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Posts tagged ‘Wall Street Journal’

Euro-zone Debt Crisis, What Happens When The Core Starts To Rot

By: Raul_I_Meijer

While we’re all watching Spain and Greece, their alleged saviors in the rich core of the eurozone are starting to show serious signs of corrosion. This makes all the hollow words and promises coming from the world of troikas and politics sound even emptier than they already did. Not that anyone in Holland or Germany seems to even be prepared to think their economies are in for a big fall; for them, all the bad stuff is temporary, and soon it will all be better. Our proverbial Martian might be tempted to think denial is a river in northern EuropeTo wit: after a slew of reports on the housing situation in Holland earlier this year, by the Dutch government’s Central Statistics Bureau, the Dutch Central Bank and the Central Plan Bureau (CPB) – got to love the name -, the real estate sector itself issued a paper today, which, despite the obvious bias, makes everything look worse. Again.

As I wrote in Those Dutch Tulips Ain’t Looking All That Rosy last month, home prices in Holland rose some 20% annually around the turn of the century/millennium, for a total of 228% from 1985-2007.

On August 21, the Wall Street Journal reported that

The slump in the Dutch housing market deepened in July as prices posted the steepest drop on record, highlighting the challenges facing the Netherlands ahead of next month’s general elections. With prices now plumbing levels last seen in 2004, the downturn is weighing heavily on household consumption and has raised concern about the country’s huge mortgage debt pile, among the largest in Europe

House prices fell 8% from a year earlier, statistics bureau CBS said Tuesday, the largest decline in the 17-year history of the agency’s house-price index. Prices fell 4.4% in June and 5.5% in May. [..] House prices have fallen about 15% since their peak in August 2008 amid a stagnant economy, more stringent bank-lending criteria and weak consumer sentiment.

Today, the NVM (Dutch Real Estate Brokers Association) announced that among its members (good for 86% of transactions), Q3 sales were down 17.2% (!) from Q2. Home prices fell 2.2% from that quarter, and 7.5% from Q3 2011. Average home prices are now down 21% compared with 2008, from €265,000 to €209,000. 700,000, or over 20%, of Dutch homeowners are now underwater. The NVM expects 100,000 homes to be sold in 2012, and labels this the “absolute bottom”.

Full article at source: http://www.marketoracle.co.uk/Article36968.html

ECB Will Now Print Money Directly … But Why?

The market has rejected the euro and the EU. Now Draghi proposes to reject the market. In a groundbreaking reversal, he has indicated he will print currency to buy eurozone sovereign debt.

Mario Draghi, president of the European Central Bank (ECB), will do “whatever is necessary” to ensure a solvent euro. Draghi made the comments at an investor conference at the Olympics. Professional investors like John Fox, director of research at Fenimore Asset Management, believe it may mark a turning point in the four-year old crisis.

“When the head of the ECB comes out and says he’s willing to do anything,” Fox is quoted as saying. “That’s code for ‘We are going to agree to resolve this issue.'”

Of course, there may be another reason why Draghi is doing this now but it is nothing that Fox would ever allude to. We’ll get to it toward the end of this article.

In any case, one wonders how much of Draghi’s statement is merely an attempt to “talk up” the market and how much is grounded in reality. To be sure, he is obviously trying to sound tougher about using an array of monetary weapons at his disposal.

In an article about Draghi’s announcement, the Wall Street Journal writes that Draghi “has had enough.” Like a previously abashed partner in a bad business partnership, Draghi is going to the show the market who is “boss.” He calls the euro “irreversible,” and claims the “euro zone has the power to defeat market speculation.”

Draghi can make a case for generating price inflation now because the expense of government borrowing is impeding the ECB’s ability to conduct monetary policy and to support private sector transactions. He thus has a mandate to “lower … premiums.”

Of course, by that logic anything in the marketplace that affects government debt adversely is fair game for the ECB. Please note: The German people were sold the EU and the euro as something of benefit … not as a “transfer union.” Draghi may manage to do what he intends, but he is running close to the “red” line

full article at source: http://www.thedailybell.com/4127/ECB-Will-Now-Print-Money-Directly-But-Why


After a brief rally ( poss up to 1.26 .I expect to see the Euro hit new lows perhaps down to 1.10 even lower if Spain and Italy has to get a bailout!


ECB to recommend senior bondholders take losses in the event of a restructuring of Spanish bank debt

English: The European Central Bank. Notice a s...

English: The European Central Bank. Notice a sculpture of the euro sign. (Photo credit: Wikipedia)

The European Central Bank refused to comment today on reports that it had recommended senior bondholders should take losses in the event of a restructuring of Spanish bank debt.

But two officials with knowledge of the ECB’s thinking said it would no longer oppose the forcing of losses on senior bondholders of euro-area banks.
A key condition to imposing losses is if the bank in question is being wound down, one of the officials said. Both of them spoke on condition of anonymity as the talks are confidential.

A report in the Wall Street Journal today said ECB president Mario Draghi advocated imposing losses on senior bondholders issued by “the most severely damaged” Spanish savings banks at a meeting of European Union finance ministers on July 9th.

A spokesman for the Frankfurt-based central bank wouldn’t comment on that discussion. The spokesman said in an e-mail that the ECB’s

full article at source: http://www.irishtimes.com/newspaper/breaking/2012/0716/breaking17.html

Is Ireland in line for €100bn refund after ECB changes stance on bondholders?

By Namawinelake

In the immortal words of Ray Burke commenting on a chance of a receipt for an alleged bung, “is it f*ck” but as fantastical as it may seem, it might be the logical conclusion of taking account of the sums paid to senior bondholders in the bailed-out banks together with the comments ascribed to ECB president Mario Draghi in the Wall Street Journal yesterday.

In April 2012, Minister for Finance Michael Noonan in response to a question from the Fianna Fail finance spokesperson Michael McGrath confirmed that between 30th September 2008 when the bank guarantee was introduced and April 2012, a total of €103.7bn has been paid to senior bondholders in the state-guaranteed banks, comprising €33.1bn to “secured” bondholders and €70.6bn to “unsecured” bondholders. And analysed by bank – €32.5bn was paid by AIB/EBS, €35.7bn was paid by Bank of Ireland, €10bn was paid by Irish Life and Permanent and €25.5bn was paid by IBRC.  To date, the State has injected €64.1bn into these four banks and in addition, NAMA has paid €5.6bn in state aid for the acquisition of loans, which represents a premium over what the loans were worth on the open market.

full article at source: http://namawinelake.wordpress.com/2012/07/16/is-ireland-in-line-for-e100bn-refund-after-ecb-changes-stance-on-bondholders/

Can The World Survive Washington’s Hubris?

By Paul Craig Roberts
June 29, 2012 “Information Clearing House” — When President Reagan nominated me as Assistant Secretary of the Treasury for Economic Policy, he told me that we had to restore the US economy, to rescue it from stagflation, in order to bring the full weight of a powerful economy to bear on the Soviet leadership, in order to convince them to negotiate the end of the cold war. Reagan said that there was no reason to live any longer under the threat of nuclear war.
The Reagan administration achieved both goals, only to see these accomplishments discarded by successor administrations. It was Reagan’s own vice president and successor, George Herbert Walker Bush, who first violated the Reagan-Gorbachev understandings by incorporating former constituent parts of the Soviet Empire into NATO and taking Western military bases to the Russian frontier.
The process of surrounding Russia with military bases continued unabated through successor US administrations with various “color revolutions” financed by the US National Endowment for Democracy, regarded by many as a front for the CIA. Washington even attempted to install a Washington-controlled government in Ukraine and did succeed in this effort in former Soviet Georgia, the birthplace of Joseph Stalin.
The President of Georgia, a country located between the Black Sea and the Caspian Sea, is a Washington puppet. Recently, he announced that former Soviet Georgia is on schedule to become a NATO member in 2014.
Those old enough to remember know that NATO, the North Atlantic Treaty Organization, was an alliance between Western Europe and the US against the threat of the Red Army overrunning Western Europe. The North Atlantic is a long, long ways from the Black and Caspian Seas. What is the purpose of Georgia being a NATO member except to give Washington a military base on the Russian underbelly?
The evidence is simply overwhelming that Washington–both parties–have Russia and China targeted. Whether the purpose is to destroy both countries or merely to render them unable to oppose Washington’s world hegemony is unclear at this time. Regardless of the purpose, nuclear war is the likely outcome.
The presstitute American press pretends that an evil Syrian government is murdering innocent citizens who only want democracy and that if the UN won’t intervene militarily, the US must in order to save human rights. Russia and China are vilified by US functionaries for opposing any pretext for a NATO invasion of Syria.
The facts, of course, are different from those presented by the presstitute American media and members of the US government. The Syrian “rebels” are well armed with military weapons. The “rebels” are battling the Syrian army. The rebels massacre civilians and report to their media whores in the West that the deed was done by the Syrian government, and the Western presstitutes spread the propaganda.
Someone is arming the “rebels” as obviously the weapons can’t be purchased in local Syrian markets. Most intelligent people believe the weapons are coming from the US or from US surrogates.
So, Washington has started a civil war in Syria, as it did in Libya, but this time the gullible Russians and Chinese have caught on and have refused to permit a UN resolution like the one the West exploited against Gaddafi.
To get around this roadblock, fish out an ancient Phantom fighter jet from the 1960s Vietnam war era and have Turkey fly it into Syria. The Syrians will shoot it down, and then Turkey can appeal to its NATO allies to come to its aid against Syria. Denied the UN option, Washington can invoke its obligation under the NATO treaty, and go to war in defense of a NATO member against a demonized Syria.
The neoconservative lie behind Washington’s wars of hegemony is that the US is bringing democracy to the invaded and bombed countries. To paraphrase Mao, “democracy comes out of the barrel of a gun.” However, the Arab Spring has come up short on democracy, as have Iraq and Afghanistan, two countries “liberated” by US democratic invasions.
What the US is bringing is civil wars and the breakup of countries, as President Bill Clinton’s regime achieved in former Yugoslavia. The more countries can be torn into pieces and dissolved into rival factions, the more powerful is Washington.
Russia’s Putin understands that Russia itself is threatened not only by Washington’s funding of the “Russian opposition,” but also by the strife among Muslims unleashed by Washington’s wars against secular Muslim states, such as Iraq and Syria. This discord spreads into Russia itself and presents Russia with problems such as Chechen terrorism.
When a secular state is overthrown, the Islamist factions become free to be at one another’s throats. The internal strife renders the countries impotent. As I wrote previously, the West always prevails in the Middle East because the Islamist factions hate one another more than they hate their Western conquerers. Thus, when Washington destroys secular, non-Islamist governments as in Iraq and now targeted in Syria, the Islamists emerge and battle one another for supremacy. This suits Washington and Israel as these states cease to be coherent opponents.
Russia is vulnerable, because Putin is demonized by Washington and the US media and because Putin’s Russian opposition is financed by Washington and serves US, not Russian, interests. The turmoil that Washington is unleashing in Muslim states leaks back to Russia’s Muslim populations.
It has proved to be more difficult for Washington to interfere in China’s internal affairs, although discord has been sowed in some provinces. Several years from now, the Chinese economy is expected to exceed in size the US economy, with an Asian power displacing a Western one as the world’s most powerful economy.
Washington is deeply disturbed by this prospect. In the thrall and under the control of Wall Street and other special interest business groups, Washington is unable to rescue the US economy from its decline. The short-run gambling profits of Wall Street, the war profits of the military/security complex, and the profits from offshoring the production of goods and services for US markets have far more representation in Washington than the wellbeing of US citizens. As the US economy sinks, the Chinese economy rises.
Washington’s response is to militarize the Pacific. The US Secretary of State has declared the South China Sea to be an area of American national interest. The US is wooing the Philippine government, playing the China threat card, and working on getting the US Navy invited back to its former base at Subic Bay. Recently there were joint US/Philippines military/naval exercises against the “China threat.”
The US Navy is reallocating fleets to the Pacific Ocean and constructing a new naval base on a South Korean island. US Marines are now based in Australia and are being reallocated from Japan to other Asian countries. The Chinese are not stupid. They understand that Washington is attempting to corral China.
For a country incapable of occupying Iraq after 8 years and incapable of occupying Afghanistan after 11 years, to simultaneously take on two nuclear powers is an act of insanity. The hubris in Washington, fed daily by the crazed neocons, despite extraordinary failure in Iraq and Afghanistan, has now targeted formidable powers–Russia and China. The world has never in its entire history witnessed such idiocy.
The psychopaths, sociopaths, and morons who prevail in Washington are leading the world to destruction.

Paul Craig Roberts was Assistant Secretary of the Treasury for Economic Policy and associate editor of the Wall Street Journal. He was columnist for Business Week, Scripps Howard News Service, and Creators Syndicate. He has had many university appointments. His internet columns have attracted a worldwide following.



Over Their Dead Bodies

International Money Pile in Cash and Coins

International Money Pile in Cash and Coins (Photo credit: epSos.de)

By Bill Bonner

The more things don’t change…the more they remain the same. You can quote us on that.

On the surface, very little changed in the 2 months we were away.

The Dow was about 13,000 in mid-Feb. It’s still about 13,000.

The yield on the 10 year US note was about 2%. No change there either.

The euro was about $1.30. It’s $1.30 today.

Gold is a little lower. Big deal.

But down deeper….did anything more substantial change…evolve…develop?

Apparently not. Back in the winter, the Europeans were pretending to fix Greece. Now they’re pretending to fix Spain.

But wait…here’s something that might be changing…now nobody believes the fixes will stay fixed.

“Europe’s Rescue Plan Falters,” says the front page of The Wall Street Journal.

Yesterday, widely reported was the fact that Spanish banks held more delinquent loans than at any time since 1995. The world seemed to be waking up too to the realization that when you pour bad money after good money you end up with no money.

The ECB’s $1.3 trillion worth of loans to banks was supposed to put a stop to liquidity problems. After all, investors know that borrowers can get more money. The ECB lends to the banks. The banks lend to the governments. You can’t go broke that way. Not as long as the money keeps flowing.

But wait again… “After months of using that cash to buy their government’s debt,” reports the WSJ, “banks in Spain and Italy have little left.”

Let’s look at this more closely.

full article at source:http://dailyreckoning.com/

If Yemen Falls, so Does the Dollar Reserve?

Anthony Wile

How is it that the world’s fortunes hang on the life or death of a murderous thug that the US has been supporting for 30 years? And why, in fact, if Yemen’s President Ali Abdullah Saleh is so important, isn’t it common knowledge? Saleh was wounded yesterday when opposition forces blew up his palace. But as I’ll discuss, below, there’s more to the story. (Isn’t there always?)

In my opinion, this story is so big it should be on the front pages of the New York Times and The Wall Street Journal: “US dollar hegemony hangs in the balance.” Or how’s this: “Future of the world’s monetary system to be decided in Yemen’s Sana, the city built inside the mouth of an extinct volcano.”

How can one silly, little and desperately poor country full of people in ankle-length white robes be in the position to take down the Anglo-American empire?

First, context. It hasn’t been a good year for the West’s power elite. Yemen is only one country in tumult. Other countries verging on civil war are Bahrain and Syria. (Libya is already convulsed.) But in fact there are hundreds of places in the Middle East, Africa and Europe now where people are demonstrating and marching – or fighting with various levels of efficiency and organization.

In Afghanistan, the Obama administration is said to be desperately searching for Mullah Omar, the one-eyed leader of the Taliban, now and again reported dead or missing. US officials, in turn, wish to find Omar so that they can work out a deal where the US declares victory and Omar retains the territory. Some victory.

Libya is currently in a stalemate; China is Pakistan’s new best friend; Pakistan’s generals are again denying what Ms. Hillary Clinton – US Secretary of State – said only a week ago, that the Pakistan army was about to launch a significant attack against the Pashtun/Taliban. It’s not true, the generals say.

Meanwhile, Egypt’s youths sleep on the streets; Tunisian youth are no happier; Iran is gaining considerable regional influence because of the “color revolutions” that the CIA apparently triggered. Even the Palestinians are resurgent.

The Arab Awakening is truly a regional if not global phenomenon. Of course, we have our own name for it: The Internet Reformation. It’s really the same thing. Just as the Gutenberg press spawned the Renaissance and Reformation, so the Internet has now spawned a truly significant social convulsion. The world will never be the same. And of course, dear reader, no one’s really noticed. We have. (We read history, and so do you.)

America’s CIA-sponsored AYM youth movements were behind the initial color revolutions. But notice how the mainstream press has stopped celebrating them. Perhaps they haven’t worked out as planned. In fact, things don’t look pretty for the West. Either Western elites are encouraging a series of Arab Islamic Republics (so as to buttress what seems to be an essentially phony “war on terror“) or they are trying to create controllable regulatory democracies that will likely be run by dependable militaries with a constitutional façade. Neither of these options looks to be feasible in the near term.

Alternatively, the West seeks generalized chaos for some reason – or, more intriguingly, it has simply lost control of the situation. As we’ve stated before, Yemen is important because it may well indicate how much control the West actually has over the Arab Awakening. So far, what’s been most apparent is dithering. The West hasn’t shown a firm hand. There are reasons why.

Yemen may be spinning out of Western control. After Saleh was wounded, he was quoted as saying, “I salute our armed forces and the security forces for standing up firmly to confront this challenge by an outlaw gang that has nothing to do with the so-called youth revolution.” It’s interesting that the words Saleh used were “outlaw gang” as the tribal opposition to his rule denied making the attack. Apparently, it was what one might call “an inside job.”

That means that individuals nominally allied with Saleh tried to knock him off. And why not? He is a thoroughly despicable man. He has ruled Yemen for about 30 years through a mixture of truculence and torture; like Gaddaffi, his favorite method of staying in power is one of “divide and conquer” in which he set various tribes against each other.

Yup … Yemen is another “tribal backwater” like Afghanistan – a place where the Anglo-American elite (exaggeratedly) has no interest. It is like a kid kicking a stone past the house of a pretty girl. He just happened along the way … and thus the US just “happened’ into Afghanistan and Iraq. In fact, the US is intensely interested – mesmerized in a kind of Ted Bundy (bad) way.

How seriously does the Anglo-American empire take Afghanistan (as a speed-bump on the way to world government)? Try, probably, say … US$2 trillion in expenditures, thousands killed and tens of thousands wounded. True the total all-in cost hasn’t been as much as Vietnam (50,000 dead and 500,000 wounded) but there’s considerable evidence that the US has been undercounting the dead and wounded through a variety of manipulations.

Yemen has never presented the kind of problems as Afghanistan. In part that’s because Yemen is even more difficult to subdue militarily than the stiff-necked Pashtun Taliban. The West has wanted as little to do with Yemen as possible (outside of controlling the coastline). Here’s a description of Yemen by Paul Herman of the New Zealand Post in a recent article entitled “Cry, cry and cry again for my beloved Yemen.”

So now my beloved Yemen is on the verge of going up in flames, on the verge of a cataclysmic civil war. I say “my beloved” because I had such an extraordinary time there on an Intrepid Journey a few years back Not a lot of people actually know where Yemen is. I don’t think I really did until I checked a map before we went there. It is essentially the bottom left portion of the Arabian Peninsula. And what I certainly didn’t realise about the entire Arabian Peninsula is that a massive mountain range runs north to south down its western side, sloping down eventually to the Red Sea.

In fact, the Saudis move their capital up to the mountains, to Taif, during the ferocious Arabian summers. The Yemeni capital Sana’a sits in this same mountain range. The thing about Yemen is the architecture. There is nothing like it in the world. They seem to have engineering in their genes. They built skyscrapers when no one was doing it.

Osama Bin Laden’s father, who got rich building roads in Saudi Arabia, was Yemeni. He got so rich he rebuilt the mosque at Mecca with his own money. Old Man bin Laden came from one of the most spectacular parts of the world I have ever seen, the Wadi Hadromaut. It is probably as vast and as breathtaking as the Grand Canyon. And all through this great and ancient valley are villages perched on high, impossible sites, above steep cliffs, and you look at them and marvel because they have been there hundreds and hundreds of years.

How in God’s name did they do that, you find yourself asking time and again, round every corner. It’s the same through the entire country, especially in that great mountain range, villages with slim, square buildings six or seven storeys on the most unreachable ridges and peaks. And, of course, that was the point. Defensively, they are brilliantly sited. The truth is, neither the Turks – of whom there are still some 10,000 in Yemen – nor the British ever really conquered anywhere but the Yemeni coast. You couldn’t get near those mountain villages. The Yemenis simply rolled great rocks down on you.

As Afghanistan is the key to Middle Asia, so Yemen is the key to “Arabia.” The tribes of Oman and the Arab Emirates flowed out of Yemen. The Saud family came from Yemen apparently. And today Yemen is no less important than before in terms of the Great Game. It is perched on the edge of one of the most important waterways in the world and fronts the soft underbelly of Saudi Arabia – the part where many of the most profitable oil wells are located.

Yemen is formidable, and strangely important. But because of the mountains, because of the tribes, because of the weaponry (three rifles for every Yemeni), because boys are expected to be proficient with weapons from an early age, Yemen has not been high on the list of the Anglosphere’s “civilizing” influences.

Ironically, the Yemenis are very similar culturally to the Somalis – from the same Somalia that Western newscasters like to call a failed state. (A failed state is any country that stands in the way of the West’s dash toward One World Government.)

What Western mainstream media isn’t bothering to report, however, is that the Anglo-American power elite could already have done away with Saleh if it wanted to. He’s their man and has been for all of his violent existence. It is reprehensible that that Western elites would rather let Yemen drift into civil war than cease to support Saleh. There have been no moves made in the UN to put pressure on Saleh, no sanctions – only apparently regular ammo and tear gas refills, which he has used to slaughter hundreds of Yemenis.

The Western elites have not moved to do away with Saleh because they cannot apparently find a thug to put in his place that will garner a modicum of tribal support. The result of all this is growing antipathy. Possibly, because Yemen is another funny “impoverished backwater,” the US has handled the Yemen very badly. The whole country is inflamed. Saleh, now wounded, will likely never get his power back and the chances that the CIA will have the opportunity to create a new Saleh are growing slimmer by the minute.

The Saudis worked desperately to move Saleh out of power. It is easy to see why now; that was their leverage. But now the nightmare scenario has occurred: increasingly the Saudis are perceived as propping Saleh up (which they are doing actually by not removing him). Ultimately all this returns to the US and the Pentagon, which in turn does the bidding of the City of London. So, here is the answer to the question asked at the beginning of this article. The answer is …


The corrupt and vicious Saudi regime lies at the heart of Money Power. Without Saudi willingness to support the continued dollar-oil exchange (forcing the rest of the world to hold dollars) the dollar reserve currency system fails.

The current system was put in place in the 1940s, but it was elaborated on in 1971, when the US severed the last link between gold and the dollar and substituted oil. How did the Anglosphere elites manage this trick? Using Mao’s observation: “power springs from the barrel of a gun.”

The Saudis were willing accomplices, but in reality they didn’t have a choice. The world’s economy, when you come down to it, is a product of American military force. Use the dollar to buy oil or else … But if the US and Saudi Arabia cannot control the spiraling disaster in Yemen, the next stop on the revolutionary train is Bahrain. And after that … Saudi Arabia. And THIS time, events will not be easily salvageable. The Internet has educated the Arab world about its history.

If the Anglosphere elites had only used their tremendous industrial and monetary advantages to build a free-market instead of a phony one (disguised as a free one)! But the elites chose to propagate a central banking economy in order to chase after world government. Now they are in danger of losing the dollar reserve (GOOD!), which will deal a terrible blow to Western central banking and perhaps end up with the creation of an entirely new (and uncontrollable) currency. Anyway, if Saudi Arabia falls, the dominoes may simply keep tumbling. Who pays any attention to funny little countries like Yemen anyway?

SOURCE: http://www.thedailybell.com/2443/If-Yemen-Falls-so-Does-the-Dollar-Reserve.html

Rigged Market

Rigged Market: How Latency Arbitrage Picks $3 Billion From Your Pockets

By Peter Cohan  

If you’re like most people, you want to have some money around when you retire so you can enjoy your remaining years. So you buy mutual funds and invest in a 401(k), hoping to get 8% annual returns. If you run a business, you might want to raise capital so you can buy machines and hire people to meet the needs of your customers.

It’s much more difficult for these things to happen if the stock market is rigged. But because of huge hedge funds like Citadel Group and Renaissance Technologies, those markets are selling risk-free profits to the highest bidders. One way they’re picking your pocket — to the tune of $3 billion a year — is through latency arbitrage.

Buying Access to Insidery Information

The practitioners of latency arbitrage make money in two ways: They locate their computers as close as they possibly can to the electronic exchanges that execute their trades, and they pay exchanges to give them actual stock price information before that raw data gets consolidated and sent to most other market players.

Latency arbitrage isn’t the only way the wealthiest traders buy access to what I have called “insidery” information. But this practice of using legal, market-moving information that’s only available to a small number of traders to profit at everyone else’s expense is quite common.

Before getting into the nuts and bolts of latency arbitrage, let’s take a look at the people who are profiting from it. These guys get paid staggering amounts of money. For example, Citadel Investments is run by Ken Griffin, who took in $900 million personally in 2009. James Simons, who runs Renaissance Technologies, made $2.5 billion in 2009 — and $1.7 billion in 2006 and $2.5 billion in 2008.

Making Big Profits — at No Risk

Griffin, Simons and their latency-arbitrage practicing peers pick that $3 billion out of your pocket each year a penny or two a share at a time. According to my June 4 conversation with Sal Arnuk, a partner at Themis Trading, these high frequency traders (HFTs), which account for 70% of daily trading volume, turn the markets into a “Call of Duty video game with hollowed out buildings and children armed to the teeth with the latest weapons.”

The average investor gets quotes from a Standard Information Processor (SIP) that gets bid and ask prices for a stock on a National Best Bid and Offer (NBBO) basis. HFTs pay for data feeds that go into the NBBO prices — for example, a professional enterprise license from NASDAQ for its TotalView data covering the NYSE, NASDAQ, and Amex goes for $100,000 — so they know what the actual prices are 100 to 200 milliseconds before the retail investor.

Taking no risk at all, except for the $1.8 billion they pay to the exchanges each year to locate their servers right next to the exchange computers, these latency arbitrageurs make between one and three cents on each trade by getting that tiny jump on you. And despite the volatility in the broader markets during that time, the latency arbitrageurs have been steadily profitable for the last four years.

NYSE Disregards Fairness for Retail Investors

You might have hoped that big exchanges like the New York Stock Exchange (NYSE) would try to keep a level playing field in trading for all market participants. But according to Arnuk, that’s not the case. The NYSE is opening a $500 million, 400,000 square foot co-location facility in Mahwah, N.J.

In pitching this facility to HFTs, the NYSE makes a big deal about how it will connect every participant’s computers by 1,000 feet of cable to those of the NYSE. Therefore, if Renaissance’s computers are 100 feet from those of the NYSE, its trade will take them the same amount of time to reach the NYSE computers as Citadel’s computer, which is 800 feet away. Arnuk thinks it’s too bad that the NYSE is not more concerned about the fairness of this for the retail investor.

An Illuminating Test Case

Let’s look at an example of how latency arbitrageurs make their money. According to The Wall Street Journal, TFS Capital, a $1.1 billion firm that trades for mutual funds and is among those losing out to latency arbitrageurs, decided to conduct a trade to illustrate how it’s getting ripped off by them.

The Journal reports that in March, 2010, a TFS trader sent an order to a broker to buy shares of Nordson (NDSN) through an instant message requesting that the order be executed in a specific dark pool (DP). DPs are unregulated alternative electronic stock exchanges, in many cases run by big Wall Street banks, in which buyers and sellers show up anonymously to declare their interest in buying or selling a certain number of shares of stock within some price limit.

The TFS trader asked the broker to execute the order in “broker pool #2”, telling the broker not to pay more “than the midpoint between what buyers and sellers were offering, which at the time was $70.49,” according to the Journal. But the market price for Nordson shares did not change for a few seconds so the TFS trader “set a trap: He sent a separate order into the broader market to sell Nordson for a price that pushed the midpoint price down to $70.47.”

TFS was “almost immediately sold Nordson for $70.49 — the old, higher midpoint — in broker pool No. 2, which didn’t reflect the new sell order,” according to the Journal. Perhaps what happened was that a latency arbitrageur was able to buy the shares at $70.47 in the broader market and sell them to TFS for two cents more.

(How the latency arbitrageur knew that higher price is a mystery. But it may have been due to the practice of pinging the dark pool. This is the practice of sending a series of small orders to the DP to see if the latency arbitrageur can guess the price at which, say, the seller wants to sell.)

Twisted Rationale

In this case, TFS overpaid by two cents a share for its Nordson stock. All these pennies add up to $3 billion a year that should have gone into the pockets of retail investors but instead, help provide those billion-dollar annual paydays for hedge fund moguls like Griffin and Simons.

That doesn’t sound like the reason that securities markets were set up. So it’s a bit ironic, as Arnuk told me, that the NYSE’s Mahwah facility is surrounded by buttonwood trees because it’s under a buttonwood tree that the NYSE got started back in 1792.

A Nation of Dropouts Shakes Europe

LISBON—Isabel Fernandes, a cheery 22-year-old with a constellation of stars tattooed around her right eye, isn’t sure how many times she repeated fifth grade. Two, she says with a laugh. Or maybe three. She redid seventh grade as well. She quit school with an eighth-grade education at age 20.

Ms. Fernandes lives in a poor suburb near the airport. She doesn’t work. Employers, she says, “are asking for higher education.” Even cleaning jobs are hard to find.

Protesters in Porto, Portugal, on March 12 called for relief from the nation’s economic distress, which is made worse by poor education.



Portugal is the poorest country in Western Europe. It is also the least educated, and that has emerged as a painful liability in its gathering economic crisis.

Wednesday night, the economic crisis became a political crisis. Portugal’s parliament rejected Prime Minister José Sócrates‘s plan for spending cuts and tax increases. Mr. Sócrates handed in his resignation. He will hang on as a caretaker until a new government is formed.

Without the budget cuts, Portugal is almost certain to need an international bailout. It will run out of money this year without fresh cash, and markets are charging punitive rates for borrowing. Two firms downgraded Portugal’s credit rating Thursday.

Its dire situation thrust a possible Portuguese rescue onto the agenda of European Union leaders who gathered in Brussels Thursday for a previously scheduled meeting, where they were agreeing on a new bailout fund. Portugal would be the third country in the euro zone to require a bailout, after Greece and Ireland.

Portugal is the poorest and least educated country in Western Europe. With a debt crisis bearing down, it must make massive reforms to fix its economy, and education is at the top of the list. WSJ’s Charles Forelle reports from Lisbon.

The state of Portuguese education says a lot about why a rescue is likely to be needed, and why one would be costly and difficult. Put simply, Portugal must generate enough long-term economic growth to pay off its large debts. An unskilled work force makes that hard.

Cheap rote labor that once sustained Portugal’s textile industry has vanished to Asia. The former Eastern Bloc countries that joined the European Union en masse in 2004 offer lower wages and workers with more schooling. They have sucked skilled jobs away.

Just 28% of the Portuguese population between 25 and 64 has completed high school. The figure is 85% in Germany, 91% in the Czech Republic and 89% in the U.S.

“I don’t see how it is going to grow without educating its work force,” says Pedro Carneiro, an economist at University College London who left Portugal to do his postgraduate studies in the U.S.

The education woes in Portugal show the extent of Europe’s challenge as it tries to right itself amid the sovereign-debt crisis.

Educating Portugal

See how its graduation rate compares.

Rapid and painful budget-cutting, which is being enforced across the Continent, is the first step. But the second is far harder and will take far longer. The 17 countries linked via the euro have vastly differing levels of economic performance. Unless the gulf is narrowed, the pressures that caused the weaker among them to pile up huge volumes of debt, and have trouble repaying it, will doubtless re-emerge.

Better schooling in Portugal won’t come quickly. Sharp cuts in its education spending make the task harder. And even if there are improvements, reaping their benefits could take years.

Greece and Ireland, the two EU countries that got bailouts, reached the brink relatively rapidly: Greece came undone after revelations it had grossly underestimated the government’s parlous fiscal state; Ireland self-immolated in an orgy of property speculation.

Portugal’s crisis, by contrast, has come to a boil slowly. For a decade, Portugal’s growth trailed the euro-zone average. Traditional industries like cork harvesting and shoe stitching couldn’t energize the entire country. The tech boom of the mid-2000s largely passed Portugal by.

The Portuguese spent nonetheless. The economy—government and private sector together—has run cumulative deficits with the rest of the world of more than €130 billion over the past decade. The state hasn’t had a balanced budget, let alone a surplus, for more than 30 years.

Charles Forelle/The Wall Street Journal

Student Sophie Alves, above, said, ‘With the crisis, we have to go to university.’


The result is a pile of debt. The government’s debt, some of which is held domestically, will approach 90% of gross domestic product this year. The entire economy, including both the public and private sectors, owes foreigners an amount equal to more than two years’ of economic output.

Before his failure this week, Prime Minister Sócrates had pushed some budget cuts through parliament under pressure from other euro-zone countries. But in an interview before Wednesday’s political crisis, Mr. Sócrates made clear that investment in education was a priority, despite the costs. Appeasing financial markets was important, he said, but the country shouldn’t “lose the strategy and vision.”

There is substantial evidence from elsewhere that education confers broad economic benefits. Ireland was one of the EU’s poorest countries a generation ago. But it threw EU subsidy money into technical education and remade itself as a destination for high-tech labor, made doubly attractive by low corporate taxes. Ireland is now, even after a brutal banking crisis, among the richest nations in Europe.

“They had an educated-enough work force that they could move into a technology industry, and they rose out of nowhere,” says Eric Hanushek, a Stanford University professor.

Prof. Hanushek and a professor from the University of Munich have linked GDP growth with population-wide performance on standardized tests. They calculate that Portugal’s long-term rate of economic growth would be 1.5 percentage points higher if the country had the same test scores as super-educated Finland.


Education long was an afterthought here. “The southern countries like Portugal and Spain and the south of France and Italy, we have always had some problems related with education,” says António Nóvoa, a historian who is rector of the University of Lisbon. “That’s been like that since the 16th century.”

The repressive dictatorship that ruled Portugal from 1926 to 1974 had the idea “that people should not have ambition to be something different than what they were,” Mr. Nóvoa says. The result was widespread illiteracy and little formal schooling; just three years were compulsory. Huge leaps have been made since the 1970s, he says, but “it is not easy to change a history of five centuries.”

Portugal has just begun phasing in 12 years of required schooling; now, Portuguese can leave school after ninth grade. Many do. The government says it is racing ahead with reforms. Mr. Sócrates points to an initiative that gives students laptops and to a far-reaching project to rebuild dilapidated schoolhouses. Results last year show students improving on standardized tests.

But it is a long road. “We have accumulated years and years of ignorant people,” says Belmiro de Azevedo, a billionaire industrialist.

He described the system as calcified. The central administration wields tight control. Curricula are simultaneously undemanding and rigid. Dropout rates are high. Schools struggle to accommodate an influx of immigrants from Portugal’s former colonies in Africa, such as Angola and Guinea-Bissau.

A push to evaluate teachers triggered searing strikes and demonstrations in 2008, souring relations between powerful teachers’ unions and the government. The political life of education ministers is measured in months: since the dictatorship ended in 1974, there have been 27.

Yaroslav Trofimov/The Wall Street Journal

Many jobs such as this one in a shoe factory in Felgueiras, Portugal, have gone to Eastern European nations.


To the system’s critics, a fight that has developed over quasi-private schools is emblematic of what’s wrong. With budgets tight, the government has imposed deep cuts on schools that are at the margin of the state’s control—no matter that some are among the best.

The highway north of Lisbon rises gently out of the Tagus River’s estuary and cuts through valleys of pine and scrub and fields stained yellow by sweet clover. About 30 miles up, in the municipality of Torres Vedras, the population is spread thinly in tiny towns that dot roads meandering toward the ocean.

In one town, A Dos Cunhados, the local school isn’t run or owned by the government. It is managed by the Catholic Church, in an arrangement that dates to the end of the dictatorship, when the new Portuguese state found it didn’t have enough facilities.

At the school, Externato de Penafirme, as at 90 others with what are called “association contracts,” the state pays a management fee to a private entity, which broadly follows the state curriculum but hires its own teachers.

The deputy principal, Carlos Silva, once taught chemistry in the public school system. He was shuffled through four schools in four years. Frustrated, he quit and enrolled in a seminary. Afterward, as a priest, he asked his bishop about returning to the classroom, and was assigned to Externato de Penafirme.


Instead of being given teachers off a master list, Father Silva and other administrators of these quasi-private schools select their own. They adjust the curriculum, adding, for instance, more religious instruction. They set up teams of teachers responsible for students and try to rope back those prone to dropping out.

“We make an enormous effort to take them all to the end,” says a school administrator, José Mendes. Penafirme’s test scores put it in the top 15% of secondary schools nationwide. It is the best in Torres Vedras.

To their advocates, the privately run schools inject a needed dose of new thinking. “We have to keep a diversified system,” says Eduardo Marçal Grilo, a former education minister. If there’s a public and a private school in the same place, he says, “let’s see what is the best, and if the best is private, the state can close the public and support the private.”

But in November, the priests of Penafirme got a shock. Facing money problems—the government’s education budget is declining 11% this year—the education ministry said it would cut the sum it pays association-contract schools to €80,000 per class, from €114,000 on average. Father Silva says it spends €85,000 per class on salary and benefits alone.

To the current education minister, Isabel Alçada, directing scarce funds to private entities like Penafirme while regular public schools have grave needs “is not just.” What was once a program meant to fill gaps has turned into “competition,” she complains, in which private operators set up bus routes to lure students.

Faced with the cuts, students and parents organized. In December, 4,000 people held hands in a big ring around the Penafirme campus. The pictures hit television. A Facebook group sprang up. In January, students walked out of dozens of the privately run schools for three days. To dramatize a claim the cuts would mean the death of their schools, students and parents from 55 schools ferried mock coffins to Lisbon and put them on the median strip outside Ms. Alçada’s ministry.

Last month, the education ministry eased somewhat, agreeing to restore part of the lost funding for this semester.

Paulo Gonçalves, a Hewlett-Packard Co. corporate salesman who is president of the Penafirme parents’ association, says the détente was a victory, but more money is needed to keep quality high enough to prepare students for college. “If you earn a degree in Portugal, you earn more or less double those who don’t,” he says. “This is what I teach my kids.”

It’s particularly true with unemployment over 11%. “With the crisis, we have to go to university,” says Sophie Alves, a Penafirme senior who plans to study occupational therapy in college. With only a high-school diploma, “you can do nothing, just serve tables.”

With even less than that, prospects are bleaker still. Ms. Fernandes, the 22-year-old with an eighth-grade education, comes often to a school in Apelacão, where a tiny nonprofit called Project Leadership tries to coax young people back to class or help them get jobs.

Serafim Gomes, also 22, was there on a recent afternoon. He left school in eighth grade with the dream of becoming a professional soccer player. It didn’t pan out. Now he occasionally waits tables and hopes for better employment.

Marco Monteiro, who is 16, was recently kicked out of his regular school. Bad behavior, he says. He hoped to go back—”I don’t have enough school to find work,” he says—and then maybe get a job in the mall. Project Leadership’s director, António Embaló, complimented him on his mechanical skills.

Might he consider college, perhaps studying engineering?

“It’s never crossed my mind,” Mr. Monteiro says. “I don’t know anyone who went.”

Write to Charles Forelle at charles.forelle@wsj.com

source: http://online.wsj.com/article/SB10001424052748704076804576180522989644198.html

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