Friday, October 9, 2015

Insiders aren’t buying

Red flag: Insiders aren't buying stocks

By Heather Long @byHeatherLong

stock market alert

The stock market is having a terrific week. Momentum is giddy, except for this: the best informed people aren't buying stocks.

Smart investors keep an eye on what the so-called "insiders" are doing -- the CEOs, directors and company founders.

Typically, when the stock market tanks like it did in late August and September, top management will jump at the opportunity to buy cheap stock. It's the ultimate sign of confidence they believe better days are ahead.

But that's not what's happening.

"I've been very surprised," says David Santschi, CEO of TrimTabs Investment Research. "We were looking for a big pick up in insider buying. We didn't see it."

Enthusiasm from insiders has evaporated as the market dropped. It's a cautionary sign.

Related: Brace for worst year on Wall Street since 2008

Few insideres are buying stock

Consider this: In August 2011 when America was downgraded and stocks plunged, insiders bought $100 million worth of stock daily for a long time. They just kept buying.

This August, insiders only bought $100 million of stock for three days. And it was not across the board. Only a handful of companies were doing most of the buying.

Gap (GPS) was one of those. But when Santschi dug deeper it was even more disappointing. He found it was mostly family members of the company founder. In other words, it wasn't the CEO or officers making a bullish bet.

"We would have expected buying to be more broad based," says Santschi.

stock market 3 months

Related: Cash is king. It's better than stocks or bonds in 2015

Companies also aren't buying back stock like they used to

That trend continued in September. Insider purchases were low and just two companies -- Seattle Genetics (SGEN) and Cheniere Energy (CQH) -- accounted for 41% of the insider volume.

So far October looks sluggish as well.

As if the insider trading data isn't alarming enough, corporate stock buybacks have also slowed dramatically.

Companies had been doing over $50 billion in stock buybacks a month. That all dried up in June. The past four months have been below that $50 billion marker. The market hasn't seen four straight months of low corporate buybacks like that since late 2012.

"Buybacks tend to be heavy when people are feeling flush and confident. They tend to be less so when they are not," says Santschi.

Investors and executives continue to be concerned about a global economic slowdown and whether it will hold the U.S. back too.

The mood was uncertain enough for the Federal Reserve to hold off on raising interest rates in September, as had been widely expected.

But Wall Street banks still mostly predict stocks will end the year modestly higher -- the so-called Santa Claus rally.

Margin Debt in Freefall

Warning! Margin Debt in Freefall Is Another Reason to Worry About S&P 500

by Anthony B. Sanders • October 9, 2015

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According to Bloomberg, NYSE margin debt surged from $182 billion to $505 billion in the six years ended in June 2015, roughly tracing the trajectory of the S&P 500, which tripled over the period. The biggest gains came in 2013, with credit rising 35 percent as U.S. stocks climbed 30 percent for the best returns in 16 years.

Since June, it’s been the other way around, with margin debt falling 6.3 percent to $473 billion at the NYSE’s last update, which covered August. The S&P 500 slid 4.4 percent at the end of that period as stocks entered a correction.


Margin debt, compiled monthly by the NYSE, represents credit extended by brokerages for clients to buy stock. It hews closely to benchmark indexes such as the S&P 500, primarily because equity is used to back the loans and as its value rises, so does the capacity to lend.

Could The Fed’s asset bubble tactic be running out of juice?


Don’t worry Stanet (Janet Yellen and Stan Fischer)! House prices are plenty frothy!


Warning Janet Yellen!


Waiting for next wave down

Why Are The IMF, The UN, The BIS And Citibank All Warning That An Economic Crisis Could Be Imminent?

By Michael Snyder, on October 8th, 2015

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Question Sign Red - Public DomainThe warnings are getting louder.  Is anybody listening?  For months, I have been documenting on my website how the global financial system is absolutely primed for a crisis, and now some of the most important financial institutions in the entire world are warning about the exact same thing.  For example, this week I was stunned to see that the Telegraph had published an article with the following ominous headline: “$3 trillion corporate credit crunch looms as debtors face day of reckoning, says IMF“.  And actually what we are heading for would more accurately be described as a “credit freeze” or a “credit panic”, but a “credit crunch” will definitely work for now.  The IMF is warning that the “dangerous over-leveraging” that we have been witnessing “threatens to unleash a wave of defaults” all across the globe…

Governments and central banks risk tipping the world into a fresh financial crisis, the International Monetary Fund has warned, as it called time on a corporate debt binge in the developing world.

Emerging market companies have “over-borrowed” by $3 trillion in the last decade, reflecting a quadrupling of private sector debt between 2004 and 2014, found the IMF’s Global Financial Stability Report.

This dangerous over-leveraging now threatens to unleash a wave of defaults that will imperil an already weak global economy, said stark findings from the IMF’s twice yearly report.

The IMF is actually telling the truth in this instance.  We are in the midst of the greatest debt bubble the world has ever seen, and it is a monumental threat to the global financial system.

But even though we know about this threat, that doesn’t mean that we can do anything about it at this point or stop what is about to happen.

The Bank of England, the UN and the Bank for International Settlements have all issued similar ominous warnings.  The following is an excerpt from a recent article in the Guardian

The IMF’s warning echoes a chorus of others. The Bank of England’s chief economist, Andy Haldane, has argued that the world is entering the latest episode of a “three-part crisis trilogy”. Unctad, the UN’s trade and development arm, would like to see advanced economies boost public spending to offset the downturn in emerging economies. The Bank for International Settlements believes interest rates have been too low for too long, encouraging too much risk-taking in financial markets. All of them fear that the global financial system is primed for a crisis.

I particularly like Andy Haldane’s likening our current situation to a “three-part crisis trilogy”.  I think that is perfect.  And if you are familiar with movie trilogies, then you know that the last episode is usually the biggest and the baddest.

Citigroup economist Willem Buiter also believes that big trouble is on the horizon.  In fact, he is publicly warning of a “global recession” in 2016

Citigroup economist Willem Buiter looks at the world landscape and sees an economy performing substantially below potential output, which he uses as the general benchmark for the idea of a global recession. With that in mind, he said the chances of a global recession in 2016 are growing.

“We think that the evidence suggests that the global output gap is negative and that the global economy is currently growing at a rate below global potential growth. The (negative) output gap is therefore widening,” Buiter said in a note to clients. He added, “from an output gap that was probably quite close to zero fairly recently, continued sub-par global growth is likely to put the global economy back into recession, if indeed the world ever fully emerged of the recession caused by the global financial crisis.”

Usually when we are plunged into a new crisis there is some sort of “trigger event” that creates widespread panic.  Yesterday, I wrote about the ongoing problems at commodity giants such as Glencore, Trafigura and The Noble Group.  The collapse of any of them could potentially be a new “Lehman Brothers moment”.

But something else happened just yesterday that is also extremely concerning.  Just a couple of weeks ago, I warned that the biggest bank in Germany, Deutsche Bank, was on the verge of massive trouble.  Well, on Wednesday the bank announced a loss of more than 6 billion dollars for the third quarter of 2015

Deutsche Bank’s new boss John Cryan set about cleaning up Germany’s biggest bank on Thursday, revealing a record pre-tax loss of 6 billion euros ($6.7 billion) in the third quarter and warning investors of a possible dividend cut.

Write downs, impairments and litigation costs all contributed to the loss, the bank said.

Cryan became chief executive in July with a promise to cut costs. The Briton is accelerating plans to shed assets and exit countries to shrink the bank and is preparing to ax about 23,000 jobs, or a quarter of the bank’s staff, sources told Reuters last month.

Keep an eye on Germany – the problems there are just beginning.

Something else that I am closely watching is the fact that major exporting nations such as China that used to buy up lots of U.S. government debt are now dumping that debt at an unprecedented pace.  The following comes from Wolf Richter

Five large purchasers of US Treasuries – China, Russia, Norway, Brazil, and Taiwan – have changed their minds. They’re dumping Treasuries, each for their own reasons that are now coinciding. And at the fastest rate on record.

For the 12-month period ended July, sales of Treasuries by central banks around the world reached a net of $123 billion, “the biggest decline since data started to be collected in 1978,” the Wall Street Journal reported.

China, the largest foreign owner of Treasuries – its hoard peaking at $1.317 trillion in November 2013 – has been unloading with particular passion. By July, the latest data available from the US Treasury Department, China’s pile was down to $1.241 trillion.

Yes, I know, the stock market went up once again on Thursday, and all of the irrational optimists are once again telling us that everything is going to be just fine.

The truth, of course, is that everything is not going to be just fine.  Ever since I started the Economic Collapse Blog, I have never wavered in my belief that the greatest economic crisis that the United States has ever seen is coming, and I have written well over 1000 articles setting forth the case for the coming collapse in excruciating detail.  Nobody is going to be able to say that I didn’t try to warn them.

Those that have blind faith in Barack Obama, Wall Street, the Federal Reserve and the other major central banks around the planet will continue to mock the idea that a major collapse is coming for as long as they can.

But when the day of reckoning does arrive and crisis coming knocking at their doors, what will they do then?

Thursday, October 8, 2015

The Bulls have it wrong

Welcome to the Future: Downward Mobility and Social Depression

oftwominds-Charles Hugh Smith by Charles Hugh Smith  

If you don't think these definitions apply, please check back in a year.

The mainstream is finally waking up to the future of the American Dream: downward mobility for all but the top 10% of households. A recent Atlantic article fleshed out the zeitgeist with survey data that suggests the Great Middle Class/Nouveau Proletariat is also waking up to a future of downward mobility: The Downsizing of the American Dream: People used to believe they would someday move on up in the world. Now they’re more concerned with just holding on to what they have.

I dug into the financial and social realities of what it takes to be middle class in today's economy: Are You Really Middle Class?

The reality is that the middle class has been reduced to the sliver just below the top 5%--if we use the standards of the prosperous 1960s as baseline.

The downward mobility isn't just financial--it's a decline in political power, control of one's work and income-producing assets. This article reminds us of what the middle class once represented: What Middle Class? How bourgeois America is getting recast as a proletariat.

The costs of trying to maintain a toehold in the upper-middle class are illuminated in these recent articles on health and healthcare--both part of the downward mobility:

Health Care Slavery and Overwork

How a toxic workplace could, literally, destroy your health

We're afraid our work is killing us, and we are right

This reappraisal of the American Dream is also triggering a reappraisal of the middle class in the decades of widespread prosperity: The Myth of the Middle Class: Have Most Americans Always Been Poor?

And here's the financial reality for the bottom 90%: declining real income:

Downward mobility excels in creating and distributing what I term social defeat: In my lexicon, social defeat is a spectrum of anxiety, insecurity, chronic stress, powerlessness, and fear of declining social status.

One aspect of social defeat is the emptiness we experience when prosperity does not deliver the promised sense of fulfillment. Here is one example: A recent sociological study compared wealthy Hong Kong residents’ sense of contentment with those of the immigrant maids who serve the moneyed Elites. The study found that the maids were much happier than their wealthy masters, who were not infrequently suicidal and depressed.

The maids, on the other hand, had a trustworthy group – other maids they met with on their one day off – and the coherent purpose provided by their support of their families back home.

Downward mobility and social defeat lead to social depression. Here are the conditions that characterize social depression:

1. High expectations of endless rising prosperity have been instilled in generations of citizens as a birthright.

2. Part-time and unemployed people are marginalized, not just financially but socially.

3. Widening income/wealth disparity as those in the top 10% pull away from the shrinking middle class.

4. A systemic decline in social/economic mobility as it becomes increasingly difficult to move from dependence on the state (welfare) or one's parents to financial independence.

5. A widening disconnect between higher education and employment: a college/university degree no longer guarantees a stable, good-paying job.

6. A failure in the Status Quo institutions and mainstream media to recognize social recession as a reality.

7. A systemic failure of imagination within state and private-sector institutions on how to address social recession issues.

8. The abandonment of middle class aspirations by the generations ensnared by the social recession: young people no longer aspire to (or cannot afford) consumerist status symbols such as luxury autos or homeownership.

9. A generational abandonment of marriage, families and independent households as these are no longer affordable to those with part-time or unstable employment, i.e. what I have termed (following Jeremy Rifkin) the end of work.

10. A loss of hope in the young generations as a result of the above conditions.

If you don't think these apply, please check back in a year. We'll have a firmer grasp of social depression in October 2016.

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$SPX500 - Revised count--completing wave 4 -

$SPX500 - Revised count--completing wave 4 -

$SPX500 - Bulls lose steam -

$SPX500 - Bulls lose steam -

More on DB

Dan Stringer

Deutsche Bank: Just A Snowflake Away

Oct. 6, 2015 6:40 PM ET  by: Dan Stringer

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in DB over the next 72 hours. (More...)I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


Deutsche Bank has accumulated a substantial derivatives book, worth over 52 trillion Euros in notional value, over 50% higher than Lehman Bros. was at the time of its bankruptcy.

This large derivatives book makes DB vulnerable to potential Black Swan events.

The company's management oversight is in question as it is being investigated or litigated against by numerous parties.

This lack of oversight, combined with the sheer size and complexity of its derivatives, make DB a risky proposition in this increasingly volatile world.

In Nassim Nicholas Taleb's seminal book Antifragile, he outlines the concept of fragility. Fragility is an indication of vulnerability or being easily broken or damaged. It is a key component of complex systems. Today, we may not have a more complicated, man-made, complex system than the international financial system.

A financial system's basic tenant is to enable lenders and borrowers to exchange funds. However, as you increase the scope from a regional basis to a global basis, the complexities begin to abound with different currencies, different financial instruments and country-specific issues, such as the relative strength of each country's economy.

Financial instruments are tradeable assets of any kind, such as cash, equities, and bonds. They represent either an asset, a claim on an asset or a contractual right to an asset.

Derivatives, as their name would imply, derive their value from the performance of an underlying asset. They can fluctuate based on the price of the underlying asset and time. As these types of contracts can act as levered investments, they can potentially vary in value substantially, producing outsized gains and losses.

Derivatives were originally used mostly for hedging risk (for example, farmers could guarantee prices for corn, wheat etc. for the price of the derivative), but they are now mostly used as another type of financial instrument. The potential of outsized returns has caused them to proliferate extensively as speculators have adopted them as a way to increase their return on capital. Below are some common examples of derivative contracts:

(click to enlarge)

Source: Wikipedia

Derivatives have added an extra layer to the financial system, making a complex system even more complex as now you can have significant fluctuations in not just the underlying assets, but in the derivatives of those assets, multiplying the effect. With the wider variety of counterparties available through the global system, these fluctuations are also spread globally as well. This magnification of risk is why Warren Buffett termed derivatives as financial "Weapons of Mass Destruction". Derivatives gone wrong were at the heart of the Long Term Capital Meltdown in 1998 and the Lehman bankruptcy in 2008 that triggered the Financial Crisis.

When we look specifically at where Lehman was at the time of its filing for bankruptcy, it had a derivative book of over $35 trillion in notional value over 900,000 contracts. Notably, its leverage ratio (capital to assets) peaked at an astronomically high 31x. The actual time to process the largest bankruptcy in history was over three-and-a-half years, with Lehman emerging as a liquidating company that still needed to settle its affairs.

It is widely assumed that the Financial Crisis of 2008 had made the banks learn their lesson with respect to risk. However, we will see that Deutsche Bank (NYSE:DB) has clearly not learned this lesson, making it extremely vulnerable to the many catalysts that could shock the global financial system.

Not Learning Its Lesson

Deutsche Bank AG is a German banking and financial services company headquartered in Frankfurt, Germany with operations around the world. Founded in 1870, the bank's operations range from private wealth management to corporate banking and securities to global transaction banking.

However, with size comes complexity. DB has operations in 71 different countries, so coordinating its businesses takes a high degree of management. My concern is that its operations have become too unwieldy. This is revealing itself in the number and range of legal matters and investigations that the bank is currently facing. DB actually had these investigations on a management slide in its most recent earnings call:

(click to enlarge)

Since this earnings call, it has had several more actions initiated against it, including one by the Department of Justice. With this level of, at a minimum, alleged malfeasance, it appears management control has been severely lacking, making me question if appropriate risk controls are in place.

However, I believe this lack of risk control is even more apparent in the size of its derivative book. If we look at the notional value of its derivative book, the pure size of it is incredible:

(click to enlarge)

Source: Annual Report 2014

This gives DB a notional value of its derivative book of 52 trillion Euros or $58.2 trillion, a full 66% higher than Lehman was at the time of its failure. DB's derivative book was 47.2 trillion Euros on December 31, 2007, prior to the financial collapse, so it is now at an even higher level than it was during the height of financial institution risk taking prior to the Financial Crisis.

Although this data is from 2013, this ZeroHedge graph illustrates the absolute magnitude of its derivative book:

As a comparison, I wanted to look at Commerzbank (OTCPK:CRZBF) (OTCPK:CRZBY), the second largest bank in Germany. It has a 3.6% CRD4 (capital requirements directive) fully loaded ratio, the same as DB. Commerzbank's market cap is only about a third of DB's, though. However, its notional derivative book is significantly smaller:

Source: Commerzbank Annual Report 2014

DB's level of risk is clearly not a symptom of the German banks, as Commerzbank's derivative book value is just 9.5% the size of DB's. It has been able to create an enterprise one third the size of DB (by market cap) with about 1/10th the risk level. This holds up in assets as well as CRZBF has $660 billion in assets, roughly 1/3 of DB's $1.8 trillion in assets.

However, DB trades at a TTM simple P/E ratio of 24.1 while CRZBF trades at 18.7x, a significant discount despite its less risky derivative book. For an American comparative, JPMorgan Chase (NYSE:JPM) trades at a P/E of just 11x. However, its derivative book is just as large as DB's. DB is clearly not being penalized for its risk taking and lack of management control based on its earnings multiple.

Where we start to see a risk discount reflected is in the price to book value of DB, which sits at just 0.46 (by comparison, CRZBF is even lower at 0.42 while JPM is at 1.0). DB's price to book has been in this range largely since 2009, not reflecting its continued increase in derivatives leveraging.

Jim Rickards described a potential economic collapse in the context of snowflakes landing on a ridge. You won't know which snowflake sets off the avalanche, only that one will. I believe that DB is at great risk to potential Black Swan risks due to the size of its derivative book. In the event that these types of transactions are impacted by an unanticipated shock (for example, the Swiss de-pegging of its currency to the Euro in January 2015), this could put severe liquidity risk in play. As we saw with Lehman, there is the potential that no one will be there to help them survive a liquidity squeeze.

If there is an attempt to try to unwind its book of contracts, this will not be an easy task. I include below the steps taken to unwind each derivative contract during the Lehman bankruptcy process:

(click to enlarge)

Source: The Failure Resolution of Lehman Brothers, Michael J. Fleming & Asani Sarkar, December 2014

This will not be accomplished quickly and during a liquidity crisis, time is at a premium.

I believe that taking a short position in DB is a prudent position to take, especially as a hedge in a largely long portfolio. While I certainly cannot see the future, this is a bet against the fragility of the complex global financial system, of which DB is one of its most fragile entities.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Additional disclosure: I will use long dated put options as a portfolio hedge.

DB next Lehman?

Global Geopolitics

All Politics is now Global


Deutsche Bank shocks with warning of €6bn losses

Posted by aurelius77 on October 8, 2015

The cracks are beginning to show. The chickens from the $72.8 trillion exposure to derivatives are also yet to come home to roost.

In a late night announcement that shocked analysts, Germany’s biggest bank blamed huge impairment charges of €5.8bn for the unexpected losses. Forecasts had been for profits of around €1bn.

The charges are related to higher capital requirements for Deutsche’s investment bank and the reduced value of its Postbank retail banking division, which is up for sale.

Deutsche also took a €600m writedown on the value of its 20% stake in China’s Hua Xia Bank, which it wants to offload. It bought the stake in 2005 and it is now worth about $3.5bn.

On top of this, the bank is setting aside €1.2bn to cover litigation costs. Like other banks, Deutsche has been caught up in the Libor-rigging scandal, and faces another investigation in Switzerland for suspected price-fixing in the precious metal market.

The charges will push Deutsche into an estimated net loss of €6.2bn between July and September. On a pretax basis the company expects to lose €6bn but excluding the impairment charges, the loss would be €200m.

Full article: Deutsche Bank shocks with warning of €6bn losses (The Guardian)

Bernanke—Courage to Act—sees no bubble

Global Financial Meltdown Coming? Clear Signs That The Great Derivatives Crisis Has Now Begun

By Michael Snyder, on October 7th, 2015

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Global Financial Meltdown - Public DomainWarren Buffett once referred to derivatives as “financial weapons of mass destruction“, and it was inevitable that they would begin to wreak havoc on our financial system at some point.  While things may seem somewhat calm on Wall Street at the moment, the truth is that a great deal of trouble is bubbling just under the surface.  As you will see below, something happened in mid-September that required an unprecedented 405 billion dollar surge of Treasury collateral into the repo market.  I know – that sounds very complicated, so I will try to break it down more simply for you.  It appears that some very large institutions have started to get into a significant amount of trouble because of all the reckless betting that they have been doing.  This is something that I have warned would happen over and over again.  In fact, I have written about it so much that my regular readers are probably sick of hearing about it.  But this is what is going to cause the meltdown of our financial system.

Many out there get upset when I compare derivatives trading to gambling, and perhaps it would be more accurate to describe most derivatives as a form of insurance.  The big financial institutions assure us that they have passed off most of the risk on these contracts to others and so there is no reason to worry according to them.

Well, personally I don’t buy their explanations, and a lot of others don’t either.  On a very basic, primitive level, derivatives trading is gambling.  This is a point that Jeff Nielson made very eloquently in a piece that he recently published

No one “understands” derivatives. How many times have readers heard that thought expressed (please round-off to the nearest thousand)? Why does no one understand derivatives? For many; the answer to that question is that they have simply been thinking too hard. For others; the answer is that they don’t “think” at all.

Derivatives are bets. This is not a metaphor, or analogy, or generalization. Derivatives are bets. Period. That’s all they ever were. That’s all they ever can be.

One very large financial institution that appears to be in serious trouble with these financial weapons of mass destruction is Glencore.  At one time Glencore was considered to be the 10th largest company on the entire planet, but now it appears to be coming apart at the seams, and a great deal of their trouble seems to be tied to derivatives.  The following comes from Zero Hedge

Of particular concern, they said, was Glencore’s use of financial instruments such as derivatives to hedge its trading of physical goods against price swings. The company had $9.8 billion in gross derivatives in June 2015, down from $19 billion in such positions at the end of 2014, causing investors to query the company about the swing.

Glencore told investors the number went down so drastically because of changes in market volatility this year, according to people briefed by Glencore. When prices vary significantly, it can increase the value of hedging positions.

Last year, there were extreme price moves, particularly in the crude-oil market, which slid from about $114 a barrel in June to less than $60 a barrel by the end of December.

That response wasn’t satisfying, said Michael Leithead, a bond fund portfolio manager at EFG Asset Management, which managed $12 billion as of the end of March and has invested in Glencore’s debt.

According to Bank of America, the global financial system has about 100 billion dollars of exposure overall to Glencore.  So if Glencore goes bankrupt that is going to be a major event.  At this point, Glencore is probably the most likely candidate to be “the next Lehman Brothers”.

And it isn’t just Glencore that is in trouble.  Other financial giants such as Trafigura are in deep distress as well.  Collectively, the global financial system has approximately half a trillion dollars of exposure to these firms…

Worse, since it is not just Glencore that the banks are exposed to but very likely the rest of the commodity trading space, their gross exposure blows up to a simply stunning number:

For the banks, of course, Glencore may not be their only exposure in the commodity trading space. We consider that other vehicles such as Trafigura, Vitol and Gunvor may feature on bank balance sheets as well ($100 bn x 4?)

Call it half a trillion dollars in very highly levered exposure to commodities: an asset class that has been crushed in the past year.

The mainstream media is not talking much about any of this yet, and that is probably a good thing.  But behind the scenes, unprecedented moves are already taking place.

When I came across the information that I am about to share with you, I was absolutely stunned.  It comes from Investment Research Dynamics, and it shows very clearly that everything is not “okay” in the financial world…

Something occurred in the banking system in September that required a massive reverse repo operation in order to force the largest ever Treasury collateral injection into the repo market.   Ordinarily the Fed might engage in routine reverse repos as a means of managing the Fed funds rate.   However, as you can see from the graph below, there have been sudden spikes up in the amount of reverse repos that tend to correspond the some kind of crisis – the obvious one being the de facto collapse of the financial system in 2008:

Reverse Repo Operation

What in the world could possibly cause a spike of that magnitude?

Well, that same article that I just quoted links the troubles at Glencore with this unprecedented intervention…

What’s even more interesting is that the spike-up in reverse repos occurred at the same time – September 16 – that the stock market embarked on an 8-day cliff dive, with the S&P 500 falling 6% in that time period.  You’ll note that this is around the same time that a crash in Glencore stock and bonds began.   It has been suggested by analysts that a default on Glencore credit derivatives either by Glencore or by financial entities using derivatives to bet against that event would be analogous to the “Lehman moment” that triggered the 2008 collapse.

The blame on the general stock market plunge was cast on the Fed’s inability to raise interest rates.  However that seems to be nothing more than a clever cover story for something much more catastrophic which began to develop out sight in the general liquidity functions of the global banking system.

Back in 2008, Lehman Brothers was not “perfectly fine” one day and then suddenly collapsed the next.  There were problems brewing under the surface well in advance.

Well, the same thing is happening now at banking giants such as Deutsche Bank, and at commodity trading firms such as Glencore, Trafigura and The Noble Group.

And of course a lot of smaller fish are starting to implode as well.  I found this example posted on Business Insider earlier today

On September 11, Spruce Alpha, a small hedge fund which is part of a bigger investment group, sent a short report to investors.

The letter said that the $80 million fund had lost 48% in a month, according the performance report seen by Business Insider.

There was no commentary included in the note. No explanation. Just cold hard numbers.

Wow – how do you possibly lose 48 percent in a single month?

It would be hard to do that even if you were actually trying to lose money on purpose.

Sadly, this kind of scenario is going to be repeated over and over as we get even deeper into this crisis.

Meanwhile, our “leaders” continue to tell us that there is nothing to worry about.  For example, just consider what former Fed Chairman Ben Bernanke is saying

Former Federal Reserve chairman Ben Bernanke doesn’t see any bubbles forming in global markets right right now.

But he doesn’t think you should take his word for it.

And even if you did, that isn’t the right question to ask anyway.

Speaking at a Wall Street Journal event on Wednesday morning, Bernanke said, “I don’t see any obvious major mispricings. Nothing that looks like the housing bubble before the crisis, for example. But you shouldn’t trust me.”

I certainly agree with that last sentence.  Bernanke was the one telling us that there was not going to be a recession back in 2008 even after one had already started.  He was clueless back then and he is clueless today.

Most of our “leaders” either don’t understand what is happening or they are not willing to tell us.

So that means that we have to try to figure things out for ourselves the best that we can.  And right now there are signs all around us that another 2008-style crisis has begun.

Personally, I am hoping that there will be a lot more days like today when the markets were relatively quiet and not much major news happened around the world.

Unfortunately for all of us, these days of relative peace and tranquility are about to come to a very abrupt end.

Keynes Gospel Singer sings his own praise

Bernanke’s Balderdash

by David Stockman • October 7, 2015

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The US and world economies are drifting inexorably into the next recession owing to the deflationary collapse of commodities, capital spending and world trade. These are the inevitable “morning after” consequence of the 20-year global credit binge which has now reached its apogee.

The apparent global boom during that period was actually a central bank driven excursion into the false economics of household borrowing to inflate consumption in the DM economies; and frenzied, uneconomic investing to inflate GDP in China and the EM.

The common denominator was falsification of financial prices. By destroying honest price discovery in the financial markets, the world’s convoy of money-printing central banks led by the Fed elicited a huge excess of financialization relative to economic output.

The central manifestation of that was $185 trillion of debt growth during the past two decades——a stupendous explosion of credit which amounted to 3.7X the expansion of global GDP.

And even that ratio is an understatement. That’s because measured GDP has been artificially bloated by the monumental worldwide malinvestment and excess capacity arising from the credit bubble. That is, phony “growth” which under the laws of economics will be liquidated in due course.

Global Debt and GDP- 1994 and 2014

But you wouldn’t have known that the global economy is about to hit the skids from Monday’s action. Bernanke kicked off the day in a Wall Street Journal op ed taking a bow for “saving the world”.

Then the stock market completed a rally from Friday’s post-NFP low, which amounted to 84 points (4.5%) on the S&P 500 during a seven-hour span of trading.  That was even less time to “mission accomplished” than last October’s three-day Bullard Rip.

So here we are again circling the 2000 mark on the S&P 500—a level first crossed 440 days ago. Undoubtedly, the casino is knee-jerking upward because Goldman has already made an unsecret audible call, instructing the Fed to substantially defer lift-off well into next year.

As its New York based chief economist and B-Dud doppelganger, Jans Hatzius, informed clients:

“……..a slowdown in output and employment may justify the Fed keeping the near-zero rate policy for much longer, well into 2016 or potentially even beyond………Further bad news on output and employment could potentially result in quite a large shift in the monetary policy outlook.”

^SPX Chart

^SPX data by YCharts

That Goldman Sachs is peddling the lunacy of potentially 100 straight months of zero money market rates is not surprising. There is no greater gift to the gamblers who comprise its clientele than free money for their carry-trades—-and especially when accompanied by the absolute certainty that there will be months of forewarning through Goldman’s house organ before the Fed permits even a 25 bps change in the cost of speculation.

Oddly enough, however, the Goldman bull-hug on the Fed is exactly why the casino has become a clear and present danger to the main street economy. To wit, under the Hatzius-Dudley-Wall Street mantra of perpetual ease the Fed has become a serial bubble machine, but the retrograde academics and career apparatchik’s who nominally run it do not have a clue about this destructive modus operandi.

Exhibit number one for that proposition is Bernanke’s self-justifying balderdash printed in today’s WSJ. The kindest thing you can say about it is that now that he is cashing in big time he ought to hire a better qualified intern to write his articles while he’s out flogging his book.

This gem is an embarrassing smattering of banality and bunkum. Above all else it does not give even a passing nod to the fact that the US operates in a tightly integrated global economy and financial system; that the very warp and woof of it have been bloated and distorted by central bank enabled leverage and speculation; and that the central banks of the world are now engaged in a desperate and self-evident scramble to keep the financial bubble they have inflated over two decades from collapsing upon itself.

Bubble vision was chattering endlessly yesterday, for example, about the sudden implosion of Du Pont and the expulsion of its CEO. Well, its crashing sales in Brazil were as much a part of the global bubble as the now abandoned ramshackle man-camps of North Dakota.

In the latter case, the Bernanke-Yellen lunacy of ZIRP drove desperate money managers into a scramble for yield that caused them to buy the debt of shale drillers and suppliers dependent upon stable $75 oil prices in radically volatile global commodity markets. In the former case, DuPont’s booming ag sales in Brazil ultimately were derived from a rampaging printing press in Beijing that caused China’s debt to soar by 56X in less than 20 years.

That’s right.  Brazil’s massive export boom was indirectly funded by China’s hideous credit expansion under which outstanding debt soared from $500 billion in 1995 to $28 trillion at present, according to the cautious estimates of McKinsey and probably by far more if it could all be honestly reckoned.

Yet DuPont’s tumbling earnings came as a surprise not only to Wall Street analysts but apparently to its CEO as well. All had been drinking the central bank Kool-Aid that Bernanke was still dispensing in his WSJ blather.

To hear him tell it, the Fed’s policy has been a roaring success, having ended the financial crisis, pushed the US economy nearly back to its full potential at 5.1% unemployment and nudged inflation upwards at 1.5% or nearly to its 2.0% target.

Indeed, Bernanke took special pains to boast about the Fed’s success on the jobs front:

But there is no doubt that the jobs situation is today far healthier than it was a few years ago. That improvement (as measured by the unemployment rate) has been quicker than expected by most economists, both inside and outside the Fed.

Well, as Bill Clinton might have said it all depends on what a few years ago means. Never has the Bernank explained why the financial markets and the main street economy crashed in the fall of 2008. But counting job growth from the bottom of a bursting domestic housing and credit bubble that was self-evidently  enabled by the Fed hardly counts as proof of anything.

Here’s a better take on the jobs front. The September jobs report showed the grand sum of 96,000 jobs gains for the entire US economy outside of the government financed Health, Education And Social Services sectors (HES Complex) since December 2007.

Needless to say, the Fed’s ZIRP and QE policies had absolutely noting to do with the hiring of more home health care workers, nurses and teachers aides. Yet outside of those fiscally-dependent domains all of Bernanke’s radical financial repression and $3.5 trillion monetization of the public debt barely got the jobs market back to where it started before the recession; and, actually, not much beyond where it stood in January 2001.

So lets see. The Fed’s balance sheet has grown from $500 billion to $4.5 trillion or 9X during that span, but job growth outside the HES Complex amounts to less than 2%. For crying out loud, that’s a 12,000 per month rounding error in an economy which has 250 million adults.

Virtually every job gained since December 2009 shown in the chart below was not a “new” job at all; it was just a “born-again” job that Greenspan had claimed credit for a few years earlier.Yet Bernanke has the nerve to boast about the Fed’s success on jobs and claim that the “labor market is close to normal”!

Nonfarm Payrolls Less HES Jobs - Click to enlarge

Then there was the claim that the higher rate of growth from the pre-crisis top in the US compared to Europe was further proof of the Fed’s wisdom.

Not exactly. Its just proof that if you pick the right time intervals you can prove anything you want. In this case, Europe had a bigger boom before the 2008 peak and has suffered a more prolonged payback for its excesses ever since. Between 1995 and 2008, for example, the Eurozone’s real per capita GDP grew at 2.2% per year versus 2.0% for the US.

Euro Area GDP per capita PPP

Indeed, Bernanke’s gratuitous attack on German Finance Minister Wolfgang Schauble for consistently rejecting the Keynesian playbook and being so honest as to refer to the launch of QE2 in November 2010 as “clueless” is especially grating.

Germany has actually achieved a balanced budget, and a slightly better real GDP growth rate (1.1% per annum) than the US (0.98%) since Greenspan’s phony housing boom peaked-out in 2006. Obviously, neither growth rate is anything to write home about, but these small differences certainly don’t prove that running up the national debt and running the central bank printing press at warp speed will bring about the Keynesian nirvana of full employment.

But that didn’t stop Bernanke’s flood of sophistry. He first assailed Europe for adherence to policy “orthodoxy” and then claimed resort to aggressive monetary and fiscal stimulus by Washington accounts for a material difference in macro performance after the Lehman crisis.

There are many differences between the U.S. and Europe, but a critical one is that Europe’s economic orthodoxy has until recently largely blocked the use of monetary or fiscal policy to aid recovery. Economic philosophy, not feasibility, is the constraint: Greece might have limited options, but Germany and several other countries don’t. And the European Central Bank has broader monetary powers than the Fed does……..Europe’s failure to employ monetary and fiscal policy aggressively after the financial crisis is a big reason that eurozone output is today about 0.8% below its precrisis peak. In contrast, the output of the U.S. economy is 8.9% above the earlier peak—an enormous difference in performance.

No it isn’t. As is evident above, Germany’s growth has not lagged, yet it was subject to the same allegedly retarded ECB monetary policy that ostensibly held back the rest of the eurozone. And to complete Bernanke’s Keynesian catechism, it dramatically tightened its fiscal management in the past few years. So Germany’s debt-to-GDP ratio has turned down, and is now sharply lower than that of the US.

The fact is, the eurozone stagnation since 2008 is due to a surfeit of monetary and fiscal stimulus in the peripheral countries before the crisis, not Germany’s reliance on unkeynesian “orthodoxy” in its aftermath.

Does the Bernank think that Spain’s housing boom and crash was not caused by easy money and vast public expenditures by Spanish governments prior to the PIIGS crisis; or that the unavoidable liquidation of these bubbles in Spain and the rest of the PIIGS is not what brought down eurozone growth rate to the stagnant averages he cites?

Nor was that the extent of the sophistry.  Next we hear that the red hot bubble in London property and financial services is owing to the purportedly wise policies of the BOE:

Meanwhile, the United Kingdom is enjoying a solid recovery, in large part because the Bank of England pursued monetary policies similar to the Fed’s in both timing and relative magnitude.

C’mon! London (along with New York) is the epicenter of the global financial bubble. The economic boom there is due to the convergence of worldwide flight capital, represented by the Russian, Chinese, EM and petro-state bubble winnings that have sought refuge there.

Yes, the BOE has been right up there at the top of the money printing league tables with the Fed and BOJ, but here’s what Bernanke cannot remotely explain. Namely, that London real estate prices are up by 50% since the pre-crisis peak, while house prices in the rest of the UK have barely budged and are still at their pre-2008 level:

Image result for images of london property price increases

Presumably the BOE does not issue pounds sterling in London and non-London denominations. That is, there is one monetary policy for the whole country that cannot possibly alone explain these vast differences.

What can explain them is the chart below. The great financial bubble of the last two decades is global because all of the central banks have been doing the same thing. To wit, radically expanding their balance sheets, thereby systematically falsifying the cap rate for long-term investment and fueling a crack-up boom that is just now beginning to visibly fracture.

Global Central Bank Balance Sheet Explosion

That London has heretofore disproportionately shared in that false prosperity is not owing to the fact that the UK hired a Goldman banker from the central bank farm team in Canada, who proceeded to out-Bernanke the Bernank.

Its due to the fact that London has good property laws; speaks English, has a large international airport; is a historical center of world trade and finance; adheres strictly to the rule of “don’t ask, don’t tell” when it comes to the immense international thievery which flows its way; and has a tolerable gulfstream climate, rich culture and improving food.

Stated differently, there is no such thing as monetary policy in one country. Bernanke’s drivel comes straight out of a Keynesian time warp. Indeed, its evident in his opening claim for what he believes the Fed was doing under his watch:

“….. by mitigating recessions, monetary policy can try to ensure that the economy makes full use of its resources, especially the workforce.”

Yes, and what was it that precipitated the Great Recession on a worldwide basis if it was not the mad-cap money printing policies and resulting $185 trillion global credit expansion shown above?

Bernanke didn’t explain, but his argument amounts to saying that first central banks cause bubbles, then crashes, then recessions.  After that they rinse and repeat, denying that they had any accountability whatsoever for the economic slump at hand.

Yesterday’s trade report for August contained figures which crystalize Bernanke’s bubble blindness and Keynesian time warp in spades. Namely, that US exports of nearly all categories of goods and services are falling sharply after the temporary post-crisis surge that was caused by the world concert of money printing central bankers.

As the global deflation gathered force, the commodity sector was the first to manifest the reversal—— with prices down by 50% on average. Not surprisingly, US exports of industrial supplies and materials have dropped from their 2014 monthly peak by 20% thru August.

Likewise, overall goods exports were down 10% from the 2014 peak, and even export of travel services was down by 10%. That is, activity in domestic lodging and resorts was goosed by the global boom, and will soon be cooling owing to the global bust.

Needless to say, even as Bernanke was boasting about how he filled the domestic bathtub of GDP with that invisible ether called “aggregate demand” and thereby restored the nation’s economy to something “close to full employment”, he did let one absurdity slip that is surely dispositive.

Said the Bernank in behalf of the Fed’s long spell of zero interest rates,

Considering the economic risks posed by deflation, as well as the probability that interest rates will approach zero when inflation is very low, the Fed sets an inflation target of 2%, similar to that of most other central banks around the world…….by keeping inflation low and stable, the Fed can help the market-based system function better and make it easier for people to plan for the future.

Right. But don’t mention that to the tens of millions of main street savers and retirees who have been literally expropriated by the Fed.

And especially don’t mention that to the casino gamblers who are once again being led to the slaughter by the Fed’s adherence to Bernanke’s Keynesian gospel.

Alas, this is the third time this century. By now the gamblers are fully deserving of the just deserts which lie directly ahead.