Today’s News November 8, 2015

• "A Thin-Skinned Minority Is Ruining This Nation": Professor Crushes "Political Correctness" Wave Sweeping America

  In a time where college students are offended by pretty much everything, The Federalist Papers reports that one professor at UNC-Wilmington decided to cut through the rhetoric and let his students know that they aren’t the special snowflakes liberals and their parents would have them believe.

  His epic class introduction has gone viral, and for good reason: this is the most common sense lecture to come out of any college in a long time.

  Welcome back to class, students! I am Mike Adams your criminology professor here at UNC-Wilmington. Before we get started with the course I need to address an issue that is causing problems here at UNCW and in higher education all across the country. I am talking about the growing minority of students who believe they have a right to be free from being offended. If we don’t reverse this dangerous trend in our society there will soon be a majority of young people who will need to walk around in plastic bubble suits to protect them in the event that they come into contact with a dissenting viewpoint. That mentality is unworthy of an American. It’s hardly worthy of a Frenchman.

   

  Let’s get something straight right now. You have no right to be unoffended. You have a right to be offended with regularity. It is the price you pay for living in a free society. If you don’t understand that you are confused and dangerously so. In part, I blame your high school teachers for failing to teach you basic civics before you got your diploma. Most of you went to the public high schools, which are a disaster. Don’t tell me that offended you. I went to a public high school.

   

  Of course, your high school might not be the problem. It is entirely possible that the main reason why so many of you are confused about free speech is that piece of paper hanging on the wall right over there. Please turn your attention to that ridiculous document that is framed and hanging by the door. In fact, take a few minutes to read it before you leave class today. It is our campus speech code. It specifically says that there is a requirement that everyone must only engage in discourse that is “respectful.” That assertion is as ludicrous as it is illegal. I plan to have that thing ripped down from every classroom on campus before I retire.

   

  One of my grandfathers served in World War I. My step-grandfather served in World War II. My sixth great grandfather enlisted in the American Revolution when he was only thirteen. These great men did not fight so we could simply relinquish our rights to the enemy within our borders. That enemy is the Marxists who run our public universities. If you are a Marxist and I just offended you, well, that’s tough. I guess they don’t make communists like they used to.

   

  Unbelievably, a student once complained to the Department chairwoman that my mention of God and a Creator was a violation of Separation of Church and State. Let me be as clear as I possibly can: If any of you actually think that my decision to paraphrase the Declaration of Independence in the course syllabus is unconstitutional then you suffer from severe intellectual hernia.

   

  Indeed, it takes hard work to become stupid enough to think the Declaration of Independence is unconstitutional. If you agree with the student who made that complaint then you are probably just an anti-religious zealot. Therefore, I am going to ask you to do exactly three things and do them in the exact order that I specify.

   

  First, get out of my class. You can fill out the drop slip over at James Hall. Just tell them you don’t believe in true diversity and you want to be surrounded by people who agree with your twisted interpretation of the Constitution simply because they are the kind of people who will protect you from having your beliefs challenged or your feelings hurt.

   

  Second, withdraw from the university. If you find that you are actually relieved because you will no longer be in a class where your beliefs might be challenged then you aren’t ready for college. Go get a job building houses so you can work with some illegal aliens who will help you gain a better appreciation of what this country has to offer.

   

  Finally, if this doesn’t work then I would simply ask you to get the hell out of the country. The ever-growing thinned-skinned minority you have joined is simply ruining life in this once-great nation. Please move to some place like Cuba where you can enjoy the company of communists and get excellent health care. Just hop on a leaky boat and start paddling your way towards utopia. You will not be missed.

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  Professor Adams – having tenure – is more open to attack the ongoing Cultural Marxism that is sweeping across the nation. But, as we previously noted, there are very few legitimate cultural divisions in the world. Most of them are arbitrarily created, not only by political and financial elites, but also by the useful idiots and mindless acolytes infesting the sullied halls of academia.

  It is perhaps no mistake that cultural Marxists in the form of "social justice warriors", PC busybodies and feminists tend to create artificial divisions between people and “classes” while attacking and homogenizing very real and natural divisions between individuals based on biological reality and inherent genetic and psychological ability.

  This is what cultural Marxists do: divide and conquer or homogenize and conquer, whatever the situation happens to call for.

  They do this most commonly by designated arbitrary "victim status" to various classes, thus dividing them from each other based on how "oppressed" they supposedly are.  The less statistically prominent a particular group is (less represented in a job field, media, education, population, etc.) in any western society based on their color, ethnicity, sexual orientation, gender, etc., generally the more victim group status is afforded to them by social justice gatekeepers.  Whites and males (straight males) are of course far at the bottom of their list of people who have reason to complain and we are repeatedly targeted by SJW organizations and web mobs as purveyors of some absurd theory called "the patriarchy".

  Although cultural marxism does indeed target every individual and harm every individual in the long run, my list of personal solutions outlined in this article will be directed in large part at the categories of people most attacked by the social justice cult today.

  …

  It is not enough anymore to simply continue pointing out the insanity of political correctness; we must also take useful steps toward reversing the destruction already wrought.

  And so, here are my solutions, which must be enacted by individuals in their daily lives regardless of the potential backlash. Do you have leftist leaning friends or family members? It doesn’t matter. Are you employed in a workplace crawling with social justice ideologues? Stop seeing them as part of the equation because they do not matter. Worried about losing a relationship if you make a stand? Say good riddance. This is what must be done by free thinkers if they are to counter and reverse the collectivist nightmare of cultural Marxism.

  Feel no shame: Social justice relies on shaming tactics, usually by slandering an opponent with a label that does not really apply to him, in order to control his arguments and behavior. If you don’t care about being called a bigot, a racist, a sexist, a misogynist, a homophobe, etc., then there is not really much that they can do to you.

   

  Do not self-censor: This does not mean you should go out of your way to be antagonistic or act like an ass, but the thought police have power only if you give power to them. Say what you want to say when you want to say it, and do it with a smile. Let the PC police froth and scream until they have an aneurism. Cultural Marxists are generally weaklings. They avoid physical confrontation like they avoid logic, so why fear them?

   

  Realize there is no such thing as white privilege or male privilege: In reality, there is only institutionalized “privilege” for victim-status groups. There is no privilege for whites, males, white males or straight white males. When confronted with such claims, demand to see proof of such privilege. Invariably, you will get a long list of first world problems and complaints backed by nothing but easily debunked talking points and misrepresented statistics. People should not feel guilty for being born the way they are, and this includes us “white male devils.”

   

  Demand facts to back claims: Cultural Marxists tend to argue on the basis of opinion rather than fact. Present facts to counter their claims, and demand facts and evidence in return. Opinions are irrelevant if the person is not willing to present supporting facts when asked.

   

  Do not play the game of "unconscious bias": If social justice cultists can't counter your position with facts or logic, they will invariably turn to the old standby that you are limited in your insight because you have not lived in the shoes of a – (insert victim group here).  I agree.  In fact, I would point out that this reality of limited perception also applies to THEM as well.  They have not lived in my shoes, therefore they are in no position to claim I enjoy "privilege" while they do not.  This is why facts and evidence are so important, and why anecdotal evidence and personal feelings are irrelevant where cultural Marxism is concerned.

   

  Let cultural Marxists know their fears and feelings do not matter: No one is entitled to have teir feelings addressed by others. And, a person’s fears are ultimately unimportant. Whether the issue is the nonexistent “rape culture” or the contempt cultural Marxists feel over private gun ownership, their irrational fears are not our concern. Why should any individual relinquish his liberties in the name of placating frightened nobodies?

   

  Demand that society respect your inherent individual rights: Collectivism’s ultimate propaganda message is that there is no such thing as inherent rights or liberties and that all rights are arbitrary and subject to the whims of the group or the state. This is false. I have written extensively in the past on inherent rights, inborn psychological contents and natural law, referencing diverse luminaries, scientists and thinkers, including Thomas Aquinas, Carl Gustave Jung, Steven Pinker, etc., and I welcome readers to study my many articles on individualism.  Freedom is an inborn conception with universally understood aspects. Period. No group or collective is more important than individual liberty. No artificial society has preeminence over the individuals within that society. As long as a person is not directly impeding the life, liberty, prosperity and privacy of another person, he should be left alone.

   

  Maintain your rights; they do not hurt other people: PC cultists will invariably argue that every person, whether he knows it or not, is indirectly harming others with his attitude, his beliefs, his refusal to associate, even his very breathing.  "We live in a society", they say, "and everything we do affects everyone else…".  Don’t take such accusations seriously; these people do not understand how freedom works.

   

  Say, for instance, hypothetically, that I refuse to bake a gay wedding cake for a couple and I am accused of violating their rights in the name of preserving my own. I would immediately point out that no one is entitled to a gay wedding cake, baked by me or anyone else and I have every right to choose my associations based on whatever criteria I see fit. Now, a corrupt government entity may claim I do not have that right. But the fact is I do, and no one — not even government — can force me to bake a cake if I don’t want to. Also, I would point out that the gay couple in question has every right in a free society to bake their OWN damn cake or open their own cake shop to compete with mine. This is how freedom works. It is not based on collective entitlement; it is based on personal responsibility.

   

  Refuse to deny the scientific fact of biological gender: Gender is first and foremost a genetic imperative. Society does not determine gender roles; nature does. A man who chops up his body and takes hormone pills to look like a woman is not and will never be a woman. A woman who tapes down her breasts and gets a short haircut will never be a man. There is no such thing as “transgendered” people. No amount of social justice or wishful thinking will ever allow them to reverse their genetic proclivities. Their psychological and sexual leanings do not change their inborn biological reality.

   

  By extension, we should refuse to play along with this nonsense. I will never refer to a man in a wig and dress as a “woman.” I will never refer to a woman with identity issues as “transgendered.” They are what nature made them, and we should not police our pronouns just to falsely reassure them that they can deny nature.

   

  Deny the illusion of Utopian equality: There is no such thing as pure equality.  Society is not a homogeneous entity, it is an abstraction built around a group of unique individuals.  Individuals can be naturally gifted, or naturally challenged.  But there will always be some people who are more apt towards success than others.

   

  I have no problem whatsoever with the idea of equality of opportunity, which is exactly what we have in this country (except in the world of elitist finance which is purely driven by nepotism).  I do have a problem with the lie of universal equality through engineered means.

   

  Standards of success should not be lowered in order to accommodate the least skilled people to facilitate artificial parity.  For example, I constantly hear the argument that more people with victim group status should be given greater representation in positions of influence and regard within our culture, from science and engineering, to media, to business CEO's, to politics, etc.  The key word here is "given", rather than "earned".  There is nothing wrong with one group of people excelling in a field more than another group, and there is nothing wrong with inequality when it comes to individual achievement.  We must begin refusing to reward people for mediocrity and punishing success simply because the winners are not part of a designated victim group.

   

  If you are a man, embrace your role: I am a man and cannot claim to know what specific solutions women should take to counter cultural Marxism. I would love to read an article written on the subject by a woman in the Liberty Movement.  I will say that men in particular have a considerable task ahead in terms of their personal endeavors if they hope to repair the destruction of social justice.

   

  For thousands of years, men have been the primary industrial force behind human progress. Today, they are relegated to cubicles and customer service, to video games and Web fantasies, to drug addictions and a lack of responsibility. If we have any chance of undoing the damage of cultural Marxism, modern men must take on their original roles as producers, inventors, entrepreneurs, protectors, builders and warriors once again. They should do this for their own benefit, and not for the validation of others.

   

  You don’t have to prove to anyone you do "manly things", just go out and do them. Most importantly, become dangerous. Men are meant to be dangerous beings. That does not mean we are meant to be indiscriminately violent (just as women aren’t meant to be indiscriminately violent), but we are supposed to be threatening to those who would threaten us. Modern society has NOT removed the need for masculinity and I believe people will begin realizing this the more our culture sinks into economic despair. Train in martial arts, learn tactical firearms handling, go hunting and don’t take lip from people. In my opinion, every man should know how to kill things, even if he never plans on using those abilities.

   

  Home-school your children: It’s simple, if you don’t want your kids propagandized, if you truly want them to be free from collectivist conditioning, then you will make the sacrifice and extract them from public schooling. With the introduction of Common Core into U.S. schools in particular, there is no other recourse but home schooling to prevent the brainwashing of cultural Marxism. If you do not do this, you are relying on the hope that your children will escape with their critical thinking abilities intact. Some do, and some don’t. Others turn into mindless social justice zombies. You can give them an advantage by removing them from a poisonous environment, and that is what matters.

  The insane lie that cultural Marxists seem to have conned themselves and others into believing is that their “activism” is somehow anti-establishment. In fact, social justice is constantly coddled and supported by the establishment. From politicians to judges to media pundits to the blogosphere, the overwhelming majority of people in positions of traditional power (even in supposedly conservative circles) have been more than happy to become the enforcers of the social justice warrior agenda, an agenda representing a minuscule portion of the public. There is no establishment for the PC army to fight; the establishment bias works vastly more in favor of their ideology than any other. Cultural Marxists ARE the establishment.

  *  *  *

  Finally, still having trouble with 'Social Justice Warriors'? Who ya gonna call?

  

   

  Source: Ben Garrison

  

  

  

  

  

• A Descent Into The Tunnels Deep Under New York City

  At first glance, what happens hundreds of feet below the streets of Manhattan has very little to do with finance, until one considers the depressed costs of housing along the warzone that has been the 2nd Avenue Subway line for the past five years, or the millions wasted each day due to traffic gridlock along construction zones, or the billions in overtime pay which unionized labor makes sure it gets paid by doing nothing most of the day and then working for a few hours at night.

  The last is acutely relevant right now, because as we explained earlier, suddenly the fate of the December rate hike is in the hands of America’s 6.4 million construction workers, tens of thousands of whom dig the countless tunnels deep under Manhattan.

  Courtesy of Reuters, here is a glimpse of what is taking place right now deep under New York, and a snapshot of the people whose paycheck will determine whether Janet Yellen hikes rates by 25 bps next month.

  The following photos show so-called “sandhogs” working in various tunnels in the East Side Access project, more than 15 stories beneath Midtown Manhattan where workers are building a new terminal for the Long Island Railroad, the United States’ busiest commuter rail system, as seen during a media tour of the site in New York, November 4, 2015.

  Two enormous caverns, each several city blocks long, will house eight tracks and platforms, serving an estimated 162,000 customers a day, officials from the Metropolitan Transportation Authority said during a tour of the planned station on Wednesday. REUTERS/Mike Segar.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  Source: Reuters, Mike Segar

  

  

  

  

• Legendary US Army Commander Says Russia Would "Annihilate" US In Head-To-Head Battle

  Late in September, we brought you “US Readies Battle Plans For Baltic War With Russia” in which we described a series of thought experiments undertaken by The Pentagon in an effort to determine what the likely outcome would be should something go horribly “wrong” on the way to landing the US in a shooting war with Russia in the Balkans. 

  The results of those thought experiments were not encouraging. As a reminder, here’s how Foreign Policy summed up the exercises:

  In June 2014, a month after he had left his force-planning job at the Pentagon, the Air Force asked David Ochmanek – deputy assistant secretary of defense for force development – for advice on Russia’s neighborhood ahead of Obama’s September visit to Tallinn, Estonia. At the same time, the Army had approached another of Ochmanek’s colleagues at Rand, and the two teamed up to run a thought exercise called a “table top,” a sort of war game between two teams: the red team (Russia) and the blue team (NATO). The scenario was similar to the one that played out in Crimea and eastern Ukraine: increasing Russian political pressure on Estonia and Latvia (two NATO countries that share borders with Russia and have sizable Russian-speaking minorities), followed by the appearance of provocateurs, demonstrations, and the seizure of government buildings. “Our question was: Would NATO be able to defend those countries?” Ochmanek recalls.

   

  The results were dispiriting. Given the recent reductions in the defense budgets of NATO member countries and American pullback from the region, Ochmanek says the blue team was outnumbered 2-to-1 in terms of manpower, even if all the U.S. and NATO troops stationed in Europe were dispatched to the Baltics — including the 82nd Airborne, which is supposed to be ready to go on 24 hours’ notice and is based at Fort Bragg, North Carolina.

  To be sure, the fact that this is even under consideration is somewhat surreal. Sure, no one took Hillary Clinton serioulsy when she presented Sergei Lavrov with the now infamous “reset” button (which actually didn’t say “reset” because thanks to a “typo” the prop said “peregruzka” which means “overcharged”), but with a Nobel Peace Price-winning President in The White House, no one expected things to deterirotate to the point that NATO was seriously contemplating a war with the Russians. 

  

  Nevertheless, Moscow’s intervention in Syria has the West concerned that for the first time in nearly thirty years, The Kremlin doesn’t fear a direct confrontation. 

  The problem for The Pentagon isn’t so much that the US has fallen behind in terms of spending money on expensive war toys (i.e. we don’t necessarily doubt that Washington has the best technology).Rather, the US seems to have fallen behind in terms of its ability to fight a conventional war against a formidable foe, presumably because there really haven’t been any formidable foes in decades. 

  Well now, it seems entirely possible that the US may have to fight a conventional war against the Russians (and possibly the Iraninans) and that means you can no longer depend on the fact that on a warrior-for-warrior basis, a handful of SEAL Team Six members can pull off battlefield miracles, because no matter how elite your spec ops are, you can’t pit twelve guys against four thousand and expect them to win. 

  It’s with all of this in mind that Washington is beginning to assess whether the US could hold its ground against Russia in a conventional standoff. According to retired Army Colonel Douglas Macgregor, American forces would get “annihilated.” Here’s more, via Politico: 

  For those villagers eagerly snapping pictures on the side of a road in the Czech Republic in late September, the appearance of the line of U.S. “Stryker” armored fighting vehicles must have seemed more like a parade than a large-scale military operation. The movement of some 500-plus soldiers of the 2nd Cavalry Regiment from Vilsack in Bavaria to a Hungarian military base was intended to strengthen U.S. ties with the Czech, Slovak and Hungarian militaries and put Russia’s Vladimir Putin on notice. 

   

  But not everyone is convinced. “This Stryker parade won’t fool anyone in Moscow,” says retired Army Colonel Douglas Macgregor. “The Russians don’t do many things well, but they have been subverting, destabilizing, invading and conquering their neighbors since Peter the Great. And what’s our response: a small unit of light armored trucks.”

   

   Viewed by many of his colleagues as one of the most innovative Army officers of his generation, Macgregor, a West Point graduate with a Ph.D. in international relations (“he can be pretty gruff,” a fellow West Point graduate says, “but he’s brilliant”), led the 2nd Cav’s “Cougar Squadron” in the best-known battle of Operation Desert Storm in February 1991. In 23 minutes, Macgregor’s force destroyed an entire Iraqi Armored Brigade (including nearly 70 Iraqi armored vehicles), while suffering a single American casualty. Speaking at a military “lessons learned” conference one year later, Air Force General Jack Welsh described the Battle of 73 Easting (named for a map coordinate) as “a stunning, overwhelming victory.”

   

  In the wake of the battle, however, Macgregor calculated that if his unit had fought a highly trained and better armed enemy, like the Russians, the outcome would have been different.

   

   In early September he circulated a PowerPoint presentation showing that in a head-to-head confrontation pitting the equivalent of a U.S. armored division against a likely Russian adversary, the U.S. division would be defeated.

   

  “Defeated isn’t the right word,” Macgregor told me last week. “The right word is annihilated.” The 21-slide presentation features four battle scenarios, all of them against a Russian adversary in the Baltics — what one currently serving war planner on the Joint Chiefs staff calls “the most likely warfighting scenario we will face outside of the Middle East.”

   

  “Macgregor scares the hell out of the Army,” says a senior Joint Chiefs war planner. “What he has proposed is nothing less than the dismantling of the Big Green Machine, getting the Army to embrace a future of lighter, more agile forces than the big lumbering behemoth which takes forever to spool up and deploy. I’ll bet the armor and airborne guys are furious. Reform my ass: Macgregor has walked into the zoo and slapped the gorilla.”

  Yeah well, the US has already “walked into the zoo” and slapped the Russian grizzly bear. It sounds to us like Macregror may have a battle plan that actually isn’t a joke, which means it will be promptly dismissed by The Pentagon. 

  After all, it’s all about covert ops these days. And that’s working so well for Washington in the Mid-East. Why fix something that isn’t broken right?…

  Read the full Politico story here

  

  

  

  

  

• Why The Stock Buyback Spree Is Ending

  “Sluggish activity will spur firms to repurchase shares in an effort to boost EPS growth”

        – Goldman Sachs

  Back in April 2012, we predicted that the Fed’s “visible hand hand is forcing corporate cash mismanagement”, stating explicitly that the Fed’s ZIRP and QE, “is now bleeding not only the middle class dry, but is forcing companies to reallocate cash in ways that benefit corporate shareholders at the present, at the expense of investing prudently for growth 2 or 3 years down the road.”

  It is now three years later, and according to the latest Factset snapshot, revenue growth in Q3 is set to decline 3.7% from a year ago a quarter where corporate earnings are poised for their first recession since 2009. As we predicted, companies not only did not invest sufficiently in capex, R&D and other forms of organic, and thus revenue growth, but instead unleashed the biggest shareholder-friendly tsunami in history, with record buybacks, M&A, and dividends in the years following.

  Sure enough, as can be seen in the chart below, after spending 55% of total cash proceeds on organic growth in 2009 (capex and R&D), since then shareholder-friendly strategies have taken over again, and Goldman now expects that organic growth will account for only 40% of total cash spend, with Buybacks, Dividends and Cash Acquisitions accounting for 60% of total use of cash proceeds.

  

  Furthermore, according to the latest forecast by Goldman’s David Kostin, this surge in buybacks will continue for the simple reason that with Capex spending set for its first decline since 2009 (mostly due to the commodity crunch forcing countless energy companies to put capital expansion on indefinite hiatus), investors will have nothing else to reward, so may as well forego even more future revenue growth and demand an immediate cash out right here, right now.

  

  From Goldman:

  Managements will remain committed to returning cash S&P 500 firms will return more than $1 trillion to shareholders in 2016 with buybacks and dividends each growing by 7%. We expect high cash return strategies to outperform given modest GDP growth, low rates, and slim equity returns. A similar macro environment in 2015 rewarded stocks with high cash returns to shareholders while firms investing in capex lagged.

  

  Ah, the efficient “market”: rewarding companies that instead of investing in the future, and growth, promptly cash out and engage in a slow-motion (ideally debt-funded) LBO. For those confused why sales are down 3.7% in Q3 and set to tumble in the years ago, there is your answer.

  Goldman continues:

  Share repurchases will exceed $600 billion (+7%) in a low growth, low return market. Our economists expect modest US GDP growth of 2.4% in 2016. Sluggish activity will spur firms to repurchase shares in an effort to boost EPS growth. We expect S&P 500 will deliver a 3% total return in 2016.

  Here is Goldman confirming what we predicted would happen all the way back in April 2012:

  During the recent zero interest rate regime, investors rewarded firms returning cash to shareholders via dividends and buybacks over those investing for growth via capex and R&D. The effects of a slow recovery in aggregate demand suggested that the returns from investing in physical assets (capex) were unlikely to generate outsized profits. With few productive capex opportunities, many firms prioritized returning cash to shareholders and these stocks outperformed.

  And that’s why revenues are sliding, earnings are now officially in a recession, and millions more layoffs are coming regardless of the BLS’ endless data fabrication as companies do everything in their power to keep margins as high as possible to offset the topline contraction.

  And while Goldman admits that during periods of rising yields, the stocks of companies that invest in CapEx and R&D outperform the “buybackers”, it also says that this time it’s different.

  However, we expect stocks with high total cash returns will outperform in 2016 despite the bear flattening yield curve environment. Although the Fed will be tightening, interest rates will remain low on a historical basis. The muted pace of economic expansion in the US, the uncertain prospects for global growth, and a low expected S&P 500 return, will leave investors searching for yield.

  So buy stocks the buy their own stock. Got it. Only…. any time Goldman tells its client to do something, the opposite usually happens. Could that be the case again?

  Most certainly, and here is one explanation for the recent market revulsion with prolific repurchasers (see IBM, KORS, CAT). It comes from Citi which shows that contrary to conventional, and wrong, wisdom, gross corporate leverage has never actually been higher. Throw in rising rates, and blowing out spreads, and suddenly all these companies that enjoyed a free ZIRP lunch by engaging in the dumbest of capital allocation decisions, namely pushing their own stock higher (by issuing debt no less), are about to vomit it all right back.

  Corporate leverage continues to push higher. In Figure 3 we present the debt-to- EBITDA ratio for the average non-fin in the IG and HY markets. We see that in IG leverage rose from 1.8x to 2.1x over the past twelve months, and in HY it rose from 4x to 4.4x (Figure 3). Note that in both markets, at current levels gross leverage for our sample set is well north of the ‘09 highs. Unfortunately, we see little chance that it will decline in the near-term, or even stabilize for that matter, as the earnings backdrop appears to be too soft.

   

  

   

  The 3-fold increase in share buybacks in the past five years has been the key driver of corporate re-leveraging. In large part, buybacks have been the result of strong incentives provided to corporate managers by activists in particular and equity investors in general. As Citi’s Equity Strategists highlighted in March, companies that spent more on shareholder handouts and less on investments have tended to get higher price/earnings ratios in the market.

  But not for much longer, because if the Fed does indeed launch a tightening cycle, it means game over for the one trade that has worked the best in the past 3-4 years. Which also explains why Goldman is now aggressively pushing clients to buy companies that are the most notorious “Total Cash Returners” – because Goldman’s prop desk has a lot of these to sell, as Citi also admits: “In sum, we feel strongly that the pace of buybacks will ebb.“

  

  

  

  

  

• The Politics of Dystopia Redux

  Submitted by Erico Matias Taveras via Sinclair & Co.,

  Dystopia: a community or society that is undesirable or frightening.

  Nouriel Roubini recently penned an article titled “Europe’s Politics of Dystopia”, citing the rise of nationalistic movements across Europe as a harbinger of terrible things to come. It seems that the renowned Dr. Doom – one of the few economists to have anticipated the 2008 financial crisis – is back in the limelight with some more dire warnings.

  Ah, but this time he’s late. In case you have been hibernating, the European Union (EU) is already in a complete state of disarray. Everywhere you look – economy, politics, security, society, demographics – there are very serious problems with no credible solution in sight.

  This does not bode well for the future of the EU, starting with those who will be living in it.

  Out of the top-10 OECD countries with the highest youth unemployment rate, 8 are EU member states, each with high double digit figures. Politicians might still blame the Eurozone financial crisis for this dire situation, but this is nothing new: the economic growth rates of member states have been very poor for over a decade now. The fact is that the EU has consistently failed to promote policies that can provide decent employment opportunities to its youngest citizens.

  That first step in the job ladder is hugely important for the future prospects of any generation. This one is particularly important since their contribution is badly needed to pay for their elders’ welfare, as well as all the fiscal largesse to “stimulate the economy” facilitated by the ECB’s monetization of unprecedented levels of debt. Some of that stimulus found its way into the housing market. Good for the economy you say, but terrible if you need to find cheap housing to start a life.

  One consequence for this generation is easy to predict: no job + expensive housing = put off starting a family.

  Europe’s demographics is a complicated issue, but the current situation is alarming. Less babies means less people to pay for Europe’s generous welfare and retirement systems. Instead of addressing these problems head on, EU politicians prefer to let them fester. Populism trumps everything. After being elected President of France, François Hollande even lowered the retirement age!

  Europeans are so desperate for new blood that they will take in virtually anybody, showering them with social benefits while demanding little integration into their societies in return. The result is growing pockets of alienated minorities, portraying a disintegrating social fabric especially in the richest member states. Sweden is an interesting case study in this regard. For decades it has been the most welcoming country in the world for refugees, but the failure to properly integrate them is evident in rampant crime and declining social performance statistics.

  Sweden also showcases the current vigor of the EU’s diplomatic relations – or lack thereof. Earlier this year, Swedish foreign minister Margot Wallstrom dared to criticize Saudi Arabia for its appalling human rights record. A sensible and courageous position you might say, but one which got her into hot water with her own peers back home, no doubt reflecting pressure from the Saudis. Even the Swedish king, largely just a political figurehead, chastised her for such conduct. It turns out that one bright spot of European industry is the burgeoning arms sales to such repressive regimes (perhaps because there’s no need to fake emissions?). That they might actually end up in the hands of extremists is of no concern.

  And now the EU is facing yet another gigantic crisis, unable to stop the flow of millions of migrants pouring in. There had been plenty of forewarning that something big was brewing, even by Europe’s laxist immigration standards. But once again EU leaders were caught totally on the back foot. The response was completely disjointed as a result, creating even more discord among member states.

  Witnessing this situation, Chancellor Angela Merkel publicly announced a few months ago that Germany would take them all in. Whether this was to polish her image after the economic disaster that her government imposed on the Greeks, reverse the ageing demographics at home or just atonement for her country's past, we can't say. What we do know is that estimates of the number of migrants into Germany this year alone quickly snowballed from 400,000 to 800,000 to 1.5 million. The latest report suggests that 14 million could settle between now and 2020, in which case German society will be irreversibly impacted, perhaps even sooner than that.

  According to official statistics, only 1 in 5 migrants arriving in Germany in 2015 are actually from Syria. So contrary to popular belief the majority of migrants are not refugees; rather, they are young men seeking a better life. And why wouldn't they come, when Merkel is doling out her fellow taxpayers' money? Whether they will find a job is a different matter, as the foreign worker unemployment rate is already much higher than that of the natives.

  The cost for Germany to deal with all of this is enormous, with estimates suggesting that over the next twenty years it could easily rival the also enormous reunification cost with East Germany. And it’s the childless Germans who will foot the bill.

  Facing criticism and divisive tensions seldom seen at home, Merkel had to act. First she tried to ‎spread these migrants all over Europe, claiming that this was the “fair thing” to do. Several countries refused. Then she went to Turkey to negotiate a deal to stop the influx at the source. Sensing weakness and in no mood to deal with Europe's migration problems, President Erdogan promptly demanded a hefty sum of cash to think about it and a fast track to join the EU (even the new Islamist government in Libya is now threatening to flood Europe with migrants, so this crisis has become a great way to hold the EU hostage – thanks to the EU itself).

  The latest plan is to provide welfare benefits only to Syrian refugees, speed up processing times and tighten some border controls here and there. What to do with the hundreds of thousands of other migrants with “weak cases” was not disclosed. We speculate that they will not return home after all they went through, and as such might be condemned to a life in limbo. This pussy footing will also not stop the millions of others already on their way.

  The security risks are staggering. Rather than protecting its borders, allowing Germany to eventually regain control of the situation and provide adequate care to those who are already there, Merkel prefers to risk the social fabric and the safety of her fellow citizens. Think about what a million plus of unemployed and alienated young men can do roaming around the country.

  And why can’t she do it? Because she fears those same “politics of dystopia” proposed by Roubini. Each member state reinstating its borders is an intolerable step back in her quest to abolish their national identities. In her mind the solution to every EU problem is more EU, and for sure much less Germany, France, UK and whomever else.

  Perhaps this could make sense if member state nationalism was replaced by a powerful new sense of European identity. But who wants to embrace the basket case that the EU has become? With some of the least charismatic world leaders to boot? Even its own currency is flawed, promoting deep structural imbalances among member states. [even its own currency is flawed!!!]

  Worse, getting rid of nationalism makes the EU vulnerable to being taken over by other ideologies. Perhaps the most menacing to Europe right now is the rise of political Islam. Any Islamo-phobe will tell you that the demographics are on their side, especially once all these new migrants settle in. ‎It would be ironic that the most liberal continent on the planet might end up adopting the least liberal religion in the coming decades.

  With all of this unfolding, it is natural for the EU’s allies and trading partners to be apprehensive about the prospects of it staying together. The US has even warned the UK of dire commercial consequences if it votes itself out in the forthcoming referendum. Well, forcing someone to stay against their democratic will is not a great solution either. Not that the voice of the people across member states matters in Brussels anyway.

  Now, we don’t highlight all of this because we like to see Europe in the dumpster. Quite the opposite. It pains us to see what is going on and the lack of leadership to confront what are truly existential threats. The world needs a strong Europe. And for that to happen, the current political, social and economic guidelines need to change.

  Roubini does have a point. There are politics of dystopia at work in Europe. But he puts the blame squarely on the wrong side.

  The EU doesn't need any nationalists to destroy its future prospects. It’s doing absolutely fine on its own.

   

  

  

  

  

  

• Putin's Multi-Millionaire Media Mogul Dies Of Mysterious "Heart Attack" In Luxury DC Hotel

  Dear Sergei Lavrov and Maria Zakharova: you may want to avoid staying at The Dupont Circle in DC for the foreseeable future even though the following images may seem quite inviting…

  

  

  Yesterday evening, a variety of mainstream wires reported that Mikhail Lesin, a close ally of The Kremlin and the man credited with “inspiring” the creation of Russia Today, was found dead on an “upper floor” in the hotel. Lesin was Russia’s Minister of Press, Television and Radio from 1999 to 2004 and also served as Putin’s media adviser. In 2013 he assumed a role as an executive at Gazprom-Media. 

  

  

  

  Apparently, no one knows why Lesin was in Washington, and as of Friday evening, authorities weren’t ready to reveal the identity of the 57-year old Russian national they found dead at the Dupont. But officials in Washington and Moscow confirmed that the deceased was indeed Lesin and Vladimir Putin “expressed his sincerest condolences”, RT says. From The Kremlin: 

  “The president has a high appreciation for Mikhail Lesin’s massive contribution to the creation of modern Russian mass media. 

   

  In the West, Lesin is most widely known for his role in conceiving Russia Today (now RT), a state-run English-language television network which offers an alternative, non-Western view of global events by encouraging viewers to ‘Question More’. Since its launch in 2005, RT has expanded across continents, broadcasting in multiple languages, and successfully presenting the Russian point of view on world events, something even its harshest critics have admitted. Lesin’s role in RT’s creation is arguably his greatest accomplishment.”

  As of now, Lesin’s death has been written off to the ubiquitious unexplained “heart attack.” Here’s WaPo:

  Lesin was the former executive of Gazprom-Media, the state-run holding company that controls much of the Russian press. RIA Novosti, a state news agency, quoted a family member confirming the death and saying it was from a heart attack.

   

  Russia Today, without providing a source, suggested that Lesin had been suffering from a prolonged illness.

  We’re no doctors, and we’re also not trying to suggest that Lesin wasn’t sick, but what’s particularly odd about the mainstream media’s coverage of this story (and by the way, this applies to the Russian media as well), is that no one seems to think it’s strange that a Russian media mogul died in a DC hotel room from an apparent “heart attack” just as relations between Washington and Moscow have deteriorated to a post-Cold War low and just as sites like RT and Sputnik are becoming increasingly prominent among Western readers amid The Kremlin’s air campaign in Syria. And to top it all off, no one knows why Lesin was in the city in the first place. Nope, nothing strange about any of that. 

  It’s also worth noting that US lawmakers have called for an investigation into Lesin’s fortune. Via ABC: 

  Sen. Roger Wicker (R-Miss.), called on the Justice Department to launch an investigation into Lesin over allegations of corruption and money laundering.

   

  In a letter to then-Attorney General Eric Holder, Wicker said Lesin had “acquired multi-million dollar assets” in Europe and the United States “during his tenure as a civil servant,” including multiple residences in Los Angeles worth $28 million.

   

  “That a Russian public servant could have amassed the considerable funds required to acquire and maintain these assets in Europe and the United States raises serious questions,” Wicker wrote.

  Here’s the actual letter:

  Les in Letter

  Consider that, and then consider the following comments from John Kerry with regard to RT (note that America’s top diplomat hilariously accuses foreign media of “distorting what is happening or not happening”): 

  Here’s how RT’s Editor-in-Chief Margarita Simonyan responded at the time:

  ???????????, ??? ???????????? ????? ? ??? ??????? ? ???????????? ??? ??? ?????? ????? ?????? ?? ? ??? ??????????, ????? ?????? ??????????.

  — ????????? ???????? (@M_Simonyan) April 25, 2014

  Translation: “Surprisingly, Secretary Kerry at this difficult and humiliating [time] for his homeland no longer worr[ies] about anything except our television channel.”

  And further: “We are planning to write an official request to the State Department for concrete examples of when RT has distorted facts. It’s unfortunate that the head of the State Department knows so little about what’s going on in Ukraine at the moment.”

  Here’s Simonyan on Lesin (from Friday): 

  ????? ????. ???????? ??????????. ??????????, ???, ??? ???? ? ?? ????, ??????????? ???????. ??? ??? ????????? ?????????? ???????……….

  — ????????? ???????? (@M_Simonyan) November 6, 2015

  So in any event, Lesin was not a man that was particularly popular inside the Beltway where he inexplicably was staying last week. 

  Still, there are all kinds of questions here and determining what actually “is or is not happening” (to quote John Kerry) is difficult. Consider the follwoing from Sputnik: 

  Between 2004 and 2009, Lesin served as an advisor to the Russian president, charged with overseeing the development of media and information technology, including the creation of Russia Today. Lesin’s resignation in 2009 was unexpected, and widely rumored to have been the result of a perceived conflict of interest between his activities in business and his work as a civil servant.

   

  Lesin first came to prominence in the media industry in the early 1990s. He created the advertising agency ‘Video International’, which would go on to become a multi-billion dollar firm, and the largest player in the Russian advertising field by the end of the 1990s, a position it has maintained to this day. Coming onto the scene of the Russian media market during Russia’s difficult post-Soviet transition, Lesin and his partners effectively had to figure out from scratch how the advertising field, which never existed in the Soviet Union, actually worked.

   

  Before becoming press minister in 1999, Lesin briefly headed the Kremlin’s public relations office (1996-1997), and serve as vice-president of the All-Russia State Television and Radio Broadcasting Company (1997-1999) as it transformed into a major media holding. He was believed to have been given the position for his loyalty to president Yeltsin during the 1996 re-election campaign, during which he created the iconic ‘Vote with your heart’ and ‘I believe, I love, I hope’ campaign advertising commercials.

   

  During his tenure as press minister, Lesin would participate in one of the loudest media scandals of the early 2000s –the transfer of oligarch Vladimir Gusinsky’s media holding company Media Most’s assets to state energy giant Gazprom.

   

  To be sure, Lesin was not without his sins, and was involved in the dirty media games of late 90s Russia. As RIA Novosti recalled, the media guru was rumored to have played a key role in the creation of a secret tape compromising former Prosecutor General Yuri Skuratov. Hidden camera video of the prosecutor general, who was known as a bitter adversary of Yeltsin, and who was conducting an aggressive investigation into several large cases of government corruption, was broadcast on federal television, featuring Skuratov rolling around in bed with two young women, who turned out to be prostitutes. Ultimately, the scandal resulted in the prosecutor general’s resignation.

  And then there’s this, from last December (again, via Sputnik): 

  The head of Russia’s Gazprom-Media holding, Mikhail Lesin, has officially turned in his application to resign, Gazprom’s press service said Friday.

   

  “Mikhail Lesin has turned in a request to remove him from the post of Gazprom-Media chairman citing family issues. This request will be considered at the next Gazprom-Media board meeting,” the press service said.

  At the time, Forbes Russia said “individuals” claimed that the decision was made personally by President Vladimir Putin. For the sake of brevity we won’t go into the entire story, but we encourage readers to do their own research on Ekho Moskvy and Lesin.

  The takeaway here is that Lesin was most assuredly a “somebody”, and when a “somebody” dies in a DC hotel room of a mysterious “heart attack” and no one knows what that “somebody” was doing in DC in the first place, you may want to start asking questions with regard to the official narrative regardless of where that narrative originates.

  Of course we could be wrong.

  But in honor of RT, we’ll simply close by saying that it never hurts to “question more.”

  

  

  

  

• Biderman: "Welcome To The First Global Recession Created By Central Bankers"

  Tensions in the global stock markets appear to have calmed. In sharp contrast stands the real economic development. Even in the US there are more and more signs of an accentuated weakness (outlier jobs data aside). "Things are crazy," says Charles Biderman summing up this bizarre situation. "We’re seeing the impact of the global slowdown on the US and that’s going to continue" adds the TrimTabs founder, and, in contrast to the mainstream view on Wall Street, he doesn’t think that the Fed is going to raise interest rates (and is more likely to start a new stimulus program). "Ultimately there will be a major correction," he warns and any new stimulus will merely serve the drug-addicted market.

  Chjristoph Gisiger, of Finanz und Wirtschaft, interviews TrimTabs' Charles Biderman…

  Mr. Biderman, the US economy is sending mixed signals. How concerning is this situation?

  The global slump is impacting the US economy more significantly than people realize. Our real-time data on the economy is declining and wage growth is the lowest it’s been all year. The TrimTrabs Macroeconomic Index for the US peaked in January and has weakened recently. It was up every year since 2011 but now it’s down year to date.

  Is it even thinkable that the US will fall into recession?

  It’s obvious that we’re in a significant slowdown. According to the technical definition, a recession is two quarters with negative growth in a row. So will the economy grow below zero? Could be. But anyway: What’s the big difference between minus 0,1% or plus 0,1% growth given how lagged the data is from the quarterly GDP numbers?

  What does this mean for the Federal Reserve and its intention to raise interest rates?

  Very few people would even consider this possible. But what I really think is going to happen is that the next Fed move is not going to be a hike. The next Fed move will be another form of easing. They’re not going to call it Quantitative Easing or QE, since QE has a bad reputation by now. So they’ll call it something else. I don’t know what they are going to do exactly. But it’s not going to be a tightening. As the global economy goes into a recession and the US follows, the Fed is going to do something.

  For more than a year, the Fed is trying to prepare the financial markets for a rate hike. What would that do to the credibility of the central bankers if they back off now and actually take a U-turn?

  Who says they have any credibility? The real problem is that the people who run the central banks are either economists or bankers.

   

  If you look at the record of global economists, they’ve been consistently wrong on the market and on the economy. At least in the United States, 95% of the economists surveyed have said at the start of each of the last five years that interest rates are going to end the year higher. Although they have been wrong each year, people keep listening to them. And when it comes to bankers, consider this: I went to Harvard Business school. The top students there went to firms like McKinsey, Boston Consulting or to the top Hedge Funds. So where did the graduates go who couldn’t get the top jobs? They went to the banks. So what you end up with is people just as greedy but not as smart.

  The Fed already blinked at the September meeting. Why are they so hesitant to make a move?

  ]If the economy continues to slow down going into an election year, the Fed will be under tremendous pressure to do something. They will not let the economy and the stock market slump. That’s why I think there will be further easing.

  Why are today’s stock markets so heavily focused on monetary policy?

  A simple way to look at market valuations is earnings divided by interest rates or cash flow divided by interest rates. So even if you raise interest rates only a quarter of a point that lowers the value of stocks. Also, once the Fed starts raising, it keeps raising. That decreases the attractiveness of flow trades into the stock market because now you can earn some money on your other assets. Right now, if you’re a corporation, your cash earns nothing. So you might as well use some of it to reduce your share count or to do a takeover. Both have been essential drivers of the bull market.

  When it comes to the real economy, cheap central bank money seems not to be that beneficial.

  Governments are creating headwinds for growth. So the best thing central banks can do to promote growth is to cut interest rates to zero or even lower. That can work for a little while. But now it’s creating a global recession because of all the excess capacities. Even if it doesn’t cost to build a new plant or drill new wells, when demand dries up you’re not making a profit. So even if interest rates are at zero you’re still losing money and you have debt on top of it. That’s why I say: Welcome to the first global recession created by central banks.'

  What should investors do in this environment?
  All there is in a market is transactions: In the stock market, shares are sold for money. So if you track the number of shares outstanding and the amount of money available to buy shares, you should have a good sense of the market. And then you also have to understand that in every market the house has always an edge – or else the market wouldn’t exist.

  What do you mean by that?
  In the stock market, the house are the companies. They started markets to raise money. So they know more than investors by definition. And if companies are shrinking their share count with buybacks or cash-takeovers I want to be buying too. On the other hand, if companies are growing their share count, I want to be selling as well.

  So what are you observing right now with respect to supply and demand?
  Our data shows that buybacks are still growing. Recently they have slumped somewhat but they are still much higher than share sales.

  And what’s going on with regard to cash-takeovers? It looks like that 2015 will set a new record for mergers & acquisitions.
  A big cash takeover boom is typically what happens when companies cannot grow internally. So how do you keep growing if demand for your product is not growing? You buy a competitor, you cut costs and you add to profits. You can always cut overhead if you buy a competitor. And you have zero interest rates, so you can buy your competitors to keep growing. But that’s not real growth. Also, this is what happens on the top of the cycle when the economy is turning weak.

  Why are you so pessimistic when it comes to the economic outlook?

  It’s not rosy and the main problem why sustainable economic growth is not possible is all the headwinds to growth. From the United States to Europe and Japan: Everywhere you have hostile tax policies, regulations and a lot of anti-competitiveness from existing businesses. Ontologically speaking, growth occurs when something new happens. But in the United States for example, the ratio between companies dying and starting is now on the negative side for the first time ever.

  So what does all that mean for the stock market outlook?
  I don’t disagree at all with anybody who says the market’s overvalued and we’re way ahead of ourselves. So ultimately there will be a major correction. But that could be years from now. Even since the Fed ended QE, the market is still up a little bit. The reason for that is that the share count keeps going down. And as long as the share count keeps dropping, I expect the stock market to keep modestly rising. And when the Fed, instead of raising interest rates, announces some form of more easing next year that’s going to pop the market again.

  

  

  

  

  

• "$19,000 Premiums, Up 4x Since Passage": The 'Crippling Effect' Of Obamacare On The Middle Class

  The past month has seen a veritable litany of reports that have slammed Obamacare, from sources on both the left and the right. Some examples:

  • In Latest Obamacare Fiasco, Most Low-Income Workers Can’t Afford “Affordable Care Act”
  • The Stunning “Explanation” An Insurance Company Just Used To Boost Health Premiums By 60%
  • Your Health Insurance Premiums Are About To Go Through The Roof -The Stunning Reason Why
  • Obama Promised Healthcare Premiums Would Fall $2,500 Per Family; They Have Climbed $4,865
  • Largest Health Insurer On Colorado Exchange Abruptly Collapses
  • Co-Op Insurers Across America Are Collapsing, And Now There Is Fraud

  As we have warned over the years, all of this was expected, and is precisely what happens when the government tries to take over a critical industry. It may have had “good intentions” but the result has been a total failure.

  And nowhere is it seen better than from the laments of those whom it was supposed to benefit, such as Ed Elliott, who has laid out precisely what the “Affordable Care Act” means for the US: “This is crippling effect of ACA on small biz owners & middle class. $19000/yr premiums up 4x since passage.“

  This is crippling effect of ACA on small biz owners & middle class. $19000/yr premiums up 4x since passage. #tyranny pic.twitter.com/irHW4Oms2m

  — Ed Elliott (@gunsntoolz) October 30, 2015

  Still curious why the US middle class is expiring (even as the 1% are thriving), and has no discretionary income left at all? Simple: all of said “discretionary income” was spent to cover a soaring tax which was supposed to make life better for everyone.

  h/t @noalpha_allbeta

  

  

  

  

  

• The Fate Of The December Rate Hike Is In Their Hands

  Following the “blockbuster” jobs report from Friday, bond yields soared across the curve as experts everywhere decided that this time it’s different, that this is it: with soaring October jobs, not to mention the biggest annual jump in wages, the Fed was out of excuses.

  We would like to make three points.

  First, the October jobs reports was good, certainly at the headline level, but there is one more payrolls release from the BLS before the December 16 FOMC decision; its impact will be far greater on the FOMC’s decision especially if it now shows a sharp decline in jobs (before Friday, five of the past six payrolls reports had missed expectations).

  Second, as we showed yesterday, while the Establishment survey reported an unexpected jump in jobs in October jobs, which rose by 271K, far above the highest estimate even putting the very Fed to shame after St. Louis Fed’s Bullard explicitly talked down market expectations the night before while trying to convince the market that slowing jobs is not bad for the economy, a deeper look revealed that the Household survey suggested a far less optimistic picture, with 378,000 of the increase in employed falling in the 55 and over age group, while males 25-54 saw their jobs decline by 119,000.

  

   

  But while this suggests that the headline jobs number may have gotten far ahead of itself and upon reflection will be revised well lower, it does not explain how the October report also showed the biggest jump in average hourly earnings, which rose by 2.5% in October from a year ago, the highest annual increase since the crisis.

  

   

  Which bring us to the third, and most important point. Where did the wage growth come from?

  And therein lies the rub, because after the very disappointing job wage growth in September, October’s jump in wages suggests the economy may just be strong enough to weather a rate hike.

  There is one problem with this.

  To find where this increase in wage growth came from, we broke down the weekly payrolls increase (Y/Y %) by the 10 constituent industries that make up the private payrolls (excluding government). What we found was surprising.

  Instead of some broad rebound in October wage growth (red bar in the chart below), and certainly not due to payrolls for mining and logging workers, which is plunging, the entire jump in October average hourly wages can be attributed to just one industry – the one highlighted with a yellow in the chart below: construction.

   

  

   

  What this chart shows is that of the 120.7 million private payrolls in October, 4 industries (Mining and Logging; Trade, Transportation and Utilities; Financial Activity; and Leisure and Hospitality) employing 51.3 million workers saw a drop in the annual wage growth rate, which means they dragged down the average hourly earnings, one industry, Manufacturing (which employs 12.3 million), saw no change in its weekly payrolls, and another five industries, which employ 57 million, saw a modest increase in October weekly wages.

  And yet nobody was as instrumental to the October wage jump as the Construction industry. That said, nobody was as instrumental to the miss in September wages as the Construction industry because not only did weekly hours for Construction workers drop, so did weekly payrolls. All of this was offset, and then some, was offset in October.

  So what is going on here?

  The impact of Construction jobs on weekly payroll growth is seen best in the chart below which shows that if one excludes the contribution from Construction, annual wage growth is not improving at all, and in fact is roughly where it has been for the past year, nowhere near close to the blockbuster print revealed on Friday.

  

   

  Furthermore, as the next chart below shows, the annual growth in weekly
  payrolls for Construction workers appears to have finally topped out, and after four
  years of increases, 2015 has been the first year in which the pace of
  growth declined – clearly weekly payroll growth for Construction workers
  is slowing in the second half of 2015. And yet, October weekly payrolls soared, and
  at 8.1%, increased at the same pace as last year,
  offsetting the recent drop.

  

  Is this sustainable?

  The chart above also shows that in the New Normal, not only has there never been such a sharp drop in September Construction weekly payrolls, there has also never been as sharp a jump in October weekly payrolls.

  So what happens in November? That, dear readers, is the 25 basis point question – if Construction payrolls rise as the same pace as October, a December rate hike is assured. If however, this industry which employs just 5.3% of the US private workforce, “reverts to the slowing mean” in November, and after a torrid October we have a disappointing November (see red question mark above), then all buts are suddenly off again.

  Which is why the fate of the December rate hike is suddenly in the hands of some 6.4 million construction workers. If their wages jump in November, a rate hike it is. If their wages suddenly disappoint as the winter is about to unfold, then watch as the yield on the 2Y plunges in a microsecond when the next payrolls report is released as the December rate hike is once again put on indefinite hiatus.

  

  

  

  

  

• The Looming Death Of Small Business In America (In 1 Simple Chart)

  The latest small business survey from NFIB shows mounting pressures for small business resulting from limited pricing power and modestly rising wages (in fact the worst pressure since 2008's crash and 1999/2000's plunge).

   

  

  Chart: JPMorgan

  Absent a substantial growth pick-up that helps top-line sales (extremely unlikely in a surging USDollar, slumping global economy), the hopes and dreams of continued wage growth in 2016 will be dashed on the minimum-wage-driven, Obamacare-slayed bankruptcy shores of middle America.

  Is it any wonder that small business optimism is crashing?

  

   

   

  

  

  

  

  

• These Are The 20 Worst Cities In The US – Spot The Common Theme

  A new analysis by WalletHub has compared and classified 1,268 of America’s small cities in the U.S. to find the ones where residents don’t have to give up much by avoiding the “bright lights” and the soaring rent. Its data set include a total of 22 metrics, ranging from housing costs to school-system quality to the number of restaurants per capita.

  Why live in a small city? Inevitably, life in a small city demands some tradeoffs such as shorter business hours, a heavier reliance on cars and fewer dating opportunities.  It does bring benefits – tighter communities, less competition, shorter commutes and an actual backyard with a white picket fence. And from a purely financial standpoint, living in a small city creates a sense of greater wealth because of cheaper cost of living — one of the main draws for in-movers, especially those seeking to raise a family.

  According to the Economic Policy Institute, a two-parent, two-child family would need to earn $49,114 a year “to secure an adequate but modest living standard” in Morristown, Tenn., compared with $106,493 in Washington. So even with a lighter wallet, a family or soloist can enjoy a comparable, or even better, quality of life for much less in a cozy place like Morristown.

  What was the full ranking methodology?

  To find the best small cities in America, WalletHub’s analysts compared 1,268 cities across four key dimensions: 1) Affordability, 2) Economic Health, 3) Education & Health and 4) Quality of Life. For our sample, we chose cities with a population size between 25,000 and 100,000 residents. “City” refers to city proper and excludes surrounding metro areas. Next, it compiled 22 relevant metrics, which are listed below with their corresponding weights.

  To obtain the final rankings, a score between 0 and 100 was attributed to each metric. The weighted sum of the scores was then calculated and used the overall result to rank the cities. Together, the points attributed to the four major dimensions add up to 100 points.

  The dimensions are as follows:

  Affordability – Total Points: 25

  • Housing Costs ((median annual household income divided by median house price) plus (median annual household income divided by median price of rent): Full Weight (~8.33 Points)
  • Cost of Living: Full Weight (~8.33 Points)
  • Homeownership Rate: Full Weight (~8.33 Points)

  Economic Health – Total Points: 25

  • Unemployment Rate: Full Weight (~5 Points)
  • Median Household Income: Full Weight (~5 Points)
  • Percentage of Residents below Poverty Level: Full Weight (~5 Points)
  • Population Growth: Full Weight (~5 Points)
  • Income Growth: Full Weight (~5 Points)

  Education & Health – Total Points: 25

  • School-System Quality (WalletHub’s “Best & Worst School Systems” Ranking): Full Weight (~6.25 Points)
  • Percentage of Residents with a Bachelor’s Degree or Higher: Full Weight (~6.25 Points)
  • Percentage of Population with Health-Insurance Coverage: Full Weight (~6.25 Points)
  • Number of Pediatricians per 100,000 Residents: Full Weight (~6.25 Points)

  Quality of Life – Total Points: 25

  • Average Commute Time: Full Weight (~2.5 Points)
  • Percentage of Residents Who Walk to Work: Full Weight (~2.5 Points)
  • Mean Hours Worked per Week: Full Weight (~2.5 Points)
  • Number of Restaurants per 100,000 Residents: Full Weight (~2.5 Points)
  • Number of Bars per 100,000 Residents: Full Weight (~2.5 Points)
  • Number of Coffee Shops per 100,000 Residents: Full Weight (~2.5 Points)
  • Number of Museums per 100,000 Residents: Full Weight (~2.5 Points)
  • Number of Fitness Centers per 100,000 Residents: Full Weight (~2.5 Points)
  • Percentage of Millennial Newcomers: Full Weight (~2.5 Points)
  • Crime Rate: Full Weight (~2.5 Points)

  And now the results. A an interactive breakdown of the cities in the top of the ranking (shown in blue) and at the bottom (in orange) is shown below:

  Source: WalletHub

   

  And while he full list can be found at the following link, here are the two extremes.

  First, the 20 best cities:

  

   

  But more importantly, here are the worst – spot the common theme.

  

  Source

  

  

  

  

  

• A Nation Of Immigrants: Where America's Newest Citizens Come From

  As mass migration (otherwise known as refugee crises) remains a topic of concern for much of the world, an increasing number of the world's population is choosing to become American citizens (even as those renouncing American citizenship hits record highs). As MarketWatch notes, nearly 800,000 people decided to become American citizens in the last 12 months and more than a third of them came from Asia…

   

  

   

  Asians comprised the biggest group of new Americans by region, according to recent data from the Department of Homeland Security, edging out those from North America, in which DHS includes those from Central America and the Caribbean.

  Mexicans remain the single largest group of foreigners who were naturalized as citizens. But by state they are the biggest group in only 24. Among the remaining 26 states plus the District of Columbia, 10 other nationalities claim the top spot, as this map shows.

  In nine states, Indians made up the biggest group of naturalized citizens. Those from the Dominican Republic, who nationwide topped those from China for the first time in at least a decade, are the biggest group in five states, the DHS data show.

  One of those states is New Jersey. For two years running, Dominicans have made up the biggest group of naturalizations each year, narrowly exceeding the number of Indians.

  Here’s the breakdown by state for the 2013 fiscal year.

  

   

  Read more here…

  

  

  

  

  

• The End Of Rebalancing: Marginal Productivity Of Chinese Debt Goes From Bad To Much Worse

  Submitted by Bryce Coward via Gavekal Capital blog,

  Taking the Chinese GDP statistics at face value (an increasingly big assumption these days) we point out a rather ominous scenario which seems to be developing in the productivity dynamics of Chinese debt-financed growth.

  Basically the amount of growth that each new unit of credit produces is plunging to levels not seen since 2009-2010 when the Chinese unleashed the largest GDP adjusted stimulus program in the world. As it stands now, each new unit of debt is buying less than .5 units of marginal growth, and that, again, is taking for granted the accuracy of the GDP stats (chart 1). In reality the ratio is probably much lower than the current reading of .47.

  

   

  Is this sustainable? Of course not. As we have been saying for several years now, Chinese growth is going much lower as the economy rebalances from being an investment led model to a consumption led model. One of the signs we’re looking for to indicate that the transition is taking place is actually a slowing of new loan growth and improvement in the indicator in chart 1. We’ve got exactly the opposite so far, which is an indication of the Chinese pushing on the debt string even more to fuel growth rather than accepting slower growth still, but a rebalanced economy.

   

  

   

  This, in a perverse way, probably increases the risk of the dreaded hard landing as the chances of a credit “event” rise even further.

  

  

  

  

  

• One Day After Obama Kills Keystone XL Pipeline Another Buffett-Owned Oil Tanker Train Derails In Wisconsin

  It must be somewhat ironic for the U.S. progressive moment that a day after Obama officially slammed the seal shut on Transcanada’s Keystone XL pipeline after a seven year “review” (and days after the company itself withdrew its application, something which the admin ignored just so it could have the final say on the mater), moments ago an oil tanker train derailed north of Alma, Wisconsin along the Mississippi River 80 miles south of Minneapolis, with at least 32 cars off the tracks.

  The train belongs to BNSF – a company owned by Warren Buffett, and best known being directly involved in most of the recent oil train accidents. As such, this is the latest accident involving a “safe” Warren Buffett-owned train carrying toxic commodities, in a year where this “safe” Buffett-endorsed medium of transportation has already seen a record number of accidents.

  As an reference point, here is a smattering of comparable headlines from just this year:

  • Massive Fire Rages After Another Buffett-Owned Oiltrain Derails In North Dakota, Town Evacuated
  • Dramatic Explosion Footage: Warren Buffett-Owned Oil Freight Train Derails, Bursts Into Flames
  • Train Carrying Toxic Gas Derails In Tennessee, Catches Fire; Thousands Evacuated

  And here is the latest one.

  

  

  According to Fox9, the Buffalo County sheriff’s office says 32 cars derailed north of Alma around 8:50 am prompting several road closures and a voluntary evacuation of the affected area, according to the Buffalo County sheriff’s office. There are no reports of fire, smoke or injuries, BNSF Railway  told the Associated Press.

  Highway 35 is closed between North Main Street and Riverview Dr. in Alma, WI to Highway 35 and Spring Creek Road. Highway 37 is closed from County Road S to Highway 35. The Buffalo County sheriff’s office says it is unknown when the roads will reopen.

  RT adds that some tankers containing denatured alcohol, according to the sheriff’s office. A voluntary evacuation has been announced.

  Emergency crews are working with BNSF and the La Crosse hazmat regional team to evaluate the derailment and determine when roads can reopen and people can return to their homes

  Buffalo Co Sheriff has Hwy 35 closed north of #Alma about a 1.5 miles from #train #derailment #news8 pic.twitter.com/4r8bWqe3RZ

  — Kyle Dimke (@news8dimke) November 7, 2015

  The cause of the accident is not yet clear. There have been no reports of injuries. The derailment has prompted several road closures, according to the Buffalo County sheriff’s office.

  #BREAKING: Train derails near Alma, Wis., voluntary evacuations underway (Photo: WRDN 1430/Facebook) pic.twitter.com/CJTKoc4P8v

  — Grasswire Now (@GrasswireNow) November 7, 2015

  In July, more than 5,000 people in eastern Tennessee were evacuated after a freight train carrying “highly flammable and toxic gas” derailed and caught fire. Several firefighters were injured while battling the flames.

  This is what we said in May:

  There have been two massive BNSF oil train derailments in the US in the past two months pic.twitter.com/uLUUV2ZCds

  — zerohedge (@zerohedge) May 6, 2015

  And now make that 3 in the past 8 months. But at least the environment is safe because Obama finally pulled the plug on the “dangerous” Keystone XL pipeline.

  

  

  

  

  

• Making The World A More Dangerous Place

  Submitted by Chris Martenson via PeakProsperity.com,

  Without any doubt, the Middle East has been a very long-simmering region of violent religious and tribal enmity.

  In that regard, perhaps today is no different than 1,000 years ago. But given the importance of the remaining oil in the Middle East to the next 20 years of global economic health, the violence and chaos seen there recently is hugely important to the entire world.

  But it’s also equally without doubt that the US and NATO are inflaming the situation by provoking conflicts and supplying military weapons and training to various extremist groups — therefore deserving much of the blame for the current tensions, despair and mayhem happening in Iraq, Syria, Yemen, and Libya.

  Forget anything you might read about “brutal dictators” that need to go or the importance of “democracy” to the region. That's dumbed-down pablum for the masses and has literally nothing to do with the motivations of the (clinically insane) external power brokers actually driving the events on the ground and crafting the narrative that is faithfully scribed and re-told by the media. In fact, disturbingly often, the scribed narrative is exactly opposite of the truth.

  On The Path To War

  If a wider war breaks out between the US/NATO and either Russia and/or China, then massive systemic shocks will result to the economy, oil prices, and the global financial system.

  Some comfort themselves with the belief that such a war would not be in the interest of the true powers that now drive the politics of most countries. Others worry that chaotic systems and events sometimes have a life of their own, regardless of what 'the powers that be' may want. We have entered such a time.

  While predicting the outbreak of war is not my intent here, I do want you to be appraised of the risks. We all should note that the elevated tensions across the globe are as good a reason as any to get our houses in order. As we reinforce often here at Peak Prosperity: when it comes to such preparations, we vastly prefer to be an entire year early than a single day late.

  Good planning begins with good intelligence. But sadly, if you feel relatively well-informed because you read a lot of newspapers or watch a lot of news, you may be among the most misinformed of them all.

  Certainly, the events in the Middle East over the past decade have been almost impossible to analyze or understand from a logical perspective.

  But the pattern has been clear enough: a rough justification of the need for military force is raised by the US adminstration and, within weeks, money and war material are mobilized to do exactly that. Libya, Iraq, and Syria are recent examples of such.

  However, none of this is any surprise to those paying attention. General Wesley Clark warned about the US’s military objectives in the Middle East back in 2007 in an interview with Democracy Now!. It's difficult to read this transcript without concluding that the US was going to manufacture whatever justifications it needed in order to carry out a larger strategy that, inexplicably to rational observers, seemed intent on inflaming and toppling governments across the Middle East — a monstrous war crime by any historical standard:

  About ten days after 9/11, I went through the Pentagon and I saw Secretary Rumsfeld and Deputy Secretary Wolfowitz. I went downstairs just to say hello to some of the people on the Joint Staff who used to work for me, and one of the generals called me in. He said, “Sir, you’ve got to come in and talk to me a second.” I said, “Well, you’re too busy.” He said, “No, no.” He says, “We’ve made the decision we’re going to war with Iraq.”

   

  This was on or about the 20th of September. I said, “We’re going to war with Iraq? Why?” He said, “I don’t know.” He said, “I guess they don’t know what else to do.” So I said, “Well, did they find some information connecting Saddam to al-Qaeda?” He said, “No, no.” He says, “There’s nothing new that way. They just made the decision to go to war with Iraq.” He said, “I guess it’s like we don’t know what to do about terrorists, but we’ve got a good military and we can take down governments.” And he said, “I guess if the only tool you have is a hammer, every problem has to look like a nail.”

   

  So I came back to see him a few weeks later, and by that time we were bombing in Afghanistan. I said, “Are we still going to war with Iraq?” And he said, “Oh, it’s worse than that.” He reached over on his desk. He picked up a piece of paper. And he said, “I just got this down from upstairs” — meaning the Secretary of Defense’s office — “today.” And he said, “This is a memo that describes how we’re going to take out seven countries in five years, starting with Iraq, and then Syria, Lebanon, Libya, Somalia, Sudan and, finishing off, Iran.” I said, “Is it classified?” He said, “Yes, sir.” I said, “Well, don’t show it to me.” And I saw him a year or so ago, and I said, “You remember that?” He said, “Sir, I didn’t show you that memo! I didn’t show it to you!”

  (Source)

  Seven countries in five years. 

  Poking The Bear – Part IV

  Actually, I don’t know how many times the US has poked the bear (Russia) over the past two years, so I thought I’d use “Part IV” to get the point across.  It might be a much higher number.

  First there was Ukraine, where the US and other western parties conspired to overthrow the sitting elected government and putting in place the current crop of ultra-nationalist thugs and Nazi sympathizers that now infest the halls of power in Kiev. The situation there is an unfortunate mess, one the West fomented.

  Naturally the West was none too pleased when Russia, quite predictably, responded and sought to protect the roughly 8 million Russian speaking citizens living in eastern Ukraine with military support. Money and military aid and the ubiquitous US “advisors” flooded in to help the Kiev militarily dominate eastern Ukraine – ironic, as a few of Ukraine's current leaders were caught on tape saying they’d prefer to nuke the region in an ethnic cleansing.

  Then, when the people of Crimea voted to rejoin Russia (perhaps you would, too, if your "elected" leaders dreamed of nuking you), the US reacted as if this were some kind of foul play. That's a strange sort of needle to thread for a country that prides itself of on “spreading democracy” (even by force, if necessary). You’d think that people voting and exercising their free rights would top of the list of acceptable things to the US — but unless the election outcome is exactly in alignment with US wishes, that’s just not the case.

  Similarly, an almost comical (were it not so serious) attempt to malign Russia was made by the US State Department this week. In the aftermath of the US’s own bombing of the Afghan hospital in Kunduz, this charge was leveled against Russia:

  U.S. believes Russian bombing in Syria hit hospital: State Department

  Oct 29, 2015

   

  The United States has "operational information" that leads U.S. officials to believe Russian military aircraft hit a hospital while carrying out bombing raids in Syria, the State Department said on Thursday.

   

  Since the start of the Russian bombing campaign on Sept. 30, various reports from media and civilian groups have charged that Russian warplanes have hit hospitals with their air strikes.

   

  Asked at a briefing whether the United States had evidence that Russian bombing had hit Syrian hospitals, State Department spokesman John Kirby said, "Yes, we've seen some information that would lead us to believe that Russian military aircraft did hit a hospital.

   

  "We have seen some press reporting to that end, we have seen some Syrian civil society groups say that," Kirby said.

   

  "I would tell you that we have other operational information that leads us to believe that Russian targeting has not only not been focused on ISIL (Islamic State) but has, in fact, caused collateral damage and some civilian casualties, to include some civil infrastructure."

  (Source)

  Um…. “some press reporting” and “other operational information?” Good grief, that’s lame. Is that all the State Department has?  How about some pictures? Ballistics evidence? Satellite photos? Anything??

  Watching this RTTV reporter trying to get something credible out of a State Department spokesperson on the matter is simply cringe-worthy:

   

  The video is also notable for the arrogance on display. Assertions are useless without evidence, and in this age of satellites and drones, evidence of a destroyed hospital should be remarkably easy to come by. Yet not only did the State Department not share any such evidence, it went on to further claim that Russia had been targeting civilian infrastructure, which was another awkward charge for to lob given the news of the week prior:

  Warplanes of US-led alliance attack power plant in Aleppo

  Oct 18, 2015

   

  A military source told SANA that warplanes of the Washington alliance violated Syrian airspace and attacked civilian infrastructure in Mare’a, Tal Sha’er, and al-Bab in Aleppo countryside on Sunday.

   

  The source added that the warplanes attacked the biggest electric power plant that feeds Aleppo city, which resulted in cutting off power from most neighborhoods in Aleppo city.

   

  This transgression comes only 8 days after two F-16 warplanes belonging to the alliance targeted two power plants in al-Radwaniye area east of Aleppo city, cutting off power from the area.

  (Source)

  I’ve seen this information presented in various sources and nobody has denied it yet. But neither have I seen pictures, so perhaps this is disinformation too…though Putin is on record as saying "On Sunday, the American aviation bombed out an electrical power plant and a transformer in Aleppo. Why have they done this? Whom have they punished there? What’s the point? Nobody knows,"

  Given that charge, you’d think at least a denial from the US was in order. But none has been made. If the allegation is true, though, then it fits a larger pattern of the US criticizing other countries for doing the very same things it does.

  Even more seriously, back in June the US rattled its sabers by announcing this:

  U.S. Is Poised to Put Heavy Weaponry in Eastern Europe

  Jun 13, 2105

   

  RIGA, Latvia — In a significant move to deter possible Russian aggression in Europe, the Pentagon is poised to store battle tanks, infantry fighting vehicles and other heavy weapons for as many as 5,000 American troops in several Baltic and Eastern European countries, American and allied officials say.

   

  The proposal, if approved, would represent the first time since the end of the Cold War that the United States has stationed heavy military equipment in the newer NATO member nations in Eastern Europe that had once been part of the Soviet sphere of influence. Russia’s annexation of Crimea and the war in eastern Ukraine have caused alarm and prompted new military planning in NATO capitals.

  (Source)

  These moves are indicative of worsening relations with Russia. They show an over-reliance on military options and a woeful lack of diplomatic outreach, at least any that are being reported in the news.  Of course, the risk of all this being interpreted by Russia as 'overtly hostile' is pretty much 100%.

  “The Enemy Of My Enemy Is My Friend”

  If you are having similarly hard time trying to understand the US’s policy in the Middle East, you're not alone. The shifting alliances in play there are really hard to keep track of.

  Turkey has been aiding the so-called Syrian rebels (more on those rebels in a minute) but maintaining its long-standing hatred of the Kurdish people.  The US has been arming the Kurds and Syrian rebels while maintaining a mutual relationship with Turkey. 

  Iraq has been struggling with ISIS and accepting help from Iran to deal with them. This puts the US and Iran on the same side of the battle, if you believe that the US is actually trying to stop ISIS rather than covertly helping it. Why would it possibly help ISIS? Because ISIS is battling Assad’s government in Syria.

  Crazy, huh?

  Now, let’s talk about those so-called “Syrian rebels.”   The term "rebels" implies that these are Syrians fighting their own government. That’s significantly untrue. Consider this:

  20,000 Foreign Fighters Flock to Syria, Iraq to Join Terrorists

  Feb 10, 2015

   

  WASHINGTON — Foreign fighters are streaming into Syria and Iraq in unprecedented numbers to join the Islamic State or Iraq and Syria (ISIS) or other extremist groups, including at least 3,400 from Western nations among 20,000 from around the world, U.S. intelligence officials say in an updated estimate of a top terrorism concern.

   

  Nick Rasmussen, chief of the National Counterterrorism Center, said the rate of foreign fighter travel to Syria is without precedent, far exceeding the rate of foreigners who went to wage jihad in Afghanistan, Pakistan, Iraq, Yemen or Somalia at any other point in the past 20 years.

  (Source)

  There are dozens of reports indicating that the US, through the CIA and other outfits, has been responsible for a big part of both recruiting and training these foreign fighters, who draw from such nations as Pakistan, Afghanistan, Saudi Arabia, Chechnya and Qatar (among many others). 

  In short, anyone and everyone who could be used to topple the government of Syria is being drafted.

  I knew how ridiculous the claim of “Syrian rebels” was when I saw this picture showing the prominent ISIS leader Shishani, a well-known Chechen who was reportedly trained and backed by the US while in Chechnya.  

  

  (Source)

  But sharp eyes will also easily pick out the fact that he’s surrounded by people clearly not of Syrian origin. In fact, it looks more like a UN diversity conference than a Syrian rebel group.

  For the sake of appropriate context, imagine if China were funding “rebels” to attack and fight inside the US, and that these “rebels” were sourced from Mexico, Nicaragua, Argentina, and Peru. 

  These images and reports clearly show the pattern in play: the US and Turkey have been funneling vast amounts of arms, money and training to so-called opposition groups that, in many cases, consist of mercenaries and jihadists from a very wide range of different countries. Therefore, the US has directly supported and incubated some of the most brutal terror organization on the face of the planet — a list including ISIS and the Al Nusra front, both of which are well-documented for having committed horrible civilian atrocities.

  That this happened was not exactly news to those inside the beltway. A secret 2012 Pentagon report, since uncovered, detailed exactly this dynamic and predicted the rise of ISIS:

  Pentagon report predicted West’s support for Islamist rebels would create ISIS

  May 22, 2105

   

  A declassified secret US government document [a US Defense Intelligence Agency (DIA) document then classified as “secret,” dated 12th August 2012] obtained by the conservative public interest law firm, Judicial Watch, shows that Western governments deliberately allied with al-Qaeda and other Islamist extremist groups to topple Syrian dictator Bashir al-Assad.

   

  The document reveals that in coordination with the Gulf states and Turkey, the West intentionally sponsored violent Islamist groups to destabilize Assad, and that these “supporting powers” desired the emergence of a “Salafist Principality” in Syria to “isolate the Syrian regime.”

   

  According to the newly declassified US document, the Pentagon foresaw the likely rise of the ‘Islamic State’ as a direct consequence of this strategy, and warned that it could destabilize Iraq.

   

  The 7-page DIA document states that al-Qaeda in Iraq (AQI), the precursor to the ‘Islamic State in Iraq,’ (ISI) which became the ‘Islamic State in Iraq and Syria,’ “supported the Syrian opposition from the beginning, both ideologically and through the media.”

   

  The formerly secret Pentagon report notes that the “rise of the insurgency in Syria” has increasingly taken a “sectarian direction,” attracting diverse support from Sunni “religious and tribal powers” across the region.

  (Source)

  Well, of course the Defense department knew that arming and funding violent jihadists was going to lead to some crazy sectarian unpleasantness.  How could they not? 14 years in Afghanistan and Iraq taught them plenty about the region and its sectarian dynamics.

  But make no mistake: the US worked hard to attract regional jihadists to Syria to fight their war for them.  That was not an oddity to be curiously noted, but a feature of the program. Why? Because there was not enough legitimate internal Syrian opposition to Assad to get the job done. An angry mob had to be recruited.

  Said another way: Syria’s bloody civil unrest is not entirely the result of a natural social uprising, but was fostered with a great deal of external meddling.

  Why This Is Worth Our Full Attention

  Tensions are as high as they’ve been in decades. Neo-con hotheads with a track record of shooting first and not caring to ask questions later are still driving US foreign policy. Russia is signaling that it has had enough of American intervention that destabilizes volatile parts of the world.  China is flexing its muscles as well.

  This is all happening while global economic system is not nearly as robust as advertised. And history shows that nations always react more aggressively during leaner times.

  With so many sensitive flash points that the West has its fingers in these days, the risk of one or more of them erupting into a full-scale war between the major world powers is not dismissible. And given the huge cost should that come to pass, it makes all the sense in the world to take precautionary measures in advance.

  In Part 2: How Things May Well Get Ugly Quickly we zero in on the largest risks to monitor and the likely range of forms of retribution the US could face (from financial and cyber war to a full-blown shooting war) should the situation worsen.

  We're not trying to drum up fears that war is imminent. But what we are saying is that the risk is substantial enough, and the potential cost high enough, that it's worth making some pre-cautionary preparations at this time. 

  Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

   

  

  

  

  

  

• "The 2008 Crisis Didn't Come From Nowhere," Jim Grant Slams The Fed's Utopian World Of "Economic Sleepwalking"

  Central bank’s experimental policies are only hurting America instead of leading the nation into financial prosperity, exclaims James Grant, editor of Grant's Interest Rate Observer. "The Fed is a relic of the age of command and control. The Fed is an anachronism,” Grant tells Bloomberg TV in this excellent interview, "The Fed ought to get out of the business of masterminding ‘the American enterprise,’ what we call the U.S. economy." Central bankers, Grant adds, by pressing rates to nothing, have given rise to this "very pleasant kind of inflation we call bull markets." While bull markets are great insofar as they reflect what is actually going on, "they are very dangerous to the extent that they are the artificial creation of artificial interest rates."

  "We are in a regime of price administration. Price control is a policy that has failed for millenia. When prices are manipulated, manhandled, and otherwsise distorted, real decisions follow and the real decisions are distorted… there's bricks, mortar, and human lives attached to these [interest rate decisions]… and that's why they matter"

  "How do they know the funds rate ought to be zero?"

   

  "The world's central bankers went to the same schools, talk the same language, have the same world view.

   

  They have shared conditions. They believe, for example, that an average of prices, which they believe they can calculate, must rise at two percent a year unless the world fall into something they choose to call deflation.

   

  They believe that they can see into the future. They believe that they have the knowledge and the dexterity to manipulate interest rates to the benefit of society.

   

  The central banks no more than the rest of us can see into the future.  They are managed by human beings who do their best but who cannot — underscore — cannot see into the future and improve it before it happens. That's their conceit. But it is not given to mankind to do such things.

   

  They try. They have every good intention. But they are appliers of an outdated scheme of command and control. They don't know what they do."

  Bloomberg TV Interview…

  Some further highlights…

  On the consequences…

  The anger in the political process right now across both parties is evident for example, in the otherwise seemingly baffling popularity in the polls of Donald Trump. He is the — to my mind, he is the candidate of the thwarted and frustrated people who don't know exactly what is happening, but know full well that something is wrong, that something certainly is different.

   

  Donald Trump speaks to them in a way that I think is very destructive. But that's one consequence of the set of policies that have delivered us into this world of economic sleepwalking.

  On repeating the same mistakes…

  "the 2008 financial crisis didn't come from nowhere. It came, in my opinion, from the socialization of credit risk and from the manipulation of prices."

   

  "We are under the governance of former tenured economics faculty who think they know more than they can possibly know,"

   

  “Let us at least revert, if not to some perhaps Utopian dream of a perfect monetary standard, at least let us get out of the business of the suppression of interest rates, the administration of prices and the government sponsorship of asset bull markets."

  On the stock market…

  "Now, there is inflation and inflation. There is an inflation that is registered at the supermarket and the cash register. And there is inflation that is registered on the stock markets and in the real estate markets.

   

  And the central bankers, by pressing rates to nothing, have given rise to this very pleasant kind of inflation we call bull markets. Bull markets are great insofar as they reflect what is actually going on.

   

  They are very dangerous to the extent that they are the artificial creation of artificial interest rates."

  

  

  

  

  

• The Mangled End Of Markets: An Unambiguous Signal Of Malfunction If Not Distress

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  While the stock market had one of its best months in years, it was, like the jobs report, uncorroborated by almost everything else. The junk bond bubble, in particular, stands in sharp and stark refutation of whatever stocks might be incorporating, especially if that might be based upon assumptions of Yellen’s re-found backbone. Do or do not, corporate junk remains unimpressed and therefore depressed against the same background drowning as has been in place going back to June 2014.

  At yesterday’s close, the S&P/LSTA Leveraged Loan 100 index had fallen back to only a few fractions above its early October multi-year lows. That price action was matched by other high yield, high risk bond views.

  

  Retail junk debt prices have been somewhat more responsive which isn’t surprising given the mood in general stocks (or at least the narrowing segment of stock markets and indices that are rising). Though more so than institutional, even retail junk prices have begun to turn around again of late.

  

  Undoubtedly, part of that is due to what can only be termed and categorized as atrocious liquidity conditions. The mortgage REIT ETF REM suggested a quarter-end liquidity bottleneck at the end of September before rising as HYG (the two are well-correlated). However, in recent days REM has sunk almost to that late September nadir, suggesting, firmly, that “dollar” funding and perceptions are continue to be far more problematic than the unspecifiable euphoria elsewhere.

  

  The recent turn toward “hawkish” opinions about FOMC predilection has sparked some noteworthy returns in “dollar” proxy currencies, especially the franc. The Swiss currency had been trading in bouts of appreciation which tied closely to upwelling in fear and safe haven demand. Around October 21, however, the franc suddenly fell under a sustained bout of depreciation that has brought it to parity with the dollar. That is almost the same disastrous level that forced the SNB to noisily and dangerously abandon the euro peg back on January 15.

  

   

  Whether that relates to the changing views of monetary policy isn’t fully clear, but it would be a reasonable assumption especially as this return is matched by other currencies such as the Indian rupee.

  

  Of course, behind all this is the “dollar” which continues to press devilishly in the same perturbed direction. I examined this morning the commodity and even eurodollar futures view of that, but the most concerning parcel has to be interest rate swaps. As noted on several prior occasions, swap spreads have been sinking fast and to unprecedented levels. Though mainstream commentary will provide plausible-sounding excuses, mostly about corporate or even UST issuance, that is only because these places will not even consider that Janet Yellen has it all wrong; thus, they only search for possibilities that allow that narrative to remain undisturbed even though that narrative itself can never account for negative spreads.

  Again, the swiftness of the erosion is remarkable and down the entire swap curve. Even the 2-year spread unthinkably has flirted with zero:

  

  The fact and observation of a negative swap spread is simple dealer balance sheet capacity; for a swap rate to fall below its correspondent maturity UST can only be related to a significant reduction in offered money dealing capacity. As I wrote just a few weeks ago:

  A negative swap spread…assaults conventional financial sense. To most, a negative spread is nonsense and leads to so much consternation about how to interpret the situation when it has arisen. Unfortunately in 2015, especially after July 6, it has been near-universal across far too many maturities.

   

  

   

  While on the surface it would suggest that the “market” in swap derivatives is pricing more risk of UST’s than swap counterparties, the only real inference about such compression is the nonsense itself. In other words, the nonsense nature of negative swap spreads is precisely the point – for them to be negative in the first place, let alone highly so (like the 30s again), is a pretty unambiguous signal of malfunction if not full distress. It is only great imbalance that can change the information content of a market price into meaninglessness; therefore we can interpret that case as some great reduction in balance sheet capacity since it is dealer capacity that determines the nature of the spreads.

  This is not a revelation to anyone paying even slight attention to what has been taking place in global, eurodollar banking of late. The banks themselves have all but declared that they want out, with the events of this last “dollar” run convincing them to do so at all possible haste. If banks are withdrawing capacity and swap spreads have turned not just nonsense but insanity, then we can only conclude taking banks at their word.

  Investment Grade Bonds:

  

   

  And Junk Bonds:

  

   

   

  That brings us back to dear Janet. What is most notable on the charts above showing all the swap spread maturities is the inflection surrounding the September FOMC, not the October meeting. In other words, spreads turned quickly downward where the Fed chickened out and thus confirmed the dead recovery (and the end of “transitory”). That they continued to be negative even after supposedly the FOMC revisited their nerve more than suggests what I explained this morning – that the background recovery and “dollar” baseline has been set and that any changes in monetary policy are secondary if not further remote. Thus, all Yellen et al can do is make a bad (and growing far worse) situation that much worse. I believe that is why they intermittently seem to gain resolve only to lose it closer to their own call for action.

  This view is all the more pressing given that the likely specifics of the balance sheet capacity withdrawal emanating from those very banks that followed Yellen toward her recovery idea in the first place – Deutsche Bank and Credit Suisse, perhaps even Goldman Sachs. That means that this descent into economic and financial darkness is being driven by the same firms that were once completely, utterly and fully onboard the recovery and its most optimistic case. Their “betrayal” then simply completes and confirms the recovery’s mangled and explicit end. As I wrote back in late September, ignore swap spreads at your own peril; a sentiment increasingly applied beyond the “dollar” into the real economy as one follows the other here and across the globe.

  

  

  

  

  

• What Janet Knows

  What Janet knows, as The Burning Platform's Jim Quinn exclaims, is that a 1% increase in interest rates would increase the interest on the National Debt from $400 billion per year to $600 billion per year, a 50% increase.

  

  Source: Ben Garrison

  Interest rates back at NORMAL historical rates that we had as recently as 2007 would increase the interest on the National Debt to $1 trillion per year, a 150% increase.

  Plus, the National Debt increases by $1.5 billion per day, so our interest bill goes up by $35 million per day already.

  Do you really think Yellen is going to be increasing interest rates?

  

  

  

  

  

• The Next Level of John Law Type Central Planning Madness

  Submitted by Pater Tenebrarum via Acting-Man.com,

  Cries for Going Totally Crazy are Intensifying

  What are the basic requirements for becoming the chief economist of the IMF? Judging from what we have seen so far, the person concerned has to be a died-in-the-wool statist and fully agree with the (neo-) Keynesian faith, i.e., he or she has to support more of the same hoary inflationism that has never worked in recorded history anywhere. In other words, to qualify for that fat 100% tax-free salary (ironically paid for by assorted tax serfs), one has to be in favor of central economic planning and support policies fully in line with today’s economically illiterate orthodoxy. Meet Maurice Obstfeld, who has just taken the mantle.

   

  

  New IMF chief economist Maurice Obstfeld (left) and fellow monetary crank Haruhiko “Peter Pan” Kuroda, governor of the BoJ

   

  For all we know the man is merely misguided and otherwise a nice person (in fact, he’s laughing a lot in photographs and seems a personable enough fellow). But his proposals could eventually affect the lives of countless people in the whole world, so he is fair game for robust criticism. We personally believe that he and other members of our “enlightened” technocratic ruling class should resign without delay and start looking for productive work instead of parasitizing and hampering the ever shrinking class of genuine wealth producers, but it seems unlikely that they will be interested in our opinion.

  There once was a time when monetary cranks of the sort in charge nearly everywhere today were laughed out of the room. Today they are perfectly free to drive what is left of the market economy over the cliff. Mr. Obstfeld turns out to be yet another in a long list of luminaries belly-aching about (non-existing) “deflation” – this is to say, the alleged danger that the purchasing power of consumer incomes and savings might increase at some point. Allegedly, this remote eventuality has to be guarded against at all costs.

  According to the WSJ:

  “The Bank of Japan and other central banks around the world may need to try radical new easy-money policies to stave off the rising specter of deflation and revive sickly economic prospects, the International Monetary Fund’s new chief economist warns.

   

  “I worry about deflation globally,” new IMF Economic Counselor Maurice Obstfeld said in an interview ahead of an annual IMF research conference that focuses this year on unconventional monetary policies and exchange rate regimes. “It may be time to start thinking outside the box.”

   

  Weak—and in some cases falling—price growth has plagued Japan, Europe, the U.S. and other major economies since the financial crisis. Plummeting commodity prices are exacerbating the so-called “lowflation” and deflation problems that curb investment, spending and growth.

   

  Surveying several dozen of the largest economies around the world, Mr. Obstfeld said the number of countries experiencing low inflation is rising. Combined with slowing emerging market output, ballooning government debt and monetary policy constrained by the lower limits of interest rates, the deflation risk is fueling fears the global economy could be fast stuck into a deep low-growth mire.

  (emphasis added)

  We don’t deny that global economic prospects look dim at the moment. However, this is the direct result of the policies Mr. Obstfeld supports and recommends. It has absolutely nothing to do with the fact that government-doctored CPI data are for once indicating a minor slowdown in the pace of inflationary robbery by the State (from the point of view of consumers, price inflation is in essence a hidden tax).

  To illustrate how utterly inconsequential the recent slight decline in the rate of change of CPI is in a larger context, consider simply the long term trend in US CPI. We have contrasted it with quarterly annualized GDP growth rates, because they show something important: the steeper the trend in money and credit supply expansion and consequent “price inflation” has become over time, the more real GDP growth has actually slowed (about the only thing GDP data are remotely useful for are historical comparisons and even those have to be taken with a grain of salt: today’s GDP data are actually overstating growth relative to the data employed in past decades). One would expect positivist mainstream economists to take note of such empirical facts and perhaps even wonder if there could be a connection – we have yet to see that happen though.

   

  

  CPI “inflation” vs. real GDP growth – the blue trend line is mainly meant to serve as a visual aid

   

  An even starker illustration is provided by economic growth in the decades prior to the establishment of the Federal Reserve. We have written about this previously in Presidential Musings About Inequality. Here is the relevant passage:

  “[…] the period of the greatest real economic growth in the US, a period that was marked by sharp growth in the real incomes of the broadest possible swathe of the population, was that otherwise dreaded age of the ‘robber barons’, the Gilded Age, in the decades  prior to the founding of the Federal Reserve. Prices during that era of extremely small money supply growth were almost continually in a mildly declining trend, thereby inexorably raising the real incomes of workers and the then up and coming middle class. It is interesting in this context to look at the Wikipedia entry on the Gilded Age, which is full of complaints about the poverty of the time and the two crisis that ‘interrupted growth’. At first one gets the impression that it must have been a truly terrible time (even the term ‘Gilded Age’ was actually meant to be sarcastic). However, a few paragraphs in, one finds the following:

   

  “During the 1870s and 1880s, the U.S. economy rose at the fastest rate in its history, with real wages, wealth, GDP, and capital formation all increasing rapidly. For example, between 1865 and 1898, the output of wheat increased by 256%, corn by 222%, coal by 800% and miles of railway track by 567%. Thick national networks for transportation and communication were created. The corporation became the dominant form of business organization, and a scientific management revolution transformed business operations. By the beginning of the 20th century, per capita income and industrial production in the United States led the world, with per capita incomes double that of Germany or France, and 50% higher than Britain. The businessmen of the Second Industrial Revolution created industrial towns and cities in the Northeast with new factories, and hired an ethnically diverse industrial working class, many of them new immigrants from Europe.

   

  Wealthy industrialists and financiers such as John D. Rockefeller, Andrew W. Mellon, Andrew Carnegie, Henry Flagler, Henry H. Rogers, J. P. Morgan, Leland Stanford, Charles Crocker, Cornelius Vanderbilt of the Vanderbilt family, and the prominent Astor family would sometimes be labeled “robber barons” by their enemies. Many of these captains of industry, in addition to building up the American economy, participated in immense acts of philanthropy. Andrew Carnegie, who gave away over 90% of his wealth, said philanthropy was their duty–it was the “Gospel of Wealth”. Private money endowed thousands of colleges, hospitals, museums, academies, schools, opera houses, public libraries, and charities. John D. Rockefeller, for example, donated over $500 million to various charities, slightly over half his entire net worth.

   

  This emerging industrial economy quickly expanded to meet the new market demands. From 1869 to 1879, the US economy grew at a rate of 6.8% for NNP (GDP minus capital depreciation) and 4.5% for NNP per capita.

   

  The economy repeated this period of growth in the 1880s, in which the wealth of the nation grew at an annual rate of 3.8%, while the GDP was also doubled. Real wages also increased greatly during the 1880s. Economist Milton Friedman states that for the 1880s, “The highest decadal rate [of growth of real reproducible, tangible wealth per head from 1805 to 1950] for periods of about ten years was apparently reached in the eighties with approximately 3.8 percent.”

   

  Not so terrible a time after all! […] 1. ‘deflation’ (declining prices) is not inimical to economic growth, as the Federal Reserve and its apologists maintain (the opposite appears to be the case), and 2. the less central economic planning there is and the sounder the money employed, the more economic growth and economic advancement of the poor and middle class strata of society can be expected.

  It should actually not be necessary to draw on such empirical examples. One must always keep in mind that economic history cannot possibly replace sound economic theory, as it is always subject to a multitude of interlocking contingent forces and factors. The fact remains however: 1. during the Gilded Age, money was by and large sound, even though the banks operated with fractional reserves (which was the cause of the relatively harmless boom-bust cycles in the period). 2. Moreover, government was but a footnote in the lives of most people. Its spending amounted to approximately 4% of total economic output. It should therefore be no surprise that real GDP per capita has never again grown at a comparably fast pace:

   

  

  Real GNP growth per capita during the “Gilded Age” – it has never again been greater or more equitable. All of this happened under the dreaded gold standard, with no central bank, IMF or other central planners in sight – click to enlarge.

   

  So what does Mr. Obstfeld’s “radical, thinking out of the box” policy epiphany consist of? It appears he wants central banks to go John Law on us:

  “So, what would be thinking outside the box for Mr. Obstfeld? One option is a proposal by Adair Turner, a member of the Bank of England’s Financial Policy Committee, for central bankers to overtly finance increased budget stimulus with permanent increases in the money supply. By contrast, the increased money supply resulting from recent central bank bond-buying programs is meant to be temporary.

   

  In a paper prepared for the IMF conference, Mr. Turner contends Japan will be forced to use such “monetary financing” within the next five years and says the policy should become a normal central bank tool for all economies facing stagnation.

   

  Such an option would be highly provocative to fiscal hawks and those who fear giving central banks too much power, especially when many economists question both the returns and financial-turmoil side effects from existing easy-money policies. The provocative nature of the proposal underscores the extent of the deflation-related anxiety among some policy makers, however.

   

  Perhaps a little less controversial option is for central banks to consider overshooting their inflation targets.

   

  “You can always, always deal with high inflation,” Mr. Obstfeld said.  But, “at the zero lower bound, our options are much more limited. In order to bring inflation expectations firmly back to 2% in the advanced countries, where we’d like to see it, it’s probably going to be necessary to have some overshooting of the 2% level, or at least to entertain that as a possibility,” he said.

  (emphasis added)

  Both of these proposals, namely overt central bank financing of government spending and declaring official “inflation targets” obsolete and aiming for an overshooting of same have been peddled by assorted snake-oil sellers for several years already. It apparently hasn’t dawned on these geniuses yet that neither governments nor central banks can create even one iota of real wealth. If these ideas were implemented, they would transform a budding disaster into an intractable catastrophe – essentially the economic equivalent of an asteroid strike, as opposed to a mere earthquake (see, we always manage to smuggle in an asteroid strike somewhere…:)).

  If not checked in time, such extreme monetary interventions can lead to crack-up booms and the eventual collapse of the underlying currency system (the German term Ludwig von Mises used to describe the phenomenon is actually even more descriptive: “Katastrophenhausse”, literally, “the catastrophic boom”). The hubris of today’s planners is evident in Obstfeld’s assertion that it “you can always deal with high inflation”. This is incredibly naïve, and yet, it is a belief that is widely held by our modern-day monetary cranks. They all think they are in possession of an inner Volcker just itching to be released at the critical moment.

  What is the end result of a crack-up boom? In the worst cases, the subsequent stabilization crisis can last decades. For instance, the contemporaneous collapses of the South Seas and Mississippi bubbles in England and France in 1722 led to a continent-wide bear market and on-and-off depression lasting 68 years. Half of Europe was instantly bankrupted (in France it was eventually decided to do it all over again by instigating yet another hyperinflation after the French Revolution; the gentlemen responsible were all highly educated and convinced they were on top of things. It would be easy to just stop printing, they eloquently argued).

  In the stabilization crisis after the Weimar hyperinflation a number of positive developments were actually discernible initially: for instance, the production structure quickly realigned itself away from the early stage malinvestments of the crack-up boom toward an increase in consumer goods production, with a more sensible production-consumption balance reasserting itself. However, many other symptoms of the final stage of the inflation crisis (such as high unemployment) only improved slowly. Still, considering that the entire banking system had to start from scratch and massive amounts of phantom wealth had to be liquidated, things developed surprisingly well at first.

  Unfortunately, the roaring 20s boom was underway concurrently in the US and before the German economy had a chance to truly heal itself, the inflationary boom in the US collapsed, taking the whole world with it. Ultimately the National Socialists took power, establishing their Zwangswirtschaft (aptly called the “Vampire Economy” by Guenter Reimann). This was eventually followed by the most devastating war in history. Ah, but this time “it’s going to be different” of course, because Obstfeld and his central planning buddies have “everything under control”.

   

  The so-called “lowflation” (yes, they even invented a new term for this) that has Obstfeld et al. so exercised – click to enlarge.

   

  Egging Them on From the Sidelines

  In case more Orwellian language should be needed to invest this hoary inflationism with new clothes, Citigroup has seen fit to provide it in late September. In an article that appeared at Bloomberg at the time, we were informed that “Citi’s answer to dwindling central bank firepower is ‘Cold Fusion’”. What does “Cold Fusion” mean? Exactly the same – fiscal spending financed by permanent debt monetization. There are a few funny (if at the same time cringeworthy) passages in the article.

  First we are told that in order to “create growth”, we not only need more money printing, but more Keynesian deficit spending as well. Maybe this is proposed because it has worked so well in Japan over the past 26 years? Who knows, but all that darn “austerity” must definitely end!

  “It’s time for central bankers to ask for help. As the International Monetary Fund prepares to downgrade its outlook for the world economy again, monetary policy makers are running low of ammunition to fight a fresh downturn. Bank of America Merrill Lynch calculates they have reduced interest rates more than 600 times since the 2008 collapse of Lehman Brothers Holdings Inc. with the Reserve Bank of India extending the run on Tuesday by cutting its benchmark more than expected.

   

  While the European Central Bank and Bank of Japan haven’t ruled out buying even more bonds, there are doubts over how much more quantitative easing can achieve given yields are already around record lows and inflation still remains beneath the target of most policy makers. Even easier monetary policy may just end up propelling asset markets rather than economies. That leaves economists and investors increasingly looking toward governments to lead the rescue efforts should the China-led slowdown in emerging markets infect developed nations. BofA Merrill Lynch sees a 25 percent chance of a recession-like slump this year.

   

  “Monetary policy is basically exhausted in terms of producing real growth and even inflation,” billionaire Bill Gross of Janus Capital Management LLC told Bloomberg Television this month. “Fiscal policy is the second piece of the leg that has to take place in order to get us back to where we want to go.”

   

  […]

   

  Austerity is still the order of the day in Europe despite the rise of protest parties and another congressional showdown over debt is looming in the U.S. Gross public debt of around 117 percent of gross domestic product globally versus 81 percent in 2007 may still slow the hand of politicians.”

  (emphasis added)

  Let us take a brief look at that terrible austerity that is the “order of the day” in Europe.

   

  

  Europe – a collection of numerous de facto bankrupt states (with the exception of the smaller ones to the left of the chart – several of which are however home to mind-boggling private sector credit bubbles). All this terrible austerity has left the euro zone with record public debt, both in absolute terms and relative to economic output (debt-to-GDP ratio as of the end of 2014: 92.3%) – click to enlarge.

   

  Citigroup’s analysts have correctly recognized that it is difficult for insolvent governments to spend even more. Already a number of them are artificially propped up by the rest, in a comical arrangement that is a bit akin to Worldcom trying to prop up Enron.

  So naturally, not only will central banks have to call on governments for help, but the same must concurrently happen vice versa as well. So this is what Citi calls “Cold Fusion”. We think it would be better to call it a high level Three Card Monte (other terms come to mind as well, but are not printable; something involving a circle for instance).

  “The medicine may nevertheless need to be stronger than the traditional prescription. If the world economy enters a downdraft, Steven Englander, global head of G-10 FX strategy at Citigroup Inc., proposes a more revolutionary response, akin to the “helicopter money” once advocated by Milton Friedman.

   

  In what he calls “cold fusion,” politicians would cut taxes and boost spending. Central banks would then cover the resulting increase in borrowing by purchasing more bonds as part of a commitment to permanently expand their balance sheets. The easier fiscal policy would be covered by QE Infinity.

   

  “Politically it is difficult for central banks to outright endorse monetization of government debt, but faced with another slump and armed with ineffective policy tools, we expect that central banks will quickly give the wink and nod to fiscal measures,” Englander said in a report to clients last week.

   

  The upshot would be greater purchasing power would be injected straight into the economy, increasing activity and inflation. Long-term bond yields would rise, yet short-term yields adjusted for inflation would turn negative.”

  Once again, this proposal is in principle no different from what John Law proceeded to do when confronted with the combination of an exhausted French treasury and a moribund French economy in the early 18^th century.

   

  The Nature of the Problem

  We will try to lift the veil of economic ignorance attending these proposals a bit further. In an (unfortunately hypothetical) unhampered free market economy, there would be no “economic policymakers”. This would have the great advantage that interest rates and prices would actually be meaningful. In other words, the price signals in such an economy – which one can safely assume would employ sound money – would be genuine instead of being incessantly distorted.

  Since gross market interest rates would reflect actual society-wide time preferences (plus an entrepreneurial or risk premium emerging on a case-by-case basis), such an economy would boast of an intertemporally well-coordinated structure of production that would actually be aligned with the wishes of consumers. Businessmen wouldn’t be continually misled by the falsification of prices that results from the manipulation of the money supply and interest rates. As a result, entrepreneurial errors wouldn’t be regularly committed on a system-wide basis (this is not to say that there would be no such errors whatsoever, but there would no longer be enormous capital malinvestment across entire sectors of the economy). In short, this would be the ideal state of affairs.

  In the present-day hampered market economy, “normal” boom-bust cycles primarily are the result of the expansion of commercial bank credit to the business sector. Too many of the wrong things will be produced (which ones precisely depends on the discrete points at which newly created money enters the economy, which is mainly a question of contingent circumstances). This is actually the nature of malinvestment: it is not “overinvestment”, it is investment in the wrong lines.

  Since real capital is scarce, this implies that too few of the things consumers actually want will be produced concurrently. In practice, a shift of production factors toward more long-term oriented investment projects (the higher stages of the production structure) will occur, while capital maintenance in the middle to lower stages – the products of which are temporally closer to consumption – will be neglected (it is easy to understand why: the lower the time discount, the more the net present value of durable capital goods increases and the more profitable long term investments appear to be).

  Consumer demand will actually be higher than indicated by market interest rates, while at the same time, real savings will be lower than indicated by market interest rates: they won’t suffice to sustain and complete all the new long term projects that are undertaken (think of the many half-completed “ghost apartment complexes” left standing in Spain after the real estate bust). Eventually this discrepancy must come to light and a bust will ensue (this moment can be delayed by additional credit expansion, but not forever).

  Many businessmen may well be aware of the artificial nature of the boom, but they will still be tempted to go along, either because they believe they will be able to predict its end in timely fashion, or simply because they see no other way of staying in business. However, during the boom, capital will necessarily be consumed. Many of the accounting profits posted during the boom period will later be revealed as illusory and give way to large impairments and losses.

  What happens in the event of fiscal deficit spending? Deficit spending tends to lead to intra-temporal distortions in the production structure. Once again scarce resources will be employed in the wrong lines; bureaucrats will simply be groping in the dark and allocate resources without the ability to contrast the prospective results of their investments with the opportunity costs involved. Since all those actually producing genuine wealth have to compete for the same scarce resources, their activities will be necessarily restricted. The outcome is once again a production structure that is out of line with actual consumer wishes. Living standards must necessarily erode relative to what would have been the case otherwise.

   

  

  A famous real-life example of wasteful government spending: a road to nowhere near Kyoto.

   

  Moreover, government possesses no resources of its own. Every cent it spends has to be taken from the private sector, either by means of borrowing, taxation or inflation. Once these funds have been obtained, they are no longer available to the private sector. If one asserts that economic growth can be produced in this manner, one needs to believe that government bureaucrats are better at spending and investing these funds than the people they have been taken from. This belief strikes us as obvious nonsense. Of the three methods of funding fiscal spending, the one now under consideration – inflation – is by far the worst.

  However, we can rest assured that the great many private sector cronies infesting our state-capitalist system are salivating over the prospect of arrogating some of this coercively obtained loot to themselves.

   

  

  Always ready to obtain some of the loot – politically well-connected cronies

   

  As the Bloomberg article notes in passing:

  “[…]there is plenty to spend on with the B-20, a group of international business leaders, calculating that 100 million new jobs and $6 trillion of activity could be generated if governments met the infrastructure needs of their economies by 2030.”

  There it is again, the infrastructure canard. Building pyramids is also “activity” – but it makes no sense, because it wastes scarce resources. While pyramids, once built, are able to provide monument services, these stand in no relation to the costs involved. These so-called “necessary infrastructure projects” are for the most part no different (Poland’s ghost airports immediately spring to mind).

  We have discussed this topic on several previous occasions in the context of the EU’s investment dirigisme (see eg. “EU Planning to Spend Money it Doesn’t Have”, “The Stalinesque 4-Year Plan” and the addendum “Zwangswirtschaft”, which discusses a reader comment on the ominous parallels with Hitler’s economic plan, aiming to make Germany self-sufficient).

  The main point is precisely the one made above: investing in such projects necessitates choices. Resources must be withdrawn from other employments or will no longer be available for future alternative employments in the private sector. Since most of these (namely those turning out to be profitable) would have been in line with consumer wants, many of these wants will have to remain unsatisfied. For lack of capital, a number of entirely new products may never see the light of day. It is impossible to gauge the total impact on prosperity and progress, but the cumulative effect over time is presumably quite significant.

  Politically well connected cronies will end up benefiting to the detriment of everybody else in society. Relative impoverishment on a society-wide basis is the inevitable outcome – and that is actually the best case. Since the proposal entails financing of deficit spending by the monetary authority with money created ex nihilo, the far greater danger remains though that should it be adopted, the situation will eventually spiral completely out of control.

   

  Conclusion

  The fact that the new IMF chief economist is explicitly arguing in favor of policies like so-called “helicopter money” probably makes it more likely that they will indeed be adopted at some point. He is after all a freshly appointed bureaucrat and not a retired one like e.g. Adair Turner, who is merely sniping from the sidelines. Presumably Obstfeld’s opinions also carry more weight than the theoretical proposals forwarded by academics who are currently not in a policymaker role.

  It seems unlikely that anything of this sort will happen in the near future, but one only needs to look at how Japan’s policies have evolved over time – over the years, one previous taboo after another was eventually shoved aside by the BoJ in favor of ever crazier experimentation. Note that it wasn’t hindered by legacy legal restrictions either – the laws and regulations were simply altered. This is relevant to the issue, as most central banks are currently not allowed to fund deficit spending by governments directly.

  The strength of this prohibition varies between the important currency areas, but one must assume that once the taboo falls in one of them, the others will follow suit, especially when another severe economic bust strikes. As we always say, the lunatics are running the asylum. One shouldn’t underestimate what they are capable of.

  The only consolation is that the day will come when the monetary cranks will be discredited again (for the umpteenth time). Thereafter it will presumably take a few decades before these ideas will rear their head again (like an especially sturdy weed, the idea that inflationism can promote prosperity seems nigh ineradicable in the long term – it always rises from the ashes again). The bad news is that many of us will probably still be around when the bill for these idiocies will be presented.

   

  

  

  

  

  

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