The Fatal Conceit

Don’t Plan on Living in St. Petersburg…
GENEVA, Switzerland – When we left you last week, we were describing why neither democracy nor planning works on a large scale. Austrian School economist Friedrich Hayek described the problem with great thoroughness in his book The Fatal Conceit.
The Fatal Conceit: central economic planning is literally impossible – there can be no centrally planned rational economy. Individual planning is distinct from central planning, in that the many individual plans pursued by self-interested individuals mesh and create a spontaneous order. This order is far superior to anything that a central planning agency can ever hope to achieve – in fact, as Mises has shown, central planning is even doomed to failure ifthe planners hypothetically had perfect knowledge of all facets of the economy at a given time. However, this hypothetical situation can can never be realized anyway, as knowledge is widely distributed and as Hayek argues, is often tacit and therefore not directly communicable. It only expresses itself in human action.
Planning is a necessary feature of life. We have to plan our day… our year… our business, our vacations, our budgets – we plan for everything in our lives. And generally speaking, the better we are at planning and at following through on our plans, the better things go.
Naturally, we assume that this sort of planning will be helpful at all levels – from our personal schedules to an agenda for the entire nation. But there’s a problem: Planning requires detailed knowledge of our goals and resources.
If you’re going to build a factory, for example, you need a lot of information. You need to know where, when, how, and why, covering a vast range of issues. How much will it cost? How long will it take? What will it make? How will the goods be delivered? Where will employees come from? How much will they earn? Etc., etc.
You do that planning as best you can – sometimes right, sometimes wrong – and always knowing that you’ll have to live with the results. But then, along come the feds. And they’ve got their own plans.
‘You can’t build a factory there,’ they say.
‘We’re raising the minimum wage,’ they add.
‘You’ll have to get a license… a permit… clearance from the FDA, EPA, FBI, TSA, NSA, DOJ, SEC, NLRB…
‘And, oh yes, your product must be sold at the price we set…’

This post was published at Acting-Man on May 17, 2016.

US To Send Troops, Weapons To Libya To “Fight ISIS”

2016 was the year when, in the aftermath of the Fed’s first tightening cycle in a decade, the yield curve was supposed to not only rise substantially but also steepen, providing a much needed NIM arbitrage for commercial banks. That has not only not happened, but as a result of the Fed’s relent according to which the Fed will no longer hike 4 times in 2016 but at peast 2, and according to the market 0, yields have tumbled.
Which brings us to a fascinating report by Citi’s Vikram Rai in which the rates strategist tries to find if there is any upside to Treasury yields and is unable to find any. This is what he says.
More than 4 months have passed since lift-off and the first rate hike was largely transmitted to most money market rates (with T-bills rates being the occasional exception). But now, the prospect of another hike this year seems to be diminishing with the steady stream of underwhelming economic data, though Citi Economists believe that one more hike is likely this year. While we await the next hike (whenever that may be), we search for factors which might influence yields higher in the short term markets. But, after examining the technicals in the G10 fixed income sector, this search seems like a fool’s errand.

This post was published at Zero Hedge on 05/16/2016.

Why the Gold and Silver Futures Market Is Like a Rigged Casino

A respectable number of Americans hold investments in gold and silver in one form or another. Some hold physical bullion, while others opt for indirect ownership via ETFs or other instruments. A very small minority speculate via the futures markets. But we frequently report on the futures markets – why exactly is that?
Because that is where prices are set. The mint certificates, the ETFs, and the coins in an investor’s safe – all of them – are valued, at least in large part, based on the most recent trade in the nearest delivery month on a futures exchange such as the COMEX. These ‘spot’ prices are the ones scrolling across the bottom of your CNBC screen.
That makes the futures markets a tiny tail wagging a much larger dog.
Too bad. A more corruptible and lopsided mechanism for price discovery has never been devised. The price reported on TV has less to do with physical supply and demand fundamentals and more to do with lining the pockets of the bullion banks, including JPMorgan Chase.
Craig Hemke of explained in a recent post how the bullion banks fleece futures traders. He contrasted buying a futures contract with something more investors will be more familiar with – buying a stock. The number of shares is limited. When an investor buys shares in Coca-Cola company, they must be paired with another investor who owns actual shares and wants to sell at the prevailing price. That’s straight forward price discovery.

This post was published at Wolf Street by Wolf Richter – May 16, 2016.

China’s Rolling Boom-Bust Cycle

Sweet Authoritative Nothings
There is a mysterious figure making regular appearances in China’s government mouthpiece ‘People’s Daily’, which simply goes by the name ‘authoritative person’ (AP). This unnamed entity always tends to show up with bad news for assorted speculators, by suggesting that various scenarios associated with monetary and/ or fiscal stimulus are actually not in China’s immediate future (the details of AP’s latest pronouncements can be found here and here).
Some observers seem to believe that this represents a ‘renewed shift in policy’ – Bloomberg e.g. quotes an economist with Mizuho Securities as follows:
‘It is very significant and may signal a shift in China’s policies,’ said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. ‘Each time they publish this, it is normally a warning.’
Others are more careful – after all, this seems to be a case of ‘we’re saying one thing and doing another’, given a credit expansion of 4.6 trillion yuan in just the first quarter, which has sent narrow money supply growth soaring to more than 22% annualized.
The more measured argument is that it could be a sign that the debate about future economic policy is ongoing, resp. has been revived. No-one really knows – it is basically the Chinese version of Kremlinology.

This post was published at Acting-Man on May 17, 2016.

What Capital Controls? Chinese Buyers Flood US Real Estate Market With $110 Billion

We’ve chronicled extensively the capital flight taking place out of China and into anything that is perceived to hold value as fears that the yuan will devalue persist (here, here, and here). We’ve have also coveredthe massive debt bubble that has been created during China’s ferocious attempt to prove those who say a hard landing is inevitable wrong. George Soros and Kyle Bass also agree that China will inevitably have to devalue its currency in order to soften a crash landing, certainly not without its consequences.
We know that Chinese buyers have taken over the Canadian real estate market, and we’ve witnessed themassive amount of corporate M&A being done in the name of preserving shareholder capital. Now we’re able to learn, courtesy of a study done from the Asia Society and Rosen Consulting Group, just how much individual wealth has been poured into the United States real estate market over the past few years.
According to the study (which excludes most purchases by companies and trusts), Chinese buyers have invested a massive $110 billion into the US real estate market between 2010-2015. The $110 billion is broken out into two parts, commercial and residential real estate, absorbing $17 billion and $93 billion respectively. Furthermore, despite the speculation that China will find a way to clamp down even harder on capital controls, the study estimates that for the second half of this decade the number will likely double to $218 billion.

This post was published at Zero Hedge on 05/16/2016.

Is VIX Too Low Based On Fundamentals?

In a word… “yes,” VIX is too low based on the fundamentals underlying the economy, according to Goldman Sachs.
Mapping VIX back to the economy: Our research indicates that changes in the unemployment rate, ISM new orders and consumer spending are three macro variables with explanatory power for modeling S&P 500 realized volatility and VIX levels across the business cycle. Although the VIX is often considered a ‘sentiment indicator’, a regression of average calendar month VIX levels on these three factors explains 58% of the variability in VIX levels back to 2000. The economic data currently suggests VIX levels of 18.5, about 4 points higher than the average VIX level in April and May.
VIX Scenarios: The exhibits below show simple two-factor models that predict average VIX levels using yoy change in the unemployment rate under our forecasts and the level of either the ISM manufacturing…

This post was published at Zero Hedge on 05/16/2016.

Texan Plans to Build Gold Depository

Last year, we covered a story coming out of Texas in which the state government was planning to institute a state-controlled “gold depository” that would allow individuals to store their gold in a presumably safe place outside the United States banking system.
This proposition was met with emotionally-charged denunciationsfrom Americans in far away northeastern American states where it was claimed this measure was contrary to the “supremacy clause” and a just a terrible idea in general because it undermined faith in the US’s central government and the Federal Reserve System.
Well, in spite of the disapproval of New Yorkers, the Texas legislature passed the bill, and the governor signed it into law last June.
“With the passage of this bill, the Texas Bullion Depository will become the first state-level facility of its kind in the nation, increasing the security and stability of our gold reserves and keeping taxpayer funds from leaving Texas to pay for fees to store gold in facilities outside our state,” Abbott said when he signed the bill.
The depository won’t just store state gold and other precious metals. The law requires that individual customers, and even school districts, be allowed to open accounts. Capriglione has described it as a bank that doesn’t do any lending.

This post was published at Ludwig von Mises Institute on May 16, 2016.

Falling Chinese Demand Could Intensify The Oil War

The Chinese slowdown did more than drag down its own economy, it singlehandedly created financial tremors throughout the global financial markets. With consistent growth rates well over 6 percent, China’s economic health is an integral part of global expansion.
But just last year, investors saw the disintegration of billions of dollars’ worth of wealth on the Asian giant’s stock market. The globalized economy experienced economic withdrawals with lagging Chinese demand, a substance to which both foreign and local industries have become addicted. It goes without saying that industrial and manufacturing demand in the Chinese economy acts as a relevant indicator of the world’s financial condition, similar to the status of the United States. For that reason, investors have no choice but to realize the implications that can come from changes in demand for Chinese goods, services, and capital.
A country’s stock market is often a leading indicator of its economic performance. In China, two dramatic corrections occurred in the middle of 2015 which translated to the weakness that would infect the global economy. From its peak last year, the Shanghai CSI 300 Industrial Index has lost over 50 percent of its value in a downtrend that has depressed sentiment surrounding the industrial and manufacturing sectors in China. The downtrend has softened but continues to devalue large-cap industrial shares approaching values seen in mid-to-late 2014. As far as projections go, the stock market appears to be an indicator of a contraction in demand. Investors looking to pump capital back into these Chinese firms need to consider the bubble-like symptoms that caused four freefalls in the past year.

This post was published at Zero Hedge on 05/16/2016.

Oil Driller Hedges Soar To Five Year Highs

One recurring theme observed throughout the oil rally since the February 13 year lows, has been increasingly more aggressive hedging action by producers, who are willing to give up upside gains in order to protect from yet another swoon lower in prices. And, as Goldman cautions in its latest note on ongoing imbalances in the oil market, “the rally in long-dated prices has taken prices to levels ($50/bbl in 2017) where hedging activity is ramping up which suggests it will soon stall.”
This can be seen in the following chart of overall hedging activity by oil explorers which as of this moment is the highest since mid-2011.

This post was published at Zero Hedge on 05/16/2016.

US Treasury Quashes Saudi Threat of Dumping Treasuries

A secret US-Saudi deal from 1973 falls apart.
Ever since the US made a secret deal with Saudi Arabia in 1973 to end the oil embargo, the Treasury Department has never disclosed Saudi Arabia’s holdings of US Treasury securities.
‘It’s among concessions that U. S. administrations made over the years to maintain America’s strategic relationship with the Saudi royal family and access to the kingdom’s oil reserves,’ Bloomberg News explained, after it had successfully pushed the Treasury via a Freedom-of-Information Act request into finally disclosing the data.
So today, the Treasury released the data on Saudi Arabia for the first time. It’s a doozie: a lot smaller than the number that had been bandied about in the media.
This became a big public issue in early April, when the Saudi government threatened the White House and members of Congress that it would dump its purportedly vast Treasury holdings and other US assets if Congress dared to pass a bill that would permit plaintiffs to sue the Saudi government in US courts for any role in the September 11, 2001, attacks.
At the time, the White House lobbied Congress against the bill. According to the New York Times, these ‘Saudi threats have been the subject of intense discussions,’ with officials warning ‘senators of diplomatic and economic fallout from the legislation.’

This post was published at Wolf Street by Wolf Richter ‘ May 16, 2016.

In Unexpected Twist, Saudi Arabia Was Buying US Treasuries Over Past Year

As reported earlier after decades of keeping Saudi Arabian holdings of treasury paper non-public and bundled with those of other “oil exporting nations”, today at 4pm for the first time the US Treasury confirmed that its “leaked” look at Saudi holdings, exposed as a result of a Bloomberg FOIA, was accurate when it reported that the Saudis owned $116.8 billion in US paper as of March 31, which made the country the 13th largest holder of US Treasurys.

This post was published at Zero Hedge on 05/16/2016.

16/5/16: Earnings Surprises and Share Price Impact

A very interesting summary graph from Factset on the impact of earnings performance relative to consensus expectations on share prices

In basic terms, upside to consensus is systemically rewarded, while downside impact decays over time. The chart reflects 5 years worth of data, so capturing the period of declining earnings, where positive surprises should naturally be priced at a premium. The question the data above raises is whether coincident or subsequent shares repurchases provide support to the upside for underperforming firms and/or for outperforming firms.
Remember, recent McKinsey research showed that deviations from consensus forecast do not matter that much when it comes to underwriting longer term returns:

This post was published at True Economics on May 16, 2016.

Central Bankers Continually Suppressing Gold Before The Economy Collapses – Episode 972a

The following video was published by X22Report on May 16, 2016
Companies are now reporting more layoffs are on there way. Gold was suppressed today by the central bank. Empire Fed Manufacturing declined. 2nd Q earnings reports does not look good. Stock buybacks are slowing down and are now at 2009 levels. China’s largest bank is slowly corning the market on gold. UK company owners say companies create jobs not government. Obamacare employer mandate is going to be a disaster.


Good evening Ladies and Gentlemen:
Gold: $1,273.40 UP $1.50 (comex closing time)
Silver 17.14 UP 2 cents
In the access market 5:15 pm
Gold $1274.25
silver: 17.16
Today we witnessed gold and silver rising throughout last night, and during the early comex hours. However once London was put to bed, the crooks raided gold and silver/
In gold over 18,000 contracts were supplied at the comex by the criminal bankers over a 10 minute period (over 2.3 billion dollars worth of gold) and this knocked gold down from $1287.80 down to $1273.00. The bankers supplied enough paper to knock out all bids driving the price to its low point of the day. We are going to see continual raids like this as our banker friends are quite paranoid with gold’s strength. We need to see gold rise and pierce the $1308.00 level: (the previous high for gold in January 2015). The gold will be off to the raceway!
Let us have a look at the data for today.
At the gold comex today we had a GOOD delivery day, registering 28 notices for 2800 ounces for gold, and for silver we had 8 notices for 40,000 oz for the non active May delivery month.
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 236.257 tonnes for a loss of 67 tonnes over that period.
In silver, the open interest fell by 1214 contracts down to 204,742 as the price was silver was UP by 3 cents with respect to Friday’s trading. A very tiny contraction compared to the raid we had on Friday. In ounces, the OI is still represented by just over 1 BILLION oz i.e. .1.023 BILLION TO BE EXACT or 146% of annual global silver production (ex Russia &ex China)
In silver we had 8 notices served upon for 40,000 oz.
In gold, the total comex gold OI rose by 1,375 contracts up to 579,746 as the price of gold was up $1.60 with FRIDAY’S TRADING(at comex closing).
As far as the GLD, we had no changes in the GLD. The new inventory rests at 851.13 tonnes. We had no changes in silver inventory at the SLV. Inventory rests at 335.073 million oz..
First, here is an outline of what will be discussed tonight:

This post was published at Harvey Organ Blog on May 16, 2016.

ETF Gold Holdings Rise At The Fastest Pace Since 2009 As Central Banker Credibility Plunges

As Eric Peters explained a few days ago, by pushing prices to overvaluation and reducing yields on every investment asset, central banks have destroyed investors ability to create a portfolio that can withstand even the slightest economic disruption. Peters correctly describes it as “the most obvious disaster in finance.”
By reducing the yield on every investment asset, pushing prices to overvaluation, this policy also destroyed the ability of investors to build diversified portfolios capable of withstanding even the slightest economic disruption. Which ultimately results in reduced private sector risk-taking; the lifeblood of every economy. “This is the most obvious disaster in finance. Central bankers don’t quite understand it.”

This post was published at Zero Hedge on 05/16/2016.

The Fed Is Desperate To Keep Gold From Exploding Higher

The Federal Reserve’s ‘invisible hand’ in the markets is no longer ‘invisible.’ It’s become obvious to most market participants that the Fed is working hard to keep the stock market from collapsing and the price of gold below $1300. But why?
The price of gold moved up $15 overnight from the time the Asian markets opened until the Comex gold pit opened. Shortly after the Comex paper gold market trading was underway, an avalanche of paper contracts was dumped onto the Comex – both the electronic trading system and the floor. This is what it looked like:

This post was published at Investment Research Dynamics on May 16, 2016.

The Mystery Of Saudi Treasury Holdings Solved: US Reveals Saudi Holdings For The First Time

In the aftermath of Saudi Arabia’s explicit threat to sell off US Treasurys (of which according to the NYT it had some $750 billion) should the US pursue legislation that could hold it liable for the September 11 bombings, Wall Street’s analysts quickly tried to calculate whether Saudi Arabia had anywhere remotely close to that amount of US paper available for liquidation.
As a reminder, despite starting to release data on foreign ownership of Treasuries in 1974, the Treasury’s policy has been to not disclose Saudi holdings, and it has instead grouped them with those of 14 other mostly OPEC nations, including Kuwait, Nigeria and the United Arab Emirates. The group held $281 billion as of February, down from a record of $298.4 billion in July. For more than a hundred other countries, from China to the Vatican, the Treasury provides a detailed monthly breakdown of how much U. S. debt each owns.
A few days after the NYT’s disturbing article on Saudi Treasury liquidation, in hopes of bringing some clarity to this all too important topic, we penned an article titled “Does Saudi Arabia Have $750 Billion In Assets To Sell?” we cited Stone McCarthy which analyzed oil exporter reserve holdings and observed that “at the end of January, Asian oil exporters held $563.6 billion of U. S. securities, with Treasuries and U. S. equities accounting for 92.2% of the total. Treasury holdings totaled $268.2 billion.”

This post was published at Zero Hedge on 05/16/2016.