• Janet Yellen Falters During Speech, Receives Medical Attention, All-Clear Given

  For those watching Janet Yellen's speech this evening, the fact that she seemed to struggle towards the end of her speech was a surprise. Now we know why…

  • **FED'S YELLEN GETTING MEDICAL ATTENTION AFTER SPEECH -REUTERS

  It is hardly surprising given that she now carries the weight of the world's economic and market strength on her shoulders.

  As MarketWatch's Greg Robb noted, Yellen faltered at end of her speech. Last page was agonizing. I don't think she felt well but she seemed better when she left the stage.

  Bloomberg reports, Federal Reserve Chair Janet Yellen is resuming her planned schedule after feeling unwell toward the end of a speech she was giving Thursday at the University of Massachusetts at Amherst, Fed spokeswoman Michelle Smith said in an e-mailed statement.

  “Chair Yellen felt dehydrated at the end of a long speech under bright lights,” Smith wrote. “As a precaution, she was seen by EMT staff on-site at U-Mass Amherst. She felt fine afterward and has continued with her schedule Thursday evening.”

  But as you can see below, she really did not look well at all…

  The initial reaction was a dive in stocks…

  

   

  Fed Chair Janet Yellen is receiving medical attention after her speech at UMass, Reuters reports, citing an unidentified University of Massachusetts official.

  And she's fine @zerohedge pic.twitter.com/0vSNipWQUh

  — JM (@capitulaton) September 24, 2015

  Then this…

  • *YELLEN IS DEPARTING SPEECH EVENT, RESUMING SCHEDULE: U. MASS
  • *YELLEN IS HEADING TO A SCHEDULED DINNER – U. MASS SPOKESMAN

  Some Twitterati suggested that perhaps she was just sick of her speech…

  *  *  *

  All-Clear given… Buy!

  • *UMASS MEDIC RICE HELPED ATTEND TO YELLEN AFTER SPEECH
  • *YELLEN DIDN’T GO TO HOSPITAL, RICE SAYS
  • *YELLEN IS FINE, UMASS MEDIC SHAUNA RICE SAYS

  

  

  

  

  

  

• Forget The New World Order, Here's Who Really Runs The World

  Submitted by Jake Anderson via TheAntiMedia.org,

  For decades, extreme ideologies on both the left and the right have clashed over the conspiratorial concept of a shadowy secret government pulling the strings on the world’s heads of state and captains of industry.

  The phrase New World Order is largely derided as a sophomoric conspiracy theory entertained by minds that lack the sophistication necessary to understand the nuances of geopolitics. But it turns out the core idea — one of deep and overarching collusion between Wall Street and government with a globalist agenda — is operational in what a number of insiders call the “Deep State.”

  In the past couple of years, the term has gained traction across a wide swath of ideologies. Former Republican congressional aide Mike Lofgren says it is the nexus of Wall Street and the national security state — a relationship where elected and unelected figures join forces to consolidate power and serve vested interests. Calling it “the big story of our time,” Lofgren says the deep state represents the failure of our visible constitutional government and the cross-fertilization of corporatism with the globalist war on terror.

  “It is a hybrid of national security and law enforcement agencies: the Department of Defense, the Department of State, the Department of Homeland Security, the Central Intelligence Agency and the Justice Department. I also include the Department of the Treasury because of its jurisdiction over financial flows, its enforcement of international sanctions and its organic symbiosis with Wall Street,” he explained.

  Even parts of the judiciary, namely the Foreign Intelligence Surveillance Court, belong to the deep state.

  How does the deep state operate?

   A complex web of revolving doors between the military-industrial-complex, Wall Street,  and Silicon Valley consolidates the interests of defense contracts, banksters, military actions, and both foreign and domestic surveillance intelligence.

  According to Mike Lofgren and many other insiders, this is not a conspiracy theory. The deep state hides in plain sight and goes far beyond the military-industrial complex President Dwight D. Eisenhower warned about in his farewell speech over fifty years ago.

   

  While most citizens are at least passively aware of the surveillance state and collusion between the government and the corporate heads of Wall Street, few people are aware of how much the intelligence functions of the government have been outsourced to privatized groups that are not subject to oversight or accountability. According to Lofgren, 70% of our intelligence budget goes to contractors.

  Moreover, while Wall Street and the federal government suck money out of the economy, relegating tens of millions of people to food stamps and incarcerating more people than China — a totalitarian state with four times more people than us — the deep state has, since 9/11, built the equivalent of three Pentagons, a bloated state apparatus that keeps defense contractors, intelligence contractors, and privatized non-accountable citizens marching in stride.

  After years of serving in Congress, Lofgren’s moment of truth regarding this matter came in 2001. He observed the government appropriating an enormous amount of money that was ostensibly meant to go to Afghanistan but instead went to the Persian Gulf region. This, he says, “disenchanted” him from the groupthink, which, he says, keeps all of Washington’s minions in lockstep.

  Groupthink — an unconscious assimilation of the views of your superiors and peers — also works to keep Silicon Valley funneling technology and information into the federal surveillance state. Lofgren believes the NSA and CIA could not do what they do without Silicon Valley. It has developed a de facto partnership with NSA surveillance activities, as facilitated by a FISA court order.

  Now, Lofgren notes, these CEOs want to complain about foreign market share and the damage this collusion has wrought on both the domestic and international reputation of their brands. Under the pretense of pseudo-libertarianism, they helmed a commercial tech sector that is every bit as intrusive as the NSA. Meanwhile, rigging of the DMCA intellectual property laws — so that the government can imprison and fine citizens who jailbreak devices — behooves Wall Street. It’s no surprise that the government has upheld the draconian legislation for the 15 years.

  It is also unsurprising that the growth of the corporatocracy aids the deep state. The revolving door between government and Wall Street money allows top firms to offer premium jobs to senior government officials and military yes-men. This, says Philip Giraldi, a former counter-terrorism specialist and military intelligence officer for the CIA, explains how the Clintons left the White House nearly broke but soon amassed $100 million. It also explains how former general and CIA Director David Petraeus, who has no experience in finance, became a partner at the KKR private equity firm, and how former Acting CIA Director Michael Morell became Senior Counselor at Beacon Global Strategies.

  Wall Street is the ultimate foundation for the deep state because the incredible amount of money it generates can provide these cushy jobs to those in the government after they retire. Nepotism reigns supreme as the revolving door between Wall Street and government facilitates a great deal of our domestic strife:

  “Bank bailouts, tax breaks, and resistance to legislation that would regulate Wall Street, political donors, and lobbyists. The senior government officials, ex-generals, and high level intelligence operatives who participate find themselves with multi-million dollar homes in which to spend their retirement years, cushioned by a tidy pile of investments,” said Giraldi.

  How did the deep state come to be?

  Some say it is the evolutionary hybrid offspring of the military-industrial complex while others say it came into being with the Federal Reserve Act, even before the First World War. At this time, Woodrow Wilson remarked,

  “We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men.”

  This quasi-secret cabal pulling the strings in Washington and much of America’s foreign policy is maintained by a corporatist ideology that thrives on deregulation, outsourcing, deindustrialization, and financialization. American exceptionalism, or the great “Washington Consensus,” yields perpetual war and economic imperialism abroad while consolidating the interests of the oligarchy here at home.

  Mike Lofgren says this government within a government operates off tax dollars but is not constrained by the constitution, nor are its machinations derailed by political shifts in the White House. In this world — where the deep state functions with impunity — it doesn’t matter who is president so long as he or she perpetuates the war on terror, which serves this interconnected web of corporate special interests and disingenuous geopolitical objectives.

  “As long as appropriations bills get passed on time, promotion lists get confirmed, black (i.e., secret) budgets get rubber stamped, special tax subsidies for certain corporations are approved without controversy, as long as too many awkward questions are not asked, the gears of the hybrid state will mesh noiselessly,” according to Mike Lofgren in an interview with Bill Moyers.

  Interestingly, according to Philip Giraldi, the ever-militaristic Turkey has its own deep state, which uses overt criminality to keep the money flowing. By comparison, the U.S. deep state relies on a symbiotic relationship between banksters, lobbyists, and defense contractors, a mutant hybrid that also owns the Fourth Estate and Washington think tanks.

  Is there hope for the future?

  Perhaps. At present, discord and unrest continues to build. Various groups, establishments, organizations, and portions of the populace from all corners of the political spectrum, including Silicon Valley, Occupy, the Tea Party, Anonymous, WikiLeaks, anarchists and libertarians from both the left and right, the Electronic Frontier Foundation, and whistleblowers like Edward Snowden and others are beginning to vigorously question and reject the labyrinth of power wielded by the deep state.

  Can these groups — can we, the people — overcome the divide and conquer tactics used to quell dissent? The future of freedom may depend on it.

  

  

  

  

  

• "Hawkish"-er Yellen & Japanese Deflation Spark Uncertainty Across AsiaPac

  The evening started on a high note when Janet Yellen's survival giving a speech warranted a 100 point rip in Dow futures (and USD strength). Then Japan stepped up with its first deflationary CPI print since April 2013 (which of course was met with stock-buying because moar QQE is overdue but that soon faded). EM FX is tumbling further (with Malaysia leading the charge). Chinese credit risk jumps tro a new 2 year high (as SHIBOR remains entirely manipulated flat) as China halts its 4-day devaluation with a tiny nudge stronger in the Yuan fix.

   

  In the words of Flash Gordon, "She's alive…" so BTFYDD because she seemed a tad more hawkish

  

   

  and USD strength…

  

   

  And then Japanese CPI data hit and showed Abenomics imploding as the country dips backinto deflation…

  

   

  Which sparked panic-buying in Japanese stocks (moar QQE?) only to give it al lback as China opened…

  

   

  EM FX not happy at the USD strength and Yellen hawkishness…

  • *RINGGIT HEADS FOR BIGGEST FOUR-DAY DROP SINCE 1998
  • *MALAYSIA'S KEY STOCK INDEX OPENS DOWN 0.6% AT 1,604.15
  • *SINGAPORE'S STRAITS TIMES INDEX FALLS 0.6% TO 2,829.68 AT OPEN
  • *SOUTH KOREA'S KOSPI INDEX FALLS 0.5%

  India is closed for a holiday.

  Asian FX is sliding once again….

  

   

  In China this worries us… It appears the new target for PBOC stability is funding rates (overnight SHIBOR) which has now been dead for 3 weeks amid massive liquidty adjustments, stocks swing, credit risk surges and CNY devaluations…

  

  That is a new 2 year high for Chinese default risk.

  Looks a lot like the tortured manipulation that happened in USDCNY before it imploded a month ago…

  

  Chinese stocks are modestly lower…

  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 0.4% TO 3,130.85
  • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 0.4% TO 3,272.67
  • *HONG KONG'S HANG SENG INDEX FALLS 0.1% IN PREMARKET

  As PBOC halts its 4-day devaluation (just)

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3785 AGAINST U.S. DOLLAR

  

   

  Charts: Bloomberg

  

  

  

  

  

• "Doomsday" Arctic Seed Vault Tapped For First Time In History As Syrian Civil War Threatens Biodiversity

  With Russian boots officially on the ground at Latakia and with rumors circulating that the PLA may arrive within weeks, Syria has officially replaced eastern Ukraine as the most likely theatre for the start of World War 3. 

  While we certainly hope that cooler heads will prevail, the determination on the part of Washington, Riyadh, and Doha to oust the Assad regime simply isn’t compatible with Tehran and Moscow’s efforts to preserve the existing global balance of power which means that something will ultimately have to give and if it becomes clear that Iran is set to benefit in any way from whatever the outcome ends up being, expect Benjamin Netanyahu to make another trip to The Kremlin, only next time, he won’t be so cordial. 

  For those who – much like a certain CIA “strategic asset” – are looking for signs that Syria’s four-year old, bloody civil war might mark the beginning of the apocalypse, look no further than the Svalbard Global Seed Vault which was tapped for first time in history in response to the uncertain future of Aleppo. Here’s Reuters:

  Syria’s civil war has prompted the first withdrawal of seeds from a “doomsday” vault built in an Arctic mountainside to safeguard global food supplies, officials said on Monday.

   

  The seeds, including samples of wheat, barley and grasses suited to dry regions, have been requested by researchers elsewhere in the Middle East to replace seeds in a gene bank near the Syrian city of Aleppo that has been damaged by the war.

   

  “Protecting the world’s biodiversity in this manner is precisely the purpose of the Svalbard Global Seed Vault,” said Brian Lainoff, a spokesman for the Crop Trust, which runs the underground storage on a Norwegian island 1,300 km (800 miles) from the North Pole.

   

  The vault, which opened on the Svalbard archipelago in 2008, is designed to protect crop seeds – such as beans, rice and wheat – against the worst cataclysms of nuclear war or disease.

   

  It has more than 860,000 samples, from almost all nations. Even if the power were to fail, the vault would stay frozen and sealed for at least 200 years.

   

  The Aleppo seed bank has kept partly functioning, including a cold storage, despite the conflict. But it was no longer able to maintain its role as a hub to grow seeds and distribute them to other nations, mainly in the Middle East.

  In other words, the violence in and around Aleppo now poses a threat to global food supplies by curtailing the production of seeds for drought-resistant crops.

  As far-fetched as that might sound on the surface, the threat is apparently real enough to have prompted the first withdrawal in history from a seed bank built into the side of a frozen mountain. Here’s more on the Svalbard “doomsday” vault from the official website:

  Worldwide, more than 1,700 genebanks hold collections of food crops for safekeeping, yet many of these are vulnerable, exposed not only to natural catastrophes and war, but also to avoidable disasters, such as lack of funding or poor management. Something as mundane as a poorly functioning freezer can ruin an entire collection. And the loss of a crop variety is as irreversible as the extinction of a dinosaur, animal or any form of life.

   

  Remote by any standards, Svalbard’s airport is in fact the northernmost point in the world to be serviced by scheduled flights – usually one a day. Its remoteness enhances the security of the facility, yet local infrastructure in the nearby small Norwegian settlement of Longyearbyen is excellent. The Vault is thus accessible, and seeds can easily be transported to and retrieved from Svalbard.

   

  The Seed Vault has the capacity to store 4.5 million varieties of crops. Each variety will contain on average 500 seeds, so a maximum of 2.5 billion seeds may be stored in the Vault.

   

  Currently, the Vault holds more than 860,000 samples, originating from almost every country in the world. Ranging from unique varieties of major African and Asian food staples such as maize, rice, wheat, cowpea, and sorghum to European and South American varieties of eggplant, lettuce, barley, and potato. In fact, the Vault already holds the most diverse collection of food crop seeds in the world.

   

  The focus of the Vault is to safeguard as much of the world’s unique crop genetic material as possible, while also avoiding unnecessary duplication. It will take some years to assemble because some genebanks need to multiply stocks of seed first, and other seeds need regenerating before they can be shipped to Svalbard.

   

  A temperature of -18ºC is required for optimal storage of the seeds, which are stored and sealed in custom made three-ply foil packages. The packages are sealed inside boxes and stored on shelves inside the vault. The low temperature and moisture levels inside the Vault ensure low metabolic activity, keeping the seeds viable for long periods of time.

  And here’s a look at the outside and inside of the repository that would be tapped in the event a cataclysm threatens global food supplies:

  

  

  

  

  

  

  

  

  

  

• America's "Lumbering" Economy

  While crude and copper have been christened the great economic forecasters of our time, the data shows that there is another, more highly correlated, commodity to the economic cycle. Lumber prices are the most correlated with ISM and GDP of all industrial commodities and that is a problem…

  First, Lumber prices have collapsed to 4 year lows. The 33% Year-over-year plunge is the biggest since the financial crisis and is flashing a big red recession alarm…

  

   

  Second, Lumber prices have historically led stocks and are pointing to significant downside from here…

  

   

  and finally, Third, it appears lumber's decline points to notable downside for manufacturing…

  

   

  But apart from that, everything is fine… Oh wait…

  

   

  Charts: Bloomberg and @Not_Jim_Cramer

  

  

  

  

  

• China Set To Deploy Nuclear Sub That Can Hit US Mainland Targets, Pentagon Says

  China has made two things absolutely clear this year: 1) if Beijing thinks you may be inclined to sell stocks into a falling market, the consequences for you could be dire, and 2) the PLA navy is quite serious about projecting China’s maritime ambitions to the rest of the world.

  Evidence of the latter point is readily observable in the South China Sea, where dredgers have been busy for months building man-made islands atop reefs in the Spratlys much to the chagrin of Washington and its regional allies.

  Then there was the PLA’s unexpected arrival in Yemen back in March when a naval frigate showed up in Aden and evacuated 225 foreign nationals.

  

  (Chinese soldiers in Yemen)

  And who can forget the five ships that cruised by just 12 miles off the coast of Alaska as Obama toured the state.

  As if all of that wasn’t enough, at least one commander in Bashar al-Assad’s Syrian Arab Army now claims Chinese personnel are on their way to Latakia. 

  All of this comes as Beijing rolls out a new maritime initiative as outlined in the government’s 2015 defense strategy white paper. Here’s an excerpt from the report:

  In line with the strategic requirement of offshore waters defense and open seas protection, the PLA Navy (PLAN) will gradually shift its focus from “offshore waters defense” to the combination of “offshore waters defense” with “open seas protection,” and build a combined, multi-functional and efficient marine combat force structure. The PLAN will enhance its capabilities for strategic deterrence and counterattack, maritime maneuvers, joint operations at sea, comprehensive defense and comprehensive support.

  Now, even as Xi Jinping makes the rounds in the US and attempts to provide the American public with some clarity on a number of issues not the least of which is cyber security, the Pentagon says China is set to deploy a nuclear submarine armed with JL-2 missiles that have the range to hit the US. Here’s Bloomberg with the story:

  A new Chinese nuclear submarine designed to carry missiles that can hit the U.S. will likely deploy before year’s end, the Pentagon said, adding to Obama administration concerns over China’s muscle-flexing in Asia.

   

  China’s navy is expected this year to conduct the first patrol of its Jin-class nuclear-powered submarine armed with JL-2 submarine-launched ballistic missiles, the Pentagon’s Defense Intelligence Agency said in a statement. It declined to give its level of confidence on when the new boat will be deployed or the status of the missile.

   

  “The capability to maintain continuous deterrent patrols is a big milestone for a nuclear power,” Larry Wortzel, a member of the congressionally created U.S.-China Economic and Security Review Commission, said in an e-mail. “I think the Chinese would announce this capability as a show of strength and for prestige.”

   

  Wortzel said his commission’s 2015 report probably will include a comment from PLA Navy Commander Admiral Wu Shengli, who said the submarine-missile combination is “a trump card that makes our motherland proud and our adversaries terrified.”

   

  China’s increased naval might, as well as its assertion to territory in the contested South China Sea and East China Sea, has helped spur the region’s largest military buildup in decades and caused disquiet in the U.S. about its role as the region’s peace keeper.

   

  China currently has at least four Jin-class submarines. Fifty-one years after the country carried out its first nuclear test, patrols by the new submarines will give Xi greater agility to respond to a nuclear attack, according to analysts.

   

  “Of all the PLA strategic deterrence capabilities, the sea-based link is the most closely guarded secret because it is meant to be the most secure of the deterrents for China,” said Koh, who studies China’s naval modernization. 

   

  The JL-2 “has nearly three times the range” of China’s current sea-launched ballistic missile “which was only able to range targets in the immediate vicinity of China,” the U.S. Office of Naval Intelligence said in an April report on China’s Navy. The JL-2 “underwent successful testing in 2012 and is likely ready to enter the force,” it said. “Once deployed it will provide China with a capability to strike targets” in the continental U.S., it said.

  For those curious, here is the JL-2 in action:

  And here’s a bit more color from the Pentagon’s annual report to Congress:

  The PLA Navy places a high priority on the modernization of its submarine force. China continues the production of JIN-class nuclear-powered ballistic missile submarines (SSBNs). Three JIN-class SSBNs (Type 094) are currently operational, and up to five may enter service before China proceeds to its next generation SSBN (Type 096) over the next decade. The JIN-class SSBN will carry the new JL-2 submarine-launched ballistic missile (SLBM) with an estimated range of 7,400 km. The JIN-class and the JL-2 will give the PLA Navy its first credible sea-based nuclear deterrent. China is likely to conduct its first nuclear deterrence patrols with the JIN-class SSBN in 2014.

  Ultimately, the deployment was planned and as indicated above, this doesn’t exactly come as a surprise to anyone in military circles, but what it does do is underscore the idea that the return to bipolarity is more likely to see China as the counterbalance to US hegemony than it is to see a resurrgent Russia retake its place as US spoiler par excellence. Of course Beijing and Moscow seem generally to be on the same page as evidenced by their security council veto coordination on Syria which means that between the two, the balance of power could move against the US especially if Washington’s warnings about the UK’s declining military capabilities prove accurate.

  *  *  *

  Full report on PLA navy from US Office of Naval Intelligence

  2015 Pla Navy Pub Print

  

  

  

  

  

• Half Of Americans Think "Government Is An Immediate Threat To Liberty"

  Submitted by Mac Slavo via SHTFPlan.com,

  Government poses a threat to liberty, that much is clear.

  But what may be surprising is that almost half of Americans clearly identified government as a clear and “immediate” threat, and are obviously outraged about what is going on.

  Oddly, the number of angry Americans has remained consistent in poll number ever since about 2006 during George W. Bush’s second term, maintaining around 46-49% throughout Barack Obama’s entire presidency.

  And yet, things continue to get worse and worse with each political cycle, and each new president.

  Gallup reported that:

  Almost half of Americans, 49%, say the federal government poses “an immediate threat to the rights and freedoms of ordinary citizens,” similar to what was found in previous surveys conducted over the last five years.

   

  The remarkable finding about these attitudes is how much they reflect apparent antipathy toward the party controlling the White House, rather than being a purely fundamental or fixed philosophical attitude about government.

   

  […] during the Republican administration of George W. Bush, Democrats and Democratic-leaning independents were consistently more likely than Republicans and Republican-leaning independents to say the federal government posed an immediate threat.

   

  […] during the Democratic Obama administration, the partisan gap flipped, with Republicans significantly more likely to agree.

   

  […]

   

  Still, the persistent finding in recent years that half of the population views the government as an immediate threat underscores the degree to which the role and power of government remains a key issue of our time… numerous other measures show that the people give their government some of the lowest approval and trust ratings in the measures’ history.

  So why does the situation between the people and government continue to deteriorate?

  The complaints about government’s abuse of powers reaches across the isle, and straddles both parties in the White House, yet people tend to direct their anger only at the current president – thus falling for the ruse of blaming the puppet, and not the system.

  As Americans shift blame about the state of affairs back-and-forth with every election, most miss the point about why these things are happening – someone is writing reports and creating policies that allow these things to happen. All the Congress and President do is approve them, and deflect attention towards who is running the show.

  What are Americans upset about, according to polls?:

  Overall, Americans who agree that the government is an immediate threat tend to respond with very general complaints echoing the theme that the federal government is too big and too powerful, and that it has too many laws. They also cite nonspecific allegations that the government violates freedoms and civil liberties, and that there is too much government in people’s private lives.

   

  [also…]

   

  perceptions that the government is “socialist,” that the government spends too much, that it picks winners and losers such as the wealthy or racial and ethnic minorities, that it is too involved in things it shouldn’t be and that it violates the separation of powers.

   

  [as well as…]

   

  freedom of speech, freedom of religion, the overuse of police and law enforcement, government surveillance of private citizens including emails and phone records, government involvement in gay marriage issues, overregulation of business, overtaxing, the healthcare law and immigration.

  The vast majority of these issues happen under the mis-leadership of both parties, progressing without fail through the years.

  It is time that Americans embrace their anger at government, and focus their attention past the politicians to the real problem.

  Start with the bankers, follow the money, and see where it goes…

  

  

  

  

  

• Presenting The "QE Infinity Paradox", Or "The Emperor Is Naked, Long Live The Emperor"

  Perhaps the most important thing to understand about what was widely billed as the most important FOMC decision in recent history, is that by “removing the fourth wall” (to quote Deutsche Bank), the Fed effectively reinforced the reflexive relationship between its decisions, economic outcomes, and financial market conditions.

  In simpler terms, differentiating between cause and effect is now more difficult than ever as Fed policy affects markets which in turn affect Fed policy and so on. 

  This sets the stage for any number of absurdly self-referential outcomes.

  For instance, the Fed needs to remain on hold to guard against the possibility that a soaring dollar triggers an EM meltdown that would then feed back into developed markets, forcing the FOMC to reverse itself. But delaying liftoff sends a downbeat message about the state of the US economy which triggers the selling of domestic risk assets. Hiking would solve this as it would signal the Fed’s confidence in the outlook for the US economy, but that would be USD-positive which is bad news for EM. 

  A similarly absurd circular dilemma presents itself if we take the view that the Fed missed its window to hike and is now creating more nervousness and uncertainty with each meeting that passes without liftoff. Here’s how former Treasury economist Bryan Carter put it to Bloomberg: “short-end rates move higher as the Fed gets closer to hiking, and that causes the dollar to strengthen, and that causes global funding stresses. They are creating the conditions that are causing the external environment to be weak, and then they say they can’t hike because of those same conditions that they have created.”

  When you tie the reflexivity problem in with the fact that the excessive use of counter-cyclical policy is leading to the creation of ever larger asset bubbles by effectively short circuiting the market’s natural ability to purge speculative excess and correct the misallocation of capital, what you get is a never-ending loop whereby the consequences of unconventional monetary policy serve as the excuse for doubling and tripling down on those same policies. 

  It’s with all of the above in mind that we present the following flow chart from RBS’ Alberto Gallo who illustrates the “QE infinity paradox”:

  

  

  

  

  

  

• Uncomfortably Revisiting Yellen's Bubble Doctrine

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  There is growing turmoil in buybacks that threatens the very fabric of the stock bubble. That was always the primary transmission of the foundation of its current manifestation, corporate debt, into asset prices; especially the huge run following QE3 and QE4. As represented by the S&P 500 Buyback Index, this liquidity propensity has found a durable reverse. After peaking all the way back in late February, the index is now more than 12% below that level after sustaining the August 24 liquidation.

  

  The fact that this reversal is seven months in the making more than suggests a potential major shift. As the NYSE Composite, stocks were not long for continued momentum against the “dollar.” Buybacks seemed to have weathered the first piece of the first “dollar” wave, but as junk debt there was always conjoined a limit.

  Some say expectations around the Federal Reserve have a lot to do with the buyback decline. Even though the central bank elected to keep its benchmark rate near zero Thursday, fears of higher rates are causing companies to rethink their capital return program, posits Boris Schlossberg of BK Asset Management.

   

  “Even though rates have not gone up, we clearly are in a tightening position in terms of monetary policy, and I think they’re looking ahead and saying, ‘Do I really want to finance this thing with no-longer-cheap money that we used to have a couple months ago?'” Schlossberg said Tuesday in a ” Trading Nation ” segment.

  I have little doubt that the causation effect claimed above is slightly misplaced, as “monetary tightening” isn’t the Fed so much as the eurodollar standard; that is just one mainstream method of trying to reconcile what is now seen with the financial plumbing remained misunderstood and largely hidden. As with the junk bond bubble, there is undoubtedly a correlation between re-assessing stock repurchases and the bald reductions of issuance in corporate credit. That hasn’t changed throughout this year, instead having gained further in this second “dollar” wave. Yet again, we see the “dollar” intrude in unwelcome fashion (to the bubbles).

  

  The problem once momentum fades is that investor attention turns toward valuations that were repeatedly ignored before. As long as everything is moving upward and any fundamental downside is completely contained (in perception) as “transitory” then valuations are easily set aside as one form of rationalization. The effect of reversing momentum is for a more honest measurement; particularly by force of change in economic sentiment which is almost always concurrent.

  To that end, valuations remain as they have been for the past several years. Stock prices are out of alignment with any historical trend (except the one weakly conjured by Bernanke to attempt self-justification, which instead actually furthered the score against him). Worse, some forms of valuation are subject the same kind of statistical subjectivity that has plagued main accounts like GDP and the Establishment Survey (trend-cycle).

  In the Tobin’s Q measure of valuation for the stock bubble, the basis (denominator) is Nonfinancial Corporate Net Worth. Revisions in this segment of the Financial Accounts of the United States (formerly Flow of Funds) have followed the pattern of revisions in GDP; upward until the last benchmark which reduced 2012 and 2013 figures while preserving the levels for 2014 and 2015. That had the effect, on GDP, of reducing growth rates in the first period while thus increasing them in the second. Corporate net worth is somewhat derived from that economic view, and its revised results are somewhat reflective of that.

  

  The numerator for Tobin’s Q is corporate equities (the classification now changed with this Q2 update from equity liabilities to market value of corporate equities) which somehow are continually revised downward. The net result is a vision of Tobin’s Q that is less outlier (but still historically high).

  

  Even with these revisions and the decline in valuation intensity, the current calculated Tobin’s Q for Q2 2015 remains at the 90th percentile. The level for my modified Q ratio (which subtracts the market value of real estate from net worth, so as to not “justify” one bubble with another) remains above the 92nd percentile.

  

  Robert Shiller’s CAPE’s current reading, also down from 2014, of 24.3 is also just about the 90th percentile but in a data series that goes back almost a century and a half. And if we exclude the obvious bubble period after 1995, 24.3 would have been in the 99th percentile for the period 1871-1995 (which shows you just how much the past two decades have skewed and screwed valuations).

  

  That truly becomes a serious consideration where the eurodollar, the mother and proginator of all these bubbles, is no longer the assumed basis. In other words, if “investors” have been expecting “dollar” liquidity and eurodollar financial resources as a root for maintaining valuations and that turns out as a false assumption (like 2008) what becomes the true underlying value for stocks? Certainly not something close to the 90th percentile.

  *  *  *

  Without direct momentum, valuation and fundamentals begin to govern which is why, I believe, QE3 pushed the market as much as it did; it promised to provide both with a direct attachment to the corporate bubble to project that perfection. The lack of momentum in 2015 is the stock “market” waking up to the falsification of those assumptions as QE aided the debt-based flow but little else (and that spans the globe). Again, extreme valuations are trouble at any time, even when they are “justified” by economic expectations. That is the Yellen Doctrine whereby a bubble isn’t a problem when it leads to or even just leads recovery and booming growth.

  That theory is, of course, as absurd as it sounds. The problem right now is that even if you buy into it, as so many did literally as well as rationalizing, the booming growth is still, at some point, necessary. That may be why the FOMC is so insistent upon “strong” no matter how much that is demonstrably assaulted. We are clearly at that point where it does not want to remain; if the growth doesn’t show up soon, then by this very count stocks are in a bubble and worse, already on the downslope. It is the raw force of the “dollar” in all forms, to rebuke Yellen by compelling sanity of asset bubbles, stripped of further financial inequality, making investors come to terms with reality rather than continued fantasy.

  

  

  

  

  

• The One Phrase That Actually Matters In Yellen's Speech: "Nominal Interest Rates Cannot Go Much Below Zero"

  While many are focusing on the latest attempt by Yellen to restore some Fed confidence, even if it means confusing the market even more and sound far more hawkish than last week’s FOMC statement, which showed once and for all that the mandate of the Fed is the stock market and global risk pricing stability, and is written by Goldman Sachs, with an emphasis on the circular assumption that inflation is under control because, well, it is under control…

  Wow – Yellen Speech Word Cloud pic.twitter.com/Dxl2SkMWtC

  — Not Jim Cramer (@Not_Jim_Cramer) September 24, 2015

  … which naturally is something to be expected from a speech titled “Inflation Dynamics”, the one phrase in the quite massive speech of 5531 words, had nothing to do with inflation, and everything to do with the Fed’s deflation “reaction function”, i.e., NIRP.

  This is what Yellen said in her speech dissecting the theory, if not practice, of inflation:

  …the federal funds rate and other nominal interest rates cannot go much below zero, since holding cash is always an alternative to investing in securities.

  So just a “little” then? Which is what exactly: -0.25%? -1.0%? -2.5%? Or, as Albert Edwards suggested earlier today: -5%? Yellen explains:

  … the lowest the FOMC can feasibly push the real federal funds rate is essentially the negative value of the inflation rate. As a result, the Federal Reserve has less room to ease monetary policy when inflation is very low.

  Well, no: not less room – more room: negative room! What is the most negative inflation, pardon deflation, can get? Very:

  This limitation is a potentially serious problem because severe downturns such as the Great Recession may require pushing real interest rates far below zero for an extended period to restore full employment at a satisfactory pace.

  Just in case it was lost, here it is again, from footnote 9:

  Because of the inconvenience of storing and protecting very large quantities of currency, some firms are willing to pay a premium to hold short-term government securities or bank deposits instead. As a result, several foreign central banks have found it possible to push nominal short-term interest rates somewhat below zero

  And there you have it: while Yellen is desperate to regain some of the Fed’s lost credibility with the September rate indecision, what she is really doing is reciting Bernanke’s Nov 2002 speech: “Deflation: Making Sure “It” Doesn’t Happen Here.” Only, the US already has deflation. Which is why it is better to call Yellen’s version: “Depression: Making Sure “It” Doesn’t Happen Here” and just like Bernanke’s 2002 speech hinted at LSAP, aka QE, so Yellen’s speech, academic in its discussion of theoretical inflation, is really a warning that the Fed is now actively considering negative rates as its primary “reaction function.”

  After all, it’s not like Kocherlakota would come up with negative dots out of the blue.

  * * *

  As for the big picture from Yellen’s speech, Pedro said it best:

  The Fed seems to be losing confidence in its own confidence.

  — Pedro da Costa (@pdacosta) September 24, 2015

  

  

  

  

  

• All The Gold In The World

  For the companies exploring for gold, a deposit that has more than one gram of gold for every tonne of earth is an exciting prospect. In fact, in our 2013 report summarizing the world’s gold deposits, we found that the average grade of gold deposits in the world is around that amount: about 1.01 g/t.

  Think about that for a moment. One gram (0.035 oz) is equal to the mass of a small paper clip. This small amount of gold is usually not even in one place – it is dispersed through a tonne of rock and dirt in smaller amounts, most of the time invisible to the naked eye. For some companies that have the stars align with easy metallurgy, a deposit near surface, and open pit potential, this gram per tonne deposit may even somehow be economic.

  It’s hard to believe that such a small amount of gold could be worth so much, and that is why great visualizations can help us understand the rarity of this yellow metal. Luckily, the folks at Demonocracy.info have done the heavy lifting for us, putting together a series of 3D visualizations of gold bullion bars showcasing the world’s gold that has been mined thus far. Note: these visualizations are a couple of years old and optimistically have the value of gold pegged at US$2,000 per oz, presumably for the ease of calculations.

  For those interested, we have also put together a similar slideshow on the topic, showing how much gold, silver, copper, and other metals are mined each year.

  
  Smaller denominations of gold plates: 1 gram, 5 grams, 10 grams, 20 grams, and 1 troy oz of gold.

  
  Larger denominations of gold plates: 50 grams, 100 grams, 250 grams, 500 grams, and 1 kg of gold.

  
  This 400 oz gold bar, at $2,000 per oz gold, is worth the $800,000 cash beside it. The gold bar is extremely heavy, weighing more than three full milk jugs.

  
  Here’s what one tonne of gold looks like. At $2,000 per oz, it’s worth $64.3 million.

  
  Gold is so heavy that the suspension of an average truck would break if it held anymore than pictured above. Even if the truck’s suspension broke, the load of gold in the back could buy 2,660 brand new trucks at an MSRP of $40,000 per truck.

  
  Here’s 10 tonnes of gold compared to 100 tonnes of the yellow metal.

  
  This semi-truck is carrying the maximum load it can legally carry, which is about about 25 tonnes. Here there are 24.88 tonnes of gold, worth $1.6 billion.

  
  The Northrop Grumman B2 Spirit Bomber program cost $44.75 Billion for a total of 21 units built, which averages to $2,130,952,380 per unit. Shown here is the amount of gold it costs to buy one unit.

  
  Here’s the entire gold reserves of the United States government, which is 8,133.5 tonnes.

  
  Here’s the world’s gold reserves by government circa 2012. This is slightly outdated, with China and Russia both having significant increases since then.

  
  All gold mined in history, stacked in 400 oz bars. The 166,500 tonnes here is actually divided into four levels: the bottom level is jewelry (50.5% of all gold), the 2nd level is private investment (18.7%), the third level is world governments (17.4%), and the highest level is other uses for gold such as industry (13.4%).

  
  Lastly, we finish off with an image of all of the world’s mined gold in one cube with dimensions of 20.5m. If it was all melted, it would fit within the confines of an Olympic Swimming Pool.

  Source: Visual Capitalist

  *  *  *

  Want to learn everything you need to know about gold in about 20 minutes? Our five-part Gold Series covers everything from its rich history, supply and geology, demand drivers, investment properties, and market trends.

  

  

  

  

• Cleaner Than A Volkswagen

  

  

  Meme Created using FinanceLOL

  

  

  

  

• Yellen "Do-Over" Speech – Live Feed

  Highlights

  • YELLEN:STILL SLACK BUT LABOR MARKET MADE CONSIDERABLE PROGRESS
  • YELLEN:RISK INFL EXPCTS GET UNMOORED TO DWNSIDE, WARRANTS EASE
  • YELLEN: BELOW 2% INFL LIKELY DUE TO TRANSITORY FACTORS
  • YELLEN SAYS MOST ON FOMC `INCLUDING MYSELF’ EXPECT 2015 LIFTOFF
  • YELLEN SAYS FOMC VIEWS MAY CHANGE IF ECONOMY `SURPRISES US’
  • YELLEN SAYS ECONOMY ‘NOT FAR AWAY FROM FULL EMPLOYMENT’

  Preview

  When risk sold off last week in the wake of the Fed’s so-called “clean relent,” it signalled at best a policy mistake and at worst the loss of any and all credibility. To be sure, the FOMC was facing a number of Catch-22s. That is, there probably was no “right” answer per se, but because the Fed put itself in that position by not hiking when it had the chance, the fact that they were up against a lose-lose scenario got them no sympathy. 

  

  Tonight, Yellen will get what some are billing as a kind of “do over” opportunity when she delivers a speech (written by Jan Hatzius?) in Amherst, Massachusetts, on “Inflation Dynamics and Monetary Policy. A note to the Fed: the only thing you need to know about “inflation dynamics” is that trillions in global QE hasn’t worked to boost inflation expectations.

  The market will of course hang on every word in an effort to discern how likely liftoff is to occur before the end of the year.

  *YELLEN: SEES INITIAL INCREASE IN FED FUNDS RATE LATER THIS YR

  And Market says “no”!

  

   

  As it appears The Market is indeed ‘macro-data-dependent’ even if The Fed isn’t…

  

  *  *  *

  Full Text

  In my remarks today, I will discuss inflation and its role in the Federal Reserve’s conduct of monetary policy. I will begin by reviewing the history of inflation in the United States since the 1960s, highlighting two key points: that inflation is now much more stable than it used to be, and that it is currently running at a very low level. I will then consider the costs associated with inflation, and why these costs suggest that the Federal Reserve should try to keep inflation close to 2 percent. After briefly reviewing our policy actions since the financial crisis, I will discuss the dynamics of inflation and their implications for the outlook and monetary policy.

  Historical Review of Inflation

   

  A crucial responsibility of any central bank is to control inflation, the average rate of increase in the prices of a broad group of goods and services. Keeping inflation stable at a moderately low level is important because, for reasons I will discuss, inflation that is high, excessively low, or unstable imposes significant costs on households and businesses. As a result, inflation control is one half of the dual mandate that Congress has laid down for the Federal Reserve, which is to pursue maximum employment and stable prices.

   

  The Federal Reserve has not always been successful in fulfilling the price stability element of its mandate. The dashed red line in figure 1 plots the four-quarter percent change in the price index for personal consumption expenditures (PCE)–the measure of inflation that the Fed’s policymaking body, the Federal Open Market Committee, or FOMC, uses to define its longer-run inflation goal.1 Starting in the mid-1960s, inflation began to move higher. Large jumps in food and energy prices played a role in this upward move, but they were not the whole story, for, as illustrated here, inflation was already moving up before the food and energy shocks hit in the 1970s and the early 1980s.2 And if we look at core inflation, the solid black line, which excludes food and energy prices, we see that it too starts to move higher in the mid-1960s and rises to very elevated levels during the 1970s, which strongly suggests that something more than the energy and food price shocks must have been at work.

   

  A second important feature of inflation over this period can be seen if we examine an estimate of its long-term trend, which is plotted as the dotted black line in figure 1. At each point in time, this trend is defined as the prediction from a statistical model of the level to which inflation is projected to return in the long run once the effects of any shocks to the economy have fully played out.3 As can be seen from the figure, this estimated trend drifts higher over the 1960s and 1970s, implying that during this period there was no stable “anchor” to which inflation could be expected to eventually return–a conclusion generally supported by other procedures for estimating trend inflation.

   

  Today many economists believe that these features of inflation in the late 1960s and 1970s–its high level and lack of a stable anchor–reflected a combination of factors, including chronically overheated labor and product markets, the effects of the energy and food price shocks, and the emergence of an “inflationary psychology” whereby a rise in actual inflation led people to revise up their expectations for future inflation. Together, these various factors caused inflation–actual and expected–to ratchet higher over time. Ultimately, however, monetary policy bears responsibility for the broad contour of what happened to actual and expected inflation during this period because the Federal Reserve was insufficiently focused on returning inflation to a predictable, low level following the shocks to food and energy prices and other disturbances.

   

  In late 1979, the Federal Reserve began significantly tightening monetary policy to reduce inflation. In response to this tightening, which precipitated a severe economic downturn in the early 1980s, overall inflation moved persistently lower, averaging less than 4 percent from 1983 to 1990. Inflation came down further following the 1990-91 recession and subsequent slow recovery and then averaged about 2 percent for many years. Since the recession ended in 2009, however, the United States has experienced inflation running appreciably below the FOMC’s 2 percent objective, in part reflecting the gradual pace of the subsequent economic recovery.

   

  Examining the behavior of inflation’s estimated long-term trend reveals another important change in inflation dynamics. With the caveat that these results are based on a specific implementation of a particular statistical model, they imply that since the mid-1990s there have been no persistent movements in this predicted long-run inflation rate, which has remained very close to 2 percent. Remarkably, this stability is estimated to have continued during and after the recent severe recession, which saw the unemployment rate rise to levels comparable to those seen during the 1981-82 downturn, when the trend did shift down markedly.4 As I will discuss, the stability of this trend appears linked to a change in the behavior of long-run inflation expectations–measures of which appear to be much better anchored today than in the past, likely reflecting an improvement in the conduct of monetary policy. In any event, this empirical analysis implies that, over the past 20 years, inflation has been much more predictable over the longer term than it was back in the 1970s because the trend rate to which inflation was predicted to return no longer moved around appreciably. That said, inflation still varied considerably from year to year in response to various shocks.

   

  As figure 2 highlights, the United States has experienced very low inflation on average since the financial crisis, in part reflecting persistent economic weakness that has proven difficult to fully counter with monetary policy. Overall inflation (shown as the dashed red line) has averaged only about 1-1/2 percent per year since 2008 and is currently close to zero. This result is not merely a product of falling energy prices, as core inflation (the solid black line) has also been low on average over this period.

   

  Inflation Costs

  In 2012 the FOMC adopted, for the first time, an explicit longer-run inflation objective of 2 percent as measured by the PCE price index.5 (Other central banks, including the European Central Bank and the Bank of England, also have a 2 percent inflation target.) This decision reflected the FOMC’s judgment that inflation that persistently deviates–up or down–from a fixed low level can be costly in a number of ways. Persistent high inflation induces households and firms to spend time and effort trying to minimize their cash holdings and forces businesses to adjust prices more frequently than would otherwise be necessary. More importantly, high inflation also tends to raise the after-tax cost of capital, thereby discouraging business investment. These adverse effects occur because capital depreciation allowances and other aspects of our tax system are only partially indexed for inflation.6 

   

  Persistently high inflation, if unanticipated, can be especially costly for households that rely on pensions, annuities, and long-term bonds to provide a significant portion of their retirement income. Because the income provided by these assets is typically fixed in nominal terms, its real purchasing power may decline surprisingly quickly if inflation turns out to be consistently higher than originally anticipated, with potentially serious consequences for retirees’ standard of living as they age.7 

   

  An unexpected rise in inflation also tends to reduce the real purchasing power of labor income for a time because nominal wages and salaries are generally slow to adjust to movements in the overall level of prices. Survey data suggest that this effect is probably the number one reason why people dislike inflation so much.8 In the longer run, however, real wages–that is, wages adjusted for inflation–appear to be largely independent of the average rate of inflation and instead are primarily determined by productivity, global competition, and other nonmonetary factors. In support of this view, figure 3 shows that nominal wage growth tends to broadly track price inflation over long periods of time.

   

  Inflation that is persistently very low can also be costly, and it is such costs that have been particularly relevant to monetary policymakers in recent years. The most important cost is that very low inflation constrains a central bank’s ability to combat recessions. Normally, the FOMC fights economic downturns by reducing the nominal federal funds rate, the rate charged by banks to lend to each other overnight. These reductions, current and expected, stimulate spending and hiring by lowering longer-term real interest rates–that is, nominal rates adjusted for inflation–and improving financial conditions more broadly. But the federal funds rate and other nominal interest rates cannot go much below zero, since holding cash is always an alternative to investing in securities.9 Thus, the lowest the FOMC can feasibly push the real federal funds rate is essentially the negative value of the inflation rate. As a result, the Federal Reserve has less room to ease monetary policy when inflation is very low. This limitation is a potentially serious problem because severe downturns such as the Great Recession may require pushing real interest rates far below zero for an extended period to restore full employment at a satisfactory pace.10 For this reason, pursuing too low an inflation objective or otherwise tolerating persistently very low inflation would be inconsistent with the other leg of the FOMC’s mandate, to promote maximum employment.11 

   

  An unexpected decline in inflation that is sizable and persistent can also be costly because it increases the debt burdens of borrowers. Consider homeowners who take out a conventional fixed-rate mortgage, with the expectation that inflation will remain close to 2 percent and their nominal incomes will rise about 4 percent per year. If the economy were instead to experience chronic mild deflation accompanied by flat or declining nominal incomes, then after a few years the homeowners might find it noticeably more difficult to cover their monthly mortgage payments than they had originally anticipated. Moreover, if house prices fall in line with consumer prices rather than rising as expected, then the equity in their home will be lower than they had anticipated. This situation, which is sometimes referred to as “debt deflation,” would also confront all households with outstanding student loans, auto loans, or credit card debt, as well as businesses that had taken out bank loans or issued bonds.12 Of course, in this situation, lenders would be receiving more real income. But the net effect on the economy is likely to be negative, in large part because borrowers typically have only a limited ability to absorb losses. And if the increased debt-service burdens and declines in collateral values are severe enough to force borrowers into bankruptcy, then the resultant hardship imposed on families, small business owners, and laid-off workers may be very severe.13 

   

  Monetary Policy Actions since the Financial Crisis

  As I noted earlier, after weighing the costs associated with various rates of inflation, the FOMC decided that 2 percent inflation is an appropriate operational definition of its longer-run price objective.14 In the wake of the 2008 financial crisis, however, achieving both this objective and full employment (the other leg of the Federal Reserve’s dual mandate) has been difficult, as shown in figure 4. Initially, the unemployment rate (the solid black line) soared and inflation (the dashed red line) fell sharply. Moreover, after the recession officially ended in 2009, the subsequent recovery was significantly slowed by a variety of persistent headwinds, including households with underwater mortgages and high debt burdens, reduced access to credit for many potential borrowers, constrained spending by state and local governments, and weakened foreign growth prospects. In an effort to return employment and inflation to levels consistent with the Federal Reserve’s dual mandate, the FOMC took a variety of unprecedented actions to help lower longer-term interest rates, including reducing the federal funds rate (the dotted black line) to near zero, communicating to the public that short-term interest rates would likely stay exceptionally low for some time, and buying large quantities of longer-term Treasury debt and agency-issued mortgage-backed securities.15 

   

  These actions contributed to highly accommodative financial conditions, thereby helping to bring about a considerable improvement in labor market conditions over time. The unemployment rate, which peaked at 10 percent in 2009, is now 5.1 percent, slightly above the median of FOMC participants’ current estimates of its longer-run normal level. Although other indicators suggest that the unemployment rate currently understates how much slack remains in the labor market, on balance the economy is no longer far away from full employment. In contrast, inflation has continued to run below the Committee’s objective over the past several years, and over the past 12 months it has been essentially zero. Nevertheless, the Committee expects that inflation will gradually return to 2 percent over the next two or three years. I will now turn to the determinants of inflation and the factors that underlie this expectation.

   

  Inflation Dynamics

  Models used to describe and predict inflation commonly distinguish between changes in food and energy prices–which enter into total inflation–and movements in the prices of other goods and services–that is, core inflation. This decomposition is useful because food and energy prices can be extremely volatile, with fluctuations that often depend on factors that are beyond the influence of monetary policy, such as technological or political developments (in the case of energy prices) or weather or disease (in the case of food prices). As a result, core inflation usually provides a better indicator than total inflation of where total inflation is headed in the medium term.16 Of course, food and energy account for a significant portion of household budgets, so the Federal Reserve’s inflation objective is defined in terms of the overall change in consumer prices.

   

  What, then, determines core inflation? Recalling figure 1, core inflation tends to fluctuate around a longer-term trend that now is essentially stable. Let me first focus on these fluctuations before turning to the trend. Economic theory suggests, and empirical analysis confirms, that such deviations of inflation from trend depend partly on the intensity of resource utilization in the economy–as approximated, for example, by the gap between the actual unemployment rate and its so-called natural rate, or by the shortfall of actual gross domestic product (GDP) from potential output. This relationship–which likely reflects, among other things, a tendency for firms’ costs to rise as utilization rates increase–represents an important channel through which monetary policy influences inflation over the medium term, although in practice the influence is modest and gradual. Movements in certain types of input costs, particularly changes in the price of imported goods, also can cause core inflation to deviate noticeably from its trend, sometimes by a marked amount from year to year.17 Finally, a nontrivial fraction of the quarter-to-quarter, and even the year-to-year, variability of inflation is attributable to idiosyncratic and often unpredictable shocks.18 

   

  What about the determinants of inflation’s longer-term trend? Here, it is instructive to compare the purely statistical estimate of the trend rate of future inflation shown earlier in figure 1 with survey measures of people’s actual expectations of long-run inflation, as is done in figure 5. Theory suggests that inflation expectations–which presumably are linked to the central bank’s inflation goal–should play an important role in actual price setting.19 Indeed, the contours of these series are strikingly similar, which suggests that the estimated trend in inflation is in fact related to households’ and firms’ long-run inflation expectations.20 

   

  To summarize, this analysis suggests that economic slack, changes in imported goods prices, and idiosyncratic shocks all cause core inflation to deviate from a longer-term trend that is ultimately determined by long-run inflation expectations. As some will recognize, this model of core inflation is a variant of a theoretical model that is commonly referred to as an expectations-augmented Phillips curve.21 Total inflation in turn reflects movements in core inflation, combined with changes in the prices of food and energy.

   

  An important feature of this model of inflation dynamics is that the overall effect that variations in resource utilization, import prices, and other factors will have on inflation depends crucially on whether these influences also affect long-run inflation expectations. Figure 6 illustrates this point with a stylized example of the inflation consequences of a gradual increase in the level of import prices–perhaps occurring in response to stronger real activity abroad or a fall in the exchange value of the dollar–that causes the rate of change of import prices to be elevated for a time.22 First, consider the situation shown in panel A, in which households’ and firms’ expectations of inflation are not solidly anchored, but instead adjust in response to the rates of inflation that are actually observed.23 Such conditions–which arguably prevailed in the United States from the 1970s to the mid-1990s–could plausibly arise if the central bank has, in the past, allowed significant and persistent movements in inflation to occur. In this case, the temporary rise in the rate of change of import prices results in a permanent increase in inflation. This shift occurs because the initial increase in inflation generated by a period of rising import prices leads households and firms to revise up their expectations of future inflation. A permanent rise in inflation would also result from a sustained rise in the level of oil prices or a temporary increase in resource utilization.

   

  By contrast, suppose that inflation expectations are instead well anchored, perhaps because the central bank has been successful over time in keeping inflation near some specified target and has made it clear to the public that it intends to continue to do so. Then the response of inflation to a temporary increase in the rate of change of import prices or any other transitory shock will resemble the pattern shown in panel B. In this case, inflation will deviate from its longer-term level only as long as import prices are rising. But once they level out, inflation will fall back to its previous trend in the absence of other disturbances.24 

   

  A key implication of these two examples is that the presence of well-anchored inflation expectations greatly enhances a central bank’s ability to pursue both of its objectives–namely, price stability and full employment. Because temporary shifts in the rate of change of import prices or other transitory shocks have no permanent influence on expectations, they have only a transitory effect on inflation. As a result, the central bank can “look through” such short-run inflationary disturbances in setting monetary policy, allowing it to focus on returning the economy to full employment without placing price stability at risk. Indeed, the Federal Reserve has done just that in setting monetary policy over the past decade or more. Moreover, as I will discuss shortly, these inflation dynamics are a key reason why the FOMC expects inflation to return to 2 percent over the next few years.

   

  On balance, the evidence suggests that inflation expectations are in fact well anchored at present. Figure 7 plots the two survey measures of longer-term expected inflation I presented earlier, along with a measure of longer-term inflation compensation derived as the difference between yields on nominal Treasury securities and inflation-indexed ones, called TIPS. Since the late 1990s, survey measures of longer-term inflation expectations have been quite stable; this stability has persisted in recent years despite a deep recession and concerns expressed by some observers regarding the potential inflationary effects of unconventional monetary policy. The fact that these survey measures appear to have remained anchored at about the same levels that prevailed prior to the recession suggests that, once the economy has returned to full employment (and absent any other shocks), core inflation should return to its pre-recession average level of about 2 percent.

   

  This conclusion is tempered somewhat by recent movements in longer-run inflation compensation, which in principle could reflect changes in investors’ expectations for long-run inflation. This measure is now noticeably lower than in the years just prior to the financial crisis.25 However, movements in inflation compensation are difficult to interpret because they can be driven by factors that are unique to financial markets–such as movements in liquidity or risk premiums–as well as by changes in expected inflation.26 Indeed, empirical work that attempts to control for these factors suggests that the long-run inflation expectations embedded in asset prices have in fact moved down relatively little over the past decade.27 Nevertheless, the decline in inflation compensation over the past year may indicate that financial market participants now see an increased risk of very low inflation persisting.

   

  Although the evidence, on balance, suggests that inflation expectations are well anchored at present, policymakers would be unwise to take this situation for granted. Anchored inflation expectations were not won easily or quickly: Experience suggests that it takes many years of carefully conducted monetary policy to alter what households and firms perceive to be inflation’s “normal” behavior, and, furthermore, that a persistent failure to keep inflation under control–by letting it drift either too high or too low for too long–could cause expectations to once again become unmoored.28 Given that inflation has been running below the FOMC’s objective for several years now, such concerns reinforce the appropriateness of the Federal Reserve’s current monetary policy, which remains highly accommodative by historical standards and is directed toward helping return inflation to 2 percent over the medium term.29 

   

  Before turning to the implications of this inflation model for the current outlook and monetary policy, a cautionary note is in order. The Phillips-curve approach to forecasting inflation has a long history in economics, and it has usefully informed monetary policy decisionmaking around the globe. But the theoretical underpinnings of the model are still a subject of controversy among economists. Moreover, inflation sometimes moves in ways that empirical versions of the model, which necessarily are a simplified version of a complicated reality, cannot adequately explain. For this reason, significant uncertainty attaches to Phillips curve predictions, and the validity of forecasts from this model must be continuously evaluated in response to incoming data.

   

  Policy Implications

  Assuming that my reading of the data is correct and long-run inflation expectations are in fact anchored near their pre-recession levels, what implications does the preceding description of inflation dynamics have for the inflation outlook and for monetary policy?

   

  This framework suggests, first, that much of the recent shortfall of inflation from our 2 percent objective is attributable to special factors whose effects are likely to prove transitory. As the solid black line in figure 8 indicates, PCE inflation has run noticeably below our 2 percent objective on average since 2008, with the shortfall approaching about 1 percentage point in both 2013 and 2014 and more than 1-1/2 percentage points this year. The stacked bars in the figure give the contributions of various factors to these deviations from 2 percent, computed using an estimated version of the simple inflation model I just discussed.30 As the solid blue portion of the bars shows, falling consumer energy prices explain about half of this year’s shortfall and a sizable portion of the 2013 and 2014 shortfalls as well. Another important source of downward pressure this year has been a decline in import prices, the portion with orange checkerboard pattern, which is largely attributable to the 15 percent appreciation in the dollar’s exchange value over the past year. In contrast, the restraint imposed by economic slack, the green dotted portion, has diminished steadily over time as the economy has recovered and is now estimated to be relatively modest.31 Finally, a similarly small portion of the current shortfall of inflation from 2 percent is explained by other factors (which include changes in food prices); importantly, the effects of these other factors are transitory and often switch sign from year to year.

   

  Although an accounting exercise like this one is always imprecise and will depend on the specific model that is used, I think its basic message–that the current near-zero rate of inflation can mostly be attributed to the temporary effects of falling prices for energy and non-energy imports–is quite plausible. If so, the 12-month change in total PCE prices is likely to rebound to 1-1/2 percent or higher in 2016, barring a further substantial drop in crude oil prices and provided that the dollar does not appreciate noticeably further.

   

  To be reasonably confident that inflation will return to 2 percent over the next few years, we need, in turn, to be reasonably confident that we will see continued solid economic growth and further gains in resource utilization, with longer-term inflation expectations remaining near their pre-recession level. Fortunately, prospects for the U.S. economy generally appear solid. Monthly payroll gains have averaged close to 210,000 since the start of the year and the overall economy has been expanding modestly faster than its productive potential. My colleagues and I, based on our most recent forecasts, anticipate that this pattern will continue and that labor market conditions will improve further as we head into 2016.

   

  The labor market has achieved considerable progress over the past several years. Even so, further improvement in labor market conditions would be welcome because we are probably not yet all the way back to full employment. Although the unemployment rate may now be close to its longer-run normal level–which most FOMC participants now estimate is around 4.9 percent–this traditional metric of resource utilization almost certainly understates the actual amount of slack that currently exists: On a cyclically adjusted basis, the labor force participation rate remains low relative to its underlying trend, and an unusually large number of people are working part time but would prefer full-time employment.32 Consistent with this assessment is the slow pace at which hourly wages and compensation have been rising, which suggests that most firms still find it relatively easy to hire and retain employees.

   

  Reducing slack along these other dimensions may involve a temporary decline in the unemployment rate somewhat below the level that is estimated to be consistent, in the longer run, with inflation stabilizing at 2 percent. For example, attracting discouraged workers back into the labor force may require a period of especially plentiful employment opportunities and strong hiring. Similarly, firms may be unwilling to restructure their operations to use more full-time workers until they encounter greater difficulty filling part-time positions. Beyond these considerations, a modest decline in the unemployment rate below its long-run level for a time would, by increasing resource utilization, also have the benefit of speeding the return to 2 percent inflation. Finally, albeit more speculatively, such an environment might help reverse some of the significant supply-side damage that appears to have occurred in recent years, thereby improving Americans’ standard of living. 33 

   

  Consistent with the inflation framework I have outlined, the medians of the projections provided by FOMC participants at our recent meeting show inflation gradually moving back to 2 percent, accompanied by a temporary decline in unemployment slightly below the median estimate of the rate expected to prevail in the longer run. These projections embody two key judgments regarding the projected relationship between real activity and interest rates. First, the real federal funds rate is currently somewhat below the level that would be consistent with real GDP expanding in line with potential, which implies that the unemployment rate is likely to continue to fall in the absence of some tightening. Second, participants implicitly expect that the various headwinds to economic growth that I mentioned earlier will continue to fade, thereby boosting the economy’s underlying strength. Combined, these two judgments imply that the real interest rate consistent with achieving and then maintaining full employment in the medium run should rise gradually over time. This expectation, coupled with inherent lags in the response of real activity and inflation to changes in monetary policy, are the key reasons that most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2 percent objective.

   

  By itself, the precise timing of the first increase in our target for the federal funds rate should have only minor implications for financial conditions and the general economy. What matters for overall financial conditions is the entire trajectory of short-term interest rates that is anticipated by markets and the public. As I noted, most of my colleagues and I anticipate that economic conditions are likely to warrant raising short-term interest rates at a quite gradual pace over the next few years. It’s important to emphasize, however, that both the timing of the first rate increase and any subsequent adjustments to our federal funds rate target will depend on how developments in the economy influence the Committee’s outlook for progress toward maximum employment and 2 percent inflation.

   

  The economic outlook, of course, is highly uncertain and it is conceivable, for example, that inflation could remain appreciably below our 2 percent target despite the apparent anchoring of inflation expectations. Here, Japan’s recent history may be instructive: As shown in figure 9, survey measures of longer-term expected inflation in that country remained positive and stable even as that country experienced many years of persistent, mild deflation.34 The explanation for the persistent divergence between actual and expected inflation in Japan is not clear, but I believe that it illustrates a problem faced by all central banks: Economists’ understanding of the dynamics of inflation is far from perfect. Reflecting that limited understanding, the predictions of our models often err, sometimes significantly so. Accordingly, inflation may rise more slowly or rapidly than the Committee currently anticipates; should such a development occur, we would need to adjust the stance of policy in response.

   

  Considerable uncertainties also surround the outlook for economic activity. For example, we cannot be certain about the pace at which the headwinds still restraining the domestic economy will continue to fade. Moreover, net exports have served as a significant drag on growth over the past year and recent global economic and financial developments highlight the risk that a slowdown in foreign growth might restrain U.S. economic activity somewhat further. The Committee is monitoring developments abroad, but we do not currently anticipate that the effects of these recent developments on the U.S. economy will prove to be large enough to have a significant effect on the path for policy. That said, in response to surprises affecting the outlook for economic activity, as with those affecting inflation, the FOMC would need to adjust the stance of policy so that our actions remain consistent with inflation returning to our 2 percent objective over the medium term in the context of maximum employment.

   

  Given the highly uncertain nature of the outlook, one might ask: Why not hold off raising the federal funds rate until the economy has reached full employment and inflation is actually back at 2 percent? The difficulty with this strategy is that monetary policy affects real activity and inflation with a substantial lag. If the FOMC were to delay the start of the policy normalization process for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. In addition, continuing to hold short-term interest rates near zero well after real activity has returned to normal and headwinds have faded could encourage excessive leverage and other forms of inappropriate risk-taking that might undermine financial stability. For these reasons, the more prudent strategy is to begin tightening in a timely fashion and at a gradual pace, adjusting policy as needed in light of incoming data.

   

  Conclusion

  To conclude, let me emphasize that, following the dual mandate established by the Congress, the Federal Reserve is committed to the achievement of maximum employment and price stability. To this end, we have maintained a highly accommodative monetary policy since the financial crisis; that policy has fostered a marked improvement in labor market conditions and helped check undesirable disinflationary pressures. However, we have not yet fully attained our objectives under the dual mandate: Some slack remains in labor markets, and the effects of this slack and the influence of lower energy prices and past dollar appreciation have been significant factors keeping inflation below our goal. But I expect that inflation will return to 2 percent over the next few years as the temporary factors that are currently weighing on inflation wane, provided that economic growth continues to be strong enough to complete the return to maximum employment and long-run inflation expectations remain well anchored. Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us, our judgments about appropriate monetary policy will change.

  Here’s some (possibly) helpful context from Bloomberg:

  Janet Yellen has a chance this week to do one of two things: emphasize that the Federal Reserve remains on track to raise interest rates in 2015, or validate the view of many investors that liftoff will be delayed until next year.

   

  “The market is really second-guessing them,” said Michael Hanson, senior U.S. economist at Bank of America Corp. in New York. “There doesn’t seem to be an easy way to get from where we are today to a rate hike in 2015 without some additional volatility. The market just isn’t there.”

   

  The communications challenge for Yellen and her colleagues is how to describe two competing forces as they weigh liftoff: downward pressure on inflation coming from slumping prices of imported goods and commodities due to a stronger dollar and slowing growth in China, versus steady U.S. consumer demand that they believe should push domestic prices higher as unemployment falls and the labor market tightens further.

   

  The jobless rate is already low at 5.1 percent and the median forecast of Fed officials last week showed it averaging 5 percent for the final quarter of the year. On the other hand, inflation as measured by their preferred gauge has been under their 2 percent target since April 2012 and was just 0.3 percent in the 12 months through July.

   

  The picture is further clouded by the ongoing instability in financial markets that could serve as a warning that U.S. growth prospects may not be as insulated from a global slowdown as the Fed’s forecasters expect.

   

  

  

  

  

  

• The Oligarch Recovery: 30 Million Americans Have Tapped Retirement Savings Early In Last Year

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  The ongoing oligarch theft labeled an “economic recovery” by pundits, politicians and mainstream media alike, is one of the largest frauds I’ve witnessed in my life. The reality of the situation is finally starting to hit home, and the proof is now undeniable.

  Earlier this year, I published a powerful post titled, Use of Alternative Financial Services, Such as Payday Loans, Continues to Increase Despite the “Recovery,” which highlighted how a growing number of Americans have been taking out unconventional loans, not simply to overcome an emergency, but for everyday expenses. Here’s an excerpt:

  Families’ savings not where they should be: That’s one part of the problem. But Mills sees something else in the recovery that’s more disturbing. The number of households tapping alternative financial services are on the rise, meaning that Americans are turning to non-bank lenders for credit: payday loans, refund-anticipation loans, pawnshops, and rent-to-own services.

   

  According to the Urban Institute report, the number of households that used alternative credit products increased 7 percent between 2011 and 2013. And the kind of household seeking alternative financing is changing, too.

   

  It’s not the case that every one of these middle- and upper-class households turned to pawnshops and payday lenders because they got whomped by an unexpected bill from a mechanic or a dentist. “People who are in these [non-bank] situations are not using these forms of credit to simply overcome an emergency, but are using them for basic living experiences,” Mills says.

  Of course, it’s not just “alternative financial services.” Increasingly desperate American citizens are also tapping whatever retirement savings they may have, including taking the 10% tax penalty for the privilege of doing so. In fact, 30 million Americans have done just that in the past year alone, in the midst of what is supposed to be a “recovery.”

  From Time:

  With the effects of the financial crisis still lingering, 30 million Americans in the last 12 months tapped retirement savings to pay for an unexpected expense, new research shows. This undercuts financial security and underscores the need for every household to maintain an emergency fund.

   

  Boomers were most likely to take a premature withdrawal as well as incur a tax penalty, according to a survey from Bankrate.com. Some 26% of those ages 50-64 say their financial situation has deteriorated, and 17% used their 401(k) plan and other retirement savings to pay for an emergency expense.

   

  Two-thirds of Americans agree that the effects of the financial crisis are still being felt in the way they live, work, save and spend, according to a report from Allianz Life Insurance Co. One in five can be called a post-crash skeptic—a person that experienced at least six different kinds of financial setback during the recession, like a job loss or loss of home value, and feel their financial future is in peril. 

  So now we know what has kept meager spending afloat during this pitiful “recovery.” A combination of “alternative loans” and a bleeding of retirement accounts. The transformation of the public into a horde of broke debt serfs is almost complete.

  Don’t forget to send your thank you card to you know who:

  

  *  *  *

  For related articles, see:

  The Oligarch Recovery – Study Shows Real Wages Have Plunged for Low Income Workers During the “Recovery”

  The Oligarch Recovery – Low Income Americans Can’t Afford to Live in Any Metro Area

  The Oligarch Recovery – Renting in America is Most Expensive Ever

  Another Tale from the Oligarch Recovery – How a $1,500 Sofa Costs $4,150 When You’re Poor

  The Face of the Oligarch Recovery – Luxury Skyscrapers Stay Empty as NYC Homeless Population Hits Record High

  Census Data Proves It – There Was No Economic Recovery Unless You Were Already Rich

  Use of Alternative Financial Services, Such as Payday Loans, Continues to Increase Despite the “Recovery”

  

  

  

  

  

• Bank of Spain Responds, Promises It Is Not Confiscating Catalonia's Gold

  On Wednesday, some were curious to know why a line of armored vans was stationed outside the Bank of Spain’s Barcelona branch.

  

  Our interest was piqued when we remembered that on Sunday, Catalans will vote in what might as well be an independence referendum. 

  We’ll spare readers a lengthy discussion of the history behind the independence movement and just note that CDC and ERC need 68 seats for an absolute parliamentary majority. If they hit that threshold, they’ll push quickly for an independent Catalonia. Based on the latest polls, it looks like it’s going to be close:

  

  It doesn’t require a leap of logic to draw a connection between what looked like unusual activity at a central bank branch in the Catalan capital and this Sunday’s vote and so, we took the opportunity to ask the following: “Is the Bank Of Spain quietly pulling its gold from Catalonia ahead of this weekend’s vote?”

  The answer, according to The Bank Of Spain itself who was kind enough to send us a letter this morning, is “no.” We present their response below without further comment:

  Good morning,

   

  Regarding the story posted by Tyler Darden on 09/23/2015 under the headline Is The Bank Of Spain Quietly Pulling Its Gold From Catalonia Ahead Of This Weekend’s Vote?, we want to point out the following:

   

  Nothing extraordinary happened yesterday in the building of Banco de España in Barcelona. A number of armoured vans were stationed for a while in the street because of the increased movement of cash being distributed to the commercial banks prior to the banking holiday in Barcelona today (followed in many cases by another non-working day tomorrow or “Puente” as it is called in Spanish).

   

  We gladly provided this explanation yesterday to the media which happened to ask us about the matter (which was not the case of VilaWeb, that did not contact the Banco de España regarding this –or any other- matter).

   

  And, by the way, there is no gold in this site of Banco de España in Barcelona.

  

  

  

  

  

• Caught On Tape: Anarchy – When Chicken Prices Hit Record Highs

  We have all watched the dramatic and disturbing scenes from Venezuela as 'average joes' fight over the last bar of soap or sheet of toilet paper as prices soar beyond anyone's control… and said "that could never happen here." Well with stealth-flation leaking into everyday prices wherever you look (as long as 'you' are not The Fed), we may have just witnessed the awakening. With prices for chicken having hit record highs, residents of America are brawling over the last winged feast…

  When this occurs…

  

   

  This eventually happens…

   

  "could never happen here"

  Chart: Bloomberg

  

  

  

  

  

• Gold Pops, Dollar Drops, As CATastrophe Slaps Stocks Ahead Of Yellen "Do-Over" Speech

  Despite a lot of effort today…

   

  BMW fears battered European stocs – not helped at all by a 4th day of China devaluation wringing the carry trade out of EUR… CAT crushed hopes early on and weak US data pushed stocks lower but Crude's rampathon lifted stocks (as JPY lost its mojo) and then JPM's quant fell on his sword

  

   

  Cash indices roundtripped but were unable to get green…

  

   

  And since the post-FOMC peak…

  

   

  CAT was the big loser after cutting outlooks and slashing jobs…

  

   

  VIX was higher on the day but those crazy tails were very evident again…

  

   

  And the JPM comment drove the algos wild…

  

   

  The whole day was one of roundtrips…around Europe's close…

  

   

  Credit continues to push lower…

  

   

  As US Financials see credit surge back towards Black Monday wides…

  

   

  Treasury yields tumbled as stocks sold off then began to ramp back higher as Europe closed…

  

   

  The USD Dollar dumped early on as Yuan devaluation sparked more EURCNH unwinds (and EUR strength) but once again as soon as Europe closed a mysterious bid for USDs re-emerged ahead of Asia…

  

   

  Commodities generally rose on the day with gold and silver most notable.

  

   

  Close up on crude's roundtrip

  

   

  But it was gold and silver that stood out…

  

   

  Charts: Bloomberg

  

  

  

  

• One By One the Central Banks Are Losing Control

  Since 2008, the Keynesians running global Central Banks had always suggested that there was no problem too great for them to handle. They’d promised to do “whatever it takes,” to maintain the financial system and print the world back to growth.

   

  Thus far, we’d seen some pretty aggressive moves. The most aggressive was committed by the Bank of Japan, which announced a single QE program equal to 24% of Japanese GDP in April 2013.

   

  However, the SNB was the first Central Bank to actually reach the point at which it had to decide between printing a truly insane amount of money relative to GDP (50%+) or simply giving up.

   

  It chose to give up.

   

  In many ways, the SNB was cornered by the ECB into this situation. I think this is why the SNB decided to make its announcement on a Thursday as opposed to over the weekend (when Central Banks usually announce bad news to minimize the market impact). The SNB wanted to cause mayhem, likely because it was frustrated by the ECB’s upcoming QE program of which the SNB was undoubtedly aware in advance.

   

  This situation has since progressed with an even larger, more important Central Bank buckling to market forces.

   

  That Central Bank is China.

   

  As we’ve noted before, China’s economy is in tatters. At best it is growing around 3.5%. At worst it isn’t growing at all. And with its currency closely linked with the US Dollar (which is in a bull market) Chinese exporters were getting destroyed.

   

  So what did China do? It chose to devalue the Yuan.

   

  In short, a new player is in the global currency war. And it represents the second largest economy in the world. Having said that, we want you to take note of a few lessons from this situation:

   

  1)   There are in fact problems that are too big for Central Banks to manage.

   

  2)   Central Banks are in fact individual entities. True, they try to coordinate their moves, but when push comes to shove, it will be each Central Bank for itself. This trend will be increasing going forward.

   

  3)   Central Banks have no problem lying about the significance of a situation right up until they shock the market (both the SNB and the PBOC’s moves were suddenly announced).

   

  Of these, #1 is the most important. Since the mid-‘80s, the general consensus has been that there is no problem too great that Central Banks cannot fix it. This has been the case because most crisis that have occurred during that period were either isolated to a particular market (Asian Crisis, Latin American Crisis, Russian Ruble Crisis, etc.) or a particular asset class (Tech Bubble, Housing Bubble, etc.).

   

  This situation has resulted in less and less volatility in the financial system, combined with increased risk taking on the part of investors. As a result, the necessary deleveraging has never been permitted to occur and the financial system has become increasing leveraged (meaning more and more debt).

   

  You can see this in the below chart revealing total credit market instruments in the US (this only includes investment grade bonds, junk bonds, and commercial paper). The deleveraging of the 2008 crisis which nearly took down the entire financial system was a mere blip in a mountain of debt (and this doesn’t even include US sovereign debt, emerging market debt, derivatives, etc.).

   

  Today, when you include global debt issuance, we are facing a debt super crisis, the likes of which has never existed before: $100 trillion in global bonds, with an additional $555 trillion in derivatives.

   

  Central Banks, by printing money, began a war of competitive devaluation in 2008. This worked fine when they were coordinating their moves to prop the system up from 2009-2011. We even had some coordinated efforts by the Fed and the ECB to push the markets higher in 2012 in order to benefit President Obama’s re-election campaign.

   

  However, 2012 marked the high water mark for Central Bank intervention without political repercussions. From that point onward, all Central Bank began to lose their political capital rapidly.

   

  1.     In Japan, the Bank of Japan’s policies are demolishing the Middle Class. The number of Japanese living on welfare just hit a record and real earnings and household spending have been in a free fall since the middle of 2014.

   

  2.     In Europe, the ECB’s President Mario Draghi has admitted in parliament that he was concerned about a “deflationary death spiral” and admitted that QE was the last tool left. Half of the ECB’s Board is against his direction.

   

  3.     In the US, the Fed is now being targeted by Congress. Legislation has been introduced to audit the Fed AND force it to abide by the Taylor Rule. Also, the Fed appears to be losing control of the system as it failed to increase interest rates and stocks STILL collapsed.

   

  4.     In China, deflation is spiraling out of control with a stock market crash, housing bubble bursting, and economic downturn that is more serve than most realize.

   

  The significance of these developments cannot be overstated. Central Banks will be increasingly acting against one another going forward. There will more surprises and more volatility across the board. Eventually it will culminate in a Crash that will make 2008 look like a picnic.

   

  Smart investors are preparing now, BEFORE it hits.

   

  If you've yet to take action to prepare for this, we offer a FREE investment report called the Financial Crisis "Round Two" Survival Guide that outlines simple, easy to follow strategies you can use to not only protect your portfolio from it, but actually produce profits.

   

  We made 1,000 copies available for FREE the general public.

   

  As we write this, there are less than 10 left.

   

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  Best Regards

   

  Phoenix Capital Research

   

  Our FREE e-letter: www.gainspainscapital.com

   

   

  

  

  

  

• Is Goldman Preparing To Sacrifice The Next "Lehman"

  One of the more “unmentionable” conspiracy theories surrounding the demise of Lehman Brothers in 2008 is that this “shocking” event was in fact a well-choreographed and carefully scripted “controlled demolition”, with the Lehman Bankruptcy – the event that officially unleashed the Great Financial Crisis – getting the express prior permission of both Ben Bernanke and Hank Paulson, a former Goldman employee, whose motive was the elimination of the one firm that was then Goldman’s biggest competitor in the FICC space, and whose subsequent bailout of his former employer (Goldman Sachs and all other insolvent banks) would lead to the preservation of trillions in worthless equity courtesy of the biggest taxpayer funded bailout in history, and with billions in excess reserves parked on Goldman’s balance sheet smoothing the bank’s transition through a historic recession.

  Fast forward to this week when as we reported previously, following a surge in its Credit Default Swaps, the “doomsday” scenario for Glencore is now on the table, because the market suddenly realized that Glencore’s most valuable asset, not its mines, or its trading operations, but its investment grade rating, could be stripped away.

  This is what we said, after we noted that GLEN CDS had just hit a multi-year wide of 464bps (precisely as we said it would over a year ago):

  We expect this CDS blowout to continue.

   

  What’s worse, if the company is downgraded from investment grade to junk, watch as the “commodity Lehman” scenario for Glencore, which much more than a simple copper miner just happens to be one of the world’s biggest commodity trading desks, comes full cricle leading to waterfall collateral liquidations and counterparty freeze-outs as suddenly the world is reminded that there is a vast difference between a real and a rehypothecated commodity, and that all collateral rehypothecation chains are only as strong as the weakest counterparty!

  Long story short: if and when Glencore loses its Investment Grade rating, it’s more or less game over, if not for the company’s already mothballed mining operation then certainly for its trading group, where “junking” would lead to numerous collateral shortfalls and margin call waterfalls, reminiscent of the ratings agency downgrade of AIG that culminated with the US bailout of the insurer.

  Therefore we were not surprised earlier today to see Glencore stock crash to a new record low below 100p even as the CDS blow out continued.

  

   

  We were, however, very surprised by the catalyst, because the company that managed to successfully hammer Glencore, which in our view is nothing short of the commodity “Lehman” (or perhaps AIG) was none other than Goldman, which earlier today released a report which is essentially blueprint for not only how to take away Glencore’s precious investment grade rating, but taken a few steps further, how to unleash this cycle’s commodity “Lehman event” (once again, Glencore is first and foremost a trading desk which serves as a counterparty with trillions in derivatives notional exposure to virtually every other commodity using and trading entity in the world) and taken to the extreme, how to “force” the Fed to finally unleash the helicopter money should Glencore’s failure be the catalyst the pushes the entire world into a deflationary recession, if not outright depression.

  This is what Goldman said earlier in a note titled “Much progress made but the song remains the same”

  We update our estimates for Glencore following the completion of its equity placement on September 16, in which it raised its target of $2.5bn. We also update our estimates to incorporate our commodity analysts’ lower thermal coal forecasts ($58/54/52/t for 2015/16/17E) and lower met coal forecasts ($91/85/90/t), which impacts Glencore’s 2016/17/18E EBITDA by c.15-18%… On lower estimates we reduce our 12-month price target to 130p (was 170p).

   

  Implications

   

  Since announcing c.$10bn of debt reduction measures on September 7 and completing a 9.9% equity placing, shares have retreated a further 14%. In our view investors are not yet convinced that Glencore has gone far enough to totally allay fears that the industrial assets can service the new lower debt level. Our scenario analysis suggests that using GS estimates for commodities prices and FX rates, Glencore’s IG rating would be secure in the medium term, but our estimates for zinc, nickel and coal prices are higher than spot prices. When we run the same analysis using spot commodity prices and spot FX rates, most of Glencore’s credit metrics would be at the border of required ranges to maintain its IG rating. Finally, a 5% drop in spot commodity and flat FX would see most of Glencore’s credit rating metrics fall well outside the required range to maintain its IG rating, suggesting concerns would quickly resurface. Glencore has a few levers left – further lowering capex, signing streaming deals and releasing more working capital. Recent underperformance suggests that the measures exercised are insufficient and more is needed. We remain Neutral rated but expect continued volatility in the near term.

  Why is Glencore’s IG rating so critical? As explained above, Glencore is really not so much the Lehman as the AIG of the commodity world: without an investment grade rating, a self-reinforcing collapse will begin that could ultimately terminate Glencore’s trading desk, in the process liquidating one of the world’s biggest commodity trading counterparties.

  From Goldman:

  Glencore’s trading business relies heavily on short-term credit to finance commodity deals and its financing costs would increase if it were to lose its Investment Grade credit rating. In addition, it could even lose some counterparties due to increased counterparty risk.

  That’s putting it mildly: what a junking of Glencore would do, is start a collateral demand waterfall cascade that the cash-strapped company simply would not be able to sustain.

  So having laid out the strawman, Goldman next, very conveniently, explains just what would take for the Investment Grade trap to slam shut:

  it would only take a c.5% fall in spot commodities prices for concerns about its credit rating to resurface

   

  While Glencore’s announced measures have allayed near-term concerns about the potential for its credit rating to be downgraded, its high leverage to commodity prices is demonstrated in our scenario analysis, where we estimate just a c.5% drop in spot commodity prices would see concerns resurface about the potential for its credit rating to be downgraded. In addition, given the latest guidance on capex of c.$4bn in FY17, we believe there is limited flexibility for the company to make any further cuts while maintaining its production targets.

  Wait, high leverage to commodity prices as the biggest risk factor? Where have we seen this before? Oh yes, in our March 2014 post (saying to buy GLEN CDS) which showed the one thing nobody was looking at at the time; Glencore’s, wait for it, high leverage to commodity prices!

  

   

  For those who enjoy playing with numbers, here is Goldman’s real “Doomsday” scenario: the one which sees Glencore’s IG rating stripped. As Goldman admits, all it would take is a small 5% drop in commodity prices from here:

  If commodity prices were to fall 5% from current levels – which we do not consider to be a far-fetched assumption given the downside risk to commodity consumption in China – we believe that concerns about its IG credit rating would quickly resurface. Under this scenario, we estimate that most of Glencore’s credit rating metrics would fall well outside the required ranges to maintain its IG rating, and as early as the next reporting period (FY15).

   

  Although Glencore has a few levers left in the event commodity prices continue their leg down (such as deferring capex and executing streaming deals), the key point to highlight is that executing these options would take time. That said the recent announcement by Silver Wheaton that it is working with Glencore on the streaming deal highlights that management is focused on bolstering its balance sheet.

  Charted:

  

  It goes without saying that courtesy of HFTs and China’s hard landing, a 5% drop in commodities could happen overnight.

  So if one is so inclined, and puts on the conspiracy theory hat mentioned at the beginning of this post, Goldman may have just laid out the strawman for the next mega bailout which goes roughly as follows:

  1. Commodity prices drop another 5%
  2. The rating agencies get a tap on their shoulder and downgrade Glencore to Junk.
  3. Waterfall cascade of margin and collateral calls promptly liquidates Glencore’s trading desk and depletes the company’s cash, leaving trillions of derivative contracts in limbo. Always remember: the strongest collateral chain is only as strong as its weakest conterparty. If a counterparty liquidates, net exposure becomes gross, and suddenly everyone starts wondering where all those “physical” commodities are.
  4. Contagion spreads as self-reinforcing commodities collapse launches deflationary shock wave around the globe.
  5. Fed and global central banks are called in to come up with a “more powerful” form of stimulus
  6. The money paradrop scenario proposed by Citigroup yesterday, becomes reality

  Too far-fetched? Perhaps. But keep an eye out for a Glencore downgrade from Investment Grade. If that happens, it may be a good time to quietly get out of Dodge for the time being. Just in case.

  

  

  

  

  

  

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