• The Right To Tell The Government To Go To Hell (In An Age Of Bullies, Censors, And Compliants)

  Submitted by John Whitehead via The Rutherford Institute,

  “If liberty means anything at all, it means the right to tell people what they do not want to hear.”? George Orwell

  Free speech is not for the faint of heart.

  Nor is it for those who are easily offended, readily intimidated or who need everything wrapped in a neat and tidy bow. Free speech is often messy, foul-mouthed, obscene, intolerant, undignified, insensitive, cantankerous, bawdy and volatile.

  While free speech can also be tender, tolerant, soft-spoken, sensitive and sweet, it is free speech’s hot-blooded alter ego—the wretched, brutal, beastly Mr. Hyde to its restrained, dignified and civil Dr. Jekyll—that tests the limits of our so-called egalitarian commitment to its broad-minded principles.

  Unfortunately, our appreciation for a robust freedom of speech has worn thin over the years.

  Many Americans have become fearfully polite, careful to avoid offense, and largely unwilling to be labeled intolerant, hateful, closed-minded or any of the other toxic labels that carry a badge of shame today. We’ve come to prize civility over freedom. Most of all, too many Americans, held hostage by their screen devices and the talking heads on television, have lost the ability to think critically.

  Societies that cherish free speech relish open debates and controversy and, in turn, produce a robust citizenry who will stand against authoritarian government. Indeed, oppressive regimes of the past have understood the value of closed-mouthed, closed-minded citizens and the power inherent in controlling speech and, thus, controlling how a people view their society and government.

  We in the United States have a government with a ravenous appetite for power and a seeming desire to turn the two-way dialogue that is our constitutional republic into a one-way dictatorship. Emboldened by phrases such as “hate crimes,” “bullying,” “extremism” and “microaggressions,” the government is whittling away at free speech, confining it to carefully constructed “free speech zones,” criminalizing it when it skates too close to challenging the status quo, shaming it when it butts up against politically correct ideals, and muzzling it when it appears dangerous.

  Free speech is no longer free.

  Nor is free speech still considered an inalienable right or an essential liberty, even by those government entities entrusted with protecting it.

  We’ve entered into an egotistical, insulated, narcissistic era in which free speech has become regulated speech: to be celebrated when it reflects the values of the majority and tolerated otherwise, unless it moves so far beyond our political, religious and socio-economic comfort zones as to be rendered dangerous and unacceptable.

  Consider some of the kinds of speech being targeted for censorship or outright elimination.

  Offensive, politically incorrect and “unsafe” speech: Disguised as tolerance, civility and love, political correctness has resulted in the chilling of free speech and the demonizing of viewpoints that run counter to the cultural elite. Consequently, college campuses have become hotbeds of student-led censorship, trigger warnings, microaggressions, and “red light” speech policies targeting anything that might cause someone to feel uncomfortable, unsafe or offended.

   

  Bullying, intimidating speech: Warning that “school bullies become tomorrow’s hate crimes defendants,” the Justice Department has led the way in urging schools to curtail bullying, going so far as to classify “teasing” as a form of “bullying,” and “rude” or “hurtful” “text messages” as “cyberbullying.”

   

  Hateful speech: Hate speech—speech that attacks a person or group on the basis of attributes such as gender, ethnic origin, religion, race, disability, or sexual orientation—is the primary candidate for online censorship. Corporate internet giants Google, Twitter and Facebook are in the process of determining what kinds of speech will be permitted online and what will be deleted.

   

  Dangerous, anti-government speech: As part of its newly unveiled war on “extremism,” the Obama administration is partnering with the tech industry to establish a task force to counter online “propaganda” by terrorists hoping to recruit support or plan attacks. In this way, anyone who criticizes the government online is considered an extremist and will have their content reported to government agencies for further investigation or deleted.

  The upshot of all of this editing, parsing, banning and silencing is the emergence of a new language, what George Orwell referred to as Newspeak, which places the power to control language in the hands of the totalitarian state. Under such a system, language becomes a weapon to change the way people think by changing the words they use. The end result is control.

  In totalitarian regimes—a.k.a. police states—where conformity and compliance are enforced at the end of a loaded gun, the government dictates what words can and cannot be used. In countries where the police state hides behind a benevolent mask and disguises itself as tolerance, the citizens censor themselves, policing their words and thoughts to conform to the dictates of the mass mind lest they find themselves ostracized or placed under surveillance.

  Even when the motives behind this rigidly calibrated reorientation of societal language appear well-intentioned—discouraging racism, condemning violence, denouncing discrimination and hatred—inevitably, the end result is the same: intolerance, indoctrination and infantilism.

  Thus, while on paper, we are technically still free to speak, in reality, we are only as free to speak as a government official or corporate censor may allow.

  The U.S. Supreme Court has long been the referee in the tug-of-war over the nation’s tolerance for free speech and other expressive activities protected by the First Amendment. Yet as I point out in my book Battlefield America: The War on the American People, the Supreme Court’s role as arbiter of justice in these disputes is undergoing a sea change. Except in cases where it has no vested interest, the Court has begun to advocate for the government’s outsized interests, ruling in favor of the government in matters of war, national security, commerce and speech. When asked to choose between the rule of law and government supremacy, this Court tends to side with the government.

  In the 225 years since the First Amendment to the U.S. Constitution was adopted, the rights detailed in that amendment—which assures the American people of the right to speak freely, worship freely, peaceably assemble, petition the government for a redress of grievances, and have a free press—have certainly taken a beating, but none more so than the right to free speech.

  Nowhere in the First Amendment does it permit the government to limit speech in order to avoid causing offense, hurting someone’s feelings, safeguarding government secrets, protecting government officials, insulating judges from undue influence, discouraging bullying, penalizing hateful ideas and actions, eliminating terrorism, combatting prejudice and intolerance, and the like.

  Unfortunately, in the war being waged between free speech purists who believe that free speech is an inalienable right and those who believe that free speech should be regulated, the censors are winning. Free speech zones, bubble zones, trespass zones, anti-bullying legislation, zero tolerance policies, hate crime laws and a host of other legalistic maladies dreamed up by politicians and prosecutors have conspired to corrode our core freedoms.

  If we no longer have the right to tell a Census Worker to get off our property, if we no longer have the right to tell a police officer to get a search warrant before they dare to walk through our door, if we no longer have the right to stand in front of the Supreme Court wearing a protest sign or approach an elected representative to share our views, if we no longer have the right to voice our opinions in public—no matter how misogynistic, hateful, prejudiced, intolerant, misguided or politically incorrect they might be—then we do not have free speech.

  What we have instead is regulated, controlled speech, and that’s a whole other ballgame.

  Just as surveillance has been shown to “stifle and smother dissent, keeping a populace cowed by fear,” government censorship gives rise to self-censorship, breeds compliance, makes independent thought all but impossible, and ultimately foments a seething discontent that has no outlet but violence.

  The First Amendment is a steam valve. It allows people to speak their minds, air their grievances and contribute to a larger dialogue that hopefully results in a more just world. When there is no steam valve—when there is no one to hear what the people have to say—frustration builds, anger grows and people become more volatile and desperate to force a conversation.

  The problem as I see it is that we’ve lost faith in the average citizen to do the right thing. We’ve allowed ourselves to be persuaded that we need someone else to think and speak for us. The result is a society in which we’ve stopped debating among ourselves, stopped thinking for ourselves, and stopped believing that we can fix our own problems and resolve our own differences.

  In short, we have reduced ourselves to a largely silent, passive populace, content to watch and not do. In this way, we have become our worst enemy. As U.S. Supreme Court Justice Louis Brandeis once warned, a silent, inert citizenry is the greatest menace to freedom.

  Brandeis provided a well-reasoned argument against government censorship in his concurring opinion in Whitney v. California (1927). It’s not a lengthy read, but here it is boiled down to ten basic truths:

  1. The purpose of government is to make men free to develop their faculties, i.e., THINK.

   

  2. The freedom to think as you will and to speak as you think are essential to the discovery and spread of political truth.

   

  3. Without free speech and assembly, discussion would be futile

   

  4. The greatest menace to freedom is a silent people.

   

  5. Public discussion is a political duty, and should be a fundamental principle of the American government.

   

  6. Order cannot be secured through censorship.

   

  7. Fear breeds repression; repression breeds hate; and hate menaces stable government.

   

  8. The power of reason as applied through public discussion is always superior to silence coerced by law.

   

  9. Free speech and assembly were guaranteed in order to guard against the occasional tyrannies of governing majorities.

   

  10. To justify suppression of free speech, there must be reasonable ground (a clear and present danger) to believe that the danger apprehended is imminent, and that the evil to be prevented is a serious one.

  Perhaps the most important point that Brandeis made is that freedom requires courage. “Those who won our independence by revolution were not cowards,” he wrote. “They did not fear political change. They did not exalt order at the cost of liberty.” Rather, they were “courageous, self-reliant men, with confidence in the power of free and fearless reasoning applied through the processes of popular government.”

  In other words, the founders did not fear the power of speech. Rather, they embraced it, knowing all too well that a nation without a hearty tolerance for free speech, no matter how provocative, insensitive or dangerous, will be easy prey for a police state where only government speech is allowed.

  What the police state wants is a nation of sheep that will docilely march in lockstep with its dictates. What early Americans envisioned was a nation of individualists who knew exactly when to tell the government to go to hell.

  

  

  

  

  

• Front Loaded: China, Volatility, and Debt Deflation

  Below are some excerpts from our latest macro note, “Front Loaded: China, Volatility, and Debt Deflation.” The full report with the charts and footnotes is on www.kbra.com.  The key question raised by the comment is this: Do Chair Yellen and the other members of the Federal Open Market Committee actually believe that there is a positive trade-off between the “benefits” of QE and zero rates and the carnage now unfolding in the global capital markets?  

  The downside of the social engineering experiment by Ben Bernanke & Janet Yellen is measured in the trillions of dollars, but the benefits seem to be few.  Indeed, the only segment of global society that seems to benefit from zero rates and “large scale asset purchases,” to paraphrase Chairman Bernanke, are debtors.  

  So was this whole exercise with zero rates and purchases of trillions of dollars worth of Treasury and agency securities simply a delaying tactic to avoid deflation and debt liquidation?  The FOMC says that QE and ZIRP are all about restoring jobs and growth, but when you examine the situation carefully, it seems hard avoid the conclusion that the Fed’s actions were really about managing a world that is drowning in a sea of uncollectible debt. 

  Chris

  Front Loaded: China, Volatility, and Debt Deflation

  Kroll Bond Rating Agency

  January 21, 2016

   

  Summary

  Kroll Bond Rating Agency (KBRA) believes that the secular shift of asset allocations away from high-yield and leveraged credit, and into more secure government and investment grade credits, will result in lower interest rates as the year progresses – even as the Federal Open Market Committee (FOMC) talks about raising interest rates in its policy guidance. 

  Increased market volatility results from changes in expectations for global growth and come at the end of Fed bond market market intervention, euphmestically called “quantitative easing.” The credit bubbles in sectors like energy and commodities created during the period of FOMC market intervention must now necesssarily be unwound. 

  Watching the benchmark 10-year Treasury trade through 2% yield confirms KBRA’s earlier judgement that the bias with respect to market interest rates will remain negative for some time to come – regardless of what the FOMC may say or attempt to do in terms of increasing the cost of short-term funding. Ironically, KBRA believes that short-term benchmark interest rates will remain under downward pressure even as credit spreads widen and the process of remediating distressed credits moves forward. 

  Discussion

  When financial markets began the New Year 2016, comfortable assumptions about financial stability were dashed by strong selling pressure coming from the Chinese equity markets. This outflow by domestic Chinese investors somehow caused a cascade of selling throughout global equity markets. Many analysts have concluded that worries about forward growth prospects in China are the cause of the selling pressure, but we believe that rising debt levels and central bank manipulation of financial markets are also significant drivers of renewed market volatility. 

  The Fed and other central banks have pursued a policy of purchasing hundreds of billions of dollars’ worth of debt securities, action meant to change investor preferences and, indirectly, result in higher growth and employment. KBRA believes that the end of debt purchases by the FOMC, not only selling in China’s equity markets, is now the chief source of instability in the global financial markets, especially given that most other central banks are easing policy as the Fed attempts to tighten. 

  The conclusion of Fed securities purchases over a year ago essentially marked the start of a tightening process that has coincided with a sharp decline in demand for commodities and has seen an equally sharp selloff in the high yield debt sector. Former Dallas Fed President, Richard Fisher, describes how the FOMC “front loaded” a rally in financial markets starting in 2009, but now says that the global economy must go through a “digestive period” of lower growth. Fisher specifically opines that one should not blame the equity market selloff on China and that market distortions caused by the Fed are to blame for recent market volatility.

  Of note, the just-released 2010 minutes of the FOMC reveal that former Chairman Ben Bernanke unsuccessfully sought to get a consensus to accurately describe QE, namely as “large scale asset purchases.”  Mass purchases of assets, it should be recalled, are fiscal activities that traditionally required Congressional authorization. For example, the government purchase of gold in the 1930s was funded by the Reconstruction Finance Corporation, an executive branch agency created by President Herbert Hoover. 

  The market intervention conducted by the Bernanke and Yellen Feds exceeds the scope of past practice by western central banks, which have become de facto fiscal agencies funded not via the debt markets but by investing moribund bank reserves on deposit with the central bank. Significantly, the real economy has not responded to the Fed’s social engineering experiment. Indeed, since 2013 economic growth has gradually slowed so that as 2016 begins the world economy seems on the brink of entering a recession. Many economists, joined by the International Monetary Fund and Atlanta Fed, have lowered forward growth estimates for 2016 and beyond.

  To read the rest of the KBRA research note, go to:

  https://www.krollbondratings.com/show_report/3640

  
  

  

  

  

  

• The Fragile Forty & How The World Lost $17 Trillion In 6 Months

  It's official. More than 50% of the "wealth" effect created from the 2011 lows to the 2015 highs has been destroyed (despite the world's central banks going into money-printing overdrive over that period). Almost $17 trillion of equity market capitalization has evaporated in just over 6 months with over 40 global stock indices in bear markets…

  

   

  As Bloomberg adds,

  The U.K. was the latest market to fall 20 percent from its peak, while India is less than 1 percent away from crossing the threshold that traders describe as the onset of bear market. Nineteen countries with $30 trillion have declined between 10 percent and 20 percent, thereby entering a so-called correction, according to data compiled by Bloomberg from the 63 biggest markets on Wednesday.

   

  

   

  Emerging nations bore the brunt of the meltdown, accounting for two out of every three bear markets. Slowing Chinese growth, the 24 percent slump in oil this year and currency volatility have driven developing-nation stocks to the worst start to a year on record.

   

  Among equity indexes that are on the cusp of entering bear territory are Australia, India and the Czech Republic, each having fallen about 19 percent from their rally highs. New Zealand and Hungary are putting up the best resistance to the turmoil, limiting their losses to less than 7 percent.

  So just before you (Jim Cramer et al.) demand the central banks do more, just remember what reality looks like – will you use any centrally-planned rally to buy moar or sell into as the smoke and mirrors of yet another bubble is exposed with the business cycle inevitably beating the rigging…

  

  

  

  

  

  

• A Simple Warning

  Via KesslerCompanies.com,

  We like to consider the longest time periods available to find reliable historical trends in data series. Of these, the price/earnings ratio (p/e ratio) of the S&P 500 index is instructive to study. Major bull markets in equities tend to start from heavily disfavored markets; those with earnings multiples (p/e ratios) in the single digits. In a sense, investors have to give up hope in the stock market before it can regain popularity. In the chart below, you will see that price/earnings ratios around 6 or 7 have preceded long equity bull markets.

  Yet, for all the upheaval in the markets over the last 16 years, the US stock market has not yet fallen to single digit p/e ratios. The S&P 500 p/e ratio is currently about 16 and it has been 33 years since the index last traded with p/e below ten. We maintain that this will likely fall this low before the downside of the credit cycle is finished. With earnings now, a single digit p/e would imply an S&P 500 below 1109; a whopping 40% below current levels.

  

   

  It is important to note that these are glacial processes and we aren't predicting this to happen on any particular schedule, but markets in 2016 have returned to a sense of fear and we just want to remind readers that there is a lot of space between 1870 and 1100 in the S&P 500.

  

  

  

  

  

• Soros Reveals He Is Short The S&P 500: Warns China Will Have A Hard-Landing, Says "Fed Hike Was A Mistake"

  There’s been no shortage of commentary from market heavyweights this week thanks to the World Economic Forum in Davos, but for anyone who hasn’t yet gotten their fill of billionaire talking heads, George Soros gave a sweeping interview to Bloomberg TV on Thursday, touching on everything from China to Fed policy to Vladimir Putin to Europe’s worsening refugee crisis.

  As for China, Soros says he “expects a hard landing,” a contention we won’t argue with considering said hard landing probably arrived a year ago. “A hard landing is practically unavoidable,” he said. “I’m not expecting it, I’m observing it. China can manage it. It has resources and greater latitude in policies, with $3 trillion in reserves.” $3 trillion in reserves which, we might add, are rapidly evaporating. 

  As for the Fed, Soros is on the policy mistake bandwagon, saying Yellen may have mistimed liftoff. That echoes sentiments voiced by Marc Faber among other prominent investors and speaks to what we’ve been saying since September, namely that December’s hike might go down as the worst-timed rate hike in history. “The investor said he would be surprised if the Federal Reserve raised interest rates again after hiking them in December for the first time in almost a decade,” Bloomberg writes. He, like Ray Dalio, says the FOMC is more likely to cut than hike going forward.

  Draghi, Soros thinks, will ease further. No surprise there. This morning we got a bit of dovish jawboning out of the former Goldmanite and it seems likely that the ECB will move again in March given the rather dour outlook for inflation across the euro.

  And speaking of inflation (or a lack thereof), Soros warns that deflation has indeed arrived and China, along with falling oil prices and raw materials, are the root causes.

  He also voiced concern over the bloc’s refugee crisis and says he’s worried about the political fate of Angela Merkel. The EU, he contends, is falling apart.

  Commenting on Vladimir Putin, the billionaire says the Russian President is operating from a position of weakness and thus has to act erratically and take “big risks.”

  But the most important point – for markets anyway – came when Soros revealed that he is short the S&P, and long TSYs which again recalls Marc Faber’s take on what’s likely to work during a year in which the US slides into recession. Here was the reaction in equities:

  

  Finally, speaking about the outlook for global growth, Soros says that although he “sees the light at the end of the tunnel,” he “just doesn’t know how to get there.”

  Neither do we.

  Trade accordingly.

  

  

  

  

  

• New Drone Footage Shows Utter Devastation In Syria's Third Largest City

  Since the war in Syria entered a new phase in late September with the entry of the Russian air force, we’ve brought you quite a bit of footage depicting the desolation wrought by five years of bloody combat between government forces and the mishmash of rebels battling for control of the country (see here and here).

  As Bashar al-Assad put it in an interview with Die Presse, “much of Syria’s infrastructure is destroyed.”

  And it isn’t just the infrastructure. Syria has also lost quite a bit of its cultural heritage. For example, the ancient ruins at Palmyra have been partially, well, ruined by Islamic State.

  Although we’re quite sure readers are well aware of just how bad things truly are in Syria thanks in no small part to the US-backed effort to bring about regime change in Damascus, it never hurts to remind the public of just how “successful” Washington’s Mid-East foreign policy is and on that note, we bring you the following drone footage of Homs, Syria’s third-largest city.

  

  

  

  

• Billionaire Blackstone CEO Trolls American Public – Doesn't Get Why People Are Angry

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  DAVOS MAN: “A soulless man, technocratic, nationless and cultureless, severed from reality. The modern economics that undergirded Davos capitalism is equally soulless, a managerial capitalism that reduces economics to mathematics and separates it from human action and human creativity.”

   

  – From the post: “For the Sake of Capitalism, Pepper Spray Davos”

  I’ve written several posts examining the dangerous cluelessness inherent throughout the ranks of the oligarch class over the past several years. One of my earliest and most viral pieces was published two years ago and titled, An Open Letter to Sam Zell: Why Your Statements are Delusional and Dangerous. That article was a response to the billionaire’s appearance of CNBC during which he instructed the less financially fortunate to “emulate the 1%,” as if their destitution was a result of personal shortcomings as opposed to egregious structural flaws inherent in the rigged, crony, oligarch-controlled Banana Republic economy billionaires such as himself helped mold. Here’s an excerpt:

  Individuals, social classes, even cultures and nation-states develop storylines and so-called “myths” about themselves and how they fit into the bigger picture of current events and human history. We all see ourselves and whatever group(s) with which we identify within a particular social, political and economic context. This is obvious, yet it is much more difficult to look at your owns myths and question them. It is far easier to look at other groups’ myths and heap criticism on them. That is basically all you do.

   

  You think everyone that has issues with you oligarchs and how the 0.01% is destroying our economy and society is simply envious because you assume they think like you do. Certainly, if you were poor you would be envious of the the rich. You’ve made that clear. However, that is not the primary motivation of the anger and resentment swelling up from the underclasses.

   

  Your misdiagnosis of the root cause of the current dissent in America is a result of your obliviousness to the actual concerns of the 99%. A group about which you speak with such certainty, yet certainly know almost nothing about. In fact, my website is dedicated to highlighting all of the destructive trends happening in this nation today. From record high food stamp participation, to declining real wages and the reality that young people need to take on so much debt they become indentured serfs from the moment they enter the workforce. From a loss of 4th Amendment rights due to illegal NSA spying, to the militarization of the police force. From oligarch immunity from serious financial crimes that average citizens would be thrown in jail for life for, to trillion dollar bailouts with zero strings attached for the financial community. From the over-prosecution of some of our bravest citizens such as Aaron Swartz, Barrett Brown and Private Manning to a fraudulent two-party sham political system entirely controlled by your socio-economic class.

  In that article, I outlined many of the reasons people are angry and why they should be angry. In fact, I’ve published hundreds of articles every year since early 2012 detailing exactly why the country is in such dire straights. It’s not just me of course, tens of thousands of people across the globe have been doing it for far longer and to much larger audiences. The reason billionaires are incapable of comprehending what’s going on is because doing so would contradict the life-stories they tell themselves about themselves. Make no mistake about it, billionaires think of themselves as truly exceptional people. Privately, they likely muse that their mere presence on earth is nothing short of a glorious gift to humanity from the heavens. These people are deluded, secluded and emotionally stunted in more ways than you could possibly imagine. They have zero capacity for self-reflection.

  In our modern world, our culture has become convinced that extreme wealth and power are something to admire, when history shows us time and time again that “the people” must always remain vigilant against the centralization of precisely those two things. Naturally, the people who are centralizing the wealth and power for themselves don’t see the problem with wealth and power centralization. Neither does much of the fawning, inept, and soulless media.

  The latest example of oligarch disconnectedness comes, quite appropriately, from Davos. So here’s the quote from Steven Schwartzman, billionaire CEO of private equity giant Blackstone:

  “I find the whole thing astonishing and what’s remarkable is the amount of anger whether it’s on the Republican side or the Democratic side,” the Wall Street mogul said at the World Economic Forum in Davos. “Bernie Sanders, to me, is almost more stunning than some of what’s going on in the Republican side. How is that happening, why is that happening?”

  Forbes goes on to accurately note that:

  America is the richest and most unequal nation in the world — at least when you look at the wealth in 55 of the more conventionally developed countries. Median income has largely fallen behind economic growth as corporations continue to retain a bigger share of the benefits, turning into a reverse of what is usually claimed as the danger of income redistribution.

   

  But whether there are long term changes coming or not of their own accord is immaterial in this case. People in the U.S. don’t tend to think that way. What many perceive now is a basic economic unfairness. They work hard, play by the rules as they’ve learned them, and keep getting further behind. The debt funding for college and large purchases seems to be never ending for large portions of the populace, which cements in a sense of unending inequality.

   

  In a way, Bernie Sanders and the Tea Party are different expressions of the same phenomenon. People disagree over the causes and the proper fixes, but they can find common ground in the sense that things are wrong, that power and wealth are too concentrated, and that most of the country will be left holding the bag when things blow up. That the biggest banks got bailed out of an economic downturn largely of their own creation while the promised help for homeowners largely never materialized didn’t help.

   

  Of course people are angry. It’s one thing to face problems but another to face incompetent greed and manipulation. Unless people climb out of their ivory towers and recognize what is happening on the ground, there will be pain and suffering for all to pay. It’s happened time and again in the past. What makes anyone think that our age is somehow immune?

  David Sirota at the International Business Times adds:

  On the eve of the conference, the nonprofit group Oxfam released a report showing that the richest 62 people on the planet now own more wealth than half the world’s population. In the United States, recent data from Pew Research shows the average American’s median household worth has stagnated, as the median household worth of upper-class Americans increased 7 percent. Schwarzman, though, expressed surprise that people are enraged.

  Yes, you read that right. 62 people own more than 3.5 billion of the earth’s inhabitants. Nothing to see here, move along serfs.

  Of course, as I’ve maintained time and time again, this sort of aggregation of wealth only happens in rigged economies. It’s as if the entire Western world has become that Third World oil dictatorship where three guys have billions while the rest of the population eats dirt. I’m sure those dictators also see wonderful, admirable people when they fawn over themselves in the mirror, just as Steven Schwartzman undoubtably does.

   

  Which brings me to my final point: Blackstone. It’s not like Steven Schwartzman is Steve Jobs or Henry Ford, revolutionary entrepreneurs who made their fortunes changing the world and bringing innovative products to people. In fact, you could very easily make the argument that Schwartzman has made much of his fortune by bringing misery to people, or if we want to be generous, hyper rent-seeking from the destruction of the American middle class. Need some proof? Check out the following:

  Leaked Documents Show How Blackstone Fleeces Taxpayers via Public Pension Funds

  A Closer Look at the Decrepit World of Wall Street Rental Homes

  America Meet Your New Slumlord: Wall Street

  Poll Time: Which group presents a greater danger to world peace and prosperity?

  — Michael Krieger (@LibertyBlitz) January 20, 2016

  

  

  

  

  

• Chinese Stocks Face Derivatives-Driven Trigger Of Doom

  Despite the collapse in Chinese stocks, Bloomberg reports annual sales of Chinese equity-linked structured notes across AsiaPac rose to a record (prompting Korea's financial regulator to warn investors in August that their holdings had become too concentrated in notes tied to the China H-Shares index). When banks sell the structured products to investors, they take on an exposure that's similar to purchasing a put option on the index… which needs to be hedged via index futures; and if BofAML is right, Chinese stocks in Hong Kong are poised for a fresh wave of selling now that HSCEI has crossed 8,000 as banks are forced to hedge.

  As Bloomberg details,

  [The selling pressure] is because the benchmark Hang Seng China Enterprises Index is approaching a level that forces investment banks to pare back their bullish futures positions, according to William Chan, the head of Asia Pacific equity derivatives research at BofA’s Merrill Lynch unit in Hong Kong. The trades, tied to banks’ issuance of structured products, are likely to start unwinding when the index falls through 8,000, a level it briefly breached on Wednesday. The gauge dropped 1 percent to 7,932.24 at 1:05 p.m. local time on Thursday.

   

  Banks have purchased futures on the gauge of so-called H shares to hedge exposure to structured products that they’ve sold to clients, according to Chan. Many of those products have a “knock-in” feature at the 8,000 level that will spur banks to cut futures positions to maintain the effectiveness of their hedges, he said. Additional pressure points may also come at lower levels, Chan said.

   

  “As the market goes lower from here, the downward move may accelerate,” he said. “There will be a large amount of hedging in futures which dealers need to unwind.”

  And it appears that has already begun as not only did stocks accelerate through the "pin" level of 8,000 but Chinese 'VIX' has surged as banks look for alternative ways to hedge their implied positions…

  

  When banks sell the structured products to investors, they take on an exposure that’s similar to purchasing a put option on the index, Chan said.

  To hedge against the possibility of a rally, the banks buy Hang Seng China index futures. If the stock gauge falls below knock-in levels for the structured products — the price at which investors begin to lose their principal — the sensitivity of the bank’s position to index swings gets smaller, and banks respond by selling futures to reduce their hedge.

   

  "There will certainly be a build-up of pin risk at given strikes," said Andrew Scott, head of flow strategy and solutions for Asia Pacific at Societe Generale SA in Hong Kong. "But it is clearly very difficult to accurately identify specific key market trigger levels with a great deal of confidence."

  Still, if Chan’s scenario plays out, the market could soon come under pressure. A notional $13.6 billion of structured products linked to the H-share measure will get knocked in between levels of 7,000 and 8,000 on the index, and $16.8 billion between 6,000 and 7,000, he said.

  

   

  It was clear that is what happened yesterday, but how many more are to follow?

  

  

  

  

  

• The Next "Significant Risk For The S&P 500" – Kolanovic Reveals "The Macro Momentum Bubble"

  Yesterday when we presented Tom DeMark’s latest technical forecast, which anticipates a 5-8% bounce in risk before the next leg lower in equities, we said to “look for the next few days to see if DeMark still has his magic” adding that “we, on the other hand, would rather wait for “Gandalf” Kolanovic’ next take.”

  We didn’t have long to wait: moments ago JPM’s head quant, whose uncanny track record of predicting every major market inflection point has been duly documented here, laid out his latest thoughts on the negative feedback loop that is “becoming a significant risk for the S&P 500” but also showed what he thinks is an odd divergence between various asset classes, to wit: “as some assets are near the top and others near the bottom of their historical ranges, we are obviously not experiencing an asset bubble of all risky assets, but rather a bubble in relative performance: we call it a Macro-Momentum bubble.“

  His warning: beware the bursting of the macro-momentum bubble.

  Here is the latest warning from the man whose every single caution so far has played out virtually as predicted:

  Macro Momentum Bubble

   

  In our report last week, we argued that the chance of a bear market is much higher than the market expectation at the time (our estimate ~50% vs. options implying ~25%) and recommended increasing allocations to gold and cash. Over the past week, S&P 500 took another leg lower—and now we believe the market prices a ~50% probability of a bear market. While systematic strategies de-levered more than 2/3 of their exposure (as compared to August/September), market sentiment remains bleak, and there is no obvious catalyst to drive market higher. Short option positions increase market volatility and intraday market moves. The large S&P 500 intraday selloff yesterday was likely driven by gamma hedging (there’s a large put-call gamma imbalance of $25bn per 1%). As we wrote in our report last week, significant short gamma positions are in the 1950-1800 range, and decline below 1800 (on account of put-spreads, where clients are short lower strike puts). As the market fell close to 1800 yesterday, declining gamma near 1800 could have contributed to the sharp intraday reversal.

  That was then, and played out just as Kolanovic predicted: here is the latest warning:

  At this point we think that the negative feedback loop between market performance, volatility and the real economy (wealth effect) is becoming a significant risk for the S&P 500. To stabilize equities one would need a strong catalyst such as the Fed turning significantly more dovish (or even launching another round of easing). This could put the dollar rally into reverse, stabilize commodity prices and put a floor under the S&P 500. The S&P 500 selloff may also be the catalyst for a momentum– value convergence, which we advocated in our 2016 Outlook (e.g., Oil – Equity convergence).

   

  Going into 2016, many investors were wondering if the monetary easing over the past 7 years inflated a bubble in risky asset prices. The answer to this question depends on which risky asset one looks at. In fact, while some assets are near their peaks of historical price and valuation levels, others are near their lows. Since the last bear market 7 years ago, the S&P 500 is up ~200% and still near  all-time high levels. The US Dollar Index (DXY) is also at its highest point in 15 years (since the tech bubble). On the other hand, a large number of risky assets are in the opposite situation: Emerging Market equities, EM Currencies, Commodities are currently trading below levels during great recession of 2008/2009. This unprecedented divergence (more than ~3 standard deviations) is shown in the figure below (also see our 2016 Outlook). Figure 1 shows price of several Momentum assets (S&P 500, S&P 500 Low Volatility Index, S&P 500 Software Index), and Value Assets (EM Currencies – JPM EM FX Index, MSCI Latin America Equities and Commodities – BCOM Index). The left Figure below illustrates that since the onset of the 2008 crisis, the price of Momentum assets increased to 500%, 600%, or even 700% as expressed in units of Commodity prices (BCOM Index, and we observe a similar appreciation in units of EM FX or EM Equities). In summary, as some assets are near the top and others near the bottom of their historical ranges, we are obviously not experiencing an asset bubble of all risky assets, but rather a bubble in relative performance: we call it a Macro-Momentum bubble.

  

  Why do we have this bubble?

  Every asset trend starts with fundamental developments. As the US was the first to get out of the global financial crises of 2008-2011 (with Europe and Asia lagging), US assets such as the S&P 500 and USD started outperforming international assets. Divergence between Central Bank policies triggered the USD rally, cross-regional capital flows, and put pressure on EM economies, Commodity prices and Commodity related Developed Market Equity sectors. However, we think that fundamentals were only one of the drivers, and that structural reasons played an equally important (or bigger) role in the creation of this relative performance bubble. These structural drivers are listed and explained below.

   

  Diagram above right shows a hypothetical performance of 2 assets: one with positive momentum and another asset whose price declined below some long-term valuation level. As the price of the trending asset increases, its volatility declines. Similarly, the volatility of the ‘value’ asset increases as the price moves lower. Based on this pattern, most risk models would increase the weight of  the trending asset and decrease the weight of the value asset, reinforcing the divergence. Many systematic strategies (such as CTAs, Risk Parity/Vol Target, Low-vol Risk factor portfolios) would do the same. The positive feedback between inflows and low volatility eventually increases the crash risk for trending assets.

   

  We think S&P 500 momentum turning negative this year (after a 6-year rally) may be the first step of the mean reversion we expect to play out later this year. Mean reversion would lead to the outperformance of Emerging Market stocks, Commodities, Gold, and the Energy Sector, and relative underperformance of Momentum assets such as USD, S&P 500 Low Volatility and Momentum portfolios, and likely the S&P 500 itself.

   

  Below we list and explain several structural factors that led to Macro-Momentum bubble:

   

  Explicit Trend Following Strategies: Assets in strategies that explicitly follow price momentum experienced double digit growth over the past few years, and currently stand at over $350bn. This includes CTAs, but also in-house managed pension assets, dealers’ structured products, etc.

   

  Implicit Trend Following Strategies: Many systematic strategies bias towards momentum assets. Historically, assets with strong trends exhibit lower volatility and lower correlation to other assets, and are over-weighted in risk budgeting frameworks such as Risk Parity and Volatility Control. In addition, Low Volatility/Smart Beta strategies often overlap with Momentum investing. Over the past year we saw a significant increase in these assets, with the asset base likely topping $1Tr.

   

  Macro HF bets are aligned with Momentum bets: Over the past years, many popular macro trades (long USD, short Oil and Gold, long DM and short EM equities) are closely aligned with simple trend following signals. The more recent trades betting on HY defaults or breakdowns in EM currency pegs, also align with recent price momentum (USD up, Oil down, etc.)

   

  Volatility based risk management: Many risk management tools refer to historical covariances to determine asset allocation. This approach prefers momentum assets (that have lower volatility and average correlation) over value assets.

   

  Decrease of active assets and increase of passive assets: Active equity managers tend to have a value bias, while capitalization based passive indices tend to have a momentum bias (e.g., they increase the weight of stocks that outperform). The shift from active (e.g., seen from persistent mutual fund outflows) to passive assets (particularly ETFs) may have contributed to the underperformance of value and outperformance of momentum in equity long-short portfolios.

   

  Higher cost of capital for Value assets: Value trades require more capital than Momentum. Given higher volatility, value assets tie up more risk capital for longer periods of time (momentum tends to work on shorter time horizons, and value/reversion on longer time horizons).

   

  Lower liquidity of Value assets: Value assets, being more volatile than momentum assets are also less liquid. Since financial crisis, both investors and market makers are averse to hold and provide liquidity of less liquid assets.

  So now we know that we have not one massive bubble, but a bubble of small asset-class divergences, all thanks to the Fed. What to do? As a reminder, here is how JPM’s will trade this: use transitory bounces to liquidate risk positions, and stay in either cash or gold until better buying opportunities present themselves.

  Unless, of course, Yellen launches QE4, in which case all bets are off.

  

  

  

  

  

• "Dip Buying Is Officially Dead"

  Back in November, JPM prophetically warned that “The long period of indiscriminately buying any dip might be coming to an end.” Today it’s official, and from the same JPM, in its closing day trading note we read that “dip buying is officially dead and stocks (esp. US ones) are no longer impressed by promises of central bank largess.”

  From Adam Crisafulli’s LookBack at the Market

  Market update – dip buying is officially dead and stocks (esp. US ones) are no longer impressed by promises of central bank largess. The reason the SPX has only witnessed insipid rally attempts during this weeks-long swoon is the absence of robust dip-buying.

   

  In years past (when multiples were lower and Corporate America and the US economy were earlier in their recovery process) investors were confident in the SPX rebounding to fresh highs following any material dip and that helped keep sell-offs rare and brief. However, w/the economic and profit cycle advanced and multiples full that reservoir of dip buying doesn’t exist and rallies are now being looked at as opportunities to fade (and not something to be chased). This isn’t to mean the fundamental backdrop is nearly as bad as the YTD sell-off signals – economic data is holding up OK and (perhaps more importantly) the tone from CEOs (both on CQ4 earnings calls and during Davos interviews) is a lot better than both the present market and media narrative would suggest.

   

  However, the current multiple/estimate framework is a formidable one and w/$120 and 16x considered “best case” scenarios its going to be hard for the SPX to lift much above the low/mid-1900 range (1950 is less than 5% from present levels, not compelling enough to fuel a wave of broad buying). As far as central banks are concerned it isn’t that they’ve “lost control” or are “powerless” – the world’s big CBs (FOMC, ECB, BOJ, BOE, and PBOC) remain extraordinarily accommodative and the fundamental landscape would be much worse w/o their actions. However, the relationship between accommodation and sentiment isn’t linear and the likely next CB steps are either too incremental to impress (mild adjustments from the ECB w/the Fed and BOE only staying on hold for longer) or structurally damaging as the limits of policy get hit (this is the case w/the BOJ and to a less extent the ECB as Eurozone bank investors grow nervous about deposit rates being brought deeper into negative territory).

   

  The present debate is unnecessarily binary – just b/c the SPX isn’t about to sprint to fresh highs doesn’t mean a bear market, recession, or 2008-like environment is imminent. At the Wed lows (1812 on the SPX cash) conditions had become very oversold, sentiment was extremely bearish, and the unrelenting YTD selling was growing tired – all this, coupled w/a handful of OK earnings (XLNX, VZ, etc), a bounce in oil/energy equities (thanks to the inventory, some spurious OPEC emergency meeting noise, and KMI’s earnings), and the CB rhetoric (markets don’t respond to CB words like they did but that doesn’t mean a Draghi press conf. can’t help a deeply oversold market to bounce) helped engineer a (pretty tepid) rally. Flows didn’t spike Thurs and buying for the most part is hesitant (a mix of covering and faster-money “renting”) w/people keeping a close eye on the exit. It seems like this recent rebound should be able to persist for more than 24 hours (there  isn’t as much urgent heavy selling left, as was evident mid-day Thurs when a sell-off attempt faltered) but the low/mid-1900s will  remain a formidable ceiling (and the inability of banks to find any support, despite putting up solid numbers overall, is a negative omen).

  So if BTFD is dead then… STFR?

  

  

  

  

  

• "What Planet Are We Living On?"

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  One follow up point to yesterday’s missive about why the economy seems to be converging in recession rather than full and blossoming recovery: There must be something said about the manner of redistribution in this “cycle” as different from all others. In other words, the Fed has been attempting greater and greater redistribution efforts via monetary interference ever since Solow and Samuelson predicted their disastrous “exploitable” Phillips Curve. At least in 1961 the Fed was as much a captured article of Treasury’s orbit, but after Greenspan (or Volcker, we don’t really know) moved to interest rate targeting (and eurodollar denial) the intent has been quite evident.

  We can measure such things in raw, absolute terms, as the FOMC targeted a low of 3% for federal funds by September 1992. And while ostensibly in recovery, the economy experienced its first “jobless” version (just ask Bush Sr.) during the whole of the low-rate regime. The next cycle, after recognizing just the contours of a grand monetary shift, Greenspan by June 2003 had federal funds targeted at 1%; (not) coincidentally that was another and more prolonged “jobless recovery.” We have now not just ZIRP but much more than that the jobless nature of the economy this time is in a class by itself far removed even from those prior two.

  

  The things that have happened over the past eight plus years (the first “emergency” rate cut was September 2007; since that initial moment of “stimulus” we have anyway received the worst recession and then the worst recovery of any cycle dating to the 1930’s and it isn’t even close) would have in 2006 seemed so far beyond radical as to have been plain absurd. Redistribution predicated upon the increasingly bizarre begins to describe our economic deficiency quite well, I think; including the growing unease about having another recession without ever finding recovery from the last great one.

  To appreciate that point in all its “glory”, we need only look to Japan yet again where, if orthodox economists survive this one still with any influence at all, we find our future. Japan has pioneered the absurd, but we mustn’t think we are all that far away from this (thanks to L Bower for pointing it out):

  The Bank of Japan’s purchase of corporate debt at negative yields for the first time adds to distortions in Japan’s bond markets and raises risks for investors and banks, according to Mana Nakazora, the chief credit analyst in Tokyo at BNP Paribas SA.

   

  The central bank bought corporate bonds in market operations at minus 0.03 percent on Wednesday, according to data from the central bank. While the BOJ has purchased company notes at zero interest in the past, it’s the first time for it to buy the debt at negative levels, according to data compiled by Bloomberg.

  What planet are we living on? It is, at least, truly the death of money both as an economic tool and even the living, historical concept. Again, if we think that only something for or from Japan, ask yourself what a Yellen might do if 2016 turns out the way it is shaping up. Our future is continuously bleak as central bankers cling with religious devotion to increasingly absurd redistribution schemes, or to fix the error – them.

  

  

  

  

  

• "China Is Not Contained" Credit Market Screams

  We have seen this pattern before, and it did not end well. While the most mainstream indications of China's "stability" are droned on about as indicating some level of control (i.e. Yuan volatility suppression), the fact is that no matter how hard China tries to centrally plan the entire world, segments of the credit market are screaming "uncontained."

  First, China was forced to inject the most liquidity in three years… and it's still not helping support risk…

  

   

  The last time China supressed FX volatility, in the desperate hopes of holding the balloon underwater long enough for everything to be fine, China's sovereign CDS market was screaming that devaluation was coming… and it did – and large. Now, we see the same pressures building…

  

   

  And finally, despite record amounts of liquidity being spewed into China's financial markets, China's largest bank – ICBC – is seeing its credit risk explode…

  

   

  Do these pictures look like China is "contained" as Bernanke and Dalio believe?

  

  

  

  

  

• Someone Is Trying To Corner The Copper Market

  It may not be as sexy as gold and silver, but sometimes even doctor copper needs a little squeeze and corner love as well, and according to Bloomberg, that is precisely what someone is trying to do.

  One company whose identity is unknown, is “hoarding as much as half the copper available in warehouses tracked by the London Metal Exchange.”

  However, unlike the famous cornering of silver by the Hunts in 1980 which sent the price soaring if only briefly, in this case the unknown manipulator is trying to push the price of the physical lower. By taking control of half the available copper, the trader can help drive up the fees associated with rolling forward a short position, making it tougher for speculators to keep their bearish, explains Bloomberg.

  Indeed, as shown in the chart below, this week the borrowing cost jumped to the highest in three years, almost as if someone is desperately trying to punish the shorts in a strategy very comparable to what Shkreli did with KBIO, when he bought up 70% of the outstanding stock and then made removed his shares from the borrowable pool, forcing a massive short squeeze.

  

   

  In its disclaimer warning, Bloomberg writes that the episode, which caught traders by surprise “is one example of the perils of trading on the London Metal Exchange, where contracts are physically settled and speculators can end up paying dearly if they leave their bets without an offsetting position. Money managers are holding a net-short position on the LME, with prices down 23 percent in the past year and no sign of a recovery in Chinese demand.”

  Meanwhile, market participants are quietly moving to the sidelines ahead of what may be some serious copper price swings:

  “A big trader is probably trying to squeeze the market,” said Gianclaudio Torlizzi, the managing director of T-Commodity srl, a Milan-based consultancy.“It’s an indication the supply side in copper is tightening.”

  Bloomberg adds that yesterday was the third Wednesday of the month, when many traders settle their commitments. To renew a short position, traders have to buy back metal while selling it forward. The tom-next spread, a measure of how much the process costs over one day, jumped as high as $30 a metric ton on Tuesday, the highest since May 2012.

  The declining amounts of physical copper mean that liquidity in the metal is evaporating, resulting in violent, sharp price swings. The amount of metal available in warehouses has dropped more than 40 percent since August, making it costly to roll shorts.

  

  So who is trying to corner the plunging in price metal? According to Bloomberg, the suspect who controls a large portion of the copper is an unidentified company. “Two firms held 40 to 49 percent of copper inventories and short-dated positions, according to Jan. 19 exchange data that shows holdings as a proportion of available stockpiles. While the LME provides data on the approximate size of large positions, it doesn’t disclose who is behind them.”

  One wonders if perhaps the question is not which company is behind the cornering, but rather which country.

  Still, no matter who is behind this attempt to artificially push copper prices higher – which may explain the recent industrial metal strength – one can’t help but wonder how it plays out, because there is hardly a “cornering” episode in history that does not end in tears.

  And certainly not in copper, where cornering attempts are nothing new, but perhaps few instances of manipulation are quite as infamous as that of “Mr. Copper” Yasuo Hamanaka.  For those who are unfamiliar, here is a brief recap of what happened in the mid-1990’s.

  The Copper King: An Empire Built On Manipulation

  The commodities market has grown in importance since the 1990s, with more investors, traders and merchants buying futures, hedging positions, speculating and generally getting the most out of the complex financial instruments that make up the commodities market. With all the activity, people dependent on futures to remove risk have raised concerns over large speculators manipulating the markets. In this article we’ll look to the past for one of the biggest cases of market manipulation in commodities and what it meant to the future of futures.

  The 5%

  There is still a sense of mystery surrounding Yasuo Hamanaka, a.k.a. Mr. Copper, and the magnitude of his losses with the Japanese trading company Sumitomo. From his perch at the head of Sumitomo’s metal-trading division, Hamanaka controlled 5% of the world’s copper supply. This sounds like a small amount, since 95% was being held in other hands. Copper, however, is an illiquid commodity that cannot be easily transferred around the world to meet shortages. For example, a rise in copper prices due to a shortage in the U.S. will not be immediately canceled out by shipments from countries with an excess of copper. This is because moving copper from storage to delivery to storage costs money, and those costs can cancel out the price differences. The challenges in shuffling copper around the world and the fact that even the biggest players only hold a small percentage of the market made Hamanaka’s 5% very significant.

  The Setup

  Sumitomo owned large amounts of physical copper, copper sitting in warehouses and factories, as well as holding numerous futures contracts. Hamanaka used Sumitomo’s size and large cash reserves to both corner and squeeze the market via the London Metal Exchange (LME). As the world’s biggest metal exchange, the LME copper price essentially dictated the world copper price. Hamanaka kept this price artificially high for nearly a decade leading up to 1995, thus getting premium profits on the sale of Sumitomo’s physical assets.

  Beyond the sale of its copper, Sumitomo benefited in the form of commission on other copper transactions it handled, because the commissions are calculated as a percentage of the value of the commodity being sold, delivered, etc. The artificially high price netted the company larger commissions on all of its copper transactions.

  Smashing the Shorts

  Hamanaka’s manipulation was common knowledge among many speculators and hedge funds, along with the fact that he was long in both physical holdings and futures in copper. Whenever someone tried to short Hamanaka, however, he kept pouring cash into his positions, outlasting the shorts simply by having deeper pockets. Hamanaka’s long cash positions forced anyone shorting copper to deliver the goods or close out their position at a premium.

  He was helped greatly by the fact that, unlike the U.S., the LME had no mandatory position reporting and no statistics showing open interest. Basically, traders knew the price was too high, but they had no exact figures on how much Hamanaka controlled and how much money he had in reserve. In the end, most cut their losses and let Hamanaka have his way.

  Mr. Copper’s Fall

  Nothing lasts forever, and it was no different for Hamanaka’s corner on the copper market. The market conditions changed in 1995, in no small part thanks to the resurgence of mining in China. The price of copper was already significantly higher than it should have been, but an increase in the supply put more pressure on the market for a correction. Sumitomo had made good money on its manipulation, but the company was left in a bind because it still was long on copper when it was heading for a big drop.

  Worse yet, shortening its position – that is, hedging with shorts – would simply make its significant long positions lose money faster, as it would be playing against itself. While Hamanaka was struggling over how to get out with most of the ill-gotten gains intact, the LME and Commodity Futures Trading Commission (CFTC) began looking into the worldwide copper-market manipulation.

  Denial

  Sumitomo responded to the probe by “transferring” Hamanaka out of his trading post. The removal of Mr. Copper was enough to bring the shorts on in earnest. Copper plunged, and Sumitomo announced that it had lost over $1.8 billion, and the losses could go as high as $5 billion, as the long positions were settled in a poor market. They also claimed Hamanaka was a rogue trader and his actions were completely unknown to management. Hamanaka was charged with forging his supervisor’s signatures on a form and was convicted.

  Sumitomo’s reputation was tarnished, because many people believed that the company couldn’t have been ignorant of Hamanaka’s hold on the copper market, especially as it profited from it for years. Traders argued that Sumitomo must have known, as it funneled more money to Hamanaka every time speculators tried to shake his price.

  Fallout

  Sumitomo responded to the allegations by implicating JPMorgan Chase and Merrill Lynch. Sumitomo blamed the two banks for keeping the scheme going by granting loans to Hamanaka through structures like futures derivatives. All of the corporations entered litigation with one another, and all were found guilty to some extent. This fact hurt Morgan’s case on a similar charge related to the Enron scandal and the energy-trading business Mahonia Ltd. Hamanaka, for his part, served the sentence without comment.

  

  

  

  

  

• Guest Post: Sarah Palin Is Making Sense (Really!)

  Authored by Jon Schwarz, originally posted at The Intercept,

  While the New York Times ridiculed Sarah Palin’s speech endorsing Donald Trump yesterday as “mystifying,” a big portion of it was a non-mysterious, coherent attack on big money politics. It’s worth reading that whole portion:

  [Trump] is beholden to no one but we the people. …

   

  Trump, what he’s been able to do, which is really ticking people off, which I’m glad about, he’s going rogue left and right, man. That’s why he’s doing so well. …

   

  The permanent political class has been doing the bidding of their campaign donor class and that’s why you see that the borders are kept open. For them, for their cheap labor that they want to come in. That’s why they’ve been bloating budgets. It’s for crony capitalists to be able to suck off of them. It’s why we see these lousy trade deals that gut our industry for special interests elsewhere.

   

  We need someone new, who has the power, and is in the position to bust up that establishment. …

   

  His candidacy, which is a movement. It’s a force. It’s a strategy. It proves, as long as the politicos, they get to keep their titles and their perks and their media ratings. They don’t really care who wins elections. …

   

  And the proof of this? Look what’s happening today. Our own GOP machine, the establishment, they who would assemble the political landscape, they’re attacking their own frontrunner. …

   

  We, you, a diverse dynamic, needed support base that they would attack. And now, some of them even whispering, they’re ready to throw in for Hillary over Trump because they can’t afford to see the status quo go. Otherwise, they won’t be able to be slurping off the gravy train that’s been feeding them all these years. They don’t want that to end.

  Trump himself has repeatedly condemned politicians’ servitude toward their big donors.

  During the first GOP debate last August in Cleveland, he declared, “I was a businessman. I give to everybody. When they call, I give. And do you know what? When I need something from them two years later, three years later, I call them, they are there for me. And that’s a broken system.”

  Palin and Trump may or may not believe what they’re saying. As Laura Friedenbach, press secretary of the campaign finance reform organization Every Voice, points out, “Every single Republican presidential candidate, including Donald Trump, has so far failed to offer” any concrete plan to reduce the influence of money in politics.

  However, they’re responding to a genuine passion among Republicans. A 2015 New York Times poll found that 80 percent of Republicans believe “money has too much influence” in political campaigns, and 81 percent feel the campaign finance system needs either “fundamental changes” or must be completely rebuilt. A recent survey by Democracy Corps found that 66 percent of likely Republican voters support a program of public matching funds for small donors. Among Republican candidates such a program would be an enormous boon to Ben Carson and Ted Cruz (and less so to Trump, since his campaign is almost completely self-financed).

  Palin did, however, inaccurately differentiate the Democratic and Republican establishments, claiming that Democratic powerbrokers would never “come after their frontrunner and her supporters … because they don’t eat their own. They don’t self-destruct.” In fact, the Democratic party elite has previously attempted to destroy its own presidential candidate, most notoriously in 1972 when new primary rules allowed George McGovern to capture the nomination; as a Richard J. Daley ward heeler predicted that fall, McGovern was “gonna lose because we’re gonna make sure he’s gonna lose.” And if Bernie Sanders genuinely threatens Hillary Clinton, Democratic establishment attacks on him as a “socialist” with “wackadoodle” ideas will surely intensify, for exactly the reason Palin identified: “They can’t afford to see the status quo go.”

  

  

  

  

  

• "Most Of Us Ended Up At Office Depot": Thousands Of Angry Students "Flood" Government With Demands For Debt Relief

  Last summer, Corinthian Colleges closed its doors amid government scrutiny of for-profit colleges.

  The school – which had been the recipient of some $1.5 billion in annual federal aid funding – was variously accused of employing deceptive marketing practices, falsifying job placement records, and lying about graduation rates.

  As we noted when the doors were shut, for-profit students won’t have a particularly easy time transferring their credits (meaning they would have to start over at another school if they wanted to complete their degrees). That means that when a government mandated closure leaves them out in the cold, they’ll likely seek to take advantage of their ‘right’ to have their debt discharged.

  Sure enough, the government quickly found itself scrambling to respond after Secretary of Education Arne Duncan received a group request from 78,000 former Corinthian students requesting loan forgiveness in late May. Essentially, the law says students can have their debt expunged in the event they’ve been defrauded. In cases like Corinthian, where the government itself has effectively accused the school of fraud, it’s difficult to deny students’ claims.

  We immediately suggested that in the wake of the Corinthian affair, many more of the nation’s heavily indebted students and former students would seek to have their loans forgiven as well. Here’s what we said in May:

  The real question now is whether continued pressure on for-profit colleges will result in further closures and more petitions from hundreds of thousands of students with tens of billions of loans they now know can be legally discharged. Note that we have not used the term “canceled”, because as we like to remind readers, liabilities are never “canceled”, they are simply written off by the person for whom they are an asset.

  Fast forward nine months and sure enough, “thousands” of students are “flooding the government” with appeals to have their student loans discharged on the grounds they were the victims of fraud.

  “In the past six months, more than 7,500 borrowers owing $164 million have applied to have their student debt expunged under an obscure federal law that had been applied only in three instances before last year,” WSJ wrote on Wednesday. “The law forgives debt for borrowers who prove their schools used illegal tactics to recruit them, such as by lying about their graduates’ earnings.” Here’s more:

  The U.S. Education Department has already agreed to cancel nearly $28 million of that debt for 1,300 former students of Corinthian Colleges—the for-profit chain that liquidated in bankruptcy last year. The department has indicated that many more will likely get forgiveness.

   

  The sudden surge in claims has flummoxed the Education Department, which says the 1994 forgiveness program is overly vague. The law doesn’t specify, for example, what proof is needed to demonstrate a school committed fraud.

  And that’s a problem. Because the law is short on specifics, US taxpayers are theoretically on the hook for every student who feels aggrieved at not being able to secure gainful employment in a field related to what they studied in college. “The program could prove to be one of the few lifelines for hundreds of thousands of Americans buried in student debt after attending disreputable schools that failed to land them a decent job,” WSJ continues. 

  Of course “disreputable schools” aren’t to blame for every jobless graduate.

  As we’ve shown on countless occasions using countless metrics, the “robust” US labor market is anything but, and has been reduced to a kind bartender creation machine. That deplorable state of affairs is the result of America’s rapid transformation from a middle class utopia buoyed by breadwinner jobs in sectors like manufacturing to a kind of modern day fuedal system wherein the peasantry slaves away in the service sector so the robber barons can enjoy conveniences like $6 lattes. “Andrew Kelly of the American Enterprise Institute, a conservative think tank, said there is a danger that the program will become overly broad, encompassing not just instances of outright fraud, but also cases in which borrowers simply regret taking out the debt because they can’t find a job, through no fault of the colleges,” WSJ adds, underscoring our point.

  Because the government didn’t take the time to spell out what counts as “fraud,” taxpayers may effectively end up subsidizing the “strong” US jobs market by bailing out every student who can’t find gainful employment in an economy which, if you believe the BLS, is adding nearly 300,000 positions a month. 

  Imagine the shock when the US public suddenly realizes that bailing out jobless students isn’t compatible with the “robust” labor market rhetoric. Here’s a bit more from The Journal:

  The surge in applications reflects the growing savvy of student activists, who discovered the law last year after it had largely sat dormant for two decades. Education Department officials say the agency failed to draft rules after the law was passed in the early 1990s and lacked the urgency to do so because it had only received five applications—three of them granted—before last year.

   

  The clamoring for forgiveness represents the fallout of a college-enrollment boom—driven by a surge in students attending for-profit colleges—that caused student debt to nearly triple in the past decade to $1.2 trillion, New York Federal Reserve figures show. Seven million Americans have defaulted, government data show.

   

  So far, almost all of the borrowers applying for forgiveness under the 1994 program attended for-profit schools.

   

  Three-quarters went to Corinthian-owned institutions, while hundreds of others attended the Art Institutes, owned by Education ManagementCorp.; and ITT Technical Institutes, owned by ITT Educational Services Inc. All three have been the subject of federal investigations into illegal recruiting tactics in recent years.

   

  “I feel robbed of my life,” wrote one student who said she owes $114,000 in federal student debt—most of it in her mother’s name—for her time at a branch of the Art Institutes chain of for-profit schools. “Even after paying my student loans on time and in full every month for over seven years, I’ve barely made a dent.”

   

  Syd Andrade’s story is emblematic. He said in an interview that during his high-school senior year, he received a call from an Art Institutes recruiter promising “great facilities, great teachers, use of industry-standard software” for a game-art design program.

   

  
  

   

  Mr. Andrade, who graduated from the company’s Tampa, Fla., location, said the classes used outdated software and were taught by an instructor who knew less than the students. “Most of the time spent in her classes were us teaching her,” he said. “It was a group effort of everyone trying to learn together.”

  So while the phenomenon is for now confined to the shady for-profit arena, don’t kid yourself into thinking that there aren’t student activist groups at large state schools pondering how they can take advantage of the law as well. In short, it’s just a matter of time before the “thousands” of appeals flooding the Department of Education turn into tens and hundreds of thousands as recent graduates suddenly discover the harsh realities of America’s waiter and bartender economy.

  

  At the end of the day, there’s $1.2 trillion in student debt that needs paying down and students simply aren’t finding the type of jobs they need to service their liabilities. That means you, dear taxpayer, will shoulder the burden of wiping the slate clean for millions of disgruntled students who were literally sold a lie not only about the quality of the education they would receive, but about the well being of the American dream itself.

  On that note, we close with a quote from the abovementioned Syd Andrade:

  “They promised us to get jobs in the field, and most of us ended up at Office Depot,” he said.

  

  

  

  

  

• Recession Signs – 2008 & Now

  Submitted by Lance Roberts via RealInvestmentAdvice.com,

  Warning Signs Of A Recession

  In late 2007, I was giving a presentation to a group of about 300 investors discussing the warning signs of an impending recessionary period in the economy. At that time, of course, it was near “blasphemy” to speak of such ills as there was “no recession in sight.”

  Then, in December of that year, I penned that we were either in, or about to be in, the worst recession since the “Great Depression.” That warning too was ignored as then Fed Chairman Ben Bernanke stated that it was a “Goldilocks Economy.” The rest, as they say, is history.

  I was reminded of this as I was reading an article by Myles Udland, via Business Insider, entitled “The US economy is nowhere near a recession.” 

  It is an interesting thought. However, the problem for most analysts/economists is that they tend to view economic data as a stagnant data point without respect for either the trend of the data or for the possibility of future negative revisions. As shown in the chart below, this is why it SEEMS the financial markets lead economic recessions.

  

  However, in reality, they are more coincident in nature. It is just that it takes roughly 6-12 months before the economic data is negatively revised to show the start of the recession. For example, the recession that started in 2007 was not known until a year later when the data had been revised enough to allow the NBER to make its official call.

  The market decline beginning this year is likely an early warning of further economic weakness ahead. I have warned for some time now that the economic cycle was exceedingly long given the underlying weakness of the growth and that eventually, without support from monetary policy, would likely give way. The following charts are the same ones I viewed in 2007, updated through the most recent data periods, which suggested the economy was approaching a recessionary state. While not all are in negative territory yet, they are all headed in that direction.

  

  

  

  

  

  

  Is the economy “nowhere near recession?” Maybe. Maybe not. But the charts above look extremely similar to where we were at this point in late 2007 and early 2008.

  Could this time be “different?” Sure. But historically speaking, it never has been.

  The Topping Process Completes

  For the last several months I have repeatedly discussed the topping process in the markets and warned against dismissing the current market action lightly. To wit:

  “Typically bubbles have an asymmetric shape. The boom is long and slow to start. It accelerates gradually until it flattens out again during the twilight period. The bust is short and steep because it involves the forced liquidation of unsound positions.

  The chart below is an example of asymmetric bubbles.

  

  The pattern of bubbles is interesting because it changes the argument from a fundamental view to a technical view. Prices reflect the psychology of the market which can create a feedback loop between the markets and fundamentals.

  This pattern of bubbles can be clearly seen at every bull market peak in history.”

  Take a look at the graphic above, and the one below. See any similarities?

  

  As you will notice, the previous two bull-market cycles ended when the topping process ended by breaking the rising support levels (red line). The confirmation of the onset of the “bear market” was marked by a failed rally back to the previous rising support level. Currently, that has not occurred as of yet.

  The next chart is another variation of the above showing the break-down of the rising bullish trend in the market.  In all cases, investors were given minor opportunities to reduce equity risk in portfolios well before the onset of the bear market decline. 

  

  I have been asked repeatedly as of late whether or not the markets will provide a similar “relief rally” to allow for escape. The answer is “yes.” However, as in the past, those relief rallies tend to be short-lived and don’t get investors “back to where they were previously.”

  The risk to the downside has risen markedly in recent weeks as the technical, fundamental and economic deterioration escalates. This is not a time to be complacent with your investments.

  “One & Done Yellen” And The Rise Of QE4.

  Back in December, when Janet Yellen announced the first hike in the Fed Funds rate in eleven years from .25% to .50%, the general mainstream consensus was “not to worry.”  It was believed that a rate hike by the Fed would have little impact on equities given the strong economic recovery at hand. Well, that was what was believed anyway as even Ms. Yellen herself suggested the “odds were good” the economy would have ended up overshooting the Fed’s employment, growth and inflation goals had rates remained at low levels.

  The problem for Ms. Yellen appears to have a been a gross misreading of the economic “tea leaves.” With economic growth weak, the tightening of monetary policy had a more negative impact on the markets and economy than most expected. As I wrote previously:

  “Looking back through history, the evidence is quite compelling that from the time the first rate hike is induced into the system, it has started the countdown to the next recession. However, the timing between the first rate hike and the next recession is dependent on the level of economic growth at that time.

   

  When looking at historical time frames, one must not look at averages of all rate hikes but rather what happened when a rate hiking campaign began from similar economic growth levels. Looking back in history we can only identify TWO previous times when the Fed began tightening monetary policy when economic growth rates were at 2% or less.

   

  (There is a vast difference in timing for the economy to slide into recession from 6%, 4%, and 2% annual growth rates.)”

  

  “With economic growth currently running at THE LOWEST average growth rate in American history, the time frame between the first rate and next recession will not be long.”

  Given the reality that increases in interest rates is a monetary policy action that by its nature slows economic growth and quells inflation by raising borrowing costs, the only real issue is the timing.

  With the markets appearing to have entered into a more severe correction mode, there is little ability for Ms. Yellen to raise interest rates any further. In fact, I would venture to guess that the rate hike in December was likely the only one we will see this year. Secondly, we are likely closer to the Federal Reserve beginning to drop “hints” about further accommodative actions (QE) if conditions continue to deteriorate.

  It is important to remember that in 2010, when Ben Bernanke launched the second round of QE, the Fed added a third mandate of boosting asset prices to their roster of full employment and price stability. The reasoning was simple – create an artificial wealth effect encouraging consumer confidence and boosting consumption. It worked to some degree by pulling forward future consumption but failed to spark self-sustaining organic economic growth.

  With market pricing deteriorating sharply since the beginning of the year, it will not take long for consumer confidence to slip putting further downward pressure on already weak economic growth. With Ms. Yellen already well aware she is caught in a “liquidity trap,” there would be little surprise, just as we saw in 2010, 2011 and 2013, for the Fed to implement another QE program in hopes of keeping consumer confidence alive.

  

  The issue is at some point, just as China is discovering now with failure of their monetary policy tools to stem the bursting of their financial bubble, the same will happen in the U.S. With the Fed unable to raise rates to reload that particular policy tool, a failure of QE to stabilize the markets could be deeply problematic.

  Just some things to think about.

  

  

  

  

  

• Venezuela Hits "Point of No Return" – 2016 Bankruptcy Is "Difficult To Avoid" According To Barclays

  In November 2014, just after OPEC officially died with the 2014 Thanksgiving massacre which was the first oil-crushing catalyst that has led to crude’s relentless decline since Saudi Arabia officially broke off with the rest of the cartel, sending the black gold to a price of around $28 per barrel, we revealed who the first oil-exporting casualty of the crude carnage would be: the Latin American socialist paradise that is Venezuela.

  Back then we said that the best way to bet on the OPEC cartel collapse, and the inevitable death of said socialist paradise as we know it, was to buy Venezuela CDS. Sure enough, anyone who has done so has generated massive returns since then.

  

  More importantly, the wait for the long-overdue credit event is coming to an end.

  As Barclays’ Alejandro Arreaza notes, Venezuela has officially reached the “point of no return” and writes that “the economic emergency decree and any measures that the government could take at this point may be too late. After two years of inaction and the recent decline in oil prices, a credit event in 2016 is becoming increasingly difficult to avoid, in our view.”

  Here is why Barclays thinks that the first OPEC default is now just a matter of time:

  Point of No Return

  • The economic emergency decree and any measures that the government could take at this point may be too late. After two years of inaction and the recent decline in oil prices, a credit event in 2016 is becoming increasingly difficult to avoid, in our view.
  • The figures released by the BCV show that foreign currency assets had reached USD35.5bn by the end of Q3 2015; however, we believe that they could have dropped further in Q4, to USD27.6bn, which is lower than our previous estimate of USD33bn.
  • Considering current oil prices, any reasonable additional import cuts may be insufficient to cover the financing gap, in our view. At the oil price that the futures curve is pricing in (USD/b32), the government would need to use more than 90% of oil exports to make debt payments if we include market, bilateral, commercial, and Chinese Fund obligations.
  • The authorities keep reiterating their willingness to pay. However, their position seems to indicate a lack of appreciation of the magnitude and roots of the critical situation that the Venezuelan economy is facing, which may increase the risk of a disorderly credit event.
  • The government could still make the February payment using its available assets; however, they are insufficient to finance the gap of nearly USD30bn that Venezuela could face in 2016, considering our commodities team’s estimate of Brent at USD/b37, which is above what the oil future curve is pricing in (USD/b 32).
  • Inaction has been costly for Venezuela. Although GDP growth figures were better than expected, they confirm that the country is in a severe recession, with an accumulated contraction of approximately 16% in the past two years, and considering the contraction that we expect in 2016, the country could lose almost one quarter of its GDP.
  • Inflation had reached 141.5% by the end of Q3 2015, but is likely to have continued to accelerate in Q4, possibly exceeding 200% as we expected, showing the effects of monetization of the fiscal deficit.

  Some more details, first on the lack of disposable assets to face the oil price collapse

  After more than a year without publishing official data for the main economic indicators, the Central Bank of Venezuela (BCV) finally released the figures. The results are mixed. While activity indicators suggest that the economy’s contraction could have been smaller than we and the consensus expected, the external sector posted worse-than-expected results. The combination of lower-than-expected exports and higher-than-expected imports led to a larger-than-expected current account deficit. To finance this deficit, the public sector has been forced to liquidate more assets, which, in our view, leaves it with less than it would need to finance the deficit that it faces for 2016.

   

  There have been important methodological changes in the way the official data are presented. In the case of the balance of payments, there is a reclassification of transactions that had previously been reported as capital outflows and seem to have been moved to imports of either goods or services. As a result, previous years’ current account balances have changed significantly (as a reference, the 2012 current account declined from USD11bn to just USD2.6bn). We believe that was mainly due to public sector trade transactions such as the “services” provided by Cuba under the energy agreements or imports of military equipment and capital goods from Russia, which previously were not considered imports. In addition, the exports show a balance for 2014/15 that is lower than PDVSA oil export figures suggest (circa 6% lower). A possible explanation for this could be that BCV figures are showing net exports, discounting crude imports. In the prices figures, there are important changes in weights of the different CPI components, particularly those that have increased the most (food). On several occasions, we contrasted official Venezuelan figures with other sources of information, but we have not found large inconsistencies. The differences have been explained mainly by accounting methods – for example, in oil exports, the type of crudes and products that are considered. Nonetheless, in the past, the market has been skeptical about the credibility of the official information, and these changes without a clear explanation increase the concerns.

   

  

   

  BCV figures suggest that the government’s FX allocations to the private sector through the different mechanism (CENCOEX, SICAD, SIMADI) covered around half of the total private sector imports of goods and services. This could be an important factor when oil prices recover because it could give the government additional room, cutting FX allocations with a less than proportional effect in terms of imports. However, considering current oil prices, any reasonable import cut seems likely to be insufficient to cover the financing gap. Public sector external assets would have to decline below what we consider minimum operational levels. At the oil price that the futures curve is pricing in (USD/b32), the government would need to use more than 90% of the oil exports to make debt payments if we include market, bilateral, commercial, and Chinese Fund obligations (Figure 3). After two years of inaction, with depleting external assets and the recent decline in oil prices, a credit event in 2016 may be becoming hard to avoid, in our view.

  In other words, a default is coming in 2016, which may explain Maduro’s increasingly more panicked pleas to OPEC to cut production, pleas which fall on deaf ears.

  Who is to blame for the country’s imminent bankruptcy? Well, the government of course, although in all honesty Maduro’s regime has not dony anything different from every other “developed” regime in the past 6 years, which instead of undertaking difficult fiscal reform and structural changes, merely kicked the can hoping things would get better.

  They didn’t, and now Venezuela has to pay the piper.

  Inaction has been costly

  In addition to the weaker external position of the country, the rest of the economic indicators show a strong deterioration. The government has avoided an orthodox adjustment and has preferred to implement quantitative restrictions. The results indicate that the authorities’ inaction in tackling the large distortions in the economy has been costly for the country. Although GDP growth figures were better than expected, they confirmed that Venezuela is in a severe recession. GDP fell 4.5% in the first three-quarters of the year, but considering its trend and tightening of controls by the government, the whole-year contraction could have been 5.8%, with an accumulated contraction of approximately 16% in the past two years, and considering the contraction expected in 2016, it could lose almost one quarter of its GDP.

   

  

   

  Inflation had reached 141.5% by the end of Q3 2015, but it is likely to have continued to accelerate in Q4, possibly exceeding 200% as we expect, showing the effects of monetization of the fiscal deficit.

   

  Although these inflation figures are historical, we believe they underestimate real inflation. In fact, since June 2014, the central bank has modified the method used to calculate the inflation rate, changing the weights of different goods and services that make up the consumer price index. Curiously, the new weighting system reduced the effect on general inflation of some groups such as food, alcoholic beverages, restaurants, and hotels, characterized by a higher inflation rate than the average, and increased the weights of rents and telecommunications groups, characterized by lower inflation rates associated with strict price controls or a heavy market share by state companies.

   

  As a consequence of these reforms, the official inflation rate was 68.5% in 2014, instead of 76% using the previous method. In 2015, the gap from using the different methods is even larger. Consider the inflation number on a year-on-year basis for all sectors, inflation would have been187.9% instead of 141.5%. For the first nine months of 2015, using the new weights, the BCV indicated that inflation reached 108.7%, but with the old weights, inflation would have been at 144.1%. Following this trend, we expect that the official inflation rate could close 2015 at 210.4%, more than double the highest rate in Venezuelan history, but using the previous weights, inflation could have been 290.7%. Such high inflation has a strong detrimental effect not only on real salaries, but also on income distribution, as the lowest income part of the population tends to have fewer alternatives to protect against inflation. This could  increase social and political risks, making the current equilibrium increasingly unstable.

  Translation: first default, then revolution.

  

  Which is good news for those who buy CDS. Our only hope for those who have held so far is that the counterparty you will have to novate with will still be around once the sparks fly, because once this first OPEC member goes bankrupt, things will start moving very fast.

  Finally, for all those who are praying for an oil bounce, your day may be near, because nothing will send the price of crude soaring quite as fast as one entire OPEC nation suddenly entering a death spiral of chaos.

  

  

  

  

  

• "Is That It?"- Global Jawbone & Crude Pump Fails To Ignite Equity Exuberance

  BoJ Jawboning, ECB jawboning, PBOC rumors, and an artificial ETN-driven crude ramp… and we end up with this?

  

   

  And despite the largest liquidty injection in 3 years, Chinese stcoks tumbled…

  

   

  Seems like the central planners are losing their grip…

  The Short Squeeze-driven rally is over – "Most Shorted" stocks extended their squeeze from yesterday thanks to Draghi into the European close and then everything started to fade…

  

   

  Stocks managed to hold yesterday's bounce gains but traded in a very rangebound (admittdly wide) manner all day…

  

   

  But were unable to hold green for the week…

  

   

  As a reminder for 2016, things are still ugly…

  

   

  Credit was not buying the bounce in the afternoon…

  

   

  Much of today's strength was on the basis of crude's surge (despite surging inventories, rising production, and dropping demand), but Energy credit markets were not impressed…

  

   

  And somethinmg is seriously broken in the oil ETF complex…

  

   

  VIX futures (barely) broke its closing backwardation streak (Front month vs 2nd month)- which is what VIX ETPs are focused on…

  

   

  Making it the 8th longest streak in history…

  

   

  And the 3rd longest streak of spot-front-second month backwardation in history (h/t @RussellRhoads)

  

   

  Lots of talk today that everything is awesome and the lows are in and that none of this is systemic… so why is bank counterparty risk soaring?

  

   

  Treasury Yields continued their see-saw pattern ending the day steeper (30Y +5bps, 2Y unch) and 10Y pushed back above 2.00%

  

   

  FX markets were volatile, as Draghi's jawboning spiked the USD (dumped EUR), but that was entirely unwound the close leaving USD Index just in the green for the week..Commodity currecies rallied notably…

  

   

  Draghi impotence exposed…

  

   

  Commodities were very mixed with PMs flat as crude and copper gained…

  

   

  Crude was crazy today… but we suspect this was pure algos, runing stops to Iran…(and roll-related chaos on the ETN complex)

  

   

  Charts: Bloomberg

  

  

  

  

• The Birth Of The PetroYuan (In 2 Pictures)

  Give me that!!

  

   

  It belongs to the Chinese now!

  

  h/t @FedPorn

  As we previously detailed,  two topics we’ve deemed critically important to a thorough understanding of both global finance and the shifting geopolitical landscape are the death of the petrodollar and the idea of yuan hegemony. 

  In November 2014, in “How The Petrodollar Quietly Died And No One Noticed,” we said the following about the slow motion demise of the system that has served to perpetuate decades of dollar dominance:

  Two years ago, in hushed tones at first, then ever louder, the financial world began discussing that which shall never be discussed in polite company – the end of the system that according to many has framed and facilitated the US Dollar's reserve currency status: the Petrodollar, or the world in which oil export countries would recycle the dollars they received in exchange for their oil exports, by purchasing more USD-denominated assets, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop.

   

  

   

  The main thrust for this shift away from the USD, if primarily in the non-mainstream media, was that with Russia and China, as well as the rest of the BRIC nations, increasingly seeking to distance themselves from the US-led, "developed world" status quo spearheaded by the IMF, global trade would increasingly take place through bilateral arrangements which bypass the (Petro)dollar entirely. And sure enough, this has certainly been taking place, as first Russia and China, together with Iran, and ever more developing nations, have transacted among each other, bypassing the USD entirely, instead engaging in bilateral trade arrangements.

  Falling crude prices served to accelerate the petrodollar’s demise and in 2014, OPEC nations drained liquidity from financial markets for the first time in nearly two decades:

  

  By Goldman’s estimates, a new oil price “equilibrium” (i.e. a sustained downturn) could result in a net petrodollar drain of $24 billion per month on the way to nearly $900 billion in total by 2018. The implications, BofAML notes, are far reaching: "…the end of the Petrodollar recycling chain is said to impact everything from Russian geopolitics, to global capital market liquidity, to safe-haven demand for Treasurys, to social tensions in developing nations, to the Fed's exit strategy.”

  Shifting to the idea of yuan hegemony, China is aggressively pushing its Silk Road Fund and Asian Infrastructure Investment Bank.

  The $40 billion Silk Road Fund is backed by China’s FX reserves, the Export-Import Bank of China, and China Development Bank and seeks to increase ROIC for Chinese SOEs by investing in infrastructure projects across the developing world, while the $50 billion AIIB is funded by 57 founding member countries (the US and Japan have not joined) and will serve to upend traditionally dominant multilateral institutions which have failed to respond to the rising influence and economic clout of their EM membership. China will push for the yuan to play a prominent role in the settlement of AIIB transactions and may look to establish special reserves in both the AIIB and Silk Road fund to issue yuan-denominated loans.

  Back in early November, SWIFT data showed that 15 new countries had joined a list of nations settling more than 10% of their trade deals with China in yuan. "This is a good sign for [yuan] adoption rates and internationalisation. In particular, Canada's [yuan] usage for payments, which has increased greatly over this period, is very interesting since we have not seen strong adoption of the [yuan] from North America to date,” Astrid Thorsen, Swift's head of business intelligence said.

  Earlier that month, China and Russia indicated that going forward, more trade between the two countries would be settled in yuan. From Reuters, last November:

  Russia and China intend to increase the amount of trade settled in the yuan, President Vladimir Putin said in remarks that would be welcomed by Chinese authorities who want the currency to be used more widely around the world.

   

  Spurred on by their often testy relations with the United States, Russia and China have long advocated reducing the role of the dollar in international trade.

   

  Curtailing the dollar's influence fits well with China's ambitions to increase the influence of the yuan and eventually turn it into a global reserve currency. With 32 percent of its $4 trillion foreign exchange reserves invested in U.S. government debt, China wants to curb investment risks in dollar.

   

  The quest to limit the dollar’s dominance became more urgent for Moscow this year when U.S. and European governments imposed sanctions on Russia over its support for separatist rebels in Ukraine.

  "As part of our cooperation with this country (China), we intend to use national currencies in mutual transactions.The initial deals for rouble and yuan are taking place. I want to note that we are ready to expand these opportunities in (our) energy resources trade," Putin said at the time, suggesting that going forward, Russia may look to settle sales of oil in yuan. 

  Sure enough, Gazprom has confirmed that since the beginning of the year, all oil sales to China have been settled in renminbi. From FT:

  Russia’s third-largest oil producer, is now settling all of its crude sales to China in renminbi, in the most clear sign yet that western sanctions have driven an increase in the use of the Chinese currency by Russian companies.

   

  Russian executives have talked up the possibility of a shift from the US dollar to renminbi as the Kremlin launched a “pivot to Asia” foreign policy partly in response to the western sanctions against Moscow over its intervention in Ukraine, but until now there has been little clarity over how much trade is being settled in the Chinese currency.

   

  Gazprom Neft, the oil arm of state gas giant Gazprom, said on Friday that since the start of 2015 it had been selling in renminbi all of its oil for export down the East Siberia Pacific Ocean pipeline to China.

   

  Russian companies’ crude exports were largely settled in dollars until the summer of last year, when the US and Europe imposed sanctions on the Russian energy sector over the Ukraine crisis…

   

  Gazprom Neft responded more rapidly than most, with Alexander Dyukov, chief executive, announcing in April last year that the company had secured agreement from 95 per cent of its customers to settle transactions in euros rather than dollars, should the need to do so arise.

   

  Mr Dyukov later said the company had started selling oil for export in roubles and renminbi, but he did not specify whether the sales were significant in scale.

   

  According to Gazprom Neft’s first-quarter results issued last month, the East Siberian Pacific Ocean pipeline accounted for 37.2 per cent of the company’s crude oil exports of 1.6m tonnes in the three months to March 31.

  With that, the "PetroYuan" has officially been born and while FT notes that "other Russian energy groups have been more reluctant to drop the dollar for settlement of oil sales," the fact that Russian producers are now openly considering a shift at the same time that officials in the US and Europe are openly discussing stepped up economic sanctions suggests renminbi settlements may become more commonplace going forward.

  To understand why and to what extent this is significant in the current environment, consider the following from WSJ:

  Officials of the Organization of the Petroleum Exporting Countries, which declined to cut oil production last year, reasoned that maintaining high production levels would protect market share in crucial importing nations.;

   

  But Chinese customs data released Friday show that China’s crude imports from some big OPEC nations have plummeted, while imports from Russia surged 36% in 2014. Meanwhile, imports from Saudi Arabia fell 8% and those from Venezuela dropped 11%.

   

  

   

  To summarize: Western economic sanctions on Russia have pushed domestic oil producers to settle crude exports to China in yuan just as Russian oil is rising as a percentage of total Chinese crude imports. Meanwhile, the collapse in crude prices led to the first net outflow of petrodollars from financial markets in 18 years, and if Goldman's projections prove correct, the net supply of petrodollars could fall by nearly $900 billion over the next three years. All of this comes as China is making a concerted push to settle loans from its newly-created infrastructure funds in renminbi.

  Putting it all together, the PetroYuan represents the intersection of a dying petrodollar and an ascendant renminbi.

   

  

  

  

  

Digest powered by RSS Digest

• Stocks, Crude Tumble As Offshore Yuan Sinks To Day Session Lows

  From the close of the US day session, offshore Yuan began to weaken and despite the largest liquidity injection in 3 years, has tumbled almost 200 pips from the dead-cat-bounce highs, testing the lows once again. This in turn has weighed on crude and dropped Dow futures 140 points off the after-hours highs…

  As Yuan tumbled so Crude and stocks lurched lower…

  

   

   

  We have seen this pattern before… this morning…

  

   

  What happens next?

  

  

  

  

• The U.S. Is At The Center Of The Global Economic Meltdown

  Submitted by Brandon Smith via Alt-Market.com,

  While the economic implosion progresses this year, there will be considerable misdirection and disinformation as to the true nature of what is taking place. As I have outlined in the past, the masses were so ill informed by the mainstream media during the Great Depression that most people had no idea they were actually in the midst of an “official” depression until years after it began. The chorus of economic journalists of the day made sure to argue consistently that recovery was “right around the corner.” Our current depression has been no different, but something is about to change.

  Unlike the Great Depression, social crisis will eventually eclipse economic crisis in the U.S. That is to say, our society today is so unequipped to deal with a financial collapse that the event will inevitably trigger cultural upheaval and violent internal conflict. In the 1930s, nearly 50% of the American population was rural. Farmers made up 21% of the labor force. Today, only 20% of the population is rural. Less than 2% work in farming and agriculture. That’s a rather dramatic shift from a more independent and knowledgeable land-utilizing society to a far more helpless and hapless consumer-based system.

  What’s the bottom line? About 80% of the current population in the U.S. is more than likely inexperienced in any meaningful form of food production and self-reliance.

  The rationale for lying to the public is certainly there. Economic and political officials could argue that to reveal the truth of our fiscal situation would result in utter panic and immediate social breakdown. When 80% of the citizenry is completely unprepared for a decline in the mainstream grid, a loss of savings through falling equities and a loss of buying power through currency destruction, their first response to such dangers would be predictably uncivilized.

  Of course, the powers-that-be are not really interested in protecting the American people from themselves. They are interested only in positioning their own finances and resources in the most advantageous investments while using our loss and fear to extract more centralization, more control and more consent. Thus, the hiding of economic decline is enacted because the decline itself is useful to the elites.

  And just to be clear for those who buy into the propaganda, the U.S. is indeed in a speedy decline.

  In 'Lies You Will Hear As The Economic Collapse Progresses', published in summer of last year, I predicted that “Chinese contagion” would be used as the scapegoat for the downturn in order to hide the true source: American wealth destruction. Today, as the Dow and other markets plummet and oil markets tank due to falling demand and glut inventories, all we seem to hear from the mainstream talking heads and the people who parrot them in various forums is that the U.S. is the “only stable economy by comparison” and the rest of the world (mainly China) is a poison to our otherwise exemplary financial health. This is delusional fiction.

  The U.S. is the No. 1 consumer market in the world with a 29% overall share and a 21% share in energy usage, despite having only 5 percent of the world’s total population. If there is a global slowdown in consumption, manufacturing, exports and imports, then the first place to look should be America.

  Trucking freight in the U.S. is in steep decline, with freight companies pointing to a “glut in inventories” and a fall in demand as the culprit.

  Morgan Stanley’s freight transportation update indicates a collapse in freight demand worse than that seen during 2009.

  The Baltic Dry Index, a measure of global freight rates and thus a measure of global demand for shipping of raw materials, has collapsed to even more dismal historic lows. Hucksters in the mainstream continue to push the lie that the fall in the BDI is due to an “overabundance of new ships.” However, the CEO of A.P. Moeller-Maersk, the world’s largest shipping line, put that nonsense to rest when he admitted in November that “global growth is slowing down” and “[t]rade is currently significantly weaker than it normally would be under the growth forecasts we see.”

  Maersk ties the decline in global shipping to a FALL IN DEMAND, not an increase in shipping fleets.

  This point is driven home when one examines the real-time MarineTraffic map, which tracks all cargo ships around the world. For the past few weeks, the map has remained almost completely inactive with the vast majority of the world’s cargo ships sitting idle in port, not traveling across oceans to deliver goods. The reality is, global demand has fallen down a black hole, and the U.S. is at the top of the list in terms of crashing consumer markets.

  To drive the point home even further, the U.S. is by far the world’s largest petroleum consumer. Therefore, any sizable collapse in global oil demand would have to be predicated in large part on a fall in American consumption. Oil inventories are now overflowing, indicating an unheard-of crash in energy use and purchasing.

  U.S. petroleum consumption was actually lower in 2014 than it was in 1997 and 25% lower than earlier projections predicted. A large part of this reduction in gas use has been attributed to fewer vehicle miles traveled. Though oil markets have seen massive price cuts, the lack of demand continued through 2015.

  This collapse in consumption is reflected partially in newly adjusted 4th quarter GDP forecasts by the Federal Reserve, which are now slashed down to 0.7%.  And remember, Fed and government calculate GDP stats by counting government spending of taxpayer money as "production" or "commerce".  They also count parasitic programs like Obamacare towards GDP as well.  If one were to remove government spending of taxpayer funds from the equation, real GDP would be far in the negative.  That is to say, if the fake numbers are this bad, then the real numbers must be horrendous.

  And finally, let’s talk about Wal-Mart. There is a good reason why mainstream pundits are attempting to marginalize Wal-Mart’s sudden announcement of 269 store closures, 154 of them within the U.S. with at least 10,000 employees being laid off. Admitting weakness in Wal-Mart means admitting weakness in the U.S. economy, and they don’t want to do that.

  Wal-Mart is America’s largest retailer and largest employer. In 2014, Wal-Mart announced a sweeping plan to essentially crush neighborhood grocery markets with its Wal-Mart Express stores, building hundreds within months. Today, those Wal-Mart Express stores are being shut down in droves, along with some supercenters. Their top business model lasted around a year before it was abandoned.

  Some in the mainstream argue that this is not necessarily a sign of economic decline because Wal-Mart claims it will be building 200 to 240 new stores worldwide by 2017. This is interesting to me because Wal-Mart just suffered its steepest stock drop in 27 years on reports that projected sales will fall by 6% to 12% for the next two years.

  It would seem to me highly unlikely that Wal-Mart would close 154 stores in the U.S. (269 stores worldwide) and then open 240 other stores during a projected steep crash in sales that caused the worst stock trend in the company’s history. I think it far more likely that Wal-Mart executives are attempting to appease shareholders with expansion promises they do not plan to keep.

  I am going to call it here and now and predict that most of these store sites will never see construction and that Wal-Mart will continue to make cuts, either with store closings, employee layoffs or both.

  As the above data indicates, global demand is disintegrating; and the U.S. is a core driver.

  The best way to sweep all these negative indicators under the rug is to fabricate some grand idea of outside threats and fiscal dominoes. It is much easier for Americans to believe our country is being battered from without rather than destroyed from within.

  Does China have considerable fiscal issues including debt bubble issues? Absolutely. Is this a catalyst for global collapse? No. China’s problems are many but if there is a first “domino” in the chain, then the U.S. economy claims that distinction.

  China is the largest exporter in the world, not the largest consumer. If anything, a crash in China’s economy is only a REFLECTION of an underlying collapse in U.S. demand for Chinese goods (among others). That is to say, the mainstream dullards have it backward; a crash in China is a herald of a larger collapse in U.S. markets. A crash in China is a symptom of the greater fiscal disease in America. The U.S. is the primary cause; it is not the victim of Chinese contagion. And the crisis in the U.S. will ultimately be far worse by comparison.

  I wrote in 'What Fresh Horror Awaits The Economy After Fed Rate Hike?', published before Christmas:

  "Market turmoil is a guarantee given the fact that banks and corporations have been utterly reliant on near-zero interest rates and free overnight lending from the Fed. They have been using these no-cost and low-cost loans primarily for stock buybacks, purchasing back their own stocks and reducing the number of shares on the market, thereby artificially elevating the value of the remaining shares and driving up the market as a whole. Now that near-zero lending is over, these banks and corporations will not be able to afford constant overnight borrowing, and the buybacks will cease. Thus, stock markets will crash in the near term.

   

  This process has already begun with increased volatility leading up to and after the Fed rate hike. Watch for far more erratic stock movements (300 to 500 points or more) up and down taking place more frequently, with the overall trend leading down into the 15,000-point range for the Dow in the first two quarters of 2016. Extraordinary but short lived positive increases in the markets will occur at times (Christmas and New Year’s tend to result in positive rallies), but shock rallies are just as much a sign of volatility and instability as shock crashes."

  Markets moved immediately into crash territory after the new year began. This was an easy prediction to make and one that I have been reiterating for months — just as the timing of the Fed rate hike was an easy prediction to make, based on the Fed’s history of deliberately increasing instability through bad policy as the economy moves into deflationary spirals. The Fed did it during the Great Depression and is doing it again today.

  It is no coincidence that global markets began to tank after the first Fed rate hike; no-cost overnight lending to banks and corporations was the key to maintaining equities in a relatively static position.  As the U.S. loses momentum, the world loses momentum.  As the Fed ends outright stimulation and manipulation, the house of cards falls.

  I have said it many times and I’ll say it yet again: If you think the Fed’s motivation is to prolong or protect the U.S. economy and currency, then you will never understand why it takes the policy actions it does. If you understand and accept the fact that the Fed is a saboteur working carefully and incrementally toward the destruction of the U.S. to make way for a new globally centralized system, everything falls into place.

  To summarize, the U.S. economy as we know it is not slated to survive the next few years. Read my article 'The Economic Endgame Explained' for more in-depth information on why a collapse is being engineered and what the openly admitted goal is, including the referenced 1988 article from The Economist titled “Get Ready A World Currency In 2018,” which outlines the plan for a reduction of the dollar and the U.S. system in order to make way for a global basket reserve currency (Special Drawing Rights).

  It is astonishingly foolish to assume that even though the U.S. has held the title of king of global consumption share for decades, that our economy is somehow not a primary faulty part in the sputtering global economic engine.  Economies are falling because demand is falling.   Demand is falling because Americans are not buying.  Americans are not buying because Americans are broke. Americans are broke because central bank policy has created an environment of wealth destruction. This wealth destruction in the U.S. has been ongoing, but only now is it becoming truly visible.  The volatility we see in developing nations is paltry compared to the financial chaos we now face.  Anyone who attempts to dismiss the dangers of a U.S. breakdown or the threat to the unprepared public is either an idiot, or they are trying to divert and distract you from reality. The coming months will undoubtedly verify this.

  

  

  

  

  

• For Emerging Markets, It Is Now Worse Than The Asian Financial Crisis

  "It’s Black Wednesday for emerging markets," one strategist warned and Thursday is not looking any better, as SocGen's Berg warns "The rout in emerging markets could continue for some time, especially as the major global central banks have exhausted their ammunition in recent years, making it unlikely that they will rescue global markets this time around." In fact, as Bloomberg reports, this year's EM turmoil is already worse than in the same period in 1998's Asian financial crisis (and EM FX is even worse).

  The MSCI Emerging Markets Index dropped 3 percent to 692.76, the lowest close since May 2009.

  More than $2 trillion has been wiped out from the value of developing-nation equities this year as the MSCI Emerging Markets Index slid 13 percent, the worst start to a year since data began in 1988. As Bloomberg reports, The drop has exceeded the 7.9 percent decline in the gauge in the same period in 1998 during the Asian financial crisis and the drop in 2009 amid the global financial crisis.

  

  “We are now in the correction territory,” Don Townswick, director of equity products at Conning Inc. Indian stocks are on the cusp of a bear market, potentially joining the three out of every four major emerging stock markets that have fallen 20 percent from peaks.

  But it's not just stocks, EM FX markets are collapsing as traders are betting that it’s become too expensive for policy makers to continue defending exchange rates after investors and companies pulled $735 billion out of developing nations last year, according to the Institute of International Finance.

  

   

  “With some losses already booked this year in their portfolios, investors will avoid risk as much as possible," said Attila Vajda, managing director at Singapore-based advisory firm Project Asia Research & Consulting Pte. “Investors remain more pessimistic with the global outlook."

  And finally EM debt is tumbling.
  The premium investors demand to hold emerging-market debt over U.S. Treasuries widened nine basis points to 481, according to JPMorgan Chase & Co. indexes.

  

   

  Which is why EM central bankers such as Mexico;s Carstens are begging for moar QE…

  Central banks in emerging markets could follow counterparts in the developed world and become “market makers of last resort”, using unconventional monetary policies to try and stimulate their flatlining economies, according to Mexico’s central bank chief.

   

  “Emerging markets need to be ready for a potentially severe shock,” Mr Carstens told the Financial Times. “The adjustment could be violent and policymakers need to be ready for it.”

   

  Policymakers and economists have warned that heavy selling of EM stocks and bonds by international investors since the middle of last year threatens to provoke a credit crunch that would make it hard for EM companies to service their debts.

   

  Many EM companies have filled up on cheap credit over the past decade, after a commodities boom and ultra-loose monetary policies led by the US Federal Reserve resulted in very low borrowing costs. As investors pull out, those costs are set to soar.

   

  Mr Carstens said the required policy response from EM central bankers would stop short of outright “quantitative easing” or QE — the large-scale buying of financial assets undertaken by the Fed and other developed market central banks.

   

  But it would include exchanging high risk, long-dated assets held by investors for less risky, shorter-dated central bank and government liabilities.

  So Operation Twist? If it were to happen, maybe this time they will use the break to delever?

  

  

  

  

  

• Guest Post: How Hitler Came To Power

  Submitted by 'Thinker' via The Burning Platform blog,

  Hitler came to power for a number of documented reasons, some of which are rational, others of which are emotional. Either way, the world continues to question how a vicious madman could rise to power in Germany during this time, most of all the German people who, to this day, will do almost anything to prevent another authoritarian movement.

  Though I believe that is being used today against them as a bigger authoritarian movement gains hold (migrant fundamentalism), the German people seem to be either blind to a new definition of totalitarianism or are so terrified of it happening again in Germany that they are incapable of resisting it.

  Following WWI, the following issues remained from the 1920s or were present at the time:

  Long-term bitterness

  Deep anger about the First World War and the Treaty of Versailles created an underlying bitterness to which Hitler’s viciousness and expansionism appealed, so they gave him support.

  Today, we have deep-seated anger at a number of things: government over-reach, the broken rule of law, inequality, crony capitalism, lack of meaningful representation from elected officials, degenerated race relations… we all know the many things that have created the seething undercurrent in this country.

  Ineffective Constitution

  Weaknesses in the German Constitution crippled the government. In fact, there were many people in Germany who wanted a return to dictatorship. When the crisis came in 1929–1933 – there was no one who was prepared or able to fight to stop Hitler.

  Here in the U.S., we have a growing number of people who promote / want socialism, or expect the government to take a more authoritarian approach. Our Constitution is in shambles after the actions of the past few Presidents, with many questioning whether it really stands for something any more. When the rule of law fails, that’s a sure sign that we are facing a constitutional crisis. We even have a governor (TX) calling for a Constitutional Convention to restore states’ rights… I’d say that fits, as well.

  Money

  The financial support of wealthy businessmen gave Hitler the money to run his propaganda and election campaigns.

  Banks, MIC companies, foreign governments, shadowy billionaires pulling strings, TPTB… always been this way, always will be, with very few exceptions throughout history.

  Propaganda

  Nazi propaganda persuaded the German masses to believe that the Jews were to blame and that Hitler was their last hope.

  Plenty of this to go around on both sides… Muslims are the problem, illegal immigrants, black people / white people, China, you name it. There’s a LOT of finger-pointing and tribalism going on now, and one guy standing up and saying he’s going to fix everything.

  Promises to fix everything

  Hitler promised everybody something, so they supported him.

  No one’s doing that just yet — promising something to everyone — but we’re not far off. Trump is saying things people want to hear, which is the power behind his meteoric rise. He’s claiming he’s going to get blacks voting for him, he’s going to get women voting for him… like most of the politicians we need to worry about the most, he’s broadening his appeal in order to achieve what he wants to do. But is it good for everyone? Will he really do it? Once someone like that is elected, they tend to do whatever they want, no matter what they’ve said in the past. Just look at our current fiasco-in-charge.

  Attacks on other parties

  The Stormtroopers attacked Jews and people who opposed Hitler. Many opponents kept quiet simply because they were scared of being murdered – and, if they were, the judges simply let the Stormtroopers go free.

  We’re not here yet, though one could say the current Administration has this one nailed. The IRS is used to target opposition, the NSA can take down anyone they want to, police forces around the nation already act above the law and get away with it. It wouldn’t take much for a REAL authoritarian to take advantage of the stage that’s been set. Which is why it’s so important to get past the “it’s only against blacks / conservatives / immigrants” mentality. Remember the Hangman.

  Personal Qualities

  Hitler was a brilliant speaker, and his eyes had a peculiar power over people. He was a good organizer and politician. He was a driven, unstable man, who believed that he had been called by God to become dictator of Germany and rule the world. This kept him going when other people might have given up. His self-belief persuaded people to believe in him.

  Driven, organized, belief that only he can fix things, grandiose statements of making the country “great” again… signs that we should tread very, very carefully.

  Economic Depression

  After the Wall Street Crash of 1929, the US called in its loans to Germany, and the German economy collapsed. The number of unemployed grew; people starved on the streets. In the crisis, people wanted someone to blame, and looked to extreme solutions – Hitler offered them both, and Nazi success in the elections grew.

  We don’t have people literally starving, though more are below poverty level than when the War of Poverty started. Instead, we have people “starving” from societal, family and community breakdown. People want someone to blame and they’re looking for extreme solutions — Trump on one hand / Hillary or Sanders on the other. Either way, we lose.

  “Those who cannot remember the past are condemned to repeat it.” — Santayana, The Life of Reason, 1905

  

  

  

  

  

• Tom DeMark: "Today Is An Interim Low" Followed By A 5-8% Rebound, Then Another Selloff; China To Fall Further

  There are not many technicians that Steve Cohen has on speed dial, but Tom DeMark, whose indicators grace the default graphs of many Bloomberg terminals around the globe, is one of them. One reason may be DeMark’s recent track record, having called a “Sell” on November 3 which was close to the all time high in the S&P, shortly after which US indices tumbled leading to the worst start of the year in history hitting DeMark’s targets well ahead of time.

  Earlier today, just as global stocks entered a bear market, DeMark spoke with Bloomberg TV, and may have been one of the catalysts for today’s violent surge off the lows just as the Dow Jones was crashing by over 550 points, when he said that “today may have been an interim low” highlighting that the intensity of the decline is comparable to the plunge in November 2008 and August 2011, both of which were followed by reflex rallies of 5-8%, roughly the same as what he expects now:

  We think it could be a pretty good rally off that low; We’re going to have a two-step affair: a low today, maybe tomorrow and then we rally and people take a deep breath. After we see that rally, maybe anywhere from a week and a half to three weeks, we decline again and I think that’s coincident with the Shanghai Composite and the Hang Seng Index declining.

  Incidentally, he said this just around noon when stocks were at their lows, so he did not have the benefit of hindsight from the market close. However, this good news for US stocks if only in the short-term, will not be shared by their Asian peers: DeMark discussed the Hong Kong and Chinese market, and sees those as continuing their fall:

  We are pretty confident the next level on the HSCEI is below 7,500. We think what we’re going to see in the HSCEI is four consecutive, maybe five, lower closes and that should bottom that market. We should get down below 7,500 and the Shanghai Composite we should still get down to objective which is about 2,500-2,600.

  DeMark then reveals why at this point a central bank intervention, which gratifying in the very near term, would be the worst possible outcome for a stable, long-term rally in stocks:

  Markets bottom when the last seller has sold and markets top when the last buyer has bought. We are looking for a bottom that’s a secondary bottom where you make one bottom, you rally, make a lower low and the internals of the market show that there’s strength and at the same time when we make that low there’s a low of negative news: we don’t want to see positive news from the government; we don’t want to see positive news from central banks. That interferes with the rhythm of the market.

  Finally since this was a typical soundbity finTV interview in which the anchors always have to know what, if anything, the interviewee is buying, we found DeMark’s answer to be wonderfully laconic:

  If I were a long-term buyer, I’d wait. Today we got -2,500 net declines in the NYSE. We’ll rally, we’ll make a lower low, and maybe we do -1,500 for a few days which would be a divergence and indicates that we are probably at a bottom. We could recover 40% of the decline subsequent then to that but we do have a lot of damage done to the market long-term.

  The interview took place just after noon, which may explain why the Steve Cohens of the world bought today’s massive dip and sent some of the most shorted stocks soaring in an epic closing dash for trash.

  What happens next? DeMark could well be right, however his call for a rebound has been consensus for the past few days, and ironically the reason for today’s sharp decline may have been that everyone was expecting stocks to jump which may explain why they did precisely the opposite.

  In any event, look for the next few days to see if DeMark still has his magic. We, on the other hand, would rather wait for “Gandalf” Kolanovic’ next take.

  Full interview below:

  

  

  

  

  

• PBOC Injects Massive $60 Billion Liquidity – Most In 3 Years; China Stocks, Yuan Drop

  Offshore Yuan is sliding lower after its "US equity market saving" surge during the day session as PBOC fixes Yuan stable for the 10th day in a row. Despite the smoke and mirrors of stability however, they injected a colossal 400 billion Yuan into the financial system – the most in 3 years.

  Offshore Yuan is sliding…

  

   

  PBOC holds Yuan Fix stable for the 10th day with a very small weakening:

  • *CHINA SETS YUAN REFERENCE RATE AT 6.5585 AGAINST U.S. DOLLAR

  

   

  But injected a godzilla-size 400bn Yuan of liquidity

  • *PBOC TO INJECT 110B YUAN WITH 7-DAY REVERSE REPOS: TRADER
  • *PBOC TO INJECT 290B YUAN WITH 28-DAY REVERSE REPOS: TRADER

  This is not normal new year liquidty injection at all…

  • *PBOC INJECTS MOST CASH IN THREE YEARS IN OPEN-MARKET OPERATIONS

  

   

  Something is breaking and PBOC is desperate to fill the hole with centrally planned reverse repo.

  And equity markets are not bouncing like the rest opf AsiaPac:

  • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 1.2% TO 3,136.38
  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 1.4% TO 2,934.39

  

  

  

  

  

  

• We Know How This Ends – Part 2

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  Part 1 is HERE.

  In March 1969, while Buba was busy in the quicksand of its swaps and forward dollar interventions, Netherlands Bank (the Dutch central bank) had instructed commercial banks in Holland to pull back funds from the eurodollar market in order to bring up their liquidity positions which had dwindled dangerously during this increasing currency chaos.  At the start of April that year, the Swiss National Bank (Swiss central bank) was suddenly refusing its own banks dollar swaps in order that they would have to unwind foreign funds positions in the eurodollar market.  The Bank of Italy (the Italian central bank) had ordered some Italian banks to repatriate $800 million by the end of the second quarter of 1969.  It also raised the premium on forward lire at which it offered dollar swaps to 4% from 2%, discouraging Italian banks from engaging in covered eurodollar placements.

  The “rising dollar” of 1969 had somehow become anathema to global banking liquidity even in local terms.

  The FOMC, which had perhaps the best vantage point with which to view the unfolding events, documented the whole affair though stubbornly and maddeningly refusing to understand it all in greater context of radical paradigm banking and money alterations.  In other words, the FOMC meeting MOD’s for 1968 and 1969 give you an almost exact window into what was occurring as it occurred, but then, during the discussions that followed, degenerating into confusion and mystification as these economists struggled to only frame everything in their own traditional monetary understanding – a religious-like tendency that we can also appreciate very well at this moment.

  At the April 1969 FOMC meeting, Charles A. Coombs, Special Manager of the System Open Market Account, reported that the bank liquidity issue then seemingly focused on Germany was indeed replicated in far more countries.

  Mr. Coombs reported that the other main recent development in the European exchange markets had been the actions taken by the various continental central banks to defend their domestic liquidity and credit situations from the strains generated by the sharp rise in U.S. bank borrowings from the Euro-dollar market.

  European central banks, in particular, were nearly apoplectic about US banks’ sudden and incessant presence as eurodollar borrowers. Prior to 1968, eurodollars were largely a European affair, that Merchant’s bankers market to achieve global trade finance and settlement.  Rising consumer inflation starting in 1965 had the effect in domestic money markets of increasing interest rates then under the control of Regulation Q.  Ostensibly a systemic protection arrangement put in place in the 1930’s to avoid another Great Depression, Regulation Q limited what banks could pay on deposits.  By the middle of 1968, nearly all money market rates had hit their ceilings; eurodollar markets had no ceilings.

  Large time deposits particularly of corporate, non-bank accounts started shifting in 1968 and playing a large role in provoking and amplifying the global currency crisis that year.  Large banks in New York responded to the loss of primarily CD’s by simply bidding for funds in eurodollars (or exchanging them by bookkeeping alone, as Milton Friedman pointed out contemporarily) and booking those liabilities instead as borrowings from their foreign subsidiaries operating in eurodollar markets. The scale here was also massive; foreign subs booking eurodollar liabilities on behalf of their domestic head offices had added $3 billion during January and February 1969 alone.

  The more US banks were “forced” to bid in eurodollars to escape the liability and deposit strangle of Regulation Q, the more illiquidity spread throughout the rest of the exchange markets, particularly eurodollars and eurocurrency.  As the FOMC discussion in April 1969 pointed out then, “U.S. banks were willing to pay almost any rate for marginal additions to their resources, but that the actions of U.S. banks at their margins were tending to force upward the general levels of rates in European money markets.”  There was a direct link between eurodollars and the domestic money conditions in the countries most exposed or participatory in eurodollars.

  And it wasn’t just eurodollars, either.  The loss of time deposit liabilities had struck smaller reserve city banks domestically. These banks, unlike the global NYC banks, however, could not bid in eurodollars to re-obtain this funding.  Instead, there was a massive increase in “borrowed reserves”, both federal funds and the Discount Window.  From the February 1969 FOMC MOD:

  These funds were then channeled through the Euro-dollar market to the largest banks, with an actual basic reserve surplus developing in New York City banks last week and a record level of borrowing by country banks. These twin developments had the result of taking some of the pressure off the Federal funds market as the most aggressive bidders had less urgent needs and country banks made greater use of the discount window. This in turn helps explain last week’s anomaly of the highest level of net borrowed reserves in 16 years and a relatively comfortable Federal funds market.

  The domestic, as well as international, banking system was becoming fully functional on a wholesale level of action and activity (and, as you can appreciate, it greatly favors the biggest NYC and London banks).   But while there might be some domestic redistribution through NYC bank “excess reserves” into federal funds, for foreign liquidity arrangements there was no such recycling pass-through possible. Thus, “tightening” in eurodollars was directly translatable:

  He [Mr. Bodner, AVP of FRBNY] noted that rising Euro-dollar rates tend initially to push up the forward exchange rates for other currencies. In recent weeks, however, when the German Federal Bank had been supplying forward marks relatively cheaply there had been large outflows from Germany into Euro-dollars and fairly significant increases in German domestic interest rates. Swiss rates, too, had risen.

  And Denmark, Holland, Japan and any number of other eurodollar-connected places. While Mr. Bodner was ascribing these processes to the short-term, “tend initially”, what the events of 1969 would demonstrate conclusively was that the disruption left a lasting, scarring impact upon global finance (and then, as the recession developed, global economy). The “rising dollar” had major influence on what were thought completely separate financial systems – an assumption that persisted even though central banks had been actively participating and entangling their own banking systems (as Bundesbank belatedly admitted) within it all for years by then.

  

  Throughout the whole of 1969, the FOMC remained as if this was all some minor nuisance for foreigners to settle out amongst themselves.  Though the Fed had sent representatives to the conference in Bonn in November 1968, there was absolutely no urgency even though central bank after central bank succumbed to the “rising dollar.”  From the April 1969 MOD:

  In addition to domestic considerations, there is the impact of Euro-dollar takings on foreign money and exchange markets mentioned by Mr. Coombs. He suggests careful watching and contingency planning. This raises serious questions about the need for policy tools that could be used on short notice should there arise an urgent need to reduce the strains in the Euro-dollar market. Fortunately, we don’t have to reach a conclusion today. [emphasis added]

  But it wasn’t just quantity issues that were affecting almost everything in the global regime during the dying days of Bretton Woods; in fact, the innovation here in qualitative terms and repurposing was perhaps far more important. It certainly was a contributing factor toward the eventual dissolution of gold exchange, but these transformations in money and banking would rule the next forty-five years and set us up to do this all over again:

  The impact of monetary restraint on reserve aggregates and on bank deposits and credit is amply reflected in the written reports. It is also amply reflected in the ingenuity of banks in trying to avoid the constraints of Regulation Q. In addition to a still more intensive use of the Euro-dollar market, there has been increasing evidence of the exploration or use of other devices–such as the introduction of “documented discount notes,” sales of assets to foreign branches, sales of commercial paper by a subsidiary or by a bank holding company, as well as various forms of link financing. While these devices are probably not yet large in volume, they are casting increasing doubt on the validity of the regular bank credit statistics that we follow.

  And:

  He [FOMC Board Member Charles Scanlon] had no strong feeling regarding the establishment of reserve requirements against Euro-dollars except to question whether that device would be totally effective. He had been impressed by the ingenuity of people engaged in the Euro-dollar market who had already worked out various methods of escaping the constraints of a possible imposition of reserve requirements–including the use of brokers and repurchase agreements on Euro-dollars.

  “Escaping constraints” was not a feature of hard money, as that was entirely the point of hard money. Not only were repurchase agreements becoming more common as a domestic workaround of Regulations Q and D, they were also becoming more prevalent upon eurodollars where more swaps and forwards than “covered” participation of global banks existed.  In other words, not only would there be, as there increasingly had been, no hard money there wouldn’t even be money.  The dollar was becoming the full “dollar” and that meant a systemic shift due to massive imbalance that was unanswerable under the paradigm in operation at that time – not just Bretton Woods but in many ways the economic and monetary theories that then prevailed.  Rather than restore a hard money anchor economists instead simply continued the progression because they saw themselves now free and “flexible” to control it all more closely.

  It was, obviously, a disaster right from the start as we have been made to live their errors in repetition.  By 1980, Keynesianism in general was being totally repudiated but rather than fade into history it just merged with the technocratic principles that had been adopted by central banks thinking they could more easily wield their own influence under this “floating” monstrosity; monetarism and Keynesianism became all one big mess.  Thus, the precursor to the degradation of the serial asset bubbles of the 21^st century was refashioned as some kind of monetarist, central planning Golden Age – the Great “Moderation.”

  But this new floating and intangible eurodollar system was itself inherently unstable once it surpassed some threshold of intrusiveness.  That seems to have been in 1995 when eurodollars were shifted from payment system accounting for largely global trade to encompass an entirely parallel offshore banking system.  There were continuous indications that this was a terribly inefficient and just plain bad idea (starting almost right away with the Asian flu/LTCM) but it would continue on anyway until August 2007.  Since then, just like 1961, the world has been infected with almost continuous instability attaining more and more the properties and desperation that looks to be a symmetrical bookend of 1968-69.

  

  The only difference relevant in this overriding conception is that the eurodollar in 1969 was ready to break free of the shackles of hard money.  Its very existence owed to the fact that central banks were repeating the same processes that they had experimented with in the 1920’s and thus felt that they had learned from those mistakes (they didn’t; blaming gold the whole time when economists, deep down, care little for gold so much as power and control).  The eurodollar imbalance of 1969, which led to the great interruption of the 1970’s, was a faction, the majority faction, of banking following along the lines of monetary flexibility; in short, economists thought they would be replacing gold with themselves when even in 1969 it should have been readily apparent that banks were replacing gold with their own designs.

  One final note, a haunting warning that was echoed in 1979 (itself an echo of 1964) and seemingly destined to be unheeded and thus the source of our great repetition.  If we are doomed to repeat history, it is because the self-selected “best and brightest” are more enamored with their own credentials than their abilities as critical thinkers in a truly enlightened, scientific discipline.  Mr. Coombs’ words from April 1969 would find application in August 2007, again in August 2011 and in increasing regularity since June 2014 and this renewed “rising dollar.”

  European central banks remained apprehensive, however, that a serious crunch in the Euro-dollar market might suddenly develop if intensified U.S. and European competition for Euro-dollars suddenly revealed some vulnerable positions. The situation could be particularly serious because the Euro-dollar market had become an increasingly important source of financing for industrial and commercial enterprises not only in Europe but in the whole world. One bankruptcy could attract a lot of attention, and if it led the European commercial banks that had been supplying funds to the market to reassess the credit risks they faced, the result might be a sudden scramble for liquidity. The chances of such a development were enhanced by the fact that no central bank had formal responsibility for the behavior of the Euro-dollar market; what had been accomplished in that connection had been done through informal central bank cooperation.

  As noted through this whole discussion, that “informal central bank cooperation” doesn’t really amount to anything.  That lesson could be applied to the Bundesbank “selling dollars” in 1969, the PBOC “selling UST’s” in 2015 or the worthless, useless Federal Reserve RRP in 2016.  They really don’t know what they are doing, they never have and it truly doesn’t matter fixed or floating.  Adjust accordingly because we know how this ends; we’ve already seen it.

  

  

  

  

  

• Canada's "Other" Problem: Record High Household Debt

  Earlier today, the Bank of Canada surprised some market participants by failing to cut rates.

  True, the loonie was plunging and another rate cut might very well have accelerated the decline, further eroding the purchasing power of Canadians who are already struggling to keep up with the inexorable rise in food prices, but there are other, more pressing concerns.

  Like the fact that some analysts say the CAD should shoulder even more of the burden as Canada struggles to adjust to a world of sub-$30 crude. In short, if Stephen Poloz could manage to drive the loonie lower, the CAD-denominated price of WCS might stand a chance of remaining above the marginal cost of production. Barring that, the shut-ins will start and that means even more job losses in Canada’s oil patch, which shed some 100,000 total positions in 2015.

  Alas, Poloz elected to stay put, characterizing the current state of monetary policy as “appropriate.”

  We’re reasonably sure that assessment won’t hold once the layoffs pick up and as we noted earlier, the longer Poloz waits, the larger the next cut will ultimately have to be, which means that if the BOC waits too long, Poloz may have to rethink his contention that the effective lower bound is -0.50%.

  While there are a laundry list of concerns when it comes to assessing the state of the Canadian economy and the impact of either higher rates (the loonie is supported but growth is further choked off) or lower rates (the economy gets a boost but consumer spending is stifled as Canadians watch their purchasing power evaporate), perhaps the most important thing to remember is that Canada is now the most leveraged country in the G7.

  According to a new report from the Parliamentary Budget Officer (PBO) the household debt-to-income ratio is now a whopping 171% which means, for anyone who is confused, “that for every $100 in disposable income, households had debt obligations of $171.”

  

  That’s the highest level in a quarter century and it means that when it comes to household leverage, no other advanced economy does it like Canada:

  

  That would be bad enough in a favorable economic environment with a benign outlook for rates, but it’s a veritable nightmare when the economy is sliding headlong into recession and central planners are hell bent on trying to normalize policy some time in the next five or so years.

  Put simply, the more debt you have, the higher the cost of servicing your obligations and just about the last thing a grossly overleveraged economy needs is a wave of job losses and a severe economic downturn. Brazil is facing a similar dynamic. 

  “Since 1991, household debt has increased each quarter, on average, by almost 7 per cent on a year-over-year basis, with the sharpest acceleration occurring over 2002 to 2008,” the PBO says in the report. “In the third quarter of 2015, household debt amounted to $1.9 trillion.”

  

  “On its own, however, the debt-to-income ratio provides a limited measure of the financial vulnerability of households,” the report continues, adding that “what matters more for financial vulnerability is not so much the level of the debt relative to income, but rather the capacity of households to meet their debt service obligations.”

  Correct, and on that measure, things have only been worse on one other occasion: during the crisis.

   

  As Canada’s depression worsens, expect overburdened households to simply fold up under the pressure. That’s when the dominos start to fall in earnest as a cascade of foreclosures bursts the nation’s housing bubble once and for all and as the world discovers how exposed Canada’s banks are to the country’s levered up families. “Concerns about financial vulnerability are particularly prominent in the current context given the recent economic weakness and the expectation that interest rates will rise in the coming years from their historically-low levels,” the report concludes.

  Of course if rates don’t rise, that’s probably even worse news for Canadian households because it will mean that the country is still mired in recession. 

  We close with two passages, the first from Finance Canada’s Update of Economic and Fiscal Projections and the second from the Bank of Canada’s Financial System Review.

  Canadian household debt levels also remain elevated relative to historical norms. While this is not a risk in and of itself, it does limit the contribution that consumption and residential investment can make to growth. Moreover, if there were a negative external shock to the economy, this could trigger deleveraging among those households holding higher levels of debt, leading to a commensurate impact on consumption and residential investment.

   

  Household vulnerabilities could be exacerbated by a severe recession that is accompanied by a widespread and prolonged rise in unemployment. This could reduce the ability of households to service their debt and cause serious and broad-based declines in house prices.

  

  

  

  

  

• War On Cash Escalates: China Readies Digital Currency, IMF Says "Extremely Beneficial"

  Remember when Bitcoin and its digital currency cohorts were slammed by authorities and written off by the elite as worthless? Well now, as the war on cash escalates, officials from The IMF to China are seeing the opportunity to control the world's money through virtual (cash-less) currencies. Just as we warned most recently here, state wealth control is the goal and, as Bloomberg reports, The PBOC is targeting an early rollout of China's own digital currency to "boost control of money" and none other than The IMF's Christine Lagarde added that "virtual currencies are extremely beneficial."

  By way of background, as we explained previously, What exactly does a “war on cash” mean?

  It means governments are limiting the use of cash and a variety of official-mouthpiece economists are calling for the outright abolition of cash. Authorities are both restricting the amount of cash that can be withdrawn from banks, and limiting what can be purchased with cash.

  These limits are broadly called “capital controls.”

  Why Now?

  Why are governments suddenly so keen to ban physical cash?

  The answer appears to be that the banks and government authorities are anticipating bail-ins, steeply negative interest rates and hefty fees on cash, and they want to close any opening regular depositors might have to escape these forms of officially sanctioned theft. The escape mechanism from bail-ins and fees on cash deposits is physical cash, and hence the sudden flurry of calls to eliminate cash as a relic of a bygone age — that is, an age when commoners had some way to safeguard their money from bail-ins and bankers’ control.

  Forcing Those With Cash To Spend or Gamble Their Cash

  Negative interest rates (and fees on cash, which are equivalently punitive to savers) raise another question: why are governments suddenly obsessed with forcing owners of cash to either spend it or gamble it in the financial-market casinos?

  The conventional answer voiced by Mr. Buiter is that recession and credit contraction result from households and enterprises hoarding cash instead of spending it. The solution to recession is thus to force all those stingy cash hoarders to spend their money.

  *  *  *

  And so now we see China pushing for the early unleashing its own virtual currency, as Bloomberg reports

  Issuance of digital currency can help reduce costs, curb crimes and money laundry, facilitate transactions and boost central bank’s control on money supply and circulation, PBOC says in statement on website after concluding a seminar today.

   

  PBOC has asked its research team, which was set up in 2014, to study application scenarios for digital currency and strive for an early rollout.

  PBOC Statement:

  People's Bank of China digital currency seminar held in Beijing. From the People's Bank, Citibank and Deloitte digital currency expert, respectively, on the overall framework of digital currency currency evolving national digital currency, encryption currency issued by the State and other topics of discussion and exchange. People's Bank of China Governor Zhou Xiaochuan attended the meeting, the People's Bank of China Deputy Governor Chair Fan Yifei. Relevant research institutions, major financial institutions and advisory bodies of experts attended the meeting.

   

  The meeting pointed out that with the development of information technology and mobile Internet, cloud computing Trusted controlled, secure storage terminal evolution, block chain technology worldwide payment undergone tremendous changes, the development of digital currency is central Bank of currency and monetary policy has brought new opportunities and challenges. The People's Bank attaches great importance from 2014 to set up a special research team, and in early 2015 to further enrich the power of digital distribution and business operations monetary framework, the key technology of digital currency, digital currency issued and outstanding environment, digital currency legal issues facing the impact of digital currency on economic and financial system, the relationship between money and private legal digital distribution of digital currency, digital currency issuance of international experience conducted in-depth research, has achieved initial results.

   

  The meeting held that China's current economy under the new norm, explore the central bank issued digital currency has a positive practical significance and far-reaching historical significance. It can reduce the traditional distribution of digital currency note issue, the high cost of circulation, improve convenience and transparency of economic transactions and reduce money laundering, tax evasion and other criminal acts to enhance the central bank's money supply and currency in circulation control, better support economic and social development, the full realization of inclusive finance help. Future, digital currency issuance, circulation system also helps build our new financial infrastructure construction, further improve China's payment system, improve payment and settlement efficiency, promote economic quality and efficiency upgrades.

   

  The meeting urged the People's Bank of digital currency research team to actively absorb the important results and practical experience of digital currency research at home and abroad, continue to advance on the basis of preliminary work to establish a more effective organizational guarantee mechanism, to further clarify the strategic objectives of the central bank issued digital currency and do key technologies, multi-scene digital currency research applications for the early introduction of digital currency issued by the central bank. Design of digital currency should be based on economic, convenience and safety principles, and ensure the application of low-cost digital currency, wide coverage, digital currency payment instruments with other seamlessly, enhance the applicability and vitality of digital currency.

   

  The People's Bank in advancing digital currency research work with relevant international agencies, Internet companies to establish a communication link with the domestic and foreign financial institutions, traditional card-based payment institutions were widely discussed. At home and abroad to participate in discussions of attention to this work, and related research on expert theory, practice and exploration and development path with the people in the banking system conducted in-depth exchanges.

  Which was raidly followed by yet another belessing from The IMF:

  • *IMF’S LAGARDE SAYS VIRTUAL CURRENCIES ARE EXTREMELY BENEFICIAL
  • *VIRTUAL CURRENCIES ALSO COULD BE DESTABILIZING: LAGARDE

  The International Monetary Fund extolled the potential benefits of virtual currencies and said they warrant a more nuanced regulatory approach, at a time when the future of bitcoin, the most well-known example, is in doubt.

  “Virtual currencies and their underlying technologies can provide faster and cheaper financial services, and can become a powerful tool for deepening financial inclusion in the developing world,” IMF Managing Director Christine Lagarde said in a statement Wednesday to accompany the report.

   

  "The challenge will be how to reap all these benefits and at the same time prevent illegal uses, such as money laundering, terror financing, fraud and even circumvention of capital controls.”

  *  *  *

  However, as we detailed previously. there are three enormous flaws in this thinking.

  One is that households and businesses have cash to hoard. The reality is the bottom 90 percent of households have less income now than they did fifteen years ago, which means their spending has declined not from hoarding but from declining income.

   

   

  While corporate America has basked in the glory of sharply rising profits, small business has not prospered in the same fashion. Indeed, by some measures, small business has been in a six-year recession.

   

   

  The bottom 90 percent has less income and faces higher living expenses, so only the top slice of households has any substantial cash. This top slice may see few safe opportunities to invest their savings, so they choose to keep their savings in cash rather than gamble it in a rigged casino (i.e., the stock market).

   

  The second flaw is that hoarding cash is the only rational, prudent response in an era of financial repression and economic insecurity. What central banks are demanding — that we spend every penny of our earnings rather than save some for investments we control or emergencies — is counter to our best interests.

   

  This leads to the third flaw: capital — which begins its life as savings — is the foundation of capitalism. If you attack savings as a scourge, you are attacking capitalism and upward mobility, for only those who save capital can invest it to build wealth. By attacking cash, the central banks and governments are attacking capital and upward mobility.

   

  Those who already own the majority of productive assets are able to borrow essentially unlimited sums at near-zero interest rates, which they can use to buy more productive assets. Everyone else — the bottom 99.5 percent — is reduced to consumer-serfdom: you are not supposed to accumulate productive capital, you are supposed to spend every penny you earn on interest payments, goods, and services.

  This inversion of capitalism dooms an economy to all the ills we are experiencing in abundance: rising income inequality, reduced opportunities for entrepreneurship, rising debt burdens, and a short-term perspective that voids the longer-term planning required to build sustainable productivity and wealth.

  Benefits To Banks and the Government of Eliminating Physical Cash

  The benefits to banks and governments by eliminating cash are self-evident:

  1.  Every financial transaction can be taxed.
  2.  Every financial transaction can be charged a fee.
  3.  Bank runs are eliminated.

  In fractional reserve systems such as ours, banks are only required to hold a fraction of their assets in cash. Thus a bank might only have 1 percent of its assets in cash. If customers fear the bank might be insolvent, they crowd the bank and demand their deposits in physical cash. The bank quickly runs out of physical cash and closes its doors, further fueling a panic.

   

  The federal government began insuring deposits after the Great Depression triggered the collapse of hundreds of banks, and that guarantee limited bank runs, as depositors no longer needed to fear a bank closing would mean their money on deposit was lost.

   

  But since people could conceivably sense a disturbance in the Financial Force and decide to turn digital cash into physical cash as a precaution, eliminating physical cash also eliminates the possibility of bank runs, as there will be no form of cash that isn’t controlled by banks.

  So, when the dust has settled who ultimately benefits by this war on cash – government and the central banks, pure and simple.

  

  

  

  

  

• David Morgan: We Are On The Precipice

  Submitted by Adam Taggart via PeakProsperity.com,

  Precious metals guru David Morgan returns to address the great threat to the global financial/monetary system from derivative risk. He sees the world at an unprecedented moment in history where the interconnected nature of the global economy makes all players vulnerable to the mind-boggling volume of outstanding derivatives, which makes the sum of all world equity + debt look tiny in comparison (if you haven't seen it yet, look at this visual from The Money Project):

  I want to give a very clear example that comes from gaming theory and I think this is a very concise and easy way for most people to understand our derivative risk exposure .

   

  There are all kinds of gambling programs out there but one of the simplest ones before any computers was: you are at the roulette table (or you could be wherever, but roulette serves as the best analogy), and you bet a dollar on black and you lose. Then the next bet, you bet $2.00 and you lose. And then the next bet, you bet $4 and you lose. And the next bet, you bet $8 and you lose. The idea is that you keep betting on black, and eventually that's going to come up and you're going to win on the roulette table. The problem with that is this. You start to bet 2 4 8 16 32 64 128 256 and on and on, and what you are doing is you are betting $256. For what? To win a dollar. That is what you are doing. And that, Chris, I think is the best example I can give to the listeners about what we are doing in these derivatives.

   

  This is based on simplified "delta hedging" which is fairly easy to understand. But now you've got these mathematicians out there writing these derivatives that make the example I just gave you look like child’s play. That's literally a fact. And these things are so interdependent and there is so much counter-party risk — that is, of course the biggest, issue — If you win the bet in the derivatives market, what happens if the counter party can’t pay you? That's what happened in 2008. People still don’t realize how close we were to the edge at that point because banks were not trusting each other or each other’s paper. So they weren’t trusting their counter-party. What happened was the Fed came in and said: Well, Bank A you don’t trust Bank Bs paper; Bank B you don’t trust Bank As paper — here's what we are going to do: I’ll take your paper. The Fed is taking these worthless mortgages and saying: We'll settle in T-bills. You like those things, don’t you? The answer is: Of course. What is better than a T-bill?

   

  So then they settled out and, of course, this is where this whole expansion of the Fed’s balance sheet has taken place over the past several years. Everybody is happy because you have paper you can trust. But what happens when you don’t trust government paper? And Chris, that is really what is happening now. If you look at the foreign markets ,what has been going on is they basically have been dumping the dollar. The exchange stabilization fund has come in and sopped it up so it's not transparent to the markets unless you really know how to dig deep.

   

  We are, in my view, in a place where the world has never been. We are on the precipice of a situation that is global in scope and  — for all practical purposes — is going to effect almost everybody on the planet. 

  In this podcast, Chris and David also discuss the upcoming Solutions Conference in Las Vegas on February 22, where they will both be featured presenters. Those looking for more information about attending that conference can find it by clicking here.

  Click the play button below to listen to Chris' interview with David Morgan (49m:51s)

  

  

  

  

  

• Why Oil Under $30 Is A Major Problem

  Submitted by Gail Tverberg via Our Finite World blog,

  A person often reads that low oil prices–for example, $30 per barrel oil prices–will stimulate the economy, and the economy will soon bounce back. What is wrong with this story? A lot of things, as I see it:

  1. Oil producers can’t really produce oil for $30 per barrel.

  A few countries can get oil out of the ground for $30 per barrel. Figure 1 gives an approximation to technical extraction costs for various countries. Even on this basis, there aren’t many countries extracting oil for under $30 per barrel–only Saudi Arabia, Iran, and Iraq. We wouldn’t have much crude oil if only these countries produced oil.

  

  Figure 1. Global breakeven prices (considering only technical extraction costs) versus production. Source: Alliance Bernstein, October 2014

  2. Oil producers really need prices that are higher than the technical extraction costs shown in Figure 1, making the situation even worse.

  Oil can only be extracted within a broader system. Companies need to pay taxes. These can be very high. Including these costs has historically brought total costs for many OPEC countries to over $100 per barrel.

  Independent oil companies in non-OPEC countries also have costs other than technical extraction costs, including taxes and dividends to stockholders. Also, if companies are to avoid borrowing a huge amount of money, they need to have higher prices than simply the technical extraction costs. If they need to borrow, interest costs need to be considered as well.

  3. When oil prices drop very low, producers generally don’t stop producing.

  There are built-in delays in the oil production system. It takes several years to put a new oil extraction project in place. If companies have been working on a project, they generally won’t stop just because prices happen to be low. One reason for continuing on a project is the existence of debt that must be repaid with interest, whether or not the project continues.

  Also, once an oil well is drilled, it can continue to produce for several years. Ongoing costs after the initial drilling are generally very low. These previously drilled wells will generally be kept operating, regardless of the current selling price for oil. In theory, these wells can be stopped and restarted, but the costs involved tend to deter this action.

  Oil exporters will continue to drill new wells because their governments badly need tax revenue from oil sales to fund government programs. These countries tend to have low extraction costs; nearly the entire difference between the market price of oil and the price required to operate the oil company ends up being paid in taxes. Thus, there is an incentive to raise production to help generate additional tax revenue, if prices drop. This is the issue for Saudi Arabia and many other OPEC nations.

  Very often, oil companies will purchase derivative contracts that protect themselves from the impact of a drop in market prices for a specified time period (typically a year or two). These companies will tend to ignore price drops for as long as these contracts are in place.

  There is also the issue of employee retention. In a sense, a company’s greatest assets are its employees. Once these employees are lost, it will be hard to hire and retrain new employees. So employees are kept on as long as possible.

  The US keeps raising its biofuel mandate, regardless of the price of oil. No one stops to realize that in the current over-supplied situation, the mandate adds to low price pressures.

  One brake on the system should be the financial pain induced by low oil prices, but this braking effect doesn’t necessarily happen quickly. Oil exporters often have sovereign wealth funds that they can tap to offset low tax revenue. Because of the availability of these funds, some exporters can continue to finance governmental services for two or more years, even with very low oil prices.

  Defaults on loans to oil companies should also act as a brake on the system. We know that during the Great Recession, regulators allowed commercial real estate loans to be extended, even when property valuations fell, thus keeping the problem hidden. There is a temptation for regulators to allow similar leniency regarding oil company loans. If this happens, the “braking effect” on the system is reduced, allowing the default problem to grow until it becomes very large and can no longer be hidden.

  4. Oil demand doesn’t increase very rapidly after prices drop from a high level.

  People often think that going from a low price to a high price is the opposite of going from a high price to a low price, in terms of the effect on the economy. This is not really the case.

  4a. When oil prices rise from a low price to a high price, this generally means that production has been inadequate, with only the production that could be obtained at the prior lower price. The price must rise to a higher level in order to encourage additional production.

  The reason that the cost of oil production tends to rise is because the cheapest-to-extract oil is removed first. Oil producers must thus keep adding production that is ever-more expensive for one reason or another: harder to reach location, more advanced technology, or needing additional steps that require additional human labor and more physical resources. Growing efficiencies can somewhat offset this trend, but the overall trend in the cost of oil production has been sharply upward since about 1999.

  The rising price of oil has an adverse impact on affordability. The usual pattern is that after a rise in the price of oil, economies of oil importing nations go into recession. This happens because workers’ wages do not rise at the same time as oil prices. As a result, workers find that they cannot buy as many discretionary items and must cut back. These cutbacks in purchases create problems for businesses, because businesses generally have high fixed costs including mortgages and other debt payments. If these businesses are to continue to operate, they are forced to cut costs in one way or another. Cost reduction occurs in many ways, including reducing wages for workers, layoffs, automation, and outsourcing of manufacturing to cheaper locations.

  For both employers and employees, the impact of these rapid changes often feels like a rug has been pulled out from under foot. It is very unpleasant and disconcerting.

  4b. When prices fall, the situation that occurs is not the opposite of 4a. Employers find that thanks to lower oil prices, their costs are a little lower. Very often, they will try to keep some of these savings as higher profits. Governments may choose to raise tax rates on oil products when oil prices fall, because consumers will be less sensitive to such a change than otherwise would be the case. Businesses have no motivation to give up cost-saving techniques they have adopted, such as automation or outsourcing to a cheaper location.

  Few businesses will construct new factories with the expectation that low oil prices will be available for a long time, because they realize that low prices are only temporary. They know that if oil prices don’t go back up in a fairly short period of time (months or a few years), the quantity of oil available is likely to drop precipitously. If sufficient oil is to be available in the future, oil prices will need to be high enough to cover the true cost of production. Thus, current low prices are at most a temporary benefit–something like the eye of a hurricane.

  Since the impact of low prices is only temporary, businesses will want to adopt only changes that can take place quickly and can be easily reversed. A restaurant or bar might add more waiters and waitresses. A car sales business might add a few more salesmen because car sales might be better. A factory making cars might schedule more shifts of workers, so as to keep the number of cars produced very high. Airlines might add more flights, if they can do so without purchasing additional planes.

  Because of these issues, the jobs that are added to the economy are likely to be mostly in the service sector. The shift toward outsourcing to lower-cost countries and automation can be expected to continue. Citizens will get some benefit from the lower oil prices, but not as much as if governments and businesses weren’t first in line to get their share of the savings. The benefit to citizens will be much less than if all of the people who were laid off in the last recession got their jobs back.

  5. The sharp drop in oil prices in the last 18 months has little to do with the cost of production. 

  Instead, recent oil prices represent an attempt by the market to find a balance between supply and demand. Since supply doesn’t come down quickly in response to lower prices, and demand doesn’t rise quickly in response to lower prices, prices can drop very low–far below the cost of production.

  As noted in Section 4, high oil prices tend to be recessionary. The primary way of offsetting recessionary forces is by directly or indirectly adding debt at low interest rates. With this increased debt, more homes and factories can be built, and more cars can be purchased. The economy can be forced to act in a more “normal” manner because the low interest rates and the additional debt in some sense counteract the adverse impact of high oil prices.

  

  Figure 2. World oil supply and prices based on EIA data.

  Oil prices dropped very low in 2008, as a result of the recessionary influences that take place when oil prices are high. It was only with the benefit of considerable debt-based stimulation that oil prices were gradually pumped back up to the $100+ per barrel level. This stimulation included US deficit spending, Quantitative Easing (QE) starting in December 2008, and a considerable increase in debt by the Chinese.

  Commodity prices tend to be very volatile because we use such large quantities of them and because storage is quite limited. Supply and demand have to balance almost exactly, or prices spike higher or lower. We are now back to an “out of balance” situation, similar to where we were in late 2008. Our options for fixing the situation are more limited this time. Interest rates are already very low, and governments generally feel that they have as much debt as they can safely handle.

  6. One contributing factor to today’s low oil prices is a drop-off in the stimulus efforts of 2008.

  As noted in Section 4, high oil prices tend to be recessionary. As noted in Section 5, this recessionary impact can, at least to some extent, be offset by stimulus in the form of increased debt and lower interest rates. Unfortunately, this stimulus has tended to have adverse consequences. It encouraged overbuilding of both homes and factories in China. It encouraged a speculative rise in asset prices. It encouraged investments in enterprises of questionable profitability, including many investments in oil from US shale formations.

  In response to these problems, the amount of stimulus is being reduced. The US discontinued its QE program and cut back its deficit spending. It even began raising interest rates in December 2015. China is also cutting back on the quantity of new debt it is adding.

  Unfortunately, without the high level of past stimulus, it is difficult for the world economy to grow rapidly enough to keep the prices of all commodities, including oil, high. This is a major contributing factor to current low prices.

  7. The danger with very low oil prices is that we will lose the energy products upon which our economy depends.

  There are a number of different ways that oil production can be lost if low oil prices continue for an extended period.

  In oil exporting countries, there can be revolutions and political unrest leading to a loss of oil production.

  In almost any country, there can be a sharp reduction in production because oil companies cannot obtain debt financing to pay for more services. In some cases, companies may go bankrupt, and the new owners may choose not to extract oil at low prices.

  There can also be systemwide financial problems that indirectly lead to much lower oil production. For example, if banks cannot be depended upon for payroll services, or to guarantee payment for international shipments, such problems would affect all oil companies, not just ones in financial difficulty.

  Oil is not unique in its problems. Coal and natural gas are also experiencing low prices. They could experience disruptions indirectly because of continued low prices.

  8. The economy cannot get along without an adequate supply of oil and other fossil fuel products. 

  We often read articles in the press that seem to suggest that the economy could get along without fossil fuels. For example, the impression is given that renewables are “just around the corner,” and their existence will eliminate the need for fossil fuels. Unfortunately, at this point in time, we are nowhere being able to get along without fossil fuels.

  Food is grown and transported using oil products. Roads are made and maintained using oil and other energy products. Oil is our single largest energy product.

  Experience over a very long period shows a close tie between energy use and GDP growth (Figure 3). Nearly all technology is made using fossil fuel products, so even energy growth ascribed to technology improvements could be considered to be available to a significant extent because of fossil fuels.

  

  Figure 3. World GDP growth compared to world energy consumption growth for selected time periods since 1820. World real GDP trends from 1975 to present are based on USDA real GDP data in 2010$ for 1975 and subsequent. (Estimated by the author for 2015.) GDP estimates for prior to 1975 are based on Maddison project updates as of 2013. Growth in the use of energy products is based on a combination of data from Appendix A data from Vaclav Smil’s Energy Transitions: History, Requirements and Prospects together with BP Statistical Review of World Energy 2015 for 1965 and subsequent.

  While renewables are being added, they still represent only a tiny share of the world’s energy consumption.

  

  Figure 4. World energy consumption by part of the world, based on BP Statistical Review of World Energy 2015.

  Thus, we are nowhere near a point where the world economy could continue to function without an adequate supply of oil, coal and natural gas.

  9. Many people believe that oil prices will bounce back up again, and everything will be fine. This seems unlikely. 

  The growing cost of oil extraction that we have been encountering in the last 15 years represents one form of diminishing returns. Once the cost of making energy products becomes high, an economy is permanently handicapped. Prices higher than those maintained in the 2011-2014 period are really needed if extraction is to continue and grow. Unfortunately, such high prices tend to be recessionary. As a result, high prices tend to push demand down. When demand falls too low, prices tend to fall very low.

  There are several ways to improve demand for commodities, and thus raise prices again. These include (a) increasing wages of non-elite workers (b) increasing the proportion of the population with jobs, and (c) increasing the amount of debt. None of these are moving in the “right” direction.

  Joseph Tainter in The Collapse of Complex Societies points out that once diminishing returns set in, the response is more “complexity” to solve these problems. Government programs become more important, and taxes are often higher. Education of elite workers becomes more important. Businesses become larger. This increased complexity leads to more of the output of the economy being funneled to sectors of the economy other than the wages of non-elite workers. Because there are so many of these non-elite workers, their lack of buying power adversely affects demand for goods that use commodities, such as homes, cars, and motorcycles.¹

  Another force tending to hold down demand is a smaller proportion of the population in the labor force. There are many factors contributing to this: Young people are in school longer. The bulge of workers born after World War II is now reaching retirement age. Lagging wages make it increasingly difficult for young parents to afford childcare so that both can work.

  As noted in Section 5, debt growth is no longer rising as rapidly as in the past. In fact, we are seeing the beginning of interest rate increases.

  When we add to these problems the slowdown in growth in the Chinese economy and the new oil that Iran will be adding to the world oil supply, it is hard to see how the oil imbalance will be fixed in any reasonable time period. Instead, the imbalance seems likely to remain at a high level, or even get worse. With limited storage available, prices will tend to continue to fall.

  10. The rapid run up in US oil production after 2008 has been a significant contributor to the mismatch between oil supply and demand that has taken place since mid-2014.  

  Without US production, world oil production (broadly defined, including biofuels and natural gas liquids) is close to flat.

  

  Figure 5. Total liquids oil production for the world as a whole and for the world excluding the US, based on EIA International Petroleum Monthly data.

  Viewed separately, US oil production has risen very rapidly. Total production rose by about six million barrels per day between 2008 and 2015.

  

  Figure 6. US Liquids production, based on EIA data (International Petroleum Monthly, through June 2015; supplemented by December Monthly Energy Review for most recent data).

  US oil supply was able to rise very rapidly partly because QE led to the availability of debt at very low interest rates. In addition, investors found yields on debt so low that they purchased almost any equity investment that appeared to have a chance of long-term value. The combination of these factors, plus the belief that oil prices would always increase because extraction costs tend to rise over time, funneled large amounts of investment funds into the liquid fuels sector.

  As a result, US oil production (broadly defined), increased rapidly, increasing nearly 1.0 million barrels per day in 2012, 1.2 million barrels per day in 2013, 1.7 million barrels per day in 2014. The final numbers are not in, but it looks like US oil production will still increase by another 700,000 barrels a day in 2015. The 700,000 extra barrels of oil added by the US in 2015 is likely greater than the amount added by either Saudi Arabia or Iraq.

  World oil consumption does not increase rapidly when oil prices are high. World oil consumption increased by 871,000 barrels a day in 2012, 1,397,000 barrels a day in 2013, and 843,000 barrels a day in 2014, according to BP. Thus, in 2014, the US by itself added approximately twice as much oil production as the increase in world oil demand. This mismatch likely contributed to collapsing oil prices in 2014.

  Given the apparent role of the US in creating the mismatch between oil supply and demand, it shouldn’t be too surprising that Saudi Arabia is unwilling to try to fix the problem.

  Conclusion

  Things aren’t working out the way we had hoped. We can’t seem to get oil supply and demand in balance. If prices are high, oil companies can extract a lot of oil, but consumers can’t afford the products that use it, such as homes and cars; if oil prices are low, oil companies try to continue to extract oil, but soon develop financial problems.

  Complicating the problem is the economy’s continued need for stimulus in order to keep the prices of oil and other commodities high enough to encourage production. Stimulus seems to takes the form of ever-rising debt at ever-lower interest rates. Such a program isn’t sustainable, partly because it leads to mal-investment and partly because it leads to a debt bubble that is subject to collapse.

  Stimulus seems to be needed because of today’s high extraction cost for oil. If the cost of extraction were still very low, this stimulus wouldn’t be needed because products made using oil would be more affordable.

  Decision makers thought that peak oil could be fixed simply by producing more oil and more oil substitutes. It is becoming increasingly clear that the problem is more complicated than this. We need to find a way to make the whole system operate correctly. We need to produce exactly the correct amount of oil that buyers can afford. Prices need to be high enough for oil producers, but not too high for purchasers of goods using oil. The amount of debt should not spiral out of control. There doesn’t seem to be a way to produce the desired outcome, now that oil extraction costs are high.

  Rigidities built into the oil price-supply system (as described in Sections 3 and 4) tend to hide problems, letting them grow bigger and bigger. This is why we could suddenly find ourselves with a major financial problem that few have anticipated.

  Unfortunately, what we are facing now is a predicament, rather than a problem. There is quite likely no good solution. This is a worry.

  

  

  

  

  

• 7 Striking Images From Deadly Taliban Attack On Pakistani University

  On December 16, 2014, seven gunmen from the Pakistan Taliban stormed the Army Public School in Peshawar, Pakistan.

  The shooters murdered 144 people, walking desk to desk and executing children aged 12 to 16. “Our men attacked the school and killed children of army personnel – not civilians,” TTP leader Maulana Fazlullah said, as though that somehow justified the massacre. “They asked about their identity before killing them [and] these people will always be our target and we will kill them in the streets, markets, everywhere,” he added.

  A little over a year later, Pakistani students were once again targeted by militants in a tragic attack that left dozens dead on Wednesday in Khyber Pakhtunkhwa province, a mere 25 miles from the site of the Army Public School attack.

  

  “The militants, using the cover of thick, wintry fog, scaled the walls of the Bacha Khan University in Charsadda on Wednesday morning before entering buildings and opening fire on students and teachers in classrooms and hostels,” Reuters writes, recounting the horrific details.

  “They came from behind and there was a big commotion,” one student told local media. “We were told by teachers to leave immediately,” he said. “Some people hid in bathrooms.”

  In the wake of the chaos, senior Pakistani Taliban commander Umar Mansoor (who some say was the mastermind behind the 2014 attack) claimed responsibility for Wednesday’s assault, saying the school is a “government institution that supports the army.”

  Later, an official spokesperson for the Taliban denied the group’s senior leadership was involved. “Youth who are studying in non-military institutions, we consider them as builders of the future nation and we consider their safety and protection our duty,” a statement from official Taliban spokesman Muhammad Khorasani reads. “We strongly condemn the attack on Bacha Khan University in Charsadda and disown the attack, saying this is not according to Shariah.”

  So a bit of militant miscommunication it would appear.

  Whether or not this was an officially sanctioned attack or not is immaterial because as you can see from the indelible images shown below, Pakistani students are the furthest thing from “safe and protected,” to quote Khorasani.

  This, apparently, is the type of “security” that billions in US taxpayer funded anti-terror aid buys for Pakistani citizens:

  

  

  

  

  

  

  

  

  

  

  

• The "Historic" Winter Blizard Was Just Upgraded To A "Potentially Epic Winter Blockbuster"

  Yesterday some readers were offended when we dubbed the upcoming winter storm set to slam the Northeastern United States and impact up to 50 million people, in roughly 48 hours as “potentially historic” – a phrase created not by us, but by the WaPo’s meteorologists.

  Still, what’s the big deal, the purists will say, pointing out that snow in January is not exactly a shocking event. We fully agree, however we would like to remind readers that “snow in the winter”, especially when coupled with, gasp, cold weather, is precisely what the US Bureau of Economic Analysis used as justification ot arbitrarily push Q1 GDP in both 2014 and 2015 higher by nearly 1% as a result of “incremental” seasonal adjustments after the fact, the explanation being that the cold weather and the snow resulting from a handful of blizards ended up crushing the US economy.

  Of course, as we explained on numerous occasions in the past, the dramatic slowdown of the US economy in 2014 and 2015 had nothing to do with the weather and everything to do with the bursting of the Chinese housing bubble first in late 2013 and then of its shadow banking bubble in late 2014, two events whose reveberation around the globe slammed the US economy into an acute, if brief, contraction.

  As such the only reason why any weather events are notable, is to observe whether the BEA once again uses the weather as a scapegoat for the third year in a row, to justify a collapse in GDP to zero, or negative even though just one month ago retailers were complaining about their lack of revenue growth and collapse in profits as a result of warm weather.

  Which brings us back to the upcoming winter storm where the hyperbole factor just went up a notch, this time courtesy the Weather Undereground’s Bob Henson, who has decided that merely “historic” is too cut and dry, and has instead dubbed the imminent climatic phenomenon not only “potentially epic” but a “winter blockbuster” to boot.

  Which is just the soundbite cover the US BEA needs to whip out triple seasonal adjustments and “calculate” that Q1 GDP did not really contract but when you melt the snow on a pro forma, “non-GAAP” basis, GDP likely grew by some $50 billion more.

  Here is what, according to yet another weather forecaster, is in store for the Northeast courtesy of The Wunderground:

  Mid-Atlantic Braces for Potentially Epic Blizzard

  For an event still several days out, computer models were in remarkable agreement late Tuesday on what could be one of the greatest snowstorms in decades for the region around Washington, D.C. It’s difficult to convey what the models are projecting without appearing to sensationalize the event, but here goes: there is every indication that snow totals on the order of two feet are quite possible across parts of the greater D.C./Baltimore area, with the potential for almost as much in Philadelphia and perhaps a foot toward New York City. Anything over 20” at Washington National Airport would be the greatest snowfall for D.C.’s official reporting station in almost a century (see below).

  Although it’s too soon to get too precise about exact amounts and locations, confidence is uncommonly high for a high-impact event in the mid-Atlantic. The 0Z Wednesday run of the GFS doubled down on the prognosis, with projected snowfall amounts exceeding 30” within commuting distance of the district (see Figure 1). As a group, the ensemble members with this GFS run weren’t quite as bullish, but as noted by Capital Weather Gang, the ensemble average still projects a widespread 20” or more over much of the D.C. area. At this writing, the 0Z operational run of the ECMWF model was just coming in, and it appeared just as compelling as the GFS output below in terms of a potential record-breaking storm for the D.C. area.

  

  Figure 1. Snowfall totals generated by the 0Z Wednesday operational run of the GFS model for the period from 0Z Wednesday (7:00 pm EST Tuesday) to 0Z Monday (7:00 pm EST Sunday). Amounts are calculated by assuming a 10:1 ratio of snow to melted water; the actual ratio can vary significantly from place to place within a storm. Keep in mind that forecasters rely on the output from a wide range of models and their trends over time before making specific snowfall predictions. Image credit: Levi Cowan, tropicaltidbits.com.

  The making of a winter blockbuster

  The impetus for the storm is an upper-level impulse that was moving into the Pacific Northwest late Tuesday. The jet-stream energy will sweep across the mid-South on Thursday into Friday, helping produce a quick shot of snow and ice for parts of Arkansas, Kentucky, and Tennessee. Snow could begin as soon as midday Friday ahead of this impulse over the D.C. area. Then, as the jet-stream energy carves out a powerhouse upper low, a surface cyclone should intensify on Saturday off the Virginia coast–a prime location for big mid-Atlantic snowstorms. In classic fashion, the low-level cyclone will funnel warm, moist air from the tropical Atlantic into the region, with the air mass cooling and generating snow as it rises.

  The storm’s expected evolution is “textbook,” said NOAA’s Paul Kocin in an NWS forecast discussion on Tuesday. Kocin would know: he literally wrote the book on the subject with NWS director Louis Uccellini, the classic two-volume ”Northeast Snowstorms”.

  There are many failure modes for big mid-Atlantic snowstorms. For example, warm air wrapping around the surface cyclone can turn the snow to rain or sleet, or a dry slot can develop south of the surface low–and of course, the location of key features can shift. At least for the time being, the model depictions are threading the needle around these frequent storm-killers, keeping alive the possibility of a once-in-a-generation event for at least some areas. Snow could fall more or less continuously for an unusually long span of 36 hours or more, heightening the chance of big accumulations.

  A serious flood threat for the mid-Atlantic coast

  There is more than snow in the works with this storm. The ferocious dynamics at play during the storm’s height could produce winds of 40-50 mph or more, which would lead to blizzard conditions and huge drifts. On top of that, strong onshore winds may produce waves up to 20 feet and major coastal flooding, especially from New Jersey to the Delmarva Peninsula. The full moon on Saturday will only add to the risk of significant flood impacts. In addition, sea-surface temperatures running 5 – 7°F above average should keep the offshore surface air relatively warm, allowing strong winds aloft to mix to the surface more readily than usual for a midwinter nor’easter, as noted by the NWS/Philadelphia office in a weather discussion on Tuesday night. The risk of damaging coastal flooding will need to be watched with the same vigilance as the potential for crippling snowfall just inland.

  

  Figure 2. D.C.’s top 1-, 2-, and 3-day winter storms, plotted by total snow amount and year. Image credit: NWS/Baltimore-Washington.

  What are D.C.’s biggest storms on record?

  Among the largest East Coast cities, models are suggesting that Washington has the best shot at a potential record storm. Only one storm since D.C. records began in 1884 has managed to rack up more than 20”, whereas Baltimore has had eight such storms and Dulles four. See the statistics page put together by NWS/Baltimore-Washington for more details.

  Top five D.C. snowstorms over periods of up to 3 days

  28” (Jan. 27-29, 1922)
  20” (Feb. 12-14, 1899)
  18.7” (Feb. 18-19, 1979)
  17.8 (Feb. 5-6, 2010)
  17.1” (Jan. 6-8, 1996)

  As this storm approaches, the NWS/Baltimore-Washington office will provide experimental snowfall guidance in the form of maps and tables with detailed probabilities of exceeding various snow-amount thresholds. We can expect to see more of this type of guidance in the future; although it offers a lot of detail to parse, it provides a much richer guide to both the high- and low-end possibilities. For a reliable source of frequently updated, hyper-local coverage, you can’t beat Capital Weather Gang. Though it’s too soon to know exactly how this storm will behave, it’s not too soon to begin common-sense preparations if you’re anywhere in or near the target area.

  Jeff and I will have a post Wednesday evening on the NASA/NOAA climate report for 2015, and I’ll have more on the looming East Coast storm on Thursday.

  Beautiful cold air advection clouds off east coast today thanks 2 strong NW winds. Winds will shift b4 nor’easter. pic.twitter.com/Jj0SToQiFk

  — Kathryn Prociv (@KathrynProciv) January 19, 2016

  

  

  

  

  

• ISIS Cuts Fighters' Pay By 50%, Cites "Exceptional Circumstances"

  As anyone who holds a “non-supervisory” job in America’s double-adjusted “recovery” is acutely aware, wage growth is missing in action in the US.

  Your boss may have gotten a raise, but you probably didn’t and if the number of multiple job holders is any indication, America’s rapid transformation from middle class utopia to feudal system is likely to continue unabated for the foreseeable future.

  Of course it’s not just Americans who are forced to deal with economic realities like the soaring cost of housing on wages that never rise.

  There’s the Japanese for instance, who have discovered that all of Abe’s “arrows” have failed to hit their mark.

  And then there’s ISIS, whose cash flow has been constrained thanks to hundreds of airstrikes against its oil infrastructure carried out by a determined Vladimir Putin.

  According to a translation of a document posted by Middle East Forum research fellow Aymenn Jawad Al-Tamimi, Islamic State just cut its fighters’ pay in half citing “exceptional circumstances.” The original document and full translation is below.

  *  *  *

  Lowering of salaries for fighters by 50%

  

  Islamic State

  Bayt Mal al-Muslimeen

  Wilayat al-Raqqa

  Decision no.: n/a

  Month of Safr 1437 AH [c. November-December 2015]

  In the name of God, the Compassionate, the Merciful

  God Almighty has said: “Go forth, lightly or heavily armed. And wage jihad with your wealth and souls in the path of God. That is best for you if you know” (al-Tawba 41) [Qur’an 9:41]. And on the authority of Anas (may God be pleased with him): that the Prophet (SAWS) said: “Wage jihad against the mushrikeen with your wealth, souls & tongues”- Musnad Ahmad: Musnad Anas Malek (11798).

  Jihad of wealth has been mentioned with jihad of soul in the Qur’an in ten cases, and in nine of those cases jihad of wealth has been presented beforehand over jihad of the soul, and only in one case has jihad of the soul been presented beforehand over jihad of wealth. And on the authority of Omar bin al-Khattab (may God be pleased with him): “The Messenger of God (SAWS) ordered us to give charity and that coincided with the time I had some wealth. So I said: ‘Today I will outdo Abu Bakr, if ever I have outdone him.’ So I came with half of my wealth, and so the Messenger of God (SAWS) said: ‘What have you left for your family?’ I said: ‘The same amount.’ And Abu Bakr came with all he had, so he said: ‘Oh Abu Bakr, what have you left for your family?’ He said: ‘I have left for them God and His Messenger.’ I said: ‘By God, I can never outdo him in anything.'” (muttafiq alayhi).

  So on account of the exceptional circumstances the Islamic State is facing, it has been decided to reduce the salaries that are paid to all mujahideen by half, and it is not allowed for anyone to be exempted from this decision, whatever his position. Let it be known that work will continue to distribute provisions twice every month as usual.

  And God is the guarantor of success.

  *  *  *

  It’s curious that no “salary” cuts were necessary during the 14 months the US spent “degrading and destroying” the group but are suddenly needed just three months into Russia’s bombing campaign.

  

  

  

  

  

• Is China's "National Team" Now Bailing Out US Markets?

  Many people wondered what the trigger for today’s massive short-squeeze was.

   

  

   

  We may have found the answer. Right as the “Most Shorted” stocks started to soar, someone decided to buy offshore Yuan with both hands and feet (yes in the middle of the US day session).

   

  

   

  This held up until the NY close… and now offshore Yuan is fading back fast.

  

   

  So did China’s “National Team” step in to save the world today?

  

  

  

  

  

• Dumpster-Diving Massive-Short-Squeeze Rescues Stocks From 2014 Ebola Lows

  Bob Pisani nailed it today "I'm agnostic about whether to buy or sell today… but I'm not selling"…

  A rollercoater of a day…

  S&P500 Heatmap for today. pic.twitter.com/Ff2jWVoY89

  — Large Void (@largevoid) January 20, 2016

  Neverthelesss, the World entered a bear market today…

  • *MSCI'S ALL-COUNTRY WORLD INDEX EXTENDS DROP TO 20% FROM RECORD

  It would appear the business cycle trumps central planning after all:

  

   

  Then a huge Short-Squeeze ramped us higher in the afternoon…

  

   

  Which was briefly stymied by a denial from China – *CHINA OFFICIAL VOWS NO MASSIVE STIMULUS TO SUPPORT GROWTH: WSJ until USDJPY took over control and ramped US equities massively higher…

  

   

  Some context: Dow futures fell 820 points in 26 hours then suddenly soared 450 points in 3 hours

  

   

  As The S&P bounced off 2014's Ebola Lows…

  

   

  A reminder from August 2015 -Losses have been cut in half after the opening collapse as a mysterious buyer in massive size lifts The Dow 600 points off its lows, cutting losses in half for now…

  

   

  VIX hit 32 before beiong slammed to drive the S&P back above August's closing lows… but that failed…

  

   

  This left Small Caps green but everything else ended back in the red…

  

   

  Futures show the real volatility this week – today's ramp in Nasdaq goit us back to green for the week….

  

   

  Investors flight-to-safety'd into GPRO, FIT, and TWTR

  

   

  Treasury yields bounced as stocks did but nothing like the level of idiocy…

  

   

  The USD Index rallied as stocks soared in the afternoon as JPY was slammed…

  

   

  Interestingly, it was a sudden bid for offshore Yuan that sparked the rally in US equities… (through JPY carry)

  

   

  Commodities were crazy…

  

   

  Here's oil for the week…

  

   

  Charts: Bloomberg

  

  

  

  

• Fantasy? North Korea's "Hangover-Free Alcohol" Or America's "Consequence-Free Debt"

  Submitted by Simon Black via SovereignMan.com,

  If you believe the official propaganda, no other nation in the history of the world has advanced the cause of humanity more than North Korea.

  According to the North Korean Ministry of Truth, their great nation has cured cancer, ebola, AIDS, SARS, MERS, and much more.

  Now they’re saving the world again, this time having invented an extra-strength adult beverage that won’t leave you feeling like a train wreck in the morning.

  It’s hangover-free alcohol. Perhaps next they’ll invent Calorie-free chocolate.

  Clearly this is an idiotic fantasy.

  Alcohol has chemical properties which have a severe physiological impact on the human body when consumed in excess.

  If you drink too much alcohol, there are consequences. Both short-term and long-term. Simple.

  Yet the North Korean government is deceiving an entire nation of devout followers that they have invented a cure-all panacea.

  Drink as much as you want and don’t worry about the consequences!

  Now, we can poke fun at North Koreans’ gullibility.

  But frankly I don’t find the idea of ‘hangover-free alcohol’ any dumber or less deceptive than the idea of ‘consequence-free debt’. Or the idea that you can print your way to prosperity.

  North Koreans may be delusional enough to believe their government. But so are most Westerners.

  People in the ‘advanced’ world believe crazy fantasies all the time.

  We’re told that the national debt doesn’t matter, nor does it make the nation poorer, because “we owe it to ourselves.” (Nobel Prize winner Paul Krugman, 9 February 2015)

   

  It’s as if the federal government being unable to pay the debts it owes to Social Security recipients, or to bank depositors in the US, is somehow less ‘bad’ than stiffing China.

   

  We’re told “the State of our Union is strong” (Barack Obama, last week).

   

  Yet trust in government is near an all-time low, wealth inequality is extreme, the Middle Class is no longer the clear majority in America, and the national debt is at an all-time high of nearly $19 trillion.

   

  We’re told that “Medicare and Social Security are not in crisis” (Barack Obama, 13 July 2015).

   

  Yet the annual report from the Treasury Secretary of the United States tells us that one of the programs’ major trust funds is completely out of cash, and the rest are running out.

   

  We’re told that running huge budget deficits don’t matter because “the government can print more money.” (Paul Krugman, 31 January 2013)

   

  … because apparently there are absolutely zero consequences when the Federal Reserve conjures money out of thin air.

   

  Except that there are consequences. Every dollar the Fed prints weakens its balance sheet and pushes it into insolvency.

   

  In fact, the Fed’s own weekly financial report shows that its level of capital is a pitifully small 0.8% of its total assets. In other words, the Fed has almost zero margin of safety.

   

  And on a mark to market basis, the Fed is already insolvent.

   

  Yet the Federal Reserve claimed in a November 2014 white paper that its own insolvency “would not create serious problems,” as if decades of wild partying with their printing presses would be consequence free.

  Western newspapers are certainly having a chuckle today at North Korea with headlines making fun of the hangover-free alcohol hoax.

  But just imagine the fun they’d have if Kim Jong-un announced to the world that he had invented ‘consequence-free debt’ or a perpetual money printing machine.

  Western media would have a field day with such propaganda, arrogant and clueless that this is already our own reality.

  Hangover-free alcohol is pretty silly.

  But in the West, we believe the biggest lies of all… that you don’t actually have to do anything, that your nation can simply print and borrow its way to prosperity until the end of time.

  All lies eventually collapse, and reality settles in.

  Given the panic in global financial markets just in the first few weeks of 2016, that reality may be quickly approaching.

  

  

  

  

  

• Oil Slides After API Reports Another Large Crude, Gasoline Inventory Build

  With December's seasonal shenanigans out of the way, and following 2 record-breaking weekly builds in gasoline stocks, with expectations of a 2.3mm barrel build API reported a large 4.6mm inventory build (double expectations) . Cushing inventories built 63k, rising for the 12th week in a row. Gasoline stocks rose once again (+4.7mm) and Distillates also (+1.5mm).

  December is over…

  

   

  Following crude's v-shaped recovery today, API's huge build sent WTI back lower…

  

   

  Charts: Bloomberg

  

  

  

  

  

• Tying It All Together: Rifle Lost During "Fast And Furious" Found In El Chapo's Hideout

  Just when we thought the surreal story surrounding Mexican drug lord Joaquin “El Chapo” Guzman’s second capture couldn’t get any more bizarre, it does just that, but in an oddly satisfying way, one which ties the soon to be incarcerated criminal south of the border with a criminal located right inside Washington D.C., one who however will never be punished. According to the Hill, a .50-caliber rifle recovered from El Chapo’s hideout was one of the firearms lost by the U.S. government’s gun-smuggling operation Fast and Furious.

  

  Agents from the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) checked serial numbers of weapons recovered after the raid earlier this month on the Los Mochis house where Guzman was staying. They traced one of two rifles back to the ATF program, according to Fox News.

  Federal officials are investigating how many weapons seized from the house originated in the U.S., sources told Fox News. The report noted that ATF agents lost track of 1,400 of the roughly 2,000 weapons it allowed suspects to buy in Arizona with the intent of tracking them.

  As the Hill ads, thirty-four of the weapons sold through Fast and Furious were .50-caliber rifles, sources told the news outlet, which reported that Guzman placed guards on hilltops to shoot down helicopters. So somehow the fallout from Eric Holder’s Fast and Furious ended up arming none other than Mexico’s most wanted criminal.

  The botched Fast and Furious operation was intended to track straw purchasers of firearms, but ATF officials lost track of the guns. One of the guns was later tied to the shooting death of a Border Patrol agent in Arizona and multiple other weapons were linked to crimes.

   

  The program sparked a major fight between congressional Republicans and the administration during President Obama’s first term.

  Then-Attorney General Eric Holder was held in contempt of Congress for refusing to turn over records about the program. A federal judge ruled this week that Obama cannot use executive privilege to keep the records from Congress.

  We doubt that will change anything, however, and the man who pegged the phrase “too big to prosecute” will continue walking free, because after all it is one thing to go after criminals in Mexico, when it comes to the former US Attorney General, in the height of irony, justice is always loopholed.

  

  

  

  

  

Digest powered by RSS Digest

• People Trust Search Engines More than Traditional Media for News

  U.S. public relations firm Edelman polled 33,000 people in 28 countries, and found that people trust search engine results more than any other media:

  

  QZ redid the graphic to make it easier to read:

  

  Edelman also argues that search engines and the Internet have turned traditional power structures – and the sources of influence – on their head:

  This sounds good … but remember that the NSA and its British counter-part the GCHQ MASSIVELY manipulate the web – including making some websites artificially popular and others less so – to spread their influence and promote their agendas.

  And everyone obtains different search engine results … even if they run the exact same search.  For example, Google gathers information across all of its platforms, and personalizes search engine results based upon what you’ve looked for in past searches.

  So search engine results are not totally objective … they are based upon our past expressions of interest.

  And some even question whether the search engine companies themselves are really as neutral as they claim.  We express no opinion on that topic, other than to note it.

  

  

  

  

• The Bull Market in Stocks May Be Done

  by Keith Weiner

   

  It has come to my attention that, perhaps, the great stock bull market is done. To most people, a bull market is good, and its end is bad. After all, a rising market signifies a healthy economy. Investors are making money. And it seems to prove that the free market is validated, able to deliver miracles despite Obamacare. Share prices are connected to business productivity, aren’t they?

  In a free market they are, of course. However—and this cannot be said too often—we don’t have a free market. We have monetary policy. This is how our central planners try to stimulate us. They create a wealth effect.

  Whenever you come across a metaphor like wealth effect, I encourage you to ask what is actually happening. Obviously, the government can’t create wealth by decree Something else has to be happening. Let’s look at that.

  The term wealth effect is interesting. There are many other effects, such as the placebo effect and the cheerleader effect. In each effect, something manipulates your judgement. The placebo effect convinces you that you feel better. The cheerleader effect convinces you that a girl is prettier. And the wealth effect convinces you that you’re richer. They’re all just illusions.

  The medical journals talk about why placebos do that, and the psychology journals analyze the cheerleaders. Our concern is to understand the wealth effect—not by the magical thinking offered by many so called economists—but through monetary science.

  Mechanically, the wealth effect is a simple process. One, the Fed drives up the price of bonds. Two, investors begin to find bonds too pricey, so they switch out of bonds. Three, they buy stocks and real estate, the main alternatives to bonds. Four, stock and real estate owners feel richer. After all, their net worth is rising much faster than the cost of living. The wealth effect exploits the common assumption that your real wealth is your net worth divided by the cost of living. Five, people spend. If your wealth went from $150,000 to $250,000, you can spend part of the $100,000 profit, the reward of having invested wisely. All asset owners are empowered to spend.

  We’re painting a picture here, not of creating wealth, but spending it. The wealth effect is not about production, but consumption. To use my favorite farm analogy, the wealth-effected farmer is not operating his farm to grow crops. He’s just eating his seed corn.

  It works, because your purchasing power is increasing. The price of corn isn’t going up (quite the opposite, it’s down 55 percent since 2012). But the assets you can swap for corn have risen significantly (stocks are up 28 percent over the same time period). The same house that could be traded for 2 years’ worth of corn, can now be swapped for maybe four. The same stock whose liquidation would pay for corn for a year, will pay for groceries for about three now. So people indulge themselves, and spend some of their gains.

  Unfortunately, this is no real gain. The iron law of economics is that you must produce first, in order to consume. The Fed produces nothing when it drives up the price of your assets, and neither do you by simply holding them in the meantime.

  The wealth effect, in reality, is a process of consuming precious capital, previously accumulated by hard working people who consumed less than they produced. Their savings now enable a whole class of people who consume more than they produce.

  Fed monetary policy induces this consumption, by altering the purchasing power of assets. In other words, the ratio of asset prices to consumer prices is distorted. The more this playing field tilts, the more everyone runs downhill to the endless party.

  Well, it seems endless while it lasts. And now it may be coming to its inevitable end.

  Please take no shadenfreude—pleasure from someone else’s pain. For the sake of our civilization, we had better stop consuming the capital base on which it’s built.

  The end of the wealth effect is a good thing.

  

  

  

  

• Stocks, Commodities, & Bond Yields Are Collapsing

  10Y Treasury Yields are plunging back below 2.00% (lowest in 3 months), WTI crude front-month (March) has just tumbled to a $28 handle, and Dow futures are now down over 500 points from this morning's exuberant stimulus hope highs…

  Crude has collaped back below $29…

  

   

  Stocks are in free-fall…

  

   

  And 30Y bonds are soaring (10Y yield below 2.00%)

  

   

  What's wrong with this picture?

  

   

  With all major US equity indices in correction post-rate-hike…

  

   

  Black Monday, Turnaround Tuesday, WTF Wednesday!!

  

  

  

  

  

• Clinton Vs. Sanders – What Does Google Say… And The Facts

  With stunning polls showing Bernie Sanders with a 60% to 33% lead over Hillary Clinton in New Hampshire…

  The new poll, mostly conducted before Sunday night’s debate, found Sanders’ support has grown by 10 points since a late-November/early December CNN/WMUR poll, which found Sanders holding 50% to Clinton’s 40%.

  As Liberty Blitizkrieg’s Mike Krieger notes, the following “suggested searches” from Google pretty much sums up how the general public feels about the two leading candidates for the Democratic nomination…

   

  

   

  And here are the facts, as dissected by Politifact:

  

   

  Democrats choose wisely.

  

  

  

  

  

• The 21st Century: An Era Of Fraud

  Submitted by Paul Craig Roberts,

  In the last years of the 20th century fraud entered US foreign policy in a new way.  On false pretenses Washington dismantled Yugoslavia and Serbia in order to advance an undeclared agenda.  In the 21st century this fraud multiplied many times. Afghanistan, Iraq, Somalia, and Libya were destroyed, and Iran and Syria would also have been destroyed if the President of Russia had not prevented it.  Washington is also behind the current destruction of Yemen, and Washington has enabled and financed the Israeli destruction of Palestine.  Additionally, Washington operated militarily within Pakistan without declaring war, murdering many women, children, and village elders under the guise of “combating terrorism.”  Washington’s war crimes rival those of any country in history.

  I have documented these crimes in my columns and books (Clarity Press). Anyone who still believes in the purity of Washington’s foreign policy is a lost soul.

  Russia and China now have a strategic alliance that is too strong for Washington. Russia and China will prevent Washington from further encroachments on their security and national interests. Those countries important to Russia and China will be protected by the alliance.  As the world wakes up and sees the evil that the West represents, more countries will seek the protection of Russia and China. 

  America is also failing on the economic front.  My columns and my book, The Failure of Laissez Faire Capitalism, which has been published in English, Chinese, Korean, Czech, and German, have shown how Washington has stood aside, indeed cheering it on, while the short-term profit interests of management, shareholders, and Wall Street eviscerated the American economy, sending manufacturing jobs, business know-how, and technology, along with professional tradeable skill jobs, to China, India, and other countries, leaving America with such a hollowed out economy that the median family income has been falling for years. Today 50% of 25 year-old Americans are living with their parents or grandparents because they cannot find employment sufficient to sustain an independent existance.  This brutal fact is covered up by the presstitute US media, a source of fantasy stories of America’s economic recovery.

  The facts of our existence are so different from what is reported that I am astonished. As a former professor of economics, Wall Street Journal editor and Assistant Secretary of the Treasury for Economic Policy, I am astonished at the corruption that rules in the financial sector, the Treasury, the financial regulatory agencies, and the Federal Reserve.  In my day, there would have been indictments and prison sentences of bankers and high government officials. 

  In America today there are no free financial markets.  All the markets are rigged by the Federal Reserve and the Treasury. The regulatory agencies, controlled by those the agencies are supposed to regulate, turn a blind eye, and even if they did not, they are helpless to enforce any law, because private interests are more powerful than the law.

  Even the government’s statistical agencies have been corrupted. Inflation measures have been concocted in order to understate inflation. This lie not only saves Washington from paying Social Security cost-of-living adjustments and frees the money for more wars, but also by understating inflation, the government can create real GDP growth by counting inflation as real growth, just as the government creates 5% unemployment by not counting any discouraged workers who have looked for jobs until they can no longer afford the cost of looking and give up.  The official unemployment rate is 5%, but no one can find a job.  How can the unemployment rate be 5% when half of 25-year olds are living with relatives because they cannot afford an independent existence?  As John Williams (shadowfacts) reports, the unemployment rate that includes those Americans who have given up looking for a job because there are no jobs to be found is 23%.

  The Federal Reserve, a tool of a small handful of banks, has succeeded in creating the illusion of an economic recovery since June, 2009, by printing trillions of dollars that found their way not into the economy but into the prices of financial assets.  Artificially booming stock and bond markets are the presstitute financial media’s “proof” of a booming economy.  

  The handful of learned people that America has left, and it is only a small handful, understand that there has been no recovery from the previous recession and that a new downturn is upon us.  John Williams has pointed out that US industrial production, when properly adjusted for inflation, has never recovered its 2008 level, much less its 2000 peak, and has again turned down.

  The American consumer is exhausted, overwhelmed by debt and lack of income growth. The entire economic policy of America is focused on saving a handful of NY banks, not on saving the American economy. 

  Economists and other Wall Street shills will dismiss the decline in industrial production as America is now a service economy. Economists pretend that these are high-tech services of the New Economy, but in fact waitresses, bartenders, part time retail clerks, and ambulatory health care services have replaced manufacturing and engineering jobs at a fraction of the pay, thus collapsing effective aggregate demand in the US. On occasions when neoliberal economists recognize problems, they blame them on China.

  It is unclear that the US economy can be revived. To revive the US economy would require the re-regulation of the financial system and the recall of the jobs and US GDP that offshoring gave to foreign countries. It would require, as Michael Hudson demonstrates in his new book, Killing the Host, a revolution in tax policy that would prevent the financial sector from extracting economic surplus and capitalizing it in debt obligations paying interest to the financial sector. 

  The US government, controlled as it is by corrupt economic interests, would never permit policies that impinged on executive bonuses and Wall Street profits.  Today US capitalism makes its money by selling out the American economy and the people dependent upon it. 

  In “freedom and democracy” America, the government and the economy serve interests totally removed from the interests of the American people. The sellout of the American people is protected by a huge canopy of propaganda provided by free market economists and financial presstitutes paid to lie for their living. 

  When America fails, so will Washington’s vassal states in Europe, Canada, Australia, and Japan.  Unless Washington destroys the world in nuclear war, the world will be remade, and the corrupt and dissolute West will be an insignificant part of the new world.

  

  

  

  

  

• What Keeps Bank Of America's Junk Bond Analyst Up At Night

  From BofA’s Michael Contopoulos

  You don’t need a recession

  Over the last several weeks much has been made of the near-term risks of recession. Some have argued that the widening in high yield is suggestive of an economy that is ready to roll over and with the manufacturing sector already reeling and China growth concerns growing, we think the fears are well justified. However, given we are not economists we ask whether a recession is a necessary backdrop for further weakness in high yield. In our view, the answer is no.

  Consider that between March 1998 and December 2000 our high yield index widened from 283bp to 916bp during a period of US economic growth that averaged 4.2%. Furthermore, as growth slowed to just 1.1% over the next 8 quarters, high yield averaged about 873bp during that time. In other words, the widening in high yield occurred in the lead up to economic weakness, not during. Defaults and the economic cycle, however, seem much more aligned; the 12-month default rate leading into the end of 1998, 1999 and 2000 was 3.4%, 6.3% and 6.4% respectively. It wasn’t until 2001, after spreads had blown out, that default rates increased to double digits.

  As we look at the index in more detail, we see that the non-commodity portion of high yield today compares favorably to the ex-Telecom index in early 2000. Although this portion of high yield eventually widened to 1000bp, the bulk of the selloff occurred before US growth slowed meaningfully. Should non-commodity spreads today go to levels we saw non-Telecom go in late 2000, we could see as much as 100bp of widening before reaching a temporary peak. Coupled with a couple points of loss due to default, and it’s not difficult to envision another year of negative total returns without a contraction in GDP or a spike to double digit default rates.

  

   

  What keeps us up at night, however, is a situation where history is little indicator of what’s to come. Although there is no doubt that we do not need to have a recession in 2016 to experience further high yield weakness, we are concerned that this cycle could prove to be not only different, but more severe than past cycles. The economic slowdown earlier this century was a modest one and was associated with a Fed that had significant policy tools. Should a slowdown today be swifter and deeper, more akin to 2008 than 2002, we are concerned about the ability of the central bank to create enough monetary stimulus to stem a crisis.

  

  

  

  

  

• When Correlation Is Causation – The Most Important Chart In The World If You're A Realtor In London Or NYC

  If ever there was any doubts about the narrative of freedom-seeking China capital outflows driving the irrationally exuberant prices of homes in some of the world's largest cities to record highs, the following two charts will extinguish them entirely. As China continues to strengthen (as quietly as possible) its capital controls to slow the leak of money from the devaluing currency nation, and US authorities clamp-down on the anonymity of cash-only transactions, realtors in NYC, Miami, and London better hope that correlation is not causation.

  Over three years ago, in August 2012, we described how while US regulators and authorities were cracking down on such "illegal" banks as Standard Chartered and HSBC, they were allowing the non-corporate shielded entities, the actual individuals who benefited from the bank crimes, slip through the cracks simply by allowing them to park billions of ill-gotten gains in US real estate:

  When it comes to the true elephant in the room, which is not foreign and is fully domestic, they continue to ignore events such as this one just described by the Wall Street Journal: "A Florida home that originally listed for $60 million has sold for $47 million, a record for a single-family house in Miami-Dade County. The home, in Indian Creek Village, had been on the market since early 2011, when construction was still being completed. The asking price was reduced to $52 million this year." And the punchline: "The identity of the buyer, a foreigner who purchased the home in the name of a U.S.-based limited-liability company, couldn't be learned."

   

  In other words a foreigner who may or may not have engaged in massive criminal activity and/or dealt with Iran, Afghanistan, or any other bogeyman du jour at some point in their past, and is using US real estate merely as a money-laundering front perhaps? Sadly, we will never know. Why? As explained before, it is all thanks to the National Association of Realtors – those wonderful people who bring you the existing home sales update every month (with a documented upward bias every single time) – which just so happens is the only organization that actively lobbied for and received an exemption from AML regulation compliance. In other words, unlike HSBC, the NAR is untouchable, even if it were to sell a triplex to Ahmedinejad on West 57th street.

  If after skimming the above, as we detailed recently, readers are still confused what the reason is for the luxury segment of the US housing market continuing to rise in price and hit record highs, even as all other segments of the quadruplicate US housing market as explained here languish, the explanation was very simple (and explained most recently back in October): the "hot money" belonging to Chinese and all other global oligarchs would be laundered by parking into the new "Swiss bank account" that U.S. real estate has become.

  Still not convinced? Here are the two most important charts in the world if you are a realtor in NYC or London…

  London home prices have soared on the back of this illicit capital outflow desperate for hard non-Yuan assets to bury itself in (within property rights protecting nations)

  

   

  And even more so in New York City homes…

  

   

  Where cash sales have been soaring…

  

   

  However, as we detailed here, just like Swiss bank accounts lost all their anonymity shortly after the Global Financial Crisis, and led to massive fund outflows from Switzerland (and ironically, into luxury US real estate), so after many years of us explaining how the ultra luxury segment of the US real estate market was being used as a money laundry vehicle, the US government has finally decided to crack down on these "secret" buyers.

  As the NYT reports, "concerned about illicit money flowing into luxury real estate, the Treasury Department said Wednesday that it would begin identifying and tracking secret buyers of high-end properties."

  The initiative will start in two of the nation’s major destinations for global wealth: Manhattan and Miami-Dade County. It will shine a light on the darkest corner of the real estate market: all-cash purchases made by shell companies that often shield purchasers’ identities.

   

  

   

  It is the first time the federal government has required real estate companies to disclose names behind all-cash transactions, and it is likely to send shudders through the real estate industry, which has benefited enormously in recent years from a building boom increasingly dependent on wealthy, secretive buyers.

  The logic behind the move is clear: "this initiative is part of a broader federal effort to increase the focus on money laundering in real estate. Treasury and federal law enforcement officials said they were putting greater resources into investigating luxury real estate sales that involve shell companies like limited liability companies, often known as L.L.C.s; partnerships; and other entities."

  …  a top Treasury official, Jennifer Shasky Calvery, said her agency had seen instances in which multimillion-dollar homes were being used as safe deposit boxes for ill-gotten gains, in transactions made more opaque by the use of anonymous shell companies.

   

  “We are concerned about the possibility that dirty money is being put into luxury real estate,” said Ms. Calvery, the director of the Financial Crimes Enforcement Network, the Treasury unit running the initiative. “We think some of the bigger risk is around the least transparent transactions.”

  Our only question is what took so long?

  What happens next remains to be seen, but now that the buyer anonymity of luxury real estate buyers is gone, and with it the opportunity to launder illegal money in the US, much to the chagrin of the NAR, we would expect a substantial drop in both demand and prices for the one segment that has so far been the most stable support of the entire U.S. housing market.

  

  

  

  

  

• Shanghai Opens Below 3,000 As Animal Spirits Leave The Building: Longest Margin Debt Drop In 6 Months

  Traders who may have napped through the earlier oil slide below $28 finally woke up just in time for the China open to find that while there was little excitement on the currency front following a Yuan fixing, which at 6.5578 was practially unchanged from yesterday's midpoint of 6.5596…

  

   

  …the Shanghai composite – following yesterday's torrid, manipulated last hour surge – opened 0.5% lower, sliding back below the 3,000 level which was breached last week for the first time since last summer.

  

   

  More troubling for China's market manipulators is that they will very quickly and aggressively need to get involved today if they wish to prop up the market, now that the animal spirits are officially gone.

  Below is a chart of the Chinese stock market "animal spirits" leaving the building. 

  

  According to Bloomberg, the outstanding balance of Shanghai margin debt dropped for 13th consecutive day on Tuesday, the longest since July 9. Balance fell 0.1%, or 610m yuan, to 583.4b yuan or the lowest level since October 9. This was the longest losing streak in 6 months as the public now leave the market bubble in droves.

  Elsewhere in related securities, while the onshore Yuan is peaceful, there was less peace for its offshore cousin, where the USD/CNH 12-month forwards tumbled following selling by Asia-based leveraged accounts, and trigger stop-losses through the 2,900 area.  PBOC intervention time? Perhaps, but it's early.

  

   

  Also troubling was the Bloomberg note that after the PBOC broke the Hong Kong interbank market by crushing all available FX liquidity in order to manipulate the CNH higher, now the offshore spillover appears to have spilled right back into China as follows:

  • CHINA'S OVERNIGHT REPURCHASE RATE JUMPS TO NINE-MONTH HIGH

  At this point it is practically impossible to track all the Chinese market breakages, which like connected vessels appear at the most random of places, and the moment one hole is patched up, another immediately takes its place.

  Finally, for those interested in the Hong Kong market, the Hang Seng Index slid 1.6% to 19,325.56 at the open, resuming declines after snapping a three-day losing streak yday, with losses led by energy companies such as Sinopec -3.6% and PetroChina -3.3% which were among the biggest drops on HSI.

  However perhaps most crucially, the Hong Kong Dollar is systematically collapsing towards the weak-end of its USD-peg band…

  

   

  And crude is unable to sustain any bounces…

  

  

  

  

  

  

• Washington Unveils Investigation Into "Russian Meddling" In The EU

  Submitted by Danielle Ryan, op-ed via RT.com,

  News broke last Saturday evening that the United States is to conduct a “major investigation” into how the Kremlin is “infiltrating political parties in Europe” amid “mounting concerns” of a new Cold War.

  The exclusive, which was published by the UK’s Telegraph newspaper, revealed that James Clapper, the US Director of National Intelligence has been instructed by Congress to begin the major review into Russia’s “clandestine” funding of EU parties over the last decade.

  Hypocritical? Oh, let us count the ways…

  “Moscow-backed destabilization” of Europe

  First, to get a sense of the motives behind this investigation, look no further than the wording used to justify it. The Russians have been “fostering agitation against NATO missile defense” and attempting to “exploit European disunity” on the subject.

  That’s right everyone, the way to deal with European “disunity” over NATO, is not to address the root causes — it’s to start investigating how the Russians might be exploiting it. In a roundabout way, that makes sense as a temporary distraction. But realistically, Washington may be giving the Russians a bit too much credit. This so-called “Moscow-backed destabilization” should be the least of their worries. In actual fact, there are plenty of reasons for Europeans to have grown naturally disillusioned with the military bloc all on their own: a massive refugee crisis, the threat of the Schengen agreement crumbling before their eyes, terrorism paying more frequent visits to Europe’s foremost cities — not to mention growing concerns over potential repeats of the mass sexual assaults seen in Cologne on New Year’s Eve.

  In other words, years of NATO interventionism have stirred up a toxic political cocktail and dropped it off on Europe’s doorstep — and that, frankly, has very little to do with Russia.

  Look who cares — and who doesn’t

  Young as it is, the investigation into the Kremlin’s “meddling” has already scored some big fans.

  “Finally waking up to the problem,” tweeted Bill Browder along with a link to the Telegraph story. Banker-turned-activist Browder was convicted of a massive tax fraud scheme in Russia (and has subsequently turned into somewhat of a hero in the Western media, despite the emergence of holes in his story and his interesting preference for speaking to an adoring press rather than under oath).

  Anders Aslund, senior fellow at the Atlantic Council also tweeted the story. Aslund’s tweets are interesting, to say the least. In November, he suggested on the platform that the “broader implication” of a Reuter’s investigation into the identity of Putin’s daughters meant that one of those alleged daughters, Ekaterina Tikhonova, would be a “successor” to her father, thus renewing a Russian “monarchy”.

  And such good news deserves to be tweeted thrice, seems to have been the thinking for Jacek Saryusz-Wolski, Polish MEP and Vice President of the European People’s Party.

  On the other hand, a lot of the reader reaction on the story was quite different. One Twitter user posted the link and asked: “When do we investigate US meddling, globally?” while one noted “several levels of irony” in the news, and another warned that merely talking about ending NATO in Europe could soon earn you the honor of being labeled part of a “Moscow-backed destabilization program”. On Facebook, the comment on the story which received the most ‘likes’ simply said: “Please investigate US meddling in Europe first.”

   

  If you talk about ending NATO, you could soon be called being part of a "Moscow-backed destabilisation" program https://t.co/LQlBcBniWq

  — Tilo Jung (@TiloJung) January 17, 2016

   

  It’s only democracy if you agree with us

  How, pray tell, would Washington and Brussels react if tomorrow Moscow announced a ‘massive investigation’ into alleged US-funding of opposition figures and parties in Russia — an investigation designed purely to stigmatize the opposition and paint them as foreign agents. Oh wait; we already know how they would react. They would scream blue murder about Putin’s ‘punitive’ and ‘authoritarian’ regime that seeks to silence dissidents and opposition figures. The headlines practically write themselves.

  The message is clear and the double standard could not be more obvious: Decades of US influence in the EU is inherently good and acceptable, while any modicum of Russian influence is awful and must be stamped out. In Europe, democracy is only democracy when pro-EU, pro-NATO parties win elections — but it’s “destabilization” and undermining “political cohesion” when anti-establishment parties and politicians gain traction.

  Neo-McCarthyism kicked up a notch

  Why the EU can’t conduct this investigation itself is not made clear in the Telegraph piece, but one could venture a guess that it’s because what’s happening here has little to do with EU interests. It’s US intelligence — with permission from Brussels — nosing around in the European democratic process in an effort to identify and weed out parties and political figures that hurt Washington’s interests. Sounds a bit like what they’re accusing the Russians of doing, only worse.

  But why should we be surprised? Something similar has already happened within the media and academia. Journalists, analysts and historians who have attempted to rationalize or explain Russia’s actions from Ukraine to Syria have been labeled agents of the Kremlin and have been pushed to the fringes for having the audacity to go against the accepted consensus. This investigation in large part will simply be an extension of that blossoming neo-McCarthyism. We’re just moving on from individual journalists and politicians to stigmatizing entire political parties.

  Already in the UK, Labour leader Jeremy Corbyn, for the sin of suggesting he would not use nuclear weapons and his reluctance to dive head-first into conflict with Russia, has already been labeled ‘Comrade Corbyn’ by the Daily Mail, while his director of communications, acclaimed journalist Seumas Milne, has been branded a ‘Stalinist’ by Politico.  

  RT gets name-checked again

  What would a story about an investigation into Russian meddling in Europe be without a mention of Russia Today? Analysts have noted that RT, the “Kremlin-controlled television channel, which operates in Britain” (gasp) gave “very positive and extensive” coverage to Corbyn during his leadership campaign. This naturally is cited as part of the Kremlin’s nefarious campaign of influence in the UK elections. No mention is made, however, of the brutal anti-Corbyn campaign waged by the majority of the UK establishment media for months in the run up to his election. In this context, the fact that RT gave Corbyn some positive attention is hardly earth-shattering stuff.

  But again, we’ve come smack-bang into another case of hypocritical nonsense. Western media treats the Russian opposition like it’s the Second Coming of Jesus — and yet we’re all supposed to get our pants in a twist over Russian media taking an interest in anti-NATO candidates in Europe? In Western capitals, the red carpet is rolled out for anyone with a Russian passport and something remotely anti-Putin to say. Criminal background? No matter. History of racist comments? Don’t worry about it. Fan of museum orgies? It’s all good. Like to set historic buildings on fire? Go ahead; you’re an ‘artist’.

  Europe’s crisis of leadership

  The Telegraph story hasn’t been covered widely since it broke at the weekend, but rest assured of the coming onslaught – and remember that the analysts overjoyed by the prospect of another excuse to divert all blame east, are the same ones that never bothered to worry about the decades-long US-backed destabilization of the Middle East, which, it’s fair to say, is proving to be a far bigger problem for Europe than Putin and RT.

  Europe is going through a crisis of leadership — and the current crew steering the ship are still blind to the fact that their passengers are beginning to look longingly out at the waves wondering whether it might not be better to just jump overboard and see what happens. In Britain, the threat of a ‘Brexit’ looms as a very real possibility. Poland’s newly-elected nationalist government doesn’t appear ready to play ball with Brussels. Spain has elected a ‘hung’ parliament. Far right and far left movements are gaining ground in Germany and France. Greece is barely holding on and a question mark remains hanging over the future of the euro.

  But the real problem is obviously Putin’s meddling. Yeah, let’s just go with that.

   

  

  

  

  

  

• "What To Own In An Equity Death Spiral"

  Just one month ago, BofA’s excited head equity strategist Savita Subramanian told Barron‘s that storm clouds would disperse and that the S&P would close out 2016 at 2,200, incidentally the same level as her year ago forecast for where 2015 would close. Fast forward to today and things are far less euphoric.

  This is what Savita writes in a note released overnight:

  Correction or bear market? The S&P 500 is in correction territory, the Russell 2000 and almost 80% of regional stock indices are in bear markets. The average S&P 500 stock is in a bear market – down more than 25% from its 52-week high. Stocks are down a lot. Let’s move on.

  Ok moving on.

  Let’s focus just on energy, where things are a disaster: “Energy is in a profits recession but Energy stock prices have fallen by more than the market falls during a recession (-44% vs. -40%), the Energy recession has lasted twice as long as a typical recession, and Energy earnings have seen 2x the cut that the S&P 500 typically sees (-65% vs. -29%).”

  What about the economy?

  Same story for the economy: should we care whether or not the NBER will one day deem this slowdown an official recession, if PMIs suggest that manufacturing sectors have been in a recession in the three biggest economies (China, US, India) and Energy has been in a profit recession that has lasted twice as long as a typical economic recession.

  Yes, we probably should care, because it takes us to the next question Savita tries to answer: “Are we at a bottom?” Her answer: “Near-term model suggests caution”

  The earnings revision ratio, which has historically been a predictor of market returns over the next 1-2 months, has been falling since July and currently sits at a nine-month low. Short term investors might want to wait for signs of stabilization in this framework.

   

  

  Subramanian then points out what we showed yesterday, namely that sentiment right now is about as bearish as it has been in the past decade, with the least number of AAII bulls since 2005. She confirms this, saying “sentiment is already bearish”

  Global investors are significantly underweight US equities (Exhibit 1) according to our BofAML Global Fund Manager Survey. The most recent survey (in December) also suggests cash levels were raised to 5.2% ahead of the recent sell-off, in “Buy” territory according to their trading rule (Exhibit 2). And our Sell Side Indicator suggests that strategists are as bearish today as they were in March of 2009, recommending investors allocate just 53% to equities, below the long-term benchmark weighting of 60-65%, and at the threshold of a contrarian “Buy” signal (Chart 4). And short interest, another measure of positioning, despite declining in the last three months, remains at its highest levels since 2009.

   

  

  In theory, as an otherwise dour JPM said yesterday, and virtually all chartists agree, this means a rebound is imminent. However, a bigger question beyond merely the technicals is whather we are now entering a bear market, which would blow up all technical models. Savita’s answer:

  Are we entering a bear market? Bear markets in context

   

  The S&P identifies 13 bear markets since 1928, of which 10 have coincided with US recessions (Chart 5). The exceptions were 1961, 1966 and 1987, which precisely because they did not occur alongside recessions, were relatively short-lived and followed by swift recoveries. The market declined ~30% on average during these three bear markets, vs. ~40% on average during the remaining bear markets which coincided with recessions. S&P EPS has historically fallen 30% on average during recessions since 1929 or 20% on average during recessions since 1960.

   

  The general rule of thumb is that the stock market leads the economy by 1-2 quarters, and on average, the market peak has historically peaked 7-8 months before a recession. But the range has been remarkably wide, from the peak of the market coinciding with the start of the recession to as early as 2.5 years before the start of the recession (1948).

   

  

  Curiously, a bear market without a recession may offer little solace, because as BofA calculates, “in bear markets without recessions (1961, 1966, 1987), returns in the subsequent twelve months after the market peak were -12%. If we assume the S&P 500 peaked at May 2015 highs, this would imply today’s levels for May 2016.”

  

  What do markets imply are recession odds? According to the S&P the odds have soared to 50%, but accordint to rates the probability is “only” 18%:

  

  Of course, whether and when the NBER will acknowledge the US has entered into a recession, only time will tell.

  * * *

  Which brings us to the core topic of this post: BofA’s response to “What To Own In An Equity Death Spiral”?

  According to BofA, first pick large, high quality, cash-rich companies:

  Large caps over small caps

  Leverage for large cap stocks remains below average, while small-cap leverage is at all-time highs (and also above-average even when excluding Energy and Materials).

   

  

  Second, pick “liquidity over leverage”

  S&P 500 companies with high yield debt have traded at a premium to those with investment grade debt for over two decades, but this has recently begun to reverse, with investment grade stocks trading at a slight premium for the first time since 1994. Cash-rich companies have also traded at a discount to levered companies post-crisis, but we expect them to re-rate as credit sensitivity is penalized and cash becomes a positive as opposed to a drag on earnings.

   

  

  Finally, choose “High quality over low quality“

  Volatility may be here to stay, and high quality stocks typically outperform low quality stocks in volatile environments. And high quality stocks have traded at a discount to low quality stocks—which have been buoyed by fiscal and monetary stimulus—since the Tech Bubble, but are starting to re-rate. We expect this normalization in multiples to continue, and believe high quality stocks will eventually trade at a premium.

   

  

  * * *

  Putting all this together, here is the answer: BofA screens for companies that fufill the following criteria:

  • Market cap > $10bn
  • S&P quality rank of B+ or better
  • Net Debt (Cash) to Market Cap < index median of 16%
  • Total Cash to Market Cap > index median of 5%
  • S&P Long-Term Credit Rating is Investment Grade
  • Underowned by active managers (relative weight <1.0 in latest fund holdings)

  The result:

  

  

  

  

  

  

• We Know How This Ends – Part 1

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  The finance ministers and representatives of central banks from the world’s ten largest “capitalist” economies gathered in Bonn, West Germany on November 20, 1968. The global financial system was then enthralled by a third major currency crisis of the past year or so and there was great angst and disagreement as to what to do about it. While sterling had become something of a recurring devaluation tendency and francs perpetually, it seemed, in disarray, this time it was the Deutsche mark that was the great object of conjecture and anger. What happened at that meeting, a discussion that lasted thirty-two hours, depends upon which source material you choose to dissect it. From the point of view of the Germans, it was a convivial exchange of ideas from among partners; the Americans and British, a sometimes testy and perhaps heated debate about clearly divergent merits; the French were just outraged.

  The communique issued at the end of the “conference” only said, “The ministers and governors had a comprehensive and thorough exchange of views on the basic problems of balance-of-payments disequilibria and on the recent speculative capital movements.” In reality, none of them truly cared about the former except as may be controlled by the latter. These “speculative capital movements” became the target of focused energy which would not restore balance and stability but ultimately see the end of the global monetary system.

  Some background is needed before jumping into West Germany’s financial energy. The gold exchange standard under the Bretton Woods framework had appeared to have lasted as far as this monetary conference, but it had ended in practicality long before. In the late 1950’s, central banks, the Federal Reserve primary among them, had rendered gold especially and increasingly irrelevant in settling the world’s trade finance.

  It took almost a decade, but Bretton Woods was mostly gone by 1968 when gold started trading at a two-tiered price. In reality, functionally, Bretton Woods ended not long after October 20, 1960, in the formation of what would become known as the London Gold Pool – a consortium of government and central bank allocations that would actively supply gold when needed to “hold” its price and enforce the official price. By the standards of Bretton Woods, to have a foreign pool established in order to maintain the convertibility of the dollar alone was breaking the rules.

   

  That fact occurred almost immediately after gold flirted with $40. In fact, on October 27, 1960, the Bank of England was called upon to work closely with the Fed to supply gold in an attempt to calm that market (though there is little paper trail, you know there were gold swaps flying the Atlantic from that point). It was the initial formation of the Gold Pool, and had some success in at least keeping further “devaluation” from rapidly destabilizing global affairs, financial and economic.

  The Gold Pool invoked but temporary calm and obviously failed. By 1967, sterling “had” to be devalued once more (from $2.80 to $2.40) and it kicked off an age that was fomented by chronic instability, or what we now call the Great Inflation. For the Gold Pool, the imbalance had grown so large that it was forced to cease operations in March 1968, having sold a massive, almost unthinkable $3 billion in gold in just the four months prior to its end – $400 million on March 14, 1968, alone (it bears emphasizing that these were just huge amounts even though in today’s inflationary context they seem quite quaint; and that is the point of comparison and devaluation where once $1 billion meant something but today we need trillions to merit any attention at all, but how we got to that point is a story nobody seems to appreciate in its relevant comprehensiveness). Of the $3 billion, the United States official reserves accounted for $2.2 billion, or an 18% drop. From that point forward, gold would trade on a two-tiered basis; the official exchange rates would be maintained but there would also be a separate price for the private market.

  If you were a European bank in early 1968 and had accumulated dollars, there wasn’t really much you could do with them without bearing currency and inflationary risk. The Bretton Woods system had been designed, intentionally, to be funneled through official channels, as that was what economists wanted (proclaiming their own enlightenment the key to fomenting permanent stability; markets = mess). Thus, any bank holding dollars wishing to exchange them at the official rate had to turn them over to their national central bank for payment in local currency. But that wasn’t as straightforward as it sounded, either.

  In truth, with gold no longer providing a satisfactory monetary anchor anywhere, banks proficient in global finance found themselves increasingly devoted to currency “speculation.” It had been a specialist trade dating back to the late 1950’s, but this Merchant’s Bank market, as it was first known, began to marry fund flows including those plying interest rate differentials and inflation risks among the world’s great currencies. Central banks, too, were active in this Merchant’s market finding it often a means to express monetary policy without having to resort to drastic and direct action.

  The object of desire in November 1968 among the world’s “great” economic policymakers was to get Bundesbank to support the mark. It had shown far too great a tendency toward devaluation even though Germany had become a standard of stability in both economic and financial terms. At first, Germany had refused the offer but, as disorder rose, before long Buba had acted.

  In the last two weeks of December 1968, Buba delivered some $400 million to the “market” and an additional $850 million in the first week of January in both spot and swap operations. Over the next two weeks, Bundesbank had grossed up its operations to a total of $650 million in spot exchange and an enormous $1.05 billion in swaps. By the end of January, the operations in support of the mark against the dollar had reached $2 billion.

  The February 4, 1968, FOMC meeting Memorandum of Discussion (the MOD, a detailed summary in lieu of verbatim transcripts) tells us what happened next:

  The drain on German reserves had actually reached the point at which they were running low on cash and were becoming concerned about the continuation of the losses. Consequently, the German Federal Bank raised its rates on swaps to make them less attractive to the commercial banks, and at the same time it permitted the spot rate to fall well below par. [emphasis added]

  Even though Germany’s reserves were counted as 33.7 billion Deutsche marks worth of deposit account balances with the world’s other central banks and commercial banks, physical currency and Federal gold holdings, barely one full cycle of intervention had run to its limit. Consequently, Bundesbank was forced to shorten up its maturities even while still intervening supposedly against the dollar. By March, as that original batch of swaps and forwards started to mature, Buba was still intervening heavily in forex but getting nowhere for the trouble. For the month, the German Federal Bank had issued another $1 billion in currency swaps and sold another $250 million dollars in spot interventions, but the reserve position of West Germany hadn’t changed. The maturing swaps had delivered back to Buba an almost equivalent amount of dollars, “sterilizing” the whole regime.

  The effort was doomed from the start by its very nature. It was nothing more than an attempt to buy time so that whatever imbalance causing general stress and disorder could by itself dissipate. That was the Keynesian handbook even at that time, to focus only upon the short run so that a steady state may once more present itself with but that minimal boost. Except in early 1969 the imbalance was more than a minor disturbance, it was a general and serialized decay.

  It only got worse from that point on since reserves under these circumstances of swaps and forward liabilities are never what they seem to be (because accounting, as policy, is taken from only the short run perspective). Just six months later, in September 1969, the Bundesbank had no choice but to allow the D-mark temporarily float; a month later, it was officially revalued from $0.25 to $0.273. In other words, despite the gigantic impression left by impressive-sounding numbers and the arcane and complex programs meant to present them in conclusive fashion, the German central bank was helpless to withstand what was already transforming the global financial landscape. Worse, the fact that the world’s other economies had come crawling to Bonn to try to force Buba’s hand to do it in the first place was no position of strength but rather another indication they were just as powerless if not more so.

  The Bundesbank’s monthly report from December 1969 makes this very plain, despite all that it had done (and other central banks) over the prior year.

  The domestic money market has in fact been tighter than ever in the last few weeks. Money-market rates reached unprecedented heights, both in absolute terms (day-to-day money on 4 December, the last day before the advance rate was raised, stood at 8 ¾ to 9%) and in relation to the advance rate, which, exceptionally, was substantially exceeded at times by the day-to-day money rate. The decisive factor behind this strain was the massive exodus of foreign exchange, which was partly due to the fact that funds placed in Germany before the revaluation flowed out again and partly to the fact that the other external transactions also ran large deficits.

  It was the “other” that was most troubling. Because of the float and revaluation, Bundesbank’s reserves had fallen by 16 billion D-marks, an amount so large that it reveals the nature of what was taking place. This was no convoy of armored trucks moving huge piles of cash across international borders, it was exchange accounts and liability settling among the modern currency regimes. What was different about 1968 and 1969 was how far that new system had penetrated. Again, Buba’s December 1969 report:

  In contrast to the situation during the preceding period of speculative money inflows into Germany, when the banks considerably stepped up their monetary investment abroad with the concurrence and at times the active assistance of the Bundesbank, the efflux of foreign exchange between the end of September and early December came solely out of central money reserves; indeed, there were calls on the reserves over and above this, as the banks continued to export funds even after the revaluation.

  In other words, currency intervention is always a losing proposition because it amounts to handing your own banking system the tools for your undoing. This was very much unexpected and had not been the case historically. What changed? Bundesbank was supposedly delivering dollars in support of the mark, and further getting German banks to aid in the effort (by handing out preferential swap rates), but where were all those dollars going? It is typically believed they were loosed upon the “market” in some generic and nonspecific conception, but forex of this kind in the late 1960’s was more and more concentrated in that Merchant’s market – the EURODOLLAR market.

  With these money exports – and with their capital exports, which were also at a very high level – the banks exploited the interest differential between Germany and the Euro-money market or the Euro-capital market. However, prior to revaluation, the capital exports ultimately did not affect the banks’ liquidity position since the latter were, so to speak, only re-exporting speculative inflows. Now, though, the capital exports made additional inroads into the banks’ liquidity cushions, which were already depleted by the reflux of foreign funds referred to above.

  We would recognize this last paragraph in today’s terms as the “dollar short.”

  In fact, you can practically exchange Germany for China and 2015(16) for 1968(69) in all of the above, leaving an eerie and thus tragic near replay of everything. That includes, relevant to our current Chinese fixation, the fact that swaps, over the intermediate term, are your ultimate enemy. However, the mark example in 1969 was not unique, as it was also the case for many, many other global currency connections just as yuan is but the most visible example of currency degradation now (real, ruble, lira, rand, etc.). The eurodollar had suddenly become not just a manner in which global trade could be accounted and settled but rather, owing to its “short” and therefore lack of actual convertibility, a central mechanism of global monetary conditions for which there was no control.

  Part 2 Tomorrow

  

  

  

  

  

• And You Thought QE Was Over: The Fed Will Monetize Half Of This Year's U.S. Treasury Issuance

  The Fed may have officially tapered QE at the end of 2014 but that doesn’t mean it is done buying Treasuries: since the Fed never ended rolling over maturing paper, it means that it will remain indefinitely active in the open market. And while there were no sizable maturities from the Fed’s various QEs to date (only $474 million in 2014 and $3.5 billion in 2015) that will change dramatically this year, when Brian Sack’s team will have to purchase about $216 billion to replace matured TSYs. According to JPM calculations, this represents half the net new government debt that will be issued over the next 12 months.

  The amounts rise from there: $194 billion comes due in 2017, about $373 billion in 2018 and $329 billion in 2019 for a grand total of $1.1 trillion over the next four years as shown in the following Bloomberg chart:

  

   

  The Fed’s intervention in the Treasury market is well known: here is a brief Bloomberg summary of where we’ve been and where we are going:

  The Fed is the biggest holder of the government’s debt. Its $2.5 trillion hoard, amassed in a bid to support the economy after the financial crisis, is more of a focus for some investors than the trajectory of interest rates. From this month through 2019, about $1.1 trillion of Treasuries in the portfolio are set to mature.

  Even though the Fed’s holdings of Treasurys won’t rise and remain flat at about $2.5 trillion, the Fed’s reinvestment mandate means a return to active POMO which also means that there will remain a backstop net buyer for 1 of every 2 bonds issued by the US government.

  Clearly this is bullish for bond bulls (one can stop wondering why year after year Goldman is so bearish on TSYs every year with its 3.00% yield target and is so eager to buy everything its clients have to sell) for whom “the Fed’s signals that it will roll over the obligations have been another reason to doubt the consensus forecast that yields will rise in 2016. If officials had chosen to stop funneling that money into new debt, the government would likely have to boost borrowing in the market by roughly an equivalent amount this year, potentially pushing up Treasury yields.”

  Hypotheticals aside, the Fed’s indirect monetization of debt has led to the Fed being the owner of about 30% of all 10-Year equivalents currently, further leading to dramatic notional scarcities among CUSIPs that were most actively purchased by the open markets desk, usually in the form of Off The Run paper, which meant that the Fed has far less On The Turn to lend to Treasury shorts in repo, leading to major “special” prints in the repo market manifesting by near-fail, or -3.00%, levels when one wishes to borrow any given Treasury.

  However, as Bloomberg explains, as the Fed will rolls over maturing Treasuries, it will add new On The Run issues to its balance sheet. Since Operation Twist, the Fed has had less of those sought-after securities to lend out in a daily program it has to ease shortages in the market. As a result, these Treasuries have frequently commanded a premium in the repo market — leading more trades to go uncompleted, or ‘fail,’ in bond parlance.

  If the Fed’s stock of those Treasuries grows, the central bank should be better able to alleviate the shortages through its SOMA Securities Lending program, said Joseph Abate, a money-market strategist in New York at Barclays Plc, a primary dealer.

   

  It will become “easier for people to access the securities they need to cover any shorts in the on-the-runs and, correspondingly, the level of fails should fall,” Abate said. “The more difficult it is to cover a short, the less liquidity there is in the market.”

   

  Dealers say bond trading has become more difficult as regulator-imposed risk limits make it costlier for banks to transact in all types of debt. While Treasuries remain one of the most liquid global markets, failing trades rose this month to about 2.5 percent of average daily volume, from about 1 percent before Twist, according to Barclays. The dollar amount of uncompleted Treasuries trades reached the highest since 2011 last month, Fed data show.

  The topic of soaring repo “fails” was covered recently, and is shown in the chart below: a direct function of the Fed’s encroachment in the open market.

  

  Then there is the question of remitting interest payments back to the Treasury, about as close to directly funding the US government as it gets (with the exception of course of the Fed directly paying $19 billion to fund the Highway Bill: that was undisputed direct funding of the US government by the banks that make up the Federal Reserve system). According to Bloomberg, if the Fed had opted not to reinvest this year, the Treasury would have had to make up for the lost funding with additional debt sales that might have boosted 10-year yields by 0.08-0.12 percentage point, according to Priya Misra at TD Securities LLC.

  One wonders just how much more debt the Treasury will have to issue and how much higher yields will go up by if the Fed ever does unwind its balance sheet?

  It also leads to another question: why did the Fed decide to begin the “normalization” process by hiking rates first instead of first removing the truly unorthodox support for asset classes, namely unwinding its balance sheet, or at least stopping the reinvestment of maturing bonds. The answer: because the Fed’s rate hike is a farce, further compounded by the fact that the Fed Funds rate on December 31, the only day it actually matters for bank balance sheet purposes, was well below the Fed’s 25bps floor.

  But that’s a topic for another post.

  For now, we leave it to Mark MacQueen, co-founder of Sage Advisory Services Ltd., which manages $12 billion in Austin, Texas, to explain precisely why those who are long assets could care less about nominal rate hikes but are terrified of the Fed’s actual balance sheet unwind: “The Fed tightening gave us little worry, but the unwind of the balance sheet gives us major worries. The Fed is keenly aware that the balance sheet has a much greater impact on the overall yield levels in the markets going forward than raising rates.”

  And there’s your answer why the Fed is hiking instead of winding down its gargantuan $4.5 trillion balance sheet: it might actually achieve the intended effect.

  

  

  

  

  

• Crude Oil Slides Below $28, Lowest Since 2003, Dragging US Equity Futures Lower

  Traders had some hope that they could take at least a brief nap ahead of the China open before all risk hell broke loose in the latest evening session, however either some liquidating algo or the Iranian oil trading desk had different plans, and moments ago WTI dipped below $28 per barrel, sliding as low as $27.92, doing so only for the first time since 2003, a new 12 year low.

  

  The plunge in the highly correlated asset promptly dragged not only the USDJPY carry pair but also the E-Mini well lower, with ES sliding as low at 1861 moments ago before recouping some of the losses.

  

  And now we turn our attention to the China open, and for the real pandemonium to begin.

  

  

  

  

  

• Borderland Homicides Show Mexico's Gun Control Has Failed

  Submitted by Ryan McMaken via The Mises Institute,

  We often  hear about homicide rates in Mexico and how they are among the highest in the world. While that is true for some parts of Mexico, much of Mexico — where nearly 80 percent of the population lives — has much lower rates than what are often quoted in the media.

  Most of the high-homicide areas in Mexico are found along the US border, and to a certain extent reflect the work of drug cartels working to keep drug trafficking channels open to the US.

  And yet, right across the border in the US, homicide rates are remarkable low. In fact, homicide rates along the US side of the border are significantly below the US average.

  Why is this?

  Homicide Rates in Mexico, By State

  First, to get a better understanding of these phenomena, let's look at homicide rates in Mexico by state. 

  While not as decentralized as the US, Mexico has a weak federal system like the United States with 31 states and one federal district (somewhat like the District of Columbia) that is Mexico City.

   

  Using OECD data (for 2013), I mapped the Mexican states by homicide rate: 

   

   

  

  Source: OECD, map by Ryan McMaken

   

  Clearly, homicides are not evenly distributed across Mexico, and some areas are lopsidedly affected. Those familiar with the Mexican Drug War will note that this pattern does indeed appear to reflect trends in cartel activity and the Drug War. Here is map to help you identify each state:

   

  

  Source: Mexconnect

   

  Most Mexicans live in states with homicide rates well below those found among the ten states with the worst rates. Indeed, the total population living outside these areas constitutes nearly 80 percent of Mexico's 117 million people (as of the 2010 census). Population is concentrated around Mexico State, Pueblo State, and other states in the southern and eastern parts of the country. However, even in these parts of the country, homicide rates remains well above the US average.

   

  Also of note is the fact that the states with the lowest percentages of indigenous Mexican populations also tend to have the highest homicide rates. Note, for example, that among heavily indigenous states in the far south and in the Yucatan, homicide rates are quie low by national standards. Chihuahua, by contrast, which historically has tended to have the largest population of non indigenous (i.e., "white") Mexicans (proportionally speaking) has the highest homicide rate.

   

  And finally, we note that northern Mexico, including the high-homicide states discussed here, tend to have higher per capital income levels than the rest of the country.

   

  The old assumptions about how the poor and non-whites cause higher homicide rates require a closer look in the case of Mexico.

   

  Big Differences on Different Sides of the Border

   

  Let's now turn our attention to the problematic north.

   

  It's not an accident that some of the highest homicide rates are found along the border. Mexican drug cartels have an incentive to ensure they maintain control of drug supplies moving norther to where the demand is (in the United States.)

   

  However, those drugs still need to be moved on the northern side of the border. So, do homicide rates continue onto the northern side? It turns out they don't. Using the same color coding (and the same data source) as the homicide map above, the border states (two states deep) on both sides look like this:

  

  Source: OECD. Map by Ryan McMaken

   

  On the other hand, Chihuahua and Texas are very big places. Perhaps if we take a more detailed look at the counties right on the border, we'll get a better feel for how things look at the border.

   

  Thanks to Omar Garcia Ponce and Hannah Postel at the Center for Global Development, the work's already been done for me. Here is a map of the border at the county/municipality level: 

  

   

  Source: Center for Global Development

   

  The general scenario remains the same.  In fact, the borderland on the US side of the border have fewer homicides than the US overall.  The authors note: 

  The map [above] illustrates the striking disparity between homicide rates on each side of the border. In 2012 (the most recent year available for all locations), Mexican border municipalities experienced 34.5 murders for every 100,000 people.  By contrast, the homicide rate in US border counties was only 1.4, far below the US national average (4.7), and a tiny fraction of that experienced by their Southern neighbors.

  While almost half of the Mexican municipalities along the border experienced more than 40 murders per 100,000 people in 2012 (176 in Tamaulipas’ Ciudad Mier), the highest homicide rate in the US border counties was 12.9 (Yuma, AZ). The next most violent county experienced only 5.4 murders per 100,000 people. Notably, some of the safest locations in the United States are contiguous to many of the most dangerous places in Mexico. Most striking is the contrast between Ciudad Juárez and El Paso, two large cities that constitute a binational metropolitan area. Once called “the murder capital of the world,” Mexico’s Ciudad Juárez is only 300 feet from El Paso, “America’s safest city.” In 2012, Ciudad Juárez had 58 homicides per 100,000 people, while El Paso experienced fewer than one (0.6).

  So why is there such an immense difference here? 

   

  Restrictive Gun Laws in Mexico

   

  The pre-packaged retort to this phenomena often repeated in the media is that the US causes the high homicide rates in Mexico by exporting guns to Mexico. We're told that criminals go into the US, buy guns legally in Texas (for example) and then sell the guns illegally to cartels in Mexico.

   

  Dave Kopel has shown that this claim isn't true. But, even if it were true, it wouldn't explain much by itself since we're left asking ourselves why criminals don' just do the same thing to the same homicidal effect in the United States. If it's so fruitful for violent criminals to buy guns in the US and sell them to organized crime rings, why aren't those criminals doing the same thing in the US?

   

  Well, the answer is the criminals probably are are well armed in the US, and have a lot of guns just like criminals in Mexico do. The difference in actual crimes carried out, however, likely lies in the fact that law abiding Mexicans have been disarmed, while law abiding Americans have not.

   

  Gun laws are very restrictive in Mexico, as The Atlantic notes: 

  Mexico can hardly be described as a heavily armed society. With around 2.5 million registered gun owners and at least 13 million more illegal arms in circulation, the country has a ratio of just 15 guns for every 100 people, well below the global average. Unlike in the U.S., civilian possession in Mexico is considered a privilege, not a right and is tightly regulated under federal law since the 1970s. Extensive background checks are required of all purchasers, and there are heavy penalties and even imprisonment for non-compliance. Astonishingly, there is just one legal gun shop in the country, compared to more than 54,000 federally licensed firearm dealers and thousands of pawnshops and gun shows scattered across the U.S.

  In other words, in Mexico, there is an immense asymmetry in gun ownership between violent criminals and law-abiding citizens. Criminals have abundant access to the means of violent coercion, and the will to use it. Ordinary citizens, on the other hand, have, practically speaking, no access. Meanwhile, local officials can be bought by the criminals, which means that private citizens will then find themselves facing two heavily armed groups who are free to behave maliciously toward the general population with little fear of reprisals.

   

  The Atlantic author notes that in Mexico, there are about 15 guns per 100 persons, which is likely referencing the data released by the Small Arms Survey. The same survey estimates that, by contrast, there are from 88 to 100 guns per 100  persons in the United States. The US far outpaces even gun-friendly Switzerland which has about 45 guns per 100 persons. 

  In response to this lopsided situation that favors the cartels, some Mexicans have formed their own militia groups, but these are considered only quasi-legal, and they are certainly rare compared to the number of armed cartel members.

   

  In the US, by contrast, violent criminals can guess that a not-insignificant percentage of Americans are armed on the street, and far more are armed in the home.

   

  Possible Other Factors

   

  Now, I'm not going to claim that gun control is the only factor at play here. Deeply ingrained issues related to government corruption, and the chaotic effect of the Drug War are clearly important factors.  However, the differences between Northern Mexico and Southern Texas or Southern Arizona are not as immense as some might think. For example, in Chihuahua, across the river from El Paso, the people share a nearly identical geography, and a very similar ethnic makeup. Even economically, northern Mexico is closer to the US than is southern Mexico, while a majority of Chihuahuans are of European descent. And, of course, it would be risible to suggest that the US is free of political corruption. However, all of these issues are exacerbated by the fact that the Mexican's state's stringent gun controls greatly enhance the coercive power of cartels and government agents at the expense of ordinary citizens. 

  And there is no denying that when one crosses the border from Chihuahua to Texas, some of the biggest differences one encounters are legal and political in nature.

   

  Among these differences is the fact that south of the border only government agents and criminals are allowed meaningful access to firearms, while norther of the border, criminals and ordinary citizens share similar levels of access.

   

  What we are witnessing in northern Mexico then, is a tragic mixture of failed Drug War policies mixed with a government refusal to allow Mexicans to arm themselves. Yes, there are many factors at work. Take out some of them — whether drug war, ethnic conflict, or poverty — and the situation would likely be improved.

   

  But, when we add gun control into the mix, things are far worse than these ever need have been. Moreover, if one's position is that the fault lies with poverty and corruption, then the pro-gun-control position is nothing more than the position that the same regime responsible for this corruption and poverty should be granted even more absolute power over the population it abuses.

   

  It is instructive that, on the northern side of the border, meanwhile, there is still a drug war, there is a lot of ethnic diversity, and the US border areas have some of the highest poverty rates in the United States. And yet, homicide rates are far, far below what they are on the southern side. Indeed, right along the border, they're among the lowest rates we see anywhere in the world.

   

  What About the Canada-US Border?

   

  Do we see similar issues along the Canadian-US border?

   

  As I noted in this article, American states near the northern US border tend to have low homicide rates with states like Idaho, Oregon, New Hampshire, and Maine reporting remarkably low homicide rates that are similar too or even lower than Canadian homicide rates.

   

  Using the same color coding as the previous maps (and the same data source), we see that, with the exception of Michigan (i.e., Detroit) the US-Canada border is marked by homicide rates all below 5 per 100,000:

   

  

  Source: OECD. Map by Ryan McMaken

   

  Of course, the situation in the Canadian border is immensely different from the situation on the Mexican border in terms of ethnicity, income levels, and climate. Crossing the northern border, however, brings nowhere near the sorts of changes in crime that are encountered on the southern side.

   

  Nevertheless, part of this might be attributed to the fact that Canada is far more gun-friendly than Mexico. There is certainly more than one gun store in Canada (to say the least), and it is estimated by the Small Arms Survey that Canada has twice as many guns per capita as Mexico, with 30 per 100 persons.

   

  Mexican Politicians (and American Politicians) Blame Everyone Else

   

  While it refuses to admit the abject failure of its gun control program, the Mexican state instead attempts to shift the blame to Americans and has attempted to impose international gun control measures on the US.

   

  For Mexican politicians, it's easier to shift the blame than to recognize the fact that neighboring Americans right across the border enjoy far lower homicide rates along side relatively easy access to firearms. (Even California looks like a gun-owner's paradise compared to Mexico.)

   

  The Mexican state (and many Mexicans) are unfortunately impervious to these facts, and, many Mexicans still believe that Mexicans will be safer if the Mexican regime tightens its grip even more on firearms, in spite of the spectacular failure of gun control in that country. 

   

  

  

  

  

  

• Hedge Fund Which Predicted The Subprime Crisis Expects Massive Yuan Devaluation In 2016

  Earlier this month, even before China unleashed the end phase of its latest currency devaluation which since forced the PBOC to enforce even more capital controls to avoid accelerating capital outflows, Kyle Bass revealed that his best investment idea for 2016 was to short the Chinese currency:

  “Given our views on credit contraction in Asia, and in China in particular, let’s say they are going to go through a banking loss cycle like we went through during the Great Financial Crisis, there’s one thing that is going to happen: China is going to have to dramatically devalue its currency…. “We are not short Chinese equities, but we are very invested in the Chinese currency: we think we are going to see a pretty material devaluation; we think it’s going to be in the next 12-18 months.”

  He did not specify exactly what he means by “pretty material devaluation” however according to our own December calculations, an indicative number is likely in the 10-15% ballpark.

  

  Today, another Texas-based hedge fund manager who just like Kyle Bass correctly predicted, and profited from, the subprime crisis, Corriente Advisors’ Mark Hart, has not only reiterated Kyle Bass CNY devaluation call, but has gone as far as quantifying by how much the Chinese currency will have to fall. Cited by Bloomberg, Hart has said that “China should weaken its currency by more than 50 percent this year.“

  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.

  Incidentally, this is precisely what Ex-PBOC adviser Yi Yongding says yesterday China should do, as quoted by the 21st Century Herald, adding that the PBOC’s forex reform in Aug. 2015, known as “crawling peg” by foreign investment banks, has many flaws and should be abandoned. Accoding to Yi, the scheme won’t be able to break mid- or long-term depreciation expectations because those are decided by fundamentals, even if they are misinterpreted. His conclusion is a widely accepted one by now, namely that China may not have better choice but to strengthen control over capital flows to stabilize financial market.

  Back to Hart who says that “there wouldn’t be anything underhanded about a sharp devaluation. Why should China be forced to suffer deflationary effects of defending its currency when everyone else isn’t?”

  In other words, why peel the bandaid one millimeter at a time when China should just rip it off in one motion?

  Here’s a reason why: or rather over 20 trillion reasons, which is how much in dollar equivalent deposits Chinese savers have parker at their local banks. If those depositors realize that their net purchasing power for foreign goods and services has suddenly lost 50%, in the words case, there would be riots in China, and in the best case an unprecedented capital outflow. Which is also why China has been so unwilling to do the “bandaid” approach.

  As Bloomberg adds, Hart, whose prescription clashes with consensus forecasts for the yuan and recent comments from senior government officials, said China would be justified in weakening the currency after central banks in Europe and Japan fueled declines in their exchange rates to stoke economic growth in recent years. Such a move would likely come as a surprise to global investors, who were rattled by a drop of less than 3 percent in the yuan last August.

  

  “They’re trying to drive a car with one foot on the brake,” said Hart, who estimates the People’s Bank of China spent more than $100 billion supporting the yuan in onshore and offshore markets during the first 12 days of January. “If China were to devalue to a level that wasn’t actually a true equilibrium they will get run over pretty quickly, they will blow through FX reserves, and then they will lose face because they’ll be forced to devalue.”

  There is another implication from a sharp devaluation: a world in which not even the IMF can deny any longer that a full blown currency war has broken out. Bloomberg adds more:

  While a one-off drop in the yuan could ease selling pressure on the currency and support exports, it would also entail risks for China and the rest of the world. Chinese borrowers have amassed $1.5 trillion of foreign-currency debt, according to an official estimate at the end of September, which would become instantly harder to repay after a sharp decline in the yuan.

   

  A devaluation could also fan fears of a global currency war — a risk that Mexico’s finance minister cited earlier this month — and spur the U.S. Federal Reserve to backtrack on plans to raise interest rates, according to Hart.

  For now, Chinese policy makers have signaled there are no plans for a big drop in the yuan. Premier Li Keqiang on Friday pledged a “stable” exchange rate and said the nation has no intention of stimulating exports through a competitive devaluation. Bets against the currency will fail and calls for a large depreciation are “ridiculous” as policy makers are determined to ensure stability, Han Jun, the deputy director of China’s office of the central leading group for financial and economic affairs, said last week in New York.

  However, while in August 2015 China did engage a modest one-off devaluation, there is a precedent for a far sharper devaluation. The currency slid 33 percent at the start of 1994 as authorities unified official and market exchange rates, and the yuan has stayed stronger than that level ever since March of that year. That decision was a “wild success,” helping to set the stage for years of economic growth and foreign-exchange inflows, said Hart, who founded his hedge fund in 2001.

  While a devaluation this year would be “jarring” and may initially accelerate capital outflows, it would ultimately put China in a stronger position, according to Hart. 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.

  It would also most likely unleash another global currency crisis, first among the Emerging Nations, and then among their Developed peers, as country after country scrambled to implement comparable currency destruction as China, in order to preserve their relative share in dwindling global trade, where the shortest way to boost one’s exports has over the past 7 years, been a very simple one: destroy your currency faster than your exporting competitors.  

  The reality, however, is that 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).

  Hart is not alone in predicting a massive Yuan devaluation: Carlyle Group’s Emerging Sovereign Group in New York and Omni Partners in London are also positioned for a retreat in the currency. Crispin Odey, who runs Odey Asset Management, said in September that the yuan should fall by at least 30 percent.

  Finally, this is how Hart is trading the upcoming devaluation: Hart said he’s wagering against the currency with put options, contracts that provide the right to sell at a specific price within a set period. Bets on a sharp devaluation aren’t common among his hedge fund peers, who only recently started to wager on a gradual depreciation, Hart said. 

  “It strikes me as odd that the world would assume that China wouldn’t pursue same the same type of monetary policies” that led to weaker exchange rates in other nations, Hart said. “They’re between a rock and a hard place.”

  Which is 100% correct, and is also why the market is finally starting to pay attention to the China in the bull store, after years of stubbornly ignoring it.

  

  

  

  

  

• How Elon Musk Stole My Car

  Submitted by Marty via Atlantic.net,

  This was my personal experience with Tesla Motors. I’m a fan of what Tesla Motors is trying to accomplish, and hope they get their issues worked out.

  With a new baby on the way, I was in the market for a new vehicle.  I scheduled a test-drive with Tesla Motors (Tesla) in mid-November, and was on the fence about purchasing a Tesla. I had some questions which I emailed my test-drive consultant, but didn’t receive any response and I wasn’t particularly in love with the car, so I let it go.

  A few weeks later, I was talking to a friend of mine who had just leased a Tesla. I explained my experience, and how I felt the price of the car was too high for what it is. While Tesla doesn’t offer discount cars, he explained there is a way to pay less. Tesla has what are referred to as “inventory cars”. These are cars used for test drives, showrooms, as well as loaners. They do have mileage, you have to take them “as is”, and there is no custom configuration. But, if you can find one to your liking you can get a pretty big discount.  He recommended I speak with his Owner Advisor, Kevin, and he connected me with him.

  Tesla doesn’t have a traditional dealership network; it is pioneering the luxury electric vehicle (EV) segment, and pioneering selling cars without traditional dealerships. That means it operates its service centers, and showrooms itself. By unifying this process it should give a better experience to it customers. Kevin, the Owner Advisor (salesperson) I was referred to, is based out of Tesla HQ in Palo Alto, California.

  After working with Kevin for a few weeks, I was able to find a car that met my needs in Pasadena, California. On December 24, I placed my order with Kevin by paying $4,000 as a deposit. Kevin assured me that this secured the vehicle for me, and that it was marked as sold and unavailable for anyone else to sell. I followed up with him the next week, and he said they were just trying to find a carrier to ship the car to Florida, and I should begin working with my Delivery Specialists.

   

  

  (Above, the confirmation screen with VIN of the Tesla Model S Elon Musk is driving)

  Tesla has Delivery Orientation Specialists and Delivery Experience Specialists who work to help you through the process of getting the car. In my case, it was Caroline and Chelsea. Caroline explained to me that typically it takes a week to get the car, but because it was late in the year it might take up to two weeks, with the latest delivery date being Jan 8. She also explained that there was no way to get the car by the end of 2015. This made sense, because as a public company, Tesla was striving to meet its delivery commitments to its shareholders. By prioritizing deliveries of cars that could actually be delivered before the end of 2015, they could meet their quotas, and then deliver cars (like mine) early in 2016. Because I wanted to support Tesla, I didn’t think much of anything when I didn’t hear from anyone from that point on.

  The week of what I thought would be my expected delivery, my electrician was calling to schedule the installation of my additional power receptacle in my garage. We had agreed to do it once I got the car. I began calling my local Tesla location and choosing the “New Vehicle Delivery” option, but it would only ring and go to a voicemail that hadn’t been set up. I called repeatedly and no one would answer. Frustrated, I called and chose the “sales” option and spoke with an representative there that took my message and assured me someone would call me back.  Still, I got no calls back. Since the car was coming by January 8, I was starting to get concerned. I had to coordinate the car, the power installation, disposing of my old car in a sequence of events that I couldn’t start until I knew when I would get the car.

  By Wednesday, I was emailing my delivery specialist and calling. I didn’t know what was going on. By Thursday I was showing people at work how they don’t answer the phone or respond to my email. I was very concerned that I was paying over $100k for a car, and if this was the new sales process how terrible would the service be? Should I just cancel? How could I cancel if no one would even talk or communicate with me? Was there a problem in transit? Basically, I was stuck and frustrated, plus I had already paid for a deposit which covered the non-refundable transportation cost.

  Exasperated, I called the local Tesla dealer again. This time, no one answered and my call was transferred to Tesla HQ. The representative asked for the 6-six digits of my vehicle VIN. Tesla offers a “my Tesla” portion of their site that new buyers login in to, to sign electronic paperwork, upload copies of driver’s licenses as well as proof of insurance. In addition, it shows a model of the car and some advice on how to power it. Most importantly, after you make your initial payment, the reservation number for your car is replaced with a VIN (Vehicle Identification Number) which signifies the specific car which is allocated to you. This is done shortly after you send in your initial payment. Therefore, I was able to provide my VIN information to the Tesla representative, who promised me Kevin my original Owner Advisor would call me back.

  On the evening of January 7, the day before I was to receive my car, Kevin called me to explain he had a call in with the Office of the CEO at Tesla and was working with his team in Tesla to resolve a problem that had come up — their CEO, Elon Musk, had taken my car and was using it as his personal vehicle to test a new version of autopilot. Even worse, he said he could see all the calls I had made into the Orlando delivery center this past week, and no one was taking my calls because no one knew what to do.

  Tesla logs every in-bound call to their centers, and stores all of this in a national database. This is most likely tied into a CRM (Customer Relationship Management) system, to provide better service. So, for example, Kevin in California saw detailed records of all my attempts to connect with someone in Orlando.  Since no one knew what to do, they were deliberately avoiding taking my calls or communicating with me.

  I was floored. Not only because my car had been taken by their CEO, not only that no one bothered to reach out or communicate with me, but they were actively trying to avoid me.  I called and reached Kevin again on the evening of Jan 8. He explained my original car was so aftermarket at this point there was no way I would get it. Kevin began suggesting a different car that didn’t match what I was looking for, then suggested another car for $20k more.

  Frustrated, I called Tesla HQ to complain, and requested to speak to someone in the Office of CEO. The person answering wanted to know why, so I explained the situation and was transferred to a Ms. Kloskey (sp?). As was typical with Tesla, not only did she not answer, her voicemail was full so I couldn’t leave a message. I hung up and called back, and reached a representative who I explained my situation to, and requested escalation to someone who could make things right. The representative took my message, and said he would forward it to the appropriate person.

  I received a call back from Kevin, who explained he had gotten the memo that I called. Once again, I couldn’t penetrate Tesla’s screening system to find someone who cared, empathized, or treated me like a human. I could only speak with Kevin who was unhappy that they didn’t give me the right experience.

  Tesla has a strange way of communicating with customers I think is best described as customer service vaporware. That is, they spend more time trying to create the illusion of customer service, rather than actually providing it. There is no mechanism for them to get feedback, as I tried to provide, so its difficult to see how they can improve if they don’t know where they are going wrong.

  Tesla is pioneering two things at once, (a) a luxury full-EV segment for passenger vehicles, and (b) bypassing the traditional dealer network and selling directly to consumers. Since I never got my car, I can’t speak to (a). But, because (b) is so horribly broken, I don’t think (a) can succeed. My concern is if Tesla fails the experiment of directly selling cars to consumers may be considered a failure, when in reality it was tremendous missteps on Teslas part that caused it to not work. Right now, Tesla ships low volumes of cars to early adopters and ardent enthusiasts who will overlook the organizations short-comings. But I think launching a higher volume (Model 3) sedan later this year with their current organization will be watching a slow-motion train wreck.

  Thought questions for Tesla:

  • Why was Elon Musk (CEO of the company) allowed to take a car that was marked in their system as sold?
  • When Tesla employees became aware of what happened, why didn’t they reach out to me? How did no one involved think of the customer?
  • Even worse, why did Tesla employees actively work to avoid my calls and email?
  • If Tesla is logging interactions with their customers (like phone-calls) to a national database, why didn’t they notice that someone was calling in and only getting voicemail. Shouldn’t this be a red-flag, or shouldn’t someone at Telsa HQ be reaching out to find out why/whats going on/why someone keeps calling so often?
  • The only person who communicated with me (in the end) was Kevin. At no point did he ever apologize or ask how to make things right. He only communicated he was disappointed and not the experience Tesla wanted to provide. (He did apologize for “handing this incorrectly”, but I think this was in regards to my requesting my money back). What is the escalation policy here?
  • I tried three times to communicate with Tesla HQ, the first on their post test-drive e-mail form which they automatically send. I wrote constructive criticism and didn’t get any follow up. As detailed in my experience here, I called the Tesla HQ twice and was unable to reach anyone that cared or could help me.

  In the end, I cancelled my order and Tesla agreed to refund my money. If a tech-savvy $100k car buyer can have this experience, what hope is there for this organization to go mainstream? Tesla is a publicly traded company that loses money. So, strictly speaking, it doesn’t need customers as long as it can fund its losses via Wall Street. In my experience, its a hobby masquerading as a company, and it can probably run as a hobbyist organization for some time. But, at some point, customers will matter, they always do. Hopefully, if this posts reaches the right people in Tesla it will serve as a wake-up call to right their ways before its too late.

  In 21 years as a founder/CEO of my own company, dealing with Tesla has been the most bizarre and strange experience I’ve had interacting with another organization.

  Note: There were many other errors, selling me a Ludicrous upgrade which didn’t apply to my car, Tesla endorsed electricians not familiar with Tesla, dual charger availability issues, etc. My experience regarding these issues may have been affected by their employees trying to avoid me.

  

  

  

  

  

• U.S. Ally Turkey Arrests Academics For The Crime Of Signing A Peace Petition

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  A senior Western official familiar with a large cache of intelligence obtained this summer told the Guardian that “direct dealings between Turkish officials and ranking ISIS members was now ‘undeniable.’”

   

  ISIS, in other words, is state-sponsored?—?indeed, sponsored by purportedly Western-friendly regimes in the Muslim world, who are integral to the anti-ISIS coalition. Which then begs the question as to why Hollande and other Western leaders expressing their determination to “destroy” ISIS using all means necessary, would prefer to avoid the most significant factor of all: the material infrastructure of ISIS’ emergence in the context of ongoing Gulf and Turkish state support for Islamist militancy in the region.

   

  There are many explanations, but one perhaps stands out: the West’s abject dependence on terror-toting Muslim regimes, largely to maintain access to Middle East, Mediterranean and Central Asian oil and gas resources.

   

  – From the post: So Who’s Really Sponsoring ISIS? Turkey, Saudi Arabia, and Other U.S. “Allies”

  There’s been a lot going on lately, so I wouldn’t be surprised if you missed the latest drama from of U.S. ally, and sometimes ISIS/al-Qaeda supporter Turkey.

  Recently, a peace petition circled the globe calling on the Turkish government to end fighting against Kurdish militants in the country’s southeast, which has reportedly led to thousands of civilian deaths. By January 15th, 2,000 Turkish academics had signed the petition, which was too much for authoritarian president Recep Tayyip Erdo?an to handle. He not only publicly denounced the entire affair, he went ahead and started arresting people.

  Nature reports:

  Hundreds of Turkish academics are waiting to find out whether they will be prosecuted or sacked for spreading “terrorist propaganda”, after they signed a petition calling for violence to end in Turkey’s southeast, where government forces have been fighting Kurdish separatists.

   

  After the petition provoked a furious response from Turkey’s president Recep Tayyip Erdo?an, several universities in the country have begun investigations into signatories among their faculty — which could lead to their dismissal if accusations of unlawful political agitation hold up. On 15 January, police arrested and later released 27 academics, according to local media reports, including economists, physicians and scientists.

   

  “We are accused of defamation of the state and of terrorist propaganda,” says Zeynep K?v?lc?m, a law professor at Istanbul University, who has signed the petition and said she knew of several arrests. “We are all waiting for the police,” she told Nature on 15 January.

   

  Turkey’s government has previously clamped down on scientists and students who question its policies, imprisoned scientists charged with terrorism offenses, and restricted the freedom of funding agencies and scientific academies. But the number of arrests and investigations makes the current episode one of the larger Turkish attacks on freedom of expression in recent years, prompting outrage among human-rights advocates.

   

  By 15 January, almost 2,000 Turkish academics from 90 or so universities had signed a petition — launched a week earlier — that called on the Turkish government to end the fighting against Kurdish militants. Thousands of civilians have been killed in the longstanding conflict, which flared up again last July after a ceasefire collapsed.

   

  In an 12 January speech (made in the wake of terrorist attacks in Istanbul) Erdo?an accused signatories of spreading and supporting Kurdish terrorist propaganda and undermining Turkey’s national security. “I call upon all our institutions: everyone who benefits from this state but is now an enemy of the state must be punished without further delay,” he said.

   

  In response, the Turkish Higher Education Board (YÖK) and public prosecutors in several Turkish university cities launched investigations against academics who signed the petition. And several Turkish universities launched their own investigations into signatories at their institutions; some of them, including Abdullah Gül University in Kayseri, have asked signatories to resign. The rector of that university, ?hsan Sabuncuo?lu, has not responded to Nature’s e-mail requests for comment.

  The drama doesn’t end in Turkey. Both the U.S. ambassador to Turkey and Noam Chomsky are involved. As relates to the U.S ambassador, let’s turn to Al-Monitor:

  Melih Gokcek has been the mayor of the Turkish capital, Ankara, since 1994. He is known as a flamboyant and loquacious member of the Justice and Development Party (AKP) and is quite active on social media. He appears on television frequently and has over 3 million followers on Twitter. He frequently engages pundits and colleagues into virtual duels.

   

  The mood changed quickly when the US Embassy posted a brief message indicating the ambassador’s support for freedom of expression for academics who signed a petition titled “We do not want to be partners to the crime,” which asked the Turkish government to find a way for peace in the southeast. As Al-Monitor’s Cengiz Candar has written, the government sees the petition as supporting terrorism. Consequently, the academics were targeted on multiple fronts, with some being detained or suspended. The social pressure against them was not limited to traditional virtual attacks. It also involved marking office doors of academics who signed the petition, and even publicizing their home addresses, the religious affiliation of their spouses and occupations of their parents.

   

  Bass’ statement read: “Expressions of concerns about violence do not equal support for terrorism.” Bass said that while the United States “may not agree with the opinions expressed by those academics,” he emphasized US support for freedom of expression, regardless of the contents of the petition.

   

  Yet, what might seem to many a simple generic document from the US Embassy was branded as a direct attack on the government by the mayor. Gokcek shared 10 consecutive tweets on Jan. 15 directly addressing Bass. His tweets received hundreds of retweets and promptly became a trending topic in Turkey. The news that Gokcek declared Bass persona non grata made the headlines in national media outlets.

   

  In his Twitter feed, Gokcek said, “Bass is incapable of comprehending what he reads. Those shady academics are saying there is a massacre against the armed terrorists. Dear Bass, in the US, the police shoot citizens like pears for simply not putting up their hands.” “And you guys call this [method] security? In our country, heavily armed terrorists are attacking the police and soldiers. You tell us to accept it in the name of democracy. Well, we cannot.” Gokcek then shared some photos of the PKK’s devastating attacks, with collapsed buildings and a few YouTube videos displaying PKK violence. He wrote: “Bass, apologize to Turkey. Take a look at these [videos and photos] where PKK killed babies yesterday. Perhaps your blind eyes will see. You are the wrong choice for Turkey. I think you should go back to your country. Another ambassador who knows us should take your place.” Gokcek concluded by stating that Turkish officials are trying to bring US-Turkey relations to their best level, while Bass is personally damaging the relationship. He recommended that Bass should at least know when to remain silent, and “not back these academics who support murderers.”

  Well then.

  Now on to Chomsky, who was one of the non-Turkish academics to sign the petition. The Guardian reports:

  The leftwing US academic Noam Chomsky has hit back at Recep Tayyip Erdo?anafter the Turkish president accused him of ignorance and sympathizing with terrorists.

   

  Hours after Tuesday’s bomb attack on a tourist area of Istanbul, Erdo?an delivered a sneering criticism of Chomsky and “so-called intellectuals” who had signed a letter calling on Turkey to end the “deliberate massacre” of Kurdish people in the south east of the country, 

  Chomsky came back with the perfect response:

  Turkey blamed Isis [for the attack on Istanbul], which Erdo?an has been aiding in many ways, while also supporting the al-Nusra Front, which is hardly different. He then launched a tirade against those who condemn his crimes against Kurds – who happen to be the main ground force opposing Isis in both Syria and Iraq. Is there any need for further comment?

  Game. Set. Match.

  

  

  

  

  

• Dutch Politician: Male Refugees Are "Testosterone Bombs," Must Be Locked Up To Save Women From "Sexual Jihad"

  Earlier today, we brought you footage from riots that took place on Monday in the Netherlands.

  When the town of Heesch attempted to hold a meeting to discuss the prospect of placing some 500 refugees, around 1,000 demonstrators arrived to storm town hall. “The atmosphere turned nasty”, to quote AFP, and ultimately, police were forced to use “extra powers” to disperse the crowd.

  The riots came just hours after far-right Dutch politician Geert Wilders aired a new campaign spot for his Freedom Party.

  “Wilders’s views have already proved controversial,” AFP reminds us. “He is expected to go on trial in March for inciting racial hatred after pledging in local elections that he would ensure there will be ‘fewer Moroccans’ in the country.” Here’s the clip:

  But trial or no trial, Moroccans or no Moroccans, Wilders’s party is expected to put up its best ever showing in the next parliamentary elections, due in 2017. Were elections held today, polls show The Freedom Party would grab some 36 seats in the 150-seat Lower House.

  Needless to say, the party’s cause has gotten a boost from the wave of sexual assaults that occurred across Europe on New Year’s Eve.

  Not one to let a good crisis go to waste, Wilders’s new video finds the PVV leader calling on European officials to “lock up” male refugees in asylum centers in ordert to save the bloc’s women from “Islamic testosterone bombs.” 

  “We have seen what they are capable of,” Wilders continues, “it’s sexual terrorism, a sexual jihad.” 

  Fortunately, Wilders has a “solution”: “I propose we lock the male asylum seekers up in the asylum centers.”

  

  

  

  

  

• Canada Set To Unleash Negative Rates As Oil Patch Dies, Depression Deepens

  This Wednesday, the Bank of Canada has a decision to make.

  Canada’s oil “dream” is dying thanks to the inexorable slide in crude prices and as the IEA made clear earlier today, the pain is set to persist for the foreseeable future as the world “drowns in oversupply.”

  “Lower for longer” has hit the country’s oil patch hard. We’ve spent quite a bit of time documenting the plight of Alberta, where job cuts tied to crude’s slide have led directly to rising suicide rates, soaring property crime, and increased food bank usage (not to mention booming business for repo men).

  

  Adding insult to injury for Canadians is the plunging loonie. Because the country imports most of its fresh fruits and vegetables, the weak currency has triggered a sharp increase in the price of many items in the grocery aisle as documented in a hilarious series of tweets by incredulous Canadian shoppers.

  The question for the Bank of Canada is this: is the risk of an even weaker loonie worth taking if a rate cut has the potential to head off the myriad risks facing the economy?

  We’ll find out what the BOC thinks tomorrow, but in the meantime, analysts have weighed in. JP Morgan’s Daniel Hui says CAD needs to fall further lest producers should simply close up shop. “[W]ith West Canada Select (WCS) now sitting just a dollar above the average per-barrel operational cost of $20 (Canadian), the risk is that any further decline will cause a whole new host of spillovers including potential shutdown and retrenchment of energy extraction and exports (with its attendant growth and balance of payment effects) or the potential of highly leveraged companies running operational losses, and the more contagious financial impact that might have in Canada, with broader spillovers.”

  None of those outcomes are particularly palatable. If the loonie continues to plunge however, it would act as a kind of shock absorber (producers’ costs are predominantly in CAD terms whereas the crude they sell is obviously denominated in USD), keeping CAD-denominated prices above the marginal cost of production.

  

  “One of the few scenarios that would keep bitumen producers above marginal cost amid a further decline in global energy prices, is for CAD to depreciate substantially and at a much higher beta to oil price than has been the case in the past 18 months,” Hui adds, driving the point home.

  But this is a Catch-22. The BOC can cut and drive the loonie even lower thus allowing zombie producers to keep pumping and thus prevent still more oil patch job losses, but a falling CAD may have undesirable knock-on effects, like reduced consumer spending, for instance. Additionally, if uneconomic producers keep drilling and pumping, they’re just digging their own grave by contributing to an already oversupplied global market.

  In short: there’s no “right” answer. “Economists are united in one view, that new plunges in oil prices, in the Canadian dollar, and weaker global financial conditions, make the Bank of Canada’s policy interest rate decision Wednesday a very close call,” MNI writes.

  “We now are looking for a rate cut next week,” Bank of Montreal Chief Economist Douglas Porter told Market News. “We believe that the balance of weight has slightly tipped in favor of them going” for a rate cut, he added, pointing out that the market is pricing in a 50-50 chance of a BOC action this week.

  

  Royal Bank of Canada assistant chief economist Paul Ferley, doesn’t agree. “We think that Governor (Stephen) Poloz will maintain his confidence that growth in exports will counter weakening business investment and he will hold the rate steady,” he says.

  Perhaps, but as we noted early last month, the BOC has already hinted that Europe’s not-so-grand experiment in the Keynesian Twilight Zone known as NIRP may be about to cross the pond. “The effective lower bound for policy rates is around -0.5%,” governor Stephen Poloz said in December, setting the stage for negative rates in Canada.

  For their part, IceCap Asset Management says NIRP is a virtual certainty for the BOC. Here’s IceCap’s straightforward, bullet point roadmap for Canadian monetary policy:

  1. Canadian economy to be in recession in 2016

  2. Bank of Canada will be at 0% interest rates in 2016

  3. Bank of Canada will be at NEGATIVE interest rates in later 2016

  4. Bank of Canada will be PRINTING MONEY in later 2016

  Ahead of Wednesday’s decision, Barclays is out with a preview and sure enough, NIRP makes a cameo.

  “The BoC would need to cut at least 50bp this year to partially counteract the continued slide in crude oil prices,” the bank begins, adding that although the price of Western Canadian Select (WCS) has fallen by half since the publication of the BoC’s last Monetary Policy Report, “this has been only partially offset by the 8% nominal multilateral depreciation of the CAD.”

  

  To fully offset the effect on GDP, Barclays says “the BoC would need to cut policy rates by at least 50bp in 2016.”

  Yes, by “at least” 50bps, and that’s assuming oil prices don’t plunge further.

  Of course 50bps puts the BOC at zero, so when Barclays says “at least”, they mean NIRP is likely on the way. To wit:

  The central bank has room to act even if rates hit zero. A 50bp cut in 2016 would bring the overnight rate to zero. The experience of countries like Switzerland, Sweden, Denmark and the euro area has taught central banks that zero is not the lower bound. The BoC estimates that the effective lower bound for Canada could be around -50bp, giving room for further cuts if needed. Without the immediate worry of hitting the effective lower bound, the central bank might be more willing to ease sooner rather than later.

   

  

  There you have it. Of course it’s difficult to see how 100bps of theoretical policy flexibility will be enough to keep the shut-ins from starting in the oil patch especially considering there’s only a CAD1 cushion above the marginal cost of production and considering the outlook for oil prices is particularly bleak now that 500,000 b/d of new Iranian supply are coming to market. 

  As for what the BOC does in the event Poloz hits the lower bound of -0.50% and the loonie still needs to weaken to offset the ill effects of declining crude, we’ll leave you with one indelible image that should serve as a harbinger of what’s to come…

  

  

  

  

  

  

Digest powered by RSS Digest

• U.S. Government Has Long Used Propaganda Against the American People

  The United States Senate Select Committee to Study Governmental Operations with Respect to Intelligence Activities found in 1975 that the CIA submitted stories to the American press:

  Wikipedia adds details:

  After 1953, the network was overseen by Allen W. Dulles, director of the CIA. By this time, Operation Mockingbird had a major influence over 25 newspapers and wire agencies. The usual methodology was placing reports developed from intelligence provided by the CIA to witting or unwitting reporters. Those reports would then be repeated or cited by the preceding reporters which in turn would then be cited throughout the media wire services.

   

  The Office of Policy Coordination (OPC) was funded by siphoning off funds intended for the Marshall Plan [i.e. the rebuilding of Europe by the U.S. after WWII]. Some of this money was used to bribe journalists and publishers.

  In 2008, the New York Times wrote:

  During the early years of the cold war, [prominent writers and artists, from Arthur Schlesinger Jr. to Jackson Pollock] were supported, sometimes lavishly, always secretly, by the C.I.A. as part of its propaganda war against the Soviet Union. It was perhaps the most successful use of “soft power” in American history.

  A CIA operative told Washington Post editor Philip Graham … in a conversation about the willingness of journalists to peddle CIA propaganda and cover stories:

  You could get a journalist cheaper than a good call girl, for a couple hundred dollars a month.

  Famed Watergate reporter Carl Bernstein wrote in 1977:

  More than 400 American journalists … in the past twenty?five years have secretly carried out assignments for the Central Intelligence Agency, according to documents on file at CIA headquarters.

   

  ***

   

  In many instances, CIA documents show, journalists were engaged to perform tasks for the CIA with the consent of the managements of America’s leading news organizations.

   

  ***

   

  Among the executives who lent their cooperation to the Agency were [the heads of CBS, Time, the New York Times, the Louisville Courier?Journal, and Copley News Service. Other organizations which cooperated with the CIA include [ABC, NBC, AP, UPI, Reuters], Hearst Newspapers, Scripps?Howard, Newsweek magazine, the Mutual Broadcasting System, the Miami Herald and the old Saturday Evening Post and New York Herald?Tribune.

   

  ***

   

  There is ample evidence that America’s leading publishers and news executives allowed themselves and their organizations to become handmaidens to the intelligence services. “Let’s not pick on some poor reporters, for God’s sake,” William Colby exclaimed at one point to the Church committee’s investigators. “Let’s go to the managements.

   

  ***

   

  The CIA even ran a formal training program in the 1950s to teach its agents to be journalists. Intelligence officers were “taught to make noises like reporters,” explained a high CIA official, and were then placed in major news organizations with help from management.

   

  ***

   

  Once a year during the 1950s and early 1960s, CBS correspondents joined the CIA hierarchy for private dinners and briefings.

   

  ***

   

  Allen Dulles often interceded with his good friend, the late Henry Luce, founder of Time and Life magazines, who readily allowed certain members of his staff to work for the Agency and agreed to provide jobs and credentials for other CIA operatives who lacked journalistic experience.

   

  ***

   

  In the 1950s and early 1960s, Time magazine’s foreign correspondents attended CIA “briefing” dinners similar to those the CIA held for CBS.

   

  ***

   

  When Newsweek waspurchased by the Washington Post Company, publisher Philip L. Graham was informed by Agency officials that the CIA occasionally used the magazine for cover purposes, according to CIA sources. “It was widely known that Phil Graham was somebody you could get help from,” said a former deputy director of the Agency. “Frank Wisner dealt with him.” Wisner, deputy director of the CIA from 1950 until shortly before his suicide in 1965, was the Agency’s premier orchestrator of “black” operations, including many in which journalists were involved. Wisner liked to boast of his “mighty Wurlitzer,” a wondrous propaganda instrument he built, and played, with help from the press.)

   

  ***

   

  In November 1973, after [the CIA claimed to have ended the program], Colby told reporters and editors from the New York Times and the Washington Star that the Agency had “some three dozen” American newsmen “on the CIA payroll,” including five who worked for “general?circulation news organizations.” Yet even while the Senate Intelligence Committee was holding its hearings in 1976, according to high?level CIA sources, the CIA continued to maintain ties with seventy?five to ninety journalists of every description—executives, reporters, stringers, photographers, columnists, bureau clerks and members of broadcast technical crews. More than half of these had been moved off CIA contracts and payrolls but they were still bound by other secret agreements with the Agency. According to an unpublished report by the House Select Committee on Intelligence, chaired by Representative Otis Pike, at least fifteen news organizations were still providing cover for CIA operatives as of 1976.

   

  ***

   

  Those officials most knowledgeable about the subject say that a figure of 400 American journalists is on the low side ….

   

  “There were a lot of representations that if this stuff got out some of the biggest names in journalism would get smeared” ….

  Former Newsweek and Associated Press reporter Robert Parry notes that Ronald Reagan and the CIA unleashed a propaganda campaign in the 1980’s to sell the American public on supporting the Contra rebels, utilizing private players such as Rupert Murdoch to spread disinformation:

  President Ronald Reagan meeting with media magnate Rupert Murdoch in the Oval Office on Jan. 18, 1983, with Charles Wick, director of the U.S. Information Agency, in the background. (Photo credit: Reagan presidential library)

  In the 1980s, the Reagan administration was determined to “kick the Vietnam Syndrome,” the revulsion that many Americans felt for warfare after all those years in the blood-soaked jungles of Vietnam and all the lies that clumsily justified the war.

   

  So, the challenge for the U.S. government became: how to present the actions of “enemies” always in the darkest light while bathing the behavior of the U.S. “side” in a rosy glow. You also had to stage this propaganda theater in an ostensibly “free country” with a supposedly “independent press.”

   

  From documents declassified or leaked over the past several decades, including an unpublished draft chapter of the congressional Iran-Contra investigation, we now know a great deal about how this remarkable project was undertaken and who the key players were.

   

  Perhaps not surprisingly much of the initiative came from the Central Intelligence Agency, which housed the expertise for manipulating target populations through propaganda and disinformation. The only difference this time would be that the American people would be the target population.

   

  For this project, Ronald Reagan’s CIA Director William J. Casey sent his top propaganda specialist Walter Raymond Jr. to the National Security Council staff to manage the inter-agency task forces that would brainstorm and coordinate this “public diplomacy” strategy.

   

  Many of the old intelligence operatives, including Casey and Raymond, are now dead, but other influential Washington figures who were deeply involved by these strategies remain, such as neocon stalwart Robert Kagan, whose first major job in Washington was as chief of Reagan’s State Department Office of Public Diplomacy for Latin America.

   

  ***

   

  Declassified documents now reveal how extensive Reagan’s propaganda project became with inter-agency task forces assigned to develop “themes” that would push American “hot buttons.” Scores of documents came out during the Iran-Contra scandal in 1987 and hundreds more are now available at the Reagan presidential library in Simi Valley, California.

   

  What the documents reveal is that at the start of the Reagan administration, CIA Director Casey faced a daunting challenge in trying to rally public opinion behind aggressive U.S. interventions, especially in Central America. Bitter memories of the Vietnam War were still fresh and many Americans were horrified at the brutality of right-wing regimes in Guatemala and El Salvador, where Salvadoran soldiers raped and murdered four American churchwomen in December 1980.

   

  The new leftist Sandinista government in Nicaragua also was not viewed with much alarm. After all, Nicaragua was an impoverished country of only about three million people who had just cast off the brutal dictatorship of Anastasio Somoza.

   

  So, Reagan’s initial strategy of bolstering the Salvadoran and Guatemalan armies required defusing the negative publicity about them and somehow rallying the American people into supporting a covert CIA intervention inside Nicaragua via a counterrevolutionary force known as the Contras led by Somoza’s ex-National Guard officers.

   

  Reagan’s task was made tougher by the fact that the Cold War’s anti-communist arguments had so recently been discredited in Vietnam. As deputy assistant secretary to the Air Force, J. Michael Kelly, put it, “the most critical special operations mission we have … is to persuade the American people that the communists are out to get us.”

   

  ***

   

  According to the draft report, the CIA officer who was recruited for the NSC job had served as Director of the Covert Action Staff at the CIA from 1978 to 1982 and was a “specialist in propaganda and disinformation.”

   

  ***

   

  Federal law forbade taxpayers’ money from being spent on domestic propaganda or grassroots lobbying to pressure congressional representatives. Of course, every president and his team had vast resources to make their case in public, but by tradition and law, they were restricted to speeches, testimony and one-on-one persuasion of lawmakers.

   

  But things were about to change. In a Jan. 13, 1983, memo, NSC Advisor Clark foresaw the need for non-governmental money to advance this cause. “We will develop a scenario for obtaining private funding,” Clark wrote. (Just five days later, President Reagan personally welcomed media magnate Rupert Murdoch into the Oval Office for a private meeting, according to records on file at the Reagan library.)

   

  As administration officials reached out to wealthy supporters, lines against domestic propaganda soon were crossed as the operation took aim not only at foreign audiences but at U.S. public opinion, the press and congressional Democrats who opposed funding the Nicaraguan Contras.

   

  At the time, the Contras were earning a gruesome reputation as human rights violators and terrorists. To change this negative perception of the Contras as well as of the U.S.-backed regimes in El Salvador and Guatemala, the Reagan administration created a full-blown, clandestine propaganda network.

   

  In January 1983, President Reagan took the first formal step to create this unprecedented peacetime propaganda bureaucracy by signing National Security Decision Directive 77, entitled “Management of Public Diplomacy Relative to National Security.” Reagan deemed it “necessary to strengthen the organization, planning and coordination of the various aspects of public diplomacy of the United States Government.”

   

  Reagan ordered the creation of a special planning group within the National Security Council to direct these “public diplomacy” campaigns. The planning group would be headed by the CIA’s Walter Raymond Jr. and one of its principal arms would be a new Office of Public Diplomacy for Latin America, housed at the State Department but under the control of the NSC.

   

  ***

   

  In the memo to then-U.S. Information Agency director Charles Wick, Raymond also noted that “via Murdock [sic] may be able to draw down added funds” to support pro-Reagan initiatives. Raymond’s reference to Rupert Murdoch possibly drawing down “added funds” suggests that the right-wing media mogul had been recruited to be part of the covert propaganda operation. During this period, Wick arranged at least two face-to-face meetings between Murdoch and Reagan.

   

  ***

   

  Alarmed at a CIA director participating so brazenly in domestic propaganda, Raymond wrote that “I philosophized a bit with Bill Casey (in an effort to get him out of the loop)” but with little success.

   

  ***

   

  Another part of the office’s job was to plant “white propaganda” in the news media through op-eds secretly financed by the government. In one memo, Jonathan Miller, a senior public diplomacy official, informed White House aide Patrick Buchanan about success placing an anti-Sandinista piece in The Wall Street Journal’s friendly pages. “Officially, this office had no role in its preparation,” Miller wrote.

   

  Other times, the administration put out “black propaganda,” outright falsehoods. In 1983, one such theme was designed to anger American Jews by portraying the Sandinistas as anti-Semitic because much of Nicaragua’s small Jewish community fled after the revolution in 1979.

   

  However, the U.S. embassy in Managua investigated the charges and “found no verifiable ground on which to accuse the GRN [the Sandinista government] of anti-Semitism,” according to a July 28, 1983, cable. But the administration kept the cable secret and pushed the “hot button” anyway.

   

  ***

   

  As one NSC official told me, the campaign was modeled after CIA covert operations abroad where a political goal is more important than the truth. “They were trying to manipulate [U.S.] public opinion … using the tools of Walt Raymond’s trade craft which he learned from his career in the CIA covert operation shop,” the official admitted.

   

  Another administration official gave a similar description to The Miami Herald’s Alfonso Chardy. “If you look at it as a whole, the Office of Public Diplomacy was carrying out a huge psychological operation, the kind the military conduct to influence the population in denied or enemy territory,” that official explained. [For more details, see Parry’s Lost History.]

  Parry notes that many of the same people that led Reagan’s domestic propaganda effort in the 1980’s are in power today:

  While the older generation that pioneered these domestic propaganda techniques has passed from the scene, many of their protégés are still around along with some of the same organizations. The National Endowment for Democracy, which was formed in 1983 at the urging of CIA Director Casey and under the supervision of Walter Raymond’s NSC operation, is still run by the same neocon, Carl Gershman, and has an even bigger budget, now exceeding $100 million a year.

   

  Gershman and his NED played important behind-the-scenes roles in instigating the Ukraine crisis by financing activists, journalists and other operatives who supported the coup against elected President Yanukovych. The NED-backed Freedom House also beat the propaganda drums. [See Consortiumnews.com’s “A Shadow Foreign Policy.”]

   

  Two other Reagan-era veterans, Elliott Abrams and Robert Kagan, have both provided important intellectual support for continuing U.S. interventionism around the world. Earlier this year, Kagan’s article for The New Republic, entitled “Superpowers Don’t Get to Retire,” touched such a raw nerve with President Obama that he hosted Kagan at a White House lunch and crafted the presidential commencement speech at West Point to deflect some of Kagan’s criticism of Obama’s hesitancy to use military force.

   

  ***

   

  Rupert Murdoch’s media empire is bigger than ever ….

  An expert on propaganda testified under oath during trial that the CIA now employs THOUSANDS of reporters and OWNS its own media organizations. Whether or not his estimate is accurate, it is clear that many prominent reporters still report to the CIA.

  John Pilger is a highly-regarded journalist (the BBC’s world affairs editor John Simpson remarked, “A country that does not have a John Pilger in its journalism is a very feeble place indeed”). Pilger said in 2007:

  We now know that the BBC and other British media were used by the British secret intelligence service MI-6. In what they called Operation Mass Appeal, MI-6 agents planted stories about Saddam’s weapons of mass destruction, such as weapons hidden in his palaces and in secret underground bunkers. All of these stories were fake.

   

  ***

   

  One of my favorite stories about the Cold War concerns a group of Russian journalists who were touring the United States. On the final day of their visit, they were asked by the host for their impressions. “I have to tell you,” said the spokesman, “that we were astonished to find after reading all the newspapers and watching TV day after day that all the opinions on all the vital issues are the same. To get that result in our country we send journalists to the gulag. We even tear out their fingernails. Here you don’t have to do any of that. What is the secret?”

  Nick Davies wrote in the Independent in 2008:

  For the first time in human history, there is a concerted strategy to manipulate global perception. And the mass media are operating as its compliant assistants, failing both to resist it and to expose it.

   

  The sheer ease with which this machinery has been able to do its work reflects a creeping structural weakness which now afflicts the production of our news. I’ve spent the last two years researching a book about falsehood, distortion and propaganda in the global media.

   

  The “Zarqawi letter” which made it on to the front page of The New York Times in February 2004 was one of a sequence of highly suspect documents which were said to have been written either by or to Zarqawi and which were fed into news media.

   

  This material is being generated, in part, by intelligence agencies who continue to work without effective oversight; and also by a new and essentially benign structure of “strategic communications” which was originally designed by doves in the Pentagon and Nato who wanted to use subtle and non-violent tactics to deal with Islamist terrorism but whose efforts are poorly regulated and badly supervised with the result that some of its practitioners are breaking loose and engaging in the black arts of propaganda.

   

  ***

   

  The Pentagon has now designated “information operations” as its fifth “core competency” alongside land, sea, air and special forces. Since October 2006, every brigade, division and corps in the US military has had its own “psyop” element producing output for local media. This military activity is linked to the State Department’s campaign of “public diplomacy” which includes funding radio stations and news websites. In Britain, the Directorate of Targeting and Information Operations in the Ministry of Defence works with specialists from 15 UK psyops, based at the Defence Intelligence and Security School at Chicksands in Bedfordshire.

   

  In the case of British intelligence, you can see this combination of reckless propaganda and failure of oversight at work in the case of Operation Mass Appeal. This was exposed by the former UN arms inspector Scott Ritter, who describes in his book, Iraq Confidential, how, in London in June 1998, he was introduced to two “black propaganda specialists” from MI6 who wanted him to give them material which they could spread through “editors and writers who work with us from time to time”.

  The government is still paying off reporters to spread disinformation. And the corporate media are acting like virtual “escort services” for the moneyed elites, selling access – for a price – to powerful government officials, instead of actually investigating and reporting on what those officials are doing.

  One of the ways that the U.S. government spreads propaganda is by making sure that it gets its version out first.   For example, the head of the U.S. Information Agency’s television and film division – Alvin A. Snyder – wrote in his book Warriors of Disinformation: How Lies, Videotape, and the USIA Won the Cold War:

  All governments, including our own, lie when it suits their purposes. The key is to lie first.

   

  ***

   

  Another casualty, always war’s first, was the truth. The story of [the accidental Russian shootdown of a Korean airliner] will be remembered pretty much the way we told it in 1983, not the way it really happened.

  In 2013, the American Congress repealed the formal ban against the deployment of propaganda against U.S. citizens living on American soil.  So there’s even less to constrain propaganda than before.

  Another key to American propaganda is the constant repetition of propaganda.    As Business Insider reported in 2013:

  Lt. Col. Daniel Davis, a highly-respected officer who released a critical report regarding the distortion of truth by senior military officials in Iraq and Afghanistan ….

   

  From Lt. Col. Davis:

   

  In context, Colonel Leap is implying we ought to change the law to enable Public Affairs officers to influence American public opinion when they deem it necessary to “protect a key friendly center of gravity, to wit US national will.”

   

  The Smith-Mundt Modernization Act of 2012 appears to serve this purpose by allowing for the American public to be a target audience of U.S. government-funded information campaigns.

   

  Davis also quotes Brigadier General Ralph O. Baker — the Pentagon officer responsible for the Department of Defense’s Joint Force Development — who defines Information Operations (IO) as activities undertaken to “shape the essential narrative of a conflict or situation and thus affect the attitudes and behaviors of the targeted audience.”

   

  Brig. Gen. Baker goes on to equate descriptions of combat operations with the standard marketing strategy of repeating something until it is accepted:

   

  For years, commercial advertisers have based their advertisement strategies on the premise that there is a positive correlation between the number of times a consumer is exposed to product advertisement and that consumer’s inclination to sample the new product. The very same principle applies to how we influence our target audiences when we conduct COIN.

   

  And those “thousands of hours per week of government-funded radio and TV programs” appear to serve Baker’s strategy, which states: “Repetition is a key tenet of IO execution, and the failure to constantly drive home a consistent message dilutes the impact on the target audiences.”

  Of course, the Web has become a huge media platform, and the Pentagon and other government agencies are influencing news on the web as well. Documents released by Snowden show that spies manipulate polls, website popularity and pageview counts, censor videos they don’t like and amplify messages they do.

  The CIA and other government agencies also put enormous energy into pushing propaganda through movies, television and video games.

  In 2012, the Pentagon launched a massive smear campaign against USA Today reporters investigating unlawful domestic propaganda by the Pentagon.

  End Notes:

  (1) One of the most common uses of propaganda is to sell unnecessary and counter-productive wars. Given that the American media is always pro-war, mainstream publishers, producers, editors, and reporters are willing participants.

  (2) A 4-part BBC documentary called the “Century of the Self” shows that an American – Freud’s nephew, Edward Bernays – created the modern field of manipulation of public perceptions, and the U.S. government has extensively used his techniques.

  (3) Sometimes, the government plants disinformation in American media in order to mislead foreigners. For example, an official government summary of America’s overthrow of the democratically-elected president of Iran in the 1950′s states, “In cooperation with the Department of State, CIA had several articles planted in major American newspapers and magazines which, when reproduced in Iran, had the desired psychological effect in Iran and contributed to the war of nerves against Mossadeq” (page x).

  

  

  

  

• The American Revolution – The Sequel

  Submitted by Jeff Thomas via InternationalMan.com,

  The US is the most observed country in the world. Since it’s the world’s current empire (and since it is beginning its death throes as an empire), it’s fascinating to watch.

  Those of us outside of the US watch it like Americans watch TV. It’s like a slow-motion car wreck that we observe almost daily, eager to see what’s going to happen next. We criticise the madness of it all, yet we can’t take our eyes off the unfolding drama. It has all the excitement of a blockbuster movie.

  • The national debt is, by far, the highest of any country in history.
  • The economic system is a house of cards, getting shakier every day.
  • The government has become mired in progress-numbing fascism and increasing collectivism.
  • The government is aggressively creating the world’s most organized police state.
  • The majority of the population have become wasteful, spendthrift consumers who apathetically hope that their government will somehow solve their problems.
  • The media consistently misrepresents international events, prodding the citizenry into accepting that the ongoing invasion of multiple other countries is essential.
  • The most popular candidates for president (both parties) are the candidates that are the most egotistical, out-of-control blowhards who preach provocative rhetoric rather than real solutions.

  Still, most Americans retain the hope that, somehow, it will all work out.

  Hope Is a Desire, Not a Plan

  There are growing numbers of Americans who have accepted that the US is unravelling rapidly and is headed for a social, economic, and political collapse of one form or another. Some talk of a new revolution (but hopefully a peaceful one, of the Tea Party sort). Some imagine that, if they can store enough guns and ammunition in their homes, they might be able to make a stand against government authorities. Others mull over the idea of organised secession by some of the states. A small, but growing, number are quietly leaving for more promising destinations.

  Except for the last of these, most of the “hopes” are understandable, but any attempt at a “Second American Revolution” is unlikely to succeed.

  Why? Well, just for a start,

  • The power of the US state is far greater than that of King George III in the late eighteenth century.
  • The present US state would be fighting on its own ground, not some continent thousands of miles across the ocean.
  • The US state is committed to the concept that it dealt definitively (and forever) with the concept of secession between 1861 and 1865.

  But, for the sake of argument, let’s say that a breakup of the union, or complete removal and replacement of the government were possible in the US. What then?

  Well, unfortunately, here comes the really bad news for those who hope that the US could start over as the free nation it was in its infancy:

  • In the late eighteenth century, America was a largely agrarian collection of colonies. Colonists had to work hard just to survive, so the work ethic and self-reliance were paramount in the colonists’ makeup. They were a brave people who were accustomed to providing for themselves and physically fighting off those who would challenge them.
  • Colonists received no significant largesse from the British or local governments. No welfare, no social security, no Medicare or Medicaid, no benefits of any kind.
  • Colonists made their own daily decisions. They had no government schools or media telling them what to think or what choices to make. They relied on common sense and self-determination to guide their decisions and actions.

  Today, of course, the opposite is true. Less than 2% of Americans are involved in agriculture. A mere 9% are actually employed in the production of goods. They are rarely directly involved in their own physical protection (Most, if not all, combat is overseas and fought by defence contractors or those who voluntarily serve the military).

  Most Americans receive benefits of one type or another from their government. Most recipients regard these benefits as “essential” and could not get by without them.

  Most Americans receive their opinions from the media. Although this is not apparent to many Americans, it’s glaringly clear to those outside the US who can only shake their heads at the misinformation proffered by the US media and the wholesale acceptance of this “alternate reality” by so many Americans.

  But what bearing does this have on what the future would be for Americans if they were to become determined enough to either remove their entire government or, alternatively, for some states to secede?

  There have been many revolutions in the history of the world, both peaceful and otherwise. In the case of the American Revolution of 1776, the colonists themselves were largely self-contained as a people and possessed the ideal ethos to succeed as a productive country. But this has rarely been true in history. Whenever a people have been heavily dependent on the State in one way or another, they had become accustomed to receiving largesse at the expense of others. This is a major, major factor. Such a group is unlikely in the extreme to either produce or elect a Washington or a Jefferson. They almost always choose, instead, to fall in behind someone who promises largesse from the State. In choosing such leaders, the people are more likely to receive a Robespierre or a Lenin. Out of the frying pan and into the fire.

  The pervasive difficulty here lies in the erroneous concept that there can be a return to freedom whilst maintaining the dependency upon largesse from the State. The two are mutually exclusive. Those who seek a return to greater freedom must also accept that “freedom for all” means an end to the State being empowered to steal from one person in order to give to another.

  Or, as stated by Frédéric Bastiat in the mid-nineteenth century, “Government is the great fiction, through which everybody endeavours to live at the expense of everybody else.”

  Whether the US continues on its present downward progression, or if it breaks free in a bid for greater freedom, the eventual outcome is likely to have more to do with the collectivist mindset of the majority than with the libertarian vision of a few.

  Unfortunately there’s little any individual can practically do to change the trajectory of this trend in motion. The best you can and should do is to stay informed so that you can protect yourself in the best way possible, and even profit from the situation.

  We think everyone should own some physical gold. Gold is the ultimate form of wealth insurance. It’s preserved wealth through every kind of crisis imaginable. It will preserve wealth during the next crisis, too.

  But if you want to be truly “crisis-proof” there's more to do…

  Most people have no idea what really happens when an economy collapses, let alone how to prepare…

  How will you protect your savings and yourself in the event of an economic crisis? This just-released PDF guide Surviving and Thriving During an Economic Collapse will show you exactly how. Click here to download the PDF now.

   

  

  

  

  

  

• What Could Go Wrong? China Builds A Floating Nuclear Power Plant

  Back in August, a horrific explosion at a chemical storage facility in the Chinese port of Tianjin killed more than a hundred people and dispersed an unknown amount of toxic sodium cyanide into the air and water.

  Despite officials’ best efforts to play down the environmental impact, a series of “unexplained” events occurred in the days and weeks following the tragedy including a massive fish die-off and the appearance of an eerie white foam on the streets following a thunderstorm.

  Beijing promised a thorough investigation and unsurprisingly, there were questions as to the warehouse’s owners had ties to the Party and if so, whether those ties helped to explain why the amount of sodium cyanide in storage was orders of magnitude greater than what’s allowed by law.

  The blast itself was described by some as akin to a nuclear explosion and indeed, the footage backs up that assessment:

  Well don’t look now, but China is set to take it up a notch when it comes to creating the conditions for a “nuclear” disaster because as World Nuclear News reports, Beijing is now all set to build a portable, floating nuclear reactor. Here’s more:

  China General Nuclear (CGN) expects to complete construction of a demonstration small modular offshore multi-purpose reactor by 2020, the company announced.

   

  The 200 MWt (60 MWe) reactor has been developed for the supply of electricity, heat and desalination and could be used on islands or in coastal areas, or for offshore oil and gas exploration, according to CGN.

   

  CGN said the development of small-scale offshore and onshore nuclear power reactors will complement its large-scale plants and provide more diverse energy options.

  The only floating nuclear power plant today is the Akademik Lomonosov, under construction in Russia, where two 35 MWe reactors similar to those used to propel ships are being mounted on a barge to be moored at a harbour. The Baltiysky Zavod in St Petersburg is on schedule to deliver the first floating nuclear power plant to its customer, Russian nuclear power plant operator Rosenergoatom, in September 2016. It could start operating in Chukotka as early as in 2017.

  Here’s an artists’ impression of what this disaster-waiting-to-happen will look like once complete:

  

  Of course CGN is an SOE which means if and when something does go horribly wrong, there will be no transparency and no accountability whatsoever. 

  Check back in 2021 to find out what happens when a nuclear reactor melts down in the middle of the ocean.

  Until then, we’ll leave you with one final quote from CGN – make a mental note of the bolded passage:

  Floating plants offer various advantages: construction in a factory or shipyard should bring efficiencies; siting is simplified; environmental impact is extremely low; and decommissioning can take place at a specialised facility.

  

  

  

  

  

• Yuan Slides After Quadruple Whammy China Data Miss: GDP Both Matches And Misses

  Following China's growth slowing to 1999 levels in Q3 (but beating expectations with the mirage of a mysteriously large drop in the deflator), all eyes were on tonight's data, most notably the deflator (especially following the trade data debacle from last week). The quadriga struck at 2100ET with Industrial Production +5.9% (MISS vs +6.0% YoY expectations), Retail Sales +11.1% (MISS vs +11.3% YoY expectations), Fixed Asset Investment +10.0% (MISS vs +10.2% YoY expectations), and then the big kahuna Q4 GDP growth +6.8% (MISS vs +6.9% YoY expectations). China, US equities were higher going in but faded quickly on the miss only to be rescued higher again. Offshore Yuan is fading.

  Someone leaked it 5 minutes early:

  • CHINA 2015 REAL GDP +6.9% VS 2014 +7.3%; EXP. 6.9%

  And while the full year real GDP print was indeed inline with the 6.9% consensus – the weakest since 1990…

  

   

  …it was the Q4 number that was disappointing missing the 6.9% expectation by 0.1%

  • CHINA 4Q GDP GROWS 6.8% FROM YEAR EARLIER; EST. 6.9%

  As Bloomberg notes this was only the first time that China's quarterly GDP has missed the forecast since early 2013.

  

   

  Industrial Production

  • *CHINA DEC. INDUSTRIAL OUTPUT RISES 5.9% ON YEAR; EST. 6.0%

  

   

  Retail Sales

  • *CHINA DEC. RETAIL SALES RISE 11.1% ON YEAR; EST. 11.3%

  

   

  Fixed Asset Investment

  • *CHINA 2015 FIXED-ASSET INVESTMENT RISES 10% Y/Y; EST. 10.2%

  

   

  Dow futures were rallying confidently into the numbers (on the back suddeny JPY weakness following Kuroda's appearance in The Diet)… but started to fade on the quadruple whammy miss only to be rescued back higher again… and now fading…

  

   

  Offshore Yuan is extending losses but only marginally.

  

   

  Gold bid, crude slid…

  

   

  And just in case you question any of this:

  • *CHINA STATS BUREAU HEAD SAYS 6.9% GROWTH NOT LOW
  • *CHINA'S GDP CALCULATION IS BASED ON SOLID DATA: NBS WANG
  • CHINA NBS: OUR GDP NUMBER IS REAL AND CAN BE TRUSTED

     

  Think about that for a second – The world's 2nd largest economy has to come out publicly and say no seriously this was good data, you can trust it, seriously, we mean it!

  Anyone who doubts that China is growing at 6.9% is peddling fiction!!

   

  Charts: Bloomberg

   

  

  

  

  

  

• What Happens To A Dream Deferred? Ask Martin Luther King Jr.

  Submitted by John Whitehead via The Rutherford Institute,

  What happens to a dream deferred?
  Does it dry up
  like a raisin in the sun?
  Or fester like a sore—
  And then run?
  Does it stink like rotten meat?
  Or crust and sugar over—
  like a syrupy sweet?
  Maybe it just sags
  like a heavy load.
  Or does it explode?—Langston Hughes, “Harlem”

  Martin Luther King Jr. could tell you what happens to dreams deferred. They explode.

  As I point out in my book Battlefield America: The War on the American People, more than 50 years after King was assassinated, his dream of a world without racism, militarism and materialism remains a distant dream.

  Indeed, the reality we must contend with is far different from King’s dream for the future: America has become a ticking time bomb of racial unrest and injustice, police militarization, surveillance, government corruption and ineptitude, the blowblack from a battlefield mindset and endless wars abroad, and a growing economic inequality between the haves and have nots.

  King’s own legacy has suffered in the process.

  The image of the hard-talking, charismatic leader, voice of authority, and militant, nonviolent activist minister/peace warrior who staged sit-ins, boycotts and marches and lived through police attack dogs, water cannons and jail cells has been so watered down that younger generations recognize his face but know very little about his message.

  Rubbing salt in the wound, while those claiming to honor King’s legacy pay lip service to his life and the causes for which he died, they have done little to combat the evils about which King spoke and opposed so passionately: injustice, war, racism and economic inequality.

  For instance, President Obama speaks frequently of King, but what has he done to bring about peace or combat the racial injustices that continue to be meted out to young black Americans by the police state?

  Republican presidential candidate Donald Trump plans to “honor” Martin Luther King Jr.’s legacy by speaking at a convocation at Liberty University, but what has he done to combat economic injustice?

  Democratic presidential contender Hillary Clinton will pay tribute to King’s legacy by taking part in Columbia, South Carolina’s King Day at the Dome event, but has she done anything to dispel her track record’s impression that “machines and computers, profit motives and property rights are still considered more important than people”?

  Unlike the politicians of our present day, King was a clear moral voice that cut through the fog of distortion. He spoke like a prophet and commanded that you listen. King dared to speak truth to the establishment and called for an end to oppression and racism. He raised his voice against the Vietnam War and challenged the military-industrial complex. And King didn’t just threaten boycotts and sit-ins for the sake of photo ops and media headlines. Rather, he carefully planned and staged them to great effect.

  The following key principles formed the backbone of Rev. King’s life and work. King spoke of them incessantly, in every sermon he preached, every speech he delivered and every article he wrote. They are the lessons we failed to learn and, in failing to do so, we have set ourselves up for a future in which a militarized surveillance state is poised to eradicate freedom.

  Practice militant non-violence, resist militarism and put an end to war.

   

  “I could never again raise my voice against the violence of the oppressed in the ghettos without having first spoken clearly to the greatest purveyor of violence in the world today—my own government.”—Martin Luther King Jr., Sermon at New York’s Riverside Church (April 4, 1967)

   

  On April 4, 1967, exactly one year before his murder, King used the power of his pulpit to condemn the U.S. for “using massive doses of violence to solve its problems, to bring about the changes it wanted.” King called on the U.S. to end all bombing in Vietnam, declare a unilateral cease-fire, curtail its military buildup, and set a date for troop withdrawals. In that same sermon, King warned that “a nation that continues year after year to spend more money on military defense than on programs of social uplift is approaching spiritual death.”

   

  Fifty-some years later, America’s military empire has been expanded at great cost to the nation, with the White House leading the charge. Indeed, in his recent State of the Union address, President Obama bragged that the U.S. spends more on its military than the next eight nations combined. Mind you, the money spent on wars abroad, weapons and military personnel is money that is not being spent on education, poverty and disease.

   

  Stand against injustice.

   

  “Injustice anywhere is a threat to justice everywhere… there are two types of laws: just and unjust. I would be the first to advocate obeying just laws. One has not only a legal but a moral responsibility to obey just laws. Conversely, one has a moral responsibility to disobey unjust laws.”? Martin Luther King Jr., “Letter from a Birmingham Jail” (April 16, 1963)

   

  Arrested and jailed for taking part in a nonviolent protest against racial segregation in Birmingham, Ala., King used his time behind bars to respond to Alabama clergymen who criticized his methods of civil disobedience and suggested that the courts were the only legitimate means for enacting change. His “Letter from a Birmingham Jail,” makes the case for disobeying unjust laws when they are “out of harmony with the moral law.”

  Fifty-some years later, we are being bombarded with unjust laws at both the national and state levels, from laws authorizing the military to indefinitely detain American citizens and allowing the NSA to spy on American citizens to laws making it illegal to protest near an elected official or in front of the U.S. Supreme Court. As King warned, “Never forget that everything Hitler did in Germany was legal.”

   

  Work to end poverty. Prioritize people over corporations.

   

  “When machines and computers, profit motives and property rights, are considered more important than people, the giant triplets of racism, extreme materialism, and militarism are incapable of being conquered.” —Martin Luther King Jr., Sermon at New York’s Riverside Church (April 4, 1967)

   

  Especially in the latter part of his life, King was unflinching in his determination to hold Americans accountable to alleviating the suffering of the poor, going so far as to call for a march on Washington, DC, to pressure Congress to pass an Economic Bill of Rights.

   

  Fifty-some years later, a monied, oligarchic elite calls the shots in Washington, while militarized police and the surveillance sector keep the masses under control. With roughly 23 lobbyists per Congressman, corporate greed largely dictates what happens in the nation’s capital, enabling our so-called elected representatives to grow richer and the people poorer. One can only imagine what King would have said about a nation whose political processes, everything from elections to legislation, are driven by war chests and corporate benefactors rather than the needs and desires of the citizenry.

   

  Stand up for what is right, rather than what is politically expedient.

   

  “On some positions, cowardice asks the question, is it expedient? And then expedience comes along and asks the question, is it politic? Vanity asks the question, is it popular? Conscience asks the question, is it right? There comes a time when one must take the position that is neither safe nor politic nor popular, but he must do it because conscience tells him it is right.”—Martin Luther King Jr., Sermon at National Cathedral (March 31, 1968)

   

  Five days before his assassination, King delivered a sermon at National Cathedral in Washington, DC, in which he noted that “one of the great liabilities of life is that all too many people find themselves living amid a great period of social change, and yet they fail to develop the new attitudes, the new mental responses, that the new situation demands. They end up sleeping through a revolution.”

   

  Freedom, human dignity, brotherhood, spirituality, peace, justice, equality, putting an end to war and poverty: these are just a few of the big themes that shaped King’s life and his activism. As King recognized, there is much to be done if we are to make this world a better place, and we cannot afford to play politics when so much hangs in the balance.

  It’s time to wake up, America.

  To quote my hero: “[O]ur very survival depends on our ability to stay awake, to adjust to new ideas, to remain vigilant and to face the challenge of change. The large house in which we live demands that we transform this world-wide neighborhood into a world-wide brotherhood. Together we must learn to live as brothers or together we will be forced to perish as fools.”

  

  

  

  

  

• Offshore Yuan Weaker, Margin Debt Tumbles Ahead Of Key Chinese Data

  While all eyes will be glued to the data avalanche unleashed by China's 'official' data creators in an hour, offshore Yuan is fading modestly, giving back half of the regulatory shift gains. PBOC injects another CNY155 billion (clearly reflecting last night's spike in 1mth HIBOR) and holds the Yuan fix 'steady' for the 8th day. Finally on the somewhat bright side following the CSRC shief's resignation, Shanghai margin debt has dropped for the 12th day in a row – the longest streak in 4 months.

  PBOC fixed YUan "stable" for the 8th day in a row but injects Yuan 155 billion for good measure… The People’s Bank of China will inject 80b yuan into the banking system using 7-day reverse repurchase agreements, and 75b yuan via 28-day reverse repo today, according to traders at primary dealers required to bid at the auctions.

  

   

  Offshore Yuan just can't extend gains on the back of China's latest attempt to squeeze shorts…

  

   

  Meanwhile in what is relatively good news for the world's sanity:

  *SHANGHAI MARGIN DEBT POSTS LONGEST LOSING STREAK IN FOUR MONTHS

   

  

   

  The outstanding balance of Shanghai margin debt dropped for 12th consecutive day on Monday, matching longest losing streak ended on Sept. 2.

   

  Balance fell 0.3%, or 1.47b yuan, to 584b yuan for the lowest level since Oct. 9

  Which likely explains why the CSRC head quit – they lost the bubble! Luckily there is one still standing…

  

   

  Eyes down for +6.9% GDP growth…

  Charts: Bloomberg

  

  

  

  

  

• Demographic Doldrums: Visualizing 100 Years Of The Most Populous Countries

  Submityted by Jeff Desjardins vai The Visual Capitalist,

  “I think ageing demographics is a bigger issue in China than people think. And the problems it creates should be become evident as early as 2016.” – Stan Druckenmiller, a 2013 quote

  Over the last year, we’ve been very skeptical of the near-term potential for robust global economic growth.

  The media narrative throughout 2015 was that U.S. rates were on the rise, and that the American economy would finally normalize post-crisis. Stock and real estate prices reached record highs on this optimism, and many pundits expected growth and interest rates to return to more traditional levels.

  Over the last few months, we’ve noticed that this narrative has changed significantly. Even though the U.S. is doing “okay” for growth, the global economy is now more entwined than ever. It’s more challenging than ever before for one economy to prop up the rest during stagnation.

  Markets this year got off to their worst-ever start after jitters from China rippled through international markets. Oil has continued its plunge and is now trading near $30/bbl. Manufacturing is slowing in the United States. Europe and Japan are going nowhere, and the amount of global debt is starting to signal alarm bells.

  Finally, media and investors are accepting the idea that things may not normalize the way they “should”. Instead, the question has become more fundamental: are there even any bright spots in the first place?

  A major drive of this un-growth is demographics, or the changing composition of population over time.

  Today’s animation, which covers the change in populations over 100 years for the most populous countries, is a starting place for this.

   

  

  Courtesy of: Visual Capitalist

   

  The first point of interest is that by about the year 2000, all European countries dropped out of the rankings. At the beginning of the animation, the United Kingdom, Germany, France, and Italy were all there. Birth rates have declined to the lowest in the world, which establishes immigration as the only potential option for economic growth. With the recent events in Paris and the current backlash against Middle Eastern immigrants, this Catch-22 becomes even more interesting and important.

  Germany, in particular, faces a crucial demographic cliff. We aim to cover this in the very near future, since the country is an important engine for Europe.

  Another major point of interest, as we referenced in the opening quote, is the changing demographics of China. In the next decade or so, China’s population will stop growing altogether – and then it will start shrinking. This is the predictable aftermath of China’s one-child policy for many decades. The country still has a giant portion of the population that will continue to move up the ladder economically, but we will be looking at what these circumstances could mean as they loom closer.

  Lastly, the rise of India and Nigeria can’t be understated in importance. Both are home to the fastest growing cities in the world. Nigeria will pass the U.S. to become the third largest country in the world by population in the coming decades, and India could be the world’s next China.

  

  

  

  

• China's Housing Is Recovering, Just Ignore The 10 Billion Square Feet Of Vacant Housing

  While we await China’s fabricated and goalseeked Q4 GDP number (less than 3 weeks after the year end) which barring some even more humorous miracle will show China’s slowest growth in a quarter century, here is a quick recap of what the world’s second largest economy said about the most important part of its economy overnight.

  Why most important? Because as shown previously when remarking on the futility of China’s attempts to create a massive wealth effect by blowing an epic stock market bubble, in China the vast bulk of household wealth is allocated to real estate, unlike in the US, where three quarters of household net worth is in financial assets.

  

   

  According to China’s entertaining National Statistics Bureau, in December new home prices rose in 39 out of 70 cities, up from 33 cities in November, representing a 7.7% increase year-over-year in new home prices.

  On the surface this is great news for China, whose housing bubble had burst in early 2014 and which has been desperately doing everything in its power to reflate it once more. So was this the long-awaited light at the end of the tunnel? Not so fast. 

  As Reuters notes, the headline number masks China’s massive property problem – a vast amount of unsold apartments mainly in its smaller cities. “Property prices were rising fast in mega cities like southern Shenzhen, where prices rocketed by nearly 47%, Shanghai, up a healthy 15.5%, and Beijing, which posted a respectable 8% gain over a year ago.”

  But the recovery that began in October, after 13 months of straight decline, has only spread to just over half the 70 cities captured by official data, leaving others languishing far behind.

  The chart below shows the unprecedented divergence that has developed between prime Chinese cities and the rest of the nation.

  

  

   

  The last time Tier 1 home prices soared as much as they have relative to the rest of the nation in late 2013, China suffered its worst housing crash in recent history, leading to the bursting of the shadow banking bubble in late 2014 and the current hard landing predicament faced by most Chinese commodity producers.

  Why the surge in Tier 1? Simple: another round of massive government stimulus.

  Shanghai-based property consultancy Centaline noted new home sales hit a seven-year high in December thanks to a swathe of government measures to spur demand, and a series of interest rate cuts. Realtors are hopeful that buyers unable to afford the cities in the first two tiers will eventually go elsewhere.

  Unless, of course, like in the US, buyers only buy in specific locations because they hope to find a greater fool and flip it as a quick investment. Because last time we checked nobody is buying in North Dakota because New York was too expensive.

  This logic appears to have gained a foothold in China as well: Wang Jianlin, China’s richest man and chairman of property and entertainment conglomerate Dalian Wanda Group, said on Monday that it could take four to five years for the market to digest the inventory in tier three and four cities.

  “Sales are highly concentrated in first- and second-tier cities, where 36 top cities account for three-quarters of the total sales value. So the portion from third- and fourth-tier cities is very low. As long as they destock slowly, there is no problem,” he told the Asia Financial Forum in Hong Kong.

  Indeed, as the chart above quite clearly shows.

  So while prices in China’s Tier 1 cities are soaring, let’s put the country’s vacant housing problem in context: China has some 13 million homes vacant – enough to house the families of several small countries .

  Actually, it’s worse: Zhu Min, deputy managing director at the International Monetary Fund, recently admitted that China’s real estate bubble now manifests itself in 10. 7 billion square feet  (1 billion square meters) of unused housing! Min added that many housing stock go unused, and the market may see a significant price correction in the future, wiping out vast household wealth.
  

  According to the Epoch Times, “despite limited demand, many third- and fourth-tier cities are laden with huge housing inventories, forming a bubble which may burst, especially in view of the low transaction volume for new houses in these cities” said Zhang Dawei, superintendent of the market research department at Centaline Property, according to Mingtiandi, a website that reports on China’s property sector.

  According to Zhang Liqun, a researcher with a Chinese regime think tank, the bulk of China’s housing projects have shifted to smaller, so-called third- and fourth-tier cities. But market demand has not kept up, a fact that Zhang said could well lead to those cities becoming ghost towns.

  Because that is precisely what China needs: even more ghost towns.

  So with China’s GDP print, as fabricated as it may be, looming what does this mean for China’s economic growth?

  Even more bad news.

  “Property investment is expected to see a single-digit decline this year despite recovering home prices, so it will continue to weigh on GDP,” said Liao Qun, China chief economist at Citic Bank International in Hong Kong.

  For the first 11 months of 2015, property investment accounted for 13 percent of gross domestic product. But the sector’s multiplier effect on other industries, from building materials to white goods and furniture, means its impact on the economy is far greater.

  “Looking forward, the property market would continue to drag on the broad economy in 2016, with property investment probably showing weak growth momentum,” said Wang Jun, senior economist at the China Centre for International Economic Exchanges (CCIEE), a Beijing-based think-tank.

  And here is a spoiler alert: Premier Li Keqiang said this past Saturday that China’s economy grew by around 7% in 2015, which generated much laughter among the China-watchers, because if the currently global pre-recession environment is the result of China growing at 7%, one wonders just how acute the global depression will be when Chna grows at 5%, or 3%, or 1%, or stops growing altogether. 

  What does the Wall Street consensus expect? Just a fraction lower, or 6.9%.

  But analysts polled by Reuters have forecast fourth-quarter GDP data set to be released on Tuesday will show growth slipped to 6.9 percent last year, the slowest in a quarter century and down from 7.3 percent in 2014. China’s growth is expected to drop to 6.5% by the end of the year.

  The reality is that nobody has any clue what China’s real growth was in 2015, with estimate ranging as low as 1%. One thing is certain: whatever China’s National Bureau of Statistics reports GDP was in 2015, the real number will be far, far lower, and it will only drop from there once the commodity defaults begin in earnest.

  

  

  

  

  

• Mission Accomplished? The U.S. Spent Half A Billion On Mining In Afghanistan With "Limited Progress"

  Submitted by ProPubolica via TheAntiMedia.org,

  The United States has spent nearly half a billion dollars and five years developing Afghanistan’s oil, gas and minerals industries — and has little to show for it, a government watchdog reported today.

  The project’s failings are the result of poorly planned programs, inadequate infrastructure and a challenging partnership with the Afghan government, the Special Inspector General for Afghanistan Reconstruction wrote in its newest damning assessment of U.S. efforts in the war-torn country. The finding comes after some 200 SIGAR reports have detailed inefficient, unsuccessful or downright wasteful reconstruction projects. A recent ProPublica analysis of the reports found that there has been at least $17 billion in questionable spending.

  The United States Agency for International Development and a Pentagon task force were in charge of developing a so-called “extractive” industry in Afghanistan – basically a system for getting precious resources out of the ground and to the commercial market. SIGAR called out both USAID and the Defense Department last year for their failures to coordinate and to ascertain the ability of Afghans to sustain the project, which unsurprisingly is not promising. In fact, when international aid stopped supporting the Afghan office responsible for oversight of the petroleum and natural gas industries, two-thirds of the staff were fired.

  Exploiting these resources, which are estimated to be worth as much as $1 trillion, is pivotal to Afghanistan’s economic future. SIGAR noted that the Afghan government has shown progress under USAID’s tutelage in regulating and developing the commercial export of the resources. But the report said the project was still hampered by corruption, structural problems and a lack of infrastructure for the mining industry, such as reliable roads. Many of the mines operate illegally, with some profit going to the insurgency, SIGAR said.

  When it came to individual extractive projects, there was little progress made, the IG found.

  The controversial Pentagon task force in charge of much of the effort, the Task Force for Business Stability Operations, spent $215 million on 11 extractive programs, but “after operating in Afghanistan for 5 years, TFBSO left with nearly all of its extractive projects incomplete,” SIGAR found. Three of the programs technically met objectives, but one of those is of questionable value at best. The task force built a gas station for an outrageously inflated cost and in the end it didn’t have any customers. So while the objective to create the station was achieved, SIGAR doubted it was a worthwhile venture.

  The task force, made up of mostly civilian business experts and designed to develop the Afghan economy, has come under fire from SIGAR and Congress for demanding unusual and expensive accommodations in the country, allegedly punishing a whistleblower, and lacking overall accountability. The Senate is holding a hearing on the task force next week.

  In today’s report, SIGAR highlighted that the task force spent $46.5 million to try to convince companies to agree to develop the resources, but not one ended up signing a contract. About $122 million worth of task force programs had mixed results, SIGAR said.

  The Defense Department declined SIGAR’s request to comment on its findings. In its response, USAID said it has helped Afghanistan “enact investor-friendly extractive legislation, improve the ability to market, negotiate and regulate contracts, and generate geological data to identify areas of interest to attract investors.” Any conclusions and criticisms, USAID told SIGAR, “need to be substantially tempered by the reality that mining is a long-term endeavor.”

  

  

  

  

  

• Art Cashin: This Is "What You Get Before You Slip Into A Crisis"

  Via Christoph Gisiger of Finanz Und Wirtschaft,

  Wall Street veteran Art Cashin warns that bankruptcies in the US oil industry could cause severe stress in the financial system. He believes the rate hike of the Federal Reserve was a mistake.

  Around the globe financial markets are in turmoil. Alarming news out of China and the crash in the oil market is causing angst among investors everywhere. In the United States, the S&P 500 is down more than 8% since the beginning of the year. Art Cashin, director of floor operations for UBS at the New York Stock Exchange, thinks that the rate hike of the Federal Reserve is one of the main reasons for the sell-off in the stock market. The highly respected Wall Street veteran fears that America will fall into a recession if the Fed doesn’t change its course and lowers interest rates back to zero.

  Mr. Cashin, the pressure on the financial markets is rising. How’s the mood on the trading floor of the New York Stock Exchange?

  The mood is both concerning and frustrated. On Friday, we traded temporarily lower than we got during the August spike down. That is never a good indication and it is troublesome. Here in the US, there was some concern that the markets will be closed for a holiday on Monday whereas the exchanges in Europe and in Asia are going to be open. So a lot of investors were worried about the exposure they will have for this extra day.

  You’re working on the floor of the stock exchange for almost six decades. During that time you have seen many difficult moments. How severe is the situation right now?

  It is very similar to what you get before you slip into a crisis. Also, it’s earnings season and because of that many corporate buybacks have to be paused during this period. That removes an important potential support for the market. Over the last year, companies buying back their own stock have put more money into the market than all of the public has. The cessation of those buybacks is probably a reason why we’re seeing the rather sharp selling that has occurred.

  A main source of concern is the sharp drop in oil prices. Both, WTI and Brent, closed below $30 on Friday. Why is this causing so much havoc on Wall Street?

  Investors are concerned that many of the small and domestic producers here in the United States have money owned in the high yield market. So if oil prices continue to go lower they’re afraid that up to two thirds of those fracking companies may go into bankruptcy. They fear that through financial contagion those bankruptcies would then begin to spread into other areas of the financial markets.

  Are there already signs of contagion?

  Several market participants have been asked to put up more collateral to prepare for bad loans. Also, on Wednesday there were both rumors and indications that there was a good deal of forced selling going on. There were rumors that it could have been either a hedge fund or a sovereign wealth fund, maybe investors who are exposed to the oil prices. It could have been Saudi  Arabia or Norway. Forced selling and margin calls are very hard to deal with because such an investor basically has no latitude. Positions must be sold at any price and that’s very difficult for the market.

  Also, there is  alarming news coming out of China. What’s the problem here?

  On Friday, before trading started in New York, Chinese equity markets were down another 3,5% already overnight –  and that is despite the best efforts of the Chinese government and the central bank to keep prices from destabilizing.

  Then again, the US economy seems hardly to be related to China.

  China is the second biggest economy in the world. The US may not sell much to China. But many of our economic partners like the countries in Europe do have big markets with China. There are other aspects to the China problem, too: The Chinese currency is relatively pegged to the US dollar.

  What’s the problem with that?

  When the Fed began raising interest rates and the dollar strengthened it made the Chinese currency go higher which put China at a disadvantage. So the Chinese began to try to find ways to slightly weaken their currency and that is disruptive throughout all the other currencies in the emerging markets and the small Asian economies. Back in 1997 when Thai baht broke everybody thought that won’t mean too much since the US doesn’t deal too much with Thailand. But in fact what happened was it rapidly spread through the financial industry and a great deal of money was lost. So investors are worried of seeing something like that happening again.

  So you think the rate hike of the Federal Reserve is one of the main sources for all the turmoil?

  The Chinese currency isn’t the only one that is under some stress. For instance, the Saudi Arabian currency is also partially pegged to the dollar. So you’re seeing many other nations beginning to suffer somewhat in reaction to the Fed move to begin raising rates.

  The appreciation of the dollar is also putting pressure on the export sector in the United States. Manufacturing has slowed down significantly over the last months.

  In its hundred year history the Fed had never before raised rates with the ISM index for the manufacturing sector below fifty which is showing that the manufacturing sector is in somewhat of a recession. I think the Fed basically painted itself into a corner. In September, because of the turmoil in the international markets, they were afraid to raise rates and they said:  »We didn’t want to move with the markets destabilized.» Because of that they found some critics here in the US who said: »Hey, you’re the central bank of the United States and not the central bank of the world. Therefore, do worry about us and do what you think our economy requires. Don’t pay attention to other economies.» So when the December meeting came the Fed talked itself into a corner with no chance to change.

  On the other hand, many economists are seeing encouraging signs in the US labor market. In December payroll employment rose by over 290’000 and beat expectations handily.

  When you look closer into the numbers you see that 280’000 of those jobs were seasonal adjustments. In other words it wasn’t physical people standing there, it was an assumption by the Bureau of Labor Statistics. They said it was December and the weather normally is cold so they had to add on some people. And If you went over to the household survey you saw that 35% of the new jobs were people under the age of nineteen. In fact, only 3% of the jobs went to people in the prime category between the ages of 25 and 55. So the vast majority of the new jobs went to people under 24 and over 55. To me, that looked liked holiday hiring: people who make deliveries, wrap packages etc. These are not long lasting jobs. That’s why I think the next couple of payroll numbers will not show that kind of strength.

  So was it a policy mistake to raise rates?

  Yes, I thinks so. I believe we may be back at zero percent interest rates before we see one percent interest rates. I think the Fed will wind up having to do that to try to avoid a recession. Before they moved Christine Lagarde, the head of the IMF, told them they shouldn’t move. Larry Summers, the former secretary of the Treasury, told them they shouldn’t move. The Bank of International Settlements told them they shouldn’t move. But they insisted upon it and I think part of the turmoil that we are seeing now is indirectly connected with the Fed’s decision to go ahead.

  But on the day the Fed raised rates for the first time since the financial crisis many investors applauded and stock prices rallied. Why has the mood soured?

  The rate hike had to work its way through the system. Investors had to see what would happen to the Chinese currency and how the Chinese central bank and the Chinese government respond to what happened to their currency. Not a lot of people guessed that immediately when they saw that the Fed raised the rate. It’s now working through the system and it’s contributing to the turmoil that we’re experiencing.

  Looking ahead, what’s going to happen next?

  The bumpy ride is probably not over yet. I would remain very careful. I think efforts have to be made to stabilize the oil price. Investors have to review their risk exposure. So make sure you’re on guard.

   

  

  

  

  

  

• Regrets

  We’ve got a few…

   

  

   

  Source: Townhall.com

  

  

  

  

  

• Negative Oil Prices Arrive: Koch Brothers' Refinery "Pays" -$0.50 For North Dakota Crude

  Do you have some extra space in your garage or attic? Or perhaps you own an oil tanker you aren’t currently using. Or maybe you have a storage unit that’s got a little extra room next to an old mattress and box springs.

  If so, you may want to call up oil producers in North Dakota and ask if they’d care to send you some free oil, because the crude glut is now so acute that the Koch brothers are actually charging $0.50/bbl to take low grade oil at their Flint Hills Resources refining arm.

  
  

  North Dakota Sour is a high-sulfur grade of crude and “is a small portion of the state’s production, with less than 15,000 barrels a day coming out of the ground,” Bloomberg notes, citing John Auers, executive vice president at Turner Mason & Co. in Dallas. “The output has been dwarfed by low-sulfur crude from the Bakken shale formation in the western part of the state, which has grown to 1.1 million barrels a day in the past 10 years.”

  High-sulfur grades are more expensive to refine and thus fetch lower prices at market. As Bloomberg goes on to note, “Enbridge stopped allowing high-sulfur crudes on its pipeline out of North Dakota in 2011, forcing North Dakota Sour producers to rely on more expensive transport such as trucks and trains [and] the price for Canadian bitumen — the thick, sticky substance at the center of the heated debate over TransCanada Corp.’s Keystone XL pipeline — fell to $8.35 last week, down from as much as $80 less than two years ago.”

  

  So there you have it. The global deflationary supply glut has now reached the point that the market is effectively forcing producers to pay to give their oil away or else see it sit in bloated storage facilities until Riyadh decides enough is enough and until the world comes to terms with the return of Iranian supply. In other words, for some US producers the business isn’t just loss making, it’s an exercise in sadomasochistic futility.

  Meanwhile, MLP Plains All American is quoting Colorado Southeastern, Nebraska Intermediate, Eastern Kansas Common Special, and Oklahoma Sour at just $16.50/bbl, $16.00/bbl, $12.20/bbl, and $13.50/bbl, respectively.

  

  The message for the Wells Fargos and Citis of the world: you’re going to need a bigger loan loss reserve.

  It’s no wonder the Dallas Fed suspended mark-to-market on energy debts – there’s no market to mark to.

  

  

  

  

  

• Sage Investment Advice From Mike Tyson

  Submitted by Tim Price via SovereignMan.com,

  In a crisis, it helps to have good counsel. Consider the following sage advice from investment strategist Mike Tyson:

  “Everyone has a plan ‘til they get punched in the mouth.”

  Or as German military strategist Helmuth von Moltke the Elder put it, somewhat more formally:

  “No battle plan ever survives contact with the enemy.”

  The enemy has been quick to show himself this year, in the form of a bear market, at least for stocks.

  This bear has so far been quick, and indiscriminate: the US; Europe; China; stock markets have fallen sharply, internationally.

  Investors, being human, have scrambled in search of an explanatory narrative.

  Some have blamed the Fed’s baby steps towards raising interest rates. Some blame the collapse in the oil price.

  Last week’s movie night showed David Cronenberg’s 2012 thriller ‘Cosmopolis’, which has Robert Pattinson playing a 28-year-old hedge fund billionaire losing his entire fortune in a single day due to the unexpected rise of the Chinese renminbi.

  Other than getting the direction of the renminbi wrong, the movie could have been shot yesterday.

  But it has certainly been a good week for bears.

  Last week RBS told us to “Sell everything except high quality bonds”. This is somewhat problematic since there aren’t actually any high quality bonds out there.

  Tuesday brought us SocGen’s Global Strategy Conference, where guest speaker Russell Napier pointed out that growth in emerging market foreign exchange reserves from 2008 to 2014 amounted to the most rapid increase in emerging market money supply in history.

  As this process goes into reverse, emerging market growth will clearly suffer.

  And since many emerging market countries have over-borrowed in foreign currencies, the fighting in the global currency wars is set to get more intense this year.

  As Napier warns, 2016 has also ushered in new rules requiring bond and deposit holders to be bailed in when banks blow up.

  The EU (and many of its bank depositors) will come to regret not restructuring their banking system during the seven years post-Lehman when they had the opportunity.

  The search for an easy narrative to explain the bear market is probably a waste of time. The financial market is a complex adaptive system and investors are prone to irrational behaviour and mood swings.

  They are also prone to overpay. The great ‘value’ investor Benjamin Graham reminded us that,

  “Operations for profit should be based not on optimism but on arithmetic.”

  The optimists have had things their own way in an almost unbroken line since March 2009. January 2016 so far would suggest that the pragmatists are now in charge.

  So the pragmatic response to this month’s volatility – if any is indeed required at all – is as follows:

  1) Diversify by asset type.

   

  2) Limit or eliminate exposure to emerging market debt. Raise cash rather than cling to a benchmark with no conviction (and no obvious value).

   

  3) Concentrate any debt exposure to bonds issued by creditors, not debtors.

   

  4) Limit equity exposure to high quality and inexpensive markets offering a ‘margin of safety’. (Most of the US market does not qualify in this regard.) Russell Napier recommends Japanese equities, currency hedged, and so do we. And in a bear market, you don’t want to own expensive growth, you want to own defensive value.

   

  5) Complement traditional investments with alternatives. We would advocate systematic trend-following funds (which can profit in bear markets just as they did in 2008), and gold – the one form of currency that comes with no counterparty risk because it is the one asset that is no-one’s liability.

   

  6) Limit your exposure to mainstream financial media, and especially to economists employed by commercial banks.

  

  

  

  

  

• Dollar-Based Investors Eviscerated in Global Stocks

  In Saudi Arabia, the Tadawul All Share Index plunged 5.4% on Sunday and dropped further on Monday before ticking up a smidgen. It’s at the lowest level since March 2011. Soothsayers blamed oil, and what Iran will do to the already oversupplied oil market now that the nuclear sanctions have been lifted. But Saudi stocks started losing it in September 2014 and have since collapsed 50%.

  Russia’s MICEX stock market index is down only 13% from its high in November, 2015. But the RTSI dollar-calculated index of Russian shares plunged over 7% on Monday as I’m writing this, is down 40% since May 2015 and 70% since August 2011. Every big rally in between was followed by an even bigger slide. The major difference between the dollar-calculated RTSI and the ruble-calculated MICEX is the value of the ruble, which has plunged 2% today to 79.3 rubles to the dollar, a new all-time low. It’s down 57% against the dollar since mid-2014 and 64% since mid-2011. The Central Bank isn’t even trying anymore to prop it up.

  China’s Shanghai Composite is down 44% from its high in June 2015. During that time, the yuan has dropped about 6% against the dollar. So dollar-based investors took an additional loss, with the total loss amounting to over 52% (not including transaction costs and fees).

  Dollar-based investors, when they buy foreign stocks, make two bets: that those stocks rise; and that the currency of those stocks at least remains stable against the dollar. When they catch it right, with both stocks and currency going up, the returns can be breath-taking. But the opposite happens when both go down, as they’ve been doing recently. And dollar-based investors are getting totally crushed.

  There has been a lot of moaning and groaning about the decline in US stocks, with the S&P 500 down 12% from its all-time high in May last year, the Dow down 13%, and the Nasdaq down 14%. After seven years of bull market, those declines have a bone-chilling effect. No one is used to losing money in stocks anymore. A whole new generation of traders and investors never experienced a big loss.

  But those declines are still puny compared to what happened in past downdrafts in the US markets, and they’re puny compared what is already happening among the major indexes around the world. In fact, the beaten-down US indexes are the world’s best performers!

  This chart shows the plunges or crashes of the major indexes since their respective recent highs in 2014 or 2015. The one exception is the dollar-calculated index of Russian stocks, the RTSI$, which has been a dreary affair all the way back to 2011; hence the decline calculated since that date.

  Note the ever longer list of markets that have now dropped 20% or more from their recent highs (below the blue line) and are in what a lot of people call a bear market. India’s Sensex and the Nikkei are a hair away from sinking below the blue line (US as of Friday close, Toronto as of Monday morning, Asia as of Monday close, Europe as of Monday afternoon):

  

  So, add those equities-based losses to the currency-based losses for dollar-based investors, and suddenly some of these indexes are starting to look like the dollar-calculated RTSI. For dollar-based investors, it has been brutal out there.

  So why can’t central banks step in and stem the bleeding and restart the good times?

  The answer lies in the Eurozone: France is down 21% from the highs in April; Germany 23%; Spain 29%; and Italy takes the crown with a 45% plunge.

  These are the big four economies of the Eurozone. In early 2015, the ECB has unleashed a massive wave of QE and inflicted negative deposit rates on the Eurozone in an effort to flog savers until their mood improves and to drive asset prices up into the sky to create that special wealth effect. That worked wonderfully during the run-up before the well-telegraphed QE and NIRP became reality. But since April, the wealth effect has reversed. The ECB has since enhanced QE, but stock market losses have only increased.

  Turns out, our delicious central-bank alphabet soup of QE, ZIRP, and NIRP is losing its effectiveness in inflating stock prices. In fact, it may have the opposite effect. Also look at Japan and Sweden. Despite massive QE programs by their central banks, their stock markets have dropped 19% and 24% respectively.

  There’s no longer any guarantee that QE, even a much hoped-for QE4 in the US, will re-inflate stock markets. That era has passed. Central banks have lost their aura of omnipotence. And thus, they’ve lost their omnipotence.

  However, when it comes to government bonds, central banks still rule; QE, ZIRP, and NIRP still pump up bond prices and repress yields. Hence the low yields prevailing in fiscally challenged countries such as Japan and Italy. But at the low end of corporate bonds in the US — the lower end of junk bonds — the bottom has already fallen out, and rot is creeping up the rating scale.

  A special mention is due Canadian stocks. The TSX has been beaten down 28% since August 2014. Canada is in part a resource economy. Oil & gas, metals & mining, agricultural commodities, lumber, etc. have gotten caught up in a vicious commodities rout. But other stocks have gotten hammered too, including Canada’s formerly must-own hedge-fund darling and stock-market giant Valeant.

  During the time that the TSX swooned from its high in August 2014, the Canadian dollar also dropped 25% against the US dollar. A nightmare for USD-based investors.

  For instance, if USD-based investors in mid-August 2014 bought US$100 worth of Canadian dollars (C$109.50) and invested them in a Canadian index fund that parallels the TSX, they would have lost C$29.67 on those stocks by Friday. If they sold on Friday, they would have obtained C$79.83. They’d then convert that fortune into USD by paying C$1.45 per greenback and end up with US$55.05. A 45% loss. More realistically, including transaction costs and fees at every step, the loss would have been over 50%.

  So how well has the highly touted, strongly urged, even must-do diversification into global equities worked out recently? It has been a massive fee-generating Wall-Street bonanza for one side, and a slickly-engineered form of capital destruction for the other.

  Because in the markets, something big has changed. Read… Consensual Hallucination Fades, Global Stocks Crushed

  

  

  

  

• Italian Banks Collapse, Short Sales Banned As Loan Loss Fears Mount

  Italian bank stocks are crashing (with BMPS down 40% year-to-date) as Reuters reports that investors are growing increasingly nervous about how the sector will cope with lower interest rates and a 200 billion euro ($218 billion) pile of loans that are unlikely to be repaid. The broad banking sector is down 4% with stocks suspended, and in light of this bloodbath, Italian regulators have decided in their wisdom, to ban short-selling of some bank stocks (which has driven hedgers into the CDS market, spking BMPS credit risk).

  Italy's banking index was down over 4 percent with shares in several lenders, including the country's biggest retail bank Intesa Sanpaolo and the third biggest lender Banca Monte dei Paschi di Siena, suspended from trading after heavy losses.

  Bloodbath for Italian financials in 2016…

  

   

  But don't worry:

  • *MONTE PASCHI CEO CONFIRMS FINANCIAL STABILITY OF BANK
  • *MONTE PASCHI CEO: STOCK DECLINE NOT JUSTIFIED BY FUNDAMENTALS

  As Reuters reports,

  Investors are growing increasingly nervous about how the sector will cope with lower interest rates and a 200 billion euro ($218 billion) pile of loans that are unlikely to be repaid.

   

  Those concerns are trumping expectations about a wave of consolidation set to sweep the sector, with cooperative banks under pressure to merge following a government reform to reduce the number of lenders.

   

  JP Morgan said this month Italian banks should be avoided because low rates are expected to put pressure on revenues more than in other countries and credit problems limit a recovery in provisions.

   

  Traders have suggested exiting investments that have been particularly favoured, such as Popolare di Milano and Intesa, as the stocks have reached key supports.

   

  "I think upside on cooperative banks this year is much more limited," said a London-based equity sales person.

   

  Short interest in Popolare di Milano soared 50 percent to 1.1 percent in the last month, and it rose 10 percent to 3.9 percent for UBI, according to Markit data.

  And now, Italian regulators have re-enforced a short-selling ban (because that has always worked so well in the past)…

  Consob adopts a temporary ban on short selling on Banca MPS shares.The ban shall apply immediately and shall last until Tuesday 19 January 2016 end of day.

   

  Consob decided to temporary prohibit short sales of the share Banca MPS (ISIN code IT0005092165).

   

  The ban will apply immediately and will be enforce for the entire trading session of tomorrow, Tuesday 19 January 2016, on the MTA market of Borsa Italiana.

   

  The prohibition was adopted pursuant to Article 23 of the EU Regulation on short selling, considering the price change recorded by the share on 18 January 2016 (in excess of 10%).

   

  The prohibition applies to short sales backed by stock lending. This extended the scope of the prohibition of naked short selling, already in force for all shares from 1st November 2012 by virtue of the EU Regulation on short selling.

  And so hedgers have shifted to other markets – spiking default risk across the entire group, soaring back towards pre-"whatever it takes" levels…

  

  Get back to work Mr Draghi.

  

  

  

  

  

• "Countdown To The End": EU Officials Say Europe Is "Going Down The Drain"

  Back in September, when Berlin and Brussels were busy devising a quota plan to settle the millions of Mid-East asylum seekers flooding into the country, Slovakia said that if Germany called for financial penalties against countries unwilling to accommodate their “share” of migrants, it would be “the end of the EU.”

  That might have seemed hyperbolic at the time, but since then, the situation has spiraled out of control. Border fences have been erected, refugee camps are overflowing, and anti-migrant sentiment is running high after a series of reported sexual assaults on New Year’s Eve sparked a bloc-wide scandal.

  In a testament to just how tense things have become, Austria suspended Schengen on Saturday as new rules came into effect for those seeking to traverse the country on the way north.  “Anyone who arrives at our border is subject to control,” Chancellor Werner Faymann said. “If the EU does not manage to secure the external borders, Schengen as a whole is put into question… Then each country must control its national borders,” he added, before warning that if the EU could not better control its external borders “the whole EU [will be] in question.”

  Indeed, the idea that the worsening migrant crisis could well bring an end to the EU has made its way out of Eurosceptic circles and into discussions between the bloc’s top diplomats and officials.

  “The Germans, founders of the postwar union, shut their borders to refugees in a bid for political survival by the chancellor who let in a million migrants,” Reuters wrote on Sunday, describing a hypothetical European endgame. “And then — why not? — they decide to revive the Deutschmark while they’re at it.” 

  Both Angela Merkel and Jean-Claude Juncker were out last week with stark warnings about the prospects for the union’s survival in the face of widespread disagreement among member countries regarding how to handle the influx of asylum seekers. Europe is now “vulnerable” Merkel admitted, before saying the fate of the euro is “directly linked” to how the bloc handles the refugee crisis. “Nobody should act as though you can have a common currency without being able to cross borders reasonably easily,” the Chancellor, whose ratings have slipped amid the migrant debate, said at a business event in Mainz.

  Juncker’s assessment was more dire. Europe “is on its last chance” he warned, before saying he hopes this isn’t “the beginning of the end.” 

  “Some see that as mere scare tactics aimed at fellow Europeans by leaders with too much to lose from an EU collapse,” Reuters continues. “[But] empty threat or no, with efforts to engage Turkey’s help showing little sign yet of preventing migrants reaching Greek beaches, German and EU officials are warning that without a sharp drop in arrivals or a change of heart in other EU states to relieve Berlin of the lonely task of housing refugees, Germany could shut its doors, sparking wider crisis this spring.”

  Make no mistake, were Germany to stop accepting refugees, a dangerous chain of events would unfold just as warmer weather makes the journey more appealing for refugees. Arrivals have not slowed during the winter months, a senior conservative German lawmaker said. “You can only imagine what happens when the weather improves.” If Germany’s open-door slams shut in the spring, millions of asylum seekers would be stuck along the Balkan route where bottlenecks led to border clashes between Hungarian riot police and migrants last year. 

  Croatia, Serbia, and Slovenia are in no position to accommodate the influx. Indeed, Slovenian officials have long said that the only reason the tiny country has been able to cope is because just as many migrants leave each day on their way to Germany and Austria as enter via Croatia. On Monday, Slovenian PM Miro Cerar said that “if Germany or Austria adopt certain measures for stricter controls then of course we will adopt similar strict measures with our southern border with Croatia.”

  “Millions, and I stress millions of migrants from Afghanistan, Iraq, Syria, Algeria, Morocco are ready to enter the EU once the weather improves in the coming months,” he cautioned.

  The EU Commission sought to play down Austria’s implementation of border controls, saying it’s “nothing out of the ordinary.” Of course any emergency measure is “out of the ordinary” by definition. Border checks will continue until at least February. 

  Meanwhile, each passing day seems to present a new reason for Europeans to become increasingly disaffected with officials’ handling of the crisis. Two days ago for instance, German FinMin Wolfgang Schaeuble proposed a bloc-wide petrol tax to fund the cost of securing the EU’s external borders. While Europeans will surely support the notion that the EU needs to better secure the chokepoints through which the majority of asylum seekers enter, migrants will now be equated with higher prices as the pump just as they are becoming synonymous with terror and sexual assaults.

  Ultimately, it appears that Germany is beginning to crack. While Merkel has been careful to preserve the “yes we can” narrative, reality is setting in and the cold facts suggest that Europe simply cannot accommodate the people flows. It now appears that it is not a matter of “if” but rather “when” the Iron Chancellor finally gives in and shuts the doors, and on that note, we’ll close with two quotes from German and EU officials who spoke to Reuters “in private.”

  “We have until March, the summer maybe, for a European solution. Then Schengen goes down the drain.”

   

  “There is a big risk that Germany closes. From that, no Schengen … There is a risk that February could start a countdown to the end.”

  

  

  

  

  

• Crash Risk & The Imminent Likelihood Of Recession

  Via John Hussman's Weekly Market Comment,

  Since October, the economic evidence has shifted from supporting a growing risk of recession, to a guarded expectation of recession, to the present conclusion that a U.S. recession is not only a risk but an imminent likelihood, awaiting confirmation that typically only emerges after a recession is actually in progress. The reason the consensus of economists has never anticipated a recession is that so few distinguish between leading and lagging data, so they incorrectly interpret the information available at the start of a recession as “mixed” when, placed in proper sequence, the evidence forms a single, coherent freight train.

  While I’m among the only observers that anticipated oncoming recessions and market collapses in 2000 and 2007 (shifting to a constructive outlook in-between), I also admittedly anticipated a recession in 2011-2012 that did not emerge. Understand my error, so you don’t incorrectly dismiss the current evidence. Though not all of the components of our Recession Warning Composite were active in 2011-2012, I relied on an alternate criterion based on employment deterioration, which was later revised away, and I relied too little on confirmation from market action, which is the hinge between bubbles and crashes, between benign and recessionary deterioration in leading economic data, and between Fed easing that supports speculation and Fed easing that merely accompanies a collapse.

  Much of the disruption in the financial markets last week can be traced to data that continue to amplify the likelihood of recession. Remember the sequence.

  The earliest indications of an oncoming economic shift are observable in the financial markets, particularly in changes in the uniformity or divergence of broad market internals, and widening or narrowing of credit spreads between debt securities of varying creditworthiness. The next indication comes from measures of what I’ve called “order surplus”: new orders, plus backlogs, minus inventories. When orders and backlogs are falling while inventories are rising, a slowdown in production typically follows. If an economic downturn is broad, “coincident” measures of supply and demand, such as industrial production and real retail sales, then slow at about the same time. Real income slows shortly thereafter. The last to move are employment indicators – starting with initial claims for unemployment, next payroll job growth, and finally, the duration of unemployment.

  Last week, following a long period of poor internals and weakening order surplus, we observed fresh declines in industrial production and retail sales. Industrial production has now also declined on a year-over-year basis. The weakness we presently observe is strongly associated with recession. The chart below (h/t Jeff Wilson) plots the cumulative number of month-over-month declines in Industrial Production during the preceding 12-month period, in data since 1919. Recessions are shaded. The current total of 10 (of a possible 12) month-over-month declines in Industrial Production has never been observed except in the context of a U.S. recession. Historically, as Dick Van Patten would say, eight is enough.

  

  A broad range of other leading measures, joined by deterioration in market action, point to the same conclusion that recession is now the dominant likelihood. Among confirming indicators that generally emerge fairly early once a recession has taken hold, we would be particularly attentive to the following: a sudden drop in consumer confidence about 20 points below its 12-month average (which would currently equate to a drop to the 75 level on the Conference Board measure), a decline in aggregate hours worked below its level 3-months prior, a year-over-year increase of about 20% in new claims for unemployment (which would currently equate to a level of about 340,000 weekly new claims), and slowing growth in real personal income.

  Valuations, market internals, and crash risk

  It’s largely irrelevant whether the Federal Reserve made a “policy mistake” by raising interest rates in December. As I’ve noted before, that would vastly understate the actual damage contributed by the Fed. The real policy mistake was to provoke years of yield-seeking speculation through Ben Bernanke’s deranged policy of quantitative easing. Just as the global financial collapse was the result of years of unbridled yield-seeking speculation in mortgage securities, the growing economic disruptions in the developing world are the result of years of unbridled yield-seeking capital flows that resulted from that policy, and the copycat behavior of other global central banks. The record ratio of corporate debt to corporate gross value added (GVA), and the elevation of equity market capitalizations to the highest ratio of GVA in history, outside of the 2000 bubble peak, have the same origins.

  Understand that just as mortgage securities were the primary objects of yield-seeking speculation during the housing bubble, equity securities have been the primary objects during the QE-bubble. This is not merely because of direct speculation and record levels of margin debt among investors. As covenant-lite debt issuance soared in recent years, the primary use of the proceeds was not the accumulation of productive capital goods and equipment, but rather financial speculation in the form of acquisitions, leveraged buyouts, and corporate stock repurchases at historically rich valuations. Once valuations become obscenely elevated, a wicked downside is unavoidably baked in the cake. That downside will emerge primarily during periods such as the present, where deterioration in market internals suggests risk-aversion among investors, in contrast to the internal uniformity that prevailed until mid-2014, which reflected a broad willingness among investors to speculate and embrace greater exposure to risk assets.

  To see how both corporate debt and equity capitalizations have soared to record levels relative to corporate GVA, and to understand why these imply dismal investment returns over the coming 10-12 years, see The Next Big Short: The Third Crest of a Rolling Tsunami. That commentary also includes a box detailing my own errors in the recent half cycle and the adaptations we introduced as a result, which require explicit deterioration in market internals (as we presently observe) before taking a hard-negative outlook. I openly discuss my own stumbles so that adherents and critics alike might benefit from the right lessons, before it becomes too late to do so.

  We’ll certainly welcome outcomes that better reflect our experience in other complete market cycles, but we won’t do touchdown dances if the market collapses. The likely distress as the current market cycle is completed is something I wish on nobody. The unfortunate reality is that someone will have to hold stocks over the completion of this cycle, and it would best be those who have either carefully evaluated and dismissed our concerns, or those who have appropriate risk tolerances and investment horizons to weather the likely 40-55% loss in the S&P 500 that would comprise a rather run-of-the-mill retreat from the 2015 valuation extremes.

  Our concerns about both the economy and the financial markets would be less immediate if we were to observe uniformly favorable market internals across a broad range of individual stocks, industries, sectors, and security types (including debt securities of varying creditworthiness). Instead, we currently observe negative leadership, weak breadth, and dismal participation, with only 17% of individual stocks still above their own respective 200-day moving averages. Meanwhile, credit spreads spiked to fresh highs last week.

  On a short-term basis, dismal market internals may be indicative of oversold conditions, but the prospect of a recovery on that basis is extremely unreliable in an environment where valuations remain extreme and market internals demonstrate few positive divergences. I continue to believe that a break of the prior support area around 1820-1850 on the S&P 500 could be the catalyst for self-reinforcing panic selling pressure among trend-following investors.

  Unfortunately, on historically reliable measures of value, current prices are nowhere near the levels that would be expected to produce adequate long-term total returns (see Rarefied Air: Valuations and Subsequent Market Returns). So there is presently an enormous chasm between the point where self-reinforcing selling pressure by speculators is likely to emerge, and the much lower point where balancing buying pressure by value-conscious investors is likely to support the market. Because every seller necessarily requires a buyer, the enormous gap between the two represents substantial crash risk.

  Remember that our own central lesson in recent years was to avoid inadvertently prioritizing overextended conditions (e.g. overvalued, overbought, overbullish) over-and-above the condition of market internals. Provided that market internals are uniformly favorable, even obscenely overvalued markets tend to be resistant to severe losses, and are instead inclined to become even more overvalued. Conversely, it would be a mistake here to prioritize short-term oversold conditions over-and-above the dismal behavior of market internals and credit spreads, particularly given that overvaluation remains extreme on reliable measures. In the current environment, oversold conditions are prone to becoming even more deeply oversold, not only because internals are weak, but because the economic evidence is quickly confirming an oncoming recession that remains almost universally denied by market participants.

  

  

  

  

  

• America's Cash Flow Negative Energy Companies Have $325 Billion In Debt Among Them

  With the topic of distress among U.S. oil and gas exploration and production companies becoming more important with every passing day that oil not only continues to drop, but certainly fails to rebound to levels that allow US energy companies to return to a cash flow positive state, we would like to show just how much debt is at stake.

  To do that, drawing inspiration from a tweet by J Pierpont Morgan, we have conducted a quick CapIQ sort through all US energy companies – both public and private – that have at least $100 million in annual revenue, and whose EBITDA less CapEx was a negative number in the LTM period.

  To be sure, this gives listed companies the benefit of not only higher EBITDA in the early quarters when the drop of oil was not as severe, but also of oil price hedges. As such as the true negative cash flow going forward assuming no rebound in the price of oil for the foreseeable future will be far worse as the benefit of the base effect dissipates with every passing quarter and as oil price hedges, which have so far cushioned the oil price blow, are unwound.

  Here are the results:

  • There are roughly 80 U.S. companies that had $100mm in LTM revenue and that had negative FCF or EBITDA less CapEx.
  • The combined market cap of these 80 companies is just shy of half a trillion dollars.
  • The combined Total Enterprise Value of these 80 companies is $775 billion.
  • The combined debt of these 80 companies is $325 billion.

  None of these companies are bankrupt, yet. As a reminder, putting as many of these companies out of business, and thus slashing non-OPEC oil production (as OPEC forecasted in its latest bulletin earlier today), is the primary motive behind Saudi Arabia’s relentless pumping spree.

  

   

  There is just one problem with the Saudi plan: even assuming all of these companies file Chapter 11, all that would happen is their debt would be wiped out, with the existing creditors getting the equity keys, and becoming the new owners of streamlined, debt-free corporations. This would means that the All In Cost Of Production would plunge as no debt payments would have to be satisfied with the free cash flow. Meanwhile, the entire existing E&P infrastructure would still be in place and ready to pump as before.

  This means that after the default and debt-for-equity deluge, US shale would be able to pump even more at far lower breakeven costs, forcing Saudi Arabia to overproduce for even longer ultimately shooting itself in the foot when its reserves run out!

  Of course, none of this is any comfort for those who have exposure to the pre-petition debt, which may explain why various regional Feds are suddenly so very defensive when it comes to US banks and other lenders who are on the hook when the default tsunami finally hits.

  

  

  

  

  

• And The Winner Of The Democrat Debate Is…

  Judging from the unbiased mainstream liberal media, Hillary Clinton won the Democratic debate last night thanks to her "formidable" performance "combined with her intelligence." The puke-worthy gushfest from Slate.com can de read here, but is summarized best as follows:

  

   

  The National Journal is a little more "balanced" –

  

   

  And here's the critical moment – in our opinion…

   

  "The first difference is I don't take money from big banks. I don't get personal speaking fees from Goldman Sachs," Sanders said.

   

  Clinton and Sanders then tussled at length over Wall Street regulations.

   

  "Goldman Sachs [was] recently fined $5 billion," he said. "Goldman Sachs has given this country two secretaries of Treasury — one on the Republicans, one on the Democrats."

   

  He continued by addressing Clinton directly: "You've received over $600,000 in speaking fees from Goldman Sachs in one year. I find it very strange that a major financial institution that pays $5 billion in fines for breaking the laws, not one of their executives is prosecuted while kids who smoke marijuana get a jail sentence."

  Which makes us wonder how the mainstream continues to suckle at the Clinton teet, when this data is exposed…

  

   

  As we recentlty reported Hillary is now doing worse than in 2008 which explains the unbiased media's desperation to talk up her debate performance.

  

  

  

  

Digest powered by RSS Digest

• Doug Casey: Why Do We Need Government?

  Submitted by Doug Casey via CaseyResearch.com,

  Rousseau was perhaps the first to popularize the fiction now taught in civics classes about how government was created. It holds that men sat down together and rationally thought out the concept of government as a solution to problems that confronted them. The government of the United States was, however, the first to be formed in any way remotely like Rousseau's ideal. Even then, it had far from universal support from the three million colonials whom it claimed to represent. The U.S. government, after all, grew out of an illegal conspiracy to overthrow and replace the existing government.

  There's no question that the result was, by an order of magnitude, the best blueprint for a government that had yet been conceived. Most of America's Founding Fathers believed the main purpose of government was to protect its subjects from the initiation of violence from any source; government itself prominently included. That made the U.S. government almost unique in history. And it was that concept – not natural resources, the ethnic composition of American immigrants, or luck – that turned America into the paragon it became.

  The origin of government itself, however, was nothing like Rousseau's fable or the origin of the United States Constitution. The most realistic scenario for the origin of government is a roving group of bandits deciding that life would be easier if they settled down in a particular locale, and simply taxing the residents for a fixed percentage (rather like "protection money") instead of periodically sweeping through and carrying off all they could get away with. It's no accident that the ruling classes everywhere have martial backgrounds. Royalty are really nothing more than successful marauders who have buried the origins of their wealth in romance.

  Romanticizing government, making it seem like Camelot, populated by brave knights and benevolent kings, painting it as noble and ennobling, helps people to accept its jurisdiction. But, like most things, government is shaped by its origins. Author Rick Maybury may have said it best in Whatever Happened to Justice?,

  "A castle was not so much a plush palace as the headquarters for a concentration camp. These camps, called feudal kingdoms, were established by conquering barbarians who'd enslaved the local people. When you see one, ask to see not just the stately halls and bedrooms, but the dungeons and torture chambers.

   

  "A castle was a hangout for silk-clad gangsters who were stealing from helpless workers. The king was the 'lord' who had control of the blackjack; he claimed a special 'divine right' to use force on the innocent.

   

  "Fantasies about handsome princes and beautiful princesses are dangerous; they whitewash the truth. They give children the impression political power is wonderful stuff."

  IS THE STATE NECESSARY?

  The violent and corrupt nature of government is widely acknowledged by almost everyone. That's been true since time immemorial, as have political satire and grousing about politicians. Yet almost everyone turns a blind eye; most not only put up with it, but actively support the charade. That's because, although many may believe government to be an evil, they believe it is a necessary evil (the larger question of whether anything that is evil is necessary, or whether anything that is necessary can be evil, is worth discussing, but this isn’t the forum).

  What (arguably) makes government necessary is the need for protection from other, even more dangerous, governments. I believe a case can be made that modern technology obviates this function.

  One of the most perversely misleading myths about government is that it promotes order within its own bailiwick, keeps groups from constantly warring with each other, and somehow creates togetherness and harmony. In fact, that's the exact opposite of the truth. There's no cosmic imperative for different people to rise up against one another… unless they're organized into political groups. The Middle East, now the world's most fertile breeding ground for hatred, provides an excellent example.

  Muslims, Christians, and Jews lived together peaceably in Palestine, Lebanon, and North Africa for centuries until the situation became politicized after World War I. Until then, an individual's background and beliefs were just personal attributes, not a casus belli. Government was at its most benign, an ineffectual nuisance that concerned itself mostly with extorting taxes. People were busy with that most harmless of activities: making money.

  But politics do not deal with people as individuals. It scoops them up into parties and nations. And some group inevitably winds up using the power of the state (however "innocently" or "justly" at first) to impose its values and wishes on others with predictably destructive results. What would otherwise be an interesting kaleidoscope of humanity then sorts itself out according to the lowest common denominator peculiar to the time and place.

  Sometimes that means along religious lines, as with the Muslims and Hindus in India or the Catholics and Protestants in Ireland; or ethnic lines, like the Kurds and Iraqis in the Middle East or Tamils and Sinhalese in Sri Lanka; sometimes it's mostly racial, as whites and East Indians found throughout Africa in the 1970s or Asians in California in the 1870s. Sometimes it's purely a matter of politics, as Argentines, Guatemalans, Salvadorans, and other Latins discovered more recently. Sometimes it amounts to no more than personal beliefs, as the McCarthy era in the 1950s and the Salem trials in the 1690s proved.

  Throughout history government has served as a vehicle for the organization of hatred and oppression, benefitting no one except those who are ambitious and ruthless enough to gain control of it. That's not to say government hasn't, then and now, performed useful functions. But the useful things it does could and would be done far better by the market.

   

  

  

  

  

  

• What Crisis Is The Gold/Oil Ratio Predicting This Time?

  The number of barrels of oil that a single ounce of gold can buy has never, ever been higher.

   

  

   

  For the last 30 years, when the ratio of gold-to-oil spikes, something systemically serious occurs globally (as opposed to the usual bullshit “this is transitory” statements).

   

  So what happens next?

  

  

  

  

  

• Caught With Our Pants Down In The Gulf

  Submitted by Justin Raimondo via AntiWar.com,

  Your bullshit-ometer should be making an awful racket in response to the shifting explanations given for the twenty-four-hour Iranian hostage scare involving two US Navy boats intercepted in the Gulf.

  First they told us “at least one of the boats” had experienced a “mechanical failure.” Then they said the boats had run out of fuel, although it wasn’t clear if they meant both boats. Then they said “there was no mechanical problem.” Then they claimed that the two crews had somehow not communicated with the military command, although “they could not explain how the military had lost contact with not one but both of the boats.” As the New York Times reported:

  “Even as Mr. Kerry was describing the release on Wednesday morning, American military officials were offering new explanations about how the two 49-foot patrol boats, formally called riverine command boats, had ended up in Iranian territorial waters while cruising from Kuwait to Bahrain.”

  And they still haven’t explained it – or any of the other distinctly odd circumstances surrounding this incident.

  The best they could do was have an anonymous Navy officer aver “When you’re navigating in those waters, the space around it gets pretty tight.” However, as the Times put it:

  “But that is hardly a new problem, and the boats’ crews would almost surely have mapped out their course in advance, paying close attention to the Iranian boundary waters. And each boat has radio equipment on board, so it was unclear how the crews suddenly lost communication with their base unless they were surrounded by Iranian vessels before they could alert their superiors.”

  We are told they were on a “training mission” – but what kind of mission? The Washington Post adds a helpful detail by telling us that “The vessels, known as riverine command boats, are agile and often carry Special Operations forces into smaller bodies of water.”

  Ah, now we’re getting somewhere.

  Amid all the faux outrage coming from the neocons and their enablers in the media over the alleged “humiliation” of the US – Iran “paraded” the sailors in their media! They made one of the sailors apologize! The Geneva Conventions were violated! – hardly anyone in this country is asking the hard questions, first and foremost: what in heck were those two boats doing in Iranian waters?

  And if you believe they somehow “drifted” within a few miles of Farsi Island, where a highly sensitive Iranian military base is located, then you probably think there’s a lot of money just waiting for you in a Nigerian bank account.

  Anyone who thinks the adversarial relationship between Washington and Tehran has turned into “détente” due to the nuclear deal is living in Never-Never Land. Our close ally, Saudi Arabia, has all but declared war on the Iranians and that means we are being dragged into the rapidly escalating conflict. In this context, two US military boats coming a mile and a half away from a major Iranian base in the Gulf isn’t an accident. This ‘training mission” was a military incursion, and although we have no way of knowing what mission the US hoped to accomplish, suffice to say that it wasn’t meant to be a kumbaya moment.

  Rachel Maddow is also raising questions about this: after a load of nonsense about how showing the sailors on Iranian media violated the Geneva Conventions – they didn’t: we aren’t at war with Iran yet – she pointed out the suspicious nature of the Pentagon’s shifting story during her January 13 broadcast.

  To add another layer to the mystery, the Iranian government released the sailors after holding them for less than twenty-four hours – which isn’t the sort of behavior one might expect if those sailors were on a spy mission. And the Iranians issued an Emily Litella-ish statement, as reported by the Los Angeles Times:

  “’After explanations the U.S. gave and the assurances they made, we determined that [the] violation of Iranian territorial waters was not deliberate, so we guided the boats out of Iranian waters,’ said Foreign Ministry spokesman Hossein Jaberi Ansari, according to the official Islamic Republic News Agency.”

  So if those two boats were “snooping,” as the Fars News Agency originally claimed, why  would Tehran come out with this all-is-forgiven statement?

  None of it makes any sense, at least not until one realizes that the Iranian government is hardly a monolith: power is divided up between various agencies and factions, with only the loosest sort of unity being enforced by the Supreme Leader. Farsi Island is controlled by the hard-line Iranian Revolutionary Guard Corps (IRGC), the hard-line faction of the ruling elite, which wields enormous political and economic power within the multi-polar Iranian state apparatus. It was the hard-liners who released the video and photos of the American sailors with their hands in the air, and their spokesmen demanded an apology from the US. It was the diplomats, however – the moderates, who negotiated the Iran deal – whose contacts with the US facilitated the sailors’ quick release.

  But it isn’t just the Iranians who are riven with factions and conflicting lines of authority: the American empire is overseen by a vast national security bureaucracy involving both military and civilians, and it isn’t monolithic, either. Although, in theory, civilians are in the drivers’ seat and the military just follows orders, in reality the Pentagon is an independent power that can obstruct or even effectively veto whatever diplomatic or military plans the White House has in mind. And while opposition to the nuke deal was centered in Congress, the Pentagon insisted at the last moment that sanctions on conventional arms and particularly those related to ballistic missiles remain in place. Iran’s recent testing of medium range ballistic missiles must have the generals in an uproar, and it could well be that this “training mission” in the Gulf was related – as either a spying mission, or an outright provocation designed to imperil relations. Or perhaps both.

  We’ll probably never know for sure: but what we certainly can know is that the official explanation for this latest incident stinks to high heaven. There’s no denying we were caught by the Iranians with our pants down. The only question is – how were we trying to f—k them over?

  I warned after the signing of the Iran deal that we are in for a long series of provocations in the Gulf, and this is only the beginning. In order to keep all this in perspective, just remember that the long dance between Washington and Tehran involves at least four partners, including their hard-liners and ours.

  

  

  

  

  

• China Stocks, Credit Risk Worsen Despite "Short-Squeezed" Yuan Strength

  On the heels of new reserve ratio regulations and the biggest strengthening in the Yuan fix in 4 weeks, offshore Yuan has strengthened notably (despite Chinese default/devaluation risk surging in the CDS markets). Chinese stocks are weaker in the early going but corporate bond yields continue to slide to new record lows as the “last bubble standing” stands ignorant of the risks around it.

  PBOC rixed the Yuan 0.07% stronger – the biggest gain in 4 weeks…

  • *PBOC STRENGTHENS YUAN FIXING BY 0.07%, MOST SINCE DEC. 21

  

   

  Offshore Yuan is rallying in early trading, because as Bloomberg notes,

  *PBOC TO IMPOSE RESERVE RATIO ON OFFSHORE BANK YUAN ACCOUNTS

  *PBOC SAYS RULE DOESN’T APPLY TO FOREIGN CENTRAL BANKS

  *PBOC SAYS RULE WON’T AFFECT DOMESTIC YUAN LIQUIDITY

  *PBOC SAYS WILL USE MONETARY TOOLS TO MAINTAIN LIQUIDITY
  

   

  PBOC will impose a required reserve ratio on offshore participant banks with yuan deposits in the mainland, according to people familiar with the matter.

   

  Raising reserve requirement is meant to increase cost of funding and discourage speculative short yuan trades, says Fiona Lim, Singapore-based senior FX analyst at Maybank

  This marks the PBOC’s latest attempt to make shorting the CNH prohibitively costly by forcing banks to purchase CNH in the open markets. As Reuters adds, by forcing banks offshore to hold more yuan in reserve, it would reduce the amount of the currency available in the market, squeezing supply further and making it more difficult and expensive for speculators.

  The costs of borrowing yuan “are set to rise” as a large volume of offshore yuan is actually being deposited back into China, explained an international investment banker who declined to be identified.

  “The expectation of yuan devaluation has led to massive remittance of yuan,” said China Industrial Bank’s chief economist Lu Zhengwei.

  “Raising the RRR will increase the cost of arbitrage,” Lu said.”Domestic banks conducting exchanges offshore and remitting yuan to China will be further controlled, pushing up the cost of offshore yuan funding.”

  As a result of this latest intervention, the Onshore-offshore Yuan spread once converged again:

   

  

   

  Although it does pose the question how desperate China must be, and how massive the capital outflow, if the PBOC is engaging in new FX manipulations virtually on a daily basis to prevent the ongoing uncontrolled devaluation of its currency.

  Perhaps related to that, Chinese sovereign default/devaluation risk surges.

  

   

  And stocks weaken:

  • *CHINA’S CSI 300 INDEX SET TO OPEN DOWN 1.6% TO 3,068.23
  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 1.8% TO 2,847.54

  

  But the money continues to flow aimlessly into the “last bubble standing” as we detailed previously with record low corporate bond yields in China (despite a collapse in creditworthiness fundamentals and huge supply). 

  

   

  But analysts are starting to worry:

  “2016 is a year when we will see systemic risks emerge in China’s credit market,” said Ji Weijie, credit analyst in Beijing at China Securities Co., the top arranger of bond offerings from state-owned and listed firms.

   

  “There may be a chain reaction as more companies are likely to fail in a slowing economy and related firms could go down too.”

  Charts: Bloomberg

  

  

  

  

  

• Saudi Arabia Is Buying Up American Farmland To Export Agricultural Products Back Home

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  Just what we need, cornfield crucifixions.

  Seriously though, this is very troubling. The Saudis are explicitly conserving their own resources at home, while exploiting land and water supplies here in America.

  CNBC reports:

  Saudi Arabia and other Persian Gulf countries are scooping up farmland in drought-afflicted regions of the U.S. Southwest, and that has some people in California and Arizona seeing red.

   

  Saudi Arabia grows alfalfa hay in both states for shipment back to its domestic dairy herds. In another real-life example of the world’s interconnected economy, the Saudis increasingly look to produce animal feed overseas in order to save water in their own territory, most of which is desert.

   

  Privately held Fondomonte California on Sunday announced that it bought 1,790 acres of farmland in Blythe, California — an agricultural town along the Colorado River — for nearly $32 million. Two years ago, Fondomont’s parent company, Saudi food giant Almarai, purchased another 10,000 acres of farmland about 50 miles away in Vicksburg, Arizona, for around $48 million.

   

  But not everyone likes the trend. The alfalfa exports are tantamount to “exporting water,” because in Saudi Arabia, “they have decided that it’s better to bring feed in rather than to empty their water reserves,” said Keith Murfield, CEO of United Dairymen of Arizona, a Tempe-based dairy cooperative whose members also buy alfalfa. “This will continue unless there’s regulations put on it.” 

  Recall, this is precisely the type of investment Michael Burry of “Big Short” fame recently said he was involved in.

  In a statement announcing the California farmland purchase, the Saudi company said the deal “forms part of Almarai’s continuous efforts to improve and secure its supply of the highest quality alfalfa hay from outside the (Kingdom of Saudi Arabia) to support its dairy business. It is also in line with the Saudi government direction toward conserving local resources.”

  Crucially, the issue of land rights comes into play.

  The area of the Arizona desert where the Saudis bought land is a region with little or no regulation on groundwater use. That's in contrast to most of the state, 85 percent of which has strict groundwater rules. Local development and groundwater pumping have contributed to the groundwater table falling since 2010 by more than 50 feet in parts of La Paz County.

  Sure, conserve local, exploit American. Just brilliant.

  "We're not getting oil for free, so why are we giving our water away for free?" asked La Paz County Board of Supervisors Chairman Holly Irwin.

   

  …

   

  Added Irwin, “We’re letting them come over here and use up our resources. It’s very frustrating for me, especially when I have residents telling me that their wells are going dry and they have to dig a lot deeper for water. It’s costly for them to drill new wells.” 

   

  Local development and groundwater pumping have contributed to the groundwater table falling since 2010 by more than 50 feet in parts of La Paz County, 130 miles west of Phoenix. State documents show there are at least 23 water wells on the lands controlled by Alamarai’s subsidiary, Fondomonte Arizona. Each of the wells is capable of pumping more than 100,000 gallons daily.

   

  “You can use as much water as you’d like, as long as it’s put to a beneficial use, and you’re not required to report your water use,” said Michelle Moreno, a spokesperson for the Arizona Department of Water Resources, which has scheduled a public meeting for Jan. 30 in La Paz County to hear concerns from residents.

   

  More competition for land and fodder is likely to make things more expensive for dairy farmers in California and elsewhere.

   

  “It will ultimately drive the price up for the West Coast dairy operations,” said Robert Chesler, vice president of the dairy group at FCStone, a Chicago-based commodity-risk management company. “This is where they are buying that hay. This is where they are buying the farmland for dairy farms as well as and where they are buying the dairy goods, because we are obviously exporting more out of the West Coast.”

  Just another example of the Saudis giving it good and hard to American public.

  

  

  

  

  

• Wells Fargo Is Bad, But Citi Is Worse

  Earlier we reported that Wells Fargo may have an energy problem because as CFO John Shrewsbury revealed, of the $17 billion in energy exposure, “most of it” was junk rated.

  But, while one can speculate what the terminal cumulative losses, cumulative defaults and loss severities on this loan book will be, at least Wells was honest enough to reveal its energy-related loan loss estimate: it was $1.2 billion, or 7% of total – as Mike Mayo pointed out, one of the highest on the street. Whether it is high, or low, is anyone’s guess, but at least Wells disclosed it.

  Citi did not.

  Yes, the bank did disclose its holdings to the oil and gas sector at $21 billion funded and $58 billion which included unfunded (watch that unfunded exposure collapsing and shrinking the available pool of shale company liquidity in the coming weeks), and it did announce that it “built roughly $300 million of energy-related loan loss reserves this quarter”, but paradoxically one thing it did not disclose was its total reserves to energy.

  Note the following perplexing exchange between analyst Mike Mayo and Citi CFO John Gerspach:

  <Q – Mike Mayo>: Can we move to energy, though? I don’t want you being the only bank not disclosing reserves to energy – oil and gas loans. I mean, I think most others have disclosed that who have reported so far. And I mean, your stock’s down 7%. The whole market is down a whole lot, but I don’t – even if it’s a low number, it can’t hurt too much more from here. And so can you – how much in oil and gas loans do you have, and what are the reserves taken against that? I know you were asked this already, but I’m going back for a second try.

   

  <A – John C. Gerspach>: When you take a look at the overall portfolio, Mike, we’ve reduced the amount of exposure. Our funded exposure to energy-related companies this quarter is down 4%. It’s about $20.5 billion. The overall exposure also came down about 4%. The overall exposure now is about $58 billion, that includes unfunded. When you take a look at the composition of the funded portfolio, about 68% of that portfolio would be investment grade. That’s up from the 65% that we would have had at the end of the third quarter. And the unfunded book is about 87% investment grade. So while we are taking what we believe to be the appropriate reserves for that, I’m just not prepared to give you a specific number right now as far as the amount of reserves that we have on that particular book of business. That’s just not something that we’ve traditionally done in the past.

  And yet all other reporting banks have done it not only in the past, but this quarter as well.

  One wonders just how much of Gerspach’s decision was dictated by the Fed’s under the table suggestion to avoid mark to market in energy entirely, and thus to stop marking its loan book. To be sure, without knowing the total amount of reserves to oil are, one simply can’t do any calculations on Citi’s total energy book, even if the once already bailed out bank so eagerly provided the incremental addition to this reserve. As if that number is in any way helpful.

  Finally, we eagerly await for someone from the Dallas Fed to contact us and to comment on our article from yesterday that the “Dallas Fed Quietly Suspends Energy Mark-To-Market On Default Contagion Fears.” Because with megabanks such as Citi refusing to disclose energy losses, the longer the Fed remains mute on just what it knows that nobody else does, the more concerned the market will be that the subprime crisis is quietly playing out under its nose all over again.

  But one thing is certain: the panic can begin in earnest when Janet Yellen says, at the next Fed press conference, that “energy is contained.“

  

  

  

  

  

• Japanese Stocks Enter Bear Market, Credit Risk Surges To 20-Month Highs

  “It’s difficult to see the fall stopping today,” warned one Japanese equity strategist and rightly so as Japan’s broad TOPIX idnex just entered a bear markets (down 20% from the August 2015 highs). With the Nikkei well below 17,000, Kuroda is due to speak at the Diet today as Japanese corporate bond risk surges to 20-month highs.

  TOPIX enters Bear Market

  

   

  And now the Nikkei:

  • *JAPAN’S NIKKEI 225 EXTENDS DECLINE FROM JUNE HIGH TO 20%

  And Japanese corporate bond risk is surging – up 3.5bps to 87bps – the highest in 20 months…

  

   

  Get back to work Mr. Kuroda!!

  • *JAPAN’S PARLIAMENT CONFIRMED KURODA’S APPEARANCE

  We just have one quick question – how does the government explain to its citizenry that foircing GPIF to go all-in Japanese stocks and corporate credit was a terrible idea and their retirement funds are FUBAR?

  

  

  

  

  

• Foreign Central Banks Furiously Dump US Treasuries: Record $47 Billion Sold In First Two Weeks Of 2016

  It’s not just stocks have a terrible start to the year, in fact the worst start in history: so is the amount of US Treasuries held in custody at the Fed, a direct proxy for the holdings of foreign central banks, reserve managers and sovereign wealth funds who park owned TSYs at the NY Fed for convenience.

  According to the latest Fed data, after a drop of $12 billion in the first week of the year, another $34.5 billion in Treasuries held in custody was sold in the week ended January 13, bringing the total to just $2.962 trillion, below the previous recent low recorded in early November, and at levels not seen since April 2015.

  Indicatively since April, total US Treasury holdings have increased by $570 billion, meanwhile not a single incremental dollar has ended up in the Fed’s custody account.

  

   

  As shown in the chart below, the drop recorded in the latest period is the single largest weekly drop recorded since China commenced liquidating its Treasury holdings in mid 2014.

  

   

  Adding up the flows from the first two weeks of the year reveals the worst and most custody holdings “outflowing” start to the year in history.

  

   

  The size of the liquidation promptly got the rate community’s attention.

  On Friday afternoon, MarketNews cited Louis Crandall, chief economist at Wrightson ICAP, who said “we have seen declines of more than $20 billion (in such Treasury custody holdings) on each of the first two weeks of this year. While accounts are volatile from week to week, that is certainly consistent with increasing intervention activity” from foreign central banks needing money to intervene either in the foreign exchange market or in the stock market, he said.

  “There is no way of knowing” exactly what such central banks sold, he added. “But it could just as easily have been liquidation of coupon securities.”

  As MNI further writes, most observers saw China selling as behind the drop in Treasuries holdings at the Fed. “Circumstantially, that’s the conclusion that people would jump to,” said Crandall.

  Some said it is not just China: Aaron Kohli, analyst at BMO Capital Markets, was less inclined to point to China. “It’s definitely a drop, but keep in mind, every foreign central bank is in there,” he said.

  One other observer said that the decline “should be foreign central bank selling” as opposed to routine rolling of maturing securities. “Those are very chunky numbers. We did not even get such large sales back in August 2015 when we knew there was such selling” in Treasuries to get money to fund buying of China stocks, he said.

  Others, however, disagree: “That kind of size could only be China,” said the observer. But he added that at the margin, other Asian central banks could have been selling Treasuries to raise dollars for foreign exchange or stock market intervention.

  One trader said China “must be selling, along with others. Look at the Hong Kong dollar, also down big. It is a game of musical chairs, and everyone is devaluing at once. The U.S. dollar strength is apparent.”

  * * *

  One trader who has put all this together, and has linked it to the abnormal moves in the Treasury swap market is Ice Farm Capital’s Michael Green.

  As he puts it, “those who chose to seek protection in rates are only experiencing middling success due to the continued inversion of swap spreads which have traded to record highs.”

  Now this has been repeatedly noted in the press as irrational – why would US government bonds be trading at a risk premium to swap spreads which carry bank counterparty risk?  I would suggest there is one very simple reason:

   

  

   

  His conclusion is that “swap spreads appear to be blowing out because foreign holders of treasuries, namely China, are selling them at a record pace to defend their currencies.  Currency levels are under attack in China, Saudi Arabia and now Hong Kong.  The specter of 1997-1998 is again haunting the markets.”

  As Green frames it, “the key question is “How long can this go on for?”  Consensus is clearly that China, in particular, has a deep pool of reserves with which to defend their currency; I am less convinced.  Having seen some contrarian work on the subject, my belief is that China is a paper tiger – with very little reserves left to defend their currency.  Perhaps as little as three months given their current burn rate.“

  If accurate (and Green’s calculation excludes the hundreds of billions China may need to leave on its books if its NPL credit cycle finally hits as Kyle Bass is currently anticipating) then the coming months could see an unprecedented shock out of China which having spent hundreds of billions to slow a record capital outflow, has no choice but to let its currency finally float freely, leading to the biggest capital exodus in recorded history.

  

  

  

  

  

• Here Is The Stealthy Way Some Are Betting On A Market Crash

  Credit markets have been warning of a looming crisis for months…

  

   

  And as the cost of protecting against credit collapse has soared so the cost of protecting against equity downside (VIX) has started to awaken:

  

   

  However, as we detailed previously, more than a few market participants have turned to deep out-of-the-money options to protect themselves against drastic downside (pushing the skew – the relative cost of crisis protection over 'normal' protection – to record highs).

  

  And so, with the cost of protection so high, traders are looking for cheaper alternatives.

  Since the Fed folded in September (under the same conditions that are playing out now), basically admitting it is terrified to raise rates and willing to backtrack due to market fragility, IceFarm Capital's Michael Green explains, it appears many market participants are piling into par Eurodollar calls:

  

  [the chart shows the cumulative open interest in par calls on eurodollar futures contracts that expire in 2016 and 2017 – basically options on short-term interest rates with a strike price of zero, such that they pay out if the Fed takes rates negative]

  When queried whether this is indeed a trade to bet on a market drop, Michael Green responded as follows:

  [A reader] thought  this might be an attempt by hedge funds to hedge out their exposure to rising interest rates very cheaply.

   

  My initial idea was that it actually could be a bet on negative rates (if for some reason the Fed had to come back into the picture with QE4).

   

  The bottom line: "Deep OTM puts on the S&P are very expensive while par ED calls are relatively cheap.  In my view, we are that inflection point where the Fed is going to start to waffle…the bear market beckons and they will not be able to stick with their interest rate guidance. Of course, markets tend to frown on Central Bankers revealed as less than omniscient…"

  And the market is already shifting to that opinion – as CME shows, no one trusts The Fed's dot-plots anymore:

  

   

  Thus, the ED Par Calls are a direct proxy for The Fed's "Dow-Data-Dependent" policy (and given the surge in Open Interest, it seems more than a few agree).

  h/t IceFarm Capital's Michael Green

  

  

  

  

  

• Wells Fargo's Problem Emerges: $17 Billion In Junk Energy Exposure

  When Wells Fargo reported its Q4 earnings last week, the one topic analysts and investors wanted much more clarity on, was the bank’s exposure to oil and gas loans, and much more color on its energy book over concerns that Wells, like most of its peers, was underestimating the severity of the upcoming shale default wave.

  And while the company’s earnings call indeed reveals that things are deteriorating rapidly in Wells energy book, perhaps an even bigger concern for Wells investors, which just happens to be the largest US mortgage lender, should be what is going on with its mortgage book. The answer: nothing. In fact, at $64 billion in mortgage applications in the quarter, this was not only a major drop from Q3, but also the lowest since the first quarter of 2014.

  

   

  Needless to say, without significant growth in Wells’ mortgage pipeline and originations, there can be no upside to Wells Fargo stock, meanwhile one can kiss the so-called housing recovery goodbye for the final time, because now that the US Treasury is cracking down on criminal and money laundering “all cash” buyers, we fully expect the housing industry to grind to a near halt in the coming 2-3 quarters.

  That covers the lack of upside. As for the substantial downside, here are the key parts from Wells Fargo’s conference call discussing the bank’s energy exposure.

  First: how big is Wells’ loan loss allowance for energy:

  We’ve considered the challenges within the energy sector and our allowance process throughout 2015 and approximately $1.2 billion of the allowance was allocated to our oil and gas portfolio. It’s important to note that the entire allowance is available to absorb credit losses inherent in the total loan portfolio.

  Then, from the Q&A, how much is Wells’ total loan exposure, its fixed income and equity exposure toward energy:

  I would use $17 billion as outstandings  for energy loans. And for securities, I would use, call it, $2.5 billion which is the sum of AFS securities and non-marketable securities.

  In other words, a 7% loan loss reserve toward energy, perhaps the highest on all of Wall Street.

  Then, here is the breakdown by services:

  We’re focused on the whole thing. Half of  those customers – half of those balances represent E&P companies, upstream companies. A quarter of them represent oilfield services companies, and a  quarter of them represent pipelines and storage and other midstream activity. And it excludes what I would describe as investment grade sort of diversified larger cap companies where we don’t view the credit exposure as quite the same.

  But the “downside risk” punchline was the following exchange with Mike Mayo:

  <Q – Mike L. Mayo>: What percent of the $17 billion is not investment grade?

   

  <A – John R. Shrewsberry>: I would say most of it. Most of it.

   

  <Q – Mike L. Mayo>: So most of the $17 billion is non-investment grade.

   

  <A – John R. Shrewsberry>: Correct.

  To summarize: $17 billion in oil and energy exposure, which has a modest $1.2 billion, or 7%, loss reserve assigned to it (the highest on the street mind you), and which is made up “mostly” of junk bonds.

  Why could the be concerning? Well, one reason is that junk yields just surpassed the all time highs set just after the Lehman bankruptcy.

  

  In retrospect we can see why the Dallas Fed told banks to stop marking assets to market.

  As for Wells, Warren Buffett may want to take another bath in the coming days.

  Source: Wells Fargo Q4, 2015 Conference Call

  

  

  

  

  

• The "Putin Is Isolated" Meme Officially Dies As Japan Calls For Closer Ties With Russia

  One of the great ironies of the Obama administration’s foreign policy record is the extent to which Washington started 2009 with designs on normalizing frosty relations with Russia and started 2015 with the worst US-Russo dynamic since the Cold War.

  To be sure, not all of that was Washington’s fault – but most of it was.

  Of course the international community probably should have curbed its enthusiasm early on, given that the entire effort got off to a rather inauspicious start when then-Secretary of State Hillary Clinton presented Sergei Lavrov with a big red button that was supposed to say “reset” (a nod to the “resetting” of relations between Washington and Moscow) but which actually said “overcharged” in Russian.

  

  (“overcharged“)

  Six years, one annexed Crimea, a raft of economic sanctions, and one Ukrainian civil war later, and we’re back to Soviet-era politics.

  Part and parcel of Washington’s PR and foreign policy strategy over the last three or so years has been to perpetuate the idea that Vladimir Putin is “isolated” on the world stage. This, along with subtle reminders in the media and on the silver screen that America needs to preserve a healthy bit of Russophobia if it is to be safe, has worked domestically, but not internationally.

  Russia has strengthened ties with China, kicked off the BRICs bank, cemented an alliance with Iran (another “isolated” state), and worked to de-dollarize everything from oil markets to cross-border financial transactions.

  Moscow’s dramatic entry into the Syrian conflict and Russia’s common sense approach to ending the years-long affair has resonated with the likes of France and everyone else who understands that the way to fight terror is to kill the terrorists, not arm them.

  Indeed, The Kremlin’s successful attempt to wake the world up to the fact that Washington and its regional allies are actually exacerbating the war in Syria by arming rebel groups with questionable motives has gone a long way towards forcing the international community to rethink who the “good” superpower really is.

  Now, in what may be the best evidence yet that the “Putin is isolated” meme is officially dead, none other than US ally Japan is ready to “bring Putin in from the cold.”

  “Japanese prime minister Shinzo Abe is pressing for President Vladimir Putin to be brought in from the cold, saying Russian help is crucial to tackling multiple crises in the Middle East,” FT writes, adding that “Mr Abe said he was willing to go to Moscow as this year’s chair of the Group of Seven advanced economies, or to invite the Russian president to Tokyo.” Here’s more:

  Pointing to tension between Saudi Arabia and Iran, the war in Syria, and the threat of radical Islamism, Mr Abe said: “We need the constructive engagement of Russia.”

   

  The former G8 excluded Russia following its annexation of Crimea and military support for separatist rebels in eastern Ukraine. But while Japan has joined in sweeping economic sanctions, Mr Abe made clear he wants to work with Mr Putin.

   

  “As chair of the G7, I need to seek solutions regarding the stability of the region as well as the whole world,” he said, noting Japan’s ongoing territorial dispute with Russia over the Kuril Islands. “I believe appropriate dialogue with Russia, appropriate dialogue with president Putin is very important.”

  As the only Asian nation in the club of rich democracies, Japan prizes its G7 membership, and Mr Abe is determined to make the most of the Ise-Shima summit he will host in May.

  This is the kind of talk that will get you blacklisted in Washington and we wonder how long it will be before Abe gets a courtesy call from the Obama to remind Tokyo of the grave “threat” Putin poses to global peace and security.

  Or maybe The White House will take a step back and ponder whether decades of foreign policy blunders combined with a misplaced (and highly off-putting) sense of exceptionalism have now left America as the “isolated” superpower.

  

  

  

  

  

  

• Oil Plunges To $28 Cycle Lows As Iran Supply Looms, Stocks Slide

  February WTI Crude futures have plunged to new cycle lows at $28.60 (down 2.7%) as Iran supply looms over an already over-glutted global crude market. Brent is down even more (-3.7%). Dow futures are down 60 points at the open.

  • *WTI OIL FALLS AS MUCH AS 2.7%, BRENT CRUDE DROPS 3.7%

  Feb futures (which have just rolled) are under $29…

  

   

  And the new on the run March contract is trading $29.60, down 2.6%…

  

   

  It seems Nomura may be right:

  “Iran’s additional crude shipments have the potential to further depress prices, perhaps to as low as $25 a barrel,” Gordon Kwan, Hong Kong-based analyst at Nomura Holdings Inc., says by e-mail Sunday.

  And crude weakness (and fears over US banks) are weighing on US equities… Dow futures down 65 points

  

  

  

  

  

  

• "China Banks Seem To Be Doing Whatever They Can To Avoid Paying Anyone In Dollars"

  By Dan Harris of China Law Blog

  Getting Money Out of China: What The Heck is Happening?

  Regular readers of our blog probably know that our basic mantra about getting money out of China is that if you have consistently follow all of China’s laws, it ought to be no problem. Not true lately.

  In the last week or so, our China lawyers have probably received more “money problem” calls than in the year before that. And unlike most of these sorts of calls, the problems are brand new to us. It has reached the point that yesterday I told an American company (waiting for a large sum in investment funds to arrive from China) that two weeks ago I would have quickly told him that the Chinese company’s excuse for being unable to send the money was a ruse, but with all that has been going on lately, I have no idea whether that is the case or not.

  So what has been going on lately?

  Well if there is a common theme, it is that China banks seem to be doing whatever they can to avoid paying anyone in dollars. We are hearing the following:

  1. Chinese investors that have secured all necessary approvals to invest in American companies are not being allowed to actually make that investment. I mentioned this to a China attorney friend who says he has been hearing the same thing. Never heard this one until this month.

  2. Chinese citizens who are supposed to be allowed to send up to $50,000 a year out of China, pretty much no questions asked, are not getting that money sent. I feel like every realtor in the United States has called us on this one. The Wall Street Journal wrote on this yesterday. Never heard this one until this month.

  3. Money will not be sent to certain countries deemed at high risk for fake transactions unless there is conclusive proof that the transaction is real — in other words a lot more proof than required months ago. We heard this one last week regarding transactions with Indonesia, from a client with a subsidiary there. Never heard this one until this month.

  4. Money will not be sent for certain types of transactions, especially services, which are often used to disguise moving money out of China illegally. This is not exactly new, but it appears China is cracking down on this. For what is ordinarily necessary to get money out of China for a services transaction, check out Want to Get Paid by a Chinese Company? Do These Three Things.

  5. Get this one: Money will not be sent to any company on a services transaction unless that company can show that it does not have any Chinese owners. The alleged purpose behind this “rule” is again to prevent the sort of transactions ordinarily used to illegally move money out of China. Never heard this one until this month.

  What are you seeing out there? No really, what are you seeing out there?

  

  

  

  

  

• The State Of Our Denial Is Strong

  Well, things did ‘change‘…

   

  

   

  Source: Townhall.com

  

  

  

  

  

• What Just Happened With OIL?

  Yesterday, we reported exclusively how the Dallas Fed is pulling strings behind the scenes to conceal the fallout from the oil market crash. As Dark-Bid.com's Daniel Drew notes, by suspending mark-to-market on energy loans and distorting the accounting, they are postponing the inevitable as long as possible. The current situation is eerily reminiscent to the heyday of the mortgage market in 2007, when mortgage defaults started to pick up, and yet the credit default swaps that tracked them continued to decline, bringing losses to those brave enough to trade against the crowd.

  Amidst the market chaos on Friday, a trader brought something strange to my attention. He asked me exactly what the hell was going on with this ETN he was watching. I took a closer look and was baffled. It took me awhile to put the pieces together. Then when I saw the story about mark-to-market being suspended, it all made sense.

  Here is the daily premium for the last 6 months on the Barclays iPath ETN that tracks oil:

  

   

  Initially, Dark-Bid.com's Daniel Drew thought this was merely a sign of retail desperation. As they faced devastating losses on their oil stocks, small investors turned to products like oil ETNs as they tried to grasp the elusive oil profits their financial adviser promised them a year ago. Oblivious to the cruel mechanics of ETNs, they piled in head first, in spite of the soaring premium to fair value. After all, Larry Fink is making the rounds to convince the small investor that ETFs are indeed safer than mutual funds. Because nothing says "safe" like buying an ETN that is 36% above its fair value.

  Sure, there are differences between ETFs and ETNs, particularly regarding their solvency in the event of an issuer default, but the premium/discount problem plagues ETFs and ETNs alike. Nonetheless, widely trusted retail sources of investment information perpetuate the myth that ETNs do not have tracking errors.

  But was it just retail ignorance?

  Something remarkable happened in the last hour of trading on Friday which sparked the massive decoupling in OIL from its NAV…

  

   

  Making us wonder, was an 'invisible hand' at play? Or was this just more evidence of OPEX-inspired broken markets?

  As Dark-Bid.com's Daniel Drew so eloquently concludes,

  With the oil fallout quickly spreading, the Fed is resorting to behind-the-scenes manipulation of energy debt, and now, that apparently includes oil ETNs as well.

  Is anything too much (too off limits, too conspiracy wonk) for them? Do they really think the ETF tail can wag the oil complex dog and rescue the disastrous MtM values of the US banking system's energy loans?

  

  

  

  

  

• Syria 4 Years On: Shocking Images Of A Post-US-Intervention Nation

  While US intervention in its various forms has likely been ongoing for decades, March 2011 is often cited as the start of foreign involvement in the Syrian Civil War (refering to political, military and operational support to parties involved in the ongoing conflict in Syria, as well as active foreign involvement).

  Since then the nation has collapsed into chaos with an endless array of superlatives possible to describe the economic and civilian carnage that has ensued.

  However, while a picture can paint a thousand words, these four shocking images describe a canvas of US foreign policy “success” that few in the mainstream media would be willing to expose…

  

   

  Mission un-accomplished?

  

  

  

  

• Cracks At The Core Of The Core

  Exceprted from Doug Noland's Credit Bubble Bulletin,

  January 15 – Bloomberg (Matthew Boesler): “The U.S. economy should continue to grow faster than its potential this year, supporting further interest-rate increases by the Federal Reserve, New York Fed President William C. Dudley said. ‘In terms of the economic outlook, the situation does not appear to have changed much” since the Fed’s Dec. 15-16 meeting, Dudley said, in remarks prepared for a speech Friday… He added that he continues ‘to expect that the economy will expand at a pace slightly above its long-term trend in 2016,’ and said future rate increases would depend on incoming economic data.”

   

  January 15 – Reuters (Ann Saphir): “The stock market's swoon does not change the economic outlook and is merely market participants trying to make sense of global developments, San Francisco Federal Reserve Bank President John Williams told reporters… ‘As the Fed is moving gradually through a process of normalization it's not surprising that we are not going to be at the peak stock prices’ of last year, Williams said. So far swings in stock market prices have not fundamentally changed his expectation for moderate economic growth, he said.”

  The world has changed significantly – perhaps profoundly – over recent weeks. The Shanghai Composite has dropped 17.4% over the past month (Shenzhen down 21%). Hong Kong’s Hang Seng Index was down 8.2% over the past month, with Hang Seng Financials sinking 11.9%. WTI crude is down 26% since December 15th. Over this period, the GSCI Commodities Index sank 12.2%. The Mexican peso has declined almost 7% in a month, the Russian ruble 10% and the South African rand 12%. A Friday headline from the Financial Times: “Emerging market stocks retreat to lowest since 09.”

  Trouble at the “Periphery” has definitely taken a troubling turn for the worse. Hope that things were on an uptrend has confronted the reality that things are rapidly getting much worse. This week saw the Shanghai Composite sink 9.0%. Major equities indexes were hit 8.0% in Russia and 5.0% in Brazil (Petrobras down 9%). Financial stocks and levered corporations have been under pressure round the globe. The Russian ruble sank 4.0% this week, increasing y-t-d losses versus the dollar to 7.1%. The Mexican peso declined another 1.8% this week. The Polish zloty slid 2.8% on an S&P downgrade (“Tumbles Most Since 2011”). The South African rand declined 3.0% (down 7.9% y-t-d). The yen added 0.2% this week, increasing 2016 gains to 3.0%. With the yen up almost 4% versus the dollar over the past month, so-called yen “carry trades” are turning increasingly problematic.

  Importantly, the past month has seen contagion effects from the collapsing Bubble at the Periphery penetrate the Fragile Core. Japan’s Nikkei 225 index was down 7.6% over the past month. While bubbling securities markets have worked to underpin European economic recovery, now prepare for the downside. The German DAX is off 11% in the first two weeks of 2016, with stocks in Spain and Italy also sporting double-digit declines. France’s CAC 40 has fallen 9.2% y-t-d. And highlighting a key Issue 2016, European bonds have provided little offsetting protection against major equities market losses. So far in 2016, German bund yields are down only eight bps. Yields are little changed in Spain and Italy. Sovereign yields are up 20 bps in Portugal and 130 bps in Greece. European corporate debt has posted small negative returns so far in 2016.

  Recent weeks point to decisive cracks at the “Core” of the U.S. financial Bubble. The S&P500 has been hit with an 8.0% two-week decline. Notably, favored stocks and sectors have performed poorly. Indicative of rapidly deteriorating economic prospects, the Dow Transports were down 10.9% to begin 2016. The banks (KBW) sank 12.9%, with the broker/dealers (XBD) down 14.1% y-t-d. The Nasdaq100 (NDX) fell 10%. The Biotechs were down 16.0% in two weeks. The small cap Russell 2000 was hit 11.3%.

  Bubbles tend to be varied and complex. In their most basic form, I define a Bubble as a self-reinforcing but inevitably unsustainable inflation. This inflation can be in a wide range of price levels – securities and asset prices, incomes, spending, corporate profits, investment and speculation. Such inflations are always fueled by some type of underlying monetary expansion – typically monetary disorder. Bubbles are always and everywhere a Credit phenomenon, although the underlying source of monetary fuel often goes largely unrecognized.

  I’ll posit another key Bubble Dynamic: De-risking/de-leveraging at the Periphery is problematic, with a propensity for risk aversion and associated liquidity constraints to spur contagion effects. At the Core, de-risking/de-leveraging becomes highly destabilizing. Indeed, I would strongly argue that de-leveraging at the “Core of the Core” is tantamount to financial crisis.

  It is the “Core of the Core” that now concerns me the most. That is where Federal Reserve (and global central bank) policies have left their greatest mark. It is at the “Core of the Core” where momentous misperceptions and market mispricing have become deeply entrenched. It’s the “Core of the Core” that has attracted enormous amounts of “money” over recent years. It’s also here where I believe leverage has quietly been used most aggressively. Over recent years it became one massive Crowded Trade. Now the sophisticated players must contemplate beating the unsuspecting public to the exits.

  I’ll return to “Core of the Core” analysis after a brief diversion to the “Core of the Periphery.”

  At $275 billion, Chinese Credit growth surged in December to the strongest pace since June. While growth in new bank loans slowed (15% below estimates), equity and bond issuance jumped. China’s total social financing expanded an enormous $2.2 TN in 2015, down slightly from booming 2014. Such rampant Credit growth was (barely) sufficient to sustain China’s economic expansion. At the same time, I would argue that Chinese stocks, global commodities and developing securities markets in particular have been under intense pressure due to rapidly waning confidence in the sustainability of China’s Credit Bubble.

   

  A similar dynamic is now unfolding in U.S. and other “Core” equities markets: Sustainability in the (U.S. and global) Credit Bubble – the monetary fuel underpinning the boom – is suddenly in doubt. The bulls, Fed officials and most others see the economy as basically sound, similar to how most conventional analysts argued about the Chinese economy over the past year. Inherent fragility and unsustainability are the key issues now driving securities markets – in China, in the U.S, and globally. And, importantly, sentiment has shifted to the view that policy tools have been largely depleted.

   

  January 15 – Reuters (Trevor Hunnicutt): “Fund investors continued to sour on U.S. stocks and corporate debt during the weekly period that ended Jan 13, Lipper data showed…, as risk appetite waned in the wake of global market turmoil. U.S.-based stock mutual funds and exchange-traded funds lost $9.0 billion to withdrawals during a week that saw U.S. stocks continue one of their worst starts to a new year… The outflows also included $5 billion pulled from one ETF alone: SPDR S&P 500 ETF… Before last week, ETF investors had been bullish on U.S. stocks, pumping money in for twelve weeks straight… Corporate bond funds suffered too. Investment-grade bond funds, widely held by retail investors, extended to eight straight weeks their streak of outflows after posting $740 million in outflows during the week. The two-month run of outflows now totals $15.4 billion, about 1.8% of the assets those funds held when the trend started…”

  January 15 – Barron’s (Chris Dieterich): “Money hemorrhaged from of mutual and exchange-traded funds for the second week in a row, EPFR Global data show… Global investors pulled $12 billion out of U.S equity funds and a combined $4.5 billion from high-yield bond, bank loan and total return funds in the week ended Jan. 23. Emerging-market funds shed cash for the 11th week in a row. Over the past two weeks, some $21 billion has come out of equity funds, still shy of the $36 billion during the August 2015 selloff.”

  January 15 – Bloomberg (Aleksandra Gjorgievska and Fion Li): “Exchange-traded funds that hold U.S. junk bonds dropped to their lowest levels since 2009 as the global growth fears that clobbered stock markets also raised doubts about whether companies’ would continue to generate as much cash to pay their debt obligations.”

  This week saw the Bank of America Merrill Lynch High Yield Energy Bond Index trade to a record17.43% yield, surpassing the December 2008 high (from Barron’s Amey Stone). “Triple C” bond yields jumped to 18.8%, the high since 2009 (FT’s Joe Rennison). The yield on the Markit iBoxx Liquid High Yield index jumped this week to the highest level since 2012.

  Returning to “Core of the Core” analysis, investment-grade corporate debt has rather abruptly joined the market turmoil. After a rocky first week of 2016, investment-grade debt spreads widened again this week to a three-year high, as investment-grade funds suffered their eighth straight week of outflows.

  “Triple A” MBS occupied the mortgage finance Bubble’s “Core of the Core”. GSE securities were perceived as “money”-like (“Moneyness of Credit”), with implied backings from the Treasury and Fed seemingly guaranteeing safety and liquidity. Throughout the global government finance Bubble period, I have often invoked the concept “Moneyness of Risk Assets.” With the Federal Reserve and global central banks determined to do just about anything to uphold booming securities markets, the marketplace perceived that safety and liquidity were virtually ensured. Trillions flowed into global stock and bond mutual funds, the majority into perceived low-risk U.S. equities indexes and investment-grade corporate debt products.

  It is worth recalling that my tally of Total U.S. Securities (Treasuries, Agencies, Corp Bonds, Munis and Equities) ended Q2 2015 at a record $76.924 TN, or 429% of GDP. This was up $30.90 TN (77%) from 2008’s $46.034 TN (313% of GDP) – and greatly exceeded 2007’s $53.279 TN (368% of GDP).

  As securities market inflation inflated Household Net Worth, spending increases bolstered corporate profits and income growth. Booming markets, especially ultra-easy financial conditions throughout the corporate Credit market, spurred stock buybacks and incited record M&A activity. As noted above, Bubbles are self-reinforcing but inevitably unsustainable. Especially with faltering Bubbles at the “Core of the Core,” wealth effects will now operate in reverse. Spending (household and corporate) will slow, with domestic issues joining international to pummel corporate profits. Significant tightening in corporate Credit will weigh heavily on both stock repurchases and M&A. And as economic prospects darken at home and abroad, there will be reinforcing downward pressure on U.S. equities and investment-grade corporate debt.

  Back in 2000, Dallas Fed president Robert McTeer suggested that our economy’s ills would be rectified “if everyone would hold hands and buy an SUV.” And for the next 15 years Fed policies did the unimaginable in the name of (indiscriminately) stimulating growth of any kind possible. And if epic mortgage finance Bubble financial and economic maladjustment was not enough, the past seven years have seen the type of financial folly and egregious wealth redistribution that tear societies apart.

  The bottom line is that Bubbles destroy and redistribute wealth, though the true effects are masked for a while by inflated securities and asset markets – along with resulting unsustainable spending patterns and economic activity. Regrettably, years of policy mismanagement, gross financial excess, deep structural maladjustment and the most imbalanced economy in our nation’s history will now come home to roost. At this point, I cannot confidently forecast how quickly the bust will unfold. I do, however, believe this process has begun as Bubbles falter at the “Core of the Core.”

  

  

  

  

  

• US Bank Counterparty Risk Soars After Energy MTM Debacle

  A few dots are starting to be connected now that we have exposed the debacle of The Fed's decision to allow banks to mark-to-unicorn their energy loans. "Something" was wrong in recent weeks as the TED-Spread surged (implying rising counterparty uncertainty among banks) and then the last week – since The Fed's alleged meeting with banks – has seen financial credit and stocks crash.

  Coincidence? We don't think so. In the week since The Fed gave the nod to banks to hide losses on energy loans, credit risk has spiked and stocks tumbled…

  

  It is clear banks are hedging against one another's systemic risk.

  Simply put, it's 2008 all-over-again as "when in doubt, sell 'em all" is back for the US financial system. When you know/question one bank (or some banks) is not transparent in their loan losses (and implicitly their capital ratios) then contagion (and collateral chains) tells any good fiduciary to sell them all – and the banks themselves will enable a vicious circle as they hedge.

  And of course, the unintended consequence of The Fed's decision to enable cheating in the banks' energy loans is a surge in financial system instability as banks and the price of oil now become systemically more coupled.

  

  

  

  

  

  

• JPM Explains How Crude Carnage Creates $75 Billion SWF "Contagion" For Equities

  Back in August, we explained why the great petrodollar unwind could be $2.5 trillion larger than anyone thinks.

  China’s effort to “control” the glidepath for the yuan devaluation led to a dramatic decline of Beijing’s FX reserves and pushed reserve liquidation to the front of the market’s collective consciousness.

  But “the great accumulation” (as Deutsche Bank calls it) of USTs ended long before the RMB deval forced the market to start talking about FX reserves. In short, the inexorable decline in crude prices (and commodities in general) forced producers to sell USD assets in an effort to offset pressure on their currencies and plug yawning budget gaps.

  And while the world is now fully awake to the fact that these asset sales amount to QE in reverse (global central banks are selling the same assets the Fed once bought), what isn’t as well understood is that looking strictly at official FX reserves paints an incomplete picture. “Crucially, for oil exporting nations, central bank official reserves likely underestimate the full scale of the reversal of oil exporters’ ‘petrodollar’ accumulation,” Credit Suisse wrote last year. “This is because a substantial part of their oil proceeds has previously been placed in sovereign wealth funds (SWFs), which are not reported as FX reserves (with the notable exception of Russia, where they are counted as FX reserves).”

  The difference between total SWF assets and official reserves for oil exporting nations is vast. “Currently, oil exporting countries hold about $1.7trn of official reserves but as much as $4.3trn in SWF assets,” Credit Suisse went on to point out, adding that. “In the 2009-2014 period, oil exporters accumulated about $0.5trn in official reserves but as much as $1.8trn of SWF assets.” Or, visually:

  

  As you can see from the above, oil exporters’ accumulation of SWF assets comes to a dramatic halt when crude prices fall. Critically, it’s exceedingly possible that the accumulation of SWF assets turns negative now that the return of Iranian supply means oil prices are set to stay lower for longer. Or, as Credit Suisse put it, “now that the tide has turned, it is likely that not only official reserves drop but that SWF asset accumulation slows to nil or even reverses.”

  Perhaps the best example of this is Norway’s SWF which, at $830 billion, is the largest in the world. 

  

  Falling crude has put enormous pressure on Norway’s economy, and with oil revenue plunging along with prices, the country is now set to drawdown its SWF rainy day fund for the first time in history in order to plug budget holes and pay for fiscal stimulus designed to offset some of the jobs lost to the industry downturn. The fund will still grow as long as return assumptions hold up, but as we saw in the first two weeks of this year, any “assumptions” about returns are dubious in an increasingly uncertain environment. Here, for reference, it a handy table lists SWFs by country and AUM:

  

  It’s important to understand that SWFs hold more than just bonds. That means that if SWFs become sellers, there are implications for other asset classes. 

  Like stocks. 

  Here are some findings on SWF equity investments from “Sovereign Wealth Fund Investments: From Firm-level Preferences to Natural Endowments,” by Paris School of Economics’ Rolando Avendano:

  There is significant variance in the allocation of SWF equity investments, depending on underlying factors associated with the fund (source of proceeds, OECD “effect”, home/foreign bias). Whereas most SWFs are attracted to large firms, with proven profitability and international activities, differences among groups remain:

  • Non-commodity funds favour firms with more foreign activity and higher turnover, in contrast to commodity-funds.

  • OECD-based funds prefer firms with lower leverage levels, whereas non-OECD funds have a preference for profitable and international firms.

  • SWF foreign investments are oriented towards large and highly leveraged firms, in contrast with their domestic (small and low leveraged) investments. Foreign investments are attracted to R&D sectors.

  • In line with the previous literature, I find that SWF ownership has a positive effect on firm value. However, this effect is only significant for commodity and OECD-based funds.

  The study was from 2006-2009 and one imagines some of these preferences might have changed in the post-crisis world, but the paper (found here) is still worth a read.

  All of the above begs the following question: will the SWFs of oil producing countries be net sellers of stocks if crude prices remain subdued and if so, how much will they sell?

  JP Morgan’s Nikolaos Panigirtzoglou and team have ventured a guess. “In our mind financial contagion from lower oil prices to equity markets is created via sovereign wealth funds,” JPM begins. Here’s more:

  The lower the oil price the higher the potential depletion of SWF assets as oil producing countries struggle to prevent their spending from declining too much. And the equities owned by oil producing countries SWFs encompass all regions and all sectors.

   

  To assess SWF flows and their potential impact on equity market flows, we update our analysis on FX reserves and Sovereign Wealth Fund (SWF) assets for 2016 in light of the recent steep decline in oil prices. Using our average Brent oil forecast of $31 for 2016, how would oil-related financial flows look like in 2016?

   

  In 2015, oil exporters (Middle East, Norway, Russia, Africa and Latam countries) received $740tr from their oil exports and will see their oil revenue decline further to $440bn should Brent oil price average at $31 this year. Oil exporters’ revenues are recycled via two channels: via imports of goods and services from the rest of the world and via accumulation of financial assets, mostly through SWFs. In 2015, oil exporters consumed $70bn more than their oil revenues to prevent their spending from declining too much. On our estimates, this excessive spending was met via around $50bn of FX reserve depletion and $20bn of SWF depletion.

   

  Assuming a $22 decline in the average oil price in 2016 relative to 2015 (i.e. from $53 to $31), the oil exporters’ aggregate current account balance will likely decline to around -$260bn vs. -$70bn in 2015 (based on last year’s sensitivities of current account balance change to oil price change). This year’s dis-saving of $260bn should be mostly met via depletion of official assets, i.e. FX reserve and SWF assets ($240bn) rather than issuance of government debt ($20bn). For 2016 we look for FX reserve depletion of $100bn and a decline in SWF assets of $140bn.

   

  Assuming selling in accordance to the average allocation of FX Reserve Managers and SWF across asset classes, we estimate that the sales of bonds by oil producing countries will increase from -$45bn in 2015 to -$110bn in 2016 and that the sales of public equities will increase from -$10bn in 2015 to -$75bn in 2016. There is little offset to this -$75bn of equity sales from accumulation of SWF assets by oil consuming countries, as we expect these countries to spend most of this year’s oil income windfall.  

  In short, SWF’s will liquidate some $75 billion in equities this year assuming oil at $31 per barrel. Needless to say, the lower oil goes, the more selling they’ll be. 

  “This prospective $75bn of equity selling by SWFs in 2016 is not huge but becomes significant after taking into account the potential swing in equity fund flows,” JPM continues, in an attempt to discuss the impact this will have on markets. “Last year retail investors bought $375bn of equity funds globally. This year we expect an amount between 0 and $200bn. Subtracting $75bn of selling from SWFs would leave the overall equity flow from Retail+SWF investors barely positive for 2016.“

  Well, not really. It’s “barely positive” if retail buys $76 billion or more. But if retail investors buy anywhere from zero to $74 billion, SWF + retail goes negative.

  Needless to say, the first two weeks of the year haven’t done anything to either shore up the SWFs of oil producers or put retail in a bullish mood. That being the case, the market better home the “smart” money is buying or you can forget about equities catching a bid this year.

  *  *  *

  An infographic look