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Things That Make You Go Hmmm...

What’s the Frequency Zenith?

April 14, 2014

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What’s the Frequency Zenith?

“All of the expectations didn’t work,” recalls Serge. “They thought they controlled the market, but it was an illusion. Everyone would come into work and were blown away by the fact that they couldn’t control anything at all.... Finance is a gambling game for people who enjoy gambling.”




“I’m shocked, shocked to find that gambling is going on in here!”





“If you want to do this, let’s do this.”

“I thought I’d pegged you an idiot’s dream

Tunnel vision from the outsider’s screen

I never understood the frequency”


THINGS THAT MAKE YOU GO HMMM... ....................................................3

Ukraine: Truth — The First Casualty ................................................................23

How the Italian Mafia Is Infiltrating Germany .....................................................24

Heartbleed Flaw Described as “Catastrophic” by Experts ......................................26

Europe Has Subjected the Greek People to a Cruel Experiment ...............................27

Draghi Says Euro Appreciation Would Trigger ECB Stimulus .....................................28

Jamie Dimon Says Fed Stimulus Exit Will Be Easy ................................................29

The Best SEC Speech Ever ............................................................................30

Central Banks Are Incubating a Crisis the IMF is Disinclined to See ...........................33

What’s Your Stock Market Story? ....................................................................34

CHARTS THAT MAKE YOU GO HMMM... ..................................................36

WORDS THAT MAKE YOU GO HMMM... ...................................................39

AND FINALLY... .............................................................................40

Things That Make You Go Hmmm...

WARNING: This week’s Things That Make You Go Hmmm... is going to run a little longer than usual, I’m afraid, so if you have some time to kill, strap yourself in for the ride.

Yes. I have read it.


For the last couple of weeks those have been the five words I have used the most — by a country mile.

The second most-used five-word combination during that time has been “I know, what a tool.”

The subject to which the first group of words pertains is, of course, Michael Lewis’s new book, Flash Boys; and the second phrase refers to a certain president of a certain exchange, who made a complete fool of himself during the fierce media debate that has surrounded the book since it burst upon the public consciousness in the space of what ironically felt like a few nanoseconds. (The particular piece to which I refer has to be seen to be believed; but if you somehow missed it, you’ll have your chance. Stick around.)

Now, before we get started, let’s get a few things straight right off the BAT(s).

Firstly, I am an enormous fan of Michael Lewis’s work. I think he is an incredible storyteller with a gift for narrative worthy of a place alongside many modern greats. I have read each of his books and enjoyed them all tremendously. Michael has an ability to weave complex subject matter into a tapestry that can be understood and enjoyed by many who might otherwise find such material utterly incomprehensible.

Secondly, I am no expert in high-frequency trading, but I have had some experience of it in recent years; and I have spent some considerable time analyzing it from a business perspective, which has given me a reasonable understanding of its mechanics.

Thirdly, whilst I have limited direct experience of HFT, I DO have almost thirty years’ hands-on experience of equity, bond, and commodity markets in the US, UK, Singapore, Hong Kong, Australia, and Japan, as well as in another dozen or so countries across Asia Pacific; and having watched markets of all types move in strange ways for seemingly no reason until, a few moments later, the cause of the move revealed itself, I feel I have developed enough of an understanding about how the markets work and, perhaps more importantly, about the people who MAKE them work, to venture an opinion or two about the subjects raised by Michael Lewis in Flash Boys.

But before we get to the book that is on everybody’s Kindle, we’re going to turn to sport for a little lesson. Let’s go back in time to Game 6 of the American League Championship Series between the Boston Red Sox and the New York Yankees in 2004, and recall the actions of another “Flash Boy,” Alex Rodriguez, the Yankees’ star third baseman.

Now, at this point, I’m sure the thousands of non-baseball fans amongst you are tuning out in your droves; but in order to try to keep you engaged, let me also tell you a parallel story from the football (or “soccer,” if you must) 2002 World Cup in South Korea, a tale that features one of its brightest stars of that era, the Brazilian midfielder Rivaldo ... and some decidedly unsavory antics.

Let’s see how we get on with this whole parallel story thing, shall we? I know Michael Lewis would do a phenomenal job of weaving the two stories together. Me? I’m not so sure...

Deep breath.

In 2002, Rivaldo Vitor Borba Ferreira was a footballer at the very top of the world game. He had helped Brazil reach the final of the 1998 World Cup (where they lost to France), and four years later he was one-third of the renowned “Three Rs,” alongside Ronaldo and Ronaldinho (sadly NOT referred to as “the Two Ronnies”), who spearheaded the dynamic Brazilian team that was rightly installed as the prohibitive favourite to win the trophy that year.


In Brazil’s opening game against Turkey on June 3rd, Rivaldo scored a goal in the 87th minute to give Brazil a 2-1 lead with only three minutes to play, and was on his way to earning the Man of the Match award (think “MVP,” baseball fans). With seconds of added time left, Brazil won a corner, which Rivaldo wandered across the pitch to take at a pace which could, at best, be described as “lacking a degree of urgency.” The ball was at the feet of Turkish defender Hakan Ünsal, who most certainly WAS in a hurry...

(Cue Michael Lewis-like change of scene to increase the dramatic tension.)

Game 6 of the 2004 ALCS, played at Yankee Stadium on October 19, 2004, had urgency to spare, as the Boston Red Sox, having lost the first three games of the series to their hated rivals from New York, needed a win to tie the series at 3 games each and force a Game 7 decider, which would be played at The Stadium the following night. One more loss and their season was over. (No team had ever come from 3 games down to take a Championship Series.)

The Yankees were led by their talismanic third baseman, Alex Rodriguez, who had almost joined the Red Sox earlier that year after the team had suffered a heart-breaking Game 7 loss in the 2003 ALCS — to whom else but the Yankees — only to have the deal voided at the last minute by the players’ union, a move which opened the door for the Yankees to steal the highest-paid and, at the time, most prolific player in the game from under the noses of the seemingly cursed Red Sox. (You can see how that whole situation played out in the excellent ESPN short documentary The Deal).


Rodriguez had been on a tear in 2004 and would end the season with 36 home runs, 106 RBIs, 112 runs scored, and 28 stolen bases. (Soccer fans, I’d give you a comparison, but there isn’t one. Think: doing everything. Really well.) This made Rodriguez only the third player in the 100+ years of baseball history to compile at least 35 home runs, 100 RBIs, and 100 runs scored in seven consecutive seasons (joining two other players with names that even soccer fans would know [kinda]: Babe Ruth and Jimmie Foxx). (No, NOT the actor who won an Oscar for Ray, soccer fans.)

During the playoffs, Rodriguez had dominated the Minnesota Twins, batting .421 with a slugging percentage of .737. (Soccer fans, let’s face it, baseball owns statistics. You got nuthin’. Nuthin’. Take it from me, Rodriguez was Messi with a bat.) He had also equaled the single-game post-season record by scoring five runs in Game 3 as the Yankees seized a 3-0 lead.

But in Game 6, Messi with a bat was about to get messy with at-bats as his form deserted him and he found himself at the plate in the 8th inning, facing Red Sox relief pitcher Bronson Arroyo, in the game for starting pitcher Curt Schilling, who had battled heroically through seven innings with a torn tendon sheath in his right ankle.

With the Yankees down 4-2 and team captain Derek Jeter on first base, Rodriguez represented the tying run...

On that steamy night two years prior, in a purpose-built stadium in Korea, Rivaldo stood by the corner flag, hands on his knees, waiting oh so patiently for the clock to run down Ünsal to pass the ball to him. The fans whistled their derision at the Brazilian’s delaying tactics. Sadly, time wasting in such situations is commonplace in football, and though the referees are obliged to add additional seconds to negate these tactics, they seldom do so effectively.

Ünsal was no doubt frustrated at the Brazilian’s gamesmanship and kicked the ball towards him at some pace in an attempt to speed things up.

Rivaldo flinched and tried to turn away from the incoming ball, which struck him roughly two inches above his right knee.

With the linesman (baseball fans, think: third base umpire) standing no more than two or three feet from the Brazilian, Rivaldo collapsed to the ground, clutching his face as if he had pole-axed by the incoming projectile, and writhing around as if every bone in his face had been shattered by the evil Turk.

To the astonishment of everybody in the stands, commentators from over a hundred countries, hundreds of millions of fans around the world, and, above all, Ünsal himself, the Turkish player was shown a red card and sent off (baseball fans, think: ejected) for his “crime.”

Rivaldo, having made a miraculous recovery, took the resulting corner, and Brazil held on against the ten men of Turkey for the victory.

Back in the Bronx, with the count at 2-2 (soccer fans, that’s two balls and two strikes, which means... oh, to hell with it. Baseball is so much trickier to explain. From here on in, you’re on your own), Alex Rodriguez swung his bat, made contact with Arroyo’s pitch, and sent it bobbling down the first-base line. As soon as he hit it, Rodriguez set off in a furious foot race that he had absolutely no chance of winning as he tried to beat the ball to first base. He knew it. We knew it.

Sure enough, Arroyo, with a head start, got to the ball first and took the two or three steps necessary to tag the Yankee with the ball (before he reached first base, which would render him “out” and send him back to the dugout, bringing the Yankee inning closer to an end).

However, as he reached out to tag Rodriguez, the ball spun loose from Arroyo’s glove and bobbled into right field, keeping the play alive and letting Jeter score from second and throw the Yankees a lifeline.

Rodriguez continued to second base, where he stopped, called time out, clapped his hands, and whooped.

Cue pandemonium.

Everybody in the stadium — except the first-base umpire ... and presumably the millions at home — had seen Rodriguez intentionally slap the ball from Arroyo’s glove, a move which in baseball parlance is known as “cheating.” (Soccer fans, think: cheating.)

After a strong protest from Red Sox manager Terry Francona and a lengthy consultation among the various umpires, justice was done. Rodriguez was called “out,” Jeter was returned to second base, and the score remained 4-2.

The Red Sox would go on to win the game and, the following night, become the first team in baseball history to win a series after losing the first three games. They would go on to defeat the St. Louis Cardinals 4-0 in the 100th World Series (soccer fans, think: national championship with no “world” connotation whatsoever) and to vanquish a famous “curse” that had persisted for 86 years.

Now, armed with that background, watch these two defining moments HERE and HERE.

In the aftermath, both players were defiant. Rivaldo, amazingly, tried to paint himself as the victim:

(BBC): Rivaldo had admitted fooling the referee by clutching his face after Ünsal kicked the ball at his leg while he was waiting to take a corner in the closing moments of the Group C match.

But he shrugged off the fine and defended his faking as part and parcel of the game.

The 30-year-old said: “I’m calm about the punishment.

“I am not sorry about anything.

“I was both the victim and the person who got fined.

“Obviously the ball didn’t hit me in the face, but I was still the victim. I did not hit anyone in the face.”

... whilst Rodriguez was, for some reason, “perplexed”:

(NY Times): Alex Rodriguez was standing on second base when the umpires decided that he did not belong there. He folded his hands atop his helmet and screamed, “What?’’

He was, to use his word, perplexed.

After the game, Yankees Manager Joe Torre demonstrated that, when it comes to seeing important plays that go against your team, there is one thing common to both soccer AND baseball: the unreliability of a manager’s eyesight. These guys see EVERYTHING that goes against their team perfectly but somehow always seem to be curiously oblivious when the shoe is on the other foot:

(NY Times): “Randy Marsh was closer than anyone else, and it looked like there were bodies all over the place,’’ Torre said, referring to the fact that first baseman Doug Mientkiewicz was near the play. “There were a lot of bodies in front of me, so I can’t tell you what I saw. I was upset it turned out the way it did for a couple of reasons.”

Presumably neither of those reasons involved the fact that the call was right.

Anyway, the point of these two stories as they pertain to Flash Boys is this:

Both Rodriguez and Rivaldo knew there were dozens of TV cameras on them. They knew there were millions of pairs of eyes on them around the world, and they knew that they were being watched by officials charged with monitoring the games to ensure fairness and punish malfeasance — and yet, knowing all that to be true, they both instinctively cheated to try to gain an edge.

That is how they, as competitors, are wired. Whether it’s right or wrong is irrelevant. (It’s wrong, in case you were wondering.) They were both given a set of rules within which to play, and both chose to step outside those rules in the hope that they would get away with it.

Rivaldo did, Rodriguez didn’t.

It’s a fine line, but the reward for success — even if it does involve bending the rules — is considerable.

Lewis’s media blitz began on Sunday night with an appearance on 60 Minutes, and in answering a simple opening question with a typically florid response, he sparked a media storm the likes of which I haven’t seen in a long, long time.

Steve Kroft: What’s the headline here?

Michael Lewis: Stock market’s rigged. The United States stock market, the most iconic market in global capitalism, is rigged.

Those words sent financial anchors on CNBC and Bloomberg TV into a state of apoplexy at the mere suggestion that the playing field in financial markets is anything but scrupulously fair.

As I watched the circus unpack its tents, erect them, and send a parade of clowns careening into the ring, I was genuinely baffled at what I was seeing.

The first act was Bill O’Brien, the president of BATS (one of the exchanges which, according to Lewis’s book, offers an unfair advantage to high-frequency traders), going toe-to-toe on CNBC with the hero of the book, Brad Katsuyama, once of RBC and now the founder of IEX, an exchange dedicated to leveling the playing field for the average investor.

Until last Sunday, I had never heard of either man, nor had I ever seen them in action.

What followed was extraordinary.

If you haven’t seen the clip, you can (and should) watch it HERE, because excerpts from a transcript cannot do justice to either the defensiveness of O’Brien or the cool confidence of Katsuyama; but from the off, had it been a fight, it would have been stopped before one of the participants embarrassed himself any further:


(CNBC):O’Brien: I have been shaking my head a lot the last 36 hours. First thing I would say, Michael and Brad, shame on both of you for falsely accusing literally thousands of people and possibly scaring millions of investors in an effort to promote a business model.

Bob Pisani (to Katsuyama): You are very respected on the street. I have known you a little while. You are thought very highly of. Do you think the markets are rigged?

Katsuyama (calmly): I think it’s very hard to put a word on it...

O’Brien (animatedly): He said it in the book. You said it in the book. “That’s when I knew the markets were rigged.” It’s disgusting that you are trying to parse your words now. Okay?

Katsuyama (calmly): Let me walk you through an example...

O’Brien: It’s a yes or no question. Do you believe it or not?

Katsuyama (calmly): I believe the markets are rigged.

O’Brien (somewhat triumphantly): Okay. There you go.

Katsuyama (calmly): I also think that you are part of the rigging. If you want to do this, let’s do this.

From there, Katsuyama proceeded to ask O’Brien how his own exchange (the one he, O’Brien, is president of) prices trades:

O’Brien: We use the direct feeds and the SIP (Securities Information Processor) in combination.

Katsuyama: I asked a question. Not what you use to route. What do you use to price trades in your matching engine on Direct Edge?

O’Brien: We use direct feeds.

Katsuyama: No.

O’Brien: Yes, we do...

Katsuyama: You use the SIP.

O’Brien: That is not true.

From there, O’Brien made the most successful attempt to make himself look a fool that I think I have ever seen (and on CNBC, that’s saying something). It was, I thought, painfully embarrassing to watch.

In my head, all I could hear was Sir Winston Churchill’s booming voice:

“Never engage in a battle of wits with an unarmed man.”

Less than 24 hours later...

(Wall Street Journal): BATS Global Markets Inc., under pressure from the New York Attorney General’s office, corrected statements made by a senior executive during a televised interview this week about how its exchanges work.

BATS President William O’Brien, during a CNBC interview Tuesday, said BATS’s Direct Edge exchanges use high-speed data feeds to price stock trades. Thursday, the exchange operator said two of its exchanges, EDGA and EGX, use a slower feed, known as the Securities Information Processor, to price trades.

Viva El Presidente!

Anyway, the interesting thing to me, once I got past the sheer insanity of it all, was the level of amazement shown by the CNBC journalists that the market could possibly be “rigged” in any way, shape, or form.

That amazement was shared by the two anchors on Bloomberg’s Market Makers show, Stephanie Ruhle and Eric Schatzker, when their turn came to take a tilt at Lewis the following day:

Ruhle (bewildered): The market is rigged? That’s a big claim!

Lewis (even more bewildered): Well it IS rigged. If you read the book, I don’t think you’d put it down and say the market’s not rigged.

Then, after a pretty good casino analogy that was interrupted by the anchors a few times, Lewis got to the crux of the issue that had been bothering me as I watched:

Lewis: Why are you so invested in the idea this is fair? Why are you even arguing about this? It’s so clear... people are front-running the market. There’s plenty of evidence in the book.

Schatzker: Their orders are being “anticipated.”

Lewis (laughing at the escalating absurdity): Anticipated and run in front of.... [The HFTs] PAY to execute the orders. Tens of millions of dollars a year. Ask yourself THAT question. Why would ANYONE pay for the right to execute someone else’s stock market order?... It’s quite obvious. That order is an opportunity to exploit, because he has advance information about the pricing in the stock market. Is that “fair”?

Ruhle: Today, when I go to execute a stock, I feel like, man, how did that get jacked right in front of me, every time? I do feel that way. But fifteen years ago when I did a trade, I was paying significantly more to do it through a specialist because of what the fees were.... Is it a different situation than when specialists were on the floor?

Lewis (with a somewhat confused look on his face): I never said THAT.

Ruhle: So has the system ALWAYS been rigged?

Lewis: Yes.


After watching these exchanges, I was so astounded that so many people could STILL live in a complete fantasy world under the illusion assumption that the markets couldn’t possibly be rigged that I turned to my friends in the Twittersphere:


That was the 2,567th tweet I have sent out and, in contrast to the nearly pathological indifference shown by the rest of the world to the previous 2,566, this one was retweeted 96 times. (Button it, Bieber! That’s an impressive number for me, OK?)

But who are these people who believe in unicorns and rainbows fair markets?

Well, of course, the anchors on CNBC and Bloomberg (and the corporations that employ them) need people to believe that the markets are free and fair, because if they don’t they may turn off in their droves; so I understand why they feel a need verging on desperation to take the other side to ANY claims that there is manipulation at play in the equity markets.

Unfortunately, those viewers HAVE been turning off in their droves, as CNBC’s ratings demonstrate:


Source: Nielson/Zerohedge

Not only that, but investors have been shunning the stock market since the nadir of 2009:


And as the humans have packed up their tents and gone home, we have witnessed the Rise of the Machines.

As far back as 2012, Morgan Stanley noted just how stunning that rise had been:

(FT): Trading by “real” investors is taking up the smallest share of US stock market volumes [since Morgan Stanley started keeping track 10 years ago].

The findings highlight how US trading activity is increasingly being fueled by fast turnover of shares by independent firms and the market-making desks of brokerages, many using high-frequency trading engines.... [Actually, all of the market-making desks are using it.]

The proportion of US trading activity represented by buy and sell orders from mutual funds, hedge funds, pensions and brokerages, referred to as “real money” or institutional investors, accounted for just 16 per cent of total market volume in the form of buying, and 13 per cent via selling in the final quarter of last year, according to analysis by Morgan Stanley’s Quantitative and Derivative Strategies group.

Further back still, in January 2011 to be precise, a Tabb Group report showed the phenomenon wasn’t exclusive to the US:

(Bloomberg): High-frequency trading accounts for 77 percent of transactions in U.K. markets, according to a study by research firm Tabb Group LLC.

Orders from long-only funds that bet stocks will rise, hedge funds and retail investors account for 23 percent of activity in continuous markets, the group said in a report today. High-frequency trading, in which firms may transact thousands of times a second, accounts for the rest. The practice makes up 35 percent of the 3.9 trillion-euro ($5.3 trillion) U.K. turnover when over-the-counter transactions and other non-continuous trading is included, Tabb said.

Tabb’s data covers what it calls continuous markets where trades occur electronically, including venues where prices are publicly displayed and dark pools, where they aren’t. Over-the-counter trading, conducted away from exchanges and alternative systems, isn’t included, Tabb said....

“What the study shows is that so little of the continuous market is natural order flow,” Will Rhode, co-author of the report with Miranda Mizen, said in a phone interview. “It’s critical for pension funds to have alternative strategies to achieve best execution and alternative sources of liquidity which they trust.

But, amazingly enough, many inside the financial industry also seem to have drunk the Kool-Aid (either that or they just can’t bring themselves to admit what they see before them on a daily basis), and so there has been a furious debate in the media and across financial websites and blogs in the days since Flash Boys hit the street.

I can’t speak for anybody else, but having spent those nearly thirty years immersed in equity, bond, and commodity markets all around the world, I have seen enough to absolutely confirm in my own mind that the markets are rigged.

Not just some of them. All of them. In different ways, to be sure, but they’re all rigged.

Not only are they rigged, but they are rigged in ways that beggar belief; and in many places they are rigged by the very people who ought to be responsible for STOPPING any rigging.

So... as Brad Katsuyama said:

“If you wanna do this, let’s do this.”

How do I rig thee? Let me count the ways:

1) Equities

I have lost count of how many times I have seen a stock jammed several percent at the close (either up or down), only for news to come out immediately afterwards that, quite coincidentally, would have dictated such a movement in the stock. It happens EVERY DAY.

It happens in Asia, the US, Australia, Europe — EVERYWHERE. This would be amongst the easiest rigging to prove. Is anything ever done about it? No.

Last year, after one particularly egregious and completely inexplicable move shortly prior to a big placement was made, I sent detailed evidence along with an explanatory chart (below) to the regulators of the market involved and was thanked for my trouble and told that they would take it from there. In addition, I was specifically informed that I would never hear from them as to whether any action had been, or would be, taken.


Source: Bloomberg

When “insider trading” is actually a euphemism, you’ve got problems. It’s a form of rigging.

2) Data releases

I have lost count of the number of times I have watched markets move dramatically in the seconds before important economic data releases.

It happens before the non-farm payroll numbers (to pick just one) all the damn time. Is it just folks taking a punt ahead of the figures? Maybe. But if it is, their success rate is truly staggering.

3) Gold

Oh boy! We don’t have time to go down this particular rabbit hole again just now, but regular readers know my thoughts on this.

Just for old time’s sake, though, I’ll throw in the two charts from my buddy Nick Laird of which I think best demonstrate just how badly the gold “fix” is rigged.

First up, a 44-year chart that depicts the outcome of buying gold at the AM fix every day in London and selling it back at the afternoon fix the same day, which equates to being long gold only during hours when the London market is open:



Next, a chart on buying gold at the afternoon fix in London every day and selling it back at the following morning’s fix — essentially, being long gold while the market is closed in London but trading in Asia, where there is no “fix”:



These kinds of examples of rigging occur every day in every market around the world, and everybody who spends any time seeing them happen learns to work around them and deal with the frustrations. There is no other option. Somebody always has more information and will always use it to their own advantage. Sadly, the realization comes only after the penny drops that market regulators are at best ineffectual and at worst asleep at the wheel.

The scales fell from my eyes years ago, and I could go on, but let’s get to the really important part of this whole market-rigging saga, shall we?

4) The risk-free rate

At the very root of every financial investment on earth and underpinning the valuation of every asset, lies something called the risk-free rate. Investopedia defines it thus:

The theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time.

In practice, however, the risk-free rate does not exist because even the safest investments carry a very small amount of risk. Thus, the interest rate on a three-month U.S. Treasury bill is often used as the risk-free rate.


See anything unusual there? In the rectangle on the right-hand side? Yeah, that five-year-long flatline — a pattern not seen at ANY point during the previous 6o years.

That, folks, is the market being “rigged.”

It’s being “rigged” by a combination of artificially low interest rates:


... and the printing of money by the Federal Reserve through their QE programs:


( rig: verb (used with object), rigged, rig·ging.

1. To put in proper order for working or use...

2. To manipulate fraudulently

Now, the Fed will argue that the first definition applies to their actions and that they are putting the market in “proper order for working or use.” I would assert, however, that (a) their manipulation of the market is utterly beyond contention and (b) it would be hard to find a more egregious example of fraud than the creation of money out of thin air.

Manipulation and fraud. To me, definition 2 is the correct one.

But IT DOESN’T MATTER which definition you choose. BOTH apply to the action of “rigging.”

The anomaly here is that the people rigging the market are essentially the same people in charge of policing it; so, of course, everybody simply looks the other way. It helps that the Fed’s particular form of manipulation is moving asset prices of all descriptions in predictable directions, which makes money for everybody who tags along for the ride. When manipulation leads to profit, investors are willingly complicit.

How bad is it? Think of this little scenario as it pertains to allegations of “rigging”:

(NY Times): The Federal Reserve financed most of the government’s deficit in 2013, in sharp contrast to the year before, when the Fed did not add to its holdings of Treasury securities. The American private sector appears to have been a net seller of Treasuries in 2013, but the foreign private sector was a substantial buyer, according to government estimates released this week...

The Fed bought a net $543 billion of Treasuries during 2013. That was not a record amount — in 2011 it had purchased $656 billion — but it enabled the Fed to finance 71 percent of the net Treasury borrowing during the year. That was the highest proportion since the government resumed running deficits in 2002. The 2011 purchases amounted to 61 percent of the money the government borrowed that year.


Source: NY Times

Yes, the US government is the largest buyer of its own debt. This is not something we didn’t know, but think of the practice in terms of whether it’s “rigging” a market.

Is the world’s largest market trading where it would be under normal conditions and with free-market forces allowed to exert themselves?

Of course not. It’s rigged.

Greek, Italian, and Spanish bonds? UK gilts? JGBs? Rigged, rigged, and rigged. Rigged. Rigged.

Like the Fed, the forces at work in these supposedly free markets will point towards the first definition of rigging and suggest they are putting those markets in proper order; but the truth is, creating a marketplace whereby Greece can sell $4 billion of 5-year debt at a yield of only 4.95% (as they did this week in a triumphant return to the bond market) made possible an implicit backstop by the ECB is fraudulent. It ensures that the price does NOT accurately reflect the underlying risk.

Thankfully, the bond was priced on the basis of the ECB’s implicit backstop and NOT the strength of the Greek economy (which contracted 25% over the last four years and a whopping 2.3% in Q4 of LAST YEAR), nor the state of its workforce and their ability to contribute the necessary revenues to enable the government to pay back the latest loan. (Greek unemployment is 27%, and youth unemployment is 58% — in case you’d lost count.)

Thank heavens the bond markets are rigged. If they weren’t, this could get ugly.

Want more “rigging”?

How about the seemingly never-ending litany of investment banks being allowed to buy their way out of rigging allegations by paying huge fines but admitting no wrong? JP Morgan has paid about $20 billion in fines in the last year alone but has admitted no wrongdoing. If they get caught rigging a market, then the fine is merely the cost of doing business. Nothing is ever actually DONE about it.

It’s just rigging of another kind. Nothing more.

Mortgages, Libor, FX markets — the list goes on and on and on. So perhaps you can understand my astonishment that the media, who have been covering these stories of questionable practices for years now (I use the verb cover in the loosest possible way), can STILL bridle when Michael Lewis dares to use the “R word” and then sit there and defend the notion that the playing field is level.

To all of you in the mainstream financial media; it’s NOT “journalism” to take the other side of accusations like those made by Michael Lewis, it’s cowardice.

But perhaps the most egregious and downright criminal act of them all has been the rigging of what is supposedly the only truly risk-free investment, the one that is relied upon by those whose working lives are at an end and who look to live out their days in relative comfort.


Let’s take an FDIC-insured savings account of $500,000, jointly owned by a retired married couple. The full amount is insured by the government ($250,000 per co-owner), so even if the bank goes bust, their $500,000 is safe. THAT is risk-free.

As you can see from the chart below, as a series of bailouts going back to LTCM in 1998 have pushed rates to all-time lows in a quest to keep the plates spinning, the interest income on that $500,000 (assuming it was all invested in a 1-year CD) has gone from roughly $27,500 per year to roughly $0.



THAT, Dear Reader, is a rigged market — not only that, it’s theft.

Whether Bill O’Brien likes it or not, Michael Lewis was speaking the truth when he said the market was rigged. He was talking about US equity markets, but rigging goes much, much deeper.

Whether Bob Pisani, Stephanie Ruhle, or any of the other talking heads who form the informational front lines between the public and the markets care to admit it or not is immaterial; the markets are rigged.

Arguing about whether the rigging is a “tax” on investors is so spurious as to be ridiculous.

Rivaldo and Rodriguez thought they could get away with gaming the system. Rodriguez was caught in the act by vigilant officials, but his only punishment was being called out on the play.

Amazingly, Rivaldo got away with his attempt at rigging the game; and when his crime came to light, he was fined a paltry amount and allowed to continue playing. Sound familiar?

In one of his interviews, Lewis denied that he was “anti-Wall Street.” He also denied that the high-frequency traders about whom he wrote are bad people or immoral:

I don’t regard high-frequency traders as villains, I really don’t. That really is like blaming the lion for eating the antelope. They’re just wired that way. The system is screwed up.

Stephanie Ruhle: Wired that way to do what?

To exploit opportunity, glitches in the system. They’re not wired to say this is moral or immoral. They’re not wired to say “Is this good for the world?”

He’s right.

In order for market rigging to be stopped, the changes have to come from those entrusted with regulation, in the form of stern punishments for those caught rigging them, and there must be changes to the rules to close the loopholes that allowed this kind of activity to occur in the first place.

Instead, the bodies which supposedly oversee the markets are involved in the most serious rigging of all.

What chance is there that we will see any change?

Get used to it, folks. As anyone who looks at financial markets up close with their eyes open will tell you, they are all rigged — it’s simply a question of degree.

The question is, do you adapt and work around the rigging, or do you simply decide not to play?

Central banks and governments seriously hope you choose the former option.


OK ... rant off — sorry, folks.

I’ll keep today’s summary short:

Ukraine, the Mafia, the Heartbleed bug, the thoughts of Chairman Jamie, Draghi wakes up, Barry Ritholtz, the idiocy of the IMF, the best SEC speech of all time, David Stockman, Louis Gave, David Hay, me, Chris Martenson, Alasdair MacLeod, Ambrose Evans-Pritchard, Mad Men, margin debt, Global PMIs ... and some incredibly talented musicians (don’t miss them!).

Until Next Time...



Ukraine: Truth — the First Casualty

How do wars begin?

Wars begin when, first, politicians lie to journalists, then they believe what they read in the press!

Karl Kraus, 1912

The bombastic and totally counterproductive Western response to the crisis which followed the nationalist coup d’état in Kiev, at least in part stage-managed from Washington and Brussels with that signature mix of arrogance and duplicity witnessed in the buildup to previous imperial exercises, represents a tragic failure of Western diplomacy, which has attained none of its presumed goals. This crisis once again highlights the deeply pernicious role of the press — which in any crisis reliably abandons all pretense of objectivity or balance at the exact moment when these are most needed. Jingoistic and violently partisan, it assists politicians in the fine art of painting themselves into tight corners, drawing them into increasingly grotesque posturing so as to appear resolute and manly to an electorate these same media have whipped up to a fever pitch; shrill rhetoric drowns out any hint of moderation, much less any attempt to understand the motives and goals of the adversary. A psychotic “them-or-us” mentality prevails — the opponent is ridiculed and dehumanized. Diplomacy degenerates into a shouting match. Wars begin.

With a precious few exceptions, Western media coverage of the current crisis has involved a single, unitary message — a fable of brave, freedom-loving Ukrainians striving to break the Russian yoke — while ignoring the numerous inconvenient truths: that Russians form the second largest ethnic and linguistic group in Ukraine and are a majority in the Eastern provinces; that Crimea is overwhelming Russian, both historically and ethnically; that Yanukovich, as distasteful as he might be, remains the democratically-elected president of Ukraine; and, finally, that he was driven into exile by a violent opposition under the control of the openly neo-fascist parties Pravyi Sektor and Svoboda.

Reading the “Pravda-on-the-Potomac” (d.b.a. The Washington Post) and other corporate-owned media one encounters the tacit assumption that, alone among countries, Russia has no legitimate interests in her own backyard; that she should be expected to passively accept Western-sponsored regime-change as Kiev, the historical cradle of Russian civilization and part of a single country within our generation, is drawn into a hostile military alliance.

The conflict has been conveniently but fraudulently framed as an attempt to stop “Russian expansionism” — ignoring the fact that despite repeated promises made to Gorbachev NATO would never be extended to Russia’s borders, Russia has been pushed back continuously for the past 20 years. US Neocons make no secret of wishing to include neighboring Georgia and Ukraine into an anti-Russian pact; can the reader imagine the US response were Canada and Mexico to cement a hostile militarily alliance with China?

Having nothing to fear from the tame US media, John Kerry can angrily fustigate countries for “invading other countries on trumped-up pretexts” without fear of ridicule — conveniently ignoring the fraudulent Iraqi WMD dossier, the invasions of Cambodia and Nicaragua kept secret from the US Congress, or indeed, dozens of other military interventions, covert or overt, on equally flimsy grounds. The Western powers fail to respect international law except when convenient; it is profoundly disingenuous to expect Russia to be the sole power to act otherwise. As Ukraine fractures, Washington is demanding the respect for international boundaries — a consideration ignored during the NATO operation in Kosovo; if Catalonia or Scotland can hold referenda to split from their respective countries, then the principle of self-determination has at least equal legitimacy with that of territorial integrity.

Yes, the reader will argue, raw power remains the basis for international law — but then why not drop the hypocritical discourse and simply assert that they do it because they can do? And, especially, why does the press signally fail at what should be its raison d’être — not to cheerlead, not to carry water for those in power, but to tenaciously challenge its own camp?

Democracy, in the absence of a properly and objectively informed populace, and of a political process that allows that populace to effectively influence policy, is a sham. The mainstream media have been clearly complicit in the steady decline in the level of US political discourse — thus bearing much responsibility for the resultant disastrous policy errors. Perhaps the best remaining hope for pluralism lies in the rise of the social media and alternative sources — internet blogs, RT Television, Telesud, etc. While these too have their own agendas, they provide a vital service by re-injecting a note of diversity into a landscape which, given the corporate ownership of mass media, would otherwise be totally monochromatic....

*** Truth & Beauty (...and russian finance) / link

How the Italian Mafia Is Infiltrating Germany

In the early summer of 2012, Gabriele S., a small business owner, let his frustrations loose on the phone. “I swear to you, I will tear off his head,” the native Sicilian ranted to an informant. “He is a major league bastard!” He wanted to kill the man, “eradicate” him. This was followed by more swears and curses.

The lively conversation, which was being listened to by the Cologne police, turned out to be very valuable for the officers of the special “Scavo” commission — giving them insight into the internal functioning of two supposed Mafia groups in the Western German state of North Rhine-Westphalia. The conversation showed investigators how the perpetrators divided up their turf and resolved or escalated conflicts.

After all, Gabriele S. — a former shepherd from the small town of Licata — doesn’t merely have a fiery temperament, he also has criminal interests. According to the investigators, he ran a network of shell companies and helped cheat the state and the social security benefits office of many millions of euros.

Gabriele S. and three accomplices are currently on trial at the Cologne regional court for, among other things, organized tax fraud. The verdict is expected on Wednesday.

The Sicilians are accused of owning 17 seemingly construction-related businesses and employing straw men as managers. According to the indictment, the men used the companies to help launder money in exchange for a fee.

The case of Gabriele S. and his accomplices seems to be exemplary of the construction sector, which, according to an internal study by the North Rhine-Westphalia State Office of Criminal Investigation (LKA), has been broadly infiltrated by bogus companies. In the Rhine and Ruhr regions, these fake businesses are mostly dominated by southern Italians who, in turn, according to the paper, have frequent ties to Cosa Nostra.

The developments have left many asking if part of the German economy is in the grip of the Mafia? A joint investigation by public broadcaster Westdeutscher Rundfunk, newspaper publisher Funke Mediengruppe and SPIEGEL has found strong connections between construction industry scammers and Italian organized crime. Investigative authorities in many German states share this assessment.

“For the Mafia, Germany is simultaneously a place for rest and for activity,” says the president of the LKA for Baden-Württemburg in Stuttgart, Dieter Schneider. “It’s a place where individuals who are wanted hide from the authorities, but also a place where crimes are planned and committed.” The Italian criminals’ goal, however, is to go as undetected as possible. According to Schneider, a bloodbath like the one that left six people dead in Duisburg in 2007 should be considered a “workplace accident.” The clans main aim in Germany has been to enter the legal economy and the higher echelons of society.

Gabriele S. is accused of being deeply involved in illegal activity. His strawman businesses charged for work that was never done in exchange for a brokerage fee of 8 percent. According to the accusations, the money was transferred to the Sicilian and his accomplices in exchange for false labor, and then given back to the customers in cash, minus the criminals’ share. The customers could then use the slush fund to pay their workers or bribe officials.

The dimensions of this form of sham business — using so-called proforma invoices — are considerable. According to investigators’ estimates, this activity costs the state around €1.5 billion ($1.2 billion) in lost taxes and approximately €2 billion in unpaid social security contributions. The labor union Ver.di pegs the annual damages at approximately €10 billion....

*** der spiegel / link

Heartbleed flaw described as ‘catastrophic’ by experts

A software bug that has gone unnoticed for two years has exposed sensitive data in as many as two out of every three web servers, say researchers.

The ‘heartbleed’ bug is a flaw in the widely-used web encryption software known as OpenSSL. Google, Facebook and Yahoo are some of the major companies that use SSL technology — most recognisable to users as the padlock that appears in the address bar of your browser.

Bruce Schneier, a security expert who has been covering the industry for years, described the flaw as ‘catastrophic’: “On the scale of 1 to 10, this is an 11,” wrote Schneier in a blog post.

Since the flaw was discovered by researchers from Google and Finnish security group Codenomicon, webmasters have scrambled to update their software and protect users’ data, although some researchers warn that it is already too late.

The bug allowed attackers to pull random chunks of information from the memory of a server, meaning that everything from passwords and usernames to credit card numbers and home addresses could have been taken. As many as half a million websites are thought to have been affected.

The padlock in browser used to signal that HTTPS encryption is being used has been unsafe for more than two years.

The scale of the damage might never be known but the bug is thought to be the most serious uncovered in recent years. Some websites are encouraging users to change their passwords while others are advising that until they have confirmed that the bug has been fixed, changing passwords will do nothing.

Other security researchers have given more practical advice: “If you need strong anonymity or privacy on the Internet, you might want to stay away from the Internet entirely for the next few days while things settle.”

Google says that it has already “applied patches to key Google services” while Yahoo says that it has “made the appropriate corrections across the main Yahoo properties”. Facebook too, says that it has addressed the issues

Unfortunately, there’s not much that individual users can do to protect against ‘heartbleed’ — the responsibility is with the companies tasked with operating individual websites.

*** The Independent / link

Europe has subjected the Greek people to a cruel experiment

Greece’s triumphant sale of five-year bonds to hedge funds (1/3) and global in investors — half based in London — tells us a great deal about the mental and emotional state of investors.

It tells us very little about the state of the Greek economy or Greek society. It is certainly not evidence that Greece is safely out of the woods. It is even less a vindication of EU/IMF Troika policies, an epic failure that will be studied years hence by scholars.

Normally when a country emerges from the trauma of an IMF austerity regime it has at least a tolerable level of debt, and if need be a devalued currency to restore competitiveness. Tough reforms matched by condign relief. The country is put on a viable path towards recovery.

This has not happened in Greece. Public debt is still 178pc of GDP, despite a haircut of private creditors near 70pc in effective terms, and despite (or because of) serial EU-IMF loan packages — the “occupation loans” as they are known in Greece. This level remains untenable for a country without a sovereign central bank and currency.

Markets know this. They are snapping up Greek bonds at yields of 4.75pc because we have returned to the pre-Lehman frenzy where they will buy almost anything, and this is all that’s left. They are betting that the EMU authorities will prop up Greece for the next five years by stretching out maturities and offering rock bottom rates. They are also betting that Greek politics will not blow up.

Themistoklis Fiotakis from Goldman Sachs said the various tricks have cut the interest payments on Greek debt to 4pc to 4.5pc of GDP, no higher than before the crisis, so the theoretical debt level is (for now) irrelevant. Over 80pc of Greek debt will be in the hands of the EU/ECB and official creditors by 2016. The default risk is “low”.

This is all true, though Greek 10-yield jumped 32 basis points yesterday, so yesterday’s buyers are already nursing a loss.

Whether investors really have a handle on Greek politics — or indeed European politics — is another matter. The coalition of Antonis Samaras is down to a one-vote margin in the Greek parliament. The radical Syriza movement refuses to fade away. It topped the latest Pulse poll. The neo-fascist Golden Dawn is still in double-digits.

If you think that we are in the early stages of a global liquidity cycle and a fresh expansion, then rising growth may be enough to lift Greece and the Club Med bloc off the reefs. It is another matter if you think G2 monetary tightening by China and the US suggest we may be nearer the end of a cycle that is already five years old, or if you subscribe to the Larry Summers view of secular stagnation — another way of saying that global savings are too high, and consumption too low, like the 1930s.

Professor Charles Wyplosz from Geneva University says EMU leaders have merely swept the sovereign debt crisis under the carpet. Debt ratios have been rising as a deflationary dynamic takes hold. The current debt levels in Greece, Italy, and Portugal are a “recipe for disaster” when the next downturn hits, he says.

Hedge funds holding Greek debt believe they are agile enough to see any such storm coming and will be able to offload their new bonds onto sleepy pension funds (mine and yours) in time. No doubt they are right.

The Greek economy has clawed back some competitiveness by the crude methods of “internal devaluation”, which is to break the labour resistance to pay cuts by driving unemployment to criminal levels.

The IMF said in its 4th Review last year that the current account deficit has been eliminated largely by “import compression”, not by rising exports. There is still a “structural current account deficit at about 6pc of GDP” implying a currency overvaluation of about 10pc.

In other words, Greece may be near trade balance now (though it still has a CA deficit), but that is after six years of depression. It takes a jobless rate of 27.5pc, or 58.3pc for youth, to achieve this. The implication is that the deficit will jump again if Greece ever recovers properly....

*** Ambrose Evans-Pritchard / link

Draghi Says Euro Appreciation Would Trigger ECB Stimulus

European Central Bank President Mario Draghi said a further appreciation of the euro would trigger more monetary stimulus in his strongest warning yet about the region’s rising currency.

“The strengthening of the exchange rate would require, to make our monetary policy stance to remain equally accommodative, it would require further monetary policy accommodation,” Draghi told reporters in Washington yesterday. “The strengthening of the exchange rate requires further monetary stimulus. That’s an important dimension for our price stability.”

The toughest in a series of currency comments from Draghi and fellow ECB officials came after the euro appreciated 6 percent versus the dollar over the past year. A rising exchange rate threatens the central bank’s ability to deliver inflation of just below 2 percent because it would cheapen imports and hurt exporters.

While the Frankfurt-based central bank doesn’t have a currency target, the exchange rate “impacts on inflation and we have an inflation mandate,” Executive Board member Benoit Coeure told Bloomberg Television on April 11. “So the stronger the euro, the more need for monetary accommodation.”

Draghi, attending spring meetings of the International Monetary Fund, said the euro had a “significant” impact on price stability. He has ratcheted up his rhetoric since saying March 7 the currency “might influence our price-stability objective.”

“I’ve always said that the exchange rate is not a policy target, but it’s important for price stability and growth,” he said. “And now, what has happened over the last few months, it’s become more and more important for price stability.”

Draghi is already considering whether to introduce more stimulus including possibly quantitative easing after the inflation rate of the 18-nation euro area dropped to 0.5 percent in March, the lowest level in more than four years. The ECB will probably act to ease policy within two months, according to two-thirds of respondents in a Bloomberg survey.

ECB Governing Council member Jens Weidmann, also speaking to reporters yesterday in Washington, said the “euro appreciation is partly due to capital inflows, in particular into the euro periphery.”

The gains show “a return of confidence in the euro area,” Weidmann said. The exchange rate “is one of many factors for our inflation assessment and, therefore, we are considering” the effects of a stronger euro, he said....

*** bloomberg / LINK

Jamie Dimon says Fed stimulus exit will be easy

Jamie Dimon, the CEO of America’s biggest bank, says it’s time to stop worrying about the Fed. After all, he’s not worried.

In his annual letter to shareholders, which was released on Wednesday afternoon, the CEO of JPMorgan Chase (JPM) said there is “little question” that the Federal Reserve’s signature stimulus program boosted the economy and hastened the recovery. What’s more, he says the Fed’s exit from QE, which is expected to happen this year, isn’t likely to reverse that.

That’s not a universally held view, particularly on Wall Street. Last year, Warren Buffett said he was worried about what will happen when the Fed unwinds its stimulus. Others have predicted accelerated inflation, sharply rising interest rates, another financial crisis, and a stock market collapse. Even the Fed itself has been testing banks to see how they would do if interest rates were to increase at a rapid clip.

Instead, Dimon says the end of quantitative easing is a good thing and will most likely be uneventful. The Fed’s bond buying has ballooned its balance sheet to $4.5 trillion, up from $1 billion before the crisis. While large, Dimon says in his letter that that’s still not a very big percentage of the overall $90 trillion in financial assets within the global economy. However, the markets that the Fed would be selling into — the Treasury and mortgage-bond markets — are considerably smaller, more like $16 trillion and $10 trillion, respectively.

Dimon does think interest rates will rise, perhaps to 5% on the 10-year Treasury bond, which is double where it is today. But he says that it is unlikely to slow the economy. Companies already have a lot of cash. And a stronger economy means they only will be generating more of it. So he doesn’t think the higher borrowing costs will affect them much.

“Those of us who operate in the money economy are very sensitive to interest rates,” writes Dimon. “Maybe overly sensitive.”

Dimon does observe, as others have, that bank lending hasn’t jumped nearly as much as you would expect, given the low interest rates. He argues that that is at least partly the result of increased banking regulation. The flip side of that, though, is all those new regulations are likely to continue to hold back lending, and therefore inflation, when QE is over.

MORE: Does JPMorgan’s Jamie Dimon really deserve $20 million?

As in past years, Dimon also uses his annual letter to gripe about bank regulations, claiming the new rules will drive up the cost that borrowers will have to pay for certain loans. And he also says that the stricter rules the U.S. has for its largest banks, like JPMorgan, could put American banks at a competitive disadvantage. But all-in-all Dimon admits in his letter that regulations have made the banking system and the economy better off.

Dimon also has a book recommendation: The Better Angels of Our Nature by Harvard professor Steven Pinker, which the CEO says shows that the world, over time, has become a less cruel and better place. No word on whether he has read Michael Lewis’s Flashboys.

*** CNN / link

The Best SEC Speech Ever

Before today, I had never heard of Jim Kidney. And I certainly hope this isn’t the last time I do.

Kidney, a longtime trial attorney for the Securities and Exchange Commission, delivered a barnburner of a going-away speech at his retirement party last month, which has only just begun to make the rounds publicly. Thanks to the union that represents the agency’s employees, everyone can now read the whole thing. After a career in the SEC’s enforcement division that began in 1986, Kidney, 66, was gracious, polite and full of good humor. And for the most part he didn’t name names. But sometimes it wasn’t hard to figure out whom he was talking about.

For example, note his reference to “broken windows” in this passage:

Combined with the negative views of the civil service promoted by politicians and the beatings we take from the public, it is no surprise that we lose our best and brightest as they see no place to go in the agency and eventually decide they are just going to get their own ticket to a law firm or corporate job punched. They see an agency that polices the broken windows on the street level and rarely goes to the penthouse floors. On the rare occasions when enforcement does go to the penthouse, good manners are paramount. Tough enforcement — risky enforcement —- is subject to extensive negotiation and weakening.

That one could end up sticking like a glop of tar to Mary Jo White, the SEC’s current chief. Back in October, as Bloomberg News reported at the time, White gave a speech in which she said her enforcement program would emulate the “broken windows” strategy used by former New York Mayor Rudy Giuliani to signal that disorder would be not tolerated.

“Minor violations that are overlooked or ignored can feed bigger ones, and perhaps more importantly, can foster a culture where laws are increasingly treated as toothless guidelines,” she said. “And so, I believe it is important to pursue even the smallest infractions.”

There’s something to be said for that, sure. But the SEC also has to go after big fish, not just guppies. And after about a year at the SEC’s helm, White is turning out to be not much different than her recent predecessors in that regard. There have been a handful of cases against big names such as JPMorgan Chase & Co. and hedge-fund manager Philip Falcone, but few that caused more than a flesh wound — and never a settlement where a defendant was required to admit liability for fraud. (Heaven forbid.)

There’s a lot more that Kidney said that’s worth repeating, including his comments about the revolving door:

I have had bosses, and bosses of my bosses, whose names we all know, who made little secret that they were here to punch their ticket. They mouthed serious regard for the mission of the commission, but their actions were tentative and fearful in many instances. You can get back to Wall Street by acting tough, by using the SEC publicity apparatus to promote yourself as tough, and maybe even on a few occasions being tough, if you pick your targets carefully. But don’t appear to fail. Don’t take risks where risk would count. That is not the intended message from the ticket punchers, of course, but it is the one I got on the occasions when I was involved in a high profile case or two. The revolving door doesn’t push the agency’s enforcement envelope very often or very far.

Here’s what he said about the SEC enforcement division’s obsession with measuring its performance by the number of cases it brings:

It is a cancer. It should be changed. I have suggested to our higher ups on several occasions starting a discussion about factors we —- after Monday, you — should weigh in evaluating investigations to be sure our resources are being well-spent and properly distributed. It has gone nowhere. One argument against change is that the press and Congress are welded to our own anvil. But I submit that there are not more than a dozen reporters who matter covering the commission, and about the same number of Hill staffers. I imagine they would welcome coming to an educational event about the division’s new metric, one which focuses on quality, not quantity. Who could be against it? Goodness knows we spend millions promoting even our emptiest achievements. Why not promote a new metric that will be sensible and helpful? Current management of the division would either adjust or leave.

Nor does he think much of the SEC’s recent efforts against small-time fraudsters in far-away countries:

I saw on Tuesday on one of those hallway screens we have now at the home office showing a slide promoting how the SEC now goes after defendants in China, India and, for all I know, Moldavia and other obscure nations. My question: Are we so sure that our own domestic corporations and audit firms are law abiding that we can spend vast quantities of staff time and taxpayer money worrying about firms in other countries because a handful of ADRs are sold on U.S. markets?

Are we so paralyzed by the organizational stovepipes we have created and made more and more of that we can’t flood the zone on important cases instead? Do we have to preserve bureaucratic organizational boundaries by sweating the minutiae just so each organizational unit can claim to have enough to do to protect some manager’s turf? When a case against an Indian corporation which likely will default or settle for a meaningless (in India) “sin no more” injunction is as important as one against a Wall Street giant, and I know for a fact that in some instances way more is spent on the lesser case, there is a problem with our management. It has been going on a long time. It should stop.

Here’s a thought: How about making Jim Kidney an SEC commissioner the next time a seat comes open?...

*** Jonathan Weil / LINK

Central banks are incubating a crisis the IMF is disinclined to

According to the old saw, forecasting is difficult, especially when it’s about the future. It’s a truism that the International Monetary Fund — focused, perhaps inevitably, on the rearview mirror rather than the road ahead — has been repeatedly forced to take to heart.

Famously, it failed to see the financial crisis coming, despite a chief economist at the time, Raghuram Rajan, who came as close as any to identifying the risks of excessive credit expansion. Later, it blamed its blind spot on “group think”.

A similar problem seems to have coloured the IMF’s view on Britain’s fiscal consolidation, which as little as a year ago the current IMF chief economist, Olivier Blanchard, characterised as “playing with fire”.


This spectacularly ill-timed judgment, just as the UK economy was beginning to turn, again reflected a kind of “group think”, certainly among many academic economists, where received wisdom was that growth and austerity were incompatible, if not among less theoretically-minded applied economists. At the time, UK Treasury officials attributed the way the IMF singled out the UK for criticism as an indirect warning to the US, where a fierce fiscal squeeze was also being applied.

If so, it was an odd way of going about it. Nor did it work. Not only did the US squeeze proceed as demanded by Congress, but it didn’t obviously have a great deal of impact on growth. Both the US and Britain grew relatively strongly last year and are expected to grow by even more this year.

George Osborne, the Chancellor, is entitled to take some satisfaction in the IMF’s discomfort, though he promises not to rub it in when he gives a speech on Britain’s apparent “economic miracle” at the IMF’s spring meeting in Washington this week.

All this raises an obvious question; having been far too upbeat about prospects for the world economy ahead of the crisis, then too sanguine about its impact, and then, realising its mistake, far too downbeat, is the IMF again missing the big picture?

With past errors ringing in its ears, the IMF tends these days to hedge its forecasts with lots of caveats. The list of potential “risk factors” that could derail the IMF’s central forecasts grows with the publication of each passing World Economic Outlook. The biggest cause of concern this time around, according to the IMF, is again that of persistently low European growth.

In a speech last week, Christine Lagarde, managing director of the IMF, said she wasn’t referring to the threat of outright “deflation” when she cited these concerns. This was a word previously used only “to catch everyone’s attention”. Actually, the more potent threat was simply that of a prolonged period of “low inflation” and therefore low growth.

More monetary easing, including unconventional measures, were needed, she insisted, to the obvious irritation of the European Central Bank’s Mario Draghi, who pointed out that she would never dare offer policy advice to the US Federal Reserve. Ms Lagarde’s clear implication, also apparent in pre-released papers from the IMF’s World Economic Outlook, due to be published on Tuesday, is that the world, and particularly Europe, needs a bit more inflation.

I don’t necessarily disagree with this, but I would be very wary about doing it in the manner Ms Lagarde suggests — through further central bank money printing.

The big fear about quantitative easing when the US and Britain first started doing it was that it would be inflationary. Images of Weimar Germany’s hyperinflation were quickly brought to mind. Yet so far it has proved nothing of the sort. One thing it has done, however, is put a rocket under asset prices. Rising asset prices are only the flip side of the same coin as falling yields, and they are phenomena that long precede the financial crisis. Basically, it’s been going on ever since the late 1970s. Both inflation and long-term interest rates have fallen dramatically since then, driving a spectacular long-term bull market in asset prices....

*** Jeremy Warner / link

What’s Your Stock Market Story?

Whenever we see any sort of disruption in markets an explanation usually follows. The headlines will explain that “Markets are going up/down because of this good/bad thing.” News anchors will solemnly intone why the volatility is significant and what it means for one thing or another.

None of these casual explanations can withstand close examination. They are often things that have existed for months or years, and so can’t account for what happened yesterday.

Stocks are fully valued, and have been for a while, so why is it that valuations suddenly matter after not mattering at all? The market for initial public offerings is too hot? Wait, the Federal Reserve is going to end quantitative easing, something it has been warning us about for two years? Now it suddenly matters?

Of course, all of these narratives serve a singular purpose: They give the appearance of meaning and rationality to actions that are meaningless and irrational. The daily action in the markets is a form of noisy, random, Brownian motion. If you are looking for a clear reason as to why stocks did what they did, then you are in the wrong line of business.

Given that truth, it was with great pleasure this morning I read a headline in the Wall Street Journal that accidentally reflected this reality: “Biotech Stocks’ Rout Perplexes Analysts.”

There are several things that make this such a wonderfully inadvertent truth-telling exercise. The headline implies that other times when stocks get shellacked, the analysts know and understand the reasons why. Never mind that they cannot forecast where these stocks will go, and all of their explanations are a post-hoc rationalization. But this time they are perplexed.

I find that delightful.

Here is the simple reality most of us try desperately to ignore: Most of the time, we have no idea what is going on. Our understanding of objective reality is at best tenuous. At its worst, our beliefs reflect a completely erroneous viewpoint, one that is as comforting as it is misleading. Indeed, the comfort often comes from hiding the truth from ourselves.

Consider this explanation of the artificial construct most of us live in: People create a happy little bubble of delusion. We engage in all sorts of cognitive foibles. Our selective perception allows us to only see that which agrees with our preconceived notions. Our selective retention only holds onto the stuff that confirms our views, disregarding the rest. In our minds’ eye, we are younger, better-looking, slimmer, and have more hair than an objective observer would see. The universe we construct bears only a passing resemblance to the objective world.

Sometimes, Toto pulls back the curtain and we see the wizard is nothing more than an old man with a few parlor tricks. For a brief moment, we understand how little we really understand. The grim reality of human cognition is that however little we know, we understand even less.

Hence, the accidental revelation in the headline is more noteworthy for how extraordinary it is....

*** barry ritholtz / link

Charts That Make You Go Hmmm...


Source: Zerohedge/Bloomberg

Gordon Gekko was almost right.

In this case, Green is Good.

This great snapshot of the global economy shows just how perilous things are, with way too much red ink in all the wrong places. Click on the link to enlarge.

*** zerohedge / link

Then vs. Now — Mad Men Edition



With the final series of AMC’s huge hit Mad Men set to begin on Sunday, the staff at decided to take a look at how the United States of 2014 stacks up against that of Don Draper & Co. in the 1960s. To that end, they set about putting together the Mad Men Chartbook.

Stat fans will love what they found...

*** / link


There was never a clearer sign of excessive bullish optimism than the current level of margin debt. Even as the markets sold off sharply in February, investors levered up portfolios and increased overall portfolio risk.


Even professional investors, who are supposed to be the “smart money,” are currently at the highest level of bullishness seen since 1990. (The chart below is the 4-month moving average of the net difference between bullish and bearish sentiment.)


*** lance roberts / link

Words That Make You Go Hmmm...



If you jump to the 27:00 minute mark of this edition of The Charlie Rose Show, you will find an excellent interview with David Stockman about his wonderful recent book, The Great Deformation.

Stockman finally gets the platform he deserves with Charlie Rose, and I urge you to watch him explain why the Fed is a perennial “bubble machine.”

Stockman’s takedown of Paul Krugman alone is worth the price of admission — though even the normally neutral Rose can’t resist taking a shot at a former establishment insider turned outsider.


If you have 54 minutes to kill and are at all interested in the gold market, I recommend you pass that time with Chris Martenson and Alasdair Macleod, who discuss the bind that Western central banks find themselves in, thanks to the actions of the PBoC.




During a recent trip to Seattle, I had the opportunity to sit down with my good friends David Hay and Louis Gave of Evergreen Gavekal and Ed D’Agostino of Mauldin Economics to discuss the movie Money for Nothing and how to protect yourself from the Fed and their pernicious quantitative easing program.


and finally...



These three incredibly talented ladies (along with their pianist) prove beyond any doubt that a (mostly) string quartet can, in fact, be exhilarating.

Who knew?




Grant Williams

Grant Williams is the portfolio manager of the Vulpes Precious Metals Fund and strategy advisor to Vulpes Investment Management in Singapore — a hedge fund running over $280 million of largely partners’ capital across multiple strategies.

The high level of capital committed by the Vulpes partners ensures the strongest possible alignment between the firm and its investors.

Grant has 28 years of experience in finance on the Asian, Australian, European and US markets and has held senior positions at several international investment houses.

Grant has been writing Things That Make You Go Hmmm... since 2009.

For more information on Vulpes, please visit


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As a result of my role at Vulpes Investment Management, it falls upon me to disclose that, from time to time, the views I express and/or the commentary I write in the pages of Things That Make You Go Hmmm... may reflect the positioning of one or all of the Vulpes funds—though I will not be making any specific recommendations in this publication.



A walk around the fringes of finance


By Grant Williams

14 April 2014


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