Nasdaq Shuts Trading for Three Hours After Computer Errors

Computer malfunctions shook American equity trading for the second time this week, freezing thousands of stocks listed on the Nasdaq Stock Market for three hours and raising fresh concerns about the fragility of exchanges.

The second-biggest American exchange operator, home to 3,200 companies from 37 countries, halted transactions in all of its securities shortly after noon, a decision that caused buying and selling to stop on its platform and dozens of others where the securities trade. Errors in the feed used to disseminate quotes and prices were to blame, Nasdaq said on its website.

Many of the country’s most-traded shares, from Apple Inc. (AAPL) to Intel Corp. and Facebook Inc., ground to a virtual standstill as brokers were unable to execute customer orders. Nasdaq equity indexes didn’t update during the outage and volume in stocks listed on the rival New YorkStock Exchange also dwindled as liquidity dried up around the country.

“The real fear is that we get stuck wearing some kind of risk because of an interruption that is not of our doing,” Max Breier, a senior equity derivatives trader at BMO Capital Markets Corp. in New York, said in a phone interview. “Any halt in information or ability to trade is going to hinder our ability to manage our risk and take positions.”

Afternoon Resumption

Shares covered by the halt began to change hands again at about 3:25 p.m. in New York. Nasdaq let stand transactions executed between 12:14 p.m. and 12:23 p.m. Open orders were not automatically canceled and customers were told they could cancel them voluntarily before trading resumed, the exchange company said on its website.

President Barack Obama was briefed on the disruption this afternoon by his chief of staff,Denis McDonough, Josh Earnest, deputy White House press secretary, said in an e-mail to reporters traveling with the president in upstate New York. The Securities and Exchange Commission was also monitoring the situation.

U.S. Treasury Secretary Jacob J. Lew saw no reason to believe the halt had “any of the more frightening aspects to it, but we’re going to have to learn all the facts.” He was questioned about the shutdown by a moderator today after a speech in Mountain View, California.

The disruption, just two days after options markets were roiled by mistaken trades sent by Goldman Sachs Group Inc., is the latest in a series of computer malfunctions that have raised questions about the reliability of electronic markets. Nasdaq faced criticism last year when it mishandled the public debut of Facebook, causing losses for its member firms.

Another Headache

Though the cause was unclear, the outage is more bad news for Robert Greifeld, the Nasdaq chief executive officer whose reputation suffered following the Facebook IPO. Company representatives didn’t respond to e-mails and phone calls asking what triggered the breakdown.

“This is just another one of those headaches that are going on with this electronic stuff,”Frank Ingarra, head trader at Greenwich, Connecticut-based NorthCoast Asset Management LLC, said in a phone interview.

The action froze stocks both on Nasdaq’s platforms and dozens of other markets around the country that trade securities it lists. Exchanges from Bats Global Markets Inc. in Lenexa,Kansas, to Jersey City, New Jersey-based Direct Edge Holdings published notices saying they were adopting Nasdaq’s halt.

Lower Volume

The disruption resulted in the second-fewest number of shares changing hands on U.S. exchanges in at least five years during a full-day session. About 4.4 billion shares tradedtoday, 30 percent below the three-month average. Volume was lower only on Oct. 8, 2012, excluding holiday trading, according to data Bloomberg began compiling in 2008.

About 740 million exchange-listed shares changed hands during the three hours through 3:20 p.m. in New York following the suspension, or a third of the total transactions over the first three hours today, data compiled by Bloomberg show.

Nasdaq’s own shares, which were covered by the halt, fell 3.4 percent to $30.46 at the 4 p.m. close in New York. They’re up 22 percent in 2013. The Nasdaq Composite Index (CCMP), which didn’t move during the outage, gained 1.1 percent to 3,638.71, while the Nasdaq 100 climbed 1 percent to 3,101.82.

The Dow Jones Industrial Average (INDU), which includes Nasdaq-listed Microsoft Corp. and Cisco Systems Inc., was calculated throughout the day using the shares’ last price. It gained 0.4 percent to 14,963.74. Among Nasdaq stocks, Apple increased 0.1 percent to $502.96 and Intel added 0.4 percent to $22.26.

‘Big Deal’

“It’s a big deal for the Nasdaq, but it wasn’t as impactful on the market as you would expect,”Douglas Kass, the founder of Palm Beach, Florida-based Seabreeze Partners Management Inc., said in a phone interview. “There’ll be some residual loss of confidence on the part of retail investors, but beyond that I don’t think it’ll have impact.”

Trading failures are multiplying as global financial markets get more complex. U.S. equity trading, which began on Wall Street more than two centuries ago and was dominated by the New York Stock Exchange for most of that period, has become dispersed among more than 50 computerized platforms accessible around the world.

Individual investors have showed signs of embracing equities this year. Almost $95 billion was poured into exchange-traded funds that own American shares this year, while a measure of historical price swings indicates the U.S. market is the calmest in more than six years compared with shares from China, Brazil, India and Russia.

Flight Risk

“A trading halt is pretty big on a major public market,” Douglas Cote, chief market strategist at ING U.S. Investment Management in New York, said in a telephone interview. His firm oversees $190 billion. “It’s kind of like being in an airplane. It’s risky. Even though planes have had some problems, you don’t not fly because of it.”

Signs of strain appeared earlier when NYSE’s Arca canceled orders for Nasdaq shares and other exchanges routed trades away from the electronic platform through a procedure known as self-help. Just before 12:30 p.m., shares of Yahoo! Inc. briefly plunged more than a dollar over about a dozen trades. Intel surged 20 cents or more in a handful of transactions.

“We are monitoring the situation and are in close contact with the exchanges,” SEC spokesman John Nester said.

Sean Oblack, a spokesman for Senate Banking Committee Chairman Tim Johnson, said in an e-mail statement that the panel’s staff “has been following the issues, is in contact with the SEC and will continue to monitor additional developments.”

Hungry Squirrels

American stock markets regularly shut down as share volume rose in the late 1960s before computers were in widespread use. According to the Depository Trust & Clearing Corp.’s website, exchanges closed every Wednesday and shortened trading hours as daily share volume of 10 million to 12 million shares meant ’’brokers were literally buried in paperwork.’’

Today’s outage was worse than an approximately 40-minute shutdown in 1994 that was triggered when a squirrel chewed through a power line in Shelton, Conn., disrupting electricity near a Nasdaq computer facility in Trumbull. That same year, a communications-software error shut the exchange for two-and-a-half hours. Another squirrel was to blame for a 1987 outage that last 82 minutes, according to a New York Times report at the time.

Options markets were bombarded with erroneous orders two days ago when an internal computer at Goldman Sachs malfunctioned. Options officials at Nasdaq as well as NYSE Amex and CBOE Holdings spent almost a day reviewing orders for cancellation.

China Error

Investors in China were whipsawed by a computer malfunction last week. State-controlled brokerage Everbright Securities Co. reported a trading loss of 194 million yuan ($32 million) and apologized to investors after errors in order-execution systems on Aug. 16 sparked the biggest intraday swing in China’s benchmark index since 2009. The incident touched off a 53 percent surge in volume in the Shanghai Composite Index, which jumped from a loss of as much as 1 percent to a gain of 5.6 percent in two minutes. Xu Haoming resigned as president of the firm four days after regulators announced a probe.

In May, Nasdaq agreed to pay $10 million to settle SEC charges related to the initial public offering of Facebook. Regulators cited it for its “poor systems and decision-making” during the IPO in May 2012 that was delayed when software that collects orders fell into a loop. Nasdaq agreed to the settlement without admitting or denying the SEC’s findings.

Facebook Fine

The SEC penalty was imposed because Nasdaq failed in its obligation to ensure that systems, processes and contingency planning are robust and adequate to manage an IPO without disruption to the market, the agency said.

Legislation that created the SEC in 1934 also deemed the main venues self-regulatory organizations, or SROs, overseeing their member firms and trading. Critics said the Facebook mishap shows how changes in the structure of markets have made old regulations obsolete and that firms such as Nasdaq should be regulated like any other for-profit company.

Exchanges have close to absolute legal protection for actions taken as part of their regulatory duties. The doctrine arose when exchanges were not-for-profit organizations owned by their member firms. The shield protects them from lawsuits related to the exercise of powers delegated by the SEC and prevents financial losses that could jeopardize institutions seen as vital to the U.S. economy.

http://www.bloomberg.com/news/2013-08-22/nasdaq-shuts-trading-for-three-hours-in-latest-computer-error.html

Nasdaq Market Halts Trading

A trading halt on the Nasdaq Stock Market NDAQ +0.82% neared an hour after an unexplained technical issue, paralyzing the market for thousands of securities and raising new questions about the robustness of U.S. trading systems following a series of high-profile glitches.

The second-largest U.S. stock exchange expected to resume trading shortly, a person familiar with the matter said just after 1 p.m. ET. The exchange said in a notice to traders that it wouldn't cancel open orders, but that customers could do so. The exchange would resume trading at a time "to be determined," the notice said.

The outage saw a large chunk of the U.S. stock market effectively come to a standstill at midday, freezing prices in stocks, exchange-traded funds and options listed on Nasdaq and prompting other trading venues to stop trading those securities. Dark pools and other electronic trading platforms were also forced to suspend trading in Nasdaq-listed stocks, since there were no publicly quoted prices on those securities, traders said.

Traders said there was confusion about what stocks were affected, and that phones were lighting up across trading desks as investors tried to figure out what as happening.

"We're pulling out our orders to wait until the system works itself out," Rick Fier, director of equity trading at Conifer Securities. "The best thing clients can do is take a break."

http://online.wsj.com/article/SB10001424127887324619504579028873794227410.html
http://www.cnbc.com/id/100968086

GALLUP: UNEMPLOYMENT RATE JUMPS FROM 7.7% TO 8.9% IN 30 DAYS

Outside of the federal government's Bureau of Labor statistics, the Gallup polling organization also tracks the nation's unemployment rate. While the BLS and Gallup findings might not always perfectly align, the trends almost always do and the small statistical differences just haven't been worthy of note. But now Gallup is showing a sizable 30 day jump in the unemployment rate, from 7.7% on July 21 to 8.9% today.

This is an 18-month high.

At the end of July, the BLS showed a 7.4% unemployment rate, compared to Gallup's 7.8%. Again, a difference not worthy of note. But Gallup's upward trend to almost 9% in just the last three weeks is alarming, especially because this is not a poll with a history of wild swings due to statistical anomalies. Gallup's sample size is  a massive 30,000 adults and the rolling average is taken over a full 30 day period.

Gallup also shows an alarming increase in the number of underemployed (those with some work seeking more). During the same 30-day period, that number has jumped from 17.1% to 17.9%.

http://www.breitbart.com/Big-Government/2013/08/21/Gallup-Unemployment-jumped-from-77-to-89

British Virgin Islands in US tax evasion talks

The British Virgin Islands (BVI) has begun talks with US authorities over compliance with a law designed to crack down on offshore tax evasion.

The BVI, home to about 30,000 people and 500,000 registered companies, is one of the world's biggest offshore trust jurisdictions.

Rules coming into force next year will mean US taxpayers must disclose greater detail about assets held abroad.

BVI Premier Orlando Smith said talks with the US were the best way forward.

Jurisdictions such as the BVI provide incorporation registration, so that businesses and super-rich investors can claim they are based on the islands and so avoid taxes in countries where their work is carried out.

Last week, the Cayman Islands agreed with the US on providing information on accounts held by US citizens and residents.

Mr Smith told a news briefing that his administration was negotiating an "intergovernmental agreement" with Washington to comply with the US Foreign Account Tax Compliance Act.

"We are of the very considered opinion that this course is the best one to adopt for the BVI," he said.

Officials on the Caribbean jurisdictions of the Bahamas and Bermuda have also said they intend to comply with the US regulations.

http://www.bbc.co.uk/news/business-23778144?print=true

Unwinding Of Unsustainable Speculative Positions

Some participants also stated that financial developments during the intermeeting period might have helped put the financial system on a more sustainable footing, insofar as those developments were associated with an unwinding of unsustainable speculative positionsor an increase in term premiums from extraordinarily low levels.

http://www.zerohedge.com/print/477863

Bitcoin Spawns China Virtual IPOs as U.S. Scrutiny Grows

Sun Minjie is a 28-year-old Internet worker who lives in Beijing. Eager to profit from growing demand for the digital currency, Sun has invested more than $3,000 in a company called 796 Xchange Ltd., an online exchange for trading stocks and other financial instruments related to Bitcoin, where initial public offerings are also being held.

He’s part of a small but growing group of investors in China who have put the country into contention with the U.S. as the biggest downloader of the virtual money that’s being used to buy a growing range of goods and services online. While intensified scrutiny by U.S. regulators casts doubt on the currency’s future there, China’s Bitcoin industry is expanding.

“What’s worrisome is that a lot of people could be just treating it as a speculative investment,” said Peter Pak, head of trading of BOCI Securities Ltd. in Hong Kong. “In China, the stock market, property and bond market are all not so good, so people get really excited when they hear of a new investment that generates high returns.”

Sun’s outlay of about 28 Bitcoins -- or $3,108 -- for more than 400 shares in 796 Xchange has returned about 46 percent since the stock’s Aug. 1 debut on the company’s own website. The benchmark Shanghai Composite Index (SHCOMP) has only gained about 2 percent during the same period.

‘Expensive to Crack’

Bitcoin is similar to other currencies -- say, the Mexican peso-- except it’s not controlled by any government and the total number is capped at about 21 million coins. Computer users can “mine” them by solving mathematical puzzles -- uncovering the hidden series of letters and numbers that matches up with security keys specified by the computer programmers who invented Bitcoin in 2009. As more are mined, the puzzles get harder, and therefore more expensive to crack.

Sun turned to shares of Bitcoin companies after initially trying to mine the currency crunching algorithms on souped-up PCs at his office and home. He gave up after a month, concluding that his computers weren’t up to the task.

“Simple desktops can no longer dig them up,” he said.

There are about 11.5 million Bitcoins in circulation, according to Blockchain.info, which tracks the virtual currency. At today’s price of about $121, there’s still $1.15 billion to unearth. The inherent scarcity of Bitcoin that was intended to help secure its value has also attracted early investors -- Cameron and Tyler Winklevoss, the twins known for their claim to have co-founded Facebook Inc. (FB), own about 1 percent of the currency in issue.

Bigger Drills

Prices have been volatile, with the value of one Bitcoin varying from $84 to $266 in the span of one week in April, according to Tokyo-based Mt. Gox, the largest exchange that allows Bitcoin to be traded for dollars, euros and other currencies.

More advanced miners use specially designed gadgets that cost as much as 86 Bitcoins, about $10,407, in order to mine the digital currency.

Labcoin, managed by Hong Kong-based ITec-Pro Ltd., also began trading its shares this month in a virtual market. The seller of virtual-mining equipment had a market value of 20,000 Bitcoins, or about $2.4 million. Another company that sold shares is Myminer, which operates “mining farms” in China, where it says the low cost of power to run computers gives it an edge. BTC Garden, a Shenzhen-based Bitcoin miner, withdrew its IPO this month, citing a dispute with an investor.

Hong Kong-incorporated 796 Xchange offers an online stock market for Bitcoin companies, as well as futures, financing and IPO services, all priced in Bitcoins, according to its website.

Regulatory Probe

BTCChina.com, China’s most popular Bitcoin exchange, lets traders to use the payment systems of more established companies. That includes Tencent Holdings Ltd. (700), the nation’s biggest Internet company, and Alipay, an affiliate of Alibaba Group Holding Ltd., the No. 1 e-commerce company. Other Bitcoin trading platforms popular in China includeFXBTC.com and Btctrade.com.

China briefly overtook the U.S. in monthly downloads of Bitcoins in May, and now ranks second, according to SourceForge.

In the U.S., the Securities and Exchange Commission sued a Texas man over claims he operated a Bitcoin Ponzi scheme. New York’s Department of Financial Services this month sent subpoenas to 22 digital-currency companies to determine whether new regulations should be adopted, according to a person familiar with the matter.

The lack of regulation, which has drawn scrutiny from U.S. regulators, is why Bitcoins are taking off in China, where the government controls the flow of money overseas and keeps a tight rein on what it views as undesirable behavior.

‘Bitcoin is Freedom’

“The advantage for Chinese users to use Bitcoin is freedom, people can do something without any official authority,” said Patrick Lin, system administrator of Erights.net and owner of about 1,500 Bitcoins. Lin said he’s sticking to the currency itself, rather than IPOs, in part because of weak regulation. “The Bitcoin world is just like the Wild West -- no law, but opportunity and risk,” he said.

The China Securities Regulatory Commission didn’t respond to a faxed query on whether it’s looking at new rules regarding Bitcoin. So long as it remains small, the industry may continue to fly below the radar screen of a Chinese government more preoccupied with a faltering economy and social stability.

“If the circulation of Bitcoins is still confined to a small circle of people, it won’t be something on the Chinese authority’s priority list,” said Edward Au, co-head of Deloitte China’s public-offering group. “They already have too much to cope with.”

What Is Going To Happen If Interest Rates Continue To Rise Rapidly?

Submitted by Michael Snyder of The Economic Collapse blog [24],

If you want to track how close we are to the next financial collapse, there is one number that you need to be watching above all others.  The number that I am talking about is the yield on 10 year U.S. Treasuries, because it affects thousands of other interest rates in our financial system.  When the yield on 10 year U.S. Treasuries goes up, that is bad for the U.S. economy because it pushes long-term interest rates up.  When interest rates rise, it constricts the flow of credit, and a healthy flow of credit is absolutely essential to the debt-based system that we live in.

Just imagine someone squeezing a tube that has water flowing through it.  The higher interest rates go, the more economic activity will be squeezed.  If interest rates continue to rise rapidly, it will be more expensive for the U.S. government to borrow money, it will be more expensive for state and local governments to borrow money, the housing market may crash again, consumer debt will become more expensive, junk bond investors will be in for a world of hurt, the stock market will experience a tremendous amount of pain and there is a good chance that we could see the 441 trillion dollar interest rate derivatives bubble [25] implode.  And that is just for starters.

So yes, we all need to be carefully watching the yield on 10 year U.S. Treasuries.  On Friday, it opened at 2.76% and hit a high of 2.86% before closing at 2.83%.  The yield on 10 year U.S. Treasuries is up nearly 120 basis points since the beginning of May, and almost everyone on Wall Street seems convinced that it is going to go much higher.

We are truly moving into unprecedented territory, because we have been in a bull market for U.S. Treasuries for the last 30 years.  Many investors don't even know that it is possible to lose money on U.S. Treasuries.  They have been described as "risk-free" investments, but that is far from the truth.

In fact, we could see bond investors of all types end up losing trillions of dollars before it is all said and done.

And those in the stock market will lose lots of money too.  Low interest rates are good for economic activity which is good for the stock market.  The chart posted below shows that stock prices have generally risen as the yield on 10 year U.S. Treasuries has steadily declined over the past 30 years...

When interest rates rise, that is bad for economic activity and bad for stocks.  That is why so many stock analysts are alarmed that interest rates are going up so rapidly right now.

And as I wrote about the other day, we have just witnessed the largest cluster of Hindenburg Omens [26] that we have seen since before the last financial crisis.  The stock market already seems ripe for a huge "adjustment", and rising interest rates could give it a huge extra push in a negative direction.

By the time it is all said and done, stock market investors could end up losing trillions of dollars in the next stock market crash.

In addition, rising interest rates could easily precipitate another housing crash.  As the Wall Street Journal [27] discussed on Friday, as the yield on 10 year U.S. Treasuries goes up it will also cause mortgage rates to rise...

Higher yields will push up long-term borrowing cost for U.S. consumers and businesses. Mortgage rates will rise, and investors are keeping a close eye on whether this may derail the recovery of the housing market, which has shown signs of turning a corner this year.

In one of my previous articles [28], I included an example that shows just how powerful rising mortgage rates can be...

A year ago, the 30 year rate was sitting at 3.66 percent.  The monthly payment on a 30 year, $300,000 mortgage at that rate would be$1374.07.

If the 30 year rate rises to 8 percent, the monthly payment on a 30 year, $300,000 mortgage at that rate would be $2201.29.

Does 8 percent sound crazy to you?

It shouldn't.  8 percent was considered to be normal back in the year 2000.

If you own a $300,000 house today, do you think it will be easier to sell it or harder to sell it if mortgage rates skyrocket?

Yes, of course it will be much harder.  In fact, there is a good chance that you will have to reduce your selling price significantly so that prospective buyers can afford the payments.

Let us hope that the yield on 10 year U.S. Treasuries levels off for a while.  If it says at this current level, the damage will probably not be too bad.

But if it crosses the 3 percent mark and keeps soaring, things could get messy pretty quickly.  In fact, according to a Bank of America Merrill Lynch investor survey [29], the 3.5 percent mark is when the collapse of the bond market is likely to become "disorderly"...

Our latest Credit Investor Survey, conducted July 8-11, showed that 3.5% on the 10-year is most commonly thought of as the trigger of a disorderly rotation – i.e. higher interest rates leading to outflows and wider credit spreads – among high grade investors.

Put differently, 3.0% on the 10-year will not lead to overall wider credit spreads if there is enough buying interest from institutional investors (though note that the 10s/30s spread curve would flatten further, as mutual fund/ETF holdings are concentrated in the belly of the curve, whereas institutional demand is disproportional in the long end of the curve). However, if the probability of a further move higher in interest rates to 3.5% is high – which will be the perception if interest rate volatility is high – certain institutional investors will choose to remain on the sidelines.

Thus there may not be enough institutional buying interest to mitigate retail fund outflows and contain overall high grade spread levels.

So what is causing this?

Well, there are a number of factors of course, but one very disturbing sign is that foreigners are selling off U.S. Treasuries [30] at a pace that we have not seen since 2007...

One of the biggest fears in the financial markets is that foreign investors will stop buying U.S. Treasury securities, causing borrowing rates to surge.

Not that this is the beginning of a frightening trend, but new data from the Treasury Department shows that foreigners were net sellers in June. In fact, this is the largest net sale of U.S. securities since August 2007.

Do you remember all of the warnings that we have received over the years about what would take place when foreign countries started dumping U.S. debt?

Well, it looks like it may be starting to happen.

Unfortunately, there is no way that the party that the U.S. government has been throwing can continue without foreigners buying our debt.  We have added more than 11 trillion dollars to the national debt since the year 2000, and according to Boston University economist Laurence Kotlikoff we are facing unfunded liabilities in future years that are in excess of 200 trillion dollars.

Even with foreigners continuing to loan us gigantic mountains of super cheap money, it would still take a doubling of our taxes [31] to put us on a fiscally sustainable course...

Writing in the September issue of Finance and Development, a journal of the International Monetary Fund, Prof. Kotlikoff says the IMF itself has quietly confirmed that the U.S. is in terrible fiscal trouble - far worse than the Washington-based lender of last resort has previously acknowledged. "The U.S. fiscal gap is huge," the IMF asserted in a June report. "Closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 per cent of U.S. GDP."
This sum is equal to all current U.S. federal taxes combined. The consequences of the IMF's fiscal fix, a doubling of federal taxes in perpetuity, would be appalling - and possibly worse than appalling.

Prof. Kotlikoff says: "The IMF is saying that, to close this fiscal gap [by taxation] would require an immediate and permanent doubling of our personal income taxes, our corporate taxes and all other federal taxes.

"America's fiscal gap is enormous - so massive that closing it appears impossible without immediate and radical reforms to its health care, tax and Social Security systems - as well as military and other discretionary spending cuts."

Can you afford to pay twice as much in taxes to the federal government?

Very few Americans could.

But that is how serious the financial problems of the federal government are.

And all of the above assumes that interest payments on U.S. government debt will remain at current levels.  If the average rate of interest on U.S. government debt rises to just 6 percent, the U.S. government will be paying out a trillion dollars a year just in interest on the national debt.

Also, all of the above assumes that we will have a healthy financial system that does not need to be bailed out again.

But if rapidly rising interest rates cause the 441 trillion dollar interest rate derivatives bubble to implode [32], the bailout that the "too big to fail" banks will need will likely be far, far larger than last time.

In fact, once that bubble bursts there probably will not be enough money in the entire world to fix it.

If the picture that I have painted above sounds bleak, that is because it is bleak.

Sometimes I get frustrated with myself because I don't feel I am communicating the tremendous danger that we are facing accurately enough.

We are heading for the worst financial crisis in modern human history, and the debt-fueled prosperity that we are enjoying today is going to go away and it is never going to come back.

You can dismiss that as "doom and gloom" and stick your head in the sand if you want, but that isn't going to help anything.  Instead of ignoring reality you should be working hard to prepare your family for what is coming and warning others that they should be getting prepared too.

When a hurricane is approaching landfall, you don't take your family out for a picnic at the beach.  That would be foolish.  Unfortunately, way too many Americans are acting as if nothing like the financial crisis of 2008 could ever possibly happen again.

If you deceive yourself into thinking that all of this is going to have a happy ending somehow, you are going to get blindsided by the coming storm.

But if you make preparations now, you might just be okay.

There is hope in understanding what is happening and there is hope in getting prepared.

So watch the yield on 10 year U.S. Treasuries.  The higher it goes, the later in the game we are.

Phil Falcone Done: To Pay $18 Million, Admit Guilt, Agree To 5 Year Bar

Once upon a time Harbinger was the most desirable hedge funds to work for. 10 years later, it, and its head Phil Falcone [2], have just been effectively shut down.

• SEC: HARBINGER CAPITAL, FALCONE TO PAY $18M IN SETTLEMENT
• SEC SAYS HARBINGER, FALCONE ADMIT TO CONDUCTING IMPROPER SHORT SQUEEZE IN BONDS ISSUED BY A CANADIAN MANUFACTURING COMPANY
• SEC
  SAYS FALCONE CONSENTS TO BAN FROM ASSOCIATION WITH ANY BROKER, DEALER,
  INVESTMENT ADVISER, OTHER ENTITIES, WITH RIGHT TO REAPPLY AFTER FIVE
  YEARS
• SEC SAYS FALCONE ADMITTED TO IMPROPERLY BORROWING $113.2M
• SEC: FALCONE ADMITTED TO RETALIATTION VS FINL SERVICE FIRM

In other rumored news, Phil's wife Lisa Maria [4]to join cast of the Real (non-prenupped) Ex-Wives of New York (Hedge Funders) in 5...4...3...

So from this...

 [5]

to this [6]?

More from the SEC [7]:

Among the set of facts that Falcone and Harbinger admitted to in settlement papers filed with the court:

• Falcone improperly borrowed $113.2 million from the Harbinger Capital Partners Special Situations Fund (SSF) at an interest rate less than SSF was paying to borrow money, to pay his personal tax obligation, at a time when Falcone had barred other SSF investors from making redemptions, and did not disclose the loan to investors for approximately five months.
• Falcone and Harbinger granted favorable redemption and liquidity terms to certain large investors in HCP Fund I, and did not disclose certain of these arrangements to the fund’s board of directors and the other fund investors.
• During the summer of 2006, Falcone heard rumors that a Financial Services Firm was shorting the bonds of the Canadian manufacturer, and encouraging its customers to do the same.
• In September and October 2006, Falcone retaliated against the Financial Services Firm for shorting the bonds by causing the Harbinger funds to purchase all of the remaining outstanding bonds in the open market.
• Falcone and the other Defendants then demanded that the Financial Services Firm settle its outstanding transactions in the bonds and deliver the bonds that it owed.  Defendants did not disclose at the time that it would be virtually impossible for the Financial Services Firm to acquire any bonds to deliver, as nearly the entire supply was locked up in the Harbinger funds’ custodial account and the Harbinger funds were not offering them for sale.
• Due to Falcone’s and the other Defendants’ improper interference with the normal interplay of supply and demand in the bonds, the bonds more than doubled in price during this period.

http://www.zerohedge.com/print/477772

Indian Rupee Collapses - Worst Day In 20 Years

Presented with little comment (over our earlier detail [3]) but just to note that around the world there are significant events occurring (even as the US equity market slumbers). So much for the gold coin ban - gold now trades at 4 month highs in Rupee terms.

Today's 1.46 Rupee slump is the largest in absolute terms since 1993... (the largest single-day percentage depreciation since 9/22/2011)...

 [4]

and the last 4 weeks' move is the largest since 1991...

 [5]

And just for fun, since May 2nd, holders of paper Rupee have lost 18% of their purchasing power while those that held gold instead have seen their 'wealth' appreciate 13% in local purchasing power.

End Of The Great Market Illusion

A series of data which normally would be considered anomalous is growing at such an accelerated rate, it’s no longer ‘black swan’ data; now the flock seems to be all black and it’s flying north for the winter.  Read full article at: http://globalintelhub.com/end-of-the-great-market-illusion/

Why Isn't There A Demonstrably Correct Economic Theory?

Although economics doesn't recognize it, the operative phrase here is systemic injustice.

 

Correspondent C.G.D. recently asked what I consider a very profound question: why isn't there demonstrably correct economic theory?

 

"My wife has asked me a 'simple' question that I can not answer. After 2000 years, why do we not know which economic theory is correct: Keynesian or Hayek-Friedman? Surely, there is a demonstrably, statistically correct answer."

Let's add Marxism to the short list of contenders, and then consider why we have cargo-cult faiths (Keynesianism) instead of demonstrably correct models of economic behavior.

http://globalintelhub.com/why-isnt-there-a-demonstrably-correct-economic-theory/

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Fed Warns Leveraged ETFs Could Trigger 1987-Style "Cascade" In Stocks

In a 43-page research report, the Federal Reserve has authored a rather concerning tome warning that the mechanical positive-feedback rebalancing of Leverage ETFs (LETFs) resembles the portfolio insurance strategies, which contributed to the stock market crash of October 19, 1987. The impact of LETFs on broad stock-market indexes become significant during periods of high volatility (shown empirically in 2008/9 and H2 2011) as they show that LETF rebalancing in response to a large market move could amplify the move and force them to further rebalance which may trigger a “cascade” reaction. Furthermore, executing orders within a short period of time, such as the last hour of trading, may cause disproportionate price changes (especially in financial stocks). The Fed warns that a significant price reduction at market close may also impair investor confidence with accelerating depressed prices at the close potentially driving large investor outflows overnight.

ETF-rebalancing implied price effects are most egregious at times of stress...

ETF rebalancing flows have grown dramatically...

BUT - what is most concerning is that LETF rebalancing flows as a fraction of stock volume in the last hour is surging - especially for small-caps...

The frequency of a large price move in the last hour of trading is zero until 2007 when the first financial LETF is launched. Consistent with the implied price impact results, the frequency of a large price move is elevated when the price volatility is high, reaching 0.8 in the 2008-2009 financial crisis and 0.6 in the second half of 2011. These results, combined with the implied price impact estimates, suggest that LETF rebalancing contributed to the stock market volatility in the 2008-2009 financial crisis and in the second half of 2011.

Goldman Admits Payroll Data Is "Economically Meaningless"

As the disconnect between payroll data and GDP grows, [10] and the schrodinger reality of a non-farm-payroll print and JOLTs data increases [11]; it will not come as a total surprise to Zero Hedge readers that Goldman Sachs has finally been forced to admit that investors have been fooled by the relative importance of jobs data. While the payrolls data has the largest financial market effect of all economic indicators (by a large margin), Jan Hatzius finds that neither payrolls (or Advance GDP) provide any incremental information about the broad strength of the economy.

Via Goldman Sachs,

Every investor knows that US economic data releases can trigger large price moves in the Treasury bond market.

Exhibit 1 shows the impact of a 1-standard-deviation (SD) surprise in the most important US economic activity indicators relative to the Bloomberg consensus in the 20 minutes surrounding the release.

Payrolls Have by Far the Biggest Impact on the Bond Market

 [12]
Economic data releases are also important for the equity market, although the relationship is not quite as strong. Exhibit 2 repeats the previous exercise with the price of S&P 500 futures in the 20 minutes surrounding the release.

Payrolls Also Most Powerful for Stocks, But It’s a Closer Call

 [13]

At least in the Treasury market, the payroll release has recently become even more dominant.

 [14]

But - given all this 'efficient' market moving information... the fact is that neither the payrolls nor advance GDP data provide much incremental economic information...

Our most important finding is that the impact of both nonfarm payrolls and advance GDP is small and statistically insignificant, whether we focus on the CAI or the change in the unemployment rate.

 [15]

Thus, neither indicator seems to contain statistically significant information for growth when evaluated on a first-release basis.

Why is it that payrolls and GDP - the two most market-moving releases in the US data calendar - provide so little incremental information about the economy?

First-release data can look very different from fully revised data.

It is difficult to overemphasize the importance of using first-release data for the explanatory variables in our analysis. Payrolls and GDP are subject to heavy revisions between the first release and the fully revised version. Some of these revisions occur in the next monthly or quarterly release, and some occur with much longer lags via the annual revisions. And they are very important; if we re-run our regressions using fully revised data, both payrolls and GDP become statistically significant as predictors of future growth. But revised data are obviously not available in real time.

And as far as the market being efficient?

Some readers will undoubtedly be skeptical of our results on the grounds of market efficiency. How could the financial markets possibly put so much weight on indicators that in reality provide little useful information about the economy? Does this not fly in the face of the idea that financial markets are powerful aggregators of information that will seek out the most accurate possible signals about the future?

First, although market efficiency is a powerful idea, the empirical finance literature of the past three decades has made it clear that financial markets are not always perfectly efficient... Our results suggest that these investors will put too much weight on indicators that tend to get heavily revised and are not very informative in real time. Moreover, many investors seem to look for a simple, high-profile summary of the performance of the economy, rather than piecing together a composite picture from many different reports. And the highest-profile indicators are the monthly employment report and the quarterly GDP report.

Second, part of the market’s outsized sensitivity to payrolls is probably directly due to recent Fed communications. Given the limited usefulness of first-release nonfarm payroll numbers, we believe that the distinction between an initial print of 162,000 and one of 180,000-200,000 is too small to determine whether Fed officials should make a significant policy change. But if the markets have some reason to believe that this distinction will in fact drive Fed policy, the outsized response to relatively small and economically meaningless payroll surprises may not be so irrational.

So, the bottom line is that market moves off the headline data releases of the Payrolls and GDP are inefficient and based on a false belief that this data in some way indicates improving (or deteriorating) economic conditions. Once again, investors have been fooled by an ongoing mythology about the often noisy (and always revised) data and the mainstream media's need for a headline upon which to hang the manipulation-du-jour.

Where The Fed's Excess Reserves Are Going: 51% Foreign Banks; 49% Domestic

As shown [3]here previously [4], there is a direct correlation between the excess reserves created by the Fed, and the cash holdings of domestic and foreign banks (operating in the US) disclosed by the Fed's weekly H.8 statement [5]. So with the Fed's reserves reaching new all time highs with every week courtesy of the $85 billion in monthly flow injected by the Fed...

 [6]

... some wonder where is this cash ending up. The answer: in the week ended July 31, a record $1,157 billion was parked with foreign banks in the US, while "just" $1,112 of the Fed's created reserves was allocated to US banks.

This breakdown is shown in the chart below:

 [7]

 [8]

Or, in short, the Fed's QE-created reserves have gone to:

• Foreign banks: 51%
• Large-domestic banks: 36%
• Small domestic banks: 13%

At least someone is benefiting from the Fed's generosity, in that order.

Source: H.8 [5] [5]

G20 Showdown On Dollar Hegemony

By RUSS WINTER of Winters Actionables

Obama canceled his scheduled meeting with Russian President Vladimir Putin last week. Although Obama didn’t give his reason for the cancellation, the media stoogery speculated it was because of Russia’s protection of whistleblower-patriot Edward Snowden. What is not being reported is that Russia has been warning its citizens and institutions since last March’s Cyprus bail-in to divest assets out of western banks.

Additionally, last week Yao Yudong of the PBoC’s monetary policy committee 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 cooperation and supervision are needed.

Because of the U.S. dollar hegemony, the lion’s share of all global dollar-denominated transactions pass through the New York. This includes those that have absolutely nothing to do with the U.S. In turn, these transactions are monitored by the New York State Department of Financial Services, which was created in 2011. This agency plays a special role in the exposure of bank and company wrongdoers, real or imagined.  Around 4,500 organizations, with assets of $6.2 trillion, are under the direct control of this agency.

This circumstance, the unnecessary power and the unlimited surveillance/invasion of privacy are powerful incentives for non-U.S. banks and companies to replace the U.S. dollar with the currencies of other countries when making international payments, while at the same time creating their own regional systems of international payments.

Thus, recent Western self-inflicted wounds have opened the Pandora’s box for China and Russia as well as other BRIC nations to pressure hard for non-dollar settlement of trade, and in particular oil. I submit that this agenda and the G20 meeting Sept. 5-6 is the venue for this to be revealed. THAT should be the real concern for the U.S., and it ties direct into my earlier article, China Maneuvers to take Away US’ Dominant Reserve Currency Status. 

As far as the timing, there are just too many coincidences happening on the gold and other fronts to assume the yellow metal does not play a role here. Is it a coincidence that JP Morgan has literally cornered the gold market [see Banker's Participation Report].

The Shanghai Gold Exchange has had deliveries equal to the world’s production for months straight.

The Comex registered gold is only at a mere 2% of open interest.

Chart source: Garrett Goggin

Is it a coincidence that GOFO has been negative for 25 straight days, and gold in backwardization?

Is it a coincidence that the stock market witnessed four Hindenberg Omens in the last week?

The end of Dollar hegemony is going to be a “gap” game-changer. 

*Gold Forward Offered Rates:

When it is negative, you will receive more interest when you lease your gold than your dollars. Primarily it means that gold leased out today is worth more than the gold delivered at the end of the three months.

The negative GOFO rate means someone wants to get their hands on gold.  There is speculation that the elevated high levels of demand we’re seeing in Asia has emptied the London Market.

Americans Giving Up Passports Jump Sixfold as Tougher Rules Loom

Americans renouncing U.S. citizenship surged sixfold in the second quarter from a year earlier as the government prepares to introduce tougher asset-disclosure rules.

The U.S., the only nation in the Organization for Economic Cooperation and Development that taxes citizens wherever they reside, is searching for tax cheats in offshore centers, including Switzerland, as the government tries to curb thebudget deficit. Shunned by Swiss and German banks and facing tougher asset-disclosure rules under the Foreign Account Tax Compliance Act, more of the estimated 6 million Americans living overseas are weighing the cost of holding a U.S. passport.Expatriates giving up their nationality at U.S. embassies climbed to 1,131 in the three months through June from 189 in the year-earlier period, according to Federal Registerfigures published today. That brought the first-half total to 1,810 compared with 235 for the whole of 2008.

“With the looming deadline for Fatca, more and more U.S. citizens are becoming aware that they have U.S. tax reporting obligations,” said Matthew Ledvina, a U.S. tax lawyer at Anaford AG in Zurich. “Once aware, they decide to renounce their U.S. citizenship.”

Fatca requires foreign financial institutions to report to the Internal Revenue Service information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest. It was estimated to generate $8.7 billion over 10 years, according to the congressional Joint Committee on Taxation.

Delaying Implementation

The 2010 Fatca law requires banks to withhold 30 percent from “certain U.S.-connected payments” to some accounts of American clients who don’t disclose enough information to the IRS. While banks can sign agreements to report to the IRS individually, many are precluded from doing so by privacy laws in their jurisdictions.

The Treasury Department last month announced that the IRS will delay the start of Fatca by six months until July 1, 2014, to give foreign banks time to comply with the law. The extension of the act follows a previous one-year delay announced in 2011.

Financial institutions including Canada’s Toronto-Dominion Bank (TD) and Allianz SE ofGermany have expressed concerns that Fatca is too complex.

The latest delay comes after the Swiss government agreed in February to simplifications that will help the country’s banks implement Fatca.

Penalty Threat

“The United States wishes to ensure that all income earned worldwide by U.S. taxpayers on accounts held abroad can be taxed by the United States,” the Swiss government said on April 10.

Since 2011, Americans, who disclose their non-U.S. bank accounts to the IRS, must file the more expansive 8938 form that asks for all foreign financial assets, including insurance contracts, loans and shareholdings in non-U.S. companies.

Failure to file the 8938 form can result in a fine of as much as $50,000. Clients can also be penalized half the amount in an undeclared foreign bank account under the Banks Secrecy Act of 1970.

The implementation of Fatca from July next year comes after UBS, Switzerland’s largest bank, paid a $780 million penalty in 2009 and handed over data on about 4,700 accounts to settle a tax-evasion dispute with the U.S. Whistle-blower Bradley Birkenfeld was sentenced to 40 months in a U.S. prison in 2009 after informing the government and Senate about his American clients at the Geneva branch of Zurich-based UBS AG. (UBSN)

Compliance Costs

The additional compliance costs for companies to ensure that Americans they hire are filing the correct U.S. tax returns and asset-declaration forms are at least $5,000 per person, said Ledvina.

For individuals, the costs are also rising. Getting a mortgage or acquiring life insurance is becoming almost impossible for American citizens living overseas, Ledvina said.

“With increased U.S. tax reporting, U.S. accounting costs alone are around $2,000 per year for a U.S. citizen residing abroad,” the tax lawyer said. “Adding factors, such as difficulty in finding a bank to accept a U.S. citizen as a client, it is difficult to justify keeping the U.S. citizenship for those who reside permanently abroad.”

http://www.bloomberg.com/news/2013-08-09/americans-giving-up-passports-jump-sixfold-as-tougher-rules-loom.html