April 18, 2014

It's Time To Ditch The Consumer Price Index (CPI)

So why does the government maintain such a transparently inaccurate and misleading metric? For three reasons.

That the official rate of inflation doesn't reflect reality is obvious to anyone paying college tuition and healthcare out of pocket. The debate over the accuracy of the official consumer price index (CPI) and personal consumption expenditures (PCE--the so-called core rate of inflation) has raged for years, with no resolution in sight.

The CPI calculates inflation based on the prices of a basket of goods and services that are adjusted by hedonics, i.e. improvements that are not reflected in the price of the goods. Housing costs are largely calculated on equivalent rent, i.e. what homeowners reckon they would pay if they were renting their house.

The CPI attempts to measure the relative weight of each component:

Many argue that these weightings skew the CPI lower, as do hedonic adjustments. The motivation for this skew is transparent: since the government increases Social Security benefits and Federal employees' pay annually to keep up with inflation (the cost of living allowance or COLA), a low rate of inflation keeps these increases modest.

Over time, an artificially low CPI/COLA lowers government expenditures (and deficits, provided tax revenues rise at rates above official inflation).

Those claiming the weighting is accurate face a blizzard of legitimate questions. For example, if healthcare is 18% of the U.S. GDP, i.e. 18 cents of every dollar goes to healthcare, then how can a mere 7% wedge of the CPI devoted to healthcare be remotely accurate?

In my analysis, the debate over inflation is intrinsically flawed. What really matters is not the overall rate of inflation, which can be endlessly debated, but the purchasing power of earned income, i.e. wages and the exposure to real-world costs.

In other words, those households with zero exposure to college tuition and the full costs of daycare, medical care and healthcare insurance may well experience low inflation, while the household paying the full costs of daycare, college tuition and healthcare insurance will experience soaring inflation.

Here's one example of how CPI fails to capture real-world inflation/loss of purchasing power. Let's say an employee works for a company or agency that pays his/her healthcare insurance. The monthly cost has risen from $1,000/month to $1,500/month. The employee's wage has remained stagnant but the total compensation costs paid by the employer have gone up by $500/month.

Now the employer shifts that $500/month to the employee as their share of the healthcare insurance cost. Since the average full-time worker earns around $40,000 a year, and pays around 18% in taxes, their take-home pay is around $33,000 annually.

The employee's co-pay of $6,000 a year ($500/month) represents 18% of their take-home wage. This is an 18% reduction in earnings, or the equivalent of 18% inflation (i.e. a reduction in purchasing power).
This shifting of the skyrocketing burden of healthcare costs acts the same as 20% inflation, yet it doesn't even register in the current CPI.

The geography of inflation doesn't register, either. Soaring rents in Brooklyn, NY and the San Francisco Bay Area have a profound effect on those exposed to these rapidly rising costs, yet these impacts are massaged to zero by national CPI calculations.

So once again we have a bifurcated society: those protected by the state from rising costs and those exposed to real-world reductions in purchasing power.Households that receive government subsidies and direct payments have little exposure to real-world healthcare costs, since they are covered by Medicaid, and modest exposure to housing if they receive Section 8 benefits (Section 8 recipients pay 30% of their income for rent, regardless of the market price of the rental). Retirees on Medicare also have limited exposure to the real-world costs of their care paid by the government.

If we analyze inflation by these two metrics, we find the middle class is increasingly exposed to skyrocketing real-world prices. Pundits in the top 5% have the luxury of pontificating on the accuracy of the CPI while those protected by government subsidies and coverage have the luxury of wondering what all the fuss is about. Only those 100% exposed to the real costs experience the full fury of actual inflation.

So why does the government maintain such a transparently inaccurate and misleading metric? For three reasons: 1) it is useful propaganda; 2) it suppresses the state's cost-of-living increases and 3) it lowers the government's cost of borrowing. The benefits of reducing COLA adjustments are self-evident, as is the benefit of borrowing money at low rates of interest, but the propaganda benefits are more subtle.

The key to enabling the endless printing of money that enriches the banks and the top .1% is low inflation. Asset bubbles can be inflated, ballooning the wealth of the owners of the assets, as long as inflation is near-zero.
Indeed, the Federal Reserve claims it must print money to counter low inflation.

Meanwhile, in the real economy, those exposed to the real costs of college tuition, healthcare, childcare, etc. are seeing their purchasing power evaporate like a puddle of water in Death Valley. The Fed needs low inflation to justify its continuing enrichment of the financial elite, and the Federal government needs low inflation to keep its COLAs and borrowing costs low.

There are two ways to mask real-world reductions of purchasing power: 1) skew the CPI by distorting the component percentages, hedonics and how costs are measured, and 2) protect enough of the populace from real-world increases so they no longer care. Seniors, who famously vote in droves, have no idea what their Medicare benefits actually cost. As a result, they have no experience of healthcare inflation /reduction of purchasing power.

This works in all sorts of industries. As I have often mentioned here, the F-35 Lightning fighter aircraft costs in excess of $200 million each, roughly four times the cost of the F-18F it replaces. This extraordinary inflation is not experienced directly by the taxpayer who is paying for the boondoggle, as the Federal government borrows trillions of dollars to pay for such boondoggles, effectively passing the inflated costs on to future generations.

These costs are hidden by the low cost of borrowing trillions to pay for boondoggles. If real-world inflation is (say) 5%, then interest rates would typically adjust to a few points above that rate, to compensate capital for the erosion of purchasing power. If the Treasury had to pay 7% to borrow money, the interest cost would soon cripple Federal spending. People would be forced to focus on how all those trillions of dollars are being spent, and to whose benefit.

But with borrowing costs so low, nobody cares.

The solution? One, abolish the Fed and let the market discover interest rates, and two, abandon the simplistic notion that one number of inflation has any meaning in a complex economy with numerous subsets of exposure to market costs and the loss or gain of purchasing power.

Will we muster the will to look past failed models and metrics? Sadly, the answer is no. Why?

As I noted yesterday in What's the Difference Between Fascism, Communism and Crony-Capitalism? Nothinga system set up to enrich political and financial elites is incapable of reform. the only way the CPI will ever be replaced is when the Status Quo collapses in a heap of lies and insolvency. Until then, propaganda and gaming the system to protect vested interests will rule.

April 17, 2014

SEC is Kinda Thinking About Doing Something About High Frequency Trading

Before you get too excited about the notion that the SEC might actually be saddling up to Do Something about high frequency trading, the agency has roused itself to issue a leak….that it is pondering launching a limited trial to address all of one practice.

I’m not making this up. From the Wall Street Journal:
SEC officials, including some commissioners, are considering a trial program to curb fees and rebates they say can make trading overly complex and pose a conflict of interest for brokers handling trades on behalf of big investors such as mutual funds. 
At issue are “maker-taker” fee plans, which pay firms that “make” orders happen—often high-frequency trading firms that specialize in trading strategies designed to capture payments. The plans charge firms that “take” trades—typically big investment firms looking to buy or sell a chunk of stock or hedge funds making bets on short-term price swings. 
The trial program would eliminate maker-taker fees in a select number of stocks for a period to show how trading in those securities compares with similar stocks that keep the payment system.

Now let us consider the rather awkward position the SEC finds itself in. It sat by as the NYSE and Nasdaq allowed HFT firms to co-locate servers so as to get advantaged access to orders. The exchanges were eager to play ball because the high frequency traders paid for this privilege. And the fig leaf is that while FINRA, Wall Street’s self regulatory body, has a rule against brokers front-running their clients, the high frequency traders aren’t acting as brokers. As the New York Times noted:
There is no small paradox in the stock exchanges profiting by selling access to information that can be used for something that looks an awful lot like front-running, while Finra enforces a rule prohibiting brokers from doing the same thing.
Now unless the high frequency tradingfuror dies down quickly (which it might, scandals can sometimes have a short half life), we are likely to have Congressional hearings and the SEC will have to explain itself.

The SEC is almost certain to contend that it not only does take l’affaire high frequency trading seriously, it’s been moving with all deliberate speed. As a Bloomberg story pointed out last week:
The SEC took its first deep dive into HFT in January 2010, before many other enforcement agencies had waded into the debate. As part of a broad review of market structure, it examined how brokers route the electronic orders of speed traders and questioned whether that put other investors at a disadvantage. The report elicited more than 400 comment letters from banks, exchanges, retail brokerages, and large institutional investment firms.
Yves here. Notice how all of nothing happened? That means the SEC ran into such a thicket of competing interests that it didn’t see an easy path forward. And mind you, later that year, the flash crash took place. But the SEC has yet to implement any measures to prevent a recurrence.

Now here is the beautiful part:
The trick for regulators is finding ways to prevent abuses without blocking high-speed firms that actually benefit investors… 
The problem is that the SEC doesn’t have all the data it needs. In 2012 the agency spent $2.5 million on a surveillance system named Midas (Market Information Data Analytics System) that collects information from all 13 public exchanges in the U.S. This essentially gives the SEC the same view of the market that many speed traders have. It doesn’t, however, give it a picture of the whole market. Only about 70 percent of trades happen on public exchanges; the rest take place offline, either inside large wholesale brokerages that match buy and sell orders internally or in private trading venues called dark pools. To see that activity, the SEC needs a much more powerful system that can track the life of every stock quote, order, and trade… 
In 2010, White’s predecessor, Mary Schapiro, approved a project to build such a system to funnel terabytes of information every day into one massive feed that regulators could monitor. Called the consolidated audit trail (CAT), the system would allow the SEC to conduct detailed forensic analysis and weed out abuses. The contract for the huge project, which will cost more than $1 billion, still hasn’t been awarded. The SEC estimates that CAT won’t be finished until 2016.
One billion dollars? For a ginormous data feed to gather info on the 30% of the market the SEC does not see now? And given how most IT initiatives go, this “one data feed to rule them all” project could easily come in vastly over budget.

The SEC’s annual budget is $1.3 billion. As much as HFT is an important issue, this is a grossly disproportionate expenditures. As a management consultant, I’ve regularly had to do studies in OTC markets where we had access to only a teeny slice of market data compared to what the SEC had. You don’t need perfect information to make decisions. You can get it via sampling and qualitative assessments for an itty bitty fraction of this $1 billion price tag.

So what this really says is either the SEC is unwilling to act and is playing the Penelope game*, of making action dependent on a task that will never get done, or it is genuinely unwilling to walk into a political minefield, and so will make a proposal only if it has incontrovertible data. Needless to say, I’m leaning toward the first theory.

Now that isn’t to say that the practice the SEC has roused itself to take interest in is unimportant. The Wall Street Journal notes:
Fund managers and others concerned about the negative effects of maker-taker recently held a series of private meetings with SEC Chairman Mary Jo White and other staff members to push for its elimination, according to people familiar with the meetings. Among those who met with the SEC was Jeffrey Sprecher, chief executive of IntercontinentalExchange Group Inc., which owns the New York Stock Exchange; representatives from fund manager T. Rowe Price Group Inc; and representatives from RBC Capital Markets, a unit of the Royal Bank of Canada…. 
Maker-taker has come under a harsh spotlight in recent years, with big investment firms, academics and exchange executives saying it can hurt long-term investors and skew brokerage-firm incentives. 
A primary criticism is that the fees pose a conflict for brokers, who might choose to route an investor’s order to an exchange with the goal of earning a payment, not to get the best deal for the client. 
A recent study by finance professors Robert Battalio and Shane Corwin at the University of Notre Dame and Robert Jennings at Indiana University found stockbrokers appear to routinely route client orders to markets that provide the best payments. The study found that can saddle investors with worse results than if the brokers hadn’t factored in the payments, and that such trades are “unlikely to be consistent with the broker’s responsibility to obtain best execution” for investors.
Even so, the Journal stresses that White has only indicated she is sympathetic to the calls to eliminate maker-taker, but has not made any decision. And thinking about launching a trial looks a lot like a way to slow-walk any action.

So it looks like the SEC will have its pat answers if it is put under the Congressional hot lights: it takes all the public concerns seriously, it has been soliciting input from all the concerned parties. It’s even about to launch a project!

Don’t buy it. Remember, after the 1987 crash, President Reagan authorized a study within ten days and had an analysis and recommendations, know as the Brady Commission Report, two months later. The data gathering is admittedly more difficult due to the opaque nature of some of the market, but having no point of view on high frequency trading nearly four years after the flash crash should be seen as an indictment of the SEC’s seriousness and competence.
*Remember the wife of Odysseus held off her suitors by saying she’s marry one of them once she finished weaving a burial shroud for her father, which she unravels every night.

April 16, 2014

The global banking game is rigged and the FDIC is suing

Taxpayers are paying billions of dollars for a swindle pulled off by the world’s biggest banks, using a form of derivative called interest-rate swaps; and the Federal Deposit Insurance Corporation has now joined a chorus of litigants suing over it.

Derivatives . . . have turned into a windfall for banks and a nightmare for taxpayers. . . . While banks are still collecting fixed rates of 3 to 6 percent, they are now regularly paying public entities as little as a tenth of one percent on the outstanding bonds, with rates expected to remain low in the future. Over the life of the deals, banks are now projected to collect billions more than they pay state and local governments—an outcome which amounts to a second bailout for banks, this one paid directly out of state and local budgets.
It is not just that local governments, universities and pension funds made a bad bet on these swaps. The game itself was rigged, as explained below. The FDIC is now suing in civil court for damages and punitive damages, a lead that other injured local governments and agencies would be well-advised to follow. But they need to hurry, because time on the statute of limitations is running out.

The largest cartel in world history

On March 14, 2014, the FDIC filed suit for LIBOR-rigging against sixteen of the world’s largest banks—including the three largest US banks (JPMorgan Chase, Bank of America, and Citigroup), the three largest UK banks, the largest German bank, the largest Japanese bank, and several of the largest Swiss banks. Bill Black, professor of law and economics and a former bank fraud investigator, calls them “the largest cartel in world history, by at least three and probably four orders of magnitude.”

LIBOR (the London Interbank Offering Rate) is the benchmark rate by which banks themselves can borrow. It is a crucial rate involved in hundreds of trillions of dollars in derivative trades, and it is set by these sixteen megabanks privately and in secret.

Interest rate swaps are now a $426 trillion business. That’s trillion with a “t”—about seven times the gross domestic product of all the countries in the world combined. According to the Office of the Comptroller of the Currency, in 2012 US banks held $183.7 trillion in interest-rate contracts, with only four firms representing 93% of total derivative holdings; and three of the four were JPMorgan Chase, Citigroup, and Bank of America, the US banks being sued by the FDIC over manipulation of LIBOR.

Lawsuits over LIBOR-rigging have been in the works for years, and regulators have scored some very impressive regulatory settlements. But so far, civil actions for damages have been unproductive for the plaintiffs. The FDIC is therefore pursuing another tack.

But before getting into all that, we need to look at how interest-rate swaps work. It has been argued that the counterparties stung by these swaps got what they bargained for—a fixed interest rate. But that is not actually what they got. The game was rigged from the start.

The sting

Interest-rate swaps are sold to parties who have taken out loans at variable interest rates, as insurance against rising rates. The most common swap is one where counterparty A (a university, municipal government, etc.) pays a fixed rate to counterparty B (the bank), while receiving from B a floating rate indexed to a reference rate such as LIBOR. If interest rates go up, the municipality gets paid more on the swap contract, offsetting its rising borrowing costs. If interest rates go down, the municipality owes money to the bank on the swap, but that extra charge is offset by the falling interest rate on its variable rate loan. The result is to fix borrowing costs at the lower variable rate.

At least, that is how it’s supposed to work. The catch is that the swap is a separate financial agreement—essentially an ongoing bet on interest rates. The borrower owes both the interest on its variable rate loan and what it must pay out on this separate swap deal. And the benchmarks for the two rates don’t necessarily track each other. As explained by Stephen Gandel on CNN Money:
The rates on the debt were based on something called the Sifma municipal bond index, which is named after the industry group that maintains the index and tracks muni bonds. And that’s what municipalities should have bought swaps based on. 
Instead, Wall Street sold municipalities LIBOR swaps, which were easier to trade and [were] quickly becoming a gravy train for the banks.
Historically, Sifma and LIBOR moved together. But that was before the greatest-ever global banking cartel got into the game of manipulating LIBOR. Gandel writes:
In 2008 and 2009, LIBOR rates, in general, fell much faster than the Sifma rate. At times, the rates even went in different directions. During the height of the financial crisis, Sifma rates spiked. LIBOR rates, though, continued to drop. The result was that the cost of the swaps that municipalities had taken out jumped in price at the same time that their borrowing costs went up, which was exactly the opposite of how the swaps were supposed to work.
The two rates had decoupled, and it was chiefly due to manipulation. As noted in the SEUI report:
[T]here is . . . mounting evidence that it is no accident that these deals have gone so badly, so quickly for state and local governments. Ongoing investigations by the U.S. Department of Justice and the California, Florida, and Connecticut Attorneys General implicate nearly every major bank in a nationwide conspiracy to rig bids and drive up the fixed rates state and local governments pay on their derivative contracts.
Changing the focus to fraud

Suits to recover damages for collusion, antitrust violations and racketeering (RICO), however, have so far failed. In March 2013, SDNY Judge Naomi Reece Buchwald dismissed antitrust and RICO claims brought by investors and traders in actions consolidated in her court, on the ground that the plaintiffs lacked standing to bring the claims. She held that the rate-setting banks’ actions did not affect competition, because those banks were not in competition with one another with respect to LIBOR rate-setting; and that “the alleged collusion occurred in an arena in which defendants never did and never were intended to compete.”

Okay, the defendants weren’t competing with each other. They were colluding with each other, in order to unfairly compete with the rest of the financial world—local banks, credit unions, and the state and local governments they lured into being counterparties to their rigged swaps. The SDNY ruling is on appeal to the Second Circuit.

In the meantime, the FDIC is taking another approach. Its 24-count complaint does include antitrust claims, but the emphasis is on damages for fraud and conspiring to keep the LIBOR rate low to enrich the banks. The FDIC is not the first to bring such claims, but its massive suit adds considerable weight to the approach.

Why would keeping interest rates low enrich the rate-setting banks? Don’t they make more money if interest rates are high?

The answer is no. Unlike most banks, they make most of their money not from ordinary commercial loans but from interest rate swaps. The FDIC suit seeks to recover losses caused to 38 US banking institutions that did make their profits from ordinary business and consumer loans—banks that failed during the financial crisis and were taken over by the FDIC. They include Washington Mutual, the largest bank failure in US history. Since the FDIC had to cover the deposits of these failed banks, it clearly has standing to recover damages, and maybe punitive damages, if intentional fraud is proved.

The key role of the Federal Reserve

The rate-rigging banks have been caught red-handed, but the greater manipulation of interest rates was done by the Federal Reserve itself. The Fed aggressively drove down interest rates to save the big banks and spur economic recovery after the financial collapse. In the fall of 2008, it dropped the prime rate (the rate at which banks borrow from each other) nearly to zero.

This gross manipulation of interest rates was a giant windfall for the major derivative banks. Indeed, the Fed has been called a tool of the global banking cartel. It is composed of 12 branches, all of which are 100% owned by the private banks in their districts; and the Federal Reserve Bank of New York has always been the most important by far of these regional Fed banks. New York, of course is where Wall Street is located.

LIBOR is set in London; but as Simon Johnson observed in a New York Times article, titled The Federal Reserve and the LIBOR Scandal, the Fed has jurisdiction whenever the “safety and soundness” of the US financial system is at stake. The scandal, he writes, “involves egregious, flagrant criminal conduct, with traders caught red-handed in e-mails and on tape.” He concludes:
This could even become a “tobacco moment,” in which an industry is forced to acknowledge its practices have been harmful—and enters into a long-term agreement that changes those practices and provides continuing financial compensation.
Bill Black concurs, stating, “Our system is completely rotten. All of the largest banks are involved—eagerly engaged in this fraud for years, covering it up.” The system needs a complete overhaul.

In the meantime, if the FDIC can bring a civil action for breach of contract and fraud, so can state and local governments, universities, and pension funds. The possibilities this opens up for California (where I’m currently running for State Treasurer) are huge. Fraud is grounds for rescission (terminating the contract) without paying penalties, potentially saving taxpayers enormous sums in fees for swap deals that are crippling cities, universities and other public entities across the state. Fraud is also grounds for punitive damages, something an outraged jury might be inclined to impose. My next post will explore the possibilities for California in more detail. Stay tuned.


April 15, 2014

Predictably, Central Bankers Suggest the 'S-Word' ... Securitization

Why Europe needs the City's financial weapons of mass destruction ... There is very little chance of a market-led recovery taking hold in Europe without a revival in securitised lending to give it legs. America's sub-prime lending boom led to the banking crisis, yet securitisation is poised to make a comeback ... They were the "financial weapons of mass destruction" which blew up the world economy, yet perhaps surprisingly, they are poised to make a comeback – and what's more, it is with the active encouragement of Europe's new generation of central bank governors. – UK Telegraph 

Dominant Social Theme: Wall Street does God's work after all. 

Free-Market Analysis: So Europe's central bankers have decided that the only way to revitalize the European economy – especially Southern Europe – is via securitization of assets. 

This we learn from Jeremy Warner, assistant editor of The Daily Telegraph, and author of the article excerpted above. Is it possible that Mr. Warner did not think up this thesis all by himself? 

Is it possible that it was, ahem ... suggested to him? 

As we have reported regularly, those charged with maintaining economic order are bound and determined to continue to support – and expand – the current stock market boom. 

And so ... enter securitization. Of course, this financial strategy is widely held to have aggravated the 2008 financial crisis. But no matter. Five years is long enough. There is a market to stimulate and securitization provides the wherewithal. 

Perhaps this is the reason we are now treated to a securitization "white paper" by Europe's central banking crowd. (See below.) And an article, as well. 

Perhaps the groundwork is being laid. Directed history is about to welcome asset securitization back into the fold of reputable financial strategies. 

You see, the problem is (according to the bankers) that credit from banks is not being extended. To some degree, reportedly, perpetually dampened interest rates are crowding out securitization. 

This issue of low rates is obviously a big deal to central bankers. We wrote about it recently here: 

IMF Misleads on Interest Rates

The idea would be that securitization can take the place of low interest rates. The ECB wants banks to increase lending while reducing leverage. If banks can bundle their loans via securitization, they can move those loans off the books. 

Once the loans are off the books, the bank will have additional capital available for lending. Or so the thinking goes. 

Here's more: 

Could we so soon have forgotten the damage that these fiendishly complex instruments inflicted on the world? How could we be even thinking about inviting them back into the fold? 

Well we are, and the reasons for it are sounder than you might think. Indeed, I would go further, and say that there is in fact very little chance of a broadly based, market-led recovery taking hold in Europe without a revival in securitised lending to give it legs. ... 

In the run-up to the crisis [of 2008], securitisation was one of the main mechanisms by which banks expanded their balance sheets and facilitated abundant credit. New lending, whether for mortgages, credit cards, car loans, commercial property or even straight SME finance, would be routinely packaged up and sold off to investors, thereby freeing up capital for yet more lending. ... 

The reality was that the risks were becoming progressively concentrated, through securities trading operations, on bank balance sheets, or in vehicles connected to banks, so that when the sub-prime crisis hit, and many "asset-backed securities" were found to be worthless, they undermined confidence in the entire banking system. 

Why on earth would you want to bring back such collective madness? Some of the answers to this question are provided in a newly published joint paper by the Bank of England and the European Central Bank, a front runner to a more detailed consultation due to be issued next month on how to remove some of the blockages to a resurgent securitisation market. 

Amusingly, the paper regurgitates many of the arguments in favour of securitisation that ahead of the crisis had lulled banking regulators into thinking it not just safe but, positively beneficial. The following sentence could have come straight from the mouth of Alan Greenspan circa 2006; a revival in asset-backed securities (ABS) issuance "could translate into a diversified funding source for banks and potentially transfer credit risk to non-bank financial institutions, thereby providing capital relief that could be used to generate new lending to the real economy". 

But my intention is not to mock; rather, it is to praise. There is nothing wrong with securitisation per se, provided it is kept simple and transparent, and the wretched credit rating agencies are kept well away from the game, so that investors themselves can make up their minds about the risk, rather than abdicating responsibility to corrupted outside analysts. 

The article concludes by pointing out that Europe "desperately needs new sources of market-based finance" and must re-adopt the securitization schemes of the City's "Anglo-Saxon alchemists." 

The article even presents securitization as a political football. Central bankers "get it" while Brussels does not. In other words, Brussels is inclined toward strict regulation of securitized products while the banking community understands that the free market of financial instruments – maligned as they are – has a place as well. 

Should we be worried about increased securitization? Not according to the article: "Properly contained, these 'financial weapons of mass destruction' are key to unlocking renewed growth and a well functioning economy." 

This is where we depart from the article's analysis. The problem of modern Western economies is that they are central bank driven. Any single financial strategy is bound to blow up sooner or later because central-bank money printing inevitably creates great booms and busts. 

During the "boom" period, economies expand dramatically and it seems that currency available to entrepreneurs and even average workers is inexhaustible. 

During the "bust" period the reverse is true. Suddenly, companies are going bankrupt, employment is diminishing, stock markets are swooning and bankers are discovering that their balance sheets are hollowed out. 

Depending on the size of the market distortion, the gradual realignment of the economy can take months or years.

The current economic crisis has been going on for at least a half-decade or more because there is a consensus among bankers and politicians that those firms – financial and industrial – that need to go bust ... won't.

The "crony capitalism" that has led to this state of affairs is responsible for the endless Great Recession as well. Money circulates only reluctantly because people don't know where to invest. Large companies and banks may yet be secretly bankrupt. No one knows.

The modern central-bank run business cycle also makes regulation irrelevant because whatever regulations are passed during a bust – not that they would be effective anyway in the long term – are unwound toward the top of the boom.

There are arguments by the "national socialist" wing of the alternative media claiming that central banks are not responsible for money creation and that it is the "private sector" via commercial banking that creates most money via lending.

But this is fairly nonsensical. There were around five central banks at the end of the 19th century and today, some 100 years later, there are about 150, including 70 or so that are under the direction of the BIS. It is central banks that provide the command-and-control mechanism for monetary creation. Central banks these days set the parameters for commercial bank loans. Not enough "capital" (central bank electronic digits) and no loans can occur.

It is central banks that set the pace when it comes to money creation via absurdly low interest rates that are maintained in order to stimulate another bubble. And we can gauge the desperation of the central banking crowd by their determination to bring back "private market" securitization.

The "free-market" that such securitization is supposed to stimulate remains both moribund and farcical. And if it were somehow stimulated by securitization the result would inevitably be the same boom-and-bust that occurred throughout the latter half of the 20th century.

Nonetheless, we anticipate these sorts of strategies will be tried. The globalist crowd is determined to further inflate equity markets for a variety of reasons, as we have long pointed out. The Wall Street Party that we have exhaustively analyzed is not a marketplace evolution but a massive manipulation that includes fiscal, monetary and regulatory elements.

In pursuit of this "party" internationalist bankers are now, once again, floating securitization as methodology of credit expansion.

They are wedded to an excessively expansionist stock market for a variety of reasons – as we have previously reported. These sorts of proposals are not random suggestions. If the globalists have anything to do with it, markets will continue to be pumped incessantly.


A bigger debacle ultimately awaits. But not yet. Not for a while …

April 14, 2014

CME Sued For Giving "High-Frequency Traders Peek At Market" Since 2007

Now that both the FBI and the DOJ have woken up from a half-decade slumber realizing there was riggedness, RIGGEDNESS going on in these here stock markets courtesy of Michael Lewis' book, it wasn't long before those most impacted by the frontrunning strategies of HFTs spoke up - anyone who has lost money in the stock market since Reg NMS was conceived.

Of course, said loss could have been the loss of many other factors - such as the market being rigged by the Fed as opposed to vacuum tubes - but since nobody really know much if anything about how HFTs operate, it is rather convenient to scapegoat anything and everything that ever went wrong with one's P&L on algorithms.

Sure enough, in a lawsuit that was just filed by lead plaintiff William Charles Braman, seeking class-action status, and filed on behalf of all users of real-time futures market data and futures contracts listed on the CBOT and CME from 2007 to now, the CME is allegd to have sold order information to high-frequency traders ahead of other market participants.
Specifically, from the lawsuit:
Throughout the Class Period, Defendants not only permitted the HFTs to see price and market data, including open orders, market  orders before all other market participants and trader saw the price and market data, they permitted the HFTs to execute trades using this same non public data and order information before all other traders and market participants. In so doing, the Defendants engaged  in a fraud on the marketplace, deceptive practice and failed to maintain a marketplace that is free from market disruption and market manipulation.

Throughout the Class Period, the Defendants concealed the fact that they were not providing a marketplace free of market manipulation because they were allowing the HFTs to trade based upon non-public information, specifically, the non-published and unexecuted orders of all other users of the CME and CBOT. In so doing, the Defendants failed to provide a marketplace that is free from market manipulation and established an unequal and two-tiered marketplace all the while inviting and soliciting the use of its financial trading instruments for profit.

Well, duh. Apparently it took the general public a Michael Lewis book to reread out post from October 2012 in which we showed that an estimated over 30% of CME revenues were made from HFT - in other words from selling proprietary data in direct feeds to high-paying subscribers, that hits collocated servers ahead of the consolidated tape.

But the punchline is that this is not illegal per se. Why? Because the regulators, in all their corrupted and captured brilliance, allowed it!
The Chicago-based company, owner of the Chicago Mercantile Exchange and the Chicago Board of Trade, offers futures based on interest rates, equity indexes, currencies, energy products and agricultural commodities. The plaintiffs, in their complaint against CME and CBOT, allege “a fraud on the marketplace” and seek class-action status on behalf of exchange users. CME denied their accusations in a statement.

Sometime after the start of 2007, the CBOT and CME began letting HFTs peek “at all orders to buy and sell futures contracts before they were reflected” to the rest of the market, according to the complaint filed April 11 in federal court in Chicago. That glimpse occurred “before the person or entity entering the buy or sell order received confirmation that their order was received -- in other words before anyone other than the HFTs were privy to this information.”

The lawsuit alleges CME Group gave high-frequency traders early access and that trades from that exclusive advance notice changed prices for everyone else. The plaintiffs had paid for real-time data, according to the complaint.

CME Group “invited HFTs to make trades ahead of all other market participants and because the HFTs’ generally entered very large orders, they had the ability through their de facto inside trading to influence the price of financial futures artificially,” according to the complaint.
So does the NY Fed by trading through Citadel. And? One doesn't see either Bill Dudley or Ken Griffin in court. Of course, the CME knows, sees, hears and certainly trades no evil.
“The suit is devoid of any facts supporting the allegations and, even worse, demonstrates a fundamental misunderstanding of how our markets operate,” CME Group said in an e-mailed statement. “It is sad when plaintiffs’ lawyers bring a suit based on a desire for publicity, and in the rush to file a suit fail to undertake even the most basic effort to determine if there is any basis for their allegations. The case is without merit, and we intend to defend ourselves vigorously.”

Anita Liskey, a CME Group spokeswoman, said that wasn’t true and that the exchange only offers one data feed with its prices that all investors get at the exact same time.

“We have only one data feed, no one can buy it to be faster than anyone else,” she said. “No trader can see any other person’s order until it hits the order book, when it is made public.”
Still, while this particular case will likely be promptly forgotten as rigged as it may be, the market and its HFT parasites operated largely in the confines of the law, we will be following Braman vs CME closely if only for discovery purposes - we eagerly look forward to finally getting a factual glimpse under the skirt of the vacuum tubes.

April 11, 2014

High-Frequency Trading and the Shrinking Trust Horizon

The list of markets where big players are cheating the rest of us (and each other) keeps growing. First there was the Libor interest rate, then foreign exchange, then gold. And now comes high-frequency trading (HFT), where Wall Street banks use supercomputers to monitor incoming stock market orders, analyze their likely impact on prices, and place orders ahead of those trades to capture a bit of the price impact. In an HFT-dominated market, individual investors get fractionally-less-favorable prices, which they seldom notice, while in the aggregate billions of dollars are siphoned each year from retail investors, pension funds and even some hedge funds to big Wall Street banks.

Since this practice adds absolutely nothing to the efficiency of the equity markets, and since “front running” is clearly illegal, HFT is a crime without offsetting social benefits. But Wall Street gets away with it — and will continue to get away with it — because the major banks and exchanges make a lot of money from it and donate sufficiently to both major parties to buy a degree of immunity.

Because HFT is the topic of Michael Lewis’ best-selling book Flash Boys, and Lewis is showing up on mainstream outlets like CNN and Good Morning America where he explains the con in layman’s terms, the powers that be now feel compelled to appear to investigate it.

Like the ongoing probes of Libor, foreign exchange and gold, the result will be more show than substance. A few fines will be paid and possibly a few mid-level quants will be sacrificed, while Wall Street’s bonus pool stays deep and wide. So HFT’s exposure, rather than being that big a deal in and of itself, should be seen as part of a pattern of systematic corruption, yet another brick in the wall that separates the financial/political/con artist class from the vast bulk of people who are being harvested.

But the fact that this scandal is being explained on mainstream outlets by a best-selling author means that it is reaching a much broader audience. Lewis isn’t preaching to the choir; he’s bringing the idea that the financial system is a rigged casino to people who hadn’t previously given it much thought. In so doing, he’s accelerating the shrinkage of the trust horizon.

This last term comes from Nicole Foss at Automatic Earth and refers to the process by which people gradually realize that their country’s big systems — the government, banks, national currency, etc. — have been captured/corrupted by people who now run those systems for their rather than the public’s benefit. Seeing this, individuals stop trusting those big systems and shift their attention and resources to people and institutions that they can see and judge face-to-face. They start buying local food rather than national brands, home school their kids, stop identifying with the two major political parties, put their money in local rather than money center banks, and buy hard assets like precious metals and farmland rather than financial assets like stocks and bonds.

When a critical mass of people start behaving this way the big systems are starved for capital and begin to fail. Banks go bust, governments run out of money, the currency collapses, etc. That day appears to be coming, and HFT may have given the trend a little added momentum.

April 10, 2014

SEC Lawyer on Goldman CDO Case Describes How the Agency Wimped Out

Susan Beck at American Lawyer (hat tip Abigail Field) has managed to get an inside view of what was going on at the SEC when it launched its case against Goldman and a Goldman vice president, Fabrice Tourre, over a Goldman CDO called Abacus that went spectacularly bad. At the time, the reaction to the filing was explosive; even though Matt Taibbi had already run his vampire squid piece, Goldman still enjoyed a stellar reputation with customers.

One of the big puzzles of the case was why Tourre was singled out. Many assumed this was an effort to target a relatively low-level employee and pressure him to testify against the higher-ups. Another was the fact that the SEC had charged Goldman on only one CDO. Goldman had sold 25 Abacus CDOs, which were pure synthetics (the assets were all credit default swaps). Goldman also sold other CDOs that were only part synthetic or all cash (the assets were a mix of CDS and bonds or all bonds). This Abacus CDO was, like all hybrid and synthetic 2005 and onward asset-backed-securities CDOs, teed up to suit the appetites of short sellers, which meant, in colloquial terms, they were designed to fail.

American Lawyer made a Freedom of Information Act filing to obtain documents, including those developed in the course of an SEC Inspector General investigation into whether the suit against Goldman was politically motivated. It shows that, quelle surprise, one of the agency’s most highly respected trial attorneys was stymied in his efforts to take the probe further and target more senior Goldman executives.

Bloomberg did a peculiar piggyback story which focused on James Kidney, the attorney that was pushing for more aggressive prosecution, without mentioning the American Lawyer story or having access to its documents. Nevertheless, Bloomberg interviewed Kidney and also gives a sense of how Kidney was seen at the agency:
James Kidney, who joined the SEC in 1986 and retired this month, offered the critique in a speech at his goodbye party… 
The SEC has become “an agency that polices the broken windows on the street level and rarely goes to the penthouse floors,” Kidney said, according to a copy of his remarks obtained by Bloomberg News. “On the rare occasions when enforcement does go to the penthouse, good manners are paramount. Tough enforcement, risky enforcement, is subject to extensive negotiation and weakening.”… 
Kidney, who was part of the initial team that was building the Goldman Sachs case, pressed his bosses in the enforcement division to go higher up the chain. He later took himself off the team after being given a lesser role, according to people familiar with the matter. 
In particular, the people said, Kidney argued that the commission should sue Tourre’s boss, Jonathan Egol. Kidney also wanted to bring a case against Paulson & Co. or some executives at the hedge fund, which helped pick the portfolio of securities that were underlying the Abacus vehicle and then bet against it… 
Stephen Crimmins, a former colleague of Kidney’s at the SEC who attended the retirement party, said he was one of the “finest lawyers ever to serve in the enforcement division.” Kidney was known for winning the SEC’s first jury trial, which was an insider trading case.
This doesn’t sound too hot…aggressive attorney eased out of an important role on a case he helped develop. But the American Lawyer account is far more detailed and damning. For instance:
Kidney was one of at least 30 SEC lawyers and officials who gave sworn testimony in the summer of 2010 as part of a probe by the SEC’s then–inspector general, David Kotz, into whether the Goldman Sachs case was politically motivated. Kotz included portions of those interviews in a heavily redacted 2010 report that concluded the case wasn’t politically motivated. But the transcripts, obtained through the FOIA, fill in many details. Not only do they reveal more fully the discord within the SEC over the handling of the case, they also suggest that the SEC’s $550 million settlement with Goldman secretly ended roughly a dozen other related investigations into collateralized debt obligations that the agency dropped.
This is more damning than it might seem. As we wrote in Was the SEC Rolled by Goldman?, this was as defacto global settlement for all Goldman CDOs, even though the settlement was formally limited to the lone Abacus CDO. Even though the formal settlement agreement was limited to the one deal, Goldman brayed on its website that:
We understand that the SEC staff also has completed a review of a number of other Goldman Sachs mortgage-related CDO transactions and does not anticipate recommending any claims against Goldman Sachs or any of its employees with respect to those transactions based on the materials it has reviewed. We recognize that, as is always the case, the SEC has reserved the right to reopen those matters based on new information..
The fact that Goldman couldn’t be bothered to play nicely with the SEC and undercut what looked to be a solid victory. $550 million for a single CDO is a lot of change, but when you figure the SEC could have sued Goldman for even more toxic CDOs it launched, $550 million was cheap to make this embarrassment go away.

This section of the American Lawyer article is critical:
When Kidney joined the Abacus team in the summer of 2009, he was dismayed at the state of the investigation, which was led by then–associate director Cheryl Scarboro and assistant director Reid Muoio. They were focused on charging Tourre, a 28-year-old Goldman vice president at the time of the deal who was tasked with marketing the CDO. “There were obvious holes in the investigation,” Kidney told Kotz. “This was not a case where there was only one low-level vice president involved.” 
Kidney was bothered by what he called Muoio’s “extreme reluctance” to take the testimony of Jonathan Egol, then a Goldman Sachs managing director who supervised Tourre. 

According to Kidney, Muoio told him he already knew that Egol would say he was too busy to pay much attention to the Abacus deal. 
“We were highly unlikely, highly unlikely to have a case against him,” Muoio told Kotz. 
Kidney was astounded by this reasoning. “It just seems to me this was the first time in my whole career here that we were not following the string,” he said. “I mean the smallest stock manipulation case, the smallest insider trading case, the smallest almost anything would go at least a little way up the supervisory chain.” Kidney said the issue of taking Egol’s testimony was raised with Scarboro, and then enforcement director Robert Khuzami, and “it wasn’t going anywhere.” 
Scarboro told Kotz she supported taking Egol’s testimony; Khuzami said he didn’t recall a dispute over taking the testimony. Scarboro, who is now a partner at Simpson Thacher & Bartlett, did not respond to a request for comment. Muoio, who is still at the SEC, declined to comment, as did Khuzami, who is now a partner at Kirkland & Ellis. 
Kidney was further angered when the case was scheduled for a vote by the five commissioners in December 2009 without Egol’s testimony. Kidney threatened to quit the case, and eventually the SEC interviewed Egol on Jan. 7, 2010. Muoio told Kotz the interview was a bust, as he had predicted all along. “We didn’t lay a glove on him,” Muoio asserted. But Kidney said he was encouraged by Egol’s testimony that he had reviewed the marketing materials, as was Lorin Reisner, who was then the deputy director of enforcement. After that interview, the SEC issued a Wells notice to Egol on Jan. 29, 2010, informing him that the enforcement staff planned to recommend charges against him. 

After a March 4 meeting with Egol’s lawyer, Frank Wohl of Lankler Siffert & Wohl, Khuzami polled the team: Kidney, Reisner and another SEC lawyer wanted to sue, according to the transcripts; Muoio remained against it. 
Khuzami had the final say. On March 23 he emailed the team: “I’m a no on Egol.” Khuzami told Kotz the decision was a “difficult judgment call,” but he concluded they didn’t have evidence that Egol had engaged in deceptive conduct. Egol’s emails weren’t as incriminating as Tourre’s.
So get this: even after hearing the pitch by Egol’s attorney, three of the four lawyers on the case wanted to proceed against him. But they were overruled by head of enforcement Robert Khuzami. Gee, why might THAT be? As we wrote in 2011:
The SEC went after Goldman only on one Abacus deal out of 25 in its program. Even though the $550 million settlement was limited to that transaction, it was widely understood that the SEC was not going to pursue Goldman on other CDOs. And it hasn’t. The SEC has gone through the motions in this arena: it poked around some Magnetar deals (not surprisingly, after the hedge fund got some real press about its destructive strategy) and negotiated a $153.6 million settlement with JP Morgan on a particularly noxious Magnetar trade, a CDO squared imaginatively called Squared. 
Look no further for an answer than the SEC chief of enforcement, Robert Khuzami, Stewart’s primary and probably sole source for this article. He was General Counsel for the Americas for Deutsche Bank from 2004 to 2009. That means he had oversight responsibility for the arguable patient zero of the CDO business, one Greg Lippmann, a senior trader at Deutsche, who played a major role in the growth of the CDOs, and in particular, synthetic or hybrid CDOs, which required enlisting short sellers and packaging the credit default swaps they liked, typically on the BBB tranches of the very worst subprime bonds, into CDOs that were then sold to unsuspecting longs. (Readers of Michael Lewis’ The Big Short will remember Lippmann featured prominently. That is not an accident of Lewis’ device of selecting particular actors on which to hang his narrative, but reflects Lippmann’s considerable role in developing that product). 
Any serious investigation of CDO bad practices would implicate Deutsche Bank, and presumably, Khuzmami. Why was a Goldman Abacus trade probed, and not deals from Deutsche Bank’s similar CDO program, Start? Khuzami simply can’t afford to dig too deeply in this toxic terrain; questions would correctly be raised as to why Deutsche was not being scrutinized similarly. And recusing himself would be insufficient. Do you really think staffers are sufficiently inattentive of the politics so as to pursue investigations aggressively that might damage the head of their unit?
Bear in mind that the path from Goldman to Deutsche Bank was even more direct than this extract suggests. Famed subprime short John Paulson worked closely with Goldman on the Abacus transaction in question. As Greg Zuckerman recounts in his book, The Greatest Trade Ever (which is less colorfully written but is a far more complete history of the subprime short story than Michael Lewis’s The Big Short), John Paulson was keen to tee up synthetic CDOs where he would select all of the crappy assets. The idea was so clearly smelly that even Bear Stearns refused to play ball. But Goldman and Deutsche were game. So following the Paulson thread, which is what Kidney and his colleagues were keen to do, would have taken them straight to Deutsche Bank and Lippmann, and thus Khuzami.

So it’s not surprising that the comparatively tame Bloomberg story also omits the most stinging quotes from Kidney’s farewell speech, which American Lawyer uses to close its story:
“For the powerful, we are at most a tollbooth on the bankster turnpike,” Kidney said. “We are a cost, not a serious expense. …The system is broken.”
People under 40 find it hard to believe that the SEC was once a respected and feared agency. It’s now widely seen as the worst regulator in Washington DC and shows how quickly effective organizations can be ruined by self-serving leaders.


April 9, 2014

40 Central Banks Are Betting This Will Be The Next Reserve Currency

As we have discussed numerous times, nothing lasts forever - especially reserve currencies - no matter how much one hopes that the status-quo remains so, in the end the exuberant previlege is extorted just one too many times. Headline after headlines shows nations declaring 'interest' or direct discussions in diversifying away from the US dollar... and as SCMP reports, Standard Chartered notes that at least 40 central banks have invested in the Yuan and several more are preparing to do so. The trend is occurring across both emerging markets and developed nation central banks diversifiying into 'other currencies' and "a great number of central banks are in the process of adding yuan to their portfolios." Perhaps most ominously, for king dollar, is the former-IMF manager's warning that "The Yuan may become a de facto reserve currency before it is fully convertible."

The infamous chart that shows nothing lasts forever...

As The South China Morning Post reports, Jukka Pihlman, Standard Chartered's Singapore-based global head of central banks and sovereign wealth funds (who formerly worked at the International Monetary Fund advising central banks on asset-management issues), notes that:
At least 40 central banks have invested in the yuan and several others are preparing to do so, putting the mainland currency on the path to reserve status even before full convertibility
The US dollar remains in charge (for now)...but
The US dollar is still the world's most widely held reserve currency, accounting for nearly 33 per cent of global foreign exchange holdings at the end of last year, according to IMF data. That ratio has been declining since 2000, when 55 per cent of the world's reserves were denominated in US dollars.

The IMF does not disclose the percentage of reserves held in yuan, but the emerging market countries' share of reserves in "other currencies" has increased by almost 400 per cent since 2003, while that of developed nations grew 200 per cent, according to IMF data.
As SCMP goes on to note, the rising popularity of the yuan among central bankers is probably mainly due to Beijing's extremely favourable treatment of them as it has sought to encourage investment in the yuan.
For example, central banks enjoy preferential treatment in the qualified foreign institutional investor category, both on the size of the quota and the length of the lock-up period. The QFII quotas given to central banks are not publicly known, but some of those announced by investing central banks are up to 10 times larger than others in the programme and, most importantly, free of any capital controls.

"Central banks and sovereign funds have special treatment," Pihlman said. "They have the ability to invest in a way that any other investor does not have. When it comes to convertibility, there is nothing formally out there, but it is fully convertible."
As Pihlman explains, things are accelerating...
Pihlman said "a great number of central banks are in the process of adding [yuan] to their portfolios".

"The [yuan] has effectively already become a de facto reserve currency because so many central banks have already invested in it," he said. "The [yuan] may become a de facto reserve currency before it is fully convertible."

The central banks more likely to add yuan holdings in the future were the ones with "strong trade linkages to China" and those which had relatively large levels of reserves which could consider diversifying more for return-related reasons, he said.

"The [yuan's] convertibility may be already there for central banks in a way that has got them comfortable to start investing in the currency," Pihlman said.
We leave it to a former World Bank chief economist, Justin Yifu Lin, to sum it all up...
"the dominance of the greenback is the root cause of global financial and economic crises,"
It appears the world is beginning to listen.

April 8, 2014

What In The World Is Happening To The Nasdaq?

All of a sudden, the Nasdaq is absolutely tanking.  On Monday, it fell more than 1 percent after dropping 3.6 percent on Thursday and Friday combined.  At this point, the Nasdaq is off to the worst start to a year that we have seen since 2008, and we all remember what happened back then.  So why is this happening?  In recent years, the Nasdaq has been ground zero for "dotcom bubble 2.0".  The hottest stocks in the entire world are on the Nasdaq - we are talking about stocks like Yahoo, Netflix, Apple, Tesla, Google and Facebook.  Those stocks have gone to absolutely incredible heights, but now they are starting to fall.  Some are blaming insider selling, and without a doubt the "smart money" is starting to flee the stock market.  Just check out this chart.  Others are blaming low expectations for first-quarter earnings or the tapering of quantitative easing by the Federal Reserve.  But whatever is causing this decline, it is starting to get alarming.  The Nasdaq just experienced its largest three day fall since November 2011.

No stock can resist gravity forever.  What goes up must eventually come down.  This is especially true for stock prices that become grotesquely distorted.

On Wall Street, a price to earnings ratio of 20 to 25 is usually considered fairly normal.  In recent years, the price to earnings ratios for many of these "hot tech stocks" have gone way, way beyond that.  For example, posted below is a screen capture from Bloomberg TV that was featured in a recent Zero Hedge article...

Zero Hedge

There is no way in the world that such valuations are justified.

We have been living in another dotcom bubble, and it was inevitable that it was going to burst at some point.
The following is how one financial industry insider described the carnage that we have seen on the Nasdaq over the past few days...
Gary Kaltbaum, president of money-management firm Kaltbaum Capital Management, describes the carnage of once high-flying "growth" names in the Nasdaq composite, that have come crashing down to earth: "The best we can describe what we have been recently seeing in 'growth-land' is a 50-car pileup," Kaltbaum told clients in a morning research note. "Call them what you want … risk areas, growth stocks, froth areas … they are melting away."
And of course it isn't just the Nasdaq that has been seeing declines over the past few days.  On Monday, some of the biggest names on the Dow also fell precipitiously...
Visa, Goldman Sachs and Boeing are among the biggest drags on the Dow Monday, falling 2.1%, 2.9% and 1.4% respectively. Weakness in these stocks is especially problematic since the Dow gives greatest weight to the stocks with the highest per-share prices. And at $203.41, $158.56 and $125.59 respectively, Visa, Goldman and Boeing are the stocks that really matter to the measure. 
And the trouble in these stocks isn’t just today. So far this year, Visa is down 8.7%, Goldman is off 10.5% and Boeing is down 8.0%.
This recent decline has many analysts groping for answers.

Some believe that it is simply a "rotation" as investors leave growth stocks that have become overvalued and move into safer, more traditional stocks.

Others are pointing their fingers at the Federal Reserve...
Peter Boockvar, chief market strategist at Lindsey Group, believes it's all about the Fed. "I'm still amazed at the complacency with the Fed taper, and a lot of people still don't think it's a big deal," he said. "I just don't think it's a coincidence that the high-fliers are getting popped when the Fed is half way done with QE. We've got tightening smack in front of your face with the taper."
In fact, some believe that the really big stock market decline will happen later this year when the Fed starts to wrap up quantitative easing completely...
Once the Fed begins to truly reduce its massive bond buying program later this year, markets could see a quarter of their value wiped off the books, a private equity pro told CNBC on Friday. 
Jay Jordan, founder of the Jordan Company, issued the dire warning during an interview on CNBC's "Squawk Box," saying a 25 percent drop could extend to all asset classes. He blames the monetary policies of former Fed chair Ben Bernanke for artificially inflating asset prices through super-low interest rates.
Yet others point to the fact that we are now moving into earnings season, and it is being projected that corporate earnings will come in at very poor levels.  In fact, it is being estimated that overall earnings for companies in the S&P 500 for the first quarter will be down 1.2 percent.

So what should we expect to see next?

Whether it happens this month or not, at some point a massive stock market correction is coming.  In recent years, the financial markets have become completely and totally divorced from economic reality, and that is a state of affairs that cannot last indefinitely.

Many have compared the current state of affairs to 2008, but to me what is happening right now is eerily reminiscent of 2007.  The Dow soared to record heights quite a few times that year, but there were constant rumblings of economic trouble in the background.  Stocks began to drop steadily late in the year, and 2008 ultimately turned out to be an utter bloodbath.

I believe that what is happening right now is setting the stage for another financial bloodbath.  I truly believe that we will look back on this two year time period and regard it as a major "turning point" for America.
And as I have written about previously, we are in far worse shape as a nation than we were back in 2008.  We have far more debt, the "too big to fail banks" have a much larger share of the banking industry, the derivatives bubble has gotten completely and totally out of control, and our overall economy is far weaker than it was back then.

In other words, we are now even more vulnerable.  When the next great financial crisis strikes us, it is going to be absolutely crippling.

Now is not the time to get complacent.

Now is the time to get prepared, because time is running out.