Oct 11

Today’s News October 11, 2015

  • The Tragic Ending To Obama's Bay Of Pigs: CIA Hands Over Syria To Russia

    One week ago, when summarizing the current state of play in Syria, we said that for Obama, “this is shaping up to be the most spectacular US foreign policy debacle since Vietnam.” Yesterday, in tacit confirmation of this assessment, the Obama administration threw in the towel on one of the most contentious programs it has implemented in “fighting ISIS”, when the Defense Department announced it was abandoning the goal of a U.S.-trained Syrian force.

    But this, so far, partial admission of failure only takes care of one part of Obama’s problem: there is the question of the “other” rebels supported by the US, those who are not part of the officially-disclosed public program with the fake goal of fighting ISIS; we are talking, of course, about the nearly 10,000 CIA-supported “other rebels”, or technically mercenaries, whose only task is to take down Assad.

    The same “rebels” whose fate the AP profiles today when it writes that the CIA began a covert operation in 2013 to arm, fund and train a moderate opposition to Assad. Over that time, the CIA has trained an estimated 10,000 fighters, although the number still fighting with so-called moderate forces is unclear.

    The effort was separate from the one run by the military, which trained militants willing to promise to take on IS exclusively. That program was widely considered a failure, and on Friday, the Defense Department announced it was abandoning the goal of a U.S.-trained Syrian force, instead opting to equip established groups to fight IS.

    It is this effort, too, that in the span of just one month Vladimir Putin has managed to render utterly useless, as it is officially “off the books” and thus the US can’t formally support these thousands of “rebel-fighters” whose only real task was to repeat the “success” of Ukraine and overthrow Syria’s legitimate president: something which runs counter to the US image of a dignified democracy not still resorting to 1960s tactics of government overthrow. That, and coupled with Russia and Iran set to take strategic control of Syria in the coming months, the US simply has no toehold any more in the critical mid-eastern nation.

    And so another sad chapter in the CIA’s book of failed government overthrows comes to a close, leaving the “rebels” that the CIA had supported for years, to fend for themselves.

    From AP:

    CIA-backed rebels in Syria, who had begun to put serious pressure on President Bashar Assad’s forces, are now under Russian bombardment with little prospect of rescue by their American patrons, U.S. officials say.


    Over the past week, Russia has directed parts of its air campaign against U.S.-funded groups and other moderate opposition in a concerted effort to weaken them, the officials say. The Obama administration has few options to defend those it had secretly armed and trained.


    The Russians “know their targets, and they have a sophisticated capacity to understand the battlefield situation,” said Rep. Mike Pompeo, R-Kan., who serves on the House Intelligence Committee and was careful not to confirm a classified program. “They are bombing in locations that are not connected to the Islamic State” group.

    With the US now in damage control mode, the finger pointing begins.

    First, it is only natural that finger will point at Putin – after all he is an easy target:

    U.S. intelligence officials see many factors motivating Russia’s intervention: Moscow’s reasserting its primacy as a great power, propping up Assad and wanting to deal a blow to the United States, which has insisted that Assad must go to end Syria’s civil war.


    Russia is also interested in containing IS, an organization that includes thousands of Chechen fighters who may pose a threat to Russia, officials say.


    But in the short term, “my conclusion is that the timing of their intervention was driven by Assad really going critical,” said Rep. Jim Himes, D-Conn., also a House Intelligence Committee member.

    Alas, blaming Putin only underscores his latest victory over the US state department, leaving the US diplomatic corps no choice but to blame its own. This is imminent, and many heads will – or should – roll.

    The administration is scrambling to come up with a response to Russia’s moves, but few believe the U.S. can protect its secret rebel allies. The administration has all but ruled out providing CIA-backed groups with surface-to-air missiles that can down aircraft, fearing such weapons would end up in the wrong hands, officials say.


    Rep. Adam Schiff, the top Democrat on the committee, says the U.S. should consider establishing a no-fly zone that allows rebels a safe place from which to operate, and shooting down Syrian helicopters that are bombing civilians. He said the U.S. also should provide arms to the Ukrainian government fighting Russian-backed separatists.


    A no-fly zone would require the U.S. military to be ready to engage in air battles with the Syrian government, something it is not prepared to do.

    Why? Because it is not the Syrian government that is flying those sorties above Syria, it is Putin, and despite all the posturing, Obama is unwilling to risk World War III just to stop a Qatar gas pipeline to Europe.

    Which means Obama now has just one option: admitting that his latest gamble to overthrow Assad, one which started in 2013 with the fake YouTube clips of “chemical attacks”, and the resultant naval escalation, coupled with the CIA’s training of thousands of local rebels mercenaries, and which escalated with the “appearance” of ISIS in the summer of 2014, is about to end with Obama admitting yet another major political defeat.

    The administration “is debating the merits of taking further action or whether they are better off letting Putin hang himself,” he said, referring to Russian President Vladimir Putin.

    Because somehow handing over control of the Middle East to the Russian-controlled axis – incidentally the topic of another article yesterday in the WSJ “America’s Fading Footprint in the Middle East” – is now spun as a defeat for Putin.

    “Our options are much narrower than they were two weeks ago,” said Sen. Angus King, I-Maine, who serves on the Intelligence and Armed Services committees. “I don’t think there is any simple answer. … Further air involvement has become very problematic because of the Russian engagement.”

    * * *

    And so Putin has once again “won”, or as the administration would prefer to spin it, “has hung himself.”

    Incidentally, this is just the beginning. Now that the U.S. has begun its pivot out of the middle-east, handing it over to Putin as Russia’s latest sphere of influence on a silver platter, there will be staggering consequences for middle-east geopolitics. In out preview of things to come last week, we concluded by laying these out; we will do the same again:

    The US, in conjunction with Saudi Arabia and Qatar, attempted to train and support Sunni extremists to overthrow the Assad regime. Some of those Sunni extremists ended up going crazy and declaring a Medeival caliphate putting the Pentagon and Langley in the hilarious position of being forced to classify al-Qaeda as “moderate.” The situation spun out of control leading to hundreds of thousands of civilian deaths and when Washington finally decided to try and find real “moderates” to help contain the Frankenstein monster the CIA had created in ISIS (there were of course numerous other CIA efforts to arm and train anti-Assad fighters, see below for the fate of the most “successful” of those groups), the effort ended up being a complete embarrassment that culminated with the admission that only “four or five” remained and just days after that admission, those “four or five” were car jacked by al-Qaeda in what was perhaps the most under-reported piece of foreign policy comedy in history.


    Meanwhile, Iran sensed an epic opportunity to capitalize on Washington’s incompetence. Tehran then sent its most powerful general to Russia where a pitch was made to upend the Mid-East balance of power. The Kremlin loved the idea because after all, Moscow is stinging from Western economic sanctions and Vladimir Putin is keen on showing the West that, in the wake of the controversy surrounding the annexation of Crimea and the conflict in eastern Ukraine, Russia isn’t set to back down. Thanks to the fact that the US chose extremists as its weapon of choice in Syria, Russia gets to frame its involvement as a “war on terror” and thanks to Russia’s involvement, Iran gets to safely broadcast its military support for Assad just weeks after the nuclear deal was struck. Now, Russian airstrikes have debilitated the only group of CIA-backed fighters that had actually proven to be somewhat effective and Iran and Hezbollah are preparing a massive ground invasion under cover of Russian air support. Worse still, the entire on-the-ground effort is being coordinated by the Iranian general who is public enemy number one in Western intelligence circles and he’s effectively operating at the behest of Putin, the man that Western media paints as the most dangerous person on the planet.


    As incompetent as the US has proven to be throughout the entire debacle, it’s still difficult to imagine that Washington, Riyadh, London, Doha, and Jerusalem are going to take this laying down and on that note, we close with our assessment from Thursday:  “If Russia ends up bolstering Iran’s position in Syria (by expanding Hezbollah’s influence and capabilities) and if the Russian air force effectively takes control of Iraq thus allowing Iran to exert a greater influence over the government in Baghdad, the fragile balance of power that has existed in the region will be turned on its head and in the event this plays out, one should not expect Washington, Riyadh, Jerusalem, and London to simply go gentle into that good night.”

    Which is not to say that the latest US failure to overthrow a mid-east government was a total failure. As Joshua Landis, a Syria expert at the University of Oklahoma says “probably 60 to 80 percent of the arms that America shoveled in have gone to al-Qaida and its affiliates.”

    Which is at least great news for the military-industrial complex. It means more “terrorist attacks” on U.S. “friends and allies”, and perhaps even on U.S. soil – all courtesy of the US government supplying the weapons – are imminent.

  • "Carpe Chaos" – ISIS, Israel, Iraq, & Syria: It's All Part Of The Plan

    Authored by Dan Sanchez, originally posted at AntiWar.com,

    Israel lacks a national motto. If its leaders are looking for a Latin one, “carpe chaos” would be an apt and honest choice.

    “Seize the chaos” is half of Israeli foreign policy in a nutshell (the other half being the instigation of that chaos in the first place). Indeed, even its friends in the media cannot help but put it in such terms. For example, The New York Times recently reported about the:

    “…many Israeli leaders and thinkers seizing on the chaos in Syria to solidify Israel’s hold on Golan.”

    This refers to the Golan Heights, which Israel captured from Syria in 1967 and has occupied ever since. Even the Israel-enabling United Nations considers that occupation and subsequent annexation to be unjust and illegal. Returning Golan to Syria has long been advanced as part of a potential peace deal.

    But now, Israel is using the civil war in Syria as an excuse to expand settlements in the Golan Heights; a senior minister wants 100,000 new residents in the next five years. Its potential uses are manifold:

    “The 400-plus square miles of the Israeli-controlled Golan on the northeast border with Syria is both strategic plateau and lush agricultural terrain yielding prize apples, cherries and beef. It is also a vast playground that drew 3 million tourist visits last year.”

    This is Israel’s usual M.O. in the Palestinian West Bank as well: forging ahead with illicit settlements to establish “realities on the ground” that will be too intractable to reverse, thereby fixing the occupation permanently in place.

    Advocates of the new Golan settlements defend them by citing the chaos in Syria:

    “With Syria ‘disintegrating’ after years of civil war, they argue, it is hard to imagine a stable state to which the territory could be returned.”

    The Times quotes Israeli MP Michael Oren who adds a blatant lebensraum argument to the case for good measure:

    “We need places to build, and the world doesn’t want us to build in the West Bank. I don’t think anyone in the world can come at us and say we’re building on land that’s going to be part of a peace deal if we build on the Golan Heights.”

    “Seize the chaos” is not a new doctrine: neither is it limited to Israeli halls of power. A veritable “carpe chaos” manifesto was written in 1996 for a Washington think tank by David Wurmser, an Israel-first neocon (but I repeat myself) who would later play a key role in the Bush administration’s drive to the Iraq War: advising Dick Cheney in the Vice President’s Office, assisting John Bolton at the State Department, and fabricating fanciful “connections” between Iraq and Al Qaeda at the Department of Defense.

    David Wurmser

    In “Coping with Crumbling States: A Western and Israeli Balance of Power Strategy for the Levant,” Wurmser made a case for “limiting and expediting the chaotic collapse” of the Baathist governments in Iraq and Syria.

    Wurmser predicted that “Baathism’s days are numbered,” due to its own inherent failings as a stable basis for statehood. Indeed, he argued, Arab nationalism in general was unsuitable for the Arab people, given their particularist and tribal tendencies. Therefore, its adoption can only condemn Arab countries to forever “fluctuate between repression and anarchy.”

    In particular, the Gulf War had “accelerated Iraq’s descent into internal chaos.” To Wurmser, this made the Middle East of 1996 resemble Europe of 1914. Just before World War I, the Ottoman Empire had long been dubbed “the sick man of Europe.” Its imminent demise was beyond doubt; what was in question was who would get to despoil its corpse.

    In 1996 Iraq was “the sick man of the Middle East.” Wurmser predicted that, after the inevitable downfall of its ruler Saddam Hussein, Iraq would be dominated either by the Baathist regime in Syria or the “Hashemite” royal house in Jordan.

    He characterized Iraq not as any serious threat to Israel or the West but as “the prize” in a Middle Eastern game of thrones:

    “The prize itself is more powerful than any of the neighbors that covet it. Iraq, a nation of 18 million, occupies some of the most strategically important and well-endowed territories of the Middle East.”

    Wurmser called for the West and Israel to help the Hashemite monarch of Jordan win this game of thrones by enthroning one of his kin as king of Iraq. He advanced what he termed Jordan’s “Hashemite option for Iraq” as a far superior alternative to a Syrian-dominated continuation of Baathist Arab nationalism. The former, he averred, is “more solid and traditional,” and:

    “The Hashemites alone are adept enough in forging strong tribal, familial and clan alliances to create viable nations in the Levant.”

    Of course Wurmser’s amateur sociological analysis is poppycock, and the real advantage the neocons saw in the “Hashemite option” was that the royal house of Jordan is obedient to Israel because it is a wholly-owned western client completely dependent on the hundreds of millions of dollars in foreign aid the US feeds it every year.

    Indeed, Wurmser hinted at this real reason when he argued that, if Iraq were to go Hashemite:

    “…then Syria would be isolated and surrounded by a new pro-western Jordanian-Israeli-Iraqi-Turkish bloc…”

    Thus isolated, Baathist Syria’s own inevitable “chaotic collapse” could then be “expedited.” And the expanded pro-western bloc could:

    “…contain and manage… the scope of the coming chaos in Iraq and most probably in Syria.”

    This was the “balance of power strategy” Wurmser proposed for the West and Israel, to replace the despised:

    “…quest for ‘comprehensive peace?—?including its ‘land for peace’ provision, with Syria.”

    Nineteen years later, Wurmser must now be elated that the Golan Heights are, as discussed above, being taken off the table for any future “land for peace” deals thanks to his hoped-for chaotic collapse in Syria.

    In fact, mere months before he wrote “Coping with Crumbling States,” Wurmser made the case for implacable antagonism toward Syria as a preferred alternative to returning Golan in particular:

    “Given the nature of the regime in Damascus, it is both natural and moral that Israel abandon the slogan ‘comprehensive peace’ and move to contain Syria, drawing attention to its weapons of mass destruction program, and rejecting ‘land for peace’ deals on the Golan Heights.”

    Wurmser wrote this in the infamous policy paper “A Clean Break: A New Strategy for Securing the Realm,” which was addressed, not to Washington, but to Tel Aviv (indicating his true loyalties).

    In “A Clean Break,” Wurmser even more expressly made the case for outright regime change in Iraq as a “means” of “weakening, containing, and even rolling back Syria.” (This in turn was imperative because, “Syria challenges Israel on Lebanese soil.”)

    “A Clean Break” was written under the auspices of a “study group” headed by Wurmser’s mentor Richard Perle and including fellow Perle-protege Douglas Feith. This is extremely significant because Perle and Feith, like Wurmser, also played key roles in the Bush administration’s war drive.

    For more details on both the “Lebanese connection” mentioned above and the role of the “Clean Breakers” in starting the Iraq War, see my essay, “Clean Break to Dirty Wars.”

    Indeed, it is Washington’s Israeli-occupied foreign policy that has enabled Israel’s “seize the chaos” doctrine by using America’s vast imperial might to create so much seizable chaos in the first place.

    As it turned out, Iraq was not nearly as mired in mayhem or blundering toward the brink as Wurmser judged in 1996. At the dawn of the 21st century, Saddam was as firmly ensconced in power as ever. So much for Wurmser as a geopolitical analyst.

    This posed a problem. There was no chance of “expediting” a “chaotic collapse” that wasn’t there; a process has to exist first before it can be accelerated. So Wurmser and the other neocons in the Bush administration had to cook up a collapse from scratch themselves.

    And it took a full-scale invasion and occupation by a global superpower to make this particular Leninist “omelet,” at the cost of a prodigious amount of “broken eggs”: 4,425 American lives and $1.7 trillion.

    But the neocons and Israel finally did get their longed for chaotic collapse in Iraq, along with the deaths of over a million Iraqis and the displacement of millions more. This blood-soaked business is what they call “statecraft.”

    Yet, even then, the best laid plans of the neocons and Likudniks still completely failed to pan out.

    In both of his seminal strategy documents of 1996, Wurmser imagined that if the Hashemites were installed in Iraq, they could use their influence with a certain prominent cleric there to turn the Shiites of Syria and Lebanon against Assad, Iran, and Hezbollah.

    And the “Coping” report envisioned a supporting role in that project for Ahmed Chalabi, identified by Wurmser as “one of the most prominent of the Iraqi opposition figures to Saddam” and “himself a Shiite and a close, long-time Hashemite confidant.” Wurmser further anticipated that:

    “…pro-Jordan Iraq Shiites as Ahmed Chalabi… would define the Iraqi Shiite community after Saddam’s removal.”

    By the Iraq War, the neocons had given up on outright enthroning a Hashemite in Baghdad. It’s one thing to coordinate something like that from behind the scenes, but installing a royal despot through a high-profile American war would have made for unacceptably bad press for Washington.

    So Perle and Company settled for a “democratic” “Hashemite option.” In this Plan B, “Hashemite confidant” Ahmed Chalabi graduated from a supporting to a leading role in Israel’s plan for the new Iraq.

    Chalabi had long delighted the neocons by feeding Washington bogus “intelligence” on Iraqi weapons that eventually helped to justify the US invasion. On the basis of this rapport, Chalabi assured the neocons that, as a leading light in “democratic” Iraq, he would steer state policy in Israel’s favor. The neocons even swallowed his pledge to build a pipeline for them from Iraq’s oilfields to an Israeli refinery and port.

    None of Chalabi’s promises ever manifested. As it turned out, Chalabi was just as much an agent of Iran (enemy to both Saddam and Israel) as he was a “Hashemite confidant.” For more details on this, see the amazing article, “How Ahmed Chalabi Conned the Neocons.”

    The neocons and Israel got their war and collapse in Iraq, but it blew up in their faces. The new US-armed Iraqi government, as well as the Shiite militias that do most of its fighting, became dominated, not by loyal Jordan, but by hated Iran. Oops.

    And after the war, the neocons were faced, not with Wurmser’s anticipated “Jordanian-Israeli-Iraqi-Turkish bloc,” but what they perceive as an anti-Israel “Shia crescent” including Iran, Iraq, Syria, and (most importantly) Hezbollah in Lebanon. Far from being isolated, Syria seemed to have more friends than ever. Oops.

    But Israel sure as hell wasn’t going to leave bad enough alone. Where the subtleties of neocon “strategists” miserably failed, Israel’s influence over the sheer wealth and brute power of the US empire (what Wurmser has called its “raw capability”) would have to make up the difference once again.

    So for the sake of Israel, and since at least 2007, Washington, along with its regional allies, has been waging a broad covert proxy war to undermine the “Shia crescent.” This policy pivot, which legendary journalist Seymour Hersh dubbed “The Redirection,” has involved supporting Sunni Islamist mujahideen in Lebanon, Syria, and Iran.

    Then, after the 2011 “Arab Spring” of popular uprisings reached Syria, “The Redirection” went into overdrive. The US-led regional coalition (Turkey, Jordan, Saudi Arabia, Qatar, etc) has been strenuously trying to overthrow the Syrian regime of Bashar al-Assad since at least 2012 by heavily sponsoring an insurgency led by jihadists including Al Qaeda and ISIS .

    Israel has also been contributing to the cause of chaos more directly. Like a prizefighter’s “cutman,” the Israeli military has stood in Al Qaeda’s corner, taking in its wounded terrorist “rebels,” patching them up, and then sending them back into Syria to resume fighting.

    In Syria too, the neocons and Israel have finally seen their longed for chaotic collapse, to the tune of a quarter of a million Syrian deaths and millions more displaced (many fleeing to Europe or drowning en route).

    As discussed above, Israel has seized on the chaos it has unleashed on its northern neighbor as an excuse for expanding settlements in the Golan Heights.

    Moreover, whenever that chaos even slightly spills over into Golan, Israel has been seizing that as a pretext for still more war.

    Syrian soldiers are desperately battling Al Qaeda just north of Golan. Whenever a shell strays into the Heights (almost always exploding harmlessly in some unoccupied field), Israel responds by bombing Syrian military positions, thus effectively serving as Al Qaeda’s air force as well as its combat medic.

    It does this regardless of (and generally clueless as to) who actually fired the offending projectile: whether it was the Syrian army, Al Qaeda, or any other faction. As CBS News related in a report of recent such strikes:

    “Lt. Col. Peter Lerner, an Israeli military spokesman, said in a statement that Israel holds the Syrian military ‘responsible and accountable for any aggression emanating from Syria.’”

    Israel’s self-righteously sociopathic behavior toward Syria and the Golan Heights beggars belief. It’s like some wealthy homeowner taking over his poor neighbor’s backyard and then sending a gang of crazed ruffians to invade his home. Then in the ensuing brawl, when something crashes through the neighbor’s window onto the seized yard, the land thief yells from a balcony, “Why can’t you get your house in order!” and fires at him with a shotgun. Then the thief walks back to his room muttering to himself, “What a hopeless basket case! How I’m definitely not giving him back his yard.”

    What makes it especially incredible is that the ruffians in the real-life scenario are Al Qaeda and ISIS. But from the twisted perspective of Israel and the neocons, it makes perfect sense.

    Even way back in 1996, Wurmser was already stressing in his “Coping” report that Arab nationalism must be considered enemy number one, and that Islamic fundamentalism was only a distant second.

    Wurmser flat-out rejected any pragmatic detente with the Baathists, even for the sake of having a “bulwark” against the spread of radical Islam. He despised any such “peace process” as “prop[ping] up secular-Arab nationalism in its crumbling weakness.” He contended that such a policy is:

    “…anchored to the belief that [secular-Arab nationalism] can be “reformed” enough to be resurrected as a bulwark against Islamic fundamentalism. Yet, one of the main strategic objectives of the peace process is to perpetuate Levantine secular-Arab nationalist regimes. Indeed, the previous Israeli government believed that, “[Israel’s] role is to protect the existingregimes, to prevent or halt the process of radicalization, and to block the expansion of fundamental religious zealotry.”

    But the present study… shows that the pursuit of comprehensive peace and the effort to harness secular-Arab nationalist regimes such as Syria’s in the battle to stem the fundamentalist tide is not only futile. It is also a dangerous strategic misstep.

    Wurmser argued that US support for secular Arab-nationalist Iraq in its brutal invasion of fundamentalist Iran in the 1980s was “an explosive mistake,” as Iraq’s subsequent “rogue” invasion of Kuwait demonstrated. And so:

    “The same lesson should now be applied to Syria. It is in both Israel’s and the West’s interest to expedite the demise of secular-Arab nationalism. (…) The pursuit of the peace process is preventing this.”

    Secular-Arab nationalism, Wurmser insisted, is nothing but an “obstacle” to introducing better defenses against and alternatives to fundamentalism, and to “more healthy future” for the Arab world.

    “The West and its local friends must engage fundamentalism with better associates than Baathists.”

    Such thinking would seem to explain the otherwise baffling tendency of today’s policy makers in Washington and Tel Aviv to stubbornly insist on the overthrow of one secular-Arab nationalist regime after another?—?Saddam in Iraq, Gaddafi in Libya, and now Assad in Syria?—?even though it invariably leads to explosive growth for extreme Islamist groups in membership, might, and conquests.

    Yet, one would expect the 9/11 attacks to have pulled the rug out from under this rationale. Aren’t the 9/11 attacks why the US is raining bombs throughout the Muslim world in the first place? And secular-Arab nationalists didn’t knock down the Twin Towers; Islamic fundamentalists did.

    Even ignoring the crucial issues of empire and blowback, and taking militaristic “offense as the best defense” premises for granted, shouldn’t Islamist terror organizations?—?which have actually attacked American cities?—?be menace number one, and secular-Arab nationalist states?—?which have never dared?—?be at most a distant second?

    And so, especially after 9/11, wouldn’t creating “jihadist wonderlands” throughout the Middle East by decapitating the secular-Arab nationalist regimes that are the jihadists’ chief mortal enemies be the last thing our government should do? Especially when one of the groups thriving the most amid the chaos is Al Qaeda, the very perpetrators of the 9/11 attacks?

    Not from Israel’s perspective. Michael Oren (the lebensraum-loving Israeli official mentioned above) has made it crystal clear that Wurmser’s priorities are still official state policy. In 2013, at the end of his tenure as Israeli ambassador to the US, Oren delivered this parting message through The Jerusalem Post:

    “‘The initial message about the Syrian issue was that we always wanted [President] Bashar Assad to go, we always preferred the bad guys who weren’t backed by Iran to the bad guys who were backed by Iran,’ he said.

    This was the case, he said, even if the other ‘bad guys’ were affiliated to al-Qaida.

    ‘We understand that they are pretty bad guys,’ he said, adding that this designation did not apply to everyone in the Syrian opposition. “Still, the greatest danger to Israel is by the strategic arc that extends from Tehran, to Damascus to Beirut. And we saw the Assad regime as the keystone in that arc. That is a position we had well before the outbreak of hostilities in Syria. With the outbreak of hostilities we continued to want Assad to go.’”

    Michael Oren

    Then in 2014, just after ISIS advanced through Iraq to Mosul and declared itself a Caliphate, Oren said this regarding the conflict between the Shiite-led government of Syria and the Sunni extremists overrunning eastern Syria and western Iraq:

    “From Israel’s perspective, if there’s got to be an evil that’s got to prevail, let the Sunni evil prevail.”

    Lest he be misunderstood, by “Sunni evil” Oren is here specifically referring to ISIS. This is clear, because seconds before, he conveyed his recognition of the fact that they are indeed “bad guys” by referring to a specific mass-execution that ISIS had just committed.

    That is Israel’s position. “Assad must go. We prefer Al Qaeda. Let ISIS prevail.”

    In other words: “To hell with your towers, America. And your big city residents can go to hell too, where they can burn along with the Syrian victims of Al Qaeda and ISIS for all I care. Israel has its own regional strategic goals to think of. Now get back to work to pay your taxes so your government can keep decimating Muslim countries for me and my power clique and keep sending us billions of dollars in foreign aid.”

    This from “America’s greatest friend in the Middle East.”

    Israel would have preferred to have the Levant ruled by stable sock puppets of the West. But failing that, it would much rather be surrounded by an extremist-stricken Muslim maelstrom of mutual massacres than to have in its neighborhood even a single secular-Arab nationalist state with an independent rational leadership, a steady tax base, and a disciplined military.

    And for 14 years, Washington has been adopting Israel’s perspective on this question with incredible fidelity. And as a recently-released government intelligence document revealed, it has done so knowing full well that it would likely result in the Levant being overrun by America-hating Islamic terrorists.

    And thus it is demonstrated that the only enemy of the American people greater than Israel’s government is our own.

    David Wurmser warned that if the West did not adopt his warlike strategic vision, it:

    “…will still not get peace. Instead it will look beyond Israel’s borders at secular-Arab nationalism’s final legacy: a chaotic sea… (which will painfully intrude on the West)…”

    The West has indeed adopted the neocon/Israeli strategy, precipitating the “chaotic collapse” of secular-Arab nationalism in Iraq, Libya, and Syria. But the chaos has not been “contained and managed” as Wurmser anticipated. Neither has it cleared the way for “a more healthy future” as he promised.

    Instead it has created exactly what Wurmser said it would prevent: a “chaotic sea” immersing the entire Middle East and “painfully intrud[ing] on the West.” That chaotic sea is even lapping up onto the shores of Europe in the form of the refugee crisis.

    And now that Russia has been drawn into the Syrian war, where its bombers and troops operate at cross purposes with American bombers and proxy fighters, the chaotic sea threatens to become a thermonuclear lake of fire engulfing the whole world.

    Israel may eventually see every secular-Arab nationalist regime that defies it fall. It may yet see Assad die in some humiliating way, just as it saw Saddam hanged before a jeering crowd and Gaddafi sodomized in the street. It may also finally see American bombs raining down on Tehran.

    Israeli troops may once again march upon Beirut, and this time see every important member of Hezbollah executed or buried under a prison. (It’s extremely unlikely, but it’s conceivable.) It may then have total sway over Lebanon and untrammeled access to all its natural resources (including the coveted Litani River).

    Israel may never have to give the Palestinians freedom, restitution, or peace. And it may never have to give up any of its territorial spoils of war: the West Bank, the Gaza Strip, East Jerusalem, or the Golan Heights. Golan’s “places to build,” its “strategic plateau,” its “prize apples,” and its “vast playground” spaces may be Israel’s until the end of mankind.

    But if that end is a decade from now?—?or a day?—?will it really be worth it?


  • There's No Correlation Between Gun Ownership, Mass Shootings, & Murder Rates

    Submitted by Ryan McMaken via The Mises Institute,

    While I was fact checking my previous article, I checked some correlation coefficients of my own so I didn't have to rely on Volokh's numbers as my only source.

    I approached the data a little differently than Volokh did and instead of using a subjective ranking by an organization like the Brady organization, I just looked at the rate of gun ownership in the state. After all, the argument is often that more guns and more gun owners leads to more violence.

    So, I looked at the correlation between the gun ownership rate (a percentage on the x axis) and the murder rate (n per 100,000 on the y axis) in each state. The visual result is this:


    As you can see, there is no correlation. In fact, if you run the numbers, the correlations coefficient is 0.1, which suggests a negligible correlation, or none at all. The murder data is 2012 data from the Justice Department. The gun ownership rate data is from a 2015 report called "Gun ownership and social gun culture."

    Just for good measure, I also went in and looked for a correlation between mass shootings and gun ownership rates. Here, I took the total number of mass shooting victims in all states so far in 2015. This is updated constantly by Mass Shooting Tracker, and includes the most recent Oregon mass shooting. Mass shootings here include a shooting involving 4 or more people, and do not necessarily mean school shooting. They can mean someone went nuts and shot his wife, her lover, and two bystanders at a birthday party when the shooter personally knew all the victims. There are not just cases of random public shootings. If we only included those, the total numbers would be microscopically small. Even with all mass shooting data together, it's obvious that your odds of being involved in one in any given year are vanishingly small, and less than 1 per 100,000 in 48 states. I've included all victims, not just fatalities here. If I used only fatalities, the mass shooting numbers would be much smaller:

    There's even less of a correlation here: -0.006.

    Now, I've noticed that when someone points out the lack of a correlation here, gun-control advocates are quick to jump in and say "but you didn't control for this" and "you didn't control for that." That's true. But what I do show here is that the situation is much more complicated than one would think from absurd claims like "states with fewer guns have fewer murders" and so on. Apparently, claims that new gun laws are commonsensical can't be true if the relationship between gun laws and murder rates require us to adjust for half a dozen different variables. In fact, by looking at the data, I could imagine any number of other factors that might be more likely a determinant of the murder rate than gun ownership.

  • How Much Longer Can Our Unaffordable Housing Prices Last? (Spolier Alert: Not Much)

    Submitted by Charles Hugh-Smith via PeakProsperity.com,

    Markets discover price via supply and demand: Big demand + limited supply = rising prices. Abundant supply + sagging demand = declining prices.

    Eventually, prices rise to a level that is unaffordable to the majority of potential buyers, with demand coming only from the wealthy. That’s the story of housing in New York City, the San Francisco Bay Area and other desirable locales that are currently magnets for global capital.

    In the normal cycle of supply and demand, new more affordable housing would be built, and prices would decline.

    But that isn’t happening in hot real estate markets in the U.S.  What’s happening is rental housing is being built to profit from rising rents and luxury housing is being built to meet the demand from wealthy overseas buyers.

    With limited land in desirable urban zones and high development fees, it’s not possible to build affordable housing unless the government subsidizes the costs.

    Meanwhile, the supply of existing homes for sale is limited by the owners’ recognition that they won’t be able to replace their own home as prices soar; it makes financial sense to stay put rather than sell and try to move up.

    Some homeowners are cashing in their high-priced homes and retiring to cheaper regions. But this supply is being overwhelmed by a flood of offshore cash seeking real estate in the U.S.

    This is part of the global capital flows I described in my recent analysis What Happens Next Will Be Determined By One Thing: Capital Flows. As China and the emerging market economies stagnate, capital that was invested in these markets in the boom years is moving into dollar-denominated assets such as bonds and houses.

    This globalization of regional housing markets is pricing the middle class out of housing in areas that also happen to be strong job markets.

    Many commentators are concerned that a nation of homeowners is being transformed into a nation of renters, as housing is snapped up by hedge funds and wealthy elites fleeing China and the emerging markets.

    But will current conditions continue unchanged going forward?

    Let's start with the basics of demographic demand for housing and the price of housing.

    Demographics & Housing Valuations

    There are plenty of young people who'd like to buy a house and start a family (a.k.a. new household formation), but few have the job or income to buy a house at today's nosebleed levels — a level just slightly less insane than the prices at the top of Housing Bubble #1:

    (Charts courtesy of Market Daily Briefing)

    The current Housing Bubble #2 (also known as the Echo Bubble) certainly isn’t being driven by rising household income, as median household income has declined when adjusted for inflation:

    What enabled households to buy homes as prices pushed higher?  Super-low mortgage rates:

    Now that mortgage rates have hit bottom, there’s not much room left to push housing valuations higher by lowering rates. No matter how solid the buyers’ credit rating, mortgages remain intrinsically risky, as unexpected medical emergencies, job losses, divorces, etc., trigger defaults in the best of times. In recessions, job losses typically cause defaults and lenders’ losses to rise.

    All debt, including home mortgages, is based on household income and debt levels. The higher the debt load, the more money the household must devote to debt service. That leaves less to spend on additional debt or other spending.

    As this chart shows, the ratio of debt-to-earned income (wages and salaries) has declined since the speculative frenzy of Housing Bubble # 1, but it remains almost twice the levels of the pre-bubble era:

    Based on the fundamentals of domestic income — debt levels and current home prices — only the top 10% of households has much hope of owning a home in globally desirable regions:

    If domestic buyers can no longer afford to buy, then who’s left? Cash buyers from overseas is one answer.

    Capital Flows into U.S. Real Estate

    Chinese millionaires buying homes for cash in the U.S. and Canada have been voting on conditions in China with their feet.  The tide of money leaving China has turned into a veritable flood, with hundreds of billions of dollars leaving China in the past year aone as economic conditions there deteriorated.

    This flood tide can be seen in real estate transactions, not just in the U.S. but in Australia, Canada and the U.K.:

    These cash purchases by wealthy foreign nationals are creating a bifurcated housing market.

    In areas deemed desirable, Chinese and other foreign nationals are dominating the market (see: 80% Of All New Home Buyers in Irvine, CA Are Chinese).

    In regions that are below the radar of offshore buyers, for example, broad swaths of the Midwest, home prices remain more affordable.

    But even domestic markets with relatively few foreign buyers have seen soaring home prices if there is strong job growth and limited land for new development.

    A Bifurcated Housing Market: The New Normal?

    These dynamics have created islands of strong job growth and global/domestic demand for housing in which only the wealthy can afford to buy and everyone else is a renter for life. These islands are surrounded by a sea of lower-cost housing in regions with weak job growth and stagnant wages.

    Is this bifurcation the New Normal? Or is Housing Bubble #2 heading for the same shoals that popped housing bubble #1 in 2007-08?

    Right now, the general consensus is that housing prices “will never decline” in New York City, the San Francisco Bay Area, etc.—the islands of job growth and high valuations–due to the strong U.S. economy and capital flows into USD-denominated assets. But if the bulk of this capital flow has already occurred, and capital controls and clawbacks become the order of the day, this prop under current nosebleed housing valuations might be kicked away far sooner than anticipated.

    In Part 2: How A Major Housing Correction Can Happen Over The Next 1.5 Years we examine the strong argument can be made that conditions are far more fragile in this Bubble #2, as the global recession that is rapidly spreading around the globe can’t be reversed with the same bag of tricks that worked in 2008-09.I expect home valuations to fall rather quickly once capital flows out of China drop off and the recession swamps America’s economy.

    History suggests that the markets that soared the most are also the ones that collapse the farthest.

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


  • "It's Over For Me" Matt Drudge Warns Public "You're A Pawn In The 'Ghetto-isation'" Of The Web

    The very foundation of the free Internet is under severe threat from copyright laws that could ban independent media outlets, according to Matt Drudge. "I had a Supreme Court Justice tell me it’s over for me,” said Drudge, warning web users that they were being pushed "pawn-like" into the cyber "ghettos" of Twitter, Facebook and Instagram.

    "Reclusive" Drudge says he has not had a photo taken in 8 years

    As DCClothesline.com reports,

    During an appearance on the Alex Jones Show, Drudge asserted that copyright laws which prevent websites from even linking to news stories were being advanced.


    “I had a Supreme Court Justice tell me it’s over for me,” said Drudge. “They’ve got the votes now to enforce copyright law, you’re out of there. They’re going to make it so you can’t even use headlines.”


    “To have a Supreme Court Justice say to me it’s over, they’ve got the votes, which means time is limited,” he added, noting that a day was coming when simply operating an independent website could be outlawed.


    “That will end (it) for me – fine – I’ve had a hell of a run,” said Drudge, adding that web users were being pushed into the cyber “ghettos” of Twitter, Facebook and Instagram.


    “This is ghetto, this is corporate, they’re taking your energy and you’re getting nothing in return – nothing!”

    Watch the full interview below…

    Drudge warned that social media giants like Twitter and Facebook were swallowing up content and strangling the organic growth of independent Internet news platforms. Automated news aggregators like Google News also came under fire.

    “Google News – hello anybody? The idiots reading that crap think there is actually a human there – there is no human there – you are being programmed to being automated even up to your news….a same corporate glaze over everything,” said Drudge.


    “Stop operating in their playground, stop it,” said Drudge, asserting that people were being confined by what the likes of Facebook and Twitter defined as the Internet as a result of this “corporate makeover” of the web.


    “I’m just warning this country that yes, don’t get into this false sense that you are an individual when you’re on Facebook, no you’re not, you’re a pawn in their scheme,” concluded Drudge.

  • The Endgame Takes Shape: "Banning Capitalism And Bypassing Capital Markets"

    One month ago we presented to readers that in the first official “serious” mention of “Helicopter Money” as the next (and final) form of monetary stimulus, Australia’s Macquarie Bank said that there is now about 12-18 months before this “unorthodox” policy is implemented. We also predicted that now that the seal has been broken, other banks would quickly jump on board with an idea that is the only possible endgame to 8 years of monetary lunacy, and sure enough, both Citigroup and Deutsche Bank within days brought up the Fed’s monetary paradrop as the up and coming form of monetary policy.

    So while the rest of the street is undergoing revulsion therapy, as it cracks its “the Fed will hike rates any minute” cognitive dissonance and is finally asking, as Morgan Stanley did last week, whether the Fed will first do QE4 or NIRP (something we have said since January), here is what is really coming down the line, with the heretic thought experiment of the endgame once again coming from an unexpected, if increasingly credibly source, Australia’s Macquarie bank.

    * * *

    Would more QE make a difference? Have to move to different types of QE or allow nature to take its course

    It seems that over the last week investor consensus swung from expecting Fed tightening and some form of normalization of monetary policy to delaying expectation of any tightening until 2016 and possibly beyond whilst discussion of a possibility of QE4 has gone mainstream.

    Although “QE forever” and no tightening has been our base case for at least the last 12-18 months, we also tend to emphasize the diminishing impact of conventional QE policies. As the latest Fed paper (San Francisco) highlighted, “There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed-inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation”.

    Whilst one could apply the same for BoJ and ECB QE policies, the above quote perhaps underestimates what could have happened to inflation if there was no QE. In other words, whilst it is true that both real GDP and inflation rates are undershooting CBs’ targets and have been lower than consensus expectations, would the global economies have undergone a severe case of deflation in the absence of QE? The answer is probably in the affirmative.

    However, the challenge is that ongoing flow of QEs prevents rationalization of excess capacity (in turn created through the process of preceding three decades of leveraging) whilst also precluding acceleration of demand (both household and corporate), as private sector visibility declines. Hence declining velocity of money requires an ever rising level of monetary stimulus, which further depresses velocity of money, and requiring even further QEs. Also as countries compete in a diminishing pool by discounting currencies, global demand compresses, as current account surpluses in these countries rise not because of exports growing faster than imports but because imports decline faster than exports. This implies less demand for the global economy.

    If the above fairly “bleak” picture is correct, then how much incremental QE do we need to arrest (at least temporarily) the decline in global liquidity and ensure that overall liquidity grows by at least ~10%+ to enable continuing leveraging? In the context of 2016, the numbers would suggest that we would require incremental QEs to the tune of at least US$700bn to replace declining FX reserves. However, if we were to aim for 10%+ rise in  overall liquidity, incremental QEs need to be at least US$1.5-2 trillion, rising annually into perpetuity. As QEs rise, their efficacy would continue to drop.

    Hence, there is an urgent need to either allow nature to take its course (i.e. re-set the business cycle by either closing excess capacity or writing down debt) or re-assess the nature and type of QEs used. We maintain our view that it is highly unlikely that CBs would be prepared to accept the inevitable and stop “managing business cycles”. If nothing else the consequences of re-setting the cycle (either demand or supply) are perceived to be socially and politically unacceptable.

    We believe that the path of least resistance would be to effectively ban capitalism and by-pass banking and capital markets altogether. We gave this policy change several names (such as “Cuba alternative”, “British Leyland”) but the essence of the new form of QE would be using central banks and public instrumentalities to directly inject “heroin into blood stream” rather than relying on system of incentives to drive investor behaviour.

    Instead of capital markets, it would be governments that would decide on capital allocation, its direction and cost (hence reference to British Leyland and policies of the 1960s). It could involve a variety of policy tools, with wholesome titles (i.e. “Giving the economy a competitive edge”, “Helping hard working American families” or indeed recent ideas from the British Labour party of “People’s QE”). Who can possibly object to helping hard working families or improving productivity?

    However as the title of our previous note suggested (“Back to the Future”), most of these policies have already been tried before (such as Britain in the 1960-70s or China over the last 15 years) and they ultimately led to lower ROE and ROIC as well as either stagflationary or deflationary outcomes. Whilst the proponents of new attempts of steering capital could argue
    that we have learned from the lessons of the past and economists would start debating “multiplier effects” and “private-public partnerships”, the essence of these policies remain the same (i.e. forcing re-allocation of capital, outside normal capital market norms), and could include various policies, such as:

    1. Central banks directly funding expansion of fiscal spending;
    2. Central banks and public instrumentalities funding direct investment in soft (R&D, education) and hard (i.e. infrastructure) projects; and
    3. Outright nationalization of various capital activities (such as mortgages, student loans, SME financing, picking industry winners etc).

    Whilst, these policies would ultimately further misallocate resources, they could initially result in a significant boost to nominal GDP and given that capital markets are now populated by highly leveraged financial instruments, the impact on various financial asset classes would be immediate and considerable. In other words, neither China nor Eurozone need to spend one dime for copper prices to potentially surge 30%+.

    Are we close to such a dramatic shift in government and CB policies?

    We maintain our view that for CBs to accept this new form of QE, we need to have two key prerequisites:

    1. Undisputed evidence that it is needed. The combination of a major accident in several asset classes and/or sharp global slowdown would be sufficient; and
    2. There has to be academic evidence (hopefully supported by sophisticated algebra and calculus) that there are alternatives to traditional QEs.

    At the current juncture, none of these conditions are satisfied. However, we maintain that as investors progress through 2016-17, there is a very high probability that both conditions would fall into place.

    What about short-term (say next three-to-six months)?

    Whilst we believe that it is indisputable that the Fed needs to ease rather than tighten, the hurdle rate for Fed to embark on QE4 in an election year is far greater than doing nothing. At the same time, both ECB and BoJ are likely to maintain their current policies, perhaps somewhat expanding the scope but they are unlikely to embark on anything more dramatic. In terms of PBoC, it is currently attempting to fine tune its policies and avoid what it perceives to be excessive policy shifts (as it tries to reconcile short-term liquidity and a long-term structural agenda). Ultimately, we maintain that China is at the very early stages of massive stimulus (both monetary and fiscal). However, it probably lies beyond the next three-to-six months.

    If the above policy choices are made, then we believe that global liquidity would continue to contract, creating ever greater deflationary pressures and potentially causing both “accidents” as well as slower growth.

    However, this assumes perpetuation of perceived policy errors, which is always a dangerous assumption to make. We maintain that it is likely that prior to trying extremely unorthodox measures, Central Banks are likely to have another try of more traditional monetary stimulus measures. However, as outlined above, in order to make a difference, the incremental increase in the size has to be significant. Small and incremental changes are unlikely to make much difference.

    * * *

    Thank you Macquarie for stating what most “fringe” blogs have been saying for years.

    To summarize what Australia’s biggest investment bank just said, in a nutshell, “small and incremental is out”, and will be replaced by big and “paradroppy”, a step which as Macquarie succinctly puts it, will “ban capitalism and by-pass banking and capital markets altogether.

    Crazy? Not at all: since the status quo will be fighting for its life, this step is all too likely if it means perpetuating a broken system, and an economic orders based on textbook after textbook of lies. In fact, we would go further and say war (of the global variety) is also inevitable, as the global “1%” loses control. It won’t go quietly.

    Finally, we most certainly agree that the catalyst to unleash the “endgame” cycle will be some “combination of a major accident in several asset classes and/or sharp global slowdown.” But long before that even, keep an eye on gold: having provided a tremendous buying opportunity for the past 4 years because for some idiotic reason “conventional wisdom” decided that central banks are in control, have credibility and can fix a problem they created and make worse with each passing day, soon the global monetary debasement genie will be out of the bottle, and not even the entire BIS trading floor will be able to suppress the price of paper (as physical gold has not only decoupled from paper prices but long since departed on a one-way trip to China) for much longer.

  • The Death Of Cognitive Dollar Dissonance & The Remonetization Of Gold

    Submitted by John Butler via The Amphora Report,


    Two years ago, prior to travelling to Sydney to present at the Annual Precious Metals Symposium, I prepared an article for the Gold Standard Institute Journal titled Cognitive Dollar Dissonance: Why a Global De-Leveraging Requires the De-Rating of the Dollar and the Remonetisation of Gold (see here). This article highlighted the growing inconsistency between those arguing on the one hand that the dollar’s role in international trade and finance was clearly diminishing; yet denying that it was in any danger of losing the near-exclusive monetary reserve status it has enjoyed since the 1940s.

    This apparently contradictory yet mainstream thinking about the future of the international monetary system continues to the present day. Indeed, earlier this month the Economist magazine ran a special feature on fading US economic power replete with dollar dissonance. The experts cited note the accelerating trend towards bilateral trade settlement, say between Russia and China, who plan to finance their multiple ‘Silk Road’ infrastructure projects using their own currencies and their own development bank (The Asian Infrastructure Investment Bank or AIIB: See http://www.aiib.org/). They also observe that Russia, China and the other BRICS are no longer accumulating dollar reserves (although curiously overlook that they continue to accumulate gold). They acknowledge that not only the BRICS but many other countries have repeatedly expressed their desire that the current set of global monetary arrangements should be restructured in some way, although they are not always clear as to their specific preferences.

    Note the sharp contrast in these two paragraphs, both on the very same page of the Economist feature:

    “This special report will argue that the present trajectory is bound to cause a host of problems. The world’s monetary system will become more prone to crises, and America will not be able to isolate itself from their potential costs. Other countries, led by China, will create their own defences, balkanising the rules of technology, trade and finance. The challenge is to create an architecture that can cope with America’s status as a sticky superpower.”


    “Today’s world relies on a vastly bigger edifice of trade and financial contracts that require continuity. Trade levels and the stock of foreign assets and liabilities are five to ten times higher than they were in the 1970s and far larger than at their previous peak just before the first world war… China and America are not allies. The greater complexity and risk involved in remaking the global order today create a powerful incentive for current incumbents to keep things as they are.”

    Does anyone else hear the clear dissonance, confusion even? On the one hand we have a complex system prone to debt and currency crises, a growing lack of cooperation between the two largest players and a need for a ‘new architecture’. Yet on the other we are supposed to accept that there is sufficient common incentive to cooperate in monetary matters? Really?

    Now consider the developing global economic context. Although the mainstream tend to be quiet on these issues, they cannot possibly fail to notice that, seven years on from the 2008 global financial crisis, following unprecedented economic and monetary policy intervention, dollar interest rates are still zero; quantitative easing has failed to achieve its stated objectives; global imbalances have risen to record levels; emerging market balance-of-payment crises are springing up all over; leading indicators in every major global economy have rolled over; and financial markets, in particular the credit markets, are beginning to tell you that another major crisis may lurk in the near future. It is thus entirely reasonable if unfashionable to hold the view that the dollar monetary reserve system has become unstable and is overdue a fundamental restructuring or reset of some kind. None other than IMF Managing Director Christine Lagarde has hinted at this in multiple speeches over the past two years.



    But let us ask: Why is this cognitive dollar dissonance so persistent? There are several plausible and complimentary explanations. First, much human reasoning, expert or otherwise, is affected by at least some degree of so-called ‘normalcy bias’, that is, a naïve if not necessarily incorrect belief that the future will resemble in whole or part the recent past. The dollar has been the world’s pre-eminent monetary reserve for some 70 years, so the thinking goes. Why should that change now?

    Second, and potentially reinforcing the above, is what one might call ‘The Whig view of international monetary history.’ This is a subset of the better known, general ‘Whig view of history’, perhaps best represented by Scottish Enlightenment philosopher David Hume, that history is the evolution of an ever-more perfect world, of constant if not always understood or appreciated progress. Hence the dollar-centric monetary regime of today is superior to those that have come before, because it is that of today, not yesterday. No further explanation is required or desired. (It is worth noting here that German late Enlightenment / early Romantic philosopher GWF Hegel postulated a more subtle, dialectical process of historical progress. Karl Marx would subsequently adapt this particular strain of teleological thought to demonstrate in his unique way the inevitable replacement of Capitalism by Communism.)

    We know such thinking is flawed. History shows us it is flawed: Recessions, financial crises, depressions, wars, revolutions, nation-building, nation-busting, tyranny, despotism, etc, feature with some regularity, including in much of North Africa and the Middle East today. But this facile sense of steady (or sporadic) progress is nevertheless surprisingly common across all knowledge disciplines, not only in economic and monetary matters. Indeed, even in the hard sciences, where presumably only hard facts and evidence should matter, there can be tremendous resistance to new ways of thinking. Thomas Kuhn cogently demonstrated this to be the case in his monumental study of the history of science, The Structure of Scientific Revolutions. According to Kuhn, even in hard science, it is not the facts that matter. Rather, it is the ‘paradigm’, as Kuhn chose to call it. Facts that clearly do not fit the existing paradigm are either conveniently ignored, or those proffering them are persecuted outright, such as with Galileo’s observations of Jupiter’s moons. Given the relative subjectivity of the social sciences, including economics, one should wholly expect that the power of the presiding paradigm to misconstrue, ridicule or simply ignore inconvenient facts and their associated theories would be all the more powerful in stifling real understanding, productive debate and progress.

    Kuhn also noted that one reason why paradigms were so hard to break down once established was that those in highest regard within the discipline—akin to the high priests of a hierarchical church—had so much to lose if challenged by unorthodox thinking. We laugh at the Papal persecution of Galileo today but to them it was no laughing matter. His observations, plain to see as they were through a telescope, directly contradicted the venerable, geo-centric or Ptolemaic paradigm of the day, thus threatening the very foundations of Church power.

    Today we generally pat ourselves on the back that, atheists or not, we tend to treat science as distinct from religion. And yet quasi-faith-based paradigmatic thinking nevertheless still infects science to a great if underappreciated degree. Take the ‘Big Bang’ theory, for example, which has stood for decades but is still mere theory. This is due in part to the fact that, notwithstanding huge investments in research into the origins of the universe, there is still no convincing data to confirm it. Although I am hardly an authority on this matter, I do note that, in my youth, astrophysicists believed strongly that, due in large part to the Big Bang framework, a Grand Unified Theory of the universe was within reach. All they needed for confirmation was a powerful enough supercollider. Today, some 30 years later, against these optimistic expectations, they are nearing exasperation. All the observational and computing power of which they could only have dreamed a generation ago is today at their disposal, yet they haven’t got qualitatively farther than did Einstein a century ago with maths, chalk and slate? Could it be that astrophysics has become stuck in a paradigm that has outlived its usefulness and is now retarding rather than facilitating progress? I don’t have the answer but no doubt Kuhn would agree the question is clearly worth asking.

    Given that in today’s dollar-centric monetary world US Federal Reserve and dollar policies comprise the dominant part of global monetary policy generally, should we not fully expect those in power to resist ideas that might expose their policies as unsustainable or outright counterproductive? What of the anointed academics who advise and are, directly or indirectly, funded by them? Yes there are some scholars who are willing to challenge the paradigm, a few of whom are rather prominent. Nobel Laureate Robert Mundell, the so-called ‘Father of the euro’, speaks openly about the dollar’s gradually eroding reserve status (although he stops short of claiming it will lose reserve status entirely). Professor Kevin Dowd, architect of monetary reform plans through the decades, has also expressed this view. But the mainstream financial media have chosen mostly to ignore them.

    Intriguingly, however, the International Monetary Fund (IMF) has begun to promote the idea that the dollar might indeed eventually lose its premier reserve currency status. But here, too, we observe a self-serving paradigm at work: the IMF is proposing in no uncertain terms that the ‘solution’ for the erosion of the dollar’s reserve currency status is to replace it with the IMF’s very own ‘Special Drawing Right’ or SDR. And can you guess which essentially unaccountable supranational bureaucracy the IMF suggests could administer an SDR-centric international monetary regime? Yes, the IMF itself is put forward as the institution to control the world’s money supply and, by implication, global interest rates.



    This may all sound nice on paper, but as I wrote in my book back in 2011, it is nothing but a bureaucratic pipe-dream. The idea, amid record global economic imbalances and associated historic, unserviceable debt burdens in Japan, the euro-area and arguably the US itself, that somehow China, the other BRICS, oil producers and other creditor nations are going to agree just how the IMF can take over from where the US Federal Reserve has left off is a non-starter. No, as with the US in the 1940s, the creditor nations are going to insist on an international monetary restructuring that favours their economic interests, even if at the expense of others. The requisite international cooperation required for the IMF to implement sustainably a ‘one size fits all’ international monetary policy is just not there, nor should we be at all optimistic that it will be prior to a meaningful global deleveraging and rebalancing which is being resisted by economic and monetary officials at all costs and by all means.

    The recent experience of the euro-area should serve as an example in this regard but, as observed above, facts can be quite an inconvenience for those clinging to a flawed paradigm. Here too, we see cognitive dissonance in the fashionable belief that what demonstrably does not work at the regional level can work miraculously at the global one. The fact is, monetary central planning does not work. It didn’t work for Europe in the 1920s and 1930s, as currency devaluations and outright hyperinflations were used as weapons in the so-called ‘currency wars’ of that era. It didn’t work in the 1960s, as the London Gold Pool struggled to hold the Bretton Woods conventions together. It didn’t work in the 2000s, when the so-called ‘Great Moderation’ in business cycles merely disguised colossal misallocations of capital, exposed as such in 2008. And seven years on from that spectacular crisis, as the global economy again enters a steep downturn, it is not working still.

    There is good reason to believe that what is already underway is going to be more severe than 2008-09. This time around, interest rates are already at zero, or outright negative. QE has failed. Confidence in economic officials’ general ability to restore healthy, sustainable growth has weakened considerably. Indeed, at a recent roundtable event at Chatham House I attended, multiple prominent international economists suggested that with ‘conventional QE’ having failed, the next logical arrow in the monetary policy quiver is that of direct money injections into corporations or households, in effect a Friedmanesque ‘Helicopter Drop’ of money. This conversation would not be taking place at all were the macroeconomic outlook not so poor.

    Prolonged economic weakness has now fostered the growth and migration of previously fringe parties to what may eventually become a new political centre, attesting to deep discontent with the status quo in many countries around the world. In some places, such as where I now reside, in the UK, the major opposition party borders on advocating socialism. Senator Sanders in the US, a possible Democratic nominee for President, sings a similar socialist tune. Such developments increase the political risks to global financial markets, potentially further destabilising the now-fragile dollar-centric system. In this regard we should take note of a recent article in the Financial Times:

    “Investors have long known that markets reflect better than they predict. By nature they are better at pricing existing information than pricing the probability and scale of an unexpected event. But they can fail at both.”

    For those who generally prefer free market commerce to socialistic central planning, this can all seem rather frightening. A glance back at history can reinforce these fears. But if one looks carefully between the clouds of the gathering global monetary storm one can discern a distinct silver lining, or rather a golden one as it were.



    If the dollar is indeed losing pre-eminent international monetary reserve status and the requisite cooperation required for the IMF to simply replace it with the suprantional SDR is lacking, then what on earth is going to happen in international monetary relations? Without stable international money, countries will find they cannot trade as easily with one another. What currencies will be held as reserves against external trade (or capital) imbalances? Chronic net importers such as the US have the incentive for the world to hold their currencies as reserves whereas chronic net exporters have the opposite, that is, to keep their currencies artificially cheap in order to maintain or grow their global export market share. But as the imbalances accumulate, as they have today to a record level relative to global GDP, beyond a certain point there is insufficient trust in the importing countries’ currencies as reliable stores of value.

    But then if distrustful exporters insist on invoicing for exports strictly in their own currencies, trade will grind to a halt: It is by definition the importing nations, not exporting nations, which must provide the net balance of circulating media for international trade, as these media represent the international ‘IOU’ that must eventually be repaid through a reversal in the trade (or capital) balance or otherwise liquidated (eg via a default).

    We all know global trade is hugely beneficial for consumers, who benefit from the associated, evolving global division of labour and capital. A contraction in global trade, ‘globalisation in reverse’ as it were, would thus be highly damaging to global economic growth, implying a general ‘stagflation’ of both weaker growth and higher real goods prices. No politician, socialist or otherwise, wants that; it will force them from office in short order. So absent demonstrably unworkable central planning, how can future international monetary arrangements nevertheless facilitate international commerce with exporters and importers at loggerheads over which currencies to use?

    Why, the same way they did so in the 1800s: Just re-monetise gold. While gold may have retreated backstage for a time, it is about to make a spectacular reappearance. For gold is the only international monetary asset that can resolve the exporter/importer dilemma of a lack of trust on the one hand; yet a deep, essential need to trade on the other. Gold is not itself a national liability. It can be neither arbitrarily devalued nor defaulted on. It is real international money, not bureaucratic fiat scrip.

    But wait, one might protest, why on earth would governments willingly give up the power to devalue and inflate their way out of debt? Because if their essential trading partners so demand it, they simply have no choice. What if Russia, concerned about the future of the euro, were to demand its European customers pay for imports of oil and gas in gold instead of euros? What if China, concerned about the dollar, made a similar demand vis-à-vis the US? How about the Gulf oil producers? What if they were to insist that China pay for imports of their oil in gold? The fact is, if just one exporting country, even a relatively small one, begins to demand payment in gold, then their trading partners must supply the gold. For each incremental move in this direction gold’s share of international monetary reserves grows exponentially due to the ‘network’ or ‘node’ effect. Conversely, the dollar’s share exponentially declines. And as those familiar with game theory will note, while there is no doubt a ‘first mover disadvantage’ associated with demanding trade settlement in gold—a possible loss of market share—there is a far larger ‘last-mover cost’, that is, the last exporter to switch from dollars to gold will find they have accumulated the residual dollar reserves from the rest of the world at a greatly reduced if not worthless value.



    As Nobel Laureate Mundell wrote a few years back:

    “We can look upon the period of the gold standard as being a period that was unique in history, when there was a balance among the powers and no single superpower dominated.”

    The Economist and the IMF recognise that the US is no longer the sole global economic superpower that it once was, able to dictate terms in monetary matters. A new, multipolar balance of power is forming. Gold, the only internationally-recognised non-national money provides the game-theoretic international monetary solution to an economically multipolar, globalised, competitive world. It represents the Nash equilibrium. Whether or not this is ever formalised in a de jure ‘gold standard convention’ or not is beside the point. The classical 19th century gold standard was never de jure formalised as such. As renowned monetary historian Guilio Gallarotti observes, it arose spontaneously from below, catalysed by the rise to economic power of the United States and the German Zollverein in the late 19th century, thus transforming what had been, following the Napoleonic wars, a nearly unipolar British imperial world into a clearly multipolar one.

    As gold again begins to circulate in order to settle cross-border balance of payments, it resolves the perennial floating fiat currency (ie Triffin’s) dilemma of ever-growing imbalances and the associated ever-growing debts to finance them. As gold moves physically, from place to place (or simply from vault to vault in London or New York, as it did once upon a time) imbalances are settled, then and there, at whatever price gold commands at that location and time. No arbitrary monetary expansion or contraction is necessary; no central planning required.

    By implication, as the demand function for gold shifts due to de facto remonetisation, the price of gold is going to rise. By how much depends largely on the degree of confidence in the dollar and other currencies that circulate alongside gold. As long as the global imbalances and associated debts remain large relative to incomes, confidence will be low, implying a far higher gold price than that observed today. One way to benchmark the order of magnitude price increase for gold would be to allow the price to rise to a level that would back a substantial portion of the narrow or perhaps even broad money supply of major currencies. At current prices gold only backs about 5% of the narrow major currency global money supply and barely 2% of broad money. A substantial price increase would thus be required to restore gold backing to where it was under the Bretton Woods system, for example, when it exceeded 20%.

    Not only will gold rise in price. Once gold is remonetized in some way at the international level, there will be an international interest rate imputed from the price of gold forward contracts or swaps. While gold itself pays no interest, these derivatives will, and that rate of interest will be as close an approximation as one can come to a ‘risk-free’ interest rate, the purest possible expression of the time value of money. Henceforth, no national or supranational central bank will be required to tell the international marketplace what the time value of money should be at any given point. Rather, the international money (gold) market will determine spontaneously what interest rate clears the market for gold delivery today, or tomorrow, or next year. This information will then flow into international commerce generally, where it will provide a robust basis for the sensible allocation of international capital in all forms, financial and real, across both time and space. The escalating boom and bust cycles of modern times will become a thing of the past, and the natural, occasional recessions that do occur will allow for the Schumpeterian ‘creative destruction’ required to qualitatively re-order the capital stock so as to clear malinvestments and incorporate new technologies.



    As George Gilder demonstrates in his masterful work on economics and information theory, Knowledge and Power, “Capitalism is not primarily an incentive system but an information system.” Prices are the information. And the price of time itself is the single most valuable piece of information. Time, as we intuitively know, is money; they are two sides of the same coin. Mess with time and money, and you mess with everything else. Yet as with central planning in general, the central planning of either money, or time, cannot possibly work. Hayek warned the economics profession of precisely this in the 1970s. They didn’t listen, ensconced as they still remain within their interventionist Keynesian paradigm. Well that paradigm is about to be blown apart, time and money are about to return to the market, where they belong, and real, sustainable economic progress is about to restart once again.

    Having begun with a timeless quote from Lord Acton, it would seem apposite to so conclude. He also once wrote:

    “The wisdom of divine rule appears not in the perfection but in the improvement of the world.”

    At first glance, this might seem a teleological Humian or Hegelian statement. Yet when juxtaposed to Acton’s eponymous dictum on the corruption of power, it provides for further understanding both for the understanding of retrograde socio-economic cycles and of hope, that with each such setback eventually comes a great, qualitative improvement in the human condition. If I may be so bold, I predict we are on the cusp of precisely this today. If it requires a global monetary crisis as a catalyst, then bring it on.

    *  *  *

    PDF version available here

  • US Foreign Policy Explained (In 1 Simple Flow-Chart)

    No Exit…



    h/t @Ognir2

  • The Devil's Dictionary Of Post-Crisis Finance, Part 1

    Reuters published a pioneering appropriation of Ambrose Bierce's 1911 form in 2007, when the global financial crisis was barely beginning. Call it "The Original Devil’s Dictionary of Finance."

    But it no longer seems adequate for the post-crisis task. Herewith part one – for the letters A to K – of the sequel, updated and enlarged for the world of hedge funds, private equity, structured finance, subprime equity and the like: "The Devil's Dictionary of Post-Crisis Finance."


    Activist: One who makes importunate demands for financial engineering*.

    Alpha: An investment return above that of a benchmark index, usually achieved by luck or by “gaming” the index.

    Analyst: A stock puffer whose purpose is to generate brokerage commissions. See Chinese walls.

    Arbitrage: The time-consuming and risky activity of buying an underpriced asset whilst simultaneously selling an equivalent overpriced asset. Eschewed by Wall Street, which instead profits from regulatory arbitrage, accounting arbitrage, jurisdictional arbitrage and fiscal arbitrage.

    Asset price bubble: The most noticeable consequence of the U.S. Federal Reserve’s easy money policy. See ZIRP.

    Auction house: A place where Wall Street high-flyers blow their windfall gains. See Contemporary art.

    Austerity: Also known as “sado-fiscalism”. A forlorn attempt to stave off government bankruptcy.


    Bandwagon: That which every investor jumps upon. “If you see a bandwagon, it’s too late.” (James Goldsmith, financier.)

    Bank: An institution which, by applying leverage and mismatching assets and liabilities, earns short-term profit and generates long run losses.

    Bankrupt: A person who has run out of liquidity. Also, the intellectual state of modern economics.

    Basel: The Swiss home of the Bank for International Settlements, an institution which creates global banking rules thus setting the stage for regulatory arbitrage and, thereby, precipitating crises at regular intervals.

    Behavioural finance: The field of study resting on the notion that an asset price bubble is the result of “irrational exuberance” (see Greenspan*) rather than the inevitable consequence of bad monetary policy and conflicts of interest on Wall Street.

    Bell curve: A visual representation of the false assumption, baked into most financial models, that outcomes are what statisticians call “normally distributed”.

    Bernanke, Ben: Former Fed chairman who failed to spot the housing bubble before it burst and in 2007 claimed that U.S. subprime mortgage problems were “contained”. After the Lehman Brothers bust, Bernanke succeeded in re-inflating the Greenspan* superbubble. Soon after leaving the Fed, he was rewarded with a job at Citadel, a hedge fund, which presumably didn’t hire Bernanke for his market insights. See Revolving door.

    Biotech: A pharmaceutical Ponzi scheme of a company. See Burn rate.

    Bitcoin: A digital tulip bulb.

    Black swan: A common bird on Wall Street, renowned for its fat tail.

    Bonus: In banks, a large payment out of short-term profit to retain “talent”. While a bank’s profit is generally illusory, bonuses endure.

    BRIC: A “Bloody Ridiculous Investment Concept” (Peter Tasker, fund manager and author). An emerging bull market acronym comprising the first letters of Brazil, Russia, India and China coined by Jim O’Neill, a former member of theGoldman Sachs marketing department.

    Burn rate: The alarming pace at which technology and biotechnology companies run through their cash piles.

    Business school: Networking hotspot where young people pay large sums of money to have their scruples expensively removed. See MBA.

    Buybacks: Debt-funded purchases of a company’s own shares in order to enhance growth in earnings per share. A tool to maximize the value of a chief executive’s stock options.


    Capex: The splurging of shareholder funds on the latest investment fad (see Mine). Sensible CEOs prefer financial engineering*.

    Capital controls: A futile attempt to evade the global carry trade. Chinese capital controls are circumvented through gaming in Macau, faking exports, offshore borrowing and the age-old expedient of carrying suitcases of cash abroad.

    Capital flight: The last act of the global carry trade. Currently under way in China.

    Career risk: The near inevitability that a fund manager will be sacked if he or she refuses to participate in an asset price bubble or exhibits more than a hint of tracking error.

    Carried interest: The “performance” fee extracted by private equity firms for leveraging assets. Proposals to remove the advantageous tax rate on carried interest were compared by Stephen Schwarzman, co-founder of private equity firm Blackstone, to the Nazi invasion of Poland.

    Carve-out: A seemingly profitable Chinese business freshly separated from a larger loss-making state-owned enterprise, which retains control, in preparation for an initial public offering.

    Chief executive officer: A corporate boss who extracts any surplus value created by the business he or she runs for his or her own benefit. SeeShareholder value.

    China: Since GDP growth started slowing, a country suffering from 3,000 years of bureaucratic despotism and corruption.

    China dream: The age-old business vision of selling a toothbrush to everyone in China. Until recently, a useful way of pushing stocks. Now Wall Street’s worst nightmare.

    Chinese credit guarantees: The provision of credit insurance, unregulated and without adequate reserves, which supports China’s non-bank, or shadow, financial system.

    Chinese economic growth: “Unstable, unbalanced, uncoordinated, and unsustainable” (Wen Jiabao, Chinese premier, in 2007).

    Chinese GDP: A “man-made” figure (Li Keqiang, future Chinese premier, in 2007).

    Chinese infrastructure: The construction of bridges to nowhere, ghost cities and the like, which has driven recent economic growth. “In China you don’t rob a bank, you rob infrastructure” (Minxin Pei, expert on Chinese corruption).

    Chinese public debt: Beijing’s vastly understated liabilities, which are mostly hidden off balance sheet – in local government funding vehicles, asset-management companies, policy banks, and so forth.

    Chinese real estate: Jerry-built apartment buildings standing empty on the outskirts of second-tier cities and providing the collateral for China’s broken credit system.

    Client: See Muppet.

    Commodity supercycle: A term coined in 2004 so that investment banks could extract fees from selling commodity index funds and arranging mining-related IPOs, mergers and debt issuance.

    Company accounts: A misrepresentation of a firm’s profitability and financial state. See Off balance sheet and Kitchen sink.

    Compensation committee: A group of people, often the chief executives of other companies, tasked with ratcheting up the CEO’s pay. See Executive pay consultants.

    Compliance officer: A box-ticking functionary charged with ensuring the letter – but not the spirit – of the law is observed on Wall Street.

    Contemporary art: A bubble asset class, which combines conspicuous consumption with tradability whilst making no demands on taste.

    Corporate governance: A set of rules intended to preserve the fiction that executives are working on behalf of shareholders. See Shareholder value.

    Corporate psychopaths: Clive Boddy, who studies company leadership, maintains the recent financial crisis was the consequence of Wall Street being run by mentally unstable types. A plausible hypothesis.

    Correlation: A spurious statistical relationship between the prices of different assets, used in risk models.

    Credit cycle: The ebb and flow of finance determined by the actions of central bankers, who are blissfully unaware of its existence. See Bernanke, Ben.


    Debt supercycle: The apparently endless accumulation of financial obligations by people and governments around the world. The road to perdition.

    Default: “A thorough and complete deception of the creditor by the debtor” (Max Winkler, 1933). See Greece.

    Deflation: A benign fall in the price level due to productivity improvements and the expansion of global trade. Not to be confused with debt deflation, the consequence of the Fed’s easy money policies.

    Derivatives: “Financial weapons of mass destruction” was the definition once used by Warren Buffett, but that hasn’t stopped the Berkshire Hathaway chairman from dabbling in them himself. See Sage of Omaha.

    Dollar: A worthless token conjured up by an entry in the Fed’s balance sheet. The lynchpin of the global financial system, which results in low U.S. interest rates wreaking havoc in all corners of the globe.

    Dollar-weighted return: The investment industry’s dirty little secret. The average return on every dollar invested in a fund over its lifetime. Invariably lower than the published return of a fund since inception, and sometimes negative.

    Dot-com 2.0: The second coming of the internet bubble. See Burn rate.


    Earnings per share: A corporate performance metric, published quarterly, which says little about a company’s true profitability and is easily manipulated. Often set as a target for executive compensation schemes.

    Economist: A person who failed to anticipate the global financial crisis; generally, an undistinguished mathematician with a poor understanding of finance. See Bernanke, Ben.

    Efficient market hypothesis: The discredited notion that market prices reflect all available information and that asset price bubbles cannot be identified in advance.

    Elon Musk: A company promoter who may one day be seen to have taken investors for a ride (in electric cars, spaceships, and so on).

    Emerging markets: A collection of relatively poor countries with little in common save a history of economic mismanagement, widespread corruption and the absence of the rule of law. See BRIC.

    Endowment: A speculative investment fund, which embraces illiquidity and leverage in an attempt to emulate Yale University’s past success.

    Eurodollar market: A $5 trillion unregulated offshore financial market in which banks fund the global carry trade and enable emerging market countries to borrow cheap dollars. Such asset-liability mismatches lie at the heart of most emerging market crises.

    European Central Bank: An institution which holds the euro zone together by providing limitless credit to insolvent members. See Target 2.

    Exchange-traded fund: An investment vehicle which trades like shares, providing retail investors with exposure to illiquid assets and the latest investment fads, for example the ALPS U.S. Equity High Volatility Put Write Index Fund.

    Euro zone: Europe’s “permanent” currency union. A doomsday machine which generates debt deflation, economic sclerosis and sovereign bankruptcy.

    Evergreening: the practice of rolling over a bank’s bad debts in order to avoid reporting losses and to support corporate zombies*. A Japanese invention of the early 1990s, more recently adopted by China and the euro zone.

    Executive pay consultants: Advisers who justify one CEO’s proposed pay increase by reference to another client’s recent pay increase.


    Finance: The work of the devil, sometimes known on Wall Street as “God’s work” (Lloyd Blankfein, CEO of Goldman Sachs).

    Financial innovation: New ways conceived by Wall Street to extract fees, conceal risks, and evade financial regulation.

    Financial liberalization: The loss of control by a government of its domestic financial system, antecedent to the system’s collapse.

    Financial regulation: A Maginot Line constructed around Wall Street after the last bust. See Regulatory arbitrage.

    Financial repression: The Fed’s mechanism for transferring wealth from savers to bankers by keeping interest rates below the rate of inflation.

    Fine: A punishment inflicted on a bank’s shareholders after its employees have abused their trust.

    Flack: A purveyor of financial propaganda and public relations pabulum, normally an ex-journalist, who ensures a favourable news flow by feeding pet journalists with “scoops”.

    Flash Crash: A brief but large dip in the stock markets on a May afternoon in 2010, resulting from the antics of high-frequency traders. The authorities have found an unlikely scapegoat for this event in the Hound of Hounslow.

    Forecast: An inaccurate prediction, invariably optimistic, produced by brokers to generate turnover and by pension plan sponsors to mask insolvency.

    Fund management: An industry built on the “illusion of skill” (Daniel Kahneman, Nobel laureate). Although it takes several decades to distinguish luck from skill in the investment world, successful fund managers are inclined to believe in their own skill. See Lucky fool*.


    Gate: That which slams on investors in hedge funds and money market funds during periods of market turmoil, preventing them from redeeming their investments.

    Gaussian copula: A quantitative tool used to measure securitization risk based on faulty assumptions of correlation and normal distributions. Sometimes known as “the formula which killed Wall Street”, this invention of rocket scientists was one of the biggest causes of the global financial crisis.

    German banker: The patsy of global finance.

    Global carry trade: The flooding of the global financial system with cheap dollars. This trade normally comes to a sudden stop when U.S. rates rise, ushering forth the inevitable emerging-market crisis.

    Global financial crisis: An event which, before the Fed came to the rescue, threatened to bring to an end Wall Street’s well-oiled fee-extraction machine.

    Globalisation: The opening up of the world economy to the global carry trade.

    Gold: “A pet rock” (Wall Street Journal).

    Goldman Sachs: “A great vampire squid wrapped around the face of humanity” (Matt Taibbi). Wall Street firm that specializes in “handling” conflicts of interest.

    Goldman Sachs alumni: Former employees who infest central banks and finance ministries around the world, ensuring that the authorities bail out the bank whenever it is about to go belly up.

    Goodwill: An accounting entry quantifying how much a firm has overpaid for past acquisitions. Written off by incoming CEOs. See Kitchen sink.

    Greece: A country which has spent half its time since independence in default. Qualified to join the euro zone after taking off-balance-sheet financial advice from Goldman Sachs.

    Greenspan put: The Fed’s practice of using monetary policy to prevent asset price bubbles from bursting. A cause of even bigger bubbles. See Moral hazard.

    Gunning the fund: The practice of marketing investment funds with good initial track records. Funds with poor initial returns are either dropped or merged with better performing funds. See Survivorship bias.


    High-frequency trading: A zero-sum game played by computer nerds.

    High-water mark: The high point of a hedge fund’s value, below which it cannot charge extra fees. Falling below this level indicates that it is time to start a new fund.

    Hot money: Short-term debt used to finance the global carry trade. Runs for the door at the first sign of trouble.

    Hound of Hounslow: A trader operating from his parents’ sitting room underneath the Heathrow flight path, blamed by the authorities for the Flash Crash.


    Inequality: The social consequence of Fed policies that inflate Wall Street fees and CEO pay while simultaneously reducing returns on the public’s savings.

    Initial public offering: An opportunity for insiders to sell overpriced shares to outsiders and for Wall Street to extract exorbitant fees, manipulate markets and distribute favours. See Spinning and Laddering.

    Interest: A reward for saving enjoyed in distant memory by our forefathers. SeeZIRP.

    Interest rate: The price of money over time, which balances saving and investment. In the hands of the Fed, a dangerous policy tool.

    Internal rate of return: A distorted measure of performance used by private equity firms to boost reported returns. A high IRR can be achieved by selling their best investments early whilst hanging on to the dogs.

    Investment conference: A place where asset managers meet to discuss the latest investment fad. Investment strategist: A person who always recommends buying equities regardless of price.


    Keynesians: Economists “who hear voices in the air (and) are distilling their frenzy from some academic scribbler of a few years back” (John Maynard Keynes).

    Kitchen sink: Excessively large writedowns whose subsequent reversal becomes a source of future profit. Usually announced by an incoming CEO. Also known as “cookie-jar accounting”.


    Source: Reuters (Part 2 next week)

  • Should We Be "Scared" Of Capitalism?

    Submitted by Pater Tenebrarum via Acting-Man.com,

    Physicists Should Stick to Physics

    We know already since Einstein that renowned physicists would do better to avoid straying into the field of economics. In 1949 Einstein published an essay on economics and education that is brimming with ignorance. According to Einstein, “The economic anarchy of capitalist society [is] the real source of evil”. Any old Marxist could have written that of course – the “capitalist anarchy of production” was routinely mentioned as an alleged drawback by Marxists, one that their “scientific” central economic planning would overcome.



    Albert Einstein: great physicist, terrible economist.

    Photo credit: Steffen Kugler / Getty Images

    This conviction eventually cost the lives of hundreds of millions of people and utterly bankrupted half of the world for good measure. A representative quote from Einstein’s article:

    “I am convinced there is only one way to eliminate these grave evils, namely through the establishment of a socialist economy, accompanied by an educational system which would be oriented toward social goals. In such an economy, the means of production are owned by society itself and are utilized in a planned fashion. A planned economy, which adjusts production to the needs of the community, would distribute the work to be done among all those able to work and would guarantee a livelihood to every man, woman, and child.”

    We have no idea what possessed Einstein to write this clap-trap. Was he not aware, in 1949, of the evils perpetrated by Stalin and the planners of the Soviet Union? Had he not heard of the purges, the famines and the Gulag?

    There should be no need to mention that Ludwig von Mises already showed in 1920 that economic calculation is literally impossible in a society in which the State is the sole owner of the means of production. Moreover, a vigorous debate between F.A. Hayek and Lionel Robbins on the one side, and assorted supporters of central economic planning such as Oskar Lange and Henry Dickinson on the other side had been raging between the mid 1930s and early 1940s (previously Marxist writers had proscribed such debates on the basis of polylogism).

    Possibly Einstein wasn’t aware of this debate, but a salient feature of it was that the socialist planners had been forced to retreat step by step, until in the end, the only proposal they were left with was that the central planning agency should try to “imitate a market”. As Mises remarked on this later (in Human Action, which incidentally was also published in 1949):

    “What these neo-socialists suggest is really paradoxical. They want to abolish private control of the means of production, market exchange, market prices, and competition. But at the same time they want to organize the socialist utopia in such a way that people could act as if these things were still present.


    They want people to play market as children play war, railroad, or school. They do not comprehend how such childish play differs from the real thing it tries to imitate.”

    (italics in original)

    If the socialists had succeeded in establishing socialism globally after the Russian revolution, the world would have been back in something resembling the stone age within a few short years. Society would have fallen apart, people would have been forced to lead a hand-to-mouth existence, barely subsiding. The only reason why the communists held on for as long as they did was that socialism was not implemented on a global scale. The planners were therefore able to observe prices in the capitalist societies, allowing them to engage in a rudimentary form of economic calculation.



    Polish economist and “Market socialist” Oskar Lange: he lost the socialist calculation debate and didn’t even realize it, as he simply failed to grasp the essence of the argument. Poland’s economy was duly run into the ground by his fellow socialists.

    Photo credit: W?adys?aw Miernicki

    It is truly remarkable how deeply embedded socialist thought remains in society to this day, in spite of the downfall of the socialist Prison State in the late 1980s/early 1990s, after its utter bankruptcy could no longer be concealed (as an aside, we plan to soon post another article on the enduring popularity of collectivism, a phenomenon that strikes us as more than passing strange). Thus yet another popular and renowned physicist, namely Stephen Hawkins, has jumped into the debate, seemingly attacking capitalism. According to the Huffington Post, “Stephen Hawking Says We Should Really Be Scared Of Capitalism, Not Robots”.

    To paraphrase Albert Jay Nock, it is downright absurd that socialist ideas are still so unquestioningly accepted that one is actually forced to discuss and defend capitalism, as if there were any other type of economy! An economy cannot be anything but capitalistic; without economic calculation, there is simply no rational economy to discuss. It makes no sense to call any other system an “economy”.

    It follows that the only people who have reason to discuss the viability of the capitalist system are those who want to return to a hunter-gatherer lifestyle. But they can do that without trying to enforce their nonsense on anyone else. Surely there is enough room in the Amazon forest. If a handful of morons eager to shun civilization want to ship themselves there, we imagine no-one would object (such as e.g. the insane eco death-cult of Paul Kingsnorth in the UK; they probably wouldn’t do it though, due to the lack of wall plugs needed to recharge the batteries of their iPhones).


    Production and Distribution are not Separate Activities

    We are not sure why Mr. Hawking would object to capitalism. Does he not realize that without the free market economy (hampered as it is nowadays), there would be no modern physics as we know it? That the radio telescopes and the particle accelerators used by experimenters to check the validity of his theories wouldn’t exist?



    Stephen Hawking, world-renowned theoretical physicist. He has inter alia published books on physics even laymen can enjoy, and which we highly recommend.

    Photo credit: NASA

    Here is what the Huffington Post writes about Hawking’s remarks (perhaps not surprisingly, French Marxist economist Thomas Piketty is mentioned as well in the commentary proved by the HuffPo’s author. In spite of the – in our opinion artificially blown out of all proportions – popularity of Pikkety’s tome, it is a book that is absolute garbage both in terms of theory and and its misrepresentation of empirical data).

    “Machines won’t bring about the economic robot apocalypse — but greedy humans will, according to physicist Stephen Hawking. In a Reddit Ask Me Anything session on Thursday, the scientist predicted that economic inequality will skyrocket as more jobs become automated and the rich owners of machines refuse to share their fast-proliferating wealth.


    “If machines produce everything we need, the outcome will depend on how things are distributed. Everyone can enjoy a life of luxurious leisure if the machine-produced wealth is shared, or most people can end up miserably poor if the machine-owners successfully lobby against wealth redistribution. So far, the trend seems to be toward the second option, with technology driving ever-increasing inequality.”


    Essentially, machine owners will become the bourgeoisie of a new era, in which the corporations they own won’t provide jobs to actual human workers.

    As it is, the chasm between the super rich and the rest is growing. For starters, capital — such as stocks or property — accrues value at a much faster rate than the actual economy grows, according to the French economist Thomas Piketty. The wealth of the rich multiplies faster than wages increase, and the working class can never even catch up. But if Hawking is right, the problem won’t be about catching up. It’ll be a struggle to even inch past the starting line.”

    (the emphasized part are Hawking’s own words)

    First of all, as we have discussed in these pages on many occasions, inequality cannot possibly be a problem as such (here is an example from 2011: “Wealth and Income Inequality in the US”). It may produce envy, but that doesn’t mean inequality is a problem – envy is.

    Let us simply consider two hypothetical societies. In one of them, every inhabitant makes the equivalent of $1,000 per month. Perfect equality! In another, three people make $6,000 per month each, while the rest make $2,000 each. Bad, bad, bad….there are three rich people! Rhetorical question: which one do you think people would prefer to live in?

    The reason why inequality is seen as a problem nowadays, is that the incomes of the middle class and the poor have stagnated or even declined since the adoption of the full-fledged fiat money system in the 1970s, while already rich owners of assets have seen their wealth and income soar. Had everybody’s wealth increased, even if at unequal rates, there would be precisely zero reason to complain.

    What is the reason for this deplorable development? It certainly isn’t the fact that the “machine-owners” (read: capitalists) have successfully lobbied against wealth redistribution” as Mr. Hawking avers. As a matter of fact, in the US a tiny minority of the population pays the vast bulk of the taxes the State then redistributes. As of 2015, the top 20% of income earners pay 84% of all income tax. It seems their “lobbying against wealth redistribution” hasn’t been all that successful so far.

    The bottom 20% (up to annual earnings of $47,300) pay no income tax at all – on the contrary, they receive a net income tax benefit. The slightly dated chart below shows the situation as of 2012 (it shows the bottom 50% as a single group, so one doesn’t see the tax beneficiaries, but it also shows a more finely grained overview of the top earners and how much they are paying).



    Wealth redistribution hardly seems to be a “problem” (chart by Erik Soderstrom) – click to enlarge.

    As Murray Rothbard notes in Man, Economy and State, in a free market there is no such thing as “distribution” that is separate from production:

    “The theory of the market determines the prices and incomes accruing to productive factors, thereby also determining the “functional distribution” of the factors. “Personal distribution”— how much money each person receives from the productive system—is determined, in turn, by the functions that he or his property performs in that system. There is no separation between production and distribution, and it is completely erroneous for writers to treat the productive system as if producers dump their product onto some stockpile, to be later “distributed” in some way to the people in the society. “Distribution” is only the other side of the coin of production on the market.


    Many people criticize the free market as follows: Yes, we agree that production and prices will be allocated on the free market in a way best fitted to serve the needs of the consumers. But this law is necessarily based on a given initial distribution of income among the consumers; some consumers begin with only a little money, others with a great deal. The market system of production can be commended only if the original distribution of income meets with our approval.


    This initial distribution of income (or rather of money assets) did not originate in thin air, however. It, too, was the necessary consequence of a market allocation of prices and production. It was the consequence of serving the needs of previous consumers. It was not an arbitrarily given distribution, but one that itself emerged from satisfying consumer needs. It too was inextricably bound up with production.”

    (italics in original)



    Murray Rothbard: production and distribution are not separate activities

    Photo credit: Ludwig von Mises Institute

    This leaves the question why the real incomes of the middle class and the poor have stagnated and declined – and the answer was already implicit in what we wrote further above. It is the unfettered fiat money inflation that has been in train since Nixon’s gold default that is to blame. Newly printed money always enters the economy at discrete points, and there will be earlier and later receivers of this money. Wealth will be redistributed from the latter to the former. The rich are in a better position than the poor, as asset prices tend to rise earlier and disproportionately relative to other prices. However, the central bank and its fiat money system are not capitalist free market institutions – they are socialist central planning agencies and tools.

    It seems to us Mr. Hawking should be worried about socialism, not about capitalism. To be fair, we cannot really see as strong an indictment of capitalism in Mr. Hawking’s words as insinuated by the HuffPo’s author and the title of his article. Hawking definitely sounds a lot more harmless than Einstein did. However, he still seems to be advocating some sort of forcible wealth redistribution – plenty of which is already occurring.


    Fear of Robots and the Problem of Scarcity

    Hawking also seems to some extent express the fear of modern-day Luddites, that “robots will take all our jobs”. First of all, economic activity is primarily about producing more with less. It is about “economizing” – to relieve us of the drudgery of the pre-capitalistic order is its very object. It is absurd to complain and worry about its success in this department. The assertion that machines will “steal jobs” is of course as old as the first machines.

    And yet, in spite of ever greater progress and ever more work being done by machines, human prosperity has continued to increase (by any measure one can possibly apply). Instead of jobs simply “disappearing”, different and better ones have taken their place. No-one can as of yet know what industries there will be in the future. No-one knew in 1990 that one day, a “social media company” would employ 10s of thousands of people and earn $10 billion per year.

    Simply put, as long as there is more land (in the widest sense) than there are people on the planet, labor will always remain a scarce resource. What unemployment there is, is in part catallactic (voluntary), while the rest consists of “institutional” unemployment. The latter is to 100% the result of government intervention in the economy and specifically the labor market – it is not a result of capitalism or technological progress.

    We also want to briefly address the belief that “robots will do all the work and produce everything”, the implied assertion that these production processes will somehow come for free, and that therefore only the “distribution question” remains. It is in a sense true that we are no longer constrained by a scarcity framework as long as we have a capitalist system. As Israel Kirzner wrote in this context in Discovery and the Capitalist Process – encapsulating both what we said above regarding the as of yet unknown future and the fact that capitalism is not confined by the problem of scarcity:

    “We are not able to chart the future of capitalism in any specificity. Our reason for this incapability is precisely that which assures us . . . the economic future of capitalism will be one of progress and advance. The circumstance that precludes our viewing the future of capitalism as a determinate one is the very circumstance in which, with entrepreneurship at work, we are no longer confined by any scarcity framework. It is therefore the very absence of this element of determinacy and predictability that, paradoxically, permits us to feel confidence in the long-run vitality and progress of the economy under capitalism.”

    However, “not confined” doesn’t mean that scarcity has all of a sudden ceased to exist. If not for scarcity, there would be no need to allocate resources properly. In fact, there would be no economic goods and no prices. We may not be confined by scarcity under capitalism, but we still have to deal with it; it is a fact of life.



    A stern looking Israel Kirzner. Kirzner’s has produced highly interesting works on the entrepreneurial process, partly based on Hayek’s ideas about the role of knowledge in society

    What many of the “robot worriers” overlook is that while we have enormous knowledge, and in theory could probably automate a great many production processes that are as of yet not automated, we are still faced with the fact that capital is scarce. The main reason why e.g. the Central African Republic is not at the level of development of an industrialized nation is precisely that it lacks capital. In other words, it is not “technology” or know-how that is the obstacle to the Utopia Hawking imagines to come into being – it is scarcity.



    Caution, job thief!

    Image credit: DARPA

    However, if the problem of scarcity were licked once and for all, why should there still be a problem of distribution? As we noted above: scarcity is why there are economic goods that have prices. The air we breathe is an example of a non-scarce good. Has anyone ever worried about its “distribution”? If there is no longer any scarcity, i.e. once Utopia or the Land of Cockaigne has been achieved, everything will indeed come for free. There will no longer be anything worth stealing and redistributing.



    Stephen Hawking is undoubtedly a nice man and a genius in his field. This is probably also the field he should stick with. Anyway, we can lay his worries to rest: once there is no longer scarcity in the world, nobody will have reason to worry about wealth redistribution. Of course, it’s also not going to happen anytime soon and probably never will. There is also no reason to worry about employment while at least vestiges of a free market exist: as long as there remain unsatisfied human wants and as long as there are more resources than people, everybody will find work. The only real problem is government intervention in the market process.

  • Obama Is Considering Gun Control Through Executive Order

    After yesterday’s not one, not two, but three campus shootings, which come a week after the latest mass killing at Umpqua Community College left 10 people dead, it was only a matter of time before the administration would pick up where it left off shortly after the Sandy Hook shooting of December 2012.

    The time has arrived, and according to The Hill after Obama’s failed efforts to implement any form of gun control in early 2013 fizzled, the lame duck president is preparing to do what he has been threatening to do for a long time, by issuing a new executive action on gun control.

    “Obama is wading back into the divisive issue of gun control as he travels to Roseburg, Ore., Friday to meet privately with survivors and families of victims of the mass shooting at Umpqua Community College.”

    While not a full ban on gun sales (yet) Obama is considering extending background check requirements to more dealers, according to The Washington Post. A White House official confirmed the plan is under consideration.

    As we have noted previously, this proposal is among a number of executive actions that Obama considered after the 2012 shooting at an elementary school in Newtown, Conn. Back then the idea was abandoned, partly due to objections from the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF).

    Still, unwilling to ride off into the sunset without imposing at least one executive order on gun control, the White House is giving the plan a second look.

    At a press conference last week, a frustrated Obama said he had asked his advisers “to scrub what kinds of authorities do we have to enforce the laws that we have in place more effectively to keep guns out of the hands of criminals.”

    The details:

    Under the plan, dealers who sell guns above a certain amount would have to perform background checks and obtain a license from the ATF.


    Many of those dealers are exempt from the requirements now under a federal law that states people who make “occasional sales” as a hobby do not have to obtain a license or perform background checks, The Post notes.


    The rule change would effectively help to close what critics call a loophole that allows people to purchase firearms online and at gun shows without going through a background check.


    The president’s legal staff is weighing just how far he could tighten the standard without the regulation being overturned in court.

    Like on previous occasions, such an executive order is certain to set off a firestorm in Washington, with a debate raging in Congress whether gun control is needed to stem the tide of mass shootings.

    Obama’s proposal is sure to also launch a firestorm on the presidential campaign trail, where Hillary Clinton, the front-runner for the Democratic presidential nomination, has seized on the Oregon shooting to put forward a number of gun control proposals, including an executive action on background checks that is similar to what Obama is now considering.

    The Democratic Party’s focus on guns has drawn fierce criticism from Republican White House hopefuls, who largely say mental health, and not gun control, is the correct policy response. They say Democrats are using the shootings to roll back Second Amendment rights.

    Meanwhile, just like in 2012, the threat of more gun control is having just the opposite effect of what the president intends, and as we reported earlier this week, gun sales are soaring in the aftermath of the most recent cluster of shootings. In fact, “gun sales this year could surpass the record set in 2013, when gun purchases surged after the December 2012 Sandy Hook murders.”

    In the first nine months of this year, 15.6m of the background checks needed to purchase guns from federally licensed sellers have been processed, compared with the 15.5m applications in the same period in 2013, according to the National Instant Criminal Background Check System.

    Why the surge? Simple: “Once the public hears the president on the news say we need more gun controls, it tends to drive sales,” said Mr Hyatt, who owns one of the largest gun retailers in the US. “People think, if I don’t get a gun now, it might be difficult to get one in the future. The store is crowded.

    Because if you want something to be truly broken, just invite the government to “fix” it. Which is not to say that everyone is a loser – two clear winners from Obama’s repeated attempts to enforce gun control are shown in the chart below.

  • Peak Sovereign Wealth Fund?

    Via ConvergEx's Nicholas Colas,

    Sovereign wealth funds tied to oil producing states have been much in the news of late. With the volatility in energy prices, Norway, Saudi Arabia and Russia have all tapped their SWFs over the course of the year to plug budget shortfalls.  So have we seen “Peak SWF” in terms of assets under management with last year’s $7 trillion balance?  Only if oil prices stay permanently low, an unlikely event barring a global depression.


    SWFs are here to stay, and a review of this year’s major conferences dedicated to these investors points to how the global investment landscape will change in coming years.  SWFs want more exposure to non-correlated returns from private equity, infrastructure and hedge funds while using more passive strategies for their “core” financial asset investments. Also, aware that much of their funding comes from carbon-based fuels, some are keenly interested in “Green” investing and other socially-conscious initiatives. The only caveat to the money management industry: SWFs are becoming much more fee conscious.

    There was a small piece of good news out of civil war ravaged Libya today: there’s a tanker loading some oil at a terminal in the east of the country.  According to a Wall Street Journal article, it is the first such production in months and provides a glimmer of hope that the country can begin to stabilize the local petroleum-based economy. “Normal” production for Libya is 1.5 million barrels/day. Current output is less than a third of that number.

    Given all the terrible news out of the country since the fall of Muammar Ghaddafi in 2011, you might be surprised to know that the country is far from broke.  In fact, the Libyan Investment Authority (LIA) has some $67 billion in assets – the equivalent of $10,000 for every citizen. The only problem is that no one seems to quite agree on the legitimate leadership of the country, and both sides are pressing their claims in British courts. In the meantime, the fund is still a player in global finance with +$8 billion in public equity investments alone. 

    Sovereign wealth funds such as the Libyan Investment Authority started in the 1950s – Kuwait had one even before its independence from Great Britain – and they most often associated with energy exporting countries. Their goal is to invest excess cash generated from oil and other fossil fuel sales so that when the country’s natural resources run out there is another base of assets to support the population. There are also SWFs in countries with long histories of exporting finished goods, such as Singapore, Hong Kong and, of course mainland China. 

    Now, with oil prices under pressure over the last year it should be no surprise that energy exporting countries would be tapping their SWFs to fill budgetary gaps. Some recent headlines:

    Norway, which actually runs the largest sovereign wealth fund in the world, plans to draw approximately $450 million from the fund in 2016 to replace oil revenues diminished by low energy prices.  Since the fund has $820 billion under management, that’s not much of a drawdown. The fixed income portion of the fund generates more than that in interest over the next 12 months, so the fund doesn’t actually have to sell assets to meet the government’s financial needs.


    Saudi Arabia, where the central bank also doubles as the country’s SWF, is drawing on its foreign currency reserves to make up for declining oil revenues.  Now, the country still has over $600 billion in reserves, but that is down 10% from last year.


    Russia has tapped its SWF for $14.3 billion over the course of 2015 according to press accounts

    So was last year some kind of “Peak SWF”, or will the $7 trillion invested in these funds continue to grow?  The short answer is that it depends on energy prices, with 60% of SWF assets domiciled in oil and gas producing countries. So if you believe energy prices will remain low for the next 10 years, then yes…  Sovereign wealth funds might continue to shrink. But if and when (emphasis on the latter) oil prices recover, these funds will certainly resume their growth track.

    Regardless of when oil prices turn, SWFs are large enough right now – and for the near future – to play a prominent global role in capital markets.  There are two major conferences for this group of investors just this month – the International Forum of Sovereign Wealth Funds in Milan, and the Institute Fund Summit (hosted by SWFI) in Amsterdam.  If you want to know what’s important to SWFs at the moment, the answers are in the titles of the presentations at these two events:

    • Interest in alternative asset classes, specifically Private Equity, Infrastructure Investments, and Hedge Funds.
    • A focus on European investment, leveraging an improving economic picture for the region.
    • “Decarbonizing Investment Portfolios” by lowering exposures to fossil fuel related companies and also investing in “Clean energy”.
    • Optimal Asset allocation, with an eye on underappreciated asset classes.
    • Responsible Investing benchmarking.
    • Smart beta and factor-based investing.

    There are three distinct threads from these topics.  First, at least some SWFs clearly feel they must synchronize their investing approach to the populations they serve.  If environmental responsibility is a national social priority, then that should be reflected in the portfolio (even if the source of the capital was not originally so pristine). Second, SWFs clearly want to move beyond the 60/40 equity-fixed income model and invest in alternative assets. Some of the largest funds (Norway, for example) are already doing this, especially in real estate. Lastly, they want low cost options for “Core” investments in stocks and bonds that still offer some opportunity for outperformance. 

    The bottom line to this brief tour of sovereign wealth funds is that, even with the drop in oil prices, the $7 trillion invested in SWFs makes them important participants in global capital markets; what they do, even at the margin, matters.  Having seen the volatility in equity markets – first in 2008 and again this year – they want to diversify.  Moreover, SWFs have the time horizon to look at long time frame projects like real estate and infrastructure; they don’t have to limit their scope to just liquid capital markets like stocks and bonds. The great unknown is how they will reallocate capital if oil prices really do remain muted for longer than expected.  Will they take more risk?  Or less?  And in what form?  Given their collective size, those decisions could alter the global investment environment more permanently than issues like Federal Reserve policy or next quarter’s corporate profits.

  • Trump's Success Exposes America's Winner-Loser Society

    Everywhere you look – from political campaigns, both Democratic and Republican, that are focused on the haves and have-nots, to much of the Internet – people are upset. They are angry that they are being bullied by folks who have more power – and sometimes lots more money — than they have.

    You feel a tension in America now between “us” and “them.” This is not about the usual suspects of polarization – conservatives and liberals. It is “us” and those myriad groups that the public feels have disempowered them. Because bullying isn’t just an issue for children any more. It is an issue – perhaps the issue – for everyone.

    Trump is a beneficiary of something ubiquitous in America today: The United States is a winner and loser society.

    That is how most Americans think of it. We have long been told that anyone in this country who wants to succeed, can. Casting aside the increasing impediments to social mobility, such as high college tuition costs and the loss of high-paid, blue-collar jobs, the onus is entirely on the individual. Surveys show that Americans strongly believe it. In fact, among industrialized nations, Americans are the only people who believe that they have the power to determine their own destiny.

    Yet, however much Americans espouse it, that belief is shakier than we let on. Many Americans increasingly feel, deep down, that the game is rigged. That the people who run this country – the economic, political and intellectual elites – get all the advantages. Average Joe can’t win.

    We know people feel this way because they say so. It is what unites Tea Party activists and Senator Bernie Sanders’ supporters, reactionaries and radicals. Both sides rail at the abuse of power and the power of abuse.  They may not agree on much, but they see themselves as victims of the same force: bullies.

    Read more here at Reuters…

  • US Recession Watch: The Inventory Liquidation Looms

    Submitted by Eugen von Bohm-Bawerk via Bawerk.net,

    In The Coming US Recession Charted (June 20, 2015) we argued that the US economy is heading toward recession, not escape velocity as the sell-side and Fed officials have been telling us. Today we will revisit the possibility of the US entering a recession in 2016 and by extension substantiate our argument for NIRP, and not lift-off, as the most likely next move by FOMC.

    One of the most reliable predictors for the business cycle is the yield curve. Unfortunately, due to Federal Reserve manipulation, whereby the short end of the curve have been permanently pegged to zero, an inverted yield curve is more or less impossible. However, if we look at the relative change from trend we can construct an equally good predictor. The blue line in the chart below depicts difference in the 10/5 term spread vs. its underlying trend. Historically, a breach of 50 basis points have indicated an upcoming recession. While the current trend deviation is not giving a clear signal yet, it is close enough to suggest we are heading straight into another recession.  

     Term Spread Recession

    Source: Federal Reserve Bank of St. Louis, Bawek.net

    The growth rate in real GDP for 2015 goes a long way to validate what we see in the picture above. Sup-par performance, even by a lacklustre post-crisis standard, is the most likely outcome for the year. Recent data point to a very weak third quarter, with growth probably coming in less than 1 per cent SAAR;  supported by the prescient Atlanta nowcast model. The annual run rate for GDP suggest growth below 2 per cent, thus entering 2016 on slowing momentum.

    Nowcast vs, actua

    Source: Federal Reserve Bank of Atlanta, Federal Reserve Bank of St. Louis, Bawerk.net

    Why do we believe the second half will weaken from an already dismal first half? One reason stems directly from the outcome of the so-called residual seasonality debate that raged after the catastrophically poor first quarter. In what, by now, have become a sell-side embarrassing ritual, first quarter GDP ruin all preceding year-end forecast of impending escape velocity.

    This year they had enough of it and demanded from the BEA to remove any residual seasonality that had to still be left in the data. The BEA complied and revised the first quarter as requested. The problem with such myopic thinking is that it obviously comes back to bite you when you least need it. We are sure the Atlanta Fed model does not account for the fact that GDP “given” to the first quarter must be “taken”, most likely from second and third quarter, since seasonal adjustment cannot (or should not) change the average growth rate for the year as a whole. If BEA shifted GDP units into the first quarter, they must revise down second and third quarter correspondingly as shown by our “second round” seasonal adjustment in the chart below. In other words, there should be downside in the already downbeat Atlanta Fed nowcast.

    The FOMCs lift-off debate will thus do a one-eighty quicker than most people think possible.Residual Seasonality

    Source: Bureau of Economic Analysis (BEA), Bawerk.net

    In addition, as we pointed out in our update from June 20, time is getting ripe for another down cycle. Historically the trough to peak last around 40 months, while the current expansion has been ongoing for 75 and is by that the fourth longest on record (actually third, as the second world war was not a time of prosperity in the US, but the statistics measure it as such).Expansion Length

    Source: National Bureau of Economic Research, Bawerk.net

    As we should expect in a mature expansion, business sales stalls and have actually started to fall; this is not something that just tend to happen now and then. The chart below clearly shows what falling business sales means – recession.

     Total Bus Sales

    Source: Federal Reserve Bank of St. Louis, Bawerk.net

    Inventories, as witnessed in the latest wholesale sale report, are rising fast with the inventory to sales ratio clearly in recessionary territory. As ZeroHedge recently pointed out, the dollar value of inventories over sales have never been higher.

    Wholesale Sales with dollar diff

    Source: Census Bureau, Bawerk.net

    In this environment, we should expect imports to slow down, but due to a strong dollar, it makes more sense for Americans to import goods than buy from local suppliers. We calculate the non-oil trade deficit to be at a record while the overall deficit is flattered by increased domestic oil production and oil product exports. As the shale-gale settles down, domestic oil production will fall; probably 400 – 600kb/d in 2016. Imports will obviously rise accordingly. The total deficit will converge with the non-oil deficit, creating another GDP headwind.Total and non oil trade balance

    Source: Census Bureau, Federal Reserve Bank of St. Louis, Bawerk.net

    As a side-note regarding the strong dollar and how the Fed has become the global central bank. In times of QE, dollar liquidity has improved, which includes the all-important Eurodollar market. With increased confidence that actual dollars will be there if needed, money flows back out pulling the dollar value down. However, as soon as the Fed stops the flow of fresh dollars,  the dollar value spikes wreaking havoc to global dollar liquidity. What is interesting to note is how QE3 completely failed to lift confidence in the global dollar market and the mere taper crushed the remaining confidence leading to a scramble for actual dollars, thus bringing the EM down with it. USD and QE

    Source: Federal Reserve Bank of St. Louis, Bawek.net

    But we digress, with higher inventories and more goods flowing in from foreign markets US industrial production growth has fallen (to a large extent tied into reduced activities in shale oil development) and will soon cross the zero line as production need to be realigned with demand.

    Industrial Production

    Source: Federal Reserve, Bawerk.net

    The factory order report confirms our view. Both “core” and headline factory orders are pointing to tougher times for US manufacturing.  

    Factory Orders

    Source: Census Bureau, Federal Reserve Bank of St. Louis, Bawerk.net

    Excess capacity leads to another round of deflationary pressure; exacerbated by the dramatic change in EMs FX reserve accumulation. We showed yesterday that even Norway is on the brink of becoming a net seller of financial securities. Bond markets agree with that assessment witnessed in the rapidly falling 5Y/5Y, in both Europe and the US.

    We end with an update to our cumulative goods sales vs. cumulative inventories chart derived from the GDP report.

    Cumulative goods sales vs inventory


    There can be little doubt that the massive, unprecedented surge in inventory accumulation (which counts positively to GDP) will eventually be liquidated. When it does the US enter recession,  global dollar liquidity crashes, the value of dollar surges even higher, pulling EM further down and a world recession will be upon us again. In this scenario central banks panic; NIRP, QE4 and helicopter money is the only thing they know and they will stick to it.

  • We Are All (Almost) Japanese Now

    Submitted by Jeffrey Snider via Alhambra Investment Partners,

    It may be unexpected to economists, but the sudden and uniform economic downside that is either appearing or strengthening almost everywhere in the world is closely tracking the wholesale “dollar.” In many cases, that flows through China and so is given that gloss, but there can be little doubt now about either cause or effect. In Japan, machine orders (a highly-used proxy for capex) tumbled “unexpectedly” in August after a mixed view from July (to put it kindly).

    Machine orders – a proxy for private capital expenditures – fell 3.5 per cent in August from a year earlier, with the drop catching economists off guard.

    They had predicted a 3.5 per cent increase for the month, building upon a 2.8 per cent year-on-year gain in July.

    Worse than that, the measure of private “non-volatile” (read: core) machine orders fell 5.7% year-over-year in August after declining 3.6% in July and 7.9% in June. The fact that there is apparent downside gathering two and a half years into QQE without any actual upside to date is perfectly ruinous. As noted discussing Japan’s lack of progress for industrial production, there has been no such upside to QE in any of the channels and pathways that economists were absolutely sure would result. Instead, without any gains, there has only been engineered a massive economic hole that is “unexpectedly” widening and deepening again.

    ABOOK Oct 2015 Global Econ Japan Machine OrdersABOOK Oct 2015 Global Econ Japan IP

    The Bank of Japan mercifully held off from expanding QQE again this week, which only allows some minor reprieve for Japan’s beleaguered households. Real wages were up just 0.2% Y/Y in August only because “inflation” was calculated as close to zero. Total hours worked was once more flat, suggesting that the best that the Japanese can hope is “scraping along the bottom” before any renewed contraction.

    ABOOK Oct 2015 Global Econ Japan Hours ABOOK Oct 2015 Global Econ Japan Real Wages ABOOK Oct 2015 Global Econ Japan Real Wages Index

    The Japanese economy has only “grown” smaller without any apparent catalyst for the recovery (QQE no longer counts, having been proved decisively ineffective and harmful) and “defeat of deflation” that pushed at least asset markets to multi-year extremes. So where Japan risks continuing a downward slope of depression, despite pressing against quadrillion and the true debasement via orders of magnitude, there is purportedly no connection to the “unexpected” trade developments in Germany:

    German exports fell sharply in August, in the latest sign that the slowdown in emerging markets is beginning to affect Europe’s biggest exporter.

    Exports in August were 5.2 per cent lower than July, their sharpest monthly fall since the financial crisis, according to Germany’s national statistics office. Imports also fell 3.1 per cent.

    Of course, we are re-assured that all that is left “overseas” and unrelated to the monetary-driven boom in the QE feudal districts of the US and Europe (it must be that Japan’s extra “Q” in QQE is the difference):

    “The figures are consistent with the industrial data we’ve already had this week and round off quite a bad August for German data,” said Richard Grieveson, an economist at the Economist Intelligence Unit.

    “Clearly, what’s happening in emerging markets — particularly China and Russia — is having an effect and the outlook is not as positive as it was, given the fall in factory orders and the possible impact of the Volkswagen scandal on the ‘Made in Germany’ brand.

    “However, it would be dangerous to read too much into one month’s numbers, given the impact of summer holidays, as well as the fact that the year-on-year data and sentiment indicators are not showing a big change in trend.”

    “Transitory” again? The credentialed economist assures us that there isn’t yet any slowdown in trade activity with especially the US and non-Eurozone EU, despite the Census Bureau reporting this week an August continuation of the 2015 slowdown in US imports from Europe (to nearly 0%).

    ABOOK Oct 2015 USTrade Imports Europe

    Perhaps the US is importing more from Germany than the rest of the EU, but even if that were the case such a situation where the US is buying from Germany at the expense of other European nations doesn’t bode well for any European trade business in the future. Denials aside, there isn’t any evidence to support the idea of US economic strength which is why the September payroll report was only shocking to those that testify to the Yellen economy; US and global. Thus, Japan wages and machine orders and German exports all figure in with US consumers further slipping down in economic function, to and through China or not.  And each is met with the growing chorus of “more stimulus” as if the word itself accomplished the directive (since semantics is undoubtedly all that is left of it).

    ABOOK Sept 2015 Stimulus Japan QE the rest


    Apparently the “slippery slope” of economic denial is likewise as universal as the aligned direction of economic progression across the world:

    1. Dollar doesn’t matter, indicates strong economy relative to the world
    2. Dollar matters for oil, but lower oil prices mean stronger consumer
    3. Manufacturing slump doesn’t matter, only temporary
    4. Manufacturing declines are consumer spending, but only a small part
    5. Manufacturing declines are becoming serious, but only from overseas
    6. Global Recession

    Fittingly, we are all almost Japanese now.

  • China's President Tops Obama In "Most Influential" Ranking

    Chinese President Xi Jinping topped US President Barack Obama to take the second place amongst 50 people in Bloomberg's 5th annual Market Most Influential Ranking. As Xinhua notes, according to Bloomberg, the world is waiting for Xi and the Communist Party of China to steer the world's second largest economy through turmoil. Xi, however, lost out on the "most" influential position to the diminutive Federal Reserve Chairwoman Janet Yellen… which, rather worryingly, exposes the terrifying central-planned reality of our 'utopian' new world order.



    Apple's CEO Tim Cook ranked the third, with Berkshire Hathaway CEO Warren Buffett came the fifth and U.S. President Barack Obama the sixth.

    Meanwhile, the number of Chinese people got on the list this year marks a record high. Among them were Bao Fan, Chairman and Chief Executive Officer at China Renaissance (22th); Wang Qishan, the head of the CPC Central Commission for Discipline Inspection (33rd); and Wang Jianlin, Chairman of Wanda Group (37th) – clearly signifying China's growing influence on global markets.

  • Fairy Tales & The Gun Control "Middle Ground"

    Presented with no comment…

    Because of this…

    Source: Townhall.com



    Source: Investors.com

  • The Massive Energy Top

    From the Slope of Hope:  I’m getting uncomfortable pounding on the same theme over and over again (there’s only so many times I can point out the large, looming topping patterns across the board), so I thought I’d mix things up a bit and just get of the price bars entirely and catch up on a trio of exponential moving averages to show how things have turned south, irrespective of the gargantuan, quadruple-point rally on the Dow. Here are the Industrials:


    The even-more-important Dow Composite:


    And the S&P 500:


    I’ll be the first one to admit that the moving averages looked very similar to this in October 2011, after which time we simply kept soaring higher. But – dare I say it? – it’s different this time! OK, OK, stop throwing rotten vegetables at me. I’m serious.

    Even more enticing to me is the shape of the energy sector, which has been simply nuked:


    I have vastly expanded my short holdings over the course of this week, and if we (finally) start re-weakening this week, I’m going to augment my favorite positions. As I suggested, my favorite sector is (once again) energy, as giants like Exxon are exhibiting topping patterns that strike me as once-a-generation type opportunities.


  • "The Biggest Protest This Country Has Seen In Years" – Quarter Million Germans Protest Obama "Free Trade" Deal

    When it comes to official and media opinion on Obama’s crowning trade “achievements”, the Trans-Pacific Partnership (TPP) and the Transatlantic Trade And Investment Partnership (TTIP), the party line is united. As previously noted, Barack Obama has assured the population that this treaty is going to be wonderful for everyone:

    In hailing the agreement, Obama said, “Congress and the American people will have months to read every word” before he signs the deal that he described as a win for all sides.


    “If we can get this agreement to my desk, then we can help our businesses sell more Made in America goods and services around the world, and we can help more American workers compete and win,” Obama said.

    The mainstream media’s chorus of support for these trade deal is likewise deafening: here are some indicative headlines from this past Monday:

    The far less popular opposing view, one repeatedly presented here, is that like with every other “free trade” agreement that the U.S. has entered into since World War II, the exact opposite is what will actually happen: the outcome will be that the US trade deficit (which excluding petroleum is already back to record levels) will get even larger, and we will see even more jobs and even more businesses go overseas, thus explaining the secrecy and the fast-track nature of the TPP and TTIP’s passage through Congress.

    And while the US population, which is far more perturbed by what Caitlyn Jenner will wear tomorrow than D.C.’s plans on the future of world trade, has been mute in its response to the passage of the first part of the trade treaty, the TPP – after all the MSM isn’t there to tell it how to feel about it, aside to assure it that everything will be great even as millions of highly-paid jobs mysteriously become line cooks – other countries are standing up against globalist trade interests meant to serve a handful of corporations.

    Case in point Germany, where today hundreds of thousands of people marched in Berlin in protest against the planned “free trade” deal between Europe and the United States which they say is anti-democratic and will lower food safety, labor and environmental standards.

    TTIP critics fear that it would lead to worse safeguards in Europe, bringing down standards for consumer safety, food and health or labor rights down to those in America. European nations have stricter regulations for things like genetically modified foods or workers benefits than the US does. There is also discontent with the secretive nature of the negotiations, which prompts skeptics to assume the worst about the document they would eventually produce.

    The organizers – an alliance of environmental groups, charities and opposition parties – claimed that 250,000 people were taking part in the rally against free trade deals with both the United States and Canada, far more than they had anticipated.

    As many as 250,000 protesters gathered in Berlin, according to organizers

    “This is the biggest protest that this country has seen for many, many years,” Christoph Bautz, director of citizens’ movement Campact told protesters in a speech.

    According to Reuters, “opposition to the so-called Transatlantic Trade and Investment Partnership (TTIP) has risen over the past year in Germany, with critics fearing the pact will hand too much power to big multinationals at the expense of consumers and workers.”

    Popular anger appears to be focused on the encroachment by corporations into every corner around the globe:

    “What bothers me the most is that I don’t want all our consumer laws to be softened,” Oliver Zloty told Reuters TV. “And I don’t want to have a dictatorship by any companies.”

    Other are mostly concerned about the secrecy covering the treaty and its negotiations: “Dieter Bartsch, deputy leader of the parliamentary group for the Left party, who was taking part in the rally said he was concerned about the lack of transparency surrounding the talks. “We definitely need to know what is supposed to be being decided,” he said.”

    As Deutsche Welle adds, the EU and US aim to conclude the negotiations, which began in 2013, by sometime next year. The next round of negotiations is set to begin later this year. Once completed, TTIP would create the world’s largest free-trade zone, home to some 800 million consumers.

    Campaigners are particularly concerned about a provision in the deal that would allow companies to sue governments in special tribunals. Such an arrangement, they fear, would lead to an erosion of labor and environmental protections . TTIP’s supporters dismiss such thinking and argue that the deal would boost the EU’s economy by removing tariffs and creating common standards.

    Gerhard Handke, who heads the Federation of German Wholesale, Foreign Trade and Services, told DW that TTIP would even help uphold such standards. Europe, he explained, would soon be overshadowed by other economic players, such as India and China. “Now is the time to set standards, rather than have other countries dictate them later on,” he said. “Otherwise, one day, we’ll have Asia setting those standards, without anyone asking us what we think.”

    Those gathered in Berlin, though, take a very different view. “We have heard these promises before, these promises of jobs and prosperity and growth,” Larry Brown, a trade unionist from Canada – which is negotiating a similar trade deal with the EU – shouted into a microphone on Saturday as demonstrators clapped and cheered and several police looked on. “They are lies. They have to be stopped.”

    * * *

    Oddly, few in the US aside from the fringe media, share any of these concerns.

    In Germany however, the marchers banged drums, blew whistles and held up posters reading “Yes we can – Stop TTIP.”

    As Reuters adds, the level of resistance “has taken Chancellor Angela Merkel’s government by surprise and underscores the challenge it faces to turn the tide in favor of the deal which proponents say will create a market of 800 million and serve as a counterweight to China’s economic clout.”

    And just like in the US, the government is scrambling to soften the popular opposition before the deal is scuttled:

    In a full-page letter published in several German newspapers on Saturday, Economy Minister Sigmar Gabriel warned against “scaremongering”.


    “We have the chance to set new and goods standards for growing global trade. With ambitious, standards for the environment and consumers and with fair conditions for investment and workers. This must be our aim,” Gabriel wrote.


    “A fair and comprehensive free trade deal promotes growth and prosperity in Europe. We should actively participate in the rules for world trade of tomorrow,” Ulrich Grillo, head of the BDI Federation of German industries, said in a statement.

    Businesses hope the trade deal will deliver over $100 billion of economic gains on both sides of the Atlantic.

    Which, naturally, is jargon for millions in cost-cuts and layoffs, meant to boost profitability and shareholder equity.

    For now the U.S. public remains largely inert to the TPP and TTIP concerns sweeping the globe; we expect that to last until the next major round of layoffs hits the US, just in time for the NBER to admit the country has been in a recession for at least 6 months.

    This is how the protest looked like covered by social networks and other non-US media outlets:

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