Interview with Eric Spott About Economies Around the World

Awesome interview on BNN with Eric Sprott, chairman and CEO, Sprott Asset Management explaining his view and research concerning the World's biggest economies (China, US, and Europe) talking specifically about the Flash Crash that I wrote about a few weeks ago. He's a very articulate speaker and really does a good job bringing some very complicated topics down to earth. A Must watch!

http://watch.bnn.ca/#clip304447

Pay No Attention to the Oil behind the Curtain: the Cheney Administration's Perfect Execution

Behind the excitement associated with the debt concerns of various countries in Europe, allegations of fraud against certain Wall Street titans, the over-heating of the Chinese real-estate market, and of course the record price of gold, there remains a tedious War Against Terror, that has finally dragged on long enough for the majority of ADHD Nation to stop paying attention. Meanwhile, it seems the success of the oil auction in Iraq early last year was timed perfectly, creating a windfall for American oil services companies Halliburton (HAL), Schlumberger (SLB), et. al., just before the market cycle begins to thaw and the stronger dollar begins to deplete the market-exchange value of oil (crude is hovering around $76, down from $87 two weeks ago). Having committed to a drilling backlog of 2,500-3,000 new wells per year for each of the next six years as well as to the development and maintenance of the pipeline and shipping terminal infrastructure that will support this massive number of new wells that will be coming online throughout this time period, it appears that the Chaney administration will have indeed succeeded in making Iraq the world’s largest oil exporter (not to mention putting a solid revenue stream in Halliburton's back pocket). The total value of these contracts may reach as much as $60 billion over the next six years, generating $1 billion in new revenues for each company per year.

Two offshore terminals are currently under construction already (first reported here back in 2009), and another two are scheduled to begin by 2013. Upon completion of all four, oil production in the country will go from the current 2.5 million barrels a day to an awesome 12 million barrels per day by 2016. [Official EIA list of top oil producing countries as of 2008]

Iraq’s oil production peaked at 3 million barrels per day in 1979, and then dropped dramatically after it invaded Iran. Saddam did very little to help the ailing situation thereafter, sucking and stealing what little financial nutrient remained from the teet of the severely broken oil fields at the expense of his own people. Year-end earnings reports from every oil engineering company involved in the region reported dismay at just how poor the state of Iraq’s energy infrastructure is after 40 years of neglect, essentially proclaiming that it all has to be rebuilt from scratch. Granted, I try to keep these proclamations in perspective—after all, common sense tells us not to ask a barber if he thinks you need a haircut. Nonetheless, SEC regulations do not permit falsification of facts of any kind in financial statements, and this is one area of government that is fairly well regulated. In the end, if the new Iraqi government can provide the necessary infrastructure (or at least the funding for American and European companies to build it) and political stability necessary to turn Iraq into another Saudi Arabia, we could very well be witnessing one of the largest changes to international trade in a great number of years as it will dump an incredible supply of oil onto the market, essentially putting a long-term cap on dollar denominated oil prices.

Flashback 8 years, and we can see why anti-war activists were the only voices confronting the feeble and unconvincing arguments that were allegedly holding up the United States’ declaration of war and the right to invade Iraq. Early in the planning of the war there was near-open discussion about the US’s ability to reclaim the cost of the war using newly freed oil exports; hence, Iraq’s oil fields were never targeted during either gulf war—well, at least not by the US.

Could it be that much of this philandering stock market entertainment and even the BP oil spill off the US coast is really just a big sideshow meant to distract us from the significant events taking place in the background? Come to think of it, back in 2002 wasn't Saddam Hussein threatening to begin only dealing Iraqi oil in Euro? Funny the Euro is imploding as I write this, down to 1.23354 from an intermediate high of 1.5141 four months ago. It seems the pieces are just falling into place. If I were rooting for the oil mongers and pandering politicos, I might be inclined to say "well done sir! Talk about planning to perfection."

Retail Traders and Investors get Fleeced by Humongous Banks and Brokers: JPMorgan and BofA Sell High, Buy VERY Low, Sell High Again in Mere Minutes

Thursday's market meltdown and ensuing rally, all of which took place in a matter of 8 minutes will go down as one of the most unethical fleecings of retail investors/traders by the HB&B's ("Humongous Bank & Brokers") in history. Thanks in part (at the least) to high frequency trading algorithms (more about HFT below), between 2:40 and 2:48pm on Thursday May 6, 2010, the S&P500, already down 2% on the day, dropped an additional 6.1%, before dramatically rebounding right back to where it was before the collapse. Of course, the media (namely, CNBC), very quickly (within 2 minutes of this collapse and rebound) came out with "the explanation," that "someone had fat fingers at one of the trading firms, and entered a 'b' for billion instead of an 'm' for million." Give me a break! (See CitiBank Fat Finger, or Stock Sell off May Have Been Triggered by a Trader Error; there are hundreds of additional sources online, just google "fat finger sell-off". Several hours later, conflicting reports out of Fox, SmartMoney, and even CNBC, the source of the original "explanation" came out: Obama Administration Source: 'Fat Finger' Error Didn't Trigger Thursday Selloff and 'Fat Finger' Trigger May be a Myth. ) Again, there are myriad sources that argue in opposition to what I personally believe is an incredibly lame excuse that a single trade at one of the HB&Bs triggered more than $1 Trillion worth of losses and gains in less than 10 minutes (it took 4 minutes for the market to drop and another 4-5 minutes for the market to bounce back to where it was before the meteorite struck).

It is undeniable, however, who benefited the most from this "freak" event. I have managed to get my hands on twenty-five minutes of audio from the NYSE stock trading floor before, during, and after this 8 minute period, which I believe sheds some light on what really happened during the aforementioned time period (nothing short of grand larceny). At the very least, it shows who bought at the absolute nadir of the collapse (Dow -928 points) and sold once the market "returned to normalcy" (Dow -300 points). It gets really interesting just before the halfway point in the audio clip when the anonymous reporter yells: "This will blow people out in a big way like you won't even believe."

Many believe--myself included--that the market does not have the fundamental foundation to support being where it is right now and that it is only at such levels because High Frequency Trading (HFT) or algorithmic trading on the part of hedge funds and the HB&B's have artificially moved it higher taking both the bid and ask prices up in fractional increments so fast that true supply and demand pivots cannot be calculated. In other words, up until several years ago, large stock market transactions required a person to stand up and bid for a certain amount of stock at a particular price and then do the opposite if and when that person or entity was ready to sell. Now, however, with computer trading comes the ability to create a trading algorithm that would trade in place of the person behind the trading account by taking advantage of so-called "inefficiencies" in the market place. This works wonderfully (for the hedge fund behind the computer) when other (mostly retail) investors and traders are willing and able to take the other side of that trade; indeed, it is extremely lucrative under such conditions, which is why when the market is acting "rationally" the HB&Bs are able to rake in the profits. However, when a political or economic event suddenly makes it difficult or impossible to gauge an intrinsic value for the market (the BP oil spill in the Gulf, the uncertainty surrounding Greece's debt problems in the Euro Zone, and the Financial Reform legislation taking place on Capital Hill all qualify) these computer algorithms do not have a counter party to take the other side of their trade and since they are programmed to figure out where inconsistencies exist based on the next bid, they start pounding the market price down until a bid is reached, no matter how far that bid may be. Before HFT, the market would simply have stalled momentarily while the persons behind the trades thought about what was a reasonable bid and ask spread. That moment of reason does not exist with HFT and since it all happens so fast, the market can very easily and quickly feed on itself, igniting fierce downward pressure in market prices that essentially force everyone involved to reevaluate appropriate market valuations. Well, I believe that is partially what happened on Thursday. But wouldn't you know who was available to buy at the exact bottom of this downward spiral, which coincidentally was a few fractions of a percentage points away from the circuit breaker trigger (10% loss) that would have shut down the market for the day: that's right, the proprietary trading desks of JPMorgan and Merrill Lynch (now owned by Bank of America). Just listen to the audio to hear it yourself--note that the recording cracks at various points because of the excitement of the environment. Just keep listening, it comes back.

Computers do what they are programmed to do, and nothing more. If the algorithm behind the trades incorrectly assumes that trading conditions or environments do not change, and therfore does not compensate for "panic" scenarios that inevitably happen in the stock market from time to time, the end result can be catastrophic because the permissions and controls have already been provided to the computer. If you are interested in learning about and discussing the perils of high frequency trading, I highly recommend this prescient post HFT: The High Frequency Trading Scam, by Karl Denninger, which was published on Seeking Alpha two weeks ago.

For those who know what a stop-loss order is, suffice it to say that pretty much every stop order that had been placed prior to this event was hit. For those who do not know what a stop-loss order is, essentially what it amounts to is a great number of individual traders and investors were forced to sell at very low prices, which only became trades in the first place because the algorithms were instructed to "find the next lowest price"--period. Furthermore, it happened so fast that those who were bright enough to figure out what was happening did not have enough time to react.


UPDATE Sunday May 9, 2010: A plethora of news syndicates have finally reached past the implausible "fat-finger" excuse and are actually doing some critical thinking into the matter. Fortune Magazine Online just published an article dissecting what they believe are the most likely possibilities for cause of the flash crash of May 6th, but only after first reiterating my thoughts above:

The fat finger. Plausible, but very unlikely. Typing in billions with a "b" versus millions with an "m" seems impossible. Trading systems don't work that way. More likely, the trading system accepts the sell/buy amount in thousands. Some trader in the heat of the moment forgets it's in thousands, types in an order for 16,000,000 instead of 16,000. That kind of thing seems far more plausible.

Check out the article for more.