US Recovery: Pieces of The Jigsaw Are Missing

Who doesn't like a good Hollywood movie, there's a villain, a hero, a fight, the hero wins and there's always a happy ending. Even though the plot is fiction it can absorb us for hours, unless it is too surreal, then we lose interest, switch the channel, or do something else. 

About this US economic recovery, there’s something wrong with the plot, a few important pieces of the jigsaw are missing.

There are a number of holes with the US recovery story.

Firstly, if the US economy is growing, that typically means US oil inventories should be falling, but the reverse is happening. Usually an increase in economic activity means more demand for energy to make products and move people or said products around. Moreover, demand for oil making products should also be rising. The list of products made from petroleum is endless, running into thousands. From the keyboard I’m using, made from petroleum, to over 100 litres of oil in just four simple tyres fitted to an electric car (It's fantasy when environmentalists talk about doing away with petroleum for energy and materials, a modern world could not function without the black gold). So a buoyant economy should also mean falling oil inventories. Instead they are rising, which doesn't support the US recovery story. 

Then there is the 321,000 jobs added in November and the unemployment rate at 5.8 percent. The impression we get from the data is that jobs are plentiful. That should then mean that labour participation rates should be high, but it is not even near that level. Labour participation rates are at 30 year lows of 62.8 percent. Since 2007 the number of working age Americans has risen by 17 million, while the number of employed has risen by less than 1 million. So how can the unemployment rate remain the same? 

If the employment environment were as good as the data indicates, then more people would be entering the labour market. Instead almost 14 million working age Americans have left the labor force since 2007. Within the last 12 months that figure rose to 1.2 million, leaving the labour market in an economy which is recovering? Moreover, median household incomes should be rising in a buoyant economy, where 8 million jobs have been created since 2010, right? 

Wrong! Median household income has fallen by 2.3 percent.

A buoyant economy must also mean a rise in capital investments, in 2000 the figure amounted to 20 percent of GDP, today that figure is just 16 percent. 

The US consumer spending accounts for more than half the GDP, which is 68 percent. So how can GDP be rising when consumer real income is falling? 

Okay, so a bulk of that GDP growth must be coming from public expenditure. Indeed, the figures have been juiced-up by a recent surge in military expenditure, a $69 billion increase in government spending, with the majority going to the military industrial complex. Got to fight those bad boys ISIS! 

Fair enough, fight the good fight, you know that kind of stuff, but then why have they been air dropped with US arms? Oh, it gets too confusing!

Back to the economic recovery. 

So then we should be seeing robust spending right?

After all, we are being constantly told by captains of industry that the future is looking bright. 

However, on main street we get another picture. Black Friday weekend sales collapsed by 11% versus the previous year. As the pundits tried to blame it on on-line sales (10% of total retail sales), Cyber Monday also proved to be a dud. 

Confident consumers usually spend more on their credit cards, nevertheless, credit card balances still $138 billion below where they were in 2008? If all these new jobs are being created why is credit card debt lower than it was in mid-2010? 

Then there is the increase in spending on food stuffs and restaurants, which is due to food inflation. Meanwhile, discretionary spending at furniture, electronics, and sporting goods stores remains stagnant.

Just look at the sales of department stores, they continue to fall. Sears and JC Penney teeter on the verge of bankruptcy. Delia’s is liquidating and Radio Shack isn’t far behind. The major chains have completely stopped building new stores and online growth is stalling as states implement sales taxes. 

What about the great housing recovery with a 24 percent rise in home prices, since 2012? Surely, that is impressive. But most of the buyers are Wall Street hedge fund/Federal Reserve scheme, with the aim of elevating prices and making the Wall Street balance sheets look less insolvent.

The percent of first time home buyers remains near record lows, mortgage applications to purchase homes are at 1995 levels and 30% below 2009 recession lows. 

What about the automobile sector? It’s firing on all cylinders with annual sales of 16.4 million, the highest since 2006. But selling automobiles to people with little or no means of paying the loan back isn't a good business model. It is like issuing more bad debt to boost the GDP figures. Over 31% of all new auto loans this year were to subprime borrowers. Auto loan debt is at an all-time high of $950 billion, up 33% since 2010 when the Fed. There are 65 million auto loans outstanding, and the average debt now stands at $17,352. Enter the auto sub-prime burst? 

If the auto business were booming then why have GM profits fallen from $9.2 billion in 2011 to $5.4 billion in 2013, and on course to fall to $4 billion in 2014? 

Why is their stock 25% below its 52 week low? 

But then there’s that wild card, low oil prices, which is estimated to save each household $368 per year. If necessities, like groceries and healthcare continue rising most of the benefit will go towards paying the grocery bills and health care costs. It might be a zero sum game with no new consumption occurring. 

There is something wrong with the US recovery story…

Billionaire's Massive Bet on Gold and Silver.

Hot on the heels of a 25 US dollar surge in the price of gold and a recent 5 percent rally in the price of silver, billionaire Frank Giustra, a fat cat, decides to make a massive bet on significantly higher gold and silver prices in the future.

Below is a recent interview with Frank Giustra;

“We are seeing a very nice move in gold and silver today. I have consistently said that the big move we are going to see for the next few years would start before 2015. The start of this move beginning in December seems perfect. I’m not surprised at the action at all and the breakout is clear”, said Giustra.

A number of investors have had their fingers burnt investing in precious metals over the last few years so many are wondering whether this recent support for the precious metal is just a short term spike upwards. In other words, are we seeing a short term bull market in a long term secular bear market, or could this be the beginning of a new trend?

“This advance will go a lot further on the upside, and this is happening at the same time that the stock markets are coming off a little bit and more importantly the dollar turning down,” believes Giustra.

But what has the dollar trajectory got to do with gold prices?

A lot, the price US dollar is inversely related to the value of gold. In other words, when the dollar falls, gold goes up and vice versa, reckons Giustra. There is logic in that, as the US dollar and gold are viewed as shelter assets, investors tend to flock to US dollars or gold in times of trouble.

Why?

The US holds the heavyweight title, albeit hotly contested, as the world's only superpower, militarily and economically strong enough to weather bad times. Moreover, the US economy is diverse. The current commodity and oil price crash hasn't depreciated the US dollar, it still remains top dog of all fiat currencies. But the dollar is just that, a fiat currency, it has no intrinsic value. It has value as a currency because people and investors place trust in the monetary authorities’ ability to maintain economic stability, tackle inflation and promote policies that create prosperity.

So when there is a lack of confidence in the US Federal Reserve’s handling of the economy, speculative money, or “hot money”, flows out of US dollars into other assets, often precious metals such as gold. During the first few years of QE, many believed that pumping the system with liquidity (increasing the money supply) would cause runaway inflation and devalue the dollar. Gold, a tangible asset, has always been viewed by investors as an excellent hedge against inflation. What happened to the value of gold when the US dollar was tanking a few years ago?

The price of gold went up. Today the US dollar has strengthened, meanwhile gold has fallen.

So there is a negative correlation between the USD and gold price, as one asset goes up, the other falls in value and vice versa.

But there is an opportunity cost of holding gold.

One of the downsides of holding the precious yellow metal is that unlike stocks, bonds or cash deposits at a bank, where the investor can earn interest on their money at the bank or receive dividend payments from their stock-holdings, gold pays the investor nothing.

Parking your wealth in gold becomes expensive, particularly if you could be earning good dividend in stocks, bonds or interest payments at the bank.

So when the Fed raises interest rates, or even talks about the prospect of a rate rise sometime in the near future, it is a real kick in the teeth for gold prices.

Will gold prices continue rising?

“This advance will go a lot further on the upside, and this is happening at the same time that the stock markets are coming off a little bit and more importantly the dollar turning down. That’s very significant because I’ve always said that a move up in gold will be linked to a move down in the dollar,” said Frank Giustra.

So US dollar down and gold up from here onwards?

“It certainly looks as though the dollar is turning down here and this should be the beginning of a very big move to the downside for the dollar. So this is going to be the start of an exciting period for the precious metals that KWN readers around the world will enjoy for the next few years.”

What about the looming problems of deflation and excessive leverage, what impact is that likely to have on gold prices?

“In the midst of this massive bank leverage there are powerful deflationary forces that are building. This is putting pressures on the global economy and the banking system. So we can’t be too far from a massive money printing program. Central banks know that a deflationary implosion would mean the end of the banking system. All of this will be incredibly bullish for gold and silver going forward as well as the shares.”

So that is one billionaire's, with an interest in mines, tip for 2015, buy precious metals.

But there is one caveat. Precious metals are a rival to the monetary system, when you are in gold you are no longer participating in the system. When there is a gold rally, it’s like a vote of no confidence and that's a problem because the kingpin doesn't like competition. For that reason, I believe the value of precious metals are being suppressed today, which might also be the case going forward.

Again politics at play, which explains why I was bearish on Bitcoin when it was trading at around 650 USD last summer.

Survival Kits?!?!

Those of us following the markets, analysing official economic and corporate data with the aim of trying to join the dots to make sense of it all, would probably agree after a few happy hour drinks, that the fundamental economic prospects look shaky. Maybe in the cold light of day, stone sober, without your boss listening over your shoulders and not worrying about those dodgy positions your investment house has to unload, you'd confess that the situation is dire.

But even if the worse were to happen, a total financial meltdown, or as James Rickards puts it in his book called, “The Death of Money,” while it is no pleasant event to live through, the world will still keep turning. People will go on wanting necessities, food, water, shelter, warmth, they will want to communicate. The transition period will be difficult, but in the end those businesses, or entities providing what people really need, will survive and maybe even prosper. 

The graveyard of fallen Empires is full. The Byzantine, Persian, Greek, Roman and more recently the British, were all once Great Empires, but they are no more. Everything has a beginning and an end, so perhaps the US Empire is approaching its twilight period. Will the US dollar continue its reign as the world’s reserve currency?

Monetary scholar Edwin Vieira, answers the question. “The average life span of a fiat currency monetary system is just 27 years,” said Viera. So every 30 to 40 years the reigning monetary system fails and has to be retooled. The last time that happened for the U.S. was in 1971, when Nixon cancelled the convertibility of dollars into gold. Many would also agree that the Nixon petrodollar deal with the House of Saud also saved the US dollar. 

So the dollar could get “retooled” yet again and the Empire might metamorph into something else and live on. The ingenuity of the US to be able to reinvent itself to survive is awesome.

If the previous economic policy of Quantitative Easing (QE) didn't do much for the economy on main street, in terms of creating full time well paid jobs, increasing consumption and business investment, then maybe more public investment projects are required. Mending the roads, building bridges, the railways and the kind of infrastructure projects that President Obama was standing on his soapbox preaching about a few weeks ago.

Or maybe even something more radical is needed.

Perhaps the US Treasury officials are burning the midnight oil to try and come up with a wining plan.

Maybe they are indeed planning something radical if they’re focusing on survival kits. Regretfully I don't mean this in the metaphorical sense.

The kits of which I speak are the type used by military commandos forced to survive in hostile environments without electricity, food, water etc.

Survival kits are typically required by the military… But the Department of Treasury?

Below is a leaked 27 page tender and protocol from the Department of Treasury requesting survival kits for their employees who oversee the federal banking system.

http://freebeacon.com/wp-content/uploads/2014/12/Survival_Kits_RFP.pdf

Department of Treasury released the tender on December 4.

The emergency supplies is destined for every employee at the Office of the Comptroller of the Currency (OCC), which conducts on-site reviews of banks throughout the country.

The survival kits must come in a fanny-pack or backpack that can fit all of the items, including a 33-piece personal first aid kit with “decongestant tablets,” a variety of bandages, and medicines, according to the tender. 

The survival kit must contain the following items;

240 calorie food bar (minimum 5 year shelf life)

3 pack 8.5 oz. water (minimum 5 year shelf life)

50 water purification tablets (minimum 5 year shelf life)

Reusable solar blanket 52” x 84”

Dust mask

One size fits all poncho with hood

12 hr. light stick

1 pair of latex gloves

Whistle with lanyard

33 piece personal first aid kit:

1 antibiotic ointment pack

2 extra strength non asp

Dynamo rechargeable lantern with AM/FM radio

Aid emergency mask for protection against airborne viruses.

The government is willing to spend up to $200,000 on the kits. 

Survival kits will be delivered to every main bank in the US including Bank of America, American Express Bank, BMO Financial Corp., Capitol One Financial Corporation, Citigroup, Inc., JPMorgan Chase & Company, and Wells Fargo. 

What is the function of the OCC?

According to the website, “the mission of the OCC is to ensure that national banks and federal savings associations operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations.”

The agency has roughly 3,814 employees , each of which would receive a survival kit. The staff includes “bank examiners” who provide “sustained supervision” of major banks in the US. 

“Examiners analyze loan and investment portfolios, funds management, capital, earnings, liquidity, sensitivity to market risk for all national banks and federal thrifts, and compliance with consumer banking laws for national banks and thrifts with less than $10 billion in assets,” the OCC website explains. “They review internal controls, internal and external audit, and compliance with law. They also evaluate management’s ability to identify and control risk.”

What is going on?

US Defence Secretary resigns suddenly, and nobody wants the job and now this. Treasury Department is ordering survival kits, which are usually destined for the military or law enforcement agency such as the FBI. 

Are they thinking the unthinkable?

Profitting Faster Than The Blink of An Eye

Profiting faster than the blink of an eye isn't fiction, institutional trader’s robots actual do it, the practice is known as high frequency trading (HFT).

The non-fiction book called “Flash boys,” by Michael Lewis raised public awareness of HFT. Lewis grabbed centre stage and brought the controversial practice of flash trading to the public’s attention when he wrote that "The market is rigged" by HFT traders who front run orders placed by investors.

So what is HFT?

As the name suggests, speed is the essence of HFT, but we are not talking about fighter pilots with cat like reflexes, the type that always wins in a game of snap, or is able to hit the buy and sell button at a fraction of a second. The type of speed we are talking about is lightning fast, well beyond the capabilities of any human. To be able to execute trades at this speed, electrical engineers needed to construct secretive fiber optic networks of cables spanning hundreds of miles, running through mountains and beneath rivers. This enables data to travel between say Chicago to New Jersey at just 13 to 17 milliseconds. You probably got the gist of it, the faster the data travels the better the price of the trade and profit that the institutions make.

Then on the other end of the network sitting in an office, is a powerful computer running on a dedicated program trading platform, communicating a massive volume of orders at very fast speeds. Finally, complex algorithms, probably designed by PhD graduates in mathematics, analyze multiple markets and execute orders based on market conditions.

HFT is out of range for the retail trader. As Lewis suggest in his book, access to the super-fast fibre optic network and other technologies are barriers to entry, which enable the big Wall Street banks to gain even more control over the market.

So HFT is a game for the heavyweights, where the smaller players are not invited to play.

Nevertheless, the ecosystem works in strange ways and somehow we might still be able to ride on the buffalo's back, so to speak.

In other words, HFT practised by the institutional banks might actually help the retail trader.

How could that be possible?

With the volume of trades increased due to HFT activities of the institutional player, liquidity in the market is greatly increased. When a market is highly liquid, traders can move in and out of trades without having any impact on prices.

Another measure of the market's liquidity is the “bid-ask spread”.

This is the difference between what traders must pay to buy a stock (the “ask”) and what they get if they sell it (the “bid”). This difference represents the cost of trading. Sometimes the spread can be as much as 5 percent in less liquid markets. So the spread is a loss to the trader, but it’s a profit, or what a market-maker earns for risk and time spent making a market in whatever financial asset he buys and sells.

If you trade on short time frames, you need to be able to calculate the bid-ask spread and factor it into the cost of your trade, broker’s commission and taxes to know whether or not you should proceed with the trade. For example, if you anticipate a stock to rise by five percent during a given time frame, but the “bid-ask spread” is five percent. If the stock were to rise by that amount you still haven't broken-even, after factoring broker’s commission costs for buying and selling the stock.

You'll notice on the FTSE100 stocks the spreads are smaller, typically one percent, making it easier for traders to move in and out to make a profit. Compare this to stocks on the FTSE 250, a less liquid market, you'll notice the spread widens, making the cost of the trade more expensive for traders.

So the more liquidity, the more trades take place, thus the lower the bid-ask spread needs to be for market-making to be worthwhile. HFT now accounts for as much as half of all stock market trading in the US. The rise in trade volumes has coincided with a marked narrowing of the bid-ask spread.

But Eric Budish, Peter Cramton and John Shim believe that HFT can also sap liquidity as well as create it. One reason market-makers need to charge a bid-ask spread is to insure themselves against being the “dumb money” in the deal.

The reasoning is as follows: Assuming you were to take up a market-maker’s offer, you would do so because you probably have some reason to think it is good value. The bid-ask spread compensates market-makers for the risk that the customers who choose to transact are those with private information, a problem known as “adverse selection.” (A situation where seller might have information that buyer doesn't, or vice versa, about the stock)

The authors argue that HFT can make adverse selection worse.

For example, imagine Apple releases a buoyant trading statement regarding the sales of iPhones, which beats expectations and the stock shoots north. HFT firms, first to enter the game, due to their lightning speed advantage, take up “stale” offers of market makers to sell Apple stock, which now looks a bargain before the market-maker has time to withdraw them. This is known as “sniping”. But assuming that market makers plan ahead, to compensate for the time lag to respond, so what do they do? They push up bid-ask spreads, which raises costs for traders.

So the author argues that sniping, practised by HFT firms, also pushes up trading costs.

There is always a flip side to every argument.

Mother of All Agreements

It might be the “mother of all agreements,” it is the Transatlantic Trade and Investment Partnership (TTIP). The vision is to link-up the two titan trading blocs, the US and EU, to create the world's largest prosperous free trade zone. It would promote the trade of European made cars, food, fashion and design and maybe even financial services, by removing trade tariffs in the US market. A potential turbo charge to get the EU bloc states out of an economic quagmire and back to economic growth, job creation and prosperity. But TTIP might make more than just economic sense, there are chilly winds blowing from the East. Russian EU relations are not what they used to be, with tit for tat sanctions over the alleged Russian military support of the pro separatist forces in the ongoing Ukrainian civil war. More than 1,000 civilians have died since the September Ukrainian truce, which exists regretfully only in name. With bitter winter approaching, the Ukrainian crisis may turn out to be more than a humanitarian crisis, since it has already ignited a new cold war that could turn “hot.”

Trade wars between the East and West are at a peak. The Eurasian Union, worth anywhere between two and three trillion USD, is set to abandon the dollar and the Euro in all trade deals. Russian official says dollar, euro could be banned in Eurasian Union. So with the door likely to be slammed in the face of euro companies, with the eastern end of Europe, becoming difficult if not impossible to trade with, why then isn't the EU embracing TTIP with open arms? With all this bad blood on Europe's door step it would make strategic and economic sense to strengthen economic and political ties with a powerful ally across the Atlantic.

But not only is the EU indifferent to the idea of TTIP, it is even sceptical about signing a massive trade deal with the US?

Why all this EU paranoia over a transatlantic trade deal?

The French articulate the worries of the southern bloc states, with their proud culture, traditions and love of good food. “The Americans are a little bit surprised we think their foods are inferior. They don’t understand why we feel so superior”, said Marietje Schaake, a Dutch liberal MEP on the parliament’s trade committee (the invasion of transatlantic toxic chickens and Frankenstein foodstuffs into Europe). Or, would the French, Italian, Spanish film industry be gobbled up by Hollywood? So maybe it is the fear of the Americanisation of Europe and the death of their culture that could partly be behind the resistance to formulate closer trading bloc ties.

For the British, closer American trade ties might spell the beginning of the end of their treasured NHS, public health service. The privatization of the NHS would become a stripped down Medicare clone.

In an attempt to counter what US ambassador Barzun describes as “myths” and “scaremongering” in Europe about aspects of the proposed pact, both sides emphasise there is nothing in the talks that could facilitate the privatization of public services such as the NHS. Audio-visual services have also been excluded to appease French fears of Hollywood and Silicon Valley decimating the French film and television industries. American hormone-fed beef, GM foods, or chlorine-washed chickens will not be allowed in Europe, the European commission maintains, for as long as they are proscribed in the EU.

Nevertheless, senior commission officials have admitted to the Guardian that they are fighting a losing battle against, what they describe as “a tide of hostile and emotional public opinion that has taken them by surprise. I need to try to understand the scepticism, the fears,” said Cecilia Malmström of Sweden, the EU trade commissioner.

In fact the transatlantic trade acronym TTIP is the most contested in Europe.

Perhaps Matthew Barzun, the US ambassador in London sums up the problem in just a few words, “There is mistrust,” said the US ambassador in London to the Guardian. A key EU official put it another way: “[TTIP is] more sensitive politically in Europe than in the US”.

But where is most of this mistrust emanating from in the EU?

Germany, as well as Austria and France.

The fact that the Germans are sceptical is probably no surprise. After all, wouldn't you feel a little uncomfortable about a friend or neighbour who was spying on you?

The Snowden and NSA mass surveillance scandals have rattled transatlantic relations. The revelations of the NSA tapping Chancellor Angela Merkel’s mobile phone, has really thrown a spanner in the works. Then there is the potential loss to German Industry? The only natural resource Germany has lies about six feet above the ground, its intellectual property. All that energy, time and money spent on research and development to try and keep ahead of the game and your ally is listening in on everything, maybe even cheating. About 200 questions have been tabled in the German parliament on aspects of TTIP, which underscores how MPs have been besieged by their constituents.

No doubt American diplomats are probably working overtime, to mop up the mess and step up their charm offensive. Maybe with the EU now on its knees they may find a warmer reception. Meanwhile, the anti-trade pact are also keeping up the anti by handing a petition against the transatlantic trade pact to Jean-Claude Juncker, the European commission chief.

My view is that TTIP will go forward in 2015 after the wrangling over some differences have been ironed out , for example Brussels wants access to financial services in the US, but Washington is not keen on the idea. In view of the current geopolitical situation and delicate economic situation, neither trading bloc would want to jeopardize a great trading opportunity, which has the potential of boosting economic activity and prosperity in Europe and across the Atlantic.

The Forecaster

To the global trading community Martin Armstrong may be known as the ultimate forecaster who devised a computer model capable of collecting and analysing thousands of years of economic, political and financial data, in order to predict future market trends. The computer programme he designed is so “intelligent” that it allowed his firm Princeton Economics to literally predict the rise and fall of entire nations. To data, Armstrong has accurately predicted the savings and loan crash of 1987, the collapse of the Japanese economy, the collapse of the Russian Rouble, the dotcom bubble and the 2008 financial crash.

Armstrong is a controversial figure. Due to his accurate predictions the Securities and Exchange Commission and the Commodity Futures Trading Commission believed that he was conspiring with a syndicate, or acting on insider information, to gain trading advantages.

Armstrong’s defence was that he was acting on a programme designed by himself, the authorities wanted the codes. Armstrong refused to hand them over, was nailed for contempt of court and thrown in a Federal prison for ten years.

“He didn't want to go to college, so I said you have got to do something, so he enrolled in RCA Computer school”, said Armstrong's mother. “I wanted to create a system that could store the knowledge of centuries to predict the future. The entire trading community would scramble to see the signals when they were released.” The Universal Bank of Lebenon asked him whether he could make a model (computer). He concluded that country was going to fall apart in eight days, that prediction was correct.

Soon after, Armstrong had a clash with the authorities. 

"We want the source code," said an FBI agent. "I said you are not getting it, sorry," replied Armstrong. The FBI then shut down his office and closed down the accounts. "They wanted what I have spent my entire life developing and I am not giving it to them."

So the primary reason for Armstrong being locked up and the keys thrown away was due to the fact that he wouldn't handover the programme codes, which the US Government was extremely eager to possess. Ten years imprisonment would break most men, but Armstrong refused to cave in, he has still not revealed his codes to the US Government.

He’s out of prison now, but while incarcerated Armstrong continued to analyze, write, sketch charts, and share his findings via surrogates who posted his work on the internet.

Reading his writings is like peeking into the mind of a genius. It’s a journey into a lateral dimension, geopolitics, economics, global events and connecting the dots to forecast with incredible accuracy political and economic outcomes.

Armstong was pondering over the following question back in June. What if the panic caused by a collapsing global economy leads to a limited crash and then sends stock markets soaring?

Armstrong takes an alternative view believing that an economic collapse will play out in that way. In other words, we will see negative divergence to the maximum, with fundamentals pointing sharply downwards and the stock market shooting up. Even though mainstream will be unable to hide the reality, more people reliant on food stamps and food banks for their survival, mass unemployment hidden by zero hour contracts and low paid part time work. Company results will be made to look good with more of the same; stock buy backs and downsizing, cutting costs, output capacity and cutting employment to increase profits. The Goldilocks economy will spin along, occasionally there will be a few high profile cases of someone making a fortune on the markets, illustrating to the herd of hungry masses that they should get off the streets, stop protesting, find any miserable work they can, save and play the game. Because after all, it is just child's play, they too can lift themselves out of poverty.

So what we are seeing then has little to do with economics, since a buoyant market is a powerful ideological message to say look people capitalism works, it is the best and only system for allocating scarce resources and spreading wealth, which has lifted millions of people out of poverty.

Like an obstinate child that refuses to give in and admit that maybe the system has passed its expiry date. The stock market will power along, it is the central banks perpetual motion machine where the fundamentals have been surgically removed from the markets. It now serves only one purpose, a political one, to advertise to the world that capitalism is robust and can survive anything, come and join us. Failure will never be admitted. An obstinate child never gives in, even if it means smashing the toys on the ground in tantrums to get their way.

“The U.S. stock market, although it sounds a bit crazy, it’s liable to go up very dramatically. I would think we could go up 50% at least. But it’s going to depend upon when the capital flows start coming in very dramatically, and they’ll come when you start to see those types of geopolitical problems [along with]…economic problems from Europe. But, I mean, there will be more dips—one more little crash first—and then it’s going to take off,” said Armstrong.

"One way or the other, whether stocks rise or fall, we’ve entered an unprecedented period in world history."

The end result, regardless of how we get there, will likely culminate in a war unlike anything human civilization has ever witnessed before as politicians the world over angle to convince their citizenry that someone else is to blame for their problem.

Though we can’t predict with certainty the dates or sequences of events that will lead to the eventual downfall of the system as we know it today, we can, at the very least, prepare in advance and insulate ourselves against the brunt of the hit when it does happen.

Deep down, though many refuse to admit it, we know that something just isn’t right.”

Zero In: Greece

A financial meltdown took place in last week. The Stock Market went into free fall, collapsing by more than 10 percent, trading had to be halted in its worse plunge since 1987. Bond prices collapsed as investors scrambled for the exit door, pushing yields to an all-time peak of 9 percent. Regretfully, such high yields will make servicing the sovereign debt unaffordable and thereby make the unthinkable, a massive sovereign debt default in Europe, now realistic. If such an event were to occur, it could potentially be the catalyst for a financial crisis that would make the last crisis look like a picnic. As explained in my previous piece, this is where I believe the financial apocalypse event will occur, with a massive sovereign debt default in the peripheral states of the euro bloc. 

Basically, if sovereign debt is collateral and used to make more loans throughout the system due to leveraging, when collateral becomes worthless, in the case of a sovereign debt default, the money supply shrinks. Moreover, due to the global inter-connectivity of the system, shock waves are felt and magnified around the globe. There is no need for me to go into the detail regarding the above, as I have already explained in a number of my writings. Perhaps you can get a feel for the potential severity of the problem by looking at it this way. The sub-prim mortgage default in the US caused the last Financial Crisis of 2008, which only involved a relatively small portion of risky mortgage lending to home buyers in the US, who couldn't pay their debts back. The financial and economic impact of that fallout is still with us today. But what happens when a whole nation, interconnected to the financial system, defaults on their debts? Regretfully, it may be a question of mathematics, you take the 2008 Financial Crisis and the severe recession that ensued and magnify the problem many times. If that paints a bleak picture, well that’s because it is.

So why now a financial meltdown in Greece?

Greece has been severely hit by the 2008 financial crisis, its economy has shrunk by a massive 25 percent since then and one in five people have no work. It’s a basket case, resembling the Great Depression experienced by the US in 1929. For the nation to payback its debt, the size of the state has to shrink. An economy that’s shrunk by a quarter in six years, doesn't generate the tax revenue to support its existing public sector. But selling austerity, depleted public health service, diminished public education, transport and public goods is like trying to flog misery to the electorate, which can be political suicide. So the cold reality may be that no politician will do it unless the financial market, through a crisis, forces them to tackle the issue.

The Greek credit line deal to keep the “lights on” has not been concluded in a speedy way that lenders anticipated. As I mentioned last week in a piece it would cause ripples in the market if lenders were to walk away feeling unsatisfied.

The main wrangling issue is Greece's widening budget gap, it’s spending more than it earns. But, the Greek government doesn't have the stomach for more politically unpopular austerity measures, believing that tightening the noose might tip the country into civil unrest.

So the idea is to call an early election, which is causing more political uncertainty. Markets don't like political uncertainty, particularly when the popular political opponent is viewed as a far left Marxist, with unconventional plans to ditch the euro and default on the sovereign debt.

The Greek government needs a super-majority to install a president, which it doesn't have. If it can't elect a president, that might bring forward a general election. The radical Coalition of the Left (Syriza) is leading the polls.

The bond holders are shaking in their boots

An economic meltdown has rapidly turned into a financial crisis that metamorphoses into a political crisis, which typically swings from two extremes (left and right) of the political spectrum. 

How are the financial markets reacting, this time around?

The market's respond to uncertainty in a predictable way; it is always negative. 

Sovereign bond yields are breaking out of the region they've been in for the past few days, up from 7.2% to beyond 7.75%. The yield on a 10-year bond is a common measure used to show how expensive it is for governments to finance their debt. Yields saw a recent peak just below 9% in October, when the far left anti austerity party Syriza took a polling lead and the government was planning to exit its bailout early.

Deutsche Bank's Jim Reid explains the situation here:

The failure to elect a President by the existing parliament would lead to a national general election within 3-4 weeks, with the current SYRIZA opposition party leading in the polls (according to various opinion polls). Such very large electoral uncertainty and lack of an official financing backstop, ensures a meaningful period of uncertainty ahead for Greece.

Deutsche's George Saravelos also says there's a 60/40 chance of a Greek parliamentary election. With Syriza in the lead, that's a big risk for bondholders. The insurgent party wants Greece's creditors to take a major haircut (dramatically cutting the value of their investment) and for existing bailout programs to be cancelled.

As they say, there is no such thing as a free lunch. If a sovereign bond pays higher than the average, it does so because it’s a riskier investment. It wasn't so long ago when a bandwagon of investors, intoxicated by the central banks funny money QE policy, were falling over each other to pile into Greek bonds yielding 6 percent. The Wall Street expression comes to mind: “picking up nickels in front of a steamroller.” 

The problem is that when mistakes are made high up the food chain, the fallout is usually big and it is always felt downstream. This is a serious problem that could easily spread to larger countries in Europe. Italy isn't in that much of a better situation. I see a flight to safety moving forward.

Aussie Dollar Trouble Down Under

China is slowing down, according to the not so reliable official data coming from the local statistics office. Moreover, the economic data from the Euro bloc economies range from either dire to disappointing, despite years of failed quantitative easing (QE), the peripheral states remain in a severe recession/depression. Germany, which used to be known as the bloc's engine, is beginning to stumble and France's economy is also expected to contract, dragging the Euro zone into the deflation danger zone. But Europe is not only the weakest link in the fragile global economy chain.

Japan's latest third quarter 2014 data provides no comfort either, the world's third largest economy continues to contract. Gross domestic product (GDP) shrank an annualized 1.9% in the third quarter from the previous three-month period. Even US GDP isn't that hot when you strip out a sharp upturn in military expenditure.

If an independent level headed economist were to examine the latest raft of economic data, they would probably arrive at the sobering conclusion that the system is now eating itself. We are in a downward spiral of stagnating/shrinking economic growth, deflation, rising unemployment, pending massive debt defaults, political instability and civil unrest. It's one big mess! The greatest experiment in the history of finance has failed. The trillions of US dollars squandered on QE have not saved the real economy on Main Street from the edge of the abyss (I explain this in my article entitled, “Fire Backstage” where I attempted to explain the looming liquidity crisis). The opportunity to put the problem (from the last 2008 Financial Crisis) right was wasted by policy makers and we are now probably at the point of no return.

If that’s the picture, you are probably wandering how to survive and even prosper from the pending carnage. To survive a lion attack you don't have to run faster than the lion, you just have to run faster than the herd.

Surviving and prospering is the name of the game and being ahead of the curve is the way to do it in the financial markets.

But that’s easier said than done, especially when nature hasn't handed us the longest legs.

Nevertheless, let's look at some of the early getaway trends.

The global economy is slowing, that is becoming more evident with every bit of data being released and it is likely to accelerate next year. Foreign currencies with large commodity based economies are depreciating. As I mentioned in one of my articles a few weeks ago, as more evidence of a slowing world economy surfaces this trend will accelerate. If you call up a chart of the US dollar, that is pretty much what has happened over the last quarter with respect to the AUS dollar.

The sharp decline in world commodity prices, triggered by a slow-down in the world economy, has reduced the demand for commodities and is depressing prices. Already, this trend is starting to have a detrimental impact on commodity based economies.

“Sharp falls in prices of commodities from iron ore to crude oil are shrinking the windfall that Australia's government hoped would support spending on new infrastructure and some of the most generous social welfare plans in the world,” reports market watch.

About a third of Australian exports goes to China, so when China wobbles and demand for Aussie commodities falls, its price tumbles and the Australia economy gets whacked. 

For decades Australian economists have been talking about moving away from an economy heavily reliant on commodities and developing other areas of the economy, such as manufacturing or services. A commodity based economy is too vulnerable to volatile commodity prices, therefore is prone to steep economic cycles.

But regretfully, for the lucky country blessed with natural resources, its fortune has also been its misfortune. China's, up until recently, unquenched demand for commodities has propelled the Aussie dollar to highs for a period long enough to choke-off its manufacturing industry.

The appreciated Aussie dollar, has made it very difficult for Australia's manufacturing to compete with their extremely low labour cost neighbours in Asia.

So the invisible hand of the market has channelled capital and resources into mining activity.

But the market has a time lag, while higher prices acted as a signal for mining companies to increase their output at the peak of the commodity boom, a few years ago, that output is probably now ready to come on the market, at the worse time.

Already exports to China are down by more than 40%, which is causing a slump in commodity prices. The end result of that is a rapidly deteriorating economic panorama.

Instead of reaping a revenue boost from an investment-driven export boom as expected, the conservative government now faces a tax write-down of about 8 billion Australian dollars (US$6.7 billion), or 0.5% of gross domestic product in the fiscal year starting July 1, according to Morgan Stanley.

Australia's economy grew by much less than expected in the third quarter as commodity prices tumbled and mining investment slumped, driving calls for interest-rate cuts next year.

Unemployment is rising for the first time in years, reaching a 12-year high of 6.2%.

Morgan Stanley recently said that without more stimulus measures to boost growth, Australia may struggle to avoid its first recession in more than two decades.

The bank last month trimmed its growth forecasts for 2015 to 1.9% from 2.5%. That compares with the current Reserve Bank forecast of around 3%.

Morgan Stanley, Deutsche Bank, Goldman Sachs and Credit Suisse have all turned bearish on the Australian economy in recent weeks. Deutsche Bank on Dec. 2 abandoned its forecast of an interest-rate rise in 2016, and now forecasts two cuts of 0.25 percentage points each in 2015.

Indeed, slow global economy and a heavily reliant economy on commodities means that there may be trouble down under, particularly if the global economy deteriorates further. With a drop in interest rates now likely to be on the cards, the sliding Aussie dollar may have just begun making it a shorter's delight.

Paradoxically, the inter-connectivity of economies, the comparative trade advantages, the free movement of capital and trade that aided economic growth and prosperity for decades in developed economies, in bizarre twist, can sometimes work in reverse, destroying the very prosperity and economic growth that it helped create.

Zero-In: Euro Zone Woes Continue

The economic saga, now into its sixth year, continues in Europe with the peripheral parts of the bloc remaining gripped in severe recession. The previous woes of low investment, mass unemployment in the south, sovereign debt default and a currency crisis are again haunting economic policy makers.

Latest official data from European Union's statistics agency confirm that the economy has stagnated. The currency area's gross domestic product was just 0.2 percent higher in the third quarter than in the second, a slight acceleration from the 0.1% expansion recorded in the three months to June.

The data also confirmed another concerning trend of falling investment, which is continuing to stifle the Euro bloc's economic recovery and disappoint expectations this year. Investments in spending fell by 0.3%, in the third quarter of the year, according to Eurostat, The latest investment data underscores the lack of confidence businesses have in the economy picking up in 2015. 

Mindful of the shortfall in investment across the eurozone, the European Commission President, Jean-Claude Juncker, has launched a kick start plan aimed at enticing pension funds, insurance companies and other large investors to finance infrastructure projects across the European Union.

But economists have questioned whether the plan would be able to raise the targeted amount of money and noted that it will take some time to select and launch projects.

Meanwhile, with lacklustre private business investment on the table, job creation has been weak. Unemployment remains high and may even start rising again, unless investment picks-up. Additionally, the bloc's Balance of Trade deteriorated slightly, despite depreciation in the euro's exchange rate, with exports rising more slowly than imports. This worsening Balance of Trade also provided headwinds on growth. The European Central Bank's economists Thursday cut their forecast for economic growth in 2015 to just 1.0% from the 1.6% projected in September. 

On a slightly more positive note, consumption increased by 0.5 percent in quarter. The very low levels of inflation appear to have boosted the real spending power of households, aiding a 0.5 percent increase in their consumption during the quarter. Collapse in the oil price is likely to put some change in consumers' pockets going forward. So the trend of consumption picking up should continue, unless there is a rise in unemployment rates going forward. 

Responding to the prospect of continued low growth and inflation, ECB President, Mario Draghi, may be looking at the options available to stimulate the euro zone's near-stagnant economy. But a decision has been deferred until early 2015 amid signs of continuing divisions over the right course of action.

Economists said that even if the ECB does decide to provide more aggressive stimulus in the form of quantitative easing--or large-scale purchases of government bonds--that won't be enough to significantly boost investment and growth.

Indeed, Mr. Draghi has repeatedly said further action by the ECB will have to be accompanied by labour market reforms in Italy and France, as well as an easing in the pace of budget cuts in parts of the Eurozone.

"These are the two laggards", said Mark Zandi, chief economist at Moody's Analytics. "They haven't made significant progress toward reforming labour and product markets. Otherwise, the Eurozone will be stuck in a rut." 

"I don't know if policy makers will muster the political will without being visibly pushed by financial markets", Mr. Zandi said. "I believe it won't happen unless there is another round of financial turmoil, another chapter in the debt crisis. The crisis isn't over."

Indeed, Greece will have to ask for an extension on its bailout program before parliaments in Eurozone nations close for Christmas, because a new credit line will not be ready in time, a senior euro zone official said on Wednesday.

After two bailouts totalling 240 billion euros ($300 billion) since 2010, Greece wants to switch back to market financing from the start of next year but disagreement over Greece’s funding needs next year means the euro zone cannot sign off on a back-up credit line.

“I’m willing to work on Dec. 24 but parliaments are not around,” the official told reporters on condition of anonymity, setting Dec. 15 as the cut-off date for prolonging Greece’s existing program into January so that lenders can make a final 1.8 billion euro payment.

All Eurozone parliaments must approve that extension.

Greece and its lenders aimed to get a deal on a credit line – which Athens would only tap in an emergency – by next Monday from the International Monetary F

und, the European Commission and the European Central Bank. Greek Prime Minister Antonis Samaras has staked his government’s political survival on exiting the deeply reviled bailout by the end of the year, but a deal on Monday is now looking out of reach.

“Is it my central expectation that a staff-level agreement (on a credit line) is reached by Monday? No, it is not”, the euro zone official said.

The main wrangling issue is over Greece's widening budget gap.

So, if the Greek credit line deal goes pear shaped that might give the bond market the wobbles next week.

Meanwhile, Germany is feeling smug about its public finance, 2015 has been described as “black zero,” which translates to no new borrowing. But the opposition party is less impressed complaining about the crumbling roads, bridges and ports etc. that need doing.

Backstage Fire

By E. Pugh (artist), James Fittler (engraver) [Public domain], via Wikimedia Commons

The collapse in oil and commodity prices, among other things, is flagging up a sharp slowdown in the world economy, which has been the catalyst for a record number of hedge fund closures in recent months.

But that might be masking an even more concerning event that is most likely playing out right now on the secondary market. The secondary market is enormous in size and worth about 650 trillion USD, which equates to about 10 times the sum of global economic activity. 

Through the practice of leveraging (known as gearing in the UK) hedge funds leverage their investment (bets), typically by a ratio of 10 with the aim of maximising profits on the secondary market. So with one million USD of capital hedge funds increase the size of the bet to 10 million USD. Consequently, the size of the bets out there, are many times greater than the actual capital financing them.

Years of quantitative easing (QE), the cheap money available for those high up the food chain, such as the big commercial banks, have fuelled speculation on the secondary market to levels of insanity. In other words, not only has QE had an inverse impact on global economic growth, but it has also aided and abetted wild speculation on the secondary market. 

This multi trillion dollar market, probably more appropriately known as the shadow market, despite its enormous size, is rarely discussed in the mainstream. It is an opaque and unregulated market, operating almost under stealth with many of the funds registered in tax havens, sheltered from tax regimes. 

That being said, the secondary market where derivatives are traded has a useful function in the real economy, particularly for mining and oil companies, where prices fluctuate on global markets. Imagine putting together a business plan with the aim of raising capital to finance mining or drilling licenses, heavy machinery and labour required to mine a commodity or drill for oil. Forecasting the potential annual output of an oilfield or open pit mine is feasible, but predicting the commodity's price during the extraction phase is speculation. So if the oil or mining company is able to lock-in a given price for say a duration of two years, then revenue and profit forecast figures have value. For this reason, the company is likely to purchase a sell derivative contract, which locks in at today's price and the amount of the commodity that can be sold over a specified period of time, typically two years. Note that in this instance, while the company has shifted the risk onto someone else, the seller of the derivative contract, the risk of falling oil prices has not been eliminated but rather transferred to the financial system. 

Indeed, the risk of fluctuating commodity or oil prices has been absorbed by the hedge funds that buy and sell these derivative contracts on the secondary market with the aim of making a profit. In the example above, if oil prices were to rise, the fund makes a profit. Alternatively if oil falls they lose money.

However, due to leveraging, when the hedge funds make bad bets, their losses are magnified many times throughout the financial system. Those high up the food chain, the commercial banks, funnel the cheap money they receive from the central bank to juice the hedge funds, but when the funds get it wrong, the commercial banks also lose big. It is a zero sum game. For example, those oil companies and hedge funds that locked in oil prices before the crash are okay, but on the other side of their win contract is a loser, a commercial bank, which is magnified by a factor of ten. 

What happens in the secondary market (a horse betting game fuelled by years of cheap money and run by a few big players) has consequences for everyone else. When commercial banks make loses, there is less lending activity between the banks, credit becomes tight, interest rates rise, mortgage payments increase, servicing debt becomes more expensive and business investment falls off a cliff, with all the consequences that follow.

So to what extent have commercial banks invested in commodity derivative contracts? 

It has been estimated that six of the largest “too big to fail” banks control 3.9 trillion USD in commodity derivatives contracts. Moreover, a very large chunk of that amount is made up of oil derivatives.

What happens when many of these oil producers have locked in say, 100 USD a barrel and oil continues to slide to say 50 USD a barrel?

Oops!

The losses for being on the wrong end of the derivatives contract would be enormous.The derivative market works fine, except for those black swan events that nobody predicts.If the record closure of hedge funds is anything to go by, then a lot of players got caught out by the recent oil and commodity price collapse.That also implies that someone somewhere who underwrote these derivative contracts must be nursing a colossal amount of losses in commodities and oil derivatives.

Already there is a meltdown looming in the global credit market and now massive losses on commodity derivatives.

While the show displays a predictable normality, backstage there is a fire raging.

London Property, Super Prime Super Pop

There are a number of factors at play which would suggest that London property, particularly the high end real estate is primed to burst at any moment.

It seems like the perfect storm. Changing geopolitics, a recent oil crash, cleaning up corruption in China and a halt to the US economic policy of quantitative easing are all likely to tighten up capital inflows into the high end property market in London.

The frosting relations with Russia over the on-going crisis in Ukraine, shows no signs of abating. There have been rumblings from Washington about ratcheting up the sanctions on Russia, a move likely to make Russian Tycoons run for the bunkers. Meanwhile, in an attempt to halt the relentless slide of the Russian ruble, which has been in free fall since OPEC's decision to keep the oil taps open, the Kremlin is contemplating imposing capital controls. So, that translates to a cut in Russian capital inflows finding their way into UK properties, particularly high end London properties.

Then there’s the recent crash in oil prices, which suddenly means Middle Eastern oil elites have less big ones to slosh in high end London properties.

With civil discontent growing in the region amongst a large youth population, the Saudi Government may be forced to step up spending on bred and circus programs, leaving less funds for foreign acquisitions at a time when revenue has declined due to recent sharp falls in oil price.

Over in Asia, China's assault on corruption also means less funds from bent Chinese officials being funnelled into high end properties.

Moreover, the winding down, for now, of US quantitative easing means there is also likely to be less hot money flowing in from across the pound.

Then there’s the political factor which seems to be a heads I win, tails you lose scenario for potential buyers of high end property in London - it's a bet they can't win. Would Labour impose a Mansion tax if they were to win the elections? Alternatively, if the Conservative Party were to retain power, what would happen if they don't get their way curbing EU immigration? Would the UK decide to go it alone and turn their back on the EU? Would that then trigger a run on the pound sterling?

Who would want to invest a fortune in an asset if it’s likely to be worth, say thirty percent less sometime in the future because the local currency has just taken a nosedive.

So in this climate of political wilderness, with money tightening up, are the real estate agents feeling the squeeze and registering falls?

According to a report from City AM – citing statistics from Halifax and Britain’s ONS – since 2009 certain sectors of the British property market have fallen by as much as 20% (most of Scotland and Wales and parts of northern and south-western England) while others (in pockets of central London) have risen by as much as 61%.

But when compared to average wages, the current property prices give you vertigo. Let's put it into perspective.

The median UK wage is £22,044. This sum of money would currently buy 2 square meters of real estate in the plushest London boroughs of Kensington or Chelsea. Spreading out from the centre to Brent, Merton, Greenwich or Waltham Forest the same sum will yield slightly more space at between 5 and 6 square meters. On the other end of the spectrum – in parts of Wales, such as Merthyr Tydfil, the median wage would acquire 24 meters squared.

Central London has generally seen a rise in prices of between 40% and 60% in the last six years. Southern England has mainly seen rises of between and 15% and 30%. Whereas south west England has seen declines of around 4% in the same timeframe – with West Devon losing 13% of its property values.

In Wales there have been modest declines in some areas (1 -5%) and more severe in others (down 10% in Swansea) with some others showing a rise in price. Most of northern England has seen declines in price or in some clusters such as around Manchester or York seeing slight rises.

Even mainstream is putting the cat among the pigeons, talking about properties with asking prices ten times greater than the median wage and young people being forced to move out of London in droves.

I smell property bubble trouble and a super prime super pop in the high end property market, in other words this might be a shorters delight.

High end properties, high end real estate agents, and lenders financing the bubble are all primed to fall with real gusto moving forward.

All that “hot money” squandered in a bubble and you end up with a phoney economy that makes no real products, that employs people on zero hour contracts, that exports little and imports everything because it makes nothing. Building sandcastles in the sand, boom, bust, boom, bang....!

Hedge Fund Closures

Hedge funds are closing down at a record rate not seen since the financial crisis. In the first half of the year, 461 funds closed, Chicago-based Hedge Fund Research Inc said. If that pace continues, it will be the worst year for closures since 2009, when there were 1,023 liquidations. Probably no one is shedding tears for these money managers, with the exception of investors who backed them. But who knows, their misfortune may be their fortune. The guys booted from the casino empty handed might end up doing something useful with their lives, after all, as one legend trader said, there has got to be more to life than making rich people even richer. 

So what’s the reason behind this high closure rate? 

In a word, returns, specifically dismal returns from a large number of the hedge fund managers, which have underperformed the wider index. “Most hedge funds have not performed extraordinarily well,” said Stewart Massey, chief investment officer at Massey Quick & Co. in Morristown, New Jersey, which invests in the private partnerships. He expects that redemptions will hit small-and medium-sized firms this year, reducing assets to a level where “they will have to make a decision whether to carry on or not.” 

Brevan Howard Asset Management LLP, a $37 billion asset, is now the latest firm to throw the towel in and close a fund. Last week it pulled the plug on its $630 million commodity fund managed by Stephane Nicolas after it tumbled 4.3 percent this year through the end of October, according to a person working for the firm.

There is a debate ongoing whether hedge funds should exist. One school of thought argues that hedge-funds add to financial instability in the markets. But another view argues the contrary, that hedge-funds help bring about efficient pricing in the market. However, one thing undisputed is that those at the top of the game are money making machines. It is a high risk, high reward activity where a few big players tend to be consistantly getting it right and winning big. For that very reason, the hedge fund industry will have the financial muscle to lobby policy-makers, grease their palms and hire top professionals to fight their corner. Big money always gets its way in the end, so hedge funds will very likely continue to be part of the ecosystem. 

Hedge funds trade derivative products so they profit irrespective of whether the market trades up or down. The name of their game, as is with all investors/traders, is to profit from market volatility. However, they’re enormous in size compared to the average investor, since they are able to borrow huge amounts of money and leverage to generate spectacular profits, or loses. 

The market in which hedge funds operate is massive in size and many times bigger than the primary market. These companies are not regulated and are all in off shore jurisdictions. The mortality rate is relatively high in the industry.

Philippe Jabre, Manages Jabre Hedge Funds, personal wealth 200 million pounds sterling. “You are allowed to make a mistake once, but if it is a bad one you are out. You are the ultimate risk taker,” he added. Using funds from a few wealthy clients and also borrowing massive amounts of money, colossal fortunes in profits have been made by some hedge funds. In 2006 approximately 10 of them made more than 500 million dollars each. 

So with the recent collapse in the oil price, the commodity sell-off and the sharp decline in the Russian economy, those hedge fund managers who did not see it coming have been wiped out. Hall Commodities LLP, a London-based $100 million hedge-fund firm run by Tony Hall and Arno Pilz, told clients in October that it’s shutting down after less than two years, citing poor performance. The industry operates in an opaque environment, but with the same cut-throat law of survival of the fittest. This probably explains the reason why the industry is experiencing a shake-out now.

A number of hedge fund managers are struggling to regain after years of losses. Dan Arbess said last month that he’s closing his Perella Weinberg Xerion Fund after failing to recoup a 21 percent loss dating from 2011. The fund, which focused on distressed credit and special situations, hadn’t been able to charge any performance fees since then. 

Hedge funds, on average, have returned just 2 percent in 2014, their worst performance since 2011, according to data compiled by Bloomberg. Smaller funds have struggled to grow as institutional investors flocked to the biggest players. In the first half of 2014, 10 firms including Citadel LLC and Millennium Management LLC accounted for about a third of the $57 billion that came into the industry.

Many of the closures have been among macro funds, which have returned less than one percent this year, on average, according to Bloomberg data. Macro managers have complained that in an environment of low interest rates and muted swings in prices, it’s difficult to make money.

Josh Berkowitz’s Woodbine Capital Advisors LP said earlier this year that it was closing down after assets dwindled to $400 million from a peak of $3 billion four years ago. Keith Anderson's Anderson Global Macro LLC and Kingsguard Advisors LP, started by two former Goldman Sachs Group Inc. traders, both shut after less than three years in business.

So it looks like we are seeing a consolidation in the industry with just a few big players left and receiving all the finance.