Today’s News November 1, 2015

• The Empty Bus

  From the Slope of Hope: With all the grousing and grumbling I do here, I thought I’d change my tone and write up a genuinely positive, optimistic post. This has to do with what I think will be a tectonic shift over the next twenty years: transportation.

  As dull as that sounds, I think the changes that take place in how we get people (or cargo) from point “A” to point “B” are going to be more profound that Amazon, Facebook, and the iPhone put together. My insight, if you want to be generous enough to call it that, is spawned from a couple of (as is typical for me – – negative) observations I make on a periodic basis.

  The first observation is one I make almost daily: in spite of the relative wealth of the San Francisco peninsula, there are buses all over the place. Some of them are the fabled “white buses” that tote highly-paid twenty-somethings from Google and Facebook back to their residences in San Francisco. But most of them are the large (and sometimes double-length) VTA buses that drive all over the Santa Clara valley, and there is one thing I notice about virtually every one of them: they’re empty or near-empty. As they rumble by, I typically see two or three people sitting in a bus that holds 50 to 100 people.

  

  The other observation I have is that the people driving these buses are really, really, really overpaid. Many of them make six figures. One fellow mentioned in this article was clearing almost $200,000. For driving a bus. This is about as close to “unskilled labor’ as I can imagine. It’s mindless, boring work. And very, very lucrative. (Thank you, civic employee unions!)

  I find inefficiency to be offensive, and just about every aspect of bus systems is offensive to me. Just off the top of my head:

  1. The empty seats are a screaming declaration of inefficiency. To have these huge, gas-guzzling, polluting monstrosities with a quantity of people that could fit into a VW Beetle is preposterous.
  2. The bloated salaries (union-driven, surely) are also wildly out of step with the skill set required.
  3. The passengers themselves have to somehow make their way to the closest bus stop they can find for departure, where in an ideal world I’m sure they’d prefer being driven directly from home, work, or wherever they happen to be.
  4. The destinations are also approximate, because wherever the bus is taking people is surely not quite where they really want to go. As with boarding, the passenger has to figure out the least-bad place to get off the bus so they can make their way to their actual destination.
  5. Even the bus stops themselves are wasteful, because, in the future I am envisioning, they simply wouldn’t exist. That space could be used for something else – – or be simply empty. To say nothing of the huge parking lots where they store all the buses at night.

  In short, it’s a huge waste of space, energy, time, and money. I cringe every time I see one of these things rumble by with hardly anyone on board.

  

  So what’s going to get better? I think (or hope, at least) a far better world would be one in which small, self-driving cars were deployed all across the nation, and these would be at the beck and call or the same people that are presently riding buses.

  First, let me give you a picture for your mind: here in Palo Alto, we see Google self-driving cars constantly. These have been retrofitted normal vehicles, but recently, the actual Google cars (not modified production cars, but honest-to-God all-Google cars) have been zipping around. They look like this:

  

  Cute, isn’t it?

  So imagine a working-class person needs to get to their job somewhere. They request the car from their mobile phone, and in about five minutes, the vehicle above pulls up in front of their apartment building. They get in the (driverless) car and are taken to work in the most efficient way possible. There’s no waiting and very little walking. For the passenger, it’s a profoundly better experience.

  Well, that sounds all lovely, but who is going to pay for this convenience? Well, hold on a second. Just think of the costs that are being expended right now on the inferior system in place. There are the aforementioned huge salaries, and with nearly 700,000 bus drivers in the United States alone, the human expense is enormous.

  There are the buses, of course, and all the attendant costs, such as fuel, insurance, replacement parts, repair, and the replacement of worn-out buses. I daresay if you added up all the expenses related to toting individuals from place to place via the bus system and divided it by the number of passenger-miles, you’d get a higher figure than the one you’d get with the “one person/one car” idea I’m offering above.

  Now this sort of thing doesn’t happen overnight. It’s going to take decades. But the technological leap forward of self-driving vehicles is, I believe, going to utterly alter the economic landscape for decades to come, not only with human transportation, but even more broadly with cargo. All the twenty-somethings today that are adding sillier and sillier features to all these social media web sites will be in far more useful occupations in the future as they weed out the grotesque inefficiencies present in worldwide transportation.

  This sounds bone dry, I realize, but I think it’s going to be a very big deal. Google is quite smart to be changing themselves to “Alphabet” and getting into new areas like this, because I think it’s ultimately going to assure they are the largest company on the planet.

  As for what those hundreds of thousands of unemployed bus drivers are going to do with their lives? Or the 3.5 million truck drivers? No clue. That’s going to be just as big a challenge, but I seriously have no idea what the answer could be.

  

  

  

  

• Analyst Warns Of Turbulence: "Geopolitical Dislocations Could Result In Key Resource Supplies Disappearing"

  Submitted by Mac Slavo via SHTFPlan.com,

  Some of the world’s biggest investors have been taking significant positions in the commodity resource sector as of late, most notably in gold. With geopolitical tension and fear of economic breakdown reaching a near boiling point, it’s not difficult to see why. Instability pervades the entire system, encompassing everything from financial markets to social safety nets. And while it is easy to ignore the seriousness of current events because stock markets remain at record highs and mainstream pundits continue to toe the recovery line, the fact is that an unexpected and seemingly minor event could well send the entire world into a tailspin.

  According to analyst John Kaiser, this is exactly what we need to be concerned with. In a candid interview with Future Money Trends Kaiser explains just how political dislocations could result in supply lines to critical commodities like food, copper, zinc and gold being cut – even without a major war – should the United States, Russia and China continue to bump heads.

  
  (Watch at Future Money Trends or Youtube)

  Forget about the big, giant macro-economic increases in overall global GDP, but instead let’s look at the turbulence we’re starting to see where China is asserting itself in the South China Sea area… where Putin is eyeing its lost colonies in Europe and Central Asia and thinking maybe we should re-establish the Soviet empire… where we see instability in the middle east.

   

  Then you also realize that a lot of metal comes from China… a lot of metal comes from Russia. And if we end up in a shoving match where, say, the United States pushes back in the South China Sea… and Chinese generals get all up in arms and we end up with an incident… well what happens if China suddenly has sanctions going against it… or something similar, that Russia goes beyond messing in the Ukraine and starts taking out Latvia or Estonia?

   

  All of a sudden we have not so much nickel coming from Russia anymore… and similar in China.. Tungsten, 85% of it comes from China… graphite, 85% of it comes from China… 40% of the world’s zinc comes from China.

   

  These types of geopolitical dislocations… they could result in supply simply disappearing.

   

  And because the rest of the world is still using the same volume of copper and nickel as before, that’s where you can see price spikes.

  As we know, much of our critical supply chain is dependent on China. Likewise, Russia supplies necessary industrial metals. One misstep here, whether in the South China Sea, Ukraine or the middle east and we could very well see massive price spikes for commodity resources across the board.

  This instability, as John Kaiser notes, could lead to a collective rush of risk capital into safe haven assets, including gold:

  Gold is also supposed to respond to geo-political stresses. When you recall in 1980, yes we had inflation. But also part of the problem in 1980 was that the United States appeared to be losing it… we had the Tehran hostage crisis… we had the Soviet Union expanding itself in Afghanistan… the perception was that the United States was losing its dominant role.

   

  …

   

  If we ended up in a situation of anxiety about… are China, Russia and the United States about to square off? Is the world going to embark on a war footing?

  We could see anxiety about this spike [gold] higher.

  The similarities within this context is that the perception of the United States today compared to 1980 is that we are, indeed, losing our dominant role as the world’s leading economic and military superpower.

  Couple that with geopolitical tensions and economic upheaval around the world, and it’s not hard to see why resource investments into core commodities like food, gold, and industrial metals could spike significantly in the near future.

  

  

  

  

  

• Fed Admits "Something's Going On Here That We Maybe Don't Understand"

  In a somewhat shocking admission of its own un-omnipotence, or perhaps more of a C.Y.A. moment for the inevitable mean-reversion to reality, Reuters reports that San Francisco Fed President John Williams said Friday that low neutral interest rates are a warning sign of possible changes in the U.S. economy that the central bank does not fully understand. With Japan having been there for decades, and the rest of the developed world there for 6 years…

  

   

  Suddenly, just weeks away from what The Fed would like the market to believe is the first rate hike in almost a decade, Williams decides now it is the time to admit the central planners might be missing a factor (and carefully demands better fiscal policy)… (as Reuters reports)

  "I see this as more of a warning, a red flag that there's something going on here that isn't in the models, that we maybe don't understand as well as we think, and we should dig down deep deeper and try to figure this out better," said San Francisco Federal Reserve President John Williams on Friday pointing out that low neutral interest rates are a warning sign of possible changes in the U.S. economy that the central bank does not fully understand.

  Williams, who is a voting member of the Fed's policy-setting panel through the end of the year, has said the central bank should begin to raise interest rates soon but thereafter go at a gradual pace; ironically adding that the low neutral interest rate had "pretty significant" implications for monetary policy, and put more focus on fiscal policy as a response.

  "If we could come up with better fiscal policy, find a way to have the economy grow faster or have a stronger natural rate of interest, then that takes the pressure off of us to try to come up with other ways to do it, like through a large balance sheet or having a higher inflation target," Williams said. "It also means we don't have to turn to quantitative easing and other policies as much."

  As we noted previously, depending on the importance of the credit channel, the Federal Reserve, by pegging the short term rate at zero, have essentially removed one recessionary market mechanism that used to efficiently clear excesses within the financial system.

  While stability obsessed Keynesians on a quest to the permanent boom regard this as a positive development, the rest of us obviously understand that false stability breeds instability.

   

  It is clear to us that the FOMC in its quest to maintain stability is breeding instability and that previous attempts at the same failed miserably with dire consequences for society. We are sure it is only a matter for time before it happens again.

  And thus, Williams' warning now seems oddly-timed at best, and cover-your-ass tactics at worst perhaps "the matter of time" is about to bite once again…

  

  

  

  

  

  

• Another Black Swan? Turkey Holds Snap Elections Amid NATO-Backed Civil War

  There’s a potential black swan event taking place in Turkey on Sunday and no one seems to care. That is, the media isn’t devoting nearly enough coverage to Turkish elections considering the impact the outcome will invariably have on the situation in Syria, on the fate of the lira, and on the Pentagon’s strategy with regard to embedding spec ops with the YPG.

  As a reminder, Turkey held elections back in June and the outcome did not please President Recep Tayyip Erdogan.

  AKP lost its absolute majority in parliament thanks in no small part to a relatively strong showing by the pro-Kurdish HDP and that meant that Erdogan couldn’t move forward with plans to consolidate his power by amending the constitution. Well, if you know anything about Erdogan, you know that he isn’t exactly the type to take these kinds of things lying down, and so, he decided to trade NATO access to Incirlik for Western acquiescence to a crackdown on the PKK.

  Of course that’s not how it was pitched to the media.

  The official line was that after a suicide bombing in Suruc claimed by ISIS, Ankara decided it was time to go after Islamic State. Not to put too fine a point on it, but that’s a joke. The PKK and many other observers have long contended that Turkey is complicit in allowing money, guns, and personnel to flow across the border into Syria so that ISIS can continue to destabilize the Assad regime which Ankara opposes. In other words, Erdogan has no interest whatsoever in fighting ISIS. What he does have an interest in is starting a new war with the PKK in order to convince voters that the security situation in Turkey is such that only a dictator can get the situation under control – that’s the whole gambit.

  So what Erdogan did was this: he obstructed the coalition building process in the wake of June’s elections, started a civil war in order to try and convince voters that supporting HDP was a mistake, then called for new elections in November which he hopes will restore AKP’s absolute majority and allow him to change the constitution. It’s deplorable to the point of absurdity (especially given the recent suicide attack in Ankara) and underscores the extent to which ISIS has now become a catch-all smokescreen that can be cited whenever a government wants to do something that would otherwise come across as insane. 

  So that’s the backdrop for Sunday’s elections in Turkey. Here’s a bit of color from Barclays which is useful from a technical perspective, but please remember that this is all about the push and pull between Erdogan and a powerful Kurdish militia. In other words: attempts to analyze this rationally will everywhere and always miss the point but we would note that Barclays does a nice job of taking into account the realities of the situation on the ground and indeed, the bank’s analysts believe the market is mispricing the risk of a geopolitical mishap.

  *  *  *

  From Barclays

  Four months after the June parliamentary elections and the party negotiations failed to produce a new government, Turks are asked to go to the polls again this Sunday (1 November). Market pricing in recent weeks suggests investor optimism that these elections will lead to a swift formation of a new government, possibly in the form of an AKP-CHP coalition.

  We are less sure about such an outcome: the polls do not suggest any significant change in the allocation of votes, nor do we see meaningful changes in party leaders’ attitudes that would imply a greater probability of building a coalition government. In fact, in our view, the political backdrop has become increasingly polarised and fractious.We therefore think the market could become nervous in the absence of signals of tangible progress on coalition talks in a relatively short time, especially given the upcoming Moody’s review on 4 December. 

  The likelihood of a third election is higher than market expectations, in our view. In particular, the probability of a third election would be re-priced higher if the AKP manages to increase its share of the vote in November (ie, towards 43%). In the event of a third election, we see significant risk of a negative rating action, particularly from Moody’s.

  

  The polarisation in Turkey has deepened further, across political and ethnic lines, as a result of the renewed terror attacks, inflamed political rhetoric and negative repercussions of the Syria issue domestically (particularly among Kurds). The tragic bombing attack in Ankara, which was the worst terror event in the history of the country, not only showed the extent of the polarisation but also highlights equally important problems besetting Turkey. The first is the idea of, ‘adaptive reality’; whereby different factions have moulded events to reach a different perceived reality. A related concept is that of ‘alienation of other’, whereby existing divisions are further deepened by the creation of an environment of mistrust and recrimination.

  

  The act of “alienation of other” is not something new to Turkey, and has been widely used by political parties at times to consolidate voter base. The side-effects can be toxic and long-lasting, however. It not only makes facilitation of dialogue between political parties nearly impossible (eg, MHP’s isolation of HDP as a party) but can also spread to the general population. A recent example to this was when fans of the national football team protested the moment of silence for the victims of Ankara bombings during Turkey’s football match in Konya, a stronghold for the AKP. There is also evidence of a growing perception among opposition groups that the government has failed to ensure appropriate security during opposition rallies.

  * * *

  Right. The government has no desire to de-escalate here. This is all about convincing the populace that supporting the Kurds leads to an increased incidence of terrorist attacks. 

  But to be clear, no one believes this anymore. This is just as much of an international joke as the idea that Washington, Riyadh, and Doha want to “fight terrorism.” 

  But bear in mind, the results aren’t in question. That is, as Barclays suggests, Erdogan is going to simply undermine the coalition building process on the way to calling for snap elections until he eventually wins. Sadly, this willing usurpation of the democratic process will continue until the President eventually gets his way and the lira will likely collapse until at some point, voters simply give up on democracy and give Erdogan his majority back. 

  Additionally, it’s important to note that this election comes just hours before the US intends to deploy spec ops with Kurdish forces in Syria. As we discussed earlier today, Washington intends to support those toops with sorties flown from Incirlik. If Erodgan doesn’t get the outcome he wants on Sunday and he believes the PKK is responsible, Ankara could begin to re-evaluate its partnership with Washington…

  

  

  

  

  

• HaPPY HoRRoRWeeN 2015

  

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• Crude Supertanker Rates Collapse As VLCC 'Traffic' To China Lowest In 13 Months

  A few days ago we warned, confirming Goldman Sachs' earlier analysis that the world was running out of space to store crude distillate products, that China was running out of storage space for crude oil as it dramatically ramped up its Strategic Petroleum Reserve 'buy low' plan. While the brightest indicator at the time was "about 4 million barrels of crude oil stranded in two tankers off an eastern port for nearly two months," this week, the dial went to 11 on the oil-demand-fear-o-meter, as Bloomberg reports supertankers sailing to Chinese ports plunged to its lowest in 13 months, sending the daily rate for shipping crashing. The marginal demand-er of last resort just left the market.

   

  As a reminder, this is what Goldman said: "the build in Atlantic distillate inventories this year has been large, following near-record refinery utilization in both the US and Europe, only modest demand growth, especially relative to gasoline, and increased imports from the East on refinery expansion and rising Chinese exports."

  As a result, and despite a cold winter in both Europe and the US last year, European and US distillate storage utilization is reaching historically elevated levels, driving a sharp weakening in heating oil and gasoil time spreads.

   

  

   

  Such high distillate storage utilization has two precedents, leading in both cases to storage capacity running out in the springs of 1998 and 2009, pushing runs and crude oil prices and timespreads sharply lower. This raises the question of whether today’s oil market oversupply can rebalance simply through financial stress – prices remaining near their current low level through 2016 – or if operational stress – breaching storage capacity constraints and forcing prices below cash costs like in 1998 and 2009 – is ineluctable.

  And then something very unexpected happened: the world quietly hit a tipping point when, according to Reuters, China ran out of space to store oil.

  In a report explaining why "oil cargoes bought for state reserve stranded at China port" Reuters notes that "about 4 million barrels of crude oil bought by a Chinese state trader for the country's strategic reserves have been stranded in two tankers off an eastern port for nearly two months due to a lack of storage, two trade sources said."

  And now, as Bloomberg reports,

  VLCCs sailing to Chinese ports at lowest since Sept. 19, 2014, according to ship tracking data compiled by Bloomberg.

   

  As China began its Strategic Petroleum Reserve build in Oct 2014: 89 VLCCs inbound for China…

   

  

   

  and after ramping up its buying (and VLCC traffic and thus tanker rates),  just 59 ships are now signalling Chinese ports, down by 13 from week earlier…

  

  And this has sent the daily VLCC rate from Mideast Gulf to East Asia crashing to less than half this year’s recent peak…

  

   

  And just like that China has, if only for the time being, run out of storage facilities. As we concluded previously,

  How long until this translates into an actual drop in oil purchases, and even more importantly, how long until the U.S. itself finds itself in a comparable "overflow" bottleneck, leading to the next, and sharpest yet, drop in oil prices?

  Charts: Bloomberg

  

  

  

  

  

• Congresswoman Calls US Effort To Oust Assad "Illegal," Accuses CIA Of Backing Terroists

  One point we’ve been particularly keen on driving home since the beginning of Russian airstrikes in Syria is that The Kremlin’s move to step in on behalf of Bashar al-Assad along with Vladimir Putin’s open “invitation” to Washington with regard to joining forces in the fight against terrorism effectively let the cat out of the proverbial bag. 

  That is, it simply wasn’t possible for the US to explain why the Pentagon refused to partner with the Russians without admitting that i) the government views Assad, Russia, and Iran as a greater threat than ISIS, and ii) Washington and its regional allies don’t necessarily want to see Sunni extremism wiped out in Syria and Iraq.

  Admitting either one of those points would be devastating from a PR perspective. No amount of Russophobic propaganda and/or looped video clips of the Ayatollah ranting against the US would be enough to convince the public that Moscow and Tehran are a greater threat than the black flag-waving jihadists beheading Westerners and burning Jordanian pilots alive in Hollywood-esque video clips, and so, The White House has been forced to scramble around in a desperate attempt to salvage the narrative. 

  Well, it hasn’t worked.

  With each passing week, more and more people are beginning to ask the kinds of questions the Pentagon and CIA most assuredly do not want to answer and now,  US Congresswoman Tulsi Gabbard is out calling Washington’s effort to oust Assad both “counterproductive” and “illegal.” In the following priceless video clip, Gabbard accuses the CIA of arming the very same terrorists who The White House insists are “our sworn enemy” and all but tells the American public that the government is lying to them and may end up inadvertently starting “World War III.” 

  Enjoy:

  For more on how Russia and Iran’s efforts in Syria have cornered the US from a foreign policy perspective, see “ISIS In ‘Retreat’ As Russia Destroys 32 Targets While Putin Trolls Obama As ‘Weak With No Strategy‘”

  

  

  

  

  

• Mario Draghi Admits Global QE Has Failed: "The Slowdown Is Probably Not Temporary"

  Undoubtedly, the most amusing this about the prospect of more easing from the ECB (as telegraphed by Mario Draghi last week) and the BoJ (where Haruhiko Kuroda just jeopardized his status as monetary madman par excellence by failing to expand stimulus) is that both Europe and Japan both recently slid back into deflation despite trillions in central bank asset purchases. 

  In other words, the market expects both Draghi and Kuroda to double- and triple- down on policies that clearly aren’t working when it comes to altering inflation expectations and/or boosting aggregate demand. Indeed, both Goldman and BofAML said as much last week. For those who missed it, here’s Goldman’s take

  The subdued and increasingly persistent inflation dynamics that have prevailed in recent years may have eroded central banks’ best line of defence in the face of adverse disinflationary shocks. The energy-price-driven decline in Euro area inflation from 2012 to 2015 has thrown this possibility into even sharper relief.

   

  By embarking on unprecedented balance sheet operations and forward guidance, central banks in Europe have sought to ring-fence domestic inflation expectations and signal their intention to maintain monetary conditions easy for a protracted period of time. Mario Draghi himself described the ECB’s asset purchase programme as a way of ensuring that very low (and, at times, negative) inflation does not lead wage- and price-setters to adjust their behaviour to a perceived lower steady-state rate of inflation. However, judging from market-based implied measures of longer-term inflation expectations, the effectiveness of the ECB’s announcements has proved limited so far.

  Or, visually:

  

  Meanwhile, many critics have accused the ECB of adopting policies that work at cross purposes with Berlin’s insistence on fiscal rectitude. That is, the more Draghi’s PSPP drives down borrowing costs, the less effective the “market” is at pricing risk which in turn means investors aren’t able to punish governments for budgetary blunders. In other words, Spain, Portugal, and Italy shouldn’t be able to borrow for nothing based on the fundamentals, but thanks to the ECB they can – so why implement reforms? 

  And so, ahead of what might fairly be described as one of the most highly anticipated ECB decisions in history, everyone’s favorite Goldmanite gave an interview to Alessandro Merli and Roberto Napoletano. The transcript can be found on the ECB’s website, but we’ve included some notable excerpts below. 

  Perhaps the most interesting passage comes at the outset with Draghi essentially admitting that global QE has demonstrably failed:

  The conditions in the economies of the rest of the world have undoubtedly proved weaker compared with a few months ago, in particular in the emerging economies, with the exception of India. Global growth forecasts have been revised downwards. This slowdown is probably not temporary. To illustrate the importance of emerging markets, it is recalled that they are worth 60% of gross world product and that, since 2000, they have accounted for three-quarters of world growth. Half of euro area exports go to these markets. The risks are therefore certainly on the downside for both inflation and growth, also because of the potential slowdown in the United States, the causes of which we need to understand fully. The crisis led to a sharp drop in incomes. It is up to us to push them up again.

  So, a couple of things there. First, we agree that the “slowdown is probably not temporary.” Indeed, as we’ve documented extensively, we’ve likely entered a period of lackluster global growth and trade, and there’s every reason to believe this is structural and endemic, as opposed to fleeting and cyclical. Second, the last bolded passage there speaks volumes about what’s wrong with the current central planner “strategy.” No, Mario Draghi, it’s not “up to you” to push up incomes. It’s “up t you” to get out of the way and the market figure this out. Central planners had their chance to boost wage growth and they failed – miserably. 

  Here’s Draghi on the effect oil prices are likely to have on inflation expectations going forward:

  As far as the next few months are concerned, the most relevant factor will be the price of energy. We expect inflation to remain close to zero, and maybe even to turn negative, at least until the start of 2016.

  Of course what Draghi doesn’t say is that ZIRP is a contributor. That is, when you ensure that capital markets remain wide open, uneconomic producers continue to dig, drill, and pump and that contributes to lower prices and thus, to a deflationary impulse. 

  And here’s Draghi explaining that the idea of the “lower bound” is becoming antiquated thanks to Europe’s descent into NIRP: 

  Now we have one more year of experience in this area: we have seen that the money markets adapted in a completely calm and smooth way to the new interest rate that we set a year ago; other countries have lowered their rate to much more negative levels than ours. The lower bound of the interest rate on deposits is a technical constraint and, as such, may be changed in line with circumstances.

  Again, it’s all about what Darghi doesn’t say. The reason NIRP is still doable is because it hasn’t yet been passed on to household deposits:

  

  Here’s a bit from Draghi on inflating away massive debt piles…

  Low inflation has two effects. The first one is negative because it makes debt reduction more difficult. The second one is positive because it lowers interest rates on the debt itself. The path on which fiscal policy has to move is narrow, but it’s the only one available: on the one hand ensuring debt sustainability and on the other maintaining growth. If interest rate savings are used for current spending the risk increases that the debt becomes unsustainable when interest rates go up. Ideally, the savings are instead spent on public investments whose rates of return permit repayment of the interest when it rises.

  And finally, here’s how the ECB chief explains away the idea that central bank stimulus is incompatible with fiscal retrenchment: 

  Structural reforms and low interest rates complement each other: carrying out structural reforms means paying a price now in order to obtain a benefit tomorrow; low interest rates substantially reduce the price that has to be paid today. There is, if anything, a relationship of complementarity. There are also other more specific reasons: low interest rates ensure that investment, the benefits from investment and from employment, materialise more quickly. Structural reforms reduce uncertainty regarding macroeconomic and microeconomic prospects. Therefore, it is the opposite, rather than seeing an increase in moral hazard, I see a relationship of complementarity, of incentive.

  Sure. So what Draghi wants you to believe is that the EU periphery is committed to budgetary discipline and all the ECB is doing by artificially suppressing borrowing costs is making the transition to fiscal responsibility less painful. Here’s proof of how well that strategy is working:

  

  But none of this matters. DM central bankers are all-in on this; that is, there’s no turning back. Just as night follows day, the ECB will ease further which will lead directly to more easing from the Riksbank and the SNB. Similarly, the BoJ will likely end up attempting to further monopolize the Japanese ETF market and may ultimately move into individual stocks in an insane attempt to control corporate management teams and mandate the wage hikes that Abenomics has so far failed to produce. 

  That said, both the ECB and the BoJ are running out of monetizable assets which makes us and others wonder whether they will not become gun shy, having realized that they’ve finally bumped up against the limits of Keynesian insanity. 

  Whatever the case, just note that while Mario Draghi is quite adept at playing emotionless bureaucrat (unless a twenty-something is throwing glitter at him), it seems clear that DM central bankers are now beginning to question their own omnipotence and as Kuroda will tell you, “the moment you doubt whether you can fly, you cease to be able to do it forever.”

  

  

  

  

  

• Should America Fight For The Spratlys?

  Submitted by Fred Reed via AntiWar.com,

  It appears that Washington, ever a seething cauldron of bright ideas, is looking for a shooting war with China, or perhaps trying to make the Chinese kowtow and back down, the pretext being some rocks in the Pacific in which the United States cannot possibly have a vital national interest. Or, really, any interest. And if the Chinese do not back down?

  Years back I went aboard the USS Vincennes, CG-49, a Tico class Aegis boat, then the leading edge of naval technology. It was a magnificent ship, fast, powered by a pair of airliner turbines, and carrying the SPY-1 phased-array radar, very high-tech for its time. The CIC was dark and air-conditioned, glowing with huge screens – impressive for then – displaying all manner of information on targets in the air. Below were Standard missiles, then on a sort of chain drive but in later ships using the Vertical Launch System. It was, as they say in Laredo, Muy Star Wars. (The Vincennes was the ship that later shot down the Iranian airliner.)

  

  The Vincennes. The boxy thing up front is the radar. It is not hardened.

  Being something of a technophile, I took all of this in with admiration, but I thought – what if it gets hit? As a kid in my preteens I had read about the battleships of WWII, the Carolinas but in particular the Iowa class, fast, brutal ships with sixteen-inch belt armor and turrets that an asteroid would bounce off of. The assumption was that ships were going to get hit. They were built to survive and continue fighting.

  By contrast, the Vincennes was thin-skinned, hulled with aluminum instead of steel, and the radar, crucial to combat, looked perilously fragile. A single hit with anything serious, or perhaps even a cal .50, but certainly by anything resembling a GAU-8, and she would be hors de combat until refitted.

  One hit.

  

  The Iowa, BB-61. I went aboard her at Norfolk at the Navy’s invitation. It altered my appreciation of guns. I came away thinking that if you can’t crawl into it, it isn’t really a gun. And solid: There is a reason why no battleship was sunk after Pearl Harbor.

  I also knew well that the Navy played Red Team-Blue Team war games in which our own submarines – then chiefly 688s – tried to “sink” the surface fleet. The idea was that if the sub could get into firing position, it would send up a green flare. The subs were then running if memory serves the Mk 48 ADCAP torpedo, a wicked wire-guided thing with a long range. Sailors told me that invariably the subs “sank” the surface force.

  When I mentioned this at CHINFO, the Navy’s PR operation in the Pentagon, flacks told me that the potential bad guys only had piddling diesel-electric subs, far inferior to our nukey boats, and couldn’t get near the fleet in open seas. Yes, no, maybe, and then. It sounded like happy talk to me. In WWII, diesel-electrics certainly got in range of surface ships, perhaps the most famous example being when Archer Fish sank Shinano.

  I do not know a great deal about the Chinese Navy, having been out of that loop for years. I do know that the Chinese are smart, and that they have optimized their forces specifically to take out carrier battle groups near their territory. They do not try to match the US ship-for-ship in the kind of war America wants to fight. They would lose fast, and they know it. The key is to swarm the fleet with cruise missiles arriving all at once, accompanied perhaps by large numbers of aircraft. Would this work? I don’t know, but that is certainly the way I would bet.

  

  DF-21D anti-ship (read: anti-carrier) missile. This is not the place for detail, but China has anti-ship ballistic missiles designed to kill carriers, and is working on others, hypersonic glide vehicles, that are not real interceptible. I do not know how well they work. If I were a carrier, I would make a point of not finding out.

  The Navy has not been in a war for seventy years. It has sat off various shores and launched aircraft, but the fleet has not been engaged. Over decades of inaction, complacency sets in. Unfortunately, wars regularly turn out to be otherwise than expected. Further, the American military’s standard approach to a war is to underestimate the enemy (there is probably a manual on this).

  Yet further, great emotional and financial capital resides in a carrier-battle group, one of the most impressive achievements of the human race. (I mean this: the technology, organization, and competence involved in, say, night flight ops are…”astonishing” is too feeble a word.)

  This assures reluctance to question the fleet’s effectiveness in the face of changing conditions. Such as high-Mach, stealthed, maneuvering, sea-skimming cruise missiles. Or terminally guided anti-ship ballistic missiles. America is accustomed to fighting enemies who can’t fight back. This may not include the Chinese.

  There is also the fact that the American military simply doesn’t matter, which reduces concern with whether it can fight and who it can fight. It doesn’t defend the US, since there is nothing to defend it against. (What country has the remotest possibility of invading America?) So the military is used for what are essentially hobbyist wars, keeping Israel happy, providing markets for the arms companies, and for social engineering: we have girl crews who would be a disaster at damage control, but we assume that there will never be any damage to control.

  Uh…yeah. The evidence is that these ships are fragile:

  

  The carrier Forrestal, 1967. A single Zuni missile was fired accidentally. A huge fire ensued, bombs cooked off, 134 men were killed, and the ship was devastated, out of service for a very long time. One five-inch missile. Something to think about.

  

  USS Stark, 1987. Hit by two Exocet missiles fired by an Iraqi Mirage.

  What would happen if in a shooting war the Chinese crippled the American fleet? Washington is rampant with large egos, especially that of John McCain, the senator from PTSD. If it were discovered that China could disable the Navy, many other countries might conclude that they could do it too. They most certainly would think of this. Washington could not accept the discovery: Fear of the carriers is a large element in Washington’s intimidation of the world. To save face, the US would be tempted to go nuclear, or seriously bomb China proper, with unforeseeable results.

  The Air Force and Navy could hurt China badly by conventional means, yes, for example by cutting off oil from the Mideast, or destroying the Three Gorges dam. For a variety of reasons this would be playing with fire. The economic results of any of these bright ideas would be godawful.

  

  USS Cole, 2000. Blown up by suicide guys in a small boat.

  Washington seems not to realize that it wields far less military power than it thinks it does, and that the power it does wield is ever less useful than before. As a land power, it is very weak, being unable to defeat Russia, China, or peasants armed with rifles and RPGs. Air power has regularly proved indecisive.

  If Washington somehow won a naval war with China, so what? It would provide the satisfactions of vanity, but China’s danger to the US imperium lies in increasing economic power and commercial expansion through Asia, where it holds the high cards: it is there, Washington isn’t. Grrr-bowwow-woofery in the far Pacific, even if successful, is not going to stop China’s commercial expansion, and a defeat would end the credibility of the Navy forever.

  As I say, Washington is full of bright ideas.

  

  

  

  

  

• After The Novelty Of McDonalds' All-Day Breakfast Wears Off

  They appear to have resorted to a ‘new’ dollar menu item…

   

  

   

  h/t @ianbremmer

  

  

  

  

  

• The Quick "Bull" Vs "Bear" Case In 8 Charts

  “What happens next?” Everyone wants to know the answer, but nobody has it (if they do, they are lying).

  Still, one attempt at framing the narrative, comes from BofA’s Savita Subramanian. Here is the 30,000 foot cliff notes version of the two sides of the story.

  First, the bear case, or as BofA calls it “an economic shock derails a fragile economy.”

  Concern over global growth has become more wide-spread, as suggested by the charts below. We believe that outside of an exogenous geopolitical event, an economic shock would most likely be tied to credit, where signs of stress are building the most.

  • Growth expectations have come down over the past 12 months, per the Global Fund Manager Survey
  • More investors are starting to believe we’re in the “late cycle”
  • There are signs of stress in the high yield market, with distress ratio increasing recently
  • More companies in the S&P 500 are projected to lose money than those with negative EPS 12M ago.

  

   

  And here is the “4 chart summary” of the bull case, which as usually expected, is “more aligned” with BofA’s economists’ current outlook (which does not foresee a recession any time in the coming decade), where they see stable to improving growth in developed markets. This requires that China’s economy does not collapse. But much of the uncertainty may be reflected is asset process, and we see several reasons to remain positive.

  • Valuations are still below average – see Chart 2 for the normalized P/E
  • Short interest has risen over time and is at the highest levels since 2008
  • Investors are underweight the US by a net 10% (per the Global FMS)
  • Sentiment is still bearish, with our Sell Side Indicator in “Buy” territory (see Chart 12) and cash levels at mutual funds also generating a “Buy” signal per the Global FMS.

  

  A more detailed version of the above to follow tomorrow.

  

  

  

  

• Halloween Surprise: How Will The US Banks Plug Their $120B Capital Shortfall? Trick Or Treat?

  

   

  Source: searchglobalnews.wordpress.com

  The Federal Reserve had a nasty surprise for the financial markets right before the Halloween weekend (the perfect timing to sweep something under the carpet and hoping the markets will have forgotten about it by Monday). At 8PM on Friday night (again, perfect timing, the Fed made sure all Bloomberg terminals were switched off and the average Wall Street trader was already spending his salary in a fancy Manhattan bar), a statement was issued, confirming the major banks in the USA would need an additional capital injection of $120B to secure the safety of the financial system and to get rid of the capital shortfall.

  The governors of the Federal Reserve have confirmed and approved a draft version of the proposal, and it will now be made available for public comments. The remarkable part of the proposal is the fact the council of governors is proposing to fill the gap by raising additional debt, instead of issuing new shares to increase the equity level on the banks’ balance sheets.

  

  Source: opengov.com

  The six major banks will be hit by this new proposal, and it’s widely expected JP Morgan and Citigroup will have the hardest task to comply with the Fed’s requirements. So okay, if the $120B could be covered by new (probably subordinated) debt issues, the damage could be limited to the banks just paying a few billions in interest expenses per year. Nothing to lose your sleep over.

  However, what’s really disturbing here is that these same banks, 6 years after the global financial crisis, are still facing shortcomings on the balance sheet front. Despite the government and the Federal Reserve claiming that the ‘crisis is over’ and the American economy is ‘healthy again’, apparently the banks would still have difficulties to deal with any decent-sized economic crisis.

  

  But wait, that’s not all. On Friday, the European Central Bank also announced the results of a review of the situation of the Greek banks in the Euro-system. Apparently, there still is a huge hole in the Greek financial sector (surprise, surprise), and the Greek banks would need an additional capital injection of in excess of $15B , just to survive any adverse economic scenario in the country.

  

  Source: politico.com

  And this will very likely prove to be a much tougher challenge for these banks as the combined market capitalization of the four largest banks in Greece is less than $5B. Oops. Do you see the problem here?

  It will be close to impossible to inject another $15B in those 4 Greek banks without a complete nationalization or at least absorption by a larger entity. And okay, yes, approximately $25B of Greece’s next rescue package is earmarked to be used to support the banks, but that’s only kicking the can further down the road.

  Let it be clear. We are NOT out of the danger zone yet, and with a shortfall of $120B at the six largest banks in the USA and a $15B shortfall in Greece (roughly 3 times the market capitalization of the four largest Greek banks COMBINED), the situation actually looks pretty bad. There’s no way the Federal Reserve could maintain its position that ‘everything is going great in the USA’.

  >>> Read our Latest Gold Report!

  Secular Investor offers a fresh look at investing. We analyze long lasting cycles, coupled with a collection of strategic investments and concrete tips for different types of assets. The methods and strategies are transformed into the Gold & Silver Report and the Commodity Report.

  Follow us on Facebook @SecularInvestor [NEW] and Twitter @SecularInvest

  

  

  

  

  

• Mainstream Media Looks In The Mirror

  Could Not Be Clearer…

   

  

   

  Source: Investors.com

  

  

  

  

  

• Blatant Gold/Silver Manipulation Reflects The Complete Corruption Of The U.S. System

  Submitted by Dave Kranzler via Investment Research Dynamics,

  The morning of the FOMC announcement on Wednesday (Oct 28) gold was up $14 overnight, close to $1080 and the cartel’s dreaded 200 day moving average.  The “premise” was that the market was expecting another rate hike deferral.

  A friend called me that morning and I told him to not get excited because when the FOMC policy decision hits the tape, they will annihilate gold and push the S&P 500 up toward 2100.   I was only 10 pts off on the S&P call, as the S&P 500 closed at 2090, up an absurd 24 points.  

  

   

  Gold was taken to the cleaners:

  

   

  What’s incredible is not one mainstream media analyst or reporter questions this market action. If the premise behind the gold sell-off was a “hawkish” FOMC statement and the threat of a rate hike in December (yawn), then the exact same premise should have cause a big sell-off in stocks. Since when does the threat of tighter monetary policy not hit the stock market?

  Just to recount the play-by-play in gold, the moment the FOMC announcement hit the tape, the Comex computer system was bombarded with sell orders. At this point in the trading day, the ONLY gold/silver market open is the Comex computer Globex system. In the first 30 minutes 29.6k contracts were unloaded – 2.6 million paper ounces. In the entire hour after the announcement 50.5k contracts were unloaded – 5.1 million ounces. Note that the Comex is showing around 200k ounces to be available for delivery.

  The blatant, unfettered manipulation and intervention in the gold and silver market is sponsored by the Fed and the U.S. Treasury, executed by the big bullion banks and fully endorsed by the CFTC.

  Dan Norcini vomited up a theory that the hit on Wednesday was a product of long side (hedge fund) liquidation.  That view proved to be utter scatological regurgitation from an analyst who’s analysis and views have gone completely off the rails.  As it turns out, open interest increased by over 4,000 contracts on Wednesday.  So much for that “long liquidation” idiocy.

  The manipulation of the gold and silver market is a nothing but a product of complete systemic corruption.  The only way that the Fed and the politicians can claim that the economy is “fine” and QE “worked” is to make sure that the one piece of obvious evidence which would say otherwise is kept highly restrained.

  I’ve told colleagues for years that the only way the elitists will let the Comex default, causing gold and silver to launch in price toward Pluto, is when they know they can no longer support their fraud.

  If I’m wrong, how else to do you explain the fact that the front-running candidate to be the next President of the United States is openly a criminal and traitor who should be devoting her entire resource base toward defending herself from being throw in jail forever?  This person, by the way, issues a statement today giving the U.S. economy an “A.”

  On a positive note, I do believe that this country is in its 9th inning and there will be no extra innings in this game.   Gold and silver do appear to be back in an uptrend, with a lot of pressure from the part of the world that demands physical delivery.

  

  

  

  

  

• Goldman's 4 Word Summary Of Q3 Earnings Season: "Adequate Earnings, Dismal Sales"

  Haven’t bothered to check in on the third quarter earnings season (which at this rate will mark the first two back-to-back quarters of earnings declines since 2009, aka an earnings recession)? Then here is the 4 word summary from Goldman Sachs: “adequate earnings, dismal sales.“

  With results from 341 companies (77% of total market cap) in hand, the 3Q reporting season thus far can be summed up as simply as “adequate earnings, dismal sales.” Earnings have been in line with history, with 48% of firms surprising on the bottom line (above the historical average of 46%), for an average EPS surprise of 4% versus the historical average of 5%. On the other hand, sales results have been disappointing, a function of slowing economic growth and a stronger dollar. Just 21% of companies beat consensus revenue estimates by more than one standard deviation, well below the 10-year average of 32%. Excluding Energy, 49% of companies has surprised on EPS, while 20% has surprised on the top line.

  If companies beat on earnings do they also beat on revenues?

  Stocks delivering positive sales surprises have been more likely to surprise on earnings, but a top-line shortfall has not necessarily led to a bottom-line miss. 21% of firms has posted positive 3Q sales surprises, while 14% of stocks beat on both the top and bottom line, meaning firms that beat on sales were also likely to beat on earnings (see Exhibit 1). Stocks surprising on both the top and bottom-line include AMZN, JNPR, NOC. Interestingly, 71% of companies that beat on earnings either negatively surprised on revenue, or reported sales results in-line with expectations, suggesting that margins have surprised to the upside thus far.

   

  

  So as corporate teams seek to push margins even higher in the coming quarters, there will be even more layoffs in the coming quarters, and even more disappointing employment numbers… which is great news for a “lower for longer” addicted market.

  What is the cause of the ongoing revenue slowdown, aside from lack of capital investment of course? The strong dollar is the biggest culprit, a dollar which keeps getting stronger.

  FX headwinds and a slowing US economy have caused positive and negative revenue surprises to diverge significantly from historical averages. Through the first 22 days of 3Q earnings season, only 21% of companies has positively surprised on revenue, nearly 12 percentage points below the 10-year average at this point in the earnings season. Around one third of S&P 500 companies have disappointed on revenue, significantly above the 21% average (see Exhibit 2).

   

  

   

  Historically, as positive sales surprises become scarce, investors are more likely to reward beats on the top line (see Exhibit 3). This trend has been evident during 3Q reporting season. 73% of companies surprising on revenue outperformed the S&P 500 the day following the announcement, the second best hit-rate in the past decade. 3Q sales for NKE, which was aided by surprisingly strong revenue growth in China, beat consensus expectations and subsequently outperformed the S&P 500 by nearly 900 bp during the following day. In contrast, companies surprising on earnings have outperformed the market 64% of the time.

   

  

  For those wondering if the weak top line number means a slowing economy, the answer is yes.

  Disappointing sales results reflect below-average 3Q economic growth. GDP growth equaled just 1.5% in 3Q. Solid growth from  consumer-facing sectors was offset by a drag from inventories. While real personal consumption expenditures increased by 3.2%, inventory accumulation subtracted 1.4 percentage points from growth.

  It’s not bad news for all though: the biggest companies will survive and will likely get even bigger.

  Company results thus far suggest the largest S&P 500 companies have weathered the challenging growth environment better than their smaller counterparts. 58% of S&P 500 market cap has positively surprised on earnings versus an equal-weighted average of 48%, implying better-thanexpected results from larger companies. In fact, 66% of the 50 largest companies in the S&P 500 has beat earnings expectations versus 45% for the remainder of the index. 32% of the 50 largest companies beat on sales versus 19% for the remainder of the S&P 500 (See Exhibit 4).

   

  

  … something the market has noticed and rewarded.

  Better-than-expected earnings results for larger companies have coincided with large-cap outperformance. As measured via the Russell 1000 versus the Russell 2000, large-cap stocks have outperformed small-cap stocks by 257 bp since the end of 3Q. Looking beneath the surface, Consumer Discretionary and Health Care sectors in the Russell 1000 have crushed the Russell 2000 sector indexes, both by more than 400 bp.

  

  Finally here is the full sector and industry performance broken down in various periods:

  

   

  * * *

  Finally, this is where Goldman sees the S&P trading in 1 year: “We expect the S&P 500 will likely trade at 2075 in 12 months (-0.7%).“

  

  

  

  

• The Power Of Fear & The Gullibility Of The Masses

  Submitted by Jim Quinn via The Burning Platform blog,

  “We know now that in the early years of the twentieth century this world was being watched closely by intelligences greater than man’s and yet as mortal as his own. We know now that as human beings busied themselves about their various concerns they were scrutinized and studied, perhaps almost as narrowly as a man with a microscope might scrutinize the transient creatures that swarm and multiply in a drop of water. With infinite complacence men went to and fro over the earth about their little affairs … In the thirty-ninth year of the twentieth century came the great disillusionment. It was near the end of October. Business was better. The war scare was over. More men were back at work. Sales were picking up.” – Opening monologue of  War of the Worlds broadcast – October 30,1938

  

  It was 77 years ago this week that Orson Welles struck terror into the hearts of Americans with his live radio broadcast of the HG Wells classic War of the Worlds. The broadcast began at 8:00 pm on Mischief Night 1938. As I was searching for anything of interest to watch the other night on the 600 cable stations available 24/7, I stumbled across a PBS program about Welles’ famous broadcast.

   

  As I watched the program, I was struck by how this episode during the last Fourth Turning and how people react to events is so similar to how people are reacting during the current Fourth Turning. History may not repeat exactly, but it certainly rhymes.

  It was the ninth year of the Fourth Turning. The Great Depression was still in progress. After a few years of a faux recovery (stock market up 400% from the 1932 low to its 1937 high) for the few, with the majority still suffering, another violent leg down struck in 1938. GDP collapsed, unemployment spiked  back towards 20%, and the stock market crashed by 50%. The hodgepodge of New Deal make work programs and Federal Reserve machinations failed miserably to lift the country out of its doldrums. Sound familiar? The average American household had not seen their lives improve and now the foreboding threat of war hung over their heads.

  The national hysteria over a play about the ridiculously impossible plot of Martians attacking Grover’s Mill, New Jersey seems crazy without the benefit of context. The nation was already on edge. They had just suffered another economic blow to their solar plexus, and now the drumbeats of war in Europe were growing louder. Welles’ biographer Frank Brady described the mindset of the nation:

  “For the entire month prior to ‘The War of the Worlds’, radio had kept the American public alert to the ominous happenings throughout the world. The Munich crisis was at its height. … For the first time in history, the public could tune into their radios every night and hear, boot by boot, accusation by accusation, threat by threat, the rumblings that seemed inevitably leading to a world war.”

  Studies discovered that fewer than one-third of frightened listeners understood the invaders to be aliens; most thought they were listening to reports of a German invasion or a natural catastrophe. The public allowed their emotions to overcome their rational mind. Playing upon people’s fears becomes easier when they are emotionally susceptible and beaten down from years of bad news. Even though it was specifically stated the show was a work of fiction, the mental state of the country was so panicked, people believed something bad was on the verge of happening and allowed themselves to believe.

  

  Much of the credit for the realism of the broadcast goes to Welles, a brilliant showman, who went on to create one of the greatest movies ever made just three years later – Citizen Kane. Welles thought the script was dull, just a day or two before the broadcast.  He stressed the importance of inserting news flashes and eyewitness accounts into the script to create a sense of urgency and excitement. The nation had gotten used to breaking news bulletins during the Munich Crisis.

  Another important issue was the fact the Mercury Theater on the Air was a radio show without commercial interruptions, adding to the program’s realism. The entire episode lasted 90 minutes and at the end of the play Welles assumed his role as host and told listeners the broadcast was a Halloween concoction: the equivalent, he said, “of dressing up in a sheet, jumping out of a bush and saying, ‘Boo!'” Despite the announcements before and after the show, the outrage and calls for Orson Welles’ head were deafening.

  What struck me while watching the PBS retrospective were the similarities between then and now. The gullibility of the masses, the power of fear, the overreaction by the media, busy bodies calling for the government to do something, and the effectiveness of propaganda are all commonalities between that Fourth Turning and today’s Fourth Turning.

  Evidently some listeners heard only a portion of the broadcast because they had been tuned into the Edgar Bergen Show and switched to CBS radio after the play had begun. Some of these people were overcome with fear as  the tension and anxiety prior to World War II led them to mistake it for a genuine news broadcast. Thousands of those people rushed to share the false reports with others, or called CBS, newspapers, or the police to ask if the broadcast was real. The telephone switchboards were overcome with volume and policeman overstepped their authority and entered the CBS studios to try and stop the show mid-broadcast. Evidently, the authorities weren’t big fans of the First Amendment or Fourth Amendment in 1938 either.

  Retrospective analysis has found the hysteria was not as widespread as purported by the mainstream media. The fact the play was performed in NYC, the media capital of the world, and the fictional attack was occurring in New Jersey provided much more publicity to the event. In reality, most of the dupes who were gullible enough to believe that Martians were actually attacking were old people and women. The timeline of the show should have revealed its falsehood to any critical thinking person, as the military somehow was mobilized and defeated within a 30 minute window.

  It seems our society will always have a large swath of people who will believe anything they are told by the media or the government. Our government run public education system now matriculates millions of functionally illiterate zombie like creatures into society, who can be easily manipulated and controlled through the use of  mass media and false propaganda. Those who constitute the invisible government behind the Deep State duly noted the psychological power of fear during this episode in history.

  The master of propaganda during that age even noted the impact on the American public. Adolf Hitler referenced the broadcast in a speech in Munich on November 8, 1938. Welles later remarked that Hitler cited the effect of the broadcast on the American public as evidence of “the corrupt condition and decadent state of affairs in democracy”. It likely confirmed his belief the democratic countries of the world would not have the guts to stand up to a man willing to wage all out war. He invaded Poland less than one year later, initiating the bloodiest war in history.

  Fear is a potent emotion to manipulate by the ruling class among a populace incapable or unwilling to think for themselves. The men behind the curtain, after decades of perfecting the psychological methods of molding the opinions, tastes, and ideas of the masses, believe they can control society through the use of fear. In 1938 Americans feared Germans, economic hardship, war, and evidently Martian invasions. Today they are taught to fear phantom Muslim terrorists, Russians, Chinese, Iranians, gun owners, anyone who questions government overreach, and anyone who disagrees with the social justice warrior agenda. The father of Propaganda, Edward Bernays, portrayed it succinctly in 1928:

  “In almost every act of our daily lives, whether in the sphere of politics or business, in our social conduct or our ethical thinking, we are dominated by the relatively small number of persons…who understand the mental processes and social patterns of the masses. It is they who pull the wires which control the public mind.”

  As I watched the despicable display of yellow journalism by the pathetic excuses for journalists during the CNBC presidential debate the other night, I was reminded of the PBS show and how the press completely blew the War of the Worlds broadcast out of proportion to its actual impact. Within three weeks, newspapers had published at least 12,500 articles about the broadcast and its impact, although the story dropped off the front pages after a few days. It was essentially a tempest in a teapot that has lived on for decades because the press created the outrage and fear.

  This is no different than what happens on a daily and weekly basis today. The mainstream media attempts to work the masses into a frenzy over a meaningless debt ceiling “showdown”, the latest hurricane or snowstorm, the latest fake terrorist warning, the collapse of Greece, the imminent acquisition of a nuclear bomb by Iran, the invasion of the Ukraine by Russia, or whatever sensationalist storyline that will get them ratings and strike the necessary fear into the hearts of the masses.

  Every looming threat is relegated to the back pages of the legacy media rags a few days later. The degraded faux journalists prefer to distract the willfully ignorant masses with the latest Kardashian/Lamar Odom/Caitlyn Jenner reality TV episode, Oscar fashion shows, professional sports, how to get rich in the stock market infomercials, and how you can have the perfect body segments on one of the dozens of faux news shows.

  What I found fascinating in the PBS episode is the never ending calls from busy bodies, control freaks, and lovers of government coercion to do something about everything they don’t like. In the days following the broadcast, there was widespread outrage in the media. The program’s news-bulletin format was described as deceptive by some newspapers and public figures, leading to an outcry against the perpetrators of the broadcast and calls for regulation by the Federal Communications Commission. How dare Orson Welles broadcast a play, described beforehand as a work of fiction, in a creative, exciting, and realistic manner. Do you see any similarities to calls for the FCC to control the internet, where anti-establishment websites dare to speak the truth?

  There will always be a sociopathic segment of the population who want control over everything and everyone. They want bigger government, more laws, more regulations, more restrictions, more taxes and more control over your life. The 1930’s marked a huge turning point for this country, with the majority supporting the New Deal and government intervening deeply into our everyday lives. Today, the government, in the control of bankers, crony corporate interests, billionaires, and captured political hacks, has smothered our freedoms, liberties, entrepreneurial spirit, intellectual debate, and ability to change the system from within.

  Shortly after the Welles broadcast, the nation came together and endured seven years of shared sacrifice, with the young men of the country fighting and dying on continents and islands far from our shores in a struggle against aggression. Today, I feel the aggression is coming from within. It’s our own government and the men who control it who are the real enemy. The coming struggle during this Fourth Turning is more likely to be American versus American. A prominent figure from the last Fourth Turning saw into the future decades ago, and he was right.

  “I am concerned for the security of our great Nation; not so much because of any treat from without, but because of the insidious forces working from within.” ? Douglas MacArthur

  

  

  

  

  

• First Images Of Russian Passenger Jet Crash Site Emerge

  Earlier today, ISIS claimed responsibility for the downing of a commercial airliner over the the Sinai Peninsula.

  The crash killed all 224 people on board. 

  Islamic State described the passengers as “crusaders” and “praised God” for their deaths:

  Breaking: Downing of Russian airplane, killing of more than 220 Russian crusaders on board.

   

  Soldiers of the Caliphate were able to bring down a Russian plane above Sinai Province with at least 220 Russian crusaders aboard.

   

  They were all killed, praise be to God. O Russians, you and your allies take note that you are not safe in Muslims lands or their skies.

   

  The killing of dozens daily in Syria with bombs from your planes will bring woe to you. Just as you are killing others, you too will be killed, God willing.

  Although analysts have disputed the idea that ISIS could have brought down the plane from the ground, if the video circulated online is authentic, then someone knew exactly when to start filming and that, in and of itself, seems to suggest that this was premeditated. Then again, reports indicate that even IS Sinai claim the video is fake. 

  Whatever the case, tragedy struck in the skies above Egypt today and below, find the first images and footage from the crash site.

  

  

  

  

  As we noted earlier, the question now is whether Russia will expand its Mid-East operations and commence airstrikes in Egypt because one thing is clear: if the Russian population had any qualms about continuing the campaign against “terrorists”, they were just eliminated in perpetuity.

  As for figuring out exactly what went wrong with the Airbus A321 that crashed this morning, don’t worry, John Kerry will soon get to the bottom of things: 

  “Secretary Kerry spoke to Foreign Minister Lavrov today to express the United States’ deepest condolences to the families and friends of those killed in the crash in Egypt of Kogalymavia Flight 9268. Secretary Kerry also offered to provide US assistance, if needed.”

  

  

  

  

• Did The PBOC Just Exacerbate China's Credit & Currency Peg Time Bomb?

  Submitted by Doug Noland via Credit Bubble Bulletin,

  October 30 – BloombergView (By Matthew A. Winkler): “Ignore China’s Bears: There's a bull running right past China bears, and it’s leading the world’s second-largest economy in a transition from resource-based manufacturing to domestic-driven services such as health care, insurance and technology. Just when the stock market began its summer-long swoon, investors showed growing confidence in the new economy — and they abandoned their holdings in the old economy. These preferences follow Premier Li Keqiang's directive earlier in the year at the National People's Congress to ‘strengthen the service sector and strategic emerging industries.’”

  Bubbles always feed – and feed off of – good stories. Major Bubbles are replete with great fantasy. Even as China’s Bubble falters, the recent “risk on” global market surge has inspired an optimism reawakening. August has become a distant memory.

  In the big picture, the “global government finance Bubble – the Granddaddy of all Bubbles” is underpinned by faith that enlightened global policymakers (i.e. central bankers and Chinese officials) have developed the skills and policy tools to stabilize markets, economies and financial systems. And, indeed, zero rates, open-ended QE and boundless market backstops create a “great story”. Astute Chinese officials dictating markets, lending, system Credit expansion and economic “transformation” throughout a now enormous Chinese economy is truly incredible narrative. Reminiscent of U.S. market sentiment in Bubble years 1999 and 2007, “What’s not to like?”

  Never have a couple of my favorite adages seemed more pertinent: “Bubbles go to unimaginable extremes – then double!” “Things always turn wild at the end.” Well, the “moneyness of Credit” (transforming increasingly risky mortgage Credit into perceived safe and liquid GSE debt, MBS and derivatives) was instrumental the fateful extension of the mortgage finance Bubble cycle. At the same time, Central banks and central governments clearly have much greater capacity (compared to the agencies and “Wall Street finance”) to propagate monetary inflation (print “money”). Most importantly, this government “money” and the willingness to print unlimited quantities to buttress global securities markets now underpin securities markets on a global basis (“Moneyness of Risk Assets”). And unprecedented securities market wealth underpins the structurally impaired global economy.

  China has been a focal point of my “global government finance Bubble” thesis. Unprecedented 2009 stimulus measures were instrumental in post-crisis global reflation. Importantly, China – and developing economies more generally – had attained strong inflationary biases heading into the 2008/09 crisis. Accordingly, the rapid Credit system and economic responses to stimulus measures had the developing world embracing their newfound role of global recovery “locomotive”. I contend that the associated “global reflation trade” was one of history’s great speculative episodes. I have posited that the bursting of this Bubble (commodities and EM currencies) marks a historical inflection point for the global government finance Bubble. I find it remarkable that this analysis remains so extremely detached from conventional thinking.

  Conventional analysis revels in seemingly great stories. As an analyst of Bubbles, I methodically contemplate a fundamental question: Is the underlying finance driving the boom sound and sustainable? Over the past 25 years, I’ve pondered this puzzle on too many occasions to count – about market, asset and economic Bubbles – at home and abroad. Arguably, it’s been 25 years of progressively destabilizing global Monetary Disorder. Looking today at the U.S., Europe, Japan and EM – I strongly believe the underlying finance driving the lackluster boom is hopelessly unsound. I as well appreciate that today’s acute monetary instability remains inconspicuous to most analysts.

  As a macro analyst, I view China as the global Bubble’s focal point – the weak link yet, at the same time, the key marginal source of Bubble finance. In the short term, China’s ability to stabilize its stock market, incite lending and reestablish their currency peg have been instrumental in the resurgent global “risk on” backdrop. At the same time, I’m confident that the underlying finance driving this historic Bubble is unsound. This will remain a most critical issue.

  I have argued that the global government finance Bubble elevated “too big to fail” from large financial institutions to encompass global risk markets more generally. Importantly, so-called “moral hazard” and associated risk misperceptions evolved into a global phenomenon. And nowhere has this dynamic had more far-reaching consequences than in China. Underpinned by faith that China’s policymakers will backstop system liabilities (i.e. deposits, intra-bank lending, etc.), Chinese banking assets (loans and such) have inflated to double the size of the U.S. banking system. China’s corporate debt market has ballooned to an incredible 160% of GDP (double the U.S.!), again on the view of central government backstops. Then there’s the multi-Trillion (and still growing) “shadow banking” sector, possible only because investors in so-called “wealth management” products and other high-yielding instruments believe the government will safeguard against loss.

  International investors/speculators have been willing to disregard a lot in China. Corruption has been almost systemic. The historic scope of malinvestment is rather conspicuous. China is in the midst of a historic apartment construction and lending Bubble. There’s a strong case to be made that the amount of Chinese high-risk lending is unprecedented in financial history. The massive Chinese banking system is today vulnerable from the consequences of extremely unsound lending to households, corporations and local governments. Chinese lenders are also likely on the hook for hundreds of billions of loans provided to finance China’s global commodities buying binge.

  Throughout the now protracted boom, perceptions have held that Chinese officials have things under control. And with a massive trove of international reserves, the Chinese have been perceived to possess ample resources for stimulus as well as banking system recapitalization, as necessary. Erratic Chinese policy moves were widely assailed this summer. And while down $500 billion over recent months, China’s $3.5 TN of reserves have been sufficient to underpin general confidence (once Chinese officials convinced the marketplace that they would stabilize their currency).

  Last week’s CBB succumbed to the too colorful language “Credit and Currency Peg Time Bomb.” China’s policy course appears to focus on two facets: to stabilize the yuan versus the dollar and to resuscitate Credit expansion. For better than two decades, similar policy courses were followed by myriad EM policymakers in hopes of sustaining financial and economic booms. Many cases ended in abject failure – often spectacularly. Why? Because when officials resort to such measures to sustain faltering Bubbles it generally works to only exacerbate systemic fragilities. For one, late-stage reflationary measures compound Credit system vulnerability while compounding structural impairment to the real economy. Secondly, central bank and banking system Credit-bolstering measures create liquidity that invariably feeds destabilizing “capital” and “hot money” outflows.

  As the globe’s leading superpower and master of the world’s reserve currency, the U.S. has experienced quite contrasting dynamics (to EM). The U.S. financial system has enjoyed the freedom to aggressively expand Credit, with “capital” and “hot money” outflows invariably (and effortlessly) “recycled” right back into U.S. financial assets. With U.S. corporations, households and financial institutions borrowing almost exclusively in dollars, the Fed has enjoyed extraordinary flexibility when it comes to monetary inflation. Post-tech Bubble reflationary policies and dollar devaluation did not risk an EM-style asset/liability currency mismatch. Moreover, post-mortgage finance Bubble QE-amplified liquidity outflows were largely absorbed by China and EM central banks as they accumulated international reserve holdings (flows conveniently recycled back into Treasury and agency securities).

  Importantly, faith in the dollar as the unrivaled global reserve currency underpinned confidence in Federal Reserve Credit – while the unfettered inflation of Fed Credit underpinned confidence in the U.S. securities markets and financial system right along with the American economy. It’s worth noting also that the juggernaut German economy has provided considerable flexibility to the ECB and euro currency and Credit management. Unique attributes have also thus far afforded the Bank of Japan phenomenal stimulus and devaluation latitude without inciting a crisis of confidence in the yen or Japanese financial assets. Overall, faith in central bank Credit has inflicted immeasurable damage.

  Conventional thinking holds that China’s currency is on the verge of “reserve” status. It is believed that Chinese officials will enjoy similar dynamics and policy flexibility as the U.S., Europe and Japan. The “Credit and Currency Peg Time Bomb” thesis rests upon the view that China is not a leading “developed” economy, but rather one massive “developing”-economy Credit and economic Bubble. I could be wrong on this. But the issue “Developing or Developed?” has profound ramifications for China’s future, as well as for global finance, the international economy and geopolitics more generally.

  China presents the façade of a highly advanced, high-tech “developed” economy. But in terms of corruption, reckless lending and state-directed uneconomic investment – China is “developing” at its core. In terms of corporate governance – it’s “developing”. Extreme wealth disparities? Right, “developing.” The government’s obtrusive role in finance and in the real economy, on full display over recent months, is pure “developing.” In short, China simply doesn’t have the history, capitalistic institutional structures or governance to function as a grounded and well-developed market economy. They were moving in the right direction before fatefully losing control of finance.

  I really hope China pulls out of this Bubble period without calamity. But I fear they are locked in a precarious policy course of perpetual Credit excess – a progressively unsound Credit boom destined for a crisis of confidence. They face constant “capital” outflow pressures – from both domestic-based and international sources. Wealthy Chinese will continue to try to get “money” (and their families) out of the country, as international investors and speculators flee an increasingly chaotic backdrop. How enormous is the Chinese speculative “carry trade” playing high-yielding Chinese debt instruments?

  I used “time bomb” terminology because throwing previously inconceivable quantities of new Chinese Credit atop “Terminal Phase” excess ensures exponential growth in systemic risk. Ironically, the huge reserve holdings – perceived to support systemic stability – actually ensure excesses are allowed to run unchecked to catastrophic extremes. I expect “capital” flight will continue to deplete reserve holdings. Markets will fret covert activities employed to support the yuan and bolster reserves. At some point, the markets will contrast the rising mountain of problem and suspect loans (and bonds) to the dwindling stock of reserves – and turn jittery. At some point there will be plenty to worry about in the Chinese banking system and corporate debt markets.

  I expect the downside of this historic Credit cycle to come with negative currency ramifications. Reminiscent of the nineties SE Asian Bubbles, Chinese officials are keen to postpone the day of reckoning. Rather than more gradual and less disruptive currency devaluation, determination to cling to reflationary policies coupled with a pegged currency regime ensures a major currency dislocation becomes part of a disruptive general crisis in confidence.

  At the end of the day, the massive unabated inflation of government finance – the unprecedented issuance of sovereign debt and central bank Credit – ensures a crisis of confidence in the underlying value of this “money.” Unfettered “money” in the hands of politicians and contemporary central bankers is risky business. Confidence in EM finance has waned, although an ebb and flow has seen sentiment improve over recent weeks. Optimism’s revival has much to do with perceptions of China’s stabilization. Count me skeptical that confidence in China is anything more than skin deep. “Developing or Developed?” How long will they enjoy the flexibility of unfettered Credit and a currency tied to the dollar?

  

  

  

  

  

• Greek Bad Debt Rises Above 50% For The First Time, ECB Admits

  It was almost exactly one year ago, on October 26, 2014, when the ECB concluded its latest European Stress Test. As had been pre-leaked, some 25 banks failed it, although the central bank promptly added that just €9.5 billion in net capital shortfall had been identified. What was more surprising is that to the ECB, the Greek banks – Alpha Bank, Eurobank Ergasias, National Bank of Greece, and PiraeusBank had entered Schrodinger bailout territory: they had both failed and passed the test at the same time. To wit:

  These banks have a shortfall on a static balance sheet projection, but will have dynamic balance sheet projections (which have been performed alongside the static balance sheet assessment as restructuring plans were agreed with DG-COMP after 1 January 2014) taken into account in determining their final capital requirements. Under the dynamic balance sheet assumption, these banks have no or practically no shortfall taking into account net capital already raised.

  Got that? According to the ECB, last October Greek banks may have failed the stress test, but under “dynamic conditions” they passed it. What this meant was unclear at the time, although as we explained this was nothing more than an attempt to boost confidence in Europe’s banking sector. This was the key quote from the ECB’s Vítor Constâncio: “This unprecedented in-depth review of the largest banks’ positions will boost public confidence in the banking sector. By identifying problems and risks, it will help repair balance sheets and make the banks more resilient and robust. This should facilitate more lending in Europe, which will help economic growth.”

  It didn’t.

  Eight months later when it became very clear what the ECB meant in practical terms, when the entire Greek financial system found itself in cardiac arrest as a result of increasing hostilities between the Greek government which was on the verge of severing its ties with Europe and an ECB backstop, and only €90 billion in Emergency Liquidity Assistance from the ECB – which also was this close from being withdrawn forcing Greece to implement draconian capital controls – prevent the total collapse of the Greek financial system which now, it is clear to everyone, has become a hostage of European “goodwill.”

  Fast forward to today, when the ECB repeated its annual exercise in confidence-boosting futility, when it released the results of its latest stress test focusing on Greek banks, i.e., the “AGGREGATE REPORT ON THE GREEK COMPREHENSIVE ASSESSMENT 2015“

  This is what the ECB said in its executive summary:

  The exercise is based on updated macroeconomic data and scenarios that reflect the changed market environment in Greece and has resulted in aggregate AQR-adjustments of €9.2 billion to participating banks’ asset carrying value. Overall, the assessment has identified capital needs totalling, post AQR, €4.4 billion in the base scenario and €14.4 billion in the adverse scenario.

   

  Covering the shortfalls by raising capital would then result in the creation of prudential buffers in the four Greek banks, which will facilitate their capacity to address potential adverse macroeconomic shocks in the short and medium term and their capacity to improve the resilience of their balance sheet, keeping an adequate level of solvency.

   

  Banks have to propose remedial actions (capital plans) in order to cover the entire shortfall (€14.4 billion), out of which a minimum of € 4.4 billion (corresponding to the AQR plus baseline shortfall) is expected to be covered by private means.

  The tabulated capital shortfall results for the same 4 banks which a year ago “dynamically” passed the ECB’s “stress test” with flying colors, but failed it in every possible way this time around, were as follows:

  

  Bloomberg’s take:

  Greece’s four main banks must raise 14.4 billion euros ($15.9 billion) in fresh capital, after a review by the European Central Bank, as investors and taxpayers face the cost of repairing the damage resulting from six months of wrangling between the country’s government and its creditors.

   

  The asset-quality review resulted in valuation adjustments of 9.2 billion euros at National Bank of Greece SA, Piraeus Bank SA, Eurobank Ergasias SA and Alpha Bank AE, the Frankfurt-based ECB said in a statement Saturday. In the stress tests, the banks’ capital gap amounted to 14.4 billion euros under a simulated crisis, and 4.4 billion euros under the baseline scenario. The four banks will have to submit recapitalization plans to the ECB’s supervisory arm by Nov. 6.

   

  

   

  National Bank of Greece, the country’s biggest bank by assets, has a total capital shortfall of 4.6 billion euros, of which 1.6 billion euros arises from the baseline scenario. Piraeus has the biggest shortfall of all the lenders, having to raise 2.2 billion euros under the baseline scenario, and 4.9 billion euros in total. Alpha Bank only needs to raise 263 million euros under the baseline scenario, of a total shortfall of 2.7 billion euros. Eurobank has the lowest aggregate shortfall, totaling 2.2 billion euros, of which 339 million euros corresponds to the baseline scenario.

  There was no commentary on the “odd” twist how in the span of one year, the same banks which last October were deemed stable and “dynamically” not needing any bailouts, not only had to implement capital controls to avoid a terminal deposit outflow, but now need to raise at least €14 billion.

  None of this contradictory confusion is surprising, and neither was the reason for today’s stress test: it is just the latest desperate attempt to restore confidence in a country’s banking sector, a country which still has and will have capital controls for a long time, and to give depositors the confidence that keeping their cash with the local insolvent banks is safe.

  The European Commission said in a statement that it is “encouraged” by the results, while Eurobank said that it targets maximum participation of high quality private funds in its capital increase. Alpha Bank said in a filing to the stock exchange that the result “demonstrates resilience,” despite “higher hurdle rates and the repayment of 940 million euros of state preference shares in 2014, which further improved the quality of capital.”

  As Reuters further writes, today’s result was merely another optical exercise in putting lipstick on the Greek bank pig:

  The fact, however, that the declared capital hole is smaller than the 25 billion euros earmarked to help banks in the country’s bailout may encourage investors such as hedge funds to buy shares.

   

  Germany’s Deputy Finance Minister Jens Spahn said attracting investors would reduce the support needed from the euro zone’s rescue scheme, the European Stability Mechanism.

  The ECM, which is the source of funds for the third Greek bailout, also promptly chimed in: “the comprehensive assessment conducted by European Central Bank on Greek lenders shows that ESM-backed loan program to Greece is adequately funded to accommodate additional capital needs in these banks, a spokesman for ESM says in an e-mail to Bloomberg. He added that the ECB stress test EU14.4b shortfall is “well within” EU25b buffer earmarked by ESM for Greek bank recapitalizations. After approval by euro-area member states, EU10b, which have already been mobilized and sitting in segregated account managed by the ESM, will be made available quickly to Greece.

  He ended on a hopeful note: “with sufficient private-sector participation, the remaining EU15b won’t be needed.”

  Well, a year ago Greeks were told there was nothing to fear and that no new capital was needed. This was a lie. Today we learn that, as expected, billions are needed… but less than the €25 billion set aside over the summer for the Greek bank bailout, so this is great news: after all it’s “better than expected.”

  Alas, this is just the latest lie, and one year from today, we can be certain that tens of billions more in new capital will be required.

  The reason: the biggest surprise from today’s stress test results was not in the capital shortfall measures, which will be promptly adjusted once again when the next Greek systemic crisis arrives – as it will because despite all the talk, absolutely nothing has changed either since last October or since the third Greek bailout. The surprise was the ECB’s admissions that the biggest problem not only for Greece, but all of Europe, the relentless surge in bad debt, continues without stopping.

  Recall what we said in July, when noting that Greek Non-Performing Loans had risen to €100 billion.

  Data from banks show that repayments declined to between 20 and 50 percent of performing loans, creating the conditions for a major increase in bad loans. This trend is in line with the estimates of the Bank of Greece, according to which NPLs amounted to 40 percent of the total at the end of 2014, with the likelihood they will grow further in the first half of the year.

   

  As a reference point, there is a little over €210 billion in total Greek loans, both performing and non-performing, currently and about €120 billion in deposits. There is also about €90 billion in Emergency Liquidity Assistance from the ECB.

   

  The total amount of bad loans (those which have remained unserviced for at least 90 days) has reached 100 billion euros, and the BoG data show that 70 percent of the loans that have entered payment programs remain nonperforming.

   

  This is a major problem for the Greek Banks but even more so for The ECB as there is not much it can do to ‘control’ NPLs and given provisions for bad loans are a mere EUR40bn – there is a big hole here that no one is accounting for.

   

  

  And since, this unprecedented and ongoing increase in NPLs is really all that matters, the only relevant data point from today’s ECB exercise was the following as cited by Reuters: “As controls on cash withdrawals have squeezed the economy, loans at risk of non-payment have increased by 7 billion euros to 107 billion euros.“

  The punchline: following yet another tortured admission of just how ugly Greek balance sheets are, the ECB has confirms what we knew months ago, namely that more than  half of all Greek loans are now nonperforming, and that as much as 57% of the loans made by Piraeus Bank the bank which fared worst, are at risk with the other Greek banks not much better off.

  What happens next?

  As expected, the Greek parliament did not waste any time to approve legislation outlining the process of recapitalising the country’s banks, which it did earlier today. According to the FT, “the bill states that bank rescue fund HFSF will have full voting rights on any shares it acquires from banks in exchange for providing state aid. Under the bill the bank rescue fund will have a more active role, assessing bank managements.

  The exact mix of shares and contingent convertible bonds the HFSF will buy from banks in exchange for any fresh funds it will provide will be decided by the cabinet.

   

  The capital hole has emerged chiefly due to the rising number of Greeks unable or unwilling to repay their debt.

  And therein lies the rub, because in the span of three months, Greek NPLs have risen from 47.6% of total to 51%: an increase of just over 1% in bad debt every month.

  Which means that whether or not the latest attempt to boost confidence by the ECB, ESM, and the Greek parliament succeeds is moot. Yes, a few hedge funds may invest funds alongside the ESM, but in the end, as the NPLs keep rising and as long as Greek debtors refuse – or simply are unable – to pay their debt or interest, the next Greek crisis is inevitable.

  The biggest wildcard is whether or not the Greek population will accept this latest promise of stability in its banking sector at face value: a banking sector which since July is operating under draconian capital controls. Granted, we should point out that in the past two months the deposit outflow from banks has stopped, and even reversed modestly adding about €900 million in deposits in the past two months, although that is mostly due to the inability of households and corporations to withdraw any sizable amount of funds.

  

  The real answer whether Greek banks have been “saved” will wait until the shape of the final bank recapitalization takes place, even as NPLs continue to mount. Remember: Greek lenders are currently kept afloat only by the ECB’s ELA but there is a rush to get the recapitalization finished. If it is not done by the end of the year, new European Union rules mean large depositors such as companies may have to take a hit in their accounts.

  If the proposed recap is insufficient – and it will be since under the surface the Greek economy continues to collapse and NPLs continue to mount – and a bank bail-in of depositors takes place (a bail-in which took place immediately in the case of Cyprus back in 2013 when Russian oligarch savings were “sacrificed” to bail out the local insolvent banking system), the next leg in the Greek bank crisis will promptly unveil itself, only this time Greece will have some 200% in debt/GDP to show for its most recent, third, bailout.

  Finally, the real question is: having read all of the above, dear Greek readers, will you hand over what little cash you have stuffed in your mattress to your friendly, neighborhood, soon to be recapitalized bank?

  Source: ECB, Bank of Greece

  

  

  

  

  

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