Sunday, October 4, 2015

More Pain For Biotechs Ahead: Valeant's "Astronomical" Price Increases Take Center Stage; Pfizer Gets Dragged In

Two weeks ago, the biotech sector imploded after a piece by the NYT'a Andrew Pollack drew attention to the 5000% increase in the price of a toxoplasmosis drug by specialty biotech firm Turing Pharma, whose CEO Martin Shkreli promptly became the poster child for greedy biotech executives who seek to profit on the back of people's misery by gouging the price of life-extending/saving drugs.
However, as we subsequently pointed out, what Shkreli did was merely an extension of the far more gradual if far more aggressive hiking in drug prices by every other company in the sector. Indeed, according to a Citron report in which the bearishly-focused research boutique "in the Twitter-storm furor over Turing’s recent one-drug price gouge attempt, the media has overlooked the reality that Martin Shkreli was created by the system. Shkreli is merely a rogue trying to play the gambit that Valeant has perfected."
Conveniently, Deustche Bank laid out just what the average wholesale acquisition cost increases by Valeant for its univers of drugs in the past 3 years.
We compiled the data to show that even as the US is supposedly drowning in deflation, Valeant had not gotten the memo, and its average annual drug price increase had risen from 21% in 2012 to a whopping 66% YTD.

In fact, as shown in the table below, Valeant had clearly put all its biotech peers to shame when it comes to enforced price increases.

Then late last week, after looking at Valeant soaring default risk as measured by the price of its blowing out CDS, soaring to over 30% even as its stock prices was surging, we wondered - does someone know something?
It appears someone may have known that this weekend, the same Andrew Pollack whose NYT article exposing Turing's 5000% price increase resulted in Hillary Clinton promising to cap specialty biotech prices if elected, has come back for round two and after taking aim at Shkreli and Turing, much to the chagrin of Bill Ackman, Pollack is now taking aim at the biggest culprit: Valeant Pharmaceutcals.
Here are some of the highlights from his just released article: "Valeant’s Drug Price Strategy Enriches It, but Infuriates Patients and Lawmakers" which is certain to put the biotech sector right back in the crosshairs of regulators and legislators, not to mention presidential candidates, just as the market was hoping the biotech pricing scandal was about to fade from collective memory.
J. Michael Pearson has become a billionaire from his tough tactics as the head of the fast-growing Valeant Pharmaceuticals International. And consumers like Bruce Mannes, a 68-year-old retired carpenter from Grandville, Mich., are facing the consequences.

Mr. Mannes has been taking the same drug, Cuprimine, for 55 years to treat Wilson disease, an inherited disorder that can cause severe liver and nerve damage. This summer, Valeant more than quadrupled its price overnight.
Yes, Mannes' out of pocket expenses will soar, from the $366 he paid in may to $1,800, but guess who will be charged for the balance of the price surge? Why you, dear taxpayers:"Medicare will now have to cover about $35,000 for the 120 capsules he takes each month."
Which is also why biotech companies have been able to get away with such prices hikes for so long: courtesy of "buffers" such as Medicare and Obamacare, their impact has been diluted on the back of everyone else.
Whom should US taxpayers thanks for this sad state of affairs, in which drug prices are literally hyperinflating? Two people. As we explained last week, most of the reason for soaring prices "devolves from a backroom deal cut when the Bush administration set in motion the Medicare Drug benefit and inexplicably (if you’re not a lobbyist) gave away the rights of the US Government - the nation's largest buyer of pharmaceuticals - to negotiate drug prices with suppliers."
The other person: well, the name Obamacare should give you a hint.
Back to the NYT piece which having laid out the strawman, next goes for the emotional angle:
"My husband will die without the medicine,” said his wife, Susan, who is now working a second part-time job to help pay for health care. “We just can’t manage another two, three thousand dollars a month for pills."
And then goes for the jugular:
Valeant’s habit of buying up existing drugs and raising prices aggressively, rather than trying to develop new drugs, has also drawn the ire of lawmakers and helped stoke public outrage against the growing trend of higher and higher drug prices imposed by big drug companies. This year alone, Valeant raised prices on its brand-name drugs an average of 66 percent, according to a Deutsche Bank analysis, about five times as much as its closest industry peers.
Just as we showed above. The bigger prolem is that now even Congress understands what is going on, and Valeant's "valiant" stonewalling of Congress where it has shown a dramatic determination to not testify, will fail in the coming days:
For example, after Valeant acquired Salix Pharmaceuticals this year, it raised the price of one Salix drug, the diabetes pill Glumetza, about 800 percent, in two steps.

“How can they just do this?” said Gail Mayer, a retired computer systems analyst on Long Island, who said her monthly supply of Glumetza went from $519.92 in May to $4,643 in August. For now, her insurance is covering most of that increase, but she is worried that it will stop covering the drug altogether, as others have.

“I’m sure it didn’t cost them $4,000 more to make,” Ms. Mayer said. “You don’t just go buy a bottle of milk and suddenly the supermarket charges you $100.”
The irony is that what Valeant and its peers are doing is quite logical in the framework of the broken US healthcare system, whose failure has only been compounded with the insurtance free-for-fall that is Obamacare.
Mr. Pearson has told analysts that it is standard industry practice to raise the price of a drug shortly before it faces generic competition, which Glumetza might face in February.

The drug industry argues that list prices are typically not what health plans pay after discounts and rebates are negotiated, and there is evidence that these discounts are increasing.

But even if patients are often shielded, the costs are paid by insurers, hospitals and taxpayers and lead to higher premiums and co-payments for everyone, critics say.
There is much more in the NYT piece but the kicker is the chart which will soon make its way to a Congressional deposition room and the latest kangaroo court in which Congress demands a corporate CEO explain how dare he take advantage of the idiotic laws passed... by Congress.
As the NYT calls it, the VRX price increases are "astronomical" - an adjective that will stick with the company throughout the now-inevitable congressional hearings:
For Prescription Drugs, Some Astronomical Price Increases - Valeant Pharmaceuticals has made a business of buying prescription drugs and raising their prices when possible. Now some members of Congress are demanding information from the company about price increases on two heart drugs, one of which is Isuprel. Some examples of price increases in Valeant’s drugs over the last several years:

What happens next: "last week, Democrats on the House Committee on Oversight and Government Reform demanded that Valeant be subpoenaed for information about big price increases on two old heart drugs that the company acquired in February."
After this NYT article, one can be certain that the House will get its subpoena, but the bigger irony is the following:
Hillary Rodham Clinton, who is seeking the Democratic nomination, called for efforts to control “price gouging” after a public outcry over the actions of Turing Pharmaceuticals, which abruptly increased the price on a drug to $750 a tablet from $13.50.
Yes, it will indeed be great to have Hillary involved because as we said two weeks ago, we are very curious "to see how Hillary's populist outrage at [biotech price gougers] will be explained when the public realizes that it is only thanks to the benefits of socialized insurance programs such as Obamacare, of which Hillary is a staunch supporter, that such price gouging was possible in the first place."
Finally, just in case the rest of the biotech and specialty pharma industry thinks it is safe and that Valeant will be the scapegoat for everyone's shadow price increases, here comes Bloomberg with "Pfizer Raised Prices on 133 Drugs This Year, And It's Not Alone"
Pfizer Inc., the nation’s biggest drugmaker, has raised prices on 133 of its brand-name products in the U.S. this year, according to research from UBS, more than three-quarters of which added up to hikes of 10 percent or more. It’s not alone. Rival Merck & Co. raised the price of 38 drugs, about a quarter of which resulted in increases of 10 percent or more. Pfizer sells more than 600 drugs globally while Merck has more than 200 worldwide, including almost 100 in the U.S.
Pfizer's saving grace: it's average price hike according to Deutsche Bank was 9%, or "only" 5 times more than core inflation.
Will this be enough to placate Congress which is finally realizing the Frankenstein pricing monster the broken US healthcare system has unleashed? The answer will be revealed in the coming weeks.

Global Dollar Funding Shortage Intesifies To Worst Level Since 2012

The last time we observed one of our long-standing favorite topics (first discussed in early 2009), namely the global USD-shortage which manifests itself in times of stress when the USD surges against all foreign currencies and forces even the BIS and IMF to notice, was in March of this year, when we explained that "unlike the last time, when the global USD funding shortage was entirely the doing of commercial banks, this time it is the central banks' own actions that have led to this global currency funding mismatch - a mismatch that unlike 2008, and 2011, can not be simply resolved by further central bank intervention which happen to be precisely the reason for the mismatch in the first place."
Furthermore JPM conveniently noted that "given the absence of a banking crisis currently, what is causing negative basis? The answer is monetary policy divergence. The ECB’s and BoJ’s QE coupled with a chorus of rate cuts across DM and EM central banks has created an imbalance between supply and demand across funding markets. Funding conditions have become a lot easier outside the US with QE-driven liquidity injections and rate cuts raising the supply of euro and other currency funding vs. dollar funding. This divergence manifested itself as one-sided order flow in cross currency swap markets causing a decline in the basis."
To which we rhetorically added: "who would have ever thought that a stingy Fed could be sowing the seeds of the next financial crisis (don't answer that rhetorical question)."
All this was happening when the market was relentlessly soaring to all time highs, completely oblivious of this dramatic dollar shortage, which just a few months later would manifest itself quite violently first in the Chinese devaluation and sale of Treasurys, and then in the unprecedented capital outflow from emerging markets as the great petrodollar trade - just as we warned in November of 2014 - went into reverse. In fact, there are very few now who do not admit the Fed is responsible for both the current cycle of soaring volatility, or what may be a market crash (as DB just warned) should the Fed not take measures to stimulate "inflation expectations" (read: more easing).
In any event, since March we have received numerous requests for follow-up of where said funding shortage is now. So here are the latest observations on the current level of the global dollar funding shortage as measured by the Dollar fx basis, courtesy of JPM:
The dollar fx basis declined further over the past two months. The 5-year dollar fx basis weighted across six DM currencies declined to a new  low for the year and the lowest level since the summer of 2012 during the euro debt crisis.
In other words: the USD funding shortage is even worse than it was when we looked at it in March, it still is a function of conflicting central bank liquidity flows, and while not as bad as it was at its all time worst levels in late 2011, it is slowly but surely getting there with every passing week that the Fed does not ease monetary conditions. 
A brief history of the three key periods of global USD-funding shortfalls:
  • The first episode immediately after the Lehman bankruptcy coincided with a US banking crisis that quickly became a global banking crisis via cross border linkages. Financial globalization meant that Japanese banks had accumulated a large amount of dollar assets during the 1980s and 1990s. Similarly European banks accumulating a large amount of dollar assets during 2000s created structural US dollar funding needs. The Lehman crisis made both European and Japanese banks less creditworthy in dollar funding markets and they had to pay a premium to convert euro or yen funding into dollar funding as they were unable to access dollar funding markets directly.
  • The second episode of very negative dollar basis took place during the Euro debt crisis. The sovereign crisis created a banking crisis making Euro area banks less worthy from a counterparty/credit risk point of view in dollar funding markets. As dollar funding markets including fx swap markets dried up, these funding needs took the form of an acute dollar shortage. European banks and companies that had dollar assets to fund had to pay a hefty premium in fx swap markets to convert their euro funding into dollar funding. Those European banks and companies that were unable to do so, were forced to liquidate dollar assets such as dollar denominated bonds and loans to reduce their need for dollar funding
  • The third phase of very negative dollar basis started at the end of last year. Monetary policy divergence has for sure played a role during the end of 2014 and the beginning of this year. The ECB’s and BoJ’s QE has created an imbalance between supply and demand across funding markets. Funding conditions have become a lot easier outside the US with QE-driven liquidity injections raising the supply of euro and yen funding vs. dollar funding. This divergence manifested itself as one-sided order flow in cross currency swap markets causing a decline in the basis. And we did see these funding imbalances in cross border corporate issuance.
More from JPM:
Similar to the beginning of this year, the decline in the dollar fx basis is raising questions regarding shortage in dollar funding. This is because the fx basis reflects the relative supply and demand for dollar vs. foreign currency funds and an even more negative basis currently points to more intense shortage of USD funding relative to the beginning of the year.

Figure 5 shows that the current negativity of the dollar fx basis represents the third major episode since the Lehman crisis. Before the Lehman crisis the fx basis was remarkably stable hovering around zero as funding markets were well balanced. After the Lehman crisis, funding markets experienced persistent imbalances with an almost structural shortage of dollar funding.
This is how it looks now:
The conclusion:
In all, continued monetary policy divergence between the US and the rest of the world as well as retrenchment of EM corporates from dollar funding markets are sustaining an imbalance in funding markets making it likely that the current episode of dollar funding shortage will persist.
What does this mean in simple terms? Think back to what David Tepper said several weeks ago on CNBC when, contrary to popular opinion, he admitted he was bearish on risk assets mostly as a result of the "reserve streams" going in two different ways. This is precisely what the dollar shortage as quantified by the negative dollar basis is telling us: the policy divergence between the "tight" Fed and the ultra loose ECB and BOJ is starting to reach extreme levels, and will likely continue until the basis blows out to its theoretical limit of -50bps as set by the Fed-ECB swap line.
At that point either the Fed will be forced to admit it was beaten by the market, and either cut rates (to negative) while perhaps unleashing even more QE to offset the monetary imbalance with the rest of the world, or it will once again engage in even more swap lines with foreign central banks as the dollar funding shortage moves beyond simply synthetic and into an actual shortage of USD "bills" all in electronic credit format of course, because as we further explained last week, it is simply impossible to satisfy all global USD-denominated claims.

"They Just Don't Want A Job" - The Fed's Grotesque "Explanation" Why 94.6 Million Are Out Of The Labor Force

In a note seeking to "explain" why the US labor participation rate just crashed to a nearly 40 year low earlier today as another half a million Americans decided to exit the labor force bringing the total to 94.6 million people...
... this is what the Atlanta Fed has to say about the most dramatic aberration to the US labor force in history: "Generally speaking, people in the 25–54 age group are the most likely to participate in the labor market. These so-called prime-age individuals are less likely to be making retirement decisions than older individuals and less likely to be enrolled in schooling or training than younger individuals."
This is actually spot on; it is also the only thing the Atlanta Fed does get right in its entire taxpayer-funded "analysis."
However, as the chart below shows, when it comes to participation rates within the age cohort, while the 25-54 group should be stable and/or rising to indicate economic strength while the 55-69 participation rate dropping due to so-called accelerated retirement of baby booners, we see precisely the opposite. The Fed, to its credit, admits this: "participation among the prime-age group declined considerably between 2008 and 2013."

And this is where the wheels fall off the Atlanta Fed narative. Because the regional Fed's very next sentence shows why the world is doomed when you task economists to centrally-plan it:
The decrease in labor force participation among prime-age individuals has been driven mostly by the share who say they currently don't want a job. As of December 2014, prime-age labor force participation was 2.4 percentage points below its prerecession average. Of that, 0.5 percentage point is accounted for by a higher share who indicate they currently want a job; 2 percentage points can be attributed to a higher share who say they currently don't want a job.
And there you have it: there are nearly 100 million working-age Americans who could be in the labor force, but are not "mostly" because they don't want a job.
Nothing about the lack of job demand as mega corporations continue to lay workers off in droves instead of hiring, instead using every last dollar of free cash flow to buyback their own stock to boost executive compensation instead of growing their company and hire more workers.
Nothing about the collapse in small business formation - that driver of 80% of US employment - as firm exit rates are now greater than firm entry rates
Nothing about the inability to get a job in a world in which the rest of
the global is lapping the US in educational and labor skills.
Nothing about the US economy never having left the post-2008 depression where $4.5 trillion in Fed credit was created just to boost the S&P to all time highs and never making it to the actual economy (until the helicopters finally start paradropping of course)
Nothing about millions of aging, 55 and over, Americans refusing to retire or quit their job simply because they have no return on their savings to fall back on thank to the Fed's ZIRP, thus keeping the labor pipeline clogged and preventing younger Americans from getting promoted and achieving better paying jobs.
Nothing about a Millennial generation encumbered with $1 trillion in debt, that is so terrified of its job prospects and having to pay down its debt, it choose instead to keep rolling and piling on to this debt by remaining in college indefinitely
Nothing about the perverted incentive structure of a welfare state that makes it more attractive to collect generous government handouts which end up punishing hard work.
None of that.
You see, it is because Americans "mostly don't want a job."
And these are the pompous academic "intellectuals" who are supposed to micromanage the US economy. But how can they fix the biggest problem facing the US economy when they fail to even accurately diagnose what the problem is?
Which, incidentally, is why the same old Fed tools will be used and abused in hopes of kicking the can down a few more months at at time, be it QE 4, 5, 100, or ever more negative rates, both of which are coming.
How long will this continue? Now that is a very simple question: it will continue until the dollar loses its reserve status, just like the pound before it, and the livre before that, and the guilder before that, and so on.

Thursday, October 1, 2015

Bailed Out FX Broker FXCM Says It Was Hacked, Resulting In "Wire Transfers From Customer Accounts"

It has not been a good year for retail currency broker FXCM which in January faced massive losses in the aftermath of the shocking Swiss Franc revaluation. In fact, only a $300 million bailout from Jefferies/Leucadia allowed the currency trader to meet regulatory requirements and continue operations.
Then, this morning, FXCM clients woke up with even more headaches when the currency broker admitted it had been hacked, leading to a "small number" of unauthorized wire transfers from customers’ accounts. FXCM said it received an email from a self-proclaimed hacker who claimed to have access to customer information. The company said it is working to establish the scope of the breach and identify affected customers.
Not a bad idea: hack clients accounts, then quietly syphon money out.
So, blame the Chinese again? That would be awkward after Xi Jinping's visit with Obama last week.
But more importantly, will this be the final straw for FXCM, and will the broker's client decide to give the already teetering company one more chance? Perhaps the biggest question is why would anyone still want to trade FX when this is clearly the domain of the central banks, and anyone with a less than infinite balance sheet get stopped out virtually on a daily basis, especially once the momentum igniting effect of the HFT algos is added.
As a final remember, FX trading is the one venue where HFT firms like Virtu are betting their on. Expect even more grotesque moves in any given FX pair as liquidity in this critical market evaporates to nothing.

Tuesday, September 29, 2015

This Is "Getting Really Ugly, Really Fast": Two Thirds Of Recent Graduates Say US College Education Is A Ripoff

If there was any question about whether college students in the US were getting wise to the fact that their degrees may not be worth the $35K (on average) they’re paying for them, that question was answered earlier this year with one hilarious graduation cap:
Yes, “Game of Loans,” and as the student debt bubble balloons into the trillions, the federal government has come to realize that, to quote Bill Ackman, there’s “no way” students are ever going to pay back all of this debt, which is why the Obama administration is promoting (and we mean explicitly promoting) IBR programs that in many cases ensure former students will have at least a portion of their student debt forgiven thereby guaranteeing taxpayer losses on government higher education loans will run into the tens and probably hundreds of billions of dollars. 
Assessing what role students have played in this is akin to asking what role potential homeowners played in the housing bubble. That is, the government has held up certain ideals (i.e. the right to homeownership and the right to pursue post secondary education) as inalienable and so while there’s an extent to which people have to be accountable for the money they borrow, when you pitch these things as being on par with John Locke’s natural rights and then move to effectively subsidize them by either driving interest rates into the ground or passing out trillions in loans to students who you know have no hope of paying it all back, you create a scenario whereby borrowers can then claim they were misled, mistreated, and ultimately defrauded. 
That was the case with the housing bubble and, thanks to the fact that today’s college graduates are entering a job market that despite all the rosy rhetoric, is actually nothing more than a bartender creation machine, former students are now looking with disdain at the tens of thousands in student loans they must now figure out how to pay back while bringing in less than the median national yearly income which is itself largely insufficient when it comes to servicing large lines of credit.
It is with all of the above in mind that we bring you the following from WSJ who reports that two thirds of students who graduated in the last nine years and whose debt matches or exceeds the national average do not believe their degree was worth the cost. Here’s more:
Recent college graduates are significantly less likely to believe their education was worth the cost compared with older alumni and one of the main reasons is student debt, which is delaying millennials from buying homes and starting families and businesses.

The insight into the generational divide comes courtesy of the second annual Gallup-Purdue Index, which polled more than 30,000 college graduates during the first six months of this year.

Former Indiana Governor Mitch Daniels created the survey when he became president of Purdue University in 2013 in an effort to better understand the value of a college education from the people who should know best—alumni.

The steep decline in the perception of whether a degree was worth the cost startled Brandon Busteed, Gallup’s executive director for education and workforce development.

Overall, 52% of graduates of public schools “strongly agreed” that their education was worth the expense, compared with 47% of private-school graduates. Among graduates of private for-profit universities, just 26% felt the same.

About two-thirds of college students graduate with debt, with an average load of about $35,000.

According to the Index, only 33% of alumni who graduated between 2006 and 2015 with that amount of debt strongly agreed that their university education was worth the cost. 
On the one hand, this suggests that going forward, students may demand some combination of the following three things, i) lower tuition, ii) better coordination between those who design curriculums and employers, and hopefully iii) efforts to create a more robust jobs market characterized by rising wage growth and real opportunity for graduates. 
Unfortunately, the more likely outcome will be that demand for higher education will simply dry up, thereby creating an even larger divide between the skills set of America's youth and that of job seekers around the globe. But don't take our word for it, just ask Gallup’s executive director for education and workforce development Brandon Busteed who spoke to The Journal:
“When you look at recent graduates with student loans it gets really ugly, really fast. If alumni don’t feel they’re getting their money’s worth, we risk this tidal wave of demand for higher education crashing down.”

EES: Trade with the best - trade at Pepperstone



Click here to open an account with Pepperstone

EES Clients: Open an account with the above link and receive our DRS EA Portfolio FREE!  Minimum 25,000 deposit.  

Did The Bank Of England Rig Emergency Liquidity Auctions During Crisis?

Late last year, the Bank of England followed in the venerable footsteps of virtually every sellside firm on the planet when it moved to dismiss its chief currency dealer Martin Mallett. Through his participation in central bank meetings with traders Mallet, who had worked at the bank for three decades, was aware of the possibility that the world’s largest banks were conspiring to manipulate the $5 trillion a day FX market but apparently failed to take the proper steps to escalate those concerns. The dismissal was of course accompanied by a cacophony of nonsense from the BOE. Here’s an amusing excerpt from our coverage of the story for those who need a refresher:
But back to the Bank of England, which it turns out, lied about its involvement in FX rigging. According toBloomberg, alongside the FX settlement announcement, the Bank of England fired its chief currency dealer - the abovementioned Martin Mallett - a day before he was faulted in an independent investigation for failing to alert his superiors that traders were sharing information about client orders.

Martin Mallett was dismissed by the Bank of England yesterday for “serious misconduct relating to failure to adhere to the Bank’s internal policies,” according to a statement by the central bank today.

Mallett, who worked at the bank for almost 30 years, had concerns from as early as November 2012 that conversations between traders right before benchmarks were set could lead to the rigging of those rates, according a report today by Anthony Grabiner, who was commissioned by the central bank to look into what its officials knew about practices under investigation around the world. Mallett was “uncomfortable” with the traders’ practices, yet he didn’t escalate these concerns, Grabiner said.
“We’re disappointed because we hold ourselves to the highest standards -- we have an outstanding markets division,” BOE Governor Mark Carney said at a briefing in London today. “What Lord Grabiner found was that our chief dealer was aware of circumstances in the market that could facilitate or lead to improper behavior by market participants.”

And then just to keep the ball rolling, the BOE lied again!

Mallett “was not acting in bad faith,” according to the Grabiner report. He wasn’t “involved in any unlawful or improper behavior, nor aware of specific instances of such behavior,” it said.

Reuters adds, that the dismissal was unrelated to an ongoing foreign exchange scandal  "This information related to the Bank's internal policies, not to FX,” a BoE spokeswoman said on Wednesday. So... the Bank's internal policies on FX rigging?
Here's how The Telegraph recently described the debacle:
An independent report published last year into the scandal reserved its criticism largely to Martin Mallett, the Bank’s former chief currency trader, saying he should have told his superiors about his concerns.

When traders at major banks were rigging foreign exchange rates, Mr Mallett developed concerns about manipulation, several years before the scandal became public.

Lord Grabiner, the barrister who carried out the report, criticised him for failing to escalate concerns, but also said the Bank needed a proper “escalation policy” to make sure that staff are able to raise the alarm.

Mr Mallett was fired over unrelated conduct issues, which Mr Carney later revealed amounted to more than 20 violations of Bank rules, including “sharing a confidential bank document, venturing personal opinions about Bank policy… inappropriate language, inappropriate attachments to emails… incidents that could have brought the bank’s reputation into dispute”
Of course as we went on to note (and this is what we meant above when we said Mallet's dismissal was consistent with post-rigging investigations across the sellside), Mallet's only crime in the BOE's eyes was being exposed in the papers and thus he - like all of the scapegoats that were not-so-promptly dismissed across Wall Street once word got out that everything from money market rates to FX had been rigged for years - simply had to go, lest anyone should get the idea that the corruption and coverups are actually endemic and go all the way to the top.  
In yet another indication that manipulation may well be unspoken (or perhaps even spoken) policy at the BOE, new details regarding the UK Serious Fraud Office's investigation into emergency liquidity auctions conducted during the crisis suggest the central bank may have played a direct role in rigging the bids. Here's FT with more:
The Serious Fraud Office is investigating whether Bank of England officials told lenders to bid at a particular rate to minimise questions about the health of their ­balance sheets, thereby rigging emergency auctions at the onset of the financial crisis.

It is investigating whether banks and building societies were instructed to offer roughly the same amount of collateral so no lender would be singled out for overbidding, insiders said.

Over-pledging by an individual lender at the time of the auctions could have been seen as a sign of desperation, adding more turbulence to already volatile financial markets.

The central bank introduced the auctions in late 2007 after money markets had frozen, allowing lenders to swap a wider range of assets for funding and gain access to emergency liquidity.
So essentially, in order to make sure market participants couldn't use the auctions to make accurate assessments of who might be facing the most acute pressure, the BOE instructed auction participants on how to bid. Here's more:
The SFO has deployed investigators who worked on building the case that resulted in the world’s first guilty verdict in a trial related to the rigging of the London interbank offered rate (Libor).

Their new case focuses on 2008 auctions, where lenders pledged mortgage-backed securities in exchange for UK government bonds. At the peak of the auctions, in January 2009, up to £185bn of gilts had been lent out.
What the implications of this will ultimately be are as yet unclear, but it certainly looks like this was a concerted effort to obscure risk and while the BOE will no doubt claim that gaming the auctions was necessary to avoid inciting a panic, it also means that the central bank was intent on hiding the extent to which it believed the market was in peril heading into the crisis. 
We're sure we'll be coming back to this in due time. Well, then again maybe not, because as FT goes on to note, SFO will only continue its investigation if it believes "it's in the public interest" which is particularly amusing in this context as the probe itself revolves around whether the BOE was entitled to make an assessment of what it's in the public's best interest to know. If the SFO does decide the public is entitled to know more, the next question will of course be this: who's the Mark Mallet that instructed banks on how to bid?

Tuesday, September 22, 2015

Why Volkswagen Is Systematically Important For Germany And Europe

It is no secret that with the rest of the US economy, and especially housing, sputtering the one bright spot for US production and manufacturing has been the automotive sector. Whether the recent strength has been a function of money-losing leases, extremely generous terms on auto loans including a new rise in subprime debt issuance is up for debate, but whatever the reason carmakers have had a few years of relative stability (with China rolling over this won't last, but that's a different topic).
But if in the US automakers have been the solitary silver lining to an economy that is once again rolling over (as the Fed lack of a rate hike just confirmed), in Europe carmakers are absolutely critical, while for export powerhouse Germany, one can say the local auto industry is nothing short of systemic.
Here are the latest facts on Germany's automotive industry from GTAI.de
  • German automobile manufacturers produced almost 13 million vehicles in 2013 – equivalent to more than 17 percent of total global production.  Twenty-one of the world’s 100 top automotive suppliers are German companies.
  • The automotive industry is the largest industry sector in Germany. In 2014, the auto sector listed a turnover of EUR 384 billion, around 20 percent of total German industry revenue. Source: VDA 2015
  • The auto industry is the largest industrial sector in Germany, contributing about 2.7% to gross domestic product.
  • Some 20% of Germany's exports are made up of vehicles and parts.
  • Germany is Europe’s number one automotive market; accounting for over 30 percent of all passenger cars manufactured (5.6 million) and almost 20 percent of all new car registrations (3.04 million). Source: ACEA 2015
  • Germany is home to 43 automobile assembly and engine production plants with a capacity of over one third of total automobile production in Europe. Source: ACEA 2015
  • One in every five cars worldwide carries a German brand. Source: VDA 2015
  • In 2014, automotive industry R&D expenditure reached EUR 17.6 billion, equivalent to one third of Germany’s total R&D expenditure. Source: VDA 2015
  • 21 of the world’s top 100 automotive suppliers are German companies. Source: PWC 2013
  • Around 77 percent of cars produced in Germany in 2014 were ultimately destined for international markets – a new record. Source: VDA 2015
  • R&D personnel within the German automobile industry reached a level of just over 93,000 in 2014. Around 775,000 are employed in the industry as a whole.Source: VDA 2015
Then there is the value-chain, i.e., the suppliers and the providers of R&D for Germany's automotive industry.
  • Germany boasts 21 of the world’s top 100 automotive OEM suppliers. Of these 21 companies, 18 belong to the top 50 automotive suppliers in Europe. Breaking the figures down further still, six belong to the top 25 global suppliers by size.
  • Exports account for almost 37 percent of 2013 revenue generated by German OEM suppliers
As for why Volkswagen is the benchmark? Because not only is the Volkswagen Group the largest automaker in Germany, it is also the largest German company by revenue according to Forbes (Daimler is #3, BMW is #7). Some other facts:
  • The Volkswagen group accounts for roughly one in 10 vehicles sold globally.
  • Most German auto sales came from the Volkswagen group, which reported just over 202 billion euros in revenue in 2014.
  • Roughly 70% of Volkswagen vehicles are sold outside German borders.
  • Volkswagen employs nearly 600,000 people around the world, and more than a third of the 775,000 people who work in the auto industry in Germany.
In short, while banking may be the most important sector to the hyper-financialized US economy, for the export-driven German economy - whose exports account for over 40% of GDP- it is all about the car companies and their massive supply chains.
So what happened over the past 48 hours to Volkswagen, which has lost over a third of its market cap, or more than the market cap of Tesla, is nothing short of an earthshattering cataclysm to an economy where all the cogs and gears and running in a smooth, undisturbed ensemble... until everything changed overnight.
What happens next to Volkswagen is unknown: as noted earlier a Credit Suisse laid out what may be the worst case scenario: "the balance sheet is at significant risk to deteriorate beyond the impact of the €6.5bn provision the company has announced so far. With group free cash flow generation largely dependent on China (we estimate 94% of industrial free cash flow – 78% dividend from JV), there could be increasingly risk to dividend payments."
But it is not so much concerns about Volkswagen as fears the entire German auto industry may be at risk.
The best case scenario: "Even a heavy drop in diesel car production and exports would probably not subtract more than 0.2% from German GDP," said Berenberg economist Holger Schmieding. "Demand for non-diesel cars may rise and partly offset the drop in demand for diesel-powered cars."
The worst? Quote Theo Vermaelen, a finance professor at INSEAD: "If nobody else has done it, the damage would be limited. If it looks like it's more companies, not just Volkswagen, it would be a major problem for the German car industry, and the German economy overall."
And that's the question German investors are wrestling with: was it just one cockroach. If it was more, the ultimate outcome will (not may) be more QE from the ECB because with Europe tentative recovery also sputtering after 6 months of ECB QE, a steak through the heart of Germany's most important industry, will be just the black swan that sends Europe into a recession.
So the question becomes: will Mario Draghi wait to see the fallout of the rapidly escalating Volkwsagen scandal, or will he preempt and ratchet up the bondbuying even more? Find out in the next few weeks.
* * *
Finally for those curious to learn more, we present what may be the winner of the "worst named corporate presentation" award for 2015 - Volkswagen's "Stability in Volatile Times" released earlier today.

Monday, September 21, 2015

Russians Buy 1 Million Ounces of Gold Bars In August


Russia's gold reserves rose to 42.4 million troy ounces as of September 1 compared with 41.4 million troy ounces a month earlier, the Russian central bank announced on Friday.
The monthly accumulation of 1 million ounces in just one month was one of the more sizeable monthly purchases by Russia and equates to 31.1 metric tonnes in August alone.
The value of the bank's holdings rose to $47.68 billion from $44.96 billion a month earlier, Russia said in a statement on its website.
The amount bought was more than the 30.5 metric tons that Russia purchased in March, then the highest amount in six months. 
Russia is now the seventh biggest holder of gold reserves after the U.S, Germany, the IMF, Italy and France and the rising gold power China. Russia has  more than tripled its reserves since 2005 and holds the most gold bars since at least 1993, International Monetary Fund data shows.
Nations globally have been increasing their gold holdings in recent years, a reversal from two decades of selling. China, Kazakhstan, Ukraine and Belarus are among other nations that have been accumulating gold.
Gold remains a large part of many central banks’ reserves, decades after they stopped using it to back paper and the electronic currency of today.
Russia has been steadily buying bullion since 2007 and the advent of the global financial crisis. Russia was accumulating gold even prior to tensions with the West and international sanctions over the Ukrainian conflict. 
Gold has protected the Russian reserves and acted as a hedge as gold priced in rubles has surged over 60 percent in the last 12 months. The plunge in oil prices contributed to sharp falls in the ruble.
Russia added about 13 tons in July and 24 tons the month before that. As tensions escalate with the U.S., the UK and the EU, Russia appears to be intensifying efforts to diversify out of their large dollar holdings and into physical gold.


DAILY PRICES
Today’s Gold Prices: USD 1136.85, EUR 1007.27 and GBP 732.86 per ounce.Friday’s Gold Prices: USD 1136.00, EUR 992.31 and GBP 726.25 per ounce.(LBMA AM)
Gold had a 3 percent weekly gain and silver had a 3.5% weekly gain. Gold ended with a gain of 0.73% on Friday while silver rose to as high as $15.43 before ending with a gain of 0.26%.
Read more on the GoldCore.com blog

IMPORTANT NEWS
Gold hovers near 3-week high as equities slip – Reuters
Gold Has First Weekly Gain in a Month After Fed Holds Rates – BloombergGold at near 3-week high as Fed rate decision weighs on equities – ReutersAsian shares slump on global growth concerns, U.S. selloff – ReutersVolkswagen Plunges 17% After U.S. Emissions Cheat Scandal – Bloomberg TV
IMPORTANT COMMENTARY
Now Is Time To Get Into Gold? – Bloomberg TVNegative interest rates could be necessary to protect UK economy – The TelegraphSardinia’s privately created local currency endures after six years – Financial TimesWhat Keynes Would Think of ‘Neo-Keynesians’ – Wall Street JournalSaxobank CIO Prefers Gold Amid Increased Uncertainty – Zero Hedge
Read more News & Commentary from GoldCore.com

http://www.zerohedge.com/news/2015-09-21/russians-buy-1-million-ounces-gold-bars-august

Going Back To What Works: Gold Is Money Again (Thanks To Utah)

As of today you really can pay your taxes, your credit cards, your mortgage, shop at Costco, and buy your groceries without so much as a bank account while using sound money.
The fact that Texas announced that it withdrawing its gold from Manhattan and is creating a state gold depository generated a good deal of interest because there would also be a way to transfer gold to others via said depository. So much interest that Texas received calls from all over the United States from folks that wanted to be part of such a system. The articles covering the future Texas depository cumulatively received millions of views. What was missed in all of this coverage is that a functional, and legal depository that allows anyone in the country to pay and save in gold dollars already exists. In Utah.

The United Precious Metals Association in Utah has gold and now separate silver accounts that act as checking accounts do at any bank or credit union.The way it works is that members deposit Federal Reserve Notes (or paper dollars) into their UPMA account which in turn translates them into golden dollars (or silver). The golden dollars are based off the $50 one ounce gold coins produced by the Treasury of The United States. They are legal tender under the law and are protected as such. So if I were to deposit $1,200 FRNs then I would have $50 golden dollars.

UPMA is the only institution in the country that I know of that doesn't have a buy/sell spread on their Golden Eagles or Silver Eagles. This means that all my $1,200 FRNs once converted to gold could be spent the next day without losing anything to any sort of premium. The price of a Gold Eagle is 5.8% above spot but when you 'cash out' you do so at 5.8% above gold spot. This effectively removes that barrier from sound money.

This year the UPMA released a gold backed debit card via American Express. The way it works is that a member may spend up to half of their gold or silver dollars in any given month period using the card. When I interviewed the founder of UPMA today, Larry Hilton, I learned that the way the card works is that they have made a contract with American Express so that UPMA members can use what are technically credit cards as a debit card anywhere American Express is accepted. The members are added on as 'employees'. Right now there are already hundreds of people around the country using this method of payment. They are literally spending gold on groceries without losing anything to premiums or in transaction fees to UPMA. In fact they get 1% cash back in gold.

This service is available to anyone in the United States and requires no credit check whatsoever. Using the billpay service online one can pay for what American Express can't such as credit card bills, property taxes, or your mortgage. The golden dollars are simply converted right back into FRNs and paid out. When asked Mr. Hilton affirmed that there are many people that don't store anything in the banks anymore thanks to this service. They are obsolete if you want to use sound money. There are no fees associated with the use of the card. Members that store more than $50 in golden dollars do pay a small storage/membership fee of 10 golden cents or $2.50 FRNs and an additional 0.25 FRNs for every additional $50. These $50 Golden Eagles can also be withdrawn and sent to you directly.

The United Precious Metals Association has the full backing of Utah Attorney General Sean Reyes who also uses the service. The legal foundation was set up in 2010 and 2012 here in Utah where the vault is located. Many members of the board including General Counsel Larry Hilton are lawyers that specialize in law regarding the use of legal tender.

An elected board of members makes regular audits to assure that all of the gold and silver is there and reports to the general membership every year at the monetary summit. This year it will be held on October 17 in Salt Lake City. The vault is insured from theft and fraud via the Llyods of London. They hold a 100% reserve ratio.
And as UPMA summarizes, this is nothing new and it is not different this time...In fact we are going back to what works...
All very unmodern? The gold standard is not up-to-date only if we have a yen for running away from economic success in the form of stable prices and major growth. After Nixon went off gold in 1971, abrogating the conversion agreement with the foreign nations, and keeping gold-holding illegal in the United States, inflation did things that were unheard of. The price level leapt by 200% from the late 1960s to the early 1980s, a period also bedeviled by the economic sluggishness known as “stagflation,” where double-dip recessions came every few years and the long term growth rate sunk below 2%. In the 1980s and 1990s, the Fed returned to conducting monetary policy in view of the gold price, and sure enough the consumer price index stabilized at one-third the stagflation level and growth rebounded past 3.5% per year. The verification just kept on coming: key on gold stability – effectively making the dollar convertible on demand to gold at a fixed price – and watch prices stay the same and growth shoot the moon.

In the 2000s, we are witness to a Fed that has disdained the gold price now for a decade. The result has been the loss of that decade to economic growth, as well as stirrings in key commodities such as oil and food, if not the brutal comprehensive arrival of inflation. If the Fed decided today to target the price of gold as the pole star in its monetary operations, there is no historically conversant reason to believe that we would have unfold before us anything but yet another era of price stability and maximal economic growth. For this is the only thing that has ever resulted from gold standards and their approximations throughout our history.

The arc of time has revealed connections that we have the opportunity to re-forge today. The United States became the largest economy in the world in the 1870s, was two-and-a-half times larger than the second-place nation in 1913, boomed along with everyone else in the Bretton Woods era, and in the 1980s and 1990s did not succumb to the “Eurosclerosis” or any “Japan disease” that afflicted its major economic partners. In every episode of fantastic economic performance – in terms of both price stability and major growth – there was a commitment to gold.
Choice in currency is being recognized as a basic human right around the world. Utah was the first State to make gold and silver coins legal tender alongside the U.S. dollar on March 25th, 2011.