Posts filed under “Think Tank”

The King Report: Goldman’s Magic Software



We are stunned – no, we’re shocked, shocked over the following admission from an Assistant US Attorney about the theft of Goldman’s proprietary trading codes.

Bloomberg: At a court appearance July 4 in Manhattan, Assistant U.S. Attorney Joseph Facciponti told a federal judge that Aleynikov’s alleged theft poses a risk to U.S. markets. Aleynikov transferred the code, which is worth millions of dollars, to a computer server in Germany, and others may have had access to it, Facciponti said, adding that New York-based Goldman Sachs may be harmed if the software is disseminated.

“The bank has raised the possibility that there is a danger that somebody who knew
how to use this program could use it to manipulate markets in unfair ways,” Facciponti
said, according to a recording of the hearing made public today. [The prosecutor apparently does not understand the implications of his statement but most of The Street and much of the public do.]
Karl Denniger: Did Assistant US Attorney Facciponti make an erroneous statement, or did he just lay a nuclear egg on the table, step back, and set it off – on accident – admitting in open court that the software in question “can be used to manipulate markets”?

Zero Hedge: At least it is refreshing that none other than Goldman’s own de facto attorney admits that the firm has created a piece of code that permits “market manipulation.” When Goldman is the perpetrator, the manipulation is conveyed via “fair ways.” And when the manipulator is someone else, the ways become “unfair.”

NYTimes (Thanks, Per): Chinese Currency Used for Some Foreign Payments Banks in China and Hong Kong began wiring Chinese renminbi directly to each other on Monday to settle payments for imports and exports, as China took another step toward establishing the renminbi as a global currency — and, eventually, an international alternative to the dollar.

China has tempered its recent calls for a global reserve currency other than the dollar going into a meeting of the world’s major industrialized countries and biggest emerging economies in Italy on Thursday. He Yafei, China’s vice foreign minister, said on Sunday that the dollar would remain the world’s dominant currency for “many years to come.”

But the Chinese government is accelerating the process of making its own currency, the renminbi, more readily convertible into other currencies, which gives it the potential over the long-term to

The above story is a perfect example of the necessity to heed behavior and not rhetoric.

The Telegraph: US lurching towards ‘debt explosion’ with long-term interest rates on course to double The US economy is lurching towards crisis with long-term interest rates on course to double, crippling the country’s ability to pay its debts and potentially plunging it into another recession, according to a study by the US’s own central bank [China understands the mathematics of US debt.]

Here is why China is going postal over US schemes and chicanery: Yesterday the Fed bought, which is a euphemism for monetized, $7B of Treasuries maturing between January 2014 and March 2016 even though the US Treasury will hold a one-week record of four auctions this week to issue $73B of US debt. $8B of 10-year inflation-linked notes was sold yesterday. The remaining tranches: $35B of 3s today, $19B of 10s on Wednesday and $11B of 3s on Thursday.

Bloomberg: The central bank has bought $197.723 billion in U.S. debt through the operations, which began March 25.

EPI: A very significant story: This is the only recession since the Great Depression to wipe out all jobs growth from the previous business cycle, a testament both to the enormity of the current crisis and to the extreme weakness of jobs growth over the business cycle from 2000 to 2007…

To keep up with population growth, the economy needs to add around 127,000 jobs every month, so the labor market needed to grow 2.3 million jobs over this period.

The WSJ: Deadly Ethnic Riots Pose Fresh Crisis for Beijing Chinese security forces clamped down on large parts of this city of 2.4 million Monday, a day after long-simmering ethnic tensions erupted in rioting that authorities said left at least 150 dead and more than 1,000 injured.

The fatalities, if confirmed, would represent one of the deadliest outbreaks of violence in China in decades…

The FT: Investment banks, including Goldman Sachs and Barclays Capital, are inventing schemes to reduce the capital cost of risky assets on banks’ balance sheets, in the latest sign that financial market innovation is far from dead.

The schemes, which Goldman insiders refer to as “insurance” and BarCap calls “smart
securitisation”, use different mechanisms to achieve the same goal: cutting capital costs by up to half in some cases, at the same time as regulators are threatening to force banks to increase their capital requirements.

Barry Ritholtz highlights this Andrew Cockburn story: How Goldman Sachs and Citi Run the Show – The Wall Street White House Robert Hormats, Vice Chairman of Goldman Sachs, is to be installed as Under Secretary of Economics, Business, and Agricultural Affairs. This comes as one more, probably unnecessary reminder of the total control exercised by Wall Street over the Obama administration’s economic and financial policy…he will find plenty of old friends used to making decisions, almost all of them uniformly disastrous for the U.S. and global economy…

Hormats’ agricultural responsibilities will of necessity bring him into frequent contact with the Chairman of the Commodity Futures Trading Commission, Gary Gensler – a former Goldman partner.

As Assistant Secretary of Treasury in the Clinton Adminsitration Gensler played a key role in greasing the skids for the notorious Commodity Futures Modernization Act of 2000, which set the stage for the great credit default swaps scam that underpinned the recent bubble and subsequent collapse. News of the appointment did generate threats of obstruction in the Senate – any one of the senators could have blocked the appointment had they really wished to do so – but such threats proved predictably hollow. Had they been otherwise, Treasury Chief of Staff Mark Patterson could of course have lent the expertise he gained as Goldman’s lobbyist to overcome the obstacle…

Such connection to the key enablers of our bankrupt casino helps explain many of the other hires listed above…

Goldman Sachs has attracted the spotlight in a huge way. We wonder where this will lead.

The WSJ: Public Pensions Cook the Books; Some plans want to hide the truth from taxpayers Public employee pension plans are plagued by overgenerous benefits, chronic underfunding, and now trillion dollar stock-market losses. Based on their preferred accounting methods — which discount future liabilities based on high but uncertain returns projected for investments — these plans are underfunded nationally by around $310 billion.

The numbers are worse using market valuation methods (the methods private-sector plans must use), which discount benefit liabilities at lower interest rates to reflect the chance that the expected returns won’t be realized. Using that method, University of Chicago economists Robert Novy-Marx and Joshua Rauh calculate that, even prior to the market collapse, public pensions were actually short by nearly $2 trillion. That’s nearly $87,000 per plan participant. With employee benefits guaranteed by law and sometimes even by state constitutions, it’s likely these gargantuan shortfalls will have to be borne by unsuspecting taxpayers…

For these reasons, the Public Interest Committee of the American Academy of Actuaries recently stated, “it is in the public interest for retirement plans to disclose consistent measures of the economic value of plan assets and liabilities in order to provide the benefits promised by plan sponsors.”

Nevertheless, the National Association of State Retirement Administrators, an umbrella group representing government employee pension funds, effectively wants other public plans to take the same low road that the two Montana plans want to take. It argues against reporting the market valuation of pension shortfalls. But the association’s objections seem less against market valuation itself than against the fact that higher reported underfunding “could encourage public sector plan sponsors to abandon their traditional pension plans in lieu of defined contribution plans.”

Fitch cut California’s debt rating to BBB, which is one step above junk. Does the market still believe that states do not default? How many Street denizens remember Walter Wriston’s [Citi’s former CEO] bold assertion in the seventies during the lending mania to Latam that ‘sovereign nations do not default’?

Investing continues to be a very dangerous endeavor because lying, dissembling and fraud are not only pervasive, the nefarious practices are openly encouraged by various and sundry parties.

Today – For the past month or two, traders have dominated stock market trading. But now even fewer traders and ‘real’ orders are in the arena. So stocks will gyrate according to whim. Traders are likely to play trader games until the window for manipulation closes for earnings reporting season [next week].

Defensive stocks have been the market leader for the past two weeks. This is not a good omen.

Category: Think Tank

A recession proof business? Money printing

Comments today from the British Chambers of Commerce highlight the favorable backdrop, in my opinion, for hard assets/commodities as they call on the Bank of England to print more money. Not only do they want the BoE to complete its current asset purchase plan but “they should go beyond 150b pounds” as while the “worst…Read More

Category: MacroNotes

Make Sure You Get This One Right

There are those who sweat over every decision, worrying about how it will affect their lives and investments. Then there is the school of thought that we should focus on the big decisions. I am of the latter school.

85% of investment returns are a result of asset class allocations and only 15% come from actually picking investment within the asset class. Getting the big picture right is critical. In this week’s Outside the Box we look at a very well written essay about the biggest of all question in front of us today. Do we face deflation or inflation?

This OTB is by my good friends and business partners in London, Niels Jensen and his team at Absolute Return Partners. I have worked closely with Niels for years and have found him to be one of the more savvy observers of the markets I know. You can see more of his work at and contact them at

John Mauldin, Editor
Outside the Box

Make Sure You Get This One Right

By Niels C. Jensen

“You can’t beat deflation in a credit-based system.”

Robert Prechter

As investors we are faced with the consequences of our decisions every single day; however, as my old mentor at Goldman Sachs frequently reminded me, in your life time, you won’t have to get more than a handful of key decisions correct – everything else is just noise. One of those defining moments came about in August 1979 when inflation was out of control and global stock markets were being punished. Paul Volcker was handed the keys to the executive office at the Fed. The rest is history.

Now, fast forward to July 2009 and we (and that includes you, dear reader!) are faced with another one of those ‘make or break’ decisions which will effectively determine returns over the next many years. The question is a very simple one:

Are we facing a deflationary spiral or will the monetary and fiscal stimulus ultimately create (hyper) inflation?

Unfortunately, the answer is less straightforward. There is no question that, in a cash based economy, printing money (or ‘quantitative easing’ as it is named these days) is inflationary. But what actually happens when credit is destroyed at a faster rate than our central banks can print money?

A Story within the Story

Following the collapse of the biggest credit bubble in history, there has been no shortage of finger pointing and the hedge fund industry, which has always had an uncanny ability to be at the wrong place at the wrong time, has yet again been at the centre of attention. And politicians, keen to divert attention away from themselves as the true culprits of the crisis through years of regulatory neglect, have been quick at picking up the baton. Admittedly, the hedge fund industry is guilty of many stupid things over the years, but blaming it for the credit crisis is beyond pathetic and the suggestion that increased regulation of the hedge fund industry is going to prevent future crises is outrageously naïve.

If you prohibit private investors from investing in hedge funds which on average use 1.5-2 times leverage but permit the same investors to invest in banks which use 25 times leverage and which are for all intents and purposes bankrupt, then you either don’t understand the world of finance or you don’t want to understand. Shame on those who fall for cheap tactics.

Let’s begin by setting the macro-economic frame for the discussion. I have been quite bearish for a while, suspecting that the growing optimism which has characterised the last few months would eventually fade again as reality began to sink in that this is no ordinary recession and that ‘less bad’ doesn’t necessarily translate into a quick recovery. I still believe there is a good chance of enjoying one, maybe two, positive quarters later this year or early next; however, a crisis of this magnitude doesn’t suddenly fade into obscurity, just because the economy no longer shrinks at an annual rate of 6-8%.

Going forward, not only will economic growth disappoint, but the economic cycles will become more volatile again (see chart 1) with several boom/bust cycles packed into the next couple of decades. This is a natural consequence of the Anglo-Saxon consumer-driven growth model having been bankrupted. Growing consumer spending over the past 30 years led to rapidly expanding service and financial sectors both of which will now contract for years to come as overcapacity forces players to downsize.

Chart 1: US GDP Growth Volatility

This will again lead to higher corporate earnings volatility which will almost certainly drive P/E ratios lower, making conditions even trickier for equity investors. At the bottom of every major bear market in the last 200 years, P/E ratios have been below 10. As you can see from chart 2 overleaf, few countries are there yet. The next decade is therefore not likely to be a ‘buy and hold’ market for equity investors. The combination of low economic growth and pressure on valuations will create severe headwinds. The most likely way to make money in equities will be through more active trading.

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Category: Think Tank

Markets Dig In After Thursday’s Fireworks

Good Evening: After early losses in the wake of Thursday’s very poor unemployment report, the major U.S. stock market averages rallied back this afternoon to finish mixed. Shares of financial companies and traditionally defensive names made for odd bedfellows in leading today’s comeback, but economically sensitive sectors like materials were heavy for most of today’s…Read More

Category: Markets, Think Tank

Spot Oil Price Volatility

Courtesy of NYT > Source: Swings in Price of Oil Hobble Forecasting JAD MOUAWAD NYT, July 5, 2009

Category: Commodities, Markets, Think Tank, Trading


The euro is rallying to the highest level of the day vs the $ after a Canadian official, speaking anonymously, said that while the G8 will likely discuss the US$ and its reserve currency status, there will not be explicit US$ reserve currency comments in the official communique. With about 70% of China’s almost $2…Read More

Category: MacroNotes

10 yr TIPS auction

The Treasury’s 10 yr TIPS auction was solid as the yield was about 1 basis point below expectations and the bid to cover of 2.51 is the highest since Jan ’00 and well above the average over the past year and a half of 2.13. The level of indirect buyers at 49.7% is no longer…Read More

Category: MacroNotes

ISM services index

The June ISM services number was one point more than expected at 47 and up from 44 in May and it’s at the highest since Sept ’08 when it was at 50, the cut off between contraction and expansion. Business Activity rose 7.4 points to just shy of 50 at 49.8. New Orders rose to…Read More

Category: MacroNotes

FusionIQ S&P 500 Equity Market Review

Kevin Lane is one of the founding partners of Fusion Analytics, and is the firm’s director of Quantitative Research. He is the main architect for developing their proprietary stock selection models and trading algorithms. Mr. Lane is a member of the Market Technicians Association. ~~~ As seen below in the S&P 500 has been capped…Read More

Category: Index/ETFs, Markets, Think Tank

La Narco Sistema: My friend Lucy Komisar has just published a great scoop in The Miami Herald that reports on the role played by the State of Florida in enabling the Ponzi scheme of Allen Stanford and the now-defunct Stanford Group. Lucy reports: “Florida regulators — over objections by the state’s top banking lawyer —…Read More

Category: Investing, Legal, Think Tank