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4 Factors Signaling Volatility Will Return With A Vengeance

Buckle up. It's going to get bumpy.
Wednesday, May 20, 2015, 8:43 AM

Today we welcome Nomi Prins as our newest contributing editor to PeakProsperity.com. We're thrilled to have her keen perspective & analysis added to that of our other editors. Please join Chris and me in giving her a very warm welcome to the site community. ~ Adam

No one could have predicted the sheer scope of global monetary policy bolstering the private banking and trading system. Yet, here we were - ensconced in the seventh year of capital markets being buoyed by coordinated government and central bank strategies. It’s Keynesianism for Wall Street. The unprecedented nature of this international effort has provided an illusion of stability, albeit reliant on artificial stimulus to the private sector in the form of cheap money, tempered currency rates (except the dollar - so far) and multi-trillion dollar bond buying programs. It is the most expensive, blatant aid for major financial players ever conceived and executed. But the facade is fading. Even those sustaining this madness, like the IMF, are issuing warnings about increasing volatility.

We are repeatedly told these tactics benefit broader populations and economies. Yet by design, they encourage hoarding, or more crafty speculative behavior, on the part of big financial firms (in the guise of obeying slightly adjusted capital rules) and their corporate clients (that largely use cheap funds to buy their own stock.) While politicians, central banks and multinational government-funded entities opine on “remaining” structural weaknesses of certain individual countries, they congratulate themselves on having staved off more acute crises.  All without exhibiting the slightest bit of irony. 

When cheap funds stop flowing, and “hot” money shifts its attentions, as it invariably and inevitably does, volatility escalates as it is doing now. This usually signals a downturn, but not before nail-biting ups and downs in the process.

These four risk factors individually, or collectively, drive rapid price fluctuations. Individually, they fuel market volatility. Concurrently, they can wreak far greater havoc:

  1. Central Bank Policies
  2. Credit Default Risk
  3. Geo-Political Maneuvering
  4. Financial Industry Manipulation And Crime

Events that in isolation don’t impact markets severely can coalesce with more negative results. This is important to understand when prioritizing personal investment decisions. In this two-part report, I will outline driving forces behind today’s volatility and provide suggestions as to what you can do to protect yourself, and even thrive, going forward.

Take Central Banks First

Two weeks ago, stock and bond markets dipped when Federal Reserve Chair Janet Yellen announced, “equity market valuations at this point generally are quite high."  She admitted,  “There are potential dangers." She saw no bubble. The Fed continues to claim its policies have fostered sustainable - if slow – growth for the mainstream economy.

This wasn’t the first time Yellen has said as much. It won’t be the last. In November 2013, she saw no equity or real estate bubble, either. In July 2014, at an IMF lecture, she said the Fed wouldn’t raise rates just to burst bubbles, rather when the US has a healthy job market with stable prices.  She has assumed Ben Bernanke’s mantras in this regard.

Each time she speaks, the media enters interpretation overdrive and markets react similarly. They drop initially, then rebound to slightly lower levels than before. The pattern is becoming increasingly pronounced, though, as is the associated volatility.

Recent volatility spikes underscore the fragility of markets inhaling cheap money due to the global central bank policies that began with the US Federal Reserve, and spread to the European Central Bank, the Bank of Japan and the People’s Bank of China.  The IMF has recently stated that, despite rising volatility, a dose of “QE-Plus” may be needed.

Since the beginning of 2015, the stock market has fluctuated between new highs and turning negative for the year. Movements are mostly linked to the rate hike timing guessing game, amidst a roster of other commonly circulated “threats” from Grexit to erratic oil price behavior. Associated speculation is marked by lengthy media debates about what the word ‘patience’ means regarding Fed talk on rate hikes and smatterings of the realization that artificially stimulated markets don’t promote real long-term growth.

Growing Credit Risk

Yellen also mentioned "compression of spreads on high-yield debt, which certainly looks like a reach for yield type of behavior.” Obviously.  When high-grade debt interest rates are low, the only place to grab yield is in riskier securities. A credit bubble develops. This awareness has not been met with deterrent policy though, leaving the propensity of compressed spreads (and credit default spreads) to blow out (widen) from these levels.

The Fed’s goalposts on rate hikes keep changing. Globalization of low to negative interest rates and dampening of currency exchange rates relative to the dollar has helped keep US rate policy where it is, though the Fed doesn’t say this. The Fed’s zero-interest-rate and QE policy has propped markets, encouraged corporate share buybacks, caused yield seekers to buy riskier securities, and provided banks incentives to leverage it all.

Yellen isn’t wrong in her diagnosis; she’s just ignoring the Fed’s role in it. So is every other central bank and multinational entity. They offer liquidity crack and then wonder why junkies multiply. The Fed missed the last bubble and is missing this one. Meanwhile, the rate-hike guessing game increases market volatility.

From Geo-Politics to Manipulation

Excessive speculation also provokes volatility, especially as enacted by the major market players that control the narrative and the trading volume. This occurs with stocks, bonds, and commodities.  Often such moves rely on geo-political tensions as a cover.

When the US and its Euro-friends slapped economic sanctions on Russia over its actions in the Ukraine, the fallout was used to explain weaker market days.  Oil price drops were partially attributed to Middle East tensions, ostensibly because OPEC didn't agree to withhold production. They were also used to explain Russian economic weakness, allowing the Obama administration to gloat about the success of its sanctions.

Energy volatility, widely reported as oil price movements, can impair household budgets and the overall economy. When oil prices are elevated, associated household costs rise. When they drop, media stories about resultant layoffs can dampen markets and household investments in them. To the extent that prices are manipulated in either direction by financial players and not end-producers or users, they cause excessive volatility.

Big banks don’t care about any of this. They have the capital and global agility to leverage whatever situation arises. If Russia is weak, head to Latin America. If US hedge funds force Argentina into technical default, press Obama to lift sanctions and head to Cuba. It’s a merry-go-round of institutional speculation followed by volatility and decline.

Financial firms, including banks, hedge funds and less regulated players, exert tremendous power through leveraging capital, trading positions and public predictions. They can hype up prices to attract money into their market of choice and quickly reverse course, aided by a media eager to follow the story-du-jour for page-views or ratings.

The power of the large trading players to move prices remains vast. The Big Six US banks control 97% of all trading assets in the US banking system and 95% of all derivatives. Thirty Globally Systemically Important Banks (GSIB’s) control 40% of lending and 52% of assets worldwide. As volatility rises, ongoing concentration in these still-too-big-to-fail entities that can manipulate financial markets, produces triple digit stock market swings that capture headlines and stoke people’s fears.

Subsidization for the elite banking class can’t last forever. But it has already overstayed its welcome many times over, so predicting a specific end date is not easy (though I’m going with mid-2016, when the ECB will be done with this round of bond-buying.) In the interim, rising volatility signals an unraveling of current polices that can’t be ignored.

The uncertainty surrounding the inevitability, if not the exact timing, of multiple and possibly overlapping volatility drivers is itself a source of volatility. For the average person, these signs can be scary. Taking steps to avoid the circus as much as possible, such as extracting money from the markets, securing personal assets, and waiting out the swings, can be a source of emotional comfort and future financial stability.

In Part 2: Navigating Safely In The Coming Era Of Volatility, we look closer at the factors mostly likely to trigger market gyrations, as well as steps investors should be considering to safeguard capital in a coming age that promises turbulence and unpredictability.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

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14 Comments

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5570
What an excellent piece of writing!

I am really thrilled with this first piece by our newest contributing writer Nomi Prins.

For those who may not be familiar with her excellent work, here's some of her extensive bio.

Nomi Prins is a renowned journalist, author and speaker. Her latest book, All the Presidents' Bankers, is a groundbreaking narrative about the relationships of presidents to key bankers over the past century and how they impacted domestic and foreign policy.

Her other books include a historical novel about the 1929 crash, Black Tuesday, and the hard-hitting expose It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals from Washington to Wall Street (Wiley,2009/2010). She is also the author of Other People’s Money: The Corporate Mugging of America (The New Press, 2004) which was chosen as a Best Book of 2004 by The Economist, Barron's and The Library Journal, and Jacked (Polipoint Press, 2006).

She has appeared on numerous TV programs: internationally for BBC, RtTV, and nationally for CNN, CNBC, MSNBC, CSPAN, Democracy Now, Fox and PBS. She has been featured on hundreds of radio shows globally including for CNNRadio, Marketplace, NPR, BBC, and Canadian Programming. She has featured in numerous documentaries shot by international production companies, alongside prominent thought-leaders, and Nobel Prize winners.

She is a Forbes contributor. Her writing has been featured in The New York Times, Fortune, Newsday, Mother Jones, The Daily Beast, Newsweek, Truthdig, The Guardian, The Nation, Alternet, NY Daily News, LaVanguardia, and other publications.

I invite you to check out the rest.  

Context is essential, especially in these times, and that is exactly what is typically missing from most main stream financial publications.

Nomi brings to us the experience of having extensively researched and published works on the disturbingly routine shenanigans of the banking/financial sector.

Not only do they lie cheat and steal whenever they can, but they get away with it with nominal, token fines when they finally do something so blatant that the "regulators" and "prosecutors" are almost literally forced to act.

As happened, yet again, today:

Global Banks to Pay $5.6 Billion in Penalties in FX, Libor Probe

May 20, 2015

Officials said a 19-month investigation in which FBI agents conducted 175 interviews and reviewed a terabyte of trading data showed traders withholding bids or offers to avoid moving the rate in directions that would hurt open positions held by other members of the group, in violation of antitrust laws.

Members of the group discussed whether to allow one Barclays trader to join the chat room and ultimately decided to let him in for a “1 month trial,” but advised him: “mess this up and sleep with one eye open at night,” according to the New York Department of Financial Services.

The fines, which include penalties from the Federal Reserve and other regulators, come on top of a combined $4.3 billion many of the same banks paid in November to resolve similar charges from U.S. and U.K. regulators.

Bank of America Corp. will also pay a $205 million penalty to the Fed to resolve the regulator’s foreign exchange probe. Bank of America didn’t face similar action from the Justice Department.

Citigroup, which was accused of being involved in the misconduct from December 2007 through January 2013, is paying the largest criminal fine of $925 million, in addition to a Fed penalty of $342 million. The other banks were accused of engaging in the conduct for various periods within that time frame.

Note that not one single person will be facing any jail time. No indictments were handed down. This is despite specific email exchanges with people’s names on them.

Were this a normal prosecution of something or some entity that the Justice Department really hated and wanted to make an example out of, say an environmental organization or perhaps a raw milk collective, the normal procedure would have been to start with the persons on the email strings, threaten them with hundreds of potential years in the Federal Penitentiary, and then lean on them to name names higher up the ladder. You don’t stop until you reach as high into the organization as you can.

You see, the idea behind criminal probes is that you want to both catch and punish the prior wrong doings but also deter future criminal acts.

Let’s see how they did. Citi was fined fined the most and dinged for $925 million. First quarter 2015 revenues for Citi were $19.7 billion. This means that 4.5% of a single quarter’s incoming cash flows, or roughly 0.5 weeks of operational cash flows were dinged.

This would be like you robbing a bank, being caught, and then having the prosecutor come out and hit you for a half a week’s pay.

Not only is nobody else deterred by your “punishment” but you probably aren’t either.

While the Justice Department wanted to appear they were being tough, it was yet another massive failure on their part to do anything meaningful, and that means Obama's administration is literally the very worst on record for going after Wall Street fat cats.  The bar is now so low, there's really no further to go...except to just default into overt Ukrainian style plutocracy.

kaimu's picture
kaimu
Status: Silver Member (Offline)
Joined: Sep 20 2013
Posts: 160
Aloha! The whole world and

Aloha! The whole world and human history has been nothing but a "plutocracy"! The wealthy have always ruled the poor, because the poor want to be ruled. A few times the poor revolted, but the system settled back into plutocracy complacency. To me the "complacency level" of the Middle Class is now at extremely high levels. This only encourages our rulers to add on more rules and take away more financial freedom. 

While the poster below was from an era when industrial slavery was allowed the era we are in now allows debt slavery to flourish. Those at the bottom of the pyramid have always suffered under some sort of slavery. Those at the bottom have always served those at the top! We can't all be Kings ...

Capitalism

What is wrong with "capitalism"? It is just the accumulation of capital. Is anyone here thinking that Stalin or Vladamir Putin never accumulated capital or capital assets? Is anyone here thinking the leaders of the Chinese Communist Party aren't over in Shanghai accumulating capital? Does anyone think that Hillary Clinton isn't an expert at "capitalism"? Or the head of the Sierra Club? Or Al Sharpton? Show me an avowed anti-capitalist and I will show you a liar! As they drive away in their BMW SUV!

If you live in the USA you're a full on capitalist whether you get food stamps or sit at the top office of Goldman Sachs. Its just the CEO of Goldman Sachs accumulates more capital at a faster rate than the average EBT recipient. There is no "level playing field" ... never was! Problem is it is a lot more obvious the game is rigged now than ever before. We are the #1 Consumer Nation of all human history! Only in America can you be classified dirt poor and have a car and flatscreen! Wonder why foreigners want in the Land of Opportunity? 

Still where would US GDP be without the huge debt based government spending? What would Walmart's share price look like with no EBT? What would the share price of Lockheed Martin look like with a 50% cut in Defense spending? But, dang ... we need wars!!

 

 

Broadspectrum's picture
Broadspectrum
Status: Bronze Member (Offline)
Joined: Mar 14 2009
Posts: 88
Look Who Was Indicted

Hello Chris and All,

Right, no one is going to jail over currency manipulation but this guy is going to jail for doing what he did.  As Chris said, the Justice Department is making an example out of him because he embarrassed the establishment and they hate him for that. That’s not justice.  That’s a mockery of justice.   

http://www.nbcnews.com/news/us-news/d-c-gyrocopter-pilot-douglas-hughes-...

Broadspectrum

Jbarney's picture
Jbarney
Status: Silver Member (Offline)
Joined: Nov 25 2010
Posts: 233
Jail Time

Chris pointed out that none of the bankers get jail time....

The teachers involved in the test score manipulation got three years.....

People get arrested for marijuana possession every day....

Sad statement about where our judicial priorities are.

Jason

thc0655's picture
thc0655
Status: Diamond Member (Offline)
Joined: Apr 27 2010
Posts: 1517
Look into the mirror

pat the rat's picture
pat the rat
Status: Silver Member (Offline)
Joined: Nov 1 2011
Posts: 100
banks

Just got a payment from my bank about class action settlement of $ 3.80. I know it cost us $100.00s of dollars at  the time. If I knew it was so little I would told them to keep out of discuss!!! 

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1429
Let's forget about the

Let's forget about the different "ruling systems".  We are at a point where ruler theft is at an historic high.  Does the GMO foods include a "pacify switch"?  Kings, Queens of yore?  Childs play.  Did America win the Cold War?

Time2help's picture
Time2help
Status: Diamond Member (Offline)
Joined: Jun 9 2011
Posts: 2769
Did America...
KugsCheese wrote:

Let's forget about the different "ruling systems".  We are at a point where ruler theft is at an historic high.  Does the GMO foods include a "pacify switch"?  Kings, Queens of yore?  Childs play.  Did America win the Cold War?

Did America win WWII?

kaimu's picture
kaimu
Status: Silver Member (Offline)
Joined: Sep 20 2013
Posts: 160
WW2?

Aloha! We lost WW3! And WW4 is on the horizon ...

Bobby's picture
Bobby
Status: Member (Offline)
Joined: Nov 26 2009
Posts: 19
Nomi Prins' Inclusion is Big - Congrats & Welcome!

Having Nomi Prins on board is a great breakthrough for peakprosperity.com. This is what investigative journalism should be like. Welcome Nomi Prins!

sand_puppy's picture
sand_puppy
Status: Diamond Member (Offline)
Joined: Apr 13 2011
Posts: 1763
SEC grants permission to continue to defraud the public

SEC Commissioner Furious That SEC Has Made A Mockery Of "Recidivist Criminal Behavior" By Banks

After being caught red handed engaging in fraud, several days ago the TBTF banks received a sharp "wristslap," but were then NOT disqualified from participating in the market for the next 3 years as required by statute.  They were instead given a wavier to continue business as usual.  

Two weeks ago, SEC commissioner Cara Stein raged that the SEC would turn a blind eye to Germany's Deutsche Bank for a "Decade Of Lying, Cheating, And Stealing".  

Two days ago, she files a dissenting opinion with the SEC that accurately says what EVERY REASONABLE PERSON ON EARTH KNOWS TO BE TRUE.

Traders at these firms “entered into and engaged in a combination and conspiracy to fix, stabilize, maintain, increase or decrease the price of, and rig bids and offers for,” the euro-dollar foreign currency exchange (“FX”).  To carry out their scheme, the conspirators communicated and coordinated trading almost daily in an exclusive online chat room that the traders referred to as “The Cartel” or “The Mafia.” Additionally, salespeople and traders lied to customers in order to collect undisclosed markups in certain transactions.  This criminal behavior went on for years, unchecked and undeterred.

Should these institutions be permitted to continue as players in the markets (be "given a waiver" from the required disqualification)?  Hell no.  They have been convicted of fraud multiple times and each time continued to operate without being barred from the market as required by law.

There are compelling reasons to reject these requests to waive the automatic disqualifications required by statute or rule.  Chief among them, however, is the recidivism of these institutions.   For example, in the face of the FX criminal action, a majority of the Commission has determined to grant Citigroup yet another WKSI waiver (“WKSI” = well-known seasoned issuer status), its fourth since 2006.  It is worth noting that Citigroup was automatically disqualified from WKSI status between 2010 and 2013 for unrelated misconduct, meaning that it has effectively now triggered WKSI disqualifications five times in roughly nine years.  Further, through this latest round of Orders, the Commission has granted:

 

Barclays its third WKSI waiver since 2007;
UBS its seventh WKSI waiver since 2008;
JPMC its sixth WKSI waiver since 2008; and
RBSG its third WKSI waiver since 2013.
The Commission has thus granted at least 23 WKSI waivers to these five institutions in the past nine years. The number climbs higher if you include Bad Actor and other waivers.

It is troubling enough to consistently grant waivers for criminal misconduct.  It is an order of magnitude more troubling to refuse to enforce our own explicit requirements for such waivers.   This type of recidivism and repeated criminal misconduct should lead to revocations of prior waivers, not the granting of a whole new set of waivers.  We have the tools, and with the tools the responsibility, to empower those at the top of these institutions to create meaningful cultural shifts, yet we refuse to use them.

 

At least one SEC commissioner seems to see and say accurately what is going on.  

I am reminded of James Howard Kunstler's statement that the government is "hemorrhaging legitimacy." How obvious can public corruption be?

 

 

Time2help's picture
Time2help
Status: Diamond Member (Offline)
Joined: Jun 9 2011
Posts: 2769
Bring on the "bail-in's"
Quote:

"Never interfere with a central banking cabal while it's in the process of destroying itself"

- Head nods to Napoleon and Sun Tzu

 

jennifersam07's picture
jennifersam07
Status: Silver Member (Offline)
Joined: Oct 14 2012
Posts: 112
Wonder how long she will continue to

be an SEC commissioner. 

jeandavid8's picture
jeandavid8
Status: Member (Offline)
Joined: Aug 2 2014
Posts: 1
Did America win WWII?

Not alone. Not in Europe. Mainly, the Soviet Union defeated the German army. Had they not, the US would have been totally defeated in the Normandy landing. The Soviet Union demolished most of the German army on the eastern front.

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