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About Me

Darren Winters is a self made investment multi-millionaire and successful entrepreneur. Amongst
his many businesses he owns the number 1 investment training company in the UK and Europe.
This company provides training courses in stock market, forex and property investing and since
the year 2000 has successfully trained over 250,000 people.

Thursday, 30 October 2014

Europe's Largest Laundrette

Europe's largest laundrette has been revealed and it's in Britain. But this outfit wasn't set-up with the intentions of keeping Mr Jones looking fresh and clean for work, but rather laundering Mr Bigs' loot. It was about laundering ill-gotten gains from prostitution, people trafficking, drug trafficking, illicit arms deals and corruption, and to make it all look respectable by making illegitimate money legitimate, then funneling it through the economy. Some may argue that if the loot gets recycled and put to good use, creates businesses and provides work for people in these desperate times then maybe just look the other way? I guess that depends on the size of the operation, if the illicit activities amounts to millions of dollars, then it's a good fish for the establishment to fry and the predictable happens. The criminals are marched off in handcuffs, the media is invited to take living color photos of the villains with their bundle of illegal substance in clear view on a table with a burly policeman standing proudly by. It is a victory for law and order and the government of the day is given a pat on the back by the electorate.

But this money laundrette didn't involve millions of dollars, it was massive in scale and at least 19 UK household name firms are under investigation. It was truly international in nature and high level corrupt officials around the globe have been caught up in the scandal. 

The scale of this money laundrette would have made the notorious American gangster, Al Capone, look like a small time villain. The aim of this massive global underworld operation was to make 20 billion US dollars of dirty money look legitimate.

When it’s a white collar crime of that magnitude it is just too big to jail. An article in The Independent, entitled “The great British money launderette”, dated October 15, reports that “An investigation by Organised Crime and Corruption Reporting Project, an NGO, has identified dozens of firms in a global web spreading from Birmingham to Belize”. At the heart of the investigation are front companies in the UK into one of Europe’s biggest money-laundering operations, allegations that criminal gangs and corrupt officials conspiring to make $20bn (£12.5bn) of illegitimate money look legitimate. The funds are believed to have come from major criminals and corrupt officials around the world wanting to make their ill-gotten cash appear “clean”, so they can move the funds in the legitimate economy without creating suspicion.

There are at least 19 UK-based front companies under investigation. Those calling for tighter corporate laws in the UK are using the scandal to highlight how lax corporate rules have made the UK a hotbed destination for global organised crime. Apparently, according to the article, the secrecy that company directors are entitled to under UK law is also making it extremely complex to identify who the big player, the kingpin behind Europe's largest money laundering operation, actually is.

Money laundering involves creating the impression that dirty money has been earned through legal means. This major scam involving billions of dollars has been going on four years without alerting the attention of the regulators and the authorities. But it was finally shut down in May by the authorities in another of its main centers, the former Soviet republic of Moldova.

Vasile Sarco, an investigating officer in Moldova, told The Independent: “This money was routed from Russia, but the companies incorporated in Britain were instrumental to transit the funds.”

But due to the sheer volume of money involved the deception, the scam, had to be more complex, so that it gave the illusion of credibility to the authorities. It is difficult to launder billions of dollars through say a retail pizza operation. Billions of dollars laundered through a restaurant, or night club, a “window type business operation,” would look suspicious and raise the alarm bells. It just wouldn't look credible. Moreover, documentation is required for moving such large scale amounts of cash.

So the kingpins masterminded another more complex web of deception involving front companies, corrupt officials and bankers to launder the billions of dollars through the banking system. The deception went something like this; front companies in the UK were created with the sole purpose of carrying out massive phoney business deals between themselves. These front companies then sued each other in courts in Moldova, demanding the repayment of hundreds of millions of pounds of loans. Then a corrupt judge in Moldova, a small Eastern European country whose legal system is not considered as robust as those in Western Europe, would rule in favor of the claimant company with an all-important signed court document ordering the debt to be paid. The cash, sometime amounting to hundreds of thousands of dollars was then given to the claimant company from the front company. The claimant company would then launder the money through the British banks and with a court document ordering the debt to be paid, nobody would bat an eyelid. The money is given a clean appearance and enters the EU banking system and the owners of the front claimant company are free to spend the money how they wish.

Although the British companies were registered at ordinary-looking office buildings in London, Edinburgh, Belfast, Glasgow and Birmingham, their real ownership is hidden by a web of brass-plate entities and nominee directors in secretive tax havens like the Seychelles, the Bahamas and the Marshall Islands.

For example, one of the companies based in Edinburgh lists its shareholders as two untraceable companies in Panama and Belize. They’re a bit like Russian dolls, you open one, and there is another one inside, and it goes on and on and on never discover the identity of the Kingpin. He is sheltered, within the law, I guess he is just too big to jail.

Wednesday, 29 October 2014

A Shot Across The Bow

The recent IMF (International Monetary Fund) report was a shot across the bow, a warning that the world might be entering a new financial crisis. The threat could stem from global central banks which have been encouraging excessive risk taking in the markets. More than half a decade of ultra low borrowing costs, induced by the central banks through loose monetary policy, such as quantitative easing (QE), which involved the purchase of bonds at an unprecedented level, has reduced interest rates and pumped the system with liquidity. QE has fueled investment but it has been the wrong type of investment in the economy. Years of QE has done little to stimulate the productive type of business investment. Instead, the central banks loose monetary policy has aided and abetted speculative financial investment and blown up asset bubbles in equities, bonds, real-estate and even in some alternative investments, such as classic cars, wines etc.

What about growth in developed economies returning to levels seen before the 2008 financial crisis? The IMF believes that this is unlikely, so perhaps this downturn in economic activity in the developed economies is more than just a business cycle, maybe we are seeing a systematic decline in economic activity among the developed economies.

The problem plaguing developed economies is that there is far too much debt in the system and not enough growth. The IMF has highlighted the problem of stagnant growth. In the Euro-zone there is now no growth and deflation is creeping in and the consensus among economist is that the bloc is likely to experience another contraction. The Japanese economy is again in contraction. Japans economy shrank at an annual pace of 6.8 per cent in the second quarter after spending got slammed by a sales tax hike that kicked in from April. Has the US economy really reached escape velocity? Economists have slashed US Gross Domestic Product (GDP) forecast for Q3, nevertheless, they see steady growth of 3 percent for the year ahead. The UK's budget deficit continues to grow exponentially and the trend is unlikely to be reversed ahead of the 7 May 2015 general elections. While the economy is in a relatively better shape than its neighbouring countries on the continent in Europe, the economic recovery is unbalanced. The recovery in UK manufacturing and construction remains subdued and there are fears that low levels of interest rates have created a property price bubble, particularly in London.

The historic low levels of interest rate now means that speculative investment is rampant. The lengthy low interest environment hasn't spurred on productive investment, which could explain why growth levels have been so disappointing in developed economies. It seems that all loose monetary policy has done is to fuel rampant speculation in financial activities. In other words, loose monetary policy and low interest rates have spurred on the accumulation of debt for the purpose of financial gambling.

A Frankenstein monster, called the shadow banking system has grown beyond the control of governments and financial regulators. The shadow banking system entails the off balance sheet activities, all the transactions that banks and large institutions don't want to put on their balance sheet, which would normally be monitored and registered. It is a kind of secret world where activities are opaque. The shadow banking system conducts mysterious operations beyond the preying eyes of governments and regulators and it’s no small corner shop operation either. In the US the shadow banking system is massive, many times bigger than the US economy, which is valued at 16.7 trillion US dollars. The shadow banking system in the UK isn't as big yet, nevertheless it is growing rapidly. So there exists a massive financial intermediary, which operates out of sight of government and regulators. It’s a law unto itself and is just brewing away. But is it important?

Very much so. In fact one of the factors that made the financial crash of 2008 so severe was the collapse of the shadow banking system. The unregulated, off balance sheet activity of the shadow banking system in 2008 fed back into the main banking system and also brought everything else down with it.

In many ways we are seeing the return of the conditions which brought about the last financial crisis of 2008.

Howerver, this time we also have the added problem of an escalation in global tensions that was not a feature back in 2008. The tensions between Russia and the West over the Ukraine, which has culminated in tit for tat sanctions on Russia and the West is being blamed by many in Germany for the recent economic slow down in growth.

Perhaps in many ways the process is just cyclical, the economy goes through a period of a large credit cycle when there is an enormous build-up of debt and credit in the system, then it falls over itself. A massive credit default magnified by leveraging then follows. That is what drove the financial crisis in 2008. Ideally what should have happened following this enormous build up of debt and credit, is that the economy should have picked up and accelerated out of debt. Unfortunately, that just didn't happen and the world economies are burdened with huge debt, which is likely to turn into a big problem sometime in the future.

Speculate To Accumulate

It is now official, the richest 1% of the world’s population are getting wealthier, owning more than 48% of global wealth, according to a Credit Suisse global wealth report. The wealth scale is as follows; a person needs just $3,650, that also includes the value of equity in their home, to be among the wealthiest half of world citizens and more than $77,000 is required to be a member of the top 10% of global wealth holders. To belong to the richest 1% $798,000 is required.

“Taken together, the bottom half of the global population own less than 1% of total wealth. In sharp contrast, the richest decile hold 87% of the world’s wealth, and the top percentile alone account for 48.2% of global assets,” noted the Credit Suisse global wealth report. Total global wealth has now been estimated at $263trillion, which is a new record and more than twice the $117 trillion calculated for 2000. The report found that the UK was the only country in the G7, group of seven of the most advanced economies, to have recorded rising inequality in the 21st century. The wealth gap has widened and is more concentrated than at the beginning of the millennium. A total of just 85 of the richest people across the globe now own one trillion dollars of wealth, which is the combined wealth of the poorest 3.5 billion of the world’s population.

“These figures give more evidence that inequality is extreme and growing, and that economic recovery following the financial crisis has been skewed in favour of the wealthiest. In poor countries, rising inequality means the difference between children getting the chance to go to school and sick people getting life saving medicines,” said Oxfam’s head of inequality Emma Seery.

“In the UK, successive governments have failed to get to grips with rising inequality. This report shows that those least able to afford it have paid the price of the financial crisis whilst more wealth has flooded into the coffers of the very richest.”

But perhaps there’s something more behind the reason why wealth is more skewed towards some people rather than others?

Has something changed in the economy? If we look at wealth creation over the last century we will notice that there was a distinct link between raising productivity in the economy and accumulating wealth. For example, in the last century the most successful auto-mobile entrepreneurs figured out how to mass produce autos for the masses and make a profit, they built factories, employed people, provided work for the local community. The mas-production of autos made them affordable, which improved the mobility of the masses and raised productivity in the economy. Similarly, the entrepreneurs who built the rail roads in the 19 century employed resources, machinery and people. Their wealth was linked to improving productivity in the economy. The rail roads made it cheaper to move goods and people around the country so the economic benefits were spread across the population.

But today the link between productivity and the accumulation of wealth no longer exists. Take the example of a farmer planting seeds in a field and a trader speculating on grain prices. In some respects both activities are similar, the farmer is taking a risk when he decides to cultivate his land and plant seeds, praying that bad weather won't destroy his crops. Likewise, the trader is taking a risk when he purchases a contract for wheat at today's prices for sometime in the future, say six months or a year. While both the trader and the farmer are in fact risk takers there is a fundamental difference between the two, the latter profits are gained by making investments in the economy, purchasing seeds, maybe machinery, a tractor employing a farmhand etc. So, in the case of the farmer, there is a link between production, profit and the creation of wealth.

The global derivatives market today is worth 1,200 trillion dollars, that figure is so large that it is difficult to comprehend. Let me put it another another way, the global derivatives market is twenty times larger than the entire global economy. So we have a market, where there is no production, there are no machines, factories or people employed in the production of goods, which is worth twenty times more in monetary terms than the real economy. Fortunes are literally made and lost over night, new anonymous millionaires are created daily on this mysterious market.

Despite the derivative market's enormous size, 72 times larger the world's biggest economy, the US, the derivatives market is relatively unknown to the public. If you where to ask 10 people outside a supermarket do they know what a derivative is, you would be lucky if more than two would know the answer. Yet everyone knows how David Beckham got famous. Amazing!

Bearing in mind that the derivative market is 20 times larger than the global economy, then it becomes fairly apparent that the top traders, speculators, investors are amongst the world's 100 richest people. Warren Buffet, George Soros are just a few that come to mind, but there is a growing list of mega rich traders.

So it is true that speculating/investing, if it is successfully done, is one of the main routes to accumulating wealth today.

Increased stock-market values raised the wealth of stockholders in Germany on average by 22.6 percent and thirty percent in Canada and France. Most of the world's new wealth was created in China and developing nations between 2000 and 2014. Emerging markets accounted for 11. 4 percent of wealth. Asia and China were the largest emerging wealth creators in the emerging markets. Global wealth will grow in 2019 by 40 percent and reach 369 trillion USD. Emerging markets will account for 26 percent more than double of what they are now .The number of millionaires is expected to increase from 35 million today to 50 million in 2019, according to the report.

Tuesday, 28 October 2014

New Market Cycle?

Has the five and a half year secular bull market in equities finally come to an end? Well, it is beginning to look more like that as time progresses. The buying on the dip strategy, that worked so well over the last five and a half years and was a win win strategy, might not play out like that in the future. If this secular bull market has expired, bearing in mind that the typical time frame of a bull market is about five years, so the bull market has run for six months longer than usual, then maybe the market might well be posed for a new trend. But it might be too simplistic to determine the end of a market cycle solely on the duration of that cycle.

Indeed, there are many factors at play which drives a market cycle. This bull market, which the more bearish amongst us believe has run its course, has been induced by the central banks. The fundamentals, at least over the last few years, have not really played a role in determining the market's trajectory and investors have brushed aside the fundamentals of investing. The price earning ratios of stocks, market capitalisation and even the underlying state of the economy seems irrelevant today and over the past few years. The central banks, have managed to surgically remove the fundamentals from the market and all investors look to now is what the Gods, the central banks, will do next.

When the market looks like it is about to go cold turkey, the central banks keep investors high by pumping the system with liquidity, known as quantitative easing (QE), which involves massive bond purchases. Consequently, the market has become hooked on QE. But you can't keep a drug addict high without the drugs. So who knows, maybe the central banks will be back again with their fix of QE, perhaps they'll even give it another fancy name, call it operation twist or tango just to keep mainstream bamboozled.

So while the market is kept high on funny money the real economy is starting to deteriorate at an accelerated rate. Even the bright spots are not as lustrous as they were recently. Market Watch reported, October 21, further evidence of a slowdown in the Chinese economy. Firstly, housing sales have declined sharply. “Housing sales in China in the first three quarters this year fell 10.8% to 4.05 trillion yuan ($661 billion), according to data released by the National Bureau of Statistics on Tuesday. Sales were 3.43 trillion yuan in the first eight months of the year--down 10.9% from the same period of 2013.” “China's economy in the third quarter grew at its slowest pace in five years as it battles a slumping real-estate market and weak domestic demand and industrial production.

The results Tuesday marked a drop from the second quarter's growth rate and suggest China's economic performance for all of 2014 will come in at the low end of the government's target of about 7.5%.”

With respect to Europe, regretfully there is no good news to report, the economic situation is going from very bad to dire, on a weekly basis. Spain's industrial output per capita has gone back to 1976. Austerity has devastated the economy with more than half its youth without work, already one in four of the workforce are without a job and that is likely to rise, if they continue with the Brussels (German) imposed austerity cuts. Save the Children report calls on the Spanish government to take “emergency measures,” with almost a third of Spanish children now at risk of living in poverty. In Italy, Rome, up-to a million people are marching for job creation. Tax breaks and spending cuts unveiled in Italy’s 2015 budget last week have also come under scrutiny, with Secretary General Susanna Camusso arguing that the plans “will keep the country in a state of recession.”

The French are wrangling with Brussels (Germany) over breaching its EU deficit target of 3% of Gross Domestic Product (GDP) for the third time. France expects its deficit to reach 4.3% of output in 2015. A group of anti-austerity MPs, known as "les frondeurs" (rebels), say that Brussels's deficit target will "asphyxiate any possibility of growth".

Greece is now in full blown collapse and has been downgraded to emerging market status.

Under extreme stress you see the personality traits of individuals and nationals. The Southern Europeans through their hands in the air, the French bicker with the Germans, the Germans get bossy and the Brits nervously look over the English channel, making sure there are no aliens sailing across the sea. Isn't British Prime Minister David Cameron talking about placing quotas on EU migrants?

But back to the markets. In this recent sell off there has been a rotation away from cyclical stock, which tend to perform better when the business cycle is coming out of a recession, going into a boom. For example, Shares in Allianz Technology Trust (ATT) formerly RCM Technology, have fallen 10% in the past month as tech stocks have de-rated on fears of an economic slowdown and on the impact of higher interest rates. Chip makers are down. IBM's recent results were disappointing with Q3 revenue sliding 4% on top of revenue also down last quarter 3%. There are fierce price wars raging amongst the retailers in, clothing, travel and even the more defensive sectors like food. Moreover, the recent second profit warning from the world's second largest engine maker Rolls Royce, underscores the rapid deteriorating global environment. "the economic environment has deteriorated, and it has deteriorated quite quickly" - Rolls Royce CEO John Rishton.

Perhaps a profit warning from Rolls Royce and IBM revenue downgrade is a clue for what awaits us in these forthcoming Q4 revenue earnings. Already we see a rotation away from cyclical equity into more defensive less risky asset classes, which typically perform well in a downturn.

If Q4 earnings turn out to be disappointing, then that could spell the end of the secular bull market and the beginning of a bear market cycle. But again that all depends on what the central banks do.

Monday, 27 October 2014


The European continent is now plagued with deflation and it is further evidence that the medicine, loose monetary policy, isn't working-in fact the patient appears to be getting sicker.

Already seven countries in Europe are now in a deflation, Bulgaria-1.4%, Greece -1.1%, Spain-0.3%, Italy-0.1%, Hungry-0.5%, Slovenia-0.1%, Slovakia -0.1%. Additionally, there are now four other countries where the inflation rate is zero percent; they include Cyprus, Lithuania, Sweden and Portugal. The EU average inflation rate is 0.4%.

Deflation means that prices for goods and services are falling in the economy and is the inverse of inflation, which means rising prices.

But why are economists getting hot under the collar about deflation? After all , falling prices for goods and services means that consumers have more change in their pockets, which means that they go out and spend more, which in turn is a boost for the economy. Surely that is a good thing. So what is the problem? Well, that is partly true depending on what type of deflation the economy is experiencing.

There are two types of deflation. For example, when deflation is brought about by a fall in technology prices, such as computers and mobiles becoming cheaper, it can lead to productive gains in the economy. Consumers will have more change in their pocket to spend on other items. This type of deflation, as described above, is beneficial for the economy. Regretfully, this is not the type of deflation European economies are currently experiencing.

Falling real incomes have resulted in a sluggish aggregate demand in the economy. Producers, retailers and service providers have responded by discounting the prices of their products or services. As reported in Reuters in an article dated in May 2014, entitled, “Carrefour in front line as French retail price war heats up.” The article goes on to to say that Carrefour is in the front line of a French retail price war that is showing signs of becoming bloodier than expected as supermarkets scrap for market share in a sluggish economic recovery.

"The price battle will be tough in the second half of 2014 due to a still tense consumption climate. As Carrefour regains market share, Leclerc and Auchan have become more restless", said Yves Marin, senior manager at the Kurt Salmon consultancy.

French consumer confidence fell unexpectedly in April as debt-burdened households grew more wary about their deteriorating finances and high unemployment, according to the official data.

Auchan, another major retail group, has now joined the fray, cutting prices in March by up to 5 percent and making clear its determination to continue.

"The price war is continuing. We will not be the first ones to end it," Phillipe Courbois, head of client relations for Auchan France, told Reuters by phone.

So with severe price wars that start in the first and second quarter of 2014 in almost every sector it is no surprise then that we are seeing deflation figures currently in many countries today in Europe.

This type of deflation is concerning, particularly when consumers are put off from spending today. Why make that purchase now, when the product or service is likely to be cheaper sometime in the future? So consumption is deferred for a later date. Furthermore, businesses might be detered from making investments to ramp up production in an environment of falling prices, which translates to falling profits. With business investment put off, it can be a drag on employment, which leads to falling aggregate demand and then falling price. The viscous cycle of falling prices, consumption and investment, continues until the economy eats itself which is exactly the type of deflation that economists are worried about in Europe.

However, what is more perplexing is that the European Central Bank (ECB) is proposing to tackle the problem of deflation by carrying out pretty much more of the same policy that it’s been carrying out since the beginning of the 2008 financial crisis.

Indeed, the solution that the ECB proposes is more quantitative easing, which means purchasing bonds with the aim of keeping interest rates low and pumping billions of dollars into the economy.

But pumping the economies with liquidity (money) is unlikely to solve Europe's economic woes. After all, what happens to the money supply is irrelevant. What really matters is the level of investment in the economy. If private investment has gone on strike, so to speak, then public investment should step in financing large infrastructure projects with the aim of boosting employment and aggregate demand.

But what’s being suggested is nothing new. It was said years ago by the esteemed economist John Maynard Keynes, who basically suggested that the money supply is irrelevant. When the economy has been derailed, what really matters is capex, businesses investing in fixed assets, plant and machinery and public expenditure on large scale infrastructure projects

Nevertheless, we see ECB doing what it did previously, purchasing billions of US dollars of Italian and Spanish bonds to keep them stable, which happened to be an identical policy followed up its counterpart across the pond, the Federal Reserve (FED).

In an article in Bloomberge entitled “U.S. Stocks Rebound With Crude as Treasuries Drop on Fed”, October 16, the market rebounded from the recent sell off due to news from a Federal Reserve official that the central bank should consider delaying the end of stimulus plans (85 billion dollar plan of monthly bond purchases since January). The market responded as usual. Equities jumped, Treasuries fell and oil price recovered. Again we see the central bank “call trade”, making profits for traders. Maybe its a no brainer. Wait for the market to tank, then place a bet that the central bank will respond with more QE and bank the profits the next day.

But what has changed in the real economy?....

Euro Bloc Woes

The downward spiral in the Euro bloc economies continues.

The euro zone's largest economy, Germany, has slashed its growth forecasts for this year and next, citing a weak global economy amid a series of international crises. This latest gloomy economic data out from Germany comes following a raft of recent downbeat news. The forecast in declining economic activity is anything but moderate. The economy is now forecast to grow this year to 1.2% from an earlier forecast of 1.8% and just 1.3 percent for 2015, according to the latest data from the economic and energy ministry.

"The German economy is in choppy waters concerning foreign trade," Sigmar Gabriel, minister for economics and energy, said in a statement.

The market had already anticipated a revised down in the bloc's largest economy after the economics minister warned in a radio interview in late September that growth could come in below the earlier 1.8% forecast, given the tensions between Russia and Ukraine. However, on a more upbeat note foreign trade minister Gabriel said that better growth figures next year could be achieved if international factors improve and he added that Germany's robust jobs market and domestic demand remain intact.

The economic ministry's forecast of slowing economic activity comes hot on the heels of Germany's leading economic think tanks who also last week have slashed their growth forecasts on the domestic economy for 2014 and 2015. Sluggish domestic demand, weakening exports and stagnant euro bloc economies are the reasons for a slowing economy, according to these leading German Institutes. Europe's largest economy will grow by only 1.3% this year and 1.2% next year, compared with April's forecasts of 1.9% and 2.0%, respectively, according to leading economic think tanks.

Greece, which has now been downgraded to an emerging economy recently informed the International Monetary Fund (IMF) that it will end its obligations to the deeply unpopular rescue program, which have placed crippling austerity measures on the country, more than a year early.

The IMF’s rescue plan for Greece, which was implemented in 2010 amounted to a massive €240 billion (£188 billion). It was a bailout, or financial rescue, of a nation that was unprecedented in the history of finance. Few economists doubt that the rescue plan saved Greece, albeit what is left of Greece, and may have even prevented the rest of the European Union back then from a financial meltdown. Athens is now taking the view that it is stable enough to exit the program. “Not only do we not need a new memorandum [rescue loan agreement]. We don’t need the rest of the money that from the start of next year we were on course to get from the current memorandum. We can leave it one and a half years earlier… that is our goal,” Prime Minister Antonis Samaras told parliament just prior to his government surviving a vote of confidence on Saturday.

Greek Finance Minister Gikas Hardouvelis, informed IMF Director Christine Lagarde on Sunday October 12 of the decision. 

The financial lifeline from the IMF had been scheduled to expire in March 2016, while funding provided by the eurozone, the bulk of which came from Germany, is scheduled to end this year.

The Greek economy remains in perpetual ruins with unemployment officially around 27 percent and youth unemployment above 50 percent. It is a hot bed for political extremism. More than 3 million Greeks have no health insurance and if ebola were to speed to Greece, with a decimated public health system, the virus would spread rapidly.

Last week, Lagarde advised Athens to continue with the program, saying that Greece is still confronted by a budgetary shortfall of about €15 billion for 2015.

“The country would be, in our view, in a better position if it had precautionary support,” she said. “So we are talking about evolution in the relationship. But we believe that the relationship can still be extremely helpful for the country to move on.”

Meanwhile, the Italians are up in arms over the EU sanctions imposed on Russia, which have already cost Italy alone two billion euros due to Moscow’s retaliatory food embargo, according to the leader of Italian opposition party Matteo Salvini.

Western sanctions on Russia are a “great foolishness" and the EU agricultural sector has already lost five billion euro, said European Parliament deputy and the leader of the Northern League opposition party Matteo Salvini. The Northern League is a far right political party in Italy with a separatist agenda to split the northern part of the country from the southern regions. Salvini previously described the euro as a "crime against humanity". With respect to loss of business due to sanction, Salvini said that Brussels is only ready to provide 200 million in compensation and he is arguing that it is not enough.

A little further north over the Alps the French are also wrangling with Brussels over its budget deficit. French MPs will soon begin debating the country’s 2015 budget and are under great pressure from Brussels to make further cuts to reign back spending. France's tension with Brussels over its budgetary deficit is mounting with Paris demanding more “respect”. France is facing increasing pressure to modify its deficit-hit budget for 2015. But Paris's posture on the matter remains unwavering and it claims that it deserves greater “respect”. Moreover, France is refusing calls by Brussels to further rein back spending. Discord over the budget deficit is driving a wedge between France and Brussels, particularly Germany, the two main EU countries. So it will be interesting to see how this one plays out.

France estimates that next year’s budget deficit, the shortfall between revenue and spending will hit 4.3 percent of annual economic output, well over 3.0-percent ceiling set by the EU for member states.

Friday, 24 October 2014


Tehran, Iran
It may have been viewed by the West as a pariah state for the last three decades but could Iran now be shaping up today into a hot opportunity for investors for the next decade.

At Grosvenor Square Hotel in London, a room, half the size of a football pitch is stacked with rows upon rows of chairs, not one empty seat is available, potential investors gathered at the first Europe-Iran Forum in London. The mood among investors was unmistakably upbeat as they assessed the investment opportunities in Iran while listening to the former British foreign secretary Jack Straw speech on Iran and meeting members of Iran's top business families.

Iran has undergone a major re-haul in the last18 months. It all started with the election of President Hassan Rouhani, which fostered an environment for a reconciliation with the West. That then led to temporary sanctions being lifted. "Iran is the last, large, untapped emerging market in the world," said Ramin Rabii, group chief executive of Turquoise Partners. Rabii’s company currently manages 90 percent of the foreign funds invested on the Tehran Stock Exchange.

"If you compare Turkey and Iran, they both have populations of around 80 million people," Mr Rabii said. "60% of the Istanbul Stock Exchange is owned by foreigners. In Iran, it is less than half of 1%."

However, the caveat for investors is that the Iranian market might still be premature. While sanctions were eased as a good will gesture during talks concerning Iran's nuclear programme, unless a conclusive deal is reached by November 24 those sanctions could just as easily be reinstated. In other words, roll over sanctions could still be on the cards.

Bearing this in mind then perhaps investors are jumping the gun considering investing in Iran. So might investing in Iran be premature for now?

"I don't think it's premature," said Toby Iles, regional editor for the Middle East and Africa at the Economist Intelligence Unit. "Businesses are drawing up plans for how they would re-engage with the Iranian market, contingent on an opening."

Even so, Iran is a long way from being truly open yet.

Many of the Iranian delegates attending the London conference didn't want to discuss matters with journalists. That seems rather odd as you would have thought that Iranian business executives would have taken the opportunity to showcase their companies to the world. One unnamed business executive said the the “risks were too high.”

Iran's internet is still slow and making payments is difficult because of financial restrictions imposed by international banks, which happens to be the biggest hindrance for Iranian business at the moment.

Resolving the banking problems will be a big step in the right direction for Iranian businesses. There was general optimism in the London forum that this problem will be overcome as Iran's relationship with the international community improves. "Overall, six months down from these interim agreements, little has happened that is visible to your average businessman in Iran," said Amir Ali Amiri who is a partner at ACL, a family conglomerate selling a wide range of goods, from Renault trucks to consumer electronics.

"Financial intermediaries around the globe self-opt out still for the fear of reprisals by the US Treasury. If those financial intermediaries on the whole do not partake in any scheme, allowed or not, it cannot happen," said Amiri.

That view was echoed by other Iranian business men,"We're seeing a surge in interest and we've hosted over 65 potential investors over the last nine months in Tehran” said Mr Rabii at Turquoise Partners. But he added that, "These visits are not translating into investment yet because of the issues with the sanctions and also the issues of getting money into the country."

For the general public in Iran things are stabilizing, they are not getting worse at the same pace according to Mr Rabii. "Within 12 months in office the new administration has been able to bring inflation down from 45% to 15%. I think that is nothing short of a miracle."

'Morale is very high.' "There is a lot of hope, since the election of Mr Rouhani's administration”,," Mr Amiri says. "There has been a ground change in dialogue surrounding Iran."

Mr Rabii agrees with Mr Amiri's assessment of the business community's morale in Iran. "I think it's cautious optimism”, he said.

So what we are seeing are companies, entrepreneurs and investors working on a contingency plan ahead of anticipated improving diplomatic relations.

Matthew Spivack, practice leader at emerging market advisory firm Frontier Strategy Group underscores the opportunities in Iran. "Iran is not just about oil”, he said. "FMCG (fast moving consumer goods) and healthcare companies prioritize Iran, because of very attractive demographics”, said Spivack.

Tehran's stock exchange lists 339 companies, according to its website, with a combined market capitalization of 104.21 billion US dollars. Iran is the second most populated region in the Middle East and North Africa region, according to the World Bank, with 77 million people, which is three times the regional average. Furthermore, the region is blessed with huge energy reserves. Iran has the fourth biggest oil reserves in the world as indicated by the US Energy Information Administration, and the second biggest natural gas reserves, second only to Russia.

Spivack believes that Iran's public sector could potentially attract a lot of foreign investment interest in the long term. The country's energy sector is ideally suited for heavy public investment. It is in need of upgrading following decades of international isolation. If diplomatic relations continue to improve and sanctions are permanently lifted Iran could start selling its oil and gas on the international market.

So if the politics could align and a deal could be reached on its nuclear program Iran may have a lot of potential for both investors and businesses alike.

What Now?

The wafer thin veneer of an economic recovery, peddled by the mainstream media, is melting away. Europe, regretfully is pretty much dead in the water and starting to decompose into political extremism. The far right, far left, separatist and anti European parties are mushrooming everywhere on the continent. France, Italy, Greece, Cyprus, Portugal economies are in a deep recession, or depression with chronic unemployment. The economic engine of Europe, Germany, is stalling with its economic forecasts being regularly revised downwards. The latest revised down forecast for economic growth in Germany this year is 1.2 percent and 1.3 percent for 2015. But at the rate that things are deteriorating that is likely to be revised down again sometime in the future, maybe next month or next quarter? The contagion is now spreading across the Channel to the UK, dragging its economy lower too.

Across the pond traders are growing skeptical about the US recovery and are wonderingr whether the latest employment data showing unemployment numbers, down 5.9 percent, gives an accurate picture of the true state of the economy. Many part time jobs have replaced more stable full time jobs and some analysts believe that the data is being manipulated ahead of the US general elections, scheduled for November 4, 2014. A total of 46.2 million Americans were on food stamps, in May 2014, although the figure has improved slightly it still remains high and doesn't reconcile with the employment data.

The small business sector already senses that something isn't right. They’re noticing a slow down in sales and tight credit. Small business optimism index fell 0.8 percent to 95.3 percent, which is now 3 points below 2008 financial crisis.

So how fearful is this market?

We are seeing an unprecedented level of fear in this market that surpasses that of the last financial crash of 2008. There is no comparable event or level of fear other than the Great Stock Market crash of 1929.

How do we know that?

We can gauge the level of fear in the market by measuring the put/call ratio, which is a technical indicator that reflects investors’ sentiment, according to the Chicago Board Options Exchange’s (CBOE). The ratio represents a proportion between all the put options and all the call options purchased on any given day. Puts are options that increase in value as stocks decline. Calls are options that increase in value as stocks rise. So if traders believe that the market will fall, they buy more puts (bets the market will drop) than calls (bets the market will rise).

It is phenomenal that the recent CBOE put/call ratio of 1.53 exceeded the put-call ratios of the 2008 global financial meltdown, which topped at 1.52.

In actual fact there is no hard and fast rule for measuring sentiment. If we think about it, participants buy options to protect or hedge their portfolios and also do so to speculate on market moves. With this in mind the put-call ratio reflects a wide range of motivations and emotions. Nonetheless, it serves as a rough-and-ready thermometer of participants’ fear and panic.

CBOE ratio is available at the CBOE website. Information can be displayed in an Excel spreadsheet.

If we sort the 2,003 records from highest to lowest, we will notice that the only days during that specific time period where the put-call ratio exceeded the Lehman collapse, was on October 13, 2014, and three days in early 2007, when the first indications that the sub-prime mortgage collapse and housing bubble burst hit the mainstream media. Those three days registered the only PCRs above 1.53: 1.61, 1.65 and 1.68.

Only 28 of those 2003 days registered put-call ratios of 1.40 or higher. Only 12 days registered PCRs of 1.50 or higher. Therefore, the current level of fear (1.53) is significant.

So technically we can prove that this market is at historic fear levels, but that doesn't answer another important question. Why is this so?

This might have something to do with the fact that the market has lost confidence with the Gods, the central banks. It seems as if the central banks have fired their rounds. Quantitative easing, call it QEI, QE2, operation twist or whatever, it is done! Five and half years on and the real economy continues to remain in a quagmire (to put it politely), despite what mainstream media would like us to believe. So the central banks might have just delayed the inevitable, regretfully there is now a real risk of a full blown crash and depression ensuing. In fact, years of loose momentary policy have kept interest rates artificially low and all this has done is skewed investor perception of risks and aided and abetted another asset bubble in equities, bonds, real estate and even the classic car market.

It seems that the central bank's perpetual motion machine is broken.

But don't be surprised if we see another form of QE4 or whatever. At some point when the market looks like it is about to crash we will get a response from the central banks. Maybe the plunge protection teem will step in and do some buying, recent volatility suggest that something like this is has actually been going on. Likewise, we may see further sharp falls followed by equally sharp rises, that could just be short covering, shorters banking their profits. Either way this is a super choppy market.

Thursday, 23 October 2014

Recent Sell Off

Any marksman will tell you that trying to hit a moving target is difficult enough, trying to predict where that target is likely to be sometime in the future and then hit it with accuracy is bordering on the realms of impossibility. Likewise, predicting accurate future price movements in the financial markets is equally challenging, although some traders have a better success rate at doing it than others.

With a sell off last week in the equity markets participants are now calling for declines from anywhere between 10 to 20 percent from its recent peak. A less conservative view is that a correction of even 50 percent could be on the cards, breaching all support levels.

So are we entering a new market cycle and if so how far could the equity markets really fall?

If we call up a stock market indices chart, between a given time period such as a day, month or a year, we notice that prices move in a kind of roller coaster patten, they go up and then down and vice-versa, you rarely see prices descend in a vertical straight line, not even in a sharp bear market. Similarly, even when markets are hugely optimistic, like in a bull run prices move up sharply, then they pause, maybe fall a little and then continue their upward trajectory. But in both instances prices are not moving upwards, or downwards in a vertical strait line. Prices tend to move in a roller coaster pattern.

By analysing the FTSE 100 index chart, over a given period we can then plot a diagonal line between two or more price pivot points, this is called a trend line and it is used by traders to help them determine future price movements.

If we call up a FTSE 100 index price chart over the last five and half years we notice that the trend line has been moving upwards. During this period there were a number of falls, but they were less steeper and shorter in duration compared to the rises. This is basically the definition of a secular bull market cycle, where the market trajectory is upwards, with a few smaller falls (bear markets) in-between.

These roller coaster rides are often the result of fundamental reasons, such as economic dater, or company results or alternatively what major participants in the markets say or do.

But it’s the latter that’s had most influence in the market’s trajectory, particularly over the last year. Take a look at FTSE 100 index over the last year, this also applies to other stock market indices. What we can see is that every time the markets look like they’re about to go into free fall, breaching all support levels something happens, the bull's best friend comes to the rescue. The central bank responds with it’s governor either saying or doing something to stabilise the market. That shouldn't really surprise us, after all one of the main functions of a central bank is to maintain financial stability. We also know that the central banks are major players, their actions move markets, In a crash scenario typically central banks move in, they lower interest rates or as we discovered recently even buy equities to prop up the market up.

If you were to analyse a FTSE 100 chart over the past 18 months, you will have noticed that every sharp upturn in the market has been the result of central bank intervention. When the market looked like it was about to tank and it seemed like a sure one way bet for traders, the central bank responded with quantitative easing. What was the markets response? It turned sharply upwards. This is pretty much how the market has played out to date.

So the real question that traders should be asking themselves is not necessarily how low the market will fall, but how will the central bank respond to a market in free fall and trade on the basis of that.

This trading strategy is known as the central bank call trade and it has banked traders in excess of 13 percent returns in 2013. These traders wait for the market to fall below a certain support levels, they then anticipated central bank intervention, either equity purchases or quantitative easing to lower interest rates, which has happened without fail over the last 18 months, the market then takes a sharp upturn and continues along its upward trajectory.

So trading on the anticipation on central bank response is a more prudent way to play the markets.

The buying at the dips strategy during this market cycle has been a profitable play. But just because a trading strategy worked in the past doesn't necessarily mean that it will also work in the future. This may be the case if we are seeing the end of this five and a half year secular bull market in equities. Moreover, the average life cycle of a long term secular bull market is about five years, so we may be entering a new market cycle.

Oil Weapon

You might have been pleasantly surprised when you last pulled into the gas station to top-up your tank. Yes, oil prices are falling and that is good news for businesses moving people or things and consumers alike.

The global economy isn't growing at the rate that was anticipated at the start of 2014, so that could be a contributing factor to a correction in the recent oil price. But surely, that can't be the only reason for such a sharp correction, bearing in mind energy hungry China and India, which economies are still growing at enviable rates, would most likely mop up any excess supply.

So what could be behind the sharp fall in the oil price?

Could history give us a clue? Cast your mind back to the time when Michael Jackson's “Beat it” was the rage and the old Soviet Union was dubbed “The Evil Empire” by the then US President Ronald Reagan, way back in 1983. Do you remember what happened to the Soviet Union? It disappeared into a mountain of debts in 1991. Sure, the deception of the century, the fictional star-wars project so masterly spun-out by Reagan(a former actor) that duped the Russians into overspending on their military was a major factor in contributing to the demise of the Soviet Union.

However, there was also another factor at play. Oil prices during that decade also tumbled. Back then, as is the case now, the Soviet Union was highly dependent on oil exports for its economy. So when the oil prices collapsed, falling to the equivalent of more than 100 (today's) dollars per barrel in 1980 to about 30 (today's) dollars and stayed low for more than a decade Soviet Union income was sharply reduced. So burdened with military expenditure and falling export earnings, for oil exports, it was a one two knockout blow for the Soviet economy, financial ruin was inevitable.

Legend has it that at the time a secret agreement took place between the US and the House of Saud conspiring to engineer the collapse of the Soviet Union by flooding the market with Saudi oil, thereby bringing down the oil price. Several decades on and there is no proof that such an agreement did exist. Moreover, if we look at a breakdown of the supply of oil, during that period, from the major producing countries, OPEC, it becomes apparent that the Saudis actually cut their supply

In other words, the Saudis did everything possible to try and prop-up the oil prices.

So it would be unreal to assume that a number of oil dons, with a few US senior officials, filled a smoky room and plotted to financially ruin the Soviet Union.

However, what did cause oil prices to drop, and contribute indirectly to the financial ruin of the Soviet Union was newly discovered oil fields starting their production phase, mainly in Alaska and in the North Sea.

But with no new discovery of oil fields today, could the latest push by the Saudis to aggressively flood the market with supply have an agenda. A recent article in the Wall Street journal entitled, Saudis Make Aggressive Oil Push in Europe, October 12, “The kingdom is taking the unusual step of asking buyers to commit to maximum shipments if they want to get its crude”.

“The Saudi push is not just in Asia. It’s a global phenomenon,” one oil trader said. “They are using very aggressive tactics” in Europe too, the trader added.”

After cutting its November prices there, Saudi Aramco is also asking refiners to commit to full, fixed deliveries in talks to renew contracts for next year, the traders say. They say the Saudi oil company had previously offered a formula allowing flexibility of more or less 10% of contracted volumes, the most commonly used in the industry.

So oil prices are falling sharply because the Saudis are flooding the market with oil.

Why would the Saudis act in a way that is not in their commercial interests, unless their arms were being twisted by the US. Maybe this time a secret US/Saudi deal is for real.

The motives are clear; lower oil prices are benefiting US consumers in a midterm election and crushing Russian revenues.

From the Saudi's perspective what they are losing in revenue from the lower oil prices they make up in volume sales. They are saying to their customers buy more or we won't sell you another drop of oil.

“They are threatening buyers” to discontinue sales if they don’t agree with the fixed deliveries, another trader said.

This is not going to go down well with some struggling EU economies, which are already running huge deficits.

So while the Saudi's are dumping oil on the market, probably spurred on by the US, the Russians are dumping US dollars. during the third quarter ending in September Russia has paid off a near record 53 billion US dollars in foreign debt, and sold off dollars to use as capital to stabilize their declining currency, and to protect their primary resource industry from the deflation.

Whether, secret US/Saudi deal is for real this time, who knows. But one thing for certain is that a commodity dependent economy is its Achilles heel when the price of those commodities fall. There would we strong motives for this kind of US/Saudi deal, bearing in mind the current trade war raging between the two states. If this were the case we would again be seeing geopolitics rather than economics as being a leading factor in determining prices.

Wednesday, 22 October 2014

When America Sneezes

Remember the old truism, "When America sneezes, the rest of the world catches a cold"? Well, if official data is anything to go by, we may need to flip it on its head.

Let's take a look at two titan economies that have a combined Gross Domestic Product (GDP) of 8.5 trillion US dollars, in 2013, they are of course Germany and Japan, which represent about half that of the US's GDP, in the same period.

Nevertheless, if these two industrial powerhouses stagnate, then it is also likely to act as a drag on the US economy. But could a financial collapse in either of these countries be the catalyst that sets off the financial dominoes across the globe?

In Europe's industrial powerhouse things are starting to look bad.
German stocks have declined 10 percent since July, which is putting them in "correction" territory. Meanwhile, In Japan, the economy is looking like a basket case. According to figures that were recently released, Japanese GDP contracted at a 7.1 percent annualized rate during the second quarter and private consumption contracted at a 19 percent annualized rate.
Around a fortnight ago the markets were rattled by the worst German industrial production figure since 2009. Germany is considered the industrial powerhouse of Europe, but the engine is now starting to stumble. There's no doubt that there are a number of new external risks, that didn't exist a year ago, that have emerged and they are beginning to take their toll on the economy. The civil war in the Ukraine is a drag on the German economy and the Ebola crisis is another factor that is likely to have a negative impact on the economy. All this is making German investors jittery, with 10 percent declines in the Dax since July. Moreover, recent data indicate that the German economy has ground to a halt, the economic sanctions levied on its major trading partner, Russia, by the U.S. and European Union with the aim of getting Moscow to stop meddling in its former colony, the Ukraine, is also having a dent on German GDP.

There's no boost from Germany's other trading partners, France`s economy is stagnating, Italy's is contracting, Greece has been downgraded to emerging market status and Portugal's main bank recently had insolvency problems. Spain's economy showed signs of a slight improvement, but it is likely to be a temporary blip. Bearing in mind that tourism accounts for 12 percent of the Spanish economy the ebola outbreak, now 40 or is it 50 people have been quarantined and there seems to be mixed information coming out of the ministry nobody quite knows the true situation, is likely to be a serious drag on the economy. And when you look at some of the biggest corporate names in Germany, things look even more dramatic. The hardest hit sectors have been retailers, industrials and leisure stocks with sports clothing giant Adidas down 37.7percent for the year, airline Lufthansa down 27percent, car group Volkswagen sliding 23.6 percent and Deutchse Bank falling 20.2 percent so far this year.

So much for Abenomics in Japan, things are going from bad to worse.

The government of Japan has piled on the debt like a sumowresler carrying more than a quadrillion yen in debt and it has been furiously pumping its monetary system with money, result being to devalue the yen in a desperate attempt to crank start the Japanese economy back to life. Regretfully, for the Japanese it just isn't working

The following extract comes from a Japanese news source;.

On an annualized basis, the GDP contraction was 7.1 percent, compared with 6.8 percent in the preliminary estimate. That makes it the worst performance since early 2009, at the height of the global financial crisis.The blow from the first stage of the sales tax hike in April extended into this quarter, with retail sales and household spending falling in July. The administration signaled last week that it is prepared to boost stimulus to help weather a second stage of the levy scheduled for October 2015. Corporate capital investment dropped 5.1 percent from the previous quarter, more than double the initial estimate of 2.5 percent. Private consumption was meanwhile revised to a 5.1 percent drop from the initial reading of 5 percent, meaning it sank 19 percent on an annualized basis from the previous quarter, rather than the initial estimate of 18.7 percent, Monday’s report said.

The true picture in the US regretfully doesn't look that good either.
The UK economy is also likely to catch the contagion and fall back into a decline. Furthermore, public debt keeps escalating.

So if we are seeing the end of this five and half year secular bull market,then the big question on every traders mind is how hard is this market going to fall?

“I view the stock market as likely to lose more than half of its value from its recent high to its ultimate low in this market cycle. In my view, speculators are dancing without a floor.” wrote John Hussman, stock market analyst and mutual fund owner.

No doubt there are other views and as they say, time will tell. But as you will note from my writings I too share the pessimism.

Chosen Few

 The naked ape can't run fast on land, is a poor swimmer, neither can it see well in the dark, nor has it got strong limbs and yet it dominates the planet. Blessed with a big brain the naked ape has outpaced the fastest animals on land, can fly higher than an eagle and defeated the most carnivorous predator. Yet paradoxically, the greatest threat the naked ape faces now is himself. His greed and laziness threatens his very own existence.

Humans used to hunt or gather to survive but because they are smart and lazy they invented tools to make work easy, the first tool was probably a stick, then ploughs and tractors. So we went from nearly everyone making food to nobody needing to make food and yet there was an abundance. Then we spent thousands of years building mechanical muscles, which were more reliable and more tireless than human muscles could ever be. These were positive advances, since everyone was better off, even those doing physical labour, additionally this is how economies grew and standards of living rose. People then specialised, productivity rose and standards of living kept improving.

But what happened when mechanical engineers and computer programmers pushed the boundaries of technology to build mechanical minds?
Just as the mechanical muscle has made human labour less in demand mechanical minds are now making human brain labour less in demand. I am not referring to the automated robots used for mas-production with robots performing repetitive tasks in a narrow framework. The generation of robots that now exist have vision, they can learn to perform a task by watching someone do it and they cost less than the average salary of a human worker. The main difference with this generation of robots is that they are not programmed to perform one specific job. They can do multiple tasks. This type of robot can do whatever work is in reach of their mechanical arms. These robots are general purpose, it could be a waiter, cook, butler. Although this robot is slow, its hourly cost of labour is pennies compared with his meat based competition, it is a fraction of the cost of the minimum wage. In supermarkets what use to be thirty humans performing a task we now have 30 robots being overseen by one human.

Today mechanical minds are capable of decision making and out competing humans for jobs in the way that no mechanical muscle could do.

Think about the role of horses before the harnessing of steam power and subsequent internal combustion. They were used for transport, delivered the mail, ploughed fields and rode into battle. Technology has changed all that. Did technology provide horses with new roles? The answer is no. Sure, there are still working horses but nothing like before. The horse population peeked in 1915, from then onwards it was nothing but downhill for the use of horses and their population.

There is no rule of economics that says better technology makes better jobs for horses. So if we swap horses for humans, why should we think that the rule is right?

So just like mechanical muscles pushed humans out of the economy mechanical minds will do the same. As technology gets cheaper, better faster biology cannot match, pushing millions of humans out of work. The automobile was the begining of the end for the horse and it might be an indication of what is about to come. Take self driving cars, the transport industry employs 70 million people worldwide, these jobs are at risk. If you think the Unions will protect these jobs, its unlikely. Look at history, the workers always lose and the economy wins.

The plan of pushing 100 million people through higher college eduction is no safe haven either because white collar work is also at risk. The software robots will soon be able to do your work too. The world's smartest software engineers are probably right now working on a robot to do your job. The cutting edge of programming today isn't about super smart programmers writing programs for robots, it's super smart programmers writing programs for robots that teach themselves how to do things that even its author could not do. Robots are now traders, NYSE is now largely a TV set with robots trading. Robots have learnt the financial markets and taught themselves to write. So demand for human brain labour even in these types of job is on the way down.

Professions are safe from robots?

The bulk of legal work is paper work, drafting contracts, sifting through information at a fraction of the time. Robots don't get sleepy reading through a million emails. IBM has developed a robot called Watson, which is now capable of processes information more like a human. The challenge is to make it the best medical doctor in the world. Teachers are also being replaced by technology.

Even creative robots are being created to compose music, paint... and write...

I am wandering where this is all going to leads us. What is going to happen to the hundreds of millions of unemployed workers, how are they going to survive?

Are we going to end-up with just a chosen few, already in the past 40 years there has been an enormous growth in inequality of wealth. The wealthiest 400 people in the United States had their combined net worth grow thirteen percent to 2.29 trillion USD this year, according to Forbes rich list. This is about the same as the gross domestic product of Brazil, a country of 200 million people.

Monday, 20 October 2014

Zero In

Let's zero-in on some recent market news and data.

The International Monetary Fund (IMF) Financial Stability Report, published during the first half of October, flagged up losses to the tune of 3.8 trillion US dollars to global bond portfolios.

This is a staggering loss in a relatively risk free asset class and it's no storm in a teacup. A loss of such magnitude has the makings of a credit squeeze that could dwarf the last 2008 financial crisis.

To realize the impact that these losses could have on the money supply and in turn the economy, we need to understand the role that collateral and leveraging plays in a modern economy. Collateral as we know, from my previous article, entitled Great Depression II, refers to property or other assets that a borrower offers typically to a bank to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses. This is known as secured lending. where the borrower pays less interest because they are pledging collateral against the debt.

When you take out a bank loan for a car or a home the bank wants something pledged as collateral, in the event that, for whatever reason you fail to pay the money back.

Collateral for the bank then is like an insurance policy, should the deal not workout and the loan goes bad the bank can grab the asset pledged against the loan.

But Collateral can also be an intangible asset. Financial firm at the top of the corporate food chain pledge corporate bonds, government bonds, also known as sovereign-debt, as collateral to raise finance. They then leverage their investments, sometimes investments are levered 10:1. So for example, a 10 million dollar investment might be made with a 1 million dollar loan pledging 1 million dollars of bonds as collateral. But what happens when the collateral, in this case bonds, which is perceived as a relatively safe asset class becomes worthless, the lender then demands more collateral as security, or increases the interest payments on the loan. When the borrower can't make the higher interest payment we have a default, which then has a knock on effect. Play this scenario out multiple times and throw leveraging into the equation and we end up with a mega problem.

Moreover, the availability of high grade debt such as US, UK, Japanese and German sovereign debt, has been soaked up from the system due to the quantitative easing policies carried out by the central banks. In other words, approximately 10 trillion USD worth of high grade collateral has been withdrawn from the system. So with no collateral there's no trust and no lending and in this scenario the money supply sinks resulting in a credit squeeze. The IMF report of 3.8 trillion US dollars losses to global bond portfolios confirms that this scenario is regretfully now at play.

Meanwhile, the euro zone is in a free fall. Germany was hit with another piece of bad economic data with exports tumbling 5.8 percent in August. Deflation in Greece is deepening. The Greek consumer prices index fell to -0.8% in September, showing that deflation accelerated after August’s -0.3%.

The decline was even sharper, -1.1%, when measured on an EU-harmonised basis.

This means that prices have now fallen for the last 19 months in a row, as wages and pensions have shrunk amid its austerity programme. Greece’s unemployment rate has fallen, but still remains extremely high. The jobless rate dipped to 26.4% in July, down from 26.7% in June. The jobless rate for those between 15 and 24 was 50.7%, down from 58.2% a year ago.

Auditors representing the country’s “troika” of creditors have abruptly ended their latest inspection tour. Basically, the auditors regard the Greek government figures as overly optimistic and it was deemed “more diplomatic” if the negotiators disappeared. Obviously, there are major disagreements going on there.

France has revised down its growth forecasts and says it will miss its deficit target for another three years. Finance Minister Michel Sapin said Wednesday that the budget deficit would be around 4.3 percent of GDP in 2015 and would not dip under the 3 percent dept to GDP ratio target for European Union countries until 2017. That is causing a rift in Brussels, particularly with Germany who is pushing for a 3 percent target for European Union countries.

Italy is also unlikely to meet the EU deficit targets. Protests in Naples have broken out with thousands of demonstrators marching as the European Central Bank holds its monthly monetary policy meeting. Police used tear gas to contain the protests.

Over to the US, the view now is that this economic miracle is being pumped up with fake debt money creation and hidden behind data manipulation just to get through the mid term elections, but it cannot last. Some of the nation's biggest money managers are now openly expressing the same doubts. Mark Grant, Managing Director of Southwest Securities; was recently interviewed on Bloomberg radio an when asked whether the US economy is looking healthy he said; “I am sorry to say this about America, but the numbers that are being put out right now-it is difficult to place much faith in them. Almost 35 percent of workforce is on welfare so the data is being skewed by Gov and I don't have a lot of faith in it.”

The number of Americans on food stamps has topped 46,000,000 for 35 straight months, according to data from the Department of Agriculture (USDA), which amounts to approximately the population of Spain.

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