Stock Market Bubbles And Record Margin Debt: A (Repeating) History Of Ignoring All Warnings

It is well-known that as part of the S&P500's ascent to new records, investor margin debt has also surged to all time highs, surpassing for the past three months previous records set during both prior, the dot com and the housing, stock market bubbles.

And as more attention has shifted to the topic of speculator leverage once more, inquiries into the correlation between bets upon bets and stock performance are popping up once more, in this case in a study by Deutsche Bank titled "Red Flag! - The curious case of NYSE margin debt." Of particular note here is a historical comparison of margin-debt warnings that have recurred throughout history but especially just before major stock bubble crashes, such as in the period 1999/2000, 2007/2008 and of course today, which have time and again been ignored. Here is what was said then, what is being said now, and what is ignored always.

As DB says, "we prepared a collection of press articles which were published around the key events during the past financial crises. Our key finding is straight forward. Irrespective of the publishing date, the articles read alike throughout the two major crisis periods, i.e. the “new technologies market equity bubble” (1999-00) and the “Great/Global Financial Crisis” (2007-08). Most interestingly, literally the same content can be found in todays’ press. Universal phrases include:

• “A rising stock market encouraged more investors to go into debt to buy stocks, sending margin debt levels past their all-time high”.
• “The National Association of Securities Dealers (NASD) has asked members to review their lending requirements in a sign of increasing concern that rising levels of margin debt could exacerbate a stock market plunch.”
• “The Fed is concerned about a sharp rise in margin debt but has been unwilling to attack stock market speculation as high levels of leverage do not necessarily translate into high risk. The last time the Fed adjusted the margin rules was in 1974, when when it reduced the down payment required for stocks to 50 percent of the purchase price, from 65 percent.” […] “The Fed should return to its pre- 1974 policy of actively changing margin requirements in response to stock market speculation”.
• “High margin debts show the effect of over-leveraging and mispricing of risk”.
• “The movements in stocks cause brokerages to stop allowing customers to buy some of the volatile stocks on margin or require clients to put up more cash.”
• “Either the market rises dramatically to make those loans good or in any down move there is tremendous selling pressure”.
• “Until recently, most investors ignored red flags raised by regulators”.

And more detail:

25 May 1999, Event: 1st MoM change in NYSE margin debt > 10%, Reuters News: “Soaring margin debt seen bad for Internet stocks.”

“Soaring margin debt is likely to trigger a debacle in Internet stocks", Charles Biderman, chief executive of TrimTabs.com said Tuesday. "New online investors are buying heavily on margin and it looks like they're buying Internet stocks", Biderman said. TrimTabs.com is a Santa Rosa, Calif.-based firm which collects information on mutual fund flows and other market data. "When people borrow to buy (stocks) that's a very bad sign for the future." Biderman cited figures showing margin debt for customers of New York Stock Exchange (NYSE) member firms at $182 billion at the end of April, up from $156 billion at the end of March and $142 billion at the end of February. He said the nearly 30 percent increase over a two-month span was unprecedented. ” The wild price moves in Internet stocks, which can go up or down tens of dollars a day, have caused brokerages to stop allowing customers to buy some of these volatile stocks on margin or require clients to put up more cash. "Either the market has to rise dramatically to make those loans good or in any down move there's tremendous selling pressure," Biderman said. 

08 December 1999, Event: 2nd MoM change in NYSE margin debt >10%; The Cambridge Reporter: "Margin debt oddly overlooked "

"U.S. Federal Reserve figures show that margin debt has grown tremendously. Since 1993 the rate at which margin debt has grown is three times faster than the growth rate for U.S. household debt and overall debt in credit markets. According to a non-profit think tank, Financial Markets Centre, as a percentage of market capitalization or the total value of stocks, margin debt has reached the highest level since just before the 1987 market crash. Too, as a percentage of gross domestic product, margin debt is at the highest level in 63 years, and now of course the over-valued stock market makes that more worrisome. In Canada for reasons of privacy margin debt figures are not disclosed. The U.S. Federal Reserve has been unwilling to attack stock market speculation. Since January, 1974, the Federal Reserve has left margin requirements at 50 percent, despite the huge rise in the stock market. The unwillingness of monetary authorities to deal with the equity markets is unprecedented and puzzling. The failure to acknowledge the role of debt in the stock market surge, something so massive, is difficult to understand. Now, just sitting with folded hands is a prescription for disaster in thee long run for the U.S. and Canada as well." 

21 December 1999, Event: 3rd MoM change in NYSE margin debt >10%; The Los Angeles Times: "Monthly increase, largest since 1971, adds to fears that level of speculation in stocks may signal near-term peak"

"The Federal Reserve is concerned about a sharp rise in margin debt, or money borrowed from brokers to purchase stocks, in the last two months of 1999, Fed chairman Alan Greenspan said on Wednesday. Greenspan said, however, that the Fed did not consider raising its margin requirements, currently at 50 percent, an effective way to address the problem. At a Senate Banking Committee hearing on his renomination, Greenspan was asked if the Fed was worried about data showing margin debt rose substantially in November and December. "Obviously," he replied. "It is certainly the case that the numbers that you cite, especially for November and December, have caught our attention." While there has been considerable conversation at the Fed about how to address the problem, Greenspan said changing margin requirements was not the solution. "All of the studies have suggested that the level of stock prices have nothing to do with margin requirements," he said. The Fed has been reluctant to adjust requirements that would not affect large investors, who have other sources of financing, he said. "

26 February 2000, Event: (prior to) Margin debt peak; Reuters News: “NYSE, NASD call for review of margin lending rules.”

“The New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD) have asked members to review their lending requirements in a sign of increasing concern that rising levels of margin debt could exacerbate a stock market plunge. [...]Some firms add their own requirements to that rule in order to limit risk but the popularity of margin borrowing still causes concern. Indeed, Federal Reserve Chairman Alan Greenspan said recently that the central bank has been paying increasing attention to a surge in margin debt. Last fall, the NYSE said margin debt held by its member firms equalled $182 billion, or 2 percent of the U.S. gross domestic product. That compared with NYSE member firm margin debt of $30 billion at the start of the decade.”

17 May 2000, Event: (post) Margin debt peak, WSJE: "Margin Debt Fell Almost 10% in April - Turbulence in U.S. Market May Have Curbed Borrowing"

"Margin debt, which has been soaring, fell nearly 10%during the month. The drop marks the first time since August that investors pruned their debt loads. Investor borrowing reached record levels in recent months, drawing the scrutiny of securities regulators who viewed it as a sign of the market's peculative fervor. But until recently,most investors ignored red flags raised by regulators. "The bottom line is that investors got their fingers burned during the recent market downdraft," says Morgan Stanley Dean Witter & Co. analyst Henry McVey. The drop isn't all that surprising, however, given last month's sharp fall in stock prices. Many investors were forced to come up with additional cash or stock to meet margin calls; others had their stocks sold without notice as falling share prices eroded the value of their holdings. The decline in investor borrowing was sharp at some online firms. At Datek Online Holdings Corp., margin debt fell about 20% in April and "looks pretty flat in May so far," says spokesman Mike Dunn. Margin debt also fell about 20% in April at Ameritrade Holding Corp. and is up about 1%or 2%so far this month, a spokeswoman says. About 80% of the decline is due to customers voluntarily cutting back on their borrowing, she adds. Some brokerage firms continue to make it tougher for investors to borrow to buy stock. TD Waterhouse Group Inc. plans to increase its base margin-lending rate to 35% from 30% on June 15. "We think the change is prudent and we think it protects customers, in light of the current volatility we're seeing in the marketplace," says TD Waterhouse spokeswoman Melissa Gitter. The online broker now has more than 800 stocks subject to higher margin requirements, up from 443 on April 13."

19 December 2006, Event: 1st MoM change in NYSE margin debt > 10% DJ News Service, "Margin Debt Saw Big Spike In November"

"A rising stock market encouraged more investors to go into debt to buy stocks last month, sending so-called margin debt to a level not seen in more than six years. […] November was the first month since 2000 that margin debt has topped the $270 billion figure. The last time that happened was in March 2000, when margin debt set a record at $278.53 billion as the Nasdaq Composite Index was reaching its all-time peak. Last month's rise, which left margin debt about 3% below its record, came as stocks continued to rise. The Dow Jones Industrial Average and the Standard & Poor's 500-stock index gained 1.2% and 1.6%, respectively, during November, leaving both market barometers with double-digit percentage gains for the first 11 months of the year. That display has helped inspire margin trading, in which investors use funds borrowed from their brokers to help finance their transactions. "This market has been uni-directional" for a while, and "that gets a lot of money chasing performance," said Art Hogan, chief market  analyst at Jefferies. "You're not going to borrow to buy in a market where the trend has been downward."

20 February 2007, Event: All-time high margin debt (Mar-2000) crossed;  Dow Jones Intl News: “Margin Debt Tops All-Time High; Reached $285.6B In January”

“A rising stock market continued to inspire investors to go into debt to buy stocks last month, sending margin-debt figures past their all-time high, which had been set several years ago in the waning days of the technology-stock boom.Margin debt as tracked by the New York Stock Exchange totaled $285.61 billion in January, the NYSE said Tuesday, up from $275.38 billion in December and moving past the previous peak of $278.53 billion. That high was set in March 2000, as the Nasdaq Composite Index was peaking. Margin debt's recent advance has come as stocks moved higher.”

11 April 2007, Event: 2nd MoM change in NYSE margin debt > 10% The Globe and Mail: “Record level of margin debt prompts regulator warning”

"As thousands of homeowners in the United States are realizing it's unwise to borrow more than they can afford, the National Association of Securities Dealers is offering a similar warning to investors: It's risky to invest more than you have. The brokerage regulator said yesterday the amount of debt investors took on to buy securities, known as buying “on margin,” had soared to a record $321.2-billion (U.S.) in February. That topped the previous  record of $299.9-billion in March, 2000, at the peak of the last bull market in stocks. Margin debt has more than doubled from $141.3-billion in January, 2003, the NASD said, three months after the bottom of a bear market in stocks." “When the Internet bubble imploded, many people were shocked to learn that firms can sell their stock, and they have no choice in what can be sold,” John Gannon, an NASD senior vice-president for investor education, said. Regulators, including the Federal Reserve, the New York Stock Exchange and the NASD, set minimum requirements for margin traders. Brokerages are free to set more stringent standards. Under the minimum requirements, before trading on margin, ordinary investors must deposit at least $2,000 or 100 per cent of the purchase price, whichever is less. Fed rules generally let investors borrow up to 50 per cent of the purchase price of securities that can be bought on margin. NYSE and NASD rules then require equity in an account to be at least 25 per cent of the securities' market value in that account, known as a “maintenance margin.” “You can lose your money fast and with no notice,” the Securities and Exchange Commission said.

12 July 2007, Event Margin debt peak; The Wall Street Journal: "On the NYSE, 'Margin Debt' Jumps to Record $353 Billion"

"Investors are borrowing record sums of money to finance trades on the New York Stock Exchange, according to data due out from the Big Board today. NYSE officials attribute the trend to recent regulatory changes effectively allowing both small and big investors to take on more leverage, or borrowed money, from their brokers. So-called margin debt, a broad measure of leverage, jumped 11% to $353 billion at NYSE in May, up from nearly $318 billion in April.Wall Street has had a love affair with leverage in recent years, typified by hedge funds and private-equity firms that make use of it to buy companies and stocks and bonds. Such financing can also amplify losses if investors' bets go the wrong way. But regulators say that doesn't necessarily translate into more risk. "I wouldn't necessarily say that leverage equates to risk," said Grace Vogel, executive vice president for member regulation at NYSE. "We feel that the amount of margin being collected by the firms is appropriate, given the strategies in [their customers'] portfolios." 

27 October 2007, Event: S&P 500 peak, SUNBUS: "Stock market vulnerable to sharp fall as margin debt remains high"

"It has become a source of concern to some investors who worry that it makes the stock market more vulnerable to a nasty tumble, particularly if equities’ resurgence continues. “High margin debts show the effect of over-leveraging and mispricing of risk in our financial system,” says Scott Schermerhorn, chief investment officer for Choate Advisors, which runs about $2.7bn (£1.3bn, e1.9bn). “It indicates that, despite the August runoff, there’s still more problems out there. This will take a long time to work through the system.” Based on historical levels, margin debt makes the market look risky and subject to a sharp downtick right now. It comes to 2.4%of total adjusted-market capitalisation – 3.4 times its 62-year norm of 0.74%. “These are certainly not the kind of numbers you see at the beginning of a bull market,” says Ed Clissold, an analyst for Ned Davis Research. In July,margin debt hit an all-time high of $381bn. But as worries about sub-prime mortgage loans set off a credit crunch in August, more than $50bn of the debt was erased. Almost half of the margin drawdown came from brokerages such as Merrill Lynch, which called loans backing two Bear Stearns hedge funds.What is particularly worrying to some is that margin debt is just one tool available to investors seeking leverage these days. Options and futures make it easier than ever to obtain leverage. So the near-record margin numbers may understate the situation. “As financial markets have grown and become more diversified, margin has become one of many ways to finance securities, so it represents less of a proportion of finance than it used to,” says Henry Kaufman. The one-time chief economist of Salomon Brothers now heads Kaufman & Co, an investment management and financial consulting firm. Granted, recent structural changes that take into account an entire portfolio’s risk have contributed to the gains. If an investor is using options to hedge his risk, new rules give him the ability to borrow more because he has lowered the risk profile of his entire portfolio. But the new rules do nothing to minimise margin lending’s inherent conflicts of interest or its potential to send the market down sharply as it did in August in a cascade of margin calls. Brokers sometimes give investors little or no time to cough up more cash before they liquidate a portfolio at bargain-basement prices. A brokerage firm may force a margin call on the one hand, while helping set the price on the securities sold to meet it on the other." 

09 January 2013, Event: 1st MoM change in margin debt > 10%; DJ Newswire: "Margin Debt Soared in January; Sign of Top Nearing?"

"NYSE says margin debt jumped 10% in January alone to $364 billion, 32% higher than a year earlier and the third-highest ever, trailing just June and July 2007. The previous instances, of course, came just a couple months before US stocks last topped out before the ongoing rally, with margin then peaking at $381 billion. So it's pretty clear where the record January rush of cash into equity products came from. Now, what happens if things get a little frisky and some margin debt turns into margin calls?"

06 May 2013, Event: All-time high margin debt (Jul-2007) crossed (1/2); The Wall Street Journal: “NYSE Margin Debt Raises Eyebrows”

“High levels of margin debt on the New York Stock Exchange are raising concerns about the state of the rally. Stephen Suttmeier, technical research analyst at Bank of America Merrill Lynch, notes leverage, as measured by NYSE margin debt, rose 28% in March from a year ago to $380 billion. That figure is slightly below the July 2007 peak of $381 billion.Market analysts track margin-debt activity as an indication of investors’ appetite for taking on speculative trading. It has been trending higher since bottoming out during the financial crisis and currently is hovering around all-time highs. “Leverage can be used as a sentiment indicator because it is related to investor confidence... Although it should not be used as a market timing tool, the implication is contrarian bearish,” Suttmeier says. ”Peaks in NYSE margin debt preceded peaks in the S&P 500 in both 2007 and 2000.” It's no surprise people have been taking on more risk as the market has moved to record highs. But the question is what happens when the easy ride higher turns south and some of that margin debt turns into margin calls? A potential pitfall for those trading "on margin" is a sharp decline in stock prices, which can expose investors to margin calls, requiring them to post additional collateral lest their brokers sell their securities to cover the debt. A wave of margin calls can worsen selling pressure on stocks and was seen as partly to blame for the market's woes during the financial crisis. "It's rather alarming to see NYSE margin debt just shy of its all-time high as of the March reading," Cullen Roche of Orcam Financial Group wrote on the Pragmatic Capitalism blog (hat tip Business Insider). "My guess is we've actually already surpassed the all-time high though we won't officially know until April data is released. Fun times knowing we live in a world that is built on such a fragile foundation." 

31 May 2013, Event: All-time high margin debt (Jul-2007) crossed (2/2):The New York Times “Shades of 2007 Borrowing”

“AMERICAN investors have taken out more margin loans than ever before. That indicates that speculative investing has grown among retail investors, reaching levels that in the past indicated the market was getting to unsustainable levels and might be in for a fall. [...]It was the first time the total had surpassed the 2007 peak of $381 billion, a peak that was followed by the Great Recession and credit crisis. [...][T]he last time the Fed adjusted the  margin rules was in 1974, when it reduced the down payment required for stocks to 50 percent of the purchase price, from 65 percent.  ...]Nonetheless,margin loans have remained popular among many individual investors, who tend to raise their borrowings during times of market optimism and to reduce them when markets are falling. Thus the margin debt levels now may provide an indication of popular enthusiasm for investments.” 

27 June 2013, Event: All-time high margin debt (Jul-2007) crossed = Did margin debt peak already? (1/2);Reuters: "U.S. stock market margin debt falls in May from record April level"

"The value of U.S. equities investors bought with borrowed money fell 1.7 percent in May from the previous month's record high, marking the first monthly decline in margin debt in nearly a year. Margin debt accounts totaled $401.6 billion in May, down from a record $408.7 billion in April, data from the Financial Industry Regulatory Authority showed on Thursday. The level had increased every month since a 2.3 percent drop between June and July 2012. Margin debt is one way to measure how much risk hedge funds and other large investors are taking to enhance their returns through the use of borrowed cash. Extremely high readings are seen as a gauge of overly bullish sentiment. In April, the New York Stock Exchange reported margin debt hit $384.4 billion, surpassing the previous record of $381.4 billion in July 2007. On Thursday, the NYSE said its share of the May total was $377 billion." 

27 June 2013, Event: All-time high margin debt (Jul-2007) crossed = Did margin debt peak already? (2/2); ARMNET: "Record margin debt points to a far wider Wall Street Crash coming soon"

"Don’t even think about jumping back into US stocks after the recent modest sell-off. If margin debt is any guide, and historically it has been an excellent guide then what we have just seen is just a warning of a much biggerWall Street crash around the corner. The last time margin debt was at present levels was at a previous peak in July 2007 at $381 billion, just before the global financial crisis struck. Yes it is hard to believe that confidence was that high in stocks just at the wrong moment. Record margin debt: It is the same story now. In March 2013 NYSE margin debt totaled $380 billion. You do not need to be much of a financial analyst to spot almost an exact parallel. But what you should also understand is that margin debt works in both directions. It accelerates the upside in stocks by allowing punters to buy with borrowed money but then it accelerates the drop in a stock market by taking it away from them. How does it do that? Well think about it. If you owe money then you will be forced to sell a perfectly good asset in a falling market to pay off your debt, and that sale accelerates the fall in stock prices. Besides with the bond market weakening the cost of margin debt is going up. That will also be triggering liquidation of this debt with an obvious impact on stock prices supported by this borrowing. [...] The current weakness in gold and silver is also a sign of a coming crash in all major financial assets. Once the weaker investment holders of gold and silver have finished selling precious metals they will continue with other assets, and margin account requirements will force them to liquidate US stocks. Stock market crash: We think the sell-off of precious metals is almost done but it has hardly started with the overinflated US stock market. A historically high US price-to-earnings ratio still anticipates an economic recovery that is just not coming through. US GDP growth in the first quarter was revised down from 2.4 to 1.8 per cent, after the negative fourth quarter. The only economic recovery is in house prices and the stock market, both inflated by cheap money courtesy of the Fed. Rising mortgage rates are going to ditch the housing recovery and rising margin costs will do for the US stock market. Welcome to the liquidation sale of the century!"

* * *

This time must be different.

http://www.zerohedge.com/news/2013-08-09/stock-market-bubbles-and-record-margin-debt-repeating-history-ignoring-all-warnings

Thanks to the NSA, the Sky May Be Falling on U.S. Cloud Providers

Revelations of widespread spying by the U.S. government could bring big financial fallout to the cloud-computing industry, according to a Washington-based think tank.

U.S. cloud providers could lose between $21.5 billion and $35 billion in revenue over the next three years because of worries about the National Security Agency's PRISM program, which enables the government to access user data from U.S. Internet companies, according to a report this week by the Information Technology & Innovation Foundation.

The estimate is partly based on market-share projections and a global survey, which found that more than half of respondents, including companies and other industry professionals based outside the U.S., said they would be less likely to use a U.S.-based cloud service in light of Prism. Ten percent said they had already canceled a project with a U.S.-based Internet company as a result, according to the Cloud Security Alliance, the trade group that conducted the survey.

Spying concerns "will likely have an immediate and lasting impact on the competitiveness of the U.S. cloud computing industry if foreign customers decide the risks of storing data with a U.S. company outweigh the benefits," according to the think tank's report. A $21.5 billion or $35 billion loss of revenue would be the equivalent of 10 percent or 20 percent of the estimated market, respectively.

Frank Gillett, an analyst at Forrester Research, said he expects there will be some financial impact as a result of the leaks by NSA contractor Edward Snowden. However, the number of cloud customers that actually jump ship from U.S. providers may be less than the think tank's estimates because relatively few have canceled contracts so far, Gillett said.

"I'd be surprised at anything of that magnitude," Gillett said in an interview. "Those who were already concerned about the U.S. Patriot Act and other types of legal authorities have already avoided the United States, anyway. For them, it wasn't a big surprise."

Companies aren't abandoning U.S. cloud-service providers en masse because there are few other competitive options. Still, the gloomy forecast for American Internet companies could be a ray of sunshine for global competitors.

http://www.bloomberg.com/news/2013-08-08/thanks-to-the-nsa-the-sky-may-be-falling-on-u-s-cloud-providers.html

Go Long Cyber Security Companies

We've seen one of the most groundbreaking intelligence scandals in history. Leaked to sources such as the Guardian, whistleblower Edward Snowden released a trove of files showing the NSA among others is not only spying on Americans, they are also monitoring conferences such as political negotiations, foreign diplomatic offices, and more.

http://seekingalpha.com/article/1618012-go-long-cyber-security-companies

ALERT for all IRA account holders - IRS changing policy on self directed IRAs

Submitted by Simon Black via Sovereign Man blog [7],

I recently received some disturbing news that I felt critical to pass on to you.

As we’ve been writing for over four years now, it’s long been a common approach for government sliding into insolvency to confiscate wealth from their own citizens.

Charles I of England infamously commandeered 200,000 pounds of his own citizens’ gold right before the English Civil War in 1638. Roosevelt confiscated his entire nation’s gold holdings roughly three centuries later.

And of course, Cyprus raided domestic bank accounts earlier this year in a desperate attempt to bail-in the national banking system.

It’s foolish to think that these things cannot happen, especially when you look at the numbers.

The United States government is in debt to the tune of nearly $17 trillion. What’s more, Uncle Sam has to borrow money just to pay interest on the money they’ve already borrowed… and they’re still posting trillion-dollar annual deficits.

The only reason that the US government is still in business is because the Federal Reserve has been buying the vast majority of newly issued US Treasury bonds… in some cases as much as 90%.

The problem with this method, aside from being a completely fraudulent system, is that the Federal Reserve is quickly reaching the point of insolvency itself.

As we’ve explored in recent letters, the Fed’s capital ratio (a significant measure of it’s financial health) is at a laughably small 1.53%. And as the Fed continues to expand its balance sheet buying even more of the Treasury’s debt, its capital ratio gets smaller and smaller.

The government is soon going to be in a position to seek ‘other’ sources of funding, just as we saw in Cyprus earlier this year.

And as we’ve been saying for years, one of the most likely targets is retirement savings.

There are tens of trillions of dollars in the US retirement system, predominantly in 401(k) and IRA accounts managed by big financial institutions.

And it would be quite simple for the government to mandate that a portion of those retirement accounts be invested in the ‘safety and security’ of US Treasuries. The big institutions who manage the accounts would have no choice but to comply.

In fact, it wasn’t too long ago that the new Consumer Financial Protection Bureau began talking about ‘helping’ Americans manage their retirement savings.

Jim Rogers and Ron Paul spoke about this at our event in Santiago, Chile – watch the video below:

One of the best solutions over the past few years, particularly for IRA account holders, was to set up a special type of self-directed IRA.

In this structure, your IRA exclusively owns a domestic LLC, and you as the IRA account holder become the manager of the LLC.

This gives you the authority to directly manage your retirement funds, allowing you a lot of flexibility to ship your savings overseas, invest in foreign real estate, etc. as long as you stay away from a clear set of ‘prohibited transactions’ that the IRS outlines.

These IRA structures are incredibly flexible, and I think one of the best ways for people to safeguard what they’ve worked their entire lives to build.

So here’s the disturbing news… and it’s something you won’t hear about anywhere else.

One of the attorneys that I work with routinely has specialized in setting up these types of structures. He’s an accomplished tax professional with decades of experience under his belt, and he recently told me that the IRS is no longer ‘allowing’ this type of structure.

More specifically, the IRS is refusing to issue tax ID numbers for single-member LLCs that are owned by an IRA… which is the specific structure that US taxpayers need to create in order to ship their retirement savings overseas.

Of course, no LAW has been passed. No vote has been conducted. The IRS simply decided by policy in its sole discretion to stop allowing Americans to create this structure, and hence, force them to keep their retirement savings in the US.

My attorney’s understanding of this policy is that the agency is trying to ‘protect’ taxpayers from potential consequences. But the end result is that US taxpayers now have one fewer option to safeguard their retirement savings abroad to keep from getting Cyprused.

My colleagues and I are working on another solution, and hopefully will receive some clarification on the matter from the IRS.

In the meantime, this underscores a critical point: there is a finite window of opportunity on many of these steps to safeguard your wealth, preserve your freedom, and ensure your family’s future security. And it’s important to take action while the window of opportunity closes.

Because, once it does, there may not be another option.

Greek Youth Unemployment Soars To Record 65%

RIP Greekovery.

What little hope there may have been that bad and/or deteriorating Greek economic data had peaked in the early part of 2013 and the country was set for a long overdue "recovery" was promptly extinguished following today's latest release of the Greek May labor force survey.

The headline news for the broader population was ugly:

• The number of employed was 3,621,153, a decline of 14,889 from April, and down 171,356 from a year earlier
• The number of unemployed was a record high 1,381,088, an increase of 43,467 from April, and up 193,668 from a year earlier
• The unemployment rate was a record high 27.6%, up from 26.9% in April and 23.8% a year earlier

But that was the "good" news.

The bad news? Greek youth (15-24 year old) unemployment halted its decline over the past few months only to explode higher from 57.5% in April to a whopping 64.9% in May! Needless to say this is a record high, and means that two thirds of all eligible for work youths can not find a job. That this is the most combustible combination for social upheaval if not war, is well known to anyone who has opened even one history book.

Source: Elstat

USA Laboring Under A Conclave Of Would-Be Wizards

Submitted by James Howard Kunstler via Kunstler.com,

The world is swiftly moving to the dangerous place where nations won’t be able to do business with each other because they don’t trust the institutions that control wealth, which includes central banks, commercial banks, and governments. It will happen when the purveyors of international commodities, oil especially, refuse to accept the letters of credit issued by untrustworthy intermediaries. And when that dark moment arrives, nations will throw tantrums. The USA may be the loudest baby in the playpen.

The USA is veering into a psychological space not unlike the wilderness-of-mind that Germany found itself in back in the early 20th century: the deep woods of paranoia where our own failures will be projected onto the motives of others who mean to do us harm. Of course, even paranoiacs have enemies. There are quite a few others who would like to harm the USA, at least to bamboozle and paralyze us, to push back against our influence on their culture and economies. But the tendency here will be to magnify the supposed insults while ignoring our own suicidal behavior.

Historians will remark that it was a beautiful August with bright days and cool nights for sleeping, and the Hamptons were ablaze with self-satisfied egos, and that nobody was paying attention to all the mischief that was set in motion the previous spring, not to mention the many seasons of bad behavior that preceded it. And when they returned from vacation, lo, the world was in crisis. What a surprise.

The USA cannot come to terms with the salient facts staring us in the face: that we can’t run things as we’ve set them up to run. We refuse to take the obvious actions to set things up differently. Instead, we’ve tried to offset the accelerating losses of running our unrunable stuff with accounting fraud, aimed at pretending that everything still works. But the accounting fraud has only accelerated the gathering disorder in the banking system. That disorder has infected our currency and the infection is spreading to all currencies. What a surprise that the first pandemic to strike an overstressed global immune system was not bird flu after all, but a sickness of money.

Near the center of that money sickness was the blitzkrieg against gold and silver in the spring, when arrant serial selling dumps were executed against the money metals to un-money them. The net result was only that a lot of that ancient money flowed from the places pretending it was valueless to the places that never adopted that pretense. At stake in that rather massive movement was the supposed value of the other stuff that pretended to hold value, namely sovereign bonds, and especially the treasury paper issued by the USA. After all, US Treasury bonds and notes were, in the eyes of bankers, the functional equivalent of cash-in-hand. Alas, the world was starting to choke on it — not least the US central bank itself, which had been gorging at the monthly auction buffet for years and was now stuffed to the gills. In fact, it had grown too fat to even leave the room where the buffet had been set up.

Anyway you look at it, there is no escape from the looming crisis of confidence. The “primary dealer” banks and commodity exchanges behind the spring gold smash are out of tricks and out of gold to play tricks with. Their partner, the US Government has two tricks left: confiscation of gold in private hands a la Franklin Roosevelt’s ploy of 1933, or punitive taxes on private sales of gold. What worked in 1933 might not go over so well now, in a land full of preppers armed to the teeth and long-simmered in gall. It brings to mind the bumper-sticker about prying things from people’s cold dead hands. As for the tax gambit, I venture to say that many holders of gold hold it in expectation that there may shortly be no effective government left to depend on to do the wrong thing. Meanwhile, over in the land of paper wealth, the interest rate on the 10-year US Treasury bond clicks up a basis-point here, a basis-point there, like a remorselessly rising sea level. It won’t take many more clicks to put, for instance, the Federal Reserve Bank of New York under water.

I felt sorry for President Obama, going about the country trying to appear historically heroic without doing a damn thing, really, to face down to the monsters in our own midst. But then one hears the rumor of Larry Summers’ imminent appointment to chair the Fed, and it is no longer possible to feel sorry for Obama, but rather to feel sorry for the nation laboring under such a conclave of would-be wizards.

I just don’t see how the world financial system doesn’t blow up this fall, when the digested remains of the last miso-glazed oyster tidbit passes through the cloacal fundament of the prettiest girl in Sag Harbor. When it does blow, at least the NSA will have its prepared “to-do” list, and then perhaps all the unemployed can be enlisted at $8 an hour to harass the rest of the people trying to go about their daily lives. The roar you hear in the distance this September will be the sound of banks crashing, followed by the silence of business-as-usual grinding to a halt. After that, the crackle of gunfire.

STUDY: U.S. DEBT OBLIGATIONS $70 TRILLION

A new study by University of California-San Diego economics professor James Hamilton finds that the United States has over $70 trillion in off-balance sheet liabilities--an amount nearly six times the on-balance-sheet debt figure.

The Treasury debt outstanding is $16.74 trillion. Of that, $4.84 trillion is money the U.S. owes itself. For that reason, explains Matt Phillips of Quartz, “many analysts tend to focus on the $11.91 trillion in debt that is publicly available to be traded.”

Hamilton’s study, however, examined the federal liabilities that are not included in the government’s officially reported numbers. Specifically, he examined the federal government’s “support for housing, other loan guarantees, deposit insurance, actions taken by the Federal Reserve, and government trust funds.”

Not surprisingly, Hamilton found that Medicare and Social Security represent the bulk of future U.S. debt obligations, coming in at $27.6 trillion and $26.5 trillion respectively.

The study's $70 trillion debt estimate may actually be overly optimistic. Boston University economics professor Laurence J. Kotlikoff, who served on President Ronald Reagan’s Council of Economic Advisers, says the nation’s true debt obligations are three times that figure.

"If you add up all the promises that have been made for spending obligations, including defense expenditures, and you subtract all the taxes that we expect to collect, the difference is $211 trillion. That's the fiscal gap," Kotlikoff told National Public Radio. "That's our true indebtedness."

Hamilton concedes that other scholars may arrive at different figures.

“Some may argue that the current off-balance-sheet liabilities of the U.S. federal government are smaller than those tabulated here; others could arrive at larger numbers," writes Hamilton. "But one thing seems undeniable—they are huge.”

http://www.breitbart.com/Big-Government/2013/08/04/Study-U-S-Debt-Obligations-70-Trillion

SPY volume lowest since 2007 while number of quotes reach all time high

Nanex ~ 05-Aug-2013 ~ SPY Lowest Volume Since 2007. On August 5, 2013, SPY recorded the lowest non-holiday volume since February 16, 2007. August 5th also turned in a record high quote/trade ratio, as High Frequency Quote Spam persists. Charts below show daily counts of quotes and shares during regular trading hours in SPY from January 3, 2005 through August 5, 2013.

1. SPY Trading Volume (millions of shares).

2. SPY Quote Counts (millions). No record low.

3. SPY - Quotes Per Trade - New All Time Record.

4. SPY - Quotes Per 100 Shares - This ratio leaps to record highs.

MetaQuotes releases app market for MT4

Many developers have been waiting for MetaTrader 4 application store, and it has finally happened: the Market for MetaTrader 4 trading platformapplications has been released in beta mode. You can register on the web site and offer your MQL4 programs for sale right now!

The updated version of MQL4 language having many MQL5 language features will also be released soon (approximately at the end of August). But we want you to start developing your MQL4 applications and uploading them to the Market right now. Why now? The answer is simple: several hundred applications should already be available in the database at the moment of the Market's full-fledged launch. Since the language update and the launch of MetaTrader 4 Market are serious matters, the tests are going to be detailed and comprehensive. So, the sooner you upload your program to the Market, the earlier the Market's final version is released. 

http://www.metaquotes.net/en/metatrader4/news/4016

Can the Stock Market Get Any Better Than This? Korean Black Swan?

What in the world is going on?! As I write this letter from the Maine woods, the S&P 500 has just cleared 1,700 for the first time. The German DAX continues to set all-time highs above 8,400. The United Kingdom’s FTSE 100 is quickly approaching its 1999 record high of 6,930, and its mid-cap cousin, the FTSE 250, just broke through to its all-time level above 15,000. And last but not least, Japan’s Nikkei 225 is extending its gains once more, toward 14,500. This weekend I am sitting around with some of the smartest economic and trading minds in the country. At Leen's Lodge, where we're fishing and eating where our phones don’t work, the question on our minds is, how long can this run go on? The debates can get intense in a room full of strong opinions.

So, with a little help, I did some research on what our forward-looking prospects are for the markets. Let me take this opportunity to introduce a new name to readers, one that will become familiar over the next few years. I have gotten to know Worth Wray, a young economist (though I should say that, as I stare 64 in the face, a lot of people are looking young these days) who has really impressed me with the breadth of his knowledge and insights. He was the former portfolio strategist for my good friends at Salient down in Houston, and they were kind enough to let me entice him to come to Dallas to work with me. This is a big move for both of us, and I am finding that it's one I should have undertaken a long time ago. Worth is really going to help me expand my abilities to do research and present my thoughts to you. I asked him a few questions, and he helped me tee up this week’s letter. Plus, we'll look across the Pacific, and I'll share some though ts I’ve had about an interesting black swan that could be developing in the Korean Peninsula. Let’s get started!

Can It Get Any Better Than This?

To many investors, developed markets appear healthier and stronger than they have in years. Major equity markets are rallying to record highs; corporate credit spreads are tight versus US Treasuries and getting tighter; and broad measures of volatility continue to fall to their lowest levels since 2007.

This kind of news would normally point to prosperity across the real economy and call for a celebration – but prices do not always reflect reality. Moreover, the combination of high and rising valuations, low volatility, and a weakening trend in real earnings growth is a proven recipe for poor long-term returns and market instability.

Let’s take the S&P 500 as an example. It returned roughly 42% from September 1, 2011, through August 1, 2013, as the VIX Index fell to its lowest levels since the global financial crisis. Over that time frame, real earnings declined slightly (down about 2% through Q1 2013 earnings season), while the trailing 12-month price-to-earnings (P/E) ratio jumped 44%, from 13.5x to 19.5x. That means the majority of the recent gains in US equity markets were driven by multiple expansion in spite of negative real earnings growth. This is a clear sign that sentiment, rather than fundamentals, is driving the markets higher.

Of course, the simple trailing 12-month P/E ratio can be misleading at critical turning points if you are trying to handicap the potential for long-term returns. For example, the collapse in real earnings during the global financial crisis sent the S&P 500’s trailing P/E multiple through the roof by March 2009. So, while trailing P/E is a useful tool for understanding what has already happened in the market, the “Shiller P/E” is far more useful for calculating a reasonable range of expected returns going forward. This approach won’t help you much with short-term market timing, but current valuations have historically proven extremely useful in forecasting long-term returns. In his book Irrational Exuberance (2005), Robert Shiller of Yale University shows how this approach “confirms that long-term investors – investors who commit their money to an investment for ten full years – did do well when prices were low rel ative to earnings at the beginning of the ten years. Long-term investors would be well-advised, individually, to lower their exposure to the stock market when it is high … and to get into the market when it is low.”

As you can see in Figure 6, compared to the more common trailing 12-month P/E ratio in Figure 5, the Shiller P/E metric essentially smooths out the series and helps us avoid false signals by dividing the market’s current price by the average inflation-adjusted earnings of the past ten years. Historically, this range has peaked and given way to major market declines at around 29x on average (or 26x excluding the dot-com bubble), and it has bottomed in the mid-single digits. Not only does today’s Shiller P/E of 24x suggest a seriously overvalued market, but the rapid multiple expansion of the last two years in the absence of earnings growth suggests that this market is also seriously overbought.

John Hussman helps us keep current valuations in historical perspective:

The Shiller P/E is now 24.4, about the same level as August 1929, higher than December 1972, higher than August 1987, but less extreme than the level of 43 that was reached in March 2000 (a level that has been followed by more than 13 years of market returns within a fraction of a percent of the return on Treasury bills – and even then only by revisiting significantly overvalued levels today). The Shiller P/E is presently moderately below the level of 27 at the October 2007 market peak. It’s worth noting that the 2000-2001 recession is already out of the Shiller calculation. Moreover, looking closely at the data, the implied profit margin embedded in today’s Shiller P/E is 6.3%, compared with a historical average of only about 5.3%. At normal profit margins, the current Shiller P/E would be 29.

While it may be impossible to accurately predict when this policy-driven market will break, history suggests it would be very reasonable for the secular bear to eventually bottom at a P/E multiple between 5x and 10x, opening up one of the rare wealth-creation opportunities to deploy capital at truly cheap prices. Some of these technical details are rather dry, but I hope you'll focus on the main idea: We are not talking about the potential for a modest 20% to 30% drawdown in the S&P 500. If history is any indication, we are talking about the potential for a 50%+ peak-to-trough drawdown and ten-year average annual returns as bad as -4.4%, according to the chart above from Cliff Asness at AQR. Such a result would fall in line with somewhat similar deleveraging periods such as the United States experienced in the 1930s and Japan has experienced since 1989. There is no way to sugarcoat it: too much equity risk can be unproductive and even destructive in this kind of economic environment.

But where there is danger, there is also opportunity. This is a terrific time to take some profits and diversify away from the growth-oriented risk factors that dominate most investors’ portfolios. Instead of concentrating risk in one asset class or one country, investors can boost returns and achieve more balance by taking a global view, by broadening the mix of core asset classes, and by weighting those return streams to achieve balance across potential economic outcomes (rather than trying to predict the future). Since equities and credit are essentially a directional bet on positive economic growth and benign inflation, you have a lot to gain from diversifying into other core market risks: commodities, which thrive when inflation, or more specifically expected inflation, is rising; and nominal safe-haven government bonds, which thrive as inflation gives way to deflation and the oth er assets typically decline. While each group of asset classes responds to economic conditions differently and exhibits low correlations to the others, each of them tends to offer similar risk-adjusted returns over long periods of time, thus warranting constant inclusion in any core portfolio.

It also makes sense to embrace truly diversifying alternative strategies that are either less correlated or negatively correlated. When valuations are expensive across the board, momentum-based strategies like managed futures can be a fantastic addition to a portfolio. Aside from government bonds, momentum is the only easily accessible strategy that tends to become more negatively correlated with broader markets during times of extreme stress and tends to deliver outsized returns when your other investments are losing money.

Of course, combining the asset classes into one portfolio is the hard part, but research going back to the early 1970s suggests that broadening this mix of core assets – so that you have some element of your portfolio that responds positively to every potential economic season – and managing the relative allocations to each economic scenario may be your biggest opportunity to add value in the investing process.  

You have a lot to gain from diversifying as broadly as possible, eliminating unrewarded costs, reducing your reliance on equity risk, and reining in the emotional mistakes that often lead investors to dramatically underperform. Remember, in a world characterized by deleveraging, changing demographics in aging populations, financial repression, and increasingly experimental monetary policy, every basis point counts and anything can happen.

With that, let’s end our discussion with a few words of advice from the world’s largest and arguably most successful hedge fund manager, Ray Dalio:

What I'm trying to say is that for the average investor, what I would encourage them to do is to understand that there's inflation and growth. It can go higher and lower and to have four different portfolios essentially that make up your entire portfolio that gets you balanced.  Because in every generation, there is some period of time, there's a ruinous asset class, that will destroy wealth and you don't know which one that will be in your life time. So the best thing you can do is have a portfolio that is immune, that is well diversified.  That is what we call an all-weather portfolio.  That means you don't have a concentration in that asset class that's going to annihilate you and you don't know which one it is.

A Korean Black Swan?

Last week I was in Newport, Rhode Island, at the Naval War College, where I participated in a summer study group focused on possible futures and how they might affect the strategy of the US Defense Department. The discussions were wide-ranging and mind-expanding, at least for me. As readers know, I believe that Japan has begun a long-term process of continually devaluing its currency. For reasons I have written about at length in previous letters, I think the yen could go to 200 to the dollar in the next five years. I don’t see a precipitous move, simply a steady erosion as Japan tries to bring back inflation and export its deflation.

While the yen at its current valuation is not a particular problem for the rest of the world, when it hits 120 we will start to see raised eyebrows and political speeches from the countries most affected. At 140 we could start to see serious reactions.

One of the countries that I think is put into a most difficult situation is South Korea. Their options for responding to a weakening yen are quite limited. If they respond by printing more of their own currency, they are likely to engender a debilitating inflation, which is of course not a good thing. Protectionism will have little real effect vis-à-vis Japan. Remember that the Japanese yen was 357 to the dollar about 40 years ago. The Japanese watched their currency rise by almost 400% in the decades since. The only real response available to them was to simply become more competitive and more productive as their currency got stronger, and to their great credit they did.

Honing their competitive edge may also be the only real option for South Korea. But it is not an easy one, of course, and you will hear lots of complaints from Korean politicians and businessmen. Not an easy environment, to be sure.

Now let’s shift our focus to North Korea. Everyone (including your humble analyst) is worried about the isolationist regime in North Korea having access to nuclear weapons and the ability to deliver them on missiles. But a few conversations I had this past week led me to think there is another scenario we should consider.

A side conversation at the study group began with an observation by a senior officer about the ability of the North Korean military to actually project power. As this information is nothing more than what you can find in the newspapers, I feel comfortable discussing it here. Everyone knows that North Koreans have been malnourished for multiple decades. Studies suggest that North Koreans may be up to three inches shorter than South Koreans and have diminished IQs because of malnourishment as children. The latter is a known effect on human beings anywhere who are subjected to a starvation diet. The North Korean population has suffered from severe diet restriction for decades.

How capable is the North Korean military of actually mounting an offensive when their soldiers are simply not physically able to withstand the pressures of combat? I was also able last week to visit with one of the great geopolitical strategists of our time, Professor Ian Bremmer of Columbia, who is the president and founder of Eurasia Group, with some 100 geopolitical analysts working for him. I shared with him my concerns about the Korean peninsula. He immediately said that he was more worried about the Korean peninsula than any other part of the world, including the Middle East. One of the interesting things that he shared is that an increasing number of cell phones are being smuggled into North Korea from China and that the North Koreans are beginning to get the real story about the world rather than just the propaganda fed to them by their government.

While there is little ability for the North Korean population to actually stage a revolution, as they do not have the weapons and hungry people really have difficulty mounting military operations, there is the possibility of the country becoming increasingly difficult to manage. Combine that with the potential for a disastrous food-production year, and the potential for the collapse of the government is not all that far-fetched.

There were not many people forecasting the collapse of the USSR in 1987. Yet as we look back, the confluence of causes that resulted in its collapse seems rather obvious. Probably, the current dictatorship will maintain its stranglehold on North Korea. That is the tendency with repression and tyranny – witness Cuba and any number of other countries. But one cannot dismiss the possibility of a collapse of the North Korean state.

If that were to happen it would be a humanitarian disaster. In the long run it might be better for the North Korean people, but in the short run it would be catastrophic. It is not unreasonable to expect that South Korea would have to do the bulk of the heavy lifting, especially after the first year or so. And should the world no longer have to focus on the ability of North Korea to create mischief with nuclear weapons, North Korea could soon become page 16 news.

No matter how positively you would want to view Korean unification, the process would be enormously expensive for South Korea. Assimilating a population long challenged by hardship into a new reality, not to mention incorporating it into a modern economic model, is a daunting challenge. I think the task would be more difficult and more expensive on a per-capita basis than the unification of Germany.

And this could happen while the attention of South Korea is focused on dealing with the devaluation of the yen and the need to become progressively more competitive to maintain its export and business model. There is also the possibility of massive refugee movements into China. That is a significantly different issue than worrying about a million-man army crossing the DMZ into South Korea.

I’m not saying this will happen, but it is a possibility we need to keep an eye on.

http://www.marketoracle.co.uk/Article41718.html

Did China Just Fire The First Salvo Towards A New Gold Standard?

In a somewhat shockingly blunt comment from the mouthpiece of Chinese officialdom, Yao Yudong of the PBoC's monetary policy committee has called for a new Bretton Woods system to strengthen the management of global liquidity. In an article in the China Securities Journal, Yao called for more power to the IMF as international copperation and supervision are needed. While comments seem somewhat barbed towards the rest of the world's currency devaluers, givenChina's growing physical gold demand and the fixed-exchange-rate peg that 'Bretton Woods' represents, and contrary to prevailing misconceptions that the SDR may be the currency of the future, China just may opt to have its own hard asset backed optionality for the future; suggesting the new 'bancor' would be the barbarous relic (or perhaps worse for the US, the Renminbi). Of course, the writing has been on the wall for China's push to end the dollar reserve supremacy for over two years as we have dutifully noted - since no 'world reserve currency' lasts forever.

Over the last two years, we have noted:

"China Takes Another Stab At The Dollar, Launches Currency Swap Line With France",

"BOE and the PBOC announced a currency swap",

"Australia And China will Enable Direct Currency Convertibility",

"World's Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade",

"China, Russia Drop Dollar In Bilateral Trade",

"China And Iran To Bypass Dollar, Plan Oil Barter System",

"India and Japan sign new $15bn currency swap agreement",

"Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says", "India Joins Asian Dollar Exclusion Zone, Will Transact With Iran In Rupees", and

"The USD Trap Is Closing: Dollar Exclusion Zone Crosses The Pacific As Brazil Signs China Currency Swap"

As a reminder, we noted here:

The question why China has been scrambling to internationalize the CNY has nothing to do with succumbing to Western demands at reflating its currency to appreciate it and thus to push its current account even lower in the country with the shallowest stock market and the most bank deposits (i.e., most prone to sudden, abrupt bursts of inflation), nearly double those of the US, and everything to do with preparing the world for the "final monetarism frontier", which will take place when the BOJ's reflation experiment fails, and last remaining source (at least before Africa, but that is the topic for another day) of credit formation - the PBOC - finally ramps up.

As we pointed out a few days ago when we discussed the accelerating Chinese credit impulse and its soaring 240% debt-to-GDP ratio:

 

What should become obvious is that in order to maintain its unprecedented (if declining) growth rate, China has to inject ever greater amounts of credit into its economy, amounts which will push its total credit pile ever higher into the stratosphere, until one day it pulls a Europe and finds itself in a situation where there are no further encumberable assets (for secured loans), and where ever-deteriorating cash flows are no longer sufficient to satisfy the interest payments on unsecured debt, leading to what the Chinese government has been desperate to avoid: mass corporate defaults.

At that point it will be up to the PBOC to do what the Fed, the ECB, the BOE and the BOJ have been doing: remove any pretense of money creation via the commercial bank complex (even if these are merely glorified government-controlled entities), and proceed to outright monetization of de novo created assets, thus flooding the system with as much money as is needed to preserve the illusion of growth. Naturally, with the Chinese stock market having proven itself to be a horrible inflation trap (and as a result the bulk of new levered money creation goes into real estate), the inflation explosion that would result would be epic.

And that, in a nutshell, is the reason why China is doing all it can to prepare for the moment when capital flows will soar once the PBOC no longer has the option to extend and pretend its moment of entry into the global reflation race. Yes, it will be caught between a rock (hyperinflation) and a hard place (a very hard crash landing), but the fact that neither of those outcomes has a happy ending will hardly stop the PBOC from at least preserving the alternative. That alternative will of course be to be ready and able to hit the switch when the BOJ's printer burns out, and someone else has to step in and fill its shoes in the global "money creation" strategy, which sadly is the only one the world has left.

Finally, the question then will be not if, or how long, the US Dollar will remain the world's reserve currency, when even the Developed world is forced to admit the PBOC's monetarist primacy over the Fed, but just how much unencumbered gold one has to hedge against what will be the final, global bout of hyperinflation, the one spurred by every single DM and EM central bank is forced to print for dear fiat status quo life, or else.

http://www.zerohedge.com/news/2013-08-04/did-china-just-fire-first-salvo-towards-new-gold-standard

Dallas Fed's Fisher: "We Own A Significant Slice Of Critical Markets. This Is Something Of A Gordian Knot"

From "Horseshift! (With Reference to Gordian Knots [15])" - the prepared remarks by the Dallas Fed's Dick Fisher released moments ago, in which the Fed president with GLD holdings, gets folksy with the Fed's balance sheet.

Years of Extraordinary Measures

For six of my eight years at the Fed, we have been working to bring the nation’s economy out of recession. The fiscal authorities have for the most part been AWOL during this time, having left the parking brake on during their absence. This has placed the onus on the Bernanke-led Federal Reserve. We have undertaken extraordinary measures, first to get the economy out of the emergency room after the financial system seizure of 2008-09, and more recently, to goose up the private sector to expand payrolls. Toward this end, the Fed cut interest rates to their lowest levels in the nation’s 237-year history by initially cutting the base rate for overnight interbank lending—the “fed funds rate”—to near zero, and then by purchasing massive amounts of U.S. Treasuries and bonds issued or backed by U.S. government agencies (obligations of Fannie Mae, Freddie Mac and Sally Mae, and mortgage-backed securities).

This later program is referred to as quantitative easing, or QE, by the public and as large-scale asset purchases, or LSAPs, internally at the Fed. As a result of LSAPs conducted over three stages of QE, the Fed’s System Open Market Account now holds $2 trillion of Treasury securities and $1.3 trillion of agency and mortgage-backed securities (MBS). Since last fall, when we initiated the third stage of QE, we have regularly been purchasing $45 billion a month of Treasuries and $40 billion a month in MBS, meanwhile reinvesting the proceeds from the paydowns of our mortgage-based investments. The result is that our balance sheet has ballooned to more than $3.5 trillion. That’s $3.5 trillion, or $11,300 for every man, woman and child residing in the United States.

The theoretical mechanics behind QE are straightforward: When the Fed buys Treasuries and MBS, it pays for them, putting money into the economy. A key intent of this unprecedented program was to drive down interest rates to such a degree that businesses would achieve a financial comfort level that would induce them to put back to work the millions of Americans that were laid off in the Great Recession. Thus far, only 76 percent of the jobs lost during 2008-09 have been clawed back in the more than three and a half years of modest to moderate payroll gains. This 76 percent figure does not include the 3 million or so jobs that would normally be created to absorb growth in the working-age population.

The Challenge of Untying the Monetary Gordian Knot

The challenge now facing the FOMC is that of deciding when to begin dialing back (or as the financial press is fond of reporting: “tapering”) the amount of additional security purchases. In his press conference following our June FOMC meeting, speaking on behalf of the Committee, Chairman Bernanke made clear the parameters for dialing back and eventually ending the QE program. Should the economy continue to improve along the lines then envisioned by Committee, the market could anticipate our slowing the rate of purchases later this year, with an eye toward curtailing new purchases as the unemployment rate broaches 7 percent and prospects for solid job gains remain promising.

Kindly note that this does not mean that the Committee would envision raising the shorter term fed funds rate simultaneously; indeed, the Committee has said it expects this pivotal rate to remain between 0 and ¼ percent at least as long as the unemployment rate remains above 6.5 percent, intermediate prospects for inflation are reasonable, and longer-term inflationary expectations remain well anchored.

Having stated this quite clearly, and with the unemployment rate having come down to 7.4 percent, I would say that the Committee is now closer to execution mode, pondering the right time to begin reducing its purchases, assuming there is no intervening reversal in economic momentum in coming months.

This is a delicate moment. The Fed has created a monetary Gordian Knot. You can see the developing complexity of that knot in this sequence of slides tracing the change in our portfolio structure with each phase of QE.

Whereas before, our portfolio consisted primarily of instantly tradable short-term Treasury paper, now we hold almost none; our portfolio consists primarily of longer-term Treasuries and MBS. Without delving into the various details and adjustments that could be made (such as considerations of assets readily available for purchase by the Fed), we now hold roughly 20 percent of the stock and continue to buy more than 25 percent of the gross issuance of Treasury notes and bonds. Further, we hold more than 25 percent of MBS outstanding and continue to take down more than 30 percent of gross new MBS issuance. Also, our current rate of MBS purchases far outpaces the net monthly supply of MBS.

The point is: We own a significant slice of these critical markets. This is, indeed, something of a Gordian Knot.

Those of you familiar with the Gordian legend know there were two versions to it: One holds that Alexander the Great simply dispatched with the problem by slicing the intractable knot in half with his sword; the other posits that Alexander pulled the knot out of its pole pin, exposed the two ends of the cord and proceeded to untie it. According to the myth, the oracles then divined that he would go on to conquer the world.

There is no Alexander to simply slice the complex knot that we have created with our rounds of QE. Instead, when the right time comes, we must carefully remove the program's pole pin and gingerly unwind it so as not to prompt market havoc. For starters though, we need to stop building upon the knot. For this reason, I have advocated that we socialize the idea of the inevitability of our dialing back and eventually ending our LSAPs. In June, I argued for the Chairman to signal this possibility at his last press conference and at last week’s meeting suggested that we should gird our loins to make our first move this fall. We shall see if that recommendation obtains with the majority of the Committee.

Horseshift!

We needn’t be condemned to the glue factory. As I said, American companies publicly held and private—large, medium and small—have taken advantage of the cheap and abundant money made available by the Fed’s hyper-accommodative monetary policy to create lean and muscular balance sheets. In response to the deep recession and the challenges of fiscal and regulatory uncertainty, they have rationalized their cost structures and ramped up productivity, leveraging IT, just-in-time inventory management and new production structures to the max. I believe American businesses today are, far and away, the most efficient operators in the world. We have countless businesses in every sector of goods and service production that are the equivalents of the Secretariats, Man o’ Wars, Citations, Seabiscuits or any great thoroughbred that has ever graced the track. They just need to be let out of the starting gate.

That gate is controlled by Congress, working with the president. If they would just let 'em rip, we would have an economy that would soar. We would experience what, tongue firmly but confidently in cheek, I would call “horseshift”: from being the stuff of an economic glue factory to becoming the wonder-horse that would outpace the rest of the world, putting the American people back to work and renewing the wonder of American prosperity. If you and your fellow citizens from whatever state you hail from insist upon it, it will be done.

---

But why "let them rip" when Congress and the president can continue the charade, and pretend they are doing their political roles of sticking to their ideologies (i.e., no consensus on anything) when at the end of the day it is the Fed whose all enabling monetary policy provides the necessary impetus to keep the economy if not growing, then at least keep it from imploding (for now) even if it means record daily S&P highs and unseen splintering between America's uber rich and everyone else.

In other words good luck with all that.... folksy or not.

'Havoc' as HSBC prepares to close diplomatic accounts

HSBC bank has reportedly asked more than 40 diplomatic missions to close their accounts as part of a programme to reduce business risks.

The Vatican's ambassadorial office in Britain, the Apostolic Nunciature, is among those said to be affected.

The head of the UK's Consular Corps told the Mail on Sunday the decision has created "havoc".

The Foreign Office has been in touch with HSBC, stepping in to help diplomats open other bank accounts.

HSBC said embassies were subject to the same assessments as its other business customers. They need to satisfy five criteria - international connectivity, economic development, profitability, cost efficiency and liquidity.

A spokesman said: "HSBC has been applying a rolling programme of "five filter" assessments to all its businesses since May 2011, and our services for embassies are no exception.

"We do not comment on individual customer relationships."

The Mail on Sunday reported that the High Commission of Papua New Guinea and the Honorary Consulate of Benin have also been asked to move their accounts within 60 days.

Bernard Silver, head of the Consular Corps, which represents consuls in the UK, told the paper: "HSBC's decision has created havoc.

"Embassies and consulates desperately need a bank, not just to take in money for visas and passports but to pay staff wages, rent bills, even the congestion charge."

John Belavu, minister at the Papua New Guinea High Commission, said: "We've been banking with HSBC for 22 years and for them to throw us off in this way was a bombshell."

Lawrence Landau, honorary consul of Benin, told the paper his mission had been having trouble finding a new bank.

He said: "We have been trying everyone but all the UK banks are clamming up."

Suspicious accounts

Embassies are treated like business customers by banks as they generally use services like cash and payroll management and can take out loans.

They also have to pay for ambassadorial accommodation and costs such as school fees for the children of diplomats - expenses that are difficult to meet without a valid UK bank account.

They are sometimes considered to be at risk of money laundering activities because of their political exposure and banks have been warned in the past for failing to flag up suspicious accounts.

The Riggs National Bank in Washington was fined and later sold off after a 2004 US Senate report revealed executives in its embassy business had helped Chilean dictator Augusto Pinochet hide millions of dollars.

HSBC was fined $1.92bn (£1.26bn) by US authorities last year after it was blamed for alleged money laundering activities said to have been conducted through its Latin American operations by drug cartels.

The bank admitted at the time that it had failed to effectively counter money laundering.

http://www.bbc.co.uk/news/uk-23565506?print=true