Creation of Debt As The Basis For Growth

By Bob Chapman

The UK, Europe, the US and Canada are different degrees of welfare states. By way of regulation, government controls via taxation. The states and their inhabitants send taxes to Washington, which takes its cut and sends funds back to the states with strings attached. You either do what we want you to do, or we cut off your funds. The states and the people are subject to extortion with government using their funds to do so. By using regulations, welfare and extortion, the federal government creates dependency.

Another phenomenon that has developed is a second dependency. People in society, not just in the US, but also in many countries, are dependent on their grandparents and parents and as years progress that situation will worsen. Earning power to maintain a previous lifestyle is no longer available with the staggering tax burden. Including income and VAT taxes in Europe, taxation averages 70%. The ability and opportunity to become successful and wealthy is more limited in today’s societies. Even the college degree has been demeaned. Almost anyone who can hold a pencil today is college material, when 60% of attendees shouldn’t even be there. Adding insult, the jobs once available to college attendees are no longer available, because more often then not illegal aliens hold them. As a result, it is far more difficult to work your way through college and as a result one graduates with a loan for $60,000 that will be paid back in many cases over a lifetime. In most cases that means most won’t be able to afford to buy a house until they are in the 30s or 40, if ever.

Since 1913 the basis for growth in America has been creation of debt out of thin air, a product of the privately owned Federal Reserve and a fractional banking system. It is considered prudent under such a system to lend nine times your underlying assets. Several years ago the figure was 70 and today it is still 40 times. Government and citizens purchase economic goods on credit. Government issues bonds and individuals borrow money.

Today money is only a method of exchange; it is not longer a store of value, especially in an environment of zero interest rates. An important characteristic of money to retain its soundness is gold backing. Today only one currency has any gold backing and that is the euro, which has about 5% gold backing. Ten years ago that backing was 15%, but gold was sold off to suppress the price of gold in conjunction with the US government and many other central banks. As a result we have a world of essentially worthless fiat currencies. The world is left with no sound money and as a result gold has again taken its place as the world’s reserve currency. If for no other reason is that it owes no one anything. Occasionally silver fulfills this role as well – both have for the last six centuries.

Financial operations conducted by government and a privately owned Federal Reserve leads to the extended creation of money and credit exceeding revenues. That leads to inflation, perhaps hyperinflation, and some times eventually deflationary depression. This is especially true when currency is not backed by gold. Having a Federal Reserve makes sound money even more difficult, because it can create endless amounts of money and credit as we have witnessed since August 15, 1971. What the banks and the Federal Reserve have done is use the fractional banking system to steal and expropriate the wealth of dollar owners. Such a system by its very nature is unsound. There is no such thing as full faith and credit, because it is not worth the paper it is written on, whether it is issued by a Federal Reserve or by a government, especially if it’s fiat or unbacked by something such as gold. This money leads to servitude because as it carries less value perpetually and the discovery leads to war and totalitarian government.

A recent manifestation of this profligacy is the urging by government for consumers to consume more with their steadily depreciating currency and to stop paying off debt. At the same time interest rates are lowered to zero to encourage consumption. Needless to say, savers are penalized with poor returns. That is for the most part the elderly. Such policy forces savers to become speculators, unless, of course, they have discovered gold and silver related investments. This process reduces the savings base and forces central banks to create more and more aggregates. It also enrages savers. The entire game has been changed and for the most part few have learned how to protect themselves.

The foregoing allows the Dow to sell at higher levels than previously because a part of those savings go into the stock market and bonds. If you haven’t noticed the bond market is in a bubble created by the Fed. You would think there was some kind of safety in stocks and bonds. Then again, desperate people do desperate things. If you want to see what safety in bonds is, just look at Britain’s bond markets since WWII. This is the sort of result you can expect when you marry corporations and government, and you end up with corporatist fascism.

By the time you read this the US congressional elections will be over and the Democrats will have lost about 50 House seats and probably 9 Senate seats. The American people are outraged over what has been done to them by the last three administrations.

As a result gold has been rising strongly, as the dollar remains under pressure. This in part is due to QE2, as well as the systemic problems facing the US economy. Spending the economy into strength again is not working. The only party increasing spending is the government. They also reflect most of the job growth. Private construction was the weakest in a dozen years.

This is reflected as well in government debt up $1.65 trillion to $13.5 trillion. The government is so deep in debt it cannot sell more debt fast enough to keep up with increases and old debt. The Fed has to purchase 80% of that debt, which cannot continue indefinitely. The result of all this is that the US lurches from one crisis to another.

As always bankers have been borrowing short to lend long, a sure recipe for disaster. That leads us to one of the greatest frauds of the century, the collapse of the real estate market and securitized mortgages. In order to survive banks are borrowing from the Fed at zero rates and lending back to them at 2-1/2%. No one says anything because no one wants the banks to fail. No matter what you call it the result is extending the debt timeline hoping something good will happen

Over the past few weeks we have seen the beginnings of trade war, which in reality had been going on for years. The statements by Chairman of the Fed, Bernanke, and statements as well by Treasury Secretary Geithner, started the ball rolling. The discussion of a possible QE2 set off wild currency volatility with the dollar falling the most and the yen, euro and Aussie dollars being the strongest. The Swiss franc shared leadership with the yen. While this transpired Mr. Geithner told the world the government wanted a strong dollar and that its lower level was just about right.

The significance of currency war is that inevitably leads to trade war. You might call it a backdoor entry. The string of competitive devaluations over the years were overlooked and tolerated by the US because cheap foreign goods held down US inflation and the dollars purchased to subdue domestic currency value were used to buy US Treasuries and Agencies. That benefit was now of limited benefit as nations bought less Treasuries and the Fed had to monetize US Treasury debt. This has and will continue to bottle up inflation to a larger degree in the US, as less hot US dollar flow goes into foreign countries. Countries such as Brazil have already implemented a tax on dollar flows into their country. We can expect more countries to follow and that will be followed by US trade taxes on goods and services. We have already started to see this in goods sold in China and the US. The US wants to increase exports and a weaker dollar makes that happen.

The Fed via stealth has been engaged in QE2 since early June via the bond and repo markets and Wall Street is well aware of that. The easing is talked to in terms of $500 billion over the short term in order to keep the economy level to slightly higher. Some $2.5 trillion will be needed over the next year and another 42.5 trillion the following year. If not forthcoming deflation will rear its ugly head and devour the US and then the world economy. In the meantime the secretive Fed has been surreptitiously lending more funds to Europe to Greece, Ireland, Spain, Portugal and Italy.

The deliberately cheapened Chinese yuan has caused a $260 billion trade deficit with China, or a 20% plus increase. That is a doubling in 10 years from 20% to 40% of its trade deficit. China says it is willing to raise the value of the yuan incrementally over the next several years, but that simply isn’t good enough. We believe trade barriers will become a major issue in the coming session of Congress. The transnational conglomerates know such a move is inevitable. The US has to find a way to solve growing unemployment, which in the real world now stands at 22-3/4%. You cannot have a recovery as long as that many people are unemployed. In addition, those numbers are headed higher, soon to reach 1930’s depression levels. This is something that should have been done long ago, but the elitist forces fought it off as long as possible. The end of free trade and globalization, as we have known it, over the past 20 years will be one of the bigger issues in congress over the next two years. When the yuan is 40% undervalued it becomes a major issue.

The flip side of the immediate problem of QE2 and a lower dollar is higher gold, silver and commodity prices, and an increase in inflation. Mr. Bernanke says we need inflation. Not a lot just a little. Official CPI figures are up 1.6%, whereas real inflation has risen 7% and is headed higher. It’s tough being between the rock and the hard place and that is where the Fed sits. It’s expanded money and credit for banking and Wall Street so no one will be too big to fail.

This issue will hit the streets prior to all the election results being known.

Just as big news will be how much QE2 will be admitted to by the Fed and besides Treasuries and Agencies, how much and what other bonds will the Fed purchase? After we find out how money will be injected into the system we then have to discern how much inflation it will foster.

The truth of the current Keynesian economic system has been taken for granted and it is in the processes of failure. That event demands that the system be purged of its excesses. As we projected back in May, the Fed and the administration will pour $5 trillion into the economy over the next two years just to keep the economy going sideways. This is a staggering amount of money and credit created out of thin air to be monetized, which will certainly depreciate the dollar. We have just seen food and other prices double again. What will happen when all this liquidity hits the economy? You guessed it, more inflation. For some reason the masters of the universe on Wall Street seem to think that somehow inflation and hyperinflation will not appear. They believe in a destructive theory that everything they believe is true. It is part of their misreading of life and its real meaning.

The US would be spending a whopping $200 million per day on President Barack Obama’s visit to the city.

“The huge amount of around $200 million would be spent on security, stay and other aspects of the Presidential visit,” a top official of the Maharashtra Government privy to the arrangements for the high-profile visit said.

About 3,000 people including Secret Service agents, US government officials and journalists would accompany the President. Several officials from the White House and US security agencies are already here for the past one week with helicopters, a ship and high-end security instruments.

“Except for personnel providing immediate security to the President, the US officials may not be allowed to carry weapons. The state police is competent to take care of the security measures and they would be piloting the Presidential convoy,” the official said on condition of anonymity.

Navy and Air Force has been asked by the state government to intensify patrolling along the Mumbai coastline and its airspace during Obama’s stay. The city’s airspace will be closed half-an-hour before the President’s arrival for all aircraft barring those carrying the US delegation.

The personnel from SRPF, Force One, besides the NSG contingent stationed here would be roped in for the President’s security, the official said.

The area from Hotel Taj, where Obama and his wife Michelle would stay, to Shikra helipad in Colaba would be cordoned off completely during the movement of the President.

Shares of Ambac Financial Group Inc. (ABK 0.50, -0.32, -39.23%) were down 49% in Monday’s premarket trading after the company in a regulatory filing said its board has decided not to make a regularly scheduled interest payment on notes due in 2023. If the interest is not paid within 30 days of the scheduled interest payment date of Nov. 1, an event of default will occur under the indenture for the notes, Ambac said. The firm has been unable to raise additional capital as an alternative to seeking bankruptcy protection and is currently pursuing with an ad hoc committee of senior debt holders a restructuring of its outstanding debt through a prepackaged bankruptcy proceeding, according to the filing. If Ambac is unable to reach agreement on a prepackaged bankruptcy in the near term, it intends to file for bankruptcy prior to the end of the year. “Such filing may be with or without agreement with major creditor groups concerning a plan of reorganization,” Ambac said.

[When Ambac insures, mostly municipal bonds, they transfer their own rating to the bonds so if a municipal has a rating of BBB and Ambac is AAA, the municipals assume a Triple A status. If Ambac goes out of business the bonds lose their AAA status and revert to their normal rating status, which might be B or BBB or AA, the bottom line is munis are going to fall in value and we predicted this would happen two years ago, and as usual few were listening. Bob]

The Transportation Security Administration is implementing an enhanced pat-down procedure at national airport security checkpoints, including in Greater Rochester International Airport.

Last week the Dow fell 0.1%, S&P was unchanged, the Russell 2000 was unchanged and the Nasdaq 100 gained 1%. Banks fell 1.1%; broker/dealers rose 0.6%; cyclicals fell 0.4% and transports were unchanged. Consumers fell 0.5%; utilities fell 0.6%; high tech rose 1.6%; semis surged 4.4%; Internets rose 3.2% and biotechs rose 1.4%. Gold bullion rose $30.00, the HUI rose 4.4% and the USDX fell 0.4% to 77.04.

The 2-year T-bills fell 2 bps to 0.33% and the 10-year T-notes rose 4 bps to 2.60%. The 10-year German bunds gained 4 bps to 2.52%.

Freddie Mac 30-year fixed rate mortgages rose 2 bps to 4.23%, the 15’s rose 2 bps to 3.66%, one-year ARMs were unchanged at 3.30% and the 30-year fixed rate jumbos fell 6 bps to 5.18%.

Fed credit fell $1 billion. Fed foreign holdings of Treasury, Agency debt rose $12.9 billion to $3.294 trillion. Custody holdings for foreign central banks rose Year-to-date to $339 billion, or 13.9% annualized.

M2, money supply, expanded $13 billion to $8.873 trillion, that is up 3.5% annualized and yoy it is up 3.3%.

Total money market fund assets rose a large $24.6 billion to $2.807 trillion. YOY assets have fallen $487 billion.

Total commercial paper outstanding jumped $22.8 billion to $1.168 trillion, a high for the year.

Economist Stiglitz: We need stimulus, not quantitative easing

Joseph Stiglitz, the Nobel prize- winning economist at Columbia, disagrees. He thinks it can hurt, and it also won’t do very much.

Joseph Stiglitz: The Fed, and the Fed’s advocates, are falling into the same trap that led us into the crisis in the first place. Their view is that the major lever for economic policy is the interest rate and if we just get it right, we can steer this. That didn’t work. It forgot about financial fragility and how the banking system operates. They’re thinking the interest rate is a dial you can set and by setting that dial, you can regulate the economy. In fact, it operates primarily through the banking system, and the banking system is not functioning well. All the literature about how monetary policy operates in normal times is pretty irrelevant to this situation.

The point is the stimulus did work. They made a very big mistake in underestimating the severity of the downturn and asked for too small of a stimulus, and they didn’t do enough in the design.

http://www.washingtonpost.com/wp-dyn/content/article/2010/10/30/AR2010103004612.html

Stiglitz, Nobel or not, is recycling Keynesian remedies that are the cause of US economic and financial problems; and his logic is faulty.

Joe says QE is undesirable because it will intensify ‘currency wars’. But the currency wars are a direct result of US reliance on Keynesian economics that have pushed the US toward bankruptcy and forced the Fed to paper over the enormous Keynesian deficits. [‘Tis why most economists aren’t money managers.]

The cost of tires, gloves and condoms is set to rise following a 65 per cent jump in the price of natural rubber in the past year.

Yves Smith op-ed in NY Times: How the Banks Put the Economy Underwater – When mortgage securitization took off in the 1980s, the contracts to govern these transactions were written carefully to satisfy not just well-settled, state-based real estate law, but other state and federal considerations. These included each state’s Uniform Commercial Code, which governed “secured” transactions that involve property with loans against them, and state trust law, since the packaged loans are put into a trust to protect investors. On the federal side, these deals needed to satisfy securities agencies and the Internal Revenue Service.

This process worked well enough until roughly 2004, when the volume of transactions exploded. Fee- hungry bankers broke the origination end of the machine. One problem is well known: many lenders ceased to be concerned about the quality of the loans they were creating, since if they turned bad, someone else (the investors in the securities) would suffer.

A second, potentially more significant, failure lay in how the rush to speed up the securitization process trampled traditional property rights protections for mortgages.

Business inventories increased $115.5B, which is far more than expected. The inventory binge contributed 1.44% to GDP growth. Final sales (GDP less inventories) increased 0.6%. Final sales to domestic purchasers increased 2.5%. This is down significantly from the 4.3% increase in Q2.

The measure is in place for travelers who choose not to go through the imaging technology devices known as the full-body scanners.

Passengers always have had the option to walk through the metal detectors and be patted down, but there will be some change to the latter procedure. The enhanced pat-down, which TSA officials tested in Boston and Las Vegas airports and which officials say adds another detailed layer of security, uses a front-of-the-hand, slide-down technique on passengers’ bodies.

“If you refuse to go through the full body scan, you are going to be subject to a physical pat-down of your person,” said David Damelio, Greater Rochester International Airport director. “In Rochester, we only have one machine, so we are not always going to be able to get everyone through that machine.”

Damelio said passengers will be able to request a pat-down from someone of the same gender.

“TSA constantly evaluates and updates screening procedures to stay ahead of evolving threats,” said TSA spokesperson Ann Davis. “While we cannot share specific details of our procedures for security reasons, pat-downs are designed to address potentially dangerous items, like improvised explosive devices and their components, concealed on the body.”

Sixty-five airports use the body scan imaging technology, with the device coming soon to four more major airports: Chicago Midway Airport, Dulles International Airport in Washington, D.C., William P. Hobby Airport in Houston and LaGuardia Airport in New York City.

The body scan has been known to speed up security procedures by producing images in seconds and reducing the need for additional screening.

Images are transferred to monitors in another room, where they are viewed by security personnel.

The images are disposed of immediately after they are evaluated, and facial features are blurred.

“I’ve gone through the scan before, and it takes seconds and doesn’t bother me,” Damelio said. “But I know it does bother some people. The more you travel, the more you are going to be impacted by these changes because they are happening nationwide.”

One of our contacts in the oil and gas business says that oil will move up $30 to $50 a barrel over the next 8 months; that means that those in that business should take action to protect themselves.

“Indianapolis Workforce Development spokesman Marc Lotter said the agency is merely being cautious with the approach of an early-December deadline when thousands of Indiana residents could see their unemployment benefits end after exhausting the maximum 99 weeks provided through multiple federal extension periods.

“Given the upcoming expiration of the federal extensions and the increased stress on some of the unemployed, we thought the addition of 36 armed guards would provide an extra level of protection for our employees and clients,” he said.

Senate Majority Leader Harry Reid this weekend promised to force the Senate to vote on an immigration bill, the Dream Act, in a lame-duck session of Congress next month.

Mr. Reid, a Nevada Democrat who is in a desperate battle to keep his Senate seat, told Univision’s “Al Punto,” a Sunday political talk show, that he has the right as majority leader to decide what legislation reaches the floor, and said he is “a believer in needing to do something” on immigration.

In doing so, he elevated immigration to join jobs, spending and tax cuts — the issues most lawmakers expect to dominate Congress when they reconvene in November.

“I just need a handful of Republicans. I would settle for two or three Republicans to join with me on the Dream Act and comprehensive immigration reform, but they have not been willing to step forward,” Mr. Reid said. “They want to keep talking about this issue, and I say [it] is demagoguery in its worst fashion and is unfair to the Hispanic community.”

The Dream Act would grant legal status and a path to citizenship to illegal immigrant schoolchildren and to illegal immigrants who agree to serve in the U.S. military.

In September, just before Congress adjourned for two months, Mr. Reid tried to attach the Dream Act to the annual defense policy bill, which already was loaded down with language laying out a path for gays to serve openly in the military. But Republicans blocked the defense bill, arguing that Mr. Reid was playing politics just before the election.

The immigration issue has been dominant in the Nevada Senate race, which pits Mr. Reid against Republican nominee Sharron Angle, who has been running ads accusing Mr. Reid of being a friend of illegal immigrants.

Then, Mr. Reid last week had to fire a staffer after it was revealed she had entered into a sham marriage to help a man stay in the United States.

The Justice Department is sending a small pack of election observers to Arizona as Hispanic groups sound the alarm over an anti-illegal immigration group’s mass e-mail seeking to recruit Election Day volunteers to help block illegal immigrants from voting.

Hispanic voting rights groups say the e-mail is just an attempt to intimidate minority voters. But election fraud monitors say that there are hundreds of examples of duplicate registrations, wrong information and past unregistered voters getting ballots.

http://www.foxnews.com/politics/2010/10/29/justice-dept-send-election-observers-arizona-group-seeks-crack-illegal-voters/

The New York Times said in an editorial Sunday that Secretary of Homeland Security United States, Janet Napolitano, should eliminate the costly and inefficient virtual fence that has tried to build on the border with Mexico.

Napolitano, who slowed this year, new works of Secure Border Initiative Network (SBInet) and allocated 50 million of its funds to other programs, you should delete “once and for all” when the contract expires with the Boeing company late next month recommended.

The SBInet program, consisting of towers with radar and cameras to curb illegal immigration along the three thousand 200 kilometers of border “is a costly failure” and it is time to “disconnect the virtual fence,” the newspaper said New York.

The project initially estimated at seven thousand 600 million dollars was driven in 2006 by former President George W. Bush and continued by his successor, Barack Obama, but has been plagued by software defects.

With over a billion dollars already spent, barely have covered 80 kilometers from the border to date, to which is added critical reports on Government Oversight Office (GAO), which questioned the failure to meet deadlines already established.

The GAO also criticized Boeing for providing evaluation data “incomplete and abnormal”, which has prevented the Department of Homeland Security asked for an accounting firm for its cost control and timeliness, said The New York Times.

He said the virtual fence was a malconcebida idea based on the false premise that immigration control is achieved by closing the border, with more sensors, fences and “boots on the ground.”

As long as the demand for cheap labor, the need for better jobs and legal impediments to enter the country, people continue to seek ways of crossing the border, the newspaper said.

Urged a comprehensive immigration reform that allows for greater border security.

The Institute for Supply Management’s factory index rose to 56.9 in October from 54.4 a month earlier, the Tempe, Arizona-based group said today. Readings greater than 50 signal growth.

Economists forecast the ISM manufacturing gauge would decline to 54, according to the median of 75 projections in a Bloomberg News survey. Estimates ranged from 52 to 56.8.

U.K. factory growth unexpectedly accelerated as hiring and export orders improved, other reports showed today.

A China purchasing managers’ index released by the logistics federation rose to 54.7 last month from 53.8. A second PMI, from HSBC Holdings Plc and Markit Economics, jumped to 54.8 from 52.9.

Consumer spending rose less than forecast in September as incomes dropped for the first time in more than a year, a sign Americans may keep rebuilding savings and paring debt as the economy is slow to recover.

Purchases increased 0.2 percent, the smallest gain in the third quarter, Commerce Department figures showed today in Washington. Incomes fell 0.1 percent, the first drop since July 2009, and the Federal Reserve’s preferred measure of inflation stagnated, capping the smallest 12-month gain in nine years.

Construction spending in the U.S. unexpectedly rose in September, led by increases in homebuilding and public projects.

The 0.5 percent gain brought spending to $801.7 billion after a revised 0.2 percent drop in August that was previously reported as a 0.4 percent gain, Commerce Department figures showed today in Washington.

Homebuilders are recovering from a slump in demand following the expiration of a government tax break and still face the challenge of mounting foreclosures that are adding to the housing inventory. While rising profits may help corporate spending on structures grow next year, government construction outlays may slow as federal stimulus funds fade and state and local municipalities cut budgets.

“Construction is still a very low- to no-growth scenario for the next nine months at least,” Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit, said before the report. “There’s still a lot of capacity out there to be absorbed. We’ve already been seeing some hit to infrastructure spending from budget cuts on the state and local governments especially as the federal stimulus eases.”

Economists forecast construction spending would decrease 0.5 percent, according to the median projection in a Bloomberg News survey. The 50 estimates ranged from a drop of 1.2 percent to a 0.5 percent increase.

Other figures from the Commerce Department today showed consumer spending rose less than forecast in September as incomes dropped for the first time in more than a year, a sign Americans may keep rebuilding savings and paring debt as the economy is slow to recover.

Purchases advanced 0.2 percent, the smallest gain of the third quarter. Incomes fell 0.1 percent, the first drop since July 2009, and the Federal Reserve’s preferred measure of inflation stagnated, capping the smallest 12-month increase in nine years.

Construction spending was down 10 percent in the year ended in September, today’s report showed.

Private construction spending was unchanged. A 1.8 percent increase in homebuilding was offset by a 1.6 percent drop in commercial projects as fewer factories were put up. Non- residential construction decreased to the lowest level since January 2005.

Public construction climbed 1.3 percent following a 2.2 percent gain in August. Federal construction outlays increased 6.1 percent, while state and local government spending rose 0.8 percent. New transportation grids and schools accounted for most of the gains.

State and local debt sales swelled to an 18-month peak of $13.8 billion, overwhelming investor demand and sending municipal bond yields to the highest level in more than two months.

The Federal Reserve will probably introduce an unprecedented second round of unconventional monetary easing tomorrow by announcing a plan to buy at least $500 billion of long-term securities, according to economists surveyed by Bloomberg News.

Policy makers meeting today and tomorrow will restart a program of securities purchases to spur growth, reduce unemployment and increase inflation, said 53 of 56 economists surveyed last week. Twenty-nine estimated the Fed will pledge to buy $500 billion or more, while another seven predicted $50 billion to $100 billion in monthly purchases without a specified total. The remainder said the Fed would buy up to $500 billion or didn’t quantify their forecast.

The varied responses reflect differences among Fed officials over the total amount of purchases needed to bolster the recovery. Policy makers, pursuing unprecedented stimulus, have cut the benchmark rate almost to zero and bought $1.7 trillion in securities without generating growth fast enough to bring down unemployment from near a 26-year high.

“There’s no silver bullet right now” and central bankers have “very few options left in terms of lowering interest rates,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. He predicted $500 billion of Treasury and mortgage-backed securities purchases in the next six months.

Hijacking the Stock Market with High Frequency Trading

FT

At an industrial estate on the edge of Tseung Kwan O, a new town connected by road tunnel to Kowloon, work has started on a data centre where traders of stocks, futures, options and currencies will place their computers next to Hong Kong Exchanges’ own systems.

The idea is that by having their equipment only metres away from where the operator of the territory’s securities markets handles the trades, those for whom speed is everything can shave milliseconds off the time it takes for a transaction to be completed. It is a far cry from the days when shares were bought and sold by humans on a trading floor.

The concept – known as co-location – is growing fast. Last week, NYSE Euronext completed the move of trading in thousands of New York Stock Exchange-listed companies to a similar data centre in New Jersey. The Hong Kong facility is being built by the local exchange as one of its “strategic business initiatives”. The same is happening in India, where the National Stock Exchange has rented out racks of computer space for traders. In Australia, ASX plans a centre offering co-location by next August.

The speed with which exchanges are building such facilities is a sign of the global spread of a phenomenon gripping the markets: “high-frequency trading” (HFT). The phrase describes a style of electronic dealing that uses algorithms to dip automatically in and out of markets hundreds of times faster than the blink of a human eye.

The practice is controversial. In the US, HFT has chilling associations with the “flash crash” of May 6, when rapid, computer-driven orders were seen as a main culprit in sending the Dow Jones Industrial Average down by 1,000 points in 20 minutes – a fall unprecedented in its depth and speed.

Ted Kaufman, a US senator for Delaware, where many of America’s listed companies are incorporated, wrote to the Securities and Exchange Commission last month arguing that “excessive messaging traffic, the dissemination of proprietary market data catering to high-frequency traders, and order-routing inducements all may be combining in ways that cast doubts on the depth of liquidity, stability, transparency and fairness of our equity markets”.

Regulators such as the SEC are still puzzling over exactly what caused the flash crash. But what is clear is that it exposed fundamental flaws in the mechanics of today’s markets – and, some maintain, in the rules that govern them. High-frequency traders are by and large privately held, have no clients and trade using their own money. That has led, some believe, to a point where there has been a dangerous breakdown in investor trust in the way markets work.

Christian Thwaites, chief executive of Sentinel Investment Companies, a US asset manager, says: “The mystery and mystique of HFT, the lack of clarity and therefore opacity has meant that retail investors – who have obviously been terribly burned over the last few years – look at this and say: ‘this whole Wall Street thing is just rigged against me’.”

But like an invasive species in the natural world, HFT had grown rapidly before the wider public even noticed. Tabb Group, a consultancy, estimates that HFT now accounts for 56 per cent of all equity trades in the US and 38 per cent by value in Europe. Another sign that Asia is the latest growth spot came this week as traders and technology companies gathered for a Hong Kong conference billed as Asia’s first high-frequency trading event.

At the same time, changing regulations and increasing competition have created a complex matrix in the US of nine exchanges and dozens of other types of venue, including networks run by banks and brokers, and “dark pools” set up to handle large blocks of shares away from public markets. Exchanges now compete not only with each other for their order flow but also with bank and broker networks, including dark pools.

In Europe the same pattern has played out thanks to the Markets in Financial Instruments Directive, a European Commission regulation that broke the national monopolies of exchanges. Mifid allowed the emergence of rival platforms such as Chi-X Europe, fragmenting trading across many venues: the London Stock Exchange now accounts for only 55 per cent of trading in the stocks that comprise the FTSE 100 index.

Such fragmentation has been a driving force behind the growth of HFT, since it produces a variety of trading venues each with slightly different trading systems, speeds and fee schedules. This allows traders to exploit these differences by using computer algorithms to trade back and forth from one platform to another.

Concern is therefore growing that the markets may be morphing into little more than a playground for a specialised type of trading that has minimal economic benefit and contributes little if anything to capital formation – the traditional function of stock exchanges.

Established market users – such as the asset managers that take care of pension funds – say HFT, coupled with the fragmentation of trading across venues, makes it harder to rely on one of the most basic functions of the markets: orderly and fair price formation.

“Because of the predatory nature of some participants we have no incentive to post liquidity,” Kevin Cronin, head of equity trading at fund manager Invesco, told a hearing into the flash crash last month. “There are 40 places where stocks are transacted and none of us has clarity of supply and demand on most [equity] issues. These are fundamental issues as to what the value of a securities market is.”

One worry is the use in HFT of algorithms to direct trades automatically, often to several market centres at once. Not only do such algorithms generate huge volumes of trades, but they can – like any machinery – go wrong. The past six months have brought three cases where an algorithm has run amok – and those are only the ones that have been revealed publicly. The latest came last month when the Osaka Stock Exchange handed an “admonition” to Deutsche Bank for not having “a sufficient degree of control” over an algorithm trading Nikkei 225 index futures.

Mr Cronin is not alone in suspecting that certain kinds of algorithms are actually predatory. Analysts at Nanex, a Chicago market data company, say high-frequency traders may be using algorithms to send unusually heavy traffic to exchanges and other platforms in a deliberate attempt to slow down their data systems.

Knowing that a certain exchange’s system is about to run more slowly gives a trader an opportunity to set up a buy or sell order in advance. The process is called “quote stuffing” and is used in a strategy known as “latency arbitrage” – latency referring to the speed at which message traffic moves through a system.

In its analysis of the flash crash, Nanex managed to plot how the bursts of traffic looked visually on graphs. Many appeared as distinct geometric patterns, such as jagged shapes that Nanex dubbed “Bandsaw II”, and another pattern called the “Boston Zapper”. “There’s no economic justification for it,” says Eric Scott Hunsader, founder of Nanex. “If this is OK by everybody, the market is not going to function in a very short period of time.”

Some go further and suggest outright wrongdoing. “When orders get pinged out to multiple trading venues, there is at least circumstantial evidence that there’s quite widespread use of that information to front-run trades,” Jim McCaughan, chief executive of Principal Global Investors, a large US asset manager, told CNBC last month.

Yet for regulators it is hard to figure out who is behind any of the activity. That is because high-frequency traders can operate with minimal supervision. In Britain, for example, all it takes to set up a HFT operation is a company registration and the necessary technology.

Trading systems can be bought off the shelf from a number of specialist companies. Registration with the Financial Services Authority, the UK markets watchdog, is not needed under a long-standing exemption for people trading on their own account – as high-frequency traders do – unless they present themselves as marketmakers. Similarly, in the US some are registered as broker-dealers but many are not. “Some of the people who are doing the really big volumes are completely unregulated,” says one lawyer familiar with the business. “Now, they have become a potential systemic risk. That’s the issue.”

Many exchanges say they have ­controls in place that can detect unusual trading patterns before they cause trouble. Rolande Bellegarde, head of European execution at NYSE Euronext, says that a month ago the exchange disconnected the algorithm that a trader was using, after software detected that his dealings deviated significantly from the normal pattern the exchange had observed over time.

F  or their part, the few HFT firms willing to show their face in public are at increasing pains to demonstrate that their business is beneficial to markets in providing liquidity and tighter bid-ask spreads.

Firms such as Getco, based in Chicago and formed by a pair of former pit traders, and peers in Europe including Optiver of the Netherlands, argue that high-frequency trading is a label used too loosely to describe almost any kind of rapid electronic trading, whether beneficial to markets or not. Getco and other US firms – excluding the banks and hedge funds that are equally big in HFT – recently formed an association to make their case more coherently.

Getco rejects allegations that high-frequency traders’ interests are at odds with those of ordinary investors. “While the story line may be a compelling narrative, there is no reliable evidence to suggest that this conflict exists. To the contrary, most retail brokers … intentionally route a majority of their customers’ marketable orders to firms that engage in high-frequency trading.”

Some studies back up their assertions. Woodbine Associates, a Connecticut consultancy, found in a study of US equity markets over 2008-09 that HFT had “improved execution quality”. Matt Samelson, a principal at the company, says that if there are any high-frequency traders “gaming the market”, then “we don’t think that constitutes the majority of HFT”.

But many asset managers remain unconvinced that the liquidity high-frequency traders provide is as valuable as they claim. For one thing, many exited the market during the flash crash. That has led to calls for regulators to impose as yet undefined obligations on marketmakers, including high-frequency traders. According to an online poll on FT Trading Room, a section of the Financial Times’ website focused on market structures, a clear majority (56 per cent) favours the move.

Asset managers worry that their interest in depth of liquidity and making long-term bets on company fundamentals is being crowded out by traders interested only in speed – cheered on by exchanges eager to offer incentives to attract such participants in order to stay ahead of rival platforms in the battle for liquidity. Exchanges have little incentive to discourage HFT since, aside from the fees it generates, they have found a new revenue stream in the rent they charge for rack space in data centres such as the ones emerging across Asia.

However, according to Mr McCaughan, investors are being put off by the volatility that phenomena such as HFT can cause. NYSE volumes were the lowest last week since 2006 – a fact that he attributes in part to a loss of trust in US equity market structures. “Our business is Main Street, not Wall Street,” he says, noting that Principal looks after “millions of people’s” pension schemes.

“We want to be able to look them in the eye and say the market is fair. And unfortunately, at the moment it’s quite difficult to do that.”

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Rothchild Engineer Giving Away UK Infrastructure to Foreign Corporations

PrisonPlanet.com

The Rothschild banking family is pushing for the privatization of the UK’s motorway network that would force Brits, who already pay road tax, to enrich the coffers of private corporations intimately tied in with the Rothschilds by means of road tolls and pay-by-mile schemes enforced with spy cameras.

“A plan to privatize the UK’s motorway network, giving toll firms access to large swaths of road, would take place under the guise of paying down the government’s debt, British media reported Tuesday, citing a number of key officials who support the scheme, proposed to all major political parties by NM Rothschild, one of the world’s oldest, most influential and little discussed investment banks, founded by the Rothschild family,” reports Raw Story.

Both Transport Secretary Philip Hammond and Business Secretary and UK Treasury Spokesman Vince Cable have signaled that the scheme will go ahead, formally handing over Britain’s infrastructure to transnational corporations and offshore banks at the behest of the most insidious gaggle of globalists ever to walk the earth.

The Rothschilds are perhaps the most larcenous banking family in history, a dynasty that has routinely made vast fortunes from economic collapses it personally engineered, such as the massive London stock market crash during the battle of Waterloo.

In June 1815, Nathan Rothschild, after being told by his agent that Wellington had defeated Napoleon at Waterloo, immediately dashed to London and ordered his agents to dump consuls. This triggered a selling panic, with traders believing that Wellington had lost. Only when stocks plummeted and could be bought for a song did it emerge that Wellington had in fact won, something that Rothschild knew all along, and by this point his agents had bought up cheap stocks for next to nothing. The stock market soared again and the Rothschild family made obscene profits, enabling them to become the richest family in the world.

This gargantuan Rothschild ploy was documented in the excellent documentary, The Money Masters. Watch a clip below.

The UK government is now laboring under record deficits and indebted to the same central bankers who control the country through the Bank of England, originally named the Company of the Bank of England, which was controlled by Nathan Rothschild, who once stated, “I care not what puppet is placed upon the throne of England to rule the Empire on which the sun never sets. The man who controls Britain’s money supply controls the British Empire, and I control the British money supply.”

Rothschild family members have wielded significant influence over the Bank of England through their service on the Bank’s Court of Directors over the years.

“The bank was behind many of the key privatisations of the 1980s and 1990s, including British Steel, British Gas and British Coal. It has close links to the Conservatives, having employed several senior Party figures including Lord Lamont, John Redwood and Lord Wakeham. Oliver Letwin, the former shadow chancellor, works there part-time,” reports the London Times.

Rothschilds have had significant influence of the British government in recent years through their close relationship with recent Business Secretary and influential Bilderberg member, Lord Mandelson, who is routinely photographed cavorting around with Rothschild family members on private yachts and in sports cars in luxury holiday resorts. Mandelson is widely loathed in Britain as a snobbish elitist and was forced to resign from the government on two separate occasions having been involved in numerous cover-ups and scandals, but just seems to keep getting back into power in one way or another.

Britons already pay road tax as well as local council tax which is supposed to go towards the cost of maintaining roads and motorways, but will be forced to pay even more on private-owned toll roads if this scheme goes ahead, having their living standards reduced yet further as a fresh wave of tax increases for the “middle class” is readied by the new government. The “middle class” is defined as anyone barely scraping a living, since the hikes will affect people who earn just £20,000 a year.

Critics have labeled the move a “shadow toll” and predicted a public backlash, which is a good thing because Brits will finally start to realize that it is private central bankers, and not puppet politicians who really control the country, and that internationalist crooks are selling Britain’s infrastructure to their offshore affiliates who will then reap the rewards from Brits being charged to use the roads they already pay for through a myriad of other taxes.

As it turns out, the U.S. does negotiate with Terrorists and Drug Traffickers

By Luis R. Miranda

Have you heard the rumors that the U.S. is the main carrier of drugs around the world?  How about the one that tells how the former New York Stock Exchange boss went to Colombia to ask the Narcos to invest in the NYSE?  All rumors, right?  Nope.  There are enough trails to know that indeed the United States is not only the largest carrier and co-grower of drugs in the world.  There is also enough proof that Richard Grasso, the former NYSE’s head traveled to Colombia to meet with local narcotrafficking bosses to offer ‘his exchange’ to hide their money.

The U.S. military closely guards the largest poppy plantation in the world.

Currently, the United States guards and aids in the growth of poppies in Afghanistan, -as reported by Fox News’s Geraldo Rivera.  There is of course a good explanation for the double standard.  If the U.S. does not help President Karzai’s brother to make a living of it, then terrorists would grow it and use the money to attack the ‘free world.’  Coincidentally, this is exactly what happens in Colombia.  As reported by the Washington Post, Colombian president’s brother, Santiado Uribe, was the head of an infamous death squad in the northern part of the country, right out of a estate that belonged to the Uribe family.  Santiago, also known for his ties to drug cartels, took it upon himself to murder petty thieves, guerrilla sympathizers and suspected subversives.

But negotiating with Narcos is not limited to Colombia or Afghanistan.  The ‘glorious’ war on drugs reaches the highest heads of the current Obama administration.  Obama’s advisor George Soros is a known narco businessman too.  Soros is one of the most vocal people who want all illegal drugs to be legalized.  As part of the drug war, Colombia surrendered part of a mountainous territory to the FARC, a paramilitary group which was then allegedly dismantled as part of the negotiating process to end the war trade.

NYSE Richard Grasso embracing FARC leader Raul Reyes in 1999.

As the documentary American Drug War exposes, the U.S. has a long history of running drugs across the continents, especially from South America to the North, and more recently from Asia to America.  Since President Nixon legalized the trafficking of drugs by the U.S. government through the establishment of the war on drugs, the business of dealing and transporting drugs has grown exponentially and the result has been the laundering of billions of dollars by Wall Street banks which is then used to finance illegal intelligence secret operations around the globe.  Such operations are carried out to capture non collaborating countries, using guerrilla forces and special-ops military contractors.

Former Los Angeles Police Narcotics Detective Mike Ruppert sent shockwaves around the United States when he told CIA Director John Deutch and a room full of reporters that the organization he headed had been running drugs for a while.  Amadeus, Pegasus and Watch Tower are the names of three operations the CIA used to run drugs around the United States.  He himself had been recruited to help protect the agency’s dealing of drugs.  Ruppert challenged Deutch to investigate classified operations and to tell the truth to the public.

Catherine Austin-Fitts, a former Assistant Secretary of Housing-Federal Housing Commissioner in the first Bush Administration, says of Grasso’s visit to Colombia:

I presume Grasso’s trip was not successful in turning the cash flow tide. Hence, Plan Colombia is proceeding apace to try to move narco deposits out of FARC’s control and back to the control of our traditional allies and, even if that does not work, to move Citibank’s market share and that of the other large US banks and financial institutions steadily up in Latin America.

In her essay Narco Dollars for Dummies, Fitts exposes how the money works in the illicit drug trade.  According to Fitts, the power of Narco Dollars comes when you combine drug trafficking with the Stock Market.  She points out that drugs are not always a commodity, but sometimes it becomes a currency.  When the military industry sells weapons to a terrorist group, for example, they may or may not pay in dollars.  When the green back is scarce, there is the option of paying with drugs.  That is why the CIA brings drugs into the U.S. as payment for the secret sale of arms to Colombia and other puppet governments in Latin America.

We all remember the Iran-Contra scandal.  The heart of the scandal was the fact that Oliver North and the White House (National Security Council) dealt drugs through Mena, Arkansas to facilitate arms shipments. Mena was of course a large contributor to Bill and Hillary Clinton’s multiple campaigns at the local regional and national levels.  Other examples of the drugs for arms trade are the conflicts in Vietnam, Kosovo, Mexico, and so on.  In all these cases, drugs, oil, gas and arms are the currencies used to deal.  “Add gold, currency and bank market share and you have the top of my checklist for understanding how the money works on any war or “low intensity conflict” around the globe,” says Fitts.

Along with Bill Clinton, the Bushes are some of the most corrupt elements of the American elites.

On the other side of the coin we have the Bushes.  George H.W. Bush was CIA director and U.S. President.  His sons Jeb and George W. were the governors of two of the largest drug markets in the United States: Texas and Florida.  The other two states are New York and California.  Later, George W. Bush became president of Unites States.  Can it be a coincidence that the sons of a former CIA Mafia boss successfully held office during one of the most intense drug trafficking period in the history of the country?

Why are people who used drugs put in jail then?  Well, drug trafficking is a round business.  The same corporations who benefit of the drug trade also run the prison system.   Take for example the CCA, or Corrections Corporation of America.  On its website they label their work as a service to build and run prisons.  “Our approach to public-private partnership in corrections combines the cost savings and innovation of business with the strict guidelines and consistent oversight of government.”  From the more than 2 million people in prison in the United States, more than 80 percent are non-violent offenders, who are in jail for smoking, selling or buying marihuana, for example.  The drug trade business simply collects profits from every possible point.  It plants the drugs, harvests them, transports them, sells them and imprisons those who use them.  Of course it is not enough with sending people to prison.  While innocent or non-violent offenders are inside the gulags, they are also obligated to work in slavery camps in order to multiple the profits for the prison industrial complex.  Is that a monopoly or what?

The second debt storm

Who will bail out the countries that bailed out the world’s corporations?

Market Watch

The debt mountain that brought down some of the world’s biggest banks and dragged the international financial system to the brink ofsovereign debt disaster has simply shifted to governments. Now it’s threatening countries around the globe — and, if left unchecked, could rip the very fabric of Europe’s economic system and wreck economic recoveries in the U.S., China and Latin America.

The impact on markets has been severe. The euro has slumped more than 12% against the dollar since the sovereign-debt crisis flared in southern Europe. Gold has marched to new highs as investors seek a safe haven and, perhaps most alarming, it is now more expensive to buy insurance against national default than it is to insure against corporate failure.

“The sovereign-debt crisis spun out of control in the past week, and we see no easy way to resolve it,” said Madeline Schnapp, director of macroeconomic research at TrimTabs Investment Research.

Some investors and analysts are increasingly concerned that governments may be no more capable of repaying their debts than the banks and insurance companies they saved. And, they warn, if a major country comes close to default, it could trigger a financial meltdown that would eclipse the panic that followed the bankruptcy of Lehman Brothers in 2008.

The world has seen sovereign debt crises before. Latin America, Africa and Asia have all experienced upheavals sparked by excessive debt. These crises were all accompanied by stunted economic growth, inflation and weak stock market returns, which make it even harder to pay off debts. As investors and government officials ponder the current state of affairs, they see ominous signs that the developed world may be facing a similarly bleak future.

“The problem of the western world is that we have too much debt,” said Daniel Arbess, who manages the Xerion investment strategy at Perella Weinberg Partners. “Rather than reducing our debt, we’ve been moving it from one balance sheet to another.”

“All we’re doing is shifting chairs on the deck of the Titanic,” he added.

Europe’s bailout

Some governments have started to respond to market pressure, with the U.K. pledging billions of pounds in spending cuts this week. Spain and Portugal also unveiled austerity measures. But the problem is so big that investors remain wary. Check out Portugal’s plans.

Stock markets plunged and credit markets shuddered last week on concern Greece and other indebted European countries like Portugal and Spain might default. See the story on market impact.

“What’s happened on a corporate level is now happening on a national level. The first nation to experience this is Greece, but other nations will, too,” Schnapp said.

To stop Greece’s debt troubles turning into a run on the euro and a global stock market rout, the European Union unveiled an unprecedented package of almost $1 trillion in emergency loans, stabilization funds and International Monetary Fund support on Sunday.

In the days that followed, the European Central Bank bought the government debt of Greece and other countries on the periphery of the region’s single-currency zone, such as Portugal, Spain, Italy and Ireland, investors said. Such a drastic step has been shunned by the ECB until now. Read about the market response on Monday.

“Temporarily the crisis in terms of liquidity has been averted, but the underlying problem hasn’t gone away,” Schnapp added. “Giant debt and expenditures by governments are still there.”

TrimTabs cut its recommendation on U.S. equities to neutral from fully bullish on Sunday, in the wake of the European bailout.

Protection

The sovereign crisis has been brewing for months.

For much of the financial crisis, investors worried about financial institutions defaulting, rather than sovereign nations. But that pattern has been upended.

In early February, the cost of insuring against a sovereign default in Western Europe exceeded the price of similar protection against default by North American investment-grade companies. That was the first time this had happened, according to data compiled by Markit from the credit derivatives market.

More…