Articles About Trading & Investing

What They Didn’t Say About the Fed in Monday’s Debate

0 | By Shah Gilani

Republican Presidential Nominee Donald Trump blasted the Federal Reserve and Fed chair Janet Yellen for being more “political” than his Democratic counterpart Hillary Clinton in Monday night’s heated presidential debate.

Is he right? Is the Federal Reserve political in any way, shape or form?

Fed officials, the vast majority of political analysts, and “a wide range of independent observers,” according to the New York Times, “roundly rejected” Mr. Trump’s “accusation.”

But the truth is, the Federal Reserve is absolutely, positively political. It’s in their DNA.

I’ll prove it to you…

The Fed Began as a Political Tool

This isn’t about Donald Trump being right. And, it isn’t about Hillary Clinton telling reporters on her campaign plane on September 6, 2016, “You should not be commenting on Fed actions when you are either running for president or you are president. Words have consequences. Words move markets. Words can be misinterpreted.”

This is just the bare naked truth about the Federal Reserve and how it operates.

Most people, including the majority of politicians in the U.S., analysts and journalists covering politics and the economy, and overseas observers, don’t know what the Fed is.

They think as America’s central bank it’s a branch of the government. It isn’t.

An example of the ignorance of even respected news outlets like the New York Times was front and center yesterday.

In a Times article titled “Scant Evidence to Support Trump’s Attacks on the Fed,” author Binyamin Applebaum writes, “The Fed is not independent. It is an arm of the federal government, chartered by Congress to maximize employment and minimize inflation.”

Wrong!

The Federal Reserve System is privately-owned by shareholders. It is not an “arm” or branch of the U.S. government.

It was conceived in 1910 by a handful of rich and powerful men including Senator Nelson Aldrich of Rhode Island, well known as an agent of John D. Rockefeller, to whom he was related through a family marriage, J.P. Morgan & Co. partner Henry Davison, Paul M. Warburg the principal partner at Kuhn Loeb & Co., and American agent of  Europe’s richest, most powerful banking family, the Rothschilds, and National City Bank president Frank A. Vanderlip, at a clandestine meeting at the secluded Jekyll Island Club off the tip of South Georgia, partly owned by John Pierpont (J.P.) Morgan.

The Senator and bankers designed the private central bank, which took three years to slide through Congress, to have the sole right to create Federal Reserve Notes (U.S. dollars), in other words they own America’s money supply, and to use their money to buy the government’s debt whenever it was necessary to support Federal operations and to support and backstop the big banks who were the shareholders in the new central bank.

The whole story of how the Fed was created, by who, for what purposes, and how it was greased to be twisted through Congress and institutionalized in law under the Federal Reserve Act of 1913 is one of America’s dirtiest secrets. But the truth is out there.

As conceived, the Federal Reserve System is a political tool. It couldn’t have come into being if political interests weren’t satisfied.

The Fed Is Political – Whether it Acts or Not

The Fed was meant to look to the outside world like it was above politics in order to be a “Reserve System” (not a bank, wink, wink) to backstop the financial system and maintain stable prices.

The so-called “dual mandate” which says the Fed has to “promote effectively the goals of maximum employment,” in addition to stable prices, was only inserted into the Federal Reserve Act when in 1977 Congress punted its fiscal responsibilities to the Fed because it was tired of being blamed for “stagflation” plaguing the country.

But that doesn’t mean the Fed isn’t political.

Politicians constantly threaten the Fed with audits, greater Congressional oversight and control, and on rare occasions threaten to abolish it.

Since Congress has the ability to legislate the Fed out of existence, successive Federal Reserve chairmen, FOMC members and Regional Bank presidents have had to play ball with whichever party’s administration is in power.

Donald Trump maintaining that, “They’re keeping the rates down so that everything else doesn’t go down,” and saying, “The Fed is being more political than Secretary Clinton” isn’t a stretch.

The Fed announced last December, when it raised the Federal Funds rate one quarter of one percent, its first rate hike in nine years, it was looking to hike four times in 2016.

After a hiccup through February when stocks and bonds fell sharply, stocks made multiple new all-time highs and bonds are booming again. And still there’s no rate hike.

No doubt, the Obama administration and Hillary Clinton remember when in October 1979, right before the presidential election between Jimmy Carter and Ronald Reagan, the new non-partisan Fed chair, Paul Volcker, changed the Fed’s policy objectives and rates soared.

Jimmy Carter lost hands down.

In terms of the metrics the Fed says it watches, there was no reason for it not to raise in September, unless of course, there were political motivations.

Of course there were. Especially in light of Donald Trump criticizing and threatening the Fed.

Saying the Fed isn’t political is like calling the Grand Canyon a ditch.

Sincerely,

Shah

The Unintended Consequences of These New Rules Could Kill the Rally – Or Worse

1 | By Shah Gilani

Starting October 14, 2016, institutional prime money market funds won’t be able to price themselves at a constant $1.00 a share.

New SEC rules will require these giant funds to value shares based on actual market prices for underlying assets in their portfolios.

That means their per-share prices will fluctuate on a daily basis.

While that’s not exactly good news, it gets worse.

The rules allow funds to charge up to a 2% redemption fee when investors want out.

But the killer is, funds can put up “gates” that prevent investors from selling shares.

Besides problems investors will have with the new rules, unintended consequences affecting companies and municipalities that rely on selling their commercial paper and other short-term debt instruments to these big funds could end up killing the market.

Here’s what you need to know, and what to do…

Why They’re Changing the Rules

Money market funds used to price their shares at a constant $1.00. It used to be “a dollar in and a dollar out.”

If the underlying assets in a money market fund rose above a $1.00 funds could pay the excess out as a dividend. If the underlying value of assets fell such that the pro-rata per share price was below $1.00, funds could use amortizing accounting methods to still maintain the fund’s constant $1.00 a share price.

In 2008 the oldest and largest money market fund in the U.S., The Reserve Primary Fund “broke the buck” and priced its shares at $0.97 when Lehman Brothers collapsed and the price of Lehman’s commercial paper The Reserve Fund held imploded.

The Reserve Fund breaking the buck panicked investors who immediately withdrew hundreds of billions of dollars from money market funds before they could lower their prices too.

That run on money market funds brought the financial system to a standstill.

Instantly, there were no buyers for the billions of dollars of commercial paper and other short-term debt instruments corporations and municipalities sold to money market funds on a daily basis to fund their payrolls and other short term cash needs.

In July 2014 the Securities and Exchange Commission handed down new rules to make some money market funds more transparent in terms of pricing their underlying assets and to temporarily steady funds during times of extraordinary financial stress.

Making institutional funds float their share price makes it more transparent to impacted investors so that they, and not the fund sponsors or the Federal government, bear the risk of loss.

By allowing these funds to charge up to a 2% redemption fee, under certain circumstances, the SEC hopes to slow redemptions when investors would normally head for the exits.

By allowing funds to put up “gates” to shut down redemptions altogether, the SEC expects to halt debilitating money market runs when the financial system can least afford them.

The Letter of the Law

Here’s how the SEC explains the new pricing requirements, the new redemption fees, or “liquidity fees,” and gates:

Showing Fluctuations in Price – Institutional prime money market funds would be required to price their shares using a more precise method so that investors are more likely to see fluctuations in value. Currently, money market funds “penny round” their share prices to the nearest one percent (to the nearest penny in the case of a fund with a $1.00 share price). Under the floating NAV amendments, institutional prime money market funds instead would be required to “basis point round” their share price

Liquidity Fees – Under the rules, if a money market fund’s level of “weekly liquid assets” falls below 30 percent of its total assets (the regulatory minimum), the money market fund’s board would be allowed to impose a liquidity fee of up to two percent on all redemptions. Such a fee could be imposed only if the money market fund’s board of directors determines that such a fee is in the best interests of the fund. If a money market fund’s level of weekly liquid assets falls below 10 percent, the money market fund would be required to impose a liquidity fee of one percent on all redemptions. However, such a fee would not be imposed if the fund’s board of directors determines that such a fee is not in the best interests of the fund or that a lower or higher (up to two percent) liquidity fee is in the best interests of the fund. Weekly liquid assets generally include cash, U.S. Treasury securities, certain other government securities with remaining maturities of 60 days or less, and securities that convert into cash within one week.

Redemption Gates – Under the rules, if a money market fund’s level of weekly liquid assets falls below 30 percent, a money market fund’s board could in its discretion temporarily suspend redemptions (gate). To impose a gate, the board of directors would find that imposing a gate is in the money market fund’s best interests. A money market fund that imposes a gate would be required to lift that gate within 10 business days, although the board of directors could determine to lift the gate earlier. Money market funds would not be able to impose a gate for more than 10 business days in any 90-day period.

You can read the SEC’s full release here.

What the Unintended Consequences Mean for Your Money

Now, let me be clear: not all money market funds are subject to the new rules.

Retail and government money market funds are exempt and can still price their shares at a constant $1.00 per share.

Retail funds cater to natural persons, individual accounts (brokerage or mutual fund), retirement accounts, including workplace defined contribution plans, college savings plans, health savings plans, ordinary trusts and accounts sold through intermediaries with the underlying beneficial ownership being a natural person.

Government money market funds only invest in government issued debt instruments and are exempt.

But these rules could still have a big impact on your investments.

Besides affecting the industry already, where almost $500 billion has exited institutional prime funds this year, there are sure to be unintended consequences from the new rules.

Big institutional investors who invest in prime money market funds, a lot of them whose companies issue the commercial paper held by prime funds, aren’t going to take kindly to being subjected to redemption fees when they want their money out of funds as prices are falling.

And they for sure aren’t going to want to be in prime funds if they can’t get their money out at all, while prices are plummeting.

That means there will be hundreds of billions of dollars, possibly more than $1 trillion, not available to banks, corporations and municipalities who borrow on an almost daily basis by selling their commercial paper and debt instruments to institutional prime money market investors.

Besides drastically choking short-term borrowers, who will have to find other ways to raise short-term funds, investors who would normally invest in money market funds are moving into government money market funds, who now have to find hundreds of billions of dollars of short-term Treasury bills to hold in their portfolios.

There’s already a shortage of T-Bills.

Between banks, hedge funds and institutional investors hoarding T-Bills for liquidity purposes, there’s very little supply in the $1.7 trillion T-Bill market. The Treasury plans to add another $188 billion to the T-Bill supply in anticipation of the new money market rules and the move by big investors out of prime funds and into government funds.

That’s not nearly enough supply. Any rush into Treasuries, which are across the yield curve in short supply because the Fed’s hoarding over $3 trillion of government notes and bonds, could result in severe liquidity problems if any kind of market selloff triggers a further rush into safe governments and there aren’t enough of them.

The new rules will undoubtedly spawn unintended consequences that regulators and investors haven’t considered but are likely because of the massive disruption to corporate borrowers and big investors we’re about to witness.

Whenever the market encounters huge unknowns, there’s likely to be disruptions, dislocations and possibly panic if something somewhere all of a sudden breaks or stops working.

You’ve been warned.

Sincerely,

Shah

Why Tomorrow Is the Most Important Day in the Markets

9 | By Shah Gilani

If you haven’t been paying attention, you could be forgiven for not understanding just how important tomorrow is for the markets.

Tomorrow is day two of two-day meetings being held by the Bank of Japan’s monetary committee and the Federal Reserve’s Federal Open Market Committee (FOMC).

Right now, it’s not what central bankers with god complexes say that matters – even though, yes, they move markets with what they say and even what they don’t say.

It’s what they’ve done and what’s going to happen – no matter what they say – that matters now.

Forget the gobbledygook, cryptic blathering spewing down from Mt. Olympus.

Here’s what going to happen tomorrow – and beyond…

Three Things You Need to Know About Central Banks

Before we dive in, there are three facts you probably don’t know – but you absolutely need to know – about central banks.
Number one:

All central banks, in all their iterations, whether they’re a branch of government, quasi-independent institutions, or private corporations whose shareholders are big banks and elitist bankers, which is exactly what America’s Federal Reserve System is, are all in bed with their governments.

They couldn’t exist otherwise. They’re given the power to manipulate interest rates, mostly through “open market operations,” where they go into financial markets (without any capital to speak of) and buy and sell trillions of dollars’ worth of government bills, notes and bonds to move interest rates up and down, for two reasons:

  1. They can buy all the government-issued debt they’re asked to buy so governments can run unlimited deficits without immediately adversely impacting interest rates;
  2. They can be blamed by politicians if there’s no economic growth or high inflation due to too much government borrowing, relieving politicians of the blame for high unemployment or high interest rates.

Number two:

All central banks, after glad-handing their political masters, serve their country’s big banks, providing liquidity when needed and bailing them out, if they can, at least up to the point that governments have to step in with bailout money they get from central banks. Central banks are big bank, backstopping, bailout machines.

Number three:

There is no need for any central bank, anywhere. They only exist to be manipulated by governments, to bailout TBTF (too-big-to-fail) banks, and to enrich bankster oligarchs, their capitalist cronies, and political officers all feeding at the same dirty trough.

With that established, I want to take a close look at the Bank of Japan. In terms of modern-day manipulations, BOJ has been at it the longest.

Believe it or Not, the BOJ Is Worse Than the Fed

After the BOJ’s excessive easy money policies inflated Japanese real estate, which was used as collateral in the 1980s for margin loans to buy stocks, which rose exponentially and were themselves used as collateral with banks for mortgages to buy skyrocketing properties, all ended in the horrific crashing of Japan’s stock markets in 1990 and real estate markets in 1991, the BOJ stepped in. And it never left.

Thirty-five years later, the BOJ’s still manipulating rates, still pushing on a string, still trying to underpin stocks and real estate, still trying to turn deflationary realities into some kind of magical 2% inflationary panacea. It’s not working.

The BOJ’s pursuit of inflation by artificially manipulating interest rates lower, into negative territory as of this past January, by buying 38% of all Japanese government issued debt in the world, by buying corporate debt, and by buying stocks, hasn’t worked.

It’s not that the BOJ can’t see that their low interest rate policies haven’t worked.  It’s not that the BOJ can’t see that Japan’s exporting juggernaut has been slam-dunked by rising emerging markets exporters, especially China. It’s not that the BOJ can’t see that productivity declines and demographic realities are working against Japan’s economy.

The BOJ sees all that. None of it matters to them because it’s just doing what it does, what central bankers with god complexes and their cheerleading state governments want them to do, step into the void and manipulate rates and financial markets.

Why? Because regardless of what’s working for the economy, or the population, there are financial asset renters, bankers, and politicians who benefit by the manipulation.

The same story holds true for the run-up in real estate prices in the U.S. and the stock market crash. The Federal Reserve’s low interest rate policies inflated bubbles that popped.

Just like in Japan, big banks were saved by a central bank and have all gotten bigger.

The haves have gotten wealthier and the middle class and lower socio-economic classes have tragically fallen backwards down a very slippery slope.

Savers have been punished. Retirees and pensioners have been devastated. And the capital they’d amassed, which fed bank lending and capital formation throughout free markets, has been replaced by central bank, master-of-the-universe funny money.

Here’s why tomorrow is so important…

Why Tomorrow Is Huge for Markets

Tomorrow, the BOJ’s going to say they’re going to do more.

They’re probably going to say they’ll take rates further into negative territory if they have to. They’ll buy more government bonds, more corporate bonds, and more equities if they have to. They’ll buy foreign government bonds to lower those rates to manipulate the yen down to spur export growth if they have to. And to help beleaguered savers and pensioners, they’ll even let longer-term rates rise, and buy even more shorter-term debt to “steepen the yield curve” if they have to.

And the Fed?

It’s unlikely they’ll raise rates tomorrow. Partly because they don’t want to let the world think Donald Trump, who called them out for being political (which of course they are) is going to goad them into raising rates before the presidential election (which, by the way, happened in October 1979 and cost Jimmy Carter the election).

They’ll probably say they’re data dependent and since things have slipped a little they’re on hold until December.

But the fact remains that the Fed could raise rates tomorrow. And that could disrupt markets that aren’t expecting a raise. The BOJ could say tomorrow that to help pensioners they’re going to let long-term rates rise. And that could disrupt markets even more than the Fed raising rates.

Or they both might take those unexpected courses and really double-whammy disrupt markets.

But it doesn’t matter. The disruption is coming. It’s either coming tomorrow or between now and the end of the first quarter of 2017. But it is coming.

It’s impossible to keep manipulating rates and blowing smoke into financial markets when there’s no earnings growth, when earnings have been declining for five quarters in a row, when there’s no meaningful economic growth anywhere.

Central bankers are not gods. Free Markets are the closest thing we have to capitalist heaven, and they eventually will break free from the massive manipulation, from the extraordinary decades-old manipulations.

Because that’s what happens when markets are manipulated too high for too long.

Starting today, get ready for bond market and stock market volatility.

We’re betting interest rates are going to rise and we’re betting stock market volatility is going to explode over at my subscription newsletters.

We’re shorting the bond market by buying inverse ETFs that go up when bond prices decline (and rates rise) and we’re buying call options on the VIX.

Follow us – before the storm hits.

Sincerely,

Shah

The Situation at Wells Fargo Is Worse Than We Thought

15 | By Shah Gilani

We covered the still-breaking story last week, and I told you how it sold its customers up the river by selling them accounts and services they never signed up for, how the once-cleanest big bank in America sold its soul for a tiny fistful of dollars.

It’s already old news that the bankster culture club bred another scandal of almost biblical proportions on account of 5300 Wells’ “team members” getting the stiff arm out of the bank for doing what they were pressured to do.

It’s old news that the bank paid $185 million in fines to settle civil charges with the Consumer Financial Protection Bureau (CFPB), the Office of the Comptroller of the Currency, and the L.A. city attorney.

And it’s old news that none of that money will do one ounce of good anywhere – it’s only going to be absorbed into the black hole of the federal government.

But there’s still plenty to be said about cross-selling at Wells Fargo.

In fact, it’s worse than we thought…

Too Little, Too Late

First, for those aggrieved customers who suffered ignominious identity theft, forgery and fraud at the hands of junior banksters executing orders from above, Wells set aside $5 million to pay them back the false fees they were charged.

Do you get that? This deep and wide-ranging scheme that included the creation of two million unauthorized accounts, perpetrated by some 5300 employees (including bankers, managers, and branch managers) in 8800 branches for a measly $5 million in fees!

And we’re not talking about one of the usual suspects here (I’m looking at you, Goldman Sachs, Deustche Bank, and HSBC). We’re talking about a well-admired bank with 70 million customers and $1.9 trillion in assets.

It’s disgusting.

And to make matters worse, the Los Angeles Times unleashed an incendiary investigative piece by E. Scott Reckard titled, “Wells Fargo’s Pressure-Cooker  Sales Culture Comes at a Cost” back on December 21, 2013 detailing most of what’s come to light two and a half years later.

It’s a great piece of investigative reporting, and if you have the stomach for it, you can read it here.

One question: What took the CFPB and other regulators and district attorneys so long?

If You’re Not Thoroughly Disgusted, You Will Be

The other bit of news that’s breaking is about Carrie Tolstedt, the 55-year-old senior executive vice president of Community Banking at Wells, who announced her retirement this past July, and was the driving force behind Wells’ phenomenal cross-selling binge.

Tolsted, a 27-year Wells veteran and senior executive vice-president of Community Banking, was ranked the 27th “Most Powerful Women” in the U.S. in 2015 by Fortune.

That Tolstedt’s $1.7 million salary was augmented in 2015 with $7.3 million in stock and cash bonuses, which was announced in a Wells Fargo proxy statement detailing executive pay, and said, “under her leadership, Community Banking achieved a number of strategic objectives, including continued strong cross-sell ratios, record deposit levels, and continued success of mobile banking initiatives,” is all too telling.

When she retires, she’ll leave with an additional $124.5 million courtesy of stock, options, and restricted Wells Fargo shares, which weren’t vested but eligible because she’s “retiring.”

Yep, another exit package that should get clawed back, but probably won’t.

The facts aside, it looks like high-pressure sales tactics and a win-at-all-costs mentality trickled down from the head of the Community Banking throughout the company and bred a culture within a culture.

This coming Tuesday, Well Fargo’s CEO John Stumpf has to address a Senate Banking Committee hearing, called in astonished anger to admonish the bankster in charge. They’ll no doubt will ask him why the hell the bank is paying Tolstedt $124.5 million on the way out the door.

This travesty of a mockery of a sham is not going away so quickly for Wells Fargo.

According to the Wall Street Journal, “Federal prosecutors are in the early stages of an investigation into sales practices at Wells Fargo & Co. that led to the bank being hit last week with a $185 million fine.”

The investigation is being conducted by the U.S. Attorney’s Offices for the Southern District of New York and the Northern District of California, and while prosecutors have yet to decide if any case can be brought, either civil or criminal charges could result.

The Journal says:

The investigation is focusing on whether someone senior within the bank directed employees to falsify documents in conjunction with the opening of accounts and products without consumers’ knowledge or authorization. Prosecutors are also focusing on whether there was willful blindness to sales practices on the part of executives at the bank.

Please! That’s a no-brainer.

It’s about the bankster culture club. We all know it. And Wells Fargo knows it too.

Upon Carrie Tolstedt’s retirement announcement, Wells’ chairman and CEO John Stumpf sang her praises and the bank’s culture saying,

A trusted colleague and dear friend, Carrie Tolstedt has been one of our most valuable Wells Fargo leaders, a standard-bearer of our culture, a champion for our customers, and a role model for responsible, principled and inclusive leadership.  Because of her passion for serving our customers, wherever and however they chose to receive their banking services – online, in branches, or via mobile phones – Carrie leaves Wells Fargo uniquely positioned to continue to be a leader in retail banking, no matter how the future of banking evolves. We share in the pride that she has for the legacy, accomplishments and talent that she will leave behind.

Somebody pass me a barf bag, PLEASE!

Sincerely,

Shah

A Huge “Bond Bomb” Is Set to Explode – Here’s What You Need to Know

8 | By Shah Gilani

I recently told you that volatility is about to come back to life.

In fact, it’s already happening.

From the close last Thursday through the close yesterday, markets have fallen 2.48%. That’s the power of volatility.

Sometimes it’s a seasonal phenomenon. Traders return from the summer doldrums and markets resume normal business – and volatility gets up of the floor and starts scaring traders again.

This year, though, the timing could not have been worse.

Right now, there’s a massive $400 billion cross-market bomb sitting there, waiting for something to set it off – and market volatility could be just the thing to blow it up.

Today I’m going to tell you where this bomb is planted and how a spike in volatility could light the fuse.

Here’s what you need to know…

The Portfolio Model That’s Threatening Markets

The more than $400 billion powder keg’s actually a portfolio management trend that’s been growing for years.

It’s called “risk parity” and it makes perfect sense.

Bridgewater, the largest hedge fund in the world, runs its $70 billion All-Weather Fund using this strategy. In fact, according to Bank of America reports, there’s probably more than $400 billion being managed using this popular portfolio allocation strategy.

Risk parity, according to ZeroHedge is a, “cross-asset allocation portfolio model that assigns weight inversely proportional to volatility.”

In other words, multi-billion dollar funds and monster macro-global portfolio managers who diversify (because diversification is supposed to reduce portfolio risk) across an array of asset classes and need an allocation model that mathematically or otherwise tells them how to spread their capital across those different asset classes, are using volatility to weigh how much money goes into which asset classes.

Often criticized for placing performance ahead of concerns that the management technique exacerbates market turbulence, risk parity strategies produced dismal results last year thanks to excessive volatility in too many asset classes, including commodity prices, currencies,  and equity markets exhibiting crazy volatility by alternatively rising, falling and rising again into year-end 0f 2015.

But in 2016, risk parity’s making a comeback.

The Salient Risk Parity Index, which according to the firm’s website is a “quantitatively driven global asset allocation index that seeks to weight risk equally across four asset classes – equities, interest rates, commodities and credit. The Index is calculated daily, rebalanced monthly, and targets a 10% volatility level” is showing 2016 to be a banner year for the model, with an 18.57% annualized return using data through the end of June.

That said, there are three very big problems with the strategy…

Three (Big) Problems with Risk Parity

First, the amount of money following the strategy has gotten really big. That creates a herd that moves in the same direction, which can be off a cliff if something goes wrong.

Second, as correlation (the tendency for different asset classes to track each other, or move in the same direction – like a herd) increases, as it has been increasing lately, the diversification theory of holding different asset classes as an overall hedged strategy goes out the window. Or, we might say, over a cliff… like a herd heading the wrong way.

And third, volatility (the weighting measure used to allocate capital into different asset classes) had been coming down, and was in fact at cycle lows for equities, at yearly lows for bonds, and had been dropping steadily since April for commodities and other “hard” assets. As volatility comes down, leverage tends to go up where this strategy is used.

It gets worse. If you combine the facts that big portfolios have gotten too big to unwind gently if they’re all headed for the same exits at the same time, and that correlation is so high that all asset classes could selloff in a pure panic, with the fact that volatility has been dampened enough that historical and mathematically-driven allocation models haven’t seen this potential “tail” on their bell curves, things could go terribly wrong.

The fuse that’s been lit is volatility. The minute the calendar turned from August to September, previously tamped-down volatility across asset-classes woke up and is stretching its legs and arms outward and upward.

We’ve Been Here Before

Is this speculation on my part – that risk parity can be a bomb? Absolutely not. It’s fact.

We got a good and scary glimpse of exactly this phenomenon last August in 2015.

All it took that summer was for the Chinese to push down their currency, and BANG!

The bomb that went off, that knocked stocks down 10% in a heartbeat, and hit other asset classes, was the selling by risk parity managers when volatility, which started with currency volatility, exploded (for example: the VIX went from 13 to 40), which caused risk parity models to automatically sell as volatility weightings rose.

We’re there again.

While there are plenty of “black swans” that could trigger volatility spikes, the one I’m most concerned about is coming right at us.

The Federal Reserve’s interest rate decision-makers on the FOMC meet September 20-21. It’s unlikely that they’ll raise rates, because they presumably know that risk parity funds will react negatively (hence you hear that the Fed’s “trapped” into doing nothing) and the dreaded market selloff the Fed’s desperate to avoid might happen.

But they could raise. Because volatility’s been so subdued up until September, they might be fooled into believing that’s a trend and a good sign. On top of that, because equities are still near record highs, they might see that as a good reason to raise now. And because bond volatility has been remarkably subdued, excluding the recent fairly minor tantrum, they might think the bond market can handle a small raise.

They could raise for any or all of those reasons. In my betting book the chance of a raise is about 30% to 40%, which is very high. As far as the markets, they’re betting the chances of a hike are somewhere around 20%.

That’s scary because the markets are not pricing in a possible rate hike.

If we get one, it could get ugly.

The worst case scenario would be for the bond market to sell off, and hard.

The amount of money that would be lost if bonds tumble would immediately trigger cross-selling of other asset classes, instantly spiking volatility across the map and potentially causing risk parity funds to automatically rebalance out of increasingly volatile asset classes into cash.

We need to be prepared for that possibility.

So here’s what to do.

How to Play the $400 Billion Bond Market Bomb

First – make sure you have your stops in place when and if the bomb goes off. With volatility kicking markets back into gear, you should already be looking to tighten your stops in case a bad day knocks a few hundred points – or a thousand points – off the Dow.

Next, you’ll want to put on a play that will soar if Treasuries selloff.

I like the ProShares UltraShort 20+ Year Treasury ETF (NYSEArca:TBT), an inverse fund that goes up in price when Treasury bond prices fall (meaning yields are rising)

TBT is a leveraged ETF, which means it goes up twice as fast as the treasury market falls.

That means two things:

  1. It’s better as a short-term play. You’ll want to hold it for a couple of weeks – any more than that and tracking errors can start to interfere with your returns.
  2. It’s got plenty of juice.

We’ll hold this position for a couple of weeks, maybe longer if it’s going our way. TBT closed trading yesterday at $33.24 and its 52-week low is $29.45.

If you buy it at these levels, put a stop down around $29. That’ll get you out of the position with around a 12.75% loss, making this is a good risk-reward play.

If you’re more adventurous, and can stand some more risk, meaning possibly losing 50% to 100% of your bet, I recommend buying call options on TBT for even more leverage.

For my money, I’m always willing, when it comes to options, to risk a small amount of my capital (usually 1%) for a potential couple hundred percent gain on the position. If you want to play that way, buy the calls.

Sincerely,

Shah

Why the Latest Big Bank Scandal Is Worse Than Usual

29 | By Shah Gilani

Yesterday, Wells Fargo & Co. (NYSE:WFC) – America’s third-largest bank by assets and one of the “Big Six” too big to fail banks – got hit with a $190 million fine from the Consumer Financial Protection Bureau.

This isn’t surprising. In fact, big banks get hit with hefty fines for shady activity all the time.

But yesterday’s judgment against Wells Fargo is different. And the reason why is downright disturbing.

What happened at Wells Fargo is an indication that the corrupt culture of big banksters is so pervasive that it infects everyone, from the billionaires at the top all the way down to salespeople on the bottom rung of the corporate ladder.

Today, I want to take a close look at Wells Fargo’s latest misstep, and contrast it with some other big bank skullduggery to show you just how different this scheme is than what we’ve seen in the past – and why that’s a huge problem.

Let’s take a look…

Bankers Gonna Bank

We’ve been around this particular block many, many times here at Insights & Indictments. Too many to count.

A bank misbehaves, gets caught, incurs a fine that amounts to a slap on the wrist, then goes back to testing the limits of government regulation and the reach of government power around the world.

As many of you know, Deutsche Bank (which I recently called the world’s most dangerous bank) is one of the absolute worst offenders. Since 2008, DB has paid more than $9 billion in fines and settlements to government regulators in the U.S. and Europe.

You might be thinking that $9 billion sounds a lot like government overreach. And normally, I’d be right there with you.

But DB has been the undisputed king of corruption, and has been caught scheming to manipulate the price of gold and silver, defrauding mortgage companies, and violating U.S. sanctions by trading in Iran, Syria, Libya, Myanmar, and Sudan. DB was also punished to the tune of $2.5 billion for its role in manipulating the London Interbank Offered Rate, or LIBOR, which is the interest rate that banks charge one another

And while DB is the king of corruption, we can’t forget HSBC, which has a long and ignominious rap sheet of its own. HSBC has paid billions of dollars to settle allegations of money laundering and mortgage-market irregularities. It’s paid upwards of $10 billion in civil penalties relating investigations of global forex-market manipulation. And it’s under constant scrutiny and investigation for aiding and abetting tax evaders around the globe.

But, as I said, the situation at Wells Fargo was different.

The corrupt culture club this time wasn’t a handful of top executives plotting to ruin the economy for their personal benefit, or a gang of top traders manipulating foreign exchange fixings, LIBOR, or screwing clients on derivatives trades to fatten bonus pools.

This time, it was 5300 sales employees and their managers who were caught emulating their scheming bosses.

If this isn’t prima facia evidence that banks breed corrupt cultures, then pigs can fly.

Here’s what happened…

What Went Down at Wells

Wells Fargo, considered a consumer-friendly, mostly plain-vanilla big bank is big into cross-selling clients and customers services the bank offers.

Cross-selling is big business. It’s cheaper, by a long shot, to cross-sell an existing customer on a new service, like a mortgage, or a business credit line, a deposit account, or a credit card account, than it is to bring in brand new customers.

Bank sales employees are “incentivized” to get customers to buy into new products.

In fact, at Wells Fargo, incentive bonuses for successfully cross-selling products can be anywhere from 3% of an employee’s salary to 15%, and sometimes more. So it’s a nice “bump” if you can get it.

Well, it turns out that 5300 Wells Fargo employees, or about 2% of the bank’s workforce, figured out how to make those cross-selling bonuses a reality.

Frighteningly, and criminally in my opinion, the bank’s customers weren’t aware they were in on the deal.

From 2011 through 2014 bank employees opened up two million new product accounts on behalf of thousands of bank customers who had no idea bank employees were setting up unauthorized accounts by creating false PINS, using made-up emails and phone numbers, and falsifying signatures.

Among other accounts, the army of 5300 opened 1.5 million deposit accounts and 565,000 credit card accounts. They even illegally transferred money between accounts to make the new accounts look legitimate.

It’s not surprising that they got caught. After all, sooner or later customers were going to complain they were getting charged fees for accounts they never opened.

What’s surprising is the scam went on nationwide. It was systemic!

Wells Fargo, back in 2013, when the first allegations of this fraud were reported in the Los Angeles Times, denied it completely. Of course, the crimes were too big and pervasive to hide and the criminal activity was eventually weeded out.

That’s how we know there were 5300 employees fired over the bonus-bump scheming.

The announcement yesterday that Wells Fargo would have to pay a $190 million fine, $100 million to the Consumer Financial Protection Bureau, $50 million to Los Angeles County, and $35 million to the Office of the Comptroller of the Currency, shocked everyone, especially Wells Fargo customers, who had no idea what the bank’s culture had become.

The Hard Questions

So, how is it that an enterprise as large as Wells Fargo, which employs over 260,000 people, could have created an across the country culture of criminality?

Is it that banks are a breeding grounds for greedy, money-grabbing criminals, or is the incentive system a recipe for criminal behavior?

I don’t think either get it quite right.

What if the bad behavior at so many banks was the result of top management’s bad behavior?

What if the top brass of these perpetually scheming criminal enterprises foster a culture of greed at all costs, at any cost?

That’s where culture begins and emanates from – the top. For decades now, bank employees have watched – just as we have – their top executives show blatant disregard for their customers, their country, and the global economy while lining their own pockets. Why wouldn’t they do the same?

But… what if there was personal responsibility at the top?

What if all bank criminals went to jail, especially all the top criminals who foster the corrupt culture club?

Would that be too much to ask?

Sincerely,

Shah

You Can Become a Goldman Sachs Partner for Just One Dollar (Here’s Why You Shouldn’t)

2 | By Shah Gilani

Goldman Sachs, the second-largest bank in America and frequent target of scorn at Wall Street Insights & Indictments, has launched a new venture.

Starting right now, for one measly dollar, you can partner with Goldman Sachs to make money.

It’s a safe bet, at least up to $250,000, so go ahead and get your tentacles on.

All you have to do is deposit a dollar in Goldman Sachs Bank USA – not by visiting a branch, because there aren’t any, but by going to GSBank.com and opening an account.

Goldman will pay you interest on your savings account well above the national average offered by other banks.

And it will use your money to make money for itself.

It’s a typical Goldman partnership with their customers – one for you, ten for them.

How will Goldman make a ton of money off you? They’re starting another bank, an online lender they’re calling Marcus, and they’re going to use the savings you park in GSBank to fund loans made by Marcus.

Here’s how the game will work and why you might not want to deposit more than FDIC insurance will cover, just in case things go wrong (and if the past is any indication, they likely will).

Why the “Vampire Squid” Needs Retail Deposits

Goldman Sachs wants – make that needs – to get into retail banking, meaning gathering deposits from Joe Six Pack and anybody else who wants the cache of having an account with Wall Street’s bad boys, infamously described by Rolling Stone magazine’s Matt Taibbi as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

The great vampire squid needs retail deposits because they are “sticky.”

Ever since the financial crisis and the demise of Bear Stearns and Lehman Brothers due to their inability to raise short-term funds when they desperately needed them, regulators have been pushing banks to have more secure sources of funds.

Retail deposits are the safest sources of short-term funding. Sure depositors can withdraw their money, but according to the Basel Committee, an international bank regulatory authority, retail deposits have only a 10% chance of fleeing within 30 days of some major financial turmoil.

That makes them “sticky.”

Banks use short-term funding sources, like issuing commercial paper, to finance their trading books and “assets.” For banks, loans and their trading positions are assets. Their liabilities are what they owe, which includes deposits.

But because deposits as liabilities are sticky, regulators are more comfortable with banks holding more deposits as a means of financing their assets.

Goldman’s almost always been an investment bank, but became a bank holding company (so it could borrow directly from the Federal Reserve) like a commercial bank, on a Sunday night at the height of the financial crisis in 2008.

Goldman created Goldman Sachs Bank USA (GSBank) a wholly-owned, direct subsidiary of Goldman Sachs Group Inc. to be its retail bank. GSBank is a New York State chartered bank, a member of the Federal Deposit Insurance Corporation (FDIC), and regulated by the Federal Reserve System.

In April, Goldman closed on the purchase of General Electric’s GE Capital Bank’s online deposit platform with $16 billion in deposits ($8 billion in direct deposits and $8 billion in brokered deposits). That new hoard was put into GSBank, which Liz Beshel Robinson, Goldman Group Treasurer, called a “new funding channel.”

GSBank already has more than $128 billion in assets (about 15% of Goldman’s total assets) against its deposit base of about $89 billion today.

This month, Goldman created Marcus, named after founding partner Marcus Goldman who in 1869 joined with Samuel Sachs to start Goldman Sachs. Marcus, formally, Marcus by Goldman Sachs (sounds like a line of men’s underwear) is an online lender, like Lending Club or Prosper (which, if you’ve been following along with me for a while, you know I’m not a fan of).

Marcus is slated to launch in October, when it will issue consumer and possibly small business loans just the way other online lenders do.

Online lending has taken a beating lately, which makes Goldman’s timing look terribly off – they’re supposed to be smarter than their peers and will supposedly make online lending work where others are failing.

With trading revenue, investment banking revenue, and other traditional revenue streams taking it on the chin lately, Goldman needs new revenue streams.

And that’s where you come in, partner.

To attract deposits GSBank is paying five times more interest on six-month CDs than national banks. On an annual basis, it’s paying almost 1.05% for your money.

Go ahead, “partner’ with them and help finance their lending business at Marcus.

But don’t deposit more than $250,000 in GSBank if you’re afraid Goldman’s notorious greed might imperil the bank and your deposits there, because $250,000 is individually what you’re insured for by the FDIC.

And you should be worried. Goldman, the vampire squid, has a long rap sheet when it comes to looking out for themselves while duping customers doing business with them (you can check out their rap sheet here).

Goldman Has a Long History of Duping Its Customers

As far as the squid’s big-time foray into retail, the story of the Goldman Sachs Trading Corp. (GSTC), Shenandoah, and Blue Ridge Corporation is a worthwhile reminder.

In December 1928 Goldman got into retail investment trusts in a very big way. With the bull market “long in the tooth,” it formed GSTC, an investment trust that pooled investors money to buy shares, pretty much like a mutual fund.

While the plan was to create a $40-$50 million pool (trust?) it began life as a $100 million fund formed with 1 million shares at $100 a share. Goldman bought all the shares GSTC accumulated and sold them to the public on the opening day at $104, netting a $3 million profit, which today is equivalent to $1 billion fee for one transaction.

When the share price got as high as $222.50, twice the value of the underlying cash and securities, Goldman got greedier. It sold more shares to the public, bought $57 million worth on margin for itself, formed another investment trust, Shenandoah Corp. that was seven times oversubscribed. GSTC owned 40% of Shenandoah while Goldman Sachs owned 10% of GSTC.

Then in August 1929, Shenandoah sponsored Blue Ridge Corporation, a $142 million investment trust, 86% of which was owned by Shenandoah. In the end, Goldman with $20 million in partnership capital leveraged itself on the backs of retail suckers wanting a piece of the Goldman mystique, up to $500 million.

Just before the October 1929 crash, shares reached $326, then fell to $1.76.

According to “Goldman Sachs: The Culture of Success,” Lisa Endlich’s beautifully researched book:

When asked many years later what sparked Goldman Sach’s desire to embark on this frenzy of activity, Walter Sachs sadly replied, “To conquer the world. Not only for greed for money, but power sparked it and that was the great mistake because I confess to the fact that we were all influenced by greed. We were carried away by the bull market, we thought these values were going to be justified…and the bottom fell out of everything as we were caught with our pants down.”

So go ahead and partner with Goldman – up to your protected limit. Otherwise you’ve got no one to blame if the squid’s tentacle pops a bubble somewhere and wipes out your savings.

Sincerely,

Shah

Chipotle Stock Continues to Struggle – Here’s What Shah’s Doing Now

0 | By Wall Street Insights and Indictments Staff

After a string of high-profile foodborne illness outbreaks, Chipotle Mexican Grill Inc. (NYSE:CMG) is trying to win back customers with free stuff.

And yet, the stock is still struggling. It’s lost nearly half its value – 44% – since (October 13, 2015, dropping from a high of $750.42 to $415.15 as of the close on August 30, 2016.

Will the company’s new loyalty promotions – free meals for kids on Sundays and free drinks for high school and college students – help propel the stocks back toward its old highs?

Shah doesn’t think so, as he said on a recent episode of Varney & Co.

In fact, if the stock slips just a little more, to $400, it could go a whole lot lower…

Click below for the full video, where Shah comments on the EU’s Apple cash grab, Google’s entry into ride-sharing, and Alibaba’s value.


Burying Our Future at Jackson Hole

17 | By Shah Gilani

At 10:00 am Eastern this morning, Federal Reserve chair Janet Yellen gives her greatly anticipated opening speech at the Federal Reserve Bank of Kansas City’s annual economic symposium held in beautiful Jackson Hole, Wyoming.

Today, I’m going to tell you what she says before she says it. If you’re reading this after the speech, you can gauge whether or not I was right.

This exercise, “guessing” what Yellen is going to say, before she speaks, is important.

It’s important because if I’m right, you’ll know I wasn’t guessing and you’ll know exactly how the actors in Jackson Hole are burying us alive.

And you’ll know what’s going to happen with financial markets.

Here’s what she’s going to say…

You Can’t Fight the Fed’s Future

The title of the meeting this year in Jackson Hole, which is usually attended by the Federal Reserve chair, the world’s central bankers and economists, is “Designing Resilient Monetary Policy Frameworks for the Future.”

The title of Janet Yellen’s speech, according to the symposium’s agenda, is “The Federal Reserve’s Monetary Policy Toolkit.”

So, first of all, I’ll tell you the symposium is about covering central bankers failed tracks and offering up a witch’s brew of monetary concoctions that, if necessary, will be implemented in the future, just so the world knows these gods of monetary manipulation have our backs and will make everything alright, no matter what fears we have.

Excuse me while I laugh my head off.

Yellen’s speech, and she’s wearing the tallest, most pointed black hat at the barn-raising event, will be about how the Fed hasn’t failed, how unemployment is better because of the Fed’s policies, how the U.S. is leading the world out of global recession, and how, not matter how it looks, there are other tools the Fed can drill and thrill us with, just in case we’re worried that what’s not really been working, stops working, or implodes us.

All this is necessary because the Fed’s credibility is in a ditch somewhere in Detroit.

Yesterday, the Wall Street Journal’s Jon Hilsenrath penned a fantastic piece titled “The Great Unraveling: Years of Fed Missteps Fueled Disillusion With Economy and Washington.” The subtitle was, “Once-revered central bank failed to foresee the crisis and has struggled in its aftermath, fostering the rise of populism and distrust of institutions.”

Hilsenrath cites how steeply confidence in the Fed has fallen, saying,

An April Gallup poll found 38% of Americans had a great deal or fair amount of confidence in Ms. Yellen, while 35% had little or none. In the early 2000s, confidence in Chairman Alan Greenspan often exceeded 70%.

Back when the cryptic Alan Greenspan spoke in tongues when he spoke at all, most Americans, and a good part of the world, thought he was some kind of monetary god. The economy was humming along and his mostly low interest rate policies seemed to be doing the trick. Of course, in hindsight, we know the original modern central bank cranks set us up for the financial crisis and Great Recession.

So much for black magic.

One reason the Fed gets it so wrong, so often, is their economic “models” are like trash trucks – garbage in, garbage out. They’re consistently wrong in their predictions and prognostications. Still, people believe they have some black box that predicts economic futures. They don’t and they’ve proved that for decades.

According to Hilsenrath’s article (which is impossible to argue with) the Fed:

…missed signs that a more complex financial system had become vulnerable to financial bubbles, and bubbles had become a growing threat in a low-interest-rate world; were blinded to a long-running slowdown in the growth of worker productivity, or output per hour of labor, which has limited how fast the economy could grow since 2004; and had no idea inflation wouldn’t respond “to the ups and downs of the job market in the way the Fed expected.

What’s Actually Being Said in Jackson Hole

So with all that in mind, and knowing the symposium is about “Monetary Policy Frameworks for the Future,” and that Chair Yellen is going to talk up her toolkit, here’s what she’s going to say:

  1. What the Fed’s done has worked, look at unemployment at 4.9%
  2. Look at the U.S. economy, it’s not good, but the Fed expects it to get better
  3. Global markets still need help, but other central banks are doing God’s work
  4. If there’s any slippage in the U.S. the Fed’s got the fixes
  5. They can always do more QE since they have an unlimited balance sheet
  6. They can buy other assets
  7. They can take rates negative if they absolutely had to
  8. They have other tricks in their bag that they don’t want to trot out unless they’re needed

Here’s what she really means, and what she’s not saying:

  1. The only thing the Fed has to point to is lower unemployment, and if you’ll notice, financial assets are enjoying bubblicious highs, but let’s not talk about the bubble-making aspect of that.
  2. The economy is crawling along at a 1.2% growth rate and that has to change because our models, that show inventories are depleted and will get restocked, say a better growth’s coming. Only, it may not happen, on account of the fact that our models are almost always wrong.
  3. Global markets are in a death spiral and central banks are doing everything they can to save the world. Negative rates aren’t helping, and God help us all if any of these big economies slip back into recession or some black swan sinks some big financial market somewhere.
  4. The Fed’s done all this before, it knows where its tools are and how to use them. More is always better if something’s not working.
  5. The Fed’s done a couple rounds of QE, so it’s ready and willing to go the full 15 rounds if it has to. QE has never been an effective trickle-down policy, but it helps the banks stay profitable.
  6. The Fed’s willing to buy more assets like more Mortgage-backed securities and other government-backed assets, not just Treasuries. Hell, we’ll buy corporate bonds, and stocks if we have to, because you know we can.
  7. Negative rates are on the table. If the goes negative, they’ve lost all control.
  8. There’s nothing the Fed can be stopped from doing. If it comes down to black magic they’ll try it because it’s about saving the Fed and its constituent big bank shareholders more than the economy.

Sure, the markets are flat, waiting with baited breath to whatever the witchy woman says.

They’ll be some reaction.

If Yellen is perceived to be dovish, meaning she’s leaning towards more easing, more stimulus, if necessary, markets will rally for a while. Maybe a few hours, days, or weeks.

If Yellen is hawkish, meaning she indicates things are so rosy a rate hike isn’t off the table (she won’t give a timeframe), markets will drop. Maybe a lot.

In the end, Janet Yellen’s job now is to not spook markets. It’s not about the economy, stupid. It’s about the markets holding up long enough for the economy to prove they’re not in bubble territory and that their lofty levels are justified.

Folks, there isn’t enough time on any economic clock for that to happen.

Janet Yellen and the Fed, like all the world’s central banks, believe they’re gods and can corral the free market and manipulate the world spinning on its axis to their beat.

Words will never be enough to control markets when they decide they’ve heard enough.

That’s what we have to look forward to, no matter what Janet Yellen says today.

Sincerely,

Shah

Are the Markets Prepared for a “September Surprise”?

2 | By Wall Street Insights and Indictments Staff

On Making Money with Charles Payne, Shah addressed the question on everyone’s mind right now: will the Federal Reserve raise interest rates in September?

If so, what effect with that have on global markets?

It could have a huge impact on U.S. equities, the bond market, and even the presidential election.

That the markets are making new highs right now indicates that the Fed has the leeway to raise rates, but as Shah correctly points out, the central bank keeps moving the goalposts when it comes to rate increases.

What will happen come September? Click below for the full video: