Liquidity And Bubbles As Systems Theory; Or Inevitability

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

I have to thank my colleague Joe Calhoun for passing alone a very topical article written by Nassim Taleb and Gregory Treverton in Foreign Affairs. Taleb is, of course, well-known for his “black swan”, but it is really far more than that as it gets to the failure of modern economics as nothing more than a study of statistics. Conventional statistics, axiomatically, is the study in exclusion by the very definitions of technological limitations. Taleb’s argument is that observation itself may be flawed because we have, as a species, still to witness and catalogue every “unknown.”

This latest article is Taleb’s next step which is really a systems approach to pretty much anything. Saying we live in a complex world is not just a cliché but rather an important technical distinction. A complex system is one in which variables are innumerable, therefore making prediction of the interaction of variables nigh impossible. But economists will try, and do so, as I said above, by excluding a great deal.

My interest here is what is really the criminal (euphemistically, not legally, though some downstream impacts might lead in that direction as intentional neglect) ignorance of fractal geometry and chaos (mathematical theory). Central banks, and even governments, have a vested interest in maintaining average occurrences, shortening kurtosis as it were, and shooting for a steady state whereby only small deviations are “permitted.” As Minsky observed a generation ago, such a steady state is a false paradise because the longer it goes, like a rubber band stretching, the worse the inevitable reversion to the mean (which doesn’t exist).

Ruble Anti-Panic

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Going the Other Way

Even while newspaper headlines are still full about the ruble’s panic sell-off last week, the ruble has actuallyrisen by 39% from last week’s intra-day lows near 80 to the dollar over the past five trading days (1 ruble was 0.0125 dollars at one point on December 16, while at the time of writing early on Monday, 1 ruble was 0.0174 dollars. That is an increase in the currency’s value of more than 39%). In the traditional notation USDRUB it’s a decline from 80 to 57.48. In early trading on Monday, the ruble has moved back to the level it inhabited on December 5. Anyone shorting the ruble between December 5 and December 16 or selling his rubles for foreign currency during this time period is now deeply underwater:

The Russian ruble goes the other way – click to enlarge.

Incidentally, crude oil prices have begun to trade slightly firmer as well, in spite of a continuation of the barrage of ostensibly bearish news (such as this report about Saudi Arabia swearing up and down it won’t cut production).

However, both Brent and WTI are only back near the upper end of last week’s volatile trading range, which is a far cry from the extent of the ruble’s rebound. This makes it all the more likely that the selling squall in the ruble was indeed caused by traders front-running Rosneft’s debt payment.

The Lawless Manipulation of Bullion Markets by Public Authorities

Submitted by Dr. Paul Craig Roberts – Institute for Public Economy

Paul Craig Roberts and Dave Kranzler

The Federal Reserve and its bullion bank agents are actively using uncovered futures contracts to illegally manipulate the prices of precious metals in order to keep interest rates below the market rate. The purpose of manipulation is to support the U.S. dollar’s reserve status at a time when the dollar should be in decline from the over-supply created by QE and from trade and budget deficits.

Historically, the role of gold and silver has been to function as a means of exchange and a store of wealth during periods of economic and political turmoil. Since the bullion bull market began in late 2000, It rose almost non-stop until March 2008, ahead of the Great Financial Crisis, which started with the collapse of Bear Stearns. When Bear Stearns collapsed, gold was taken down over the course of the next 7 months from $1035 to $680, or 34%; silver from $21 to $8, or 62%. The most violent takedown occurred as Lehman collapsed and Goldman Sachs was about to collapse. This takedown occurred during a period of time when gold should have been going parabolic in price. The price of gold finally took off in late October 2008 from $680 to $1900 while the Government and the Fed were busy printing money to bail out the banks. While the price of gold rose nearly 300% from late 2008 to September 2011, the U.S. dollar lost over 17% of its value, falling from 89 on the dollar index to 73.50.

Patience is a Virtue: Unless you are a Central Banker

Submitted by Michael Pento – Pento Portfolio Strategies

With the utterance of one word, “patience” in reference to the Fed’s anticipated lift off date from its zero bound interest rate target, Janet Yellen sent the Dow Jones soaring over 700 points in two days.  It is clearly evident that our central bank is finding endless excuses not to raise interest rates in an effort to keep the equity and bond bubble rolling along. But this entrenched addiction to free money has now set the economy up for a catastrophe.  The Fed’s $3.7 trillion dollars in QE and six years of ZIRP have created massive economic imbalances. When interest rate normalization eventually occurs, it will lead to widespread insolvency.

The following is just one example…just follow the bouncing ball. The mere threat from our Fed to raise interest rates in about six months from today is causing the US dollar to soar against the Yen.  The rising dollar, which is soaring in relation to the Japanese currency only because it will become confetti sooner than greenbacks, is in turn is causing Wall Street speculators to dump oil.  Plummeting oil prices are leading to the implosion of the oil fracking industry in the U.S. and the junk debt that supports it.  This will wipe out investors in high-yield bonds that have mistakenly dumped over a half a trillion dollars into the space since 2010.

Grow Your Way Out of Debt? Don’t Make Us Laugh…

Submitted by Bill Bonner – Chairman, Bonner & Partners

Janet Yellen made headlines again last week. She promised the Fed would be “patient” in raising interest rates.

Will she raise rates sooner… or later?

She probably doesn’t know. She is just reading the newspapers as we do, and wondering when she can get away with it.

She looks in the mirror in the morning and gasps… incredulous of the way people overestimate her. She knows – at least before putting on her makeup – that the whole thing is nothing but face paint and false accounting.

Yellen just doesn’t want to be the Fed chief who has to admit it. And she certainly doesn’t want to be remembered as the one who finally popped the biggest credit bubble in history and ushered in a global depression.

More Fun Than North Korea

Meanwhile, US foreign policy is finally lightening up…

After half a century, it was clearly time for the Land of the Free to let go of its abiding dislike of the Castro brothers.

In the light of history, they don’t look so bad. After all, plenty of movies have been made featuring Castro-like characters; never once did they threaten to blow up US movie theaters.

Besides, Cuba will be more fun to visit than North Korea.

Washington Creates A Chinese-Russian Alliance

Submitted by Dr. Paul Craig Roberts – Institute for Public Economy

The Washington Morons Have Managed To Create A Chinese-Russian Alliance

Tass News Agency

“If the Russian side needs it, we shall offer all possible support.” — Chinese Foreign Minister

BEIJING, December 22, TASS. China believes Russia will be able to overcome the current economic problems, and is ready to offer whatever assistance if needed, China’s Foreign Minister Wang Yi said in an interview with Hong Kong’s Fenghuang television channel on Sunday.

“We believe that Russia has opportunities and knowledge to overcome the current problems in the economy. The Chinese-Russian relations of strategic partnership are at a high level, we are always supporting and helping our friend. If the Russian side needs it, we shall offer all possible support we may have,” the foreign minister said.
http://itar-tass.com/en/economy/768328

If Wishes Were Loaves and Fishes

Submitted by James Howard Kunstler  –  www.kunstler.com

Janet Yellen and her Federal Reserve board of augurers might as well have spilled a bucket of goat entrails down the steps of the mysterious Eccles Building as they parsed, sliced, and diced the ramifications in altering their prior declaration of “a considerable period” (that is, before raising interest rates), vis-à-vis the simpler new imperative, “patience,” with its moral overburden of public censure aimed at those too eager for clarity — that is to say, the assurance that the Fed will not pull the plug on their life-support drip of funny money for the racketeering operation that banking has become.

The vapid pronouncement of “patience” provoked delirium in the markets, with record advances to new oxygen-thin heights. Behind all this ceremonial hugger-mugger lurks the dark suspicion that the Federal Reserve has no idea what’s actually going on, and no idea what it’s doing. And in the absence of any such ideas, Ms. Yellen and her collegial eminences have engineered a very elaborate rationale for doing nothing.

This is for You Steve Liesman…. Welcome to Economics

Submitted by Thad Beversdorf  –  The First Rebuttal Blog

I stumbled onto one of Peter Schiff’s radio shows and it was the one where he discusses CNBC chief economic correspondent, Steve Liesman’s call that the American economy needs more consumer debt, which is right in line with the Keynesian theory of spending our way to prosperity.  I expect most non-liberal arts degree carrying economists would agree that Steve, once again, out did himself to put economic analysis through a meat grinder and serve it up as a David Burke’s Primehouse 40-day-bone-in ribeye.  I’m going to prove that such a theory is simply impossible, and show how it has become that basis of American economics.  This is going to get a bit heavy so grab a coffee.

Steve says consumer debt is the bridge between working hard and playing hard.  America was built on consumer debt he argues.  He claims that debt levels are very low in America which he claims is a sign of a bad economy.  Now he also seems to have a hint of understanding that too much debt can cause bubbles and he uses student loans as an example, yet he says that a bit trepidatiously despite the fact that we’re still trying to crawl out of one of the worst credit induced recessions in history.   However, despite his caution with student debt he claims the over leverage from the mid 2000′s “has been unwound” and that we are now at the “bottom of the credit cycle”.  And that is why, he claims, the American economy needs more consumer debt.

Ok so lot’s of interesting claims there by Mr. Liesman.  What I’d like to do here is have a very deep look into the American economic psyche and de-engineer some understanding about GDP, the economy and the American standard of living.  To some extent I think we’ll find that Liesman is not all wrong.  However, his call for more consumer debt might actually be the worst piece of economic analysis I’ve ever witnessed on national television.    But Liesman is just a symptom to the larger problem in our distorted understanding of economics here in America.  In any case let’s dig into the matter.

Why don’t we start by having a quick long term look at American consumer debt levels.

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• Age of Plenty Seen Over for Gulf Arabs as Oil Tumbles (Bloomberg)
• Ready for $20 Oil? (A. Gary Shilling)
• Houston Suddenly Has A Very Big Problem (Feroli via ZH)
• Saudis Insist Oil Supply Cuts Are Not Needed (Independent)
• Oil Crash Wipes $11.7 Billion From Buyout Firms’ Holdings (Bloomberg)
• North Sea Oil Summit Announced By Aberdeen City Council (BBC)
• Southwest’s Oil Swap Trade Waiver Raises CFTC Questions (Reuters)
• US Gas Prices Fall To Lowest Since May 2009 (Reuters)
• Rosneft Repays $7 Billion and Says Has No Need to Buy Dollars (Bloomberg)
• China Offers Russia Help With Currency Swap Suggestion (Bloomberg)
• China Investigates Possible Stock-Price Manipulation (WSJ)
• China Stock Connect Scheme Scorecard Throws Up Surprises (Reuters)
• The Fallacy of Keynesian Macro-Aggregates (Ebeling)
• Europe in Wonderland Wants Russia to Bail Out Ukraine (Mish)
• Greek Premier Makes Offer In Bid To Avoid Snap Elections (WSJ)
• Greece’s Radical Left Could Kill Off Austerity In The EU (Guardian)
• Rising Price Of Olive Oil Is A Pressing Matter (FT)
• Leaked CIA Docs Teach Operatives How To Infiltrate EU (RT)

Continue Reading: Debt Rattle December 22 2014 – The Automatic Earth