• Reality Check: No Matter Who Wins The White House, The New Boss Will Be The Same As The Old Boss

  Submitted by John Whitehead via The Rutherford Institute,

  “The main problem in any democracy is that crowd-pleasers are generally brainless swine who can go out on a stage & whup their supporters into an orgiastic frenzy—then go back to the office & sell every one of the poor bastards down the tube for a nickel apiece.” ? Hunter S. Thompson

  Politics today is not about Republicans and Democrats.

  Nor is it about healthcare, abortion, higher taxes, free college tuition, or any of the other buzzwords that have become campaign slogans for individuals who have mastered the art of telling Americans exactly what they want to hear.

  Politics today is about one thing and one thing only: maintaining the status quo between the Controllers (the politicians, the bureaucrats, and the corporate elite) and the Controlled (the taxpayers).

  Hillary will not save the nation. Nor will Bernie, Trump, Rubio, or Cruz.

  The only ones who can save the nation are “we the people,” and yet the American people remain eager to be persuaded that a new president in the White House can solve the problems that plague us.

  No matter who wins this next presidential election, you can rest assured that the new boss will be the same as the old boss, and we—the permanent underclass in America—will continue to be forced to march in lockstep with the police state in all matters, public and private.

  Indeed, as I point out in my book Battlefield America: The War on the American People, it really doesn’t matter what you call them—the 1%, the elite, the controllers, the masterminds, the shadow government, the police state, the surveillance state, the military industrial complex—so long as you understand that no matter which party occupies the White House in 2017, the unelected bureaucracy that actually calls the shots will continue to do so.

  Consider the following a much-needed reality check, an antidote if you will, against an overdose of overhyped campaign announcements, lofty electoral promises and meaningless patriotic sentiments that land us right back in the same prison cell.

  FACT: According to a scientific study by Princeton researchers, the United States of America is not the democracy that it purports to be, but rather an oligarchy, in which “economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy.”

   

  FACT: Despite the fact that the number of violent crimes in the country is down substantially, the lowest rate in forty years, the number of Americans being jailed for nonviolent crimes such as driving with a suspended license is skyrocketing.

   

  FACT: Thanks to an overabundance of 4,500-plus federal crimes and 400,000-plus rules and regulations, it is estimated that the average American actually commits three felonies a day without knowing it. In fact, according to law professor John Baker, “There is no one in the United States over the age of 18 who cannot be indicted for some federal crime. That is not an exaggeration.”

   

  FACT: Despite the fact that we have 46 million Americans living at or below the poverty line, 16 million children living in households without adequate access to food, and at least 900,000 veterans relying on food stamps, enormous sums of taxpayer money continue to be doled out for presidential vacations ($16 million for trips to Africa and Hawaii), overtime fraud at the Department of Homeland Security (nearly $9 million in improper overtime claims, and that’s just in six of the DHS’ many offices)HurricaHur, and Hollywood movie productions ($10 million in taxpayer money was spent by the Army National Guard on Superman movie tie-ins aimed at increasing awareness about the National Guard).

   

  FACT: Since 2001 Americans have spent $10.5 million every hour for numerous foreign military occupations, including in Iraq and Afghanistan. There’s also the $2.2 million spent every hour on maintaining the United States’ nuclear stockpile, and the $35,000 spent every hour to produce and maintain our collection of Tomahawk missiles. And then there’s the money the government exports to other countries to support their arsenals, at the cost of $1.61 million every hour for the American taxpayers.

   

  FACT: It is estimated that 2.7 million children in the United States have at least one parent in prison, whether it be a local jail or a state or federal penitentiary, due to a wide range of factors ranging from overcriminalization and surprise raids at family homes to roadside traffic stops.

   

  FACT: According to a Gallup poll, Americans place greater faith in the military and the police than in any of the three branches of government.

   

  FACT: “Today, 17,000 local police forces are equipped with such military equipment as Blackhawk helicopters, machine guns, grenade launchers, battering rams, explosives, chemical sprays, body armor, night vision, rappelling gear and armored vehicles,” reports Paul Craig Roberts, former Assistant Secretary of the Treasury. “Some have tanks.”

   

  FACT: At least 400 to 500 innocent people are killed by police officers every year. Indeed, Americans are now eight times more likely to die in a police confrontation than they are to be killed by a terrorist. Americans are 110 times more likely to die of foodborne illness than in a terrorist attack.

   

  FACT: Police officers are more likely to be struck by lightning than be made financially liable for their wrongdoing.

   

  FACT: On an average day in America, over 100 Americans have their homes raided by SWAT teams. Most of those SWAT team raids are for a mere warrant service. There has been a notable buildup in recent years of heavily armed SWAT teams within non-security-related federal agencies such as the Department of Agriculture, the Railroad Retirement Board, the Tennessee Valley Authority, the Office of Personnel Management, the Consumer Product Safety Commission, the U.S. Fish and Wildlife Service, and the Education Department.

   

  FACT: The FBI’s Next Generation Identification (NGI) facial recognition system, which is set to hold data on millions of Americans, will include a variety of biometric data, including palm prints, iris scans, and face recognition data. The NGI will be capable of uploading 55,000 images a day, and conducting tens of thousands of photo searches daily.

   

  FACT: Comprising an $82 billion industry, at least 30,000 drones are expected to occupy U.S. airspace by 2020.

   

  FACT: Everything we do will eventually be connected to the Internet. By 2030 it is estimated there will be 100 trillion sensor devices connecting human electronic devices (cell phones, laptops, etc.) to the Internet. Much, if not all, of our electronic devices will be connected to Google, which openly works with government intelligence agencies. Virtually everything we do now—no matter how innocent—is being collected by the spying American police state.

   

  FACT: Americans know virtually nothing about their history or how their government works. In fact, according to a study by the National Constitution Center, 41 percent of Americans “are not aware that there are three branches of government, and 62 percent couldn’t name them; 33 percent couldn’t even name one.”

   

  FACT: Only six out of every one hundred Americans know that they actually have a constitutional right to hold the government accountable for wrongdoing, as guaranteed by the right to petition clause of the First Amendment.

  Perhaps the most troubling fact of all is this: we have handed over control of our government and our lives to faceless bureaucrats who view us as little more than cattle to be bred, branded, butchered and sold for profit.

  If there is to be any hope of restoring our freedoms and reclaiming control over our government, it will rest not with the politicians but with the people themselves.

  When all is said and done, each American will have to decide for themselves whether they prefer dangerous freedom to peaceful slavery. One thing is for sure: the reassurance ritual of voting is not going to advance freedom one iota.

  

  

  

  

  

• Peddling Non-Fiction

  Some folks were peddling fiction… for everyone else, there's this reality!

  

  No child (or student, or poor person, or grandchild, or debtholder, or healthy person, or retiree, or African American, or family, or homeowner, or renter) left behind untouched…

  Now that is a legacy.

  

  

  

  

• Eric Hunsader Explains To CNBC That "Markets Are Always Rigged" And What He May Spend His $750,000 Prize On

  Once upon a time it was anathema the publicly proclaim two things: i) that central banks manipulate and intervene in the markets and that ii) the market is rigged. Ever since this website was launched 7 years ago and made the proof of these two claims its mission, it was branded as a collection of “tinfoil hat conspiracy theorists” by either the most incompetent, most corrupt or most clueless cores of what passes for financial media and capital markets participants (with either real or virtual money).

  More importantly, what has also become apparent over these same 7 years, is that we were right: it is now no longer even a debate if HFTs rig markets or if central banks intervene directly in stocks, bond or FX – it is broadly accepted and even desired: just imagine the dreadful world in which there is fair price discovery and where traders actually have to take risk. Ghastly.

  To be sure, those same well-dressed if hollow talking heads and click generators who claimed precisely the opposite, fell back to the only defense they had: “well, maybe the Fed intervenes, and maybe the markets are rigged, but everyone knows that and after all, what’s the big deal – they have been manipulated and rigged since the beginning.”

  It is usually at that point where one laughs and moves on to important topics.

  Unfortunately, Nanex’ Eric Hunsader – who as noted earlier won a $750,000 whistleblower award for demonstrating precisely how the NYSE had rigged the market in 2010 – was unable to “move on” because he had a little under 5 minutes to kill this afternoon on CNBC.

  Instead he had to endure exchanges such as the following:

  Q. What do you think this says about the way markets currently function? Do you think such issues have now been fixed? Do you think the playing field is more “fair now”? Do you still think the markets are rigged?

  A. Well yeah.

  * * *

  Q. Just looking at the history of markets, aren’t they always rigged to some degree?

  A. Yes, they are always rigged. Does that mean that if someone gets mugged in New York City we don’t have to care about it?

  * * *

  Q. Should long-term investors care about milliseconds.

  A. Yes, they should.

  * * *

  Frankly, we were impressed by Hunsader’s stoic patience with this line of “questioning” because had we been presented with the logic that grudgingly admits the market is rigged and enriching a group of parasitic criminals who break the law billions of times every year, and who have made so much money through their crimes they have purchased the regulators, is really ok because it only affects a penny here and there – a few hundred million every hour a day mind you – it is not really a crime even if it confirm the entire “market” is built on a bedrock of lies and fraud and is thus susceptible to collapse at any given moment, we would have simply hung up the phone.

  Actually judging by Hunsaders’ twitter comments, it only hit him hours later:

  I believe I got Josh Brown to admit the markets are rigged on CNBC today (because they’ve always been) https://t.co/VufqKDbsIx

  — Eric Scott Hunsader (@nanexllc) March 1, 2016

  Easy to track this in electronic markets. But not the U.S. Stock market? Did you play a + or – role today? https://t.co/c9CyAKhCGH

  — Eric Scott Hunsader (@nanexllc) March 2, 2016

  OK, followers, is Josh right?
  Is it OK to say “markets are always rigged, so what?”
  How about a do over CNBC/Josh? https://t.co/LJgI3wnjPd

  — Eric Scott Hunsader (@nanexllc) March 2, 2016

  * * *

  The best exchange however was that with Bloomberg blogger Barry Ritholtz’ partner Josh Brown, whose tongue in cheek question was if Hunsader needs advice on parking his $750,000 in pre-tax proceeds: “Have you considered the power of variable annuities and what they might be able to do for you?“

  Hunsader’s in kind response: “I was thinking about GDX, throwing it all in there. What do you think?”

  Drops mic.

  

  

  

  

  

• Terminal American Apathy – A Population Perfectly Ripened For Authoritarian Control

  Authored by Brett Redmayne-Titley via ActivistPost.com,

  “Tolerance and apathy are the last virtues of a dying society.” – Aristotle

  When considering the cause of national apathy, Americans are evidently physiologically and socially similar to the junk food addled laboratory rat. Both tolerate repressive environments while confined against their will in a maze. In the natural desire to escape and find freedom, like the affected rat, Americans passively accept their confinement, acquiescing without struggle to a life of controlled stimulation and manipulation by all manner of drugs, tests, and mandated choice of direction. In a country objectively descending into chaos, why don’t Americans care? In recent studies at the University of California, Los Angeles (UCLA), these same rats evidence one reason for America’s irrational disinterest in self-preservation.

  In ever-more-frequent and growing worldwide protests, resistance to the American empire’s imposed maze increases. Strangely, Americans offer no similar resistance at all. The social, economic, and political problems in the USA mirror those of an empire-afflicted world, yet in the “exceptional” nation most would rather chew off their tails than find the energy to extricate themselves from their maze. Examples of exceptionally paltry public resistance and protest abound. Rarely does an American protest amount to more than a few hundred temporarily outraged souls who then quickly return to their couches when told to do so by the well-armed militia of the government they came into the streets to change.

  Why is America the isolated case study of this strange domestic malady that may best be summed-up as: clinical, terminal apathy?

  The cause of this national apathy seems to be clear as shown in results from the UCLA study: it’s the food. Processed, adulterated, adjunct-laden, GMO-filled junk food; the preferred and almost unavoidable daily diet of Americans.

  Dr. Aaron Blaisdell, a professor of psychology at the UCLA /College of Letters and Science and a member of UCLA’s Brain Research Institute, used rats to determine if a diet of poor quality processed foods resulted directly in obesity, or if the actual initial result was fatigue.

  Dr. Blaisdell’s team placed thirty-two female rats on one of two diets for six months. The first received a standard rat’s diet, consisted of relatively unprocessed foods like ground corn and fish meal. As a substitute for a junk food diet the second Americanized group received highly processed food of lower quality that included substantially more sugar. As expected, “One diet led to obesity, the other didn’t,” said Blaisdell, as quoted in UCLA’s, “Newsroom.” However…

  “Our data suggest that diet-induced obesity is a cause, rather than an effect, of laziness [apathy],” concluded Blaisdell. “…the [poor quality] diet causes obesity, which causes fatigue.”

  The rats were given a task in which they were required to press a lever to receive a food or water reward. The rats on the junk food diet demonstrated impaired performance, taking substantially longer breaks than the lean rats before returning to the task. During repeated 30-minute sessions the overweight rats became more lazy due to their increasing obesity, taking breaks that were nearly twice as long as clean rats.

  Dr. Blaisdell’s studying clearly indicates that junk food, while causing obesity, subsequently causes laziness and fatigue. Combined, the political cousin of these two symptoms is: apathy.

  By all metrics, Americans consume the most quantity of the worst-quality food supply in the developed world, as such leading in obesity. In America this endemic apathy is causing Americans to have little interest in their own increasing domestic peril. In a nation of increasing authoritarian governmental control, American processed junk food may have now become the most effective US government weapon for controlling the reactions of its own population. Examples of irrational American apathy are evident every week.

  Just this past weekend, on Feb 27, 2016, seventeen-year-old Abdi Mohamed, was shot three times by Salt Lake City police responding to a dispute. Not taking time to digest the situation and realize that Mohamed, who was not threatening them in any way, only held a piece of a broom stick, they opened fire within seconds of their arrival. The resulting protest of reportedly no more than one hundred outraged souls, were next met with the predicable draconian response of over one hundred cops being called to provide back-up; in force. This routine military response has one emphatic message for the protesting public, “Take your First Amendment home…and stay there.” Accepting this message, by Sunday all outrage was over. Considering this obvious example of America’s growing police disregard for life, this protest should have been in the thousands. What then?

  In dozens of countries across the globe rebellion in the thousands and tens-of-thousands by outraged nationalist populations is growing despite brutal American-backed-and-funded crackdowns by their governments. This weekend alone saw huge protests which all amounted to a public rejection of the influence of the American empire on their politicians and therefore their happiness. Consider…

  Just hours ago, in London, over 10,000 protested the US/NATO imposed risk to their lives of Trident submarine ICBMs. In Poland, Ukraine and South Korea equally large protests also took place against the American-controlled national policies imposed on them. In Iran and Ireland national and local elections took place peacefully, the results also showing that their citizens, too, were casting out the politicians who favor guns over food. In France, where all GMOs are still banned, thousands of French farmers have battled police due to their lives being destroyed by US-required French sanctions against these farmers exporting their crops to the once lucrative and huge Russian market. Not surprisingly, and for good reason, these protesters have had enough of the “benefits” of American empire and imposed democracy. As the military might of the empire kills scores of innocents around the globe daily, while the quality of life continues to diminish, resistance is not, for these citizens, futile. It is daily.

  Why is this not the case in the American Homeland?

  As for North America, Canada and Mexico have also recently produced huge protests, starting with the 2012 Montreal student protests where 100,000 angry students protested tuition fee increases. When Canada’s legislature attempted to quell the protest by passing emergency legislation allowing for new draconian anti-protest laws, this huge protest then grew exponentially to more than one million citizens. Anti- government protests in major Canadian cities have been large and frequent since. Subsequently, on November 4, 2015, the Liberal Party, led by now Prime Minister, Justin Trudeau, won 184 seats, turning-out the Conservative Party, led by incumbent, ultra-Zionist/ corporatist, former Prime Minister Stephen Harper.

  In Mexico City protesters hit the one million mark, also in 2012, within minutes of the announcement of the most recent presidential election results that declared president-elect, Enrique Peña Nieto, the victor. Thanks to American-made Diebold electronic voting machines (yes, those Diebold voting machines), the results had been rigged. Mexicans knew it. They were mad as hell. They went to the streets.

  In late 2014, forty-three very innocent college students were “disappeared” by Mexican government troops. That same government has been covering up the criminals involved ever since. But Mexican protests have been often, very large and unyielding to government’s demand that these anti-government protests end. The protesters will not go home.

  However, back in the Homeland, where over 1300 Americans were killed by police firepower in 2015, many of whom were as completely innocent of any crime that justified deadly force, this weekend produced just one completely ineffective protest. When killer cops get off from prosecution scot-free, outrage generally amounts to, as seen in Salt Lake City, a mere hundred-or-so protesters. Even the anti-authoritarian spectacle of Ferguson, Missouri accomplished nothing except to showcase the futility of protest to the apathetic public watching on the TV. But it was not the fault of these sincere, passionate and legitimately outraged protesters who did put their freedom on the line at these small protests. The real problem in changing endemic domestic American abuses: enough people willing to rise to their feet and effect the true “power of the people!”

  The most demonstrative recent example of the national terminal apathy of Americans was illustrated at the 2012 Democratic National Convention in Charlotte, North Carolina.

  The government and the local police expected big trouble. Uncle Sam knew his people had good reason to take to the streets outside the convention. Four years of Pres. Obama’s broken promises, lobbyists, high unemployment, growing authoritarian state, endemic corruption in banks, business, government and sports gave many good reasons for American outrage to hit the streets of Charlotte en masse. Just months before, the dozens of Occupy camps in major cities nationwide, as the only cohesive national protest movement, had all been closed down in the space of two very violent and draconian days at the hands of nationwide police. So, when NSA, CIA, and Charlotte police authorities publicly stated their assumption of over 100,000 upset Americans showing up to protest, their estimate seemed well founded.

  Taking no chances the federal government provided Charlotte $50 million, and added $50 million more, to defend Pres. Obama from “the will of the people.” As witnessed then, this funding produced a truly awe-inspiring showcase of America’s domestic authoritarian, anti-protest arsenal. The American government was ready to take on America’s collective best shot, no matter what, at resisting Obama’s new definition of democracy.

  Anyone coming to Charlotte found that walking the streets was a laboratory maze in itself. The maze was not here metaphorical, consisting of literally several miles of contiguous sixteen-foot-high, black-painted metal, crowd-proof fencing along both sides of the entire pre-selected boulevards that would be used to keep the loonies on the path. Hordes of cops by the hundreds – thirty-five hundred in total – funneled protesters back into the maze at every intersection, all dressed in full riot gear and showing different shoulder badges with insignia from police departments as far away as Austin, Texas; Chicago, Illinois; New York City and Albuquerque, New Mexico. Each cop grimaced at this arrogant display of democracy before their face masks and batons. New police vehicles were everywhere; from ATVs and MRAPs, to refrigerated trucks and golf carts. Dozens of brand new “Police” mountain bikes and motocross bikes stood in rows of twenty, some under fat cops who sat watching on menacingly. No less than four helicopters were in the air at all times. Police cars – state, federal, and local – were evident by the hundreds. CIA had commandeered a local junior college, and US Army troops maintained defenses outside the city. Just in case. These were the front lines, ready for anything an understandably outraged public of 100,000 plus might dish out.

  The cops need not have bothered.

  The largest protest of the six-day event was a paltry 2000 people. Almost all other protests numbered no more than three hundred. The protesters were always outnumbered by the cops and the press. Considering Charlotte has over 150 million Americans within a five-hundred-mile drive, why such a paltry, ineffective, impotent turnout throughout the national six-day event?

  Why?

  We may have found a cure for most evils; but we have found no remedy for the worst of them all, the apathy of human beings. – Helen Keller

  Dr. Blaisdell’s rats expose the fundamentals of this malady. The toxic combination of engineered food leading to endemic apathy is causing a sickness infecting Americans. Apathy. If not; despair.

  America’s diet is factually the worst in the industrialized world. GMO ingredients are in eighty-five percent of all processed foods, not that this processed food is of acceptable quality. In December 2013, Professor Irina Ermakova, vice president of Russia’s National Association for Genetic Safety, called for a 10-year ban on GMO foods. Ermakova conducted GMO rat-feeding tests that showed alarming results, including extreme mortality rates. “It is necessary to ban GMO, to impose a moratorium for 10 years. It has been proved that not only in Russia, but also in many other countries in the world, GMO is dangerous,” he concluded. In 2015 Russia past new laws banning all American GMO products. China, France and the United Kingdom have similar bans.

  Illustrating Dr. Blaisdell’s study, while choosing willful ignorance, American voters have defeated GMO labeling laws in state referendums in California and Oregon. This means Americans have actually voted not to know that food-borne poison is contained in what they choose to eat. Really. But taking no chances with future elections, however, this week a US Senate committee announced it is preparing legislation seeking to prohibit states from attempting to pass their own mandatory state labeling laws via the public’s constitutional right to vote in their own interests. Labeled the “Dark Act” this is a government reaction to the few successful state initiatives requiring GMO labeling, such as Vermont, New Hampshire and Connecticut.

  As reported by William Engdahl, in a study on the toxicity of GMO plants associated with the plant killer, Roundup, Anthony Samsel and Stephanie Seneff, have found additional confirmations. Their review concluded, in regard to glyphosate, the main active component of Roundup herbicide, that, “Residues (of glyphosate) are found in the main foods of the Western diet.”

  Samsel and Seneff continue…

  [M]any of the health problems that appear to be associated with a Western diet could be … attributed to glyphosate. These include digestive issues, obesity [emphasis added], autism, Alzheimer’s disease, depression, Parkinson’s disease, liver diseases and cancer, among others. We believe that glyphosate may be the most significant environmental toxin.

  Researcher, Tim Spector, a professor of genetic epidemiology at King’s College London, bolsters the connection between junk food and apathy. Enlisting the help of his son Tom, a genetics student at the University of Aberystwyth in Wales, for a little over a week Tom ate nothing but McDonald’s Big Macs, chicken nuggets, fries, and Coke. He reported that he, “felt good for three days, then slowly went downhill, became more lethargic, and by a week my friends thought I had gone a strange gray color. The last few days were a real struggle. I felt really unwell.” Cornell University testing revealed that Tom’s gut microbes were “devastated.” He had lost about 1,400 types (or 40%) of his bacteria species, which is a red flag indicator for health issues such as obesity and diabetes.

  In one week.

  In Australia, further study from researchers at Deakin University and the Australian National University has shown that junk food does indeed physiologically affect the brain’s growth and development leading to poor mental health. Their findings concluded that a part in the brain – the hippocampus – has been shown to be smaller in those who consume junk food. The hippocampus is responsible for learning, memory and mental health. Researchers used MRI scanning to measure the size of the hippocampi in Australian adults between the ages of 60 and 64. Diet and other factors which could affect the hippocampus were measured and taken into account as well.

  The results, published in BMC Medicine, revealed that seniors who had consumed junk food are more likely to have smaller left hippocampi. On the other hand, seniors who consume more nutrient-rich foods have larger left hippocampi. Associate Professor Felice Jacka concluded,

  Recent research has established that diet and nutrition are related to the risk for depression, anxiety and dementia; however, until now it was not clear how diet might exert an influence on mental health and cognition.

  Thanks to American-inspired global franchising, people throughout the world are also getting fatter on the same brand-names of poison as their American counterparts. The World Health Organization refers to the epidemic as “globesity.” Yet nowhere is the trend as pronounced as it is in the United States, where per-capita calorie consumption of the worst food on the planet rose from 2,109 calories a day in 1970 to 2,568 calories in 2010, according to the Department of Agriculture. The average man today weighs thirty pounds more than in 1960, which equals seventy-eight million people considered obese in 2012.

  Americans habitually eat a lot of junk food. School children and their developing minds are affected from birth. Economically bankrupt America has created families where both Mom and Dad, by necessity are working, with the kids in daycare and the home-cooked family meal a relic of the American Dream long gone. Corporate America preys on this with a replacement of cheap, fast and processed food offerings substituted as breakfast, lunch and/or dinner. Plus snacks. The ongoing degradation of the American mind it seems, applied to Dr. Blaisdell’s laboratory rats and the UK, Russian and Australian studies, shows that growing American mental apathy is directly proportional to their extraordinarily high consumption of a very poor-quality diet.

  Result: a failing American mind. Combined with an ever-failing educational system, this produces a population perfectly ripened for ongoing authoritarian control.

  There is, as shown globally this past weekend, a far worse result of American apathy.

  It is only one indictment that Americans to have willfully allowed themselves and their nation to go to the gallows of history without a whimper. So be it. So, suffers the fool.

  But in allowing an ever-corrosive America to brainwash their souls, these same apathetic Americans also allow their government to rob, via America’s historic military might, the livelihood and futures of the remaining external and innocent world.

  When considered carefully, apathy – American apathy – is a serious crime. A crime against world humanity. The checks and balances by humans on Empire are permissively missing in empirical America. Americans are thus complicit in the further daily destruction of the remaining world they wish to know little about. When the dust of the oncoming rampage of history has settled over the folly of this American empire, guilt for its accumulated horrors will sit squarely on the American people’s heads, as much as the shoulders of their obviously treasonous politicians.

  Indeed.

  In tests the laboratory rat proves to be stronger of will than its Americanized human counterpart. Like the protesters in France, South Korea, Poland, Ukraine, Iran and Ireland just mere hours ago – humans who presumably do not live on an obligatory junk food diet – the rat of pure mind and conscience continues, despite its confines, to desire its freedom. And…he will bite.

  Ultimately, under the bright laboratory lights, while seemingly trapped in a maze of oppression, the lab rat will do what Americans can do no longer. The rat, growing ever more desperate, will find a way to escape.

  Summoning both will and courage, the rat draws the strength of will to rise-up on his hind legs, peering out over the top of the wall of the maze. His indomitable desire for freedom thus reveals the obvious: the way out.

  Americans have no such remaining instinct.

  

  

  

  

  

• Art Berman Sees Oil Heading To $16, Will Lead To "Banking Bloodbath"

  As Nate Hagens noted, "people think that the economy runs on money but it runs on energy," and as Art Berman details in the following interview how the current oil price collapse represents devaluation from over-investment in unconventional oil – and most commodities – because of cheap capital, and is simply a classic bubble. "Continued oil prices of $30 per barrel or less are the only reasonable path to higher growth and a balanced oil market," Berman contends, adding that he expects $16.50/bbl – "I think we're gonna get there." Berman concludes ominously, we're not going 'back' to anything – "Normal is over, and there is no new normal yet."

  Full Art Berman interview below (via Macro Voices):

   

  Breakdown:

  18:25 – OPEC will cut production in 2016

  19:05 – OPEC’s objective is to kill shale drillers’ source of funding

  19:30 – The idea that Iraq/Iran will cooperate with Saudi Arabia is laughable

  22:30 – EIA/IEA numbers are estimates at best, and almost certainly wrong

  24:00 – He doesn’t believe recent EIA figures saying consumption has fallen dramatically

  24:40 – US production must drop in a more meaningful way before OPEC can affect crude price

  27:00 – Baker Hughes Rig Count is only focused on by traders because it’s available data, not because it matters

  29:00 – Regardless of rig count, regardless of what people think, the number of producing wells continues to increase!

  31:30 – US production not necessarily in direct competition with Iranian production

  33:15 – As long as storage numbers are 80% of capacity or more, prices will remain “crushed”

  35:45 – Forget about the nonsense that you read in the WSJ about “the true breakeven price” for shale operators – the true breakeven price for the best operators in the 3 main US shale plays is $60-70/bbl

  38:40 – These shale operators “have no money”

  39:00 – If investors abandon shale company stock, their total assets decline and their debt is in trouble

  40:45 – Pretty obvious to anyone who knows that this situation is going to crash in a big way, it’s just a question of when

  40:55 – Similar situation to “The Big Short”

  44:40 – Very few options beyond increasing Cushing storage capacity, which takes time

  46:30 – Whiting Petroleum clearly out of money, made a terrible acquisition, and is stopping further drilling because they have no other option. They could care less about the shareholders and are acting out of desperation.

  48:05 – Midwestern gasoline refineries cutting back on crude purchases as they don’t see sufficient demand

  50:00 – $16.50/bbl – “I think we’re gonna get there”

  52:35 – Capital providers clearly pulling back from investing in US tight oil projects

  53:00 – Future investments in the Oil Sands are dead

  54:05 – In the first half of 2016 there will be a wave of shale operator bankruptcies and defaults on bond payments, a collapse in the high yield bond market which could spill over into other markets, as well as further distress in the banking industry – “will be a bloodbath”

  55:00 – 2016 shale operator bankruptcies could reach 50%

  57:00 – Iran will not get back to 1970’s levels as they would like to suggest. Production levels will be far less.

  58:45 – Libya is the wild card. If they ever get their civil unrest under control, they could bring 1.5MMbbl/day to market and “that would be a disaster(for oil prices)”

  1:04:15 – We’re not going back to anything – “Normal is over, and there is no new normal yet”

  Source: MacroVoices.com

  *  *  *

  And finally Art Berman's Presentation:

  

  

  

  

  

• PBOC Weakens Yuan To One-Month Lows

  Having yesterday expressed clearly that there was no desire to see the Yuan depreciate, The PBOC weakened the Yuan fix by 0.16% to one-month lows. This sent offshore Yuan notably lower back to post-RRR-Cut lows. For the 2nd day in a row, PBOC also decided to ‘skip’ open market operations (due to ample liquidity according to their statement).

  The illusion of stability once again gives way…

  

   

  And offshore Yuan drops – not helped by the Moodys ratings watch shift…

  

  

  

  

  

  

• As Fukushima Continues Leaking, 3 Former TEPCO Execs Charged With Negligence

  Submitted by Claire Bernish via TheAntiMedia.org,

  Three former executives from the Tokyo Electric Power Company (TEPCO) have been formally charged with negligence over the 2011 disaster at the company’s Fukushima Daiichi Nuclear Power Plant.

  In accordance with a ruling from a citizen’s panel last year — and despite two previous refusals by Tokyo prosecutors to press charges — the three will be the first to go to court over the catastrophic meltdown, which followed a massive tsunami.

  Those charged include former TEPCO chairman, Tsunehisa Katsumata, and former executive vice presidents, Sakae Muto and Ichiro Takekuro, according to Reuters. As their indictments did not stipulate arrest, none of the trio have been taken into custody.

  Despite previous claims there was insufficient evidence necessary to prosecute, a unique component of the country’s legal system allowed citizens to make the final call. As Reuters explained:

  “Japanese citizens’ panels, made up of residents selected by lottery, are a rarely-used but high-profile feature of Japan’s legal system introduced after World War Two to curb bureaucratic overreach. They were given the power to force prosecutions if they called for them a second time.”

  That panel found the three executives did not exercise sufficient preventive means, despite being warned of the potential effects a tsunami could have on the Fukushima plant.

  Japan’s national media outlet, NHK, said the three former executives planned to enter not-guilty pleas, as they could not have anticipated the size of the March 2011 tsunami, said the BBC.

  None of the three charged were available for comment, reported Reuters.

  Nearly five years ago, one of the strongest earthquakes ever recorded struck off the coast of Japan, spurring an enormous tsunami, which forced roughly 160,000 residents to flee. Three reactors at the Fukushima plant suffered meltdowns as the wall of water knocked power offline, triggering chain reactions.

  Close to 16,000 people died and around 2,500 are still listed as missing from events of that day — though none have been directly attributed to the nuclear catastrophe. As radioactive contamination has created an uninhabitable zone surrounding the plant, and with leaks and general mismanagement of the Fukushima cleanup still continuously making headlines, the meltdown is considered nearly on par with Chernobyl in 1986.

  

  

  

  

  

• Bearish Oil Market API Report 3 1 2016 (Video)

  By EconMatters

  

  If the EIA report matches API tomorrow there should be some weakness in the Oil Markets on Wednesday. API reported large builds in Cushing, Oil Inventories and Distillates – a rather bearish report overall.

   

  

  © EconMatters All Rights Reserved | Facebook | Twitter | YouTube | Email Digest | Kindle    

  

  

  

  

• Caught On Tape: Tear Gas Deployed As Migrants Revolt In France

  Last month, we profiled Calais, or “the jungle” as it’s known.

  The infamous refugee camp has been the subject of quite a bit of media coverage of late and now, France is tearing it down. “With the orange-vested workers again protected by dense lines of riot police as they knocked down huts with hammers and power tools, the debris then lifted into skips by diggers, a dozen or so migrants and activists climbed on to the roofs of shacks next in line to be demolished,” The Guardian notes. 

  

  The destruction of Calais has led directly to a move by Belgium to reinstate border controls as the country fears that the demolition of the camp will lead directly to an increased flow of migrants across the border. 

  As RT notes, “police were called to the area after refugees, enraged by an earlier eviction, attacked trucks with stones, debris, and iron bars.” Ultimately, police used tear gas to subdue the crowd.” 

  And here’s what a migrant did to a makeshift shelter in the wake of the French government’s decision to destroy the camp:

  

  

  

  

  

  

• Moody's Downgrades China's Credit Outlook From Stable To Negative – Full Text

  It is likely just a coincidence that just a month after we reported that China’s real consolidated debt/GDP was far greater than the 280% or so accepted conventionally, and was really up to 350% if not higher after the recent record loan issuance surge, moments ago Moody’s officially downgraded its outlook of China’s credit rating from stable to negative, citing three key risks:

  1. The ongoing and prospective weakening of fiscal metrics, as reflected in rising government debt and in large and rising contingent liabilities on the government balance sheet;
  2. A continuing fall in reserve buffers due to capital outflows, which highlight policy, currency and growth risks;
  3. Uncertainty about the authorities’ capacity to implement reforms – given the scale of reform challenges – to address imbalances in the economy.

  While these were topical about a year ago for the financial media, and about 6 months ago for everyone else, we can’t help but notice that as expected Moody’s has said nothing at all about China’s biggest current risk factor – its collapsing labor market and surging unemployment. That’s ok, we are confident even the rating agencies will be up to speed with what we have been reporting since last November before the year is done.

  Below is the full report:

  Moody’s changes outlook on China’s Aa3 government bond rating to negative from stable; affirms Aa3 rating

  Singapore, March 02, 2016 — Moody’s Investors Service has today changed the outlook to negative from stable on China’s government credit ratings, while affirming the Aa3 long-term senior unsecured debt, issuer ratings, and (P)Aa3 senior unsecured shelf rating.

  The key drivers of the outlook revision are:

  1. The ongoing and prospective weakening of fiscal metrics, as reflected in rising government debt and in large and rising contingent liabilities on the government balance sheet.
  2. A continuing fall in reserve buffers due to capital outflows, which highlight policy, currency and growth risks.
  3. Uncertainty about the authorities’ capacity to implement reforms — given the scale of reform challenges — to address imbalances in the economy.

  At the same time, China’s fiscal and foreign exchange reserve buffers remain sizeable, giving the authorities time to implement some reforms and gradually address imbalances in the economy. This underpins the decision to affirm China’s Aa3 rating.

  RATINGS RATIONALE

  RATIONALE FOR ASSIGNING A NEGATIVE OUTLOOK

  FIRST DRIVER — WEAKENING FISCAL METRICS AND SIZEABLE CONTINGENT LIABILITIES

  The first driver of the negative outlook on China’s rating relates to the government’s fiscal strength which has weakened and which we expect to diminish further, albeit from very high levels.

  The government’s balance sheet is exposed to contingent liabilities through regional and local governments, policy banks and state-owned enterprises (SOEs). The ongoing increase in leverage across the economy and financial system and the stress in the SOE sector imply a rising probability that some of the contingent liabilities will crystallize on the government’s balance sheet. In addition, we believe that continuing growth in contingent liabilities — along with stated government objectives to introduce more market discipline — suggests that support from the government and the banking system will increasingly be prioritized, based on the relative importance of each entity for the implementation of strategic national policy goals.

  While not our base case scenario, the government’s fiscal strength would be exposed to additional weakening if underlying growth, excluding policy-supported economic activity, remained weak. In such an environment, the liabilities of policy banks would likely increase to fund government-sponsored investment, while the leverage of SOEs — already under stress — would rise further.

  We do not expect all or even a significant proportion of contingent liabilities to crystallize on the government’s balance sheet in the short term. However, their existence and increase in size reflect economic imbalances. In particular, high and rising SOE leverage raises the risk of either a sharp slowdown in economic growth, as debt servicing constrains other spending, or a marked deterioration of bank asset quality. Either of these developments could ultimately result in higher government debt and additional downward pressure on the government’s credit profile.

  In addition, government debt has risen markedly, to 40.6% of GDP at the end of 2015, according to our estimates, from 32.5% in 2012. We expect a further increase to 43.0% by 2017, consistent with an accommodative fiscal stance that will likely involve higher government spending and possible reductions in the overall tax burden.

  At the same time, we expect debt affordability to remain high as large domestic savings will continue to fund government debt.

  SECOND DRIVER — ERODING EXTERNAL STRENGTH

  The second driver relates to China’s external vulnerability. China’s foreign exchange reserves have fallen markedly over the last 18 months, to $3.2 trillion in January 2016, $762 billion below their peak in June 2014.

  At the same time, reserves remain ample, particularly in relation to the size of China’s external debt. However, their decline highlights the possibility that pressure on the exchange rate and weakening confidence in the ability of the authorities to maintain economic growth and implement reforms could fuel further capital outflows. In particular, a fall in reserves — corresponding to sustained deposit outflows — could raise pressure on the deposit-funded banking sector.

  Measures to address falling foreign exchange reserves and downward pressure on the renminbi have negative implications for the economy and financial sector. First, a tightening of capital controls in response to sustained outflows would damage the credibility of the authorities’ commitment to liberalizing the capital account, an essential element of financial sector reform.

  Second, allowing reserves to fall to preserve the value of the currency — when pressures exist — would tighten liquidity conditions in China at a time when parts of the economy are slowing sharply and when the debt-servicing capability of some corporates is impaired.

  Third, preserving foreign exchange reserves and allowing a sharp depreciation of the currency would likely fuel further capital outflows.

  THIRD DRIVER — RISKS OF A LOSS IN POLICY CREDIBILITY AND EFFICIENCY

  The third driver concerns institutional strength. China’s institutions are being tested by the challenges stemming from the multiple policy objectives of maintaining economic growth, implementing reform, and mitigating market volatility. Fiscal and monetary policy support to achieve the government’s economic growth target of 6.5% may slow planned reforms, including those related to SOEs.

  Incomplete implementation or partial reversals of some reforms risk undermining the credibility of policymakers. Interventions in the equity and foreign exchange markets over the past year suggest that ensuring financial and economic stability is also an objective, but there is considerably uncertainty about policy priorities.

  Without credible and efficient reforms, China’s GDP growth would slow more markedly as a high debt burden dampens business investment and demographics turn increasingly unfavourable. Government debt would increase more sharply than we currently expect. These developments would likely fuel further capital outflows.

  RATIONALE FOR AFFIRMING CHINA’S Aa3 RATING

  The very large size of China’s economy contributes to its credit strength. Moreover, although GDP growth is slowing, it will remain markedly higher than most of China’s rating peers. The size of the buffers available to face current fiscal and capital outflow challenges allows for a gradual implementation of reform and therefore supports an affirmation of the rating at Aa3. These buffers include a relatively moderate level of government debt, which is financed at low cost, and high domestic savings and still substantial foreign exchange reserves.

  We expect a gradual economic slowdown, made possible by the capacity and willingness of the authorities to support growth. Moreover, although contingent liabilities are large, they do not pose an imminent risk to the government’s balance sheet. In a largely closed financial system, buffer erosion would most likely be gradual, providing time to address key areas of reform.

  WHAT COULD CHANGE THE RATING UP/DOWN

  Moody’s could revise the rating outlook to stable if we concluded that government policy was likely to succeed in balancing competing priorities and thereby arrest the deterioration in China’s fiscal metrics and reduce contingent liabilities for the sovereign most likely through effective restructuring of SOEs in overcapacity sectors.

  Moreover, a moderation in capital outflows due to improved confidence in the economy and policies as well as advancement of reforms — in particular in the SOE and financial sectors, including some further opening of the capital account — would be consistent with returning the outlook to stable.

  Conversely, Moody’s could downgrade the rating if we observed a slowing pace in the adoption of reforms needed to support sustainable growth and to protect the government’s balance sheet. Tangibly, this could happen if debt metrics weaken, contingent liabilities increase, or progress on SOE reform stalls. Sustained capital outflows or a marked tightening in capital controls without tangible progress on reform implementation would also be consistent with a downgrade of the rating.

  

  

  

  

  

• Did Free Markets Cause The Flint, Michigan Water Disaster?

  Submitted by Dale Steinreich via The Mises Institute,

  In the wake of numerous cases of lead poisoning through Flint, Michigan’s government-managed water supply, some commentators immediately began looking for ways to blame the private sector. Shortly thereafter, David Brodwin of U.S. News and World Report wrote “Flint: The Big Cost of Small Government.”

  According to Brodwin, what caused lead-tainted water to gush forth from faucets in Flint were “attacks on investment in public infrastructure and on regulation of all kinds.” For these he blames “right-leaning libertarian interests,” although he does not name a single one.

  America, writes Brodwin, has fallen under an “obsession with tax cuts [which] has reduced budgets to the point where they can no longer sustain basic infrastructure.” Attacks on regulation supposedly caused the failure of the Michigan Department of Environmental Quality to do its job. “Either its staff was buffaloed by those in power, or its professionals had been replaced by political hacks willing to ignore the mission of the agency.” Brodwin does not support these assertions with evidence.

  But then comes a strange concession from Brodwin: “Local officials of the federal [Obama administration] Environmental Protection Agency failed as well.”

  Brodwin’s conclusion is that “[i]f we don’t address the underlying ideologies that led to this problem, we’ll face it again and again, all over the United States.”

  If you are wondering at what point in its history Flint, Michigan jumped onto the cutting edge of free-market thinking and practice, join the club.

  Obviously Brodwin’s contradictory essay doesn’t begin to explain how small government caused lead-tainted water to pour out of Flint’s taps. From an economics perspective, what all the facts of the Flint case clearly point to is the all-too-typical failure of central planners to adequately think through the most important implications of a decision.

  On 25 March 2013, Michigan state officials and the Flint city council (by a 7–1 vote) decided to switch the city’s water source from the Detroit Water and Sewerage Department (DWSD) to the new Karegnondi Water Authority (KWA), which would not begin operating until 2016.

  In the meantime, an alternate source of water had to be found. The 26th of June 2013 was when the actual decision by the city (signed by the state-appointed emergency manager, Ed Kurtz) was made to hire an engineering firm to put Flint’s water plant into full-time operation, thus switching Flint’s water supply from Detroit to the Flint River. (The river was already Flint’s back-up water source.)

  What city, county, and state officials all failed to do was take measures to ensure that the river’s corrosive water was sufficiently treated so that it did not absorb toxic lead from Flint’s water network.

  Far from being unusually negligent for a government, this sad story is unfortunately understandable and predictable. Unlike the numerous suppliers of private bottled water, central planners have no competitive pressures to rigorously think through any and all of their decisions.

  One civil servant in Spain, for example, just recently ended a stint of not showing up for work for six years. Successfully executing such a stunt in a private-sector job in a competitive industry is just about impossible.

  Sebring, Ohio; Jackson, Mississippi; and the Trouble with Government Water

  While most readers of this site will have undoubtedly heard a lot about the lead-tainted water in Flint, Michigan, the stories that comparatively few will have heard about are lead in the water in Sebring, Ohio and last Wednesday (February 24) in Jackson, Mississippi.

  Again, what should come as no surprise is that the same type of government bungling that put lead in Flint’s waters is on full display in Sebring and Jackson as well.

  On 17 February 2016, the Ohio Environmental Protection Agency fired two of its employees and demoted a third. The first employee who was terminated failed to verify that lab test results were received by a field office. In turn, this employee’s boss was terminated for not double checking the work of said subordinate who had a long record of incompetent job performance.

  The third employee, the one demoted, was a manager who failed to notify his bosses that Sebring officials ignored warnings about their town’s lead-contaminated water.

  None of the three individuals are being publicly identified. So much for state transparency.

  In Jackson, Mississippi, of a hundred homes tested in January of 2016, almost a dozen had tap water with levels of lead that require correction. Fifty-eight of these homes had been tested in June of 2015 but the Mississippi State Department of Health did not (as required) notify Jackson officials that some homes had forbidden levels of lead in their tap water until January of 2016.

  The Progressive Jihad Against Bottled Water

  Progressives have placed a spotlight on Flint but not Sebring and Jackson because their ideology precludes them from acknowledging systemic problems with government and its central-planning process. Progressive economists such as Brodwin lay the blame at the feet of libertarian ideology. Worse than their delusions about the state, the ultimate dream of progressives is to outlaw just about all competition to government water.

  They (including filmmaker Michael Moore) are apoplectic about Flint (and by extension Sebring and Jackson) residents consuming bottled water: it has to be transported in on “pollution-spewing” trucks and it creates waste and environmental damage in the form of empty plastic bottles.

  When progressives succeeded at banning bottled water at the University of Vermont in 2013, the number of empty plastic bottles being discarded on campus actually increased as students, staff, and faculty members switched from consuming bottled water to less healthy bottled soft and other drinks. In other words, even in Bernie Sanders’s government-worshipping Vermont, consumers did everything they could to avoid government taps.

  Before Lead, There Was Viagra and Anti-Psychotics

  Years before the Flint, Sebring, and Jackson contaminations, an AP investigation in 2008 discovered everything from antibiotics, antidepressants, sex hormones, erectile-dysfunction drugs, to tranquilizers in the water supplies of twenty-four metropolitan areas with 41–46 million Americans exposed.

  Consuming government water is a bad idea. At its very best, it has a repulsive over-chlorinated swimming-pool smell and even worse off-putting saturated chemical taste. At its worst it can be tainted with everything from trace or higher levels of Viagra or estrogen to dangerous levels of lead. Only a complete fool would regularly and solely consume it to the exclusion of its private alternatives.

  

  

  

  

  

• Explaining Trump's Success In One Chart

  We’ve said it over and over again. 

  The “protest” vote – as exemplified by the American electorate’s support for Donald Trump and Bernie Sanders – reflects a backlash against the deeply entrenched political aristocracy and a revolt against business as usual inside the Beltway. 

  But it’s not just politics as usual that voters are protesting with their support for Trump and Sanders. Their strong poll numbers also reflect a rebellion against a system that “everyday” Americans feel like has utterly failed them. 

  Wall Street nearly collapsed the global economy in 2008 and Main Street never got a reprieve after the post-Lehman chaos wiped away 50% of Americans’ 401ks. 

  Meanwhile, the Jamie Dimons and Lloyd Blankfeins of the world have become billionaires – literally. Ben Bernanke will tell you that this isn’t his fault, but if you want to understand why America is prepared throw the establishment out of office, look no further than the follwoing chart, which shows that since 2006, only the rich have seen their incomes climb.

  

  Perhaps we should ask “courageous” Ben if this is what he set out to achieve with the “wealth effect.” 

  Whether or not Trump (or “the Bern”) can remedy this rather deplorable situation remains to be seen, but the bottom line is this: Americans are sick and tired of being sick and tired and they seem to believe Trump has the cure.

  

  

  

  

  

• Trump, Clinton Sweep Super Tuesday, On Collision Course For White House

  Update: Clinton wins Virginia, Georgia, Alabama, Arkansas, Tennessee, and Virgina; Sanders wins Vermont (obvioulsy), and Trump wins Alabama, Tennessee, Georgia, Massachusetts.

  *  *  * 

  The polls are closing on Super Tuesday with Donald Trump and Hilllary Clinton expected to lock up the GOP and Democratic nominations, respectively. Here’s the up-to-date delegate breakdown:

  

  Stay tuned for live coverage.

  *  *  * 

  Super Tuesday is upon us and we’re about to find out whether Donald Trump and Hillary Clinton will run the table on rivals and lock up their respective party nominations.

  “About half of the delegates needed for a Republican candidate to win the nomination are at stake, plus about a third for Democrats,” Bloomberg notes. “In roughly a dozen state races, Republican front-runner Donald Trump and Democratic leader Hillary Clinton seem poised to win in landslides that could render them nearly inevitable.”

  In other words, this is it for Marco Rubio, Ted Cruz, and the incomparable Bernie Sanders. Either they pull off a miracle today or we’re about to witness a billionaire reality TV host square off against a former Secretary of State who is being investigated by the FBI with the keys to The White House on the line.

  It’s not winner-take-all, delegate wise, on the GOP side, so conceivably, Rubio and Cruz could “win” even if they lose (so to speak), but the outlook isn’t good on the Republican side if your name isn’t Donald Trump.

  Bloomberg is out with a preview of six separate predictions for today’s polls. You can read the full breakdown here, but the following two tables do a nice job of summarizing the outlook:

  

  

  Meanwhile, a new CNN/ORC poll suggests that both Hillary Clinton and Bernie Sanders would beat Trump handily in the national election. “In the scenario that appears most likely to emerge from the primary contests, Clinton tops Trump 52% to 44% among registered voters,” CNN says. “That result has tilted in Clinton’s favor since the last CNN/ORC Poll on the match-up in January.”

  

  According to the poll, Clinton faces a tougher battle against Cruz or Rubio. In fact, in a head-to-head battle, Rubio or Cruz would win, according to the same poll.

  Frankly, we’re incredulous. The idea that Clinton would lose to Ted Cruz or Marco Rubio but would beat Trump handily seems dubious at best given what we’ve seen in New Hampshire, Nevada, and South Carolina. Cruz is flagging and Rubio, although polished, comes across as nervous and inexperienced under fire. Trump is.. well.. just Trump. Nothing sticks in the way of criticism. 

  

  “Nearly 600 delegates are up for grabs on Super Tuesday — the most for any day of the 2016 primary season,” WaPo notes. “The bulk of them come from seven Southern contests, including the day’s biggest prize: Texas.” Here’s the visual breakdown:

  

  And here’s a look ahead:

  

  “Voters’ choices broken out by party provide an interesting window into areas where Trump might hold cross-party appeal,” CNN says. “Though the share of leaned Republicans choosing Clinton on any of the tested issues tops out at 8% on health care, Trump is the most trusted for 15% of leaned Democrats on terrorism, 14% on the economy and 13% on immigration.”

  Still, there’s significant push back against the GOP frontrunner. Indeed, some say many Republicans would vote for Hillary rather than watch Trump steamroll his way into the White House. But according to some polls, it’s far too close to call:

  

  Of course after Tuesday, the argument will no longer be relegated to the realm of the hypothetical. 

  If things go as planned today, we’re going to get to watch the Hillary versus Trump battle play out in real life, which will inevitably provide all types of entertainment value. And if that’s not a good enough reason to root for the billionaire and the former First Lady on Super Tuesday, we don’t know what is.

  

  

  

  

  

• Negative Rates… Negative Outcomes

  Authored by Sean Corrigan, originally posted at TrueSinews.com,

  There has been much head-scratching of late as to why, with interest rates lower than they have been since the Universe first exploded out of the Void, businesses are not undertaking any where near as much investment as that hoped for beforehand by the academic cabal whose ‘effective demand’ and ‘transmission channel’ fixations have helped drive rates to today’s mind-boggling levels.

  This is obviously a complex topic in which there are many different factors at work – not the least of which is that the prevalence of overly-low interest rates for much of the recent past has meant that all too much of such investment as is now desired has not only already been done, but done in what has turned out to be so misguided a fashion, that there is less appetite – as well as fewer means, in many cases – to undertake much more of it today.

  If the cure for higher prices – as the saying in commodity markets goes – is higher prices, then the cause of lower rates is almost certainly lower rates!

  Be that as it may, on a more fundamental level, it might also be possible to tease out at least one aspect of the answer to the conundrum with the aid of a little straightforward logic, as we shall now attempt to do here.

  In theory, positive interest rates reflect the primal truth that goods fit for our enjoyment today are worth more to their potential consumer than those same goods which are only available tomorrow. Moreover, since producer goods are otherwise inedible, unwearable, uninhabitable, etc., in their present form, they only derive their value in respect of their quality of being innate consumer goods-to-be.

  Hence, the means of producing the day’s goods for some future date are always to be discounted back using that same ratio (which is none other than the natural rate) as the one which prevails between consumables-now and consumables-then. Doing so gives us a positive IRR (or, if you prefer, assuring that NPV>0) for the process.

  Here it goes without saying that since the natural rate is inherently unobservable, the market interest rate will be used in its place – an unavoidable substitution which demands that this latter quantity be subject to as few falsifications as possible (a vexed topic suitable for a forthcoming, much deeper treatment).

  This calculation therefore presents the entrepreneur with his bare minimum hurdle – one which, in practice, he will routinely wish to exceed in order to earn that additional surplus which constitutes his true economic, rather than his accounting, profit, as well as to compensate him for the risks he must run and the uncertainties he must bear along the way.

  Negative rates, however, tell our man the converse to the above: they implicitly prize tomorrow’s goods more highly than today’s. This means that a productive combination today should command a HIGHER price when assembled than will the combined cash value of the stream of goods and services to which it is expected to give rise over the course of time.

  That being the case, why on earth would any sane company boss make sizeable new expenditures whose IRR is deemed to be negative in cash terms – and which will therefore both deplete his equity and sap his means of paying dividends to the firms’ owners – when he can, as is becoming widely bemoaned, make alternative use of the same financial means to boost the price of his shares by swapping some of them for an obligation which he is effectively being rewarded for taking on, so making his hapless bond-holders pay his wages for him instead?

  Madness!

  

  

  

  

  

• Three Weeks After Buying Stocks, Gundlach Is Cashing Out Again: "I'm Bearish"

  it was just last Friday, when roughly at the same time that Dennis Gartman flipflopped to bullish (just as the rally stalled, and just before turning bearish again ahead of today’s torrid rally) we reported that in what came as a surprise to us, that just as Jeff Gundlach was warning about the impending failure of central banks, the lack of a “bullish case for oil”, about a bear market for stocks, and about an imminent surge in gold in early February, the DoubleLine manager was buying stocks.

  As Reuters first reported, Jeffrey Gundlach “said on Friday that his firm purchased some U.S. stocks two weeks ago after their rocky start in January.”

  His reasoning was simple: buy the bear market rally.

  “I thought it was a good buy point two weeks ago Wednesday and so we bought some,” Gundlach told Reuters. Gundlach, who oversees $90 billion in assets for the Los Angeles-based DoubleLine, said the firm was at “maximum underweight” since last August.

  Two days later, and following the biggest rally to start the month of March in history, Gundlach is happy to count his profits and once again cash out.

  In an interview with Reuters Jennifer Ablan after DoubleLine Capital’s February flow figures were released (it was a $2.2 billion inflow) , Gundlach said the firm is now considering closing out some of its long positions in the stocks that they purchased three weeks ago.

  Is the bond trader now just a closet equities daytrader? We wond’t know, but since the S&P 500 has jumped 8% in that period, why not takes some profits.

  “That’s what we’re talking about,” Gundlach said about booking some gains after their short-term rally.

  Gundlach still maintains that the U.S. stock market is in a bear market but had made those equity purchases because the conditions in the second week of February with “wickedly negative equity sentiment were such that risk/reward favored a potential tradable rally and also made such a low allocation less advisable.”

  The time to buy the dip, however, has passed: “I am bearish. There are just wiggles and jiggles in the markets.“

  

  

  

  

  

• Hillary Clinton: A Bigger Warmonger Than Bush/Cheney?

  Bush and Cheney launched two disastrous and totally unnecessary wars which increased terrorism and undermined America’s standing in the eyes of the world.

  Hillary Clinton is at least as bad …

  She is largely responsible for the war in Syria, which is plunging the Middle East and Europe into chaos.

  The New York Times confirms that Clinton is responsible for the violent regime change in Libya, which was also completely unnecessary.

  Hillary is largely responsible for the bombing of Yugoslavia … another wholly unnecessary war.  Diana Johnstone writes:

  In her star-struck biography of the First Lady, Hillary’s Choice, Gail Sheehy reported Hillary’s plea in favor of bombing Yugoslavia in 1999 as a major point in her favor. According to Sheehy’s book, Hillary convinced her reluctant husband to unleash the 78-day NATO bombing campaign against the Serbs with the argument that: “You can’t let this ethnic cleansing go on at the end of the century that has seen the Holocaust.”

   

  This line is theatrical and totally irrelevant to the conflict in the Balkans. As a matter of fact, there was no “ethnic cleansing” going on in Kosovo at that time. It was the NATO bombing that soon led people to flee in all directions – a reaction that NATO leaders interpreted as the very “ethnic cleansing” they claimed to prevent by bombing.

  Joshua Marshall notes:

  At least 15,000 Kosovars gathered in the central square of Pristina, the country’s capital, to demand the government’s resignation. In January, thousands of protesters clashed with police, hurling Molotov cocktails, setting a major government building and armored police cars on fire, and wounding 24 police officers.

   

  The aim of this protest was to overthrow the government with violence, as the government said in a statement. The U.S. ambassador chimed in, “Political violence threatens democracy and all that Kosovo has achieved since independence.”

   

  This violence gets little attention from the American media in part because, unlike the Ukrainian demonstrators who overthrew their democratically elected government in 2014, Kosovo’s protesters are targeting a pro-Western government that eagerly seeks membership in the European Union.

   

  But it’s no wonder that Kosovo’s political fabric is so rent by violent confrontations. The rump state was created by a violent secessionist movement led by the Kosovo Liberation Army (KLA). That guerrilla band of Albanian nationalists was covertly backed by the German secret service to weaken Serbia. Its terrorist attacks on Serbian villages and government personnel in the mid-1990s prompted a brutal military crackdown by Serbia, followed by NATO’s decisive intervention in 1999.

   

  During the fighting the KLA drove tens of thousands of ethnic Serbs from Kosovo as part of an ethnic cleansing campaign to promote independence for the majority Albanian population. It recruited Islamist militants – including followers of Osama Bin Laden – from Saudi Arabia, Yemen, Afghanistan and other countries.

   

  President Bill Clinton’s special envoy to the Balkans, Robert Gelbard, called the KLA “without any question, a terrorist group,” and a Council on Foreign Relations backgrounder added, “most of its activities were funded by drug running.”

   

  None of that, however, stopped Washington from embracing the KLA’s cause against Serbia, a policy spearheaded by the liberal interventionist First Lady Hillary Clinton and Secretary of State Madeleine Albright. Without authorization from the United Nations, NATO began bombing Serbia in March 1999, killing some 500 civilians, demolishing billions of dollars’ worth of industrial plants, bridges, schools, libraries and hospitals, and even hitting the Chinese embassy. (“It should be lights out in Belgrade,” demanded New York Times columnist Thomas Friedman. “Every power grid, water pipe, bridge, road and war-related factory has to be targeted. Like it or not, we are at war with the Serbian nation.”)

   

  Following Serbia’s capitulation, according to Human Rights Watch, “elements of the KLA’€ engaged in “widespread and systematic burning and looting of homes belonging to Serbs, Roma, and other minorities and the destruction of Orthodox churches and monasteries. This destruction was combined with harassment and intimidation designed to force people from their homes and communities. By late-2000 more than 210,000 Serbs had fled the province . . . The desire for revenge provides a partial explanation, but there is also a clear political goal in many of these attacks: the removal from Kosovo of non-ethnic Albanians in order to better justify an independent state.”

   

  Former KLA leaders, including its political head Hashim Thaqi, went on to dominate the new Kosovo state. A 2010 report by the Council of Europe declared that Thaqi, who was then Kosovo’s prime minister, headed a “mafia-like” group that smuggled drugs, guns and human organs on a grand scale through Eastern Europe. The report’s author accused the international community of turning a blind eye while Thaqi’s group of KLA veterans engaged in “assassinations, detentions, beatings and interrogations” to maintain power and profit from their criminal activities.

   

  ***

   

  In 2012, Madeleine Albright and a former Clinton special envoy to the Balkans bid to take control of the country’s state-owned telecommunications company despite widespread allegations of corruption, the attempted assassination of the telecommunications regulatory chief, and the murder of the state privatization agency’s chief.

   

  ***

   

  In 2014, a three-year E.U. investigation concluded that “senior officials of the former Kosovo Liberation Army” should be indicted for war crimes and crimes against humanity, including “unlawful killings, abductions, enforced disappearances, illegal detentions in camps in Kosovo and Albania, sexual violence, other forms of inhumane treatment, forced displacements of individuals from their homes and communities, and desecration and destruction of churches and other religious sites.”

   

  Under tough pressure from the United States and E.U., Kosovo’s parliament finally agreed last summer to permit a special court to prosecute former KLA leaders for war crimes. The court will begin operating this year in The Hague.

   

  “The sad thing is that the United States and European countries knew 10 years ago that Thaqi and his men were engaged in drug smuggling and creating a mafia state,” said one European ambassador last year. “The attitude was, ‘He’s a bastard, but he’s our bastard.'”

  Hillary also backed coups against the democratically-elected leaders of Haiti, Honduras and other countries.

  And she helped create the idea of “humanitarian war”, where the U.S. brutally overthrows a government by military force … justifying the action by falsely claiming that otherwise civilians will be.

  Hillary has also literally supported Islamic jihadis with arms, money and logistical support.

  For example, the U.S. under Clinton supported Al Qaeda (and see this) so that it could overthrow Libya’s government.

  And the U.S. under Clinton supported Islamic jihadis so that they would overthrow Syria’s government.

  Indeed:

  • The U.S. started plotting regime change and arming jihadis in Syria – in an effort to topple Assad – a decade ago

  • Hillary Clinton – as secretary of state – admitted that arming the rebels would strengthen Al Qaeda

  So while Bush and Cheney’s foreign policy was utterly despicable,  Hillary Clinton has wreaked havoc on the world stage on a scale which is comparable … if not worse.

  Postscript: It's telling that the Neoconservative hawks – the same people who brought us the fiascos in Iraq and Afghanistan (which Hillary also supported) – HATE Trump and LOVE Hillary.

  

  

  

  

• "We're In Trouble": Alan Greenspan Delivers Stark Warning

  Were you wondering what Alan Greenspan thinks about the outlook for monetary policy across the globe?

  Neither were we, but Bloomberg was and Tom Keene and Mike McKee got the “privilege” of sitting down with the “maestro” on Monday afternoon to discuss a variety of topics including NIRP, which Greenspan says “warps investment behavior.”

  While he isn’t willing to go so far as to condemn negative rates as “dangerous,” he does say the global race to the proverbial Keynesian bottom is “counterproductive.”

  As far as the US economy is concerned, Greenspan isn’t optimistic. “We’re in trouble basically because productivity is dead in the water…Real capital investment is way below average. Why? Because business people are very uncertain about the future.”

  Well yes, they most certainly are. Of course were it not for “the Greenspan put” and decades of policy largesse we might not have ever had a financial crisis in the first place (David Stockman will tell you all about Greenspan’s role in creating the conditions we now find ourselves in).

  As for whether Dodd-Frank has solved anything, Greenspan says no: “The regulations are supposed to be making changes of addressing the problems that existed in 2008 or leading up to 2008. It’s not doing that. ‘Too Big to Fail’ is a critical issue back then, and now. And, there is nothing in Dodd-Frank which actually addresses this issue.”

  And finally, here’s the punchline. Asked whether he’s optimistic going forward, Greenspan said this: “No. I haven’t been for quite a while. And I won’t be until we can resolve the entitlement programs. Nobody wants to touch it. And that is gradually crowding out capital investment, and that’s crowding out productivity, and it’s crowding out the standards of living where do you want me to go from there.”

  Here are the clips in which Greenspan touches on everything from NIRP to faux Chinese GDP data to US crude production:

  Now if only he hadn’t gotten us into this mess in the first place…

  

  

  

  

  

• Is Ackman Facing A Liquidity Crunch: CP Files Shelf With Pershing As Selling Shareholder

  It is often said that on Wall Street there are no guarantees. That is wrong: there is nothing more certain in the realm of big money than carnivorous predators surrounding and tearing apart any hedge fund that bleeds in the water by shorting its longs and forcing a squeeze of its shorts, until and past the point of max pain, which forces the fund to liquidate and hit any bid or lift any offer, traditionally at extremely preferential terms to everyone on the other side of the trade.

  For the sake of simplicity, “predators” include any and all hedge funds, especially those which the target assumed it was friendly with and until recently was inviting to his or her “idea dinners.” In fact the only catalyst predators typically need is any confirmation that the prey is crippled, at which point the last dance begins. In other words, any “blood in the water” usually means the different between life and death; and in these violently fast markets, the time from life to death may be counted in milliseconds.

  Which is why any time a distressed hedge fund finds itself in liquidity difficulties or faces a surge redemption requests, its first priority is to hide these as well as possible. The problem is that it still has to sell something to free up liquidity, and once it starts doing that, the prime brokers make sure it is marketwide news within minutes.

  One such hedge fund, of course, is Bill Ackman’s Pershing Square, which thanks to just one stock, Valeant, has found itself in a heap of trouble, and as of a week ago was down -17.3% for 2016 after tumbling 20% in 2015; worse, after the latest rout in Valeant stock, we expect the fund to report it is down over 20% YTD when it issues its weekly update for the week ended March 1 overnight.

  However, despite the massive performance rout Pershing Square has experienced, so far there had been no hints it may be impacting either the fund’s liquidity or, so far at least, redemption requests.

  That may have changed today when earlier this afternoon, Pershing Square portfolio company (long 13.9 million shares) Canadian Pacific filed a $1.5 billion mixed Shelf statement which covered everything from Common to Preferred to Warrants and Units.

  As a reminder, a shelf, or S-3 filing, is a type of public offering where certain issuers are allowed to offer and sell securities to the public without a separate prospectus for each act of offering. Instead, there is a single prospectus for multiple, undefined future offerings.

  In effect, it gives the seller a green light to approach the market at will.

  What was curious about the CP shelf is the following disclosure:

  Canadian Pacific Railway Limited (“CPRL” or the “Corporation”) may from time to time offer common shares (“Common Shares”), first preferred shares (“First Preferred Shares”), second preferred shares (“Second Preferred Shares”), subscription receipts (“Subscription Receipts”), warrants (“Warrants”) and units (“Units”) of CPRL (collectively, Common Shares, First Preferred Shares, Second Preferred Shares, Subscription Receipts, Warrants and Units are referred to herein as the “Securities”) having an aggregate offering price of up to US$1,500,000,000 or its equivalent in any other currency. Certain funds managed by Pershing Square Capital Management, L.P. (“Pershing Square”) or its affiliates or their respective permitted assignees (collectively, the “Selling Shareholder”) may also from time to time offer and sell Common Shares pursuant to this prospectus. See “Selling Shareholder”.

  And this:

  SELLING SHAREHOLDER

   

  As at the date hereof, based on publicly available information, the Selling Shareholder beneficially owns 13,940,890 Common Shares, which is approximately 9.1% of the outstanding Common Shares. The Selling Shareholder may sell some, all or none of their Common Shares covered by this prospectus.

   

  Pershing Square, a registered investment advisor under the United States Investment Advisors Act of 1940, is the investment advisor to each of Pershing Square, L.P. (“PS”), Pershing Square II, L.P. (“PS II”), Pershing Square International, Ltd. (“Pershing Square International”) and Pershing Square Holdings, Ltd. (“Pershing Square Holdings” and, together with PS, PS II and Pershing Square International, the “Pershing Square Funds”). PS Management GP, LLC (“PS Management”) is the sole general partner of Pershing Square. Pershing Square GP, LLC (“Pershing Square GP”), a registered investment advisor under the Investment Advisors Act of 1940, is the sole general partner of each of PS and PS II. Pershing Square has investment discretion with regards to 13,940,890 Common Shares, which Common Shares are directly owned by the Pershing Square Funds. The Common Shares were acquired during the period from September 23, 2011 to February 2, 2012. William A. Ackman is the Chief Executive Officer of Pershing Square and the managing member of each of PS Management and Pershing Square GP. Mr. Ackman is also a director of CPRL. Paul Hilal, a former Partner at Pershing Square, served as a director of CPRL from 2013 until his resignation from CPRL’s Board of Directors on January 26, 2016. Pershing Square is a Delaware limited partnership and its address is 888 Seventh Avenue – 42nd Floor New York, NY 10019.

  In other words, the selling shareholder quietly tacked on to the CP Shelf is not just the company, but a major investor, in this case the second largest investor in CP after T. Rowe Price which is Bill Ackman’s Pershing Square which owns just over $1.7 billion in common stocks, or roughly enough to fill the entire shelf.

  Why go this circuitous route to sell shares directly? The simplest answer is also the most disturbing for Pershing Square LPs – Ackman’s liquidity breaking point has come, and the fund is quietly starting to liquidate positions directly to the market bypassing prime brokers. Of course, if that is indeed the case, then Ackman would promptly deny any interest in using this shelf for liquidation purposes.

  Not surprisingly that is precisely what he did moments ago, when as Bloomberg reported:

  • PERSHING HAS NO CURRENT PLANS TO SELL CANADIAN PACIFIC SHRS

  Then why file it?

  Perhaps Ackman is telling the truth, but we wonder how much lower the stock price of VRX will have to drop before Pershing does precisely the opposite when faced with a major margin call on its option-based position, and maybe a better question – how much lower can Pershing’s P&L drop before Ackman is finally flooded with terminal redemption requests by investors who by now must have lost all their hair using Ackman as a levered bet on the survival of a company which with every passing day smells increasingly more like fraud.

  In the meantime keep an eye on Pershing Square’s weekly performance updated on the following site, because while the credibility of Ackman’s word is “fluid”, numbers – especially negative ones – are always ironclad.

  

  

  

  

  

• Worst Global Economic Data In 4 Years Sparks Stocks Best Day In 6 Months

  Dudley's "Downside Risks" and Draghi's "No Limits" were all it took to trump the worst global macro data since 2012 (JPM Global PMI) and send stocks soaring… Some quick thoughts from (ironically) 1930…

  Worst global economy since 2012…

  

   

  Best day for Nasdaq in six months…(and best first day of a month since 2013)

  

   

  Futures show what really happened…

  

   

  The Dow soared over 400 points off overnight lows, surging to the lows from the first trading of 2016… Bad News Is Great News once again!!

  

   

  With financials leading the ripfest…

  

   

  With financials managing to tag the 50DMA…

  

   

  But seriously – are we going to fall for this again?

  

   

  Ripped higher on the back of USDJPY…(but even that decoupled in the last hour as 114.000 capped the gains)…

  

   

  As the crude correlation broke shortly after EU close…

  

   

  This was not a short-squeeze per se – but as the day went on the "most shorted" names did start to suffer…

  

   

  But we do note that once again the "weakest momentum" stocks notably outperformed (messing with quant funds again)

  

   

  VIX broke to a 17 handle following trail of its tails…

  

   

  Breaking back below its 200-day moving-average for the first time in 2016…

  

   

  Lots of chatter today about liquidations of VRX positions (and the SPY market hedges with them) – driving VRX lower and the market higher… until we tweeted about it…

  

   

  Treasury yields exploded higher on the weak data this morning

  

   

  The USD Index slid back to unchanged on the week today after an early bounce on JPY weakness which was trujmped by EUR strength after Europe closed)…

  

   

  Commodities were mixed today: PMs very modstly lower, copper and crude higher – bnut we note the broad based flush ast around 8ET…

  

   

  And finally there was Nattie – which popped and dropped and popped on weather changes, hedge fund rumors, and force majeurs…

  

   

  Charts: Bloomberg

  

  

  

  

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• Financial Market Regulation – Market Transactions Tax (Video)

  By EconMatters

  

  We discuss the Financial Transactions Tax in this video. Bernie Sanders has made this issue part of his campaign in order to appeal to redistribution voters, a common liberal ideal in the Democratic Party.

  

   

  © EconMatters All Rights Reserved | Facebook | Twitter | YouTube | Email Digest | Kindle  

  

  

  

  

• Japan Sells 10Y Bond At Negative Yield For First Time Ever

  As we detailed earlier, for the first time in the history of crazy, Japan ‘sold’ 10-year government bonds today at a negative yield. Translated into English, this means “investors” agreed to pay the Japanese government 2.4bps per year for the privilege of lending it money for 10 years…

  Down from a 7.8bps positive yield at the last auction, the 10Y auction’s average yield was -2.4bps…

  

   

  Peter Pan(ic) continues as the rest of the JGB curve collapses to fresh record low yields and await the reaction in Japanese bank stocks…

  

   

  Charts: Bloomberg

  

  

  

  

  

• The Two-Party Illusion

  Submitted by Jeff Thomas via InternationalMan.com,

  “There is nothing which I dread so much as a division of the republic into two great parties, each arranged under its leader, and concerting measures in opposition to each other. This, in my humble apprehension, is to be dreaded as the greatest political evil.”  –   John Adams

  The Great Illusion of the two-party system is that it allows the voter a choice – usually between a liberal and a conservative government. The reality is that, whichever party wins the election, the government is, in truth, a totalitarian one. The “choice” is a mere distraction from the true objective.

  

   

  Recently, an American college student, Justin Snyder, commented on his choice for his country’s next president and his reasons for it. Mister Snyder said, in part,

  "I support Hillary Clinton for president … When you add up her knowhow, leadership, and experience, it's clear that Hillary Clinton is a perfect fit to be the commander-in-chief of the largest military the world has ever seen … The thing is, we've been trying the free market thing for centuries. All we have to show for it is a super wealthy class of people who run the country. What we need is someone to represent the common man, and that someone is Hillary Rodham Clinton.”

  Mister Snyder has done quite well in absorbing the modern liberal party line, one that both advances itself on the concept of collectivism, yet reverses itself on its position just two generations ago that war is an evil concept, promoted by conservatives in an effort to control the world.

  His comments are not unusual, and that’s what makes them significant. He’s a modern, educated, effectively indoctrinated liberal. His political counterpart is a modern, educated, effectively indoctrinated conservative. Together, they comprise the backbone of governmental dominance over a people: different party, same blind acceptance of political party dogma.

  John Adams had it right in his 1780 letter to Jonathan Jackson, as quoted above. He understood that the old method of thought control – that of kings ordering their vassals what to believe – had had its day. It had never been fully effective, as the vassal was free to decide whether he believed the king. But, as early as 1780, the future would belong to those politicians who were skilled in giving the public “A” and “B” choices.

  People need to believe that they have a choice. Interestingly, though, they seem to be content with only two choices. A skilled politician therefore limits the number of choices to two and, today, this is the way it’s done in most “advanced” countries. Whether it’s Democrat vs. Republican, or Tory vs. Labour, there are two dominant parties. Each is represented by a group of individuals seeking to gain or maintain public office.

  Initially, in order to sell the two-party concept to voters, it’s important for each party to have a philosophical identity. These two identities would seem to need to be based on opposing primary principles or ideologies, such as a free market system vs. collectivism, or empire-building warfare vs. a commitment to peace.

  The US did, indeed, follow this route in developing its own primary sports teams, the Democrats and the Republicans. And, along the way, it learned that the public can be best manipulated if they are blindly devoted to either one team or the other. (Those in the red T-shirts detest those in the blue, and vice versa.)

  Once this blind devotion has been achieved, it becomes possible to dispense with the extreme polarity of principles and ideology. As stated above, only two generations ago, there was a “collectivism and peace” party and a “free market and empire” party in the US. What they had in common, however, was that both required an increasingly larger government to support its objectives.

  Today, the US political system has evolved to the point that the principles and ideology are disappearing. Today, Democrats fully accept and even encourage overseas aggression. This has been achieved through the illusion of “terrorism.” Similarly, the Republicans have watered down their commitment to a free market system through the soma of ever-widening entitlements.

  No longer is it necessary that the two dogmas are polar opposites. They can only be five degrees apart from each other, yet each team of supporters fully believes his team is morally right and the other team is morally wrong. Meanwhile, they’re both headed toward the same warfare/welfare end. And of course, both teams fully accept the concept that an ever-expanding government role is necessary in achieving these ends.

  But how is it possible that the principles and ideologies have been virtually erased? After all, the very idea of principles is that they are not based on popularity, but on inner conviction. Well, truth be told, the great majority of people have no real moral compass at all; no real inner sense of convictions. Their convictions can be manipulated in such a way that the portion of the brain that wishes to deal with convictions can be redirected into areas that are of little consequence.

  On the surface of it, this seems like a bold and even radical statement, yet, as we can readily see, as long as never-ending debates are maintained over the less vital issues, such as abortion rights, gay rights, etc., a people can be distracted away from primary principles. Therefore, the government has the ability to create the illusion that a two-party system exists when, in truth, as the caption below states,

  “VOTING: It’s deciding which criminal gets to steal everything you have.”

  

  The concept of a government as a body of individuals that are chosen by election to represent the voters is a good one, but it’s not a concept that’s shared by those who are elected. Those who are elected almost unanimously see the concept as one in which the rulers are determined. They have no illusion about representation, although they do understand that they must give the impression to voters that they see themselves as representatives. Rulers seek to rule. All other concerns are secondary.

  Over time, those elected will look for every opportunity to increase their own power (both politically and economically). Consequently, the longer a governmental system exists in a given country, the more it will deteriorate toward tyranny.

  At some point, there is, in almost every country, a rebellion of some sort that causes a reset – a return to a more democratic structure where a greater level of representation once again takes place. Then the deterioration, inexorably, begins anew. This is why Thomas Jefferson was so fervent that, every so often, a revolution is essential.

  It should be pointed out that the US is not alone in this deterioration. In all fairness, many other countries are in a similar state. Increasingly, people in these countries recognise that conditions are becoming tyrannical. Yet, most hold out the hope that the next election will somehow magically result in a return to basic freedoms. This will not be the case. Deterioration is baked in the cake. Regardless of the candidate, regardless of the party, regardless of the country, the outcome will be the same.

  But, as stated previously, the deterioration process is a very long one and, at any given time in history, there are countries that are not so far along in the process. A bright future does indeed exist, but it lies not in the hope of a reversal by political leaders. It lies in choosing one’s domicile – one where basic freedoms remain.
   

   

  

  

  

  

  

• China Faces 15 Trillion Bombshell As Shadow Banking Sector Collapses

  We’ve spent more time than most documenting China’s wealth management product problem.

  WMPs are part and parcel of Beijing’s sprawling shadow banking complex which, until 2014 that is, helped pump trillions of yuan into China’s economy and shouldered the burden when it came to propping up the most important economy on the planet.

  But WMPs are dangerous. In fact, we flagged them as an 8 trillion black swan back in August on the way to asking what would happen if China’s shadow banking sector were to collapse altogether.

  This is space that’s running what amounts to an enormous maturity mismatched fraud. Of course the describes the entire fractional reserve banking system, but in the case of China’s WMPs, it’s all on the verge of implosion. Don’t believe us? Just ask anyone who bought into products sold by Fanya Metals’ Shan Jiuliang.

  This is a very real threat to the Chinese banking sector. The multifarious nature of the space’s liabilities makes it virtually impossible for anyone to assess what the embedded risks are. As we first documented last summer, some 40% of credit risk is carried off balance sheet and that figure might well have grown recently, especially considering mid-tier bank’s propensity to extend new credit through new cateogries of channel loans that are classified as “investments” and “receivables”

  In any event, China is desperate to revive the credit impulse and that means keeping the shadow banking space alive. Here’s BofA with more on China’s ticking WMP time bomb:

  • Growth rate accelerated. By the end of 2015, WMP balance reached Rmb23.5tr, up 56.46% YoY. Astonishingly, growth rate accelerated last year compared to the year before despite a high base – in 2014, the balance grew from Rmb10.2tr to Rmb15.0tr, up 47.25% YoY. The key drivers of this accelerated growth are joint stock banks whose WMP balance rose from Rmb5.67tr to Rmb9.91tr, up 74.8% YoY; city commercial banks, Rmb1.7tr to Rmb3.07tr, up 80.6% YoY. On the other hand, the big four state-owned enterprise (SOE) banks’ balance rose by a more moderate 53.2% YoY (from Rmb6.47tr to Rmb8.67tr) while foreign banks’ balance declined by 25.6% (from Rmb0.39tr to Rmb0.29tr).

  • Liquidity risk is rising. The outstanding balance of open WMPs, of which buyers can subscribe or redeem largely at will, reached Rmb10.32tr, up 96.95% YoY. They accounted for 44% of bank-run WMPs balance as of Dec 2015, up from 35% a year earlier. The increased share of open WMPs adds to the duration mismatch in the shadow banking sector and makes the system more prone to liquidity shock in our view. In 2015, banks issued Rmb158.41tr worth of WMPs, i.e., Rmb13.2tr a month on average. If WMP buyers decide to ‘go on strike’ for whatever reason, a liquidity crunch in the shadow banking sector could quickly develop in our view.

  • Implicit guarantee still largely in place. Only Rmb1.37tr worth of open WMPs, representing 13% of the total, are priced based on NAV. Also, the portion of closed WMPs that are priced similarly is tiny. This means that the vast majority of WMPs are still sold with the so-called “expected return”, which is largely viewed as promised return by WMP buyers by our assessment. In 2015, only 44 WMP products, or 0.03% of matured products during the year, caused investors to lose money. This loss ratio appears unusually low in our view. It is interesting to note that most of the 44 products were sold by foreign banks.

  • Individual buyers still dominant. As of Dec 2015, individual investors, including high net-worth individual investors, accounted for Rmb13.34tr WMP balance, or 56.6% of the total (institutional investors, 30.6%; inter-banks, 12.8%). They subscribed to Rmb101.49tr of the newly issued WMPs during the year, representing 64.1% of the total. Mood of individual investors are more volatile than institutions in general.

  The bottom line is this: if this implodes, it will not only tank the entire Chinese banking system but the global economy as well, as the amount of liabilities here is quite frankly enormous. 

   

  

  

  

  

  

• China's Crowd-Sourced Housing Bubble Goes "Crazy" – $585,000 For A 65 Square Foot 'Apartment'

  Via PandaHedge.com,

  The price of home price in China’s tier one cities (Beijing, Shanghai, Guangzhou and Shenzhen) started another around of rally in the last couple months, and became “crazy” in Feb as described by the Chinese who form lines to buy the apartments everywhere.

  When I saw this online commercial as below, I cannot help asking myself: Really?  This place can be sold as a “home” (I thought it’s just a kitchen), and at this price ($9k per sqf)?

  

  The ads is posted on the web site of China’s biggest online real estate agent Lianjia, showing a 6 square meters (65 sft) property which asks for RMB 3.8milion ($585k in total or $9k per sft).  Frankly speaking, this place has its good selling points: sitting at a good school zone, close to the subway and not subject to the real estate restriction policy. But really, $9k per sqf? 

  Maybe you think the tiny kitchen is an isolated case, but let’s look at the following general price data.

  Chart 1: Tier 1 cities ended the YoY price decline since June 2015 and enjoyed a strong rally as it did in 2010 and 2013. 

  

  Chart 2:  Absolute price level of tier 1 cities (Shenzhen, Beijing and Shanghai (RMB/sqm))

  

  Source: Wind, blue line: Shenzhen, red line: Beijing, and blue dot line: Shanghai

  The median home price in China’s top 3 tier 1 cities ranges between $0.5k to 0.6k per sqf (RMB 33k to 43k per sqm).  Based on Trulia’s data in 2015, the median home sales in NY is $1.5k per sqf and that in San Francisco is $0.95k per sqf.  However, the median household income in Shanghai is only $15,400 per year while that in NY/SF is around $59,000/$84160, so the home price to income ratio in China’s tier 1 cities is higher than those in US tier 1 cities.

  Chart 3:  Price change % of tier 1 cities in the last five years

  

  Source: Wind, from left to right, Shenzhen, Beijing and Shanghai

  So will investing in the tier one properties bring you stable income?  Let’s take a look at the rent yield.

  Chart 4: Tier 1 cities’ rent yield in the last eight years (%)

  

  Source: Wind; Red: Shanghai, Blue: Beijing and Pink: Shenzhen

   The trend of rent yield has been declining and now the yield stands at only around 2%.  But if we take a look at real yield, it’s another picture

  Chart 5: Tier 1 cities’ rent yield minus China 10 yr treasury yield (%)

  

  Source: Wind; Red: Shanghai, Blue: Beijing and Pink: Shenzhen

  Apparently, you will have negative real income if you investing in China properties.  Your investment return comes from the next buyer/speculator or the people who are stupid enough to pay 20 to 25 times home price to house income (if they really can afford).

  You must wonder how the average Chinese people can afford a living place as the home price to income ratio is so high.  Yes, you are right, the average Chinese people or even the white collar/professionals are not able to afford the home price in tier 1 cities, but they can “invest” in the property market just like they did in the A share equity market through leverage.  For the A share equity market, we can estimate the leverage through the level of “margin debt”.  However, there’s no such a metric to estimate the size of the leverage used in the property market.  But we can get a remote sense from another perspective.  We all know January new RMB loans hit a record high RMB 2.51 trillion, while the deposit of industrial corporate only increased RMB 800 billion.  It means that a decent part of the loans did not go into industrial corporate’s bank accounts to support the real economy.  Where did it go?  Apparently the margin debt in equity market was dropping in Jan, then you know the answer.

  In addition to the leverage part, there’re more concerns in the equity part: down payment.  For speculator, they like to buy as many as home in the same area so they can “manage” the price through volume control.  Right now China’s real estate policy still mandates 25% to 30% down payment when you buy a property, so the equity part itself demands significant cash flows (tier 1 cities’ average home price is around $1.2 million to $1.5 million per unit, so 25% to 30% down payment for 100 units is still a big number in China.  Yes, it’s not wrong number, 100 units is a normal case for a group of speculators who will buy the whole apartment complex).  Here are two ways how the speculators get around this entry barrier?

  • The real estate agents provide margin for the down payment. To boost the transactions and earn the commission, the agents provide 50% to 70% lending of the down payment part and make sure the buyers have enough money to finish the transaction. In reality, the buyer may only pay 10% down payment (agents lend him 70% of the 30% down payment requirement) to buy a home.  The speculator’s leverage is loosened from 1:3 to 1:10 through this down payment leverage.  Right now, the buyer not only owns money to the banks but also the agents.  But it does not matter in a quick and steep upward market, as the speculators will turn over their inventory quickly and make a fortune of it.  All they need is big enough equity to leverage the bubble.  How big is the size of down payment leverage?  From the public information of three top agents (Lianjia, 5i5j, and Fang), we know that they provided this kind of down payment leverage for transactions with the value of around RMB 500 billion.
  • Some small individual speculators use “crowdfunding” to make the down payment. Per Wiki, crowdfundingis the practice of funding a project or venture by raising monetary contributions from a large number of people, today often performed via internet-mediated registries.  Crowdfunding is popular in the tech space, but in China, speculators use it to fund their bets in the property market.  Ironically, they use Wechat as the internet platform to organize the crowdfunding.  In these days, as long as you walk into any Starbucks in Shanghai, you will hear people discussing crowdfunding their “real estate investments”.  The problem is, it’s difficult to define ownership in a crowdfunding support down payment, because it’s impossible to put 100 or 200 people’s names under a property’s ownership.

  Anyway, the current crazy bubble in China’s tier 1 cities smells the same as the A share bubble which was boosted by the margin debt in the last two years.

  We know it will end badly when the margin debt bubble is pierced.

  *  *  *

  Shortly after completing this note, Bloomberg runs the following headline:

  China State Media Warns of Home Price Surge in Top Cities

   

  Some developers and real estate agents created illusion of massive demand for homes that led to purchases by panic buyers, according to a commentary from Xinhua written by reporter Zheng Juntian on Monday.

   

  More than 30% buyers of homes in Shenzhen city made purchases as investment, Xinhua cites data from unidentified researcher

   

  Local govts should prevent home prices from rising overly fast and avoid speculative demand buying homes with financial leverage

  So having herded people into the stock market and blown them up; and then back into housing (easing mortgage restrictions etc.), the authorities will now proceed to yell "bubble" in a crowded (and over-levered) 'theater' of real estate. We sense the social unrest building as we speak.

  

  

  

  

  

• Japan Braces For A "Turbulent, Volatile" 10-Year Auction With First Ever Negative Yield On Deck

  Two days after Japanese yields plummeted on January 29, when the BOJ unexpectedly stunned the world by announcing negative interest rates, the Japanese government sold 10 Year Bonds at what was then a near record low yield of 0.078% in an auction which carried a 0.3% coupon. Since then things have only gotten more… deflationary, and as can be seen on the chart below, as of this moment the 10Y JGB is yielding a record-0.055%

  

   

  And since Japan is set to issue JPY2.4 trillion ($21 billion) in 10 year notes in a few hours, it means that for the first time ever, the Japanese government will be paid to actually “sell” 10Y paper – bonds which will have a negative yield at issue.

  This won’t be the first time Japan has sold NIRP paper: as Bloomberg writes, over the past month Japanese government bonds of as long as five years in maturity sold at a negative yields, however tonight is only the first time when the entire curve through the 10 Year mark will be submerged below the X-axis.

  However, where things may get tricky, is that as BBG adds demand at 10-year note auctions has declined this year as yields continued their slide, even with the central bank having the scope to buy every new bond issued as part of its stimulus program. In other words, bidders have no choice and if they want the “safety” of government backstopped collateral, they will have to pay Abe for the privilege of giving him their money for the next decade.

  “There are concerns about who would actually buy 10-year bonds with negative yields,” said Shuichi Ohsaki, the chief Japan rates strategist at Bank of America Merrill Lynch. “Even if you wanted to participate in the BOJ trade, you would have to hold onto the bond until it becomes eligible for the BOJ operation. And with the increase in volatility, it’s a tough one to trade.”

  Where things get even more complicated is that in China the concept of a yield curve is practically non-existent: as the chart below shows, the JGB yield curve was the flattest on record at the end of last week, under pressure from the BOJ’s bond purchases, with the premium offered by 10-year securities over two-year notes narrowing to just 11.5 basis points.

  

  That’s not all: if DB’s Makoto Yamashita is right, tonight’s auction may be quite “turbulent”:

  “We expect the10y JGB auction on the 1st to be a new issue with a 0.1% coupon, but auction yields are likely to go into negative territory. We do not expect the bank sector to buy, and demand from dealers and foreign investors is unlikely to provide sufficient support. We expect the auction to be turbulent given investors are also unlikely to short futures and the possibility of a tail. “

  Then again, Japan hasn’t had a functioning, free or efficient bond market in a decades. This is the same market which none other than SocGen’s Albert Edwards recently fell in love with because Japan’s 10Y bond is the only asset class which, as we reported last week, has not had a losing year since 2007.

  

  While Edwards was “all in” 10Y JGBs, we – and certainly Kyle Bass – are less euphoric. As we said:

  Yes, Japanese bonds have generated positive returns for the past 9 years, but all it takes is just one moment of sheer central bank stupidity, or outright insanity, to destroy everything. The BOJ had just such a moment one month ago when it launched NIRP. What if the next moment is its last?

  What is the next moment is in a few hours?

  Who knows: perhaps the combination of a manipulated, rigged bond “market”, one which is entirely dominated by the BOJ, with an unprecedented event like the first ever negative yield on a 10Y JGB in history, is precisely the catalyst that will not only snap Japan’s unbroken treasury record, but finally end the farce that is Japan’s centrally-planned, well… everything, and result in the Bank of Japan finally losing control.

  While we don’t think tonight’s auction will be the catalyst just yet, keep an eye on the auction results when the come in. Just in case.

  

  

  

  

  

• Workers At Tesla's Gigafactory Stage Mass Walk Out Protesting Out Of State Employees

  All is not well in the non-GAAP paradise known as Tesla’s Gigafactory, where labor tensions are suddenly running high.

  According to Bloomberg, at least 100 workers at the construction site for Tesla’s massive (and taxpayer subsidized) battery factory near Reno, Nevada, walked off the job Monday to protest use of workers from other states, a union official said.

  

  It used to be that workers were upset when foreigners were brought in; now it’s workers from out of state.

  Local labor leaders are upset that Tesla contractor Brycon Corp. is bringing in workers from Arizona and New Mexico, said Todd Koch (no relation to the billionaire family by the same name) president of the Building and Construction Trades Council of Northern Nevada.

  The escalation in interstate labor tensions mirrors the fragmentation of Europe, where with an imminent collapse of the Schengen customs union, members of the neighboring EU countries will soon revolt when working side by side. Perhaps it only makes sense that with globalization now running in reverse, and with Europe falling apart at the seams, that the US will follow suit by defederalizing.

  The local union’s the soundbites certainly indicate that “out-of-state workers are clearly not welcome.”

  “It’s a slap in the face to Nevada workers to walk through the parking lot at the job site and see all these license plates from Arizona and New Mexico,” Koch said in an interview. Those who walked out were among the hundreds on the site, he said.

  Construction work at the $5 billion, 10-million-square-foot factory has been proceeding ahead of schedule. Tesla said in an e-mailed statement that the nonunion contractor involved in the dispute Monday, which it didn’t identify by name, is using more than 50 percent Nevada workers and that more than 75 percent of the factory workforce is residents of that state. Tesla didn’t say how the walkout is affecting work at the site.

  Of course, the only reason for that is because otherwise the generous subsidies provided to Elon Musk by Nevada taxpayers would be voided. As a reminder, in September 2014, Musk and Nevada Governor Brian Sandoval announced a deal that included as much as $1.25 billion in tax breaks over 20 years and a requirement that half the so-called gigafactory’s expected 6,500 permanent positions go to Nevada residents.

  It said nothing about where the other 3,250 should come from, although it appears that to local labor unions, anything short of 100% “local” is increasingly unacceptable. Furthermore, it is unclear just what sparked the workers’ anger if indeed at least 75% of the Gigafactory’s worker are local.

  “Today’s activity stems from the local Carpenters Union protesting against one of the third-party construction contractors that Tesla is using,” the automaker said. “Their issue is not with how Tesla treats its workers.”

  And Tesla will continue treating it workers well as long as it is ultimately taxpayers who foot their paycheck. Once that changes, pink slips will galore, for both in and out of state workers alike.

  In the meantime, we can’t wait to see what happens if Uber’s Gigafactorians stage a Megastrike.

  Finally, while we would like to take Musk at his word, one wonders what the real reason for this quasi-labor strike truly is and if next quarter Tesla, whose GAAP vs non-GAAP revenue and EPS looks something like this..

  

  

  … won’t include a “strike-adjusted” non-cash flow metric to go with the rest of its income statement gibberish.

  

  

  

  

  

• Law Professor Slams Summers: "Cash Is The Currency Of Freedom"

  By Glenn Harlan Reyonds, aka Instapundit, a University of Tennessee law professor, originally posted on USA Today
  

  Cash Is The Currency Of Freedom

  As Fed inflates away dollar’s value, government gains more control to manipulate taxpayers and savers

  Former Treasury secretary Larry Summers wants to get rid of the $100 bill. But I think he has it exactly backward. I think we need to restore the $500 and $1000 bills. And the reason is that people like Larry Summers have done a horrible job.

  Summers wrote recently in The Washington Post that the $100 bill needs to go. The reason, he says, is that it’s a favorite of criminals, along with the 500 euro note, which is likely to be discontinued. The New York Times editorialized in agreement, writing: “Getting rid of big bills will make it harder for criminals to do business and make it easier for law enforcement to detect illicit activity. … There is no need for large-denomination currency. Britain’s top bill is the 50-pound note ($72), which has been perfectly sufficient. The United States stopped distributing $500, $1,000, $5,000 and $10,000 bills in 1969. There are now so many ways to pay for things, and eliminating big bills should create few problems.”

  Reading this got me to thinking: What is a $100 bill worth now, compared to 1969? According to the U.S. Inflation Calculator online, a $100 bill today has the equivalent purchasing power of $15.49 in 1969 dollars. Likewise, in 1969, a $100 bill had the equivalent purchasing power of $645.55 in today’s dollars.

  So even if we brought back the discontinued $500 bill, it wouldn’t have the purchasing power today that a $100 bill had in 1969, when larger denominations were discontinued. And carrying around a $100 bill today is basically like carrying around a $20 in 1969.

  And although inflation isn’t running very high at the moment, this trend will only continue. If the next few decades are like the last few, paper money in current denominations will become basically useless.

  Of course, as CATO Institute analyst Daniel J. Mitchell writes, to our ruling class this isn’t a bug, but a feature. Governments want to get rid of cash for two reasons. First, it gives them more control over citizens: They justify it in the name of fighting terrorists and organized crime, but what they really care about is making sure that nobody escapes their scrutiny, for purposes of taxes, regulation and political finagling. Second, if you’re stuck putting your money in a bank, they can force you to spend it (and thus “stimulate” the economy) by subjecting you to negative interest rates, in which money that just sits in the bank shrinks away, providing an incentive to spend.

  The Federal Reserve and various other financial regulatory bodies were sold politically in no small part as protections against inflation. But inflation has run rampant. According to the inflation calculator, today’s $100 bill is worth only as much as $4.18 in 1913, the year the Federal Reserve was established. When you realize that inflation helps debtors and that governments are the world’s biggest debtors, this makes a certain amount of sense — for them.

  But at a time when, almost no matter where you look in the world, the parts of it controlled by the experts and technocrats (like Larry Summers) seem to be doing badly, it seems reasonable to ask: Why give them still more control over the economy? What reason is there to think that they’ll use that control fairly, or even competently? Their track record isn’t very impressive.

  Cash has a lot of virtues. One of them is that it allows people to engage in voluntary transactions without the knowledge or permission of anyone else. Governments call this suspicious, but the rest of us call it something else: Freedom.

  Glenn Harlan Reynolds, a University of Tennessee law professor, is the author of The New School: How the Information Age Will Save American Education from Itself, and a member of USA TODAY’s Board of Contributors.

  

  

  

  

  

• Exporting Death & Destruction

  Nothing says Nobel Peace Prize like being the world's largest (by a long way) exporter of arms…

  The US was by far the top arms exporter in 2011-15, with a 33 per cent share of the global market. Exports from the US have increased 27 per cent in the last five years.

  

   

  As The Independent reports, the number of major weapons switching hands around the world was up 14 per cent in the last five years, compared to the five years before that.

  The Stockholm International Peace Research Institute, an independent resource on global security, has released a study that shows that India is the world's largest importer of arms.

   

  The chart above shows that Asia was the main importer of weapons in the last five years, as the region races to arm itself ahead of its regional rivals: China and Pakistan. The high levels of Indian imports are also the result of its small domestic arms industry, which means it has to buy weapons from overseas.

   

  Russia is the biggest supplier of arms to India, ahead of the US. But US imports there are growing. They were 11 times higher in 2011-2015 than 2006-2010.

  Leaving us with one big (quite scary) question – why is India suddenly preparing for war?

  

  

  

  

  

• "The GOP Is On The Verge Of A Meltdown": Senior Republicans Threaten To Vote For Hillary

  With Donald Trump set for a yuuge victory in tomorrow's Super Tuesday slugfest – oddsmakers see 80% chance of Trump being the nominee – tensions are mounting dramatically within the Republican establishment. As The FT reports, many mainstream Republicans believe Mr Trump would struggle to beat Hillary Clinton and are urgently rallying around their man Rubio with some senior Republicans saying privately that they might consider voting for Mrs Clinton if Mr Trump were to end up as their party nominee as one conservative commentator exclaimed "we are on the verge of a real meltdown in the Republican party."

  Trump's lead in the polls over his GOP nominee 'peers' continues to grow…

  

  Source: RealClearPolitics

  As The FT reports, while Mr Rubio and Mr Trump ramp up their attacks on each other ahead of the March 1 primaries, Republican grandees and lawmakers are turning to the Florida senator as they become increasingly worried that the property tycoon could lock up the GOP presidential nomination within three weeks.

  They fear that a victory for Mr Trump could fatally fracture the party and prevent them from winning the White House in November.

   

  Many mainstream Republicans believe Mr Trump would struggle to beat Hillary Clinton, the clear Democratic frontrunner after her resounding victory over Bernie Sanders in South Carolina on Saturday, given the comments he has made about Hispanics, Muslims, women, disabled people and people who have criticised his campaign.

  But, as the following chart shows, it's far too close to call…

  

  Source: RealClearPolitics

  The FT goes on to note that Mr Trump on Sunday issued a thinly-veiled warning that he would consider running as an independent.

  “The Republican Establishment has been pushing for lightweight Senator Marco Rubio to say anything to “hit” Trump. I signed the pledge-careful,” he tweeted, a reference to a pledge that all candidates signed to back the party’s eventual nominee.

  As panic is setting in within The GOP…

  “We are on the verge of a real meltdown in the Republican party,” Hugh Hewitt, the influential conservative radio talk-show host told ABC television on Sunday.

   

  Some senior Republicans have said privately that they might consider voting for Mrs Clinton if Mr Trump were to end up as their party nominee. “You’ll see a lot of Republicans do that,” Christine Whitman, the former New Jersey governor who previously compared Mr Trump to Hitler, told the New Jersey Star-Ledger.

   

  “We don’t want to. But I know I won’t vote for Trump.”

  But none other than Rupert Murdoch chimed in at the craziness and infighting…

  Both "establishment" Republicans and Trump need to cool it and close ranks to fight real enemy. Trump, Rubio, Kasich could all win general.

  — Rupert Murdoch (@rupertmurdoch) February 28, 2016

  And now the neocons are declaring war on Trump (as The Intercept notes)…

  Donald Trump’s runaway success in the GOP primaries so far is setting off alarm bells among neoconservatives who are worried he will not pursue the same bellicose foreign policy that has dominated Republican thinking for decades.

   

  Neoconservative historian Robert Kagan — one of the prime intellectual backers of the Iraq war and an advocate for Syrian intervention —  announced in the Washington Post last week that if Trump secures the nomination “the only choice will be to vote for Hillary Clinton.”

   

  Max Boot, an unrepentant supporter of the Iraq war, wrote in the Weekly Standard that a “Trump presidency would represent the death knell of America as a great power,” citing, among other things, Trump’s objection to a large American troop presence in South Korea.

   

  Trump has done much to trigger the scorn of neocon pundits. He denounced the Iraq war as a mistake based on Bush administration lies, just prior to scoring a sizable victory in the South Carolina GOP primary. In last week’s contentious GOP presidential debate, he defended the concept of neutrality in the Israeli-Palestinian conflict, which is utterly taboo on the neocon right. “It serves no purpose to say you have a good guy and a bad guy,” he said, pledging to take a neutral position in negotiating peace.

  With Trump’s ascendancy, it’s possible that the parties will re-orient their views on war and peace, with Trump moving the GOP to a more dovish direction and Clinton moving the Democrats towards greater support for war.

  

  

  

  

  

• Get Shorty? PBOC Strengthens Yuan, Erases All RRR-Cut Swing

  For the first time in six days, PBOC decided to strengthen the Yuan fix (+0.1% to 6.5385). This sent offshore Yuan surging back to pre-RRR-Cut levels, ensuring that (for the very short-term) speculators don’t get any ideas about piling into a Yuan short (again). This action followed the suspension of China’s Open Market Operations (due to lack of interest from traders).

  Following this morning’s surprise RRR Cut, The PBOC decides now is the time to strengthen Yuan…

  • *PBOC RAISES YUAN FIXING BY 0.1% TO 6.5385/USD
  • *PBOC RAISES YUAN FIXING FIRST TIME IN SIX DAYS

  Wiping out the Yuan swing from today…

  

   

  Let’s see how long this holds.

  PBOC’s Chen had some comments on the matter (just don’t tell the Japanese)

  • *YUAN DEPRECIATION HAS LIMITED IMPACT ON HELPING EXPORTERS: CHEN
  • *YUAN DEPRECIATION WILL INCREASE PROCESSING TRADE COSTS: CHEN
  • *NOT MUCH ROOM FOR YUAN DEPRECIATION: PBOC’S CHEN
  • *NO BASIS FOR CONTINUED YUAN DEPRECIATION: CHEN

  In other words – Don’t short it, or else!

  

  

  

  

  

• The Long History of Government Meddling In The American Marketplace

  Submitted by Mike Holly via The Mises Institute,

  Although the causes of economic crises recurring throughout US history and often spreading worldwide can’t be proven using empirical means, oppressive government regulations favoring special interests in relevant industries have preceded every crisis.

  Typically, cronyism involves support of politicians in exchange for regulations denying others the freedom to compete with the moneyed interests (e.g., monopolies). Less competition leads to higher costs and lower quality. It reduces economic growth, jobs, wages, innovation, and productivity. Attempts to control economic growth through government spending and/or manipulating interest rates (e.g., stimulate growth with low rates) generally leads to more severe crises.

  None of these things are recent phenomena, but can be found again and again throughout American history.

  Mercantilism

  After the Revolutionary War, when the agrarian economy was beginning to industrialize, politicians pursued British-style mercantilism, including colonialism, against natives and regulations blocking competition in banking and manufacturing. Financial panics and depressions resulted under a national bank in 1792 and from 1819–21 and state-regulated banks from 1837–43 and 1857–59.

  The Civil War was a dispute between Republicans representing manufacturers in the North that blocked free trade with import tariffs against Europe, and Democrats representing agricultural plantations in the South that refused to replace slavery with mechanization using the North’s high-cost goods.

  Monopolization

  The “Gilded Age of Capitalism” shifted the economy from agriculture to industry led by “robber barons” who lobbied mostly Republicans. The government helped create railroad monopolies with low-interest loans, land grants, and special frontier privileges. The railroads formed a conglomerate that monopolized much of the rest of the economy by favoring large over small customers (e.g., Rockefeller’s Standard Oil over farmers), large suppliers (e.g., Carnegie Steel), and big banks (e.g., J.P. Morgan).

  Both railroads and banking (with both national and state banks) were implicated in the severe financial panics from 1873–78 and 1893–97, occurring during the Long Depression of 1873–96, and another panic in 1901. Banking regulation led to the panic in 1907.

  During the Progressive Era, the US used regulation to form many of today’s monopolies. From 1906 to 1910, Republicans led efforts to create state-regulated electricity and natural gas utility monopolies, and the Seven Sisters oil and physician oligopolies. In 1913, Democrats sanctioned the telephone monopoly and founded the Federal Reserve banking monopoly (i.e., which regulates the banks). After World War I, the Fed raised interest rates which led to the depression of 1920–21, which bankrupted many companies and led to manufacturing oligopolies, including in the automotive industry.

  Thanks to these new frontiers in a regulated economy, by the 1920s, only 200 corporations controlled over half of all US industry and the richest 1 percent of the population owned 40 percent of the nation's wealth. As in recent times, the Fed responded by providing easy credit at low interest rates, which led to increased consumer and business debt, uneconomic and risky investments, and inflated assets, including stock prices (further increasing wealth disparity). After the Fed tried to raise interest rates, the result was the Great Stock Market Crash of 1929.

  Nationalization

  During the 1930s, the crash led to the Great Depression, the worst financial crisis in US history, and then spread from the world’s largest economy globally, albeit with less severity abroad. Democrats, led by President Roosevelt (FDR) and supported by bankers, agriculture, oil, and labor, tried to redistribute wealth by limiting competition through government takeovers, including trucking, airline, and housing industries, and restricting the supply of food and oil. This led to continued global depression and World War II, which was financed with debt.

  Finally, the post-war boom or “Golden Age of Capitalism” saw a dismantling of wartime regulations and growing opportunities especially in manufacturing (like China today). During global rebuilding, the US became the world’s economic leader with about 4 percent annual growth, even with increasing interest rates, decreasing debt, and high taxes. Although wealth disparity was historically low, Democrats increased regulation of necessities, leading to today’s high costs.

  FDR had taken money from taxpayers to subsidize home loans at low interest rates including guarantees from the Federal Housing Administration (FHA) since 1934, and securitization by the Fannie Mae secondary mortgage monopoly since 1938 (and Democrats added Freddie Mac to form a duopoly in 1970). After the war, the subsidies led to unsustainable demand for more expensive and larger homes, urban sprawl, and a shortage of affordable housing.

  FDR had also taken money from taxpayers to subsidize favored farm crops, which discouraged alternative crops. After 1946, Democrats increased subsidies leading to inflated prices for farmland. Since 1973, the US has subsidized food overproduction leading to dumped exports that retard agricultural and economic development in the developing world and uneconomical bio-fuels protected by tariffs against Brazilian ethanol (until 2012). FDR had led support for the nationalization of oil industries (e.g., Mexico), and military spending to defend dictators in oil-rich countries (e.g., Saudi Arabia).

  In 1965, Democrats led nationalization of about half of health care purchasing through Medicare and Medicaid. These programs, and later Obamacare, subsidized increased demand while the supply of doctors and hospitals has been restricted. The resulting health care crisis led to skyrocketing costs nearly triple those of other developed countries.

  Psuedo-Deregulation

  The dreaded stagflation of the 1970s is considered tied for the second worst financial crisis in US history. The Fed responded to inflation by raising interest rates, leading to the Great Recession of the early 1980s, which led to the Savings and Loan Crisis, and spread as the Latin American Debt Crisis. Since then, the Fed has been lowering rates overall.

  Meanwhile, politicians claimed to be trying to increase cost efficiency through privatization of public industries, and foster competition through partial deregulation of private industries. Worldwide, politicians allowed the monopolists to write the rules, including preferential bargain sales to cronies, which led to even nastier deregulated monopolies.

  Deregulation was limited mainly to common carrier industries, including airlines in 1978, trucking in 1980, telecommunications in 1996, and electricity and natural gas utilities during the 1990s, and also banking in 1999. For example, states allowed utilities to design rigged trading schemes, gain preferential access to transport lines, and sell assets to affiliates for pennies on the dollar. Deregulation declined after manipulations led to the California Energy Crisis of 2000.

  Corporatism

  After the energy crises and bursting of the internet bubble in 2000, big business Republicans and big government Democrats practiced corporatism. The US House Budget Committee explains: “In too many areas of the economy — especially energy, housing, finance, and health care — free enterprise has given way to government control in partnership with a few large or politically well-connected companies.”

  In 2003, regulations led to increased ethanol production from corn, but after that led to the 2007–08 Food Crisis, growth was stopped by mandates that the fuel be made from expensive-to-process cellulose.

  Meanwhile, George W. Bush promoted home loans securitized through the Fannie and Freddie duopoly and the Fed’s big banks, while encouraging the Fed to lower interest rates, leading to a bubble in home ownership and prices. Soon after the Fed started raising rates, the bubble burst leading to the 2007–09 Subprime Mortgage Crisis, 2007–08 Financial Crisis (considered tied for the second worst financial crisis in US history), 2008–10 Automotive Crisis, and 2008–12 Global Recession.

  In 2010, Dodd Frank gave politicians more oversight over the Fed’s big banks, increasing influence peddling, and risks of crises. The Fed has been loaning trillions of dollars at low interest rates to the big banks. Lower rates can encourage financial engineering, like mergers, which allow bankers and corporate executives to bleed profits from large corporations, who receive preferential tax treatment, especially abroad. Since 1998, the financial sector has spent over $6 billion lobbying Congress.

  The Bank for International Settlements, or so-called “bank of central bankers,” warns another global debt crisis is coming, and the debt-trap is now even worse than before 2007. The US has led many nations to continue to lower interest rates and accumulating private and public debt. Now, a slowing economy could make the debt toxic and lead to a financial crisis that would be hastened as the Fed raises rates. The Bank warns: “It is unrealistic and dangerous to expect that monetary policy can cure all the global economy’s ills.”

  Obamacare could allow bureaucracies to control patient treatments and prices, while lobbied by the industry. Since 1998, medical interests have spent over $6 billion lobbying Congress.

  The Free Market Solution

  Today, there is no party that favors true privatization or free markets. Republicans favor monopolization, while claiming support for free markets and blaming the Democrat’s high taxes and regulations for crises. Democrats favor nationalization, while blaming non-existent free markets for crises. Meanwhile, many Americans appear to be embracing the regulatory nationalism of crony capitalist Donald Trump or the democratic socialism of Bernie Sanders.

  The solution, however, is simply to take as much power as possible out of the control of corruptible politicians and their special interest supporters.

  

  

  

  

  

• The Agriculture Space – The Meats (Video)

  By EconMatters

  

  We look at Live Cattle, Feeder Cattle, Lean Hogs, and Class III Milk Futures Markets in this video. We can learn the value of the technicals in analyzing these historically technically driven markets in this video. 

   

  © EconMatters All Rights Reserved | Facebook | Twitter | YouTube | Email Digest | Kindle    

  

  

  

  

• China PMIs Plunge, Economists Demand Stimulus To "Prevent Economy Falling Off A Cliff"

  So, after $1 trillion in new credit, numerous RRR cuts, a devalued currency (great for exporters, right?), and the domestic exuberance of a housing bubble, China's economy (manufacturing and non-manufacturing) collapsed to cycle lows (weakest since Dec 08) in February. Of course, this plunge after January's bounce is all being blamed on the Lunar New Year… and in fact, according to The NBS, manufacturing confidence is increasing (seriously that's what they said!)

  • *CHINA MANUFACTURING PMI AT 49.0 IN FEB. (49.4 EXP.)
  • *CHINA NON-MANUFACTURING PMI AT 52.7 IN FEB.

  Does this look like "confidence" to you?

  

   

  So to be clear – China Services PMI went from the highest since June 2014 to the lowest since Dec 2008 in one month.

  It appears a trillion dollars doesn't go as far as it used to.

  

   

  One can't help but wonder, following these comments from PBOC's Chen…

  • *WE HOPE TO COMMUNICATE CANDIDLY WITH FED: PBOC'S CHEN
  • *CHINA, U.S. CENTRAL BANKS SHOULD IMPROVE COORDINATION: CHEN
  • *STRONG DOLLAR CYCLE MAY TRIGGER CRISIS IN EMERGING MKT: CHEN

  Whether this is some Fed-targeted dumping of bad data to allow turmoil and force The Fed to relent.

  The data deluge continued to get worse as Caixin/Markit reported:

  • *CHINA FEB. CAIXIN MANUFACTURING PMI 48; EST. 48.4 (5 MONTH LOWS)

  “The Caixin China General Manufacturing PMI for February is 48, down 0.4 points from the previous month. The index readings for all key categories including output, new orders and employment signalled that conditions worsened, in line with signs that the economy’s road to stability remains bumpy."

   

  Staff numbers declined at the sharpest rate since January 2009 during February. Companies that recorded lower headcounts widely commented on company downsizing policies as part of cost-cutting initiatives, along with the non-replacement of voluntary leavers. Despite lower employment, manufacturers were able to work through outstanding business during February. Though marginal, it was the first reduction in the level of work-in-hand since April 2015.

   

  The government needs to press ahead with reforms, while adopting moderate stimulus policies and strengthening support of the economy in other ways to prevent it from falling off a cliff.”

  

  

  

  

  

• Aussie Housing Bubble Bursts – Building Approvals Crash Most In 4 Years

  Having admitted to entirely 'cooking the books' with its jobs data, it appears Australian authorities are going full kitchen-sink and 'allowing' all the dismally honest data out to the market (we assume in some desperate PR need to justify their next monetary policy experiment). Building Approvals fell 7.5% MoM in January, crashing 15.5% YoY (5 standard deviations below expectations)  – the biggest drop since April 2012 (and the 3rd month in a row of declines).

  Sudden collapse…

  

   

  This was below the lowest economist's estimate and was in fact a 5-sigma miss…

  

   

  So why come clean now about the state of the housing bubble? As we noted when RBA admitted its fudged jobs data,

  Simple: weakness in commodity prices "is far greater than people had been expecting,” Fraser said in earlier remarks to the panel. Australia is now "swimming against the tide" because of uncertainties in the global economy, he added.

   

  Translation: "we need more easing, and to do that, the economy has to go from strong to crap."

   

  And with the Australian economy suddenly desperate for lower rates from the RBA, one can ignore the propaganda lies, and focus once again on the far uglier truth.

  

  

  

  

  

• Systemic "Fragility" Surges

  With "significant" financial stress pervading the markets, it is hardly surprising that systemic risk concerns are rising rapidly. What we have been experiencing in markets this year, as BofA's FX team notes, is the impact of multiple shocks, at a time when central banks cannot come to the rescue, in a market that has been addicted to the central bank policy put. This leave cross-asset correlation soaring as shocks become larger leaving market fragility increasing.

  With plenty of Tail risks lurking…

  This year has been challenging for financial markets as potential tail risks seemingly rear their ugly heads every time there is any semblance of stability. We continue to expect that volatility could rise from any of the following events. Although these risks are not our base case, their possibilities must still be considered. Even if the probability of each of them materializing may be small, the probability that at least once of them materializes is higher.

  1. China financial instability – the rapid debt growth over the past several years could destabilize the financial system if improperly managed.

   

  2. Central bank policy exhaustion – the ineffectiveness of negative interest rate policy may be a sign that the market has become desensitized to monetary stimulus. Thus, central banks may become constrained in their ability to smooth volatility.

   

  3. Credit cycle turning and US recession – deteriorating conditions in the credit market could create a credit crunch and lead to debt deflation. The Treasury curve may already be signaling a recession and the Fed could implement negative rates if the US economy weakens significantly. Furthermore, EPS growth is declining.

   

  4. Brexit – an exit by the UK may have negative consequences for both confidence and growth throughout Europe.

  "Significant Stress" has been reached…

  

   

  And shocks are becoming larger and/or market fragility increasing…

  The correlation of cross-asset volatility is increasing, suggesting instability in one market tends to bleed over to other markets.

  

   

  This is concerning, as it implies that shocks are getting stronger and/or the global financial system is becoming more sensitive to them.

  Indeed, rising correlations have coincided with every major crisis in the past two decades.

  

  

  

  

  

• Ron Paul Warns "First They Come For The iPhones…"

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

  The FBI tells us that its demand for a back door into the iPhone is all about fighting terrorism, and that it is essential to break in just this one time to find out more about the San Bernardino attack last December. But the truth is they had long sought a way to break Apple’s iPhone encryption and, like 9/11 and the PATRIOT Act, a mass murder provided just the pretext needed. After all, they say, if we are going to be protected from terrorism we have to give up a little of our privacy and liberty. Never mind that government spying on us has not prevented one terrorist attack.

  Apple has so far stood up to a federal government's demand that it force its employees to write a computer program to break into its own product. No doubt Apple CEO Tim Cook understands the damage it would do to his company for the world to know that the US government has a key to supposedly secure iPhones. But the principles at stake are even higher. We have a fundamental right to privacy. We have a fundamental right to go about our daily life without the threat of government surveillance of our activities. We are not East Germany.

  Let’s not forget that this new, more secure iPhone was developed partly in response to Ed Snowden’s revelations that the federal government was illegally spying on us. The federal government was caught breaking the law but instead of ending its illegal spying is demanding that private companies make it easier for it to continue.

  Last week we also learned that Congress is planning to join the fight against Apple — and us. Members are rushing to set up yet another governmental commission to study how our privacy can be violated for false promises of security. Of course they won’t put it that way, but we can be sure that will be the result. Some in Congress are seeking to pass legislation regulating how companies can or cannot encrypt their products. This will suppress the development of new technology and will have a chilling effect on our right to be protected from an intrusive government. Any legislation Congress writes limiting encryption will likely be unconstitutional, but unfortunately Congress seldom heeds the Constitution anyway.

  When FBI Director James Comey demanded a back door into the San Bernardino shooter’s iPhone, he promised that it was only for this one, extraordinary situation. “The San Bernardino litigation isn’t about trying to set a precedent or send any kind of message,” he said in a statement last week. Testifying before Congress just days later, however, he quickly changed course, telling the Members of the House Intelligence Committee that the court order and Apple’s appeals, “will be instructive for other courts.” Does anyone really believe this will not be considered a precedent-setting case? Does anyone really believe the government will not use this technology again and again, with lower and lower thresholds?

  According to press reports, Manhattan district attorney Cyrus Vance, Jr. has 175 iPhones with passcodes that the City of New York wants to access. We can be sure that is only the beginning.

  We should support Apple’s refusal to bow to the FBI’s dangerous demands, and we should join forces to defend of our precious liberties without compromise. If the people lead, the leaders will follow.

  

  

  

  

  

• "This Is Pretty Freaking Nuts": Vancouver Home Sells For $735,000 Above Asking Price

  In Canada, an interesting paradox is visible.

  On the one hand, the country’s oil patch is dying a slow death in Alberta, where the worst 12 months for job losses in 34 years is contributing to rising property crime, higher food bank usage, and a rash of unsold condos and empty office space in Calgary.

  On the other hand, if you were to take a look at real estate in Vancouver and Ontario you’d think you were looking at home prices for an economy that’s thriving.

  In fact, prices in Vancouver have reached nosebleed levels. In January for instance, the average selling price of detached homes was an astronomical $1.82 million.

  Here’s what that look likes like in chart form:

  

  The madness has caused all sorts of abberations including the following listing which, outside of Silicon Valley anyway, represents what is perhaps the most absurd example of “greater fool” speculation since the Tulip Bubble: 

   

  

   

  That listing eventually sold for more than $100,000 above the asking price despite the fact that it’s clearly a rundown shack but as is always the case when dealing with speculative bubbles, things will invariably get frothier-er as evidenced by the fact that the home shown below just sold for a whopping $735,000 above the asking price, setting a new record.

   

  

  “The house at 3555 West 1st Avenue was built in 1912, is 3,400 square feet and sits on a standard 33 x 120 foot lot without a view,” Vancity Buzz notes. “The selling price of $4.23 million is about $1.6 million above the lot’s assessed property value.”

  For his part, real estate agent Brandan Price is incredulous. “For it to go over $4 million is remarkable. I had five offers,” he said. “These were local buyers just looking to make a shift who wanted to move into this area.”

  “They were willing to sacrifice lot size to move into this area.”

  Maybe, but things seem to be getting out of hand and part of the “problem” may indeed be demand from investors attempting to find a home for capital they’ve moved out of China. As Thomas Davidoff with UBC’s Sauder School of Business told Vancity Buzz: “These prices are getting pretty freaking nuts in my opinion.”

  “As a proposition for someone who’s going to live in that house and what you’re getting for four million plus – that is a ridiculous joke and that is not something that’s going to work for people who just make a living in Vancouver,” Davidoff says. 

  Sorry Thomas, but you’re going to have to get used to it, because as long as the market expects a 30% yuan deval, Vancouver real estate is going to keep getting more “attractive”. Or, in other words, the Canadian real estate market is going to continue to be one of the world’s most attractive money laundering vehicles. 

  

  

  

  

  

• It's Not Just The GOP – The Democratic Party Is Also Imploding

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  Whichever side emerges victorious, both Republicans and Democrats should face up to a much bigger truth: Neither party as currently constituted has a real future. Fewer and fewer Americans identify as either Republican or Democratic according to Gallup, and both parties are at recent or all-time lows when it comes to approval ratings. Just 39 percent give Democrats a favorable rating and just 33 percent do the same for Republicans. Not coincidentally, each party has also recently had a clear shot at implementing its vision of the good society. If you want to drive down your adversary’s approval rating, just give him the reins of power for a few years.

   

  – From the post: Thoughts on Election Day: Relax—Both Parties Are Going Extinct

  Political pundits throughout the land are tripping over each other to compose the latest bland, uninsightful screed proclaiming the death of the Republican Party. This makes sense, because the primary purpose of a political pundit is to state the obvious years after it’s already become established fact to everyone actually paying attention.

  Yes, of course, Trump winning the GOP nomination marks the end of the party as we know it. After all, some neocons are already publicly and actively throwing their support behind Hillary. While this undoubtably represents a major political turning point in U.S. history, many pundits have yet to appreciate that the exact same thing is happening within the Democratic Party. It’s just not completely obvious yet.

  While it might sound strange, a coronation of Hillary Clinton in the Democratic primary will mark the end of the party as we know it. There’s been a lot written about the “Sanders surge,” and much of it has revolved around Hillary Clinton’s extreme personal weakness as a candidate. While this is indisputable, it’s also a convenient way for the status quo to exempt itself from fault and discount genuine grassroots anger. I’m of the view that Sanders’ support is more about people liking him than them disliking Hillary, particularly when it comes to registered Democrats. He’s not merely seen as the “least bad choice.” People really do like him.

  The Sanders appeal is twofold. He is seen as unusually honest and consistent for someone who’s held elected office for much of his life, plus he advocates a refreshingly anti-establishment view on core issues that matter to an increasing number of Americans. These include militarism, Wall Street bailouts, a two-tiered justice system, the prohibitive cost of college education, healthcare insecurity and a “rigged economy.” While Hillary is being forced to pay lip service to these issues, everybody knows she doesn’t mean a word of it. She means it less than Obama meant it in 2008, and Obama really didn’t mean it.

  Hillary is the embodiment of a sick and detested status quo. She stands for nothing, is nothing, and a vote for her all but guarantees both murder abroad and oligarchy at home. I think a large number of Bernie Sanders supporters understand this and won’t be going off silently into that quiet voting booth to commit ethical self-sacrifice despite the terrifying prospects of a Trump presidency. I think they’ll stay home, but they won’t sit there passively. They’ll be seething inside, and many will renounce the Democratic party forever. Many rank and file Republicans already came to such a conclusion years ago, which is precisely why the nomination was wide open for a man like Trump to capture. Democrats will do the same, and before you know it, political pundits will be tripping over each other to write about the death of the Democratic Party.

  It’s not just the grassroots either. This civil war is has now gone all the way to the top, as evidenced by this weekend’s very public endorsement of Bernie Sanders by Rep. Tulsi Gabbard of Hawaii. Before I get into the significance of this move, let’s recap what happened.

  From Quartz:

  A rising star within the Democratic ranks, Rep. Tulsi Gabbard of Hawaii, cut herself off from the party’s establishment by resigning from her post as vice-chairman of the Democratic National Committee and endorsing Bernie Sanders for president.

   

  Her position with the DNC required her to stay neutral in the primaries, but she said that “the stakes are too high.” She announced her decision on Sunday on NBC’s “Meet the Press,” and made a video where she explained her reasoning.

   

  Gabbard, an Iraq war veteran, said she knows the cost of war firsthand. “I know how important it is that our commander-in-chief has the sound judgment required to know when to use America’s military power—and when not to use that power.”

   

  In her endorsement for Sanders, she said America needs a president “who will not waste precious lives and money on interventionist wars of regime change,” presumably referring to the war in Iraq and strategy in Libya, led by then-secretary of state Hillary Clinton, both of which she has criticized in the past. Although generally hawkish in her foreign policy views, she is opting for the Vermont senator as a candidate who “will usher in a new era of peace and prosperity.”

  Now watch the video:

   

  The importance of this move cannot be understated. In no uncertain terms, this gesture publicly exposes the weakness of the “Clinton brand.” She clearly isn’t afraid of Hillary or of any repercussions from the Democratic Party elite, a fact that is underscored by the fact she came out with her endorsement after he got pummeled in South Carolina.

  But let’s take a step back and think about this in the even bigger picture. You don’t get to Congress by being a political imbecile. On the surface, this move looks like career suicide, particularly since Hillary is probably about to clinch the nomination. Recall, Rep. Gabbard didn’t merely endorse Sanders after a bruising loss in South Carolina, she stepped down from her official position with the DNC to do so. This isn’t merely a statement, it’s the equivalent of dropping a neutron bomb on the Democratic establishment. So why did she do it?

  While I think she genuinely agrees with Sanders on key issues, the reasons she came out so aggressively is because she sees the writing on the wall. She’s playing the long game, and in the long game, Hillary Clinton represents a discredited and failed status quo, while Sanders represents a push toward paradigm level change that will define the future.

  In summary, I believe this marks the beginning of an all out civil war within the Democratic party. A war that won’t be over until someone successfully does to the Democratic Party what Trump did to the GOP.

  

  

  

  

  

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• Gold-Silver Ratio Breakout Report, 28 Feb, 2016

  The gold to silver ratio moved up very sharply this week, +4.2%. How did this happen? It was not because of a move in the price of gold, which barely budged this week. It was due entirely to silver being repriced 66 cents lower.

  This ratio is now 83.2. It takes 83.2 ounces of silver to buy an ounce of gold. Conversely, it takes 1/83.2oz (about 0.37 grams) of gold to buy an ounce of silver.

  This ratio is now within a hair’s breadth of breaking out past the high set on Oct 17, 2008. See the historical graph (based on LBMA silver fix and PM gold fix data, provided by Quandl).

  The Historical Ratio of the Gold Price to the Silver Price
  
  

  Monetary Metals has been predicting a ratio well over 80 for a long time. And for two months, we have been calling for it to go much higher still. Could there be a correction? Absolutely. Could the fundamentals change? We expect they will—at some point. We will call that when we see it.

  Speaking of the fundamentals, read on for the only true picture of the gold and silver supply and demand fundamentals…

  But first, here’s the graph of the metals’ prices.

          The Prices of Gold and Silver
  
  

  We are interested in the changing equilibrium created when some market participants are accumulating hoards and others are dishoarding. Of course, what makes it exciting is that speculators can (temporarily) exaggerate or fight against the trend. The speculators are often acting on rumors, technical analysis, or partial data about flows into or out of one corner of the market. That kind of information can’t tell them whether the globe, on net, is hoarding or dishoarding.

  One could point out that gold does not, on net, go into or out of anything. Yes, that is true. But it can come out of hoards and into carry trades. That is what we study. The gold basis tells us about this dynamic.

  Conventional techniques for analyzing supply and demand are inapplicable to gold and silver, because the monetary metals have such high inventories. In normal commodities,
  inventories divided by annual production (stocks to flows) can be measured in months. The world just does not keep much inventory in wheat or oil.

  With gold and silver, stocks to flows is measured in decades. Every ounce of those massive stockpiles is potential supply. Everyone on the planet is potential demand. At the right price, and under the right conditions. Looking at incremental changes in mine output or electronic manufacturing is not helpful to predict the future prices of the metals. For an introduction and guide to our concepts and theory, click here.

  Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio was up substantially. 

  The Ratio of the Gold Price to the Silver Price
  
  

  For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide
  brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

  Here is the gold graph.

          The Gold Basis and Cobasis and the Dollar Price
  
  

  The price was basically unchanged. The cobasis (i.e. scarcity) was also just about unchanged. This, by the way, was also true for farther-out contracts although we only show April in this free Report.

  We calculate a fundamental gold price of over $1,440. This is the price we would have if the price effect of speculation was subtracted out of the market. Who would be shorting gold at this point? We have an idea of one group that may appear sacrilegious to the gold community.

  Let’s get it out of the way. No, it’s not the Powers That Be, the commercial banks, the central banks, or the Illuminati. It’s the silver bugs. Consider the widespread belief—at least outside of readers of this Report—in silver outperformance. Who doesn’t think the ratio should be far lower—50 for starters, on the way to 16 as in Ye Times of Olde?

  How would you trade this thesis? You would short gold futures and go long silver futures in equal dollar amounts. This would of course push up the price of silver, and push down the price of gold

  We would say to anyone in this trade to be careful, but obviously they don’t read this Report. If you must trade this trend, you should do the opposite: long gold, short silver (and be wary of violent corrections).

  How do we explain that the price of gold is 15% below its fundamental, while the price of silver is only at a 2% premium? The silver market is less liquid than the gold market, so equal dollar values of this trade would push the silver price up more than it would push the gold price down.

  We have two thoughts on this. One, if most traders think of the metals as commodities—we saw yet another article on this theme today—and if commodities are in a bear market, then the metals are hated. Perhaps silver would be 30% under its fundamental—i.e. about $10—if it weren’t for this trade that alters the relationship of silver to gold.

  Maybe. Our other thought is that if this is a new bull market in gold—i.e. a bear market in the dollar—it’s in stealth mode at the moment. Mainstream traders are not excited about gold speculation. They’re not buying gold futures, and may even be short. We are aware of the Commitment of Traders report (COT), showing that non-commercials (i.e. speculators) have a net long position. It’s the commercials (i.e. miners and jewelers) who have the short position. Perhaps it’s the miners putting on more hedges—i.e. selling more of their production forward. Maybe it’s the reduced forward buying of the gold users.

  Whatever the factors, one thing’s for sure. The price of gold in the futures market is sagging relative to the price of gold in the spot market.

  Our approach is not based on aggregate quantities. That’s why we don’t stop at the COT data. We look at spreads. Spreads inform us in a way that strict quantity analysis cannot. If you doubt this, ask how many COT analysts predicted the price action in silver or the ratio.

  This graph shows the rates we observe to carry gold for contracts in 2016 (i.e. basis).

          The Gold Bases for 2016 and LIBOR
  
  

  These yields are hardly worth anyone’s while to buy gold and sell a future against it, not to mention that the cost of funding this trade is about twice the return on the trade. Carrying gold does not pay, because gold is not abundant enough in the market to be available to carry.

  Now let’s look at silver.

  The Silver Basis and Cobasis and the Dollar Price
  
  

  In May silver, we see the scarcity (i.e. cobasis) drops on Tuesday when the price of the dollar falls (i.e. the price of silver rises), and a rising scarcity as silver is becoming cheaper. It’s no surprise that the big rise in scarcity occurred on Friday, with the big drop in price. No question, futures sold off.

  Another glance confirms it. Look at the epic drop in the basis. It’s down almost to match the gold basis (though the cobasis is nowhere near what is in gold). To review, here are our definitions:

  Basis = Future(bid) – Spot(ask)

  Cobasis = Spot(bid) – Future(ask)

  The basis is down because the bid on the May contract is being pressed down. Silver—at this price—is no longer so abundant. The basis is well below LIBOR. However, it’s not particularly scarce. The ask on the May contract is still strong, still being lifted by buying pressure.

  Last week, we showed a picture of “icicles” dripping on the chart of spot silver.

  

  This is in contrast to the futures chart. First, thanks to several folks who wrote to say that these are usually called “shadows”. We used the term icicle because of its connotation of dripping down. We believe that the cause is that metal is being sold, pushing the price down. But then that creates an actionable arbitrage to carry silver. So the market makers buy spot and sell the future. This does two things. One, obviously, it records a trade in the spot market at ask price and lifts the ask. Two, it presses the bid price in the futures market.

  If this is correct, then silver is intermittently abundant. At times when there’s selling of metal in the spot market, it’s abundant enough to go into the warehouse. At other times, and we’ll see more of this if the price falls further, it’s not so abundant.

  The fundamental price of silver fell about a nickel this week. The market price is much closer to the fundamental now.

  This brings us to the ratio. The fundamental on the ratio hit over 100 this week.

  What does it mean that the market ratio is just about to break out past its 2008 high, while the fundamental is predicting we could hit the record set in 1991? Ironically, the gold-silver ratio is showing something that most mainstream signals cannot.

  The seasonally adjusted unemployment number looks brilliant at under 5%. The S&P 500 index of stocks is only about 10% off its highs from the first half of last year. Sure, there’s that epic collapse in the price of crude oil and other commodities, but pay no heed. Cheap oil means cheap gas which gives money back to consumer who can spend spend spend our way to prosperity.

  The gold to silver ratio is showing us that the junior money is getting cheaper relative to the senior money. It is showing us that the metal which has industrial demand as well as monetary is falling relative to the metal whose demand is entirely monetary. It is also showing us that tightening credit conditions are starting to matter. So far as silver is concerned, credit conditions today match those which existed in October 2008.

   

  © 2016 Monetary Metals

  

  

  

  

• The Empire Will Strike Back

  Authored by StraightLineLogic.com's Robert Gore, via The Burning Platform blog,

  The populist revolt fueling non-mainstream political movements in both Europe and the US flows from a single source: you can not fool all the people all the time. The central lie of our time is that governments can and should forcibly assume control of individuals’ lives, in the name of vague and always shifting greater goods. The Command and Control Futility Principle holds that governments and central banks can control one, but not all variables in a multi-variable system. The number of variables global governments and central banks have arrogated to their purported control has grown beyond measure. Breakdowns are visible everywhere, and as those failures exact their ever-increasing toll on the masses, the masses are pushing back.

  

  The last financial crisis was a watershed. Capitalism’s rough justice was obviously, and gallingly, not allowed to play out. Favored financial institutions didn’t face the consequences—insolvency and bankruptcy—of their promotion of various bubbles and their leveraged business models. They were bailed out with taxpayer funds. Especially galling was that they knew they were going to be bailed out. More salt on the wound: improvident homeowners and housing speculators who took on too much mortgage debt were, other than a few spotty government programs, not bailed out or even offered appreciable relief. Since the crisis passed, banks have operated on the assumption they will be bailed out again during the next crisis. Despite all the hype about improved capital ratios and cleaned up loan books, fractional reserve banking is still fractional reserve banking; a leveraged business model that is wiped out if enough loans and speculations go bad.

  Still more salt: despite unprecedented government debt and spending, new programs, particularly Obamacare, central bank debt monetization, and ultra-low interest rates, the purported recovery is the weakest on record, with the labor force participation rate at a multi-decade low, the number of people on food stamps recently reaching a record high, and real incomes back where they were in the 1970s. Those ultra-low interest rates have destroyed the incentive to save and forced retirees back into the workforce (the one group whose labor force participation rate has increased), but provided cheap funding to the carry-trade set, stock options-laden corporate executives, and Silicon Valley moguls. Their trophy art, cars, mansions, and spouses grace the media. That’s beyond salt, it’s rubbing people’s noses in it.

  The messes the globalist powers that be have made outside their jurisdictions are even larger than the ones inside. Led by the US, the Western powers have bestowed unending chaos on the Middle East and Northern Africa. They have achieved none of their goals, (see “How To Defeat Your Enemies”) but have created massive blowback with the spread of terrorism and the refugee inundation of Europe. Not only have the war-torn lands not been reordered along liberal democratic lines, but mountains of money and barrels of blood continue to be spent in perpetual war. Meanwhile, ordinary citizens in Western homelands, not the elites, are left to contend with terrorist attacks, refugees burdening already strained social welfare systems, and obnoxious and illegal behavior by some of the new entrants. The elites shun even acknowledging these problems.

  It comes as a surprise only to the elites and their media mouthpieces that the peasants are revolting, tired of their prevarication, arrogance, and ineptitude. Don’t, however, expect them to pay attention to anything so insignificant as the popular will; they won’t go gentle into that good night. In the US, the establishment can live with Hillary, and if either Trump or Sanders—the revolution’s candidates—wins, the new president will soon learn who actually runs the government. Or he will have an unfortunate accident or heart attack. However, the Empire is leaving nothing to chance; it has already initiated a preemptive counterattack.

  

  The counterattack has three overlapping fronts: war, the economy, and civil liberties.

  “The Quagmire to End All Quagmires” stated that “the US faces the danger of being dragged into World War III.” That phrasing may have been an error (SLL reserves the right, in perpetuity, to make mistakes, see “On Failure”). The US government most likely won’t get “dragged” into World War III; it will probably initiate it. If Turkey and Saudi Arabia invade Syria, assume they’ve been green-lighted by the US government, which will join them in the carnage.

  As the economy goes down in flames, central bankers and the usual totalitarian creeps are embracing negative interest rates and bans on cash. Negative interest rates self-evidently destroy the incentive to save, the foundation of honest capitalism and progress. Many commentators have pointed out that negative rates lead to an increased demand for zero return cash, so the monetary Dr. Strangeloves have to ban it to drive money into the banking system. Although negative interest rates are patently absurd and counterproductive, always strong selling points for the Strangeloves, the real reason for locking money in the banking system is to prevent a systemic run. As in the last crisis, on a mark-to-market basis the leveraged banking system—with the largest US and European banks still massively exposed to derivatives—will be recognized as insolvent and subject to a run unless money is kept locked in the banks and expropriated.

  This assault on financial freedom goes hand in hand with the war against civil liberties, a specious battleground in the concocted “War on Terrorism.” The mainstream media and even some of the non-mainstream blogosphere have been filled with articles about the “complexity” of the Apple-FBI standoff on encryption. The word “complexity” is often a tip-off that someone’s about to pull an intellectual fast one.

  Encryption is simple. It’s one of those issues most people dread: an either-or. Either one’s computer communications are encrypted and safe from prying eyes, or they are not. There is no middle ground, and Apple is ostensibly cutting its throat asking Congress, of all people, to come up with one. Encryption that has been compromised, for any reason, is useless. At Apple and the rest of Big Tech’s behest an encryption “compromise” will emerge that fatally compromises encryption, cementing Big Tech’s partnership with government. Lovers of liberty and privacy will be left searching for quite possibly illegal encryption developed by smaller, guerrilla software outfits.

  Many will say that deliberate war, economic destruction, and technological repression are inconceivable; such a strategy is contradictory, counterproductive, depraved, deranged, diabolic, deadly, pathologic, sociopathic, psychotic, and out-and-out evil. All of the above, but if that’s your reaction, read, or reread, “Life, Or Death?” SLL recently posted Matt Bracken’s “Burning Down the House in 2016.” Bracken shares SLL’s forebodings of impending disaster, and it’s an excellent article, but he makes a mistake: granting the destroyers their stated intentions.

  The proto-Marxist Jacobins of the French Revolution put it this way: “Out of order, chaos.” But first the Jacobins had to create the chaos, with an artificially engineered grain shortage leading to food riots, which they exploited for their revolutionary ends. Vladimir Lenin put it this way, when told that bread riots were breaking out in Russia: “The worse, the better.” The better for creating the optimal revolutionary conditions. The Black Panthers, revolutionary Marxists of the 1960s, said, “Burn, baby, burn.”

  The currently existing social compact has to be burnt to the ground before the new world economic order can be built up from the ashes. This will be as true in 2017 as it was in 1917.

  Regardless of the rhetoric—Liberté, égalité, fraternité; Dictatorship of the Proletariat; The Thousand Year Reich; The New World Order—the truth is that the means—destruction and death—are the ends. Psychopaths kill millions of people because…they enjoy killing millions of people. As SLL posited in “Life, Or Death?”, citing Ayn Rand, a malevolent desire to kill others is, at root, a desire to kill one’s self. The slogans, the supposed omelets that justify cracking all those skulls eggs, are dross.

  That imparts analytic clarity to the future. When one understands that one’s life is on the line, one must fight with everything one has. Or else.

  

  

  

  

  

• The Three Charts That No Small Cap Asset Manager Wants You To See

  A funny thing happens to an index's valuation when you choose not to entirely ignore the companies that have negative earnings (i.e. losses). Ever wondered what the P/E ratio of the Russell 2000 was given that it is full of companies where the 'E' is negative? The answer is simple – and ugly – as The Wall Street Journal exposes, the aggregate P/E of the Russell 2000 is over 200x which perhaps explains the gaping chasm between bond and equity valuations for this highly credit-sensitive cohort.

   

  It seems very few 'investors' are willing to read or study reality anymore…

  If you go to the “fact sheet” for the Russell 2000 index trying to find the standard PE valuation metric, the only one provided by the index keepers is something called “P/E Ex-Neg Earnings.” The current valuation offered is 19.8, which sounds much more reasonable than the latest raw PE estimate from The Wall Street Journal): 295.81…

  

  That can't be right, right? My friendly asset-gatherer would have warned me.. or CNBC's best and brightest would have raised red flags?

  It appears not… So here are 3 charts to show him/them next time they try to pile you into this underperforming index.

  As the 'dreaming' divergence between GAAP and non-GAAP (as we noted yesterday) widens ever more and the gap between Small cap earnings (inclusive and exclusive of 'losses' and extraordinary items) explodes…

  

  (in simpler terms, green is the index's earnings when you ignore the companies that have negative earnings; red is inclusive of all companies and aggregating losers and winners – which would you prefer to judge the index's valuation?)

  Which explains the surging reality of Russell 2000 P/E valuations…

  

  As Alhambra's Jeffrey Snider previously noted, if more and more small companies have started losing money, which the difference between the current real/raw PE and that figure Russell itself provides more than suggests, there are more than a few implications here.

  Which explains why Russell 2000 index remains suspended (on a string of faith and momentum) above the ugly reality that credit markets are prophesying…

  

   

  And given that small cap firms are the most-sensitive to credit market access, this is likely to continue as credit market conditions tighten (even absent The Fed)…

  

   

   

  h/t Randy W

   

  

  

  

  

  

• China Stocks Crash: Down More Than 4% To Fresh 15 Month Lows

  It all started off well-enough: the USDJPY was modestly lower but noting big, then the Yuan was fixed a little less modestly lower – well ok, it was the lowest fixing in 8 weeks confirming China just couldn’t wait for the Shanghai summit to be over – and then suddenly the Chinese market realized what we said earlier in the weekend, namely that with the much anticipated G-20 meeting a complete dud, and with no major stimulus on the horizon, suddenly the trapdoor below Chinese stocks opened and the Shanghai Composite has started the new month tumbling over 4%.

  

   

  With this latest plunge, Chinese stocks are now back to levels last seen in November 2014 when the Chinese “replacement” bubbles (out of shadow banking) was just getting started:

  

  And just in case it wasn’t obvious:

  • CHINA STOCKS’ TECHNICAL REBOUND IS OVER: HENGSHENG’S DAI MING

  But perhaps even more important as the G-20 fiasco, Shenwan Hongyuan Group analyst Qian Qimin told Bloomberg that “the red hot property mkt may attract more and more fund inflows and investors worry this might divert liquidity from the stk market” which incidentally is precisely what we said earlier this afternoon when observing the latest iteration of the Chinese housing bubble:

  To us, there is nothing surprising in this behavior: now that the Chinese stock market bubble has burst, the local population has to find a new asset class which to chase for the next few months, and for the time being that asset is housing.

  It also means that Chinese stocks are done for the time being. It remains to be seen how the rest of the world will digest this unpleasant fact.

  

  

  

  

• A Coherent Explanation of Obama's Foreign Policy

  Authored by Eric Zuesse,

  Foreign policy is both economic and military. An interpretation of U.S. President Barack Obama’s foreign policy will be presented here that explains both his economic and his military decisions to-date, and that shows he’s been carrying out the policies of his predecessors in office.

  On economic matters, he has turned out to be the most ambitious ‘free-trader’ of any U.S. President: he has proposed three gigantic international-trade treaties, two with North Atlantic countries (TTIP for products and TISA for services), and one with Pacific countries (TPP), not only in order to serve America’s aristocracy at the public’s expense (an international “race-to-the-bottom” in terms of workers’ wages, and race to the top in terms of stockholders’ profits and executive pay) (like NAFTA on steroids), but in order to extend the NATO military alliance against Russia, to include now these trade treaties as a companion economic alliance against Russia (to reduce Russian trade with Russia’s biggest market, which is Europe).

  Obama’s economic initiative with North Atlantic countries is even more intensive than his one with Pacific countries, because his TTIP & TISA would be economic treaties that would extend the North Atlantic Treaty, or NATO, directly from the military realm into the economic realm. With his TTIP & TISA, Obama is pursuing, essentially, a NATO economic  alliance to complement the military one — virtually the same members as NATO. TPP is less important, because that treaty attempts to isolate China, not Russia — and Russia is to be conquered before a conquest of China can be even seriously considered (in some future U.S. Presidency, though Obama is also ratcheting-up the military hostility against China).

  NATO was formed in the 1949 North Atlantic Treaty as being nominally an anti-communist mutual-defense treaty against the Soviet Union. But when the Soviet Union and its communism, and that communist group's equivalent of the NATO mutual-defense treaty, their Warsaw Pact, all disbanded in 1991, NATO continued on, now as being a purely anti-Russian military alliance. In 1990, the representatives of U.S. President George Herbert Walker Bush had told Mikhail Gorbachev of the Soviet Union that NATO wouldn’t expand eastward toward Russia, wouldn’t try to do to Russia what Nikita Khrushchev had tried to do to the U.S. in the Cuban Missile Crisis in 1962 (place nuclear missiles right next door), and Gorbachev accepted those assurances and disbanded the Soviet Union and its Warsaw Pact on that basis, but GHW Bush had actually lied there, and NATO not only continued on, it went right up to the very borders of Russia — exactly what the GHWB Administration had promised that the U.S. would never do.

  U.S. President Bill Clinton continued this GHWB policy of conquering Russia bit-by-bit by bringing into NATO the Czech Republic, Hungary, and Poland — a direct violation of Bush’s verbal promise to Gorbachev. However, Bush had actually intended  this violation: Bush had told both Helmut Kohl of Germany and Francois Mitterrand of France that the promise made to Gorbachev was only a lie, and that as far as fulfilling it, “To hell with that — we prevailed, they didn’t!” Clinton — and his successors — merely followed through on Bush’s lie. Bush’s son George, in 2004, brought into NATO: Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia, and Slovenia.

  And that brought us to Obama’s Presidency, which is increasing this assault and threat against Russia to reach now a red-hot, no longer merely Cold, War. The bloody battlefields in this war so far have been in the countries that had been allied with Russia: Libya, Syria, and Ukraine. But the Cold War against Russia became hot in Ukraine first. That’s where Obama crossed Vladimir Putin’s red line.

  Russian leader Putin had long set as his red line that the U.S. mustn’t extend its NATO to include Ukraine, which has the longest border with Russia of any European country: 1,576 kilometers. If the U.S. is going to attempt a blitz-attack against Russia from next door, then Ukraine would be the most-dangerous country from which to launch it, and NATO membership for Ukraine would be the key to such success.

  In February 2014, Obama arranged a coup that overthrew the Russia-friendly and democratically elected President of Ukraine and replaced his government by one that's headed by the rabidly anti-Russian Arseniy Yatsenyuk. Obama’s operative who selected Yatsenyuk, Victoria Nuland, during the buildup to the coup, explained that, “Since 1991 [the breakup of the Soviet Union] .. we’ve invested over five billion dollars to assist Ukraine” to “build democratic skills and institutions” (which Ukraine already had, and which Obama — via her — was now tearing down).

  When she mentioned “1991,” she was thereby acknowledging  that GHWB had actually begun the overthrow of Ukraine. It was an exceedingly bloody coup d’etat in Ukraine, and Putin had always said that if Ukraine were to be added to NATO, that would be totally unacceptable — but now it was already in the process of happening.

  Immediately, the nuclear-arms race was resumed. This was very good for America’s ‘defense’ contractors such as Lockheed Martin, but not only for them. Right behind Nuland on the platform when she spoke of “1991” was the “Chevron” sign; and Chevron was the American oil-and-gas company that bought the rights to explore for oil and gas in western Ukraine — the area of Ukraine that had voted the most strongly against  the man whom Obama overthrew. (Chevron thus bought the safest  gas-rights. The locals there were happy to have a U.S. company exploring there.) Subsequently, a son of U.S. Vice President Joe Biden became appointed by the Ukrainian owner of Ukraine’s largest gas-exploration company in eastern Ukraine, to become a board-member. (That area was extremely hostile towards the United States, angry against the overthrow, and the residents there demonstrated against that company’s fracking and wanted to shut them down.) The American VP didn’t object that his son might become a billionaire from America’s Ukrainian coup — this was considered acceptable by the Obama regime and the aristocracy that it served (most of the U.S. public were never even informed of the now-booming Ukrainian-U.S. corruption).

  The overthrow of Ukraine’s democratically elected President (who had been corrupt himself, just as all  of Ukraine’s post-Soviet leaders had been) was an effort by Obama not only to take over Ukraine but to further isolate Russia, virtually all of whose former Warsaw Pact allies were by now now firmly in the anti-Russian NATO camp.

  However, Obama had actually been preparing for a renewed war against (now) Russia (no longer against the Soviet Union and communism), ever since he first became President in 2009, when his Administration responded to Syria’s drought-provoked 2008 request for food-aid not with food but with scheming to overthrow also that ally of Russia. And, then, Obama dusted off an old CIA plan from 1957, which had been drawn up by the mastermind of the successful 1953 overthrow of Iran’s freely and democratically elected progressive President Mohammed Mossadegh (replacing him with the brutal Shah); and, in this 1957 plan for Syria, the secular Ba’athist Party that ruled Syria was to become replaced by Saudi-allied Sunni fundamentalists — but this plan was placed on-hold until an appropriate time, which finally arrived during the Obama regime, when the widespread ‘Arab Spring’ demonstrations added fuel to the fires of Syria’s drought.

  That 1957 plan was itself a part of a longstanding CIA program.

  After Putin responded to those recent foreign invasions of Syria by Saudi-backed jihadists, by Russia’s starting on 30 September 2015 an all-out bombing-campaign against those tens of thousands of foreign invaders, Saudi Arabia and its fundamentalist-Sunni ally Turkey tried to draw the United States directly into an all-out invasion of Syria against both the Assad government and its now-committed Russian ally.

  In response, the Saud family teamed up with their Sunni-fundamentalist ally-and-NATO-member Turkey, to seek Obama’s support for an all-out ‘Western’ invasion of Syria to defeat both Assad and Russia, as well as to defeat two other allies of Assad: Iran and its Hezbollah ally in Lebanon.

  President Obama then reached out to the leaders of various European NATO member-nations, to seek at least one of them to join with the U.S. in making this not only a fundamentalist-Sunni invasion to overthrow and replace Syria’s Ba’athist government — the only remaining secular government in the Mideast. Thus far,Obama has failed to find any; and he seems unwilling to join the Sunni-Islamic countries as the only non-Islamic invader. However, Obama’s Secretary of State, John Kerry, is threatening to complete the 1957 CIA plan without Europe’s participation, if there’s no other way to do it. And the aristocracy’s Council on Foreign Relations recently headlined, “Divide and Conquer in Syria and Iraq; Why the West Should Plan for a Partition.” That ‘partition’ or breakup of Syria is the 1957 CIA plan. But that threat seems likely to be pure bluff from Kerry. After all, Kerry himself also says, “What do you want me to do? Go to war with Russia? Is that what you want?” He doesn’t want that. And he wasn’t bluffing when he said that he doesn’t. And Obama seems to recognize that the U.S. and NATO need at least several more years in order to have all the pieces in place for it to be launched.

  As regards Ukraine, Obama seems to have given up there, too. Ukraine is being left to rot, into perhaps sequences of regime-replacements and spiraling chaos: it’s a wrecked country.

  The end-result of Obama’s foreign policies, thus far, is to turn Russia’s allied nations into failed states. Whether his successor as the U.S. President will be satisfied with that (after all: it does hurt Russia), or else will ‘go for the gold’ (as Obama has thus far unsuccessfully tried to do) and resume the active quest to conquer Russia, might depend upon whether Obama can get his ‘trade’ deals passed and implemented; because, if that effort fails, then one would be hard-pressed to see any way in which the 1990-Bush-initiated war against Russia will be won, short of some sort of desperate nuclear invasion, for which Russia might be sufficiently well prepared so that whomever the survivors of that war would be (including even the top stockholders in firms such as Lockheed Martin) would wish they weren’t survivors. After all: what would any currency be worth then? Maybe enough to buy a gun and bullet to finish oneself off. Even for those corporate CEOs, their golf-days would be over, and only grim days would remain. But that’s when the true stature of such American Presidents as GHWB, Clinton, GWB, and Obama, would likewise become clear — to those survivors, or at least to the ones that don’t have the gun, or the bullet, or otherwise haven’t yet expired. It’s like the recognition-of-truth that people such as Palestinians, or Auschwitz-victims, or ISIS-victims, might have in their final moments. But here it would be happening even to the few aristocrats who cause such things to occur. Wouldn’t that be “a refreshing change”? After everything is said and done, and no one is around to enjoy it? But, anyway: it would be a change, and it would also be ironic. However, no one would be around to enjoy even the irony of it.

  Obama has been carrying out a bipartisan Republican-and-Democratic foreign policy; it’s the policy of America’s aristocracy. Its results have been horrible for the world, but they’ll be even worse if it succeeds. Not only will there then no longer be democracy (but instead a global government by international corporations), but if it succeeds all the way, there won’t even be much of anything except universal misery and mass-death. It is, unquestionably, an extremely ambitious foreign policy. Thus far, it seems to be entirely in accord with the foreign policy of the Saud family. However, that may be about to change: perhaps Obama, and the United States, will simply quit its alliance with the Sauds, and separate from them. But, will Europe separate from NATO? If not, then the anti-Russia policy will continue even if the Sauds’ alliance with the U.S. comes to an end.

  *  *  *

  Investigative historian Eric Zuesse is the author, most recently, of  They’re Not Even Close: The Democratic vs. Republican Economic Records, 1910-2010, and of  CHRIST’S VENTRILOQUISTS: The Event that Created Christianity.

   

  

  

  

  

  

• China Devalues Most In 8 Weeks, Offshore Yuan Slides To 3-Week Lows

  Following USD strength last week, China has come back to work after the disappointment of the Shanghai non-accord and weakened the Yuan fix by 0.2% – the most since January 7th.

  

   

  This move follows pressure from offshore Yuan weakness since traders returned from Golden Week – driving the onshore-offshore spread out to its widest since The PBOC stepped in and stomped the shorts.

  

  After a few weeks of stability, it appears China is forced to let the Yuan slip back out to where its CDS (a market it is notr manipulating directly yet) implied it to be after shaking out some weak shorts at the end of January.

  Stocks are opening modestly to the downside – following weakness in US from Friday

  • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 0.3% TO 2,939.58
  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 0.4% TO 2,754.81

  

  

  

  

  

• Central Banks Shiny New Tool: Cash-Escape-Inhibitors

  Submitted by JP Koning via Moneyness blog,

  Negative interests rates are the shiny new thing that everyone wants to talk about. I hate to ruin a good plot line, but they're actually kind of boring; just conventional monetary policy except in negative rate space. Same old tool, different sign.

  What about the tiering mechanisms that have been introduced by the Bank of Japan, Swiss National Bank, and Danmarks Nationalbank? Aren't they new? The SNB, for instance, provides an exemption threshold whereby any amount of deposits that a bank holds above a certain amount is charged -0.75% but everything within the exemption incurs no penalty. As for the Bank of Japan, it has three tiers: reserves up to a certain level (the 'basic balance') are allowed to earn 0.1%, the next tier earns 0%, and all remaining reserves above that are docked -0.1%.

  But as Nick Rowe writes, negative rate tiers—which can be thought of as maximum allowed reserves—are simply the mirror image of minimum required reserves at positive rates. So tiering isn't an innovation, it's just the same old tool we learnt in Macro 101, except in reverse.

  No, the novel tool that has been created is what I'm going to call a cash escape inhibitor.

  Consider this. When central bank deposit rates are positive, banks will try to minimize storage of 0%-yielding banknotes by converting them into deposits at the central bank. When rates fall into negative territory, banks do the opposite; they try to maximize storage of 0% banknote storage. Nothing novel here, just mirror images.

  But an asymmetry emerges. Central bankers don't care if banks minimize the storage of banknotes when rates are positive, but they do care about the maximization of paper storage at negative rates. After all, if banks escape from negative yielding central bank deposits into 0% yielding cash, this spells the end of monetary policy. Because once every bank holds only cash, the central bank has effectively lost its interest rate tool.

  If you really want to find something innovative in the shift from positive to negative rate territory, it's the mechanism that central bankers have instituted to inhibit the combined threat of mass paper storage and monetary policy impotence. Designed by the Swiss and recently adopted by the Bank of Japan, these cash escape inhibitors have no counterpart in positive rate land.

  The mechanics of cash escape inhibitors

  Cash escape inhibitors delay the onset of mass paper storage by penalizing any bank that tries to replace their holdings of negative yielding central bank deposits with 0%-yielding cash. The best way to get a feel for how they work is through an example. Say a central bank has issued a total of $1000 in deposits, all of it held by banks. The central bank currently charges banks 0% on deposits. Let's assume that if banks choose to hold cash in their vaults they will face handling & storage costs of 0.9% a year.

  Our central bank, which uses tiering, now reduces deposit rates from 0% to -1%. The first tier of deposits, say $700, is protected from negative rates, but the second tier of $300 is docked 1%, or $3 a year. Banks can improve their position by converting the entire second tier, the penalized portion of deposits, into cash. Each $100 worth of deposits that is swapped into cash results in cost savings of 10 cents since the $0.90 that banks will incur on storage & handling is an improvement over the $1 in negative interest they would otherwise have to pay. Banks will very rapidly withdraw all their tier-2 deposits, monetary impotence being the result.

  To avoid this scenario, central banks can install a Swiss-style cash escape inhibitor. The way this mechanism works is that each additional deposit that banks convert into vault cash reduces the size of the first tier, or the shield, rather than the second tier, the exposed portion. So when rates are reduced to -1%, should banks try to evade this charge by converting $100 worth of deposits into vault cash they will only succeed in reducing the protected tier from $700 to $600, the second tier still containing the same $300 in penalized deposits. This evasion effort will only have made banks worse off. Not only will they still be paying $3 a year in negative interest but they will also be incurring an extra $0.90 in storage & handling ($100 more in vault cash x 0.9% storage costs).

  Continuing on, if the banks convert $200 worth of deposits into vault cash, they end up worsening their position even more, accumulating $1.80 in storage & handling costs on top of $3.00 in interest. We can calculate the net loss that the inhibitor imposes on banks for each quantity of deposits converted into vault cash and plot it:
   

  The yearly cost of holding various quantities of cash at a -1% central bank deposit rate

  Notice that the graph is kinked. When a bank has replaced $700 in deposits with cash, additional cash withdrawals actually reduce its costs. This is because once the first tier, the $700 shield, is used up, the next deposit conversion reduces the second tier, the exposed portion, and thus absolves the bank of paying interest costs. And since interest costs are larger than storage costs, overall costs decline.

  If banks go all-out and cash in the full $1000 in deposits, this allows them to completely avoid the negative rate penalty. However, as the chart above shows, storage & handling costs come out to $9 per year ($1000 x 0.9%), much more than the $3 banks would bear if they simply maintained their $300 position in -1% yielding deposits.

  So at -1% deposit rates and with a fully armed inhibitor installed, banks will choose the left most point on the chart—100% exposure to deposits. Mass cash conversion and monetary policy sterility has been avoided.

  How deep can rates go?

  How powerful are these inhibitors? Specifically, how deep into negative rate territory can a central bank go before they start to be ineffective?

  Let's say our central banker reduces deposit rates to -2%. Banks must now pay $6 a year in interest ($300 x 2%). If banks convert all $1000 in deposits into cash, they will have to bear $9 in storage and handling costs, a more expensive option than remaining in deposits. So even at -2% rates, the cash inhibitor mechanism performs its task admirably.

  If the central bank ratchets rates down to -3%, banks will now be paying $9 a year in interest ($300 x 3%). If they convert all $1000 in deposits into cash, they'll have to pay $9 in storage & handling. So at -3%, bankers will be indifferent between staying invested in deposits or converting into cash. If rates go down just a bit more, say to -3.1%, interest costs are now $9.30. A tipping point is reached and cash will be the cheaper option. Mass cash storage ensues, the cash escape inhibitor having lost its effectiveness.

  The chart below shows the costs faced by banks at various levels of cash holdings when rates fall to -3%. The extreme left and right options on the plot, $0 in cash or $1000, bear the same costs.
   

  The yearly cost of holding various quantities of cash at a -3% central bank deposit rate

  So without an inhibitor, the tipping point for mass cash storage and monetary policy impotence lies at -0.9%, the cost of storing & handling cash. With an inhibitor installed the tipping point is reduced to -3.1%. The lesson being that cash escape inhibitors allow for extremely negative interest rates, but they do run into a limit.

  The exact location of the tipping point is sensitive to various assumptions. In deriving a -3.1% escape point, I've used what I think is a reasonable 0.9% a year in storage and handling costs. But let's assume these costs are lower, say just 0.75%. This shifts the cash tipping point to around -2.5%. If costs are only 0.5%, the tipping point rises to around -1.7%.

  This is where the size of note denominations is important. The Swiss issue the 1000 franc note, one of the largest denomination notes in the world, which means that Swiss cash storage costs are likely lower than in other countries. As such, the Swiss tipping point is closer to zero then in countries like the Japan or the U.S.. One way to push the tipping point further into negative terriotry would be a policy of embargoing the largest note. The central bank, say the SNB, stops printing new copies of its largest value note, the 1000 fr. Banks would no longer be able to flee into anything other than small value notes, raising their storage and handling costs and impinging on the profitability of mass cash storage.

  Good old fashioned financial innovation will counterbalance the authorities attempts to drag the tipping point deeper. Cecchetti & Shoenholtz, for instance, have hypothesized that in negative rate land, a new type of intermediary could emerge that provides 'cash reserve accounts.' These specialists in cash storage would compete to reduce the costs of keeping cash, pushing the tipping point back up to zero.

  The tipping point is also sensitive to the size of the first tier, or the shield. I've assumed that the central bank protects 70% of deposits from the negative deposit rate. The larger the exempted tier the bigger the subsidy central banks are providing banks. It is less advantageous for a bank to move into cash when the subsidy forgone is a large one. So a central bank can cut deeper into negative territory the larger the subsidy. For instance, using my initial assumptions, if the central bank protects 80% of deposits, then it can cut its deposit rate to -4.6% before mass paper storage ensues.

  Removing the tipping point?

  There are ways to modify these Swiss-designed cash escape inhibitors to remove the tipping point altogether. The way the SNB and BoJ have currently set things up, banks that try to escape negative rates only face onerous penalties on cash conversions as long as the first tier, the shield, has not been entirely drawn down. Any conversion after the first tier has been used up is profitable for a bank. That's why the charts above are kinked at $700.

  If a central bank were to penalize cumulative cash withdrawals (rather than cash withdrawals up to a fixed ceiling) then it will have succeeded in snipping away the tipping point. This is an idea that Miles Kimball has written about here. One way to implement this would be to require that the tier 1 exemption, the shield, go negative as deposits continue to be converted into cash, imposing an obligation on banks to pay interest. The SNB doesn't currently allow this; it sets a lower limit to its exemption threshold of 10 million francs. But if it were to remove this lower limit, then it would have also removed the tipping point.

  What about retail deposits?

  You may have noticed that I've left retail depositors out of this story. That's because the current generation of cash escape inhibitors is designed to prevent banks from storing cash, not the public.

  As central bank deposit rates fall ever deeper into negative territory, any failure to pass these rates on to retail depositors means that bank margins will steadily contract. If banks do start to pass them on, at some point the penalties may get so onerous that a run develops as retail depositors start to cash out of deposits. The entire banking industry could cease to exist.

  To get around this, the FT's Martin Sandbu suggests that banks could simply install cash escape inhibitors of their own. Miles Kimball weighs in, noting that banks may start applying a fee on withdrawals, although his preferred solution is a re-deposit fee managed by the central bank. Either option would allow banks to preserve their margins by passing negative rates on to their customers.

  Even if banks don't adopt cash escape inhibitors of their own, I'm not too worried about retail deposit flight in the face of negative central bank deposit rates of -3% or so. The deeper into negative rate territory a central bank progresses, the larger the subsidy it provides to banks via its first tier, the shield.  This shielding can in turn be transferred by a bank to its retail customers in the form of artificially slow-to-decline deposit rates. So even as a central bank reduces its deposit rate to -3% or so, banks might never need to reduce retail deposit rates below -0.5%. Given that cash handling & storage costs for retail depositors are probably about the same as institutional depositors, banks that set a -0.5% retail deposit rate probably needn't fear mass cash conversions.

  So there you have it. Central banks with cash escape inhibitors can get pretty far into negative rate land, maybe 3% or so. And with a few modifications they might be able to go even lower.

  

  

  

  

  

• GOP Super Tuesday: The Full Breakdown

  Much to the chagrin of the political establishment, Donald Trump is on the verge of locking up the GOP nomination.

  New Hampshire: Trump.

  Nevada: Trump.

  South Carolina: Trump.

  Put simply, if the brazen billionaire locks up Super Tuesday, it’s all over for the field. Here’s a preview of next week’s critical polls via Politico:

  Alabama primary; 50 delegates

  Don’t be fooled by Gov. Robert Bentley’s endorsement of his colleague John Kasich. This is conservative country. It’s the home of immigration hardliner Jeff Sessions, whose endorsement has been courted by both Cruz and Trump. There have been few polls of the largely rural state, but Trump dominated the most recent one, a December poll funded by state lawmakers that showed Trump with a 20-point edge over Cruz.

  Brent Buchanan, an unaligned Republican strategist in Alabama, said he expects the state to mirror the results of South Carolina: a strong Trump win, and a Rubio second-place finish. Buchanan noted that Rubio just earned the endorsement of 31 state lawmakers and Cruz pulled out of an Alabama forum set for Saturday, though Rubio still plans to attend. Anecdotally, he said, energy for Cruz has slid. It could leave Cruz empty-handed if he fails to reach 20 percent support in the state, the minimum threshold for receiving delegates.

  Alaska caucuses; 28 delegates

  The Alaska caucuses are virtually invisible. The low-population state is so far out of the way, few candidates devoted much time there. One potential factor: Sarah Palin. A longtime Cruz ally, Palin endorsed Trump last month. In a small state like Alaska, where Palin was governor before her vice presidential run in 2008, an endorsement could carry weight. The only poll that included Trump, taken in early January, showed a close race between the mogul and Cruz.

  Arkansas primary; 40 delegates

  One of the few obvious opportunities on the map for non-Trump candidates is here. The only recent poll shows Cruz with a narrow lead and a second-place tie between Trump and Rubio. Rubio is the beneficiary of a recent endorsement by Gov. Asa Hutchinson, part of a wave of establishment support he received after Jeb Bush dropped out of the race last weekend. Trump has spent time here, though. He held a rally shortly before the New Hampshire primary and he returned Saturday for a rally in Bentonville. He also recently hired Sarah Huckabee, daughter of former Arkansas Gov. Mike Huckabee, as a senior communications adviser.

  Georgia primary; 76 delegates

  Donald Trump holds massive leads over his rivals in recent polls of Georgia, the second-largest prize on Super Tuesday. It may be the reason that Trump will spend his night of the week in Valdosta. The state also has a 20 percent support threshold for doling out delegates, a dangerous dynamic for Cruz and Rubio who have both floated around that level in recent polls. Rubio recently opened his first office in the state, though Trump and Cruz have had a presence there for a while.

  Massachusetts primary; 42 delegates

  Trump is poised to run away with a win in Massachusetts. The main question is by how much. A resounding victory that features buy-in from the state’s significant contingent of blue-collar, Reagan Democrat/independent voters is already spooking Democrats about Trump’s strength for the general election. It’s also bad news for Kasich, whose team and supporters hoped his second-place finish in New Hampshire would come with Massachusetts coattails. Kasich is expected to get crushed in the South and hasn’t had the resources to build much of an organization, so he’s been counting on victories on less conservative turf to carry him through Super Tuesday. He won’t find much shelter here though. He will, however, likely pick 

  The only Midwestern state on the calendar Tuesday, Minnesota will be a true wildcard. Trump reportedly has limited organization in the state, and the most recent poll there actually puts Rubio and Cruz in a statistical tie with Trump. That might explain Rubio’s recent visit there. He’s in search of any state to notch an outright win, so he’s not swept on Super Tuesday as he was in the early states. Rubio received endorsements last week from two prominent Minnesota Republicans, former Gov. Tim Pawlenty and former Sen. Norm Coleman. Trump didn’t schedule any time in Minnesota over the past week, as he barnstormed the South.

  State GOP chairman Keith Downey said Minnesota is one of the few mysteries on the map. He’s urged party officials to prepare for up to twice their record-level of turnout reached in 2008. “I think Cruz, Rubio and Trump might be a little more bunched together in Minnesota, similar to Iowa,” he said. Downey added that Trump, of late, has begun assembling a field team that could help him corral more votes on Tuesday.

  Oklahoma primary; 43 delegates

  Oklahoma is looking like the “bragging rights” state. That’s the way Party Chairwoman Pam Pollard sees it. Pollard noted that Oklahoma, one of three most conservative states in the country, also holds the first totally “closed” primaries — meaning only voters who registered as Republicans by Feb. 5 can cast ballots. Earlier states and even other Super Tuesday states allow some crossover voting by Democrats or voting by independents.

  That means, the winner here can demonstrate he won a stte in which only “Republicans voted for Republicans.” That might explain the late flurry of activity here. Trump was in Oklahoma City on Friday, and Pollard said Rubio would be in the state for two stops on Monday. Cruz, she said, had visited three times and would be back again before Tuesday’s primary.

  Polls have shown Trump holding a solid but potentially surmountable lead. The Oklahoman poll put Trump ahead with 29 percent support to Rubio’s 21 percent. According to the State Elections Board, as of Friday afternoon, mail-in absentee ballots in Oklahoma hit 13,600, already significantly outpacing the 10,500 in 2012, and early voting hit 15,700, already beating 2012’s 14,500

  Tennessee primary; 58 delegates

  The state — whose elongated geography drew candidates due to its overlap with media markets in a slew of surrounding states — is something of an ideological mystery. The state’s governor, Bill Haslam, was reelected resoundingly in 2014, but he drew ire from conservatives during a failed attempt to expand Medicaid. Haslam endorsed Rubio last week. An MTSU poll taken in mid-January showed Trump lapping the field with 33 percent to Cruz’s 17 percent, though more than a quarter of voters were still undecided.

  Texas primary; 155 delegates

  This is must-win turf for Cruz. In fact, anything other than a huge victory would be a problem for his campaign. Cruz’s path to the nomination revolves around dominance in the South, starting in his home state. If he doesn’t come away from Super Tuesday with a delegate lead, it will raise enormous questions about his viability going forward. Absent that kind of showing, his best hope may be a divided electorate that sends the contest to a floor fight at the July convention. Cruz has shown strength in recent polls, leading by double digits in a new Monmouth University survey.

  The state party requires a 20 percent threshold of support for candidates to receive delegates. Trump and Cruz may be the only two who come away with delegates if current polling trends hold.

  Vermont primary; 16 delegates

  The tiniest pot of delegates up for grabs Tuesday, Vermont hasn’t gotten much attention. But Trump did hold a rally here in January, and Kasich has argued that like Massachusetts, this generally liberal state could be a pickup opportunity for a more moderate candidate. The state’s only recent poll tells a different story. Trump is dominant, and trailed distantly by a second-place Rubio. If these, as well as Massachusetts poll results hold, Kasich could come away winless on the day. The state only doles out delegates to candidates who earn 20 percent support or more — meaning Trump could shut out his rivals if he holds his large lead.

  Virginia primary; 49 delegates

  Donald Trump held a double-digit lead over Rubio and Cruz here in recent polls of the state. But the state’s impact will be diluted because it doesn’t have a delegate threshold, ensuring that even lower-performing candidates will come away with a share of delegates. Kasich made three stops here last week, and his team has cast Virginia as a state where he could prove sneaky-strong, but polls don’t bear that out. A Roanoke College poll out Friday gives Trump a 23-point edge over Cruz, who is statistically tied with Rubio. Carson and Kasich lag the field with just 8 percent support apiece.

  Wyoming convention; 29 delegates

  No drama here. Wyoming will send its 29 delegates to the July convention unbound. It holds no presidential preference poll or vote of any kind, a decision shared only by North Dakota and Guam. If the Republican convention becomes a first-ballot nail-biter, these unbound delegates could help tip the balance.

  

  

  

  

• The Central Bankers' Greatest Blunder Yet: Negative Rates = Deleveraging

  In a world which has long since crossed the monetary twilight zone of negative rates, and which is spiraling ever deeper into NIRP, below we present some quite fascinating observations on debt, NIRP and how the latter leads to the deleveraging of the former, and thus encourages global deflation – something which in retrospect will be (and in many cases already has been) seen as a central bank fatal flaw, and confirmation said central bankers have zero understanding of the process they have unleashed.

  From HSBC’s Anton Tonev.

  Negative rates = deleveraging

  • Negative interest rates on developed world sovereign bonds could reduce debt burdens and may be a market solution to overleveraging
  • While the side effect of extreme money creation is inflation, the side effect of extreme debt creation is deflation
  • We argue that the need for further deleveraging may be a reason why negative interest rates persist in sovereign bond markets

  Bonds and deleveraging

  While conventional theory suggests that central banks set base interest rates and that negative rates are a result of low inflation and slow economic growth, we suggest there may be an alternative explanation. Drawing on historical and cultural analogies, we view negative rates as a possible market response to the growing levels of debt and inequality in income and wealth.

  In April last year, Switzerland became the first country to issue a 10-year sovereign bond at a negative yield. By the end of 2015, about a third of newly issued eurozone sovereign bonds came with a negative yield. Investors who buy these bonds and hold them to maturity will receive less than they put in and the issuer will ultimately pay back less than borrowed. Through this mechanism, we believe that negative interest rates can be a useful tool for deleveraging.

  We recognise that the challenge to this view is that the objective of this policy has been to encourage even more leverage; the case of the Swedish housing market comes to mind. The majority of the countries with negative yields on their government bonds have high levels of either government or private debt (or in some cases both). Historically, one would expect government yields to go up to discourage the issuance of more debt. This is not happening now. Why? We suggest that, precisely because of the high level of debt and the need to deleverage, nominal yields in those countries have become more and more negative to encourage the issuance of more debt and slowly roll down the existing debt stock.

  This suggests the market may be indicating there is too much debt. But this has an implication for the creation of new money, which is essential for the normal functioning of the economy. Most of the money creation in the developed world is done by the private banking  system through issuing loans. If there is no demand for new debt, the money creation process stalls. In other words, while under the gold standard our money creation was constrained by the availability of gold, in the current “fiat” monetary system, we cannot issue new money without the issuance of new debt. However, the system after 1971 was much more flexible than the metallic standard before because, as long as the economy was expanding, the banks could always find someone willing to borrow from them and thus increase the money supply.

  Nevertheless, there is a natural limit to how much debt an economy can sustain. The time after the financial crisis of 2008 coincided with ever decreasing rates of growth and, as a result, not only could the banks not find people to lend to (thus money supply growth slowed down) but people started deleveraging (which caused total liquidity to contract – see Figure 12).

  The US, and by extension most of the developed world post 2008, was in a very similar situation to where it was for most of the nineteenth or the early twentieth centuries, i.e. a deflationary environment characterised by intense progress (in our case we are starting to finally see the benefits of the Internet) and the inability to boost the money supply and thus create inflation.

  Figure 12. Total US liquidity decreased after the 2008 crisis

  

  It is this economic necessity and the mathematical impossibility of paying interest continuously which has created the present situation of negative interest rates: in our view the market has found a way to keep the monetary system going but this time without the risk of ever increasing debt.

  In the past, we used to deal with too much debt either using market forces, like growth and inflation, or non-market forces, like debt jubilees, debt restructurings or excessive seigniorage. History is full of examples which reinforce the notion that putting an unbearable burden on debtors would ultimately send the whole economy into a depression. Debt jubilees were very common in Mesopotamia, for example, where, by some accounts there were around thirty episodes of general debt cancellations from 2400 to 1400 BC.

  In 1819, as agriculture prices dropped, US state governments imposed moratoria on farmers’ debt payments and some debt was even completely forgiven. During the Great Depression, the US government, through the Home Ownership Loan Corporation, helped struggling homeowners by sometimes substantially lowering their mortgage payments. “One of the largest transfers of wealth (from creditors to debtors) in the history of the world”, however, happened when the US government broke off the gold standard in 1933. This was equivalent to restructuring its debt as, by removing the gold clause in US Treasury securities and devaluing the dollar, creditors’ claims were cut by more than 40%.

  None of these options was used after the Great Recession of 2008. In addition, the developed world economies seem unable to generate growth and inflation sufficient to offset the rise in debt. Without a policy response, the market is taking the matter in “its own hands” by starting to reduce the level of debt (in present value terms) via negative yields on sovereign bonds.

  
  

  

  

  

  

  

• The Agriculture Space – Grains (Video)

  By EconMatters

  

  The effects of a strong dollar the last 3 years can be seen quite dramatically in the Grain space – to the tune of 20 plus percent. People haven`t stopped eating, and there are more and more people on this planet every year, so the grains are probably a long term buy here over a five year time frame.

  

  © EconMatters All Rights Reserved | Facebook | Twitter | YouTube | Email Digest | Kindle   

  

  

  

  

• EU's Evil Plan B: Cutting The Balkan Route Has Stranded 1000s Of Migrants In Greece

  Via KeepTalkingGreece.com,

  The closure of borders in the north of Greece has created chaos: thousands of refugees and migrants wandering from Athens to Idomeni without knowing where to sleep and what to eat, where to lay their kids and elderly to sleep.

  

   

  FYROM, Croatia, Slovenia and Austria has closed their border today. Slovenia, Croatia and Serbia said on Friday they would each restrict the number of migrants allowed to enter their territories to 580 per day, while Austria already introduced a daily cap of 80 asylum-seekers and said it would only let 3,200 migrants pass through each day. However, FYROM’s borders remained close all day Friday, onloy 150 crossed on Thursday. Albania, that had earlier said to accept refugees, decided otherwise at the end of the day, after the West Ballkan Conference initiated by Austria. Prime Minister Eddi Rama said that his country will not accept any refugees.

  Also the push-backs have started: Austria sent back 50 Syrians two days ago, they arrived in Idomeni , Greece a couple of hours ago. According to latest information, Serbia is going to push-back 1,000 people to FYROM and FYROM will forward them to Greece.

  Refugees, asylum-seekers, migrants: all in one pot. End of  story:

   

  Victoria square #athens #greece #refugeesGr #RefugeesCrisis #refugees pic.twitter.com/wYD6x9KM4K

  — prezatv (@prezatv) February 28, 2016

   

  The Balkan Route is cut.

  20,000-25,000 people are trapped in Greece.

  

  Allegedly concerned that a humanitarian crisis may occur, the European Commission is working out a contingency plan to tackle the crisis and avoid the disaster.

  “At this time we are preparing an emergency plan, ‘a humanitarian aid mechanism’ in order to avoid a humanitarian crisis in Greece,” European Commission spokesperson Natasha Bertaud said on Friday, however without elaborating on details. Correspondents of Greek TV channels in Brussels reported later that the “Emergency plan” would rather be in form of financial aid for food, logistics etc of even up to 3 billion euro. Greece has reportedly already submitted the relevant request to Brussels. According to Greek media, the Greek request aims to tackle the Refugee Crisis until March 7th.

   

  

   

  For one more time masks are fallen: the Wall Street Journal wrote on Friday:

  “Senior European officials are embracing the so-far taboo idea of cutting off the migrant trail in Greece, a step that they acknowledge could create a humanitarian crisis in the country, says a report in the Wall Street Journal.

   

  This so-called Plan B, floated until now only by Europe’s populist leaders, is a sign of rapidly waning confidence in other European Union policies to deal with the migration crisis—in particular in German Chancellor Angela Merkel’s game plan of relying mainly on Turkey to stem the human tide.”

  Apparently the EU are looking into the EU-Turkey Leaders Summit scheduled for March 7th. I saw on TV, German Chancellor Angela Merkel saying that “results of NATO mission have to be awaited, first.” NATO’s sea-monitoring mission has been officially launched in the eastern Aegean today.

  Should NATO’s mission fail and Turkey would show show much willingness for cooperation,  refugees and migrants will be keep coming form Turkey to Greece. “And this has to be stopped” the EU officials think and they argue that bottling up the migrants in Greece would be more manageable than having them stranded in poorer, non-EU neighboring countries in the Balkans.

  This is an odd EU-thinking, then none of the refugees or migrants plans to stay in FYROM or in any othe rnon-EU Balkan countries. The majority of them declares, they want to Germany or in Scandinavian countries.

  “Greece wouldn’t be the worst place to have a humanitarian crisis for a few months,” one EU official told WSJ, adding that the population there was much more refugee-friendly than those in the Balkans or Eastern Europe.”Four senior EU officials said that Greece, as an EU member state, could receive more bloc funding and other practical help to cope with the stranded migrants than its Balkan neighbors, where ethnic conflicts could flare up anytime. Once the message trickles through that migrants are stuck in Greece, the officials said the hope is that fewer people would attempt to come in the first place.”

  An evil plan smitten in devils’ rooms in Brussels, behind closed doors., by those EU “partners” who do not want to stand to their responsibilities. thus violating the sames rules and the same decisions have have signed and agreed upon.

   

  The European Commission Legal Departmental reportedly consider the border closure by Austria, Croatia and Slovenia as “illegal”.

   

  United Nations Secretary-General Ban Ki-moon expressed concern on Friday over the increasing number of border restrictions targeting migrants in the Balkans and said they ran contrary to the international refugee convention.

   

  The border rules in Austria, Slovenia, Croatia, Serbia and Macedonia “are not in line” with the 1951 convention “because individual determination of refugee status and assessment of individual protection needs are not made possible,” said UN spokesman Stephane Dujarric.

   

  It looks as if the EU and Commission will certainly tolerate the closure of borders. Unofficially. But they will do, for the sake of protecting “migrants get stuck in non -EU Balkan countries,” as the joke in Brussels claims.

   

  At the end of the Balkan Route, the truth is this: Austria’s domino-effect initiative for borders closure serves primarily Germany’s interests for fewer refugees and migrants. Mutti (translated as 'Mom' – implying Merkel as "mom of the nation") will keep polishing around her image as political correct leader with a vision.

  

  

  

  

  

• Military Would Revolt Against Trump, Former CIA Director Says

  Earlier today, we noted that America’s presumed candidate for the GOP nomination is busy retweeting Mussolini quotes.

  That’s not necessarily a reflection of an explicit desire to move America towards fascism.

  It’s not entirely clear that Donald Trump understands the movement he’s started. But America’s entrenched political establishment is now scrambling to understand how to deal with the Trump juggernaut and it’s not just politicians who are concerned. 

  Indeed, former intelligence officials now say the brazen billionaire could face a veritable security rebellion if he’s elected. 

  “I would be incredibly concerned if a President Trump governed in a way that was consistent with the language that candidate Trump expressed during the campaign,” Former CIA director Michael Hayden said, in an interview with Bill Maher. Hayden also says that the armed forces would simply refuse to follow Trump’s orders were he to be elected and follow through on his campaign promises.  

  Here’s what Hayden had to say about Trump’s promise to kill family members of ISIS: “God, no! Let me give you a punchline: If he were to order that once in government, the American armed forces would refuse to act. You cannot—you are not committed, you are not required, in fact you’re required to not follow an unlawful order. That would be in violation of all the international laws of armed conflict. There would be a coup in this country.”

  Would Trump face a military coup or would Trump simply commandeer the military? You decide. Here’s the clip: 

  

  

  

  

  

• Forward Guidance: The Road Map To Crazy Town

  Authored by Mark St.Cyr,

  One of the premier features that was to help markets interpret upcoming policy moves made at the Federal Reserve was the idea and implementation of: forward guidance. This new feature was enacted by the former Chairman Ben Bernanke. The reasoning? In a nut shell it was no more than a heads up to the financial markets of what the Fed. would do, and when. i.e., Hit this metric of X and the Fed. will do Y. So – position accordingly.

  Although that’s an extreme over simplification, in effect, that’s precisely what it was supposed to be when contrasted with one “Fed. talk” laden speech against another. This way the markets (as well as other central bankers and/or governments) could take solace (in theory) of not being adversely surprised by some sudden, unannounced, or unforeseen policy decision and announcement from a FOMC meeting.

  An example might be: “We’ll do X if Y is reached. However, if Y is not – one can take solace that we’ll stand pat until the next meeting.” Rather than leaving everything from A-Z a guesstimate in between. Why? Because the natural conclusion is when it comes to money: confusion, or guessing equals selling or, at the least, non-participation. i.e. Sitting on hands.

  Again, it was in 2012 this type of communication strategy was implemented by Ben Bernanke. Then, he himself, did the exact opposite. To wit:

  From The Economist™ in February of 2014:

  “IN DECEMBER 2012 Ben Bernanke, then chairman of the Federal Reserve, reached deep into the central banker’s bag of tricks and pulled out something novel. Using a new trick which became known as “forward guidance”, the Fed declared that it would not raise interest rates until America’s unemployment rate dropped to at least 6.5%, so long as inflation remained below 2.5%. In August 2013 the Bank of England followed suit. Mark Carney (pictured), its governor, promised to leave rates low until unemployment was down to at least 7%—again, so long as inflation and financial markets remained well-behaved. In both America and Britain, unemployment fell quickly toward the thresholds. Yet neither central bank reacted by moving to boost rates, leading critics to argue that forward guidance had failed and should be scrapped. Central banks are instead tweaking their guidance: the Bank of England will update its guidelines on February 12th, and the Fed may soon do the same.”

  As one reads the above you can’t help but be astonished. Again: “…the Fed declared that it would not raise interest rates until America’s unemployment rate dropped to at least 6.5%, so long as inflation remained below 2.5%.” How’d that work out? Yes, it’s a rhetorical question.

  Using just the aforementioned criteria given by the Fed. in 2012 as “to give guidance” we could go on to list a litany of similar examples. Never-minding how many FOMC meetings were held where this criteria was hit, and hit, and hit again – and a policy move of raising rates was ever done. Well, there was actually one move. What move you ask?

  Lower the criteria. 6 became 5, and now since we’re at 4.9. It’s not a number that means X,Y, or Z anymore. It’s now ___________(to be announced….maybe…and subject to change….definitely.)

  As confusing and obtuse many a Fed. dissertation has become. What has been even more confusing too me is the near zealot manner I’ve heard one economist after another state with surety they know, or can interpret, precisely what the Fed. will do next based on what the Fed. has communicated.

  It doesn’t matter if it’s some “next in rotation” guest economist, or their own resident “Chief economist.” The inclinations are always the same. i.e., “The Fed. will do this when that happens. And, that has yet to happen. So, those who say one should worry, or think different, just don’t know what they’re talking about and should be ignored.”

  If one puts aside all of the moving metrics and policy talk that happened during Mr. Bernanke’s tenure. How would one assess “the guidance” or the “communications for clarity” we now have emanating from not only the Fed., but also, central bankers globally? Crazy Town is the only thing that comes to my mind. (Hint: look to the SNB or BoJ for clues)

  The Federal Reserve itself has made so many pauses or “moving of the goal posts” since 2012 alone, there is not enough digital ink to list them all. While as of today under Ms. Yellen’s tenure it’s been communicated that those once aforementioned data points are now no longer as weight-bearing for policy moves as they once were. Now instead of unemployment data, or inflation data, we’re now “data dependent.” And “data” represents whatever the Fed. decides whether today, tomorrow, or right now. I guess 4.9% which once represented statistically full employment doesn’t mean what it once was. Unless they decide it does. Or – doesn’t. Maybe.

  Just look at the communication delivered at the latest FOMC presser that took place just this past December. The Fed. declared in a unanimous voting of the affirmative it was fiscally prudent to raise interest rates, even if it were ever so slightly, as to begin the path towards more normalized accommodation. This was all predicated on what everyone was made to believe not only “the data” but more importantly, “a fulfillment of their forward guidance.” For remember, that “forward guidance” was thwarted in August and delayed because “data dependent” morphed into “international developments.” There was no “guidance” for that one was there?

  As soon as the markets showed weakness following that “international development” that hit the U.S. developed markets in the form of a market selloff, The Fed reversed course and did exactly what it implied it would not do – and punted till the next meeting. All against a backdrop that “data” was not supposed to mean solely “market” data. Yet, that’s what the move implied as was interpreted. Whether rightly or wrongly. And no official “communique” was going to change minds regardless.

  And here we are just two months since and we’ve had one Fed. official after another insinuate future “rate hikes” are both on the table and off the table. While QE will not be forth coming – unless it’s needed, definitely, if and when. Maybe. But don’t count on it – unless you need too. I think.

  This is the near insane way one has had to look to monetary policy makers and try to both run a business, as well as for others – run a country. Having to decide what policy means today or, if it means today, what it meant yesterday. Then; try to formulate and put to work real business plans or national policies for growth based on current directives, insinuations, flip-flops, and more. This is not only frustrating – it borders on lunacy trying to even comprehend.

  This communicated confusion also helps to elicit precisely the greatest, most dangerous of monetary manifestations to come into fruition. Here is where companies, people, as well as governments won’t commit to anything other than: Nothing. Or, worse – sell everything. Which is the antithesis of what today’s Keynesian devotees are trying to manifest. This is what “forward guidance” has wrought: directives straight to “Crazy Town.”

  There is one more extreme example coming up that may show just how much central banks have lost any remaining credibility. Where participants of all stripes or markets will no longer heed, or wait, to see what move a central bank may take in the future. That event happens later tonight in the U.S. or Monday morning in Asia as the markets react to what many believed (and possibly positioned for) might be a watershed event for coordinated, along with sizable interventions, via the G-20 participants that concluded Saturday. Many were implying, and inferring, possible “Plaza Accord” styled accommodations.

  There was great enthusiasm expressed by many of those participants and inferred the same by the markets. Only problem? It seems once again it was a meeting of all talk – no action.

  Now we’ll just have to wait and see if the markets will act first and ask questions later once its realized it was they who were crazy to think anything other than jawboning would take place.

  

  

  

  

  

• Kuroda's NIRP Backlash – Japanese Interbank Lending Crashes

  Not only has the Yen strengthened and stocks collapsed since BoJ's Kuroda descended into NIRP lunacy but, in a dramatic shift that threatens the entire transmission mechanism of negative-rate stimulus, Japanese banks (whether fearing counterparty risk or already over-burdened) have almost entirely stopped lending to one another. Confusion reigns everywhere in Japanese markets with short-term interest-rate swap spreads surging and bond market volatility spiking to 3 year highs (dragging gold with it).

  As Bloomberg reports,

  The outstanding balance of the interbank activity plunged 79 percent to a record low of 4.51 trillion yen ($40 billion) on Feb. 25 since Bank of Japan Governor Haruhiko Kuroda on Jan. 29 announced plans to charge interest on some lenders’ reserves at the monetary authority.

   

   

  

   

  While Kuroda wants to lower the starting point of the yield curve to reduce borrowing costs and spur shift of funds into riskier assets, the interbank rate has fallen only about as far as minus 0.01 percent, above the minus 0.1 percent charged on some BOJ reserves. The swings on bond yields will make it harder for financial institutions to determine how much business risks they can take, weighing on lending in a weak economy even as they are penalized for keeping some of their money at the central bank.

   

  It will take at least another month until the market finds a level where many dealings are settled, as financial institutions face uncertainty over how the new policy affects monthly fund flows, said Izuru Kato, the president of Totan Research Co. in Tokyo.

   

  “Since past patterns don’t apply under the entirely new structure, financial institutions will take a conservative approach until the financing picture is nailed down,” Kato said. “If the funding estimate proves wrong, banks might lose by prematurely lending in negative rates. People are cautious and staying on the sidelines.”

  All this chaos has sent risk premia surging everywhere you look in Japan:

  Reflecting the confusion among traders about the unprecedented negative-rate policy, the one-month premium for one-year interest-rate swaps have surged, according to data compiled by Bloomberg.

   

  “The swaption market is reacting to the heightening volatility because players don’t know where Libor will settle,” said Naoya Oshikubo, a rates strategist at Barclays Plc in Tokyo. “One reason behind this is the fact that unsecured overnight call rates and general collateral repo rates aren’t falling as intended by the BOJ.”

  And as Japanese bond volatility surges, it seems demand for gold rises (as perhaps VaR restrictions of Japanese bank balance sheets force a rotation to relatively lower risk assets)…

  

   

  And while the last week has seen a G20-Hope-fueled lull in the collapse,

  “It is still uncertain how deep into the negative the overnight call rates will sink,” said Naomi Muguruma, a senior market economist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “It won’t settle until funding flows in the new scheme become clear. That may pressure volatility to stay high for government bonds.”

  Simply put, “The focus will be how much money these institutions facing negative rates will lend out in the market,” or how little.

  

  

  

  

  

• The G-20 Meeting Was A Big Disappointment: What Happens Next

  Exactly one week ago, when BofA’s Michael Hartnett explained what global capital markets need to rebound from their recent doldrums, he laid out what he sees are the world’s two biggest problems:

  • Problem 1: US economy in “bad Goldilocks”, i.e. US economy not hot/strong enough to lift global GDP & EPS; but not cold/bad enough to induce global coordinated response
  • Problem 2: global policy-maker rhetoric in recent days shows “coordinated innocence” not stimulus, all blaming global economy for weak domestic economies (“Overseas factors are to blame”…Japan PM Abe; “drag on U.S. economy from greater-than-expected-slowdown in China & other EM economies“…FOMC minutes; “increasing concerns about the prospects for the global economy”…ECB Draghi; “the change in China’s growth rate can be attributed in part to weak performance of the global economy”…PBoC)

  That recaps the problems; as to what the markets need he said the following:

  “We remain sellers into strength in coming weeks/months of risk assets at least until a coordinated and aggressive global policy response (e.g. Shanghai Accord) begins to reverse the deterioration in global profit expectations and credit conditions.”

  It was the expectation of a “massive policy stimulus” out of this weekend’s G-20 that unleashed last week’s furious short squeeze on concerns that shorts could be steamrolled by some G-20 surprise, as remote as it may have been. Citi’s Brent Donnelly confirmed as much: “the relevant question now is whether or not this 160-handle rally in SPX (!) is partially attributable to shorts squaring up ahead of the G20 meeting.” His answer: absolutely.

  Indeed, as we reported yesterday, the G-20 has come and gone and has been a total flop, which was also not exactly a surprise: As Hartnett also said one week ago, “stabilization of “4C’s” (China, Commodities, Credit, Consumer) allowed SPX 1800 to hold/bounce to 1950-2000; weak policy stimulus in coming weeks could end rally/risk fresh declines to induce growth-boosting policy accord.“

  Donnelly was just as blunt: “I would say the rally in the past two days has had extra momentum because of G20 and now shorts should be looking to reestablish—so I think stocks should trade weak from here into Monday.”

  Worse, it was not just that the G-20 disappointed; it actually left everyone even more confused than going into the weekend:

  Ambiguity on dealing with exchange rate swings also left market participants guessing. The policymakers reiterated that such volatility “can have adverse implications for economic and financial stability. At the same, they forswore “competitive devaluations” and vowed not to “target our exchange rates for competitive purposes.” It isn’t clear from these two sentences whether Japan has license to try to reverse the yen’s gains against the dollar since the start of the year, assuming it can stop the run-up.

  Ok, so the G-20 not only disappointed it also left market watchers scratching their head making the case for further downside more credible, but what about the lingering risk of another major central bank intervention in the coming days: after all on deck as the BOJ’s meeting as well the the ECB.

  The problem for the BOJ is that after it pulled the ridiculous NIRP stunt, it may have no political capital left for further surprises, and certainly no ammo. According to the Nikkei, “Bank of Japan Gov. Haruhiko Kuroda assured reporters on Saturday that no fellow G-20 officials had voiced objections to the BOJ’s negative interest rate policy. But Jeroen Dijsselbloem, the Dutch finance minister and president of the Eurogroup of eurozone finance chiefs, said “there was some concern that we would get into a situation of competitive devaluations” as a result of the BOJ’s move.

  Osamu Takashima at Citigroup Global Markets Japan said that “Japan’s policy of trying to lift its economy by moving the yen in a weaker direction with monetary policy isn’t very welcome.”

  He added that if the G-20 statement is seen as a deterrent against fresh monetary stimulus from the BOJ, another bout of yen appreciation may follow, and with it a renewed sell-off in Japanese stocks.

  As the Yen appreciates, that would imply further selling in the S&P as more carry trades are forced to be unwound, especially since the market finally understands what Hartnett really meant when he said that “we remain sellers into strength in coming weeks/months of risk assets at least until a coordinated and aggressive global policy response begins.”

  In other words, after the squeeze, now the next leg lower can start – one which prompts central banks to intervene. And since the BOJ is now sidelined, it means the ball is entirely in the court of the ECB. This is how Citi’s head of FX Steven Englander lays out the next steps:

  1. Policymakers are more likely to blame bad luck than policy ineffectiveness for the way in which currencies move. They will be mindful of concerns on banks from negative rates and flat curves, and will probably find some way of cushioning banks from the impact of their moves.
  2. The fear of policy ineffectiveness has led investors to downgrade both the impact of future policy moves and the probability of future policy moves. If central banks come back with further eases, with some provisions to cushion the impact on bank profits, there will be a partial bounce back in asset markets. Financial markets may still respond, even if the expected impact on final demand on inflation is limited.
  3. The ECB is in focus. EZ is undershooting on growth and inflation, and ECB President Draghi has been impassioned on the need to provide more stimulus. If they lowball or grudgingly meet expectations, we could face another December 4 move because market participants will see it as the equivalent of a ‘last ease in the cycle announcement’, basically ECB throwing in the towel. If they move aggressively (and take measures beyond vanilla QE and 10bps on rates), they will catch market off guard and unwind the view that policymakers see themselves as powerless.

  In other words, the next big move in the market is now entirely in Mario Draghi’s hands.

  

  

  

  

  

  

• Philadelphia – Heads The Union Wins, Tails The Taxpayers Lose

  Submitted by Jim Quinn via The Burning Platform blog,

  More Than 30 Blocks Of Fiscal Irresponsibility

  “Democracy is a pathetic belief in the collective wisdom of individual ignorance. No one in this world, so far as I know—and I have researched the records for years, and employed agents to help me—has ever lost money by underestimating the intelligence of the great masses of the plain people. Nor has anyone ever lost public office thereby.” – H.L. Mencken, Notes on Democracy

  I’ve written dozens of articles about the 30 Blocks of Squalor over the years. The 30 blocks are essentially from 69th Street to 39th Street encompassing the wretched potholed route from unsafe Upper Darby through the killing fields of West Philly. The fine union government workers in the Streets Department have consistently maintained Chestnut Street in a constant state of disrepair. Not that drivers notice.

  

  When there is an accident on the Schuylkill Expressway in the morning I’m forced to run the 30 Blocks gauntlet down Chestnut Street. I’ve had to do it a few times in recent days. The expletives flowed in waves as I hit four unmarked craters in the center lane. These were not the common everyday West Philly potholes that pock the landscape like it’s the moon. At least if you see a local resident fishing in the pothole, you can avoid it.

  

  These four separate craters were man made, or to be honest, created by a bunch of government union drones, not refilled with blacktop or marked with an orange cone. The question is whether this is utter incompetence, blatant indifference, spite or a business transaction between government drones and local tire dealers. Luckily, government traffic engineers have been too swamped to properly time the lights on Chestnut Street for the last 20 years, so no one can travel faster than 15 mph anyway. Government lessens the pain of their ineptitude through their ineptitude in another area. They call that a win win in Philly. As the light at 57th and Chestnut remains on blinking yellow for a week, it makes you wonder what pressing issues are occupying the fine highly compensated union Streets employees.

   

  I’ve now been navigating the crumbling ghetto of West Philly for the last ten years. I can without equivocation state I have not seen one new private business open its doors on Chestnut Street, in Mantua, or any other area I travel in West Philly during the entirety of those ten years. The existing businesses – nail and hair salons, fast food joints, bars, liquor stores, porn video outlets, smoke shops, car washes, more bars, and hysterically tax return offices (earned income tax credits) – haven’t invested a dime in keeping up their appearances. Maybe they used all their spare cash to sure up the bars on their windows and the roll down steel gates necessary to keep the upstanding neighborhood honor student juveniles from having a little fun.

  It appears there is an existential shortage of paint, hammers, garbage bags, wedding rings, and employed upstanding men taking responsibility for the children they father in West Philly. There is plenty of yellow crime scene tape, as West Philly accounts for a significant portion of Philadelphia’s 280 annual murders (up 13% in 2015). Houses originally well built in the 1950s and with some upkeep would still be fine homes, are in disrepair, with collapsing porches, dilapidated gutters and roofs, crumbling sidewalks, boarded up windows, and satellite dishes on every one.

  

  The lucky end units usually have a mural of black people doing great things, with trash, garbage and overgrown weeds underneath and black people not doing great things shuffling along the streets.

  

  As you witness the crumbling infrastructure of West Philly, with water mains bursting on a regular basis, streets sinking, houses falling down during heavy rainstorms, boarded up rat infested hovels housing drug addicts, and schools resembling prisons, it leaves you pondering how it came to this and why the fifty year War on Poverty left the people in these neighborhoods mover impoverished. I don’t blame the people stuck living in West Philly. I blame the corrupt politicians who have run the city for the last sixty years.

  Liberal solutions based upon welfare handouts, union government workers, idiotic solutions sold by slimy politicians and high taxes have combined to create a morass of uneducated, unmotivated, unmarried people who live in squalor created by the very politicians they have been voting for over the last six decades. The city has been under the complete control of the Democratic Party the entire time.

  The only things built in West Philly in the last ten years are government boondoggle projects using taxpayer money. There is a new Social Security Administration building so it’s easy to apply for SSDI because you’re overweight and depressed. There are other government social services buildings to dole out various forms of welfare to the plantation recipients. The welfare slaves don’t even notice their chains.

  The government slave owners provide the bare minimum of sustenance to their ghetto slaves in return for their unquestioned voting support in elections. Obama received 98% of  West Philly votes in the last election. There is no need for private businesses, new jobs, marriage (less benefits), personal responsibility, sense of community, education, or self respect. Government knows best and has all the solutions, until they run out of producers to tax into oblivion.

  I’ve previously written about the $24 million 683 parking spot garage built on top of a perfectly fine ground level parking lot at the Philadelphia zoo, totally paid for by taxpayer funds and government debt. At least it was built at a 30% union construction premium. I drive by this testament to government pork every work day. It is closed in the morning. It is closed at night. It is empty the entire winter. It is unoccupied at least 75% of the time during a given year. It will never be paid off by the minimal parking fees collected.

  The privately owned parking garages in Center City are gold mines. Central Parking is highly profitable. This government created white elephant was unnecessary. The zoo gets busy on a few nice weather weekends all year. They had sufficient parking and overflow parking. It was built because the broke Federal government and the even more broke PA government forked over $16 million of taxpayer funds to create some temporary union construction jobs. It’s a complete waste of taxpayer money.

  And then there is the ongoing saga of the Section 8 gated estate called Mantua Square, a $28 million, 101 townhouse, 8 store front testimonial to Keynesian idiocy that sits in the middle of an Obama Keystone Zone. As you cross the bridge on 34th Street to enter the Mantua section of West Philly, there are beautiful murals on the bridge.

  

  There are murals of colorful flowers along the entire bridge.

   

  I guarantee you they are the only flowers you’ll ever see in Mantua. Weeds, diseased barren trees, garbage and crumbling sidewalks is what you get in West Philly, along with an occasional dead body. Mantua Square was one of Obama’s shovel ready projects funded by his $800 billion porkulus package in 2009. Every dime came from taxpayers. It was touted as a game changer for Mantua. We were told businesses would open in the 8 pre-built retail spaces and other businesses would follow. A glorious revitalization would materialize due to brilliant government apparatchiks spending your money.

  It is now 5 years later and not one storefront is occupied by a single business. Not one black entrepreneur has used their Philadelphia public school education to create a viable business and the jobs that would follow. Of course, no one living at Mantua Square would apply for a job anyway. They would lose their welfare benefits and free housing. Plus it’s only a short walk to the local church handing out free food every Thursday morning. The best part is that union construction workers spent the last six months replacing the facing of all 101 townhouse units due to shoddy union construction in the first place. No biggie. Just another couple million for the taxpayers to fund. The motto of government selected union construction firms in Philly is: “We’re slow, we’re incompetent, but at least we’re the most expensive”.

  Did I mention this is gated Section 8 housing, with each unit costing over $250,000, when the median value of the hovels surrounding it is $36,000? The cars parked around this government white elephant include BMWs, Cadillacs, Lexus, and Ford F150s. I also see garbage strewn on the sidewalks, but as I pass by at 7:30 am on the way to my job I don’t see anyone rushing out of their luxury townhouses because they are late for work.

  The neighborhood is still a dangerous, drug infested, decaying shithole because one off government created projects do not change the culture or the people. More welfare promotes more dependency. Young black men get murdered in that neighborhood. A young child was raped on the way to school in that neighborhood. The school across from Mantua Square has been muraled, but the kids inside are unruly and uneducated.

  

  Every public school in the city has metal detectors to cut down on the in school murders. They can do that out on the streets, where it belongs. And despite six decades of failed policies, the politicians, teacher’s union, and liberals who run the city insist more taxpayer money will fix everything. One problem. They’ve run out of other people’s money. Maybe the money spent on useless parking garages and Section 8 estates should have been spent replacing water pipes, streets, and encouraging businesses to open in the city through lower taxes and regulations.

  I stumbled across an article in the Financial Times the other day revealing why Philadelphia’s infrastructure is crumbling, with absolutely zero possibility of reversing the downward spiral. I find it fascinating a foreign publication had to uncover the ugly truth, while the liberal rag Phila. Inquirer is completely silent on the issue. They just spout the mantra of how the Feds and PA need to give Philadelphia more money. It’s always for the children. The hundreds of billions poured into the public education system in this country over the last decade has been a complete waste of time, mainly because a huge portion of the money doesn’t go towards education, but bloated pensions and administration costs.

  More mediocre teachers, more government control, more social engineering, more free breakfasts and lunches, more catchy slogans and more promises have achieved steady declines in SAT scores across the board. The next solution is to phase out SAT scores. Measuring failure isn’t allowed in our politically correct, trophy generation, safe spaces world. Reporting declines in scores on a test that has been an accurate predictor of college success for generations is a micro aggression against the intellectually stunted morons being matriculated through the government run public education system. The $14,000 to $20,000 per student per year spent by the taxpayers across this country just isn’t enough according to those of a liberal ilk. The children would be smart if we just upped the ante by another $2,000 per kid. They’d hire more below average education majors into the teacher’s union. That’s a can’t miss solution.

  

  If you think the national scores are atrocious, and they are, wait until you see the scores from the Philadelphia School District. The students who took the SAT from Philadelphia public schools “achieved” these averages:

  Reading – 398 (PA average was 480)

  Math – 405 (PA average was 483)

  It gets even better. Only the cream of the crop even took the exam. There were 25,768 students in the Phila. public school 11th and 12th grades. Only 5,172 students even took the exam, or 20%. Based on their scores, they probably wouldn’t know how I arrived at 20%. To paraphrase George Carlin, when you see how stupid the 20% SAT takers are, just imagine how stupid the 80% who didn’t take the exam must be. The SAT score predicts your possibility of achieving a passing grade in college.

  Based on the scores of the Phila. students, less than 10% of high school seniors are capable of succeeding in college. To prove how warped our higher educational system has become, there were 8,439 graduates and 54% of them enrolled in college. If you were wondering where the hundreds of billions in taxpayer funded student loans are going – here’s your answer. It’s getting doled out to functional illiterates with zero chance of succeeding in college. There’s a 100% chance you will end up paying for the billions in student loan defaults.

  Despite a $2.8 billion annual budget, with over $1 billion coming from the State and Feds, the Phila. public school system is a complete and utter disaster. It is so bad the State had to seize control a few years ago by forming a commission to manage it. The buildings are dilapidated, rat infested, filled with mold, and need to be patrolled by police. Teachers are assaulted, principles fake test scores, students brawl, the learning materials are pitiful and little or no learning occurs. It begs to question, where did all the money go? Considering there are only 8,400 teachers and 300 principals, one wonders what the other 9,000 district employees actually do.

  There are 199,000 public school students, but only 134,000 are in the Phila. district schools. The other 65,000 are in charter schools. The 16 to 1 student to teacher ratio equals the national average. There were 212,000 students in 2003 with less teachers. More government employees were hired even though student enrollment declined 6%. The teacher’s union doesn’t care about the children. They care about getting their teachers as much as possible, and they’ve done a phenomenal job getting below average teachers gold plated benefits and pensions. The government unions use their voting power over the Democrat politicians to shakedown the taxpayers.

  

  It’s a perfect storm of governmental incompetence, union greed, political corruption, parental disinterest, societal disintegration, and poor life choices, creating the downfall of Philadelphia and other urban enclaves around the country. The Phila. public school system consists of 80% minorities (60% black, 20% hispanic). Over 75% of the population in West Philly is black.

  Over 71% of the black kids in West Philly are born out of wedlock. Only 17% of all households are occupied by married couples, while 40% are single mother households. The black men of West Philly are the primary culprits for this ongoing cesspool of ignorance, dependence, crime, and hopelessness. The disregard and scorn for the institution of marriage is a major reason for the median household income wallowing at $26,000, over 50% below the national average.

  You get more of what you incentivize and the warped welfare policies in this country incentivize the people of West Philly to not get married and not work. So they don’t. The best method to succeed in life is through higher education. It leads to higher lifetime income. Children from married households do better in school. Married couples also have a much better chance of producing higher household income. Marriage increases the odds of success tremendously for the married couple and their children. The residents of West Philly are caught in an inescapable cycle of poverty, exacerbated by the government welfare policies supposed to help them.

  The Financial Times article details why spending on essential infrastructure needs has been ignored and why the future is even bleaker. Government worker pension funds across the nation are in deep trouble, with no chance of honoring their promises. Public pension plans have promised to pay out $4.7 trillion more than they have on hand. Every U.S. citizen would have to pitch in $15,000 to pay every government worker’s promised pension. It’s not gonna happen.

  BlackRock, the world’s largest money manager, expects 85% of U.S. public pensions to fail over the next three decades. Certain state pensions are ridiculously underfunded, with Illinois only able to cover 22% of its promised payments, Connecticut only 23%, and Kentucky only 24%. The Central States Pension Fund, which manages almost $18 billion for 400,000 workers in 37 states recently was forced to cut benefit payments by as much as 61%. Retirees currently getting monthly checks for $3,000 will only get $1,180 now.

  This will happen to every government pension fund in the country because math is hard. Politicians promised government union workers more than they could ever deliver in order to secure their votes. Any government worker counting on these promises from corrupt politicians should acquire a taste for cat food and get used to setting their heat at 55 degrees in the winter. The City of Philadelphia has one of the worst pension schemes in the country. It is mathematically unsustainable, but no politician or union boss would ever utter those words to the citizens of their city. They’ll just lie until its too late.

  And it’s even worse than the published numbers. According to its actuaries, the City pension owes government workers $10.5 billion, with only $4.8 billion of assets. The annual return assumption of 7.5% is ridiculously overstated. With bonds and stocks priced to deliver 0% returns over the next ten years, the pension is really underfunded by at least $8 billion and not the reported $5.7 billion. The retirement payouts to the 64,000 current and former government employees will eventually be slashed dramatically. It’s just a matter of time.

  According to FT:

  The fund lost almost 20% in 2009 in the midst of the financial crisis. Overall, however, it has performed well, returning 7.4% a year on average since 1995, making its huge deficit all the more surprising. The pension contributions are eating up more and more of the city’s budget, leaving less money to spend on services such as the fire brigade, police and recycling. The cost of pension contributions has increased from 6% of the city’s budget to 15% over the past decade.

  The contractually required pension contributions are on automatic pilot to consume 20% of the city budget over the next five years, and the plan will still be underfunded by 60% to 70%. The average pension plan in the U.S. is “only” underfunded by 25%. Rather than deal with reality, city politicians have funded the pension deficits with higher sales taxes and cigarette taxes, further punishing their poorest citizens. As pensions account for an ever larger share of the city budget, the infrastructure of the city and schools will continue to crumble. Businesses and the producer class will continue to flee the city as taxes are relentlessly raised to honor union worker contracts. The downward spiral will accelerate.

  FT was flabbergasted by the ridiculous nature of a plan created by corrupt politicians and greedy unions:

  Despite the strain the pension fund puts on the city’s services, the scheme paid out a bonus to its members last year. Under the city’s rules, when the fund performs better than its target, some retirees get a bonus. In 2014, the scheme returned 15.7%, double its target. The bonus payout is one of the few topics Mr Dubow seems reluctant to discuss — notably whether it is controversial to pay bonuses to retired members when the scheme has less than half the money it needs for those actively paying into it. He cautiously responds that this is a requirement of the fund and will not discuss the matter further.

  Heads the union workers win, tails the taxpayer loses. When the market does well select high level retirees get bonus payments, but when the market performs below expectations there is no penalty for those same retirees. The fiscal debacle destroying Philadelphia was willfully constructed over decades by corrupt politicians, incompetent bureaucrats, greedy government unions, and a foolish citizenry who believed the lies and were too ignorant to do the math. A city run by welfare redistributionists eventually runs out of other people’s money. The wisest citizen in Philadelphia history understood the danger of creating a welfare culture 250 years ago. He was a big supporter of education (founded the University of Pennsylvania) and lifting yourself up by your bootstraps to succeed in life. Too bad his wisdom was not heeded.

  “I am for doing good to the poor, but…I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. I observed…that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer.”

  Benjamin Franklin

  

  

  

  

  

• "Trump Must Be Stopped" Plead 'The Economist' And CFR As Financial Establishment Panics

  It’s one thing for the republican establishment to throw up all over the candidacy of Donald Trump: frankly, the GOP has not been relevant as a political power ever since Boehner started folding like a lawn chair to Obama’s every demand just around the time of the first US downgrade, and as such what the Republican party – torn apart and very much irrelevant as the best of the “establishment” GOP candidates demonstrate – thinks is largely irrelevant.

  However, when such stalwart titans of financial establishmentarianism as the Council of Foreign Relations and “The Economist”, who until now had been largely ignoring Trump’s ascent in the political hierarchy finally unleash an all out assault and go after Trump on the very same day, you know that the flamboyant, hyperbolic billionaire has finally gotten on the nerves of some very high net worth individuals.

  Below are excerpts from the panicked lamentations of the Economist as written down this weekend in “Time to fire Trump“

  * * *

  The front-runner is unfit to lead a great political party, let alone America

   

  

   

  IN A week’s time, the race for the Republican nomination could be all but over. Donald Trump has already won three of the first four contests. On March 1st, Super Tuesday, 12 more states will vote. Mr Trump has a polling lead in all but three of them. Were these polls to translate into results, as they have so far, Mr Trump would not quite be unbeatable. It would still be possible for another candidate to win enough delegates to overtake him. But that would require the front-runner to have a late, spectacular electoral collapse of a kind that has not been seen before. Right now the Republican nomination is his to lose.

   

  When pollsters ask voters to choose in a face-off between Mr Trump and Hillary Clinton, the Democratic front-runner wins by less than three percentage points. Mr Trump would have plenty of time to try to close that gap. An economy that falls back into recession or an indictment for Mrs Clinton might do it for him.

   

  That is an appalling prospect. The things Mr Trump has said in this campaign make him unworthy of leading one of the world’s great political parties, let alone America. One way to judge politicians is by whether they appeal to our better natures: Mr Trump has prospered by inciting hatred and violence. He is so unpredictable that the thought of him anywhere near high office is terrifying. He must be stopped.

  … just in case there was any confusion what The Economist thinks.

  If the field remains split as it is now, it is possible for Mr Trump to win with just a plurality of votes. To prevent that, others must drop out. Although we are yet to be convinced by Mr Rubio, he stands a better chance of beating Mr Trump than anyone else. All the other candidates—including Mr Cruz, who wrongly sees himself as the likeliest challenger—should get out of his way. If they decline to do so, it could soon be too late to prevent the party of Abraham Lincoln from being led into a presidential election by Donald Trump.

  And then there is the Council of Foreign Relations’ Benn Steil with “Selling America Short” of which sections have been excerpted below:

  The country would cease to be great under a President Trump

   

  Following his primary victories in New Hampshire, South Carolina, and Nevada, Donald Trump has established himself as the clear frontrunner for the Republican presidential nomination. He has done so offering grandiose slogans — He’ll Make America Great Again! He’ll have us win so much we’ll get bored with winning! — and precious little in specifics. He has said, for example, that he would repeal Obamacare, without saying a word about what would replace it — beyond promising that his health program would be “terrific” and “take care of everyone.”

   

  * * *

   

  If Trump were to order the U.S. military to act as he suggests, the likely result would be a crisis in civil-military relations. Many military personnel would refuse to carry out orders so blatantly at odds with the laws of war; soldiers know that they could face prosecution under a future administration. If soldiers were to do as President Trump ordered, moreover, terrorist organizations would have a new recruiting pitch with the world’s Muslims — the need to counter American barbarism.

   

  * * *

  The radical changes that Trump proposes are all the more dangerous because he is so singularly ill-equipped to manage the resulting turmoil. This is a candidate, after all, who doesn’t know the difference between the Kurds and the Quds Force or have any idea what the “nuclear triad” is. Nor has Trump so far made good on his pledge to attract “top top people” to help him run things; he has still not unveiled a campaign foreign policy team in spite of months of pledges to do so. In any case, advisers cannot make up for a president’s ignorance and prejudice; presidents always get conflicting advice, and it is their job, and their job alone, to make the most difficult judgment calls in the world.

   

  Trump has already done considerable damage to America’s reputation with his crude, bombastic, and often ugly rhetoric. American standing, as measured both in “soft power” and more traditional realpolitik terms, would suffer far more if he were to become commander in chief. A Trump presidency threatens the post-World War II liberal international order that American presidents of both parties have so laboriously built up — an order based on free trade and alliances with other democracies.

   

  His policies would not make America “great.” Just the opposite. A Trump presidency would represent the death knell of America as a great power.

  So just whose nerves has Trump gotten on?

  Here is a summary of the current and honorary directors of the CFR, who basically double down as a ‘who is who’ list of everyone relevant in modern finance:

  • Carla A. Hills
  • Robert E. Rubin
  • David M. Rubenstein
  • Richard N. Haass
  • John P. Abizaid
  • Zoë Baird
  • Alan S. Blinder
  • Mary Boies
  • David G. Bradley
  • Nicholas Burns
  • Steven A. Denning
  • Blair Effron
  • Laurence D. Fink
  • Stephen Friedman
  • Ann M. Fudge
  • Timothy F. Geithner
  • Thomas H. Glocer
  • Stephen J. Hadley
  • Peter B. Henry
  • J. Tomilson Hill
  • Susan Hockfield
  • Donna J. Hrinak
  • Shirley Ann Jackson
  • James Manyika
  • Jami Miscik
  • Eduardo J. Padrón
  • John A. Paulson
  • Richard L. Plepler
  • Ruth Porat
  • Colin L. Powell
  • Richard E. Salomon
  • James G. Stavridis
  • Margaret Warner
  • Vin Weber
  • Christine Todd Whitman
  • Daniel H. Yergin
  • Madeleine K. Albright
  • Martin S. Feldstein
  • Leslie H. Gelb
  • Maurice R. Greenberg
  • Peter G. Peterson
  • David Rockefeller

  And here are the Trustees and the Board of The Economist:

  • Baroness Bottomley of Nettlestone PC, DL
  • Tim Clark
  • Lord O’Donnell CB, KCB, GCB
  • Bryan Sanderson
  • Rupert Pennant-Rea
  • Chris Stibbs   
  •  Sir David Bell   
  • John Elkann   
  • Brent Hoberman   
  • Suzanne Heywood   
  • Zanny Minton Beddoes
  • Baroness Jowell
  • Sir Simon Robertson
  • Lady Lynn Forester de Rothschild

  It is the fact that practically every member of the ultra high net worth establishment and “0.01%” loathes Trump with a passion, that he may be just a few months from claiming the US presidency.

  

  

  

  

  

• Ukraine Collapse Is Now Imminent

  Via GEFIRA,

  Two years have passed since Yanukovich was deposed and, as it turns out, another ruthless clan of oligarchs has taken power. No wonder then that Ukraine is heading for a new wave of violence and chaos. Oligarchs are fighting each other, the IMF is pulling out of the country, officials issue laws and regulations only to see them repealed within a day or two by others, and raided European companies are leaving the country after being robbed by the so-called pro-Brussels oligarchic elite. 

  It was evident from the beginning that the US and NATO-sponsored power transition was doomed to fail. Prime Minister Yatsenyuk made no secret on his personal website about his principal partners, NATO and Victor Pinchuk’s foundation. Victor Pinchuk is a link between the Ukraine corrupt oligarchic establishment and the Western political elite. In 2005, the BBC depicted him as a paragon of Ukraine’s kleptocracy:

  “Ukraine’s largest steel mill has been bought by Mittal Steel for $4.8bn (£2.7bn) after an earlier sale was annulled amid corruption allegations.

   

  The Kryvorizhstal mill was originally sold to the son-in-law (Mr. Pinchuck) of former President Leonid Kuchma for $800m.

   

  It was one of the scandals that sparked the Orange Revolution and propelled President Viktor Yushchenko into power.")

  Directly after the power transition, European leaders understood that the situation in the Ukraine was unmanageable, which we know from a confidential telephone conversation between Minister Paet (Minister of Foreign Affairs of Estonia) and Mrs. Ashton (High Representative of the Union for Foreign Affairs and Security Policy) that became public. Both politicians understood that the Maidan protesters had no trust in the politicians who formed the new coalition. Mr Paet said, “there is now stronger and stronger understanding that behind snipers it was not Yanukovich, but it was somebody from the new coalition." Their conversation makes it clear that both European politicians understood that, contrary to the official statements coming from Brussels, Europe has no solution for Ukraine’s problems and no trust in its new leaders.

  Petro Poroshenko, one of the oligarchs, became the fifth president. In line with his predecessors, he had amassed an astonishing personal wealth by mixing politics and business on behalf of the Ukraine population. He started his career under the notorious President Kuchma and served as a minister under deposed President Victor Yanukovich. One can hardly imagine a more troubled new president for a country that has to reform itself and get rid of corruption.

  In 2014 Brian Bonner, the Kyivpost chief editor, wrote: “Allowing prosecution of Kuchma (concerning the murder of a journalist) is acid test for whether Poroshenko will put national interests above his own.". Asking Poroshenko to “kill” his close friend and crony, former President Kuchma and the father-in-law of the powerful Pinchuk is a dramatic plea by the chief editor aimed at forcing President Poroshenko to show whose side he takes. Poroshenko’s answer came quickly: he rewarded Kuchma with a top position in the Minsk negation team.

  Within months after the power transition, investigative journalist Tetiana Chornovol, who lead an anti-graft body, quit, calling her time in the government “useless” because there was no political will to conduct “a full-scale war" on corruption.

  In the two years that followed rumour of ongoing corruption has not ceased. For Poroshenko and his fellow oligarchs, the biggest threat is not Putin and the separatists in the East, but the pro-Ukraine militia that only on paper were merged with the Ukraine army.

  The militia regards the Western-backed oligarchs as the second biggest threat to the Ukrainian nation. We believe the oligarchs are the primary cause of the rot in Ukraine’s government.

  Meanwhile, the Brussels elite is trying to sell the Ukraine 2014 power grab and the resultant association treaty as a way to help Ukraine to overcome its political corruption.

  The Dutch government wrote in its communique to its citizens: “This cooperation gives Ukraine a chance for a better future. The country wants to become a genuine democracy, without corruption and with a wealthy population. The European association treaty is the foundation for the national reforms.”

  Maybe this is the intention of many naive European politicians, it is not the intention of the Ukrainian elite who under Poroshenko consolidate their power. The Swiss-based company Swissport, a leading airport service company, and its French investors learned this the hard way.

  In 2012 the UK-based logistic website the “theloadstar” wrote:

  “Swissport, the Swiss ground handler stands to lose some $8m in assets in the Ukraine while other foreign investors could shun Ukraine, following an attempt to forcibly strip the company of its majority stake in Swissport Ukraine.

   

  In a move alleged to be ‘corporate raiding’, an increasingly common phenomenon in the country, 30% shareholder of Swissport Ukraine, Ukraine International Airlines (UIA), has claimed that Swissport International (SPI) violated its minority rights – a “baseless” allegation, according to the handler. During interim court proceedings the judges were changed twice – at the very last minute – before the hearings.”

  During the reign of Yanukovich, Kolomoisky (Poroshenko ally) try to strip Swissport from it assets. It did so by forcing the company to sell its multi-million majority stake for 400.000 Euro, using the corrupt Ukraine administration and the justice system. We cannot blame the company that it believed its problem was solved in 2014. The Washington and Brussels elite presented the new Kiev government as a tool in the fight against inherited Ukrainian corruption. During 2014 Swissport seems to have fought a successful battle against injustice. But at the end of 2014, the highest judicial body in Ukraine ruled that the company had to sell its multi-million investment to Kolomoisky for 400.000 dollars. The company said that it never received the 400.000 Euro from Mr. Kolomysky.

  Ihor Kolomoiskyi is the oligarch President Poroshenko installed as governor of Dnepropetrovsk. That Kolomoisky enjoyed the full protection of Poroshenko became apparent as he was not prosecuted after he had orchestrated an armed raid on UkrTransNafta Ukraine state-owned oil firm. To spare President Poroshenko the embarrassment, Kolomoyskyi offered his resignation.

  Ihor Kolomoiskyi is the founder of the Brussels-based European Jewish Parliament that served to increase his influence in Brussels. A worrisome sign that Ukraine’s political rot is spreading into the European Union.

  Swissport raid and forceful eviction from Ukraine was an embarrassment for those who try to uphold the illusion Ukraine was in the process of becoming a genuine democracy free of corruption.

  It could hardly be a surprise that a year after Kyivpost publication that Swissport had left Ukraine, Aivaras Abromavi?ius, Minister of Economics in Poroshenko’s cabinet and one of Washington’s principal allies in Kiev resigned.

  After Abromavi?ius it was Deputy Prosecutor General that resigns due to unstoppable corruption. 15 February Deputy Prosecutor General Vitaliy Kasko wrote in his resignation letter:

  “…This desire is based on the fact that the current leadership of the prosecutor’s office has once and for all turned it into a body where corruption dominates, and corrupt schemes are covered up. Any attempts to change this situation at the prosecutor’s office are immediately and demonstratively persecuted.

   

  Lawlessness, not the law, rules here…..”

  A day later General Prosecutor Victor Shokin, who analysts say, is an ally of President Poroshenko, has to quit. Viktor Shokin agrees to step down after President Poroshenko asked him to leave office Western leaders and reform-minded Ukrainian officials have long been calling for Shokin’s resignation.

  At the same time, Ukraine headed for a standoff between its two most powerful politicians after Prime Minister Arseniy Yatsenyuk had defied President Petro Poroshenko’s call for his resignation and defeated a no-confidence motion in parliament.

  The current chaos in Kiev makes it for the IMF extremely hard to keep Ukraine funded. Brazil’s IMF Director already in 2014 urged not to bend rules for Ukraine. Ukraine had failed the IMF twice before. There is now a sense of panic in Kiev, and so Ukraine leaders start to issue opposite orders. The Central Bank Governor’s ban on money exchange was repealed immediately by Yatsenyuk.

  The situation of the population deteriorates rapidly as Ukraine’s currency devalues fast and bond yields spike. Companies start to understand that direct investment can disappear overnight as raided foreign companies are forced to leave the country. Protesters take over Hotels in Kyiv and return to Maidan to demand the resignation of the Ukraine rulers who came to power with the support of Washington and Brussels. Yatsenyuk now becomes a liability for its partner NATO.

  It is a just matter of time before the Ukraine nationalistic militias will take power, resulting in a definite split of the country. Poroshenko can postpone the people final verdict by reviving the war in the east, but in the end, he can not escape the day of reconning.

  

  

  

  

  

• China's Housing Bubble Is Back: Locals Wait In Line For Days To Flip Houses

  Back in early 2014, we warned that the Chinese housing bubble has burst, promptly followed by official confirmation by China’s National Bureau of Statistics which showed that in the subsequent several months Chinese home prices and transactions plunged. Since then, however, China – whose economy has been on a steep downward spiral – has desperately scrambled to reflate this most important to its economy bubble, because as a reminder in China three quarters of all household assets are in Real Estate…

  

   

  … despite first suffering the bursting of a shadow debt bubble and then its stock market doing the same.

  Still, because in China where there is an excess $30 trillion in closed liquidity (due to China’s closed capital account and outbound capital controls) it has long meant that all that happens when one bubble bursts, is to create another asset bubble, which then bursts and the original bubble is again reflated.

  Which is precisely what has happened to China’s housing where we can now officially say that the bubble is back…

  

   

  … if only however in the first-tier cities. In fact, according to the latest data, the bubble among China’s top, or “Tier 1” cities has never been bigger entirely at the expense of all other cities.

  

  According to the latest NBS new home price update, in November the first-tier plus Xiamen were 55% of the national price increase, with Shenzhen nabbing 22% of the total national increase the Investing in Chinese Stocks blog reports. In December, those numbers were 54% and 23%, almost no change. In January, the first tier and Xiamen accounted for 52% of the total increase, with Shenzhen alone accounting for 21%, rising 4% mom. In the past year, prices are up an average of 1% nationally. Shenzhen alone is 74% of the total increase yoy. The first-tier plus Xiamen accounted for 141% of the total increase, or without those 5, prices fell 0.4% yoy nationally across 65 cities.

  But nowhere is the return of the Chinese housing bubble more obvious than in Beijing where scalpers are charging up to ?3000 for service numbers at the government office where property transfers are recorded, due to long wait times in the wake of the recent transaction tax cuts launched by the government to spur the housing market.

  Courtesy of the ICS blog, we get the following translation of what is taking place on the ground in China, where the current bubble du jou has sparked a veritable house-flipping mania:

  Transaction Tax Cut Spurs Bubble Activity in Beijing: ?1000 For Reservation Number

   

  The specific policies to Beijing, but later than 140 square meters of the only family housing, deed tax increased from 3% to 1.5% of the total housing fund. It does not look great, but the effect was particularly evident.

   

  …According to data center statistics, in the first week (February 14 to February 20) after the Spring Festival, Beijing new home net signed volume of only 1006 sets. The secondary residential net signed volume is as high as 6048 units, average daily turnover of 864 units, the highest trading volume since 2010.

   

  From the price perspective, the average transaction price 41,490 yuan / square meter, compared with 2015 annual average price rose about 5%.

   

  …The new policy to the owners and customers have brought mental changes, including the owners of more brewing prices. Xiao Gu said in Beijing many owners are selling the house for a house, he wants to buy a house prices, he will increase his selling price, eventually leading to a chain reaction.

   

  

  

  This has resulted in some bubbly behavior: paying for a reservation number:

  Now that the volume is large, the transfer of more people, so the reservation number is quite difficult. Due to the large number of people go through, on behalf of the reservation business is also booming. Taobao, enter the word Beijing transfer agent may be seized several shops in this business. In some shops turnover ranking, monthly volume of dozens, mostly ordinary numbers in the thousand or so, the price is even higher if expedited.

   

  In a shop, the owner drying out a series of successful single theme, saying last week, supplied a total of 168 successful reservation number, each priced at 999 yuan, if you need a specified time the price increases by 499 yuan.

   

  Online news says that there are already scalpers charging ?3000 for a number this week, ?1000 for next week.

  IICS then lays out another example of the house-buying frenzy in Beijing, first described in Ifeng:

  Last week I posted one example of bubble behavior in Beijing, as people paid up to ?1000 for a service ticket in order to avoid wait times at the property office. Transaction Tax Cut Spurs Bubble Activity in Beijing: ?1000 For Reservation Number

   

  Now another example emerges as sellers are throwing out high opening prices. It begins with a sale in Daxing, an outer suburb of Beijing, which saw a property sell for ?47,000 per square meter, followed by news that Vanke had hiked prices on all its projects in Beijing; the company denied the report.

   

  The latest news says ?3 million yuan is now the “opening price” for homes that are not too far outside the city. Analysts are more conservative in their estimates, projecting an increase of 5% to 10% in 2016, and say these high prices may be artificial. Still, even if that is true, it reflects an attempt by sellers to cash in on the current mood which increasingly bears the hallmarks of speculative fervor. After Spring Festival, prices in the East Fourth Ring increased ?4,000 to ?5,000 yuan per square meter, or about 10%. The average price hike in the city is about ?1,000 per sqm. 

   

  One property near Jinsong subway station (between Guomao and Panjiauan on the 10 line) sold for ?1.8 million before this year, now a similar property is listed for ?2.1 million. The transacted price will be closer to ?1.9 million according to analysts, reflecting the ?1,000 per sqm rise in price.

  This behaviour is confusing to our friends from IICS:

  I can understand someone wanting to pay to skip at the hospital, but waiting a few days to transfer a property? One reason someone might want to do this is if they fear rising prices. Chinese buyers and sellers will sometimes back out of a transaction if the market moves against them. In this case, if you bought a property before the tax was announced, the seller might try to claw back some of the tax savings. It may also be the case that, as in other situations, wealthier people would rather pay than wait.

  To us, there is nothing surprising in this behavior: now that the Chinese stock market bubble has burst, the local population has to find a new asset class which to chase for the next few months, and for the time being that asset is housing; and since the politburo gets to boast that the Chinese economy is “improving” as a result of this scramble, no “macroproudential brakes” will be deployed before it is again too late, the bubble bursts, and all the excess money has to rotate into another bubble du jour. Unless, of course, by then China’s capital account has been fully liberalized and those $30 trillion in Chinese funds can finally chase global assets without the detrminet of even a token capital control firewall.

  

  

  

  

  

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• The Hidden Persuaders – How The Internet Flips Election & Alters Our Thoughts

  Authored by Robert Epstein, originally posted at Aeon.co,

  The internet has spawned subtle forms of influence that can flip elections and manipulate everything we say, think and do

  Over the past century, more than a few great writers have expressed concern about humanity’s future. In The Iron Heel (1908), the American writer Jack London pictured a world in which a handful of wealthy corporate titans – the ‘oligarchs’ – kept the masses at bay with a brutal combination of rewards and punishments. Much of humanity lived in virtual slavery, while the fortunate ones were bought off with decent wages that allowed them to live comfortably – but without any real control over their lives.

  In We (1924), the brilliant Russian writer Yevgeny Zamyatin, anticipating the excesses of the emerging Soviet Union, envisioned a world in which people were kept in check through pervasive monitoring. The walls of their homes were made of clear glass, so everything they did could be observed. They were allowed to lower their shades an hour a day to have sex, but both the rendezvous time and the lover had to be registered first with the state.

  In Brave New World (1932), the British author Aldous Huxley pictured a near-perfect society in which unhappiness and aggression had been engineered out of humanity through a combination of genetic engineering and psychological conditioning. And in the much darker novel 1984 (1949), Huxley’s compatriot George Orwell described a society in which thought itself was controlled; in Orwell’s world, children were taught to use a simplified form of English called Newspeak in order to assure that they could never express ideas that were dangerous to society.

  These are all fictional tales, to be sure, and in each the leaders who held the power used conspicuous forms of control that at least a few people actively resisted and occasionally overcame. But in the non-fiction bestseller The Hidden Persuaders (1957) – recently released in a 50th-anniversary edition – the American journalist Vance Packard described a ‘strange and rather exotic’ type of influence that was rapidly emerging in the United States and that was, in a way, more threatening than the fictional types of control pictured in the novels. According to Packard, US corporate executives and politicians were beginning to use subtle and, in many cases, completely undetectable methods to change people’s thinking, emotions and behaviour based on insights from psychiatry and the social sciences.

  Most of us have heard of at least one of these methods: subliminal stimulation, or what Packard called ‘subthreshold effects’ – the presentation of short messages that tell us what to do but that are flashed so briefly we aren’t aware we have seen them. In 1958, propelled by public concern about a theatre in New Jersey that had supposedly hidden messages in a movie to increase ice cream sales, the National Association of Broadcasters – the association that set standards for US television – amended its code to prohibit the use of subliminal messages in broadcasting. In 1974, the Federal Communications Commission opined that the use of such messages was ‘contrary to the public interest’. Legislation to prohibit subliminal messaging was also introduced in the US Congress but never enacted. Both the UK and Australia have strict laws prohibiting it.

  Subliminal stimulation is probably still in wide use in the US – it’s hard to detect, after all, and no one is keeping track of it – but it’s probably not worth worrying about. Research suggests that it has only a small impact, and that it mainly influences people who are already motivated to follow its dictates; subliminal directives to drink affect people only if they’re already thirsty.

  Packard had uncovered a much bigger problem, however – namely that powerful corporations were constantly looking for, and in many cases already applying, a wide variety of techniques for controlling people without their knowledge. He described a kind of cabal in which marketers worked closely with social scientists to determine, among other things, how to get people to buy things they didn’t need and how to condition young children to be good consumers – inclinations that were explicitly nurtured and trained in Huxley’s Brave New World. Guided by social science, marketers were quickly learning how to play upon people’s insecurities, frailties, unconscious fears, aggressive feelings and sexual desires to alter their thinking, emotions and behaviour without any awareness that they were being manipulated.

  By the early 1950s, Packard said, politicians had got the message and were beginning to merchandise themselves using the same subtle forces being used to sell soap. Packard prefaced his chapter on politics with an unsettling quote from the British economist Kenneth Boulding: ‘A world of unseen dictatorship is conceivable, still using the forms of democratic government.’ Could this really happen, and, if so, how would it work?

  The forces that Packard described have become more pervasive over the decades. The soothing music we all hear overhead in supermarkets causes us to walk more slowly and buy more food, whether we need it or not. Most of the vacuous thoughts and intense feelings our teenagers experience from morning till night are carefully orchestrated by highly skilled marketing professionals working in our fashion and entertainment industries. Politicians work with a wide range of consultants who test every aspect of what the politicians do in order to sway voters: clothing, intonations, facial expressions, makeup, hairstyles and speeches are all optimised, just like the packaging of a breakfast cereal.

  Fortunately, all of these sources of influence operate competitively. Some of the persuaders want us to buy or believe one thing, others to buy or believe something else. It is the competitive nature of our society that keeps us, on balance, relatively free.

  But what would happen if new sources of control began to emerge that had little or no competition? And what if new means of control were developed that were far more powerful – and far more invisible – than any that have existed in the past? And what if new types of control allowed a handful of people to exert enormous influence not just over the citizens of the US but over most of the people on Earth?

  It might surprise you to hear this, but these things have already happened.

  To understand how the new forms of mind control work, we need to start by looking at the search engine – one in particular: the biggest and best of them all, namely Google. The Google search engine is so good and so popular that the company’s name is now a commonly used verb in languages around the world. To ‘Google’ something is to look it up on the Google search engine, and that, in fact, is how most computer users worldwide get most of their information about just about everything these days. They Google it. Google has become the main gateway to virtually all knowledge, mainly because the search engine is so good at giving us exactly the information we are looking for, almost instantly and almost always in the first position of the list it shows us after we launch our search – the list of ‘search results’.

  That ordered list is so good, in fact, that about 50 per cent of our clicks go to the top two items, and more than 90 per cent of our clicks go to the 10 items listed on the first page of results; few people look at other results pages, even though they often number in the thousands, which means they probably contain lots of good information. Google decides which of the billions of web pages it is going to include in our search results, and it also decides how to rank them. How it decides these things is a deep, dark secret – one of the best-kept secrets in the world, like the formula for Coca-Cola.

  Because people are far more likely to read and click on higher-ranked items, companies now spend billions of dollars every year trying to trick Google’s search algorithm – the computer program that does the selecting and ranking – into boosting them another notch or two. Moving up a notch can mean the difference between success and failure for a business, and moving into the top slots can be the key to fat profits.

  Late in 2012, I began to wonder whether highly ranked search results could be impacting more than consumer choices. Perhaps, I speculated, a top search result could have a small impact on people’s opinions about things. Early in 2013, with my associate Ronald E Robertson of the American Institute for Behavioral Research and Technology in Vista, California, I put this idea to a test by conducting an experiment in which 102 people from the San Diego area were randomly assigned to one of three groups. In one group, people saw search results that favoured one political candidate – that is, results that linked to web pages that made this candidate look better than his or her opponent. In a second group, people saw search rankings that favoured the opposing candidate, and in the third group – the control group – people saw a mix of rankings that favoured neither candidate. The same search results and web pages were used in each group; the only thing that differed for the three groups was the ordering of the search results.

  To make our experiment realistic, we used real search results that linked to real web pages. We also used a real election – the 2010 election for the prime minister of Australia. We used a foreign election to make sure that our participants were ‘undecided’. Their lack of familiarity with the candidates assured this. Through advertisements, we also recruited an ethnically diverse group of registered voters over a wide age range in order to match key demographic characteristics of the US voting population.

  All participants were first given brief descriptions of the candidates and then asked to rate them in various ways, as well as to indicate which candidate they would vote for; as you might expect, participants initially favoured neither candidate on any of the five measures we used, and the vote was evenly split in all three groups. Then the participants were given up to 15 minutes in which to conduct an online search using ‘Kadoodle’, our mock search engine, which gave them access to five pages of search results that linked to web pages. People could move freely between search results and web pages, just as we do when using Google. When participants completed their search, we asked them to rate the candidates again, and we also asked them again who they would vote for.

  We predicted that the opinions and voting preferences of 2 or 3 per cent of the people in the two bias groups – the groups in which people were seeing rankings favouring one candidate – would shift toward that candidate. What we actually found was astonishing. The proportion of people favouring the search engine’s top-ranked candidate increased by 48.4 per cent, and all five of our measures shifted toward that candidate. What’s more, 75 per cent of the people in the bias groups seemed to have been completely unaware that they were viewing biased search rankings. In the control group, opinions did not shift significantly.

  This seemed to be a major discovery. The shift we had produced, which we called the Search Engine Manipulation Effect (or SEME, pronounced ‘seem’), appeared to be one of the largest behavioural effects ever discovered. We did not immediately uncork the Champagne bottle, however. For one thing, we had tested only a small number of people, and they were all from the San Diego area.

  Over the next year or so, we replicated our findings three more times, and the third time was with a sample of more than 2,000 people from all 50 US states. In that experiment, the shift in voting preferences was 37.1 per cent and even higher in some demographic groups – as high as 80 per cent, in fact.

  We also learned in this series of experiments that by reducing the bias just slightly on the first page of search results – specifically, by including one search item that favoured the other candidate in the third or fourth position of the results – we could mask our manipulation so that few or even no people were aware that they were seeing biased rankings. We could still produce dramatic shifts in voting preferences, but we could do so invisibly.

  Still no Champagne, though. Our results were strong and consistent, but our experiments all involved a foreign election – that 2010 election in Australia. Could voting preferences be shifted with real voters in the middle of a real campaign? We were skeptical. In real elections, people are bombarded with multiple sources of information, and they also know a lot about the candidates. It seemed unlikely that a single experience on a search engine would have much impact on their voting preferences.

  To find out, in early 2014, we went to India just before voting began in the largest democratic election in the world – the Lok Sabha election for prime minister. The three main candidates were Rahul Gandhi, Arvind Kejriwal, and Narendra Modi. Making use of online subject pools and both online and print advertisements, we recruited 2,150 people from 27 of India’s 35 states and territories to participate in our experiment. To take part, they had to be registered voters who had not yet voted and who were still undecided about how they would vote.

  Participants were randomly assigned to three search-engine groups, favouring, respectively, Gandhi, Kejriwal or Modi. As one might expect, familiarity levels with the candidates was high – between 7.7 and 8.5 on a scale of 10. We predicted that our manipulation would produce a very small effect, if any, but that’s not what we found. On average, we were able to shift the proportion of people favouring any given candidate by more than 20 per cent overall and more than 60 per cent in some demographic groups. Even more disturbing, 99.5 per cent of our participants showed no awareness that they were viewing biased search rankings – in other words, that they were being manipulated.

  SEME’s near-invisibility is curious indeed. It means that when people – including you and me – are looking at biased search rankings, they look just fine. So if right now you Google ‘US presidential candidates’, the search results you see will probably look fairly random, even if they happen to favour one candidate. Even I have trouble detecting bias in search rankings that I know to be biased (because they were prepared by my staff). Yet our randomised, controlled experiments tell us over and over again that when higher-ranked items connect with web pages that favour one candidate, this has a dramatic impact on the opinions of undecided voters, in large part for the simple reason that people tend to click only on higher-ranked items. This is truly scary: like subliminal stimuli, SEME is a force you can’t see; but unlike subliminal stimuli, it has an enormous impact – like Casper the ghost pushing you down a flight of stairs.

  We published a detailed report about our first five experiments on SEME in the prestigious Proceedings of the National Academy of Sciences (PNAS) in August 2015. We had indeed found something important, especially given Google’s dominance over search. Google has a near-monopoly on internet searches in the US, with 83 per cent of Americans specifying Google as the search engine they use most often, according to the Pew Research Center. So if Google favours one candidate in an election, its impact on undecided voters could easily decide the election’s outcome.

  Keep in mind that we had had only one shot at our participants. What would be the impact of favouring one candidate in searches people are conducting over a period of weeks or months before an election? It would almost certainly be much larger than what we were seeing in our experiments.

  Other types of influence during an election campaign are balanced by competing sources of influence – a wide variety of newspapers, radio shows and television networks, for example – but Google, for all intents and purposes, has no competition, and people trust its search results implicitly, assuming that the company’s mysterious search algorithm is entirely objective and unbiased. This high level of trust, combined with the lack of competition, puts Google in a unique position to impact elections. Even more disturbing, the search-ranking business is entirely unregulated, so Google could favour any candidate it likes without violating any laws. Some courts have even ruled that Google’s right to rank-order search results as it pleases is protected as a form of free speech.

  Does the company ever favour particular candidates? In the 2012 US presidential election, Google and its top executives donated more than $800,000 to President Barack Obama and just $37,000 to his opponent, Mitt Romney. And in 2015, a team of researchers from the University of Maryland and elsewhere showed that Google’s search results routinely favoured Democratic candidates. Are Google’s search rankings really biased? An internal report issued by the US Federal Trade Commission in 2012 concluded that Google’s search rankings routinely put Google’s financial interests ahead of those of their competitors, and anti-trust actions currently under way against Google in both the European Union and India are based on similar findings.

  In most countries, 90 per cent of online search is conducted on Google, which gives the company even more power to flip elections than it has in the US and, with internet penetration increasing rapidly worldwide, this power is growing. In our PNAS article, Robertson and I calculated that Google now has the power to flip upwards of 25 per cent of the national elections in the world with no one knowing this is occurring. In fact, we estimate that, with or without deliberate planning on the part of company executives, Google’s search rankings have been impacting elections for years, with growing impact each year. And because search rankings are ephemeral, they leave no paper trail, which gives the company complete deniability.

  Power on this scale and with this level of invisibility is unprecedented in human history. But it turns out that our discovery about SEME was just the tip of a very large iceberg.

  Recent reports suggest that the Democratic presidential candidate Hillary Clinton is making heavy use of social media to try to generate support – Twitter, Instagram, Pinterest, Snapchat and Facebook, for starters. At this writing, she has 5.4 million followers on Twitter, and her staff is tweeting several times an hour during waking hours. The Republican frontrunner, Donald Trump, has 5.9 million Twitter followers and is tweeting just as frequently.

  Is social media as big a threat to democracy as search rankings appear to be? Not necessarily. When new technologies are used competitively, they present no threat. Even through the platforms are new, they are generally being used the same way as billboards and television commercials have been used for decades: you put a billboard on one side of the street; I put one on the other. I might have the money to erect more billboards than you, but the process is still competitive.

  What happens, though, if such technologies are misused by the companies that own them? A study by Robert M Bond, now a political science professor at Ohio State University, and others published in Nature in 2012 described an ethically questionable experiment in which, on election day in 2010, Facebook sent ‘go out and vote’ reminders to more than 60 million of its users. The reminders caused about 340,000 people to vote who otherwise would not have. Writing in the New Republic in 2014, Jonathan Zittrain, professor of international law at Harvard University, pointed out that, given the massive amount of information it has collected about its users, Facebook could easily send such messages only to people who support one particular party or candidate, and that doing so could easily flip a close election – with no one knowing that this has occurred. And because advertisements, like search rankings, are ephemeral, manipulating an election in this way would leave no paper trail.

  Are there laws prohibiting Facebook from sending out ads selectively to certain users? Absolutely not; in fact, targeted advertising is how Facebook makes its money. Is Facebook currently manipulating elections in this way? No one knows, but in my view it would be foolish and possibly even improper for Facebook not to do so. Some candidates are better for a company than others, and Facebook’s executives have a fiduciary responsibility to the company’s stockholders to promote the company’s interests.

  The Bond study was largely ignored, but another Facebook experiment, published in 2014 in PNAS, prompted protests around the world. In this study, for a period of a week, 689,000 Facebook users were sent news feeds that contained either an excess of positive terms, an excess of negative terms, or neither. Those in the first group subsequently used slightly more positive terms in their communications, while those in the second group used slightly more negative terms in their communications. This was said to show that people’s ‘emotional states’ could be deliberately manipulated on a massive scale by a social media company, an idea that many people found disturbing. People were also upset that a large-scale experiment on emotion had been conducted without the explicit consent of any of the participants.

  Facebook’s consumer profiles are undoubtedly massive, but they pale in comparison with those maintained by Google, which is collecting information about people 24/7, using more than 60 different observation platforms – the search engine, of course, but also Google Wallet, Google Maps, Google Adwords, Google Analytics, Chrome, Google Docs, Android, YouTube, and on and on. Gmail users are generally oblivious to the fact that Google stores and analyses every email they write, even the drafts they never send – as well as all the incoming email they receive from both Gmail and non-Gmail users.

  According to Google’s privacy policy – to which one assents whenever one uses a Google product, even when one has not been informed that he or she is using a Google product – Google can share the information it collects about you with almost anyone, including government agencies. But never with you. Google’s privacy is sacrosanct; yours is nonexistent.

  Could Google and ‘those we work with’ (language from the privacy policy) use the information they are amassing about you for nefarious purposes – to manipulate or coerce, for example? Could inaccurate information in people’s profiles (which people have no way to correct) limit their opportunities or ruin their reputations?

  Certainly, if Google set about to fix an election, it could first dip into its massive database of personal information to identify just those voters who are undecided. Then it could, day after day, send customised rankings favouring one candidate to just those people. One advantage of this approach is that it would make Google’s manipulation extremely difficult for investigators to detect.

  Extreme forms of monitoring, whether by the KGB in the Soviet Union, the Stasi in East Germany, or Big Brother in 1984, are essential elements of all tyrannies, and technology is making both monitoring and the consolidation of surveillance data easier than ever. By 2020, China will have put in place the most ambitious government monitoring system ever created – a single database called the Social Credit System, in which multiple ratings and records for all of its 1.3 billion citizens are recorded for easy access by officials and bureaucrats. At a glance, they will know whether someone has plagiarised schoolwork, was tardy in paying bills, urinated in public, or blogged inappropriately online.

  As Edward Snowden’s revelations made clear, we are rapidly moving toward a world in which both governments and corporations – sometimes working together – are collecting massive amounts of data about every one of us every day, with few or no laws in place that restrict how those data can be used. When you combine the data collection with the desire to control or manipulate, the possibilities are endless, but perhaps the most frightening possibility is the one expressed in Boulding’s assertion that an ‘unseen dictatorship’ was possible ‘using the forms of democratic government’.

  Since Robertson and I submitted our initial report on SEME to PNAS early in 2015, we have completed a sophisticated series of experiments that have greatly enhanced our understanding of this phenomenon, and other experiments will be completed in the coming months. We have a much better sense now of why SEME is so powerful and how, to some extent, it can be suppressed.

  We have also learned something very disturbing – that search engines are influencing far more than what people buy and whom they vote for. We now have evidence suggesting that on virtually all issues where people are initially undecided, search rankings are impacting almost every decision that people make. They are having an impact on the opinions, beliefs, attitudes and behaviours of internet users worldwide – entirely without people’s knowledge that this is occurring. This is happening with or without deliberate intervention by company officials; even so-called ‘organic’ search processes regularly generate search results that favour one point of view, and that in turn has the potential to tip the opinions of millions of people who are undecided on an issue. In one of our recent experiments, biased search results shifted people’s opinions about the value of fracking by 33.9 per cent.

  Perhaps even more disturbing is that the handful of people who do show awareness that they are viewing biased search rankings shift even further in the predicted direction; simply knowing that a list is biased doesn’t necessarily protect you from SEME’s power.

  Remember what the search algorithm is doing: in response to your query, it is selecting a handful of webpages from among the billions that are available, and it is ordering those webpages using secret criteria. Seconds later, the decision you make or the opinion you form – about the best toothpaste to use, whether fracking is safe, where you should go on your next vacation, who would make the best president, or whether global warming is real – is determined by that short list you are shown, even though you have no idea how the list was generated.

  Meanwhile, behind the scenes, a consolidation of search engines has been quietly taking place, so that more people are using the dominant search engine even when they think they are not. Because Google is the best search engine, and because crawling the rapidly expanding internet has become prohibitively expensive, more and more search engines are drawing their information from the leader rather than generating it themselves. The most recent deal, revealed in a Securities and Exchange Commission filing in October 2015, was between Google and Yahoo! Inc.

  Looking ahead to the November 2016 US presidential election, I see clear signs that Google is backing Hillary Clinton. In April 2015, Clinton hired Stephanie Hannon away from Google to be her chief technology officer and, a few months ago, Eric Schmidt, chairman of the holding company that controls Google, set up a semi-secret company – The Groundwork – for the specific purpose of putting Clinton in office. The formation of The Groundwork prompted Julian Assange, founder of Wikileaks, to dub Google Clinton’s ‘secret weapon’ in her quest for the US presidency.

  We now estimate that Hannon’s old friends have the power to drive between 2.6 and 10.4 million votes to Clinton on election day with no one knowing that this is occurring and without leaving a paper trail. They can also help her win the nomination, of course, by influencing undecided voters during the primaries. Swing voters have always been the key to winning elections, and there has never been a more powerful, efficient or inexpensive way to sway them than SEME.

  We are living in a world in which a handful of high-tech companies, sometimes working hand-in-hand with governments, are not only monitoring much of our activity, but are also invisibly controlling more and more of what we think, feel, do and say. The technology that now surrounds us is not just a harmless toy; it has also made possible undetectable and untraceable manipulations of entire populations – manipulations that have no precedent in human history and that are currently well beyond the scope of existing regulations and laws. The new hidden persuaders are bigger, bolder and badder than anything Vance Packard ever envisioned. If we choose to ignore this, we do so at our peril

  

  

  

  

  

• Peak Whine: Life Is Good For "Starving", "Struggling" Complaining (Ex) Yelp Employee

  Earlier in the week, (former) Yelp employee Talia Jane Ben-Ora became momentarily famous as the poster-child for all things wrong with the entitlement mindset of young adults in today's America. Her open letter to the CEO whining of her "struggle" and "starvation" had some wondering if this was an Onion parody – it was not.

  While Charles Hugh-Smith offered some advice to the 25-year-old, it appears, judging from her social media postings, that she was entirely honest about her plight…

  Some examples include:

  "So here I am, 25-years old, balancing all sorts of debt and trying to pave a life for myself that doesn’t involve crying in the bathtub every week. Every single one of my coworkers is struggling."

   

  Yep – life's a bitch alright
  

   

  Because nothing says crying yourself to sleep in a bath-tub like a coffee-infused face-mask…
  

   

  "I haven’t bought groceries since I started this job. Not because I’m lazy, but because I got this ten pound bag of rice before I moved here and my meals at home (including the one I’m having as I write this) consist, by and large, of that. Because I can’t afford to buy groceries. Bread is a luxury to me, even though you’ve got a whole fridge full of it on the 8th floor."

   

  Is that rice?
  

   

  hhmm… Home kitchen looks well used…
  

   

  "Did I tell you about how I got stuck in the east bay because my credit card, which amazingly allows cash withdrawals, kept getting declined and I didn’t have enough money on my BART Clipper card to get to work?"

   

  I guess the car wasn't working?
  

  Of course, most know, this viral 'letter' did not end well for Talia:

  "As of 5:43pm PST, I have been officially let go from the company. This was entirely unplanned (but I guess not completely unexpected?) but any help until I find new employment would be extremely appreciated."

   

  Still – we are sure she is very hirable…
  

  Reminding America's entitlement society once again that the true minimum wage is in fact $0.

  Source: ThatsALotOfRice.com

  

  

  

  

• You Might Be A Tech Company If…

  Via ConvergEx's Nicholas Colas,

  It happens at the top of every tech cycle – everyone wants to be a tech company.  We’re there now.

   

  But real tech companies do more than employ a lot of programmers.  For investors, “Tech” is now shorthand for a range of attributes that go far beyond coding and the cloud. It disrupts and destroys existing businesses and (occasionally) social constructs like government. Tech is clubby – if you’re not inside, you’re outside.  Done well, it generates outsized financial returns after first burning through a lot of cash. It engages millennials in the hopes they will be customers for life. And yes, tech makes a handful of people extremely wealthy because employees are also significant owners in the businesses they build. That’s why the world’s sharpest people so often end up in tech. 

   

  So before you try to argue for a higher valuation for a public company just because it claims to be “Tech”, consider our seven point checklist – “You might be a tech company if…"

  In December 2000 Ford, Chrysler and General Motors almost became technology companies.  Between the three concerns, they controlled a market of some $550 billion in auto parts purchases – all the bits and pieces they purchased from their global supply network to assemble into finished cars and trucks. They formed a company for the purpose, with GM and Ford taking stake in a business-to-business online portal called Commerce One to provide the technology.  Once their supply chains were online, the rest of the world’s industrial manufacturers would pay handsomely to join the network and save billions of dollars in logistics expenses.

  In a classic example of “Right idea, wrong time”, the venture never really hit takeoff speed.  The bursting of the dot-com bubble didn’t help, and nor did the economic slowdown of the following year.  Commerce One declared bankruptcy in 2004. GM and Chrysler lasted a few years longer, of course, until the Great Recession forced their restructurings.

  Fast forward to today, and you see some of the same storyline among established, name brand enterprises that want to be considered “Tech companies”.  Unlike the old dot com days, however, the reasons for donning the mantle of “tech” often has more to do with competing for talent than anything else.  The rapid growth of everything from Big Data to cloud computing to mobile app development means qualified technology professionals are much in demand. And many would prefer to work for a “Tech company” than say, a commercial bank. Fair enough, I think. Any company that creates a good environment for talented employees and shows they value their work is doing the right thing.

  Where things go astray is when investors take up the “Tech company” moniker to argue for different valuation metrics when assessing already existing businesses. It is all too tempting to look at a large industrial company or financial institution and say “They employ more programmers than lots of so-called tech companies.  Why shouldn’t they be valued the same way?” This is a slippery slope and, as the auto company example above, can end in tears.

  Here’s a quick checklist to see if your “Undervalued” tech-diamond-in-the-rough really merits the “Tech” badge. (With apologies to Jeff Foxworthy.)

  You might be a tech company if…

  #1 – You disrupt the status quo with a unique vision of the future.  This is the essence of a 21st century tech company.  Where the existing business model is a yellow cab, you see a smartphone enabled method of providing transportation without owning any cars (Uber, Lyft, etc).  Instead of a hotel chain, you envision renting unused rooms and apartments (Airbnb). You don’t care about existing businesses.  You destroy them.

  #2 – You are either burning cash or generating tons of it.  Real tech companies seem to either earn +20% returns on their capital or -20% returns.  That’s because their capital is meant to be disruptive, not evolutionary.  A “Real” tech company will earn a 5% return for about one month – either on its way to +20%, or just before it runs out of money.

  #3 – Your employees have life-changing levels of equity.  Payoffs for talent in technology make the lottery look like a money market fund.  Whether or not a tech company makes it (and most don’t), key employees generally have enough equity to become very wealthy if things work out.

  #4 – Governments don’t know what to do with you.  Technology companies disrupt established government protocols almost as often as they upend existing business models.  Apple is the poster child of this phenomenon at the moment, with the debate over the unlocking of an iPhone owned by a terrorist. Uber has had its fair share of criticism as well, from local governments around the world. Real tech is so far ahead of societal norms that their innovations often change how we view basic concepts like ownership and privacy.

  #5 – Millennials love you.  This age cohort – born from the early 1980s to 2000s – is a tough group to crack. They grew up with technology, so they are discerning users – quick to adopt, and equally quick to dismiss. Tech companies that can appeal to this mobile-enabled, multi-tasking customer base have a valuable edge indeed.

  #6 – You are “In the club”.  It’s no secret that Silicon Valley is a tight knit community of opinion leaders with a unique ability to discern winning business ideas.  Members of this group cluster together. They give TED talks. They go to Davos, Allen & Co’s Sun Valley conference, and Bilderberg. And if your company’s CEO doesn’t, they need to.

  #7 – Your addressable market grows exponentially because of your technology.  In the end, points 1-6 are nice to haves; this one is essential. The reason “Technology” is such a powerful construct is that it destroys pre-existing barriers to competition.  The old “Castle-and-moat” approach to business development crumbles in the face of technology.  In the end, “Technology” means redefining everything about a given company, industrial sector, industry, and even society itself.

  If you can honestly say a company does this, then it really is a “Tech company”.

  

  

  

  

  

• Coal Mine Canary Or "Opportunity?" You Decide

  Earlier today, we noted that Citi can’t believe how enticing CLO mezz tranches have become.

  “Can CLO mezz get any more attractive?” the bank’s structured credit team asked. You’d be forgiven for being a bit incredulous. After all, CLO 2.0 mezz hasn’t exactly been somewhere you want to be. As Morgan Stanley noted last week, “the median total return for US CLO 2.0 (2014-15 vintage) BBs is -9.2%, and for single-Bs is -20.9%.”

  Morgan continues: “Investment-grade US CLO tranches performed better but still within negative total return territory, [and] collectively, US CLOs significantly underperformed relative to comparably rated corporate bonds, leveraged loans and senior tranches of CMBS.”

  Right. So bad news all the way around.

  But you know, you want to look for BTFD opportunities anywhere you can find them and despite the fact that subordinate CLO tranches are about the most ludicrous recommendation imaginable in the current environment, Citi thinks maybe you should have a look because after all, how much wider can US CLO 2.0 spreads possibly get relative to other probably terrible investments? Here’s Citi to explain why there’s value here if your benchmark is HY and/or subordinate CMBS tranches:

  CLO BB spread has widened by 275bp to 1000-1500bp range since the start of 2016, already surpassing the 172.5bp widening observed in the full year of 2015. To put this into a broader context, CMBS BBB- also widened by about 260bp to 800bp and HY by 130bp to 876bp. CLO mezz appears cheap to loan and HY, but not so much to CMBS mezz.

   

  
  

   

  Near-term CLO mezz spread movement will largely depend on the market supply and whether the demand from non-traditional or opportunistic buyers will be in place timely to absorb that. Oil price and broader market performance/fund flows are the wild cards. There would be opportunities for the investors to step in and scale up as price downside risk lowers, but the market volatility is likely to persist. Incoming investors should weigh the return with risk management.

  Yes, “incoming investors” should “weigh return with risk management,” because if the assets in the collateral pools continue to be downgraded, you’re going to see continued underperformance and make no mistake, there’s no reason whatsoever to expect that the downgrades aren’t going to continue. 

  Additionally, Citi says BBs are at risk of forced selling by money manangers. Here’s more:

  There is about $16.7bn CLO 2.0 BB outstanding [and] based on our primary investor base data and reported fund holdings on IPREO, we estimate roughly $4.3bn is held by hedge funds, $7.1bn by asset managers and $2bn by mutual funds ($1.7bn in open end mutual funds). Assuming two thirds of hedge funds and 20% of asset managers used leverage, our best estimate is perhaps $4.3bn of CLO 2.0 BB bonds were bought with leverage and $1.7bn in open-end mutual funds. Some of these investors might consider selling ahead of more volatility.

   

  So far, TRACE reported $3.4bn non-IG rated bonds traded YTD altogether but doesn’t break into CLO BB, B and equity tranches. If we assume the same rating breakdown as in CLO BWIC traded volume, it means $2.7bn BB, $0.2bn B and $0.5bn equity could have been sold already. If so, it is fair to say more supply can come with leverage unwinding.

   

  
  

   

  Repo desks typically require investors to post daily margin if the portfolio price swing is too big. Given the median CLO 2.0 BB price has dropped about 16 points from $94 in May 2015 to $78 at the end of January 2016, our analysis shows some investors probably have posted 40-60% more capital just to meet margin calls by now, depending on the haircut and price movement (Figure 19). A further price drop in CLO junior debt might, in some cases, require holders to put down more capital than their original investment to meet the margin calls.

  So be our guest. Lever up in junior US CLO tranches. It should be fine. 

  Of course if it turns out poorly you’ll look like the biggest sucker on the planet because you should be able to divine something about the suitability of an investment by observing supply and demand dynamics. Here’s what the picture looks like for US CLOs:

  

  Again: trade accordingly.

  

  

  

  

  

• Clash Of The Gods: It's Odin Versus Allah In Norway Where Social Upheaval Looms Large

  Last month, we introduced you to “The Soldiers of Odin.”

  The “soldiers” are Nordic patriots dedicated to keeping the streets of Finland, Sweden, and Norway safe from the threat posed by marauding gangs of Mid-East migrants hell bent on accosting women.

  Well that, or they’re the Nordic equivalent of a biker gang set to capitalize on a groundswell of nationalistic fervor drummed up by the far-right in the wake of Europe’s worsening migrant crisis.

  Obviously, the truth is somewhere in-between, but there’s significant comedic value in presenting the extremes.

  In any event, the Finnish chapter of the “soldiers” says the group merely seeks to serve as a “preventive soothe” (to quote a Google translation of a statement from National Police Commissioner Seppo Kolehmainen) against the growing threat posed by refugees.

  But not everyone sees it that way. “The leaders of the ‘Soldiers of Odin’ are proven to have criminal backgrounds, in cases of racist violence and other violent or drug offenses,” Dan Koivulaakso, local politician and expert on rights movements in Finland says. The movement has spread to Norway, as is evident from the following visual: 

  

  “Progress of course doesn’t give unlimited support to the Soldiers of Odin. But the situation is that we have for a long time had a situation in our streets that nobody wants, where crimes are committed and other actions we don’t want occur and the Norwegian police don’t have the resources to do the job. Thus we think that any citizen who wants to contribute to reducing insecurity and reducing crime should be praised for it,” the Progress Party’s Jan Arlid Ellingsen said earlier this week.

  Norwegian PM Erna Solberg (who recently said she was willing to effectively contravene the Geneva Convention to keep Norway’s border safe in the event Sweden “collapses”) went out of her way to distance herself from the group. “The Soldiers of Odin have no place in keeping the streets safe. Dangerous values. Ellingsen’s remarks do not represent the government,” a Twitter post reads. 

  Odins soldaters har ingen plass i arbeidet for trygge gater. Farlig verdisyn. Ellingsen uttalelser representerer ikke Regjeringen.

  — Erna Solberg (@erna_solberg) February 23, 2016

  Well as it turns out, Solberg isn’t the only one opposed to the Soldiers. Norwegian Islamists aren’t too happy about the group’s proliferation either which is why they’ve formed the “Soldiers of Allah” that will, “in response to the infidels” patrol the streets of Oslo “to prevent evil and encourage the good.” 

  It wasn’t entirely clear what “encourage the good” meant, but the group did send Norwegian media a picture of the black hoodies they’d be wearing and the shirts feature the ISIS flag. 

  “Vigilantism does not belong in Norway, whether they do it in the name of Odin or Allah,” Hadia Tajik, the Norwegian Labour Party’s deputy leader said. “I assume that the police, who are the only ones who have the authority to patrol the streets and use force, are following these groups as closely as the circumstances require.“

  As for the Soldiers of Odin, they’re quick to distance themselves from Allah’s army but seem prepared to take the upstart group on. “When it comes to ‘Odin’s soldiers’ and ‘Allah soldiers,’ so we have two completely different starting points,” Ronny Alte, a spokesman for “Soldiers of Odin” said. “We want safe streets but they want to use coercion and oppression. That they use a word like ‘infidel’ to describe us really forces a reaction from me. What will they do – force us to convert?”

  Yes, ladies and gentlemen, there is now a very real possibility that you will see a street brawl between right-wing hooligans who pledge allegiance to a bearded Norse god and extremists who are prepared to die for the prophet. And this is taking place in Norway. 

  So please, mainstream media, tell us again about how tinfoil hat fringe blogs exaggerate the threat of societal disintegration.

  

  

  

  

  

• US Government 'Asks' Tech Companies To Tweak Algos, Promote Certain Content

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  You probably had no idea, but representatives from Silicon Valley, Hollywood and the U.S. government came together earlier this week to privately discuss how they could jointly fight ISIS propaganda online. Never mind the fact that ISIS is the child of reckless and inhumane preemptive wars of aggression perpetrated by the U.S. government. Such introspection naturally never crosses the mind of government bureaucrats ostensibly attempting to understand the epic disasters they created in the first place.

  So who attended the meeting? We don’t know for sure because the plebes aren’t entitled to know such things. Fortunately, we have become privy to some information thanks to Buzzfeed News. Here’s what we learned:

  WASHINGTON, D.C. — They flew in from New York, San Francisco, and Los Angeles to hole up in a windowless D.C. conference room for nearly five hours on Wednesday — representatives of the country’s top tech and entertainment companies brainstorming with U.S. counterterrorism officials to tackle one tough question: how to stop the spread of ISIS online.

   

  The standoff between Apple and the FBI did not come up during the meeting, though the issues it involves are at the heart of the very things being discussed. As the role of technology in our lives continues its explosive growth, how will the balance between privacy and security play out in the new Silicon Valley-D.C. relationship?

   

  Among the handful of Arab participants who took part in Wednesday’s event, the questions raised felt even greater.

   

  “They wanted to figure out how to fight ISIS online, how to understand the psychology of those who support ISIS, and they invited almost no one who speaks for those of us in the Arab world, and from Arab communities, who have everything to lose from ISIS’s growing popularity,” said one Arab attendee, who estimated that less than 10% of the attendants were of Middle Eastern descent. “They don’t understand this community. That has been proven time and time again with their tone deaf messages. Why hold an event like this where there are ten white men outnumbering every Arab?”

   

  The lack of voices from the Middle East at the event was raised repeatedly, with one attendee garnering applause when they asked why — in a discussion regarding ISIS’s appeal to young Arab-American Muslims — there was no one speaking to their appeal from within that community.

  This is what happens when people fail upward and you have a country run by a cadre of incompetent, corrupt and clueless “elites.”

  Other media outlets, who were leaked a list of attendees, revealed that Microsoft, Facebook, Apple, Google, Mediacom, and Edelman were among those attending from Hollywood and Silicon Valley. In a statement, the Department of Justice noted that Assistant Attorney General for National Security John Carlin, U.S. Chief Technology Officer Megan Smith, and Senior Director for Counterterrorism on the National Security Council Staff Jen Easterly all took part in the meeting.

  Now here’s the most disturbing revelation.

  Over the last year, the government has stepped up its overtures to Silicon Valley, meeting with tech executives in January on the subject of combatting ISIS online. The Department of Defense has opened an office in the San Francisco area, and the State Department has recently appointed its first representative to Silicon Valley. Tech executives who have met with the Pentagon team told BuzzFeed News that some of their requests have been “jarring.” In at least one case, the Pentagon spoke with several companies — who asked not to be named as a condition of discussing the meeting with BuzzFeed News — about tweaking their algorithms to promote certain types of content. Both Google and Facebook have made it clear that they would not make changes to their algorithms to bury results supportive of ISIS.

  May as well just call it the Department of Propaganda. Truly unbelievable.

  “That’s something that is always brought up in meetings. And it shows how little they understand us,” said the Google representative. “This is a Pandora’s box we won’t open, because if we answer a request by the U.S. government to feature one search result over another, what’s to stop other countries from requesting the same? What’s to stop each country from tailoring the search results of their citizens to their agenda? It’s not a path we are willing to explore.”

  Read that again. It’s always brought up at meetings. Perfect example of why Apple needs to be supported in its battle with the FBI. The U.S. government wants nothing short of total control. See:

  Video of the Day – John McAfee Proclaims “An Apple Backdoor is the End of America”

  As the Apple vs. FBI Debate Rages, Congress Plots to Mandate Encryption Backdoors

  Apple Vows to Defend Its Customers as the FBI Launches a War on Privacy and Security

  At its core, said many attendees, the issue was the basic distrust the tech and entertainment companies have for the government, which has been amplified by the unprecedented attempt to force Apple to help the FBI break into an encrypted phone and the strong stance taken by tech companies including Google, Microsoft, and Facebook to stand behind Apple.

  “It’s like you’ve been asked to partner up and dance with the bully at school who keeps trying to trip you in the hallways,” one attendee told BuzzFeed News after the event. “And even though you want to learn to dance, there isn’t a lot of trust to build on.”

  America: This is Your Government.

  

  

  

  

  

• Another Central Banker Comes Clean… Buckle Up

  In the last month, we’ve had two major confessions from Central Bankers.

   

  We’ve already detailed the first, which came from the Head of the Bank of Japan, Haruhiko Kuroda here.

   

  The second major confession from a Central Banker came from ECB President Mario Draghi. A few days ago, Draghi gave a speech in which he said:

   

  Very low inflation complicates the adjustment process within countries, leading to higher unemployment. It delays the rebalancing process across countries, hindering those that lost competitiveness prior to the crisis from regaining it. And if low inflation is unexpected, it raises real debt burdens making it harder for the economy to grow out of debt.

   

  On the surface this seems like a statement of the obvious: low inflation or deflation makes your debts more difficult to pay off.

   

  However, it is only when you take this a step further and realize that he is in fact talking about the bond bubble in Europe that you realize just why he is terrified.

   

  Remember:

   

  1)   Europe’s entire banking system is leveraged at 26 to 1. At these levels even a 4% drop in asset values (read BONDS) renders the banks insolvent.

   

  2)   Due to their massive welfare programs, most EU countries have real debt to GDP ratios well north of 300%. Even Germany is above 200%!

   

  3)   No major bank or country has used the post-crisis period (2012 to present) or lower yields to deal with their structural debt problems.

   

  Moreover, as Draghi has found, despite three NIRP cuts and €1 trillion in QE, unexpected low inflation continues to be a REAL problem for the EU.

   

  

   

  This is why Dragh is so concerned with “unexpected” low inflation… because he EXPECTED inflation to explode higher due to his monetary policies and instead it’s barely flatlining!

   

  Thus, in the last two weeks, we have had TWO major Central Bank heads confess their deepest fears… namely that they do not have the monetary tools to fix their respective financial systems’ problems.

   

  Again, the markets have yet to fully realize this. But this is as close as you can get to a Central Banker ringing a bell at the TOP.

  Another Crisis is coming. Smart investors are preparing now.                                       

  We just published a 21-page investment report titled Stock Market Crash Survival Guide.

   

  In it, we outline precisely how the crash will unfold as well as which investments will perform best during a stock market crash.

   

  We are giving away just 1,000 copies for FREE to the public.

   

  To pick up yours, swing by:

  https://www.phoenixcapitalmarketing.com/stockmarketcrash.html

   

  Best Regards

   

  Graham Summers

  Chief Market Strategist

  Phoenix Capital Research

   

   

   

   

   

  

  

  

  

• The Global Run On Physical Cash Has Begun: Why It Pays To Panic First

  Back in August 2012, when negative interest rates were still merely viewed as sheer monetary lunacy instead of pervasive global monetary reality that has pushed over $6 trillion in global bonds into negative yield territory, the NY Fed mused hypothetically about negative rates and wrote “Be Careful What You Wish For” saying that “if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances.“

  Well, maybe not… especially if physical currency is gradually phased out in favor of some digital currency “equivalent” as so many “erudite economists” and corporate media have suggested recently, for the simple reason that in a world of negative rates, physical currency – just like physical gold – provides a convenient loophole to the financial repression of keeping one’s savings in digital form in a bank where said savings are taxed at -0.1%, or -1% or -10% or more per year by a central bank and government both hoping to force consumers to spend instead of save.

  For now cash is still legal, and NIRP – while a reality for the banks – has yet to be fully passed on to depositors.

  The bigger problem is that in all countries that have launched NIRP, instead of forcing spending precisely the opposite has happened: as we showed last October, when Bank of America looked at savings patterns in European nations with NIRP, instead of facilitating spending, what has happened is precisely the opposite: “as the BIS have highlighted, ultra-low rates may perversely be driving a greater propensity for consumers to save as retirement income becomes more uncertain.”

  

  Call it another massive error on behalf of Keynesian central planners who once again fail to appreciate the nuances of the common sense and the liquidity preference of ordinary consumers.

  However, just because negative rates have not been passed on to savers yet or just because cash still has not been made illegal, that doesn’t mean it won’t be.

  The question at this point is twofold: what happens after the savings of ordinary depositors in the bank officially taxed and/or cash becomes phased out, and more importantly, what happens just before.

  In other words, will there be a run on physical cash?

  The truth is that if society panics and there is a full blown rush out of existing electronic bank deposits and into physical currency to avoid negative rate taxation, only those who panic first will be safe. Why? Because of the “magic” of fractional reserve banking – there is simply not enough physical currency in circulation to satisfy all savers’ claims.

  Here is HSBC’s Steven Major trying to explain the problem:

  Based on the evidence so far, households have not rushed to withdraw cash and put it into a safe or, more significantly, pay for someone else to store it for them. This is because retail deposit rates have stayed at or above zero as banks have opted to not pass the lower market rates on.

   

  The assumption that bank deposits can be rapidly converted into cash does not hold up, in our opinion. If everybody wanted to take their cash out of the bank at the same time, the system would soon run out as there are simply not enough notes in circulation. It would take a considerable time to print the currency needed to meet the demand. A central bank could enforce a negative rate for a considerable period of time under these conditions. For example, in the US, even if the production rate is doubled – and assuming the pace of retirement of old notes is unchanged and there is demand for USD3trn of new notes – printing would take 20-years.

   

  To explain this, consider the demand for currency created if savers tried to remove cash from the US banking system. This demand could total anything between USD2.5trn (of excess reserves) and USD4.5trn (the Fed’s total balance sheet). Currently there is USD1.5trn of currency in circulation and the total annual production had a face value USD149bn in 2014, suggesting the 20 years it would take to print the cash.

   

  Currency in circulation is small compared to the potential demand in a negative rate environment. As an example, the Fed’s assets are three times the currency in circulation and the Riksbank’s nearly ten times (see Table 1), but production capacity is limited.

  

  While largely correct, Major is wrong about two critical things.

  First, when estimating the potential demand for physical currency in circulation, one has to take into consideration not only the amount of total Fed reserves (or its entire balance sheet) but the entire fractional reserve banking system, and specifically the amount of paperless deposits parked at banks in the form of demand, checking, and savings account, or in other words, all the core components of M2. Not only that, but one must also consider the threat by increasingly more economists that large denomination bills may be outlawed, first in Europe with the €500 bill and then in the US with the $100 bill.

  What a ban of Ben ($100 bill) would imply is that the total notional value of US currency in circulation would plunge from $1.35 trillion in the most recent week, to just $271 billion once the total $1.08 trillion value of $100 bills is eliminated. Putting this in context, there are as of this moment, $11.1 trillion in various forms of savings parked at banks as summarized in the chart below.

  

   

  For the sake of simplicity, this analysis ignores what would happen globally in a comparable scenario in which paper currency in other developed markets is likewise “curbed” in part or in whole. Recall that for NIRP to truly work, paper currency has to be substantially eliminated everywhere it is implemented. We will analyze the impact of a global rush into paper currency in a subsequent post.

  Still, what the chart above shows is that if, and when, a run on physical cash begins, there will be roughly $1 dollar in physical to satisfy $10 dollars in savers’ claims, a ratio which drops to 20 cents of “deliverable” cash if the $100 bill is taken out of circulation.

  * * *

  The second, and far more critical error Major makes, is the assumption that “households have not rushed to withdraw cash and put it into a safe.”  As we explained previously, while this may have been true for a long time since 2014 when the first cases of NIRP were unveiled, that is no longer the case. Recall from “Safes Sell Out In Japan, 1,000 Franc Note Demand Soars As NIRP Triggers Cash Hoarding“

  Now that the cash ban calls have gotten sufficiently loud to be heard by the generally clueless masses and now that the likes of Jose Canseco are shouting about negative rates, savers are beginning to pull their money out of the banks.

   

  “Look no further than Japan’s hardware stores for a worrying new sign that consumers are hoarding cash–the opposite of what the Bank of Japan had hoped when it recently introduced negative interest rates,” WSJ wrote this morning. “Signs are emerging of higher demand for safes—a place where the interest rate on cash is always zero, no matter what the central bank does.”

   

  

  
  

  “In response to negative interest rates, there are elderly people who’re thinking of keeping their money under a mattress,” one saleswoman at a Shimachu store in eastern Tokyo told The Journal, which also says at least one model costing $700 is sold out and won’t be available again for a month.

   

  “According to the BOJ theory, they should have moved their funds into riskier but higher-earning assets. Instead, they moved into pure cash that earned nothing,” Richard Katz, author of The Oriental Economist newsletter wrote this month.

  Meanwhile, in Switzerland, circulation of the 1,000 franc note soared 17% last year in the wake of the SNB’s move to NIRP.

   

  “One consequence of the decision to cut the Swiss central bank’s deposit rate into negative territory in late 2014, and deepen the negative rate to -0.75% early last year, may have been to increase stockpiling,” WSJ reports. “Holding money in cash would protect it from the risk of Swiss banks at some point charging a broad range of customers to deposit money.”

   

  “The connection between the increasing circulation of the big Swiss bill and the central bank policy is obvious,” Karsten Junius, chief economist at Bank J. Safra Sarasin said. Well yes, it is. Just as the connection between soaring safe sales in Japan and Haruhiko Kuroda’s NIRP push is readily apparent.

   

  So once again, we see that when one experiments with policies that fly in the face of logic (like charging people to hold their money), there are very often unintended consqeuences and when you combine sluggish demand with NIRP in a monetary regime that still has physical banknotes, you get a run on cash. And on safes to store it in.

  And then this from “Demand For Big Bills Soars As Japan Stuffs Safes With 10,000-Yen Notes“:

   

  “Demand for 10,000-yen bills is steadily rising in Japan, even as the nation’s population falls and the use of credit cards and other forms of electronic payment increases,” Bloomberg writes. “While more cash might sound like a good thing, some economists are concerned that it shows Japanese households are squirreling away money at home instead of investing it or putting it into bank accounts — where it can make its way back into the financial system and be put to productive use.”

   

  One safe maker who spoke to Bloomberg said safe shipments have doubled over the last six months. While part of the demand for safes is likely attributable to the country’s new “My Number” initiative, “the negative-rate policy is likely to intensify the preference of Japanese households to keep cash at home,” Hideo Kumano, an economist at Dai-ichi Life Research Institute said. “Overall, the trend of more cash at home reflects concern about the outlook for economy among households. This isn’t a good thing.”

  No it isn’t, and not because of concern about the outlook for the Japanese economy: that had no chance long before Abe and Kuroda came on the scene, mostly as a result of Japan’s demographic spiral of doomed.

  “It isn’t a good thing” because it confirms that the global run on physical cash – as much as the bankers of the world would like to keep it under wraps – has begun, and as the chart above shows, in a fractionally-reserved world in which there are $10 in savers’ claims for every $1 in physical currency, it quite literally pays to panic first, as the 9 out of 10 people who panic after the first one, will be stuck with nothing.

  * * *

  At the end of the day, what it all boils down to, is Exter’s inverted pyramid. As a reminder, this is how Elliott’s Paul Singer summarized the total notional value of all global asset classes:

  • Over-the-Counter derivatives, notional amounts: $692 trillion at year-end 2014, per the BIS. For comparison, this figure was $72 trillion in 1998.
  • Global real estate: $180 trillion, according to global real-estate services provider Savills.
  • Global debt market, both securities and other forms of debt: $161 trillion at year-end 2014, per the Institute for International Finance’s Capital Markets Monitor. According to the Bank of International Settlements (BIS), debt securities make up $95 trillion of this total.
  • Global equities: $64 trillion, per the World Federation of Exchanges.
  • Global M1 money supply: $24 trillion at year-end 2013, per the World Bank.
  • Gold: $6.8 trillion at year-end 2013, according to the Thompson Reuters GFMS Gold Survey.

  Because once the banks’ physical cash runs out in a post-NIRP scramble, there is always – at least until it, too, is confiscated once again – gold.

  

  

  

  

  

  

• Hillary Cruises To Victory In South Carolina Amid Strong African American Support

  Update: CBS and CNN call it for Clinton. It was over before it started.

  *  *  *

  Last weekend, on the heels of a decisive (if expected) victory for Bernie Sanders in the New Hampshire primary, Hillary Clinton reclaimed the momentum in the race for the Democratic nomination by escaping the Nevada caucuses with a narrow victory over the Vermont senator.

  On Saturday, we’ll find out if Clinton can preserve the momentum in South Carolina, where she’s expected to win easily by riding a wave of support from the African American community. “In her last campaign, the state shattered Mrs. Clinton’s hopes and frayed the relationship she and Bill Clinton had with black voters, dealing Mr. Obama a 28-percentage-point victory and convincing the country that his appeal extended beyond the largely white, liberal electorate of Iowa,” The New York Times notes.

  This time around, she’s playing from a position of strength and is effectively hoping to use her ties to the Obama administration to her advantage. Sanders has made a valiant effort in the state, running radio ads featuring Spike Lee and attending bringing rapper Killer Mike along for campaign stops.

  But it likely won’t be enough. Instead of directors and actors, Clinton has campaigned with the mothers of Trayvon Martin and Eric Garner and her support among the state’s African American community is unwavering (questions about her “super predator” comments ca. 1996 notwithstanding). 

  A Fox News poll out earlier this month showed Clinton leading “The Bern” by a 56-28 margin. As ABC notes, “Clinton will hope to follow in the footsteps of her husband, who won the state en route to his election in 1992, and use South Carolina as her own personal “firewall” against Sanders.” Here’s a rundown of the latest polls from RealClearPolitics:

  

  The state saw record turnout in 2008 when Democratic voters cast 530,000 votes. Generally, a high turnout is a good thing for Sanders, but Clinton’s overwhelming support among African Americans means Sanders has little chance. He won’t be in the state on Saturday evening, but will instead travel to Minnesota for a rally. Earlier today, he was in Texas with planned stops in Austin and Dallas.

  Clinton, by contrast, is “right at home” in the Palmetto state. In South Carolina, she’s “the candidate she always wanted to be,” to quote Politico. 

  

  “Gone are questions about her authenticity,” Politico continues. “Here, black voters say Clinton’s history as a civil rights stalwart — she first visited the state as a college grad investigating the problem of youths incarcerated in adult jails for the Children’s Defense Fund — trumps any trust issues that dog her elsewhere.”

  “You look at South Carolina and we’re at the the bottom in anything you can thing of, educations, poverty. I think Hillary would be good because she’s gonna look out for us,” said Al Tucker, a 67-year-old African American. “I don’t think Bernie has a shot in a national election, and this election is too important,” said Elementary school teacher Alicia Newman. “The next president is probably going to end up appointing the next judge on the Supreme Court. If Hillary is elected, she’ll appoint a moderate or liberal judge to replace (Antonin) Scalia.”

  “I was at one point considering Bernie, but she really swayed me on the issues personally affecting me,” said Markos Young, of suburban Columbia. “I would love tuition to be free, but how? Somebody has to pay for it. Where’s that coming from?”

  Asked if he’d given up on South Carolina, Sanders responded: “No, no, no, no.”

  But he probably should. “I am not familiar with him at all,” a Florence, South Carolina member of the local county council said on Saturday. 

  Meanwhile, the crowd was so large at a Florence event at which Hillary was speaking that Joyce T. Marshall and 50 other supporters were forced to listen outside on a speaker. “Hillary has done a lot for us, and her husband has done a lot for us,” she said.

  Polls close at 7 p.m. EST.

  

  

  

  

  

• Snowden Sums Up The Presidential Campaign With Just One Tweet

  And so, just like that, with a sweeping victory in South Carolina, Sanders' Socialism crawls back into its cage and crony capitalism is alive and well.

  As Edward Snowden so perfectly sums up…

  2016: a choice between Donald Trump and Goldman Sachs.

  — Edward Snowden (@Snowden) February 28, 2016

  And in case you thought this was an exaggeration…

  Since 2013 Hillary's grand total is slightly less: $21.7 million for 92 private appearances.

  Below we present the full breakdown of every publicly disclosed speech event by Hillary Clinton, together with the associated fee.

  

  And as The Mises Institute's William Andersen so eloquently summarised,

  Despite Clinton’s newfound populist rhetoric, her economic agenda reflects her own lifestyle of practicing crony capitalism. Other than her promise to remove “red tape” for small business startups, Clinton’s economic propositions follow the same depressing line that we have seen from Bernie Sanders and Elizabeth Warren: private enterprise extracts wealth from the economy, while the expansion of government power builds wealth and employment opportunities.

   

  If one briefly can summarize Clinton’s policy-making viewpoints, it is this: Hillary Clinton believes that an economy should be a tool of the state and reflect the political interests of Washington. Anything else is called “greed,” or “profits before people.” Private employers and business owners should not seek to be profitable, but rather to be virtuous, with the necessary virtue being decided by Clinton herself.

   

  Hillary Clinton, a beneficiary of the very worst aspects of crony capitalism, has decided after all that she is an economic populist who wants to “share the wealth.” No one is mistaking her for Bernie Sanders or even Huey Long, but, nonetheless, she is a thoroughgoing statist telling voters that the way to improve the economy is to make it more difficult to produce things and force up business costs.

   

  She clearly is not claiming to be a free-enterpriser and stands by her view that state control of economic exchanges will result in more exchanges and improved employment prospects and increased income. What she does not say is that the very economic burdens she promises to lay upon businesses will further erode the prospects of the American middle class she claims to support.

   

  The economics of Hillary Clinton is first and foremost about expanding the power and scope of the US government, and as government gains more control, the more employers and business owners need to be in the good graces of American politicians. To be blunt, Clinton believes that people like herself can continually loot US businesses, with business owners paying their protection money without complain. After all, Hillary knows best; just ask her.

  But none of that matters of course.

  

   

  And so, as Patrick Buchanan recently asked, in a Hillary Clinton vs. Donald Trump race – which, the Beltway keening aside, seems the probable outcome of the primaries – what are the odds the GOP can take the White House, Congress and the Supreme Court?

  If Republicans can unite, not bad, not bad at all.

  Undeniably, Democrats open with a strong hand.

  There is that famed “blue wall,” those 18 states and D.C. with a combined 242 electoral votes, just 28 shy of victory, that have gone Democratic in every presidential election since 1988.

  The wall contains all of New England save New Hampshire; the Acela corridor (New York, New Jersey, Pennsylvania, Delaware and Maryland); plus Michigan, Minnesota, Illinois and Wisconsin in the Middle West; and the Pacific coast of California, Oregon, Washington – and Hawaii.

  Changing demography, too, favors the Democrats.

  Barack Obama carried over 90 percent of the black vote twice and in 2012 carried over 70 percent of the Hispanic and Asian votes. These last two voting blocs are the fastest-growing in the USA.

  A third Democratic advantage is simple self-interest.

  Half the nation now receives U.S. government benefits – in Social Security, Medicare, Medicaid, food stamps, welfare, student loans, rent subsidies, school lunches and Earned Income Tax Credits, etc.

  Folks who rely on government benefits are unlikely to rally to a party that promises to cut government. And as half the nation pays no income tax, these folks are unlikely to be thrilled about tax cuts.

  Bernie Sanders, who promises free college tuition and making Wall Street and the 1 percent pay for it, knows his party.

  While these realities of national politics would seem to point to inexorable Democratic dominance in coming decades, there are worms in the apple.

  First, there is the strangely shrunken and still shrinking Democratic leadership base. As the Daily Caller reports, under Obama, Democrats have lost a net of more than 900 state legislature seats, 12 governors, 69 U.S. House and 13 Senate seats. Such numbers suggest a sick party.

   

  Republican strength on Capitol Hill is again as great as it was in the last years of the Roaring ’20s.

   

  Second, due to Trump, viewership of the Republican debates has been astronomical – 24 million for one, 23 million for another.

   

  The turnout at Trump rallies has been unlike anything seen in presidential primaries; and what’s more, the GOP voter turnout in Iowa, New Hampshire, South Carolina and Nevada set new records for the party.

   

  Yet voter turnout for the Clinton-Sanders race has fallen, in every contest, below what it was in the Clinton-Obama race in 2008.

   

  Bernie’s millennials aside, the energy and excitement has been on the Republican contest, often a sign of party ascendancy.

   

  Not only would Trump at the top of the GOP ticket assure a huge turnout (pro and con), he is the quintessence of the anti-Washington, anti-establishment candidate in a year when Americans appear to want a wholesale housecleaning in the capital.

   

  As a builder and job creator, Trump would surely have greater cross-party appeal to working-class Democrats than any traditional Republican politician. Moreover, when Bernie Sanders goes down to defeat, how much enthusiasm will his supporters, who thrilled to the savaging of Wall Street, bring to the Clinton campaign?

  This is the year of the outsider, and Hillary is the prom queen of Goldman Sachs. She represents continuity. Trump represents change.

  Moreover, on the top Trump issues of immigration and trade, the elites have always been the furthest out of touch with the country.

   

  In the 1990s, when Bill Clinton fought the NAFTA battle, the nation rebelled against the deal, but the establishment backed it. When Republicans on Capitol Hill voted for most-favored-nation status for China, year in and year out, did Republican grass roots demand this, or was it the U.S. Chamber of Commerce and Business Roundtable?

   

  On immigration, where are the polls that show Middle Americans enthusiastic about increasing the numbers coming? Where is the majority demanding amnesty or open borders?

   

  The elites of Europe are as out of touch as America’s.

   

  Angela Merkel, Time’s Person of the Year in 2015, is at risk of being dumped in 2016 if she does not halt the next wave of Middle Eastern refugees who will be arriving on Europe’s shores when the seas calm in the spring in the Aegean and the Mediterranean.

   

  If we believe the immigration issue Trump has seized upon is explosive here, look to Europe. In the Balkans and Central Europe, even in Austria, the barriers are going up and the border guards appearing.

   

  Mass migration from the Third World to the First World is not only radicalizing America. It could destroy the European Union. Anger over any more migrants entering the country is among the reasons British patriots now want out of the EU.

  America is crossing into a new era. Trump seems to have caught the wave, while Clinton seems to belong to yesterday.

  A note of caution: This establishment is not going quietly.

  

  

  

  

• Dear Warren, Nothing Lasts Forever

  In his latest letter to investors, Cherry-Coke-sipping Warren Buffett went full fiction-peddle-tard. As the man who perhaps best rode the coat-tails of an ever-increasing wave of American credit expansion exceptionalism (only to come undone in recent times as that game ends), it is no surprise that he explains "for 240 years it’s been a terrible mistake to bet against America, and now is no time to start." We don't mean to rain on his parade too much, but the following charts suggest "nothing lasts forever" and time is ticking.

  For a man who runs a massive, highly-levered portfolio of assets exposed to 'Murica, it is hardly surprising Buffett would utter the following:

  "For 240 years it’s been a terrible mistake to bet against America, and now is no time to start.

   

  America’s golden goose of commerce and innovation will continue to lay more and larger eggs.

   

  America’s social security promises will be honored and perhaps made more generous.

   

  And, yes, America’s kids will live far better than their parents did."

  The trouble is – taking each statement…

  Nothing lasts forever…

  History did not end with the Cold War and, as Mark Twain put it, whilst history doesn’t repeat it often rhymes. As Alexander, Rome and Britain fell from their positions of absolute global dominance, so too has the US begun to slip. America’s global economic dominance has been declining since 1998, well before the Global Financial Crisis. A large part of this decline has actually had little to do with the actions of the US but rather with the unraveling of a century’s long economic anomaly. China has begun to return to the position in the global economy it occupied for millenia before the industrial revolution. Just as the dollar emerged to global reserve currency status as its economic might grew, so the chart below suggests the increasing push for de-dollarization across the 'rest of the isolated world' may be a smart bet…

   

  

   

  The World Bank's former chief economist wants to replace the US dollar with a single global super-currency, saying it will create a more stable global financial system.

  "The dominance of the greenback is the root cause of global financial and economic crises," Justin Yifu Lin told Bruegel, a Brussels-based policy-research think tank. "The solution to this is to replace the national currency with a global currency."

  

   

  Innovation may be limited by the constant manipulation of government and central banks…

  One feature of capitalism that is rarely discussed is the premium placed on cooperation and collaboration. The Darwinian aspect of competition is widely accepted (and rued) as capitalism’s dominant force, but cooperation and collaboration are just as intrinsic to capitalism as competition. Subcontractors must cooperate to assemble a product, suppliers must cooperate to deliver the various components, distributors must cooperate to get the products to retail outlets, employees and managers must cooperate to reach the goals of the organization, and local governments and communities must cooperate with enterprises to maintain the local economy.'

   

  Darwin’s understanding of natural selection is often misapplied. In its basic form, natural selection simply means that the world is constantly changing, and organisms must adapt or they will expire. The same is true of individuals, enterprises, governments, cultures and economies. Darwin wrote:"It is not the strongest of the species that survives, or the most intelligent, but the ones most adaptable to change."

   

  Ideas, techniques and processes which are better and more productive than previous versions will spread quickly; those who refuse to adapt them will be overtaken by those who do. These new ideas, techniques and processes trigger changes in society and the economy that are often difficult to predict.

   

  This creates a dilemma: we want more prosperity and wider opportunities for self-cultivation (personal fulfillment), yet we don’t want our security and culture to be disrupted. But we cannot have it both ways. Those who attempt to preserve their power over the social order while reaping the gains of free markets find their power dissolving before their eyes as unintended consequences of technological and social innovations disrupt their mechanisms of control.

   

  Yet rejecting free markets also fails to preserve the power structure, for a citizenry denied the opportunity to prosper chafes under a Status Quo that enriches Elites and relegates the masses to stagnation and poverty.

   

  The great irony of free-market capitalism is that the only way to establish an enduring security is to embrace innovation and adaptation, the very processes that generate short-term insecurity. Attempting to guarantee security leads to risk being distributed to others, or concentrated within the system itself. When the accumulated risk manifests, the system collapses.

  In other words, without the fear of ruin (which is taken away by mandate by The Fed's actions – nothing shall fail), innovation and adaptation is stalled.

   

  Social Security funding is collapsing…

  The 2015 annual report from the Social Security Board of Trustees shows that the program’s disability component is in immediate trouble. Data from the latest report show that the disability fund will be depleted as soon as next year and unable to pay full benefits to beneficiaries.

   

  This week’s first chart uses that data to show total income, expenditures, and assets in the Social Security Disability Insurance (DI) trust fund going back to 1980. The chart shows that the trust fund has been operating under deficits since 2009, as shown by the decline in the trust fund (green bars) and ever-growing gap between the payments (red line) and receipts (blue line).

   

   

  

   

   

   

  Those deficits have been financed by redeeming nonmarketable government securities that were accumulated over the years when the program was bringing in more revenue than was being paid out. The government spent the surpluses on other government programs and credited the fund with the securities. But because the securities are nonmarketable, the government had to use general federal revenues to “redeem” them once the DI fund started to run deficits in order to cover the difference. With the illusion of the DI trust fund about to disappear, policymakers have no choice but to finally confront the financial imbalance that actually began years ago.

  And that means your retirement is going to be 'stolen'…

  Given the $42 trillion funding gap in these programs, it’s mathematically impossible for Social Security to continue funding the national debt.

   

  This reality puts the US government in rough spot.

   

  It’s not like government spending is going down anytime soon; it already takes nearly 100% of tax revenue just to pay mandatory entitlements like Social Security, and interest on the debt.

   

  Plus the government itself estimates that the national debt will hit $30 trillion within ten years.

   

  Bottom line, they need more money. Lots of it. And there is perhaps no easier pool of cash to ‘borrow’ than Americans’ retirement savings.

   

  $7.3 trillion in US IRA accounts is too large for them to ignore.

  And finally – if the next generation has a better quality of life than the last, then why is this happening…if you’re a millennial, you’d be forgiven for being disillusioned with the American dream.

  As we recently noted, compared to young Americans in 1986, you’re three times as likely to think the American dream is dead and buried. As WaPo notes, "young workers today are significantly more pessimistic about the possibility of success in America than their counterparts were in 1986, according to a new Fusion 2016 Issues poll – a shift that appears to reflect lingering damage from the Great Recession and more than a decade of wage stagnation for typical workers.”

   

   

  

   

  It appears that time is drawing near as Charles Hugh-Smith recently noted, the mainstream is finally waking up to the future of the American Dream: downward mobility for all but the top 10% of households.

  Downward mobility and social defeat lead to social depression. Here are the conditions that characterize social depression:

   

  1. High expectations of endless rising prosperity have been instilled in generations of citizens as a birthright.

   

  2. Part-time and unemployed people are marginalized, not just financially but socially.

   

  3. Widening income/wealth disparity as those in the top 10% pull away from the shrinking middle class.

   

  4. A systemic decline in social/economic mobility as it becomes increasingly difficult to move from dependence on the state (welfare) or one's parents to financial independence.

   

  5. A widening disconnect between higher education and employment: a college/university degree no longer guarantees a stable, good-paying job.

   

  6. A failure in the Status Quo institutions and mainstream media to recognize social recession as a reality.

   

  7. A systemic failure of imagination within state and private-sector institutions on how to address social recession issues.

   

  8. The abandonment of middle class aspirations by the generations ensnared by the social recession: young people no longer aspire to (or cannot afford) consumerist status symbols such as luxury autos or homeownership.

   

  9. A generational abandonment of marriage, families and independent households as these are no longer affordable to those with part-time or unstable employment, i.e. what I have termed (following Jeremy Rifkin) the end of work.

   

  10. A loss of hope in the young generations as a result of the above conditions.

  If you don't think these apply, please check back in at the end of the year. We'll have a firmer grasp of social depression in December 2016… and so will Warren!

  

  

  

  

  

• Mind The Business Cycle

  Via KesslerCompanies.com,

  Counter-intuitively, the recent increases in core inflation are normal in the sequence of how a recession evolves. The typical business-cycle sequence is that the manufacturing sector weakens first, then employment and consumer spending, and lastly, inflation. In fact, it is often not until the recession is over that inflation begins to come down.

  

   

  Inflation is the longest lagging indicator.

  

  As recently as 2008, the FOMC’s hawks exploited this phenomena to argue for rate hikes (or actually raise rates in the ECB’s case), all while the economy was crumbling underneath. We covered that period here.

  Those desperate for any bullish signs will certainly do the same now, but using current inflation to argue for rate hikes or the avoidance of a downturn is misplaced.

  As we have pointed out here and here, manufacturing has clearly turned down in a way (3 independent indicators) that has not failed in calling an upcoming recession. We think that we have entered or will soon enter a full blown US recession.

  Don’t be led astray by late-cycle rises in core inflation.

  

  

  

  

  

• David Stockman: The Good, Bad & Ugly Of Donald Trump

  Submitted by David Stockman via Contra Corner blog,

  America will need the Almighty’s unstinting favor if Donald Trump becomes our 45th President. Still, blessed be The Donald for running a demolition derby in the Republican primaries.

  There is no hope for the future of capitalist prosperity and a free society at home and world peace abroad unless the Republican Party is destroyed. And, by golly, Trump may well accomplish the deed.

  We need to be clear. There is no longer a Republican Party rooted in the main street highways and byways of America. What’s left of it is not really even the xenophobic, nativist, crypto-racist flotsam and jetsam of the populist right that Trump is successfully calling to political arms.

  The fact is, the GOP has mutated into the Warfare State party. Nestled comfortably in the Imperial City, it operates a plethora of special interest rackets which underwrite its incumbents’ bi-annual electoral campaigns out in the provinces.

  In the interim, GOP politicians idle their time in the capital and on foreign junkets conjuring and embellishing scary stories about terrorist threats and hostile regimes. So doing, they perceive enemies of the American Imperium to be stalking the planet everywhere and even creeping onto these exceptional shores.

  In a word, as the party of the Warfare State, the GOP’s main business has become promoting the agenda, campaigns, machinations and glory of the Imperial City. Whenever its pro forma rhetoric about small government and fiscal prudence becomes inconvenient to the needs of the military/industrial/surveillance complex or the fund-raising requirements of its special interest rackets, the GOP’s putative conservative economics platform quickly becomes “inoperative” in the Nixonian vernacular.

  There is no better prototype for the new GOP than Senators Lindsay Graham and John McCain. Their agenda consists exclusively of promoting and superintending Washington’s foreign projects, occupations, alliances and maneuvers. Cycling through Tel Aviv on a regular basis, showing up on the battlements of Kiev and lecturing the Chinese about maritime law in international waters, for example, they comically imitate the first century Roman Senators they fancy themselves to actually be.

  Yet after decades in Washington they and most of their Senate colleagues have accomplished nothing that resembles the old Republican verities. In fact, during 2000-2006 when Republicans controlled the Congress and the White House, not a single welfare state program or agency was eliminated or even reformed, while vast new expansions of education, Medicare, agriculture, alternative energy subsides and much more were piled on the pre-existing heap of state.

  Accordingly, the Federal spending share of GDP grew faster than at any time in history; and the $4 trillion worth of new national debt incurred during the eight Bush years smashed all prior peacetime records.

  Even when the likes of Graham and McCain occasionally took time from their foreign adventures, it was not to lead a charge on shrinking the Welfare State or balancing the budget. McCain famously embraced the Wall Street bailouts in the fall of 2008, thereby ending once and for all GOP credibility on the sanctity of free markets and opposition to crony capitalism.

  Graham was worse. He embraced the dubious science of global warming, the carbon tax and the vast expansion of the regulatory state that policy implies.

  In all, the GOP establishment has become an integral part of the  Washington ruling class. It has no passion——only lip service—–for the anti-Washington predicate on which the party was founded.

  Once upon a time, by contrast, the GOP actually stood for free markets, fiscal rectitude, hard money and minimalist government. Calvin Coolidge did a pretty good job of it. And even the unfairly besmirched Warren G. Harding got us out of the foreign intervention business—-a path that the great Dwight D. Eisenhower pretty consistently hewed to under the far more challenging conditions of the cold war.

  But these were sons of America’s old school interior—–Massachusetts, Ohio and Kansas. As temporary sojourners in Washington, they remained incredulous and chary of grand state missions either at home or abroad.

  Harding called it returning to “normalcy”.  Coolidge said Washington’s business was to get out of the way. And Ike actually shrank the Warfare state by one-third, ended Truman’s wars and started no new ones, resisted much of the Dulles’ brother’s interventionist agenda, balanced the budget and froze the New Deal as hard in place at he had the votes to achieve.

  Today’s Republican crowd bears no resemblance. They live in the capital, fully embrace its projects and pretensions and visit the provinces as sparingly as possible. And that’s why The Donald has them so rattled, even petrified.

  To be sure, there is much that is ugly, superficial and stupid about Donald Trump’s campaign platform, if you can call it that, or loose cannon oratory to be more exact. More on that below, but at the heart of his appeal are two propositions which strike terror in the hearts of the Imperial City’s GOP operatives.

  To wit, he is loudly self-funding his own campaign and bombastically insisting that America is getting a bad deal everywhere in the world.

  The first of these propositions explicitly tells the legions of K-Street lobbies to take a hike, thereby posing a mortal threat to the fund raising rackets which are the GOPs lifeblood. And while the “bad deal” abroad is superficially about NAFTA and our $500 billion trade deficit with China, it is really an attack on the American Imperium

  The American people are sick and tired of the Lindsay Graham/John McCain/George Bush/neocon wars of intervention and occupation; and they resent the massive fiscal burdens of our outmoded but still far-flung alliances, forward bases and apparatus of security assistance and economic aid. They especially have no patience for the continued huge cost of our commitments to cold war relics like NATO, the stationing of troops in South Korea and the defense treaty with the incorrigible Japanese, who still  blatantly rig their trade rules against American exports.

  In short, The Donald is tapping a nationalist/isolationist impulse that runs deep among a weary and economically precarious main street public. He is clever enough to articulate it in the bombast of what sounds like a crude trade protectionism. Yet if Pat Buchanan were to re-write his speech, it would be more erudite and explicit about the folly of the American Imperium, but the message would be the same.

  That’s why the War Party is so desperate, and why its last great hope is the bantam weight Senator from Florida. In truth, Marco Rubio is an obnoxious kid who wants to be President so he can play with guns, planes, ships and bombs. He is a pure creature of the Imperial City, even if at his young age he has idled there only since 2010.

  Yet down to the last nuance of his insipid neocon worldview and monotonous recitation of the American Exceptionalism catechism, he might as well have been born in Washington of GS-16 parents, not Cuban refugees, raised as a Congressional page, and apprenticed to the Speaker of the US House rather than serving as the same in the backwaters of Tallahassee.

  What Marco Rubio is all about is Warfare State republicanism. When he talks about restoring American Greatness it is through the agency of Imperial Washington. He has no kinship with Harding, Coolidge or Eisenhower. None of them were intent on searching the earth for monsters to destroy, as does Rubio in every single speech.

  And make no mistake. Every time this naïve smart aleck chastises Obama for weak leadership and alleged failure to get the job forcefully done in Syria, Libya, Iraq, Yemen and countless elsewheres, the ghost of John Quincy Adams should be hollering in his grave. Stalking the globe for monsters to destroy is exactly what this wanna be little Napoléon is all about.

  Likewise, none of the Republican greats would have vowed to tear-up the hard-won nuclear and trade deal with Iran on day one in office, as Rubio never stops declaiming. His hard core opposition to that breakthrough for peace and sanity, in fact, is a damning indictment.

  The War Party in Washington and Tel Aviv has spent the last 30-years constructing a tissue of lies about the Iranian regime because both need an enemy in order to mobilize their domestic constituencies. The truth is that despite its theocratic rebuke of Imperial Washington after the bloody and thieving reign of the Shah was peacefully ended, the Iranians have never aspired to nuclear weapons, do not conduct a remote fraction of the terrorism inflicted by Washington’s drones, bombs and cruise missiles, and have never threatened the safety and security of the American people.

  In denouncing the Iranian accord, Rubio is loudly embracing Washington’s 30-year tissue of lies about Iran and the destructive neocon foreign policy of which it is but one baleful extension.

  So the good in The Donald at this juncture is that only he can stop Senator Marco Rubio. Only Trump’s brash bombast can finally displace the toxic neocon ideology that has mutated the GOP into the handmaiden of the Warfare State.

  Indeed, Rubio is the very worst bag carrier for the Washington neocon establishment yet. Even George Bush could not be persuaded to bomb Tehran owing the thinness of the evidence and the awful implications of launching an outright genocide against an innocent Persian nation of 80 million.

  Yet the strutting know-it-all boy Senator from Florida, who never even learned his way around the Senate but oozes with Napoleonic pretensions and delusions of grandeur, could readily do far worse.

  That brings us to the bad of The Donald and what I called the Hairy Deal a few weeks back. Even as The Donald talks up a populist-sounding storm and rebukes Imperial Washington with the insolence it richly deserves, his predicate is fundamentally wrong. He insists that the nation’s ills stem from incompetent politicians making bad deals.

  But that’s not right. The problem is bad policies and destructive ideas in the hands of Washington’s career politicians who are extremely competent at orchestrating the machinery of the state against the liberty and prosperity of its citizens.

  Thus, in the hierarchy of things screaming out for radical change, the Donald’s favorite whipping boys——-NAFTA, China’s trade practices, illegal aliens and the danger of Muslim refugees——-don’t even rank. Nor do safeguarding the Second Amendment or building a horizontal version of Trump Towers on the Rio Grande.

  The fact is, Trump has fashioned his platform by opportunistically scratching the most fearful and bigoted itches roiling the electorate. He has absolutely no semblance of a coherent program——or even an incoherent one for that matter.

  Instead, his pitch is comprised of pure bombast and bile. It’s based on the exceedingly dangerous proposition that what Washington needs is a smart deal maker who can make the government agencies and bureaus run better at home and foreign leaders run for cover abroad.

  You could call it the Man-on-the-White Horse syndrome, and pity the horse.

  But don’t pity the nation. Sadly, the people are getting what they deserve. They have allowed both political parties, the agencies of their democratic right to rule, to betray them with impunity.

  And that just as true of the Democrat party as the GOP. There is a dearth of new jobs in America today, for example, because the Democratic Party protects like a junkyard dog the single biggest agency of job destruction in the land.

  To wit, the so-called foundation labor law in the form of the social security payroll tax, minimum wage and the NLRB. These relics of the 1930s New Deal remain the litmus tests for the Democrats’ own brand of special interest racketeering——that is, kowtowing to the unions.

  But in a global market that can mobilize labor from every rice paddy and remote hamlet on the planet, the protectionism afforded US industrial unions by the NLRB imperils the few manufacturing jobs that remain. At the same time, the minimum wage stops new service sector jobs from being born, while the myth of social insurance—including its second generation off-spring in Obamacare——always and everywhere pushes employers to artificially conserve labor and substitute capital and technology.

  Stated differently, the stupidest thing that Washington can do to a $40,000 per year job in an economy where labor is drastically over-priced and uncompetitive with much of the world is to extract upwards of $17,000 worth of payroll taxes and Obamacare employer mandates before workers get a red cent of take home pay.

  And, no, the solution is not to abolish social security and dump grandma in the snow. Instead, if the community organizer who stumbled into the White House on the strength of his anti-war rhetoric had not been wedded to the Democrat’s mindless ideology of “social insurance”, he could have abolished the $1.2 trillion per year payroll tax entirely—–the sledge hammer that beats down upon worker living standards day in and day out—— and replaced it with a 10% consumption tax.

  Needless to say, in a nation where only 123 million of an adult population of 252 million work full time, we could do with less consumption and more labor hours and production—-so we should tax the former, not the latter. Indeed, a nation which is getting older, fatter and dumber while watching television or trolling the internet eight hours per day, must do less shopping and keeping up with the Kardashians and more work——or it will end up in social and fiscal bankruptcy within a decade or so.

  By that token, the giant wedge on labor imposed by social insurance could be further alleviated by the imposition of a stringent means test. Precious few retirees has actually earned through lifetime tax contributions anything close to their combined $450,000 average package of social security and medicare, anyway.

  In fact, taxing the wealthy duffers who live on Florida’s golf courses and collect $50,000 per year in medicare and social security benefits should have been a no brainer for the big thinker now incumbent in the White House. But when it comes to feeding the organized labor rackets, thinking has nothing to do with it.

  At the end of the day, America is on a slippery slope toward failure because the Warfare State and the Welfare State are suffocating what was once a prosperous capitalism and a resilient free society lightly intruded upon by the machinery of state.

  But now both parties have become handmaidens of the state. Domiciled in the Imperial City, they have long ago betrayed their founding principles in favor of incumbency, self-importance and operating the special interest rackets that keep them in office.

  Maybe The Donald’s startling but palpable momentum toward the White House will have one saving grace. His relentless campaign against the “politicians” and the Washington money rackets may end up knocking the hypocritical stuffings out of both parties.

  There could be worse fates among the present alternatives.

  

  

  

  

  

• Caption Contest: Yellen G20 Edition

  The most important officials in the financial universe gathered in Shanghai this week for the G-20 summit. 

  Despite the fact the the group failed to devise and announce a coordinated policy response to address stubbornly low global growth, subdued inflation, and market volatility, everyone was in good spirits. 

  Well, almost everyone…

  

  

  

  

  

  

• Day Of Reckoning Imminent

  Submitted by EconomicPrism.com's MN Gordon (annotated by Acting-Man.com's Pater Tenebrarum),

  Fudging Numbers

  It all seems so systematic, arranged, and orderly.  Sixty seconds make a minute, 60 minutes make an hour, 24 hours make a day, and one day equals one complete rotation of the planet earth. Roughly every 30 days the moon orbits the earth – which is one month.  Then every 12 months the earth orbits the sun – which is one year. So far so good…right?

   

  

  Oldish German calendar.

  But here’s where the nice and neat order of it all breaks down.  For if you try to measure one of earth’s orbits of the sun in days it’s not so divinely tidy.  For it takes 365 days plus an inconvenient 6 hours to fully complete the cycle. Nonetheless, we don’t let these inconvenient 6 hours hamper our perfection.

  We’re humans, after all.  We innovate, invent, and make the world in our image.  So when the numbers don’t jive, we do what must be done.  We fudge them. We create an off balance account, we concoct a new theory, we contrive negative interest rate policy…and we invent a leap year.

  This coming Monday is the day the books must be reckoned.  Peering into our off balance account we find 24 accrued hours that must be tallied up and rectified. Consequently, we must have a day of correction for the disorder of the last four years.  We must resynchronize the calendar year with the astronomical year.  Moreover, we must reground our measuring system with its baseline – its reference point.

   

  

  Did you really think we’d let you get away with that calendar-fudging, oh Julius? February 29? Seriously?

  Without this resynchronization, what’s a year really measuring?  Perhaps, the calendar wouldn’t get too off kilter for a decade or two.  But in just 28-years the calendar would be off by an entire week.  Not long after that, the calendar would be debased to nothing more than etched lines inside a cave dwellers grotto.

   

  Helicopter Drops

  So goes the dollar – or any paper money – when it’s not backed by gold or some other commodity that can’t be created at will.  For without a stable base to hold its supply in check, what’s a dollar anyway?

  It’s abstract, indefinite, and arbitrary.  It can be created out of thin air at the whims of the Federal Reserve.  A pocket full of dollars one day and you can buy the things you want and need.  On the next day these same dollars can revert to their intrinsic value…fire tinder or toilet paper.

  Gold to paper currency conversion once limited the Federal Reserve’s money creation games.  But that was before the U.S. severed the dollar’s relationship to gold and commenced the dollar reserve standard.  Prior to 1971, a foreign bank could exchange $35 with the U.S. Treasury for an ounce of gold.  After that, when foreign banks handed the U.S. Treasury $35, they received $35 in exchange.

  Nixon announces that he will “temporarily” default on the convertibility of the dollar into gold. One cannot show this video often enough, because it is such an excellent example of a government official lying as soon as he opens his mouth, with every single sentence he utters. It also betrays a frightening degree of economic ignorance.

   

  

  The gold default and the debtberg… Nixon has really shown those speculators what’s what! – click to enlarge.

   

  Unlike gold, which has no debt obligation or counterparty risk, dollars can expire worthless when their promissory obligation is defaulted on.  Alternatively, they can be inflated to nothing when a desperate Federal Reserve moves to dropping suitcases of money from helicopters over major urban centers.

  If this helicopter drop concept is new to you let me assure you that it is no joke.  In fact, this is what former Federal Reserve Chairman, Ben S, Bernanke, said the Fed would do in a time of financial crisis.  He laid it out very clearly in his November 21, 2002 speech, Deflation: Making Sure “It” Doesn’t Happen Here. Then as Federal Reserve Governor (now former Chairman), Bernanke had the following to say…

  “The U.S. Government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.  By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. Government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the price in dollars of those goods and services.”

  Later in this same speech, Bernanke made reference to a “helicopter drop,” alluding to a central banker hovering in a helicopter – dropping suitcases full of money to individuals.

   

  
  Prosperity through the printing press – a proven concept since John Law!

   

  Day of Reckoning Imminent

  Unfortunately, that day is approaching.  For without the anchor of a gold standard, financial imbalances and debt creation will continue to grow to commanding heights.  Inflation, resulting in an implied default, will likely be more politically expedient than an outright default.

  In the meantime, even if the dollar isn’t worthless – yet – its incessant variability is an incessant problem.  How does one save, invest, and accumulate wealth when the dollar’s monetary base is continuously inflated?

  When a carpenter measures the length of a cabinet as being 3 feet, he’s certain that the length measured as 3 feet will always be 3 feet.  No more.  No less.  To the contrary, when a shopkeeper prices a 24-ounce loaf of bread at $3.93, he’s not certain that the value of one loaf of bread will always be equal to $3.93.  In fact, in 1971 – the year the dollar’s last tie with gold was severed – he would’ve valued three 20-ounce loaves of bread equal to $0.89.

  Has the usefulness of a loaf of bread, on a per ounce basis, really changed 1006 percent?  Has its quality somehow become 1006 percent better? Of course not.  Rather, the baseline used to measure the value of a loaf of bread has been twisted and contorted like a politician’s spine.  The quantity of dollars in existence has increased.  Accordingly, the unit value of the dollar has decreased.

   

  

  Broad true US money supply TMS-2 – the era of Bernanke and Yellen has seen the amount of money in the economy rise be nearly 125%. Let’s call it “the courage to print” – click to enlarge.

   

  Indeed, prices of individual goods and services will fluctuate to account for natural changes in supply and demand.  But when money is anchored to a stable reference point, like during the classical gold standard of the 19th century, overall prices will by and large be stable.

  With respect to recording the passage of time, leap year’s necessary, vital, and appropriate, for preserving the calendar year’s conformity with its baseline.  So, too, today’s money needs a stable base to derive its meaning and value from.

  Without such a reference point, we’ll just continue to spin out of orbit.  Money will continue to accrue more zeros at the end of everything it measures.  Yet what good’s a $100 dollar bill if it only buys you what a $1 dollar bill did before?

  So enjoy Monday’s imminent day of reckoning.  The time was there all along…it just needed to be reconciled.  Alas, we have a startling suspicion that reckoning the distortions of the dollar reserve standard will not be so amiable.  Though it’s necessary, all the same.

   

  

  Helicopter Ben: He sure earned his nickname. The bill for all the fun is yet to be presented in full, but presented it will be.

  

  

  

  

  

• Mind The Non-GAAP: Real S&P Earnings Are The Lowest Since 2010

  We have previously documented how, with the fourth quarter earnings season almost completed, Q4 EPS are poised to drop by 3.3% Y/Y, making this the third consecutive quarter of declining year over year earnings, in other words an earnings recession and a half.

  And with this quarter’s earnings almost done, attention shifts to Q1 2016 where things are going from great to bad to absolutely abysmal. Here, it appears that Wall Street was just a “tad overoptimistic” on first quarter’s earnings, as consensus has imploded from a +5% expected increase in YoY EPS as of September 25, to a -7.4% plunge according to Factset (and even worse according to Bloomberg).

  

  The companies have validated this implosion in earnings: for Q1 88 companies have issued negative EPS guidance and 22 companies have issued positive EPS guidance. Additionally it’s not just energy: in Q1 the following sectors are expected to post annual EPS declines: Energy (-92.8%), Materials (-19.5%), Industrials (-10.9%), Info Tech (-7.3%), Financials (-4.3%), Consumer Staples (-2.6%), and Utilities (-0.2%). In fact, only three of ten sectors are expected to see their EPS rise: Healthcare, Consumer Discretionary and Telecom Services.

  

  SocGen’s Andrew Lapthorne had some thoughts on this last week saying that “forward earnings expectations are now falling fast, so whilst MSCI World has fallen by around 15% since May last year, 2016 EPS levels are now down 12% over the same period. The poor profit reality is now catching up with weak equity prices.”

  What seems to be happening is that the Q4 reporting season is leading to significant cuts to 2016 expectations. Whilst similar effects occurred last year, this is somewhat of a departure from the past when year-ahead forecasts tended to be cut steadily throughout the year. It would appear the perennial bullishness in forward consensus numbers is so out of kilter with economic reality that companies are moving earlier to correct the anomaly to the extent the consensus growth forecast for this year is already fast approaching zero.

   

  Whilst a big part of the downgrade is via the Oil & Gas sector, [there are] big cuts in an ever wider selection of stocks and sectors. Global 2016 EPS forecasts were cut by 3.6% in over the last four weeks or so: we make that the worst monthly cuts to forward estimates since early 2009.

  

  But while near-term forward EPS expectations have been crashing, for now what is keeping full year 2016 EPS up (which have tumbled from +4.3% at the start of the year to just 1.9%) is a hockey stick in Q3 and Q4 EPS expectations that would make the butt of all forecast jokes, the IMF, proud:  somehow consensus expects the growth rates for Q3 2016 and Q4 2016 to be +4.7% and +9.4%.

  It’s not going to happen.

  However, what caught our attention is not the ongoing slaughter in corporate profitability which in any other world would be a sufficient condition to confirm an economic recession; it is what Warren Buffett said earlier about non-GAAP earnings which he blasted in his annual letter:

  … it has become common for managers to tell their owners to ignore certain expense items that are all too real. “Stock-based compensation” is the most egregious example. The very name says it all: “compensation.” If compensation isn’t an expense, what is it? And, if real and recurring expenses don’t belong in the calculation of earnings, where in the world do they belong?

   

  Wall Street analysts often play their part in this charade, too, parroting the phony, compensation-ignoring “earnings” figures fed them by managements. Maybe the offending analysts don’t know any better. Or maybe they fear losing “access” to management. Or maybe they are cynical, telling themselves that since everyone else is playing the game, why shouldn’t they go along with it. Whatever their reasoning, these analysts are guilty of propagating misleading numbers that can deceive investors…. When CEOs or investment bankers tout pre-depreciation figures such as EBITDA as a valuation guide, watch their noses lengthen while they speak.

  We also decided to not play part in this charade, and took a look at S&P500 earnings on a GAAP and non-GAAP basis. After all, there are those who still say the market is cheap despite what is an earnings bloodbath around the globe.

  And indeed, even the unprecedented decline in earnings, non-GAAP 2015 EPS for the S&P500 are poised to print 118, which at an S&P of 1940 implies a P/E multiple of 16.5x. Hardly exorbitant.

  And then one looks at the actual, GAAP earnings. What one finds is absolutely shocking.

  If using I/B/E/S GAAP earnings, which exclude the barrage of pro-forma write offs, addbacks, “non-recurring items” and countless other “misleading numbers that can deceive investors”, what one gets is a true shocker: instead of 118 in LTM EPS for the S&P 500 (shown in red in the chart below) the true, Warren Buffett-approved number (shown in blue in the chart bellow) is a paltry 91.5! This is also the lowest S&P500 GAAP earnings per share since 2010.

  

  Needless to say, a GAAP P/E above 21 is the highest since the financial crisis.

  So what is going on here? The chart below showing the amount of EPS “writeoffs” and pro-forma adjustments should explain it. In 2015, 26.5 of the total non-GAAP in S&P earnings, is the result of accounting gimmicks.

  

   

  Just so there is no confusion: the GAAP to non-GAAP adjustment has nothing to do with the overall deterioration in corporate revenues and declining profitability. The two are parallel, because while both non-GAAP and GAAP EPS are clearly declining, what Wall Street is doing is using every possible contrivance to make the descent appear far less disastrous.

  Meanwhile, the addbacks to the S&P’s EPS are now the highest since the 2008 financial crisis, and in nominal dollar terms, are already an all time high. Consider that the market cap of the S&P is $17.7 trillion – this means that using the non-GAAP P/E of 16.5x one gets S&P 2015 earnings of $1.1 trillion, while real, actual earnings amount to just $830 billion. In other words, a record quarter of a trillion dollars in S&P “earnings” is in the form of pro-forma addbacks and other writeoffs which are only considered earnings in the most ridiculous of Wall Street worlds, one which even Warren Buffett is mocking. 

  This also means that 22.5% of the S&P “value” is the result of “misleading numbers that can deceive investors” in the words of Warren Buffett.

  Incidentally, the last time the difference between GAAP and non-GAAP was this vast, the financial system collapsed and had to be rebooted with trillions in taxpayer bailouts at which point GAAP and non-GAAP were roughly identical.

  So what does this all mean?

  Simple: if using GAAP earnings, and applying the market’s already generous 16.5x non-GAAP P/E, one gets a fair value of the S&P 500 of 1,500, or 25% lower than the recent prints in the S&P 500.

  Finally, keep in mind that all of this also excludes the reality that futures earnings, both GAAP and non-GAAP, in Q3 and Q4 are about to be reduced drastically lower, further reducing the E in P/E, and dragging the overall market lower.

  What can possibly short-circuit this positive feedback loop which leads to ever lower earnings, and increasingly lower prices? Two years ago we would have said another major central bank intervention or trillions in new Chinese loans. However, with both of these loopholes largely played out – China’s debt/GDP of 350% means that the entire nation is on the brink of a Minsky Moment collapse at any, well, moment, while recent central bank intervention have only led to even greater market volatility – this time around we don’t know what the true answer is. In fact, it just may be that this time around the market will actually have to crash, like it did in 2008 when the GAAP to non-GAAP spread was just as vast, for the great Wall Street “phony earnings” game to start from scratch.

  

  

  

  

  

• This Is Why So Many Political Pundits Seem To Love Hillary Clinton

  Submitted by Claire Bernish via TheAntiMedia.org,

  So-called political pundits are an ubiquitous sight on mainstream news, particularly during the run-up to a presidential campaign — but their ties to the candidates they analyze remain obfuscated, downplayed, or altogether left out by host networks.

  As The Intercept’s Lee Fang reported, “Several consultants who work at firms retained by Hillary Clinton’s campaign and her affiliated Super PACs appear regularly on the major television networks, frequently touting Clinton.”

  This cozy bedfellow relationship might not be an issue if the extent of their involvement with the candidates’ campaigns were forthrightly revealed by the networks. Instead, the failure by omission not only muddies the line between impartial analysis and campaign propaganda, it also marks a failure of journalistic integrity.

  “Journalism 101 teaches that reporters and TV news hosts must properly identify their sources and analysts,” Ithaca College associate professor of journalism, Jeff Cohen, told Fang. The Intercept’s requests for comment from NBC, CBS, CNN, and ABC News were not answered.

  Precision Strategies, co-founded by Stephanie Cutter, has been hired by Hillary Clinton’s campaign, which has paid the firm $120,049 since June 2015 to perform “digital consulting.” Cutter, meanwhile, made appearances on multiple networks without so much as a hint of her current association with Clinton’s campaign. Instead, she is often introduced as a former campaign official for President Obama. Such association with a campaign doesn’t exactly lend itself to unbiased opinion.

  “I think that Hillary Clinton has done everything right,” Cutter told NBC’s Meet the Press prior to the first presidential primaries on January 17. “She has run a good campaign. She has outperformed in debates. She’s raised money. She’s got a great ground game.”

  It stands to reason the viewing audience had no knowledge of Cutter’s firm’s affiliation with Clinton’s campaign — and her virtual unavoidable bias in such a proclamation. But had they been aware, perhaps viewers would have been better positioned to judge for themselves whether or not that statement rang true.

  As Fang noted, Cutter had previously appeared on Meet the Press, also without any indication by hosts of her association with the Clinton campaign — but also proffering similarly pro-Hillary statements. On ABC News’ This Week, Cutter appeared as a Clinton “supporter,” and on CNN, she was called a “Democratic strategist” — but those networks failed to divulge the direct involvement of Precision Strategies with Clinton’s campaign.

  Maria Cardona, who contributes to CNN, has long served as a partner with lobbying firm, the Dewey Square Group. Dewey Square partners have not only contributed and fundraised for the Clinton campaign, the firm has been paid for consulting work for Hillary’s Super PACs. Cardona, Fang noted, contributed the individual maximum to the Clinton campaign — and is a DNC superdelegate who “pledged support for Clinton last year, before any of the primary elections.”

  Again, Cardona is most often introduced or presents herself on CNN’s various networks as “a neutral Democratic strategist or CNN contributor,” and occasionally as a Clinton “supporter” — but not once, The Intercept found, as a direct campaign contributor or as a Dewey Square paid campaign consultant.

  Hari Sevugan and Lynda Tran are directly involved, through 270 Strategies, with Hillary Clinton’s campaign, as well. Tran co-founded 270 Strategies, whose website proudly boasts of its consulting advice to her campaign; and, as Fang explained, the firm was paid $75,200 by one of Hillary’s Super PACs — and $301,621 by a second. Sevugan and Tran make regular appearances on MSNBC and CBS News — without any divulgement about the nature of their affiliation with the Hillary camp, of course — where they often downplay Senator Bernie Sanders legitimate challenges to Clinton’s popularity.

  Do you still think the game isn’t rigged?

  After Fang’s requests for comment from both CBS and 270 Strategies went unanswered, Tran’s appearance on CBS News on Saturday came with an even more telling introduction than usual:

  “Before we start, we should disclose that several employees of 270 Strategies do some work for the Hillary Clinton campaign, however, Lynda, you do not.”

  

  

  

  

  

• Markets At Risk As "Tepid, Uninspiring" G20 Proves Investor Hopes Were "Pure Fantasy"

  Anyone hoping this week’s G-20 meeting would yield some manner of “Shanghai Accord” to revive sluggish global growth, pull the global economy out of the deflationary doldrums and calm jittery markets that have seen harrowing bouts of volatility in the first two months of the year are disappointed on Saturday.

  The joint communique issued by policymakers at the end of the two-day summit is bland and generic, with officials parroting vacuous promises to avoid competitive currency devaluations and maintain monetary policies aimed at supporting economic activity and price stability.

  Officials pledged to “consult closely” on FX markets, a reference presumably to China’s “surprise” August 11 deval and the PBoC’s move in December to adopt a trade weighted basket as a reference point for the RMB, a move that telegraphed lots of downside for the currency.

  The statement also “acknowledges” the fact that geopolitical risks abound and as Bloomberg noted this morning, “officials added a potential ‘Brexit’ to its long worry list in the communique.”

  “That’s a win for Chancellor of the Exchequer George Osborne, who had sought to rally international finance chiefs behind the campaign to keep Britain in the European Union,” Bloomberg goes on to point out.

  “Downside risks and vulnerabilities have risen,” due to volatile capital flows and slumping commodities but – and this was a critical passage – “monetary policy alone cannot lead to balanced growth.”

  What?! We thought counter-cyclical Keynesian tinkering was the magic elixir. A cure-all that smooths business cycles and creates demand out of thin air. Now you’re telling us it “can’t lead to balanced growth” and implicitly that Paul Krugman is a snake oil salesman? This can’t be.

  

  (Janet is not amused)

  “The global recovery continues, but it remains uneven and falls short of our ambition for strong, sustainable and balanced growth,” the statment continues, in a rather dour assessment of the economic landscape. “While recognising these challenges, we nevertheless judge that the magnitude of recent market volatility has not reflected the underlying fundamentals of the global economy,” officials added. 

  Right. If markets were “reflecting the underlying fundamentals” of this global deflationary trainwreck, things would probably be even more volatile. 

  Predictably, everyone called on fiscal policy to save the day, in what amounts to a tacit admission that central banks have failed. “Countries will use fiscal policy flexibly to strengthen growth, job creation and confidence, while enhancing resilience and ensuring debt as a share of GDP is on a sustainable path,” the statement reads.

  So countries will somehow adopt expansionary fiscal policies without resorting to deficit financing via debt sales. So, magic. Got it. 

  Long story short, there is no “Shanghai Accord” akin to the 1985 Plaza Accord between the United States, France, West Germany, Japan, and the United Kingdom, which agreed to weaken the USD to shore up America’s trade deficit and boost economic growth. All we have here is a generic statement and empty promises. 

  “Investor hopes of coordinated policy actions proved to be pure fantasy,” said TCW’s David Loevinger, a former China specialist at the U.S. Treasury. “It’s every country for themselves.”

  Yes it is which means the great yuan devaluation will continue unabated as will the competitive easing. 

  This isn’t a good thing for markets. As Citi’s Steve Englander wrote yesterday, “they won’t save the world but probably convince investors that global policymakers are sufficiently on the same page to add to global confidence.” 

  Well guess what? They didn’t. We close with the likely read through for markets from Citi’s Brent Donnelly:

  The G20 draft communiqué looks like it is out and it seems pretty tepid / uninspiring. So the relevant question now is whether or not this 160-handle rally in SPX (!) is partially attributable to shorts squaring up ahead of the G20 meeting. I would say the rally in the past two days has had extra momentum because of G20 and now shorts should be looking to reestablish—so I think stocks should trade weak from here into Monday.

  

  

  

  

  

• Citi Can't Believe How "Attractive" This Trade Is

  Three days ago in “Canary, Meet Coal Mine: These Are The Tranches Where The CLO 2.0 Meltdown Begins,” we revealed precisely where the rot is starting to show in the CLO market which, you’re reminded, is starting to unravel amid a string of downgrades in HY energy and a general aversion to junk as the US heads into a default cycle.

  Certain buckets have been hit harder than others with the single-Bs plunging nearly 21% and the BBs dropping 9.2%. Broadly speaking, new issue spreads for BBs and Bs have blown out by 225 bps and 350 bps, respectively over the past 12 months and both S&P and Moody’s recently announced their first downgrades of post-crisis US CLO tranches.

  In the crosshairs are deals from Silvermine that have double-digit exposure to US O&G.

  As we noted on Thursday, there are other factors pressuring the market including the 5% risk retention rule, which requires managers to retain a stake in the first-loss tranche. That could be a game changer for managers without extremely deep pockets and could well weigh further on supply, which is already collapsing.

  Of course if you think you’ve got a nose for picking credits there may be an opportunity for you in the equity tranche, Morgan Stanley thinks. “We reiterate our view that the levels of distress in the US market may create ‘option-like’ payoffs in CLO equity in the secondary market, especially in deals by managers who are better ‘credit pickers,’” the bank wrote.

  Well now, Citi is out with a fresh look at the space and apparently, they too think there may be some opportunities amid the turmoil. There are some useful observations in Citi’s note about forced Mezz selling amid margin calls in 2.0 BBs and we’ll profile that later this evening, but for now consider the following screengrab from the title of Citi’s new note and the excerpt from a Retuers piece out last month.

  

  From Reuters: “Citigroup retained its market-leading position at the top of the US Collateralized Loan Obligation (CLO) arranger league table in 2015 for volume and deal count.”

  In case the implication there isn’t clear enough, allow us to spell it out. First, have a look at CLO 2.0 mezz performance:

  

  Clearly, that’s the absolute last place you want to be right now and yet the biggest CLO arranger on Wall Street is apparently suggesting that these tranches are so enticing, that the bank’s structured credit team is having a hard time coming to terms with the fact that they are about to get “even more attractive.”

  Trading accordingly.

  

  

  

  

  

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• The Quagmire To End All Quagmires

  Submitted by StraightLineLogic.com's Robert Gore via The Burning Platform blog,

  There are few good reasons to go to war, but the US faces the danger of being dragged into World War III for the worst of reasons. It will be fighting in a region in which it has no overriding interest, picking a side in a sectarian battle far older than the US, and allied with Machiavellian, despotic regimes who have no regard for its interests. Even proponents of the war cannot specify what a “victory” would look like. They nourish a vague hope that the two primary antagonists will somehow be vanquished and a government cut to the specifications of the US will be imposed by force and magically accepted by its subjects. Such a miracle would require a huge military commitment, trillions of dollars, and years, if not decades, of sustained effort. That miracle would require another miracle: after the last fifteen years of counterproductive and costly warfare in the Middle East, US politicians and the public nevertheless supporting the engagement for its lengthy duration.

  Syria is a witches’ brew of conflicting internal and external forces. The US has been at odds with its leadership since Hafez al-Assad, father of the current leader, Bashar al-Assad, seized power in 1970. He aligned Syria with the Soviet Union and launched a war against Israel in 1973. He was a standard issue Middle Eastern autocrat in the Saddam Hussein, Muammar Gaddafi mold and his son has followed in his footsteps. The Assads’ Alawite Shiite Muslim sect, though a minority amidst a Sunni majority, controls the government and the leadership has fingers in all the worthwhile commercial and industrial pies. It has been religiously tolerant and politically intolerant.

  The Obama administration saw an opportunity to change the Syrian regime under cover of the Arab Spring movement in 2011. Initially peaceful demonstrations against Bashar al-Assad soon turned violent as the government cracked down on demonstrators. Within a year, the military attacked resistance strongholds and Syria was engulfed in civil war. The main opposition came from an alliance of Sunni groups, mostly al Qaeda and its offshoots, including ISIS. The Obama administration pursued a confused policy that it advertised as aiding moderate Syrian rebels, who were supposedly opposed to both the Assad government and Islamic extremist groups. In truth, most of the ostensible moderates had ties to the latter. The few that didn’t either joined the extremists when confronted or fled, leaving their US-supplied weaponry and provisions behind.

  None of this is news to either Obama or Congress. Nor is it a state secret that the Sunni extremists have received funding, supplies, and other aid from Sunni states—and US allies—Saudi Arabia, the Gulf States, and Turkey (See “With Friends Like These…” and “Who Needs Enemies?“). The US government wants to install a compliant regime in Syria, just as it wanted to install such regimes in Afghanistan, Iran, Iraq, Yemen, and Libya. Those efforts failed, stifled by the Sunni-Shiite schism, guerrilla warfare and terrorism, blowback, Middle Eastern intrigue, and the US government’s ignorance, hypocrisy, and duplicity. Although it has done virtually nothing to stop ISIS, it still pretends that its main goal in Syria is the eradication of Islamic extremism rather than Bashar Assad’s government.

  With his move into Syria and a remarkable speech at the United Nations, Vladimir Putin revealed the US government’s mendacity for all to see, except for the US public, where the mainstream media coverage ignored his speech in favor of the usual government propaganda. (Some questions were asked about the efficacy of US efforts to defeat ISIS after the San Bernardino shootings last December, but they quickly faded.) At the invitation of Assad, Russia joined with the Shiites—the Syrian government, Iraq, Iran, and Hezbollah—and Syrian and Iraqi Kurds. The Assad alliance treats all those opposed to Assad as terrorist enemies. The tide has turned and the alliance has regained territory. It is on the verge of recapturing Aleppo, Syria’s second largest city.

  Turkey, Saudi Arabia, and the Gulf States are alarmed that the Islamic extremists they have funded and supported, and the US and its Western allies, have failed to depose Assad. If the Assad alliance cuts the rebels’ supply line from Turkey and takes Aleppo, it will not only solidify Assad’s hold on western Syria, but also solidify the influence of archenemy Shiite Iran in Iraq, Syria, and Lebanon. It is a make or break moment for the rebellion. The Sunni nations, especially NATO member Turkey, would dearly love to have their fight become Europe and the United States’ fight, too. If they can ensnare the Western nations, then Syria inevitably becomes the launchpad for World War III.

  This next world war’s Archduke Ferdinand moment may come if Saudi Arabia, currently hosting a military exercise in its northern region called “Northern Thunder” involving at least 12 other nations, 350,000 soldiers, 20,000 tanks, 2,450 warplanes and 460 helicopters, leads that force into western Iraq en route to Syria. Or the trigger may come if Turkey, either in conjunction with Saudi Arabia or on its own, invades Syria from the north. With 600,000 troops, Turkey’s has the second largest armed forces in NATO. In addition to its loathing of the Shiites and Iran, Turkey fears Kurd nationalism. The Kurds, who have been the most effective fighting force against ISIS in both Iraq and Syria, have long desired their own state. Kurdish separatists are also a vociferous presence in Turkey. The US government has embraced the Kurds in Iraq and Syria, but like the Turkish government, labels the Turkish Kurds as terrorists. Turkey would probably concentrate on subduing the Kurds before it went after Assad.

  The US public is blissfully unaware either that the world is a hair’s breadth away from World War III or that their government has had an outsize role in creating that risk. The US may be dragged in by Turkey’s president Recep Tayyip Erdo?an, a corrupt, megalomaniac autocrat, or the corrupt, repressive House of Saud. The US will be in direct conflict with Russia and Iran, and lurking in the background, perhaps China. Neither the US’s so-called friends nor its foes care one whit about the best interests of the US and will in fact work against them. The blowback created will dwarf current levels of terrorism and refugee flows. The US’s degeneration into a police state will gain new momentum. Other than its deluded wish that both Assad and the Islamic extremists somehow disappear, the US government will have no clear idea of what would constitute victory, and consequently, no ability to attain it. And this war could go nuclear.

  It will be the quagmire to end all quagmires, supported by the same coalition of mental and moral midgets who have backed every disastrous US military foray since Afghanistan. It’s questionable how long the US will retain the support of Europe. Its refugee flood will turn into a deluge as the war spreads from Syria outward to the rest of the Middle East, central Asia, northern Africa, and quite possibly to Europe itself. Nor is it a sure thing that financial markets will fund this war at today’s rock-bottom interest rates. The conflict will add more trillions to the US government’s current $19 trillion debt, and with a depression looming, the government’s ability to pay will be called into question. There would be no political support for a another protracted, expensive, and bloody military commitment in the Middle East if the American people were explicitly told that just such a commitment is under consideration, especially if they were also told that it could lead to World War III. A populace fooled into war is unlikely to back it for any length of time.

  In Syria, the US will either fold or go all in. On past form, it will choose the latter and rue it ever after. Few Americans, inside or outside the government, realize either that those are the choices or that the stakes are so high. Sadly, such realizations may come only when their sons and daughters are drafted, or as the image of a mushroom cloud fills the screens of their mobile devices.

  

  

  

  

  

• Why A Hedge Fund Manager Who Made A Killing From Subprime Is Buying Bitcoin

  Long before “The Big Short’s” Michael Burry was a household name for his insight into the upcoming subprime crisis of 2006-2007, there were many others among them John Paulson, Kyle Bass, and Corriente Advisors’ Mark Hart. Just like Bass, Mark is another Texas-based hedge fund manager who correctly predicted, and profited from, the subprime crisis. He is also an expert on China, and in fact, just last month in the aftermath of the recent Chinese devaluation which roiled markets, he said that “China should weaken its currency by more than 50 percent this year.”

  In fact, it was Hart who (alongside ex-PBOC advisor Yi Yongding) first proposed the idea of the one-off devaluation that promptly afterwards become the conventional expectation for this weekend’s G-20 summit in Shangai. To wit:

  Hart believes that the Chinese crawling devaluation is an error as it carries with its the latent threat of much more devaluation in the future, thus encouraging even more outflows, which in turn forces China to sell even more reserves, which destabilizes the economy even further, forcing even more devaluation and so on.

   

  Instead, a one-off devaluation would allow policy makers to “draw a line in the sand” at a more appropriate level for the yuan, easing pressure on China’s foreign-exchange reserves and removing an incentive for capital outflows, according to Hart, who’s been betting against the currency since at least 2011. He adds that China should devalue before its $3.3 trillion hoard of reserves shrinks much further, he said, because the country can still convince markets it’s acting from a position of strength.

  According to Hart, while a devaluation this year would be “jarring” and may initially accelerate capital outflows, it would ultimately put China in a stronger position. He said the country could explain the move by saying it would put the yuan at a level more reflective of market forces and allow the currency to catch up with declines in international peers.

  As we said one month ago, “Hart is correct, and China will have to pick one option: either a sharp devaluation, or failing that, debt defaults: the current course of gradual CNY debasement will only results in an acceleration in capital outflows until ultimately China’s $3 trillion rainy day fund is whittled away to nothing (and as a reminder, according to some estimate just a little over $1 trillion in it is actually liquid assets).”

  And while we explained that Hart’s “devaluation” trade consists of buying Yuan puts, according to a recent interview he gave to Raoul Pal RealVision, he has also put another trade on alongside his FX deval: buying bitcoin.

  Why bitcoin?

  The same reason we gave back on September 2, 2015 when Bitcoin was trading at $215 in a post titled “China Scrambles To Enforce Capital Controls (Which Is Great News For Bitcoin)” and long before the topic of China’s capital controls, and their circumvention, became a routine topic of conversation. As we explained simply, with Chinese capital controls increasingly more strict, the local population, which was nearly $25 trillion in deposits in local banks, will rush to transfer these massive amount of savings offshore, and will end up using bitcoin to do it. This is specifically what we said:

  … while China is doing everything in its power to not give the impression that it is panicking, the truth is that it is one viral capital outflow report away from an outright scramble to enforce the most draconian capital controls in its history, which – as every Cypriot and Greek knows by now – is a self-defeating exercise and assures an ever accelerating decline in the currency, which authorities are trying to both keep stable while also devaluing at a pace of their choosing. Said pace never quite works out.

   

  So what happens then: well, China’s propensity for gold is well-known. We would not be surprised to see a surge of gold imports into China, only instead of going to the traditional Commodity Financing Deals we have written extensively about before, where gold is merely a commodity used to fund domestic carry trades, it ends up in domestic households. However, while gold has historically been the best store of value in history and has outlasted every currency known to man, it is problematic when it comes to transferring funds in and out of a nation – it tends to show up quite distinctly on X-rays.

   

  Which is why we would not be surprised to see another push higher in the value of bitcoin: it was earlier this summer when the digital currency, which can bypass capital controls and national borders with the click of a button, surged on Grexit concerns and fears a Drachma return would crush the savings of an entire nation. Since then, BTC has dropped (in no small part as a result of the previously documented “forking” with Bitcoin XT), however if a few hundred million Chinese decide that the time has come to use bitcoin as the capital controls bypassing currency of choice, and decide to invest even a tiny fraction of the $22 trillion in Chinese deposits in bitcoin (whose total market cap at last check was just over $3 billion), sit back and watch as we witness the second coming of the bitcoin bubble, one which could make the previous all time highs in the digital currency, seems like a low print.

   

  Yes, bitcoin may be slowly but surely leaving the domain of the libertarian fringe, but in exchange it is about to be embraced as the most lucrative and commercial “blockchained” way to capitalize on what may soon become the largest capital outflow in history…

  Two months later the value of bitcoin rose by more than 100%, but what was delightfully amusing to us was attempts by the self-appointed guardians of monetary wisdom to explain the move not as one of Chinese capital flight but because of some tiny, alleged Chinese Ponzi scheme. Apparently in the mainstream media if one can’t predict what happens, one tries to explain why something happened… and gets that wrong too. Because if bitcoin’s surge was only due to some two-bit Russian scammer exposed four months ago, it would be back at $215 if not lower, instead of trading at $432 as of this moment. 

  What really happened is what we said happened, and here is Mark Hart confirming precisely that. Here is the excerpt from an interview he gave to Raoul Pal’s RealVision:

  Bitcoin is interesting to me as a route for capital flight. I am not opining on the long-term viability of bitcoin – I do think there is something there – but I am long bitcoin specifically to capture capital flight from China.

  Sounds quite identical to what said 6 months ago. Full clip below:

   

  But this is where it gets really interesting: if one wants to bet on a massive Chinese devaluation (which is coming, the only question is when) one can simply short the Yuan as so many hedge funds have done in the past 2 months only to find that by “fighting the PBOC” they are gambling not only with their AUM, but their professional careers due to not only the unlimited downside of their trades, but to the substantial leverage involved in such FX trades.

  Furthermore, relentless interventions by a belligerent Chinese central bank in recent weeks have shown that even as the Yuan will ultimately devalue, and dramatically at that, the PBOC will do everything in its power to crush the “hated” speculators, among whom such brand names as George Soros, along the way by inspiring sudden, violent and massive surges in the currency, in the vein of the Bank of Japan circa 2011.

  So what is one trade that can be put on to bet on further Chinese devaluation (or outright economic collapse) with limited downside, with unlimited upside, and one which is guaranteed to be profitable if and when the local Chinese depositor herd gets out of Yuan en masse after the next 10%, 20%, 50% or more devaluation and rushes into bitcoin? Simple: do precisely what we said in September, and precisely what Corriente’s Mark Hart is saying now: buy bitcoin, because once the Chinese buying frenzy is unleashed, and $25 trillion in deposits scramble to be packed into a product with a $6.5 billion current market cap (but only when the price of a bitcoin is $430; the market cap does rise to $25 trillion if every bitcoin is worth $1.6 million) one thing will happen: the price of bitcoin will soar exponentially.

  

  

  

  

  

• Caught On Tape: U.S. Test Fires Nuclear ICBM, Warns "We Are Prepared To Use Nuclear Weapons"

  Less than two years ago, news of Russia test-firing an ICBM just as the east Ukraine civil war was heating up, was sufficient to send the stock market into a brief tailspin. Since then, the launches of nuclear-tipped intercontinental ballistic missiles has become an almost daily occurrence, with the market hardly batting an eyelid.

  In fact, it happened just last night at 11:01pm PST at Vandenberg Air Force Base in California, where – for the second time this week – the US test-fired its second intercontinental ballistic missile in the past seven days, seeking to demonstrate its nuclear arms capacity at a time of rising strategic tensions with Russia, North Korea, China and the middle east.

  The unarmed Minuteman III missile roared out of a silo at Vandenberg Air Force Base in California late at night, raced across the sky at speeds of up to 15,000 mph (24,000 kph) and landed a half hour later in a target area 4,200 miles (6,500 km) away near Kwajalein Atoll in the Marshall Islands of the South Pacific.

  The entire launch was caught on the following video, which was released by Vandenberg just 4 days after the previous ICBM launch.

   

  What was more disturbing than the actual launch, however, was the rhetoric behind it: instead of passing it off as another routine test, and letting US “adversaries” make up their own mind about what is going on, Deputy Defense Secretary Robert Work, who witnessed the launch, said the U.S. tests, conducted at least 15 times since January 2011, send a message to strategic rivals like Russia, China and North Korea that Washington has an effective nuclear arsenal. “That’s exactly why we do this,” Work told reporters before the launch.

  Of course, the #1 unspoken rule when launching ICBMs is to never explicitly say why you are doing it. By breaking said rule, it marks a much greater escalation in international diplomacy than merely test firing the nuclear-capable ballistic missile.

  That, however, was not an issue and Work piled on, with the following stunner

  “We and the Russians and the Chinese routinely do test shots to prove that the operational missiles that we have are reliable. And that is a signal … that we are prepared to use nuclear weapons in defense of our country if necessary.“

  Well that’s good to know.

  As Reuters adds, demonstrating the reliability of the nuclear force has taken on additional importance recently because the U.S. arsenal is near the end of its useful life and a spate of scandals in the nuclear force two years ago raised readiness questions.

  The Defense Department has poured millions of dollars into improving conditions for troops responsible for staffing and maintaining the nuclear systems. The administration also is putting more focus on upgrading the weapons.

   

  President Barack Obama’s final defense budget unveiled this month calls for a $1.8 billion hike in nuclear arms spending to overhaul the country’s aging nuclear bombers, missiles, submarines and other systems.

  That said, the irony of the Nobel Peace Prize winner re-escalating the arms race was not lost on Reuters: the nuclear spending boost is an ironic turn for a president who made reducing U.S. dependence on atomic weapons a centerpiece of his agenda during his first years in office.

  Obama called for a world eventually free of nuclear arms in a speech in Prague and later reached a new strategic weapons treaty with Russia. He received the Nobel Peace Prize in part based on his stance on reducing atomic arms.  “He was going to de-emphasize the role of nuclear weapons in U.S. national security policy … but in fact in the last few years he has emphasized new spending,” said John Isaacs of the Council for a Livable World, an arms control advocacy group.

  Perhaps the Nobel committee should watch the video above and decide if it is not too late to ask for their prize back.

  And just like that the nuclear arms race is back.

  Critics say the Pentagon’s plans are unaffordable and unnecessary because it intends to build a force capable of deploying the 1,550 warheads permitted under the New START treaty… Hans Kristensen, an analyst at the Federation of American Scientists, said the Pentagon’s costly “all-of-the-above” effort to rebuild all its nuclear systems was a “train wreck that everybody can see is coming.” Kingston Reif of the Arms Control Association, said the plans were “divorced from reality.”

   

  The Pentagon could save billions by building a more modest force that would delay the new long-range bomber, cancel the new air launched cruise missile and construct fewer ballistic submarines, arms control advocates said.

   

  Work said the Pentagon understood the financial problem. The department would need $18 billion a year between 2021 and 2035 for its portion of the nuclear modernization, which is coming at the same time as a huge “bow wave” of spending on conventional ships and aircraft, he said.

   

  “If it becomes clear that it’s too expensive, then it’s going to be up to our national leaders to debate” the issue, Work said, something that could take place during the next administration when spending pressures can no longer be ignored.

  As a reminder, the last time the U.S. engaged in a nuclear arms race with the USSR, it led to the collapse of the “evil empire.” It would be even more ironic that Obama launching nuclear rockets if this time around the tables on the ultimate loser are turned.

  In the meantime, just think of all the GDP-boosting “broken windows” that would result from a nuclear war.

  

  

  

  

• "Democracy Is Overrated" Doug Casey's Top 5 Reasons Not To Vote

  Submitted by Doug Casey via InternationalMan.com,

  Democracy is vastly overrated.

  It's not like the consensus of a bunch of friends agreeing to see the same movie. Most often, it boils down to a kinder and gentler variety of mob rule, dressed in a coat and tie. The essence of positive values like personal liberty, wealth, opportunity, fraternity, and equality lies not in democracy, but in free minds and free markets where government becomes trivial. Democracy focuses people's thoughts on politics, not production; on the collective, not on their own lives.

  Although democracy is just one way to structure a state, the concept has reached cult status; unassailable as political dogma. It is, as economist Joseph Schumpeter observed, "a surrogate faith for intellectuals deprived of religion." Most of the founders of America were more concerned with liberty than democracy. Tocqueville saw democracy and liberty as almost polar opposites.

  Democracy can work when everyone concerned knows one another, shares the same values and goals, and abhors any form of coercion. It is the natural way of accomplishing things among small groups.

  But once belief in democracy becomes a political ideology, it's necessarily transformed into majority rule. And, at that point, the majority (or even a plurality, a minority, or an individual) can enforce their will on everyone else by claiming to represent the will of the people.

  The only form of democracy that suits a free society is economic democracy in the laissez-faire form, where each person votes with his money for what he wants in the marketplace. Only then can every individual obtain what he wants without compromising the interests of any other person. That's the polar opposite of the "economic democracy" of socialist pundits who have twisted the term to mean the political allocation of wealth.

  But many terms in politics wind up with inverted meanings. "Liberal" is certainly one of them.

  The Spectrum of Politics

  The terms liberal (left) and conservative (right) define the conventional political spectrum; the terms are floating abstractions with meanings that change with every politician.

  In the 19th century, a liberal was someone who believed in free speech, social mobility, limited government, and strict property rights. The term has since been appropriated by those who, although sometimes still believing in limited free speech, always support strong government and weak property rights, and who see everyone as a member of a class or group.

  Conservatives have always tended to believe in strong government and nation­alism. Bismarck and Metternich were archetypes. Today's conservatives are some­times seen as defenders of economic liberty and free markets, although that is mostly true only when those concepts are perceived to coincide with the interests of big business and economic nationalism.

  Bracketing political beliefs on an illogical scale, running only from left to right, results in constrained thinking. It is as if science were still attempting to define the elements with air, earth, water, and fire.

  Politics is the theory and practice of government. It concerns itself with how force should be applied in controlling people, which is to say, in restricting their freedom. It should be analyzed on that basis. Since freedom is indivisible, it makes little sense to compartmentalize it; but there are two basic types of freedom: social and economic.

  According to the current usage, liberals tend to allow social freedom, but restrict economic freedom, while conservatives tend to restrict social freedom and allow economic freedom. An authoritarian (they now sometimes class them­selves as "middle-of-the-roaders") is one who believes both types of freedom should be restricted.

  But what do you call someone who believes in both types of freedom? Unfortunately, something without a name may get overlooked or, if the name is only known to a few, it may be ignored as unimportant. That may explain why so few people know they are libertarians.

  A useful chart of the political spectrum would look like this:

  

  A libertarian believes that individuals have a right to do anything that doesn't impinge on the common-law rights of others, namely force or fraud. Libertarians are the human equivalent of the Gamma rat, which bears a little explanation.

  Some years ago, scientists experimenting with rats categorized the vast major­ity of their subjects as Beta rats. These are basically followers who get the Alpha rats' leftovers. The Alpha rats establish territories, claim the choicest mates, and generally lord it over the Betas. This pretty well-corresponded with the way the researchers thought the world worked.

  But they were surprised to find a third type of rat as well: the Gamma. This creature staked out a territory and chose the pick of the litter for a mate, like the Alpha, but didn't attempt to dominate the Betas. A go-along-get-along rat. A libertarian rat, if you will.

  My guess, mixed with a dollop of hope, is that as society becomes more repressive, more Gamma people will tune in to the problem and drop out as a solution. No, they won't turn into middle-aged hippies practicing basket weaving and bead stringing in remote communes. Rather, they will structure their lives so that the government—which is to say taxes, regulations, and inflation—is a non-factor. Suppose they gave a war and nobody came? Suppose they gave an election and nobody voted, gave a tax and nobody paid, or imposed a regulation and nobody obeyed it?

  Libertarian beliefs have a strong following among Americans, but the Liber­tarian Party has never gained much prominence, possibly because the type of people who might support it have better things to do with their time than vote. And if they believe in voting, they tend to feel they are "wasting" their vote on someone who can't win. But voting is itself another part of the problem.

  None of the Above

  Until 1992, when many decided not to run, at least 98% of incumbents typically retained office. That is a higher proportion than in the Su­preme Soviet of the defunct USSR, and a lower turnover rate than in Britain's hereditary House of Lords where people lose their seats only by dying.

  The political system in the United States has, like all systems which grow old and large, become moribund and corrupt.

  The conventional wisdom holds a decline in voter turnout is a sign of apathy. But it may also be a sign of a renaissance in personal responsibility. It could be people saying, "I won't be fooled again, and I won't lend power to them."

  Politics has always been a way of redistributing wealth from those who produce to those who are politically favored. As H.L. Mencken observed, every election amounts to no more than an advance auction on stolen goods, a process few would support if they saw its true nature.

  Protesters in the 1960s had their flaws, but they were quite correct when they said, "If you're not part of the solution, you're part of the problem." If politics is the problem, what is the solution? I have an answer that may appeal to you.

  The first step in solving the problem is to stop actively encouraging it.

  Many Americans have intuitively recognized that government is the problem and have stopped voting. There are at least five reasons many people do not vote:

  1. Voting in a political election is unethical. The political process is one of institutionalized coercion and force. If you disapprove of those things, then you shouldn't participate in them, even indirectly.

  1. Voting compromises your privacy. It gets your name in another government computer database.

  1. Voting, as well as registering, entails hanging around government offices and dealing with petty bureaucrats. Most people can find something more enjoyable or productive to do with their time.

  1. Voting encourages politicians. A vote against one candidate—a major, and quite understandable, reason why many people vote—is always interpreted as a vote for his opponent. And even though you may be voting for the lesser of two evils, the lesser of two evils is still evil. It amounts to giving the candidate a tacit mandate to impose his will on society.

  1. Your vote doesn't count. Politicians like to say it counts because it is to their advantage to get everyone into a busybody mode. But, statistically, one vote in scores of millions makes no more difference than a single grain of sand on a beach. That's entirely apart from the fact that officials manifestly do what they want, not what you want, once they are in office.

  Some of these thoughts may impress you as vaguely "unpatriotic"; that is certainly not my intention. But, unfortunately, America isn't the place it once was, either. The United States has evolved from the land of the free and the home of the brave to something more closely resembling the land of entitlements and the home of whining lawsuit filers.

  The founding ideas of the country, which were highly libertarian, have been thoroughly distorted. What passes for tradition today is something against which the Founding Fathers would have led a second revolution.

  This sorry, scary state of affairs is one reason some people emphasize the importance of joining the process, "working within the system" and "making your voice heard," to ensure that "the bad guys" don't get in. They seem to think that increasing the number of voters will improve the quality of their choices.

  This argument compels many sincere people, who otherwise wouldn't dream of coercing their neighbors, to take part in the political process. But it only feeds power to people in politics and government, validating their existence and making them more powerful in the process.

  Of course, everybody involved gets something out of it, psychologically if not monetarily. Politics gives people a sense of belonging to something bigger than themselves and so has special appeal for those who cannot find satisfaction within themselves.

  We cluck in amazement at the enthusiasm shown at Hitler's giant rallies but figure what goes on here, today, is different. Well, it's never quite the same. But the mindless sloganeering, the cult of the personality, and a certainty of the masses that "their" candidate will kiss their personal lives and make them better are identical.

  And even if the favored candidate doesn't help them, then at least he'll keep others from getting too much. Politics is the institutionalization of envy, a vice which proclaims "You've got something I want, and if I can't get one, I'll take yours. And if I can't have yours, I'll destroy it so you can't have it either." Participating in politics is an act of ethical bankruptcy.

  The key to getting "rubes" (i.e., voters) to vote and "marks" (i.e., contribu­tors) to give is to talk in generalities while sounding specific and looking sincere and thoughtful, yet decisive. Vapid, venal party hacks can be shaped, like Silly Putty, into salable candidates. People like to kid themselves that they are voting for either "the man" or "the ideas." But few "ideas" are more than slogans artfully packaged to push the right buttons. Voting for "the man" doesn't help much either since these guys are more diligently programmed, posed, and rehearsed than any actor.

  This is probably more true today than it's ever been since elections are now won on television, and television is not a forum for expressing complex ideas and philosophies. It lends itself to slogans and glib people who look and talk like game show hosts. People with really "new ideas" wouldn't dream of introducing them to politics because they know ideas can't be explained in 60 seconds.

  I'm not intimating, incidentally, that people disinvolve themselves from their communities, social groups, or other voluntary organizations; just the opposite since those relationships are the lifeblood of society. But the political process, or government, is not synonymous with society or even complementary to it. Government is a dead hand on society.

  

  

  

  

  

• Hypocrisy Defined: Hank Paulson Tells China "Let Failing Companies Fail"

  "Do as I say, not as I do" is the clear message of hypocrisy spewed forth by former US Treasury Secretary Henry Paulson this week. Having presided over the largest redistriubution of taxpayer funds to bailout the banking system, while exclaiming fire and brimstone should they not be saved, he now has some advice for an over-levered, over-capacity, systemically-stymied China – "let failing companies fail."

  Some other Paulson comments:

  "As Americans, we shouldn't like bailouts. Where I come from, if someone takes a risk and they're going to make the profit from that risk, they shouldn't have the taxpayer pay for the losses."

   

  "If the financial system collapses, it's really, really hard to put it back together again."

   

  "What I've said repeatedly is, 'I think the auto industry is a very important industry.'"

  But for China – screw them all…

  "They can show right now they're very serious about dealing with inefficient state-owned enterprises as they take capacity out of the steel industry, coal industry and others by letting some failing companies fail," Paulson told CNBC's Squawk Box on the sidelines of an Institute of International Finance event organized in conjunction with the G20 meeting in Shanghai.

   

  Of course this is exactly what China 'should' do – just as America 'should' have faced up to its own malinvestment boom, dealt with the bust, and moved on to renewed growth. But that would have meant the elites lost, and that can never happen.

  Just remember, risking US taxpayer money to fill a bottomless pit of bank balance sheets was "for your own good."

  

  

  

  

  

• How The Seeds Of Revolution Take Root

  Submitted by Charles Hugh-Smith via PeakProsperity.com,

  That the dramatic upheavals of war, pestilence and environmental collapse can trigger social disorder and revolution is well-established. Indeed, this dynamic can be viewed as the standard model of social disorder/revolution: a large-scale crisis—often a bolt-from-the-blue externality—upends the status quo.

  Another model identifies warring elites and imperial meddling as a source of revolution: a new elite forcibly replaces the current elite (known colloquially as meet the new boss, same as the old boss) or a dominant nation-state/empire arranges a political coup to replace the current leadership with a more compliant elite.

  A third model was described by David Hackett Fischer in The Great Wave: Price Revolutions and the Rhythm of History. By assembling price and wage data stretching back hundreds of years, Fischer found that cycles of economic growth spawn population growth, resulting in more workers entering the market economy. Their earnings trigger a demand-driven expansion of essential commodities such as grain and energy (wood, coal, oil, etc.).

  In the initial phase, wages rise and commodity prices remain stable as supplies of essential goods expand and the demand for labor pushes up wages.

  But this virtuous cycle reverses when the supply of essentials no longer keeps pace with rising population and demand: the price of essentials begin an inexorable rise even as an oversupply of labor drives down wages.

  Fisher found that this wage/price cycle often ends in transformational social upheaval.

  While proponents of these models have a wealth of historical examples to draw upon, these models miss a key factor:  the vulnerability or resilience of the nation-state facing crises.

  Some nations survive invasions, environmental catastrophes, epidemics and inflation without disintegrating into disorder. Something about these nation’s social/ economic /political order makes them more resilient than other nations.

  So rather than accept the proximate causes of disorder as the sole factors, we should look deeper into the social order for the factors behind a nation’s relative fragility or resilience.

  The Decline Of Shared Purpose

  Historian Peter Turchin defined a key factor in the resilience of the social order as "the degree of solidarity felt between the commons and aristocracy," that is, the sense of purpose and identity shared by the aristocracy and commoners alike.

  As Turchin explains in War and Peace and War: The Rise and Fall of Empires:

  "Unlike the selfish elites of the later periods, the aristocracy of the early Republic did not spare its blood or treasure in the service of the common interest. When 50,000 Romans, a staggering one fifth of Rome’s total manpower, perished in the battle of Cannae, the senate lost almost one third of its membership. This suggests that the senatorial aristocracy was more likely to be killed in wars than the average citizen…

   

  The wealthy classes were also the first to volunteer extra taxes when they were needed… A graduated scale was used in which the senators paid the most, followed by the knights, and then other citizens. In addition, officers and centurions (but not common soldiers!) served without pay, saving the state 20 percent of the legion’s payroll…

   

  The richest 1 percent of the Romans during the early Republic was only 10 to 20 times as wealthy as an average Roman citizen.

  Roman historians of the later age stressed the modest way of life, even poverty of the leading citizens. For example, when Cincinnatus was summoned to be dictator, while working at the plow, he reportedly exclaimed, 'My land will not be sown this year and so we shall run the risk of not having enough to eat!'"

  Once the aristocracy’s ethic of public unity and service was replaced by personal greed and pursuit of self-interest, the empire lost its social resilience.

  Turchin also identified rising wealth inequality as a factor in weakening social solidarity. By the end-days of the Western Roman Empire, elites held not 10 times as much wealth commoners but 10,000 times as much as average citizens.

  Wealth inequality is both a cause and a symptom: it is a cause of weakening social resilience, but it also symptomatic of a system that enables the concentration of wealth and power in the hands of the few at the expense of the many.

  Diminishing Returns On Complexity & Expansion

  Thomas Homer-Dixon’s excellent book The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization  outlines two systemic sources of increasing fragility: diminishing returns on complexity and the rising costs of continuing strategies that worked well in the past but no longer yield positive results.

  Successful economies generate surpluses that are skimmed by various elites to support new layers of complexity: temple priests, state bureaucracies, standing armies, etc.

  All this complexity adds cost but beyond the initial positive impact of rationalizing production, it reduces productivity by draining potentially productive investments from the economy.

  Building temple complexes and vast palaces for the aristocracy appears affordable in the initial surge of productivity, but as investment in productivity declines and the population of state dependents expands, surpluses shrink while costs rise.

  Meanwhile, strategies that boosted yields in the beginning also suffer diminishing returns. Conquering nearby lands and extracting their wealth paid off handsomely at first, but as the distance to newly conquered territories lengthen, the payoff declines: supplying distant armies to maintain control over distant lands costs more, while the yield on marginal new conquests drops.

  Expanding land under production was easy in the river valley, but once water has to be carried up hillsides, the net yield plummets.

  What worked well at first no longer works well, but those in charge are wedded to the existing system; why change what has worked so brilliantly?

  As the costs of complexity and state dependents rise, productive people grow tired of supporting an economy suffering from terminal diminishing returns.

  Empires do not just suddenly collapse; they are abandoned by the productive citizenry as the burdens become unbearable. The independent class of tradespeople (a.k.a. the middle class), driven into serfdom by taxes, lose their shared identity with the aristocracy. Beneath the surface, social cohesion frays. Once the benefits of the status quo no longer outweigh its costs, the system is vulnerable to an external disruption that would have been easily handled in previous eras.

  The Suppression Of Social Mobility

  There is another key factor in the resilience or fragility of social order: the permeability of the barrier between the ruling class and everyone below. We call this permeability social mobility: how easy is it for a working class family to rise up to the middle class, and how easy is it for a middle class family to enter the political and financial aristocracy?

  I recently read Venice: A New History, a fascinating account of Venice's rise to regional empire and its decline to tourist destination.

  What struck me most powerfully was Venice's long success as a republic: it was the world's only republic for roughly 1,000 years.

  How did the Venetians manage this?  Their system of participatory democracy accreted over time, and was by no means perfect; only men of substance had much of a say. But strikingly, key political turning points were often triggered by mass gatherings of craftsmen and laborers.

  Most importantly, the system was carefully designed to enable new blood to enter the higher levels of power. Commoners could rise to power (and take their families with them if their wealth outlasted the founding generation) via commercial success or military service.

  The Republic also developed a culture that frowned on personal glorification and cults of personality: the nobility and commoners alike deferred to the Republic rather than any one leader.

  In Venice, the political leadership (the doge and the Council) were elected via a convoluted series of steps that made it essentially impossible for one clique to control the entire process.

  The doge was elected for a term, not for life, and he had to be acceptable not just to the elites but to the much larger class of movers and shakers–roughly 1,000 people in a city of at most 150,000.

  Venice's crises emerged when the upwelling of social and financial mobility was capped by elites who were over-zealous in their pursuit of hegemony: all those blocked from rising to power/influence became the source of political revolt.

  If you cap the volcano, eventually the pressure beneath rises to the point that the cap gets blown off in spectacular fashion.

  The suppression of social mobility and the monopolization of power by the few at the expense of the many are universal dynamics in social orders.

  Broadly speaking, Venice's 1,000-year Republican government, with its complex rules to limit concentrations of power and insure the boundaries between elites and commoners were porous enough to diffuse revolution and social disorder, speak to what is once again in play around the world: social unrest due to the concentration of power and the suppression of social mobility.

  I don't think it's a stretch to say that the greater the concentration of power, the lower the social mobility, the greater the odds that the system will collapse when faced with crisis.

  When the entire economy is expanding faster than population, and this tide is raising all ships, the majority of people feel their chances of getting ahead are positive.

  But when the economy is stagnating, and those in power are amassing most of the gains, the majority realizes their chances of securing a better life are declining. This is the pressure that is being capped by the status quo that first and foremost protects the privileged.

  How porous are the barriers to social mobility in our society? That a few people become billionaires from technological innovations that scale globally is not a real measure of social mobility for the masses.

  In Part 2 we identify the wellspring of revolution, and reach a conclusion that may surprise many.

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

   

  

  

  

  

  

• Presenting America's Own "Ghost Cities"

  We’ve written quite a bit about the decline of America’s once proud manufacturing industry which is now but a shadow of its former self and long ago ceded its place in the public’s heart and mind to the service industry, as US citizens are far more concerned with whether they can get a $6 latte than with whether the economy provides enough breadwinner jobs to keep the majority of the population from having to… well, serve $6 lattes for a living.

  And if it was already bad, it’s getting worse.

  In fact, as we noted just days ago, the last time manufacturing was this bad in the US, Ben Bernanke introduced QE3. 

  

  Make no mistake, the decline of American industry isn’t something that can be reversed.

  In other words, no populist presidential candidate promising to “make the country great again” is going to turn this around – and it won’t be for lack of effort. It’s just economics. The jobs aren’t coming back from China and the “made in America” stamp is a relic a bygone era. The American economy is now a bartender and waiter creation machine and it’s come at the expense of the still declining manufacturing sector. 

  

  Needless to say, this has gutted America’s Rust Belt, which is now nothing more than a now desolate reminder of a golden era in America’s history that has long since passed and as RealtyTrac reports, “among 147 metropolitan statistical areas with at least 100,000 residential properties, those with the highest share of vacant properties were [unsurprisingly] Flint, Michigan (7.5 percent), Detroit (5.3 percent), Youngstown, Ohio (4.4 percent), Beaumont-Port Arthur, Texas (3.8 percent), and Atlantic City, New Jersey (3.7 percent).”

  Port Arthur has never been a bastion of stability and the decline of Atlantic City has been well documented, but the malaise in Flint, Detroit, and Youngstown clearly reflects the decline in American industry and suggests the pain (exacerbated by China’s acute overcapacity problem) is only beginning. In Flint, for instance, one in six houses is vacant and in the metro area, the vacancy rate is 7.5%. In all, some 9,800 homes are empty in Flint. Some of this is attributable to the water scandal. “The water crisis did not cause the high vacancy rate in Flint, but it will certainly exacerbate it,” RealtyTrac VP Daren Blomquist said. Here’s more:

  “Distressed cities like Flint struggle to generate enough revenue locally to reinvest back into critical infrastructure, such as water systems. Decades of disinvestment and job and population loss have led to a phenomenal erosion of the tax base, both in terms of the number of taxpayers and in terms of the value of the land. As a result, cities with high levels of abandonment, like Flint, are faced with the financial challenge of needing to maintain and reinvest in a scale of infrastructure that was once supported by a tax base more than twice its current size.

  In Detroit, there are 53,000 empty homes – that’s one empty home for every five.

  Below, find a graphic from RealtyTrac which documents the struggle:

  

  *  *  *

  Blame China? Maybe. But some officials say other factors are at play.

  “There’s a philosophy of government that has been writing these places off — places like Flint get written off,” Rep. Dan Kildee (D-Mich.) previously told HuffPost. “And, to me, even though those people making those decisions might not see it this way, it’s hard for me to accept the fact that race is not the most significant factor.”

  

  

  

  

• The Week in Review for Financial Markets 2 26 2016 (Video)

  By EconMatters

  

  A positive week for risk assets, we consolidated recent gains and even finished the week higher in most risk assets. Gasoline had a stellar week, and points to a bottom in the Oil Market.

  © EconMatters All Rights Reserved | Facebook | Twitter | YouTube | Email Digest | Kindle  

  

  

  

  

• "There’s A Feeling Of Bits Of Ice Cracking All At Once" – This Is The 'Big New Threat' To Oil Prices

  One week ago, we reported that even as traders were focusing on the daily headline barrage out of OPEC members discussing whether or not they would cut production (they won’t) or merely freeze it (at fresh record levels as Russia reported earlier today) a bigger threat in the near-term will be whether the relentless supply of excess oil will force Cushing, and PADD 2 in general, inventory to reach operational capacity.

  As Genscape added in a recent presentation, when looking specifically at Cushing, the storage facility is virtually operationally full (at 80%) with just 4-5 more months at current inventory build left until the choke point is breached, and as we have reported previously, storage requests for specific grades have already been denied.

  Goldman summarizes the dire near-term options before the industry as follows:

  The large builds in gasoline and crude stocks have brought PADD 2 storage utilization near record high levels. While the recent decline in Midcontinent refining margins should help avoid breaching storage capacity, by finally bringing gasoline back into deficit, this will likely only exacerbate the build in crude inventories in coming months and should require further weakness in PADD2 crude prices to spread this build to the USGC. Weaker gasoline demand/exports, or higher margins/runs or finally resilient crude imports/production, could create binding storage issues beyond the intermittent Cushing WTI cash price weakness observed so far, which would require another large leg lower in crude prices to shut production in the Midcontinent and Canada. As we have argued, this continued testing of storage constraints should keep price and margin volatility elevated.

  However, while the threat from overproduction on soaring crude inventories, or in other words “supply”, has been extensively documented, far less has been said about another just as big problem: “demand”, or the potential supply-chain bottleneck that will hit the moment refiners finds themselves flooded with too much unwanted product, in turn telling producers they have to turn oil back simply because they have no more capacity.

  Is this possible? It’s already happening.

  As the WSJ reports in a piece titled “The Big New Threat to Oil Prices: A Glut of Gasoline“, refineries in the U.S. Midwest are losing their thirst for oil, posing a new risk for the battered crude market. The Midwest accounts for nearly a quarter of the crude processed in the U.S. and is home to shale producers that have few other outlets for their oil. But refiners there are already swimming in gasoline and other fuel, forcing them to cut back production until the excess can be worked off.

  In other words, not enough intermediate demand in the supply-chain with the result the same as oversupply: more crude oil is available in the market, worsening a glut that has been undermining oil prices for the past year and a half. As the WSJ adds, “with U.S. crude inventories at the highest level in more than 80 years, some storage hubs have little room left to store oil.“

  This means that storage hubs are now being hit on both sides: from excess production in a global market oversupplied by 3 million barrels daily, and from collapsing demand by the refiners for whom operating at current prices has become uneconomical. The result is that refinery production capacity, while already running at record levels for this time of the year, has tumbled from 98.2% a month ago to just 92.9% last week.

  This drop is significant because, as the WSJ explains, it marks the first time several refineries in the region have opted to reduce activity for economic reasons— a marked change after more than a year of refiners processing as much crude as possible.

  Here is the problem illustrated: gasoline stocks are literally off the charts in terms of the past 10 year min-max range:

  

   

  … as refineries operate at a record pace for this time of the year…

  

   

  … while gasoline demand is well within its past decade range:

  

   

  Which means refining production has no choice but to decline, which is precisely what it is doing. Three examples:

  • CVR Refining LP is among the companies that have scaled back. The company said recently that it reduced runs at its 70,000-barrels-a-day refinery in Wynnewood, Okla., by as much as 10,000 barrels a day. “It doesn’t make sense to process something when you’re not making anything on it,” Chief Executive Jack Lipinski said during a Feb. 18 earnings call.
  • HollyFrontier Corp. said Wednesday that it has trimmed production at refineries in Kansas and New Mexico due to lower margins.
  • PBF Energy Inc. Chief Executive Tom Nimbley said during a conference call on Feb. 11 that the industry “turned the dials to make more gasoline” in the last quarter of 2015 and overshot demand. “The gasoline is not going to the consumer,” he said. “It’s going into a tank.”

  The first immediate consequence of overproduction are dropping margins as refiners try to sell their product into a glutted market, and sure enough refining margins are lower throughout the country this year, including in the Gulf Coast region, where more than 50% the country’s refining capacity is concentrated. But refiners there have more choices when it comes to buying crude oil and can substitute cheaper options if they become available. And they can put fuel on tankers to sell overseas if supplies build up too much.

  In other areas, there are fewer viable options: recent cutbacks have been enough to nudge gasoline prices higher in the Midwest, though it’s still cheap in some places: Gas was selling for as low as $1.11 a gallon on Wednesday in Granite Falls, Minn., according to Gasbuddy.com. Gasoline futures for March delivery rose 4.6% on Wednesday to $1.0104 a gallon, up from a seven-year low hit earlier this month.

  Which again brings us to the most important commercial hub in the US, located in the heart of the Midwest in Cushing, Oklahoma.

  “Many industry players and analysts think refiners will ramp up production after spring maintenance and they expect activity to pick up in the summer as cheap gasoline spurs Americans to take more road trips. But for producers in the Midwest and Canada, any decline in Midwest refining activity is worrisome. The region is home to the crucial oil storage hub at Cushing, Okla.—the delivery point for the U.S. oil futures contract.”

  

  Sellers in the futures market can either deliver physical crude or buy futures to offset their obligations. A lack of storage space can force buyers out of the market and supplies in Cushing are at their highest level ever. Analysts warn U.S. oil futures could fall further as Cushing nears full capacity.

  This is precisely what we have been warning about for months, or as Paul Horsnell, global head of commodities research at Standard Chartered puts it, “There’s a feeling of various bits of ice cracking all at once” in the oil market, with both crude-oil and gasoline inventories at extremely high levels… People are worried about a short-term issue, particularly in the U.S., particularly at Cushing.“

  The good news is that we are likely very close to the worst case scenario playing out: refiners are unlikely to start buying more crude in the coming weeks. Instead, many will begin seasonal maintenance ahead of the busy summer-driving season. That could leave some oil producers scrambling to find places to store their output. Prices in some regions might have to drop sharply to justify the cost of shipping the oil to where it can be stored.

  Which means there are just two options: find some undiscovered storage, or hope demand picks up.

  On the first, there is always hope: “we’ll just look for every other nook and cranny throughout North America to stuff crude oil into,” said Andy Lipow, president of consulting firm Lipow Oil Associates in Houston. “The market is just not going to like it.”

  However, it is the second that is the biggest wildcard: refiners profit on the difference between oil prices and fuel prices. Oil prices have dropped 70% since mid-2014 to around $32 a barrel currently, but robust demand for gasoline kept prices at the pump from falling as quickly last year, boosting refiner margins. However, analysts question whether demand will increase strongly this year, especially given broader concerns about sluggish economic growth. 

  Which brings us to the punchline: on a four-week average basis, U.S. gasoline demand fell in January compared with the year before, according to Energy Information Administration estimates.

  This despite the alleged increase in US consumer purchasing power or the so-called “tax-savings” from low gasoline prices, which should have boosted overall gasoline demand.

  It has not.

  Which is why with the market having debated the supply issue for over a year, and overanalyzed the OPEC and non-OPEC supply question to death, what virtually nobody has discussed is the just as important demand side of the equation, perhaps because nobody dares to admit the obvious: the much needed rebound in demand is just not there.

  If that is indeed the case, expect a sharp, violent move lower in the price of oil in the coming weeks as the fundamental oil reality finally catches up with the imaginary world of stop-hunting, momentum-igniting, algorithmic daytraders.

  

  

  

  

  

• Dead Piglet Inscribed With "Mother Merkel" Found At German Mosque

  “In view of the circumstances it appears likely that this is a xenophobic act.”

  That’s from a police spokesperson who spoke to dpa after a dead pig with Angela Merkel’s name “daubed on it” was discovered at a site where a mosque is being constructed in Leipzig.

  “Mutti Merkel” was reportedly scribed on the animal’s corpse. “Mutti,” or “mom” is a term of endearment that’s been variously applied to the chancellor. When Merkel made the push to take in some 1 million refugees last year, she was dubbed a “kind hearted lion mother” by some Mid-East asylum seekers.

  But “mother” Merkel’s reputation has suffered irreparable damage over the past six months thanks to her role in fueling the bloc’s worsening refugee crisis. Germany took in more than a million migrants in 2015 and reports of mass sexual assaults carried out by immigrants combined with ever-present concerns about terror have soured Europeans on the chancellor’s “yes we can” message.

  Indeed, the narrative is increasingly “no we can’t, even if we wanted to.” In fact, the situation is so bad that EU migration commissioner Dimitris Avramopoulos warned on Thursday that if Turkey and Greece can’t work together on a solution to secure the bloc’s external borders, the entire project will collapse in the next 10 days.

  Norwegian PM Erna Solberg is preparing her country for that eventuality by passing a new bill that will allow Norway to essentially lock down the borders and turn all comers away by force if necessary.

  As NBC reports, it wasn’t exactly surprising that the pig turned up at the site. “In a 2013 incident after plans for the mosque became known, pigs’ heads were found at the same site. Police say no perpetrator has ever been found.”

  “I see this as just a stupid act. I don’t know what they mean to say with this, but our mosque construction project will continue,” Dr Rashid Nawaz of the Leipzig branch of the Ahmadiyya Muslim Jamaat (AMJ) organization told The Local. 

  Stupid act, yes. But we’re not sure what Dr. Nawaz is confused about what the “perpetrator(s) “mean to say.” They mean to send an anti-migrant, anti-Islam message. The piglet, Nawaz says, “was hurled into a patch of earth overnight.” 

  “The planned mosque for 100 people would be the second newly built mosque to be constructed in eastern Germany,” Deutsche Welle reports. “The Ahmadiyya Muslim Jamaat (AMJ), a global Islamic community with 35,000 members in Germany, has built a new mosque in Berlin’s Pankow neighborhood.”

  Leipzig mayor Burkhard Jung wasn’t particularly enamored with the display. “Insulting, reviling and smearing a whole religious community is narrow-minded and outrageous,” he said, adding that “leaving a dead pig with the words ‘Mutti Merkel’ on it isn’t just tasteless, but demonstrates fundamental failings of democratic education and conviction.”

  It seemed to have escaped Jung that when you are mayor, “fundamental failings of democratic education” among the populace are ultimately your fault.

  *  *  *

  Below, find the original article from Leipziger Volkszeitung (Google translated)

  Leipzig . The site for the new mosque of the Ahmadiyya community in Leipzig-Gohlis has been ruined again on Wednesday. As police spokesman Uwe Voigt told LVZ.de, found a passerby about 13 pm dead piglets in a bush, on the red paint “Mutti Merkel” was written. The perpetrators were not seen, but it was assumed that the animal has been filed on the day on the site at the corner Georg Schumann / Bleichertstraße.

  Meanwhile, the state protection had been turned on. Investigators from a politically motivated act from, among others, it also go to an insult to the Chancellor, so Voigt further.

  Construction in early September with religious leader

  The Ahmadiyya community itself responded on Thursday with serenity the fact. “We will not be intimidated. What the perpetrators are hoping, will not happen: This has no impact on the construction process of our mosque, “spokesman Rashid Nawaz told LVZ.de. For discussions, community’m always ready to violence and attacks were not to be tolerated.

  The Ahmadiyya plans to begin in early September with the construction of their new mosque. Approximately 700,000 Euro investments are planned for the project. “There are some other things that are now regulated. Then we hope the final construction permit, “Nawaz said. For groundbreaking ceremony then will also the London-based spiritual leader of the religious community, Mirza Masroor Ahmad, expected in the fair site, the spokesman said.

  OBM Jung condemned fact – Man: “Another low point.”

  Perella (SPD) responded on Thursday dismayed at the attack, “offend an entire religious community, to denigrate and insult is petty and despicable.The vast majority of Muslims, like most members of other religions also, peaceful believers who find in their denomination support and guidance, “said the Social Democrat.

  For the member of parliament Holger man the perpetrators expose more clearly than democracy enemies. “A dead pig with red lettering, Mutti Merkel ‘store, is not only tasteless, but discloses basic lack of democratic education as conviction. Symbolically compare a man with pigs and threaten the Chancellor with death is another low point and evidence of the brutality of the political climate “, the SPD politician said.

  The attack on Thursday was not the first attack on the planned Ahmadiyya Mosque in Leipzig. In November 2013 Unknown speared bloody pigs’ heads on poles, placed them along a beaten track that leads through the site and set fire to a garbage can. This attack sparked already nationwide revulsion.

  In addition, there were months incitement and protests in the district against the planned mosque, led by the far-right NPD. In April 2014, the former NPD politician Alexander Kurth also tried to hand over a petition against the mosque properties on the city council. Mayor Jung refused to accept.Proponents of the sacred building had previously collected more than 6,000 signatures.

  

  

  

  

  

• Can Maduro Mayhem Last To 2017?

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

  Things are turning increasingly ugly in Venezuela between President Maduro and the opposition MUD. The core political problem after December 2015 elections is the PSUV are now using the courts to neuter any opposition voices that formally hold a legislative majority to start holding the government to account.

  Right on cue, Mr. Maduro just railed a decree through the Supreme Court (TSJ) giving him total control over budgetary measures, utilize any property, suspect constitutional rights and if needs be mobilize the military for a period of 60 days (effective from 15th January) with another 60 day extension not only ‘Constitutionally possible’, but increasingly likely. The ‘good news’ from that, is President Maduro is at least starting to take some tepid measures that might help to get Venezuela onto a more realistic track, including 37% devaluation with a view to bringing Venezuela’s three tiered exchange rate into a dual system.

  Looks good on ‘paper’, but don’t be fooled. It merely leaves official rates of 10 bolivares to the US dollar, 200 bolivares (likely floated as the second tranche), compared to black market rates that’s more like 1000 to the greenback. Unsurprisingly, domestic price reforms got similarly ‘piecemeal treatment’, where memories of the 1989 Caracozo riots still ring loud in the PSUV’s ears. Going from 0.07 bolivar a litre to 1 bolivar sounds huge at 1,329% price hikes for 91 octane, but it still makes Venezuelan gasoline the cheapest in the world. PDVSA will only save around $800m from the move, and that’s assuming the government continues to adjust prices give Mr. Maduro’s measures will send inflation into the 1000% stratosphere. The IMF was already being very polite with 720% estimates on basic goods, including fabled toilet paper and condoms in increasingly short Venezuelan supply these days. 

  

   

  But so much for the ‘economic story’, what about the political backdrop?

  Unsurprisingly, Mr. Maduro’s Supreme Court stunt has left the opposition with little choice but to push for regime change at this stage. To be clear, the Venezuelan constitution is explicitly worded that any emergency Presidential enabling powers should have the approval of the Supreme Court and the National Assembly. The fact they’ve run roughshod straight over them and made up their own rules, basically renders the Assembly dead in the water at this stage. Regime change is the only card the MUD now have left to play.

  The question is how to pull it off? The preferred option would almost certainly be to hold a constituent assembly to re-write the constitution, including shortening and limiting presidential terms. The snag is that the MUD needs a two-thirds assembly majority to do so. And it’s the same ‘super-majority’ the PSUV and TSJ evidently blocked from the December 2015 poll, which makes a so called ‘recall referendum’ the obvious plan B against Mr. Maduro in April 2016 once the President is officially half way through his term. The MUD will need to garner 25% of registered voters to trigger the process, in what’s then a five month ordeal from start to finish, with multiple National Election Board (CNE) hurdles along the way. It’s almost certain the CNE and Courts will drag their heels as long as they can, mimicking previous 2003-04 tactics to forestall Chavez’s removal.

  The key reason for that is by early 2017, the PSUV can legitimately remove Maduro themselves where they could essentially put its own puppet back into office. And far more importantly, protect their own (and military) patronage networks in what’s left of an economically gutted Venezuela. The ailing bus driver soaks up all the bad PSUV news along the way, while the Party gets to work jailing more MUD figures, dividing and ruling all the way.

  Whether things can realistically be strung out that far frankly remains contingent on the ‘Venezuelan street’, somewhat ironically mirrored by what’s happening within military elites, where the Generals are getting increasingly nervous they might have to oversee a ‘transitional’ period of military rule to safeguard their own interests. Try as his might, President Maduro can politically run, but he can’t economically hide from the fact that Venezuelan will see another 5% contraction this year, with around $20bn of debt payments due by the end of 2016 with little foreign reserves left to do it.

  0

  A third of that is owed by the Central Bank, a third owed by PDVSA, and another tranche directly payable to China under oil for loans. To its ‘credit’ Venezuela has tried to honour its international obligations, even to the point of squeezing imports to avoid the political embarrassment of tanker seizures to date. But under current benchmark prices, Venezuela will have to spend around 90% of oil export revenues purely servicing debts to get through the year. Our take is that’s going to be politically impossible to do given some of those scarce dollars will be needed to provide the most basic of basic goods. That means structural default is inevitable sooner or later, at least without any fundamental regime change to try and chart a new course.

  

   

  On that ironic note, anyone expecting things to get better under a drastically fractured MUD consisting of 27 internal groups will prove very disappointed. Cut to the chase, and that ultimately leaves the ball in China’s court given its massive ($50bn) sunk costs in Venezuela where it’s thrown caution to the Caracas wind over the past decade. Sure, CNPC can directly tie new capital to its operations all it likes, but at some point, Beijing needs to decide between propping up the PSUV with more cash, or just let the house of cards fall and take their chances with a hostile MUD.

  Then again, ‘plan C’ might prove the most attractive for Beijing: Ditch the democratic niceties and do what China does best, cut a deal with the military to maintain status quo interests. Either way, Beijing will have a key role on what does or doesn’t happen with Maduro’s Mayhem in 2016-17. Force us to make a call, Mr. Maduro ultimately won’t be part of the Sino script over the longer term….

  

  

  

  

  

• HSBC Looks At "Life Below Zero," Says "Helicopter Money" May Be The Only Savior

  In many ways, 2016 has been the year that the world woke up to how far down Krugman’s rabbit hole (trademark) DM central bankers have plunged in a largely futile effort to resuscitate global growth.

  For whatever reason, Haruhiko Kuroda’s move into NIRP seemed to spark a heretofore unseen level of public debate about the drawbacks of negative rates. Indeed, NIRP became so prevalent in the public consciousness that celebrities began to discuss central bank policy on Twitter.

  When we say “for whatever reason” we don’t mean that the public shouldn’t be concerned about NIRP. In fact, we mean the exact opposite. The ECB, the Nationalbank, the SNB, and the Riksbank have all been mired in ineffectual NIRP for quite sometime and the public seemed almost completely oblivious. Indeed, even the financial media treated this lunacy as though it were some kind of cute Keynesian experiment that could be safely confined to Europe which would serve as a testing ground for whether policies that fly in the face of the financial market equivalent of Newtonian physics could be implemented without the world suddenly imploding.

  We imagine the fact that equity markets got off to such a volatile start to the year, combined with the fact that crude continued to plunge and at one point looked as though it might sink into the teens, led quite a few people to look towards the monetary Mount Olympus (where “gods” like Draghi, Yellen, and Kuroda intervene in human affairs when necessary to secure “desirable” economic outcomes) only to discover that not only has all the counter-cyclical maneuverability been exhausted, we’ve actually moved beyond the point where the ammo is gone into a realm where the negative rate mortgage is a reality. That shock was compounded by Kuroda’s adoption of NIRP and another cut from the Riksbank, and before you knew it, everyone was shouting what we’ve been shouting for more than seven years: the emperors have no clothes!

  But central banks aren’t willing to surrender just yet. Admitting that this entire experiment has been a mistake would be a disaster at this juncture. And while some brave sellside desks are indeed going full-tinfoil-hat-fringe-blog by daring to suggest that this whole damn thing simply isn’t working when it comes to reviving aggregate demand and boosting inflation, there are still those who want you to know that the “gods” are not out of lightening bolts just yet. Take HSBC for instance, where the fixed income team is out with an excellent – if rather disturbing for its references to helicopter money and even negative-er-er rates – summary of “life below zero.”

  First off, HSBC doesn’t buy the idea that rates can’t go lower – even given the constraint imposed by physical bank notes (that damn barbarous paper relic).

  “The Swiss National Bank currently operates the most negative rate at -75bp (see table 2). If the costs incurred by Swiss banks – expressed as a proportion of total assets at the negative rate – were applied to the eurozone banking system, the ECB’s depo rate would be much more negative. A simple calculation would put the ECB’s repo rate at -180bp, assuming the current level of excess reserves would all be charged at the negative rat,” the bank writes.

  

  HSBC then moves to address the constraints that keep central banks from taking rates even lower. Those contraints (in order) are:

  • Constraint 1: The ability to switch into cash, which yields zero
  • Constraint 2: Downward pressure on the earnings of banks
  • Constraint 3: Does it work? 

  We’ve discussed all of this at length. The cash constraint is simply a function of the fact that physical cash makes it impossible for central banks to move too far into NIRP. At a certain point, they’ll be a bank run. Indeed, Japanese are already loading up on safes and 10,000 yen notes. 

  The second constraint has already manifested itself in the steady grind lower in banks’ NIMs. Indeed, that’s one of the reasons investors are so concerned about European banks. With investment banking revenue constrained and NIM (i.e. traditional banking) hampered by NIRP, there’s no way for banks to cushion the blow from mountainous bad loans. 

  HSBC goes on to ask “how much more accommodation is needed?” Amusingly, they don’t really answer their own question but they do note that Ray Dalio’s “beautiful deleveraging” is a myth. Plain and simple:

  “Eight years after the financial crisis started, many global central banks are still looking to increase monetary accommodation. This follows 500bp of rate cuts by the Fed and BoE, 400bp by the ECB and rates held near zero at the BoJ. Add to this USD trillions of QE asset purchases and tightening moves that were subsequently reversed by a number of central banks. The challenge to the traditional central bank framework has come from the impact of structural factors, such as the debt overhang, which rather than disappearing over the last eight years, has actually got worse. If the role of ultra-loose monetary policy, combined with unconventional measures such as QE, was to facilitate an orderly deleverage, it has not worked.”

   

  

   

  And while it’s impossible to quantify how much MOAR we need, what we do know is that inflation expectations are no longer responding (and that language assumes they “responded” at some point post-2008 which is itself a dubious proposition): 

  

  And because you can count on policy makers to view this not as evidence that what they’re doing not only isn’t working but may in fact be contributing to deflation, but rather as proof of why they need to continue the experiment in an increasingly ludicrous example of Einsteinian insanity, you can bet that more accommodation is coming. The next to ease further will be the ECB and the Norges Bank (which, unlike other CBs, actually has a number of good reasons to cut) in March.

  Of course none of this will work. The problem isn’t monetary conditions. There’s not a shortage of liquidity – well, actually there is, ironically courtesy of central bank asset purchases, but the point is, it’s not as though the financial sector doesn’t have access to cash. The problem is that somewhere along the way, weak global growth and trade became systemic rather than cyclical and because the “gods” can’t print trade, they’re going to need to figure something else out to boost aggregate demand. 

  As for what that “something” is, we’ll simply close with one last quote from HSBC: “If central banks do not achieve their medium-term inflation targets through NIRP, they may have to adopt other policy measures: looser fiscal policy and even helicopter money are possible in scenarios beyond QE and negative rates.”

  

  

  

  

  

  

• "Peak Stupidity" – Where We Go From Here

  Submitted by Thad Beversdorf via FirstRebuttal.com,

  So I’m currently teaching applied financial modeling at Marquette University in the beautiful blue collar town of Milwaukee, WI; home of the Harley, the (Miller) High-Life and SummerFest.  It’s a great town and a great school.  A few years ago the business college brought in a pretty savvy guy called David Krause who then started a program called AIM, where the top finance students actually manage more than $2M.  Because of the program’s success US News & World Report ranked Marquette’s finance program 21st in the nation this year.  Not bad for a small Jesuit school in the midwest.

  Now I mention this because after 15 years in banking, teaching financial modeling has forced me to reacquaint myself with some of the basic tenets of markets and valuation.  Such things tend to get lost in the midst of “getting the deal done” and chasing paper profits.  This reacquaintance process has been quite illuminating for me and I thought perhaps for others too.

  A reminder of what the market actually represents is a good place to start.  The stock market is simply an asset with some intrinsic value based on an expectation of future free cash flows to equity holders.  Those cash flows are generated from revenues less costs of the underlying companies that make up the market.  Let’s use the Wilshire 5000 Full Price Cap Index as the proxy market for this discussion as it is the broadest measure of total market cap for US corporations.  It’s level actually represents market capital in billions.

  

  So the market has put a valuation on those expected future cash flows to equity holders (as of today) at around $19.7T (a 55% increase from Jan of 2012) down from around $22.5T (a 77% increase from Jan of 2012) at the market peak last summer.  So let’s take a look at the growth in cash flows of US corporations over that same period. 

  We should expect to find a growth pattern in free cash flows similar to the above growth pattern in the overall market valuation (the Wilshire is a statistically large enough sample to be representative of total US corporations).  Let’s have a look…

  

  The above chart depicts corporate free cash flows (blue line) indexed to 100 in Jan 2012.  It is obtained by taking the BEA’s Net Cash Flow with IVA and CCAdj adding back depreciation and net dividends and subtracting net capex.  (The actual definitions of these can be found here.)

  What we find is that while the current valuation of expected future free cash flows to equity holders (i.e. market cap of Wilshire) has increased by some 55% since the end of 2011, the actual free cash flows of US corporations have only increased by 4%.

  This becomes a very difficult fact to reconcile inside the classroom.  Why would market participants be baking in so much growth when the actual data simply doesn’t support it?

  Well there are plenty of potential explanations.  For instance, rarely are investors rational.  While buy low and sell high is rational investing behaviour, often market euphoria comes at the market top right before a major sell off, leading to a buy high and sell low strategy.  Another reason is that the Fed has been providing a free put to all investors for the past 7 years essentially significantly reducing naturally occurring risk factors.  But whatever the reason this dislocation between expected and realized growth begs the question, how long can it last?  So let’s explore this issue.

  Below is a longer term growth chart of the Wilshire vs US corporate free cash flows to equity holders both indexed to 1995 (i.e. 1995 = 100).

  

  And so over the past 20 years we’ve seen this same type of dislocation three times.  That is, we see expectations of growth far exceeding actual growth of free cash flows to equity holders.  In the previous two dislocations we reached a peak dislocation (peak stupidity) followed by a reversion to reality (epiphany) where expected growth moves back in line with actual growth. Let’s have a closer look at specific indicators as to when the epiphany takes place.

  

  What we find is that the epiphany trigger occurs when YoY growth of free cash flows to equity holders drops down to or below zero.  The last two bubbles began their burst when medium term moving average of free cash flows dropped to zero.  We see the very same pattern occurring presently.  Today we appear to have just passed the peak stupidity inflection point as seen in the two charts above.

  But let’s be sure not to ignore the technical patterns, so let’s do some charting.  If we look to volatility and price level patterns between our current market and the last bubble cycle (credit crisis) we find incredible similarities.

  

  The above chart depicts weekly high vs low intra-week price spreads and price level.  What we find is that at this point in the last bubble cycle we had a period of reduced volatility (small green box in 08) that followed a period of increased volatility as the market slowly rolled over.  Today’s bubble is just entering that period of reduced volatility following the period of increased volatility as the market rolled over.

  And so what should we expect from here?

  Well the fundamental charts above suggest we have significantly overvalued growth expectations and historically those over-inflated expectations can drop very sharply back in line with actual growth.  So from a fundamentals perspective we should expect a significant drop in overall valuations (i.e. market cap).

  And from a technical perspective, if we are in fact following the previous bubble cycle pattern (which we seem to be), we should expect a nice bounce in price level from the recent lows (to perhaps somewhere between 2000 – 2030) accompanied by relative calm before an explosion of volatility and a market price plunge that sends us into the next crisis sometime around May (give or take).  Happy trading!

  

  

  

  

  

• Stocks Stumble After Best Gains Since 2014's Bullard Bounce

  The week explained…

   

  Stocks extend gains this week – now the best 2-weeks since Bullard's Oct 2014 lows… BULLARD 2 – 0 REALITY

  

   

  But ended on a weak note…

  

   

  Futures give us a glimpse of the sudden buying panic into Europe's Open/China's close, selling at US Open on the "good" news… Weak close…

  

   

  Even though Trannies and Small Caps gained on the day (more squeezes)…

  

   

  Materials and Homebuilders outperformed on the week but note that financials and energy lagged today…

  

   

  One thing of note is "noise" in VIX – this was not seen during the rise in VIX but now that the trend is lower, we see these paniccy spikes lower…

  

   

  The S&P is still having the worst start to a year since 2009.

  This has been the biggest 2-week short-squeeze since October 2011…

  

   

  And the weakest momentum stocks soared…

  

   

  Treasury yields swung around like a penny stock this week. The three red lines show a delayed POMO, a delayed auction, and the actual auction… all of which triggered selling…

  

   

  This was the best week for The USD Index in almost 4 months…

  

   

  Led by serious weakness in cable (and EUR)… and general strength today after positive econ data… (note quite a significant decoupling between AUD and CAD today)

  

   

  Commodities were a very mixed bag with crude (best week since Aug 2015) and copper gaining on China stimulus hopes and PMs sold (Silver's worst 2 week drop in over 3 months)

  

   

  Oil and Silver seemed somewhat coupled with their crazy moves…

  

   

  And finally, despite an ugly week for Silver, this is the best start to a year in Gold since 1980…

  

   

  Charts: Bloomberg

  

  

  

  

• Syrian Souvenir Shops Sell Out Of Putin Mugs

  “One of the calmest periods [in Damascus] since the start of the war,” is due to Russia’s hit on Jaysh al Islam chief Zahran Alloush, Reuters wrote on Friday, citing local sources.

  Alloush was something of a hero among some Sunnis but as we said in the wake of the airstrike that killed him in December, he was, in reality, a radical militant who advocated the extermination of Alawites and Shiites in Syria.

  His death was emblematic of what the Russian intervention represents to many Syrians who are still loyal to Bashar al-Assad and the Alawite government. As we’ve noted before, regardless of how skeptical you are regarding the Western media’s portrayal of the Assad government, there’s no argument to be made that Assad is some kind of benevolent statesman. He’s not. Plain and simple. Indeed, he himself admits that the Mid-East isn’t ready for democracy (he’s said as much on a number of occasions). But the fact is this: Sunni extremist elements have made life a living hell in Syria and the country was much better off when Assad was firmly in power. Even if he wielded that power irresponsibly.

  So when Russia kills commanders like Alloush, the Syrian people feel some sense of hope that at the very least, Vladimir Putin, the Ayatollah, and Bashar al-Assad will be able to restore some sense of normalcy to everyday life. For those in the West who constantly spew the whole “Syrians want democracy and it’s the international community’s duty to support the opposition to that end” line, have a look at the images from the aftermath of the suicide blasts that killed dozens in Homs and Damascus last Sunday (see here).

  If that’s what a “democratic revolution” looks like, then we can assure you that Syrians would just prefer to be governed by an autocrat. 

  In any event, we say all of that to introduce the following punchline and image. From Reuters: “Bashar al-Seyala, who owns a souvenir shop in the Old City, said he had just sold out of mugs printed with Putin’s face.”

  

  Also visible are cups emblazoned with the face of Hezbollah leader Hassan Nasrallah. We imagine they’re selling out as well.

  So tell us again John Kerry, about how Syrians want the US to “liberate” their country and rid them of an evil dictator and rollback Iranian influence.

  *  *  *

  Forget Goldman’s muppetizing recos. Zero Hedge top trade idea for the remainder of Q1: Long Putin wearing sunglasses mugs.

  

  

  

  

  

  

• Weekend Reading: Heterogeneous Elucidations

  Submitted by Lance Roberts via RealInvestmentAdvice.com,

  I was wrong.

  I wrote last year that the economists in charge of monetary policy at the Fed were the worst economic forecasters on the planet. To wit:

  “Importantly, while Janet Yellen suggested the Fed’s economic forecast was ‘not a weak one,’ the reality is it actually was. I have repeatedly stated over the last two years that we are in for a low growth economy due to debt deleveraging, deficits and continued fiscal and monetary policies that are retardants for economic prosperity. The simple fact is that when the economy requires roughly $4 of debt to provide $1 of economic growth – the engine of growth is broken.

   

  Economic data continues to show signs of sluggishness, despite intermittent pops of activity, and with higher taxes, increased healthcare costs, and regulation, the fiscal drag on the economy could be larger than expected.

   

  What is very important is the long run outlook of 2.15% economic growth. As shown in the chart below, real economic growth used to run close to 4%. Today, the Fed’s prediction is down markedly from the 2.7% rate they were predicting in 2011.”

  

  Why anyone actually takes the Federal Reserve’s projections seriously is beyond me. However, as bad as the Fed is at making projections, the IMF has proven to be worse.  To wit:

  “Since 2010, the International Monetary Fund’s outlook for global growth has disappointed.

   

  And every year, the IMF cuts its global growth forecast only to have that lowered forecast eventually prove too aggressive.

   

  This chart, which comes from the Economic Report of the President, shows the sad state of global growth and perennially disappointed IMF forecasts.

   

  And while the failure of these forecasts for one or two years out is notable, it might be most depressing to see the IMF’s 2011 forecast for 2016 gross-domestic-product growth of 5% miss the mark so widely.”

  

  Considering that Central Banks globally are basing monetary policy decisions on faulty assumptions about economics, the potential for a severe negative outcome is an increasing possibility.

  But most importantly, it is probably a good time to stop believing the people making these decisions actually have a level of useful insight. If they did, their forecasts would be substantially more accurate.

  This week’s reading list is a collection of articles from people who have been “getting it right” for the last few years. While they are often dismissed by the media because they disagree with  “mainstream thinking,” it is quite apparent they had a better grasp of the issues in the end.

  ---

  1) Earnings & Revenue Confirm Weak Economy by Jeffrey Snider via Alhambra Partners

  “Again, with revenue and EPS expected to decline further in Q1, that will make at least four straight quarters of EPS contraction and five for revenue. Currently, analysts are not predicting positive growth in either until Q3, but that is as tenuous as the once much more robust predictions for right now.

   

  S&P Capital IQ, for example, was also as late as the end of September (even after all the August messiness and ongoing uncertainty) projecting slightly positive EPS growth in Q4 and then much better throughout the start and rest of 2016.

   

  They chose to ignore everything in order to follow the mainline narrative. Last January, S&P Capital IQ was calling for almost 12% growth for the S&P 500 overall in both Q3 2015 and FY2015. The reason for that optimism was nothing other than “transitory”, which marks the baseline for all these unraveling forecasts.

   

  In their April 2015 projections they had Q1 2016 EPS growth accelerating to 15.1%, and were still looking for +5% as late as October; they now suggest -2.5%. Estimates for future quarters are also coming down and rapidly: last April and July they expected Q2 2016 EPS growth of more than 13%; down to 6.78% in October and just 1.25% currently. For Q3 2016: also more than 13% at both the April and July estimates, shooting higher to almost 15% at the October update, though now down to 7.22%. Current market disruptions suggest only that these downgrades are far from over.”

  But Also Read: S&P Earnings Far Worse Than Advertised by Justin Lahart via WSJ

  2)  Closing Tick As A Sentiment Tool by Tom McClellan via McClellan

  “The robust rally in mid-February 2016 has pushed the TICK’s 10MA up to its highest reading since late 2014 (just off the left end of the chart).  The message is that traders were a bit too eager in chasing that counter-trend rally, and so the stage is set for the next leg down. “

  

  But Also Read: I Am Bearish – Period by Doug Kass via Real Clear Markets

  3) Difference Between Past Fed Tightening & Now by Comstock Partners

  “Another reason we are skeptical about the U.S. economy avoiding a recession in 2016 is because of the breadth being as weak as it was in 2015.  The top 10 companies in the S&P 500 accounted for virtually all the gains, but were overwhelmed by the 490 stocks that accounted for the decline in the index.  This is also true about the number of stocks in the S&P 500 above the 10 day, 150 day and 200 day moving averages.

   

  In fact, we believe the Fed’s decisions over the past 20 years were instrumental in the dot com and housing bubbles.  In the Fed’s mind they have done everything possible (including increasing their balance sheet from $800 bn. to $4.5tn.) to resurrect the U.S. economy.  Instead, their legacy will be tarnished by the outrageous policies that were used over the past 8 years, and in our view, will not result in the salvaging of our economy, but rather what may become one of the greatest destructions of wealth in history.”

  Also Read: The Fed’s Nightmare Scenario by Peter Schiff via EuroPacific Capital

  4) S&P Could Plunge 75% by Sara Sjolin via MarketWatch

  “According to Edwards, global strategist at Société Générale and prominent perma-bear, the stock benchmark could falls as much as 75% from the recent peak of 2,100 to trade around 550. Edwards argues that stocks are already in a bear market—commonly defined as a 20% fall from a recent high—and that U.S. industrial production is shaky and could represent the beginning phases of a recession. That’s bad news for stock-market bulls.

   

  A fall to below 666 would have been a plunge of 65% from Tuesday levels, but if the bottom is around 550, the size of the decline would be 72%. Measured against the recent peak, it would be a steeper 75%.”

  Also Read: 3 Day Rally Says Bear Market Is Over by Simon Maierhofer via MarketWatch

  5) Houston, You Have A Problem by Terry Wade & Anna Driver via Reuters

  “Prices for mansions in Houston’s swankiest neighborhood have tumbled in lock step with crude prices. The Houston Opera has offered free season tickets to patrons who lost their jobs in the oil bust. A fancy restaurant offers cut-price dinners.

   

  Twenty months into the worst oil price crash since the 1980s, well-heeled residents of the world’s oil capital are among the hardest hit largely because tanking energy firm shares make up much of oil and gas executives’ compensation.“

  Also Read: Recession Sign That Is 81% Accurate by Jeff Cox via CNBC

  ---

  MUST READS

  • The Problem Of Negative Interest Rates by Rick Rieder via BlackRock
  • More Subprime Borrowers Falling Behind by Matt Scully via Bloomberg
  • Citi: “We Have A Problem by Tyler Durden via Zero Hedge
  • One Chart That Should Scare Investors by Matt Turner via BusinessInsider
  • “Gig Economy” – Lots Of Workers, Few Full-Time Jobs by Eric Morath via WSJ
  • 100 Reasons To Audit The Fed by Michael Snyder via Economic Collapse
  • Beware Of The Second Half-Cycle by John Hussman via Hussman Funds
  • Market Calm May Be Short-Lived by Mohamed El-Erian via Bloomberg
  • The Big Earnings Con by Jesse Felder via The Felder Report
  • Stock Rally Glass – Half Full Or Empty via Dana Lyons via Tumblr
  • Agriculture – Asset Worth Harvesting by Michael Lebowitz via 720 Global
  • Ranking Global Markets By Valuation by Meb Faber via Faber Research

  ---

  “Investors are condemned by almost mathematical law to lose” – Ben Graham

  

  

  

  

  

• This Is The Best Year For Gold Since The Hunt Brothers

  As gold prices "Golden Cross," the precious metal is set for its best month in 4 years, and best 2-month rise since 2011. The entire precious metals complex is active with the largest fund inflows since 2009 and the biggest February COMEX trading volume in history.

  All of this adds up to the best start to a year for gold since 1980, when The Hunt Brothers tried to corner the silver market and sent all precious metals soaring.

  

   

  The best 2 months in gold since 2011…

  

   

  Pushed prices to a "Golden Cross"…

  

   

  As Bloomberg reports, gold's rally is spurring investor interest with volume on the biggest futures exchange rocketing. With prices set for the best month in four years, trading on the Comex is poised for the strongest-ever February.

  

   

  Aggregated volumes on the New York futures exchange rose 54 percent from the same month a year ago to about 4 million contracts with one trading day left.

  Amid the highest inflows since 2009…

  

  

  

  

  

  

• Satyajit Das: This Is Why You Can Expect Another Global Stock Market Meltdown

  Authored by Satyajit Das', author of the new book "The Age Of Stagnation" (via MarketWatch),

  The mispricing of assets across world markets has reached epidemic proportions.

  Stock prices have made strong advances over the past several years, yet market analysts see further gains, arguing that the selloffs of August 2015 and early 2016 represent a healthy correction.

  But this rise in stock values has been underpinned by financial engineering and liquidity — setting the stage for a global financial crisis rivaling 2008 and early 2009.

  The conditions for a crisis are now firmly established: overvaluation of financial assets; significant leverage; persistent low-growth and deflation; excessive risk taking reliant on central banks for liquidity, and the suppression of volatility.

  Steve Blumenthal, CEO of CMG Capital Management Group, tells Barron's funds writer Chris Dieterich that his firm has been clinging to ultra-safe bonds and utility stocks during the market storm.

  For example, U.S. stock buybacks have reached 2007 levels and are running at around $500 billion annually. When dividends are included, companies are returning around $1 trillion annually to shareholders, close to 90% of earnings. Additional factors affecting share prices are mergers and acquisitions activity and also activist hedge funds, which have forced returns of capital or corporate restructures.

  The major driver of stock prices is liquidity, in the form of zero interest rates and quantitative easing.

  To be sure, stronger earnings have supported stocks. But on average, 70% to 80% of the improvement has come from cost-cutting, not revenue growth. Since mid-2014, corporate profit margins have stagnated and may even be declining.

  A key factor is currency volatility. The strong U.S. dollar is pressuring American corporate earnings. A 10% rise in the value of the dollar equates to a 4%-5% percent decline in earnings. Rallies in European and Japanese stocks have been driven, in part, by the fall in the value of the euro and yen  respectively. Lower commodity prices, especially in the energy sector, affects resource firms’ earnings. In the U.S., wage increases may also erode profit margins. The major concern is weak global demand, with lackluster growth in Europe and Japan and deterioration in emerging markets.

  The lack of revenue improvement and deceleration in earnings growth mean that recent price increases reflect high price/earnings and price/ book ratios. The S&P 500  now trades at around 17-18 times forward earnings, a level that is historically expensive and only exceeded during the 1999-2000 tech-stock bubble. Other markets are also priced above historical levels.

  The frothy environment is also evident in other investor behaviors. Investors chasing revenue and earnings growth have pushed up valuations, while more than 80% of new initial public offerings were for companies with no earnings. A significant component of activity has been private equity investors taking advantage of high valuations to sell holdings.

  Other asset classes show similar stresses. Government bonds around the world, unless distressed such as Greece, Ukraine, or Venezuela, trade at artificially low rates. More than $7 trillion of sovereign debt globally now trades at negative yields.

  This perverse environment has prompted David Rosenberg, chief economist and market strategist at money manager Gluskin Sheff + Associates in Toronto, to muse about the strange phenomenon of investors buying low- or zero-yielding bonds for capital gains and purchasing shares for income. With risk on government bonds increasing, equity analysts argue that investment in shares was preferable to bonds as they offered better protection from a rise in risk-free rates.

  The lack of returns in government bonds has driven overvaluation in credit markets. Investors have taken on additional risk, moving into corporate bonds, driving rates lower, with the average falling under 2.9% in early 2015.

  With rates on investment-grade corporate debt declining, investors have invested increasingly in higher yielding non-investment grade and emerging market debt, including by ever-more exotic issuers for Africa or Asia.

  The risk-return relationship has deteriorated with investors no longer being compensated for the true default risk. Given the low absolute rates, investors are also increasingly exposed to higher interest rates. A 1% rate-rise will result in around a 7% loss in the value of U.S. corporate bonds, an increase of around 40% from the 5% percent loss five years ago.

  Real estate prices have risen globally with investors purchasing rental income streams to diversify away from low income financial assets. Markets as disparate as the U.S., Canada, U.K., Germany, France, Scandinavia, Australia, New Zealand, China, India and many other emerging countries have become overheated.

  Collectibles including fire art, vintage cars, wine, and the like also are showing the effects of excessive enthusiasm. Their prices reflect in part the desire by the world’s “smart money” to escape the manipulation of financial markets and the tremors that could be signaling a big quake to come.

  

  

  

  

  

• US Government Releases 2015 Financial Statements: "Keeps Getting Worse"

  Submitted by Simon Black via SovereignMan.com,

  Hot off the presses, the US government just published its audited financial statements this morning, signed and sealed by Treasury Secretary Jack Lew.

  These reports are intended provide an accurate accounting of government finances, just like any big corporation would do.

  And once again, the US government’s financial condition has declined significantly from the previous year.

  For 2015, the government reports $3.2 trillion in total assets.

  This includes everything from financial assets like bank balances to physical assets like tanks, bullets, aircraft carriers, and the federal highway system.

  Curiously, the single biggest line item amongst these listed assets is the $1.2 trillion in student loans that are owed to the government by the young people of America.

  This is pretty extraordinary when you think about it.

  37% of the government’s total reported assets are student loans, which is now considered one of the most precarious bubbles in finance.

  $1.2 trillion is similar to the size of the subprime mortgage market back in 2008. And delinquency rates are rising, now at 11.5% according to Federal Reserve data.

  Plus, it’s simply astonishing that so much of the federal government’s asset base is tantamount to indentured servitude as young people pay off expensive university degrees that barely land them jobs making coffee at Starbucks.

  On the other side of the equation are a reported $21.5 trillion in liabilities, giving the government an official net worth of negative $18.2 trillion.

  This is down from last year’s negative $17.7 trillion and $16.9 trillion the year prior. It just keeps getting worse.

  But there’s one thing that’s even more incredible about all of this.

  You see, each year these financial statements are audited by the government’s in-house agency known as the Government Accountability Office (GAO).

  All big companies do this. They publish financial statements, which are then reviewed by an independent audit firm.

  Auditors are a critical component of the financial reporting process.

  It’s their responsibility to make sure that shareholders and the public can have confidence in a company’s financial statements.

  When Apple publishes an annual report, auditors go through all the books of the company and make sure that management is accurately representing the company’s true condition.

  Thus when an auditor issues a failing grade, or what’s known as a qualified opinion, there’s usually hell to pay.

  At the very hint of impropriety a company’s stock price will tank immediately. People get fired. SEC investigations are launched.

  And now based on US securities law and section 404 of the Sarbanes-Oxley Act from 2002, senior executives can face criminal charges if their companies receive a failing grade from their auditors.

  This is serious stuff.

  Yet year after year the GAO gives the federal government a failing grade in its audit report of America’s financial statements.

  In this latest report, not only did the GAO chastise the federal government for its “unsustainable fiscal path”, but they state that the federal government consistently fails to prepare “reliable and complete financial information– both for individual federal entities and for the federal government as a whole.”

  The Department of Defense, Department of Housing and Urban Development, and the Department of Agriculture are all singled out for their failure to prepare complete and accurate financial statements.

  This is corroborated by a report published last year stating that the Defense Department has somehow “misplaced” $8.5 trillion of taxpayer money over the last 20 years.

  The GAO cites other material weaknesses in the government’s reporting of supposed cost reductions in Medicare and Social Security.

  In all, the GAO calculates that these financial uncertainties total $27.9 trillion, suggesting that the government’s true financial condition is far worse than reported.

  Bottom line– if this were a private company, Barack Obama and Jack Lew would be wearing dayglo orange jumpsuits in court while facing felony fraud charges.

  It’s not just the $18.2 trillion in negative net worth. Or the $41+ trillion (by their own calculations) in the Social Security shortfall.

  It’s the fact that they can’t even stand in front of the American people with an honest accounting of how pitiful the financial situation really is.

  The government of the United States is totally, desperately, hopelessly bankrupt. And they become even more insolvent with each passing year.

  Nearly every single dominant superpower throughout history was eventually consumed by its unsustainable finances.

  And in their decline from power, bankrupt governments rely on a simple playbook to desperately try to maintain the status quo by every means available.

  They destroy freedom. They impose a police and surveillance state. They seize assets. They wage campaigns of violence and intimidation.

  They impose capital controls. Cash controls. People controls. Whatever it takes.

  This time is not different. The finances of the US government are obvious, as is the trend.

  We’re not talking about what ‘might happen’ or ‘could happen’. We’re talking about what IS happening.

  And this is not a consequence free environment.