Thursday, September 12, 2013

Facebook Shares Top $45: Time to Thrive, Not Just Survive

On the morning July 24th, Facebook (FB) was still a cautionary tale. Shares were mired in the mid-$20s, more than 30% below their IPO price and close to 50% below the all-time high print made on that first day of trading. The anger from the bungled initial public offering had faded but there was a lingering suspicion that Zuckerberg's baby would forever be a cautionary tale along the lines of Myspace or "Twitter better not go public," it was whispered, "look what happened to Facebook."
By the next morning Facebook had not only justified its own existence but validated the entire notion of mobile device advertising. When Facebook revealed that it was now getting a full 41% of its revenues from its mobile platform, it justified the existence of companies like Yelp (YELP) which suddenly became a screaming buy as fund managers chased anything "social" and "mobile."
Related: Facebook Market Cap Tops $100 Billion. Is it Worth it?
Now that Facebook stock has topped the $45 level that marks its all-time high, the question for investors is whether or not the company can possibly justify Wall Street's love. David Garrity of GVA Research says the jury is still out.
"It's good to see they got the technology right, but one has to argue that what Facebook is doing is riding the wave of the transition by users towards mobile computing," he says. For tech investors that's roughly akin to saying AOL rode the wave in desktop users liking to chat with one another with IM. That's nice but it didn't help make money.
Thanks to Facebook we know there's money to be made by advertising on mobile devices. According to Garrity, youngsters don't even mind when pop-up ads clutter their phones. So there is that. Shareholders, of which I'm one, are betting Facebook can do two things. First, they need to demonstrate to advertisers there's a bang for the buck from the ad spend. Second, Facebook has to continue to drive business from the desktop to the phone.
There aren't any more shocks in Facebook's stock; companies can only justify their existence once. To drive the stock into the $50s, Facebook will need to complete it's transformation. At over $100 billion market capitalization, a failure to execute will result in severe punishment.

S&P 500 Still Has “an Appointment Below 1,600,” Says Jeff Saut

The so-called worst month of the year for stocks has, so far, been a pleasant surprise, with the S&P 500 (^GSPC) getting back within 1.5% of its record high set six weeks ago. But at least one Wall Street veteran is advising investors to wait a bit, suggesting a better buying opportunity will be here soon.
Related: Welcome to September; What's Not to Hate?
"I still think we're about halfway through the correction," says Jeff Saut, chief investment strategist at Raymond James Financial in the attached video. "And I still think we have an appointment below 1,600 on the S&P but above 1,500 before the correction is over."
That said, Saut is not trying to get too cute with a market he thinks is ultimately headed to unforeseen levels. "We're only talking about another four or five percent (downside)," he says. "That's not a whole lot to finesse with."
Related: Market Top Is in, Brace for Correction: Jeff Saut
This from the man who called the summer sell-off, almost to the day, when he pegged July 19th as the D-Day equivalent for stocks. In fact, Saut says he has told people for the past three years to "raise cash in the spring and put it back to work in the summer."
But now, as much as he targeting a run-up to 1,850 for the S&P next year, he plans to get invested for that event after we've had our first meaningful decline of the year.
"If we continue to trade at 15.2 times next year's estimate, with no earnings multiple expansion, you're looking at 1,850 on the S&P 500" he says, adding "it's a mistake to get bearish here."

10 College Majors You’ll Regret

Doing work you love and getting paid well for it is the pinnacle of success.
But a lot of people don’t attain that enviable twofer, so they settle for one or the other, either financing a cushy lifestyle through a job they don’t particularly care about or pursuing work they’re passionate about even if it requires financial sacrifice.
Then there are the no-fers who end up doing work they don’t like and getting paid poorly besides.
Nobody sets out to have a busted career, of course, but a lot of workers drift into unrewarding careers because of the college major they choose and the narrow pathways it may lead to if they don’t branch out or build new skills. And now, new data from compensation-research firm Payscale reveals which majors are most rewarding, as well as most disappointing.
The majors that lead to satisfying and lucrative careers aren’t surprising. Twelve of the 20 majors that lead to the most highly paid jobs are engineering specialties, while most of the rest involve math and science. And most majors associated with high pay score above the median when people are asked whether they’d recommend their major to others, and whether they find their work meaningful. (High pay, no doubt, contributes to a positive impression of one’s college major.)
Some majors, such as education and social work, lead to relatively low-paying jobs that are satisfying for other reasons. But other majors lead to jobs that score poorly every way Payscale measures satisfaction. Here are 10 majors that fall below the median on three key gauges of satisfaction, and therefore rank as the most disappointing majors:
Source: Payscale
Many of those majors, of course, lead to fields in which there are too many applicants for too few jobs, which usually pushes down pay for those who do get work. Some employers still emphasize the importance of a well-rounded liberal-arts education, but hiring is still a buyer’s market these days, allowing most companies to choose from many well-qualified candidates. The result is a lot of liberal-arts grads working as waiters and retail clerks, often with thousands of dollars of student debt they must repay. No wonder they’re bummed out.
Majors that lead to the most rewarding jobs, by contrast, tend to be specialized fields that lead to technical jobs in growing industries. Here are 10 majors that rank above the median on the same three gauges of satisfaction:
Source: Payscale
One thing such data doesn’t capture is the extent to which creativity, initiative and entrepreneurship allow driven people to catapult forward, no matter what they study in school. Billionaire investors Carl Icahn and Peter Thiel were philosophy majors, as was retired NBA head coach Phil Jackson. Actress Julianna Marguilles of The Good Wife studied art history. And broadcaster Howard Stern was a communications major. It might have been worth studying that just to hear him sound off in class.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

U.S. export prices fall for 6th straight month; import prices flat

WASHINGTON (Reuters) - U.S. export prices fell for the sixth straight month in August while prices for non-petroleum imports fell, signs of slack in global demand and in the domestic economy.
Export prices fell 0.5 percent during the month, the Labor Department said on Thursday.
Much of the drop was due to a sharp decline in prices for exports from the volatile farm sector, but non-agricultural exports declined as well and have fallen in every month since March.
The decline comes despite some recent signs that the European economy is getting back into gear following a recent recession.
Economists polled by Reuters had expected export prices to rise 0.1 percent last month.
Import prices also confounded analysts during the month, remaining flat. Economists in the Reuters poll had expected a 0.4 percent gain.
Import prices have trended lower over the last year, with the decline driven largely by the non-oil component. This pattern was also evident in August, with fuel import prices up 0.5 percent and non-petroleum prices down 0.2 percent.
Non-petroleum import prices have now declined every month since February, a sign that foreign producers have little leverage to raise prices for consumers.
This has helped keep the pace of inflation very low over the last year - so low that some U.S. Federal Reserve officials have expressed concern. Fed Chairman Ben Bernanke has warned that extremely low inflation raises the risk that the economy could fall into a vicious spiral of falling prices and wages known as deflation.
(Reporting by Jason Lange; Editing by Krista Hughes)

Forecasts of a Doomed Economy

ames Hall

Activist Post

Contrary investing used to be a profitable endeavor. Things have changed. The doom business is in full swing as many financial prognosticators seek to hedge their normally ecstatic outlooks in order to sell their advice. When tragedy becomes a consensus sentiment, it used to be the time to buy. Now that formula has to factor in a different set of risks. Namely the incoherent political intrusions and stimulus-austerity gyrations has to head the list. Has forecasting become a lost art or did it evolve into an algorithm supercomputer project? In either case, the doom factor is sure to continue to be a stable from the Cassandra circle as long as an economic recovery allures the former members of the middle class. Nevertheless, the bulls want you to believe that economic indicators are guardedly improving. The Global Economic Intersection boldly portends.
Our September 2013 Economic Forecast shows a change of trend. Many portions of our economic model started to expand over the previous month’s baseline.
We continue to warn that consumer spending increases are expanding at a much faster pace than income – and that eventually either a jump in income or a fall in consumption must occur to close this gap. This remains an economic headwind for 3Q2013.
Surely, equities are back in vogue as spending flows. Yet, Tom Stevenson writing in The Telegraph recommends Take forecasts with a pinch of salt...or move to Omaha, for those who have the courage to bet their money on picking particular stocks.
The problem for investors is that very often, at the individual stock level, good news is not built into valuations for some time after it has become publicly available.
This means that contrary to markets as a whole, where it can be better to travel than to arrive, good company news can trigger sustained outperformance as investors slowly accept the improved outlook. 
This might sound like a counsel of despair for investors, but it shouldn't. Awareness of the limitations of knowledge is actually strangely liberating when it comes to managing your investments.

Woe is me, what opportunities are missed by sitting on the sidelines? Almost moves one to subscribe to some of those pricey newsletters. But before you brush off the dust on your wallet, heed the lesson that Ian R. Campbell references when he asks Economic forecasting – how credible?
Frequently in this Newsletter I have said I believe that many economists wrongly advance a theoretical forecast framework based on irrelevant history when reaching conclusions on what is prospectively going to happen in any particular economy at any given point in time – and hence many economists inherently are doomed to get things wrong before they put pen to paper.
The prediction record of most experts is dismal at best. Therefore, when Charles Colgan, former chair of Maine’s Consensus Economic Forecasting Commission is cited in On economic forecasting as a ‘forlorn hope’. He "humbly admitting he’s botched the past several annual forecasts, Colgan compared himself to Charlie Brown, ever the optimist, who repeatedly tries to kick the football being held by his friend Lucy."

Yes, the small investor is just as dimwitted as Charlie Brown. The fate of most plays in the M A R K E T S, are sealed before they get started. In a corporatist economy, the balance sheets of companies swell, but the return on equity to stockowners often falls short.

One needs to admit, before placing funds in the hands of Wall Street money managers, that the game is speculation, not investing. Fortunes are made by knowing the insider decisions before the public is even aware of the news that a stock is in play. Even bigger sums are extracted from shorting a vulnerable public company as the vultures sense a ripe carcass.

Any thinking citizen with even a modest understanding of economics and commerce must conclude that the consumer patience is still gravely ill. Sophistication in interpreting trend forecasts is not necessary when CNNMoney provides the evidence. 
The average age of vehicles on America's roads has reached an all-time high of 11.4 years, according to the market research firm Polk. And that average age is sure to keep climbing, the firm said.
If the financial sages deem the consumer superfluous and define a healthy economy by a growing public sector, the prospects for a doomed system are inevitable.

For those who reject this analysis and want to be informed about the latest perspective from The Economist, signup for the Global Forecasting Service. Get unrestricted access to full, updated and interactive coverage of our world economic outlook, including projections of key indicators and analysis of developed and emerging markets.

Reading such international financial establishment pronouncements usually provide a reassuring crutch even when countries are going bankrupt. Telling as it is for the spin you are meant to accept, the forecast for personal success in the investment jungle is wrath with predators of all species.

Now all this caution is moot if the global economy enters into a new golden age. Duplicating the prosperity of the industrial revolution with a cyber collection matrix that digitally spies on propitiatory business secrets is not exactly the formula that generates wealth, which is shared by the masses.

The incomparable Paul Craig Roberts is the best political and economic forecaster. In his 2011 article, How the Economy was Lost, Doomed by the Myths of Free Trade, he explains the basic reason for the doomed forthcoming financial meltdown end game.
As the issuers of swaps were not required to reserve against them, and as there is no limit to the number of swaps, the payouts could easily exceed the net worth of the issuer.
This was the most shameful and most mindless form of speculation. Gamblers were betting hands that they could not cover. The US regulators fled their posts. The American financial institutions abandoned all integrity. As a consequence, American financial institutions and rating agencies are trusted nowhere on earth.
This is the forecast that you can bank on.

Original article archived here

James Hall is a reformed, former political operative. This pundit's formal instruction in History, Philosophy and Political Science served as training for activism, on the staff of several politicians and in many campaigns. A believer in authentic Public Service, independent business interests were pursued in the private sector. Speculation in markets, and international business investments, allowed for extensive travel and a world view for commerce. Hall is the publisher of BREAKING ALL THE RULES. Contact

A Plea for Caution From Russia

MOSCOW — RECENT events surrounding Syria have prompted me to speak directly to the American people and their political leaders. It is important to do so at a time of insufficient communication between our societies.
Relations between us have passed through different stages. We stood against each other during the cold war. But we were also allies once, and defeated the Nazis together. The universal international organization — the United Nations — was then established to prevent such devastation from ever happening again.
The United Nations’ founders understood that decisions affecting war and peace should happen only by consensus, and with America’s consent the veto by Security Council permanent members was enshrined in the United Nations Charter. The profound wisdom of this has underpinned the stability of international relations for decades.
No one wants the United Nations to suffer the fate of the League of Nations, which collapsed because it lacked real leverage. This is possible if influential countries bypass the United Nations and take military action without Security Council authorization.
The potential strike by the United States against Syria, despite strong opposition from many countries and major political and religious leaders, including the pope, will result in more innocent victims and escalation, potentially spreading the conflict far beyond Syria’s borders. A strike would increase violence and unleash a new wave of terrorism. It could undermine multilateral efforts to resolve the Iranian nuclear problem and the Israeli-Palestinian conflict and further destabilize the Middle East and North Africa. It could throw the entire system of international law and order out of balance.
Syria is not witnessing a battle for democracy, but an armed conflict between government and opposition in a multireligious country. There are few champions of democracy in Syria. But there are more than enough Qaeda fighters and extremists of all stripes battling the government. The United States State Department has designated Al Nusra Front and the Islamic State of Iraq and the Levant, fighting with the opposition, as terrorist organizations. This internal conflict, fueled by foreign weapons supplied to the opposition, is one of the bloodiest in the world.
Mercenaries from Arab countries fighting there, and hundreds of militants from Western countries and even Russia, are an issue of our deep concern. Might they not return to our countries with experience acquired in Syria? After all, after fighting in Libya, extremists moved on to Mali. This threatens us all.
From the outset, Russia has advocated peaceful dialogue enabling Syrians to develop a compromise plan for their own future. We are not protecting the Syrian government, but international law. We need to use the United Nations Security Council and believe that preserving law and order in today’s complex and turbulent world is one of the few ways to keep international relations from sliding into chaos. The law is still the law, and we must follow it whether we like it or not. Under current international law, force is permitted only in self-defense or by the decision of the Security Council. Anything else is unacceptable under the United Nations Charter and would constitute an act of aggression.
No one doubts that poison gas was used in Syria. But there is every reason to believe it was used not by the Syrian Army, but by opposition forces, to provoke intervention by their powerful foreign patrons, who would be siding with the fundamentalists. Reports that militants are preparing another attack — this time against Israel — cannot be ignored.
It is alarming that military intervention in internal conflicts in foreign countries has become commonplace for the United States. Is it in America’s long-term interest? I doubt it. Millions around the world increasingly see America not as a model of democracy but as relying solely on brute force, cobbling coalitions together under the slogan “you’re either with us or against us.”
But force has proved ineffective and pointless. Afghanistan is reeling, and no one can say what will happen after international forces withdraw. Libya is divided into tribes and clans. In Iraq the civil war continues, with dozens killed each day. In the United States, many draw an analogy between Iraq and Syria, and ask why their government would want to repeat recent mistakes.
No matter how targeted the strikes or how sophisticated the weapons, civilian casualties are inevitable, including the elderly and children, whom the strikes are meant to protect.
The world reacts by asking: if you cannot count on international law, then you must find other ways to ensure your security. Thus a growing number of countries seek to acquire weapons of mass destruction. This is logical: if you have the bomb, no one will touch you. We are left with talk of the need to strengthen nonproliferation, when in reality this is being eroded.
We must stop using the language of force and return to the path of civilized diplomatic and political settlement.
A new opportunity to avoid military action has emerged in the past few days. The United States, Russia and all members of the international community must take advantage of the Syrian government’s willingness to place its chemical arsenal under international control for subsequent destruction. Judging by the statements of President Obama, the United States sees this as an alternative to military action.
I welcome the president’s interest in continuing the dialogue with Russia on Syria. We must work together to keep this hope alive, as we agreed to at the Group of 8 meeting in Lough Erne in Northern Ireland in June, and steer the discussion back toward negotiations.
If we can avoid force against Syria, this will improve the atmosphere in international affairs and strengthen mutual trust. It will be our shared success and open the door to cooperation on other critical issues.
My working and personal relationship with President Obama is marked by growing trust. I appreciate this. I carefully studied his address to the nation on Tuesday. And I would rather disagree with a case he made on American exceptionalism, stating that the United States’ policy is “what makes America different. It’s what makes us exceptional.” It is extremely dangerous to encourage people to see themselves as exceptional, whatever the motivation. There are big countries and small countries, rich and poor, those with long democratic traditions and those still finding their way to democracy. Their policies differ, too. We are all different, but when we ask for the Lord’s blessings, we must not forget that God created us equal.
Vladimir V. Putin is the president of Russia.

FATCA Losing Its Way

Awareness of the implications of the Foreign Account Tax Compliance Act, also known as FATCA, is growing.
Passed by Congress in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, this extraterritorial law has sparked global fear, confusion, anger and controversy.
Now that controversy has come home. There is growing domestic opposition to FATCA implementation. U.S. lawmakers and banks are fighting reciprocal information exchange promised to other nations like Mexico and Germany. Yet another delay in implementation was announced recently by the U.S. Treasury.
The road to FATCA began with a simple premise: Force foreign banks to disclose income held by Americans in offshore tax havens. In May of 2009, when President Barack Obama unveiled his proposal, he said, “Taxation is a price of citizenship.”
Obama insisted people and companies trying to avoid paying taxes through offshore accounts “are aided and abetted by a broken tax system, written by well-connected lobbyists on behalf of well-heeled interests and individuals.” He suggested “corporate loopholes…make it perfectly legal for companies to avoid paying their fair share.” The IRS “tax code…makes it all too easy for a number—a small number of individuals and companies—to abuse overseas tax havens to avoid paying any taxes at all.”
To provide new tools to help U.S. catch both individual and corporate tax evaders overseas, Obama proposed FATCA to “let the IRS know how much income Americans are generating in overseas accounts by requiring banks overseas to provide 1099s for their American clients, just like Americans have to do for their bank accounts here in this country.”
Is This Where President Obama and Congress Intended to Go?
Today FATCA bears almost no resemblance to Obama’s initial goal of “commonsense measures” to simplify the U.S. tax system.
Lynne Swanson
The proposal for foreign 1099’s on American offshore accounts of a “small number of individuals and companies” in tax havens has been transformed into a massive bureaucratic worldwide reporting system. FATCA demands comprehensive data from all accounts held by millions of “U.S. persons” living in countries that are clearly not tax havens, countries like Canada, France, Sweden, New Zealand, China and Russia.How FATCA Became Lost
Failure to do a realistic assessment of the impact and risks: Congress never asked for an estimate of how much FATCA would cost to implement or a cost/benefit analysis.
For money spent building the system, how much revenue will the U.S. actually receive? Estimates range from $8 billion to $210 billion over 10 years, but no one is certain. There are simply no hard numbers from a credible source.
Failure to identify all stakeholders: FATCA was initially intended to be between foreign banks and the U.S. government. But at every stage of implementation, new stakeholders kept popping up: foreign and regional governments and their tax authorities, the compliance industry, U.S. persons abroad and more.
As the final system takes shape in 2013, some U.S. lawmakers became major stakeholders, weighing in with demands, objections and calls to repeal FATCA.
Failure to identify and involve all stakeholders has proven deadly to FATCA: Criticism grows with both legal and political challenges, which are slowing down implementation and making it even costlier.
Changing directions: By 2011, it was apparent FATCA was not just targeting “a small number of individuals and companies” hiding assets in overseas accounts. Instead, it was capturing honest, responsible Americans living and paying taxes in other countries.
In 2012, Senator Carl Levin, D-Mich., whom Obama credits as one of the FATCA leaders, wrote to the IRS with numerous demands, including that FATCA information be provided “on request” to law enforcement and national security for money laundering, drug trafficking, terrorism financing and other crimes and “misconduct.”
Complexity: FATCA has rapidly become a system weighed down by its own complexities. The Treasury Department has written over 500 pages of new regulations.
They are negotiating intergovernmental agreements, or IGAs, with nearly every country in the world (160+). Some members of Congress question the Treasury’s legal authority to do so. As IGAs are signed, changes are fed back into the regulations, making this a nightmare for foreign financial institutions trying to finish compliance projects.
In 2009, Obama announced 800 new IRS agents to run and maintain the system as he envisioned it. How many more will be needed with a system many times greater in magnitude and complexity, especially if the IRS must gather and provide information to foreign governments?
Unintended consequences: All around the globe, Americans living in other countries are in a rage at the United States, resulting in rising renunciations of U.S. citizenship. Some have already had their legal bank accounts in their communities closed simply because they were born in United States. Some have even had mortgages cancelled.
Banks worldwide are hostile to spending billions to report to the IRS on long-term customers who are legal residents of their countries.
Only nine countries have signed an IGA. They did so with signed promises and expectations that the U.S. would provide reciprocity. This is, at best, questionable. Other countries continue to resist or may sign under coercion, creating strained diplomatic relationships.
Lawsuits and constitutional challenges are being planned and considered in many countries. Two banking associations in the United States have filed lawsuits in federal court over requirements for them to report income on non-resident aliens to their home countries.
Some members of Congress from both parties predict that reciprocity will result in the flight of capital and investment from the U.S., the loss of American jobs, enormous costs to American banks and “irreparable” harm to the U.S. economy.
One American bank has already reported losing $50 million in deposits.
The President insisted FATCA was “commonsense” reform to “restore balance and fairness in our tax code” and to “crack down on illegal tax evasion, close loopholes and make it profitable for companies to create jobs in United States.” Instead, it is a hugely expensive, highly invasive, costly, complicated and controversial proposition at home and around the world.
FATCA has traveled far off the map from its original destination. Now no one—not the proponents or opponents of this law or the lawmakers and bureaucrats around the world making policy or even the average citizen cheering on the fight against tax evasion—can predict what the FATCA landscape will be down the road.
FATCA appears headed for a catastrophic collision.
The President, Congress, the Treasury Department and the IRS need to refocus on the original modest, laudable intent of FATCA to track down Americans removing their assets from the U.S. in order to illegally evade paying U.S. taxes.
Then they need to find improved ways to achieve that end.
“To restore fairness and balance” in the U.S. tax code must include “fairness and balance” for Americans living outside United States.
International cooperation in combating tax evasion should include developing true partnerships around the world that respect the laws, constitutions, sovereignty and interests of other nations.
If leaders fail to act quickly to restore global cooperation and respect, FATCA could represent one of the riskiest projects the U.S. has ever tried to push both at home and internationally.
Victoria Ferauge is an information technology professional. Originally from Seattle, she lived in Japan and has lived in France with her French husband and family for nearly 20 years. Lynne Swanson is a retired human resource professional. Born and raised in Pennsylvania, she has been a Canadian citizen for 40 years.


This is most definitely one of the best descriptions of the FATCA dilemma I have read. One would expect that legislation of this magnitude, given the obvious ongoing difficulties encountered with it's implementation, would be put on hold until some of the actions mentioned in the article (a proper cost evaluation, impact and risk assessment, etc.) are dealt with. Given the massive overreach and effect on every other country on the planet, one should expect no less. Dealing with tax evasion is certainly necessary but the approach needs to be reasonable and well-planned. At present, FATCA resembles the US Tax Code, with layer upon layer of unclear, incomplete and complex regulations that will do little to address what it was designed to do. Hopefully someone will recognize that this is simply not going to work and take steps to adjust this ill-conceived piece of legislation.
Posted by: Patricia Moon | September 11, 2013 6:21 PM

Excellent article. As a Canadian citizen and resident, born in the US, I can confirm that FATCA will have negative consequences for citizens residing abroad. Few realize that the US is the only country in the world that taxes people based on citizenship, not residency. (It's citizenship based taxation that may be at the heart of this issue.) That means if you were born in the US, left as a child and never returned, you are taxable for the rest of your life regardless of where you live and where you earn your income. President Obama described taxes as the cost of citizenship. I disagree. Taxes are justified by services provided. Non-residents receive no benefit from US services. I am not eligible for social security, welfare, food stamps, unemployment insurance, etc., or any number of benefits that US residents may be entitled to. I believe it was the prominent Washington Lobbyist James Jatras that predicted "FATCA will collapse under its own weight". I think we're finally starting to see it buckle.
Posted by: BeadGirl | September 11, 2013 1:01 PM

FATCA: American English for 'klausterfokken'.
Posted by: bubblebustin | September 11, 2013 10:21 AM

I would only add to this, that while the FATCA Compliance Complex (FCC) is still trying to figure out the first 544 pages of regs complexity and the 9 currently signed IGAs (with Treasury planning 80 or so)....... now comes the corrections, additions, clarifications just issued yesterday in the Federal Register.
I assume Michael Cohen will soon have an article about that so I will leave out the link.
This would be absolutely maddening for an FATCA administrator,I would imagine. I really feel sorry for the FFI's trying to keep up with the layering of complexity. For the FCC,the FATCA Compliance Complex, this is the gift that keeps on giving. More billable hours and consulting fees will result.
Now, add to this, the G-20 declaration of support for the OECD's Global auto tax data exchange proposal, or a Global GATCA, and the complexity is just starting. Will they just accept FATCA and be done with it, or will they have their own ideas of what it should look like. I am betting on the latter.
Will the USA just accept their GATCA as a replacement for FATCA, or will it be an add-on? I can't imagine the U.S. accepting anything less their their program, as they are pretty hubristic and unilateral about our requirements.
What happens with U.S. Citizen based taxation (CBT) really runs head on with the rest of the worlds' Residency based system, (RBT)? Will the OECD GATCA allow a carve out for the U.S. to continue to assert its dominion over its citizen's residing in their countries, or will they insist on a reciprocal Citizen reporting mechanism just like the USA?
Will USFIs really just accept a domestic DATCA as the GATCA implies that will have to happen if it is truly to be global?
This GATCA is going to be a nightmare with all kinds of repercussions for the world's economy. Who knows what the final FATCA/DATCA/GACTA landscape will be, but the complexity has just started.

Detroit ‘Contagion’ Spreads; Widely-Held Puerto Rico Muni Bonds Collapse!!! US to default Oct. 18

Detroit ‘Contagion’ Spreads; Widely-Held Puerto Rico Muni Bonds Collapse
“It’s getting concerning,” notes one fixed-income banker, Puerto Rico muni bond yields “never got near 10% [yields] even in the crisis.” Some of the 27-year maturity Puerto Rico bonds just traded at a dismal 67 cents on the dollar (10.082% yield) and the most recently issued 2036 Electric Power bonds have collapsed from par a month ago to just above 82 cents on the dollar today. As the WSJ reports, the fall in prices also is a sign of investor risk aversion in the wake of Detroit’s record municipal-bankruptcy filing in July; but it seems the anxiety and outflows from ETFs is having just as big an impact as Puerto Rico bonds now trade cheaper than Detroit’s. “It’s out of whack,” one analysts warns, though the island’s double-digit unemployment and recent weakness in economic indicators somewhat support the concerns – and while the “yields are attractive” it is possible that the island’s borrowing costs could go higher as supply is extremely heavy in coming months. With 77% of managers holding Puerto Rico bonds, this is a problem…
Puerto Rico Debt Prices Slump Anew
Yields on Longer-Dated Bonds Exceed 10%
Study: U.S. Could Default as Early as Oct. 18
Read more:
Jeff Gundlach Singles Out The Emerging Market Country Most Vulnerable To A Crisis
Jeff Gundlach of DoubleLine Funds just wrapped up his latest public webcast.
He reiterated his calls for interest rates and inflation to remain low. He also reiterated his worry about the longer risks of high Federal debts and deficits.
Gundlach spent quite a bit of time on the turmoil in the emerging markets, particularly India.
“I would not own the Indian stock market,” he said. “It looks very scary.”
Read more:

Our Huge, Stinking Mountain of Debt: Student Loans

by Charles Hugh-Smith
Imagine a huge, stinking mountain of debt, which represents all of the debt in the world… now look at this chart of student loan debt.
Notice anything about this chart of student loan debt owed to the Federal government? Direct Federal loans to students have exploded higher, from $93 billion in 2007 to $560 billion in early 2013. This gargantuan sum exceeds the gross domestic product (GDP) of entire nations—for example, Sweden ($538 billion) and Iran ($521 billion). Non-Federal student loans total another $500 billion, bringing the total to over $1 trillion.
Does this look remotely sustainable? Does it look remotely healthy for students, society, taxpayers now on the hook for a half-trillion dollars in potential defaults or the U.S. economy?

Frequent contributor Jeff W. explains the underlying dynamics of this wholesale shift of student-loan debt to Uncle Sam:
Why did Uncle Sam take over the student loan business? I don’t know for sure, of course. But I surmise that it has to do with the nature of debt money. As debt money is being created, it stimulates aggregate demand and circulates in the economy creating (false) prosperity. As long as the government and central banks can keep pumping new debt money into the economy, the economy runs well enough to keep the sheeple satisfied, e.g., housing bubble debt creation years, especially 1992-2006. The banks also profit enormously from the creation of trillions of dollars of new debt money.Problems develop, however, when there are defaults. Note carefully that when a borrower defaults on a loan, the debt money he and the bank created continues to circulate. It is only when debts are paid back that the debt money disappears from circulation. Thus a condition of debt saturation or debt revulsion (where the people are sick of debt and want to pay off existing debt and refuse to take on more debt) is fatal to a debt money regime.
Central bankers carefully guard against deflation because it causes debt revulsion. If a borrower thinks that $1.00 that be borrows today will have to be paid back, after some years of deflation, with a dollar worth $1.10 or $1.20, the borrower will likely refuse to take out a loan. Debt revulsion causes problems for government (reduced tax revenues, unemployment), but even worse problems for the banks, for the same reason that auto revulsion causes problems for the auto industry or aluminum siding revulsion causes problems for the aluminum siding industry.
Defaults do not reduce the quantity of debt money in circulation, but they can and do bankrupt lenders. By doing so, they damage the debt issuing infrastructure. This is what happened in 1929. Not only were people refusing to take on new debt in the Depression, but the conveyor belt for issuing new debt was badly damaged by the failures of thousands of banks.
Thus defaults are not so bad if the debt-issuing infrastructure is not damaged by them. By Uncle Sam keeping the student loans on his books, and because Uncle Sam is backed by Infinite Fiat (i.e. the ability to create money in unlimited quantities via the Federal Reserve–editor), students can default on their loans without damaging any banks. Banks can still make fees from issuing loans and servicing loans, but they are protected from defaults. It is the best of all possible worlds!
Uncle Sam can also lie about the value of the student loans in his portfolio and thus make his balance sheet appear healthier than it really is and thereby help prop up his all-important fiat dollar. Win-win!
Finally in brief: 1) Student loan defaults are expected; 2) Politicians will be allowed to buy votes with selective student loan forgiveness; 3) Loaning money to people who are not expected to pay back their loans is the final frontier of debt money creation: if you can figure out how to protect the debt-issuing infrastructure, limitless new debt money can be created by loaning to the innumerable deadbeats who inhabit this world.
Sometimes I picture in my mind a huge, stinking mountain of debt, which represents all of the debt in the world. The debt mountain is usually growing, but because of defaults, fissures and sinkholes often appear; so even as it is expanding, parts of it are collapsing. Insiders know which parts of the mountain are safe and solid, but small investors are often plunged into one of the many bottomless pits that pockmark the surface of the rotten debt mountain.
Thank you, Jeff, for an insightful overview of the state’s role in pumping debt money into the economy and transferring risk to the taxpayers. When one pile of stinking debt becomes too risky for the bankers, this pile is transferred to the Federal government and the taxpayers. Haven’t we seen this before? Hmm….are there any possible consequences of this huge, stinking pile of Federal debt expanding?

My new book The Nearly Free University and The Emerging Economy (Kindle eBook) is available at a 20% discount ($7.95, list $9.95) this week. Read the Foreword, first section and the Table of Contents.

G. Edward Griffin: How You can END THE FED

Today I am bringing back an encore presentation of one of my earliest podcasts starring G. Edward Griffin, widely acknowledged expert on the Federal Reserve and author of the book “The Creature from Jekyll Island: a Second Look at the Federal Reserve.” Starting as a child actor, Griffin became a radio station manager before age 20. He then began a career of producing documentaries and books on often-debated topics such as cancer, Noah’s ark, and the Federal Reserve System, as well as on libertarian views of the Supreme Court of the United States, terrorism, subversion, and foreign policy. He has opposed the Federal Reserve since the 1960s, saying it constitutes a banking cartel and an instrument of war and totalitarianism. In this interview, Griffin, exposes the truth behind the institution that has dominated our government for nearly a hundred years.
Chris Martenson – All Markets are Manipulated – Wall Street for Main Street

In this 30 minute interview Jason Burack of Wall St for Main St interviews former Fortune 500 executive, economic expert, author and founder of the Crash Course and Peak Prosperity, Dr. Chris Martenson.
During the interview Jason asks Chris about market manipulation in gold, silver and other markets. Jason then asks Chris about whether he thinks the Federal Reserve can keep the real economy in a worsening stagflation via financial repression.
Finally, Jason asks Chris about the oil and energy markets and they discuss the potential war about to occur in Syria as well as shale oil and fracking and whether this is a panacea for the world’s cheap oil supply problems.

Sheila Bair to BTV: Banks Have Way TOO MUCH Leverage

Former FDIC chairman Sheila Bair joined Bloomberg Television’s Trish Reagan and Mike McKee on “In the Loop with Betty Liu” and said excess leverage at banks is the number one problem still not solved following the financial crisis. Bair said that risk-weightings penalize lending, banks aren’t cooperating enough with regulators, and banks need to reduce reliance on short-term debt and simplify their legal structures. She also said it is possible for banks to function properly without restoration of Glass-Steagall by ensuring “firewalls of integrity.”

Bair on not doing enough to make sure a Lehman Brothers like event is never going to happen again:
“I don’t think we have done nearly enough. Banks. There are a lot of problems. The one at the top of my list banks, large financial institutions still have way too much leverage. If you look at their off-balance sheet exposures, the amount of risk that is being supportive by tangible common equities is about 3.5 percent to 4-percent. They are way too over leverage. We have put more capital into these banks as a result of the stress test, but we started at a low baseline. Leverage was a key driver of the crisis and the fragility of the system and the reason we needed bailouts, they did not have enough equity to absorb losses once the losses came. We need to reduce their reliance is on short term debt. We need to simplify their legal structures. I would wall off in insured deposits from securities and derivatives trading activity make sure it just supports commercial banking.

On a return to Glass-Stegall:
“It is okay to keep them in the same organization so long as the securities and derivatives activities are walled off from the insured bank. I think you can have five-walls of integrity. Regulators have the authority to do that now under Dodd Frank. Regulators have the authority to do that now under Dodd-Frank.”
“I think Citigroup is kind of the poster child for how the repeal of Glass-Steagall Act created banks that were too big to manage. So, yes, it is one of the factors, but I think excess leverage is really at the top of my list leading up to the crisis and still is something that has been fixed.”

On whether the financial power of the banking industry is too great for any additional reform:
“Well, it is disheartening. They’re lobbying has been relentless. I have been long enough to remember when industry worked constructively with regulators and tried to instill public confidence in a regulatory system, and to see credible regulators as in their interest. We don’t see that anymore. It is a game of winners and losers. They say they want the rules finished, but the rules that they would like, that frankly do not do much. Unfortunately a lot of the rules worked around the edges make marginal improvements, but fundamental transformative changes we just have not seen.”

On whether the lack of additional reform is ‘all about the money’:
“Yes, the industry, I don’t think the industry lobbying effort has been a responsible one, and it saddens me. It still undermines trust in the financial sector to see this spectacle in Washington. Sometimes Congress puts on that puts pressure on regulators to back down. And yes political money plays a role in that. I think the revolving door plays a role. Even the best of people, if your career path is to go to work for a bank or a consultant who works for a bank, that you are now regulating and writing rules for it’s going to infiltrate your thinking even if you try and insulate yourself from that. My book, at least on examiners and much stronger restrictions on regulators going into the industry. There are other career paths that you can choose. Right now it is pretty much accepted practice, and I do not think it is a problem. What we call cognitive capture, regulators just starting to identify that their job is making the banks profitable. I think that was a problem, a misguided notion in our bailout initiatives when the system spun out of control. We needed to do something but we are very generous with the banks. They are as profitable as they have ever been, but the economy is still hurting.”

On those who say we need less smaller banks, and just more big banks:
“I don’t know. You have to double the number of participation or increase it by a third. You already have to bring in participation with those big deals. Even the mega  banks will not take deals on their own, so they’re already sharing those transactions among a number of banks. I am more for simpler banks as opposed to size. I do think sheer size at some point you get into questions about market power, political power, but I think the complexity, intermingling commercial banking with market making and derivatives market making supporting all of that with government safety net programs, I think that is very hard. I think there are very different skill sets that are acquired with the security and derivatives market making operation in traditional commercial banking.”

On critics saying she wants to make these banks more akin to utilities than financial service institutions that are making money:
“My critics have said that I have said that. They have a principled position on that. No, I want these guys to stand on their own two feet. I want market discipline, I want better disclosure, I want understanding what they are on the hook for losses if they get into trouble. I want higher capital requirements, you bet. They are very large and complex now, and they have access to government safety net programs and that the increases their incentive to leverage. We need much stronger capital requirements and that will create market incentives to downsize because it will increase their funding costs, especially if they have tougher capital and long-term debt requirements. Plus if they are understanding they will not get more bailouts, that will create market pressure to downsize. That is encouraging regulation to make the market work the way it should.”

On whether new resolution powers under Dodd-Frank helped to put a failing major institution out of business and whether that is a process of failure before it even begins:
“No, I don’t think so. The FDIC has said is a single point of entry. They have thousands of legal entities under them, and those need to be downsized. They need a smaller number and they need to restructure them on business lines. For now the best way to do it is to take control of the holding company which owns and controls this morass below, put that into receivership have the creditors and the shareholders of the company on the hook for losses and at that point you can make a decision about foreign operations, whether they are viable and add franchise value and the new receiving, the FDIC wants to continue to support them, or whether you want to spin them off into the bankruptcy authorities of a former jurisdiction. I think that model can work absolutely to resolve authorities of a former jurisdiction. I think that model can work absolutely to resolve an internationally active bank and the FDIC is doing bilateral agreements with most of the key jurisdictions so that the one jurisdiction will respect their authorities as receiver and owner of the holding company to be able to back foreign operations where that is appropriate. I absolutely think it can work.”

On the number of the higher capital requirements that she would like to see:
“What I argue in my book and the group I had the systemic risk council  has advocated for is a minimum of 8% for Basel 3 leverage ratios that means  only tangible common equity on top, and on the bottom not just on balance sheet exposures, but a lot of off-balance sheet as well.”
On whether that will affect their ability to lend out:
“Oh, my gosh, no. The risk-weighted capital rules that regulators relay on now, actually penalize lending, so you’re pretty much at eight percent already. You are eight percent for lending… It is the banks, the big securities and derivatives operations, which perversely the capital rules treat as lower risk than loans. They are the ones who have a lot of leverage. Increasing the leverage ratio will create better incentives to lend because it will reduce the amount of leverage you can use to fund securities.”

RECOVERY? Lowest Mortgage Activity Since October 2008, Economic Damage From The Sequester Is Becoming More Clear, And It Could Get Worse

Lowest Mortgage Activity Since October 2008
For the 16th of the last 18 weeks, mortgage refinance activity plunged (dropping 20% this week alone). Since early May, when the dreaded word “Taper” was first uttered, refis have collapsed over 70%.
This is the lowest level of mortgage refinance activity since since June 2009 and lowest total mortgage activity since Oct 2008 - in the middle of the financial crisis.
Who says the Fed didn’t drive all this?

of course – it’s charts like this that are ‘used’ to show that the fall in activity and rise in rates is not impacting sales…
Mortgage apps plunge, refinancing hits 4 year low as rates soar
Applications for U.S. home loans plunged as mortgage rates matched their high of the year, with refinancing activity falling to its lowest in more than four years, data from an industry group showed on Wednesday.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, sank 13.5 percent in the week ended Sept. 6, after rising 1.3 percent the prior week.
GOLDMAN: The Economic Damage From The Sequester Is Becoming More Clear, And It Could Get Worse
Federal employment has been steadily dropping for several months, but a new note from Goldman Sachs economist Jan Hatzius suggests effects of the sequester have now cropped up other economic indicators.
“The first area where sequestration has shown up fairly clearly in the data is personal income, which registered a disappointing 0.1% monthly gain in July, due in part to a 0.5% decline in government wages and salaries,” Hatzius wrote to clients. “The decline was likely mainly due to defense furloughs, which started July 8. Absent the July furloughs, which according to the BEA reduced annualized wages by $7.7bn that month, personal income growth would have just barely been rounded up to 0.2%.”
Read more:
10 year charging toward the 3% line again!  Forward!
There Is Now No Doubt That Rising Mortgage Rates Are Hitting The Housing Market
Read more:
CHART OF THE DAY: The Complete History Of The Financial Crisis In One Chart
Read more:

Housing vendor index – Philly Housing Index – says same.…
The housing recovery is spun by the MSM.  There is no housing recovery.  It’s 2004 all over again.
Most of the total inventory is hidden in “foreclosure paper work” amongst the banks.  Available inventory is a small percentage of what is actually out there.

Why The Fed. Will INCREASE, NOT DECREASE, It's QE/Money Printing. By Gregory Mannarino

How Big Banks Can Steal Your Home From You Even If Your Mortgage Is Totally Paid Off

Source: Economic Collapse Blog

Did you know that the big banks have a way to legally steal your house from you even if you don’t owe a single penny on your mortgage?  Big banks and hedge funds are buying billions of dollars worth of tax liens from local governments all over the nation, and they are ruthlessly foreclosing on homeowners when they can’t pay the absolutely ridiculous penalties and legal fees that are tacked on to the original tax bill.  As you will see below, one 76-year-old man lost his $197,000 home that he fully owned over a $134 tax bill.  A 95-year-old woman lost her $300,000 home over a $44.79 tax bill.  This is a very, very dirty way to make money, and the predatory financial institutions that are involved in this business definitely do not want to talk about it.
Of course much of the blame should also be shouldered by the local governments that are coldly selling these tax liens to these ruthless predators.  If local governments want to collect their tax bills, they should do it themselves.  They should not be auctioning off their tax liens to cold-hearted financial institutions that are very eager to commit a legal version of highway robbery.
A few days ago, the Washington Post reported on the tragic story of a 76-year-old former Marine named Bennie Coleman.  Coleman had originally purchased his home with cash, but that didn’t stop tax lien predators from stealing his home over an unpaid $134 property tax bill…
On the day Bennie Coleman lost his house, the day armed U.S. marshals came to his door and ordered him off the property, he slumped in a folding chair across the street and watched the vestiges of his 76 years hauled to the curb.
Movers carted out his easy chair, his clothes, his television. Next came the things that were closest to his heart: his Marine Corps medals and photographs of his dead wife, Martha. The duplex in Northeast Washington that Coleman bought with cash two decades earlier was emptied and shuttered. By sundown, he had nowhere to go.
All because he didn’t pay a $134 property tax bill.
So why couldn’t he pay such a small bill?
Well, as the Post explained, these big banks and hedge funds keep tacking on interest, penalties and legal fees until the tax bills are many times the size that they originally were.  When the distressed homeowners can’t come up with thousands of dollars to pay off the debts, the big banks and the hedge funds move in for the kill…
For decades, the District placed liens on properties when homeowners failed to pay their bills, then sold those liens at public auctions to mom-and-pop investors who drew a profit by charging owners interest on top of the tax debt until the money was repaid.
But under the watch of local leaders, the program has morphed into a predatory system of debt collection for well-financed, out-of-town companies that turned $500 delinquencies into $5,000 debts — then foreclosed on homes when families couldn’t pay, a Washington Post investigation found.
In particular, hedge funds have discovered that this is a great way to make huge piles of money.  The following is a short excerpt from a CNN article that was published back in May
With buyers identified only by numbers or unrelated names, the fragmented, unregulated industry is opaque. Even the market’s size is debated — $15 billion a year, according to Howard Liggett, the chief executive of Distressed Real Estate Consulting Services, or $5 billion a year, according to the National Tax Lien Association, a trade group. While returns are a closely kept secret, investors typically make between 2.5% and 10% a year, or in the low teens for larger buys.
“The hedge funds are chasing yield in this business” says Albert Friedman, a principal at Alterna Capital, an alternative investment firm in Boca Raton that buys tax liens.
Insiders estimate hedge funds now control 40% of the tax-lien market, from under 5% five years ago, with regional banks, obscure partnerships sporting names like God’s ATM LLC, and mom-and-pop investors making up the rest.
And a number of “too big to fail” banks are involved in this business as well.
In a previous article, I described exactly how this works…
1) The big Wall Street banks set up or invest in shell companies that will disguise who they really are.
2) These shell companies run around and buy up all of the tax liens that they can get their hands on.
3) Predatory levels of interest (in some states as high as 18 percent), fees and penalties rapidly pile up on these unpaid tax liens.  The affected homeowners quickly end up owing much, much more than what the original tax bills were for.
4) If the collecting firm has to hire a lawyer, then that gets charged to the homeowner as well.  The bloated legal fees for some of these lawyers can end up being the biggest expense of all.
5) If the tax liens do not get paid, the collecting firms move in to foreclose as quickly as legally possible.
According to the Huffington Post, Wall Street banks such as Bank of America and JPMorgan Chase have been gobbling up several hundred thousand tax liens from local governments.  It appears that “distressed housing markets” are being particularly targeted.
Many of these tax liens are sold in online auctions, so it is unclear if many local government officials even realize who the big money behind many of these shell companies is.
These big financial institutions may consider this to be “good business”, but the truth is that they are absolutely shattering lives in the process.  This is particularly true when it comes to older people that do not fully understand what is happening to them.  Just consider the following examples from a recent Washington Post article
A 48-year-old math teacher paid his taxes in 2007, but the tax office took his $1,400 payment and applied it to the wrong house, crediting an entirely different taxpayer.
A 58-year-old bank employee almost lost her house in 2010 because the tax office mistakenly sent bills and notices to a wooded lot across from a strip shopping center in Virginia — 12 times.
A 69-year-old hat designer was given the wrong payoff amount and ended up in court to save her property, owned by her family since 1943.
Those homeowners found out about the mistakes in time to fight. Ninety-five-year-old Daisy Dolsey, living in a nursing home and struggling with Alzheimer’s, wasn’t so lucky: She lost her $300,000 house over a $44.79 tax debt even after she paid her taxes.
Doesn’t that just sicken you?
And then the big banks and the hedge funds have the gall to wonder why people dislike them so much.
In this day and age, large financial institutions have become more cold-hearted than ever before.
Always make sure that your property taxes are fully paid, and always keep a paper record of all financial transactions involving your home.
If you do slip up and make a mistake at some point, there is a very good chance that a ruthless financial institution will try to swoop in and steal your home right out from under your nose.

US could default on its debt obligations by mid-October, thinktank warns

Bipartisan Policy Center says default could come unless Washington agrees new legislation to raise borrowing limit
US debt crisis, Capitol Hill
The US government has never defaulted on its obligations. Photograph: Michael Reynolds/EPA
The United States could default on its obligations as early as October 18 if Washington fails to agree on legislation to raise the government's borrowing cap, a new study predicted Tuesday.
The Bipartisan Policy Center analysis says the default date would come no later than November 5, and that the government would quickly fall behind on its payments, including social security benefits and military pensions.
The thinktank's estimate is in line with a warning last month by Treasury Secretary Jacob Lew that the government would exhaust its borrowing authority by mid-October and be left with just $50bn cash on hand.
The government has never defaulted on its obligations. Raising the $16.7tn borrowing cap promises to be a major struggle for House Republicans and President Obama.
Two years ago Obama agreed to pair a $2.1tn increase in the debt limit with an equivalent amount in spending cuts spread over 10 years. But the president now says that he won't negotiate over the debt limit and is asking Congress to send him a straightforward increase that would ensure the government can pay its bills.
In January, House Republicans permitted an increase in the debt ceiling without demanding offsetting spending cuts.
It's commonly agreed that failure to increase the debt limit on time would roil financial markets and lead to a downgrade of the government's credit rating. The political fallout would also be intense, especially if Social Security benefits are delayed.
Tuesday's study predicts that if the default date — which is when the government cannot pay its bills in full and on time — comes on October 18, the subsequent social security payments due on November 1 could be delayed by almost two weeks.

Ultrafast Robots Can Take Over Financial Markets: Study

University of Miami researchers discover the sudden rise of a global ecology of interacting robots that trade on the global markets at speeds too fast for humans.

Typical ultrafast extreme events caused
by mobs of computer algorithms
operating faster than humans can react.
See for more examples
Activist Post

Recently, the global financial market experienced a series of computer glitches that abruptly brought operations to a halt. One reason for these "flash freezes" may be the sudden emergence of mobs of ultrafast robots, which trade on the global markets and operate at speeds beyond human capability, thus overwhelming the system. The appearance of this "ultrafast machine ecology" is documented in a new study published on September 11 in Nature Scientific Reports.

The findings suggest that for time scales less than one second, the financial world makes a sudden transition into a cyber jungle inhabited by packs of aggressive trading algorithms. "These algorithms can operate so fast that humans are unable to participate in real time, and instead, an ultrafast ecology of robots rises up to take control," explains Neil Johnson, professor of physics in the College of Arts and Sciences at the University of Miami (UM), and corresponding author of the study.

"Our findings show that, in this new world of ultrafast robot algorithms, the behavior of the market undergoes a fundamental and abrupt transition to another world where conventional market theories no longer apply," Johnson says.

Society's push for faster systems that outpace competitors has led to the development of algorithms capable of operating faster than the response time for humans. For instance, the quickest a person can react to potential danger is approximately one second. Even a chess grandmaster takes around 650 milliseconds to realize that he is in trouble – yet microchips for trading can operate in a fraction of a millisecond (1 millisecond is 0.001 second).

In the study, the researchers assembled and analyzed a high-throughput millisecond-resolution price stream of multiple stocks and exchanges. From January, 2006, through February, 2011, they found 18,520 extreme events lasting less than 1.5 seconds, including both crashes and spikes.

The team realized that as the duration of these ultrafast extreme events fell below human response times, the number of crashes and spikes increased dramatically. They created a model to understand the behavior and concluded that the events were the product of ultrafast computer trading and not attributable to other factors, such as regulations or mistaken trades. Johnson, who is head of the inter-disciplinary research group on complexity at UM, compares the situation to an ecological environment.

"As long as you have the normal combination of prey and predators, everything is in balance, but if you introduce predators that are too fast, they create extreme events," Johnson says. "What we see with the new ultrafast computer algorithms is predatory trading. In this case, the predator acts before the prey even knows it's there."

Johnson explains that in order to regulate these ultrafast computer algorithms, we need to understand their collective behavior. This is a daunting task, but is made easier by the fact that the algorithms that operate below human response times are relatively simple, because simplicity allows faster processing.

"There are relatively few things that an ultrafast algorithm will do," Johnson says. "This means that they are more likely to start adopting the same behavior, and hence form a cyber crowd or cyber mob which attacks a certain part of the market. This is what gives rise to the extreme events that we observe," he says. "Our math model is able to capture this collective behavior by modeling how these cyber mobs behave".

In fact, Johnson believes this new understanding of cyber-mobs may have other important applications outside of finance, such as dealing with cyber-attacks and cyber-warfare.


The study is titled "Abrupt rise of new machine ecology beyond human response time." Co-authors are Guannan Zhao, who was a post-doctoral student at UM when the work was completed; Hong Qi and Jing Meng, Ph. D students at the Physics Department at UM, Nicholas Johnson, volunteer in Physics Department at UM; Eric Hunsader, founder and CEOof Nanex LLC, and Dr. Brian Tivnan, Chief Engineer at The MITRE Corporation .

Contact: Annette Gallagher
University of Miami

For more information about the present and future of robotic control over financial markets, please read Julie Beal's article:

A.I. News and the A.I. Economy