at tbarak@bloomberg.net Nikolaj Gammeltoft, Rita Nazareth
http://www.bloomberg.com/news/2014-04-09/russia-s-new-york-stocks-in-peril-as-kremlin-makes-plea.html
Tough Swap Standards Drive Up Trade Costs 92-Fold
By Matthew Leising Apr 10, 2014 12:01 AM ET
Bloomberg
Photographer: Scott Eells/Bloomberg
The toughened standards, hatched five years ago after derivative losses almost crashed... Read More
New rules aimed at making the world safer from blowups in the $693 trillion derivatives market are poised to drive up costs so much for retirement funds and other users that bankers say they do just the opposite.
The toughened standards, hatched five years ago after derivative losses almost crashed the global economy, are meant to safeguard trades and bring more openness to a market whose secrecy and sheer size overwhelmed regulators in 2008. Where swaps had been one-on-one deals before, now they would be backstopped by third parties in clearinghouses that ensure everyone can pay, with the aim of avoiding emergency bailouts and panic.
Rules being finalized by the Basel Committee on Banking Supervision in Switzerland will require banks to set aside more money in the event the swaps go bad. And not just a little bit more -- as much as 92 times, or 9,100 percent, more, according to calculations by three banks shared with Bloomberg News. The higher costs in turn may cause market participants to flee rather than take advantage of the clearinghouses, making it more difficult for those third-party guarantors.
“Do we expect some firms to drop out? The short answer is yes,” said Will Rhode, director of fixed-income research at New York-based Tabb Group LLC. “To have more members of clearinghouses is better because then you have better resources” in a crisis, he said. Allowing instability to increase “is not an option,” he said.
‘Uneconomical’ Proposal
Bank advocates including the International Swaps and Derivatives Association Inc., a group representing the world’s largest banks, argued in a September letter to the Basel committee that its proposal was overkill and unfairly cost them too much money. The committee’s plan would “result in capital requirements that make clearing uneconomical,” the groups said.
Swaps are what investors use to help guard against risk. They’re bought by pension plans and retirement funds to protect against fluctuations in interest rates, meaning they affect most people who own annuities. They’re used by the government to limit exposure in the mortgage market and cut home-loan costs.
Investors can also hedge an investment in a company by buying a swap that will pay them if a borrower stops paying its debts. They’re called swaps because investors and banks exchange, or swap, payments over time based on how interest rates move or how the creditworthiness of companies changes.
The contracts trade on swap execution facilities, including one run by Bloomberg LP, the parent of Bloomberg News. Other SEF owners include ICAP Plc and Tullett Prebon Plc. Bloomberg Financial Markets is an associate member of ISDA.
Fine Line
The Basel committee has a fine line to walk. The lack of capital to back up losses in the private swaps market was the main reason why the U.S. bailed out American International Group Inc. in September 2008, said Michael Barr, a law professor at the University of Michigan who helped write the Dodd-Frank law - - which aimed to make the U.S. financial system more transparent and resilient -- when he served as an assistant Treasury secretary from 2009 to 2010. Taxpayers ultimately provided $182.3 billion in bailout funds to AIG, since repaid.
“One of the early reforms we knew we wanted to take was moving the system toward central clearing where risk can be better observed and managed,” Barr said. “We were extremely focused at that time, as we dug the U.S. out of this disaster, to make the U.S. system safer.”
A representative of the Basel committee, which is made up of regulators from 27 of the world’s largest economies and sets international bank supervisory guidelines, declined to comment on the proposed clearinghouse regulations.
‘Enormous Sums’
Banks complain about higher capital requirements and use them as a reason to oppose oversight legislation, Barr said.
“The dealer banks were opposed to all the reforms in the Dodd-Frank Act and all the capital reforms on derivatives in Basel,” Barr said. “They spent enormous sums of money to fight us and didn’t stop when the Dodd-Frank Act was passed.”
In the past, banks have said that higher capital requirements would hurt their business and the economy -- predictions that haven’t come true.
In 2010, a lobbying group estimated that new banking rules requiring higher capital levels would erase 3.1 percent of gross domestic product in the U.S., euro region and Japan by 2015 because banks would bump up their loan rates or reduce how much they lent. While it’s impossible to know the effect stricter requirements have had, U.S. GDP expanded about 2.5 percent in the year that prediction was made, and 1.9 percent last year.
Safeguarding Banks
In 2009, when the Basel committee proposed increasing the amount of capital banks needed to hold in reserve for private derivatives trades by an average of eight times, the industry argued it would shrink the market by making the trades too expensive. Private derivatives trading has grown since then, according to the Bank for International Settlements.
To Darrell Duffie, a Stanford University finance professor, shielding the financial system from collapse is a bigger concern than whether pension funds and insurance companies can hedge their risk.
“The first priority is to keep the banks properly capitalized,” Duffie said.
If the Basel rules are adopted, pension plans might lose a tool to boost returns at a time when they’re bleeding money. State plans for government workers in the U.S. face an estimated $780 billion gap between what they promised and what they’ve saved, according to Wilshire Consulting. That doesn’t take into account the pension plans for the thousands of municipalities within the states that have their own deficits.
Regulating Pensions
To protect retirees’ money, the U.S. Labor Department regulates what types of investments that pension plans can make. Last year it said $6.8 trillion held by the funds could be invested in cleared swap transactions. The Teachers’ Retirement System for the State of Illinois and its 390,000 members, for example, had $808.4 million of interest-rate swaps as of mid-2013, according to its annual report.
“Swaps are one of the core ways that pensions manage their long-term interest-rate risk,” said Kevin McPartland, head of market structure and research at Greenwich Associates in Stamford, Connecticut. “If they suddenly can’t afford to do that, it would be a big hit to pensioners.”
Clearinghouses can make trading safer by “clearing” trades -- collecting cash or collateral to ensure participants are able to pay their obligations. Clearinghouses deal only with member firms, which act as intermediaries for their customers. To cover losses and keep the market from being disrupted by deadbeats, clearinghouses also pool cash and securities from the member dealers in what they call default funds.
Default Funds
There’s about $30 billion in default funds worldwide, according to Chris Cononico, president of GCSA LLC, a New York-based underwriter that’s seeking to insure derivatives clearinghouses.
The largest swaps clearinghouse owners are exchanges: CME Group Inc., IntercontinentalExchange Group Inc., London Stock Exchange Group Plc (LSE) and Deutsche Boerse AG.
Since banks act as customers’ gatekeepers to the clearinghouses, the Basel committee wants them to protect themselves -- and the global financial system -- by matching every dollar they contribute to the default fund with a dollar of capital.
If the rules were adopted, swaps dealers say that only the wealthiest investors would be able to use clearinghouses. Fewer members would mean eroded financial support for the clearinghouses, which are the last backstop before losses are borne by taxpayers.
Biggest Brokers
The world’s largest derivatives brokers at the end of 2013 were owned by Goldman Sachs Group Inc., JPMorgan Chase & Co. (JPM), Newedge Group SA, Deutsche Bank AG (DBK), Morgan Stanley (MS) and the Merrill Lynch division of Bank of America Corp. (BAC), according to the U.S. Commodity Futures Trading Commission.
Here’s how costs would change under the new rule, based on internal models from three major derivatives dealers provided to Bloomberg News under the condition that their identities wouldn’t be disclosed so they could openly discuss their business models.
Executives in a bank’s treasury department don’t allocate the firm’s money to trading desks without a guarantee that the profit on it will be about 10 percent to 15 percent a year after taxes, depending on the bank. In many cases, banks earn these returns by charging fees to clients.
Bank Models
In one bank’s internal model, a $100 million interest-rate swap between a dealer and its customer prior to the new Basel proposal would have meant that, before taxes, $14,750 in capital had to be set aside.
When the bank’s trading desk asks the firm’s treasury for $14,750 as part of the trade, the traders would have to earn $3,404 per year before taxes for as long as the swap was active. That’s in the old days.
The same $100 million swap would look different under the new proposal. As part of accepting that trade, the clearinghouse would require the bank to deposit $1.2 million into its default fund. Under the Basel committee proposal, the bank would have to have $1.2 million more capital.
According to the dealer bank, it would be required to generate more than $276,000 a year before taxes for that amount of capital. When charges such as the cost of funding and others are added to the trade, the tab balloons to $307,327 a year, the dealer said.
Punishing Intermediaries
That’s 90 times as much as the $3,404 before the new rules.
The projections by other market participants are similar. A second dealer who shared an internal model for a $100 million interest-rate swap said it would have required $2,769 a year before the Basel rules. Adding in the same associated costs as in the previous example leads to more than $256,000 a year, or 92 times more expensive.
A third major derivatives dealer that provided an internal model would have incurred $12,000 in capital costs under the old system, but would now face more than $253,000. That’s a 21-fold increase.
The added charges are alarming and punitive, Rhode of Tabb Group said.
“It’s counterintuitive if you introduce clearing to make the system more robust to punish the intermediaries necessary in that business,” he said.
These are simplified examples and don’t take into account how trades that offset can lower costs. They also assume a bank will pass all of the new costs on to the client. The bank executives contacted by Bloomberg News said their institutions hadn’t decided whether they’d do that.
A fourth executive said his firm would pass along the charge to clients. He added that the 10 biggest swaps dealers would probably decide to accommodate only the 200 largest investors in the world. He didn’t want to be identified speaking candidly about his firm’s plans.
By imposing such high costs, the Basel committee may be looking to curb the size of the cleared derivatives market, McPartland said.
“This is certainly going to meet that goal,” he said.
To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net
To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net Bob Ivry
http://www.bloomberg.com/news/2014-04-10/saving-world-from-swaps-blowup-seen-raising-trade-costs-92-fold.html
Russia’s New York Stocks in Peril as Kremlin Makes Plea
By Kasia Klimasinska and Halia Pavliva
Apr 10, 2014 8:18 AM ET
Bloomberg
When Russia’s first deputy prime minister urged companies to delist from overseas stock markets two days ago, he made a reference to concerns about the country’s “economic security.”
While Igor Shuvalov didn’t specify what the security issues are, there may be reasons for the Kremlin to be concerned about stock trading as the U.S. and Europe threaten to step up sanctions against Russia, according to Gibson, Dunn & Crutcher LLP. The New York-listed equities of any company that the Treasury Department adds to the sanctions list would become off limits to U.S. investors, said Judith A. Lee, a sanctions lawyer at Gibson Dunn in Washington.
“If a company is designated, then any shares of that company in the control or possession of a U.S. person are blocked,” Lee said by e-mail on April 8. “Those shares could not be sold. That would really put downward pressure on the stock price.”
The Bloomberg index of the biggest Russian companies traded in New York rose 0.2 percent yesterday, capping a decline of 19 percent this year. The measure has plunged almost twice as much as the benchmark Micex gauge of Moscow-traded equities, which has fallen 10 percent. The Micex rose 0.6 percent at 1,357.31 at 8:14 a.m. in New York today.
Treasury List
Average daily volume in 10 of the country’s biggest stocks was 46 percent higher in the U.K. than in Moscow over the past 30 days, according to data compiled by Bloomberg. Companies including Yandex NV (YNDX), VimpelCom Ltd. and Mail.ru Group Ltd. are only traded on exchanges abroad while OAO Lukoil, OAO Gazprom (OGZD) and OAO Sberbank, among others, have shares listed in Moscow, New York and London.
U.S. President Barack Obama imposed financial sanctions on Russian officials, including billionaires close to President Vladimir Putin, following the country’s takeover of Crimea last month.
The U.S. Treasury Department’s list includes Gennady Timchenko, who partly controls natural gas producer OAO Novatek, Yury Kovalchuk, who owns stakes in Bank Rossiya and CTC Media Inc., and Putin’s former judo partner Arkady Rotenberg, an investor in road builder OAO Mostotrest. European Union leaders agreed on March 17 to impose sanctions on 21 individuals.
Delisting Russian companies from overseas exchanges is “a question of economic security,” Shuvalov told reporters after a government meeting near Moscow on April 8. Speaking later in a telephone interview, he said the move isn’t mandatory and that companies should make independent decisions.
Company Sanctions
Chris Hamilton, a spokesman for the U.K. Financial Conduct Authority declined to comment on how deeper sanctions against Russia could affect holders of Russian stocks listed in London. Hagar Chemali, a Treasury spokeswoman, also declined to comment.
“So far sanctions have been imposed on individuals and their assets,” Charles Hecker, the global research director at Control Risks Group in London, said by phone yesterday. “What we could move to next are companies and those companies’ assets.”
State-owned Russian companies or “Russian companies that have a great deal of political exposure” could be on a new sanctions list, Hecker said.
OAO Bank Rossiya, a St. Petersburg-based lender owned by associates of Putin, is so far the only company designated by the U.S., which sanctioned 31 individuals.
Joe Ailinger, a spokesman for Bank of New York Mellon Corp., declined to comment on whether the bank is taking actions in case sanctions are imposed on stock trading of some Russian companies. The New York-based bank is the world’s largest depositary for American and global depositary receipts.
’Caught Unaware’
Elizabeth Rosenberg, director of the Energy, Environment and Security Program at the Center for a New American Security in Washington, agrees with Gibson Dunn’s Lee that U.S. trading in Russian companies may be at risk.
“This measure is signaling that Russia doesn’t plan to be caught unaware, should there be a ramp-up in sanctions that would target its nationals or corporations,” Rosenberg said yesterday.
It’s unlikely that a U.S. embargo of Russia would go so far as affecting the rights of overseas investors, according to Ivan Manaenko of Veles Capital in Moscow.
“I can’t imagine U.S. sanctions would hurt U.S. investors,” Manaenko, who is head of research at Veles Capital, said by phone yesterday. “That would hurt market sentiment overall, meaning that the negative impact from such a step would not be limited to the Russian segment of the market only. It makes no sense to me.”
Russian ETF
Investors have returned to Russian stocks on prospects sanctions imposed by the West won’t go much further. A record $574 million was deposited in March in the Market Vectors Russia ETF (RSX), the largest U.S.-based exchange-traded fund investing in Russian shares, according to data compiled by Bloomberg.
Deeper Russia sanctions could resemble moves by Western governments in the past against regimes such as Iran and South Africa. America and Iran haven’t had diplomatic and relations since Islamic revolutionaries deposed the U.S.-backed shah in 1979. South Africa was under trade sanctions beginning in 1986 during the apartheid era which ended in 1994.
“Sanctions could become broader,” HSBC Holdings Plc analysts led by Garry Evans, Hong Kong based global head of equity strategy at the bank, said in an April 1 report. “The U.S. honed the use of financial sanctions against Iran -- some degree of replication is plausible.”
To contact the reporters on this story: Kasia Klimasinska in Washington at kklimasinska@bloomberg.net; Halia Pavliva in New York at hpavliva@bloomberg.net
To contact the editors responsible for this story: Tal Barak Harif at tbarak@bloomberg.net Nikolaj Gammeltoft, Rita Nazareth
http://www.bloomberg.com/news/2014-04-09/russia-s-new-york-stocks-in-peril-as-kremlin-makes-plea.html
Tough Swap Standards Drive Up Trade Costs 92-Fold
By Matthew Leising Apr 10, 2014 12:01 AM ET
Bloomberg
Photographer: Scott Eells/Bloomberg
The toughened standards, hatched five years ago after derivative losses almost crashed... Read More
New rules aimed at making the world safer from blowups in the $693 trillion derivatives market are poised to drive up costs so much for retirement funds and other users that bankers say they do just the opposite.
The toughened standards, hatched five years ago after derivative losses almost crashed the global economy, are meant to safeguard trades and bring more openness to a market whose secrecy and sheer size overwhelmed regulators in 2008. Where swaps had been one-on-one deals before, now they would be backstopped by third parties in clearinghouses that ensure everyone can pay, with the aim of avoiding emergency bailouts and panic.
Rules being finalized by the Basel Committee on Banking Supervision in Switzerland will require banks to set aside more money in the event the swaps go bad. And not just a little bit more -- as much as 92 times, or 9,100 percent, more, according to calculations by three banks shared with Bloomberg News. The higher costs in turn may cause market participants to flee rather than take advantage of the clearinghouses, making it more difficult for those third-party guarantors.
“Do we expect some firms to drop out? The short answer is yes,” said Will Rhode, director of fixed-income research at New York-based Tabb Group LLC. “To have more members of clearinghouses is better because then you have better resources” in a crisis, he said. Allowing instability to increase “is not an option,” he said.
‘Uneconomical’ Proposal
Bank advocates including the International Swaps and Derivatives Association Inc., a group representing the world’s largest banks, argued in a September letter to the Basel committee that its proposal was overkill and unfairly cost them too much money. The committee’s plan would “result in capital requirements that make clearing uneconomical,” the groups said.
Swaps are what investors use to help guard against risk. They’re bought by pension plans and retirement funds to protect against fluctuations in interest rates, meaning they affect most people who own annuities. They’re used by the government to limit exposure in the mortgage market and cut home-loan costs.
Investors can also hedge an investment in a company by buying a swap that will pay them if a borrower stops paying its debts. They’re called swaps because investors and banks exchange, or swap, payments over time based on how interest rates move or how the creditworthiness of companies changes.
The contracts trade on swap execution facilities, including one run by Bloomberg LP, the parent of Bloomberg News. Other SEF owners include ICAP Plc and Tullett Prebon Plc. Bloomberg Financial Markets is an associate member of ISDA.
Fine Line
The Basel committee has a fine line to walk. The lack of capital to back up losses in the private swaps market was the main reason why the U.S. bailed out American International Group Inc. in September 2008, said Michael Barr, a law professor at the University of Michigan who helped write the Dodd-Frank law - - which aimed to make the U.S. financial system more transparent and resilient -- when he served as an assistant Treasury secretary from 2009 to 2010. Taxpayers ultimately provided $182.3 billion in bailout funds to AIG, since repaid.
“One of the early reforms we knew we wanted to take was moving the system toward central clearing where risk can be better observed and managed,” Barr said. “We were extremely focused at that time, as we dug the U.S. out of this disaster, to make the U.S. system safer.”
A representative of the Basel committee, which is made up of regulators from 27 of the world’s largest economies and sets international bank supervisory guidelines, declined to comment on the proposed clearinghouse regulations.
‘Enormous Sums’
Banks complain about higher capital requirements and use them as a reason to oppose oversight legislation, Barr said.
“The dealer banks were opposed to all the reforms in the Dodd-Frank Act and all the capital reforms on derivatives in Basel,” Barr said. “They spent enormous sums of money to fight us and didn’t stop when the Dodd-Frank Act was passed.”
In the past, banks have said that higher capital requirements would hurt their business and the economy -- predictions that haven’t come true.
In 2010, a lobbying group estimated that new banking rules requiring higher capital levels would erase 3.1 percent of gross domestic product in the U.S., euro region and Japan by 2015 because banks would bump up their loan rates or reduce how much they lent. While it’s impossible to know the effect stricter requirements have had, U.S. GDP expanded about 2.5 percent in the year that prediction was made, and 1.9 percent last year.
Safeguarding Banks
In 2009, when the Basel committee proposed increasing the amount of capital banks needed to hold in reserve for private derivatives trades by an average of eight times, the industry argued it would shrink the market by making the trades too expensive. Private derivatives trading has grown since then, according to the Bank for International Settlements.
To Darrell Duffie, a Stanford University finance professor, shielding the financial system from collapse is a bigger concern than whether pension funds and insurance companies can hedge their risk.
“The first priority is to keep the banks properly capitalized,” Duffie said.
If the Basel rules are adopted, pension plans might lose a tool to boost returns at a time when they’re bleeding money. State plans for government workers in the U.S. face an estimated $780 billion gap between what they promised and what they’ve saved, according to Wilshire Consulting. That doesn’t take into account the pension plans for the thousands of municipalities within the states that have their own deficits.
Regulating Pensions
To protect retirees’ money, the U.S. Labor Department regulates what types of investments that pension plans can make. Last year it said $6.8 trillion held by the funds could be invested in cleared swap transactions. The Teachers’ Retirement System for the State of Illinois and its 390,000 members, for example, had $808.4 million of interest-rate swaps as of mid-2013, according to its annual report.
“Swaps are one of the core ways that pensions manage their long-term interest-rate risk,” said Kevin McPartland, head of market structure and research at Greenwich Associates in Stamford, Connecticut. “If they suddenly can’t afford to do that, it would be a big hit to pensioners.”
Clearinghouses can make trading safer by “clearing” trades -- collecting cash or collateral to ensure participants are able to pay their obligations. Clearinghouses deal only with member firms, which act as intermediaries for their customers. To cover losses and keep the market from being disrupted by deadbeats, clearinghouses also pool cash and securities from the member dealers in what they call default funds.
Default Funds
There’s about $30 billion in default funds worldwide, according to Chris Cononico, president of GCSA LLC, a New York-based underwriter that’s seeking to insure derivatives clearinghouses.
The largest swaps clearinghouse owners are exchanges: CME Group Inc., IntercontinentalExchange Group Inc., London Stock Exchange Group Plc (LSE) and Deutsche Boerse AG.
Since banks act as customers’ gatekeepers to the clearinghouses, the Basel committee wants them to protect themselves -- and the global financial system -- by matching every dollar they contribute to the default fund with a dollar of capital.
If the rules were adopted, swaps dealers say that only the wealthiest investors would be able to use clearinghouses. Fewer members would mean eroded financial support for the clearinghouses, which are the last backstop before losses are borne by taxpayers.
Biggest Brokers
The world’s largest derivatives brokers at the end of 2013 were owned by Goldman Sachs Group Inc., JPMorgan Chase & Co. (JPM), Newedge Group SA, Deutsche Bank AG (DBK), Morgan Stanley (MS) and the Merrill Lynch division of Bank of America Corp. (BAC), according to the U.S. Commodity Futures Trading Commission.
Here’s how costs would change under the new rule, based on internal models from three major derivatives dealers provided to Bloomberg News under the condition that their identities wouldn’t be disclosed so they could openly discuss their business models.
Executives in a bank’s treasury department don’t allocate the firm’s money to trading desks without a guarantee that the profit on it will be about 10 percent to 15 percent a year after taxes, depending on the bank. In many cases, banks earn these returns by charging fees to clients.
Bank Models
In one bank’s internal model, a $100 million interest-rate swap between a dealer and its customer prior to the new Basel proposal would have meant that, before taxes, $14,750 in capital had to be set aside.
When the bank’s trading desk asks the firm’s treasury for $14,750 as part of the trade, the traders would have to earn $3,404 per year before taxes for as long as the swap was active. That’s in the old days.
The same $100 million swap would look different under the new proposal. As part of accepting that trade, the clearinghouse would require the bank to deposit $1.2 million into its default fund. Under the Basel committee proposal, the bank would have to have $1.2 million more capital.
According to the dealer bank, it would be required to generate more than $276,000 a year before taxes for that amount of capital. When charges such as the cost of funding and others are added to the trade, the tab balloons to $307,327 a year, the dealer said.
Punishing Intermediaries
That’s 90 times as much as the $3,404 before the new rules.
The projections by other market participants are similar. A second dealer who shared an internal model for a $100 million interest-rate swap said it would have required $2,769 a year before the Basel rules. Adding in the same associated costs as in the previous example leads to more than $256,000 a year, or 92 times more expensive.
A third major derivatives dealer that provided an internal model would have incurred $12,000 in capital costs under the old system, but would now face more than $253,000. That’s a 21-fold increase.
The added charges are alarming and punitive, Rhode of Tabb Group said.
“It’s counterintuitive if you introduce clearing to make the system more robust to punish the intermediaries necessary in that business,” he said.
These are simplified examples and don’t take into account how trades that offset can lower costs. They also assume a bank will pass all of the new costs on to the client. The bank executives contacted by Bloomberg News said their institutions hadn’t decided whether they’d do that.
A fourth executive said his firm would pass along the charge to clients. He added that the 10 biggest swaps dealers would probably decide to accommodate only the 200 largest investors in the world. He didn’t want to be identified speaking candidly about his firm’s plans.
By imposing such high costs, the Basel committee may be looking to curb the size of the cleared derivatives market, McPartland said.
“This is certainly going to meet that goal,” he said.
To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net
To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net Bob Ivry
http://www.bloomberg.com/news/2014-04-10/saving-world-from-swaps-blowup-seen-raising-trade-costs-92-fold.html
Monsanto and co. pouring money into defeating county measure to ban GMOs
Published time: April 07, 2014 22:38
Reuters/Lucy NicholsonReuters/Lucy Nicholson
Monsanto and five other top agrochemical companies have donated a combined $455,000 to defeat an Oregon county ballot initiative that would restrict the growth of genetically-modified crops in area farms.
The internationally-powerful “Big Six” chemical companies are flooding the Measure 15-119 ballot campaign in Jackson County, Oregon with lucrative donations that have helped opponents of the measure amass an eight-to-one spending advantage, according to state figures.
Monsanto ($183,294), DuPont Pioneer ($129,647), Syngenta ($75,000), Bayer ($22,353), BASF ($22,353), and Dow AgroSciences ($22,353) have donated a combined $455,000 to Good Neighbor Farmers, the political action committee fighting Measure 15-119, which county voters will consider on the May 20 ballot.
“This is a staggering amount of money for a local ordinance,” said Center for Food Safety senior attorney George Kimbrell. “For every vote they might get, Monsanto and its pals could afford to take each voter out for a fancy steak dinner.”
Overall, Good Neighbor Farmers has $556,000 cash on hand, according to the Oregon Secretary of State.
The Center for Food Safety reported that, all in all, opponents of the measure have a total of $799,000.
Meanwhile, two political action committees supporting the measure, GMO Free Jackson County and Our Family Farms Coalition, have a combined $102,368.
Measure 15-119 “would ban any person from propagating, cultivating, raising or growing ‘genetically-engineered’(defined) plants in Jackson County.”
Kimbrell’s group says that even before the latest contribution avalanche from the “Big Six,” about 95 percent of donations in the campaign had come from outside Jackson County.
"It goes to prove just how much money is coming from outside of our county," Elise Higley, director of Our Family Farms Coalition, told The Oregonian. "The general reaction is that people are really angry that outsiders are pouring this much money into a county measure."
Jackson County, in southwest Oregon, is home to 208,545 people, according to the US Census Bureau’s 2013 estimate.
The Oregon Legislature passed legislation last summer making the state the “regulator of agricultural seeds,” according to The Oregonian, preempting local ordinances that attempt to ban GMO seeds. Yet since Measure 15-119 had already qualified for the Jackson County ballot, it is exempt from the Legislature’s edict.
The vast majority of conventional processed foods in the US are made with genetically-modified organisms (GMOs). Around 93 percent of all soybean crops planted in the US last year involved genetically-modified, herbicide-tolerant (HT) variants, the US Department of Agriculture has acknowledged. HT corn and HT cotton constituted about 85 and 82 percent of total acreage, respectively.
GMO crops are now grown in 28 countries, or on 12 percent of the world's arable land, with the acreage doubling every five years. However, in the European Union, only two GMO varieties (compared to 96 in the USA) have so far been licensed for commercial harvesting. Russia, for instance, recently barred the import of GMO products.
Powerful food industry and biotechnology players are currently banding together on other fronts to protect their investment in GMO technology despite national and international pushback. Their main effort in the US is seen in potential federal legislation that would block states from passing mandatory GMO labeling measures despite the “right to know” movement’s rising popularity.
The Center for Food Safety says dozens of states are considering GMO labeling laws on some level, as there is no federal labeling standard. Polling suggests over 90 percent of Americans would prefer GMO ingredients in consumables to be labeled to some extent.
The claim that genetically-engineered food poses no risk to human and environmental health is far from settled, despite the industry's assertions.
The US Department of Agriculture recently voiced concerns over the potentially devastating environmental effects of GMOs.
A recent study found that global classification of GMO foods is fundamentally flawed and “has failed miserably” at protecting public health.
http://rt.com/usa/monsanto-county-ban-gmo-997/
Marvel’s iPhone App Turns Sketches Into Tappable Mobile App “Prototypes”
April 9, 2014
Posted 5 hours ago by Steve O'Hear (@sohear)
Techcrunch.com
Marvel, a UK startup founded last year by ex-employees of Enpocket (acquired by Nokia), is on a mission: to put creating a mobile app “prototype” within the reach of almost anybody.
The company’s first offering, built on top of Dropbox, lets you turn sketches, wireframes, and Photoshop files synced with the cloud-storage service into a tappable (or clickable) demo of how your mobile app will work. It does this by letting you add ‘hotspots’ and transitions to your images so that the resulting prototype can be navigated as if it were an actual app.
Now Marvel has applied this simple idea to an iPhone app of its own which lets you photograph paper sketches of your app idea and tun these into interactive prototypes too.
Aimed at designers, UX experts, product managers, students and businesses that need to quickly prototype ideas to share with clients and teams, Marvel’s iPhone app (and its original web-based offering) couldn’t really be any simpler.
To begin with you draw your app screens on paper, a whiteboard, or on the back of a napkin in true folklore style, and then use your iPhone to take a snap of each sketch, which can be designed for either iPhone or iPad.
Next, using the Marvel app, you apply ‘touch’ hotspots to each image and in turn link your screens together in the way you intend the app to be navigated.
Finally, once you’re happy with your prototype, you can share it via a unique mobile-friendly URL over email, SMS or Twitter. Meanwhile, your Marvel prototype is synced with Dropbox and linked to your Marvel account so that you can continue working on it at a future date.
In addition, any changes you make to your ‘screen’ images, even via another app such as Photoshop, are synced with Marvel due to being built on top of Dropbox. This also means the startup is able to offer its core service for free without limits since it isn’t providing cloud-storage.
“In the past, if you wanted to see your app or web designs and ideas in anything more engaging than PDFs and Powerpoints, you needed to have the skills and the time to code it into an interactive prototype. This often puts prototyping out of reach for many businesses and individuals as they simply don’t have the time, money or developer resources,” explains Marvel co-founder Murat Mutlu.
“What if you could create a prototyping tool that didn’t just help designers and businesses, but anyone with an idea, no matter what level of design and technical skill they had? Marvel was designed and built to do just that,” he adds. “We’ve designed Marvel to be ‘pick up and play’. No maze like interface and gunk you don’t need. The aim of Marvel is to create your prototype and just get out of the way so that you can concentrate on the important stuff.”
Along with Mutlu, the startups other co-founders are Brendan Moore, previously a Solutions Engineer at Nokia and Navteq, and Jonathan Siao, who also worked at Nokia. All three went full-time with Marvel after the company raised a £60k investment from Haatch in November.
Mutlu cites Invision as its main competitor in what is an increasingly crowded space. “They are extremely well funded, have a huge team and a 2.5 year head start. But there’s still an opportunity to take a different approach and do something bigger, more meaningful and with a better experience,” he says.
To that end, while Marvel is free to use, the startup plans to move to a freemium model with a “Pro” version offering additional features, such as team collaboration and further service integrations.
http://techcrunch.com/2014/04/09/marvel-at-this/
Crisis in Ukraine Displays US Power Over Payment Systems
Kadhim Shubber (@kadhimshubber) |
Published on April 8, 2014 at 15:03 BST
Coindesk.com
Ukraine has returned to the top of the news agenda, with pro-Russian separatists occupying government buildings in the east of the country.
But using the levers of global finance, the conflict, with Europe and the US on one side and Russia on the other, is as much an economic battle as a physical one.
And with Russia now set on creating a new national payment system (NPS) to replace Visa and MasterCard, this fight is a reminder of the fundamental difference between the new world of decentralized digital currencies and the old world, where governments use payment systems as weapons of war.
The American monopoly on transactions
Visa and MasterCard account for 85% of the market share of global transactions in 2013. Although both are private companies, they are subject primarily to American law, which includes political sanctions against other countries.
The two effectively represent a de-facto monopoly on US transactions, and reminded Russian president Vladimir Putin of it after Russia annexed Crimea, when they halted credit card services to four banks linked to Russians targeted by US sanctions.
Services later resumed, but for the Russian government, whose statements on decentralised digital currencies have stood out as particularly hostile, the freeze gave them a taste of what happens when another government controls its payment infrastructure.
A Russian national payment system
In an alternative universe, the sanctions might turn Putin into a fan of Satoshi Nakamoto, the pseudonymous creator of the original Bitcoin protocol, but in the real world it reignited plans for a Russian NPS – and the only thing worse than using a tool your enemy controls is using a tool that citizens control.
Few people outside of financial circles had heard of the Kremlin plans for an NPS before the recent political crisis in Ukraine.
First announced back in 2011, the Russian NPS is linked to an ambitious plan to create a Universal Electronic Card (UEC). The UEC is basically a personal ID, bankcard, medical insurance, social security and pension card all in one. The initiative was launched in 2010 as has slowly been rolled out since.
The recent crisis and subsequent move by Visa and MasterCard have lit a fire under Putin’s plans for financial independence. It is likely that the NPS will be up and running before the year is out, with Russia’s two largest banks, Sberbank and VTB Bank, already competing for the project.
A different name, but fundamentally the same
Russian citizens will probably not even notice the switch to a Russian NPS, as it is mainly a software change than a hardware one. ATM terminals and cash registers will be reprogrammed and people will still be able to use their current Visa and MasterCard.
The main difference is that Russia will be able to mitigate the impact of external financial sanctions on internal money transfers. It wouldn’t be the first to build a national payment system. China has also built its own system, UnionPay.
But there is a clear advantage to the global use of a single payment system: international trade is lubricated by the quick and easy flow of money.
In the case of the US and Russia, opposition to America’s using the monopoly by Visa and MasterCard to enforce sanctions may lead to an alternative system in Russia. One day, it might trigger a large-scale shift to a decentralized system like bitcoin.
The consequences of that, good or bad, will be seismic.
This article was co-authored by Kadhim Shubber and Mark Jackson, a financial analyst from Moscow.
http://www.coindesk.com/crisis-ukraine-displays-us-power-over-payment-systems/
If the New York Stock Exchange is a “High-Frequency Brothel” then the SEC is its Pimp
By Pam Martens
April 7, 2014
(special thanks to basserdan)
The fallout from the new book, “Flash Boys” by Michael Lewis continues. Yesterday, Jonathon Trugman wrote in the New York Post that “These traders who use the HOV lane to get ahead of investors could not do their trades without the full knowledge and complicity of the New York Stock Exchange and Nasdaq.”
Trubman went on to compare the two best known stock exchanges in the U.S. to houses of ill repute, writing: “What is clearly unfair and unethical — and, frankly, ought to be outlawed — is how the exchanges have essentially taken on the role of running a high-priced, high-frequency brothel…”
While it’s true that the New York Post might possibly overuse sexual analogies (on August 10, 2011 it ran a front page cover comparing the Dow Jones Industrial Average to a “hooker’s drawers”), in this instance Trugman is spot on.
Not only are the New York Stock Exchange and Nasdaq allowing high frequency traders to co-locate their computers next to the main computers of the exchanges to gain a speed advantage over other customers at a monthly cost that only the very rich can afford to pay but they’re now tacking on infrastructure charges that price everyone out of efficient use of the exchanges except the very top tier of trading firms.
Lewis writes in “Flash Boys” that “both Nasdaq and the New York Stock Exchange announced that they had widened the pipe that carried information between the HFT [high frequency trading] computers and each exchange’s matching engine. The price for the new pipe was $40,000 a month, up from the $25,000 a month the HFT firms had been paying for the old, smaller pipe.”
By late 2011, according to Lewis, “more than two-thirds of Nasdaq’s revenues derived, one way or another, from high-frequency trading firms.”
And we’ll take Trugman’s analogy one step further: the cops on the beat who have had their palms greased to turn a blind eye to the brothels are drinking their coffee and gobbling their donuts at the Securities and Exchange Commission.
Lewis writes in “Flash Boys” that the Royal Bank of Canada conducted a study in which they “found that more than two hundred SEC staffers since 2007 had left government jobs to work for high-frequency trading firms or the firms that lobbied Washington on their behalf.”
Lewis says that some of these same staffers had played key roles in deciding whether to regulate high frequency trading, specifically citing Elizabeth King, who quit the SEC to work for Getco, one of the largest high frequency traders. Says Lewis: “The SEC, like the public stock exchanges, had a kind of equity stake in the future revenues of high-frequency traders.”
There is good reason for the growing outrage. Not only is one of Wall Street’s former top lawyers, Mary Jo White, heading up the SEC but the Federal agency is flagrantly ignoring the law that created the SEC and its statutory mandate to maintain a non-discriminatory playing field at the stock exchanges.
Under the Securities Exchange Act of 1934, the SEC was created to rein in Wall Street’s fleecing of the American public and the excesses that led to the 1929 crash. Under the legislation, the SEC is specifically charged with policing the stock exchanges. Section 6 of the Act mandates that the SEC must ensure that exchanges maintain “the equitable allocation of reasonable…fees, and other charges among its members and issuers and other persons using its facilities.” The same section requires “just and equitable principles of trade,” the removal of impediments to a “free and open market” and specifically states that an exchange shall not “permit unfair discrimination between customers.”
The SEC already has existing law to prosecute these flagrant abuses. It has simply chosen to look the other way at high frequency trading scams. And, despite, what Vanguard founder Jack Bogle says, the little guy is getting seriously harmed by these practices. Not only is the average American’s public pension fund and mutual funds in their 401(k) getting ripped off, but small-time stock investors have suffered egregiously from intraday crashes and “glitches” caused by high speed trading. Even the age-old, simple technique called a “stop-loss order” used by small investors across America to protect their profits in a stock can no longer be trusted in this high frequency-ruled world of Wall Street.
On May 6, 2010, the stock market briefly plunged 998 points with hundreds of stocks momentarily losing 60 per cent or more of their value, then reversing course and recouping most losses. The event became known as the “Flash Crash.” The Chair of the SEC at that time, Mary Schapiro, told the Economic Club of New York that “A staggering total of more than $2 billion in individual investor stop loss orders is estimated to have been triggered during the half hour between 2:30 and 3 p.m. on May 6. As a hypothetical illustration, if each of those orders were executed at a very conservative estimate of 10 per cent less than the closing price, then those individual investors suffered losses of more than $200 million compared to the closing price on that day.”
The flash crash report from regulators that was issued in September 2010 was itself a cover-up of a broken stock exchange system. The report said that “Detailed analysis of trade and order data revealed that one large internalizer (as a seller) and one large market maker (as a buyer) were party to over 50 per cent of the share volume of broken trades, and for more than half of this volume they were counterparties to each other (i.e., 25 per cent of the broken trade share volume was between this particular seller and buyer).” But the report failed to identify these culprits.
Wall Street On Parade filed a Freedom of Information Act request at the time with the SEC for the names of these firms. The SEC refused to provide that information.
The reference in Schapiro’s statement to an “internalizer” highlights another flagrant abuse of the Securities Exchange Act of 1934. The SEC is sitting idly by allowing the Too-Big-To-Fail banks run unregulated stock exchanges called “Dark Pools” inside their securities divisions. According to Lewis, “Collectively, the banks had managed to move 38 percent of the entire U.S. stock market now traded inside their dark pools…”
Dark pools are sucking transparency out of the stock market and seriously calling into question the credibility of stock prices. Dark pools match buy and sell orders in the dark and delay making the trade known to the public and stock exchanges until after the trade is transacted in secrecy. Some of the largest dark pools are Credit Suisse’s Crossfinder; Morgan Stanley’s MS Pool, and Citigroup’s Citi Match.
Under the Securities Exchange Act of 1934 “the term ‘exchange’ means any organization, association, or group of persons, whether incorporated or unincorporated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities…” Section 5 also clarifies that it is “unlawful” for any broker, dealer “to effect any transaction in a security” unless it is registered as an exchange or has received an exemption “by reason of limited volume….”
There is nothing small potatoes about dark pools controlling 38 percent of the U.S. stock market. What has very likely happened here is that by moving so much stock trading away from the regulated exchanges like the New York Stock Exchange, the big banks’ dark pools have forced the traditional exchanges to succumb to unseemly revenue sources to survive.
Exactly 82 years ago this week, the U.S. Senate Banking Committee hauled Richard Whitney, President of the New York Stock Exchange, before a hearing to begin a forensic two-year investigation of the Wall Street stock brothels that had collapsed under their own corruption, crashed the U.S. economy and ushered in the Great Depression. This time around, we’ve had no such forensic examination of stock exchange practices since the Wall Street crash of 2008.
For the entire past week, newspapers and television have blasted the news around the globe that U.S. stock markets are rigged. By writing in the New York Times Magazine, appearing on 60 Minutes, Meet the Press, CNBC, Bloomberg TV, and giving out dozens of newspaper interviews, Michael Lewis has done what the SEC and Congress have failed miserably in achieving. He has reached critical mass in delivering a public mandate for change. It’s now time for serious, comprehensive Congressional hearings to begin. Hiding from the truth will not restore trust in our markets.
http://wallstreetonparade.com/2014/04/if-the-new-york-stock-exchange-is-a-high-frequency-brothel-then-the-sec-is-its-pimp/
Ukraine, Russia, Germany And The Real Threat Facing The U.S.
Apr. 8, 2014 11:10 AM ET
Dr. Stephen Leeb, Leeb Investor
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Recent dramatic events in Ukraine seemingly presage an East-West confrontation reminiscent of the Cold War but, long-term, a looming Russian-Chinese-German axis could prove more daunting.
Ironically, any Russian plan to barter goods for Iranian via oil could also make Russia the one country able to categorically prevent Iran from obtaining nuclear arms.
Profit by investing in rails--Union Pacific and Canadian Pacific, for example--leading rail parts supplier Wabtec, big oil service companies and a major U.S. alternative energy play, Berkshire Hathaway.
The indisputably dramatic events in Ukraine in recent months seemingly presage an East-West confrontation reminiscent of Cold War days. Putin looks to us like a global thug. However galling Putin's annexation of Crimea and build-up of forces east of Ukraine, however, I ultimately expect this tempest to be obscured by a more significant Russia story-namely the emergence of an economic battlefield pitting the U.S. and North America against a Russian, Chinese and German axis.
Yes, Germany. While Ukraine grabbed headlines, another little noticed story could potentially prove much bigger. On March 28, amidst the Ukraine crisis, China's President Xi visited Duisburg, a middle-sized Germany city of half a million people, a large pig iron producer and also-the big lure for Xi-the world's largest inland port.
Two years ago the so-called Yuxinou train, roughly eight football fields long, weekly traveled the 6,800 miles from Chongqing, China's central industrial hub, to Duisburg, laden with goods. Now, it runs three times weekly and-to accommodate a sevenfold increase volume since 2012-soon will go daily. Now Germany's third-largest trade partner after the Netherlands and France, trade from China could by 2020 well surpass that of Germany's two geographically closer neighbors.
Yuxinou, a joint venture of Russian Railways with Germany's Deutsche Bahn, should prevent Germany from playing too tough with Russia. Otherwise, it risks losing a major source of trade, the one with the greatest growth potential. In an economy dependent on trade for its growth and well being, that prospect would not be taken lightly.
Notwithstanding the verbal rebuke Merkel gave Putin, I don't think Germany's premier will act all-out to undermine him. This makes the U.S. much weaker vis-à-vis Russia than our leaders might assume. For the same reason, Putin probably won't aggravate Merkel's difficulties by invading Ukraine. Can he really risk it?
Germany's economic self-interest requires it to maintain a stable relationship with Russia. The apparently genuine rapport and friendship between Putin and Merkel does not hurt. Each fluently speaks the other's language, and they talk frequently.
With time, I expect a strong Germany-China-Russia nexus to grow ever more influential, increasing disadvantages for the U.S. and its economy. For one thing, this could hasten the dollar's loss of reserve currency status, a topic I've discussed previously. Within a few years, I reasonably expect the U.S. dollar to play a relatively minor role among the world's currencies, with China's yuan, Germany's mark, Russia's ruble-and gold-assuming more important places. Gold and other precious metals should win big, along with other commodities-especially oil-whose dollar price would soar. Inflation, now more or less off-the-radar, would then surge.
I don't consider this change imminent but will keep a close eye on the situation.
Another factor to blend into this strange Russia, Germany and China mix is the sharp recent jump in Iraqi oil production. In March, various international energy agencies reported that Iraqi oil production reached 35-year highs.
Incremental production derives from development Rumaila and West Qurna, Iraq's two largest oilfields, the latter controlled by Russian oil giant Lukoil (OTC:LUKFY). Iraq's other international players include Exxon (XOM), Norway's Statoil (STO), and China's two oil giants, PetroChina (OTCQB:PCCYF) and CNOOC (CEO). The Russian and Chinese companies retain the major edge in violence-wracked Iraq, however, given their access to paramilitary protection. (Such protection has also allowed China to successfully mine copper in Afghanistan even as the U.S. waged a war costly in both lives and treasure.)
Germany and China both need Russian oil and gas exports to build their respective renewable energy infrastructures. Russia's rich conventional oil and gas reserves aside, any additional oil obtained from Iraq or elsewhere could significantly bolster its global strategic position.
Russia faces its potentially most difficult geopolitical task in the Middle East, given that region's dearth of win-win situations. Producing oil in Iraq, for example, while adding to overall global oil supplies, indirectly harms Iran, whose friendship Russia eagerly wants to cultivate. Similarly, Russia's relationship with both Iran and Syria's Assad government sticks in the side of Saudi Arabia, with which Russia also obviously wants to keep close ties.
Highly speculative rumors hold that Russia could circumvent sanctions on Iran via goods-for-oil barter. American journalist Brooklyn Middleton suggests that any such deal could include some parts for nuclear facilities. After all, Russia has already proven an integral cog in Iran's nuclear program, supplying both parts and engineering expertise. Such a deal could dissipate Iranian anger stirred by Russia's work in Iraqi oilfields. Ironically, it could also make Russia the one country able to categorically prevent Iran from developing nuclear bombs. That upshot would cause the Saudis to heave a tremendous sigh of relief. China, already strengthening its ties with the Saudis, would also reap increased influence by virtue of the Russian-Chinese nexus.
Whatever happens, a few basic questions highlight the growing economic isolation of the U.S. from major Eastern economies. Germany looks likely to consider Russia-a key energy supplier and critical link to China-more critical to its long-term growth than neighboring France, a leading trading partner, or. I thus expect an emerging Germany-China-Russia bloc to increasingly compete with North America.
If I'm even partially correct, to remain relatively competitive, the U.S. must become energy independent. It therefore must increase fracking and other unconventional sources of oil. Otherwise, the only other potential route to U.S. energy independence: a dramatic cutback in our standard of living (and indeed statistics since 2000 suggest that is exactly what is happening).
I hope I am wrong, but I don't think fracking can sustain much long-term growth. As with so many other commodities, once developers pick the low-lying fruit, scaling the proverbial tree grows increasingly costly. The energy required to extract hydrocarbons via fracking already increasingly stifles U.S. living standards. But for now, the U.S. must continue fracking, something I expect to continue a while longer.
Investors can profit in part by betting on products and services to help produce unconventional energy. The rails, for example, serve a critical role, transporting both materials needed for fracking and oil produced. Union Pacific (UNP) and Canadian Pacific (CP) are two strong choices. I also like Wabtec (WAB, the leading provider of parts to railroads. Likewise, I expect growth from the major oil service companies, including National Oilwell Varco (NOV) and Schlumberger (SLB).
Despite China's head start, even U.S. renewable energy development offers some hope. Berkshire Hathaway's (BRK.A) (BRK.B) MidAmerican utility subsidiary provides the nation's largest supply of renewable energy. Berkshire also owns the best-financed major U.S. railway, Burlington Northern. More speculative plays include Solar City (SCTY), which could become a national model for U.S. mini smart grids.
Investors should also own gold and other precious metals as a critical hedge against the dollar's loss of global monetary hegemony, a highly predictable consequence of Eastern success.
Finally, I advise readers to ignore all stories purporting to prove that China is in dire straits. Instead read Sun Tsu's ancient Chinese military classic The Art of War and acknowledge that the book has lasted millennia, longer than Christianity. It provides an effective guide to China's current strategy. China is probably most content to showcase its weaknesses and it may experience a tough year or two. For 16 of the last 18 centuries, however, China lead the world economically. Unfortunately, it will lead again in coming centuries too.
http://seekingalpha.com/article/2131213-ukraine-russia-germany-and-the-real-threat-facing-the-u-s
Dark markets may be more harmful than high-frequency trading
Reuters 5 hours ago
By John McCrank
April 7, 2014
NEW YORK (Reuters) - Fears that high-speed traders have been rigging the U.S. stock market went mainstream last week thanks to allegations in a book by financial author Michael Lewis, but there may be a more serious threat to investors: the increasing amount of trading that happens outside of exchanges.
Some former regulators and academics say so much trading is now happening away from exchanges that publicly quoted prices for stocks on exchanges may no longer properly reflect where the market is. And this problem could cost investors far more money than any shenanigans related to high frequency trading.
When the average investor, or even a big portfolio manager, tries to buy or sell shares now, the trade is often matched up with another order by a dealer in a so-called "dark pool," or another alternative to exchanges.
Those whose trade never makes it to an exchange can benefit as the broker avoids paying an exchange trading fee, taking cost out of the process. Investors with large orders can also more easily disguise what they are doing, reducing the danger that others will hear what they are doing and take advantage of them.
But the rise of "off-exchange trading" is terrible for the broader market because it reduces price transparency a lot, critics of the system say. The problem is these venues price their transactions off of the published prices on the exchanges - and if those prices lack integrity then "dark pool" pricing will itself be skewed.
Around 40 percent of all U.S. stock trades, including almost all orders from "mom and pop" investors, now happen "off exchange," up from around 16 percent six years ago.
This trend is "a real concern," John Ramsay, former head of the U.S. Securities and Exchange Commission's (SEC) Trading and Markets division, said on the sidelines of a conference in February. "We have academic data now that suggests that, yes, in fact there is a point beyond which the level of dark trading for particular securities can really erode market quality."
Given the $21.4 trillion worth of U.S. stocks that were traded in 2012, even a small mispricing can move the needle by tens of billions of dollars.
Lewis' new book - "Flash Boys: A Wall Street Revolt" - says that high speed traders bilk that kind of money from investors every year. He focuses on how high-frequency trading firms use ultra- fast telecom links, microwave towers and special access to exchanges to gain an edge over other traders.
The U.S. Justice Department is investigating high-speed trading for possible insider trading, Attorney General Eric Holder told lawmakers on Friday. Other regulators and the FBI have also confirmed they are looking into potential wrongdoing by high-frequency stock traders.
But whether or not high-speed trading is sinister, revenues for these firms have been declining for years: in 2013, they were about $1 billion, after peaking at around $5 billion in 2009, according to estimates by Rosenblatt Securities. If, as Lewis says, these traders are doing nothing more than ripping off the rest of the market, it's a shrinking problem.
Meanwhile, as the revenue from high frequency trading has waned, trading outside of public exchanges has been on the rise, threatening to roll back decades of progress towards more transparent markets.
EXCHANGES ARE LAST RESORT
A brokerage has several ways to fill customers' orders. It can match buy and sell orders from its own customers, known as "internalizing," or sell its orders to another broker that can do the same.
Brokers also send trades to "dark pools," which are similar to exchanges, except the fees are lower and they are anonymous, with orders going unreported until after they have been executed. And finally, they can send trades to exchanges, where they will have to pay higher fees.
"The exchanges have basically become the liquidity venue of last resort," said Manoj Narang, chief executive of HFT firm and technology vendor Tradeworx.
Around 45 dark pools and as many as 200 internalizers compete with 13 public exchanges in the U.S.
Top internalizers include units of KCG Holdings (KCG), Citadel, UBS (UBSN.VX), and Citigroup (NYS:C). Dark pool operators include Credit Suisse (CSGN.VX) and Morgan Stanley (MS). All of the firms declined to comment, or did not respond to requests for comment for this story.
With the incentive to use the public market eroding, many traders increasingly see exchanges, which are often described as "lit" markets because of the pricing transparency, as battlegrounds for high frequency traders, said Rhodri Preece, of the CFA institute.
The result is an increasingly splintered market.
"So much of the U.S. equity order flow is in now in the dark, or siphoned off, that it never hits the lit exchanges, and there is just a lot less in the way of trading opportunities," said Mark Gorton, CEO of high frequency trading firm Tower Research Capital LLC.
In an attempt to win back some of the retail orders, exchanges such as IntercontinentalExchange Group's (ICE) New York Stock Exchange, Nasdaq OMX Group (NDAQ), and BATS Global Markets, have allowed brokerages to place dark pool-style orders on their platforms, with the trade hidden until after it is executed. NYSE, Nasdaq, and BATS declined to comment.
There is no doubt that trading costs on U.S. markets are low, and that retail investors get a better deal than they did two decades ago. But U.S. and global trading transaction costs have actually been rising for the past two years, according to a Credit Suisse report on February 20. That may suggest the benefits from off-exchange trading are no longer accruing to investors as much as they previously did.
TRADE SECRECY
A major concern with off-exchange trading is that brokers who internalize trades and offer dark pools do not provide any data to the market before the trade is executed. On a stock exchange, when an order is sent in, the price of the stock is adjusted and everyone with a data feed sees it.
Dark pools only report data after a trade has occurred. At that stage, information about the trade has little influence on the price.
The pools were originally created for institutions to trade large blocks of stock without creating a large impact in the market. If an order of 1 million shares was tracked, people on the other side of the trade could quickly jack up prices and the original investor could easily pay more than expected.
But much of the trading isn't like that now - the average size of orders in dark pools has shrunk to around 200 shares, similar to levels on public exchanges.
"There are potential costs from this trend of having more and more trading being traded away from exchanges," said the CFA's Preece.
IEX, a new trading platform heralded in Lewis's "Flash Boys" as a fairer place to trade, aims to become an exchange once it gains more volume, but is currently a dark pool. Its average order size is around 750 shares.
"If the shift becomes too egregious to off-exchange markets, then there are no lit exchanges to price against," said Brad Katsuyama, CEO of IEX. "I don't know if we are necessarily at the imbalance yet," he said.
Preece released a study on off-exchange trading in November that showed that once more than half of the trading volume in a particular security is done on dark venues, the ability to properly price that security becomes difficult. The price discovery process can begin to erode when off-exchange trading in a security surpasses as little as 10 percent, according to a study by Carole Comerton-Forde and Talis Putnins of the University of Melbourne.
Regulators in Canada and Australia have taken steps to curb the growth of dark trading in recent years by requiring, for instance, that off-exchange trades be of a minimum size or have a significantly better price than can be found on an exchange. Authorities in Europe and Hong Kong are eying similar rules.
"Observing some of the trends in U.S. markets and elsewhere and seeing that dark trading activity in Canada was slowly growing we felt that we wanted to put some very important principles in place," said Wendy Rudd, head of market regulation at the Investment Industry Regulatory Organization of Canada.
(This version of the story corrects the spelling of the name to Preece from Pierce in paragraphs 18, 27, and 30.)
(Reporting by John McCrank; additional reporting by Sarah Lynch; Editing by Daniel Wilchins, Martin Howell
http://finance.yahoo.com/news/dark-markets-may-more-harmful-044748628.html
Another Banker Drama: ABN AMRO
April 5, 2014
Correlation Economics
You can't count them on your fingers anymore. Jan Peter Schmittmann (former CEO of ABN AMRO) has been found dead in his house along with his wife and daughter. We don't know what happened yet, could be suicide, could be murder? Probably suicide because most of the deaths are suicides.
I think we need to chart the amount of dead bankers on a timeline, could be a correlation there. Apparently it started to get serious around February 2014, which was also the month where the stock market was the lowest in 2014.
CEO Daniel Eicher, 53 — suicide, left two notes — week of 6/10/2013
CEO Carsten Schloter, 49 — suicide, found hanging — 7/23/13
Intern Moritz Erhardt, 21 — seizure due to exhaustion — week of 8/12/2013
CFO Pierre Wauthier, 53 — suicide, found hanging, left two notes — 8/26/2013
Hedge fund exec Robert Wilson, 87 — suicide, jumped from 16th floor — 12/23/2013
Wallstreet Reporter David Bird, 55 – missing/disappeared – 1/11/2014
Swiss Re AG director Tim Dickenson, 39 — cause not released — week of 1/19/2014
Executive William Broeksmit, 58 — apparent suicide, found hanging— 1/26/14
Banker Gabriel Magee, 39 — jumped or fell from building — 1/28/14
Chief economist Mike Dueker, 50 — found dead next to Bridge — week of 1/26/2014
Executive Ryan Crane, 37 — no cause given — 2/3/14
CEO Richard Talley, 57 — suicide by nail gun,7 or 8 self-inflicted wounds — 2/7/14
Banker Dennis Li Junjie 33 — jumped from from a buidling— 2/18/14
CEO Autumn Radtke, 28, — was found dead in her Singapore apartment— 2/28/2014
Banker Kenneth Bellando, 28 — found dead outside his apartment . — 3/12/2014
CEO Jan Peter Schmittmann, one of the 3 dead found in a home — 4/5/2014
Geplaatst door Albert Sung op 22:36
http://katchum.blogspot.com
Another Banker Drama: ABN AMRO
April 5, 2014
Correlation Economics
You can't count them on your fingers anymore. Jan Peter Schmittmann (former CEO of ABN AMRO) has been found dead in his house along with his wife and daughter. We don't know what happened yet, could be suicide, could be murder? Probably suicide because most of the deaths are suicides.
I think we need to chart the amount of dead bankers on a timeline, could be a correlation there. Apparently it started to get serious around February 2014, which was also the month where the stock market was the lowest in 2014.
CEO Daniel Eicher, 53 — suicide, left two notes — week of 6/10/2013
CEO Carsten Schloter, 49 — suicide, found hanging — 7/23/13
Intern Moritz Erhardt, 21 — seizure due to exhaustion — week of 8/12/2013
CFO Pierre Wauthier, 53 — suicide, found hanging, left two notes — 8/26/2013
Hedge fund exec Robert Wilson, 87 — suicide, jumped from 16th floor — 12/23/2013
Wallstreet Reporter David Bird, 55 – missing/disappeared – 1/11/2014
Swiss Re AG director Tim Dickenson, 39 — cause not released — week of 1/19/2014
Executive William Broeksmit, 58 — apparent suicide, found hanging— 1/26/14
Banker Gabriel Magee, 39 — jumped or fell from building — 1/28/14
Chief economist Mike Dueker, 50 — found dead next to Bridge — week of 1/26/2014
Executive Ryan Crane, 37 — no cause given — 2/3/14
CEO Richard Talley, 57 — suicide by nail gun,7 or 8 self-inflicted wounds — 2/7/14
Banker Dennis Li Junjie 33 — jumped from from a buidling— 2/18/14
CEO Autumn Radtke, 28, — was found dead in her Singapore apartment— 2/28/2014
Banker Kenneth Bellando, 28 — found dead outside his apartment . — 3/12/2014
CEO Jan Peter Schmittmann, one of the 3 dead found in a home — 4/5/2014
Geplaatst door Albert Sung op 22:36
http://katchum.blogspot.com/
GOFO Turned Negative AGAIN: The Consequences
April 4, 2014
InGoldWeTrust
by: Koors Jansen
Today (April 3, 2014) the one month Gold Forward Offered Rate (GOFO) turned negative again. This is the seventh time since July 8, 2013 this has happened. I would like to share a few thoughts on this.
A few weeks ago when I wanted to see and download GOFO rates these were easily accessible on the LBMA website. This site, however, recently suffered a makeover. A few days ago I couldn’t find the GOFO rates at all, then when I did find them I noted they weren’t allowed to copy! I directly emailed the LBMA about it, this was their response:
The LBMA do not own the gold and silver prices, we publish the prices on our website under an agreement with the London Gold and Silver Fixing companies, who own the data and who are responsible for setting the gold and silver prices on a daily basis. When we launched the new website, this was on condition that we prevented the data from being downloaded or scraped from the site. If you would like to be able to download the data you will require a licence from the Gold and Silver Fixing Companies.
Nice one, no more GOFO data for the average Joe to analyse. I immediately requested a license at the London Gold and Silver Fixing companies to be able to download the GOFO rates – I prey to god I get the license. In the meantime I spent a couple of hours manually writing the rates one by one in my excel sheet from the new LBMA website.
The LBMA also changed the order of the rates; the last date is now at the top. Just to make things a little easier.
What Is GOFO?
I will just skim the surface here, I will write about GOFO in detail in coming posts. First lets have a look at some equations and what factors determine GOFO to help us understand what GOFO is.
LIBOR (USD loan) – GLR (Gold Lease Rate, XAU loan) = GOFO
LIBOR – GOFO = GLR
LIBOR is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks. It’s a benchmark for fiat money interest rates all over the world. Many consumer interest rates like mortgages and credit card loans are derived from LIBOR.
The gold lease rate (GLR) is the interest rate on gold. If a central bank chooses to lend (lease) some of its gold reserves, it agrees on an interest rate with the borrower. For example, the US Treasury, which is the owner of the gold on the Fed’s balance sheet, decides to lend 3 metric tonnes for 1 year to a jeweller against a 2 % interest rate. A year later the jeweller has to repay the US Treasury 3,06 metric tonnes. In this transaction paper gold would be created out of thin air, as at the start of the lease the gold would be physically transported to the jeweller but would remain on the Treasury’s balance sheet as gold receivable (assuming the Treasury would disclose the distinction between gold and gold receivables). Double counting the same gold creates gold. When the gold loan is payed back by the jeweller the created gold vanishes. Just as in fractional reserve banking at commercial banks.
Gold loans exist in various forms, they can also be done through a book entry at a bullion bank without physically moving gold. The GLR is determined by supply (gold lenders) and demand (gold borrowers) in the gold market.
The Consequences Of Negative GOFO
From looking at the equations we can conclude GOFO is the difference in interest rates between US dolars (USD) and gold (XAU). When the three months GOFO is negative, it means the interest rate to borrow XAU for three months is higher than the interest rate to borrow USD for three months; there is more demand for XAU than USD. This suggests the value of gold expressed in dollars will rise.
Bear in mind we live in a ZIRP bubble bath, there is such USD supply (out of thin air) that LIBOR is exorbitant low.
Nevertheless in the following chart we can see that when GOFO is trending down the price of gold (XAUUSD) is pushed up.
In the above chart I made the negative GOFO periods grey. The gold price (right axis) tends to go up in these periods. If GOFO persist to trend lower it’s very likely the price of gold will rise. When we look back a couple of years, we can see that every time GOFO dipped in negative territory a strong bull market in gold followed. I expect to see the same in coming years.
Deutsche bank that recently announced to stop participating in the London gold fix (and is one of the banks under investigation of manipulating the London gold fix) wrote this on GOFO, from their Quarterly Commodities Report April 2013:
Historically, GOFO rates have only been negative twice since 1999, but have frequently moved into negative territory over the past year. We believe this is a result of on going large shift of gold from the west to the east. More recently, with GOFO turning positive, it suggests that physical tightness has eased at least in the near term.
Well guess what, GOFO is back negative again and the west to east gold exodus is long from over.
In Gold We Trust
PS I wrote this post in HTML code because my server is having some trouble again. I will update this posts with related links and more info if I can get better access to the server.
Written by Koos Jansen on April 4, 2014 at 12:57 am
http://www.ingoldwetrust.ch/gofo-turned-negative-again-the-consequences
How China Imported A Record $70 Billion In Physical Gold Without Sending The Price Of Gold Soaring
by Tyler Durden on 03/23/2014
zerohedge
A little over a month ago, we reported that following a year of record-shattering imports, China finally surpassed India as the world's largest importer of physical gold. This was hardly a surprise to anyone who has been following our coverage of the ravenous demand for gold out of China, starting in September 2011, and tracing it all the way to the present.
China's apetite for physical gold, which is further shown below focusing just on 2012 and 2013, has been estimated by Goldman to amount to over $70 billion in bilateral trade between just Hong Kong and China alone.
Yet while China's gold demand is acutely familiar one question that few have answered is just what is China doing with all this physical gold, aside from filling massive brand new gold vaults of course. And a far more important question: how does China's relentless buying of physical not send the price of gold into the stratosphere.
We will explain why below.
First, let's answer the question what purpose does gold serve in China's credit bubble "Minsky Moment" economy, where as we showed previously, in just the fourth quarter, some $1 trillion in bank assets (mostly NPLs and shadow loans) were created out of thin air.
For the answer, we have to go back to our post from May of 2013 "The Bronze Swan Arrives: Is The End Of Copper Financing China's "Lehman Event"?", in which we explained how China uses commodity financing deals to mask the flow of "hot money", or the one force that has been pushing the Chinese Yuan ever higher, forcing the PBOC to not only expand the USDCNY trading band to 2% recently, but to send the currency tumbling in an attempt to reverse said hot money flows.
One thing deserves special notice: in 2013 the market focus fell almost exclusively on copper's role as a core intermediary in China Funding Deals, which subsequently was "diluted" into various other commodities after China's SAFE attempted a crack down on copper funding, which only released other commodities out of the Funding Deal woodwork. We discussed precisely this last week in "What Is The Common Theme: Iron Ore, Soybeans, Palm Oil, Rubber, Zinc, Aluminum, Gold, Copper, And Nickel?"
We emphasize the word "gold" in the previous sentence because it is what the rest of this article is about.
Let's step back for a minute for the benefit of those 99.9% of financial pundits not intimate with the highly complex concept of China Commodity Funding Deals (CCFDs), and start with a simple enough question, (and answer.)
Just what are CCFDs?
The simple answer: a highly elaborate, if necessarily so, way to bypass official channels (i.e., all those items which comprise China's current account calculation), and using "shadow" pathways, to arbitrage the rate differential between China and the US.
As Goldman explains, there are many ways to bring hot money into China. Commodity financing deals, overinvoicing exports, and the black market are the three main channels. While it is extremely hard to estimate the relative share of each channel in facilitating the hot money inflows, one can attempt to "ballpark" the total notional amount of low cost foreign capital that has been brought into China via commodity financing deals.
While commodity financing deals are very complicated, the general idea is that arbitrageurs borrow short-term FX loans from onshore banks in the form of LC (letter of credit) to import commodities and then re-export the warrants (a document issued by logistic companies which represent the ownership of the underlying asset) to bring in the low cost foreign capital (hot money) and then circulate the whole process several times per year. As a result, the total outstanding FX loans associated with these commodity financing deals is determined by:
the volume of physical inventories that is involved
commodity prices
the number of circulations
A "simple" schematic involving a copper CCFDs saw shown here nearly a year ago, and was summarized as follows.
As we reported previously citing Goldman data, the commodities that are involved in the financing deals include copper, iron ore, and to a lesser extent, nickel, zinc, aluminum, soybean, palm oil, rubber and, of course, gold. Below are the desired features of the underlying commodity:
China is heavily reliant on the seaborne market for the commodity
the commodity has relatively high value-to-density ratio so that
storage fee and transportation cost are relatively low
the commodity has a long shelf life, so that the underlying value of the commodity will not depreciate significantly during the financing deal period
the commodity has a very liquid paper market (future/forward/swap) in order to enable effective commodity price risk hedging.
Here we finally come to the topic of gold because gold is an obvious candidate for commodity financing deals, given it has a high value-to-density ratio, a well-developed paper market and very long "shelf life." Curiously iron ore is not as suitable, based on most of these metrics, and yet according to recent press reports seeking to justify the record inventories of iron ore at Chinese ports, it is precisely CCFDs that have sent physical demand for iron through the proverbial (warehouse) roof.
Gold, on the other hand, is far less discussed in the mainstream press in the context of CCFDs and yet it is precisely its role in facilitating hot money flows, perhaps far more so than copper and even iron ore combined, that is so critical for China, and explains the record amount of physical gold imports by China in the past three years.
Chinese gold financing deals are processed in a different way compared with copper financing deals, though both are aimed at facilitating low cost foreign capital inflow to China. Specifically, gold financing deals involve the physical import of gold and export of gold semi-fabricated products to bring the FX into China; as a result, China’s trade data does reflect, at least partially, the scale of China gold financing deals. In contrast, Chinese copper financing deals do not need to physically move the physical copper in and out of China as explained last year so it is not shown in trade data published by China customs.
In detail, Chinese gold financing deals includes four steps:
onshore gold manufacturers pay LCs to offshore7 subsidiaries and import gold from bonded warehouses or Hong Kong to mainland China – inflating import numbers
offshore subsidiaries borrow USD from offshore banks via collaterizing LCs they received
onshore manufacturers get paid by USD from offshore subsidiaries and export the gold semi-fabricated products to bonded warehouses – inflating export numbers
repeat step 1-3
This is shown in the chart below:
As shown above, gold financing deals should theoretically inflate China’s import and export numbers by roughly the same size. For imports, they inflate China’s total physical gold imports, but inflate exports that are mainly related to gold products, such as gold foils, plates and jewelry. Sure enough, the value of China’s imports of gold from Hong Kong has risen more than 10 fold since 2009 to roughly US$70bn by the end of 2013 while exports of gold and other products have increased by roughly the same amount (shown below). This is in line with the implication of the flow chart on Chinese gold financing deals: the deals inflate both imports and exports by roughly equal size.
[img]www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/03/Gold%20CCFD%202_0.jpg
[/img]
Given this, that the rapid growth of the market size of gold trading between China and Hong Kong created from 2009 (less than US$5bn) to 2013 (roughly US$70bn) is most likely driven by gold financing deals.
However, a larger question remains unknown, namely that as Goldman observes, "we don’t know how many tons of physical gold are used in the deals since we don’t know the number of circulations, though we believe it is much higher than that for copper financing deals."
Recall the flowchart for copper funding deals:
Step 1) offshore trader A sells warrant of bonded copper (copper in China’s bonded warehouse that is exempted from VAT payment before customs declaration) or inbound copper (i.e. copper on ship in transit to bonded) to onshore party B at price X (i.e. B imports copper from A), and A is paid USD LC, issued by onshore bank D. The LC issuance is a key step that SAFE’s new policies target.
Step 2) onshore entity B sells and re-exports the copper by sending the warrant documentation (not the physical copper which stays in bonded warehouse ‘offshore’) to the offshore subsidiary C (N.B. B owns C), and C pays B USD or CNH cash (CNH = offshore CNY). Using the cash from C, B gets bank D to convert the USD or CNH into onshore CNY, and trader B can then use CNY as it sees fit.
Step 3) Offshore subsidiary C sells the warrant back to A (again, no move in physical copper which stays in bonded warehouse ‘offshore’), and A pays C USD or CNH cash with a price of X minus $10-20/t, i.e. a discount to the price sold by A to B in Step 1.
Step 4) Repeat Step 1-Step 3 as many times as possible, during the period of LC (usually 6 months, with range of 3-12 months). This could be 10-30 times over the course of the 6 month LC, with the limitation being the amount of time it takes to clear the paperwork. In this way, the total notional LCs issued over a particular tonne of bonded or inbound copper over the course of a year would be 10-30 times the value of the physical copper involved, depending on the LC duration.
In other words, the only limit on the amount of leverage, aka rehypothecation of copper, was limited only by letter of credit logistics (i.e. corrupt bank back office administrator efficiency), as there was absolutely no regulatory oversight and limitation on how many times the underlying commodity can be recirculated in a CCFD.... And gold is orders of magnitude higher!
Despite the uncertainty surrounding the actual leverage and recirculation of the physical, Goldman has made the following estimation:
We estimate, albeit roughly, that there are c.US$81-160 bn worth of outstanding FX loans associated with commodity financing deals – with the share of each commodity shown in Exhibit 23. To put it into context, the commodity-related outstanding FX borrowings are roughly 31% of China’s short-term FX loans (duration less than 1 year) .
Putting the estimated role of gold in China's primary hot money influx pathway, at $60 billion notional, it is nearly three time greater than the well-known Copper Funding Deals, and higher than all other commodity funding deals combined!
Under what conditions would Chinese commodity financing deals take place. Goldman lists these as follows:
the China and ex-China interest rate differential (the primary source of revenue),
CNY future curve (CNY appreciation is a revenue, should the currency exposure be not hedged),
the cost of commodity storage (a cost),
the commodity market spread (the spread is the difference between the futures
China’s capital controls remain in place (otherwise CCFD would not be necessary).
All of these components are exogenous to the commodity market, except one – the commodity market spread. This reveals an important point that financing deals are, in general, NOT independent of commodity market fundamentals. If the commodity market moves into deficit, or if the financing demand for the commodity is greater than its finite supply of above ground inventory, the commodity market spread adjusts to disincentivize financing deals by making them unprofitable (thus making the physical inventory available to the market).
Via ‘financing deals’, the positive interest rate differential between China and ex-China turns commodities such as copper from negative carry assets (holding copper incurs storage cost and financing cost) to positive carry assets (interest rate differential revenue > storage cost and financing cost). This change in the net cost of carry affects the spreads, placing upward pressure on the physical price, and downward pressure on the futures price, all else equal, making physical-future price differentials higher than they otherwise would be.
* * *
That bolded, underlined sentence is a direct segue into the second part of this article, namely how is it possible that China imports a mindblowing 1400 tons of physical, amounting to roughly $70 billion in notional, demand which under normal conditions would send the equilibrium price soaring, and yet the price not only does not go up, but in fact drops.
The answer is simple: the gold paper market.
And here is, in Goldman's own words, is an explanation of the missing link between the physical and paper markets. To be sure, this linkage has been proposed and speculated repeatedly by most, especially those who have been stunned by the seemingly relentless demand for physical without accompanying surge in prices, speculating that someone is aggressively selling into the paper futures markets to offset demand for physical.
Now we know for a fact. To wit from Goldman:
From a commodity market perspective, financing deals create excess physical demand and tighten the physical markets, using part of the profits from the CNY/USD interest rate differential to pay to hold the physical commodity. While commodity financing deals are usually neutral in terms of their commodity position owing to an offsetting commodity futures hedge, the impact of the purchasing of the physical commodity on the physical market is likely to be larger than the impact of the selling of the commodity futures on the futures market. This reflects the fact that physical inventory is much smaller than the open interest in the futures market. As well as placing upward pressure on the physical price, Chinese commodity financing deals ‘tighten’ the spread between the physical commodity price and the futures price .
Goldman concludes that "an unwind of Chinese commodity financing deals would likely result in an increase in availability of physical inventory (physical selling), and an increase in futures buying (buying back the hedge) – thereby resulting in a lower physical price than futures price, as well as resulting in a lower overall price curve (or full carry)." In other words, it would send the price of the underlying commodity lower.
We agree that this may indeed be the case for "simple" commodities like copper and iron ore, however when it comes to gold, we disagree, for the simple reason that it was in 2013, the year when Chinese physical buying hit an all time record, be it for CCFD purposes as suggested here, or otherwise, the price of gold tumbled by some 30%! In other words, it is beyond a doubt that the year in which gold-backed funding deals rose to an all time high, gold tumbled. To be sure this was not due to the surge in demand for Chinese (and global) physical. If anything, it was due to the "hedged" gold selling by China in the "paper", futures market.
And here we see precisely the power of the paper market, where it is not only China which was selling specifically to keep the price of the physical gold it was buying with reckless abandon flat or declining, but also central and commercial bank manipulation, which from a "conspiracy theory" is now an admitted fact by the highest echelons of the statist regime. and not to mention market regulators themselves.
Which answers question two: we now know that of all speculated entities who may have been selling paper gold (since one can and does create naked short positions out of thin air), it was likely none other than China which was most responsible for the tumble in price in gold in 2013 - a year in which it, and its billionaire citizens, also bought a record amount of physical gold (much of its for personal use of course - just check out those overflowing private gold vaults in Shanghai.
* * *
This brings us to the speculative conclusion of this article: when we previously contemplated what the end of funding deals (which the PBOC and the China Politburo seems rather set on) may mean for the price of other commodities, we agreed with Goldman that it would be certainly negative. And yet in the case of gold, it just may be that even if China were to dump its physical to some willing 3rd party buyer, its inevitable cover of futures "hedges", i.e. buying gold in the paper market, may not only offset the physical selling, but send the price of gold back to levels seen at the end of 2012 when gold CCFDs really took off in earnest.
In other words, from a purely mechanistical standpoint, the unwind of China's shadow banking system, while negative for all non-precious metals-based commodities, may be just the gift that all those patient gold (and silver) investors have been waiting for. This of course, excludes the impact of what the bursting of the Chinese credit bubble would do to faith in the globalized, debt-driven status quo. Add that into the picture, and into the future demand for gold, and suddenly things get really exciting.
http://www.zerohedge.com/news/2014-03-22/how-china-imported-record-70-billion-physical-gold-without-sending-price-gold-soarin
Obamacare Ship of Fools
2nd April 2014
by Administrator
theburningplatform.com
It was so fitting that Obama sauntered into the Rose Garden on April Fools day to proclaim the wonderful success of Obamacare. We are the fools for allowing this fool and his fellow fools in Congress to further bankrupt our country with this disastrous government run clusterf*ck. He is a dangerous empty suit. The only thing that mattered to him and his sociopathic control freaks in the last two months was hitting an enrollment number that he could tout as success. Making sure there are enough doctors in the plan or ensuring excellent healthcare services once you get sick is not part of their agenda. And they certainly don’t worry about the 7.1 million people paying their premiums. That’s the insurance companies’ problem.
There is so much propaganda, spin, disinformation and outright lies circulating in the captured mainstream media that the dumbed down, distracted, disinterested American populace believe the sound bites from Obama and the talking heads on MSNBC and the rest of the Obama loving media. Isn’t it funny how early in the disastrous roll-out of this joke Sebelius and her band of HHS drones didn’t know how many people had enrolled for weeks after the end of a month, but yesterday Obama knew that exactly 7.1 million people had enrolled within hours of the final deadline?
You may have noticed the non-stop 30 second ads trying to convince iGadget addicted morons to sign up for Obamacare over the last three months, building to a crescendo in the last few weeks. Obama was desperate to get young people and his black constituency to sign up. Most of the commercials were black NBA superstars yapping about the wonders of Obamacare. These were surely targeted to white middle class people. Right? Guess how much the average 30 second commercial costs. How about $123,000. The government has admitted their advertising budget for the last three months was $52 million. My guess is they went over budget and probably spent $75 million of your tax dollars to convince millions to join a government program that will cost you trillions more of your tax dollars. The original July 2013 estimate from the government for the total advertising of this mess was $700 million. I’ll take the over in the final number. This is after spending $600 million on the wonderful glitch free website.
Let’s assess the tremendous success the Savior was blustering about yesterday. He sold the plan to the American public back in 2009 with a number of promises.
It won’t add one dime to the deficit
Our teleprompter reader in chief told the American people his plan would not add one dime to the deficit. After it passed he told Congress it would cost $900 billion over ten years. Then the CBO actually ran the numbers and it jumped to $1.4 trillion. What’s a $500 billion error among friends? That almost perfect accuracy for the Federal government. Of course the Democratic politicians that passed this wonderful bill delayed all the bad stuff until 2014 and after, while front loading all the good stuff.
They delayed the major spending provisions in order to show only six years of spending under the plan in the original 10-year budget window (from FY2010-19) used by CBO at the time the law was enacted. Therefore, the original estimate concealed the fact that most of the law’s spending only doesn’t even begin until four years into the 10-year window. A Senate Budget Committee analysis (based on CBO estimates and growth rates) finds that that total spending under the law will amount to at least $2.6 trillion over a true 10-year period (from FY2014–23). That’s a lot of dimes added to the deficit. Does $2.6 trillion sound like budget neutral to you? Of course we’re doing it for the children.
It will cover the 46 million uninsured Americans
The Census Bureau number of 46 million includes 10 million illegal immigrants. I know Obama wants to cover them on our dime, but even he will have trouble with that one. A report from the Kaiser Foundation put the number of true uninsured at 28.6 million. The CBO numbers and the Obama administration storyline were built on the assumption that everyone signing up for Obamacare was previously uninsured. Studies by the McKinsey Group and Rand Corporation have concluded that only 30% of all enrollees into Obamacare were previously uninsured.
The vast majority are previously insured people, many of whom are getting a better deal on the exchanges because they either qualify for subsidies, or because they’re older individuals who benefit from the law’s massive rate increases for the young. I know Obama loving liberals don’t like math and wish that Common Core feel good math could be applied to the Obamacare clusterf*ck, but here are the facts:
*Supposedly 7.1 million people have signed up for Obamacare.
*Approximately 30% of these people were previously uninsured – totaling 2.1 million people. That is only 7.3% of the uninsured people in the country. What about the 26.5 million people still uninsured? Obama spent all this money on advertising and only convinced 7.3% of the uninsured to sign up????
*The Obama administration seems to be uninterested in whether the people who have signed up for Obamacare have actually paid their premium. The McKinsey survey found that the proportion of those who had formally enrolled in coverage, by paying their first month’s premium, was considerably lower among the previously uninsured, relative to the previously insured. 86% of those who were previously insured who had “selected a marketplace plan” on the exchanges had paid, whereas only 53% of the previously uninsured had.
*If you run the numbers, 5 million times 86% equals 4.3 million who have paid their premiums. Of the previously uninsured 2.1 million times 53% equals 1.1 million who have paid their premiums. Therefore, the true number of paying Obamacare enrollees is 5.4 million.
The skewed demographics implications will get worse over time, as the cost of plans continues to go up. In the McKinsey survey, of those who had decided not to sign up for Obamacare, the most common reason was the “affordability” of the offered plans. Indications from insurers like Aetna and WellPoint is that the premiums on the exchange will go up substantially next year. The demographic assumptions for the Obamacare enrollees are disastrous for the American taxpayer. It is skewed toward old sickly people, with very few young healthy people. The risk pool is how premiums are determined.
The LA Times painted the ominous picture for what will happen next year:
Long-term stability could be undermined if newly insured people do not pay their bills or if they drop coverage in coming months because they are unhappy about the high deductibles or narrow doctor and hospital networks some plans offer.Some people have had to pay higher premiums to replace old plans that did not comply with the law’s consumer standards.More ominously, some insurance industry officials are warning they may raise rates substantially next year. Major rate hikes could push out healthy consumers, undermining the law’s marketplaces and recharging political opposition.
Foolish conclusions
Obama and his Democratic minions (law passed without one Republican vote) have adjusted, delayed, and not enforced all the really bad stuff in this law until after the 2014 mid-term elections, with some really bad stuff delayed until after Hillary assumes power in 2016.
As usual the CBO estimate of $2.6 trillion will be off by 100% as the true cost will soar past $5 trillion. It will be the gift that keeps on giving, like Medicare, Medicaid, Social Security, Fannie Mae, Freddie Mac, etc.
The risk pool will be so skewed towards older sicker Americans that premiums will skyrocket by 20% per year over the next few years, making many of the enrollees drop it altogether.
The millions who end up not paying their premiums to the insurance companies will be subsidized by the paying customers of the insurance companies because we are rich and need to help the poor. Obama will punish insurance companies that tell the truth about non-payment by the dregs.
The government has taken control of our healthcare system under the auspices of covering the millions of uninsured. The fact that 93% of the uninsured remain uninsured after the rollout reveals that this has been nothing but a socialistic power grab by Obama and the people who want to control every aspect of our lives.
The promised $2,500 annual savings in premiums for the average family seems unlikely to materialize as premiums for the average family have risen by 30% to 50% since 2009.
The if you like your doctor you can keep your doctor promise seems to be ringing hollow as millions have been forced out of their existing plans and now have much less choice of plan and doctor options.
The millions of math challenged drones who believed Obama and have focused solely on the monthly premiums evidently don’t understand that deductibles on the lowest level plan average $5,000 and go as high as $12,000 drive the true cost much higher. I hope they don’t get sick or injured.
I hope you enjoyed being Obama’s fool on April 1. They say a fool is born every minute. Obama and his minions are counting on it.
http://www.theburningplatform.com/2014/04/02/obamacare-ship-of-fools/
Iran, Russia working to seal $20b oil-for-goods deal
White House says such a deal would raise 'serious concerns' and undermine nuclear talks between Iran and the West.
By Reuters | Apr. 2, 2014 | 8:48 PM
Zarif and Lavorv
Russian Foreign Minister Sergey Lavrovhis Iranian counterpart Mohammad Javad Zarif, Moscow, Jan. 16, 2014. Photo by AP
Iran and Russia have made progress towards an oil-for-goods deal sources said would be worth up to $20 billion, which would enable Tehran to boost vital energy exports in defiance of Western sanctions, people familiar with the negotiations told Reuters.
In January Reuters reported Moscow and Tehran were discussing a barter deal that would see Moscow buy up to 500,000 barrels a day of Iranian oil in exchange for Russian equipment and goods.
The White House has said such a deal would raise "serious concerns" and would be inconsistent with the nuclear talks between world powers and Iran.
A Russian source said Moscow had "prepared all documents from its side," adding that completion of a deal was awaiting agreement on what oil price to lock in.
The source said the two sides were looking at a barter arrangement that would see Iranian oil being exchanged for industrial goods including metals and food, but said there was no military equipment involved. The source added that the deal was expected to reach $15 to $20 billion in total and would be done in stages with an initial $6 billion to $8 billion tranche.
The Iranian and Russian governments declined to comment.
Two separate Iranian officials also said the deal was valued at $20 billion. One of the Iranian officials said it would involve exports of around 500,000 barrels a day for two to three years.
"Iran can swap around 300,000 barrels per day via the Caspian Sea and the rest from the (Middle East) Gulf, possibly Bandar Abbas port," one of the Iranian officials said, referring to one of Iran's top oil terminals.
"The price (under negotiation) is lower than the international oil price, but not much, and there are few options. But in general, a few dollars lower than the market price."
Oil is currently priced around $100 a barrel.
Iran and world powers reached an interim deal in November to ease some sanctions restrictions, which went into effect in January, in exchange for a curb to Iran's nuclear program. Work continues to reach a final settlement.
Under the sanctions accord, Iran's exports are supposed to be held at an average of 1 million barrels a day for six months to July 20, but sales have stayed above that level for five straight months, oil tanker tracking sources told Reuters last week.
"The deal would ease further pressure on Iran's battered energy sector and at least partially restore Iran's access to oil customers with Russian help," said Mark Dubowitz of Foundation for Defense of Democracies, a U.S. think-tank.
"If Washington can't stop this deal, it could serve as a signal to other countries that the United States won't risk major diplomatic disputes at the expense of the sanctions regime," he added.
The Iranian official said missiles would also be part of the deal, together with Russia providing assistance with building two nuclear plants in Iran. The Iranian official did not produce any documentation, and Russian government officials declined to comment.
http://www.haaretz.com/news/middle-east/1.583470
W(h)ither Petrodollar: Russia, Iran Announce $20 Billion Oil-For-Goods Deal
Tyler Durden on 04/02/2014 13:56 -0400
April 2, 2014
Spot what is missing in the just blasted headline from Bloomberg:
IRAN, RUSSIA SAID TO SEAL $20B OIL-FOR-GOODS DEAL: REUTERS
If you said the complete absence of US Dollars anywhere in the funds flow you are correct. Which is precisely what we have been warning would happen the more the West and/or JPMorgan pushed Russia into a USD-free corner.
Once again, from our yesterday comment on the JPM Russian blockade: "what JPM may have just done is launch a preemptive strike which would have the equivalent culmination of a SWIFT blockade of Russia, the same way Iran was neutralized from the Petrodollar and was promptly forced to begin transacting in Rubles, Yuan and, of course, gold in exchange for goods and services either imported or exported. One wonders: is JPM truly that intent in preserving its "pristine" reputation of not transacting with "evil Russians", that it will gladly light the fuse that takes away Russia's choice whether or not to depart the petrodollar voluntarily, and makes it a compulsory outcome, which incidentally will merely accelerate the formalization of the Eurasian axis of China, Russia and India?"
In other words, Russia seems perfectly happy to telegraph that it is just as willing to use barter (and "heaven forbid" gold) and shortly other "regional" currencies, as it is to use the US Dollar, hardly the intended outcome of the western blocakde, which appears to have just backfired and further impacted the untouchable status of the Petrodollar.
More from Reuters:
Iran and Russia have made progress towards an oil-for-goods deal sources said would be worth up to $20 billion, which would enable Tehran to boost vital energy exports in defiance of Western sanctions, people familiar with the negotiations told Reuters.
In January Reuters reported Moscow and Tehran were discussing a barter deal that would see Moscow buy up to 500,000 barrels a day of Iranian oil in exchange for Russian equipment and goods.
The White House has said such a deal would raise "serious concerns" and would be inconsistent with the nuclear talks between world powers and Iran.
A Russian source said Moscow had "prepared all documents from its side", adding that completion of a deal was awaiting agreement on what oil price to lock in.
The source said the two sides were looking at a barter arrangement that would see Iranian oil being exchanged for industrial goods including metals and food, but said there was no military equipment involved. The source added that the deal was expected to reach $15 to $20 billion in total and would be done in stages with an initial $6 billion to $8 billion tranche.
The Iranian and Russian governments declined to comment.
Two separate Iranian officials also said the deal was valued at $20 billion. One of the Iranian officials said it would involve exports of around 500,000 barrels a day for two to three years.
"Iran can swap around 300,000 barrels per day via the Caspian Sea and the rest from the (Middle East) Gulf, possibly Bandar Abbas port," one of the Iranian officials said, referring to one of Iran's top oil terminals.
"The price (under negotiation) is lower than the international oil price, but not much, and there are few options. But in general, a few dollars lower than the market price."
Surely an "expert assessment" is in order:
"The deal would ease further pressure on Iran's battered energy sector and at least partially restore Iran's access to oil customers with Russian help," said Mark Dubowitz of Foundation for Defense of Democracies, a U.S. think-tank.
"If Washington can't stop this deal, it could serve as a signal to other countries that the United States won't risk major diplomatic disputes at the expense of the sanctions regime," he added.
You don't say: another epic geopolitical debacle resulting from what was originally intended to be a demonstration of strength and instead is rapidly turning out into a terminal confirmation of weakness.
Also, when did the "Foundation for Defense of Petrodollar" have the last word replaced with "Democracies"?
Finally, those curious what may happen next, only not to Iran but to Russia, are encouraged to read "From Petrodollar To Petrogold: The US Is Now Trying To Cut Off Iran's Access To Gold."
http://www.zerohedge.com/news/2014-04-02/whither-petrodollar-russia-iran-announce-20-billion-oil-goods-deal
Banking Union Time Bomb: Eurocrats Authorize Bailouts AND Bail-Ins
by Ellen Brown Posted on March 29, 2014
(special thanks to basserdan)
“As things stand, the banks are the permanent government of the country, whichever party is in power.”
– Lord Skidelsky, House of Lords, UK Parliament, 31 March 2011)
(please note: The underlined words are 'clickable' links when accessed via the link at the bottom of this page)
On March 20, 2014, European Union officials reached an historic agreement to create a single agency to handle failing banks. Media attention has focused on the agreement involving the single resolution mechanism (SRM), a uniform system for closing failed banks. But the real story for taxpayers and depositors is the heightened threat to their pocketbooks of a deal that now authorizes both bailouts and “bail-ins” – the confiscation of depositor funds. The deal involves multiple concessions to different countries and may be illegal under the rules of the EU Parliament; but it is being rushed through to lock taxpayer and depositor liability into place before the dire state of Eurozone banks is exposed.
The bail-in provisions were agreed to last summer. According to Bruno Waterfield, writing in the UK Telegraph in June 2013:
Under the deal, after 2018 bank shareholders will be first in line for assuming the losses of a failed bank before bondholders and certain large depositors. Insured deposits under £85,000 (€100,000) are exempt and, with specific exemptions, uninsured deposits of individuals and small companies are given preferred status in the bail-in pecking order for taking losses . . . Under the deal all unsecured bondholders must be hit for losses before a bank can be eligible to receive capital injections directly from the ESM, with no retrospective use of the fund before 2018.
As noted in my earlier articles, the ESM (European Stability Mechanism) imposes an open-ended debt on EU member governments, putting taxpayers on the hook for whatever the Eurocrats (EU officials) demand. And it’s not just the EU that has bail-in plans for their troubled too-big-to-fail banks. It is also the US, UK, Canada, Australia, New Zealand and other G20 nations. Recall that a depositor is an unsecured creditor of a bank. When you deposit money in a bank, the bank “owns” the money and you have an IOU or promise to pay.
Under the new EU banking union, before the taxpayer-financed single resolution fund can be deployed, shareholders and depositors will be “bailed in” for a significant portion of the losses. The bankers thus win both ways: they can tap up the taxpayers’ money and the depositors’ money.
The Unsettled Question of Deposit Insurance
But at least, you may say, it’s only the uninsured deposits that are at risk (those over €100,000—about $137,000). Right?
Not necessarily. According to ABC News, “Thursday’s result is a compromise that differs from the original banking union idea put forward in 2012. The original proposals had a third pillar, Europe-wide deposit insurance. But that idea has stalled.”
European Central Bank President Mario Draghi, speaking before the March 20th meeting in the Belgian capital, hailed the compromise plan as “great progress for a better banking union. Two pillars are now in place” – two but not the third. And two are not enough to protect the public. As observed in The Economist in June 2013, without Europe-wide deposit insurance, the banking union is a failure:
[T]he third pillar, sadly ignored, [is] a joint deposit-guarantee scheme in which the costs of making insured depositors whole are shared among euro-zone members. Annual contributions from banks should cover depositors in normal years, but they cannot credibly protect the system in meltdown (America’s prefunded scheme would cover a mere 1.35% of insured deposits). Any deposit-insurance scheme must have recourse to government backing. . . . [T]he banking union—and thus the euro—will make little sense without it.
All deposits could be at risk in a meltdown. But how likely is that?
Pretty likely, it seems . . . .
What the Eurocrats Don’t Want You to Know
Mario Draghi was vice president of Goldman Sachs Europe before he became president of the ECB. He had a major hand in shaping the banking union. And according to Wolf Richter, writing in October 2013, the goal of Draghi and other Eurocrats is to lock taxpayer and depositor liability in place before the panic button is hit over the extreme vulnerability of Eurozone banks:
European banks, like all banks, have long been hermetically sealed black boxes. . . . The only thing known about the holes in the balance sheets of these black boxes, left behind by assets that have quietly decomposed, is that they’re deep. But no one knows how deep. And no one is allowed to know – not until Eurocrats decide who is going to pay for bailing out these banks.
When the ECB becomes the regulator of the 130 largest ECB banks, says Richter, it intends to subject them to more realistic evaluations than the earlier “stress tests” that were nothing but “banking agitprop.” But these realistic evaluations won’t happen until the banking union is in place. How does Richter know? Draghi himself said so. Draghi said:
“The effectiveness of this exercise will depend on the availability of necessary arrangements for recapitalizing banks … including through the provision of a public backstop. . . . These arrangements must be in place before we conclude our assessment.”
Richter translates that to mean:
The truth shall not be known until after the Eurocrats decided who would have to pay for the bailouts. And the bank examinations won’t be completed until then, because if any of it seeped out – Draghi forbid – the whole house of cards would collapse, with no taxpayers willing to pick up the tab as its magnificent size would finally be out in the open!
Only after the taxpayers – and the depositors – are stuck with the tab will the curtain be lifted and the crippling insolvency of the banks be revealed. Predictably, panic will then set in, credit will freeze, and the banks will collapse, leaving the unsuspecting public to foot the bill.
What Happened to Nationalizing Failed Banks?
Underlying all this frantic wheeling and dealing is the presumption that the “zombie banks” must be kept alive at all costs – alive and in the hands of private bankers, who can then continue to speculate and reap outsized bonuses while the people bear the losses.
But that’s not the only alternative. In the 1990s, the expectation even in the United States was that failed megabanks would be nationalized. That route was pursued quite successfully not only in Sweden and Finland but in the US in the case of Continental Illinois, then the fourth-largest bank in the country and the largest-ever bankruptcy. According to William Engdahl, writing in September 2008:
[I]n almost every case of recent banking crises in which emergency action was needed to save the financial system, the most economical (to taxpayers) method was to have the Government, as in Sweden or Finland in the early 1990’s, nationalize the troubled banks [and] take over their management and assets … In the Swedish case the end cost to taxpayers was estimated to have been almost nil.
Typically, nationalization involves taking on the insolvent bank’s bad debts, getting the bank back on its feet, and returning it to private owners, who are then free to put depositors’ money at risk again. But better would be to keep the nationalized mega-bank as a public utility, serving the needs of the people because it is owned by the people.
As argued by George Irvin in Social Europe Journal in October 2011:
[T]he financial sector needs more than just regulation; it needs a large measure of public sector control—that’s right, the n-word: nationalisation. Finance is a public good, far too important to be run entirely for private bankers. At the very least, we need a large public investment bank tasked with modernising and greening our infrastructure . . . . [I]nstead of trashing the Eurozone and going back to a dozen minor currencies fluctuating daily, let’s have a Eurozone Ministry of Finance (Treasury) with the necessary fiscal muscle to deliver European public goods like more jobs, better wages and pensions and a sustainable environment.
A Third Alternative – Turn the Government Money Tap Back On
A giant flaw in the current banking scheme is that private banks, not governments, now create virtually the entire money supply; and they do it by creating interest-bearing debt. The debt inevitably grows faster than the money supply, because the interest is not created along with the principal in the original loan.
For a clever explanation of how all this works in graphic cartoon form, see the short French video “Government Debt Explained,” linked here.
The problem is exacerbated in the Eurozone, because no one has the power to create money ex nihilo as needed to balance the system, not even the central bank itself. This flaw could be remedied either by allowing nations individually to issue money debt-free or, as suggested by George Irvin, by giving a joint Eurozone Treasury that power.
The Bank of England just admitted in its Quarterly Bulletin that banks do not actually lend the money of their depositors. What they lend is bank credit created on their books. In the U.S. today, finance charges on this credit-money amount to between 30 and 40% of the economy, depending on whose numbers you believe. In a monetary system in which money is issued by the government and credit is issued by public banks, this “rentiering” can be avoided. Government money will not come into existence as a debt at interest, and any finance costs incurred by the public banks’ debtors will represent Treasury income that offsets taxation.
New money can be added to the money supply without creating inflation, at least to the extent of the “output gap” – the difference between actual GDP or actual output and potential GDP. In the US, that figure is about $1 trillion annually; and for the EU is roughly €520 billion ($715 billion). A joint Eurozone Treasury could add this sum to the money supply debt-free, creating the euros necessary to create jobs, rebuild infrastructure, protect the environment, and maintain a flourishing economy.
Ellen Brown is an attorney, founder of the Public Banking Institute, and a candidate for California State Treasurer running on a state bank platform. She is the author of twelve books, including the best-selling Web of Debt and her latest book, The Public Bank Solution, which explores successful public banking models historically and globally
http://ellenbrown.com/2014/03/29/banking-union-time-bomb-eurocrats-authorize-bailouts-and-bail-ins/#more-7421
IEX Exchange Short-Circuits Wall Street's HFT Cheaters
By DAVID ZEILER, Associate Editor
Money Morning · March 31, 2014
Chalk one up for the good guys.
The IEX exchange, a new stock platform that launched Oct. 25 of last year, was designed to negate the advantage that Wall Street's high-frequency traders have over everyone else.
High-frequency trading (HFT) involves the use of very fast computers with very fast connections to sniff out what other traders are doing and buy or sell shares accordingly - all in milliseconds.
IEX exchangeThe IEX exchange defeats the advantage the HFT have by artificially introducing delays in the execution of trades.
And while volume at IEX is tiny - just 18 million shares out of nearly 7 billion traded daily - it has doubled since January.
"IEX is a great idea," said Money Morning Capital Wave Strategist Shah Gilani, editor of the Wall Street Insights & Indictments newsletter. "It's already having an impact. Eighteen million shares isn't even a blip on anybody's radar but watch it now. I'm willing to bet volume will double every quarter from now on. That's not an arithmetic gain - that's a geometric advance."
But what's so bad about high-frequency trading?
Those high-speed trades - which make up about half of all stock trades each day - get "in front" of other trades and change the price ever so slightly to their advantage. Although each HFT transaction nets only pennies, or a fraction of a penny, the computers conduct millions each day.
That adds up to billions in the pockets of the high-frequency traders - money extracted from the pockets of all other market participants, including retail investors.
What's more, because high-frequency trading is controlled by computer algorithms, a glitch can cause a market disaster, such as the "flash crash" of 2010, when the Dow Jones Industrial Average fell 1,000 points in a matter of minutes.
IEX Exchange CEO: "It's a Hole in the Bottom of a Bucket"
Brad Katsuyama, the chief executive officer of the IEX Group, discovered how high-frequency trading was harming other traders while running the Royal Bank of Canada's stock desk in New York. So he did something about it.
"We found a problem. It's affecting millions and millions of people," Katsuyama said in an interview on the CBS News program "60 Minutes." "People are blindly losing money they didn't even know they're entitled to. It's a hole in the bottom of the bucket."
Curiously, however, several Big Banks - such as Goldman Sachs Group Inc. (NYSE: GS) and JPMorgan Chase & Co. (NYSE: JPM) - known to engage in HFT have actually endorsed the IEX exchange. Gilani has an idea why...
"Sure, the IEX is a threat. The barbarians are at the gate," Gilani said. "Goldman and JPMorgan and the kings of the capitalism's crooked castle are yelling. But they're not stupid. They have to invest in the new technology. Why? Because if that's where the business goes, they want to know how it's getting there and how to profit from it. They want to see how these guys are getting around them, so they can figure out their next step. It's a matter of keeping your friends close and your enemies closer."
And then there's the possibility that the Wall Street powers see the writing on the wall... and want to make sure they're positioned for a post-HFT world. Indeed, they understand how to hedge a bet.
Meanwhile, there are still billions to be made from high-frequency trading while the IEX gains traction. You can be sure they will do all they can to keep the gravy train rolling for as long as possible.
"No one ever surrenders a multi-billion dollar business," Gilani said. "They have lobbyists and legislators. Remember, they are not back room operators - they are giants hiding in plain sight. The HFT guys will talk nice and say they are liquidity providers, and they do a lot to make markets more efficient. They will keep stating their case, and some people - those who don't really understand the mechanics behind the scenes - might see their side of it. But in the end HFT will come under attack, and there will be no more hiding in plain sight. They are about to be outed. And that's a good thing."
Do you think the IEX exchange will have any success in curbing high-frequency trading? Or will Wall Street's gurus come up with a clever workaround? Let us know on Twitter @moneymorning or Facebook.
http://moneymorning.com/2014/03/31/iex-exchange-short-circuits-wall-streets-hft-cheaters/
IEX Exchange Short-Circuits Wall Street's HFT Cheaters
By DAVID ZEILER, Associate Editor
Money Morning · March 31, 2014
Chalk one up for the good guys.
The IEX exchange, a new stock platform that launched Oct. 25 of last year, was designed to negate the advantage that Wall Street's high-frequency traders have over everyone else.
High-frequency trading (HFT) involves the use of very fast computers with very fast connections to sniff out what other traders are doing and buy or sell shares accordingly - all in milliseconds.
IEX exchangeThe IEX exchange defeats the advantage the HFT have by artificially introducing delays in the execution of trades.
And while volume at IEX is tiny - just 18 million shares out of nearly 7 billion traded daily - it has doubled since January.
"IEX is a great idea," said Money Morning Capital Wave Strategist Shah Gilani, editor of the Wall Street Insights & Indictments newsletter. "It's already having an impact. Eighteen million shares isn't even a blip on anybody's radar but watch it now. I'm willing to bet volume will double every quarter from now on. That's not an arithmetic gain - that's a geometric advance."
But what's so bad about high-frequency trading?
Those high-speed trades - which make up about half of all stock trades each day - get "in front" of other trades and change the price ever so slightly to their advantage. Although each HFT transaction nets only pennies, or a fraction of a penny, the computers conduct millions each day.
That adds up to billions in the pockets of the high-frequency traders - money extracted from the pockets of all other market participants, including retail investors.
What's more, because high-frequency trading is controlled by computer algorithms, a glitch can cause a market disaster, such as the "flash crash" of 2010, when the Dow Jones Industrial Average fell 1,000 points in a matter of minutes.
IEX Exchange CEO: "It's a Hole in the Bottom of a Bucket"
Brad Katsuyama, the chief executive officer of the IEX Group, discovered how high-frequency trading was harming other traders while running the Royal Bank of Canada's stock desk in New York. So he did something about it.
"We found a problem. It's affecting millions and millions of people," Katsuyama said in an interview on the CBS News program "60 Minutes." "People are blindly losing money they didn't even know they're entitled to. It's a hole in the bottom of the bucket."
Curiously, however, several Big Banks - such as Goldman Sachs Group Inc. (NYSE: GS) and JPMorgan Chase & Co. (NYSE: JPM) - known to engage in HFT have actually endorsed the IEX exchange. Gilani has an idea why...
"Sure, the IEX is a threat. The barbarians are at the gate," Gilani said. "Goldman and JPMorgan and the kings of the capitalism's crooked castle are yelling. But they're not stupid. They have to invest in the new technology. Why? Because if that's where the business goes, they want to know how it's getting there and how to profit from it. They want to see how these guys are getting around them, so they can figure out their next step. It's a matter of keeping your friends close and your enemies closer."
And then there's the possibility that the Wall Street powers see the writing on the wall... and want to make sure they're positioned for a post-HFT world. Indeed, they understand how to hedge a bet.
Meanwhile, there are still billions to be made from high-frequency trading while the IEX gains traction. You can be sure they will do all they can to keep the gravy train rolling for as long as possible.
"No one ever surrenders a multi-billion dollar business," Gilani said. "They have lobbyists and legislators. Remember, they are not back room operators - they are giants hiding in plain sight. The HFT guys will talk nice and say they are liquidity providers, and they do a lot to make markets more efficient. They will keep stating their case, and some people - those who don't really understand the mechanics behind the scenes - might see their side of it. But in the end HFT will come under attack, and there will be no more hiding in plain sight. They are about to be outed. And that's a good thing."
Do you think the IEX exchange will have any success in curbing high-frequency trading? Or will Wall Street's gurus come up with a clever workaround? Let us know on Twitter @moneymorning or Facebook.
http://moneymorning.com/2014/03/31/iex-exchange-short-circuits-wall-streets-hft-cheaters/
Exchange Rates, Gold, Food and The Captain & Tennille
Ann Barnhardt
March 31, 2014
I want to make a mathematical point which I think is lost on most people, as most people struggle mightily with the concept of relative movements and relative mathematical relationships, because, you know, public schools.
Okay. The U.S. Dollar is quoted as an index relative to a basket of six currencies. Why is the U.S. Dollar quoted against a basket? Because the U.S. Dollar is the global reserve currency (for the moment – check back in tomorrow to see if this premise still holds). The Dollar is, essentially, the benchmark against which everything else is measured. So, relative to itself, the Dollar is always "par", and since it is the global benchmark currency (as of right this second), to compare it to any other currency is really just a quote on where that OTHER currency is relative to the Dollar in practical terms. Yes, mathematically you could quote the U.S. Dollar relative to the Bolivian Peso, but um, with all due respect to Bolivia, yeah, the base metric is the Dollar, and everyone is measuring the Bolivian Peso relative to the U.S. Dollar, not the other way around.
Here is the basket that is used to calculate the Dollar Index:
Euro 57.6% weight
Japanese Yen 13.6% weight
Pound Sterling 11.9% weight
Canadian Dollar 9.1% weight
Swedish Krona 4.2% weight
Swiss Franc 3.6% weight
The DX is 77.3% comprised of European currencies, with the Euro itself being the majority of the entire basket. Thus, if Europe collapses and we collapse, we will both be sucking together, but the relative mathematical relationship between the currencies might not change that much.
If The Captain jumps out of a plane and two seconds later Toni Tennille jumps out of the same plane, they will be plummeting toward the ground at the same speed with only the two-second lag between their respective jumps between them. But they will both be falling.
So, if today a loaf of bread in the U.S. costs $3.00 and that same loaf of bread in France costs 2.13 Euros, that means that the Euro exchange rate is 1.41 Dollars per Euro.
If our economies implode and hyper inflation kicks in, that same loaf of bread might cost $3000.00 and the loaf in Europe might cost 2200.00 Euros. That would be an exchange rate of 1.36 Dollars per Euro. That's not much difference on a relative basis, huh? Does that mean that the Dollar has strengthened against the Euro and therefore everything is *teh awesome*? Of course not, but that is EXACTLY the line of bee-ess that the oligarchy and their stooges would get on TV and spew.
So how do we measure these fiat currencies as a whole? How do we cut the bee-ess and get down to the nitty-gritty? WHAT IS THE NITTY-GRITTY?
Real commodities. Food. Land. Metals.
We know that all fiat currencies all over the world are getting their butts kicked collectively and that inflation is happening even though they are strengthening relative to the Dollar because, for example, the price of cattle (food) has pretty much doubled in the last five years, and farmground (where food comes from) prices have more than doubled. Quoting metals prices is more difficult because the metals markets are heavily manipulated. I’m with Kyle Bass on metals – something seriously, seriously stinks in Denmark, baby. The exchanges clearly don’t have the physical metal, and thus we are only ever one position limit-sized demand for delivery away from a full-on clusterbungle.
The whole thing is collapsing with the Dollar leading the way simply because it is historically weak relative to the basket. Yes, the Canadians are loving the relative relationship to the Dollar, but the entire system is still falling. And in my $3000 loaf of bread example, gold would probably be trading for something like $1,600,000 per ounce assuming a very simplistic linear relationship. That would tend to get people's attention, don't you think?
Now do you see why the oligarchy wants to delegitimize gold and denies that gold is even money? Do you now see why food prices are excluded from the calculation of the Consumer Price Index (inflation)? Real commodities shine the light of truth on our economic and inflationary situation. Real commodities, not some line of FEDGOV agitprop bee-ess as shamelessly spewed by the whores in the media, are the bottom-line metric.
If the oligarchy can get rid of or otherwise suppress or deny the measuring stick, they can convince The Captain and Toni Tennille that they aren't falling, everything is fine, and no, you don't need to deploy a parachute, because LOOK! You aren't moving relative to each other, so therefore you must not be moving at all.
“When the others turn you off, who’ll be turning you . . . SPLAT
http://www.silverbearcafe.com/private/03.14/tennille.html
Exchange Rates, Gold, Food and The Captain & Tennille
Ann Barnhardt
March 31, 2014
I want to make a mathematical point which I think is lost on most people, as most people struggle mightily with the concept of relative movements and relative mathematical relationships, because, you know, public schools.
Okay. The U.S. Dollar is quoted as an index relative to a basket of six currencies. Why is the U.S. Dollar quoted against a basket? Because the U.S. Dollar is the global reserve currency (for the moment – check back in tomorrow to see if this premise still holds). The Dollar is, essentially, the benchmark against which everything else is measured. So, relative to itself, the Dollar is always "par", and since it is the global benchmark currency (as of right this second), to compare it to any other currency is really just a quote on where that OTHER currency is relative to the Dollar in practical terms. Yes, mathematically you could quote the U.S. Dollar relative to the Bolivian Peso, but um, with all due respect to Bolivia, yeah, the base metric is the Dollar, and everyone is measuring the Bolivian Peso relative to the U.S. Dollar, not the other way around.
Here is the basket that is used to calculate the Dollar Index:
Euro 57.6% weight
Japanese Yen 13.6% weight
Pound Sterling 11.9% weight
Canadian Dollar 9.1% weight
Swedish Krona 4.2% weight
Swiss Franc 3.6% weight
The DX is 77.3% comprised of European currencies, with the Euro itself being the majority of the entire basket. Thus, if Europe collapses and we collapse, we will both be sucking together, but the relative mathematical relationship between the currencies might not change that much.
If The Captain jumps out of a plane and two seconds later Toni Tennille jumps out of the same plane, they will be plummeting toward the ground at the same speed with only the two-second lag between their respective jumps between them. But they will both be falling.
So, if today a loaf of bread in the U.S. costs $3.00 and that same loaf of bread in France costs 2.13 Euros, that means that the Euro exchange rate is 1.41 Dollars per Euro.
If our economies implode and hyper inflation kicks in, that same loaf of bread might cost $3000.00 and the loaf in Europe might cost 2200.00 Euros. That would be an exchange rate of 1.36 Dollars per Euro. That's not much difference on a relative basis, huh? Does that mean that the Dollar has strengthened against the Euro and therefore everything is *teh awesome*? Of course not, but that is EXACTLY the line of bee-ess that the oligarchy and their stooges would get on TV and spew.
So how do we measure these fiat currencies as a whole? How do we cut the bee-ess and get down to the nitty-gritty? WHAT IS THE NITTY-GRITTY?
Real commodities. Food. Land. Metals.
We know that all fiat currencies all over the world are getting their butts kicked collectively and that inflation is happening even though they are strengthening relative to the Dollar because, for example, the price of cattle (food) has pretty much doubled in the last five years, and farmground (where food comes from) prices have more than doubled. Quoting metals prices is more difficult because the metals markets are heavily manipulated. I’m with Kyle Bass on metals – something seriously, seriously stinks in Denmark, baby. The exchanges clearly don’t have the physical metal, and thus we are only ever one position limit-sized demand for delivery away from a full-on clusterbungle.
The whole thing is collapsing with the Dollar leading the way simply because it is historically weak relative to the basket. Yes, the Canadians are loving the relative relationship to the Dollar, but the entire system is still falling. And in my $3000 loaf of bread example, gold would probably be trading for something like $1,600,000 per ounce assuming a very simplistic linear relationship. That would tend to get people's attention, don't you think?
Now do you see why the oligarchy wants to delegitimize gold and denies that gold is even money? Do you now see why food prices are excluded from the calculation of the Consumer Price Index (inflation)? Real commodities shine the light of truth on our economic and inflationary situation. Real commodities, not some line of FEDGOV agitprop bee-ess as shamelessly spewed by the whores in the media, are the bottom-line metric.
If the oligarchy can get rid of or otherwise suppress or deny the measuring stick, they can convince The Captain and Toni Tennille that they aren't falling, everything is fine, and no, you don't need to deploy a parachute, because LOOK! You aren't moving relative to each other, so therefore you must not be moving at all.
“When the others turn you off, who’ll be turning you . . . SPLAT
http://www.silverbearcafe.com/private/03.14/tennille.html
AG SCHNEIDERMAN: LEWIS CLAIM “HYPERBOLIC”
(special thanks to basserdan)
On Bloomberg TV, New York Attorney General Eric Schneiderman on author Michael Lewis’ contention that the stock market is “rigged” by high speed traders: “I probably would not be quite as hyperbolic as that. But we have started, actually over a year ago, looking at the use of information that didn't fit into traditional categories of insider trading. …
“There are some things here that may be illegal. There are some things that may now be legal that should be illegal or that the markets have to be changed. So part of what we're doing here in addition to looking for illegality is shining a light on this area.”
http://bloom.bg/QANSFI
***
FBI PROBING FAST TRADERS
WSJ’s Scott Patterson and Michael Rothfeld: “The [FBI] is probing whether high-speed trading firms are engaging in insider trading by taking advantage of fast-moving market information unavailable to other investors.
The investigation, launched about a year ago, involves a range of trading activities and is still in its early stages … Among the activities being probed is whether high-speed firms are trading ahead of other investors based on information that other market participants can't see.
“Among the types of trading under scrutiny is the practice of placing a group of trades and then canceling them to create the false appearance of market activity. Such activity could be considered potential market manipulation … Another form of activity under scrutiny involves using high-speed trading to place orders to conceal that the transactions are based on an illegal tip”
http://on.wsj.com/1klI1MX
***
“HARDLY NEW”
NYT’s Michael J. de la Merced and William Alden: “The [high-speed trading] worries are hardly new. Over the past five years or so, high-speed computers have increasingly taken over Wall Street, and trading has migrated from raucous trading floors in Lower Manhattan to far-flung electronic platforms. … Critics argue that Mr. Lewis broke no new ground. And a number of executives at the firms mentioned in the book said that Mr. Lewis did not double-check the facts.”
http://nyti.ms/1fIDnWe
***
FOCUS ON THE EXCHANGES
NYT’s Andrew Ross Sorkin: “Mr. Lewis … seemingly glosses over the real black hats: the big stock exchanges, which are enabling — and profiting handsomely — from the extra-fast access they are providing to certain investors. While the big Wall Street banks may have invented high-speed trading, it has gained widespread use because it has been encouraged by stock markets like the New York Stock Exchange, Nasdaq and Bats”
http://nyti.ms/1mGw3lp
Putin Flushes the US Dollar: Russia’s Gold Ruble Payments System Delinked from Dollar?
A New Financial System independent from Wall Street and City of London begins to take shape concretely in Russia?
By Umberto Pascali
Global Research, March 30, 2014
Russia “forced” by the sanctions to create a currency system which is independent from the US dollar.
Russia announces that it will sell (and buy) products and commodities – including oil – in rubles rather than in dollars. The move is towards the development of bilateral.
Putin has been preparing this move — the creation of a payment system in rubles completely independent and protected from the Dollar and the “killer speculations” (e.g. short-selling) of the big Western financial institutions — for a long time.
After sanctioning several Russian banks to punish Russia for Crimea, the Washington politicians were told by the financial power-to-be to step back because obviously, the Wall Street vampires understand that putting Russian banks outside the reach of their blood sucking teeth is never a good idea.
For Wall Street and the city’s financial services, countries like Russia should always have an open financial door through which their real economy can be periodically looted. So Washington announced that it was a mistake to enforce sanctions on all Russian banks; only one, the Rossiya bank shall be hit by sanctions, just for propaganda reasons and to make an example out of it.
It is what Putin needed. Since at least 2007, he was trying to launch an independent Ruble System, a financial system that would be based on Russia’s real economy and resources and guaranteed by its gold reserves. No tolerance for looting and financial speculation: A peaceful move, but at the same time a declaration of independence that Wall Street will consider as a “declaration of war”.
According to the Judo strategy, the sanction attack created the ideal situation for a “defensive” move that would redirect the brute force of the adversary against him. And now it’s happening. Bank Rossiya will be the first Russian bank to use exclusively the Russian ruble.
The move has not been done in secret. On the contrary. A huge golden ruble symbol will be set up in front of bank Rossiya headquarters in Perevedensky Pereulok in Moscow “to symbolize the ruble’s stability and its backing by the country’s gold reserves,” the official agency Itar-Tass explains quoting the bank officials.
In fact, the officials are very clear on their intention to punish the western speculators that have been looting their country for a long time:
“Russia, at its present stage of development, should not be dependent on foreign currencies; its internal resources will make its own economy invulnerable to political wheeler dealers.”
This is only the first step, declared Andrei Kostin, the president of VTB, another bank previously sanctioned:
“We have been moving towards wider use of the Russian rouble as the currency of settlement for a long time. The ruble became fully convertible quite a long time ago. Unfortunately, we have seen predominantly negative consequences of this step so far revealed in the outflow of capital from this country. The influx of foreign investments into Russia has been speculative and considerably destabilizing to our stock markets.”
According to Itar-Tass, Kostin was very precise and concrete:
“Russia should sell domestic products – from weapons to gas and oil – abroad for roubles and buy foreign goods also for rubles….Only then are we going to use the advantages of the rouble being a foreign currency in full measure.”
Putin himself lobbied for the new siystem in meetings with members of the Upper House of the Duma, the parliament, on March 28, overcoming the last doubts and indecisions: “
“Why do we not do this? This definitely should be done, we need to protect our interests, and we will do it. These systems work, and work very successfully in such countries as Japan and China. They originally started as exclusively national [systems] confined to their own market and territory and their own population, but have gradually become more and more popular…”
Alea Iacta Est!
see: http://www.nasdaq.com/article/putin-calls-for-creation-of-banking-payment-system-20140327-00598#ixzz2xQIi0AgY
http://www.globalresearch.ca/putin-flushes-the-us-dollar-russias-gold-ruble-payments-system-delinked-from-dollar/5375866
Putin Flushes the US Dollar: Russia’s Gold Ruble Payments System Delinked from Dollar?
A New Financial System independent from Wall Street and City of London begins to take shape concretely in Russia?
By Umberto Pascali
Global Research, March 30, 2014
Russia “forced” by the sanctions to create a currency system which is independent from the US dollar.
Russia announces that it will sell (and buy) products and commodities – including oil – in rubles rather than in dollars. The move is towards the development of bilateral.
Putin has been preparing this move — the creation of a payment system in rubles completely independent and protected from the Dollar and the “killer speculations” (e.g. short-selling) of the big Western financial institutions — for a long time.
After sanctioning several Russian banks to punish Russia for Crimea, the Washington politicians were told by the financial power-to-be to step back because obviously, the Wall Street vampires understand that putting Russian banks outside the reach of their blood sucking teeth is never a good idea.
For Wall Street and the city’s financial services, countries like Russia should always have an open financial door through which their real economy can be periodically looted. So Washington announced that it was a mistake to enforce sanctions on all Russian banks; only one, the Rossiya bank shall be hit by sanctions, just for propaganda reasons and to make an example out of it.
It is what Putin needed. Since at least 2007, he was trying to launch an independent Ruble System, a financial system that would be based on Russia’s real economy and resources and guaranteed by its gold reserves. No tolerance for looting and financial speculation: A peaceful move, but at the same time a declaration of independence that Wall Street will consider as a “declaration of war”.
According to the Judo strategy, the sanction attack created the ideal situation for a “defensive” move that would redirect the brute force of the adversary against him. And now it’s happening. Bank Rossiya will be the first Russian bank to use exclusively the Russian ruble.
The move has not been done in secret. On the contrary. A huge golden ruble symbol will be set up in front of bank Rossiya headquarters in Perevedensky Pereulok in Moscow “to symbolize the ruble’s stability and its backing by the country’s gold reserves,” the official agency Itar-Tass explains quoting the bank officials.
In fact, the officials are very clear on their intention to punish the western speculators that have been looting their country for a long time:
“Russia, at its present stage of development, should not be dependent on foreign currencies; its internal resources will make its own economy invulnerable to political wheeler dealers.”
This is only the first step, declared Andrei Kostin, the president of VTB, another bank previously sanctioned:
“We have been moving towards wider use of the Russian rouble as the currency of settlement for a long time. The ruble became fully convertible quite a long time ago. Unfortunately, we have seen predominantly negative consequences of this step so far revealed in the outflow of capital from this country. The influx of foreign investments into Russia has been speculative and considerably destabilizing to our stock markets.”
According to Itar-Tass, Kostin was very precise and concrete:
“Russia should sell domestic products – from weapons to gas and oil – abroad for roubles and buy foreign goods also for rubles….Only then are we going to use the advantages of the rouble being a foreign currency in full measure.”
Putin himself lobbied for the new siystem in meetings with members of the Upper House of the Duma, the parliament, on March 28, overcoming the last doubts and indecisions: “
“Why do we not do this? This definitely should be done, we need to protect our interests, and we will do it. These systems work, and work very successfully in such countries as Japan and China. They originally started as exclusively national [systems] confined to their own market and territory and their own population, but have gradually become more and more popular…”
Alea Iacta Est!
see: http://www.nasdaq.com/article/putin-calls-for-creation-of-banking-payment-system-20140327-00598#ixzz2xQIi0AgY
http://www.globalresearch.ca/putin-flushes-the-us-dollar-russias-gold-ruble-payments-system-delinked-from-dollar/5375866
Recommendation on Bitcoin
Mar. 27, 2014
Mish's Global Economic Trend Analysis
I have a recommendation to make on bitcoin but it's not to buy or sell or even to hold bitcoins.
Before I get to my recommendation, I have to admit that I am quite surprised that bitcoins surged from less than a cent to over $1000 (now around $520).
Treasury, Wall Street Embrace of Bitcoin
Early on, I wondered if bitcoin would even survive. But it's pretty clear now that bitcoin will survive.
I arrived at that conclusion when Wall Street embraced bitcoins (see High Frequency Bitcoin Trading Coming Your Way). In response, I stated "bitcoin is here to stay".
On March 18, I reported Treasury Department Places "Real Value" on Digital Currencies, Sees No Widespread Criminal Bitcoin Use; Virtual Currency Rules Coming Later This Year.
To me, that Treasury discussion was further evidence bitcoin is here to stay. I strongly suspect the Treasury wants to study digital currencies, possibly in advance of making the US dollar digital, and in the process making every cent traceable to someone at all times. Unfortunately, I believe such controls are coming.
Money is Made by Being Early
Bitcoin is front-page news. But money is not made when things hit the front page of the Wall Street Journal. Money is to be made in items on the 20th page of the Wall Street Journal, if not before that.
In 2009, $1,000 invested in bitcoins would be worth a staggering $50,000,000 today. That is the effect of investing in something that goes from one cent to $500. I missed it, so did nearly everyone else I know.
Recommendation
So, where are bitcoins headed next? If I knew that, I would have bought in 2009. I do not know, nor does anyone else. Yet, I do have a recommendation.
In light of bitcoin theft at Mt. Gox, at Flexcoin, and at Poloniex (see Two More Exchanges Hacked: "Flexcoin" Robbed of All Online Coins; "Poloniex" Missing 12.3% of Assets), for those who hold bitcoins, please hold bitcoins at a secure site.
Specifically, I recommend Netagio.
Why Netagio? Simple. I trust their digital currency safety, just as I trust the safety of my holdings at Goldmoney. Goldmoney and Netagio are related (See GoldMoney group launches new Bitcoin-focused company in the UK).
This of course makes me biased. I have a relationship with Goldmoney and by association with Netagio. Thus I struggled writing this post.
I do not make such recommendations lightly. I do now, not because of any current benefit (I have none), nor because of any expected future benefit (which there might be), but rather, because of multiple instances of fraud, at multiple places, people holding bitcoins need to hold them in a secure place.
Fees
Netagio currently has no storage fees. Some places like Xapo.com charge for bitcoin storage, whereas others like Coinbase.com do not.
I expect storage costs and/or transactions costs will eventually be the norm everywhere. I have no information regarding timeframe.
I can say, metal storage costs at Goldmoney are among the lowest in the industry for precious metal storage. If and when Netagio does charge storage fees, I would expect them to be among the lowest in the industry.
Financial Reporting
Given the IRS Clarifies Bitcoin as Property Not a Currency I asked Netagio if they handled financial transaction reporting and received this answer:
“We provide the same type of information like we currently do now in GoldMoney. We give a currency value to any Bitcoins on the date they were received. For those who buy and sell Bitcoins through our platform, we'll be able to map the value of them at the time of the trade execution.”
Supported Currencies
Netagio supports bitcoin trading in US dollars, Euros, and British Pounds. I suspect, but cannot guarantee other currencies will be added. Currently, most bitcoin exchanges support one or two currencies, but that may easily change as well.
Gold to Digital Transactions Coming
My opinion is that once a wider population of people are comfortable transacting with Bitcoin online, transferring gold to bitcoins is not far off.
Indeed, a quick check of Netagio shows You can Buy and Sell Gold with Bitcoins. That is something other bitcoin exchanges do not offer.
Personally, I do not want my predominant store of wealth sitting in bitcoin. I prefer gold. Others might prefer bitcoin.
For those who do prefer bitcoin, my suggestion is to question the security procedures at your current site, and if at all in doubt, move some or all of that storage somewhere else.
Specifically, look for a site where security is rock solid, where there is financial transaction accounting, and where multiple currencies are supported.
There may be other similar services elsewhere. As always, please do your own due diligence.
This is similar to my recommendation to not hold money in excess of the FDIC deposit insurance at any one bank. In this case, there is no deposit insurance anywhere in the Bitcoin world, so that makes it all the more important that you pick a site you can trust, with financial accounting, and with other services.
Again, this is not a recommendation to buy, hold, or trade bitcoins. Rather, if you do, please pick a site you can trust. Netagio is one such place, for all the reasons given above.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Read more at http://globaleconomicanalysis.blogspot.com/2014/03/recommendation-on-bitcoin.html#eUesM3PioxoxKoDV.99