Zero Hedge

Seeing Past The Hologram, by Mike Krieger of KAM LP

There is no distinctly American criminal class – except Congress.

- All quotes by Mark Twain

We Need Real Confidence to Return, Not Confidence in a Ponzi Scheme

Last week I pointed out that what I got from Banana Ben’s speech in Jackson Hole was that he realized any major public statement of interference in markets was too risky at this point following his announcement at the last meeting to keep the balance sheet steady by reinvesting MBS proceeds into treasury securities.  The operative word in this sentence being “public.”  Anyone that believes this means the Fed and government will just take a back seat and do nothing behind the scenes is deluding themselves.  Washington D.C. and the Fed still fail to comprehend how to increase standards of living in the real world, rather they remain completely addicted to the short-term buzz of printed money heroin as it flows through the house of cards they have created.  They also think that the only thing that really matters in an economy is “confidence.”  As Madoff can attest to, that is indeed the case when you are running a ponzi scheme and since the U.S. government is basically that I can understand where they are coming from.

 I agree that confidence is a huge part of any healthy economy; however, I do not define confidence in the way these arrogant bureaucrats do.  They think confidence comes from rising asset prices, including stocks and homes.  They think this is enough to spark growth in the real economy.  This is nonsense.  The confidence that is needed more than anything else today is two-fold.  First, confidence that there is the rule of law and there will be the rule of law in the future.  The second is that the money issued by the government will maintain its purchasing power over time.  As I have made clear on various occasions, I do not have confidence in either of these things based on how the government has responded to the crisis.  I do not like buying physical gold.  I do not like feeling the need to write these emails every week to warn people.  I wish I could employ capital into businesses and the real economy.  I hope that one day I will be able to do so, but at the moment I do not trust my government and I certainly don’t trust the fascist Federal Reserve.  So I will hoard what I have as the government prints and let the storm pass me by.  I am not the only one.  People are collectively starting to understand this.  So what happens when the big, smart money takes itself out of the investment and capital allocation game because they don’t trust anything?  What happens when the government’s response to this is to print money to keep up the spending habits of people with no jobs or people with government jobs that produce no goods for the economy?  You get the worst case scenario and that is exactly what is staring us straight in the face.

Is a Trade War with China Coming?

The quicker the dollar is devalued the better.  This is not to say that I think dollar devaluation is a good thing.  It is to say we are past the point of avoiding it.  We could have taken the pain in 2008, but instead it was extend and pretend all over again.  Now the debt and promises are too big.  The behind the scenes manipulations are too entrenched.  There is no avoiding a devaluation relative to things people need (food and energy) and capital goods that are imported.  The best thing would be to get it over with and then change policies and restore the rule of law.  The problem with this is that the main currencies the dollar needs its major adjustment against are those in emerging Asia and China.  What has prevented the realignment from happening in a quick and healthy way is China’s refusal to allow the yuan to appreciate.  This creates a situation where Central Banks throughout emerging Asia take steps to prevent their “free-floating” currencies from adjusting either.  If China does not change its policy I fear that what we are looking at a trade war with China after the November elections.  I think Congress and the Administration will start to introduce aggressive policies to discourage Chinese goods and encourage goods made at home.  Think it can’t happen?  We are a lot closer than you think.  This all goes back to my “think local” theme.  While I am inherently a fan of free trade we do not have free trade in any sense whatsoever.  We have policies that are geared to advantage the multi-national corporations at the expense of the U.S. citizen.  The U.S. consumer has merely been spending borrowed money.  This gave an illusion that the U.S. was benefiting from the global multinational corporate rigged market whose model mainly thrives on companies moving abroad to exploit the labor arbitrage caused by a combination of what was a labor surplus (no longer it seems) and a rigged currency.  As more people realize this, more pressure will be placed on politicians and ultimately this will overpower the corporate lobbyists and a trade war of sorts will begin.  Then the chaos could really ensue as we engage in a trade war with our biggest creditor!

Seeing Past the Hologram

The past couple of weeks have been extraordinarily interesting and some of the moves appear to be extremely important.  Although a lot of people like to point to the treasury market and then extrapolate out as to what this means to equities and the ability of the government to increase spending, I think this is the most USELESS market in the world to watch.  If anything is a hologram and a PR tool it is the U.S. treasury market.  How can people with a straight face come out and extrapolate anything from a market where the Federal Reserve is buying the debt of its own government!  The Fed is merely the fiat drug dealer to a government addicted to spending and false promises.  The equity market is the second most useless market in my opinion.  There is no doubt in my mind that a huge part of the government’s “strategy” to build confidence is to keep this thing from doing what it should be doing.  Thus, I am not surprised at all that since I last wrote the S&P500 was +1.6%, -1.5%, flat, and then +3.0%.  So what you have seen is high volatility with no real direction.  How can anyone have confidence this that thing is for real?

So what markets do I watch?  I get the most from the FX markets and the commodity markets.  While these markets are no doubt manipulated heavily as well, I think this is where the players that really understand the macro are playing.  The first currency I check in the morning is the dollar/yen.  The reason for this is that the yen is back to the highs of 1995 and if it does not stop appreciating around this level I think the Bank of Japan is going to absolutely panic.  While the yen has not broken higher yet as market participants are afraid of such intervention, unless the BOJ does something extreme soon the market may test their resolve and push this thing further.  I guess the main point I am trying to make is that with the Chinese yuan NOT strengthening and the yen threatening to break out we could be in for some major fireworks.  Meanwhile Japanese 10 year government bond yields have really started to spike lately (chart GJG10 Index on Bloomberg).  Something big is happening in the land of the rising sun.  In the back of my head I think that any panic move from the BOJ could be the spark that breaks government bond bubbles globally and ushers in a period of massive global commodity driven inflation as every country tries to devalue their way to prosperity.  Essentially, a fiat money version of the 1930’s beggar thy neighbor policies.  When this begins the rush into gold and silver that we have seen thus far will look like a trickle.  I don’t think people will be able to find supply anywhere near the quoted price on comex (or as some like to call it “crimex”).

This brings me to silver which potentially experienced a game changer last week.  I can’t remember the last time silver bounced back almost immediately after every attempted raid.  I am starting to wonder how much physical silver is available.  What we do know is that Central Banks do not store silver to manipulate markets.  Even if it doesn’t break out right now, there is no asset in the world that has more upside than silver.  Don’t buy SLV either.  Buy physical silver not something with JPM as a custodian. 

I also continue to watch food prices very closely.  Wheat, which has come off of its high now seems to have found a base at a price that is 50% higher than the end of June.  Corn prices are threatening to break above resistance at levels 30% where they were at the end of June.  Rice looks like it could have a long way to go on the upside as it is only 20% off of its June low.  If I were a foreign government I would be using this opportunity to buy every single grain of rice I could in order to feed my people when things get dicey in the months ahead.  After strong performance in recent months lean hogs and live cattle also look set to make another push to the upside.  How people in the investment world still focus on the government inflation statistics is beyond me.  It was the rampant commodity inflation, trucker strikes and food riots that played a key role in ending the game in 2008.  This is because it forced the emerging markets to raise rates and cool growth as the Western world imploded under a pile of debt.  It seems the whole play is starting again and people remain focused on deflation.  Deflation in some things yes I agree (discretionary things like homes, technology, stock prices, etc), but not in the things you NEED to buy!!!

Onto oil which is also exhibiting some strange moves.  The Asian benchmark Tapis has not experienced the recent volatility and weakness that WTI has and is currently trading at $80/b.  The Asian price is the one I really pay attention to since that is where the demand growth resides.  The spread between the two now is back above $6/b, which is toward the high end of the range for the past two years.  This tells me that one price is wrong and the spread should narrow.  Given what I think about currency debasement and lack of appropriate investment in the space I think WTI should rally.  We shall see…

A Primer on the Federal Reserve

For those that read my commentary on the Federal Reserve as an immoral an fascist institution and think to themselves “what is this guy talking about,” I have attached a video from G Edward Griffith (the author of The Creature from Jekyll Island).  It’s a great description of how the Fed was formed and who it answers to when push comes to shove.  http://video.google.com/videoplay?docid=6507136891691870450#

Also in case you weren’t aware of the power grab that the “Financial Reform” legislation allowed the Fed, read this Bloomberg article. 

http://www.bloomberg.com/news/print/2010-09-02/bernanke-meets-buffett-in-new-role-conceived-to-protect-markets.html

All the best,
Mike

More articles from Zero Hedge….

By Michael Trinkle, ForexTraders

After nearly 2 weeks of trading within a tight 150 pip range, the euro broke upside resistance at 1.2780 during the London session early Wednesday morning.  The euro actually broke through 2 key swing HI’s on the hourly chart as it broke to the upside, so we could see further euro gains in the coming days.  
 
In this chart, you can see the two clear swing HI’s in the green-shaded boxes that the euro broke above in order to post new HI’s this morning.  Then, the euro continued to push higher in early New York trading as buyers bid EUR/USD up to the 1.2850 area.  The euro will face heavy resistance in the 1.2900 area and should see sellers protect the area initially.  If the euro moves higher during the NY trading session and pressures the 2900 level, there may be very strong selling interest today.  The euro has already moved beyond its daily range at the start of the NY session, and when a currency pair is overbought as the euro is today, it oftentimes has strong difficulty breaking through key areas of support and resistance.

The push from 1.2800 to 1.2850 during early NY trading was due to the ADP Employment figure that came out at 8:15 est.  The number was a big disappointment as it posted at -10k versus the expected figure of +15k.  This means there was a loss of 10,000 jobs instead of the expected gain of 15,000.  The focus in the United States is heavily on employment figures.  The very poor labor market conditions are weighing on economic recovery and this number today is yet another confirmation that the U.S. economy is really struggling.  Economists and investors know this, but each disappointing figure just makes it worse.

The ADP Employment number can also be a leading indicator for Friday’s Non-Farm Payroll, and if it is in this case, we could see a very strong bout of risk aversion enter the market.  The question is which direction will the Dollar go?

Case for Dollar Weakness

Generally, when U.S. data comes out very poor, the Dollar tends to get strong as investors rush into the safety of the U.S. Dollar.  Then, as U.S. data comes out good, investors tend to sell the Dollar as they rush out of the low-yielding Dollar and into higher-yielding currencies.  However, during the last 3 months we have seen this correlation break down.  During the months of June and July, market participants aggressively sold the U.S. Dollar as key economic data came out negative.  Let’s break down why this has been happening.

The current global recovery is facing a major wall of resistance as the U.K., U.S., China, and the EuroZone are all facing uncertain financial conditions.  The U.S., however, seems to be facing the most difficulty at the moment.  China is still moving forward in very strong fashion, they are simply going through a period of slower than usual growth.  The same seems to be true in the U.K. and the EuroZone.  The U.S. is in a different place, though.  In the U.S., the threat is not only an economic slow-down, but an actual economic contraction.  Key economic indicators seem to be pointing to a possible double-dip recession in the United States, and some economists are beginning to predict that the Q3 GDP may read negative in the U.S.  Two consecutive quarters of negative GDP constitutes a recession.  Since the U.S. is really facing this potential threat alone, investors are beginning to raise the possibility of selling the U.S. Dollar as U.S. news continues to come out negative.

If this phenomenon continues, it could serve disastrous for the U.S. Dollar.  Investors have long been not interested in holding the Dollar during good times because of the incredibly low yield offered.  However, the market has tended to hold the Dollar during bad times since investors want the safety of their capital above everything else.  What will happen if the U.S. heads into economic contraction and other developed nations do not?  How will this affect the U.S. Dollar?

Most likely the U.S. Dollar will weaken significantly because there will be no reason for investors to hold it.  This could be the beginning of the great U.S. Dollar bear run that many economists and experts have been predicting for some time.  We have seen hints of this phenomenon unfold during June and July and we have seen it again today.

Case for Dollar Strength

Unfortunately, it seems that the only case for real U.S. Dollar strength during the 2nd half of 2010 and into 2011 is if the global economy slows significantly.  Currently, investors are unsure of the economic outlook.  There are many mixed signals in the market, and the economic outlook is probably more uncertain right now than in recent history.  At the beginning of The Great Recession, at least investors knew we were in trouble.  Now, no one is sure.  Are we going to rebound and move up from here, or is there still significant downside risk?  Of course, there is downside risk, but no one knows how far we will fall, if we will fall, or when we will fall if we do.  The outlook is very uncertain.

As long as the global outlook remains uncertain, the U.S. Dollar should find strength as investors are unwilling to completely depart from the safety of U.S. Treasuries.  However, if the global economy does deteriorate during the next month to several months, and it becomes clear that other countries are in the same degree of trouble as the U.S., then the Dollar should remain in bullish mode.

Lately, we have seen poor U.S. news come out, the market sells the Dollar aggressively, and then after 15-30 minutes of Dollar selling, the market reverses course and begins buying the Dollar only to retrace all the Dollar weakness and actually move into further Dollar strength within several hours.  This is what is playing out during the NY trading session at the moment, as investors remain very uncertain of the economic outlook.

More articles from ForexTraders….

The Daily Reckoning

Before we get stuck into today’s financial world, a request: please don’t store petrol in your garage. A reader took us to task for suggesting that last week in our survivalists “to own” list. It was just a list. But her point is well taken. Petrol doesn’t keep well. And you may need it later to burn all your paper money and furniture to keep warm. So store it somewhere safe, if you’re going to store it at all.

But perhaps all this talk of a Long Depression is premature. We’ve just finished revising and remaking our case for D2 (the Second Great Depression) in the latest issue of Australian Wealth Gameplan. We were all set with a fairly conventional analysis of the macro-economic scene when we decided to scratch the whole thing and re-write it from a long-term historical perspective.

Usually these attempts are either incredibly stimulating and provocative or really boring for everyone else to read. Hopefully it won’t be boring. But our main point is that when you’re living in the middle of one, a long depression probably doesn’t feel like it. It feels like every day things might get better. But they don’t, at least not for a long while.

You certainly wouldn’t suggest Australia is in the middle of Long Depression based on yesterday’s current account deficit figures. Boy howdy, were they good! The current account deficit went from $16.5 billion in the March quarter to just $5.6 billion in the June quarter. As a percentage of GDP, the current account deficit is now at its smallest level in about 30 years.

Go iron ore!

Go coal!

Go!

The improvement in Australia’s terms of trade is what accounted for the big jump. Record prices for iron ore and coal increased what Australia got paid for exports. And import prices – what Australia pays for the things it buys from the rest of the world – did not grow as fast. Presto. Change-o. Record low current account deficit.

Naturally, a record jump in the terms of trade – 12.5% for the quarter and 24.5% for the year – is the sort of spike that would convince us export prices have peaked and the Chinese real estate crash is imminent. Based on the Economic Statement in published in July, the government is counting a record-high terms of trade to support revenues, bring down the debt, and spur mining investment (despite the MRRT).

Speaking of the government, apparently there still isn’t one. You might have expected this lack of political certainty (clarity about the future rate of taxation on mining companies) to be negative for the share market. But apparently Aussie investors – and maybe their leveraged global contemporaries – are drinking from the big jug of Kool Aid Ben Bernanke and the Fed have brewed.

In fact, whether Aussie investors are reacting to the prospect of Quantitative Easing from the Fed or not, it’s pretty clear that not having a government is not a negative for share prices. Long live the status quo!

But on this issue of the Fed, the relevant question is how QEII would operate. We were going to write “work,” but we’re certain it’s going to fail inasmuch as its ultimate aim is get credit flowing again in America. The Fed is pushing households and businesses to do something they’ve decided they don’t want to do: borrow and spend.

If the aim of QEII is to get consumer spending back up to 70% of American GDP so it can drive global growth and restore the status quo ante the Global Financial Crisis, it will fail and gold and other tangible assets will keep going up. But if the goal of QEII is to buy corporate stocks and bonds to make everyone feel richer so that they might behave with more fiscal irresponsibility, well doggone it, it might just be crazy enough to work!

By work, we mean it might create a bid for stock prices, what with everyone knowing the Fed is there to buy. In fact, it would probably be a very good time to be a seller with the Fed on the other side of the trade. Maybe that’s why everyone’s buying now, so they can sell to the Fed later.

Of course, there’s a long way to go between speculating about QEII will manifest itself and the Fed actually buying stocks outright. But just as a journey of a thousand miles begins with a single step, so also does the destruction of a currency begin with baby moves.

And finally, about that list of things to stock up on for Long Depression, what do you reckon was at the top of most people’s lists? Salt! It was followed closely by sugar, soap, silver, bullets, and booze.

We got many notes on the subject and have read them all. We’re not able to reply to each one personally, but thanks for all the effort. We’ll compile a master-list and make it available later this week. Meanwhile, here was one of our favourite notes:

Hi ,

On reading your list I thought it appropriate to add rifle etc to the list , particularly as you have bullets on the list. I’d also add the Bible, the Koran, and the Talmud, with appropriate iconography should someone with bigger guns happen by.

I’d also add antibiotics, condoms (you can hope while you despair).

Did I mention a phrase book with simple to pronounce invitations, “To come in into my storage unit for bouncy bouncy” ?

If none of that was of use…I’d then do the unthinkable…invest in a Managed Fund!!

Regards,

HB

Dan Denning
for The Daily Reckoning Australia

Similar Posts:

• Statistical Models Can’t Predict the Future
• September is the Best Month for Gold
• Australia’s Current Account Deficit Up 4%
• Right Time for Gold Stocks
• Australian GDP is Doing Better Than the U.S.

More articles from The Daily Reckoning….

Readers of my articles will recall that I have warned as far back as December 2006, that the global banks will collapse when the Financial Tsunami hits the global economy in 2007. And as they say, the rest is history.
Quantitative Easing (QE I) spearheaded by the Chairman of Federal Reserve, Ben Bernanke delayed the inevitable demise of the fiat shadow money banking system slightly over 18 months.

Read more….

This morning the Bank of International Settlements released its Triennial FX survey which is basically the market’s benchmark for forex volume and turnover. To no one’s surprise, volume has surged over the past 3 years. Between April 2007 and April 2010, global foreign exchange market increased by 20 percent from $3.3 trillion to $4.0 trillion, which is now the golden number for forex volume.

Reading between the lines, we can tell that a large part of the increase in volume is due to the trading activities of RETAIL traders! (Yes, we are making a BIG difference) According to the BIS report, 48% of the growth was in spot transactions which represents 37% of the total turnover (or total FX flow). Although swaps became more popular to trade, all other related foreign exchange instruments saw only a 7 percent increase in volume. The report also says that “the higher global foreign exchange market turnover is associated with the increased trading activity of “other financial institutions” (think retail forex brokers). Turnover in this category rose 42% and for the first time ever, reporting dealers (banks) did more transactions with “other financial institutions” than with other banks.

Having just come back from Singapore where shelves and shelves were filled with forex trading books, I am in no way surprised that the BIS has confirmed the popularity of forex trading.

The foreign exchange market also became more global with cross-border transactions representing 65% of trading activity in April 2010, while local transactions account for 35%.

U.S. Dollar Becoming Less Important

Back in 2001, the U.S. dollar was involved in 90% of all currency transactions and as of April 2010, this fell to 84.9%. The decline in trading of dollars has benefited the euro, which gained 2 percentage points in market share since the last survey and accounts for 39% of all transactions. “The Japanese yen also increased its market share by 2 percentage points to 19%, a recovery relative to the 2007 survey but still below its peak of 23.5% reached in 2001. The pound sterling gave up most of its post-euro gains, with its share returning to the immediate post-euro level of around 13%. Trading in the Swiss franc also declined marginally to 6.4% from 6.8% in April 2007. The Australian and Canadian dollars both increased their share by around 1 percentage point, to 7.6% and 5.3%, respectively.”

“The percentage share of the US dollar has continued its slow decline witnessed since the April 2001 survey, while the euro and the Japanese yen gained relative to April 2007. Among the 10 most actively traded currencies, the Australian and Canadian dollars both increased market share, while the pound sterling and the Swiss franc lost ground. The market share of emerging market currencies increased, with the biggest gains for the Turkish lira and the Korean won.”

Of the major currency pairs, trading of EUR/USD and USD/JPY have increased while trading of the GBP/USD has decreased.

The U.K. is still the largest trading center for forex but the relative ranking of foreign exchange trading centres has changed slightly from the previous survey. The United Kingdom continued to be the most active location with a share of 46% of worldwide trading, followed by the United States with a share of 24%, slightly down from 2007. Outside these two centres, trading took place primarily in France (7%) and Japan (3%), both slightly down from 2007, Singapore (3%) and Switzerland (3%), both slightly up. Turnover in Germany almost halved to less than 2% in April 2010 compared with 2007. Banks located in the United Kingdom accounted for 36.7%, against 34.6% in 2007, of all foreign exchange market turnover, followed by the United States (18%), Japan (6%), Singapore (5%), Switzerland (5%), Hong Kong SAR (5%) and Australia (4%).

Lower Forex Margin Should Temper Volume Increases in the Future

However the pace of growth will most likely be moderated by the reduction in leverage announced in the U.S. and Japan. Last month, Japan reduced leverage to 50:1 and plans to bring this down even further to 25:1 next year. U.S. regulators announced earlier this week that leverage will be capped at to 50:1 for major currencies and 20:1 for all other currencies. This will go into effect on October 18. Lower leverage will make forex trading less attractive to some participants but 50:1 is still very generous leverage by all counts and so it will not be catastrophic for the retail forex industry. We should still see retail trading contribute positively to forex volume, but probably not by the double digit levels seen in past years.

Read more….

By Michael Trinkle, ForexTraders

Yesterday’s Asian session saw a lot of activity and was generally dominated by sales, but the American market seems to have found some floor on somewhat positive confidence and home sales data. The market seems to be rowing against the currents, however, because the positive nature of the releases is only on the surface.

Among today’s news, neither the report about better than expected industrial production rates (0.3% vs. -0.4%)in Japan in August, nor data on growth of retail sales have done much to help Japanese stocks. Nikkei was down by more than 3 percent, and most Asian stock markets registered losses, even as currencies remain strong against the USD. In U.S. better than expected home sales data for June failed to make any impact since we already possess disastrous numbers for July.

Moody’s warns about Chinese banks

Apart from uncertainty caused by Japanese inaction,pessimism about Asia was boosted today on a report by Moody’s, via the Telegraph, about the unsustainability of the current lending practices in mainland China, where the government is risking future stability by supporting bank lending through debt (i.e. higher leverage).

“Moody’s said China Investment Corporation (CIC), the country’s sovereign wealth fund, borrowed $8bn last week to recapitalise three state-owned banks, using debt rather than genuine equity to boost bank capital.

The agency said that beefing up the banks by this method is “credit negative” for China as a whole: “The increases in assets and equity are artificial and without real economic substance. The increase in reported equity enables the banks to lend more and effectively leverages up the system.”

• Weird rumors about Zhou Xiao Quan defecting leads to early Asian sell-off

  Testimony to the degree of nervousness that exists in the markets about China right now, Asian session saw major a sell-off upon claims that the PBOC Head, Zhou XiaoQuan, who had not been visible for a while in the media, had defected fearing punishment for large losses of about $430 billion suffered in consequence of his team’s FX management strategies.

  China may be a strange place in many ways, but it is not North Korea. One has to look a long way back to the past, to the times of the Zhao Ziyang, for example, to find the kind of ostracism that might conceivably compel an official to leave the country. The fact that rumors like this can find credibility is nothing more than a sign of how skeptical many people have become about the multiple Chinese bubbles, but even with all the problems in the country, the head of the central bank defecting because he fears punishment is just too outlandish to be believed.

Israel says Iran may attack a Middle-East nation, Iran threatens to bomb Dimona

The problems between Iran and Israel are not new, but the intensity of rhetoric has been increasing for the past three months or so. In yet another step of escalation, an Iranian official is quoted as saying that the country will bomb Dimona Nuclear Reactor if it gets attacked, as Israeli minister Dan Meridor, in a question and answer session on Israeli radio in Farisi, expressed his fear that Iran would attack a Middle Eastern nation.

What he means is probably that the Iranians will respond to American bombing of their reactors by attacking Israel, which is, in his thinking, a third party not involved in hostilities. We suspect that this type of comment reflects the desire of Israelis to leave the military attack to the US due to their frontline status, and the greater risks they would face in the face of an Iranian counterattack. That also speaks against a unilateral, pre-emptive Israeli attack on Iranian installations.

It is of course difficult to reach conclusions on the basis of isolated statements such as these, but given the importance of the Gulf Area in maintaining global economic stability, traders must keep an eye on the region even if matters appear to progress (almost) smoothly at the moment.

CFTC withdraws reform proposals, leaving retail forex clients free to (almost) suicide at 100:1 leverage

The CFTC had made some sensible and suitable proposals for reforming the FX market a while ago, but those proposals appear to have been withdrawn in the face intense opposition from lawyers, dealers, and some speculators. The most crucial piece of contention is maximum leverage, naturally, since it is a major cause of the frequently large losses suffered by traders, and the huge profits reaped by brokers.

The CFTC had proposed a regulation capping leverage at 10:1, at just one tenth of the currently available level at 100:1 in the U.S. At the moment, in the EU and the UK even higher leverage is possible, which explains why so many brokers prefer to base their operations in European or British centers. The calculation is simple,:while returns for the trader are often disappointing, the broker makes ten times as much money from the spread at 100:1 leverage than he would at 10:1.

Among other things, according to the statement at the CFTC website, the new, diluted rules will require “the registration of counterparties offering retail foreign currency contracts as either futures commission merchants (FCMs) or retail foreign exchange dealers (RFEDs), a new category of registrant. Persons who solicit orders, exercise discretionary trading authority or operate pools with respect to retail forex also will be required to register, either as introducing brokers, commodity trading advisors, commodity pool operators (as appropriate) or as associated persons of such entities. “Otherwise regulated” entities, such as United States financial institutions and SEC-registered brokers or dealers, remain able to serve as counterparties in such transactions under the oversight of their primary regulators.“

In other words, the CFTC is aiming to streamline regulation, and end the chaotic state of the retail forex market by establishing straightforward regulatory categories.

Also,

“FCMs and RFEDs are required to maintain net capital of $20 million plus 5 percent of the amount, if any, by which liabilities to retail forex customers exceed $10 million. Leverage in retail forex customer accounts will be subject to a security deposit requirement to be set by the National Futures Association within limits provided by the Commission. All retail forex counterparties and intermediaries will be required to distribute forex-specific risk disclosure statements to customers and comply with comprehensive recordkeeping and reporting requirements. “

On the whole, pretty much of a disappointment, after we have seen how miserable the consequences of letting an industry regulate itself are in the subprime crisis. The CFTC is letting the NFA determine leverage limits, which means that the brokerage business will get away with whatever limit (or lack of it) serves its interests best.

In sum, we note gold’s powerful rally today, and, in agreement with others, anticipate the breaking of new records in the coming weeks. In other respects, we continue to expect a significant deterioration in global economic stability largely as a consequence of major upheaval in China and the rest of the Asian region. We believe that this phase of the economic downturn lasting since 2007 will reach its climax in Asia, and Europe in the next two years.

More articles from ForexTraders….

By Charles Hugh Smith, OFTWOMINDS
The financial news and general stock market sentiment are negative; in a contrarian fashion, that sets the stage for an “unexpected” rally.

Go to my main site at www.oftwominds.com/blog.html
for the full posts and archives.

More articles from Charles Hugh Smith….

By Karl Denninger, The Market Ticker

I love this guy….

McCain was poorly positioned to counter Isaacs arguments because McCain had proposed the same accounting gimmicks Isaac was proposing. The defeat of TARP I embarrassed McCain and Senator Obamas lead over Senator McCain in the polls increased substantially.

Right.  McCain was and still is today all for accounting fraud.  In the summer of 2008 I had several "conversations" (more like talking to a brick wall) with his campaign manager Kevin Daucher, some of them in writing and thus documented.  I pointed out at the time that McCain had to get in front of this or he was going to lose.  I went so far as to attend (as a private, concerned citizen, not as a lobbyist or corporate "hack") one of his campaign events in Washington DC, at which time Tom Ridge told me while smiling for my picture with him that he, and thus I presume the McCain campaign, was fully aware of the scams – in somewhat-"sideways" language.

Senator Obama, as a candidate, and his administration after the election did not take a public position on covering up the losses. The Chamber of Commerce and bank lobbyists made the cover up of bank losses their top regulatory goal. Their strategy was to get Congress to extort the Financial Accounting Standards Board (FASB) to force a change in the accounting rules so that banks did not have to recognize loan losses. House Financial Services Capital Markets Subcommittee Chairman Paul Kanjorski (D., Pa.) held a hearing in March 2008. The hearing was a bipartisan assault on FASB. Kanjorski demanded the prompt adoption of the cover up. Otherwise, he promised the prompt passage of legislation to remove the FASBs power to set accounting rules.

Exactly.  Gee, we’ve documented that here too.  Kanjorski is a traitor to his oath to uphold the Constitution, which incidentally demands equality before the law.  This duty is something that CONgress conveniently forgets whenever it thinks it can find a "free lunch", especially when the consequences of not doing so are that it’s 20-year history of suborning fraud would otherwise come crashing down upon their heads.

Instead of holding oversight hearings that exposed the Bush and Obama administrations evasion of the PCA and demanded compliance, prominent members of Congress encouraged it. House Financial Services Chairman Barney Frank (D., Ma.) said:

"This is important for all regulators. We need to give you some discretion in how you react to these things. I am asking everyone — the Office of the Comptroller of the Currency and others — if anything in the existing legislation deprives you of discretion in how you react … I insist that you tell us."

Fraud is fraud.  PCA is black-letter law.  Evading it by lying is still fraudulent activity.  Whether you make it "legal" ex-post-facto (as was done in 2009 by Kanjorski’s threats) or not is immaterial.  A thing is either wrong or it is not.  In this case it’s not only wrong, it’s crippling our economy and financial system.

The premise of this scam was that if we just "overlooked" the problem the banks would "earn their way out."  This was bogus from the start, because the underlying problem isn’t just the BS accounting, it’s the fact that the BS accounting allowed leverage (debt) to be cranked to unsustainable levels.  You can’t fix this without taking that leverage out, and yet doing so requires recognition that the alleged "assets" aren’t worth what they are claimed at.

We see the depths of this every Friday when banks are closed and magically when the FDIC swoops in we have an institution that allegedly had more assets than liabilities is deemed insolvent and millions of dollars of losses are absorbed by the FDIC.  How is this possible?  There is only one way: The "assets" are being reported at FICTITIOUS values – we always know what the liabilities (in the case of a bank, these are the deposits) are to the penny!

For a banker, whats not to love about the right not to recognize even massive losses on assets? He gets to keep his job, reputation, and obtain bonuses for blowing up the bank. For a senior regulator whose failures allowed the bankers to cause the epidemic of mortgage fraud (FBI 2004), the mother of all bubbles, and the Great Recession a cover up is ideal. Bank failures are supposed to lead to investigations by the Inspector General and can lead to embarrassing congressional oversight hearings.

Even worse than congressional hearings are 20-year dates with a guy named "Bubba."  Mr. Wall Street no like that – most of them aren’t gay, for openers, not to mention that the caviar, blow, limousines and expensive hookers they’re accustomed to aren’t available in prison.

There’s only one small problem with all the lies about asset valuations: The fundamental truth about those values doesn’t change no matter how much you lie about it.  Therefore, those who are lying have two choices: either go under anyway, or start stealing literally everything in sight down to the carpet on the floor, fencing it to keep ahead of ever-increasing cash-flow demands that can’t be met by these impaired assets.

This is the black-hole vortex into which our economy is now spiraling.  It is, in fact, the precise same mistake that was made by FDR.  Instead of forcing those who did the evil things to admit their insolvency and be resolved, wiping out the imprudent (including those who invested in them) we are instead caught in the vortex and are unable to truly recover in our economy and markets.

Last time we "got out of it" by destroying the production facilities of essentially the entire developed world (except us, of course.)  This time such a "fix" would entail irradiating that entire developed world, and thus one would hope that nobody is that dumb.  Of course with the record we’ve seen thus far of "intelligence" coming out of DC…..

We’re headed for at best a Japan-style scenario and at worst something akin to the 1930s – if we’re lucky.  We have dramatically increased the pain level that has to be absorbed by blowing $4.5 trillion in the last three years for one purpose above all others – covering up the fraud and scams through government spending. 

It won’t work, as is now being documented as sector-by-sector fails as soon as the government tit stops dispensing "free" (really borrowed from China) milk.  Housing is just the most-recent example; as soon as the "tax credit" expired home sales cratered – right into the summer selling season, prompting panicked Administration Officials to start muttering about "re-enacting" the homebuyer handout.

While Washington continues to play this game it might want to gaze toward the East, where there are rumors that the Chinese have taken a huge loss on their foreign bond holdings, and their Central Banker is rumored to have defected (to the US!) – a rumor that, thus far, I give little credibility to.

Of course should he suddenly be found to have suffered a "heart attack"…….

More articles from the Market Ticker….

One of the most amazing things about the trade war we are fighting is that the U. S. government often does not appear to know we are even in a war. But if you go to any manufacturing town in this country, and look at the empty storefronts and the broken down plants, talk to a taxi driver or a Dunkin Donut clerk who used to work in the local factory for triple his current wage, it is clear we are in a war and it is one we are losing.

First, let’s be clear. It is not that manufacturing has left the planet earth. That is basically the line of the apologists for our failed trade policy — that there is some kind of natural shift to a post-manufacturing economy. But that is simply not the case — it is just that the jobs and the plants have left the United States. We have lost 8 million manufacturing jobs in the last several decades and are now at about 11.7 million. But China has over 100 million people employed in manufacturing. If we had a policy which resulted in recovering even a fraction of these jobs from China we would be showing long term manufacturing job growth, not decline. Similarly, our trade deficit in high technology goods is steadily growing. In 2009 we had a $56 billion trade deficit in these goods, up from a $37 billion deficit in 2006, and a positive balance of $5 billion in 2000. It’s not that these goods are not being manufactured any more, it’s just that they are not being manufactured here.

The United States has by far the largest trade deficit of any country on earth, last year about $375 billion. Meanwhile our major competitors all have strikingly positive balances of trade, China, plus $297 billion, Japan, plus $141 billion, Germany, plus $135 billion, even Russia is at a positive $50 billion. More and more Americans are sure we need a policy which will balance trade, not one based on failed economic theorizing.

The deficit is just the most blatant example of the war we are losing and the jobs we are exporting (on job exports we would have a positive balance!) But for those of us working in the trade law area, on the U. S. side of the battle line, there are other battles every day.

Example one: for the most part, the trade laws, such as the antidumping law which counters unfair pricing and the anti-subsidy (or countervailing duty) law which counters subsidization, are simply not being vigorously enforced. The Obama Administration has had in their hands the tool that could play a big role in turning around the trade problem with China. That would be to put on tariffs to off-set the amount of subsidies created by Chinese currency undervaluation. But they have not done this. This has resulted in increasingly strong calls from Senators Schumer, Brown, Graham and others to the Administration, demanding them to step up and take action.

Example two: the Congress is not entirely without fault. It has been 16 years since the Congress undertook a major rewrite of the trade laws. In those 16 years enormous changes have occurred in the world of trade, not the least of which is that China became a member of the WTO and began running the largest sustained trade surplus with the United States of any country in our history. We cannot be left with 16 year-old tools.

Example three: even more aggravating is that in those instances where one can get a trade case order against Chinese or other foreign unfair imports, the orders are often violated through illegal circumvention or fraud. The mechanisms to counter this are expensive and need to be updated.

Against this unfortunate background of trade problems, it simply makes no sense to focus on one or two bright spots, such as a new plant making solar cells, or a successful trade mission to one small country. We need to revamp the whole trade system and start winning the war. The U. S. is not out of the running. We still have the largest manufacturing sector in the world (measured by gross output), but we are very far off the top of our game. We are like a great athletic franchise that has had twenty years of bad results and needs a new strategy to turn it around.

What will that strategy be? That is what the Committee to Support U. S. Trade Laws and other like minded organizations will discuss at our Conference on the Renaissance of American Manufacturing at the National Press Club in Washington, on September 28. Among other issues, we will look at how to reform the trade law system in a major way, and how to make it work for U. S. manufacturers. The Conference will also look at why manufacturers are losing the trade policy battle, and at what structural changes need to be made in the U. S. economy. Finally, we will discuss what Congress can and should do to fix this problem. It’s high time we get some good news from the manufacturing sector and not an unending string of defeats, job losses, and plants moving overseas.

Read more….

A look at the relationship between the yellow metal and currency markets and why it is important to know how much gold is in Fort Knox

Read more….