SnappedShot

Last September, when we exposed the heretofore unknown entity actively managing Apple's $100 billion+ in offshore held cash (and thus untaxed in the US), we made the following "bold" prediction: "with the topic of finding effective tax loopholes which are perfectly legal, yet which apparently are unfair, serving as the basis of the entire presidential race to date, what Apple can be absolutely certain of is that once the farce culminating on November 6 is over, the government's eye will finally turn to minimizing "externalities" among such companies which have been able to pass through corporate tax savings to end consumers by abiding within the legal system that countless other muppet congressmen, senators and presidents have developed over the ages. Because while AAPL may have built the iPhone, very soon it will be only fair that it share its profits acquired over the years, and thus its cash balance...with the general public." Or in other words, in September we predicted the Apple "tax witchhunt" would take place shortly after Obama won his reelection. Today, it has officially begun.

For those confused, Congress has just announced it is shocked, SHOCKED to learn it has over the past several decades passed legislation making tax shelter loopholes - such as those used by AAPL, GOOG and every other multinational company - perfectly legal, and which will now be turned against those very companies in a kangaroo court of law, seeking nothing more or less than to extract all those pounds of flesh that the government so generously let slip between its fingers for so many years. Which is expected: when the entire world is broke, the government has no choice but to call in every favor accumulated over the years, because all is fair in, well, the fairness doctrine and in a world about to unleash global trade, and tax, war.

Of course, we have covered the background of this topic extensively in the past knowing quite well what direction the wealth redistributor-in-chief was heading. From Apple And Taxes:

As we have shown in the past, perhaps the one thing Tim Cook's company has loathed more than anything in the past, is to pay taxes, which is why it has some of the most convoluted legal tax shelters imaginable. Indeed, in the current quarter, according to the company's cash flow statement, a tiny $2.4 billion was paid in cash taxes. Putting this number in perspective, the company had an operating profit of $12.4 billion.

 

 

Or, cumulatively, since December 2008, AAPL has generated a grand total of $149 billion in operating profit, while paying just $21 billion in total taxes.

 

Which brings us to today. From Bloomberg:

Apple Inc. (AAPL) has created a web of offshore entities to avoid paying billions of dollars in U.S. taxes, including three foreign subsidiaries the company says have no home country for tax purposes, congressional investigators say.

 

The world’s most valuable technology company has $102 billion in offshore accounts and shifted billions in profits out of the U.S. into affiliates based in Ireland where it negotiated a tax rate of less than 2 percent, according to a report by the Senate Permanent Subcommittee on Investigations.

 

The offshore entities of the Cupertino, California-based company have paid little or no tax in recent years, the probe found.

 

One Apple affiliate -- Apple Operations International -- generated net income of $30 billion between 2009 and 2012, and declined to declare a tax residence, filed no corporate tax return and payed no income taxes to any nation, the report said. AOI is Apple’s principal offshore holding company.

 

“Apple wasn’t satisfied with shifting its profits to a low-tax offshore tax haven,” Democratic Senator Carl Levin of Michigan, the chairman of the panel, said at a news conference. “Apple sought the Holy Grail of tax avoidance. It has created offshore entities holding tens of billions of dollars, while claiming to be tax resident nowhere.

Of course, in AAPL's defense, what it has done is not illegal at all, and is in perfect compliance with both US and international laws. But that would mean Congress would have to read the laws it has passed over the ages: something which everyone knows never happens. One also knows that Congress is unparalleled when it comes to the hypocrisy of accusing others for following the rules it itself has enacted.

In prepared testimony to Congress posted on its website today, Apple defended its practices, saying it paid $6 billion in U.S. taxes last year and is one of the largest taxpayers in the country.

 

Apple’s cash is largely held in U.S. banks in U.S. dollar-denominated assets, segregated into a portion that can be used for domestic operations and a portion that can be used only for international investments, the company said. The company doesn’t use foreign subsidiaries or gimmicks to avoid U.S. taxes, said the testimony.

 

The company also said the Irish subsidiaries, which are cost-sharing arrangements, have helped to fund Apple’s research and development activities and taken on risks, leading to bigger profits and higher-paying jobs in the U.S.

None of this matters, however, in the abovementioned kangaroo court, in which...

Lawmakers in both parties are seeking a bipartisan agreement on how to tax income that U.S.-based corporations earn outside the country. Democrats and Republicans on the panel say Apple’s tax maneuverings, while not illegal, will help frame the debate about how to make the corporate tax system more fair.

 

Senator John McCain of Arizona, the panel’s top Republican, said he and Levin are seeking to craft a bipartisan proposal that would end some of the tax benefits, although the timing of an agreement isn’t clear. He said both parties in Congress should seek to address the matter, even if it isn’t in the context of a broad rewrite of the tax code.

 

“When you see egregious behavior like this, why wait?” McCain said.

And there it is again: "all in the name of fairness."

What is left unsaid is that Apple is merely the first Guniea pig in what is sure to be a long trail of wealth "redistribution" of evil companies (to benefit the Federal and State governments) who have used every legal loophole affored to them by the US tax code, in order to pad the government's soaring spending habits, and to assist in making it even bigger.

Sadly, for AAPL, and for many others like it, this means that the excess profits they generate are now known, in financial parliance, as "negative externalities" and Fair Uncle Sam is coming for his fair share.

Sadder for AAPL, and all those like it, it means that the company is now truly a utility in the eyes of the government, and one can stick a fork in any hopes that the growth company created by Steve Jobs ever has a chance of coming back.

Let’s take a look at a few graphs of the dollar, from Feb 1, 2013 through Friday May 17, 2013. Yes, I said graphs of the dollar. I’ve priced the dollar in gold first (of course), then silver, the euro, and even the yen. The pattern is obvious. The dollar is going up.

I did not show copper, lumber, or wheat though they show the same trend. These commodities are not money, of course.

My point is simple. It’s not gold that is going anywhere. In past articles, I’ve used the analogy of measuring a steel ruler using rubber bands. Using the dollar to measure gold is like that. In this article I show that it’s not just gold, but silver, other currencies, and commodities. The dollar is rising now matter how we measure it.

The question not to ask is: “how are they manipulating gold?” The question is: “why is the dollar rising?”

To answer that, we first have to understand why the dollar had been going down. Most would say that it’s because the Fed has been “printing” and increasing the quantity of dollars. If that is so, then why would the dollar ever rise, as it has before (e.g. in the 1980’s), and as it is doing now? The Fed cannot and does not “un-print” dollars. This stock explanation is not satisfactory.

In one word, the answer is: arbitrage.

Let’s take a step back and look at the Treasury bond. The government pays for net expenses above tax revenues by borrowing. To borrow money, the Department of the Treasury sells bonds. This is an important aspect of our current form of government, as voters have demanded far more government expenditures than they are willing or able to pay for via taxes. In this aspect, the Treasury bond is a tool of fiscal policy, or spending, and cash flow to pay for it.

There is another aspect to the Treasury bond. It is the key asset of our monetary system. It is the asset on the Fed’s balance sheet (increasingly, post 2008, there are also mortgage bonds) to back its liabilities. The liability of the Fed is the Federal Reserve Note, commonly called the dollar. The Treasury bond is also a significant backing for the liabilities of commercial banks, pension funds, annuities, and insurance funds. Finally, the Treasury bond is used as collateral to enable borrowing.

The monetary system today is entirely based on credit, and the Treasury bond is the base of it. The peculiar characteristic, one could even say the shabby little secret, is that the Treasury bond is payable in dollars but the dollar is the liability of the Fed which is backed by the asset of the Fed which is … the Treasury bond. It’s circular and self-referential.

People often use the shorthand of saying that the Fed is “printing” dollars. It is actually borrowing them into existence and lending them. It is true that there is no actual lender. The Fed has sole discretion to create these dollars, unlike any normal bank, that must persuade a saver to deposit his capital in the bank. The Fed’s expansion of credit involves no saver. The Fed’s credit is counterfeit.[1]

The dollars appear ex nihilo at the Fed, and they use them to buy an asset, basically a bond, or to otherwise lend. Thus the Fed creates both a liability and an asset in this process. If the value of its assets should ever fall significantly, the market will not accept the Fed’s liability—the dollar—at face value. When gold owners refuse to bid on the dollar, the dollar will collapse.

Let’s get back to arbitrage. If a bank borrows money from the Fed, they will use it to buy an asset or lend it to a third party who will. This is an arbitrage. The short leg is the loan from the Fed, and the long leg is the asset purchased. As with all arbitrages, it will act as a force to pull the two values towards one another. Market price is always pulled down by the short leg, and pushed up by the long leg.

In the case of all borrowing from the Fed, the short leg is the dollar itself. I define arbitrage as the act of straddling a spread in the markets.[2] The arbitrager is often trying to profit from the interest rate spread directly, as in borrowing from the Fed at the discount rate and buying a Treasury bond that offers a higher yield.

Another strategy is to try to profit from a change in the spread, as in borrowing dollars to buy gold. In this case, if the dollar price falls, this will be a profitable trade. This is a weaker arbitrage than buying a bond, as gold does not have a yield.

As I noted above, the very act of arbitrage pulls down the price of the short leg and in the case of borrowing from the Fed the short leg is always the dollar. Whether a bank borrows dollars, to buy Euros and from there to buy Greek government bonds; whether it lends to a hedge fund to buy gold; or whether it lends to a consumer to buy a home, the dollar is pulled down. On the other side of the trade, these assets are pushed up.

This, rather than the rising quantity of dollars, explains the falling value of the dollar. And now, recently, the dollar has been rising. The logical explanation is that these trades are being unwound, either voluntarily or under duress. My definition of deflation is a forcible contraction of credit. It is not the shrinking number of dollars (if the number is even shrinking). It is the closing of innumerable positions, by the opposite arbitrage. Previously it was sell dollar / buy asset. Now it is buy dollar / sell asset.

Gold is the most liquid asset. Its bid-ask spread does not widen much when large quantities are sold on the bid or bought at the offer. In contrast, the bid in other assets can drop precipitously in times of crisis. They are hardest to liquidate precisely at the time when one must sell. In some extreme cases, the bid can be withdrawn altogether. Though the spread does not widen in gold, heavy selling does push down the bid on gold. Market makers will then pull down the offer to maintain a consistent spread.

Being the most liquid, gold is the most sensitive. It is the first asset, the “go to” asset to sell when a balance sheet is under stress. Gold therefore has the least lag in response to a change in the monetary system. Compare to real estate, where due diligence alone could take weeks or months. Additional inertia comes from how properties are valued: by looking at recent comparable deals. Real estate would not be the first asset that a bank or fund would want to sell, due to several factors including long closing time, wide bid-ask spread, and high costs to sell such as sales commissions and attorneys. In real estate, there are no market makers. The offer can remain high even with the bid plunging, as the typical holder of real estate is not willing to sell at a loss and holds out for a number that covers all costs and fees and allows an exit at a profit.

Equities are usually liquid, closer to gold than to real estate in this regard. However, for the past few years, there have been many flash crashes. In a flash crash, the bid drops to $0.01 for a brief moment, and typically at least one market sell order is filled far below the “normal” price for the stock. These flash crashes prove that there are serious problems, that there are structural cracks beneath the surface.

An important principle to keep in mind is that in times of stress or crisis, it is always the bid and never the offer that is withdrawn. While there have been a few flash smashes (an amusing term) it is not a coincidence that these are vastly outnumbered by the flash crashes. This is because stress and crisis always come with a need for liquidity to pay debts that cannot be rolled over, margin calls, or to be flexible and agile. In bad times, people prefer to own a more marketable asset compared to one that is less marketable. They especially prefer to own the asset that is the unit of account for their balance sheet.

By definition, there is no risk to holding dollars if your balance sheet is denominated in dollars, and your liabilities are in dollars. This is the reason for the so-called “flight to safety” for the “risk-off asset”. You are not making, nor losing, money when you hold dollars. On gold denominated books, holding dollars is quite risky, of course.

Going back to the falling dollar, as the interest rate falls the discount factor used for an enterprise’s future earnings also falls. The same $1 in earnings in 2023 is worth more at a discount of 3% annually vs. 6% ($0.74 vs. $0.56). The result is rising stock prices.

In addition, the “animal spirits” of John Maynard Keynes have been set loose. Most people hold the false theory about the quantity of money and its impact on the price of everything, and it is quite popular to believe that this means stock prices can only rise. Proponents of this theory should look at Japan. In any case, deprived of other means of obtaining a yield (i.e. in the bond market), they must do something. People know the dollar is falling, though they attempt to measure it by looking at the rate by which consumer prices, measured in dollars, rise. They should be looking at the rate at which the dollar, measured in gold, is falling.

Right now, everyone is on the same side of the trade: long equities. This is dangerous because when it reverses, the market may not find a bid for quite a distance down. In a normal market, it is the short sellers who make the bid. By the indications I can see, those who have attempted to short this market have capitulated by now.

 

In Part II (free registration required), we consider why stocks are rising in this depressed economy, and look at the abyss we are now rapidly approaching.

Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

Unlike Detroit, which will run out of cash next month, Japan prints its own money, so bankruptcy in the Detroit sense is not in the cards. But they do have two things in common: depopulation and a ballooning stock of abandoned houses. For Japan, it’s an issue that even the most prodigious and reckless money-printing binge cannot resolve.

These decrepit buildings dot neighborhoods in surprising places. There was one just down the street from our apartment building near the South Korean embassy in Azabu-Juban, Tokyo. Not a cheap neighborhood. It was a diminutive wooden building, turned black with age and soot. In places there was rusted sheet-metal siding. The roof was made of rust-perforated corrugated iron. The tiny garden had morphed into a thicket of weeds.

I saw numerous such places. Sometimes they were incongruously wedged between groomed buildings. Other times, they were in rougher areas. Sometimes they were larger buildings. Further out, a neighborhood might be dotted with these pockmarks. Japan isn’t the only place with blight. But the sheer quantity of abandoned houses in Japan is stunning – and has been getting worse at an accelerating clip.

Now the government wants to do something about it. But unlike the stock market, which can be goosed by the intoxicating vapors of money-printing promises, the real economy is tougher to deal with, and housing stock, when the population is declining and shifting, is even tougher.

The Ministry of Internal Affairs and Communications surveys vacant houses every five years, splitting them into two categories: houses that could be rented, sold, or used as secondary houses; and abandoned houses. Over the fifteen years from 1993 to 2008, according to the most recent survey, total vacant houses ballooned by 72% to 7.57 million. They made up 13.1% of all houses nationwide, the highest proportion ever. Vacant but still usable houses increased by 63% to 4.88 million. And abandoned houses jumped by 91% to 2.68 million.

It’s not just in small towns suffering from depopulation, as the young migrate to urban centers. Over the decade through 2008, the number of abandoned houses in Tokyo jumped 60% to 190,000; and in Osaka 70% to 180,000! That was in 2008, before the financial crisis slammed into the housing market. Since then, the abandoned-house phenomenon has gotten worse.

Many of these structures were cobbled together during the postwar decades into the 1970s, “one-generation buildings” designed to last 30 years. While land is considered valuable, much of that value has been wrung out of it over the last 20 years. And buildings are considered an expense; they become worthless over time and have to be torn down – another expense – to be replaced by an even greater expense.

During my first foray into Japan in 1996, I stayed in a rundown apartment in a four-story building from the 1960s, in a dreary area in Ekoda, Tokyo. In 2004, I went back to check on it. It was gone. A train line had been built under the main street. The entire area had been razed. New mid-rise buildings had sprouted up. The commercial center was around the spotless station. And there was a tiny gleaming Citroën dealership. Urban renewal, the hallmark of big Japanese cities. It never stops.

But it can’t keep up with the growing fiasco of abandoned houses. There are reasons. The structure of the Japanese family has changed, with kids moving away. They might have no interest in the house. Or heirs might not have the money to maintain it. Selling a property like that in a market with a declining population and with plenty of newer houses is tough. Municipalities want owners to tear down these houses, but often they can’t find the owners. And owners are reluctant to tear them down; to continue receiving the tax benefits, they’d have to build another house on the property. Expense after expense!

It has gotten so bad that the Land Ministry has changed its stance on unoccupied houses: before, it would only allow local governments to tear them down in areas of depopulation. As of this month, it will allow all municipalities to tear them down anywhere, but warned that they might get sued by the owner if they razed a house under administrative subrogation. And to motivate owners to tear down their house, the central government and municipalities will cover 80% of the costs!

The abandoned-house phenomenon illustrates how the real economy gnaws relentlessly on Japan. It has nothing to do with interest rates, liquidity, and the value of the yen: there simply aren’t enough people to fill any of the 7.57 million vacant homes. Next year, there will be even fewer people. And more vacant homes.

For foreigners, piling into this market is unappetizing: with Abenomics hell-bent on devaluing the yen, their investment is destined to lose value. So now the solution is to raze these houses across the nation, largely at the expense of a government that is already up to the nose in debt and can only stay afloat because the Bank of Japan has promised to print whatever it takes – that’s how far Japan has boxed itself into a corner.

The status of the US dollar as the world reserve currency gives the US tremendous advantages. Among them: it allows the Fed to export inflation, while the Federal Government can run a huge deficit with impunity. But now an angry Russia has had enough! Read.... Russia’s Plan For The BRICS To Dismantle The Dollar System

Back on April 25, in the aftermath of the latest epic precious metals takedown, we reported that something odd had happened: overnight, total Eligible gold held in the vaults of JPM dropped by 65%, or 260.8k ounces in one day, to a record low of only 141.6K ounces. Contrast that with the 2 million Eligible ounces the JPM vault at the basement of 1 CMP held when it reopened.

Since that moment, many were curious if this may not be the start of the proverbial "run on the vault", and whether JPM's COMEX holdings could actually run out, and if so what happens then. And finally: is the dramatic plunge in gold related to any of this (and certainly to the Bundesbank's repatriation of NY Fed gold for the next five years)?  In the ensuing days, JPM's Eligible gold fluctuated in a tight range, until today, when another 22,780 oz were withdrawn from Blythe Masters' metals cellar, bringing JPM's eligible gold to a fresh record low of only 137,377 troy ounces.

But this is only half the story: the details are as always behind the scenes.

Because what the chart above does not show is how, quietly, JPM managed to keep its eligible inventory constant even in light of various withdrawal demands.

The chart below looks at the relative moves in JPM Eligible and Registered gold, starting with the massive withdrawal day, April 25. What is immediately obvious is that the only reason JPM's eligible gold hasn't plunged, is due to the periodic "adjustments" out of Registered into Eligible gold, which on essentially all days in the past three weeks netting out, and for every ounce converted into eligible, one ounce was removed from registered gold.This also explains why even with the three distinct sizable withdrawal days, of 24K, 57.9K, and 22.8K on May 2, May 8 and May 14.

Incidentally, when asked about the rationale behind such seemingly arbitrary reclassifications, and warrant cancellation of registered gold into eligible gold, a market surveillance analyst at the CME replied as follows:

...the adjustment column does reflect the issuance and cancellation of warrants, but it can be used for other purposes as well. Anything that is not received or withdrawn would be reported in the adjustment column.

In other words, JPM and the Comex have full liberty to adjust what is eligible and what is registered, at will, and can thus easily replenish inventory even when it is about to run out.

And run out, it almost would have.

Because if one ignores the 100k or so ounces of Registered gold that were reclassified to replenish eligible inventory, JPM's eligible gold would, as of right now, be down to a negligible 36,931 ounces, or just over 1 ton!

At that point JPM would be down to one withdrawal request away from declaring force majeure on its eligible gold holdings, and all the unpleasant consequences that this would entail for future delivery requests.

Source: COMEX

In the aftermath of the Cyprus deposit confiscation template, the first thing we did is to present not only the countries that are the biggest offshore tax havens in context, but more importantly, the ratio of total financial assets to GDP of these same countries, because when the hunt for wealth goes global, and when the untaxed money of evil [insert nationality] tax evaders becomes the political topic du jour and source of rescue bank capital.

And since as we explained, Cyprus is nothing more or less than the template for how to "collect" about $32 trillion in "offshore wealth" it would be a handy feature to keep track of which financial sectors may experience unexpected glitches in the coming months and years in order to reallign this untaxed, and thus ill-gotten in the eyes of the broader society, wealth. It is a "fairness doctrine" world after all, where how much wealth one is allowed to have is now determined by politicians.

Courtesy of Bloomberg we have just a primer. Cyprus is gone from the list for obvious reasons. But many others remain.

In brief, anyone who has substantial capital (obviously well over the "insured" $100,000 limit) stashed away in these jurisdictions, should be quite concerned. Although for now everyone is distracted by the soaring stock market: and why worry - what happened in Cyprus can never possibly happen again. Or so Europe's politicians have sworn... the same politicians who we know "only lie when it is serious.

For much more on this topic read When Will Deposit Haircuts Take Place In Other European Countries?

After retracing 61.8% of the gold crash, spot gold prices have fallen back and are now trading back under $1400 for the first time in four weeks. It would seem more time is perhaps needed to enable the gathering of physical gold to fufill Germany's demands... (and cue, the death of gold headlines) So, in summary, we have had a notable increase in tapering discussions - Treasury yields have surged, the USD has surged, Gold has dropped, and credit has widened - all reflecting lower liquidity flow expectations; but stocks just keep going...

 

 

Charts: Bloomberg

For a country, whose founder Chairman Mao once upon a time envisioned great wealth equality for all and a communist utopia, things sure have had a very capitalist ending. Perhaps nowhere is this more visible than in Mao's lineage itself, where we find that the granddaughter of Mao, Kong Dongmei, managed to rise above the great unwashed mass of egalitarianism, and ended up just slightly more equal as a result of the Great Leap Forward, with a personal fortune amounting to $815 million according to New Fortune, a Chinese financial magazine. But it is not so much the realization that the occupation of politics is one grand lie (second perhaps only to economics) and where preaching equality for all is merely a means to achieve great wealth for yourself, but that the 40 year old descendant of the Chairman, with her wealth of nearly $1 billion, is merely the 242nd richest person in China, which means there are over 200 billionaires in the country, the bulk of whom we can only imagine are descendants of the original "communist" founders of the country.

From AP:

Kong is the grand-daughter of Mao and his third wife He Zizhen. In 2001 she founded a book store in Beijing selling publications about Mao and promoting "Red Culture" after studying at the University of Pennsylvania in the US.

 

In 2011, Kong married Chen, who controls an insurance company, an auction house and a courier firm, after they had maintained an extramarital relationship for 15 years, according to the magazine, which cited other Chinese media reports.

 

The couple have two daughters and a son, said New Fortune -- likely to be a violation of China's one-child policy.

The locals, attuned to flagrant examples of hypocrisy, were not exactly delighted with the revelation:

Kong's inclusion on the rich list triggered hot debate on China's Twitter-like weibos, with some accusing her of betraying her grandfather's status as the "great teacher of proletariat revolution".

 

"The offspring of Chairman Mao, who led us to eradicate private ownership, married a capitalist and violated the family planning policy to give birth to three illegal children," wrote Luo Chongmin, a government advisor in southwest China.

 

China has implemented the one-child policy for many urban residents for over 30 years, although there have been recent suggestions that the rules may be loosened.

 

"Did Kong Dongmei... pay any fines after being a mistress for more than 10 years and giving birth to three kids?" asked another user with the online handle Virtual Liangshao.

Yes, and a bundler for the president in another non-crony capitalist country is in prison for commingling client funds before blowing up his firm as a result of his greedy bets. Oh wait...

But at least Kong was not caught trying to hide her wealth offshore like some of her uber-wealthy peers in a country in which parking one's cash has become the biggest priority. And lots of cash to park there is. According to China Daily, "Privately held wealth on the Chinese mainland hit 80 trillion yuan ($13 trillion) in 2012, with more than 700,000 individuals now holding 10 million yuan or more in investable assets, more than double the number at the end of 2008, according to a new report." In US terms, this means the number of millionaires has doubled under 350,000 during the course of the great financial crisis, once again showing that not even China is willing to let a crisis go to waste.

The findings, from China Merchants Bank and US-based management consulting firm, Bain & Co, showed that the richest on the mainland are stepping up their investment in foreign assets as they try to preserve their fortunes in the face of uncertain economic prospects.

 

Many of those surveyed said they are becoming increasingly concerned by potential changes in Chinese regulatory policies, financial market volatility and other business risks.

 

About 60 percent of respondents indicated they were now focused on preserving their wealth, against using it to make more.
Chen Kunde, wealth management business director at China Merchants Bank, said the shift in priority was being driven by uncertainties over economic growth.

 

"As the rich gradually age and their knowledge changes, they are tending to focus more on preserving the wealth instead of fighting to create more, in a business environment where it is becoming more difficult to make extra money."

Where do the wealthy want to stash the cash?

On top of cash holdings in traditional bank accounts, individuals said they had a strong interest in forming family trusts, and in creating a diversified portfolio of international interests to preserve their wealth and spread the risk, said the report, with more than half having overseas investments.

 

Jennifer Zeng, a Bain partner in Beijing and a co-author of the report, said: "We don't see a great difference between high-net-worth individuals in China and other countries when it comes to their goals, although the situation here is changing and the shift toward the preservation of wealth might accelerate as the speed at which the wealth was created was faster than in most parts of the world."

 

The report said that Chinese banks had strengthened their position in the domestic wealth management market, while foreign banks had a much lower share of the market due to business restrictions.

 

It said the need for overseas asset allocation among the rich is rising, and China's banks should be encouraged to develop overseas business models and accelerate overseas expansion, to better cater to that rising demand.

Our advice: stay away from banks susceptible to bail-ins. So anywhere in Europe.

As for the great wealth disparity forming between both China, and the rest of the world's, uber rich, and everyone else, a similar divergence developed in 18th century France with less than desirable consequences for the wealthiest. This time will likely not be very different.

The only delaying factor is the presence of the great welfare state myth, which has so far kept the great unwashed in their place, not so much through violent oppression, but through the illusion of how much they stand to lose if they overthrow the system that provides for them, and hands them crumbs in times of need. The same system that is now and always has been, an insolvent ponzi scheme which by definition lasts only as long as the new entrants put in more than existing members take out.

That equilibrium, however, is rapidly changing all around the globe, as more and more realize, voluntarily or otherwise, that the system is broke, and with the great debt creation apparatus now hinging purely on the world's central banks - a process which just like in Cyprus dooms the restoration of confidence as it is impossible to be confident about a system sustained solely by a few global "bad banks" which are terrified to remove the training wheels - that the days of the ponzi are numbered.

Just because you are a conservative and paranoid, doesn't mean the IRS is not after you. And, assuming the AP was not hacked again, this is precisely what happened. In a stunning disclosure, the supposedly impartial Internal Revenue Service has admitted and apologized for flagging and subjecting to extra reviews, conservative political groups - those that included the words "tea party" or "patriot" - during the 2012 election to see if they were violating their tax-exempt status. No such privilege was apparently afforded to groups identifying themselves as "liberal." 

From AP:

The Internal Revenue Service is apologizing for inappropriately flagging conservative political groups for additional reviews during the 2012 election to see if they were violating their tax-exempt status.

 

Lois Lerner, who heads the IRS unit that oversees tax-exempt groups, said organizations that included the words "tea party" or "patriot" in their applications for tax-exempt status were singled out for additional reviews.

 

Lerner said the practice, initiated by low-level workers in Cincinnati, was wrong and she apologized while speaking at a conference in Washington.

 

Many conservative groups complained during the election that they were being harassed by the IRS. They said the agency asked them an inordinate number of questions to justify their tax-exempt status.

 

Certain tax-exempt charitable groups can conduct political activities but it cannot be their primary activity.

It does make one wonder, just how far the IRS goes to make the lives of conservatives a living hell: will all 2012 tax audits be those who on their facebook profile admit to liking Ron Paul? And just how far does the IRS invade personal privacy to determine how any one tax filer is indeed, a "conservative?" But don't worry - aside from the obvious persecutions, America is a free country for one and all.

One wonders: how long until "conservatives" engage in "tax-avoiding" blowback and really give the IRS reason to persecute them. Alternatively, one wonders the IRS is simply limited by logistical considerations, due to the notional difference in number of actual tax filings submitted by "conservatives" vs "liberals" and the prepondrance of one group over the other...

This is a guest post by NYU Information Systems (MSIS) Graduate students Kyle Galloway, Pravish Sood and Dylan Kelemen.

We are pleased to announce the Mongo-ODBC project. As NYU MSIS students in Courant Institute’s Information Technology Projects course, we are working under the guidance of 10gen and our Professor Evan Korth to develop an ODBC (Open-Database-Connectivity) driver for MongoDB.

ODBC was created in order to facilitate the movement of data between applications with different file structures and although it is not as popular as it once was, in part due to more flexible alternatives like MongoDB, but many programs maintain ODBC compliance. The goal of our project is to create an ODBC driver that supports the ODBC functions that can be carried out on MongoDB. This will allow users of programs that don’t yet offer MongoDB support some access to data in MongoDB databases. We believe this will particularly useful for new users and those dependent on programs like Excel and Tableau for simple business analysis reporting.

Developing the driver has presented some interesting and at times frustrating issues, many but not all of which are due to the fundamental differences between relational and document-based databases. At the moment we are working on parsing SQL where statements into mongo queries, mapping SQL statements to MongoDB c++ driver functions and handling the ODBC return format specifications.

The NYU MSIS program is composed of course work on the core concepts of computing and business in order to provide students the knowledge necessary for successful careers in technically demanding management roles. Information Technology Projects (ITP) is the final piece of our program, where students work to apply their technical skills in a practical team-oriented context to build real world IT solutions for businesses, government agencies, or non-profit organizations.

This is the third collaboration between the NYU Information Systems Master’s program and 10gen. Prior student groups worked with 10gen on the MongoDB adapter for Hadoop and the MongoDB Disco Adapter. We are excited to be working on an open source project with 10gen and look forward to continuing the successful cooperation between 10gen and NYU.

• Find the MongoDB ODBC Project on Github

The Cypriot deposit confiscation has come and gone (and in a parallel world in which the global Bernanke-put never existed and in which bank shareholders were not untouchable, this is precisely how real-time bank restructurings should have taken place), but fears remain that the country's "resolution" mechanism will be the template for future instances of "resolving" insolvent banks. That may or may not be the case: the only way to know for sure is during the next European bank bailout, but one thing is certain - Cyprus was certainly a template when it comes to how a world full of insolvent sovereigns (all engaged in currency warfare), where easing, quantitative or otherwise no longer works to boost the economy, will approach what is the last chance for monetary replenishment - taxation of financial assets, just as we warned first back in 2011. Specifically, Cyprus showed the "template" for confiscating Russian oligarch billionaire "ill-gotten", untaxed cash, which many in Germany demanded should be the quid for ongoing German-funded quo. And here's the rub. There is more where said "ill-gotten" cash has come from. Much more... $32 trillion more.

An estimate by James Henry, senior advisor of Tax Justice Network, confirms that the Cypriot confiscation template will certainly be used again and again for one, or 32 trillion simple reasons: the amount of illicit, off-shore held wealth, to which the proprietors have zero recourse in a world in which the war against tax evaders has gone both nuclear and global, has grown to stupendous levels. To wit: "A significant fraction of global private financial wealth -- by our estimates, at least $21 to $32 trillion as of 2010 -- has been invested virtually tax-­free through the world's still-­expanding black hole of more than 80 "offshore" secrecy jurisdictions."

It hardly needs mentioning that to a Europe mired in years of painful "austerity" (which is what Europe inaccurately blames its sordid, depressionary fate on when in reality it is merely reverting to a state that is justified by reality when an unsustainable decade-long credit bubble finally pops), "tax-free offshore wealth" is the purest possible code word for "confiscation-eligible."

Tying it all together, as a reminder a few days ago we noted that in the US alone there is a "high quality collateral" shortage of some $11 trillion. Extrapolating this to the entire world, the amount balloons to a little over $30 trillion.... or roughly the amount that is held in offshore tax shelters which may or may not be susceptible to confiscation. And while confiscated cash is hardly the collateral that banks need in order to preserve the illusion that a world rooted in repo and other shadow liabilities is stable, it will certainly extend and pretend the illusion for a little longer.

From this perspective, it becomes immediately obvious that the Russian oligarchs parking their cash in Cyprus were merely the Guniea Pigs, and the several billions or so confiscated (under the guise of bank resolution of course), will hardly be sufficient to fund Europe's coffers, where insolvent nations and banks have become synonymous, which is why any incremental capital deficiencies will be cured precisely using the Cypriot tax confiscation weath-redistribution template.

But even that is just the beginning. Because in the Tax Justice report we immediately read that...

Remember: this is just financial wealth. A big share of the real estate, yachts, racehorses, gold bricks -- and many other things that count as non-­financial wealth - are also owned via offshore structures where it is impossible to identify the owners. These are outside the scope of this report.

 

On this scale, this - offshore economy - is large enough to have a major impact on estimates of inequality of wealth and income; on estimates of national income and debt ratios; and - most importantly - to have very significant negative impacts on the domestic tax bases of key "source" countries (that is, countries that have seen net unrecorded private capital outflows over time.)

(yes, we underlined gold bricks - soon to be confiscated from a bank vault near you all to fund "bank resolution").

So for anyone who still hasn't gotten the memo, and understood that "offshore tax-haven" is now the most dangerous oxymoron in an insolvent world, here is the intro from the 2012 Tax Justice report which is a must read for everyone confused about Europe's confiscatory blueprint:

The 139-country focus group: who are the real debtors?

 

We have focused on a subgroup of 139 mainly low-­middle income "source" countries for which the World Bank and IMF have sufficient external debt data.

 

Our estimates for this group underscore how misleading it is to regard countries as "debtors" only by looking at one side of their balance sheets.

 

Since the 1970s, with eager (and often aggressive and illegal) assistance from the international private banking industry, it appears that private elites in this sub-­group of 139 countries had accumulated $7.3 to $9.3 trillion of unrecorded offshore wealth in 2010, conservatively estimated, even while many of their public sectors were borrowing themselves into bankruptcy, enduring agonizing "structural adjustment" and low growth, and holding fire sales of public assets.

 

These same source countries had aggregate gross external debt of $4.08 trillion in 2010. However, once we subtract these countries' foreign reserves, most of which are invested in First World securities, their aggregate net external debts were minus $2.8 trillion in 2010. (This dramatic picture has been increasing steadily since 1998, the year when the external debts minus foreign reserves was at its peak for these 139 countries, at +$1.43 trillion.

 

So in total, by way of the offshore system, these supposedly indebted "source countries" - including all key developing countries - are not debtors at all: they are net lenders, to the tune of $10.1 to $13.1 trillion at end-­2010.

 

The problem here is that the assets of these countries are held by a small number of wealthy individuals while the debts are shouldered by the ordinary people of these countries through their governments.

 

As a U.S. Federal Reserve official observed back in the 1980s: "The real problem is not that these countries don't have any assets. The problem is, they're all in Miami (and, he might have added, New York, London, Geneva, Zurich, Luxembourg, Singapore, and Hong Kong)"

 

These private unrecorded offshore assets and the public debts are intimately linked, historically speaking: the dramatic increase in  unrecorded capital outflows (and the private demand for First World currency and other assets) in the 1970s and 1980s was positively correlated with a surge in First World loans to developing countries: much of this borrowing left these countries under the table within months, and even weeks, of being disbursed.

 

Today, local elites continue to "vote with their financial feet" while their public sectors borrow heavily abroad - but it is First World countries that are doing most of the borrowing. It is these frequently heavily indebted source countries and their elites that have become their financiers. In terms of tackling poverty, it is hard to imagine a more pressing global issue to address.

 

How this wealth is concentrated. Much of this wealth appears to be concentrated in the hands of private elites that reside in a handful of source countries - many of which are still regarded officially as "debtors."

 

By our estimates, of the $7.3- $9.3 trillion of offshore wealth belonging to residents of these 139 countries, the top 10 countries  account for 61 percent and the top 20 for 81 percent. 

 

Untaxed Offshore Earnings start to swamp outflows. Our estimates also correct the sanguine view that since new outflows of capital appear to have recently declined from countries like Mexico and Brazil, capital flight is no longer a problem for these countries.

 

Once we take into account the growth of large untaxed earnings on accumulated offshore wealth, it turns out that from 1970 to 2010 the real value (in $2000) of these earnings alone may be has much as $3.7 trillion - equivalent to about 60 percent of the global total unrecorded capital outflows during this period. For Latin America, Sub-­Saharan Africa and the Middle East that have long histories of accumulating offshore wealth and unreported earnings abroad, the ratio is close to 100 percent or more.

 

By shifting attention from flows to accumulated stocks of foreign wealth, this paper calls attention to the fact that retention of  investment earnings abroad can easily become so significant that initial outflows are eventually replaced by "hidden flight," with the hidden stock of unrecorded private wealth generating enough unreported income to keep it growing long after the initial outflows have dried up. 

 

Offshore earnings swamp foreign investment. Another key finding is that once we fully account for capital outflows and the lost stream of future earnings on the associated offshore investments, foreign direct and equity investment flows are almost entirely offset - even for some of the world's largest recipients of foreign investment.

 

Wide open and "efficient" capital markets: how traditional theories failed. Standard development economics assumes that financial capital will flow predominantly from "capital-­rich" high-saving rich countries to "capital-­scarce" countries where returns on investment are higher.

 

But for many countries the global financial system seems to have enabled private investor motives - understandable ones like asset diversification along with less admirable ones like tax evasion -- to swamp the conventional theory. Reducing frictions in global finance, which was supposed to help capital flow in to capital-­starved developing countries more easily and efficiently, seems to have encouraged capital to flow out. This raises new questions about how "efficient" frictionless global capital markets are.

 

The active role of private banks. Our analysis refocuses attention on the critical, often unsavory role that global private banks play. A detailed analysis of the top 50 international private banks reveals that at the end of 2010 these 50 collectively managed more than $12.1 trillion in cross-border invested assets from private clients, including via trusts and foundations. Consider the role of smaller banks, investment houses, insurance companies, and non-bank intermediaries like hedge funds and independent money managers in the offshore cross-border market, plus self-managed funds, and this figure seems consistent with our overall offshore asset estimates of US$21-$32 trillion.

 

A disproportionate share of these assets were managed by major global banks that are well known for their role in the 2008 financial crisis, their generous government bailouts and bountiful executive compensation packages. We can now add this to their list of  distinctions: they are key players in many havens around the globe, and key enablers of the global tax injustice system.

It is interesting to note that despite choppy markets the rank order at the top of the private banking world has been remarkably stable - key recent trends have been for an increased role for independent boutique money managers and hedge funds, and a shift toward banks with a strong Asian presence. 

 

Offshore Investor Portfolios. Based on a simple model of offshore investor portfolio behavior, data from the Bank for International Settlements (BIS), and interviews with private bankers and wealth industry analysts, this yields a "scale-­up" factor that is also consistent with the aggregate range for 2010 noted earlier.

 

A simple model, based on a combination of BIS data on cross-­border deposits and other asset holdings by "non-­bank" investors, an analysis of portfolio mix assumptions made by wealth industry analysts, and interviews with actual private banks, suggests an overall multiplier of 3.0 to scale up our cross-border deposits figure to total financial assets. This is very conservative.

And the punchline, or where the "template" was literally spelled out for anyone seeking:

New Revenue Sources for Global Needs. Finally, if we could figure out how to tax all this offshore wealth without killing the proverbial Golden Goose, or at least entice its owners to reinvest it back home, this sector of the global underground is also easily large enough to make a significant contribution to tax justice, investment, and paying the costs of global problems like climate change.

Guess what Cyprus was: Europe finally "figuring out" how to tax all this offshore wealth. So the only thing needed to reapportion even more offshore wealth - more "bank failures" whose "resolution" will represent precisely the "ethically-justified" basis for German popular consumption to confiscate the money which to some 99.9% of the population should not have been accumulated in the first place.

Or, to summarize all of the above: with the middle class now wiped and tapped out, the wealthy have finally turned on themselves!

Finally, for those who find themselves at the top of these two wealth pyramids, we suggest you panic:

There is a reason why Spain's "Bad Bank" has that name (its official designation is far more jovial: SAREB) - because it is full to the brim with "assets", mostly residential loans, that no longer generate cash flows, and which are capitalized increasingly more with taxpayer cash. How much assets? At last check some €50.7 billion. The problem is that since real, documented cash flows from the real economy, not the fake, made up one reflected by various stock indices, are what funds (or don't as the case may be) said assets, the liabilities will soon be in need of more equity infusions. Specifically, there is a total of €50.7 billion in liabilities consisting of senior debt, and an equity capital buffer of €4.8 billion. Alas, this liquidity buffer will hardly be enough as more and more loans are defaulted on and turn "non-pay" (i.e., the rise of NPLs drowns out the "reserve"), while cash has to be paid out - constantly - to satisfy the liabilities cash interest demands.

So just how bad is the NPL picture for the SAREB? Reuters has the most recent breakdown which is as follows: "Of its loans, only 22 percent are considered "normal"; 34 percent are rated "substandard" and 45 percent "doubtful"." The "normal" loans are linked to finished products which arguable are easier to monetize, and yet there has been zero end-market demand for said "assets" despite a global central bank liquidity injection that has made the global credit carry trade the only game in town. The reason there is no interest is that there simply is no chance these assets will generate the needed cash flows to make any cash on cash return a possibility:

Most of the loans are linked to finished properties, for which it might be easier to find a buyer, but 4.3 percent are for unfinished developments and nearly 10 percent are for empty lots, for which there is little or no demand. Nearly all of the foreclosed properties in its portfolio are empty, including apartment blocks far outside big cities. Only 6,000 of nearly 83,000 housing units have tenants.

Keep in mind that in Spain, unlike the US, mortgages are recourse, and thus walking away from one is far more complicated than it is in the US. It means the bank can "pursue and pursue" the borrowers until it gets paid back in full. 

Most importantly, it also means that by the time a borrower is in default on their mortgage, they have already defaulted on virtually all other debt in their possession, very much unlike in the US where defaulting on one's mortgage is usually the first thing a financially troubled household will do.

The logical next step is what has been clear since last summer when Spain announced the first bailout of its banking system: what it has provisioned for future losses will be far less than the final shortfall. From Reuters:

Spain's bill to bail out its banks may yet rise, some bankers and analysts fear, as a worsening economy hampers the government's early attempts to sell off nationalized lenders and threatens the "bad bank" housing their rotten property deals.

 

The 8 percent capital cushion may however be too thin to withstand losses without a top-up, which could be hard to source from the private sector, said several senior Spanish bankers and investment bankers who have worked with the government.

 

"It was a big mistake. The government is going to have to take over the entire vehicle sooner or later," said a Spanish banking executive, on condition of anonymity, echoing a view from three other senior bankers.

 

If the liabilities of the bad bank, known by its Spanish-language acronym Sareb, were to be put on the state's balance sheet, it could add up to another 5 percentage points of GDP to the country's debt, pushing it to more than 100 percent of annual output. Spain's economy ministry declined to comment.

What is most ironic, and shows just how short-sighted market "thinking" has become, is that while no one is willing to purchase the SAREB's NPLs outright, they are more than happy to buy them indirectly when covered by Spain's "sovereign" wrapper, which in turn is funded by an implicit German guarantee. Because should Spain fail to fund its deficit and its insolvent banking sector, the Euro is done. And while it is unclear if German resentment of a periphery which has now officially declared austerity dead and buried, is enough to tell it there is no longer any guarantee to fund a profligate lifestyle, what is clear is that the deteriorating Spanish economy will need much more capital to funds the rug under which it has so far swept the bulk of the financial biohzarad in its economy.

Sareb does have a contingency plan for shoring up capital, which involves restricting eventual dividend payments to shareholders, the source said. Otherwise fresh capital will have to come from investors - the state, or sound banks, some of whom had came under pressure from the government to invest.

 

A spokeswoman for Sareb said "the contingency plan is the sales plan", which entails selling almost half of assets over the next five years and paying down half of the debt.

Sell NPLs to whom? Not even Japan is (hopefully) that stupid, and this despite being able to fund Spanish purchases at absolutely zero cost courtesy of the BOJ's latest monetary expansion.

While most banks maintain they have stocked up on enough capital to counter growing provisions for losses, a handful of analysts still believe some will have to do more to ward off problems outside the real estate realm.

 

The Bank of Spain on Tuesday tightened the rules on how banks classify bad debt in cases of refinancing, in a move that could force lenders to recognize more bad debt.

 

Ratings agency Moody's had forecast last October that banks had a 100 billion euro capital gap, rather than the 54 billion euros projected by Oliver Wyman in its stress test.

 

"Despite all the developments, it's difficult to see that all of that 100 billion euros is cancelled out," Alberto Postigo, analyst at Moody's, said.

Actually the final number will be far worse. The reason, as in the case of Cyprus, as in the case of Slovenia next, as in the case of every European country where the broader population is increasingly shifting to the shadow economy, is a simple and recurring one: non-performing loans. And as the following chart from BofA shows, when one strips away all the shiny veneer, the real problem in Europe is only getting worse.

Submitted by Martin Sibileau of A View From The Trenches blog,

I want to offer today an historical perspective on the favorite liquidity injection tool: Currency swaps. These coordinated interventions are not a solution to the crashes, but their cause, within a game of chicken and egg. But I’ve just given you the conclusion. I need to back it now…

To read this article in pdf format, click here: May 5 2013

With equity valuations no longer levitating but in a different, 4^th dimension altogether, and credit spreads compressing... Which fiduciary portfolio manager can still afford to hedge? Any price to hedge seems expensive and with no demand, the price of protection falls almost daily. The CDX NA IG20 index (i.e. the investment grade credit default swap index series 20, tracking the credit risk of 125 North American investment grade companies in the credit default swap market) closed the week at 70-71bps. The index was at this level back in the spring of 2005. By the summer of 2007, any credit portfolio manager that would have wanted to cautiously hedge with this index would have seen a further compression of 75% in spreads, completely wiping him/her out.

It is in situations like these, when the crash comes, that the proverbial run for liquidity forces central banks to coordinate liquidity injections. However, something tells me that this time, the trick won’t work. In anticipation to the next and perhaps final attempt, I want to offer today an historical perspective on the favorite liquidity injection tool:  Currency swaps. These coordinated interventions are not a solution to the crashes, but their cause, within a game of chicken and egg. But I’ve just given you the conclusion. I need to back it now…

How it all began

Let me clarify: By currency swaps, I refer to a transaction carried out between two central banks. This means that currency swaps cannot be older than the central banks that extend them. On the other hand, foreign exchange swaps between corporations may date back to the late Middle Ages, when trade began to resurface in the Italian cities and the Hansastädte. Having said this, I believe that currency swaps were born in 1922, during the International Monetary Conference that took place in Geneva. This conference marked the beginning of the Gold Exchange Standard, with the goal of stabilizing exchange rates (in terms of gold) back to the pre-World War I.

According to Prof. Giovanni B. Pittaluga (Univ. di Genova), there were two key resolutions from the conference, which opened the door to currency swaps. Resolution No. 9 proposed that central banks “…centralise and coordinate the demand for gold, and so avoid those wide fluctuations in the purchasing power of gold which might otherwise result from the simultaneous and competitive efforts of a number of countries to secure metallic reserves…”

Resolution No. 9 also spelled how the cooperation among central banks would work, which “…should embody some means of economizing the use of gold maintaining reserves in the form of foreign balance, such, for example, as the gold exchange standard or an international clearing system…”

In Resolution No. 11, we learn that: “…The convention will thus be based on a gold exchange standard.” (…) “…A participating country, in addition to any gold reserve held at home, may maintain in any other participating country reserves of approved assets in the form of bank balances, bills, short-term Securities, or other suitable liquid assets…. when progress permits, certain of the participating countries will establish a free market in gold and thus become gold centers”.

Lastly, gold or foreign exchange would back no less than 40% of the monetary base of central banks. With this agreement, the stage was set to manipulate liquidity in a coordinated way to a degree the world had never witnessed before. The reserve multiplier, composed by gold and foreign exchange could be “managed” and through an international clearing system, it could be managed globally.

How adjustments worked under the Gold Standard

Before 1922, adjustments within the Gold Standard involved the free movement of gold. In the figure below, I show what an adjustment would have looked like, as the United States underwent a balance of trade deficit, for instance:

Gold would have left the United States, reducing the asset side of the balance sheet of the Federal Reserve. Matching this movement, the monetary base (i.e. US dollars) would have fallen too. The gold would have eventually entered the balance sheet of the Banque of France, which would have issue a corresponding marginal amount of French Francs.

It is worth noting that the interest rate, in gold, would have increased in the United States, providing a stabilizing/balancing mechanism, to repatriate the gold that originally left, thanks to arbitraging opportunities. As Brendan Brown (Head of Economic Research at Mitsubishi UFJ Securities International) explained (here), with free determination of interest rates and even considerable price fluctuations, agents in this system had the legitimate expectation that key relative prices would return to a “perpetual” level. This expectation provided “…the negative real interest rate which Bernanke so desperately tries to create today with hyped inflation expectations…”

There is an excellent work on the mechanics of this adjustment published by Mary Tone Rodgers and Berry K. Wilson, with regards to the Panic of 1907 (see here). The authors sustain that the gold flows that ensued from Europe into the United States provided the liquidity necessary to mitigate the panic, without the need of intervention.  This success in reducing systemic risk was due to the existence of US corporate bonds (mainly from railroads) with coupon and principal payable in gold, in bearer or registered form (at the option of the holder) that facilitated transferability, tradable jointly in the US and European exchanges, and within a payment system operating largely out of reach from banksters outside of the bank clearinghouse systems. The official story is that the system was saved by a $25MM JPM-led pool of liquidity injected to the call loan market.

How adjustments worked under the Gold Exchange Standard

During the 1920s and particularly with the stock imbalances resulting from World War I, the search for sustainable financing of reparation payments began. Complicating things, the beginning of this decade saw the hyper inflationary processes in Germany and Hungary. By 1924, England and the United States rolled out the Dawes Plan and between 1926 and 1928, the so called Poincaré Stabilization Plan in France. The former got Charles G. Dawes the Nobel Prize Peace, in 1925.

As the figure below shows, against a stable stock of gold, fiat currency would be loaned between central banks. In the case of a swap for the Banque de France, US dollars would be available/loaned, which were supposedly backed by gold. The reserve multiplier vs. gold expanded, of course:

 

With these transactions central banks would now be able to influence monetary (i.e. paper) interest rates. The balancing mechanism provided by gold interest rate differentials had been lost. As we saw under the Gold Standard before, an outflow of US dollars would have caused US dollar rates to rise, impacting on the purchasing power of Americans. Now, the reserve multiplier versus gold expanded and the purchasing power of the nation that provided the financing was left untouched. The US dollar would depreciate (on the margin and ceteris paribus) against the countries benefiting from these swaps. Inflation was exported therefore from the issuing nation (USA) to the receiving nations (Europe). The party lasted until 1931, when the collapse of the KreditAnstalt triggered a unanimous wave of deflation.

How the perspective changed as the US became a debtor nation

Fast forward to 1965, two decades after World War II, and currency swaps are no longer seen as a tool to temporarily “stabilize” the financing of flows, like balance of trade deficits or war reparation payments, but stocks of debt. By 1965, central bankers are already worried with the creation of reserve assets, just like they are today; with the creation of collateral (see this great post by Zerohedge on the latter).

Indeed, 48 years ago, the Group of Ten presented what was called the Ossola Report, after Rinaldo Ossola, chairman of the study group involved in its preparation and also vice-chairman of the Bank of Italy. This report was specifically concerned with the creation of reserve assets. At least back then, gold was still considered to be one of them. In an amazing confession (although the document was initially restricted), the Ossola Group explicitly declared that the problem “…arises from the considered expectation that the future flow of gold into reserves cannot be prudently relied upon to meet all needs for an expansion of reserves associated with a growing volume of world trade and payments and that the contribution of dollar holdings to the growth of reserves seems unlikely to continue as in the past…”

Currency swaps were once again considered part of the solution. Under the so called “currency assets”, the swaps were included by the Ossola Group, as a useful tool for the creation of alternative reserves. Three months, during a Hearing before the Subcommittee on National Security and International Operations, William McChesney Martin, Jr., at that time Chairman of the Board of Governors of the Federal Reserve System, acknowledged a much greater role to currency swaps, in maintaining the role of the US dollar as the global reserve currency.

In McChesney Martin’s words: “…Under the swap agreements, both the System (i.e. Federal Reserve System) and its partners make drawings only for the purpose of counteracting the effects on exchange markets and reserve positions of temporary or transitional fluctuations in payments flows. About half of the drawings ever made by the System, and most of the drawings made by foreign central banks, have been repaid within three months; nearly 90 per cent of the recent drawings made by the System and 100 per cent of the drawings made by foreign central banks have been repaid within six months. In any event, no drawing is permitted to remain outstanding for more than twelve months. This policy ensures that drawings will be made, either by the System or by a foreign central, bank, only for temporary purposes and not for the purpose of financing a persistent payments deficit. In all swap arrangements both parties are fully protected from the danger of exchange-rate fluctuations. If a foreign central bank draws dollars, its obligation to repay dollars would not be altered if in the meantime its currency were devalued. Moreover, the drawings are exchanges of currencies rather than credits. For instance, if, say, the National Bank of Belgium draws dollars, the System receives the equivalent in Belgian francs; and since the National Bank of Belgium has to make repayment in dollars, the System is at all times protected from any possibility of loss. Obviously, the same protection is given to foreign central banks whenever the System draws a foreign currency.

The interest rates for drawings are identical for both parties. Hence, until one party disburses the currency drawn, there is no net interest burden for either party. Amounts drawn and actually disbursed incur an interest cost, needless to say; the interest charge is generally close to the U.S. Treasury bill rate…”

My graph below should help visualize the mechanism:

 

Essentially, with these currency swaps, foreign central banks that during the war had shifted their gold to the USA, became middlemen of a product that was a first-degree derivative of the US dollar, and a second-degree derivative of gold.

On September 24^th 1965, someone called this Ponzi scheme out. In an article published by Le Monde, Jacques Rueff publicly responded to this nonsense, under the hilarious title “Des plans d’irrigation pendant le déluge” (i.e. Irrigation plans during the flood). He minced no words and wrote:

“…C’est un euphénisme inacceptable et une scandaleuse hyprocrisie que de qualifier de création de “liquidités internationales” les multiples operations, tells que (currency) swaps…” “C’est commetre une fraude de meme nature que de présenter comme la consequence d’une insuffiscance générale de liquidités l’insufficance des moyens dont disposent les Etats-Unis et l’Anglaterre pour le réglement de leur déficit exterieur”

My translation: “…It is an unacceptable euphemism and an outrageous hypocrisy to qualify as creation of “international liquidity” multiple transactions, like (currency) swaps…”…“…In the same fashion, it is a fraud to present as the consequence of a general lack of liquidity, the lack of means available to the USA and England to settle their external deficits…”

Comparing the USA and England to underdeveloped countries, Rueff added that these also lack external resources, but those that are needed cannot be provided to them but by credit operations, rather than the superstition of a monetary invention disguised as necessary and in the general interest of the public (i.e. rest of the world).

With impressive prediction, Rueff warned that the problem would present itself in all its greatness, the day these two countries decide to recover their financial independence by reimbursing with their dangerous liabilities (i.e. currencies). That day, said Rueff, international coordination would be necessary and legitimate. But such coordination would not revolve around the creation of alternative instruments of reserve, demanded by a starving-for-liquidity world.  That day would be a day of liquidation, where debtors and creditors would be equally interested and would share the common responsibility of the lightness with which they jointly accepted the monetary difficulties that are present….Sadly, Rueff’s call could not sound more familiar to the observer in 2013…

How adjustments work today, without currency swaps

Until the end of the Gold Exchange Standard, even if the reserve multiplier suppressed the value of gold (like today), gold was still the ultimate reserve and had in itself no counterparty risk. After August 15^th, 1971, when Nixon issued the Executive Order 11615 (watch announcement here), the ultimate reserve was simply cash (i.e. US dollars) or its counterpart, US Treasuries. And unlike gold, these reserve assets could be created or destroyed ex-nihilo. When they are re-hypothecated, leverage grows unlimited and when their value falls, valuations dive unstoppable. Because (and unlike in 1907) the transmission channel for these reserves today is the banking system, when they become scarce, counterparty risk morphs into systemic risk.

When Rueff discussed currency swaps, he had imbalances in mind. In the 21^st century, we no longer have time to worry about these superfluous things. Balance of trade deficits? Current account deficits? Fiscal deficits? In the 21^st century, we cannot afford to see the big picture. We can only see the “here and now”. Therefore, when we talk about currency swaps, the only thing we have in mind is counterparty risk within the financial system. The thermometer that measures such risk is the Eurodollar swap basis, shown below (source: Bloomberg). As the US dollar became the carry currency, the cost of accessing to it became the cornerstone of value for the rest of the asset spectrum, widely known as “risk”.

In the chat below, we can see two big gaps in the Eurodollar swap basis. The one in 2008 corresponds to the Lehman event. The one in 2011 corresponds to the banking crisis in the Eurozone that was contained with a reduction in the cost of USDEUR swaps and with the Long-Term Refinancing Operations done by the European Central Bank. In both events, the financial system was in danger and banks were forced to delever. How would the adjustment process have worked, had there not been currency swaps to extend?

 

 

In the figure below, I explain the adjustment process, in the absence of a currency swap. As we see in step 1, given the default risk of sovereign debt held by Eurozone banks, capital leaves the Eurozone, appreciating the US dollar. We see loan loss reserves increase (bringing the aggregate value of assets and equity down). As these banks have liabilities in US dollars and take deposits in Euros, this mismatch and the devaluation of the Euro deteriorates their risk profile

Eurozone banks are forced to sell US dollar loans, shown on step 2. As they sell them below par, the banks have to book losses. The non-Eurozone banks that purchase these loans cannot book immediate gains. We live in a fiat currency world, and banks simply let their loans amortize; there’s no mark to market. With these purchases, capital re-enters the Eurozone, depreciating the US dollar. In the end, there is no credit crunch. As long as this process is left to the market to work itself out smoothly, borrowers don’t suffer, because ownership of the loans is simply transferred. This is neutral to sovereign risk, but going forward, if the sovereigns don’t improve their risk profile, lending capacity will be constrained.

In the end, an adjustment takes place in (a) the foreign exchange market, (b) the value of the bank capital of Eurozone banks, and (c) the amount of capital being transferred from outside the Eurozone into the Eurozone.

How adjustments work today, with currency swaps

Let’s now proceed to examine the adjustment –or better said, lack thereof- in the presence of currency swaps. The adjustment is delayed. In the figure below, we can see that the Fed intervenes indirectly, lending to Eurozone banks through the ECB. Capital does not leave the US. Dollars are printed instead and the US dollar depreciates. On November 30th, of 2011, upon the Fed’s announcement at 8am, the Euro gained two cents vs. the US dollar. As no capital is transferred, no further savings are required to sustain the Eurozone and the misallocation of resources continues, because no loans are sold. This is bullish of sovereign risk. The Fed becomes a creditor of the Eurozone. If systemic risk deteriorates in the Eurozone, the Fed is forced to first keep reducing the cost of the swaps and later to roll them indefinitely, as long as there is a European Central Bank as a counterparty for the Fed, to avoid an increase in interest rates in the US dollar funding market. But if the Euro zone broke up, there would not be any “safe” counterparty –at least in the short term- for the Fed to lend US dollars to. In the presence of a European central bank, the swaps would be bullish for gold. In the absence of one, the difficulty in establishing swap lines would temporarily be very bearish for gold (and the rest of the asset spectrum).

Final words

Over almost a century, we have witnessed the slow and progressive destruction of the best global mechanism available to cooperate in the creation and allocation of resources. This process began with the loss of the ability to address flow imbalances (i.e. savings, trade). After the World Wars, it became clear that we had also lost the ability to address stock imbalances, and by 1971 we ensured that any price flexibility left to reset the system in the face of an adjustment would be wiped out too. This occurred in two steps: First at a global level, with the irredeemability of gold: The world could no longer devalue. Second, at a local and inter-temporal level, with zero interest rates: Countries can no longer produce consumption adjustments. From this moment, adjustments can only make way through a growing series of global systemic risk events with increasingly relevant consequences. Swaps, as a tool, will no longer be able to face the upcoming challenges. When this fact finally sets in, governments will be forced to resort directly to basic asset confiscation.

This is just a very small post on how to watch the progress of the “CopyBack” state of a freshly inserted disk in an Exadata “Computing” (database) node. A disk failed in the (LSI Hardware) RAID5 set, and the hotspare disk was automatically used. The failed disk was replaced, and we are now awaiting the intermediate “CopyBack” phase.

The current state of the disks is visible using the following command:

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When an Oracle process starts executing a query and needs to do a full segment scan, it needs to make a decision if it’s going to use ‘blockmode’, which is the normal way of working on non-Exadata Oracle databases, where blocks are read from disk and processed by the Oracle foreground process, either “cached” (read from disk and put in the database buffercache) or “direct” (read from disk and put in the process’ PGA), or ‘offloaded mode’, where part of the execution is done by the cell server.

The code layer where the Oracle database process initiates the offloading is ‘kcfis’; an educated guess is Kernel Cache File Intelligent Storage. Does a “normal” alias non-Exadata database ever use the ‘kcfis’ layer? My first guess would be ‘no’, but we all know guessing takes you nowhere (right?). Let’s see if a “normal” database uses the ‘kcfis’ functions on a Linux x64 (OL 6.3) system with Oracle 11.2.0.3 64 bit using ASM.

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Submitted by Michael Krieger of Liberty Blitzkrieg blog,

If there is any market that demonstrates the complete and total misallocation of capital that results from Banana Ben Bernanke’s money printing and artificially low interest rate policy, it the latest phony American housing bubble. With a record numbers of citizens on the food stamp electronic breadline, with unemployment stubbornly high no matter what data you use, billionaire financial oligarchs are running around bidding up “homes for rent” and pricing out the random average person that actually has the capacity or desire to bid. I just read an excellent article that demonstrates the degree of insanity that has now been unleashed upon the streets of Las Vegas.

As the title of the post mentions, a study from the University of Nevada at Las Vegas show some 40,000 homes are vacant, or 8% of the metropolitan area’s single-family housing stock.  So it would seem that this would provide plenty of good deals for investors right?  Certainly there doesn’t seem to be a need for new home construction.  Well think again!  In their QE-forever induced delirium, homebuilders have gone Chinese and in Las Vegas “permits for new home construction are up 50 percent, twice the national average.”

My favorite line in the entire article comes at the end when a prospective buyer explains what happens when an actual citizen attempts to purchase a home to actually live in:

“We know there is a minute chance we get anything,” she says. “The most frustrating part of all this is how home prices keep going up and up, yet you have so many empty homes.”

Oh and it seems Oaktree has followed Och Ziff’s lead and pulled back from the “buy to rent” insanity.  Soon all that will be left are the dumb money and homebuilders, who should start thinking about what kind of bailout they will lobby for when this entire thing unravels.  From Reuters:

These big investors and a handful of others have bought at least 55,000 single-family homes across the U.S. in the past year. In the Vegas area alone, they have accounted for at least 10 percent of the homes sold since January 2012, according to a Reuters analysis of housing transactions.

 

That added firepower helps explain why home prices in this metropolitan area of 2 million people are up 30 percent over a year ago, far more than the national average of 10 percent. Permits for new home construction are up 50 percent, twice the national average.

 

Las Vegas would seem a highly unlikely locale for a new housing bubble. There are at least 20,000 homes in some stage of foreclosure, and the jobless rate hovers near 10 percent, some two points above the U.S. average. A healthy housing market depends on people having good-paying jobs so they can accumulate down payments and finance their mortgages.

Healthy markets?  That’s so last century!

Cracks are showing in Vegas and beyond. Here, rents on single-family homes were down an average of 1.9 percent in March from a year ago. In other regions targeted by institutional buyers, such as Phoenix, Southern California, Atlanta and Florida, rents are either falling or flat, according to online real estate service Trulia.

 

Industry insiders estimate that roughly half of the more than 55,000 homes acquired by institutions over the past year in the U.S. have yet to be rented.

In Oceania, that is a market signal for build more homes.

The combination of rising acquisition costs, prolonged rental lead times and declining rental income is disrupting the spread-sheet analysis behind Wall Street’s bet. That could pose problems for what once seemed like a slam dunk. It could also give pause to stock-market investors as some players list their shares. American Homes 4 Rent, based in Malibu, Calif., has said it expects to file soon for an initial public offering.

Taking bets as to how soon after its IPO America Homes 4 Rent will go BK.

Early last year, Oaktree Capital Management agreed to provide up to $450 million in equity to real estate investment firm Carrington Capital Management for its foreclosed-home acquisition program. Carrington was projecting an internal rate of return of 25 percent over a three-year period for its portfolio of single-family homes in several cities, according to a marketing document.

 

Oaktree is now reluctant to commit more money to the trade after souring on the buy-to-rent strategy, said people familiar with the firms. Oaktree saw returns on rents compress and no longer is comfortable with Carrington’s initial heady yield projections, they said.

 

The Vegas market has unsteady legs. Statistics compiled by the University of Nevada at Las Vegas show some 40,000 homes are largely vacant – 8 percent of the metropolitan area’s single-family housing stock. Housing research firm RealtyTrac estimates there are 20,000 single-family homes in the metro area either owned by a bank or in some stage of foreclosure.

 

“We know there is a minute chance we get anything,” she says. “The most frustrating part of all this is how home prices keep going up and up, yet you have so many empty homes.”

Thanks Ben.

Full article here.

When it is on the receiving end of course.

Several days ago we reported that Goldman's various judicial pawns would not rest for a minute until they made the life of the original "HFT code stealer" Russian algo trader Sergey Aleynikov, the 10th circle of hell for allegedly borrowing source code from Goldman in 2009 that could "manipulate markets" and which would be used at his subsequent employer, Teza. What we also said is that what Aleynikov did was a "practice engaged by every single algo and quant programmer when they switch jobs."  What we did not say, because it is painfully obvious, is that Aleynikov's crime is nothing more than what virtually every financial professional does in the period of transition between jobs: while unethical, preserving what they believe is their labor product over the years, including porting over their work, rolodex, emails and contacts, is something done by roughly 99% of bankers who are are confident they are entitled to the portability of such information, and where the gray line between what is yours and what is your employer's, does not exist.

It also appears, while Goldman is willing to spend millions to prosecute a person for engaging in just such behavior, it has no scruples with being the receiving end of trade secrets coming from other firms. Such as Credit Suisse. Reuters reports that "Credit Suisse Group AG sued the former vice president of its emerging markets group on Friday, claiming she stole confidential documents and trade secrets to transfer business to her new employer, Goldman Sachs Group Inc."

In a complaint filed in Manhattan state court, Credit Suisse said Agostina Pechi sent confidential and highly sensitive company documents to her personal email account in the months leading up to her resignation, including databases, client contact information and sales team targets.

 

The Swiss bank also accused her of conducting an "after-hours document raid" when she was scheduled to be on vacation in which she allegedly copied transaction documents related to a longtime Credit Suisse client.

 

After Pechi resigned on April 2 and told the human resources department she was accepting a new position with rival Goldman Sachs, Credit Suisse launched an investigation into her departure and found 60 work emails in her personal account, according to the filing. The next day, those emails had been deleted and could not be recovered, the complaint said.

 

"Upon information and belief, Pechi intends to use confidential Credit Suisse information to compete with Credit Suisse, and intends to provide this information to her new employer to specifically target Credit Suisse's clients," the complaint said.

The young Ms. Pechi in question, barely six years out of university:

So it is this kind of "criminal" activity that banks have decided to unleash their lawyer hordes, just waiting to be summoned and paid $1000/hour?

Credit Suisse is seeking a temporary restraining order, barring Pechi for 30 days from seeking business from the company's clients. In addition, it asked the court to order Pechi to return all confidential Credit Suisse information and trade secrets.

 

Under her employment agreement, Pechi agreed to resolve any employment-related disputes in arbitration. In its court filing, Credit Suisse said it would pursue expedited mediation, and, if that fails, arbitration. But a court order was needed to prevent Credit Suisse from being harmed in the interim, the company said.

Apparently copying and pasting some emails, whose ultimate use will simply make the financial ladnscape more even, and end up benefitting the client (whichever firms they end up with), is a far more unethical, and illlegal, behavior in the banks' own eyes, than having the bulk of their workers pitching a client stoop to a level where coke, booze and prostitutes, all funded by clients, are the common currency in strengthening the quid pro quo bond between one sociopath and another? Recall:

the activities that bankers seem to spend the most time on, is treating their "preferred clients" with free gambling trips to Las Vegas, skiing in Chamonix, flying wives and girlfriends in helicopters, doing blow in industrial amounts, and, of course, cavorting with strippers and hookers. All paid for by some unwitting clients of course. It is this environment of utter and perfectly permitted, if not encouraged, debauchery that allowed scandals such as the Libor fixing "conspiracy" (first theory, then fact of course), to flourish, and which makes being a banker still the most desired job in the world.

 

So which is more unethical, one questions: copying one's work for future use, or using client money without the client's knowledge or approval, to fund Vegas trips, cocaine benders and brother trips for other, more important clients, in hopes of retaining their business? Oh yes, we forgot to mention that the second activity brings the potential of future bumper revenue. Which means, of course, that there is no contest.

But while the above distinction is meaningless, another question arises: we can only hope that Manhattan DA, Cyrus Vance Jr will prosecute young 20-some year old Agostina with the same passion that he has invested in destroying the life of Sergey. Or maybe a DA would scores less brownie points when going after an attractive, sympathetic young Italian female, than sicing his best prosecutors against a gaunt, bearded Russian with a thick accent?

And another final question: does anyone pretend there is still a thing called justice in the US, when money or career-promotion is involved, i.e., virtually all of the time?

"Where do multinationals pay taxes and how much?" Gaining insight from international tax experts, this excellent documentary takes a look at tax havens, the people who live there and the routes along which tax is avoided globally. As we have previously discussed in great detail, those routes go by resounding names like 'Cayman Special', 'Double Irish', and 'Dutch Sandwich' amid a financial world operating in the shadows surrounded by a high level of secrecy where sizable capital streams travel the world at the speed of light and avoid paying tax. 'The Tax Free Tour' explains the systemic risk for governments and citizens alike. Is this the price we have to pay for globalized capitalism? At the same time, the online game "Taxodus" provides an interactive guide to hiding your company's cash. In the game, the player can select the profile of a multinational and look for the global route to pay as little tax as possible.

The Documentary:

Taxodus - The Game explained:

 

Taxodus - The Game: (click image for game link)

That modern markets are broken beyond repair should by now be clear to everyone: with liquidity that can be shut off at the flick of a switch, 70% of overall market "volumes" merely churning between various rebate collecting HFT algos, and the consolidated quote tape stuffed by billions of cancellation-sniffing quotes, it is surprising that major, marketwide millisecond +/- 2% swings are not a daily occurrence (as opposed to single-stock flash crashes and smashes which now do take place daily).

However, said realization must also be followed by political and regulatory action, which will not come as these same politicians and regulators are beholden to precisely the same financial parties that have broken the market microstructure and who generously benefit from their Marketstein monster creation (with some fraction of the profits channeled as hush money to political lobbies to keep the regulators quiet and happy).

Which means the best everyone else can do is sit back and watch the accelerating cannibalization with which these same market players go after one another until there is nothing left, and there is no other choice but to go back to the drawing board and start from scratch.

To help pass the time, here is a short clip from Nanex showing just what happens at the proper timescale of modern "markets" - half a second - in the trading of Johnson & Johnson stock. If anyone had any doubts as to the stability of the market before, this should alleviate all doubt.

From Nanex:

The bottom box (SIP) shows the National Best Bid and Offer. Watch how much it changes in the blink of an eye.

 

Watch High Frequency Traders (HFT) at the millisecond level jam thousands of quotes in the stock of Johnson and Johnson (JNJ) through our financial networks on May 2, 2013. Video shows 1/2 second of time. If any of the connections are not running perfectly, High Frequency Traders can profit from the price discrepancies that result. There is no economic justification for this abusive behavior.

 

Each box represents one exchange. The SIP (CQS in this case) is the box at 6 o'clock. It shows the National Best Bid/Offer. Watch how much it changes in a fraction of a second. The shapes represent quote changes which are the result of a change to the top of the book at each exchange. The time at the top of the screen is Eastern Time HH:MM:SS:mmm (mmm = millisecond). We slow time down so you can see what goes on at the millisecond level. A millisecond (ms) is 1/1000th of a second.

 

Note how every exchange must process every quote from the others -- for proper trade through price protection. This complex web of technology must run flawlessly every millisecond of the trading day, or arbitrage (HFT profit) opportunities will appear. It is easy for HFTs to cause delays in one or more of the connections between each exchange.

And said action in its full animated glory:

The French government is saddled with enough problems; in theory, it no longer needs to create new ones. But now it wrote another excellent chapter in its tome on how to interfere with private-sector businesses, hamper entrepreneurs, and encourage them to start up their operations elsewhere instead of creating jobs in France.

Metasploit software developer Joe Vennix has detailed a vulnerability in Safari’s webarchive file format along with how it can be exploited. The post on Rapid7 says that after being reported to Apple back in February, the bug was closed last month with a status of “wontfix”, indicating that Apple has no plans to address the bug. So what is it and why is that?

In Safari, if you go to save a web page, one of the options for the format to use is Web Archive. In many browsers when you save a web page locally, it only consists of the HTML source code itself. This means that any images, embedded videos, linked stylesheets or JavaScript will be lost. When you open a copy of the locally saved page, it will be missing all of the additional content, often not showing much more than text from the page and broken images. Safari’s Web Archive format works by not only saving the HTML of the page, but any linked content. When you open a Web Archive file, you will see the page as it would have originally appeared on the Internet, with all images, styling, and linked content preserved.

The bug found in Safari’s security model is a lack of restriction on what data can be accessed by files in a web archive. Normally a page like apple.com would be restricted to reading cookies that belonged to only the apple.com domain. It could not read cookies from another domain, such as gmail.com. This is critical because if all of your cookies were readable by any website, it would be trivial for a malicious site to send your cookies back to an attacker, who could then log in to your accounts on any number of websites. In the case of Safari’s web archives, it’s possible for a malicious web archive to not only access content stored by another site, but potentially any file on the victim’s computer.

With such a serious sounding vulnerability, you might be wondering why Apple wouldn’t want to fix it. The answer seems to be that an exploit like this cannot be accomplished without user action. You couldn’t actually be affected by this unless you were to download and open a malicious .webarchive file. Users can avoid being attacked by employing the age old advice of not opening strange files from the Internet (or anywhere else for that matter). That said, some people still do and surely will continue to do so. Given the potential impact of a vulnerability like this on users, it certainly seems like something Apple would want to fix at some point.

If you’re interesting in understanding more about how this bug works or can be exploited, Joe’s blog post covers several real world examples of how it could be used.

Source: Rapid7

Microsoft China is offering a great deal for Surface RT devices through Microsoft China online store, the Tmall store, JD.com, Suning etc. When you buy a Surface RT device before May 31st, you can get a Touch Cover or Type Cover for free. This is a limited time offer. Surface RT (cover not included): one free Touch Cover (originally $119.99) Surface RT (black Touch Cover included): one free Touch Cover or Type Cover (originally $129.99) This offer is available currently only for Surface RT devices. via: Liveside

Some days are just too good to be true :) I ran into an interesting problem trying to install 11.2.0.3.0 Grid Infrastructure for a two node cluster. The storage was presented via iSCSI which turned out to be a blessing and inspiration for this blog post. So far I haven’t found out yet how to create “shareable” LUNs in KVM the same way I did successfully with Xen. I wouldn’t recommend general purpose iSCSI for anything besides lab setups though. If you want network based storage, go and use 10GBit/s Ethernet and either use FCoE or (direct) NFS.

Here is my setup. Storage is presented in 3 targets using tgtd on the host:

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A team in France has developed an app called oVid. The idea is for a handful of Windows Phones to be linked together to record video across the network of hardware that's connected. The app was developed for this year's 2013 Imagine Cup and utilises Bluetooth and WiFi to create a rather awesome experience.

Sounds interesting, right? So where can this technology be utilised? An example provided is a music festival where a user begins recording at the event, while others can join in and record from their Windows Phones once the first user halts. This opens up multiple unique points of perspective and enables everyone to enjoy the event without having to hold a device in the air for long periods of time.

As the above video shows, it's essentially a pass-along service, but instead of handing over your device, other users utilise their Windows Phones. The footage captured can then be shared on social networks and found on the oVid website, as well as the Windows and Windows Phone apps. What if the content isn't synchronised correctly? The team behind oVid notes they've implemented measures to prevent such a situation from occurring:

"We've developed a number of clever syncing technologies. We use these and Windows Azure Live Smooth Streaming to ensure that the video is all displayed live for all participants, this all works through known delays and pre-determined time intervals, we wanted oVid to be perfect regardless of platform, device, or environmental effects."

As an added bonus for Windows Phone consumers (and Microsoft) it's noted the app will be exclusively available for the mobile platform. When can we expect to see the app be made available for the public? Sometime in July, ahead of the Imagine Cup finals that take place on July 8th. Be sure to check out the oVid Facebook page for more information.

Thanks, Ouadie, for the information!

ovid video recording video recording News

Presented with little comment but perhaps it is time to rethink that $100,000 loan and the extended MBA program...

 

• Petroleum Engineering: $93,500
• Computer Engineering: $71,700
• Chemical Engineering: $67,600
• Computer Science: $64,800
• Aerospace/Aeronautical/Astronautical Engineering: $64,400
• Mechanical Engineering: $64,000
• Electrical/Electronics and Communications Engineering: $63,400
• Management Information Systems/Business: $63,100
• Engineering Technology: $62,200
• Finance: $57,400

 

Via WSJ

In what should not come as a major surprise to anyone, GM just announced that:

• GM SAYS LOSING MONEY ON EVERY VOLT SOLD

There is good news: being implicitly funded by the US taxpayer means never admitting failure. In fact, the faster one fails, the faster one gets bailed out.

• GM SAYS NOT GIVING UP ON VOLT

And when failure is not an option, the only other option is even greater failure. And even bigger losses.

• GM SAYS NEXT GEN VOLT WILL BE $7,000 TO $10,000 CHEAPER

Slowly but surely everyone is figuring out that in the USSA, where making a profit is becoming increasingly impossible, the only credible business model is that of Amazon: lose lots of money but make up for it in volume.

When it comes to the real measure of a nation's economic output, one can rely on "flexible", constantly changing definitions of what constitutes the creation of "goods and services" as well as transactions thereof, goalseeked to meet the propaganda of constant growth no matter what (and which it appears will now, arbitrarily, include intangibles such as iTunes), or one can go to the very core of "growth" (just ask the anti-Austerians for whom debt and growth are interchangeable) which is and has always been a reflection of the increase (or decrease) in broad and narrow liquidity or money supply, which in turn means how much money is created through loans, either via commercial banks or the central monetary authority, also known as the Federal Reserve.

This is best shown by the following chart which shows the near unity (on the same axis) between US GDP and total liabilities in the US commercial banking system (traditionally the primary source of loan creation) as reported quarterly by the Fed's Flow of Funds statement (combining statements L.110, L.111 and L.112)

The chart above implies one simple thing: if there is loan creation, and thus injection of liquidity in the system, there is growth. If there is no liquidity injection, there is no growth, at least growth as defined by GDP-tracking economists.

And here we run into the problem.

A quick look at just loan and lease creation in the US commercial bank system reveals something very troubling: at $7.290 trillion as of the week of April 17 (a decline of $12 billion from the week before) there has been exactly zero loan creation in the US commercial bank sector, conventionally the primary locus where money demand translates into new loans as the Fed itself defines it in Modern Money Mechanics: A Workbook on Bank Reserves and Deposit Expansion, since the failure of Lehman brothers. Specifically, in October 200/ total loans and leases outstanding in the US were $7.323 trillion. This means that loans, historically the biggest asset on bank balance sheets by far and whose matched liability is deposits, have been responsible for negative $30 billion in GDP growth in the past five years (source).

And yet, as the first chart above shows, total US bank liabilities have grown by $1.6 trillion since the failure of Lehman (from $13.6 trilion at December 2008 to $15.3 trillion as of the end of 2012) which means bank assets have also grown by a comparable amount, resulting in a matched GDP growth of roughly $2 trillion. How is this possible if commercial bank loan creation has been dormant at best, and in reality - negative, and no incremental matched liabilities could have possibly been created?

Simple: Presenting "Exhibit A" - the Federal Reserve, which has created $1.8 trillion in incremental reserves since the failure of Lehman, bringing its total balance sheet to $3.3 trillion.

The chart above shows that far more than merely goosing the market to record levels based on nothing but hot potato chasing by Primary Dealers loaded to the gills with record liquidity, and momentum-escalating High Frequency Trading algorithms, the Fed's "out of thin air" created excess reserves (a liability for the Fed) have come home to roost on the balance sheets of banks in the US (including foreign banks operating in the US) as positive carry (at the IOER rate) assets.

It also means that the Fed's excess liquidity, at least from an accounting identity standpoint, has manifested itself purely in the form of consumer and corporate deposits held at US banks ($9.351 trillion as of April 17), which as the chart below shows, used to track loans on a one to one basis, until QE started, and have since then surpassed total loans by just about the amount that the Fed has injected into the system.

Of course, the sad reality of what happens to the economy when the Fed pushes not only reserves into banks, but forces "deposits" into the hands of consumers and corporations, is precisely the one we have witnessed for the past four years: no real growth apart from the propaganda, with occasional spurts of growth driven by confusing the surge in the stock market (which is more than happy to absorb the record liquidity and where JPM and other banks use the excess deposits over loans to buy stocks and other risk assets) with a push higher in the economy. In the meantime, the middle class evisceration continues, the real unemployment is 11.6% or unchanged since 2009, US households on foodstamps are at a new record high every month, core CapEx spending is imploding to a pace not seen since 2008,  corporate earnings and revenues are stagnant at best, while companies continue to get stigmatized for daring to keep excess cash on their books instead of investing it (that the rate of return on such "investments" would be negative according to the corporate executives themselves is apparently entirely lost on the propaganda media and political talking point pundits).

But at least the S&P is at record highs, and corporate and sovereign yields are at record lows.

Sadly, since there never is a free lunch, what the above data tells us is that due to the persistent refusal of banks to take over from the Fed as lender (and money creator) of main resort over four years into the "recovery", that $2 trillion of the $16 trillion in US GDP is now held hostage by the Fed. In other words, if it wasn't for the Fed's "narrow liquidity", "low power money", whatever one wants to call it, creation, US GDP would be 12% lower, or at June 2007 levels. It also means that virtually every incremental dollar of US GDP "growth" comes solely courtesy of Ben Bernanke's narrow money spigot.

And since the US has to "grow", since US GDP has to be spoonfed to the masses as increasing at a ~1.5% annualized rate every quarter, and since US banks continue to not lend (and in fact their eagerness to not lend is further cemented by the far easier returns they can generate courtesy of the Fed in chasing stocks, and not take on NPL risk in exchange for meager 4-5% annual returns, which means a feedback loop is created where more QE means less bank lending means more QE means less bank lending), can all trivial and absolutely meaningless discussion over whether the Fed will halt QE (now or ever) finally end? It absolutely never will, until everything one day comes crashing down.

That Congress has had aspirations on collecting sales tax on online purchases, which comprise an increasingly bigger portion of all retail sales in the US, in the past is nothing new. However, following last night's passage of the Marketplace Fairness Act in the Senate with a cloture-busting 74 votes for (and 20 against), the US may be very close to finally adopting a uniform standard taxing all online transactions, regardless of physical jurisdiction or any other geographic boundaries.

As Ars Technica reported last night, "your tax-free days of online shopping are numbered. If S743, also known as the Marketplace Fairness Act, becomes law, the millions of Americans who have been able to avoid sales tax online will have to start paying it. Given the broad support shown by today's US Senate vote, some version of it is likely to come to fruition."

And since a tax is a tax is a tax, it means that the purchasing power of online shopping Americans will be uniformly reduced by some X%, depending on what the final tax structure is agreed upon, which also means that the volume of all online transactions will have to decline by a corresponding amount all else equal, in turn leading to lower overall revenues and profits for online retailers. But at least the Federal government will have more cash to waste on such high ROI generating projects as Solyndra and Fisker.

From Ars Technica:

The bill will compel companies having annual online sales of more than $1 million to collect sales tax on those purchases. Interstate sales have long been exempted from sales tax, but brick-and-mortar businesses have just as long complained about the edge that online businesses have since they avoid collecting taxes. A key opponent of online taxation, retail giant Amazon, recently switched sides after losing some key legal and political battles over taxation. Amazon already collects taxes on sales in nine states, including California, New York, and Texas.

 

"We've had a lot of innovation in the online space, but federal laws have failed to keep pace," said bill supporter Sen. Mark Udall (D-CO). "Today nearly one in ten sales occur online," and the lost sales tax revenue is hurting state coffers. "It just makes common sense... the Marketplace Fairness Act is about equitable treatment for all sales."

 

Opponents have already shifted their focus to limiting the scope of the bill through amendments, but it remains unclear if that will make much headway.

 

"A vote for the Marketplace Fairness Act is a vote to subject a senator's home state Internet [sales] companies to tax collectors in state courts around the country," said Sen. Ron Wyden (D-OR). Instead, states should look to "voluntary compacts" making it easier for companies to voluntarily collect sales taxes, rather than being compelled to do so.

 

In addition, the act is an attempt to apply "local laws to the international medium that is the Internet," said Wyden. That could inspire other countries in their own efforts to regulate the Internet, with taxes or with outright censorship.

Curiously, for all the vocal rejection of "austerity" in recent days following the R&R excel gaffe, the amusing aspect is that European government had never actually implemented spending cuts (as we have shown in the past here and here), and it was the tax hike component to austerity that infuriated most people. It is therefore amusing to watch as the same people who denounce austerity in Europe and around the world, are those who are pushing for an online sales tax, which as the name implies, is simply another form of taxation, and less real disposable income going to end purchases.

We can't wait to see in one or two years whose excel errors will be trotted out for public consumption when this latest taxation proposal backfires and crushes already razor thin retail margins further, leading to yet another downward economic swoon.

Luckily, by then it will be the Fed that will be the end buyer of not only securities, but goods and services as the central bank insanity takes another step-function leg higher, and when "more of the same" fails to stimulate the economy, the only logical response is to do "much more of the same."

The ever-encroaching 'might' of the government - or perhaps, put another way, the ever-decreasing need to be gainfully employed or productive...

 

 

(h/t @Not_Jim_Cramer)

Correlation is not causation; but coincidence means you're on the right path. Looking at the charts of Stocks, Commodities, and Precious Metals, we wonder just what it was that President Obama said at his 11am ET White House meeting last Thursday...

Equity markets soared out of the gate on the 11th. Jobless claims beat expectations handily (shaking off the previous week's concerns) and all was well in the world... until just after 11am ET (when the CEOs of Wall Street's big banks - for no apparent reason - met with President Obama)... and this happened...

 

Gold also peaked at just after 11am ET...

 

as did Crude oil...

 

So what did Obama tell them?

 

Charts: Bloomberg

What's an outgoing Microsoft executive to do on his last earnings call as CFO? Utter something that'd probably get the incoming CFO fired. Kidding aside, the outfit's own Peter Klein saw fit to reiterate something we'd heard back in March -- that Windows 8 is destined for smaller devices. To date, there isn't a Windows 8-based slate on the market south of 10-inches, but as Apple, ASUS, Google and Samsung have found, people tend to like tablets that can be held with a single hand. Of course, the "coming soon" angle definitely adds a time stamp (albeit a vague one) that we didn't have before, but we're still no closer to figuring out what kinds of devices we're to expect. A diminutive tablet? A smartwatch? A phone?

Earlier this week, Terry Myerson -- corporate vice president of Microsoft's Windows Phone division -- admitted that the wearables space was undoubtedly an exciting one, though he wouldn't go so far as to affirm that any of the code he oversaw was being tested on the arm. Of course, rumors have been running wild since Windows Phone's introduction that Microsoft would eventually push WP aside in favor of just using Windows on everything, so we suppose that's another (far out) possibility. Wild imaginations are advised to contribute their best guesses in comments below. (But seriously, keep it sane. Thanks.)

Filed under: Handhelds, Tablets, Wearables, Microsoft

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Source: TechCrunch