This Michigan Bank Just Brought Back The Zero-Down Mortgage; They"ll Even Cover Your Closing Costs

A small savings bank in Michigan, Flagstar Bank, has come up with a genius, innovative new mortgage product that they believe is going to be great for their investors and low-income housing buyers: the "zero-down mortgage."  What"s better, Flagstar is even offering to pay the closing costs of their low-income future mortgage debtors.  Here"s more from HousingWire:

Under the program, Flagstar will gift the required 3% down payment to the borrower, plus up to $3,500 to be used for closing costs.

 

According to the bank, there is no obligation for borrowers who qualify to repay the down payment gift.

 

The program is available to only certain low- to moderate-income borrowers and borrowers in low- to moderate-income areas throughout Michigan.

 

Borrowers would not have to repay the down payment or closing costs. But a 1099 form to report the income would be issued to the Internal Revenue Service by the bank. So the gifts could be taxable, depending on the borrower’s financial picture.

 

Flagstar said borrowers who might qualify for its new program typically would have an annual income in the range of $35,000 to $62,000. The sales price of the home -- which must be in qualifying areas -- would tend to be in the range of $80,000 to $175,000.

Think it"s too good to be true?  Lakeshia Wiley of Detroit"s west side begs to differ...she recently went through Flagstar to purchase her new home and only had to come up with $350 of her own money.  Per the Detroit Free Press:

Lakeshia Wiley, 35, said she wouldn"t have been able to buy her first home without the Fifth Third Down Payment Assistance program and two other grants, including one from Southwest Solutions.

 

The brick home, built in 1951, is on Detroit"s west side, needed very little work and was priced at $50,000.

 

"I"m very excited every time I think about it. It"s beautiful. I love it," Wiley said.

 

Wiley never expected to be able to buy a home, though, because she has had a hard time saving for a down payment.

 

"I didn"t think I"d be able to do it," said the single mother who has two sons, ages 17 and 10, and a daughter, age 6. She works at a Detroit pharmacy.

 

Thanks to the down payment assistance and the grants, Wiley was able to buy her home in April. She had to bring less than $350 to the table at closing.

The Flagstar program is available in 18 counties in Michigan, and could be used for certain homes in Detroit and Flint, along with other cities.

Of course, we would highly encourage Flagstar to take a look back into ancient history for case studies on what happened the last time banks started peddling "innovative" mortgage products.  Here"s a summary of the Lehman Brothers case study:

Ironically, South Park also did some fascinating research on the topic:

Einhorn: "None Of The Problems From The Financial Crisis Have Been Solved"

A month ago, a downbeat David Einhorn exclaimed "will this market cycle never turn?"

Despite solid Q3 performance, Einhorn admitted that "the market remains very challenging for value investing strategies, as growth stocks have continued to outperform value stocks. The persistence of this dynamic leads to questions regarding whether value investing is a viable strategy. The knee-jerk instinct is to respond that when a proven strategy is so exceedingly out of favor that its viability is questioned, the cycle must be about to turn around. Unfortunately, we lack such clarity. After years of running into the wind, we are left with no sense stronger than, "it will turn when it turns"."

Such an open-ended answer, however, is a problem for a fund which famously opened a basket of "internet shorts" several years prior, and which have continued to rip ever higher, detracting from Greenlight"s overall performance.

This, in turn, has prompted Einhorn to consider the unthinkable alternative: "Might the cycle never turn?" In other words, is the market now permanently broken.

While the Greenlight founder did not explicitly answer the question, in a speech yesterday at The Oxford Union in England, Einhorn made it extremely clear just how farcical he believes this market, and world, has become, pointing out that the problems that caused the global financial crisis a decade ago still haven’t been resolved.

“Have we learned our lesson? It depends what the lesson was,” Einhorn, the co-founder of New York-based Greenlight Capital, said at the Oxford Union in England on Wednesday.

Infamous for his value investing style and bet against Lehman Brothers that paid off in the crisis, Bloomberg reports that Einhorn said he identified several issues at the time of the crisis, including the fact that institutions that could have gone under were deemed too big to fail.

The scarcity of major credit-rating agencies was and remains a factor, Einhorn said, while problems in the derivatives market “could have been dealt with differently," and in the “so-called structured-credit market, risk was transferred, but not really being transferred, and not properly valued.”

“If you took all of the obvious problems from the financial crisis, we kind of solved none of them,” Einhorn said to a packed room at Oxford University’s 194-year-old debating society.

 

Instead, the world “went the bailout route.”

 

“We sweep as much under the rug as we can and move on as quickly as we can,” he said.

Einhorn didn’t avoid discussing his underperformance, citing several failed bets that companies’ stocks would decline. He didn’t name the stocks he was shorting, but insisted that none of the companies are “viable businesses.”

Value investing has worked over time, but “it’s not working at all right now,” and in fact “the opposite seems to be working,” he said.

Greenlight remains focused on developed markets, and has no plans to change that, he said.

Which reminds us of his exasperated conclusions from the latest Greenlight letter to investors:

Given the performance of certain stocks, we wonder if the market has adopted an alternative paradigm for calculating equity value. What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss?

 

It’s clear that a number of companies provide products and services to customers that come with a subsidy from equity holders. And yet, on a mark-to-market basis, the equity holders are doing just fine.

Ah yes, the Fed-funded "deflation trade" which lowers prices for goods and services courtesy of ravenous investors who will throw money at any "growth" idea, without considerations for return or profit, because - well - more such investors will emerge tomorrow.  After all, in this day and age of ZIRP, what else will they do with their money.

Here's How People Get Fooled Into Buying Bankrupt Companies...

Authored by Simon Black via SovereignMan.com,

In 1906, American entrepreneur William T. Grant opened his very first “W.T. Grant Co 25 cent store” in a small town outside of Boston.

The store became popular and fairly profitable. So Grant opened another. And another.

Three decades later, Grant’s retail empire was generating $100 million in sales (an enormous sum back then). And by the time of Grant’s death in 1972, there were over 1,000 stores bearing his name.

Investors loved W.T. Grant Company stock for its reliable profits and high dividends.

Many of our subscribers may remember W.T. Grant. The chain was among the largest in the US at its peak.

And then something completely unexpected happened…

In 1976, W.T. Grant Company declared bankruptcy.

At the time, it was the second biggest bankruptcy in US history. And, like the downfall of Lehman Brothers and other big Wall Street institutions at the onset of the 2008 financial crisis, it was a shock to the world.

How could a company as big and profitable as W.T. Grant Co. go bust?

In the autopsy that followed the bankruptcy, accountants found that while the company was generating substantial PROFIT, it was not generating any CASH FLOW.

These two terms sound the same, but they’re dramatically different.

Profit, or more specifically net income, includes all sorts of bizarre accounting rules that don’t actually make sense in the real world.

Due to these rules, companies are often required to adjust revenue and expenses for things like “depreciation”, or “foreign exchange gains and losses”.

These are all merely accounting terms that don’t directly and immediately affect cash balances. But they can dramatically impact “profitability.”

Here’s one example from my own experience: a few years ago, the large agriculture company that I founded here in Chile purchased a farm.

We bought it for far below the property’s market value.

It was a great deal for the business. BUT… accounting rules required that our company record a PROFIT based on the difference between what we paid for the property and what it was worth.

This idiotic rule made it seem like we achieved a profit simply for buying a property.

This makes no sense. In the real world, we would only earn a profit by SELLING the property for a higher amount than we paid. You can’t profit before you sell something.

It’s rules like this that make profit an unreliable metric.

CASH FLOW is much more accurate.

Specifically, OPERATING CASH FLOW tells us how much money a company makes from its business.

It strips out all the silly rules and focuses purely on how much cash a business generates from its operations.

Then there’s FREE CASH FLOW, which is the amount of money left over for investors AFTER a company makes all of the necessary investments it requires for future growth.

Cash flow is what counts. If a company has negative cash flow, it will eventually go under.

Profit can be misleading. And that’s what happened to W.T Grant Co. It was profitable but had negative cash flow.

Today there’s another famous business in similar circumstances– our old friend Netflix.

Quarter after quarter, Netflix reports a profit.

Just yesterday afternoon the company had its quarterly earnings call, posting a profit of $553 million. Not bad.

Yet when anyone dives just a little bit deeper into the numbers, Netflix’s cash flow is absolutely gruesome.

The company’s operating cash flow is negative. In other words, after stripping out all the unrealistic accounting nonsense, Netflix’s core business LOSES MONEY.

In fact Netflix’s operating cash flow has been negative FOR YEARS. And the amount of money its losing is increasing.

Netflix’s business has lost $1.3 billion so far through the first nine months of 2017. That’s 52% worse than the $916 million operating cash flow deficit they suffered in the first nine months of 2016, and nearly three times worse than the $504 million operating cash flow deficit during the first nine months of 2015.

Throughout this period, the number of Netflix subscribers has steadily grown, now well in excess of 100 million.

And every time Netflix reports a big surge in subscribers, the stock price soars.

This is truly bizarre. Just look at the cash flow numbers: as the number of Netflix subscribers has grown over the years, the company losses have grown even more.

It reminds me of that old saying from the 1990s dot-com bubble– “We lose money on every sale, but make up for it in volume.”

But it gets worse.

The company’s negative operating cash flow doesn’t include the billions of dollars that it spends on content.

And on its quarterly earnings call yesterday, executives announced they will spend a whopping $8 billion on original content next year.

That’s $8 billion that they don’t have. And don’t forget the $1.4 billion operating cash flow deficit.

Where are they possibly going to find this money? Simple. Debt. Netflix will pile on more and more debt despite racking up enormous cash flow deficits.

Now, to be fair, it’s not unusual for a business to lose money for a period of time as part of a longer-term plan to generate strong cash flow.

But just look at this industry: it seems like EVERYONE is diving in to this original content game.

Apple. Facebook. Amazon. CBS. Disney. Google. Sony. Time Warner. Hulu. Each of these organizations has developed a streaming service with original content.

And some of them (especially Google and Facebook) have an endless war chest thanks to their cash-gushing core businesses.

Google’s parent company (Alphabet) reported free cash flow of $11.6 billion in the second quarter alone. So it could easily outspend Netflix and still have billions of dollars left over.

All of this competition is going to be great for consumers; these companies are collectively spending tens of billions of dollars to entertain us. And they’re going to lose money doing it.

But for investors this is sheer madness. Don’t be the sucker paying for other people’s entertainment.

And to continue learning how to safely grow your wealth, I encourage you to download our free Perfect Plan B Guide.

Talking Global Macro Investing With A 25-Year Market Veteran

By Chris at www.CapitalistExploits.at

If you were rich, successful, and intelligent - which often, not always, go hand in hand together - where would you live?

The last time I was in the Rockies, I remember thinking to myself. You know what, if it weren"t for the fact it"s so damn far from the beach I could actually live here. It"s really quite lovely. Bite-your-hand-to-stop-you-from-crying-out-loud-lovely and if, like me, you"re a sucker for snowboarding, then it"s pretty hard to be disappointed.

After having just spent a few days of pure bliss (uninterrupted sunshine with zero wind) skiing on this baby in New Zealand, I can certainly appreciate living in Vail.

Maybe that"s why Julian Brigden, the co-founder of Macro Intelligence 2 Partners, lives there. I"ve never asked him about it, but I did ask him a bunch of other questions which I share with you today.

The quick and dirty on Julian"s background:

He"s accumulated 25 years of experience in financial markets. From 1999 to 2004, he was with Medley Global Advisors, a macro policy intelligence firm. Then from 2004 through 2011, Julian served as North American Head of Hedge Fund Sales at Crédit Agricole.

He has worked in London, Zurich, New York, and Vail at UBS, Lehman Brothers, HSBC, Drexel, Credit Suisse, and Salomon Brother in foreign exchange and precious metals.

If you"ve not heard of Julian, he"s easily searched with some stubby fingers and Google as he"s been featured on Bloomberg, CNBC, the New York Times, Wall Street Journal, and in Barron’s among other for the firm"s research on emerging markets, liquidity, QE, bubbles, and global FX flows.

As you can see, Julian"s far from some dolt-peddling advice.

In our recent conversation, we chatted about a number of things:

• The state of the global bond market


• Julian"s views on the US dollar


• What happens when central bankers get what they wanted (case study: Europe)


• Demographics and Japan


• And a host of other things which came up in conversation

I hope you enjoy it!

- Chris

“When the second wave comes in terms of the stimulus package from Trump and in particular the corporate tax repatriation, the sucking sound from the rest of the world, as the dollars come home, will mark the ‘risk off’ phase and it’s possible that you push the dollar so far that its status ultimately as the reserve currency will end up being challenged." — Julian Brigden

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Liked this article? Then you"ll probably like my other missives on

this topic as well. Go here to access them (free, of course).

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Bill Miller Says He's Invested 1% Of His Net Worth In Bitcoin

Former Legg Mason investing guru Bill Miller’s Opportunity Trust is back on top this year thanks to bets on a hodgepodge of stocks including Apple Inc., J.P Morgan Chase & Co. and Restoration Hardware. Just weeks after his Opportunity Trust was named No. 1 among diversified funds with at least $1 billion in assets, Forbes is out with a glowing profile of the 67-year-old value investor. In it, Miller makes a surprising claim - one that, if accurate, could very well help restore his legacy after a spotty string of years. Back in 2014, Miller said he invested 1% of his net worth in bitcoin. Forbes neglected to reveal Miller’s net worth, though it claimed that Miller is looking at a 1,000% return.

Indeed, it looks like Miller is once again having an investing “moment,” finding relief after a decade of returns ranging from lukewarm to disastrous. His winning streak began after Miller last year ended a 35-year relationship with Baltimore’s Legg Mason, buying out the company’s stake in three funds.

Here"s Forbes:

“Indeed, Miller still has a keen eye for change. In 2014, he put 1% of his net worth into Bitcoin, judging that the digital currency"s potential for large-scale economic disruption (see Forbes" cover story on the coin revolution) outweighed the risk of a total loss. He"s up nearly tenfold, and Bitcoin is now a top holding of his hedge fund.”

Miller’s Opportunity fund, a mutual fund that doesn"t hold any bitcoin, is also having a stellar year thanks in large part to Miller’s purchase of Apple call options with a strike price of $100. Miller also has a large stake in Amazon that has performed well this year. Miller told Forbes he expects the e-commerce giant"s market cap to rise five- or sixfold within a decade. A handful of the fund"s top-performing picks are detailed in this chart:

Of course, there’s a reason why Miller can take risks like betting on bitcoin: He’s the largest investor in each of his funs, leaving him free to think “big thoughts,” according to Forbes.

“…[This] past February, Miller completed the buyout of a partnership he had formed with Legg Mason to manage the Opportunity Trust and a small income fund. His family-owned Miller Value Partners now runs the Opportunity Trust, a separate $120 million hedge fund and the $116 million Miller Income Fund, managed by his son, 36-year-old Bill Miller IV.

Miller is the biggest investor in all three funds and can do what he likes--thinking big thoughts and placing big and often contrarian bets--without worrying about marketing or bosses. "I was at Legg Mason for 35 years and ran the Value Trust for 30 years. This is better," he says. "Here it is much more about just growing the assets and not trying to get a constant inflow of new clients and doing pitches."

In a revelation that should alarm anyone investing with Miller, Forbes claims his funds are doing little to hedge against a sudden drop in equity prices, meaning that Miller is vulnerable to history repeating itself. Miller rose to investing fame thanks to his record-setting feat of topping the market benchmark for 15 years straight between 1991 and 2005. However, he accrued massive losses during the crisis and the early years of the recovery. By the end of 2008, Value Trust had lost nearly two thirds of its value, wiping out most of Miller"s outperformance over the previous two decades. It came roaring back in 2009 and 2010, according to Forbes, but investors had already abandoned the fund, and Miller was by then the poster boy for the folly of paying active managers high fees to beat the market.

“…heading into the 2007-08 financial crisis, Miller owned everything that would soon turn toxic: subprime mortgage lender Countrywide, now-defunct Lehman Brothers and Bear Stearns, bond insurers, home builders and even AIG. When conditions worsened, he once again doubled down, mistakenly believing (he now says) that the Federal Reserve could end the crisis quickly by injecting liquidity, when the real problem was asset values.”

The string of stunning losses led to Miller’s ouster from the Legg Mason Capital Management Value Trust in 2011, which he had managed since the early 1990s. However, circumstances are different this time. Miller is in control, meaning that if a string of losses send the outside money running for cover, he will be left alone to go down with the ship.

A Former Lehman Brothers Trader: It's Time To Buy Brick And Mortar

Authored by Jared Dillian via MauldinEconomics.com,

Everyone thinks it is only a matter of time before Amazon puts every department store, every mall, every brick-and-mortar retailer out of business. Amazon gets an infinity market cap and everyone else gets zero.

Sound familiar?

That’s the accepted wisdom.

Is Amazon a great business? Yes.

Is a department store a bad business? Probably.

Does Amazon get 100% market share, with department stores getting zero? Probably not.

Amazon has over 80 million Prime subscribers in the US. It’s not quite saturated, but it’s getting close.

Source: Business Insider

I admit to being a Prime member, a late adopter.

It is pretty cool. Stuff shows up on my doorstep in two days, for free. The huge poker chip set I just ordered probably weighs about 40 pounds—free shipping! And I get all the Prime movies and TV shows.

But here is my thesis: Amazon will grow and grow, but there will always be a role for physical retailers. A reduced role, for sure, but there will always be a role.

From a capital markets standpoint, now might be the time to put on the trade.

The Bottom of Brick and Mortar

This is when I started thinking that we"ve reached a bottom in physical retailers.

Last week, ProShares—a $27 billion ETF manager—registered to list some double short leveraged ETFs on brick-and-mortar retailers! 

Ding!

In my experience, specialty ETFs like this are usually listed at the worst possible times. Plus, you know my thoughts on leveraged ETFs. When 2x short leveraged ETFs are being listed on physical retailers… it is probably time to buy physical retailers.

The graphic from AEI below is a couple of months old. Since then, Amazon’s market cap has soared to $481 billion. Meanwhile, Macy’s market cap has fallen to a little under $6.5 billion.

Source: Yahoo Finance

Amazon is worth around 75 times more than Macy’s? That doesn’t seem right.

I hope by this point I have you thinking.

I am no Macy’s fan. It is a pretty terrible business, it sells middlebrow stuff in middlebrow locations. Although its online business is actually not bad.

I used to buy ties at Macy’s, back in 2001. People laughed at those ties. I no longer buy ties at Macy’s.

But look—at a $6.5 billion market cap, Macy’s is reaching distressed levels…

That means we have to put our distressed investor hat on, pick this business apart, and see if there is value—in all parts of the capital structure. Maybe we don’t like the stock, but maybe we like the bonds, for example.  

And, Staples was bought by private equity recently for about 0.4 times revenue. Apply that standard to Macy’s and you get to a $10 billion valuation. They’re still kicking.

Plus, there’s an argument that this whole Internet retailing thing is just a giant bubble, according to the chart below.

Source: @bySamRo

How Do You Play It?

This is a smart trade, but it is also a dangerous trade unless you are smart.

There are two ways to do this:

1)  Be a distressed investor: Look at the worst-case scenario, look at all parts of the capital structure, and find value.

2) Be a quant:  Buy a basket of physical retailers, sell a basket of Internet retailers, and wait for them to converge.

The worst way to play it is just to naively buy Macy’s (or another retailer) and hope for the best.

Furthermore, I think it’s time to go dumpster-diving in mall REITs.

One final remark. As you look around for ideas, invest in things that would get you laughed off the set of CNBC. I assure you, if I went on Fast Money and pitched Macy’s as a long idea, I would get laughed off the set.

Those are the best trades.

Kunstler: "This Shit Is Not Funny Anymore"

Authored by James Howard Kunstler via Kunstler.com,

One way or another, I’m gonna find you
I’m gonna get ya, get ya, get ya, get ya

- Blondie

Perhaps the presidency has been an overly solemn office since, oh, the days of Millard Fillmore, the dreary weight of all that mortal responsibility — slavery, war, more war, depression, yet more war, nukes, we shall overcome, terror, Lehman Brothers, Ferguson, Russia here, there, and everywhere…uccchhh….

And so, at last: a little comic relief. I mean, imagine Grover Cleveland putting the choke-slam on Thomas Nast. Dwight Eisenhower punching out Edward R. Morrow. Jack Kennedy applying the Macumba Death Grip to Walter Lippman. Nahhhh. But Donald (“The Golden Golem of Greatness”) Trump versus CNN! Now that’s a matchup worthy of the WWF Hall of Fame. I just kind of wish the big fella had gone all the way and put in Anderson Cooper’s mug instead of the CNN logo box. Make it truly up front and personal since, let’s face it, Andy has been the most visible conduit of Jeff Zucker’s animadversions.

At least The New York Times seemed to take the prank in stride, calling it, “an unorthodox way for a sitting president to express himself.” Well, yes! Nicely put. They didn’t call for the Commander-in-Chief to be stripped down to his silk small-clothes and be run through a gantlet of aggrieved trannies. Well, I dunno, maybe that’s next….

But who says a president has to merely sit behind a desk and utter platitudes about bringing us together?  Nobody really falls for that anymore. But a body-slam — whoa, now that’s some change you can believe in! At least the GGOG didn’t send in some NSA black box contractors to smoke the CNN board of directors and that miserable fucker Zucker — though it does lead one to wonder how Mr. Trump intends to orchestrate his upcoming confab with Vlad (“The Impaler”) Putin. I’d like to see the president at least put on a cape for that one.

I suppose Mr. Trump was reacting to the fire-hose of objurgation aimed at him over the weekend on CNN by Carl Bernstein, reporter extraordinaire of Watergate fame, who referred to Trump’s sojourn in the Oval Office as “a malignant presidency.” Isn’t comparing a person to cancer about as low as you can go? (You talkin’ to me???) That should technically entitle Mr. Trump to an inverted stomp face-breaker followed by a fall-away moonsault slam, topped off by a final gorilla drop. Hell, get the referee to sit on Bernstein’s face for the count.

Bernstein went a little further, even, into the dark slough of disrespect, intimating that all the occult powers of the Deep State should be mobilized to remove the golden tumor from America’s body politic:

   “That malignancy is known to the military leaders of the country, it’s known to the Republican leadership in Congress who recognize it, and it’s known to the intelligence community…. This president is not in control of the presidency in a way that it is functioning. That has got our leaders worried, they are worried about his character, they are worried about his temperament,” Bernstein said. “We are in foreign territory. We have never been in a malignant presidency like this before.”

Perhaps Mr. Bernstein is just the messenger appointed by the Deep State to flop it all out on the table, so to speak, like so much Fourth of July pulled smoked pork: You’ve gone too far, you suppurating mass of rogue protoplasm! We’re coming to get ya now, with the deadliest move of all: the 25^th amendment. Let Mike Pence be the reincarnation of Herbert Hoover. This shit is not funny anymore.

Joe LaVorgna Has Left Deutsche Bank

Two years after correctly abandoning his long-held bullish perspective on the US economy"s growth prospects, Deutsche Bank"s chief economist Joe LaVorgna has reportedly left the bank, "planning to work elsewhere in financial services."

Some may recall, that back in 2013, we noted that when it comes to forecasting the future, even one Groundhog Phil has a success rate of 71%, or over a standard deviation more accurate compared to Joe "Coin Toss" LaVorgna"s 51%.

LaVorgna had long been optimistic about U.S. economic expansion. About two years ago he changed his view by correctly predicting a deceleration in gross domestic product growth. After Donald Trump was elected president of the U.S., the economist said the new leader was a “game changer” and that if the tax rate were lowered, stocks in the S&P 500 would rally.

Bloomberg reports that he left the German lender last week and is planning to work elsewhere in financial services, said one of the people, who asked not to be identified discussing personnel matters. Peter Hooper who worked alongside LaVorgna, will continue to handle duties tied to economic forecasts and analysis, said another person.

LaVorgna has worked at Deutsche Bank for about two decades, joining from Lehman Brothers Holdings Inc., according to Financial Industry Regulatory Authority records. A spokeswoman for Deutsche Bank declined to comment.

LTCM Is Back: One Hedge Fund Uses 25x Leverage To Beat The Market

Before we start, a little history lesson...

At the beginning of 1998, Long-Term Capital Managementhad equity of $4.72 billion and had borrowed over $124.5 billion with assets of around $129 billion, for a debt-to-equity ratio of over 25 to 1.

It was run by finance veterans, PhDs, professors, and two Nobel Prize winners. Everyone on Wall Street wanted a piece of their profits.

But by 1998, that firm was primed to expose America"s largest banks to more than $1 trillion in default risks. The demise of the firm, LTCM, was swift and sudden. In less than one year, LTCM had lost $4.4 billion of its $4.7 billion in capital.

The disaster had all the players - the Federal Reserve, which finally stepped in and organized a bailout, and all the major banks that did the heavy lifting: Bear Stearns, Salomon Smith Barney, Bankers Trust, J.P. Morgan, Lehman Brothers, Chase Manhattan, Merrill Lynch, Morgan Stanley, and Goldman Sachs.

In desperate need of a $4 billion bailout, the crumbling firm was at the mercy of the banks it had once snubbed and manipulated.

And so, given all that, we would imagine lessons were learned, "risks" were comprehended, and the fallacy of so-called experts (or as Taleb would call them Intellectual-Yet-Idiots) once and for all distinguished.

Which brings us to today... Meet Morten Mathiesen, 45, chief investment adviser at Copenhagen-based Moma Advisors A/S, whose Asgard Fixed Income Fund has delivered a 19 percent return in the past year.

As Bloomberg reports, the philosophy behind his success - the best returns are not in the riskiest stocks but in the least risky bonds. But you can’t get them without leverage.

“That’s the core of our strategy,”  said in a phone interview on Thursday. “The best risk-adjusted returns are actually the low vol trades.”

“We try not to speculate whether rates will go up or down,” he said. “We’re typically fully hedged.”

Bloomberg reports that Mathiesen uses a proprietary model to forecast and pick the best risk premiums in short-term, high-quality bond markets. Most of the fund’s bonds are AAA rated, such as Danish mortgage bonds.

“We’re long risk premiums in fixed income,” he said. “We have a strong bias toward the Nordics. We invest in anything that has a risk premium that doesn’t involve credit risk.”

The 600 million-euro ($670 million) fund bets on yield spreads, country spreads and money market spreads in the European fixed income markets.

The spread is usually small so the fund must borrow money to boost the return. Current leverage is about 11 times and has been as high as 25 times, according to Mathiesen. The volatility target is about 6 percent.

As Mathiesen concludes...

“We’ve been successful in providing alpha,” or excess returns, he said. “We’ve produced a higher risk-adjusted return than what the carry should justify in the positions we hold.”

By "alpha" we suspect Mathiesen means massively-levered beta, but still, performance has been stellar... The fund has delivered returns of 14 percent a year since its inception in 2003 and is beating key bond indexes. Bloomberg’s government bond index has returned 5 percent per year over the past decade.

However, looking back we are getting an ugly sense of deja vu all over again.

"Almost unbelievable track record" - check

"Sophisticated proprietary model" - check

"Betting on small spreads with borrowed money" - check

"25x leverage" - check

"we"re fully hedged" - check

What could possibly go wrong?

Hayes: "A Lot Of What I Know Even The DOJ Is In The Dark”

An exclusive excerpt from the hot new financial and legal thriller "The Spider Network" by David Enrich

The small ski resort town, nestled in the mountains outside the city of Karuizawa, was a popular destination for day trips for Japanese families. Bustling during the day, it was mostly quiet this Saturday night. Clouds cloaked the moon.

A chartered bus pulled up outside a bar, its windows aglow. A light snow was falling. Out into the peaceful evening stumbled dozens of rowdy bankers, some toting tall cans of Asahi and Kirin. Most of them were drunk. They quickly took over the small bar.

The drinkers were employees of the American bank Citigroup, one of the world’s largest and most troubled financial institutions. A year earlier, at the beginning of 2009, American taxpayers had finished pumping a staggering $45 billion into Citigroup to bail out the collapsing behemoth. Now the transfused recipient was treating dozens of its investment banking employees to a weekend getaway. The bankers were housed nearby in a sprawling luxury hotel, each employee’s room designed in Japan’s typical spare style.

These festivities weren’t so spartan. The point was to foster camaraderie, and that was happening in spades. The party had begun on the hundred-mile ride on the bullet train out from Tokyo. After a day of hitting the slopes, Citigroup ferried the bankers to a bowling alley, where they drank and bowled and drank some more. Their bus had then deposited the intoxicated crew at this bar, before leaving the partiers behind to fend for themselves.

One of the fiesta’s ringleaders was a wiry, curly-haired American named Chris Cecere. You wouldn’t know it from his behavior now, but he was one of the sharpest people in Tokyo’s cutthroat financial markets. A foul-mouthed veteran of the doomed Wall Street firm Lehman Brothers, Cecere had only worked in Japan for a year or so, but he had quickly assembled a team of rock-star traders. His mandate was to push the already risk-hungry Citigroup into brave new financial frontiers.

That wasn’t all Cecere was pushing. This snowy night, he was practically pouring shots down the throat of his subordinate, a disheveled British thirty-year-old named Tom Hayes. Slim and nearly six feet tall, Hayes was a brilliant mathematician, one of the most prolific, aggressive traders in Tokyo, if not the world. As with Cecere, he didn’t look or act the part. Bespoke suits and expensive shoes were found nowhere in his wardrobe. Specks of dandruff dusted his shoulders. He was far happier with a glass of orange juice or a mug of hot chocolate than a pint of beer, a preference that once earned him the nickname “Tommy Chocolate.”

Hayes found social situations uncomfortable to the point of painful—this one included. Before departing for the ski weekend, he had grumbled to his fiancée that he didn’t want to go. She told him he didn’t have a choice. Hayes’s life revolved around work, and Citigroup was his new family. He had only started there a couple of months earlier, and it was important that he make a good impression on his colleagues. So far, he was off to a promising start in that regard. His new bosses bathed him in praise, introducing him around Citigroup’s global organization as their newest trophy asset. Only hours before they showed up at the bar, a top Citigroup executive, Brian Mccappin, had described Hayes as “a star” who represented the future of the firm’s enormous business in Tokyo. Mccappin proclaimed that their division would further shift its trading approach to take advantage of their new hire’s extraordinary talent. Hayes was certainly being paid like a star. After years of feeling like he was getting stiffed by six-figure payouts at his former employer, the Swiss bank UBS, he had pocketed a roughly $3 million cash signing bonus when he joined Citigroup.

Mccappin, the CEO of Citigroup’s investment bank in Japan, came along to the bar that night, along with Cecere and Hayes. A native of the gritty English city of Birmingham, Mccappin was tall, with a chubby, dimpled face. A talented singer at thirteen, he and a friend had formed a band called Deadline that sometimes performed at a pub frequented by workers, including Mccappin’s father, emptying out of a nearby Rolls-Royce plant. After Deadline split, some of its members went on, years later, to form Ocean Colour Scene, which briefly rose to fame touring with Oasis. By then Mccappin had moved on to other things, but that didn’t stop him from occasionally claiming that he’d been a founding member of the infinitely more familiar band.

At the time Hayes arrived at Citigroup, the main outlet for Mccappin’s stymied musical ambitions was karaoke, and he was a frequent and enthusiastic practitioner. As Mccappin belted out tunes this night, Hayes grudgingly accepted shot after shot of Jägermeister from Cecere. He struggled to swallow the sweet herbal concoction, fighting an increasingly powerful gag reflex. But he kept throwing the shots back, unwilling or unable to withstand Cecere’s schoolboy pressure. Hayes didn’t want to disappoint his boss. The earlier part of the day had been easier: Hayes was an expert skier, who embraced risk as eagerly on a black-diamond trail as he did on a frenzied trading floor, and he thrived in the deep powder of the Karuizawa resort. Now, though, beads of sweat started tingling on his scalp. The room began to spin. Hayes staggered to the bathroom and vomited. Then he rejoined the party.

****

Three years later, in January 2013, I was sitting on a sofa in my cramped apartment in London’s Clerkenwell neighborhood. Centuries earlier, the area had been the stomping ground of knights who were about to embark on crusades to the Holy Land. In a nod to that history, the narrow alleyway that my wife and I shared with a Belgian beer hall was named Jerusalem Passage. The neighborhood had been repopulated by trendy design studios, sushi bars, and art galleries.

It was just after 8 p.m. when my iPhone buzzed with a text message from a number I didn’t recognize. “I’ll meet you tomorrow but I need to be certain I can trust you,” the text read. “This goes much much higher than me and a lot of what I know even the DOJ is in the dark.”

The message was from a terrified, and very sober, Tom Hayes.

* * *

This piece was excerpted from David Enrich’s new book, “The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History."

"Germany’s Dumbest Bank" Makes $5.4 Billion Transfer In Error

Back in the summer of 2015, Deutsche Bank mistakenly paid $6 billion to a hedge fund client by mistake in a “fat finger” trade on its foreign exchange desk. The embarrassed bank recovered the money from the US hedge fund the next day, and quickly accused junior member of the bank’s forex sales team of being responsible for the transfer in June while his boss was on holiday. AS the FT then reported, instead of processing a net value, the person processed a gross figure. That meant the trade had “too many zeroes”, said one of the people.

Fast forward two years later when the German banks have done it again.

As Bloomberg reports, state-owned KfW, which gained notoriety for erroneously transferring hundreds of millions of euros to Lehman Brothers on the day the U.S. firm filed for bankruptcy, appears to have done it again when in February it mistakenly transferred more than 5 billion euros ($5.4 billion) to four banks "because of a technical glitch that repeated single payments multiple times." 

KfW said it discovered the glitch and received the money back without suffering a loss. It was not clear as of this writing if like Deutsche Bank, KfW wold also blame a "junior trader" for the glitch.

“KfW has detected the system’s incorrect behavior very early in the process, immediately mitigated the unwanted action and started the necessary process of analyzing the causes,” the bank said in an emailed statement. “The mistake was rapidly identified and eliminated, and the amounts overpaid were successfully demanded back. We regret that during works on the systems, this incident could happen due to human error owing to a configuration mistake.”

Perhaps, however a "configuration mistake" of that magnitude better be reversible as otherwise transfering the bank"s entire equity capital to one or more lucky recipients would prove quite terminal, and may even lead to random prison time.

As Bloomberg adds, the incident serves as a reminder of an ill-timed payment of more than 300 million euros KfW made to Lehman Brothers in September 2008, just as the U.S. investment bank filed for bankruptcy. At the time, the German lender failed to refresh its counterparty check that would have prevented it from processing the regular transaction.

The transfer turned into a political scandal in Germany, with newspaper Bild calling KfW “Germany’s dumbest bank.”

Ironically, on its website KfW says it’s been awarded the title of the world’s safest bank by magazine Global Finance. After news of the dramatic screw up emerged, the bank said that “KfW has immediately started comprehensive internal and external audits, in order to clarify the causes of the incident in detail and to draw the corresponding conclusions."

Will Voters Elect The "Dutch Trump" Tomorrow?

Authored by Nick Giambruno via InternationalMan.com,

Tomorrow, a vote in the Netherlands could push the euro and the EU one step closer to death…

For the last several months, I’ve been warning readers about a populist tsunami washing through Europe. It’s drastically changing the Continent’s political landscape in a way not seen since before World War 2.

This wave is flushing away traditional “mainstream” parties. And it’s bringing in anti-establishment populists who want to leave the euro currency and the European Union.

It’s already hit the UK in the form of Brexit, killing David Cameron’s pro-EU government in the process.

Then it struck Italy, washing away pro-EU Matteo Renzi’s government.

Tomorrow, on March 15, the populist wave is set to hit the Netherlands.

That’s when Dutch voters go to the polls. I think the anti-EU populist Party for Freedom will win. It’s led by Geert Wilders, who was close to Trump’s campaign. Some even call him the “Dutch Trump.”

Leaving the euro is a top priority for the Party for Freedom. If it wins, it would be another nail in the coffin for the European currency.

Either way, the Dutch parliament will discuss how to leave the Eurozone shortly after the March 15 election.

A top lawmaker recently said that “the probe will examine whether it would be possible for the Dutch to withdraw from the single currency, and if so how,” Reuters reported.

The euro’s problems are compounding and could get much worse, very soon.

Some of Europe’s biggest countries have elections this year:

• 
  

  France (April 23)

  
  


• 
  

  Germany (September 24)

  
  

These elections will ultimately determine the fate of the European Union.

The Brexit vote, Donald Trump’s election, and the failure of Italy’s constitutional referendum have already boosted anti-euro populist parties in these countries. If the Party for Freedom wins in the Netherlands tomorrow, they’ll get another leg up.

Populist parties have a real chance to win in both France and Germany. But even if they win in just one, the EU would likely unravel.

The biggest issue in these elections is the migrant crisis, which we’ve covered here extensively. And the crisis is only accelerating.

Every single migrant that arrives in Europe increases the chance that anti-EU populists will win a key election. That’s not good news for the EU or the euro. It’s also not good news for the US.

Whatever happens in the EU—the world’s largest economy and a major US trading partner—matters. If the euro collapses, expect it to trigger a stock market collapse in the US.

The Financial Times recently put it this way:

It would probably lead to the most violent economic shock in history, dwarfing the Lehman Brothers bankruptcy in 2008 and the 1929 Wall Street crash.

If the FT is even partially right, it means we’re looking at a possible stock market crash of historic proportions. It could devastate anyone with a brokerage account. But it could also create enormous opportunities to profit.

Jim Rogers: "We're About To Have The Worst Economic Problems Of A Lifetime, A Lot Of People Will Disappear"

"Get prepared," warns billionaire commodity guru Jim Rogers, "because we"re going to have the worst economic problems in your lifetime and a lot of people are going to disappear." In this wide-ranging interview with MacroVoices" Erik Townsend, the investing legend discusses everything from whether Russia is being scapegoated ("yes, ask Victoria Nuland"), the war against cash ("governments love it... they want to control everything"), to his views on gold and the demise of freedom.

Full podcast below:

Key Excerpts...

Are Russians the bad guys?

Well I do know that during the last administration, Mr. Obama"s administration as you probably remember we started, we tried to pull of an illegal coup in Ukraine, we got caught at it, what"s her name, Victoria Nuland, whatever the woman’ name the State Department they have there several pieces of evidence where we know she tried to instigate an illegal coup then of course the Russians outsmarted us and so the State Department started blaming it on the Russians and the hype against the Russians has gotten bigger and bigger ever since after we started-- or tried to start, tried to instigate the illegal coup Crimea and Ukraine.

So yes we are certainly at fault to some extent and obviously you then, when you"re caught you"ve got to keep the rhetoric up and keep throwing more and more accusations and so the State Department has done that.

I know that before the illegal coup Obama, Bush everybody was trying to be friends with the Russians rightly so, cold war had ended long ago, the Russians wanted to be friends with America. We didn’t need NATO anymore. Who needed the Cold War etc. all the money we were spending on some of these arms manufactures and soldiers so until the illegal coup took place we were all trying to be great friends you remember George Bush said I looked him in the eye and he"s a man I can admire and work with etc.

So now of course the Democrats especially since they lost the election are trying to blame it on the Russians. It"s unfathomable to me how the Russians could have determined the outcome of the elections. Maybe they planted a story a two but so what? It"s inconceivable to me that the Russians could influence much less determine the election.

I think if we start having investigations of the illegal voting I"m afraid we"re going to find more for the Democrats than for the Republicans places big cities in America won"t name names but so far the few investigations that have taken place we find that the voting irregularities are in big cities which are Democratic strongholds.

On the Greater Depression...

...get prepared because we"re going to have the worst economic problems we"ve had in your lifetime or my lifetime and when that happens a lot of people are going to disappear.

In 2008 Bear Stearns disappeared, Bear Stearns had been around over 90 years. Lehman Brothers disappeared. Lehman Brothers had been around over 150 years. A long, long time, a long glorious history they’ve been through wars, depression, civil war they"ve been through everything and yet they disappear.

So the next time around it"s going to be worse than anything we"ve seen and a lot of institutions, people, companies even countries, certainly governments and maybe even countries are going to disappear. I hope you get very worried.

when you start having bear markets as you I’m sure well know one bad thing happens and another bad thing happens and these things snowball just like in bull markets good news comes out then more good news comes out the next thing you know you"re five or six or seven years into a bull market.

Well bear markets do the same thing and so we have a lot of bad news on the horizon. I haven"t even gotten to war. I haven"t even gotten to trade war or anything like that but you know things do go wrong.

On Trump and the possibility of trade wars...and real wars

Mr. Trump has also said he"s going to have trade war with China, Mexico, Japan, Korea a few other people that he has named. He swore that on his first day in office he would impose 45% tariffs against China. He"s been there three weeks, two or three weeks and he hasn"t done it yet but he still got it in his head I"m sure or maybe he"s just another politician like all the rest of them. He says one thing and he doesn"t mean it at all but he does have at least three people in high levels in his group who are very, very keen to have trade wars with China and other people.

If he does that Eric, it"s all over. I mean history is very clear that trade wars always lead to problems, often to disaster, sometimes even to real war, a shooting war. So I don"t know, I"m not sure Mr. Trump knows. He said so many things and many of the things are contradictory. Now if he"s not going to have trade wars with various people then chances are for a while happy days are here...

[The dollar is] going to go too high, may turn into a bubble, at which point I hope I"m smart enough to sell it because at some point the market forces are going to cause the dollar to come back down because people are going to realize, oh my gosh, this is causing a lot of turmoil, economic problems in the world and it"s damaging the American economy. At that point the smart guys will get out. I hope I"m one of them.

On governments continued war against cash...

Governments are always looking out for themselves first and it"s the same old thing you know Eric this has been going on for hundreds of years. The Indians recently did the same thing they withdrew 86% percent of the currency in circulation and they have now made it illegal to spend more than, I think it"s about $4000 in any cash transaction. In France you cannot use more than, I think it"s a €1000.

Many countries are already doing this. Some states in the U.S. you cannot make cash transactions above a certain amount. Governments love it. Then they can control you. If you want to go and buy a cup of coffee they know how many you drink, where you buy them etc. if they can all put it into electronic formats and they will the world is all going electronic. My children will probably never go to a bank when they"re adults, maybe never go to a post office maybe even never to a doctor or rarely to a doctor when they"re adults.

So the Internet and the computers changing everything that we know, money can certainly be easily converted to computers not today because there are still, some people who don"t have computers and the system is not ready it but it can be done and when it"s done the governments are going to be very, very happy they going to say they"re doing it for our own good Eric, this is not them, this is for our good. That they"re doing this, but it’s coming and it"s going to be a whole different world in which we live. Probably we are not going to have as many freedoms as we have now even though we are already losing our freedoms at a significant pace.

On the demise of freedom...

...history shows that people always would like a little more safety and a willing to “give up some things for more safety and security.” Benjamin Franklin said well anybody who would give up some freedoms for security is going to wind up with neither security nor freedom and they deserve to lose both and of course that"s the way it is.

I’m not the first to realize that people who are rising to become dictators start taking away freedoms first in Germany they took away the guns, they wouldn’t let people have guns in Germany and lots of places have done that or things like that.

In America now you and I probably remember when we were kids, you had to have a search warrant, now they can just break your door down if they have what they consider enough good reasons, they don"t even have to go to the court and get a search warrant anymore.

So it"s already happening and if you said to somebody that you know they could break your door down they say they’re not going to break my door down I’m not a terrorist or a drug dealer, well that"s how it all starts people say it"s OK but then the next thing you know they"re breaking your door down too.

So it"s already happening do I like it? No I don"t like it but I"m not the first-- what was his name Goebbels the German who said if you say something to people enough times they believe it no matter how absurd it is and you and I have certainly seen it in the news in America you say something enough times people believe it and it becomes politically correct and then you can’t even say something that"s not politically correct in America any more.

Full Transcript available here.

The Era Of Cheap Money Is Ending: "This Is The Calm Before The Storm"

Submitted by Mac Slavo via SHTFPlan.com,

We’re living in the calm before the storm.

That much everyone can sense.  The stock market highs and holiday spending spree will soon be over, the inauguration will presumably go as planned, but that’s when everything could start to go off course.

The only question is how the storm is going to stir into a frenzy – there will be a pretext of some kind. What seems certain is that it is past time to get ready for a difficult period. This could be the big, slow squeeze and the long winter.

The economy became immune to stimulus and quantitative easing; the market can only be propped up so long, and the realities of raised interest rates a matter of timing for the Fed to decide. Now, President-elect Trump provides the catalyst necessary for a dramatic rise and fall in the economy.

With the force of the economic avalanche that is poised to fall upon us all, the policies and actions of President Trump will do little to stem the tide of what is already coming; for better or worse, there is little that Trump himself can do even though it may fall squarely on his administration.

There are many putting out the talking points now; the warnings are reaching a crescendo.

Jay L. Zagorsky, Economist and Research Scientist at Ohio State University, is predicting a recession for 2017, in spite of glowing outlooks, that could dominate headlines:

My outlook for 2017 and beyond is that the U.S. economy will likely see another recession.

[…]

It could be a sudden trigger like the collapse of Lehman Brothers in late 2008 or just a general loss of confidence.

[…] At the end of very long expansions, banks and finance companies are willing to lend to almost anyone because they become overly optimistic. Some of this willingness to lend carelessly is currently seen in U.S. car loans.

[…] like a game of musical chairs [….] suddenly “the euphoria becomes a panic, the boom becomes a slump.”

Recession, of course, is a euphemism for something much more far reaching… yet the sense of true panic is there. This could be bad.

Regardless, people across the spectrum are warning about the financial blowback that is likely headed our way. Many prominent economists are currently signalling either slow growth, or the onset of a crisis that no Trump could contend with, as RT notes:

Many of the experts said the global trade slowdown, seen during the slight recovery from the financial crisis that started nearly a decade ago, could worsen.

Emerging economies are expected to remain vulnerable… accelerating inflation and a soaring US dollar among the risks to the economic balance.

Dollar strength, weakening other currencies, will influence how emerging markets manage relatively higher inflation, as well as falling business confidence, they said.

[…]

“Mr. Trump and his team have promised growth of 3.5 to 4 percent or more, which we see as ‘magical thinking’ unless accompanied by accelerated productivity growth,” said Michael Carey, US economist at CA-CIB.

If these guys are right, the Trump Administration promises of boosting the economy could end up a no go, nothing more than “magical thinking” and an overly-optimistic sales pitch.

Hopefully they are wrong.

Mike Adams emphasized the gravity of this massive monetary shift – it will rock global events, and likely overshadow almost anything else taking place during 2017 and the years that follow it:

The only prediction that really matters for 2017: The global debt collapse begins, followed by the rise of fascist, totalitarian government

At first, I thought about putting together a list of 25 bold predictions for 2017, but in the end I realized only one prediction really matters. It makes everything else almost irrelevant.

The era of cheap money and free debt is going to come to a catastrophic end

To understand the implications of this one prediction, you need to grasp the reality that we are approaching the end of the era of cheap money, endless debt and fiat currency money creation.

[…] For decades, presidents and central bankers kicked the can down the road, printed new fiat currency and spent the nation into financial oblivion. President Obama, America’s first Muslim President, doubled the federal debt in just eight years…

Now, with Trump getting sworn into office on January 20, 2017, the globalists no longer want to prevent the debt collapse from taking place.

The timing of all this is during Trump’s first four years. The plans will be set into motion in early 2017, and the mechanisms for engineering a crash will be initiated almost immediately after Trump’s inauguration. The effects of those actions, however, will take time […] no one can accurately predict the timing of when those actions will release the avalanche of global debt collapse. […] but what we do know is that once the avalanche begins, it will be unstoppable until it hits bottom.

As the debt collapse unfolds, we’re going to see the freezing of banking transactions, government payments and food stamp debit cards. The stock market will collapse (or be frozen), pensions will collapse, many banks will implode, the FDIC will go bankrupt, real estate will collapse, international banks will save themselves with “bail ins” and so on. It’s going to be financial Armageddon on a scale no living person has ever witnessed before.

Once that happens, there will be a backlash from the federal government and the emergency infrastructure that could swiftly implement a police state, tight cash and monetary controls, violence, looting and unrest in the streets and short supplies everywhere.

If the crisis is widespread enough, almost any level of draconian measures could be justified.

With nearly 50 million people dependent on food stamps in this country, no job growth, stagnant wages and a hungry, desperate and idle population drowning in debt, there will indeed by unrest as no one in this country has ever seen it.

If they are fueling the fire so that it burns with spectacular destruction, it may be wise to get as far back and away as possible.