Today’s News 5th January 2016

• Playing The Government’s Game: When It Comes To Violence, We All Lose

  Submitted by John Whitehead via The Rutherford Institute,

  “When it gets down to having to use violence, then you are playing the system’s game. The establishment will irritate you – pull your beard, flick your face – to make you fight. Because once they’ve got you violent, then they know how to handle you. The only thing they don’t know how to handle is non-violence and humor.”

  – John Lennon

  Yes, the government is corrupt.

  Yes, the system is broken. By broken, I mean it’s “dysfunctional, gridlocked, and, in general, incapable of doing what needs to be done.”

  Yes, the government is out of control and overreaching on almost every front.

  Yes, the government’s excesses—pork barrel spending, endless wars, etc.—are pushing the nation to a breaking point.

  Yes, many Americans are afraid. Who wouldn’t be afraid of an increasingly violent and oppressive federal government?

  Yes, the citizenry has little protection against standing armies (domestic and military), invasive surveillance, marauding SWAT teams, an overwhelming government arsenal of assault vehicles and firepower, and a barrage of laws that criminalize everything from vegetable gardens to lemonade stands.

  Yes, in the eyes of the American surveillance state, “we the people” are little more than suspects and criminals to be monitored, policed, prosecuted and imprisoned. As former law professor John Baker, who has studied the growing problem of overcriminalization, noted, “There is no one in the United States over the age of 18 who cannot be indicted for some federal crime.”

  Yes, the United States of America is not the democracy that is purports to be, but rather an oligarchy ruled by a wealthy corporate elite.

  Yes, politics is a sham. Average Americans have largely lost all of the conventional markers of influencing government, whether through elections, petition, or protest, have no way to impact their government, no way to be heard, and no assurance that their concerns are truly being represented.

  Yes, the Obama administration’s efforts to identify, target and punish “domestic extremists” through the use of surveillance, corporate spies, global police and the Strong Cities network sends a troubling message to all Americans that any opposition to the government—no matter how benign—will be viewed with suspicion and will likely be treated with hostility.

  Yes, we have reached a tipping point. The freedoms we once enjoyed are increasingly being eroded: speech, assembly, association, privacy, etc.

  Yes, something needs to be done about the government’s long train of abuses, power grabs, erosion of private property, and overt acts of tyranny.

  Yes, many Americans, increasingly dissatisfied with the government and its heavy-handed tactics, are tired of being used and abused and are ready to say “enough is enough.”

  No, violence is not the answer.

  A handful of armed protesters are not going to fix what’s broken in the government by forcing a showdown with government agents. In fact, this kind of scenario plays right into the government’s hands by provoking a violent confrontation that allows government officials to sanctimoniously justify their use of surveillance, military weaponry and tactics, and laws criminalizing guns and hate speech in order to target anyone who even vaguely resembles an “anti-government extremist.”

  Take the latest spectacle in Oregon, for example.

  Armed activists led by brothers Ryan and Ammon Bundy have occupied a federal wildlife refuge. The Bundys (infamous for their 2014 standoff with the Bureau of Land Management over grazing rights on federal land in Nevada) are protesting the government’s prosecution of two ranchers, Dwight and Steven Hammond, who have been sentenced to five years in prison for allegedly setting back fires on government-owned land in Oregon. (Mind you, the government owns more than half the land in Oregon.)

  Few conflicts are ever black and white, and this situation involving the Bundys, the Hammonds and the BLM is no exception. Yet the issue is not whether the Hammonds are arsonists as the government claims, or whether the Bundys are anti-government extremists as the government claims, or even whether ranchers should have their access to government-owned lands regulated as the BLM claims.

  No, as I point out in my book Battlefield America: The War on the American People, the larger question at play here is who owns—or controls—the government: is it “we the people” or private corporations?

  Are American citizens shareholders of the government’s vast repositories, or are we merely serfs and tenant farmers in bondage to corporate overlords? Do we have a say in how the government is run, or are we merely on the receiving end of the government’s dictates? What recourse do we have if we don’t approve of the government’s actions?

  Almost every struggle between the citizenry and the government is, at its core, about whether we are masters or slaves in this constantly evolving relationship with the government.

  • Do parents have a right to allow their children to play outside alone, or must they abide by the government’s dictates about how to raise their families?

  • Do homeowners have a right to manage their private property as they see fit, whether it’s with solar panels, vegetable gardens or rain barrels, or must they first seek the permission of the government?

  • Do activists have a right to freely associate with one another, assemble in public, and voice their opinions publicly or privately, or must they be constrained by what the government and its corporate partners deem to be appropriate?

  • Do residents of a community have to obey whatever a police officer says, lawful or not, or do Americans have a right to resist an unlawful order without getting shot or arrested?

  It doesn’t matter what the issue is – whether it’s a rancher standing his ground over grazing rights, a minister jailed for holding a Bible study in his own home, or a community outraged over police shootings of unarmed citizens – these are the building blocks of a political powder keg.

  Much like the heated protests that arose after the police shootings in Ferguson and Baltimore, there’s a subtext to the Oregon incident that must not be ignored, and it is simply this: America is a pressure cooker with no steam valve, and things are about to blow.

  This is what happens when a parasitical government muzzles the citizenry, fences them in, herds them, brands them, whips them into submission, forces them to ante up the sweat of their brows while giving them little in return, and then provides them with little to no outlet for voicing their discontent.

  As psychologist Erich Fromm recognized in his insightful book, On Civil Disobedience: “If a man can only obey and not disobey, he is a slave; if he can only disobey and not obey, he is a rebel (not a revolutionary). He acts out of anger, disappointment, resentment, yet not in the name of a conviction or a principle.”

  Let me say it again: an armed occupation of a government property only plays right into the government’s hands and increases its power over the citizenry. Yet it speaks to a growing tension over how to bring about meaningful change when dealing with a government that refuses to listen to its citizens.

  This is what happens when people get desperate, when citizens lose hope, and when lawful, nonviolent alternatives appear pointless.

  Whether the parties involved are blameless or not, whether they’re using the wrong tactics or not, whether their agendas are selfless or not, this is the face of a nation undergoing a nervous breakdown on all fronts.

  Now all that remains is a spark, and it need not be a very big one, to set the whole powder keg aflame.

  The government has been anticipating and preparing for such an explosion for years. For example, in 2008, a U.S. Army War College report warned that the military must be prepared for a “violent, strategic dislocation inside the United States,” which could be provoked by “unforeseen economic collapse,” “purposeful domestic resistance,” “pervasive public health emergencies” or “loss of functioning political and legal order”—all related to dissent and protests over America’s economic and political disarray. Consequently, predicted the report, the “widespread civil violence would force the defense establishment to reorient priorities in extremis to defend basic domestic order and human security.”

  In 2009, the Department of Homeland Security (DHS) released two reports, one on “Rightwing Extremism,” which broadly defines rightwing extremists as individuals and groups “that are mainly antigovernment, rejecting federal authority in favor of state or local authority, or rejecting government authority entirely,” and one on “Leftwing Extremism,” which labeled environmental and animal rights activist groups as extremists.

  Incredibly, both reports use the words terrorist and extremist interchangeably.

  That same year, the DHS launched Operation Vigilant Eagle, which calls for surveillance of military veterans returning from Iraq and Afghanistan, characterizing them as extremists and potential domestic terrorist threats because they may be “disgruntled, disillusioned or suffering from the psychological effects of war.” These reports indicate that for the government, anyone seen as opposing the government—whether they’re Left, Right or somewhere in between—can be labeled an extremist. Under such a definition, John Lennon, Martin Luther King Jr., Patrick Henry, Thomas Jefferson and Samuel Adams—all of whom protested and passionately spoke out against government practices with which they disagreed—would be prime targets.

  Fast forward a few years, and you have the National Defense Authorization Act (NDAA), which President Obama has continually re-upped, that allows the military to take you out of your home, lock you up with no access to friends, family or the courts if you’re seen as an extremist. Now connect the dots, from the 2009 Extremism reports to the NDAA and the UN’s Strong Cities Network with its globalized police forces, the National Security Agency’s far-reaching surveillance networks, and fusion centers that collect and share surveillance data between local, state and federal police agencies.

  Add in tens of thousands of armed, surveillance drones that will soon blanket American skies, facial recognition technology that will identify and track you wherever you go and whatever you do. And then to complete the circle, toss in the real-time crime centers being deployed in cities across the country, which will be attempting to “predict” crimes and identify criminals before they happen based on widespread surveillance, complex mathematical algorithms and prognostication programs.

  Hopefully you’re getting the picture, which is how easy it is for the government to identify, label and target individuals as “extremist.”

  All that we have been subjected to in recent years—living under the shadow of NSA spying; motorists strip searched and anally probed on the side of the road; innocent Americans spied upon while going about their daily business in schools and stores; homeowners having their doors kicked in by militarized SWAT teams serving routine warrants—illustrates how the government deals with people it views as potential “extremists”: with heavy-handed tactics designed to intimidate the populace into submission and discourage anyone from stepping out of line or challenging the status quo.

  What we’re grappling with is a double standard in what the government metes out to the citizenry, and how the citizenry is supposed to treat the government.

  SWAT teams can crash through our doors without impunity, but if we dare to defend ourselves against unknown government assailants, we’ll be shot or jailed.

  Government agents can confiscate our homes, impound our cars and seize our bank accounts on the slightest suspicion of wrongdoing, but we’ll face jail time and fines for refusing to pay taxes in support of government programs with which we might disagree.

  Government spies can listen in on our phone calls, read our emails and text messages, track our movements, photograph our license plates, and even enter our biometric information into DNA databases, but those who dare to film potential police misconduct will likely get roughed up by the police, arrested, and charged with violating various and sundry crimes.

  This phenomenon is what philosopher Abraham Kaplan referred to as the law of the instrument, which essentially says that to a hammer, everything looks like a nail. In the scenario that has been playing out in recent years, we the citizenry have become the nails to be hammered by the government’s battalion of laws and law enforcers: its police officers, technicians, bureaucrats, spies, snitches, inspectors, accountants, etc.

  This is exactly what those who drafted the U.S. Constitution feared: that laws and law enforcers would be used as tools by a despotic government to wage war against the citizenry.

  That is exactly what we are witnessing today: a war against the American citizenry.

  Is it any wonder then that Americans are starting to resist?

  

  

  

  

  

• "It's Coming To A Head In 2016" – Why Bank of America Thinks The Probability Of A Chinese Crisis Is 100%

  Some sobering words about China’s imminent crisis, not from your friendly neighborhood doom and gloom village drunk, but from BofA’s China strategist David Cui.

  Excerpted from “2016 Year-Ahead: what may trigger financial instability“, a must-read report for anyone interested in learning how China’s epic stock market experiment ends.

  A case for financial instability
  

  It’s widely accepted that the best leading indicator of financial instability is rapid debt to GDP growth over a period of several years as it’s a strong sign of significant malinvestment. Based on Bank of International Settlement’s (BIS) private debt data and the financial instability episodes identified in “This time is different”, a book by Reinhart & Rogoff, we estimate that once a country grows its private debt to GDP ratio by over 40% within a period of four years, there is a 90% chance that it may run into financial system trouble (Table 1). The disturbance can be in the form of banking sector re-cap (with or without a credit crunch), sharp currency devaluation, high inflation, sovereign debt default or a combination of a few of these (Table 2).

  

   

  As Chart 1 demonstrates, China’s private debt to GDP ratio rose by 75% between 2009 and 2014 (i.e., since the Rmb4tr stimulus), by far the highest in the world (we suspect a significant portion of the debt growth in HK went to China). At the peak speed, over four years from 2009 to 2012, the ratio in China rose by 49%.

  

  Other than sovereign debt default, China has experienced all the other forms of financial instability since the open-door reform started in late 1970s, including a sharp currency devaluation in the early 1990s (Chart 3) and hyper-inflation in the late 1980s and early 1990s (Chart 4). China also needed to write-off bad debt and recap its banks every decade or so. Banking sector NPL reached some 40% in the late 1990s and early 2000s and the government had to strip off some 20% of GDP equivalent of bad debt from the banking system between 1999 and 2005.

  

  When debt problem gets too severe, a country can only solve it by devaluation (via the export channel), inflation (to make local currency debt worth less in real terms), writeoff/re-cap or default. We judge that China’s debt situation has probably passed the point of no-return and it will be difficult to grow out of the problem, particularly if the growth continues to be driven by debt-fueled investment in a weak-demand environment. We consider the most likely forms of financial instability that China may experience will be  a combination of RMB devaluation, debt write-off and banking sector re-cap and possibly high inflation. Given the sizeable and unstable shadow banking sector in China and the potential of capital flight, we also think the risk of a credit crunch developing in China is high.

  In our mind, the only uncertainty is timing and potential triggers of such instabilities.

  Why 2016 can be a dangerous year

  Since 2011, there had been a round of debate about the potential of hard landing and financial instability every year in the market. So far, the financial system has held up reasonably well, notwithstanding some periodic short term volatilities. Many view the absence of any severe disturbance as proof of the government’s ability to tame financial sector volatility and believe that the risk of this happening has diminished over time. We disagree. We believe that the government has maintained a superficial stability largely by debt-funded stimulus and an ever-greening of bad debts. These strengthened various implicit guarantees which have been generating destabilizing forces beneath the surface – a classic case of short term stability breeding long term instability. It’s our assessment that the longer this practice drags on, the higher the risk of financial system instability, and the more painful the ultimate fall-out will be.

  Whether the government intended for it or not, we summarize that investors and other market participants have been counting on five government guarantees over the years: 1) the government will prevent a sharp slowdown in GDP growth by running pro-growth macro policies, including fiscal stimulus; 2) up until about two years ago, the government would always appreciate RMB vs. the USD, at least moderately a year; and since then, the government will not allow a sharp devaluation of RMB; 3) since about 2014, the government will always support the A-share market; 4) the government will not allow major debt default; and 5) the government will always hold up the property market because it’s so essential to the financial system and local government income.

  In our view, so far these implicit guarantees have helped to maintain public confidence in the financial system or prevent investors from realizing the risks. However, as stated earlier, they are also creating powerful destabilizing forces. For example, the GDP growth guarantee means that the best strategy for many businesses over the past few years was to keep borrow and expand during any downturn, anticipating government stimulus; the RMB guarantee means that carry-trades designed to arbitrage interest rates and RMB appreciation became prevalent; the A-share market support prompted many investors to use leverage, counting on the government being the buyer of last resort; the no-default guarantee means many investors turned a blind eye to potential default risks (or simply not aware of them) and fund uneconomic projects; the property guarantee drove a significant portion of national savings into one of the most unproductive areas of the economy and the financial system has increasingly become a hostage to the property market via direct lending or through collaterals.

  The problem with this stability-maintaining strategy is that many of the goals are conflicting so maintaining all of them are logically irreconcilable. For example, the government have tried to hold up growth by pumping money into the system – China’s M2 growth has been among the fastest in the world since the global financial crisis (so in our view, debating about whether China should QE or not is beside the point).

  Moreover, if we properly account for local government borrowing, the government as a whole has probably been running fiscal deficit close to 10% of GDP a year over the past few years. With this type of macro policies, it’s difficult to see how RMB can stay stable and how debt growth can be controlled. Another example is that to hold up the A-share market, the government has borrowed from the PBoC and commercial banks. This may crowd out private lending and hurt growth, or accelerate money growth and hurt the RMB.

  It seems to us that the government’s policy options are rapidly narrowing – one only needs to look at how difficult it has been for the government to hold up GDP growth since mid-2014. A slow-down in economic growth is typically a prelude to financial sector instability. Putting it all together, it seems to us that many of these conflicts may come to a head in 2016.

  * * *

  There is much more in the full report, but here is the reco summary:

  We expect the key market theme in 2016 to be financial system instability as a few destabilizing forces seem to be coming to a head. We forecast HSCEI to decline by about 7% to around 9,000 (range for the year: 7,400-12,800), and SHCOMP, by about 27% to around 2,600 (range: 2,200-4,000), by 2016 YE. Our year-end targets had not factored in a credit crunch scenario because the timing of which is difficult to predict. Should it occur, we expect the indices to end below the low bounds, possibly substantially so.

  Just remember: if the Chinese government catches you selling, arrest, or far worse, awaits.

  

  

  

  

  

  

• The Tragicomedy Of Self-Defeating Monetary Policy

  Submitted by Michael Lebowitz via 720Global.com,

  “It’s self-defeating to use the wrong monetary policy.”  -Ben Bernanke

  • What is productivity?
  • The Federal Reserve’s flawed growth benchmark
  • Excessive monetary policy is crushing productivity
  • The prescription for sustainable, durable growth – productivity

  "Because it is unclear exactly why productivity growth has slowed recently, it is difficult to be confident about what it will do in the future”.  –Bill Dudley June 2015 

  The recent quote from Federal Reserve Bank of New York President and Vice-chairman of the Federal Open Market Committee, Bill Dudley, inspired us to write this article and explain what Mr. Dudley cannot; why productivity, the key driver of economic growth, is not only slowing but on the verge of declining. 

  Bill Dudley and the Federal Reserve (Fed), in their efforts to influence economic growth may have created a speculative and consumption driven environment that is crushing productivity growth. This article explains what productivity is, how productivity has suffered at the hands of poorly benchmarked Fed policies and why those in charge of monetary policy must change their views if America is to economically thrive once again.

  Productivity

  Productivity is a core economic concept which measures the amount of leverage an economy can generate from its 2 primary inputs, labor and capital. Without productivity, economic growth is purely reliant on the 2 inputs. Given the limited nature of both labor and capital, they cannot be depended upon to produce durable economic growth over long periods of time. Leveraging labor and capital, or becoming more productive, is a function of many factors including innovation, education and financial incentives. In “Innovation – Too much, or too little of a good thing?” we discussed why the plethora of new technologies in the marketplace, are not as productive, especially in the long term, as they may appear. True ground breaking innovation involves time, effort and significant capital and ingenuity. Therefore it is imperative to ask, as we do in this article, is the Fed doing their part and providing pro-innovation incentives?

  Labor

  Labor, or human capital, is largely a function of the demographic makeup of an economy and its employees’ skillset and knowledge base. In the short run, increasing labor productivity is difficult. Changes to skills training and education take time to enact and produce a meaningful effect. Similarly, changes in birth rate patterns require decades to influence an economy. Immigration policies are arguably much easier to amend to foster more immediate growth, but the likelihood of pro-immigration policies these days is not probable.

  Within the labor force, the biggest trend affecting current and future economic activity is the so called “silver tsunami”, or the aging of the baby boomers. This cohort of the population, ages 51 to 69 are beginning to retire. As this occurs, they tend to consume less, rely more on financial support from the rest of the population, and withdraw valuable skills and knowledge from the workforce. The outsized number of people in this demographic cohort makes this occurrence more economically damaging than usual. As an example, the old age dependency ratio, which measures the ratio of people aged greater than 65 to the working population ages 18-64, is expected to nearly double by the year 2035 (Census Bureau).

  While the implications of changes in demographics and the workforce composition are numerous, they only require one vital point of emphasis: the significant economic contributions attributable to the baby boomers from the last 30+ years will diminish from here forward. As they contribute less, they will also require a higher allotment of financial support, becoming more dependent on younger workers.

  Capital

  Capital includes natural, man-made and financial resources. Over the past 30+ years, the U.S. economy benefited from significant capital growth, in particular debt. The growth in debt outstanding, a big component of capital, is shown (black line) in the graph below. The increase is stark when compared to the relatively modest level of economic activity that accompanied it (green line). The red arrows highlight the exponential rise in the ratio of debt to economic growth.

  Total Domestic Outstanding Credit vs. U.S. GDP

  

   

  This divergence in debt and economic growth is a result of many consecutive years of borrowing funds for consumptive purposes and the misallocation of capital, both of which are largely unproductive endeavors. In hindsight we know these actions were unproductive as highlighted by the steadily rising debt to GDP ratio shown above. The graph below tells the same story in a different manner, plotting the amount of debt required to generate $1 of economic growth. 

  Debt Required for Economic Growth

  

  Productivity

  Since 1980, the long term average growth rate of productivity has stagnated in a range of 0 to 2% annually, a sharp decline from the 30 years following WWII when productivity growth averaged 4%. The most recent productivity report from the San Francisco Federal Reserve shows an annualized decline of .06% versus the prior year. (http://www.frbsf.org/economic-research/indicators-data/total-factor-prod…)

  The graph below plots 10 year average productivity growth (black line) against the ratio of total U.S. credit outstanding to GDP (green line). 

  Debt to GDP Ratio vs 10yr Average Productivity Growth

  

  Within the graph, note the comparatively weak rate of productivity growth since 1980 and, more importantly, the trend towards zero productivity growth over the last 10 years. Additionally, productivity stagnation started as the debt to GDP ratio started climbing at a faster pace. This graph reinforces the message from the other debt related graphs – over the last 30 years the economy has relied more upon debt growth and less on productivity to generate economic activity.

  Given the finite ability to service capital and aforementioned demographic challenges, future economic growth, if we are to have it, will need to be based largely on gains in productivity as reliance on debt and demographics has largely run its course.

   

  The Fed’s Questionable Growth Target

  Throughout the last 30 years the Fed has become increasingly proactive in incentivizing economic growth towards their target – the potential economic growth rate. Unfortunately, the Fed’s measure of potential growth rate may be flawed leading to harmful consequences.

  To better explain potential growth we quote from an article entitled What Is Potential GDP and Why Does It Matter? Authored by William T. Gavin, Vice President and Economist at the St. Louis Federal Reserve. In the article, Mr. Gavin addresses how the Fed arrives at the potential growth rate as follows: “Instead, they estimate potential GDP by constructing measures of the trend in actual GDP that smooth out business cycle fluctuations”. This concept of relying on prior trends versus future potential is vital to grasp. From the same, article Mr. Gavin further explains: “But why does potential GDP matter? How do we use it? Potential GDP is important because monetary policymakers use the difference between actual and potential GDP—the output gap—to determine whether the economy needs more or less monetary stimulus”.

  Said differently, the decisions on how to employ monetary policy are based on a comparison of historical and current economic growth. This method ignores potential changes in growth factors that may cause GDP to deviate from the past.

  The graph below shows 7 year averages of the Fed’s potential economic growth vs. actual growth to show the simplicity of the Fed’s potential GDP forecast. Not surprisingly forecasted GDP growth for the next 10 years follows the economic growth trend of the last 10 years.

  Potential GDP vs Actual GDP

  

  Unfortunately, one must understand that potential GDP, as measured by the Fed, is not fully factoring in the limited ability to continue to increase debt loads, the demographic headwinds and the fact that productivity growth could likely be negative in the years ahead. The Fed’s measure of potential economic growth is solely a function of past activity and the different environment that produced it.

  To better explain the problems of following a faulty trend we compare 2 trends based on baseball legend Barry Bonds career statistics. During Bond’s peak playing years from ages 24 to 35 he posted outstanding statistics which likely would have earned him a seat in Cooperstown. Bonds batting average was consistently .300 or above, as seen below, and he averaged 36 home runs per year during those years. Following his peak years, when most players’ performance drops considerably, Bonds somehow got even better. From ages 36 to 40 his batting average and home run production exploded. During this time frame, Bonds averaged 51 home runs per year. This included his 2001 campaign when he hit 73 home runs, topping Mark McGwire’s then 3 year old record of 70 homeruns and shattering what had been the previous record, Roger Maris’ 61 homeruns in 1961.  

  Barry Bonds Batting Average

  

  As we now know, this incredible feat was not based entirely on his natural potential but was greatly aided by a new factor, steroids. The red and green lines above show 2 potential trend lines that could be used to summarize his performance. The red line represents Bond’s relative consistency during a typical professional players’ peak years. The green line shows the effect that steroids had on boosting performance and extending his career, or the deviation from typical potential. The gap between the trend lines is significant and could easily lead one, unaware of the new factor, to arrive at vastly different conclusions i.e. that Bonds had found some secret to increasing his productivity at a time when the typical player of similar age was declining or retired.   

  Basis for Monetary Policy

  Fortunately, monetary policy is not based off tainted baseball statistics. However, like in the Bonds example, there are new and changing factors in an economy that alter its potential growth rate. By failing to consider these factors and how such factors could alter their benchmark, the Fed runs the severe risk of conducting inappropriate monetary policy.

  The following graph illustrates how an erroneous potential growth rate would greatly change the Fed’s perception. Assume the true annual potential growth rate since 2000 was 0.50% less than the official Fed potential growth rate. Under this reasonable scenario, economic growth as measured by GDP (red) would have exceeded the hypothetical potential growth rate for 4 consecutive years prior to the financial crisis of 2008/09 and again over the last 3 years. When actual growth is above the “true” potential of an economy, the economy is pulling forward consumption from the future. When the future comes consumption needs have already been met and slower growth is inevitable. 

  Potential GDP, Actual GDP and Proxy Potential GDP

  

  Let us now consider that economic growth has failed to reach the Fed’s measure of potential GDP (blue line) since 2007. This is despite unprecedented stimulus in the form of a zero interest rate policy and the quadrupling of the money supply. One must question whether or not the target is correct. Maybe the so called “new normal” sluggish economic growth is the economy’s real potential and not the higher growth rate of years past. 

  We believe the potential growth rate is less than that which is targeted by the Fed. To what extent, is unclear. The widely followed Taylor Rule supports our analysis, to some degree, as it currently shows a glaring discrepancy between the current Fed Funds rate (.25-.50%) and that prescribed by the rule (2.92%). If the Taylor Rule and our thesis are correct, the potential growth rate of the U.S. economy may be much lower than the Fed thinks, and therefore monetary policy is not just “accommodative”, as described by Chairwoman Janet Yellen, but egregiously excessive.

  The Fed, by chasing an erroneous GDP growth target may have generated economic growth beyond that which would have otherwise been produced by keeping interest rates too low for too long and performing multiple rounds of quantitative easing. These actions increased the Fed’s measure of potential growth, creating a vicious cycle in which they repeatedly over-stimulate to meet an erroneous target. As this continually occurs, the gap between true potential and the Fed’s measure widen, leading to larger and larger policy errors.

   

  Excessive Stimulus is Crushing Productivity

  Worse yet, Fed monetary policy used to promote economic growth relies upon changes in interest rates and money supply to increase debt and drive consumption. Lower interest rates and QE have also spurred a strong preference for speculative investments, such as stocks, real-estate, and junk bonds, at the cost of productivity generating investments. Recent bubbles in technology, real estate, and stock valuations, to name a few, are signs of the speculative fever the Fed’s actions enabled. Low interest rates have also encouraged corporations to use valuable assets or borrowed funds to buy back stock instead of investing in growth-enhancing innovation. Globally, low rates in the U.S. led many investors to borrow in dollars to fund questionable projects over-seas.  In other words, trillions in capital has been misallocated with little benefit to productivity growth. While such actions may have caused one-time increases to GDP, they are neither producing sustainable economic gains nor has the debt incurred been paid down.

  If we are correct and the Fed is overestimating the potential growth rate, then by default they are also applying excessive stimulus to the economy.

   

  Prescription for Real Growth

  There are many reasons productivity growth has stagnated, and the Fed is certainly not solely responsible. Yet Fed officials, as witnessed by Mr. Dudley’s comments, treat productivity as an uncontrollable residual of capital and labor. They would be well-advised to take a different tack and use their enormous power to have a positive effect on productivity. Without productivity growth, economic growth in the future will be extremely limited as capital and labor cannot contribute nearly as much as they have in the past.

  The Fed, along with government, needs to properly incent productivity. The Fed should start this arduous task by removing excessive stimulus which will take the speculative fervor out of markets and allow asset bubbles to deflate. Although painful in the short term, it will allow capital to flow to more economically, productive uses that have been starved of capital. Congress, for their part, should reconsider current Fed mandates and discuss means in which the Fed can incent productivity growth.

  Ingenuity, not debt, made America an economic powerhouse. If we are to resume down that path we need the Fed to end their “self-defeating” policies and in its place we must demand ingenuity from them.

  

  

  

  

  

• Some Canadians May Eat Themselves To Death Unless Oil Prices Rise, Doctor Warns

  Late last month in “This Is Canada’s Depression: Surging Crime, Soaring Suicides, Overwhelmed Food Banks ‘And The Worst Is Yet To Come,’” we took a sweeping look at what is truly pitiable situation in Alberta, the heart of the Canadian oil patch.

  Roughly a third of provincial revenue is derived from “resources” which means that when oil prices collapsed, the territory plunged into recession. Oil and gas investment fell by more than a third in in 2015 and in its latest fiscal update, the government said it fully expects the weakness to carry into 2016.

  Going into December, Canada was expected to lose as many as 100,000 oil and gas sector jobs in 2015. As the following chart from Bloomberg clearly demonstrates, the pain is especially acute in Calgary:

  

  Needless to say, that kind of economic malaise has very real societal consequences.

  In Alberta for instance, suicides were up 30% through June while violent crime is soaring. Property crime in Calgary, for example, rose nearly 40% during the first quarter.

  Food bank use in the province jumped more than 23% in March (the last month for which there’s data) and repo men say business is booming as Canadians struggle to make car payments amid the downturn.

  Now, some medical professionals warn that the fallout from crude’s historic plunge may well drive Albertans to eat themselves to death. “Alberta’s oil slump could have heavy, and unanticipated health consequences, experts are warning: a jump in obesity rates,” the National Post writes, adding that “the sudden shock of job loss, debt and unemployment can trigger stress-related physiological responses that cause the body to store fat, slow the rate it burns calories and increase cravings for high-fat, calorie-loaded ‘comfort foods.'”

  “As medical professionals, we need to acknowledge that unemployment and the worries that come with it can make our patients susceptible to weight gain,” warns Dr. Arya Sharma, professor and chair of obesity research and management at the University of Alberta. Here’s more from Sharma’s recent blog post entitled “Will Low Oil Prices Lead To An Obesity Spike In Alberta?”:

  According to the Alberta economic dashboard, in October 2015, Alberta’s seasonally adjusted unemployment rate was 6.6%, up from the 4.4% rate a year earlier and from last month’s 6.5% rate. The youth unemployment rate was 11.6%, up from last year’s 9.0% rate, while male unemployment increased precipitously from 3.6% last October to 7.3% this year.

   

  As no one seems to be expecting a rosier future for this industry, it may well be that many who lost their jobs in the wake of mass oil patch

  layoffs, will find the coming months (not to mention the festive season) both economically and emotionally challenging.

   

  According to this report, suicide rates from January to June in Alberta this year are up 30% compared to the same period in 2014.

  One challenge that may escape notice is the fact that this situation may also lead to significant weight gain in those affected.

   

  Depression, anxiety, food insecurity, insomnia and simply being unable to afford healthy food are all important risk factors for weight gain.

  Indeed it is hard to imagine how going from a high-paying job to being unemployed with little immediate hope of recovery will affect families.

  As The Post goes on to note, ” studies show that during the 2008 global financial meltdown families forced to cut back on food spending switched to cheaper, processed foods high in sugar and saturated fats [with] the hardest hit reducing their consumption of fruits and vegetables by as much as 20 per cent.” To add insult to injury, “many in Alberta are losing their jobs just as healthy food becomes even pricier: The dollar’s plunge and California drought led to a sharp rise in the prices of many fruits and vegetables in 2015, and University of Guelph researchers, in their annual Food Price Report, predict prices will increase in 2016 by up to 4.5 per cent — meaning the average household will spend $345 more than in 2015 for the same food, according to a university release.”

  So in Alberta it’s “feast or famine” in the most literal sense of the phrase as those who can still afford to buy food will drown their sorrows in cheap lunch meat and off-brand ice cream while the most hard hit members of society are forced to tap increasingly overwhelmed food banks. 

  “One Australian study found those hit hard in the last global recession had a 20-per-cent higher risk of becoming obese than those who escaped the worst of the slowdown,” The Post recounts before noting that “already, nearly six out of 10 Albertans are overweight or obese.” Here’s the official data from the Health Quality Council of Alberta:

  

  So quick Saudi Arabia, stop being so obstinate and cut production.

  You’ve already destroyed Alberta’s economy, do you want it to eat itself to death too?

  

  

  

  

  

• After Tumbling At Open, Chinese Stocks Erase All Losses

  It's a miracle…

   

  SHANGHAI COMPOSITE INDEX SET TO OPEN DOWN 3% … 20 Minutes later… SHANGHAI COMPOSITE INDEX ERASES LOSS, RISING 0.3%

  — zerohedge (@zerohedge) January 5, 2016

   

  "Someone" stepped in and bid the entire Chinese market higher off its huge opening gap down…

  

   

  Despite the biggest liquidity injection (CNY130bn) in 4 months, it appears Kyle Bass' top trade remains well on target as Offshore Yuan plunges, underperforming Onshore Yuan despite the largest Fix devaluation in two months. In a word – it's chaos in Chinese markets. The Shanghai Composite looks to be opening down 3% – extending yesterday's losses (beyond the US session's ADR's move). What a mess.

   

  First: PBOC devalues the Yuan fix by the most in 2 months…

  

   

  Offshore Yuan continues to collapse and remains over 1000 pips cheap to onshore Yuan…

  

   

  Despite the biggest liquidity injection in 4 months

  The People’s Bank of China will inject 130b yuan into the banking system using 7-day reverse repurchase agreements today, according to two traders at primary dealers required to bid at the auctions.

   

  Amount injected in operation today is most since Sept. 8

  and all of this has left Chinese stocks plunging….

  

   

  China better start arresting malicious sellers stat

  — zerohedge (@zerohedge) January 5, 2016

  Charts: Bloomberg

  

  

  

  

  

• With A Straight Face, US Government "Finds" Number Of Retiring 20-24 Year-Olds Has Doubled

  Earlier today we reported that when it comes to one of the most important data series that feed directly into the US GDP calculation, namely construction spending, the US government admitted it had literally made up numbers for the past 10 years. The phrase used was “processing error”:

  In the November 2015 press release, monthly and annual estimates for private residential, total private, total residential and total construction spending for January 2005 through October 2015 have been revised to correct a processing error in the tabulation of data on private residential improvement spending.

  A processing error that lasted for 10 years? And one which, mysteriously, ended up boosting both the construction spending “data” in 2015 and, as a result, the GDP?

  Odd coincidence, that.

  But nothing compares to the latest farce released recently by the Bureau of Labor Statistics, the same guys whom we caught fabricating jobs data back in September 2013.

  As everyone knows, one of the biggest question marks surrounding the US labor market is the 95 million of Americans not in the labor force, resulting in the lowest labor force participation rate since the mid-1970s.

  

   

  The answer to this question is critical because it would explain why despite “5% unemployment”, wages in the US stubbornly refuse to rise 7 years after the recession “ended” even as a record number of Americans aged 55 and over have jobs (mostly of the low-paying variety).

  Of course, the logical explanation is that due to various generous welfare state support nets, due to “disability” and due to $1.3 trillion in student loans, tens of millions of Americans of all ages have found other options: whether to stay in school for decades, to collect various forms of welfare, or simply because millions have given up trying to find a job since the labor market is not anywhere nearly as strong as the government would like to make it appear (especially after a few hundred thousands US workers lose their jobs after the $5 trillion in global M&A “synergies” hits in 2016), and have dropped out of the labor force entirely.

  But, in these trying times, logic does not make sense. So a few months ago, the Atlanta Fed tried to answer this question. Its answer: the labor force is plunging because people simply “don’t want a job.” No really:

  The decrease in labor force participation among prime-age individuals has been driven mostly by the share who say they currently don’t want a job. As of December 2014, prime-age labor force participation was 2.4 percentage points below its prerecession average. Of that, 0.5 percentage point is accounted for by a higher share who indicate they currently want a job; 2 percentage points can be attributed to a higher share who say they currently don’t want a job.

  That “explanation” did not fly with the goalseeking statisticians manning the Arima-X-12 seasonal adjustment vacuum tubes at the BLS, so, as Bloomberg reports, in a new Bureau of Labor Statistics report, these same career economists tired to provide fresh answers to this critical question.

  And here we cross in the twilight zone, because while fabricating numbers is one thing, engaging in absolute lunacy as a form of scientific inquiry is a bridge we did not think even the BLS would dare cross. we were wrong.

  Here’s Bloomberg’s summary of what the bureau found, broadly: Thirty-five percent of the U.S. population wasn’t in the labor force in 2014, up from 31.3 percent a decade earlier. (You’re considered out of the workforce if you don’t have a job and aren’t looking for one. That’s distinct from the official unemployment rate, which tracks those out of work who are actively job hunting.)

  Drilling down into the numbers reveals more about the shifts in the reasons some people forego a paycheck. In all age groups, for instance, more people cited retirement as the reason for being out of the labor force, and it wasn’t just older people.

  So far so good: who knows if this is true or not, but since it is a “scientific” study it probably can be replicated. Unfortunately, not in this case, because here was the punchline:

  For Americans between the ages of 20 and 24, the share of those sidelined over the past decade because they were in school increased, unsurprisingly, during the decade that included the Great Recession. What’s more unusual is that the share of 20- to 24-year-olds who say they’re retired doubled from 2004 to 2014.

   

  
  

  At this point we stopped reading for one simple reason: the fact that a “scientific” study can “find” that the number of 20-24 who have retired has doubled, shows that those conducting said experiment were simply said lunatics who had set up their experiment and null hypothesis incorrectly, had asked all the wrong questions, and worst of all, given themselves a “sanity check” and passed with flying colors despite something as glaring as this “finding.”

  What is most troubling is that these are the same economists in charge of “creating” seasonally adjusted, statistically relevant and completely fabricated job number which drive the market month after month. And then, when the bottom falls out of the economy, these same people will at their data and, like with the construction spending numbers, admit it was all a fraud.

  And sadly, this takes place every cycle: goalseeked, smoothed garbage data on the way up, then once the bullshit overflows and reality can no longer mask the underlying lies, everything falls apart, and back to square one we go.

  We can only hope that we are much closer to the end of this particular cycle, of both business and epic stupidity, one in which waiters, bartenders, and minimum-wage salespeople, or rather figments of a statistician’s imagination, are the forefront of the so-called US “recovery.”

  

  

  

  

  

  

• "Refuse To Compromise", Ron Paul Implores "Purism Is Practical"

  Submitted by Ron Paul via The Ron Paul Institute for Peace & Prosperity,

  Those who advocate ending, instead of reforming, the welfare-warfare state are often accused of being “impractical.” Some of the harshest criticisms come from libertarians who claim that advocates of “purism” forgo opportunities to make real progress toward restoring liberty. These critics fail to grasp the numerous reasons why it is crucial for libertarians to consistently and vigorously advance the purist position.

  First, and most important, those who know the truth have a moral obligation to speak the truth. People who understand the need for drastic changes in foreign, domestic, and, especially, monetary policy should not pretend that a little tinkering will fix our problems. Those who do so are just as guilty of lying to the public as is a promise-breaking politician. Attempting to advance liberty by lying is not just immoral; it is also a flawed strategy that is doomed to fail.

  The inevitable failure of “reforms” that do not eliminate the market distortions caused by government intervention will be used to discredit both the freedom philosophy and its advocates. The result will be increased support for more welfare, more warfare, and more fiat money. Thus, those who avoid discussing the root causes of our problems, not those they smear as impractical purists, are the ones undermining liberty.

  For example, many Obamacare opponents refuse to advocate for true free-market health care. Instead, they propose various forms of “Obamacare lite.” By ceding the premise that government should play a major role in health care, proponents of Obamacare lite strengthen the position of those who say the way to fix Obamacare is by giving government more power. Thus, Obamacare lite supporters are inadvertently advancing the cause of socialized medicine. The only way to ensure that Obamacare is not replaced by something worse is to unapologetically promote true free-market health care.

  This is not to suggest libertarians should reject transitional measures. A gradual transition is the best way to achieve liberty without causing massive social and economic disruptions. However, we must only settle for compromises that actually move us in the right direction. So we should reject a compromise budget that “only” increases spending by 80 percent. In contrast, a budget that actually reduces spending by 20 percent would be a positive step forward.

  Those who advocate a so-called extreme position can often move the center of political debate closer to the pure libertarian position. This can actually increase the likelihood of taking real, if small, steps toward liberty. More importantly, the best way to ensure that we never achieve real liberty is for libertarians to shy away from making the case for the free society.

  Sometimes ideological movements are able to turn yesterday’s “fringe” ideas into today’s “mainstream” position. Just a few years ago it was inconceivable that a significant number of states would legalize medical, and even reactional, marijuana or that a majority of states would have passed laws allowing citizens to openly carry firearms. The success of these issues is not due to sudden changes in public opinion, but to years of hard work by principled advocates and activists.

  The ever-growing number of Americans who are joining the liberty movement are not interested in “reforming” the welfare-warfare state. They also have no interest in “fixing" the Federal Reserve via “rules-based” monetary policy. Instead, this movement is dedicated to auditing, then ending, the Fed and stopping the government from trying to run the economy, run the world, and run our lives. If this movement refuses to compromise its principles, we may succeed in restoring a society of liberty, peace, and prosperity in our lifetimes.

  

  

  

  

  

• Is 2016 The Year Of The Dollar Collapse?

  Submitted by Simon Black via SovereignMan.com,

  On September 4, 1993, President Bill Clinton spoke about the American Dream in a weekly radio address.

  He told his audience that “in America, the idea is that if you work hard and play by the rules, you’ll be rewarded with a good life for yourself and a better chance for your children.”

  That’s what America used to stand for, and indeed much of the Western world. Freedom. Truth. Hard work and fair play. Building a better life.

  But those ideals have all but faded now, displaced by a new normal of war, debt, government surveillance, freedom-killing bureaucracy, and a monetary policy that decimates responsible, hard-working people for the benefit of a tiny elite.

  In his end-of-year commentary in the Washington Post, writer George Will summed up 2015 citing example after example of government overreach and excess–

  • The value of property seized by the US federal government through Civil Asset Forfeiture exceeded the value of property stolen by burglars and thieves
  • Florida police raided a Mahjong game played by four women aged 87 through 95 because they were *gasp* betting with their own money
  • New Jersey police arrested a 72-year old retired schoolteacher for illegally carrying a firearm– a 300-year old flintlock pistol he had purchased from an antique dealer
  • A 9-year old in Florida was threatened with sexual harassment charges for writing love notes to a girl saying that her eyes sparkled like diamonds

  George Will’s list, of course, barely scratched the surface of the tip of the iceberg.

  2015 was the year that the middle class was officially vanquished in the Land of the Free, with its share of the population falling to just 50%.

  US federal debt reached nearly $19 trillion in 2015, an increase of almost $750 billion during the calendar year.

  The US government published over 80,000 pages of new regulations, making it nearly impossible to understand ‘the rules’, let alone play by them.

  2015 also saw the passing of incomprehensibly terrible laws, including the USA Freedom Act, which restored many of the worst parts of the PATRIOT Act that were set to expire.

  Then there was the Cybersecurity Information Sharing Act, passed at the end of the year, which officially turns the Land of the Free into a gigantic information-sharing surveillance state.

  And of course the 2015 spending bill, which as of 3 days ago, allows the US government to strip you of your passport if they believe in their sole discretion that you owe them money.

  These are hardly the actions of a solvent, trustworthy government, or a nation that’s on the right track.

  It doesn’t take a rocket scientist to figure out that this story doesn’t have a happy ending.

  We can pretend that this time is different, that this country is different, that there is some special sauce that allows this government to run massive imbalances forever.

  But deep down we all know the truth… and where this is headed.

  I’ve read no shortage of apocalyptic predictions suggesting that 2016 is the year of the dollar collapse. Or the global economic collapse.

  Or something else that invariably ends in the word ‘collapse.’

  I don’t believe that. First, no one can credibly answer the question “when?”

  Governments have surprised us all with their uncanny ability to kick the can down the road and delay the repercussions of their folly.

  But I don’t really think the question of ‘when’ is relevant.

  Nearly every major western government is insolvent. Entire monetary and financial systems are insolvent.

  Governments have destroyed their own middle classes, giving rise to the greatest wealth gap that has existed since the Great Depression.

  The risks are obvious. And you either stick your head in the sand and ignore them, or you take steps to reduce their impact on your life.

  It’s like anything else – if you live in a wildfire zone, you get fire insurance. And you’ll never be worse off for having good coverage on your home to protect your family.

  Having a Plan B just makes sense, regardless of whether a major disaster occurs in 2016, next year, or never.

  We can’t see the future, we can only see the risks today. Develop a Plan B that addresses those risks, and you’ll never have to worry about the future again.

  

  

  

  

  

• Montel Williams Calls For "Shoot To Kill" In Oregon Showdown; Militiamen Respond They Are "Ready To Fight"

  In the latest development in the ongoing saga of Ammon Bundy’s seizure of a Federal wildlife reuge office in Oregon, the members of the militia said they’re ready to fight, but they won’t say what they would actually do if federal authorities try to remove them by force as reported in the clip below.

   

  However, while we noted the shortcomings in Bundy’s latest standoff last night, what is even more notable is that as Shepard Ambellas of Intellihub points out, Montel Williams he tweeted that the National Guard should be mobilized to “kill” protesters who have currently overtaken the federal building in Burns, Oregon.

  Then let’s give them some – put this down using National Guard with shoot to kill orders. https://t.co/KSzUZzUor6

  — Montel Williams (@Montel_Williams) January 3, 2016

  Moreover USA Today has reported that “militia members used the ranchers as a ruse,” in what I and others feel may be the planed catalyst to start a civil war in America.

  Monday, Rick Jervis wrote:

  The Oregon sheriff whose county is at the heart of an anti-government call-to-arms said Sunday the group occupying a national wildlife refuge came to town under false pretenses.

   

  Sheriff David Ward said protesters came to Harney County, in southeastern Oregon, “claiming to be part of militia groups supporting local ranchers.” In reality, he said, “these men had alternative motives to attempt to overthrow the county and federal government in hopes to spark a movement across the United States.”

   

  In a statement issued Sunday afternoon, Ward said he was working with local and federal authorities to resolve the situation as quickly and peacefully as possible.

  Intellihub adds that its staff has identified a few suspicious individuals who claim to stand with the militants which may attempt to provocateur, escalate, the situation further. As we noted last night, this also is a distinct possibility.

  Finally, in an interesting tangent, the WaPo, which admits that there “are gun rights issues, religious overtones, broad strains of anti-government sentiment and even the tactics of the Occupy Wall Street movement” as underlying motives behind the seizure, focuses on “very particular question of how much land the government controls in the state — the same question that animated the dispute with rancher Cliven Bundy in Nevada two years ago — and that helped motivate Bundy’s son Ammon to take a lead role in the Oregon standoff.”

  It then provides several charts, alongside the following analysis, to show this curious aspect of what may be the core motive behind Bundy’s actions. To wit:

  More than half of Oregon is owned by the federal government, with a large percentage of that land owned by the Bureau of Land Management — an agency widely reviled in the West and known by its acronym, BLM. (Ammon Bundy was forced to clarify on Twitter that his use of “BLM” didn’t refer to the Black Lives Matter movement.) Data from the U.S. Geological Survey shows the amount of federal land in the state.

  

  (This map and the ones below only show areas of 600 or more acres held by the government.)

  The takeover occurred near Malheur Lake, at a building that’s part of the Malheur National Wildlife Refuge. That lake is at the upper center of the BLM’s map of the surrounding area, which shows just how much is controlled by the government. (The original protests over the Hammonds’ sentencing began in Burns, Ore.)

  

  Part of the issue is that there isn’t much population in the eastern part of the state. Mapping Oregon’s population, you can see Portland and a corridor near the coast, which is about it. The area around the wildlife refuge has almost no population.

  

  There’s a historic link between population and federal land ownership. In 2012, the Congressional Research Service looked at the history of tensions between the government and the population out West — particularly ranchers and farmers who, like the Hammonds and Bundys, use federal land for grazing and other purposes.

  Early in the history of the country, the government took over land that was then distributed to citizens for farming and economic growth. As the United States expanded westward, the land was increasingly inhospitable, including the Rockies and the deserts of Nevada and Utah. By the end of the 19th century, a new focus was placed on conserving the land, with Yellowstone becoming the first national park in 1872. At that point, very few people lived in the area, as this 1890 Census Bureau map suggests.

  

  Over the course of the 20th century, the government’s emphasis shifted away from releasing the land to private citizens and toward managing it itself. The passage of 1976’s Federal Land Policy and Management Act made that policy concrete, keeping the land as the property of the government. After the federal government’s shift, there was a push from some in the West, including governors and members of Congress, to shift control from the federal to the state or local government. The Sagebrush Rebellion, as it was known, tapered off during the relative friendly administration of Ronald Reagan.

  

  The longstanding political and legal dispute was summarized in more depth by the conservative Heritage Foundation, but the Congressional Research Service makes one additional point that’s important to consider.

  “From the earliest days,” the CRS researchers write, “these policy views took on East/West overtones, with easterners more likely to view the lands as national public property, and westerners more likely to view the lands as necessary for local use and development.”

  That’s one reason for the objection from Westerners. The other is that the lock-down on the land came after the East was heavily settled but before the West had been. In the East, land was turned over to farmers. In the West, settled later in the country’s history, there were fewer people to hand it to.

  Compare the Dakotas to Oregon, for example. In 1910, here’s how the population was distributed. Even the Dakotas had pockets of population.

  

  It’s still sparsely populated.

  

  But very little of the land is federal.

  

  On that 1910 map, notice that Nevada has very little population — thanks in part to its landscape being even less hospitable than the Dakotas. Its population is still small, save Reno and Las Vegas.

  

  The vast majority of the land — including the land around the Bundy ranch — is owned by the government to this day.

  

  The conclusion: “The fight isn’t new, as the Congressional Research Service report notes. What’s new is the way in which the broader political moment has cross-pollinated with longstanding objections to how the government manages land out West. The takeover in Oregon has its roots in the Sagebrush Rebellion. They way it’s being manifested, though, is as modern as it gets.”

  * * *

  It remains to be seen if the National Guard will take up Montel on his “shoot to kill” advice.

  

  

  

  

• Gold: The Unsurance Policy – Love It Or Loathe It

  Grant Williams, Of Things That May You Go Hhhmm, gave the following presentation at Mines & Money in London in early December laying out why he believes the gold price is languishing despite a wealth of what would ordinarily be positive catalysts. Currently, outside those who focus on precious metals, there is an enormous amount of apathy but, we suspect, that apathy will shortly turn to enthusiasm – an enthusiasm which will expose the rift between paper prices set in NY and the structural changes undergone in the physical markets over the last several years. Still, outside of today's small move, for now… Nobody Cares.

   

  Gold: The Unsurance Policy

   

   

  Read more at ttmygh.com

  

  

  

  

  

• This Is A Very Troubling Chart

  The chart below, showing the total number of monthly FBI firearm background checks – a direct proxy for gun purchases in the U.S., needs no commentary.

  

   

  Here is the same data, on a monthly basis to avoid the seasonal noise. No matter how one looks at it though, the 3.3 million background checks in December was a record high.

  

   

  Neither of these are the “troubling chart” referenced in the title. This one shown below is, and it comes courtesy of the NYT:

  

   

  The chart shows that while the soaring gun sales are the effect, the cause is simple: president Obama.

  The same president who tomorrow at 11:40am will finally reveal just what, after many delays, his executive action(s) on gun control will be.

  The concern is that with one more year under Obama’s term, gun sales over the next 12 months are certain to surge to new all time highs as Obama’s crusade to crush the second amendment slowly picks up steam in order to cement his “anti-gun” legacy, and as the population rushes to buy as many as it can before Obama makes such purchases illegal.

  It’s not all bad news though: gun makers could not have asked for a better president, as the following headline just confirmed:

  • SMITH & WESSON SEES 3Q ADJ. EPS 39C-41C, SAW 27C-29C

  As of this moment Smith and Wesson is trading at an all time high.

  

  

  

  

  

• China Day 1: Monumental Destruction

  Submitted by Salil Mehta via Statistical Ideas blog,

  China's Shanghai Composite index was stopped down nearly 7% on the first trading day of the new year.  This is worse than 99.6% of all trading days since the beginning of 2007 (a monstrous era covering the entire market turmoil of the global financial crisis).

   

  To put some risk context behind how poor a ~7% drop is -in relation to the worst losses over different time (not just relative to all daily changes)- we look at a variety of time units.  This is different from the market convolution math discussed previously (here, here).  For example, today’s loss in China is worse than 93% of the worst daily losses per month, since 2007.  We see this in the chart immediately below.  And in the chart further below that, we see today’s loss is worse than 67% of the worst daily losses per year.  Lastly, in that same chart, we show China’s first day loss is worse than even the majority of the worst weekly losses per year!  This conservative measure substantiates that on just a single day, the losses stemming from China has breached most of the worst risk levels that would normally take a complete week to get through. 

   

  

   

  And we see in the chart above that today's loss in China is worse than the worst daily loss coming out of 100 out of the past 108 months (only the 3 months where the worst daily loss was rounded to 0% have been truncated from the chart above)!  In fact, as shown in the blue portion of the chart, there have only been 4 months since mid-2008, where the worst daily loss that month was worse than today's loss.  Those 2015 months are: January, June, July, and August.

   

  

   

  We see in the jittery chart above (third column), that today's loss is worse than the worst daily loss coming out of 6 of the past 9 years (hence the 67%).  And in the middle column we see today's loss is worse than the worst weekly loss coming out of 5 of the past 9 years (or the majority)!  This statistic provides a powerful segue with our prequel article on the worst weekly loss distributions.  Finally in the first column we see that today's loss is worse than the worst monthly loss coming out of even 2 of the past 9 years.  

   

  The main takeaways from this article is that market shocks can be quite quick, when they suddenly unravel.  There is no need for markets to follow an observable pattern (therefore casting an omen just for you).  Recall as well that this is just "day 1"!  There are ~20 additional dramatic trading days ahead this month, where anything can precipitously take place.

  

  

  

  

  

• Citigroup Says "It's Too Early To Panic"; Here's Why

  Panic. That is, according to some of the best strategists on Wall Street, the most concise summary of trader sentiment today following a near history rout in the market on the first day of trading of 2016.

  But don’t worry: according to Citi’s Brent Donnelly, “It is too early to panic.”

  Here’s why:

  First is a link from Bloomberg on how the first day of the year does not predict the rest of year.

   

  The chart is mine and shows the 14 times we saw a >1% drop on Day 1 of the year, then what happened on Day 2. Mostly rallies

  

  And while we are confident that Citi will promptly advise when the right time to panic finally arrives, there is another popular saying: “he who panics first, panics best.”

  

  

  

  

  

• Jailhouse Diary Of A Libor Manipulation Scapegoat

  When last we checked in on Tom Hayes, the “Rain Man” was headed to HM Prison Wandsworth, which Bloomberg describes as “a Victorian fortress south of the Thames known for its poor conditions and violent residents.”

  

  You’ll recall that Hayes was the unlucky soul who became the scapegoat for the endemic corruption and unbridled greed that transformed the financial world’s most important benchmark into a tool the banks used to generate outsized gains for their own trading books. In other words: Hayes took the fall for the LIBOR scandal, becoming a rare human casualty in a world where white collar, Wall Street criminals almost never pay for their proverbial sins.

  Officially, a jury found Hayes guilty of eight counts of conspiracy. His sentence: 14 years.

  For those wondering what life is like behind bars for the man whose head had to roll so that many more “important” heads would not, we bring you Hayes’ letters from Wandsworth.

  *  *  *

  As originally published by The Daily Mail

  It was over. The guard led me into a room daubed in graffiti, with the faint smell of cigarettes and urine. He allowed me to use the toilet, but it had no door – the days of privacy and dignity were over. A plastic toilet with no seat. I couldn’t really comprehend it.

  I was led to a small holding cell and the door behind me was locked. I could hear banging and shouting from other cells. I curled up on the only thing in the cell, a wooden bench.

  I was then led away by a sympathetic female guard who reassured me. She handcuffed my wrist to hers, and we waited in line for those going to HMP Wandsworth to be searched.

  I figured if I sat with my back against the side of the van, no photographer would be able to get a photo of me. I pushed my back against the wall – they had enough photos; they didn’t need one of me at my lowest ebb. As the van stopped at the junction to turn on to Tooley Street, the cameras flashed through the darkened windows. I scrunched back to keep out of shot.

  The drive through the busy commuter traffic was strange. I looked out of the window at everyone going home, passing familiar places. The guards played Capital Radio; I couldn’t quite comprehend these were sights I wouldn’t see for years. Life outside the van seemed so normal.

  We pulled through the gatehouse at Wandsworth. Vans were stacked up waiting to unload and we sat for about 30 minutes waiting for our turn. Slowly my shock was abating.

  We were ordered off the van. Most on it were on remand and returning for the day. I, on the other hand, was going through induction. A strip-search. My modesty seemed strangely immune. Again it seemed like a dream, followed by an awful grey tracksuit and light blue T-shirt.

  As an entry-level prisoner, I was not allowed my own clothes. Nor was I allowed my prison bag. I was issued with a blue plastic plate, bowl and mug, and a pack of Happy Shopper tea, UHT milk and biscuits.

  It seemed so strange; these were my belongings in a clear plastic HMP bag. I was still wearing my court shoes, which made me look stupid in my tracksuit as we went to E-wing so they could process me. I was given a plate of rice and green beans and an apple. Some induction orderlies [prisoners who work on the induction wing] came to speak to me. They offered advice and some kind words, but I was a fish out of water; all I wanted to do was speak to my wife Sarah, hear her voice, for her to reassure me. I wanted to go home.

  A prison guard in the office let me make a one-minute phone call.

  I struggled not to cry. I told Sarah I was OK; she sounded fine, but we were both staying strong for one another. Then, clutching my cutlery, tea and biscuits and green sheets/pillowcase and orange blanket, I was sent down the hall.

  Because I had been processed I was meant to go to cell E403 (cell No 3 on the fourth floor). I asked a prison officer where I should go and he thought I hadn’t yet been processed. He sent me over the corridor to a holding cell full of Albanians and a heroin addict in withdrawal.

  It was about 7pm and I could hear the Channel 4 News from the TVs along the wing. I sat on the concrete floor knowing my face was on the screens next door. The room was thick with smoke. The addict kicked the steel door repeatedly, demanding attention. Officers ignored him.

  All the sounds of prison that now wash over me as ambient noise seemed so clear. I felt exhausted. A three-month trial, three-and-a-half years of bail. Years of uncertainty, years of fighting were over. At about 10pm, one officer popped his head through the door. Prisoners were coming and going as they were processed and he seemed surprised to see me. ‘Hayes! What are you doing here? You’ve been processed!’

  I clutched my meagre belongings and followed him. I felt like a refugee with my bedding and plastic bags. Then he realised they had paired me with the addict in withdrawal. I waited for 20 minutes while they moved the addict, then they put me and another first-timer in cell E403 together. I took the bottom bunk. The addict had taken the pillow. I made the bed. Fortunately the weather was hot, because the orange blanket was threadbare and offered no insulation at all.

  While my cellmate snored, I stared at the bunk above. My mind was racing and, although I was tired, I couldn’t sleep. During the trial I had taken sleeping tablets, but I didn’t have any now. Not having a watch meant I had no notion of time. Eventually the sun came up and I heard aircraft on the approach to Heathrow. I knew it must be 6am, because nothing lands before then.

  I had been given some milk and oats for breakfast the night before, but we had no kettle or hot water to make porridge. I rang the bell to ask for some hot water.

  The prison officer dismissed me. ‘Wait till we unlock you,’ was the response. We got unlocked at lunch.

  My first exercise time in the austere concrete yard reminded me of the film Midnight Express, as people circled the yard anticlockwise.

  I thought about the lunatic in the film who decided to go the other way and pondered what would happen if I did that. Some guys worked out, others smoked or harassed people for ‘burn’ [tobacco].

  I wandered in circles aimlessly, enjoying the sunshine and natural light.

  I think in my early days I stood out – I probably still do – but certainly some people recognised me from the media coverage. People seemed to labour under the misapprehension that I had made ‘trillions’ for myself. Others didn’t recognise me but, seeing the court shoes, realised I was a recent arrival and inquired whether I had brought a ‘package’ with me.

  Confused and apprehensive, I told them I didn’t have anything with me.

  I later learnt that this refers to drugs inserted in your anus. I was also told that on occasions these will be forcibly removed by other prisoners using a spoon, so I’m lucky that I didn’t have a package.

  As we left the yard, one prisoner covered himself in olive oil and tried to set himself alight – his hydrocarbon knowledge wasn’t the best, I thought.

  During my healthcare visit the nurse offered me a hepatitis B vaccination. I refused on the basis I couldn’t fathom how I could catch a blood-borne virus. Later, after observing various biting incidents, I have now had my three jabs and am vaccinated.

  Just before 5pm, the cell door opened and I was ordered to gather my ‘possessions’ and told I was moving. Although I’m now a veteran mover, at the time I hurriedly gathered the biscuits and UHT milk, my green sheet and orange blanket and, feeling like the refugees from Syria who were all over the TV, I shuffled after the guard, bidding my cellmate a laconic goodbye.

  Looking back now, I feel sorry for my first cellmate. I really chewed his ear off in that first 24 hours; all the hurt and pain poured out as I paced that tiny cell. I barely listened to his problems. Although I can’t recall his name, I’ll be for ever grateful to him for listening and helping me through that first 24 hours.

  Confused, I asked where I was going. ‘To CSU,’ came the response. Me: ‘What’s that?’ Prison officer: ‘Care and segregation unit.’ Me: ‘Why am I going there?’

  At this point, as we made our way down into the basement of E-wing that houses the segregation unit, I felt panicked that I was being taken out of the general population to be held in isolation.

  Prison officer: ‘You are a potential Category A prisoner.’ Me: ‘What? I am the most unlikely Category A prisoner ever!’ Prison officer: ‘You have the means to escape.’ Me: ‘Escape? I’ve been on bail for three years!’ I later discovered I had been put in the CSU for my own protection. Because my case had been so ‘high profile’, it was feared I would be targeted. In fact, I was in the same cell that Max Clifford had been in a few months earlier, E010.

  I couldn’t watch TV. All that sitting and watching TV as a student seemed such a waste of time; now I had all the time, I wanted to do nothing and watch TV, and I couldn’t even turn it on except to try to figure out the time of day (I still had no watch).

  I broke the day into segments. I needed to get from breakfast to lunch, lunch to dinner, dinner to bed, to try to sleep, and I had been prescribed sleeping tablets to get me through the night. Because I was on ACCT [Assessment, Care in Custody and Teamwork, for prisoners considered at risk of suicide or self-harm], the light was turned on every hour to check I was still alive, and would disturb me yet further.

  I don’t blame the prison for that, but I operated in a bizarre dystopia, exhausted in the day, unable to sleep at night.

  I was locked up for roughly 23 hours per day in the segregation unit. Everywhere I went I was accompanied by three officers.

  As I walked on my own round the tiny exercise yard for 30 minutes, three prison officers looked on. I was observing the rank filth of the prison; the yard covered in rubbish thrown from the cells. It was almost as if neither prisoners nor officers really had any respect for the environment in which they lived.

  The cell was covered in graffiti, which I would idly read, trying to imagine all the people who had been in the same cell since 1851 when the prison was built.

  Being let out for any reason was a treat. A shower, collecting “food” from the server, a healthcare appointment – anything for some form of human contact with anyone.

  I knew my mum and Sarah were going to try to visit on Wednesday morning, a reception visit allowed during the first few days. I anxiously watched the clock on the TV, having discovered the radio channel had one. I was becoming anxious. What if they had forgotten me? I was desperate to see them. At 10.15, someone came to fetch me for my visit. I breathed a sigh of relief.

  The hour flew by. I ate chocolate and drank tea from the cafe in the visitor sector and felt a little happier. My wife assessed the centre to see if it would be suitable to bring my year-old son Josh.

  I had never had the chance to say a proper goodbye to him. The morning of the sentence, I had left him as normal at nursery school and had not come home.

  Soon the visit ended. There were tears all round as we said our goodbyes, and Sarah hugged me.

  Even though the August weather was 25C, the basement cells at Wandsworth were freezing. The floor felt like ice. I sat on the bed and wrapped two blankets around me. You can do ten seconds of anything, I thought, so you can do this. Seven years is a lot of ten seconds, though. My fellow occupants of the ‘Seg’ were a noisy collection. Most were there as punishment and spent large amounts of time shouting and kicking the doors. My first cell had been adjacent to one such door-kicker. Now I was in a marginally quieter cell, but I was still woken by kicking at 3am.

  Shouted conversation took place between cells. I stayed quiet and listened. The speakers would be out early next year, I learnt. How I envied them.

  Being in isolation, you become attuned to the slightest sounds as you try to figure out what’s happening on the other side of the door. Footsteps, the clink of keys, the near-constant shouting echoing round the old building.

  Someone from the governing board came to see me on Friday evening. Once again I appealed to him that I wanted some company.

  Governor: ‘OK, but don’t get yourself beaten up.’ Me: ‘We have a mutual interest in that not happening.’ And so my time in CSU ended. I collected my still uneaten biscuits, tea bags and UHT milk (there are no kettles in case inmates throw boiling water at the officers), my bedding and my book and carried them back upstairs.

  I was in cell E432 on the top floor; it was considerably warmer than the basement. My new cellmate arrived on remand for a drug offence. Arrested on Wednesday and unable to shower, he stank. His obesity and the hot weather meant I regretted leaving the CSU. He stripped to his underwear; he was very hairy. He was a big TV fan and knew all the daytime programmes. He watched every soap. I tried to negotiate a slot to watch Channel 4 News between Hollyoaks, EastEnders, Emmerdale, Neighbours and Coronation Street. Instead, we agreed I could watch Newsnight at 10.30. University Challenge was rejected.

  Over the weekend the prison was shortstaffed, so we had no association time [time spent outside the cell] on either Saturday or Sunday. That meant no occasion for my new cellmate to shower. The temperature was high and, at some point, he lay down on my bed. I looked at his huge, sweaty, near-naked body lying on my bedding and felt vaguely sick.

  I was being eaten up inside; those moments of quiet time allowed me to be alone with my thoughts and try to work out how I was going to cope with seven years of incarceration.

  I was learning a bit more about prison life; I witnessed someone getting ‘bent up’ [prison parlance for restrained] by the prison officers. Another officer ordered me back to my cell. When I pointed out that the commotion was taking place directly outside my cell and I had no way of returning to it, he locked me in the shower room with a paedophile killer (who claimed he had written a book that was in the library).

  Because it happened after a weekend with no association time, I needed a shower, but had no toiletries or towel and so was unable to take advantage of this unexpected situation. Instead, I was locked away with a lunatic who engaged me in conversation. The officers forgot about us. After I had banged on the door for 30 minutes, someone passed by and unlocked the door. ‘What are you doing in here?’ they demanded. The irony of being locked in a room by someone else, then asked how we got there, was lost on him.

  The same day saw another prisoner jump on to the netting between the landings. He refused to leave until he had a KFC. It duly arrived and, once he finished it, he came down and was removed to CSU.

  The prison seemed to operate on a reverse incentives system: the worse you behaved, the more you got.

  Monday came and I had now been in prison for one week. As sure as night followed day, it was now time for another cell move. This time over the corridor to E401 – it had a pillow and a kettle! My new cellmate was a nice guy called Tim. We got on well. He had a two-and-a-half-year sentence and was due to be released in February. I felt jealous, but we had plenty to talk about and he was very considerate, listening at length to my frustrations. I had my first communal shower; the facilities were very dirty. I needed to shave. I asked for a razor and some shaving foam and was told, ‘Shaving foam? You’re in prison now. Use soap.’ The prison razor and soap left me with a bad shaving rash.

  I don’t recall much about Tuesday and Wednesday; perhaps my body was coming down from operating on adrenaline. I got to speak to Sarah twice in snatched five-minute conversations. Her visit booking for Thursday hadn’t been dealt with. I felt crushed.

  On Thursday morning, the cell door was unlocked. ‘Hayes, you have three minutes to pack your stuff. You’re going to Nottingham.’ Again I felt crushed. ‘Why Nottingham? So far from my friends and family?’ ‘I don’t know. The decision has been made by the area officer.’ I was on my way out of Wandsworth. I said goodbye to Tim and made my way down to reception. I changed out of the prison tracksuit I had now worn for 11 consecutive days and back into the same clothes I wore to court on August 3. As I left, the reception orderly reassured me. ‘You’ve won the prison lottery,’ he said. ‘People would give their right arm to get there.’

  It gave me some hope, but at that time it just seemed a lot further from Sarah. I got into the prison van alone; I was the only passenger. As we went through the gatehouse at Wandsworth, I contemplated how little time I had spent there. But I was no longer a prison virgin.

  I’m in the Open University room typing this, because my cell is so cold right now. I use my electric toaster to try to heat it up, but I still sit there with about five layers on.

  Last night, some lunatic prisoner in the wing next to mine broke a lot of pipes and flooded everything, so we were locked up with no water, hot or cold, unable to flush the toilet, in the freezing cold. The cell below me engaged in a ‘dirty protest’, smearing faeces everywhere, and smashing up the room, and the cell opposite had someone having a psychotic fit from taking ‘spice’ [synthetic cannabis], banging and shouting.

  I lay on my bed and wondered how I had ended up here.

  I often look at the trees on the other side of the fence from my cell; I’ve become quite the ornithologist. It seems so strange that we live in the same place but they are free, able to come and go from the trees on the ‘free’ side of the fence.

  The wagtails sit on the razor wire and I like to see them choose from all the rubbish thrown from cell windows.

  I’m becoming more immune to prison life now; being strip-searched has lost the embarrassment and indignity I felt at first.

  Drug overdoses and fights are de rigueur, and the monotony of life here takes over.’

  
  

  

  

  

  

  

• US Government Discovers 10 Years Of "Processing Errors" In Construction Spending Data Slamming GDP

  Even as increasingly more parts of the economy, especially those with exposure to manufacturing and industrial production, sink into the recessionary quicksand, one sector that was seen as immune from the malaise gripping US manufacturing and was outperforming the overall growth rate of the US economy, was housing, and specifically spending on private and public construction: a direct input into the GDP model.

  That all changed today when the US Census released its latest, November, construction spending data, which not only missed expectations of a 0.6% increase, but tumbled -0.4%, the most since June of 2014, while all the recent changes were mysteriously revised lower.

  And then the source of the mystery was revealed: in the fine print of the release, the government made a rare admission: all the construction spending data for the past 10 years had been “erroneous.”

  In the November 2015 press release, monthly and annual estimates for private residential, total private, total residential and total construction spending for January 2005 through October 2015 have been revised to correct a processing error in the tabulation of data on private residential improvement spending. An Excel file containg all of the revisions can be found here

  The result of the “revision” of the processing error is shown below: every month starting with April and going through October, was “found” to have been a lower increase than according to the previous data. Not only that, but the October print which had been the strongest since May, confounding many data watchers as it did not fit with anecdotal evidence of a dramatic slowdown in energy-related construction, suddenly was barely positive, leading to the November sequential decline, the worst since the -0.7% drop in June of 2014.

  

   

  And here is the big picture: what it reveals is that while spending data in 2013 was revised substantially higher, it proves what many have known, namely that the economy is now slowing substantially and that what until recently was seen as the strong annual increase in construction spending, namely the 14.3% increase of September 2015, was in fact substantially lower.

  The result is that the October Y/Y% change of 10.5%, and declining, is not only the lowest increase since April, but matches the level first reported in December 2013. In other words, contrary to the previous narrative suggesting construction spending was solid and supporting a growing economy, it has in fact been declining since June!

  

  And to think of the tons of digital ink spent by “strategists” and experts analyzing construction spending “data” in the past 5 years…

  Sarcasm aside, what this exercise proves – which is clearly meant to lower the goalseeked glideslope of the US economy and make it easier to enter recession – is what many have already said, namely that Yellen clearly missed her window to hike rates with the economy now clearly slowing down, and instead of tightening monetary conditions, Yellen should be easing and preparing to lower rates.

  To be sure, this is not the first time the US government has slashed historical data on a wholesale basis due to “revisions” and “errors” – recall our post from December 2014 “The Housing Recovery Remains Cancelled Due To 6 Months Of Downward Revisions” in which we showed how 6 months of New Home Sales were quietly revised materially and, of course, to the downside.

  

   

  And since as noted above, this data feeds straight into the GDP “beancounts”, we expect substantial downward revisions of recent historical GDP data, which will once again confirm Yellen’s rate hike error.

  Finally, we now await for even more government data (perhaps payrolls is next) to “unexpectedly” be shown as having substantial historical errors, and be revised, like in the cases above, materially to the downside because it will look silly if the US economy jumps from growth straight into recession with existing “data sets” which reveal that the bulk of what passes for “data” at the US government is simply double and triple-seasonally adjusted GIGO.

  

  

  

  

  

• Late-Day Buying Panic Saves Stocks From Worst Start To January In 84 Years

  Santa Rally…?

   

  An ugly day… just as we predicted

  

   

  The bloodbath started in China, which was halted early on circuit breakers…

  

   

  Europe was ugly…

  

   

  And that dragged US Futures lower, which were not helped by weak manufacturing data, weak construction data, and not helped by overly confident Fed speakers, but shortly before the EU close a hug eblock sucked up all ther liquidity in futures and stalled the selloff. We rallied back to VWAP around 1995 in S&P then faded…

  

   

  The machines did their best at 1101ET to stall the weakness, which ramped to VWAP before institutional selling started…

  

   

  Cash indices saw Dow break to a 16,000 handle, S&P under 2,000, and Nasdaq under 5,000…before a late-dat $2-3bn MOC buy order out of nowhere lifted everything…

  

   

  The moment 330ET hit, VIX was slammed (via rampant buying XIV – inverse VIX ETF) and S&P pumped back above 2000

  

   

  Financials were worst, Energy best…

  

   

  FANTAsy stocks all plunged with Tesla and Amazon worst…

  

   

  But Apple managed to ramp back to green briefly as we supposed its ubiquitous buyback prgram stepped in…

  

   

  US equities dropped to 3-month lows, catching down to high yield bonds' weakness once again – just as they did in August…

  

   

  Financials tumbled to 3-month lows, catching down to the yield curve collapse just as they did in August…

  

   

  Treasury yields dropped all morning but as Europe closed, sellers moved in lifting yields and reducing sme of the early flatness…

  

   

  The US Dollar index rose on the day against the majors (as European buying beat Asia selling)…

  

   

  And Asian FX tumbled to fresh 6 year lows against the USD…

  

   

  Commodities were a mixed bag. Despite USD strengtrh, Gold surged over 1% buit silver was stalled when US growth was questioned and sent crude tumbling…

  

   

  Crude ended the day lower as record gluts and weak growth trumped any war premium fears…

  

   

  Charts: Bloomberg

  Bonus Chart:  Just as we warned last week, we have seen this pattern of global pass the illiquidity hot potato contagion before…

  

   

   

  Bonus Bonus Chart: You know it's a bad day when…

  Brian Williams says today's market action reminds him of his early days trading the 1932 market

  — Bob Brinker (@BobBrinker) January 4, 2016

  

  

  

  

• Are Governments Running Out of Candy?

  Submitted by Jeff Thomas via InternationalMan.com,

  By now, many readers will have seen the popular American YouTube video by Mark Dice in which he stands on a city sidewalk and offers passers-by a free gift. They may choose between a 10-ounce silver bar or a large Hershey’s candy bar.

  Each taker chooses the candy – most of them with no deliberation. The only taker who seems to hesitate at all soon decides on the candy, as “I don’t have any way to do anything with the silver.” (Behind them is a coin shop. Mister Dice offers to take the silver bar inside if she wishes, but she’s uninterested and takes the candy.)

  A 10-ounce silver bar is presently valued at about $140, the Hershey’s bar at about $2.

  Mister Dice doesn’t comment in the video as to what lesson might be learned from this, but an obvious one would be that Americans (or at least those who reside in his home town of San Diego, California) are prone to prefer instant gratification over something of substantially greater, but delayed value.

  If this is his intent, he’s succeeded well in his light-hearted, but instructive video.

  Since the 1950’s, much of the world has perceived Americans as being on “Easy Street,” and in recent decades, the U.S. government has fuelled American complacency through a consciousness of easy money and entitlement.

  And so, Americans are often perceived by those outside the U.S. as being somewhat insulated, spoiled, naïve, and short-sighted. But, if this is true, Americans certainly aren’t alone. Much the same exists in Europe, Canada, and quite a few other countries that have, over recent decades, followed the American socio-economic model.

  Trouble is, all that easy money and entitlement exists only as long as a source for the “freebies” exists. Unfortunately, the idea that freebies are free is inaccurate. Freebies of any description must be paid for by someone.

  In business, freebies are sometimes provided as “loss-leaders” to attract more business. They therefore become a line item on the monthly balance sheet, a cost-of-doing-business expense. The business hopes to make the loss back through sales generated by the loss-leader.

  But, when governments hand out freebies, no sales will be generated, so the loss will not be recovered. When governments hand out freebies, the cost is paid with tax revenues. And when taxes have been raised to the point that further increases would be difficult without inciting rebellion, governments generally rely on borrowing.

  But, of course, borrowing, too, eventually reaches the point that it has become so great that it cannot be repaid. What then?

  Invariably, economic collapse is the outcome. But, why should this be so? Well, when the tipping point is reached (as in jurisdictions like the EU and U.S., where more than 50% of the public are net recipients and the other 50% must pay for both themselves and the other 50%), there’s no turning back. Those who have been receiving the candy have been told that they’re entitled to it and now they believe it. They will not tolerate the suggestion that the freebies must end, even though no further tax can be reasonably levied; no further funds can be borrowed. Therefore, in every case, the result is systemic collapse, not a gradual tapering off.

  For thousands of years, governments have sought to appease people with freebies. In ancient Rome, a dole of grain and free entertainment (bread and circuses) helped to usher in the decline of the empire. Like all great empires, it collapsed under a weight of debt and mismanagement.

  Much of the world is presently at this tipping point. Governments continue to promise benefits that they know will soon come to an end. If history repeats, they will continue repeating this promise right up until the day when the candy stops being dished out.

  They will then say that no one could have seen this coming.

  Amongst the public who will be the victims, there will be three general groups.

  First will be the Takers, those who have been the recipients who depended upon the freebies the most. They will be the hardest hit, as not only will they lose the freebies, they will have neither the skills nor the imagination to become self-reliant overnight.

   

  The second group will be the Payers, those whose tax dollars paid for the freebies. They will be hard hit, as the system in which they live and operate has broken down, although they will fare better than the Takers. They will have the skills and imagination to rebuild their lives (having previously been productive enough to pay for themselves and others.)

   

  Third will be the Preparers, those who envisioned the inevitability of the collapse of the system. They most certainly will have the skills and imagination to rebuild their lives, but, additionally, they’ll have the means with which to rebuild quickly. They will be the very few who chose the silver bar over the candy and had the wisdom to store the silver in a jurisdiction where it was not likely to be appropriated by a dying empire.

  Much of the world is now running out of candy. The latest version of Bread and Circuses is reaching its inevitable end.

  Replaying the video, we observe Mister Dice offering chocolate or silver. Each Taker looks at him incredulously, then makes the obvious choice, the candy. Each of them gives him a smile. Each is pleased to walk away with the chocolate, but, likely as not, each will have consumed the bar before the day is out and the benefit of the freebie will be short-lived.

  After giving out eight bars, Mister Dice is all out of chocolate and he presumably goes home. He has no candy, but he does have 10 ounces of silver. Perhaps he owns other silver bars as well, stored in a safer jurisdiction.

  Each of us has the opportunity to make a choice as to whether we wish to be Takers, Payers, or Preparers. The choice we make may define our future.

  

  

  

  

  

• For Kyle Bass This Is "The Greatest Investment Opportunity Right Now"

  Over the weekend, when citing from an excerpt of the latest Wall Street Week episode, we revealed what to Kyle Bass was the “best investment for the next 3-5 years”: the energy space. Bass added he was agnostic as to what subsector of energy one should invest in: whether it is infrastructure, pipelines, producers, upstream, downstream, he believes that there are places in the cap structure of each of these where once can put new capital and generate substantial returns. He also added that “the energy rebound, when it happens, will be comparable to the housing rebound post 2009.”

  Coming from the guy who correctly predicted the collapse of housing going into 2009, one should take his prediction seriously, even though as Bass himself admitted, he was early to this trade which led to “one of the worst years in the last ten” for his Hayman Capital. Judging by today’s very modest reaction in the price of oil to a dramatic escalation in the Middle East, the market will need a far more dramatic reduction in supply before it agrees with Bass’ thesis.

  But what about the shorter-term for those who don’t have a 3-5 year investment horizon? Bass discussed that after a question by Gary Kaminsky asking the Texas hedge fund manager “when you look at opportunities as an investor right now, what’s the greatest opportunity?”

  His response:

  “Given our views on credit contraction in Asia, and in China in particular, let’s say they are going to go through a banking loss cycle like we went through during the Great Financial Crisis, there’s one thing that is going to happen: China is going to have to dramatically devalue its currency.”

  He is quick to note that this is not a trade for everyone: “it’s very tough to invest as a non-professional” very much the way buying CDS on subprme MBS was a trade only for a select few. That said, the trade – which we agree with thoroughly, and have repeatedly said that China has to devalue further, in fact we predicted China’s devaluation just three days before it happened – makes a lot of sense. Bass continues:

  “China many years ago attached its currency to the dollar: they hitched their wagon to our star very smartly because back then our goal was to depreciate our dollar through inflation. So we issued debt to the rest of the world to depreciate the dollar. And so now the real problem is China has hitched their wagon to our star, and their currency has effectively appreciated about 60% versus the rest of the world since 2005 and it’s killing them… China’s effective exchange rate moving up versus the rest of the world made their goods and services a little bit more expensive each year and now that labor arbitrage is gone. And if that labor arbitrage is gone, and the banking system has expanded 400% in 7 years without a nonperforming loan cycle, my view is we are going to see a non-performing loan cycle.”

  We fully agree with this as well: incidentally, China’s NPL time, or “neutron” as we call it, bomb, has been extensively covered on this website in the past for the simple reason that while the official print here is about 1.5% of all bank loans are said to be “bad” or non-performing, the real number is likely around 20%, something which virtually guarantees a financial crisis in China at any given moment (more on that in a latter post). This is our summary on China’s NPL debacle:

  If one very conservatively assumes that loans are about half of the total asset base (realistically 60-70%), and applies an 20% NPL to this number instead of the official 1.5% NPL estimate, the capital shortfall is a staggering $3 trillion. That, as we suggested three weeks ago, may help to explain why round after round of liquidity injections (via RRR cuts, LTROs, and various short- and medium-term financing ops) haven’t done much to boost the credit impulse. In short, banks may be quietly soaking up the funds not to lend them out, but to plug a giant, $3 trillion, solvency shortfall.

  Incidentally, this is precisely what Bank of America just said overnight:

  When debt problem gets too severe, a country can only solve it by devaluation (via the export channel), inflation (to make local currency debt worth less in real terms), writeoff/re-cap or default. We judge that China’s debt situation has probably passed the point of no-return and it will be difficult to grow out of the problem, particularly if the growth continues to be driven by debt-fueled investment in a weak-demand environment. We consider the most likely forms of financial instability that China may experience will be a combination of RMB devaluation, debt write-off and banking sector re-cap and possibly high inflation. Given the sizeable and unstable shadow banking sector in China and the potential of capital flight, we also think the risk of a credit crunch developing in China is high. In our mind, the only uncertainty is timing and potential triggers of such instabilities.

  But back to Bass and his best trade idea – he conveniently even puts a time horizon:

  “We are not short Chinese equities, but we are very invested in the Chinese currency: we think we are going to see a pretty material devaluation; we think it’s going to be in the next 12-18 months.”

  Finally, judging by the ongoing collapse in the onshore and offshore Yuans overnight, which saw the currency tumble to fresh 5 year lows…

  

  … it may be far sooner, especially when considering what Macquarie Capital’s strategist Thierry Wizman said earlier today: “the big drop overnight reflects policymakers’ willingness to allow currency to account for weak data.” He expects the USDCNY to rise ~8% this year.

  The full Kyle Bass interview is below, and the part discussing the best investment opportunity begins 10:40 in.

  

  

  

  

  

• This Just Became The Most Important Map In Geopolitics

  Earlier today, in “Mid-East Melee: Sectarian Showdown Looms As Bahrain Cuts Ties With Iran, UAE Recalls Ambassador,” we brought you the latest from the war-torn Mid-East where a worsening spat between Saudi Arabia and Iran threatens to plunge the region into chaos.

  Make no mistake, things were already out of control. The conflict in Syria has mushroomed into a global proxy war, Iraq is struggling to drive Islamic State from key cities, and Yemen remains mired in war nine months after the Saudis entered the fray to drive back the Houthis and restore the Hadi government.

  Against that backdrop, the region could have done without the events that unfolded over the weekend. By executing prominent Shiite cleric Nimr al-Nimr, Riyadh has infuriated the Shiite community which took to the streets in protest, even going so far as to firebomb the Saudi embassy in Tehran.

  In order to understand the upcoming sectarian strife and in order to fully grasp who belongs to Iran’s sphere of influence and who is loyal to the Saudis, one needs to have a working knowledge of what the Sunni-Shiite split looks like across the region. Because this is set to become the key geopolitical issue in the weeks and months ahead, we thought it an opportune time to present the following map from Goldman which does a nice job of delineating the sectarian split. Note the asterisks which indicate the affiliation of a country’s leadership.

  

  From Goldman

  Where are the main sectarian and ethnic divides in the Middle East today? Saudi Arabia and Iran, with their large respective Sunni and Shiite majorities, are generally viewed as two major opposing forces in the Middle East. They lie on opposite sides of an abstract and somewhat contentious demarcation known as the Shiite crescent, an area of Shiite influence stretching from Iran through southern Iraq and into parts of Syria and Lebanon. 

  The region’s geopolitical, religious, and sectarian relationships are in reality more dynamic and complex. The conflict in Syria continues to pit anti-government insurgents, including Sunni Islamists, against the Alawite (Shiite) government’s forces and Shiite militias supported by Iran. In Iraq, some Sunnis have felt increasingly disenfranchised under the Shiite-majority government in Baghdad (a relatively new development given Iraq’s long history of Sunni rule). The Islamic State (IS) militant group has exploited this sentiment, particularly in the Sunni-majority areas of northern Iraq. 

  How are the different branches of Islam represented in politics? In some countries, such as Saudi Arabia, the rulers adhere to the same branch of Islam as the majority of their citizens. However, this is not always the case. Despite being predominantly Shiite, Iraqis lived under Sunni rulers for much of history, including under the Ottoman Empire and the Ba’thist regime of Saddam Hussein. (Ba’thists are members of the Arab Socialist Ba’th Party, a political party founded in Syria in the 1940s on platforms of Arab nationalism and anti- colonialism. In Iraq, the Ba’thists governed from 1958 until the fall of Saddam Hussein in 2003.) The Iraqi Ba’thist regime was secular in name but reserved political influence for the Sunni elite. In a break from its long history of Sunni political dominance, Iraq is currently ruled by a Shiite-majority government centered in Baghdad. Conversely, in Sunni-majority Syria, members of the Shiite Alawite sect have controlled the government since 1970. 

  What is the composition of Sunnis and Shiites in the Muslim world today? Sunnis make up the majority of Muslims worldwide – an estimated 85-90%. Sunnis comprise 85% or more of the Muslim populations in Saudi Arabia, Qatar, Jordan, Syria, and the United Arab Emirates, and 70-85% in Kuwait, Pakistan, and Afghanistan. Shiites comprise the majority in Bahrain, Iraq, and Azerbaijan (all 60-65% Shiite), as well as in Iran (90-95%), home of the largest Shiite population. Although the Middle East and North Africa region is overwhelmingly Muslim (93%), it is home to only around 20% of Muslims worldwide. The majority – over 60% – lives in the Asia-Pacific region. 

  

  

  

  

  

Digest powered by RSS Digest