The United States is
facing both a structural and demand problem - it is not the cyclical
recessionary business cycle or the fallout of a credit supply crisis
which the Washington spin would have you believe.
It is my opinion that
the Washington political machine is being forced to take this position,
because it simply does not know what to do about the real dilemma
associated with the implications of the massive structural debt and
deficits facing the US. This is a politically dangerous predicament
because the reality is we are on the cusp of an imminent and
collapse in the standard of living for most Americans.
The politicos’ proven
tool of stimulus spending, which has been the silver bullet solution for
decades to everything that has even hinted of being a problem, is
clearly no longer working. Monetary and Fiscal policy are presently no
match for the collapse of the Shadow Banking System. A $2.1 Trillion YTD
drop in Shadow Banking Liabilities has become an insurmountable problem
for the Federal Reserve without a further and dramatic increase in
Quantitative Easing. The fallout from this action will be an intractable
problem which we will face for the next five to eight years, resulting
in the “Jaws of Death” for the American public.
economic news has turned decidedly negative globally and a sense of
‘quiet before the storm’ permeates the financial headlines. Arcane
subjects such as a Hindenburg Omen now make mainline news. The retail
investor continues to flee the equity markets and in concert with the
institutional players relentlessly pile into the perceived safety of
yield instruments, though they are outrageously expensive by any
proven measure. Like trying to buy a pump during a storm flood, people
are apparently willing to pay any price. As a sailor it feels
like the ominous period where the crew is fastening down the hatches
and preparing for the squall that is clearly on the horizon. Few crew
mates are talking as everyone is checking preparations for any
eventuality. Are you prepared?
What if this is not a squall but a tropical storm, or even a hurricane?
Unlike sailors the financial markets do not have the forecasting
technology to protect it from such a possibility. Good sailors before
today’s technology advancements avoided this possibility through the use
of almanacs, shrewd observation of the climate and common sense. It
appears to this old salt that all three are missing in today’s financial
Looking through the misty haze though, I can see the following clearly
looming on the horizon.
Since President Nixon took the US off the Gold standard in 1971 the
increase in global fiat currency has been nothing short of breath taking.
It has grown unchecked and inevitably became unhinged from world
industrial production and the historical creators of real tangible wealth.
Fed officials are considering new tactics if they
resume purchases of long-term U.S. Treasury securities.
They are weighing a more open-ended, smaller-scale program
that they could adjust as the recovery unfolds.
Rather than announce massive bond purchases with a
finite end, as they did in 2009 to shock the U.S.
financial system back to life, Fed officials are weighing
a more open-ended, smaller-scale program that they could
adjust as the recovery unfolds.
The Fed hasn't yet committed to stepping up its bond
purchases, and members haven't settled on an approach.
After its meeting last week, the Fed's policy committee
said it was "prepared" to take new steps if needed.
A decision on whether to buy more bonds depends on
incoming data about economic growth and inflation; if the
economy picks up steam, officials might decide no action
But having pushed short-term rates to near zero, it now
has to devise new, untested approaches at almost every
turn. A misstep could lead to unintended consequences, one
factor that makes officials wary and investors jittery
about its every move.
The Obama administration wants a more airtight eavesdropping
law that would help law enforcement conduct real-time snooping
when people use social-networking sites and other communications
A 1994 federal law helped law enforcement keep
pace with emerging digital and wireless technology by requiring
that telecommunications companies alter their facilities and
technology to aid court-authorized wiretapping by law enforcement
However, the Federal Bureau of Investigation and other agencies
in recent years have expressed concerns that some of the newest
communications technologies, often developed by tiny start-up
companies, leave gaps not covered by the existing law, called the
Communications Assistance to Law Enforcement Act. These gaps
hamper investigators, federal officials say.
Those officials say the technologies that aren't as readily
eavesdropped-on in real time include voice-over-Internet-protocol,
which allows calls to be made over broadband internet links
instead of analog phone lines; peer-to-peer communications, best
exemplified by sites where users download music or video files;
social networking sites such as Facebook; and services such as
A key excerpt from the paper:
If large financial
crashes are “outliers”, they are special and thus require a
special explanation, a specific model, a theory of their own. In
addition, their special properties may perhaps be used for their
prediction. The main mechanisms leading to positive
feedbacks, i.e., self-reinforcement, such as imitative behavior
and herding between investors are reviewed with many references
provided to the relevant literature outside the narrow confine of
Physics. Positive feedbacks provide the fuel for the
development of speculative bubbles, preparing the instability for
a major crash. We demonstrate several detailed mathematical models
of speculative bubbles and crashes. A frst model posits that the
crash hazard drives the market price. The crash hazard may
sky-rocket at some times due to the collective behavior of “noise
traders”, those who act on little information, even if they think
they “know”. A second version inverses the logic and posits that
prices drive the crash hazard. Prices may skyrocket at some times
again due to the speculative or imitative behavior of investors.
According the rational expectation model, this entails
automatically a corresponding increase of the probability for a
crash. We also review two other models including the competition
between imitation and contrarian behavior and between value
investors and technical analysts. The most important message is
the discovery of robust and universal signatures of the approach
to crashes. These precursory patterns have been documented
for essentially all crashes on developed as well as emergent stock
markets, on currency markets, on company stocks, and so on.
We review this discovery at length and demonstratehow to
use this insight and the detailed predictions obtained from these
models to forecast crashes.
Sornette Critical Market Crashes
FLASH CRASH - HFT - DARK POOLS
Progress Energy joins flash crash crowd (Updated)
Then there was a flash crash today. Progress Energy fell from
over $40 to around $4 in a few minutes (before recovering). It's
just one stock, but it confirmed that the post May 6 circuit
breakers don't work as advertised -- another blow to confidence in
the financial markets.
There are two massive fixed exchange rate blocs operating in
world economy today, and both of them face severe strains and
eurozone is beset by problems which are typical of fixed rate
blocs in the past, with the main surplus country (Germany)
refusing to increase aggregate demand, thus forcing the deficit
countries to reduce demand in order to stay within the currency
arrangement. This, they appear willing to do, or at least to try.
Meanwhile, the China/US bloc also has a (nearly) fixed exchange
rate, and once again the surplus country (China)
is refusing, or is unable, to expand domestic demand enough to
eliminate the trade imbalance. But, in this case, the deficit
US) is increasingly unwilling to accept the consequences, and
is adopting policies which are designed to break up the bloc
altogether. Two blocs with somewhat similar problems, but very
different responses and outcomes for the deficit countries.
This pattern of trade deficits can only persist as long as
there are offsetting capital flows within the two blocs, and for
many years this was the case. The required capital flows within
the eurozone, from Germany to the peripheries, were facilitated by
the existence of the single currency, which created the illusion
that investments in the deficit countries were largely risk free.
In the Sino/China zone, the required capital flows were mainly
driven by the foreign exchange intervention of the Chinese central
bank, which resulted in huge official flows from China into US
Treasuries. These equilibria persisted for many years, so the
trade imbalances within the two blocs just grew and grew.
The IMF has suggested that a better way forward would be for
the surplus countries, Germany and China, to relieve these
pressures by boosting domestic demand, and are trying to persuade
the G20 to agree to such a package at the summit in South
Korea in November. A co-ordinated policy shift in which the
surplus countries raise demand, the deficit countries cut their
fiscal deficits, and the RMB is revalued, is likely to be optimal
for all parties.
Gordon T Long is not a registered advisor and
does not give investment advice. His comments are an expression of opinion
only and should not be construed in any manner whatsoever as
recommendations to buy or sell a stock, option, future, bond, commodity or
any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, he recommends that you consult with a
qualified investment advisor, one licensed by appropriate regulatory
agencies in your legal jurisdiction, before making any investment
decisions, and barring that, we encourage you confirm the facts on your
own before making important investment commitments.ont>
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Gordon T Long
is not a registered advisor and does not give investment advice. His comments
are an expression of opinion only and should not be construed in any manner
whatsoever as recommendations to buy or sell a stock, option, future, bond,
commodity or any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, we recommend that you consult with a qualified
investment advisor, one licensed by appropriate regulatory agencies in your
legal jurisdiction, before making any investment decisions, and barring that,
we encourage you confirm the facts on your own before making important