According to financial writer Simon Black, the federal government is spending approximately 52,000 dollars per second. This, not last year’s tax cuts, is the reason why the national debt has reached a record 21 trillion dollars, which is more than America’s gross domestic product (GDP).
Another ominous sign is that this year both Social Security and Medicare will have to draw down on their reserve funds to be able to pay benefits. The Social Security and Medicare trust funds will both soon be bankrupt, putting additional strains on the federal budget and American taxpayers.
The excessive debt caused by excessive spending will inevitably cause a major economic crisis. Yet, with a few notable exceptions, there is little to no desire in Washington to cut spending. Instead, both parties are committed to increasing spending on warfare and welfare while ignoring the looming entitlements crisis.
Examples of fiscal irresponsibility on Capitol Hill are easy to find. For instance, even though the Untied Stares is currently spending more on its military than the combined budgets of the next seven highest spending countries, Congress recently increased military spending by 82 billion dollars. This brings the total the US spends on a futile effort to police and democratize the world to 716 billion dollars. The US House has also recently passed a farm bill that increases spending by more than 3 billion dollars over the next five years. This bill does not take a step toward ending subsidies to wealthy farmers and even continues providing farm subsidies to non-famers! Pressure on Congress to increase spending on farm subsidies is likely to increase as famers becomes collateral damage in President Trump’s trade war.
Many progressives are attacking the House farm bill because it makes some reforms to the “SNAP” (food stamp) program, even though the House version of bill increases the budget for food stamps by at least 1.7 billion dollars over the next five years!
When the economic crisis hits, there will be no choice but to cut spending and raise taxes. Of course, Congress is unlikely to raise taxes or cut benefits. Instead, it will rely on the Federal Reserve to do the dirty work via the inflation tax. The inflation tax is the worst type of tax because it is both hidden and regressive.
One of the worst features, if not the worst, of the tax reform plan is increasing the inflation tax by authorizing the use of “chained CPI.” Chained CPI hides inflation’s effects by claiming that rising prices do not harm Americans as long as they can still afford low-cost substitute goods to replace products they can no longer afford due to the Federal Reserve’s devaluation of the currency — as if people forced to buy hamburger instead of steak are not negatively impacted by inflation.
Increasing federal debt will also put pressure on the Federal Reserve to keep interest rates low to prevent federal interest payments on the debt from skyrocketing. Eventually, the Fed’s monetization of the debt will lead to hyperinflation and a rejection of the dollar’s world reserve currency status. The question is when, not whether, the welfare-warfare state and the fiat currency system will end. Hopefully, those who know the truth will succeed in growing the liberty movement so we can convince Congress to gradually unwind the welfare-warfare state, restore a true free market in money, and stop trying to run the world, run the economy, and run our lives.
Vía Campaign for Liberty » National Blog https://ift.tt/2LBvZpY
With Morgan Stanley becoming the latest to join the growing lament over the market’s ever declining liquidity, noting that “It’s Not Your Imagination, Large Moves Are Becoming More Common In The Market” an appropriate question that has emerged is just how does one define, and measure, liquidity?
Today, Goldman’s derivatives strategist Rocky Fishman shares his answers, with a particular emphasis on market top-of-book depth which has implications on both bid/ask spreads and ease – and cost – of execution:
Liquidity is both hard to define and hard to monitor. Volumes, bid/ask widths, and ease of execution can all be metrics of liquidity. A key (unmeasurable) metric is the ease of executing a large trade – for example, what would the market impact of selling $1bln of SPX futures be? Of utmost importance to hedgers and volatility traders is an even more unmeasurable number: what would the market impact of a large order be if markets are already down several percent in a day? It is hard not to see the material deterioration in top-of-book depth as having negative implications for this last metric of liquidity as well.
Fishman then introduces a novel concept: an uncertainty principle when it comes to measuring liquidity, which leads him to observe that “liquidity can be monitored but not measured”:
Liquidity is unmeasurable: when defined as the ease (or cost) of executing a large trade, the only true way to measure liquidity is to actually trade large amounts, but that act would in itself alter liquidity conditions (liquidity’s Heisenberg uncertainty principle?). Barring a true measurement of liquidity, there are various metrics we watch to monitor liquidity. Volume is one: markets exhibiting high volume are generally more liquid than those exhibiting low volume. However, volume can be misleading in times of market stress, because a rush to re-align portfolios may push up volume even with high trading costs.
Expanding on his “uncertainty principle” of observation vs interference, Fishman then notes that “while we are only observers of market microstructure, we believe market bid/ask depth is a meaningful indicator of liquidity.” This is important because even if investors do not need to instantaneously execute large trades with zero market impact, “if execution algorithms are sequentially trading listed depth a smaller bid/ask depth will increase their execution costs.”
To further monitor, if not measure, liquidity, Fishman examined 7 years of intraday data, focusing on E-mini SPX futures, and analyzed the quotes posted electronically. The bid/ask depth, or number of contracts/shares associated with those quotes, is lower at the median moment now than it was throughout most of 2017.
Which brings us to Fishman’s focus on the market’s top-of-book, or bid/ask depth.
Here the Goldman strategist notes that February’s VIX spike was a key event and “while it’s easy to dismiss February as a one-off anomaly because the inverse VIX ETPs that were so important to its mechanics are much-diminished, evidence that US equity market depth conditions were weakened in the lead-up to February and remain weakened now points toward value in long volatility positions.“
He also makes the following key observations:
- Bid/ask depth had deteriorated prior to 5-Feb’s VIX spike. In the week prior to 5-Feb, bid/ask depth was roughly 50% of its typical size from early January or late 2017, and was smaller than the rise in volatility would have indicated it should be. The week of January 29 was the worst week for bid/ask depth in years for SPX futures and key US equity ETFs.
- Currently, E-mini SPX futures’ bid/ask depth is well below its range from 2H2016 and 2017, even though volatility has receded. For any given VIX range, bid/ask depth is lower this year than it was in 2016-7. We can also make the case that market depth was unusually strong in 2017 – perhaps contributing to the period’s historically low volatility.
He summarizes his findings in 4 key charts.
First, he notes that the top-of-book depth for S&P futures had declined sharply well ahead to February’s sell-off:
Additionally, the E-mini bid/ask depth currently is near its low points from 2015-6 (when vol was much higher):
Looking at a sensitivity of different market regimes in which market depth (measured in median bid/ask size) is mapped against intraday realized vol, Goldman notes that while bid/ask depth is correlated with volatility, the same vol is now associated with lower depth.
In practical terms this means that while in late 2017 over $40mm notional was on each side of E-mini futures’ bid/ask at a median moment – or how much could be traded without impacting the market – recently the median range has been $10-20mm notional.
Next, Fishman focuses on the February 2018 VIXtermination event, which was particularly notable in how rapidly liquidity disappeared from the market. Here, the Goldman strategist writes that while in the weeks leading up to February’s VIX spike, investors were justifiably worried about growing risks from the VIX ETP market, however, he thinks there was more to the story than that: top-of-book equity market depth was deteriorating, across futures and ETFs, beyond what rising vol would be consistent with.
Given the levered and inverse VIX ETP market size, an oversized reaction of VIX futures was to be expected should the SPX sell off aggressively in a late afternoon, but the ferocity of February 5’s mid-afternoon sell-off in the SPX itself is still difficult to interpret. If liquidity conditions were poor pre-event, one or more sell orders that might normally have had little impact could have escalated into a larger event.
In other words, the broader market’s shrinking liquidity, measured by the limited bid/ask depth “was likely a cause, not just an effect, of February’s volatility.“
Specifically, Prior to February’s vol spike we observed:
- 50% drop in bid/ask depth. The median bid/ask depth in the three weeks leading up to February’s vol spike was roughlyhalf the bid/ask depth seen in early January or in Q4 2017.
- There’s no single moment when it changed. There does not appear to be a single day when bid/ask depth dropped suddenly; rather, the change happened over a few days in mid-January.
The reason why Fishman is especially focused on pre-February conditions, is that the give the best clue to why market bid/ask depth conditions are not back at their pre-February normal: he writes that “With high-frequency traders an important source of E-mini SPX future quotes, a key question is what may have changed to make HFT algorithms less aggressive”:
- Vol up, spot up. During the tax reform-led rally in January, implied volatility markets started to break their pattern of vol falling when markets rise, as implied volatility was rising despite a rising spot market.
- Complex macro surprise. The market’s focus on wage inflation in the early February jobs report could have constituted the type of complex macro surprise that often leads to HFTs prudently pulling back.
To quantify the effect, we looked at SPX E-mini futures intraday data, tracking the median bid/ask depth over time and splitting each moment’s quote (based on 5-minute snapshots) into five categories of liquidity, and measured the distribution of these categories week-by-week. This is what he found:
Which brings us to today, when as Goldman’s report notes, nearly half a year after February, E-mini SPX futures’ bid/ask depth is lower than it was in most of 2015-17, and notes that while 2017 showed deeper-than-usual US equity markets, for many underlyings current bid/ask depth remains stubbornly, and surprisingly, below almost all of 2015-7’s range. He makes the following points:
- Currently, bid/ask depth is worse than most of the last few years for E-mini SPX futures and many US ETFs. Depth metrics are improving, but this is still the case if we normalize for higher volatility than we had in most of 2017.
- The initial months following 5-Feb showed poor market depth. Bid/ask depth conditions have improved, in part because volatility has fallen. Currently, bid/ask depth is slightly better than it was in the volatile early part of 2016.
- Was 2017 the aberration? It’s possible that 2017’s extraordinary low volatility helped further very strong liquidity (perhaps the post-Brexit vote rally was a sign that conditions are safe for strong market-making). We wonder if 2017’s numbers are an unreasonable metric to compare current conditions to.
- Volumes are still strong. Bid/ask depth is just one metric of liquidity, and one that seems particularly connected with high-frequency traders. Normal volumes point toward decent base-case liquidity. There are other sources of liquidity beyond electronic markets, and these are likely strong.
Which brings us to Goldman’s summary take on why liquidity has become a dominant consideration for investors in today’s market: simply said volatility and liquidity are interconnected, both logically and empirically, to wit:
- Low liquidity means high vulnerability to shocks. To the extent diminished top-of-book depth is indicative of potential weak liquidity in a sell-off scenario, we may continue to be vulnerable to severe market shocks. Heightened potential for liquidity to weaken in a sell-off ultimately contributes to volatility of volatility: when volatility rises sharply, weakening liquidity can make incremental trades move markets more, pushing up volatility further.
- An economic model of liquidity. From a logical perspective, liquidity has its own supply-demand dynamics. When demand (including systematic strategies’ need to trade) exceeds supply (market makers’ willingness to facilitate trades), the cost of liquidity (market impact of a given trade) will rise. Individual trades moving markets more than they once would have, or more than warranted by fundamentals, means higher volatility.
- Bid/ask depth is negatively correlated with volatility, but the vol-depth relationship has shifted. We have observed that measures of bid/ask depth are indeed correlated with volatility. We can also see from the graphs below that the level of market depth associated with a given level of volatility has fallen. What worries us most is the bottom-right pie chart in the exhibit below: what happens when volatility spikes, if market depth is already lower-than-usual? We are worried that in the next severe volatility spike, liquidity conditions will weaken dramatically, just at the time when demand for liquidity (from systematic flows) is starting to rise. One mitigating factor is that we have found that some managed volatility strategies have been less responsive to initial volatility spikes than in past events. As seen in February, we could continue to see occasional mismatches between products that demand near-instantaneous liquidity and markets that see diminished liquidity in moments of stress.
And here Goldman finds something surprising: despite depressed liquidity conditions, in the aftermath of February’s volatility, hedges remain historically inexpensive:
- Put options are cheaper than they were throughout most of the last few years, across equity indices.
- Hedge pricing is comparable to the low-volatility 2017 for many underlyings and strikes.
- Implied/realized volatility spreads are low or negative for most equity underlyings.
This suggests that, for some reason, despite a structural, and growing flaw, in the market, traders are unable to appreciate the implications of the collapse in liquidity, and are significantly mispricing how much they charge for insurance. Another words for this is, of course, arbitrage.
So what does the collapse of liquidity in a low vol regime mean for the market? Goldman’s conclusion is disturbing:
Weakened availability of liquidity when conditions are favorable could point toward especially low liquidity when it’s needed most – i.e. in the next severe market sell-off. The potential for markets to be vulnerable in a sell-off makes it even more prudent to take advantage of moments when volatility is back near historic lows. We believe that this trend further helps the case for hedging, which is furthered by slowing global growth and an ever-higher spot index level. Although our economists see low likelihood of a recession in the near future, it’s worth noting that the last few volatility spikes have happened in the middle of an economic expansion.
This, according to Goldman, should matter especially from a hedger or vol trader’s perspective for the following reason:
reduced available trading size at a given moment potentially implies reduced liquidity in a severe sell-off scenario. February’s volatility seems to support that point. To the extent liquidity is the new leverage, if we start off our next sell-off with already-diminished equity market liquidity, how much liquidity will there be at the depths of a sell-off?
Finally, some bad news from Goldman for the BTFDers: “Should the next crash happen closer to a recession, markets may be less likely to rebound quickly.”
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Love knows no doubt. As time passes it becomes more and more deep, to the point where it becomes trust. Trust is the highest development of love.
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July 23, 2018
Boston Celtics general manager Danny Ainge was open to a reunion with Isaiah Thomas, who reportedly phoned the team about a reunion before signing a one-year deal with the Denver Nuggets.
Ainge, according to ESPN, told Thomas he would first need to sort through the contract status of guard Marcus Smart. The restricted free agent signed a four-year, $52 million deal last week, but Thomas had already agreed to a $2 million deal with Denver.
Thomas was traded from the Celtics last offseason in the deal that brought Kyrie Irving to Boston from the Cleveland Cavaliers.
But a hip injury kept Thomas on the shelf until January, and he was traded to the Los Angeles Lakers in February as part of a dramatic roster overhaul. Thomas did not finish the season with the Lakers due to ongoing issues with the hip.
In 17 games, including just one start, for Los Angeles, Thomas averaged 15.6 points and five assists.
–Field Level Media
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July 23, 2018
By Lisa Richwine
SAN DIEGO (Reuters) – Actor Chris Pine surprised superhero fans with an appearance alongside “Wonder Woman” star Gal Gadot on Saturday but offered no explanation for how he will return to the film franchise following his character’s fiery death in the last movie.
At San Diego Comic-Con, Pine joined Gadot and director Patty Jenkins in a packed, 6,500-seat convention hall to talk about “Wonder Woman 1984,” which began filming three weeks ago.
“I am actually not really here right now,” Pine quipped when asked by moderator Aisha Tyler how he will re-emerge on the screen. “I’m just an aura of emotional support for my pals.”
Pine played World War I pilot Steve Trevor in 2017 blockbuster movie “Wonder Woman.” At the end of the film, Trevor sacrifices himself for the greater good and appears to die as his plane explodes.
Jenkins, who had tweeted a photo of Pine on the “1984” set in June, also was vague about his role on Saturday.
“What is he back here for? It’s something I’m super excited for everybody to see the movie find out,” she said. “It’s a very important part of our movie.”
The hugely successful “Wonder Woman” was a bright spot for Warner Bros.’ DC Comics movies, which have earned mixed reviews from critics and failed to match the box office success of films from Walt Disney Co’s Marvel Studios. “Wonder Woman” grossed $821.8 million worldwide.
In early “1984” footage shown to the crowd, Wonder Woman lassos two bad guys and saves a child during a battle in a shopping mall food court. The movie is scheduled to reach theaters in November 2019.
Gadot said “1984” was not a traditional sequel. “It’s its own story. It’s a different story,” she said.
Warner Bros., a unit of AT&T Inc, also unveiled the first trailer for superhero movie “Aquaman,” which is due in theaters in December. The footage showed glimpses of a brightly colored underwater world that is in peril due to conflicts with surface dwellers. Jason Momoa plays the title character, a reluctant king forced to battle his brother.
Director James Wan, known for “Furious 7” and “The Conjuring” movies, said he wanted to give “Aquaman” a different feel than other superhero movies filling up screens.
“My movie in some ways plays more like a science-fiction fantasy film than a traditional superhero movie,” he said.
(Reporting by Lisa Richwine; Editing by James Dalgleish)
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July 23, 2018
WASHINGTON (Reuters) – The U.S. unit of Mizuho Financial Group Inc <8411.T>will pay $1.25 million penalty over what U.S. financial regulators said was its “failure to safeguard information pertaining to stock buybacks by its issuer customers,” according to a U.S. Securities and Exchange Commission statement on Monday.
Mizuho Securities USA LLC agreed to pay the penalty without admitting or denying the SEC’s findings, the statement said, adding that it has censured the company and ordered it to prevent future violations.
(Reporting by Susan Heavey; Editing by David Alexander)
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July 23, 2018
LONDON (Reuters) – Britain’s government will publish proposals on Tuesday setting out more details of how it plans to leave the European Union, a junior Brexit minister said on Monday.
“We are continuing to prepare the legislation needed to implement the withdrawal agreement in UK law and we will publish a white paper tomorrow setting out more details on this,” Martin Callanan told the upper house of Britain’s parliament.
Earlier this month, Prime Minister Theresa May revealed her latest plans for Britain’s relationship with the EU after its scheduled departure in March next year.
(Writing by William Schomberg; editing by Kate Holton)
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Daniel Lacalle takes Theresa May to the woodshed over her handling of Brexit. I agree with Lacalle on all but one point.
In a Mises wire, Daniel Lacalle explains May’s Way Is Not The Only Way.
In a nutshell, May’s Brexit is the worst solution for Leavers and Remainders. It tries to please Remainders, who are obviously not satisfied as they want a full reversal of the EU exit.
In essence, the plan is the worst of both worlds. Leaves the UK with all the perceived negatives that led to a “Yes” vote in the referendum and none of the alleged benefits of staying in the European Union.
May’s way is not the only way. The UK should deliver a strong Brexit proposal that creates certainty, that eliminates the excessive costs and regulations. There is a reason why the EU has a “Canadian” or “Norwegian” solution because they were created ad-hoc for those countries. May fails to recognize the strengths of the UK to achieve a specific “British solution” that is good for both parties. She seems to accept at face value that the EU rules, those that the EU itself bends at will, are untouchable.
This political crisis adds uncertainty to business, gross capital formation, and job creation, but also diminishes the UK government’s influence on crucial international matters. Instead of delivering a message of strength, May has delivered a message of uncertainty.
I would have preferred the UK to stay in the EU and be a driving force for change and renovation, for freedom. But Brexit happened. And now the government is putting the economy at risk by creating an unnecessary political crisis that may affect many important sectors, while ignoring the results of the vote.
Brexit should have been a serious warning to the increasingly interventionist European Union to change its ways and should have been negotiated swiftly from the position of strength that the UK had as the second largest net contributor to the EU. It should have been a fantastic opportunity for both the EU and the UK to thrive. Instead, May has done the job for Brussels showing the European Union is an unchangeable entity, like the Hotel California where “you can check out anytime you like, but you can never leave”.
May’s “my way or the highway” plan has strengthened the EU’s stubborn resistance to change.
May’s Way, the Worst Way
May’s way is not the only way is accurate but fails to sum of the problem. May’s way is the worst way more accurately sums up the current situation.
Lacalle was a bit too polite with his title.
Point of Disagreement
On what point do I disagree with Lacalle?
It’s a point that is irrelevant at the moment. I was in favor of Brexit. The EU is a slow, colossal, bureaucratic mess that take near-unanimity to do most anything, and absolute unanimity on some things.
For example, France will never agree to end subsides that protect inefficient farmers. That one point alone is why it took the EU 10 years to negotiate a deal with Canada.
Water Over the Dam
That’s water over the dam now.
May’s tactic has been to bow down to the EU instead of playing hardball. She has a huge number of cards to play, and in this regard, Trump helped.
Eight Hardball Cards
Iran sanctions hurt the EU, especially Germany.
Trump clearly has it in for German autos.
The German auto industry is already on the ropes over diesel emissions.
The EU is hugely impacted by Trump’s trade war with China.
If the UK walks, the EU will lose the $39 billion Brexit fee.
The UK can close fishing rights and take control of its waters.
Germany cannot afford to get into multiple simultaneous trade wars with the US, China, and UK.
The UK can further lower business taxes.
Think about that last point until it sinks in.
The UK is one of Germany’s biggest export recipients.
Prepared to Walk
This is no time for May to cave into to nonsensical EU demand.
Rather, this is the time from May to lay those eight cards on the tables and say “We are prepared to walk. What are you going to do about it?”
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July 23, 2018
By Alan Baldwin
HOCKENHEIM, Germany (Reuters) – Lewis Hamilton dug deep into his past to explain Sunday’s stunning German Grand Prix victory and came up with a “four-poster bed”.
The four-times Formula One world champion had never before won a grand prix from lower than sixth on the starting grid but at a wet Hockenheim, he steered his silver Mercedes from 14th to first.
That was only the 12th time that a driver had started that low and won.
The achievement, helped by chaos around him and Ferrari title rival Sebastian Vettel crashing out from the lead, left the new championship leader struggling to contain his emotion.
“It’s very reminiscent of how I started out,” he explained to reporters at Hockenheim, whose present layout has been likened to a glorified go-kart track by those who miss the bygone blast through the forest.
“The kart that I had was… really, really old and had been owned by about five different families. My dad spent the little bit of money he could to shave it down and respray it and made it as brand-new as it could be.
“He would call it ‘the four-poster bed’. I would have to start at the back and wiggle my way through the more experienced and faster karts. And that’s where I learned to do it. That’s what I was best at doing.”
Hamilton is an ace in the wet, just as Michael Schumacher was before him, but on Sunday he was master of everything thrown at him.
Already up to fifth with 14 laps gone, picking off almost a car a lap, Hamilton proceeded to take great chunks of time out of his rivals as the rain fell and the tire strategy played to his advantage.
He also had the presence of mind to follow his instincts rather than listen to the panicked messages from the pitwall that almost led him to pit and risk undoing all his good work in the blink of an eye.
On such moments are championships won and lost and Hamilton, now 17 points clear of Vettel, made the difference.
As the title battle enters the second half of the season, the lead has gone back and forth and nothing can be taken for granted.
Both teams have made mistakes, Mercedes with glaring strategy errors and Vettel – as on Sunday – under pressure and in the heat of battle.
Hamilton and Vettel have four wins apiece, one retirement each and the German ahead 5-4 on pole positions. It is debatable which of the two has the faster car and small margins are proving crucial.
As Sunday showed, anything can happen and there is everything left to play for.
(Reporting by Alan Baldwin, editing by Pritha Sarkar)
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