• Open Letter to the Banks

  Jamie Dimon, JP Morgan Chase
  Brian T. Moynihan, Bank of America
  Michael Corbat, Citigroup

  Gentlemen:

  On Friday, I attended a digital money summit at the Consumer Electronics Show. I am writing to you to warn you about the disruption that is about to occur in banking. There are many startups (and larger companies too) that are gunning for you. Perhaps you have watched what Uber has done to the taxi business? Well, these guys are planning the same thing for the banking business.

  Banks used to allow even a child with a $10 deposit to spread his risk across a large portfolio of loans. At the same time, banks made it possible for a corporate borrower to raise $10,000,000 from a large group of depositors. In short, the banking business is investment aggregation and risk management.

  That business cannot be disrupted. The bigger it gets, the more difficult to displace. It’s like eBay, all the depositors come to the bank because that’s where they can earn interest. All the borrowers come, because that’s where they can get the money they need. The bigger the bank gets, at least in a free market under the gold standard, the safer it is for depositors.

  Today, however, you are quite vulnerable to disruption. That’s because you are not really in the banking business any more.

  Over three decades, you have worked with the Federal Reserve to eliminate interest. The end result is that you now offer depositors a return-free risk. Depositors cannot earn interest in a bank account (yes, I know that in the US the yield is technically not zero yet, but it’s getting there). However, a growing number are aware of the risks. For example, you have incalculable exposure to derivatives. You own sovereign debt which the world now knows is not risk-free. In fact, you have a large staff and churn through a lot of activity in order to deliver scant yield to your depositors.

  I can tell you what I observed in the digital money program. People, especially Millennials, now think of banking in terms of features like ATMs, payment clearing, fraud prevention, and point of sale solutions. However, these are just add-on services, not the core of banking. You have abandoned that core, and only the add-ons remain.

  Startups can take these businesses. They have lower costs. They are more focused. They have hip new brands, untainted by the financial crisis and the bailouts. They have developed an array of new technologies. And, of course, they are less regulated (before you think to lobby to impose more regulation on them, think about that taint to your brand).

  You’re in a tight spot. After decades of smoking the drug known as falling interest, you’re now dependent on it. The thought of a return to a 5% yield on the 10-year Treasury is not pleasant. Nevertheless, I urge you to think about it. The alternative is to let the fintech disruptors carve up your retail business.

  Sincerely,
  Keith Weiner, PhD
  The Gold Standard Institute

  

  

  

  

• US Equities Tumble As PBOC "Stamps Out" Short Yuan Speculators With "Murderous" Liquidity Squeeze

  China/Hong Kong Money Market stress remains extreme – O/N implied rates spike to 82%, 1w to 38%…

  A jump in the overnight cost for borrowing yuan in Hong Kong is "reflecting further PBOC efforts to stamp out speculation," according to Michael Every, head of financial markets research at Rabobank Group. Hong Kong-based Every told Bloomberg in an interview, following a massive spike in overnight borrowing rates for Offshore Yuan that "a 66% rate is murderous for others being swept up in this who are not speculating."

   

  PBOC advisor Han earlier warned that short selling the yuan "will not succeed," adding that "it is pure imagination that the Chinese yuan will act like a wild horse without any rein." But as Every notes, the unintended consequences could be a problem, "imagine you needed access to CNH for other purposes for a few days," concluding ominously that "in other EM crises we see that central banks usually win a round like this, but lose in the end."

  This move sent CNH ripping higher (as shorts were forced to cover) all the way to parity with CNY…

  

   

  But once that was complete, Offshore Yuan selling recommenced and that is dragging US equities lower…

  

   

  As we explaiend earlier, it is now extremely expensive to short the Offshore Yuan – which is exactly what The PBOC appears to have wanted – “It is pure imagination that the Chinese yuan will act like a wild horse without any rein,” said Han, adding that short selling the yuan “will not succeed.”

   

  

   

  As the gap between spot (squeeze) and forwards widens…

  

  • *CNH-CNY SPREAD NARROWS BELOW 100 PIPS FOR 1ST TIME SINCE NOV.

  Reuters reports that the offshore yuan (CNH) implied overnight deposit rate has hit a record high at 82%. This is squeezing CNH shorts… big time.

  As a result, the CNY-CNH spread has narrowed

  

   

  • *OFFSHORE YUAN STRENGTHENS 0.6% TO TRADE AT PARITY WITH ONSHORE

  to patirty

  Despite all the flatness and stability, Chinese stocks are extending losses… *SHANGHAI COMPOSITE FALLS 0.8% TO BELOW 3,000 LEVEL

  

   

  

   

  As we detailed earlier, with Chinese equities tumbling in the face of PBOC's liquidity withdrawal (record spike in o/n HIBOR) and short-squeeze of CNH shorts (and carry traders), the sell-side is as confused as a CNBC anhcor at what is good and what is bad. UBS urges investors not to sell while JPM fears a structured-product-driven vicious cycle between EM and Chinese equities. Following a record-breaking surge in offshore Yuan against the USD (12 handles top to bottom) during the US session, selling has resumed into the fix. "Expectations the yuan will depreciate sharply should be seen as ridiculous and humorous," warned one Chinese official (who obviously did not get the memo of the last 3 weeks) as The PBOC injected CNY80bn and decided for the 3rd day in a row to hold the Yuan fix unchanged.

   

  As we begin tonight's "trading", Chinese equities are deep in the red YTD:

  • *SHANGHAI MARGIN DEBT BALANCE DECLINES MOST IN FOUR MONTHS

  

   

  "Expectations the yuan will depreciate sharply should be seen as ridiculous and humorous," warned one Chinese official (who obviously did not get the memo of the last 3 weeks)…

  • *PBOC TO INJECT 80B YUAN WITH 7-DAY REVERSE REPOS: TRADER
  • *CHINA KEEPS YUAN FIXING LITTLE CHANGED FOR THIRD DAY
  • *SHANGHAI MARGIN DEBT BALANCE DECLINES MOST IN FOUR MONTHS

  

   

  Offshore Yuan is selling back down a little after an epic day of squeezing…

  

   

  Meanwhile, away from the actual dynamics of tonight's early moves, mixed messages from a desperate sell-side tonight with UBS proclaiming:

  • INVESTORS SHOULDN'T SELL CHINESE STOCKS AT THESE LEVELS: UBS

  And JPMorgan warning of a vicous cycle of selling between China and EM equities:

  Events in Chinese equity markets feel uncomfortably close to the June-August sell-off.

   

  The Shanghai and Shenzhen indices are down 15% and 20%, respectively, in the first six trading days of 2016. MSCI China, EM and World are down 11%, 9% and 7%, respectively. Onshore investors’ confidence in the local policy is weak. Shorting of H-share futures increased when A-share circuit breakers kicked in. If HSCEI moves below 8000 (spot 8505) then we approach structured product strikes leading to H-share futures selling. To add to the discomfort, the CNH overnight rate spiked to 23% as aggressive PBoC intervention results in a shortage of offshore renminbi. Finally, the market was disappointed that post the record decline in FX reserves, there was no RRR cut.

   

  Simply the market is unsure on policy and is technically weak, driving EM toward our bear case end 2016 target of 720.

  Wondering why we care about China? Here's one reason… US and Chinese stocks are extremely correlated since The Fed slowed and then stopped its money-printing… (and that correlation has increased since August and The Fed's September "fold")

  

   

  The jawboning started early

  • *YUAN FALL TO STIMULATE CHINA'S EXPORTS: SECURITIES JOURNAL

  which is entirely incorrect…

  

  And then this:

  • *EXCHANGE RATE NOT DETERMINING FACTOR FOR EXPORTS: SEC. JOURNAL

  Confused?

  And finallyu there is this:

  • *PBOC'S ZHOU ATTENDS BIS MEETING

  In other words – they are starting to coordinate!! Against The Speculators? Or The Fed?

  

  

  

  

  

• The State Of The Nation: A Dictatorship Without Tears

  Submitted by John Whitehead via The Rutherford Institute,

  “There will be, in the next generation or so, a pharmacological method of making people love their servitude, and producing dictatorship without tears, so to speak, producing a kind of painless concentration camp for entire societies, so that people will in fact have their liberties taken away from them, but will rather enjoy it, because they will be distracted from any desire to rebel by propaganda or brainwashing, or brainwashing enhanced by pharmacological methods. And this seems to be the final revolution.” – Aldous Huxley

  There’s a man who contacts me several times a week to disagree with my assessments of the American police state. According to this self-avowed Pollyanna who is tired of hearing “bad news,” the country is doing just fine, the government’s intentions are honorable, anyone in authority should be blindly obeyed, those individuals who are being arrested, shot and imprisoned must have done something to deserve such treatment, and if you have nothing to hide, you shouldn’t care whether the government is spying on you.

  In other words, this man trusts the government with his life, his loved ones and his property, and anyone who doesn’t feel the same should move elsewhere.

  It’s tempting to write this man off as dangerously deluded, treacherously naïve, and clueless to the point of civic incompetence. However, he is not alone in his goose-stepping, comfort-loving, TV-watching, insulated-from-reality devotion to the alternate universe constructed for us by the Corporate State with its government propaganda, pseudo-patriotism and contrived political divisions.

  While only 1 in 5 Americans claim to trust the government to do what is right, the majority of the people are not quite ready to ditch the American experiment in liberty. Or at least they’re not quite ready to ditch the government with which they have been saddled.

  As The Washington Post concludes, “Americans hate government, but they like what it does.” Indeed, kvetching aside, Americans want the government to keep providing institutionalized comforts such as Social Security, public schools, and unemployment benefits, fighting alleged terrorists and illegal immigrants, defending the nation from domestic and foreign threats, and maintaining the national infrastructure. And it doesn’t matter that the government has shown itself to be corrupt, abusive, hostile to citizens who disagree, wasteful and unconcerned about the plight of the average American.

  For the moment, Americans are continuing to play by the government’s rules. Indeed, Americans may not approve the jobs being done by their elected leaders, and they may have little to no access to those same representatives, but they remain committed to the political process, so much so that they are working themselves into a frenzy over the upcoming presidential election, with contributions to the various candidates nearing $500 million.

  Yet as Barack Obama’s tenure in the White House shows, no matter how much hope and change were promised, what we’ve ended up with is not only more of the same, but something worse: an invasive, authoritarian surveillance state armed and ready to eliminate any opposition.

  The state of our nation under Obama has become more bureaucratic, more debt-ridden, more violent, more militarized, more fascist, more lawless, more invasive, more corrupt, more untrustworthy, more mired in war, and more unresponsive to the wishes and needs of the electorate. Most of all, the government, already diabolical and manipulative to the nth degree, has mastered the art of “do what I say and not what I do” hypocrisy.

  For example, the government’s arsenal is growing. While the Obama administration is working to limit the public’s access to guns by pushing for greater gun control, it’s doing little to scale back on the federal government’s growing arsenal of firepower and militarized equipment.

  In fact, it’s not just the Department of Defense that’s in the business of waging war. Government agencies focused largely on domestic matters continue to spend tens of millions of taxpayer dollars to purchase SWAT and military-style equipment such as body armor, riot helmets and shields, cannon launchers and police firearms and ammunition. The Department of Veterans Affairs spent nearly $2 million on riot helmets, defender shields, body armor, a “milo return fire cannon system,” armored mobile shields, Kevlar blankets, tactical gear and equipment for crowd control. The Food and Drug Administration purchased “ballistic vests and carriers.” The Environmental Protection Agency shelled out $200,000 for body armor. And the Smithsonian Institution procured $28,000 worth of body armor for its “zoo police and security officers.”

  The national debt is growing. In fact, it’s almost doubled during Obama’s time in office to nearly $20 trillion. Much of this debt is owed to foreign countries such as China, which have come to exert an undue degree of influence on various aspects of the American economy.

  Meanwhile, almost half of Americans are struggling to save for emergencies and retirement, 43% can’t afford to go more than one month without a paycheck, and 24% have less than $250 in their bank accounts preceding payday.

  On any given night, over half a million people in the U.S. are homeless, and half of them are elderly. In fact, studies indicate that the homeless are aging faster than the general population in the U.S.

  While the U.S. spends more on education than almost any other country, American schools rank 28^th in the world, below much poorer countries such as the Czech Republic and Vietnam.

  The American police state’s payroll is expanding. Despite the fact that violent crime is at a 40-year-low, there are more than 1.1 million persons employed on a full-time basis by state and local law enforcement in this country. That doesn’t include the more than 120,000 full-time officers on the federal payroll.

  While crime is falling, the number of laws creating new crimes is growing at an alarming rate. Congress creates, on average, more than 50 new criminal laws each year. This adds up to more than 4,500 federal criminal laws and an even greater number of state laws.

  The prison population is growing at an alarming rate. Owing largely to overcriminalization, the nation’s prison population has quadrupled since 1980 to 2.4 million, which breaks down to more than one out of every 100 American adults behind bars. According to The Washington Post, it costs $21,000 a year to keep someone in a minimum-security federal prison and $33,000 a year for a maximum-security federal prison. Those costs are expected to increase 30 percent by 2020. Translation: while the American taxpayer will be forced to shell out more money for its growing prison population, the private prison industry will be making a hefty profit.

  The nation’s infrastructure—railroads, water pipelines, ports, dams, bridges, airports and roads—is rapidly deteriorating. An estimated $1.7 trillion will be needed by 2020 to improve surface transportation, but with vital funds being siphoned off by the military industrial complex, there’s little relief in sight.

  The expense of those endless wars in Afghanistan and Iraq will cost taxpayers $4 trillion to $6 trillion. That does not include the cost of military occupations and exercises elsewhere around the globe. Unfortunately, that’s money that is not being invested in America, nor is it being used to improve the lives of Americans.

  Government incompetence, corruption and lack of accountability continue to result in the loss of vast amounts of money and weapons. A Reuters investigation revealed $8.5 trillion in “taxpayer money doled out by Congress to the Pentagon since 1996 that has never been accounted for.” Then there was the $500 million in Pentagon weapons, aircraft and equipment (small arms, ammunition, night-vision goggles, patrol boats, vehicles and other supplies) that the U.S. military somehow lost track of.

  Rounding out the bad news, many Americans know little to nothing about their rights and the government. Only 31% can name all three branches of the U.S. government, while one in three says that the Bill of Rights guarantees the right to own your own home, while one in four thinks that it guarantees “equal pay for equal work.” One in 10 Americans (12%) says the Bill of Rights includes the right to own a pet.

  If this brief catalogue of our national woes proves anything at all, it is that the American experiment in liberty has failed, and as political economist Lawrence Hunter warns, it is only a matter of time before people realize it. Writing for Forbes, Hunter notes:

  The greatest fear of America’s Founding Fathers has been realized: The U.S. Constitution has been unable to thwart the corrosive dynamics of majority-rule democracy, which in turn has mangled the Constitution beyond recognition. The real conclusion of the American Experiment is that democracy ultimately undermines liberty and leads to tyranny and oppression by elected leaders and judges, their cronies and unelected bureaucrats.  All of this is done in the name of “the people” and the “general welfare,” of course.  But in fact, democracy oppresses the very demos in whose name it operates, benefiting string-pullers within the Establishment and rewarding the political constituencies they manage by paying off special interests with everyone else’s money forcibly extracted through taxation. The Founding Fathers (especially Washington, Jefferson, Franklin, Adams, Madison, and James Monroe), as well as outside observers of the American Experiment such as Alexis de Tocqueville all feared democracy and dreaded this outcome.  But, they let hope and faith in their ingenious constitutional engineering overcome their fear of the democratic state, only to discover they had replaced one tyranny with another.

  So are there any real, workable solutions to the emerging American police state?

  A second American Revolution will not work. In the first revolution, the colonists were able to dispatch the military occupation and take over the running of the country. However, the Orwellian state is here and it is so pervasive that government agents are watching, curtailing and putting down any resistance before it can get started.

  A violent overthrow of the government will not work. Government agents are armed to the teeth and will easily blow away any insurgency when and if necessary.

  Politics will not help things along. As history has made clear, the new boss is invariably the same as or worse than the old boss—all controlled by a monied, oligarchic elite.

  As I make clear in my book Battlefield America: The War on the American People, there is only one feasible solution left to us short of fleeing the country for parts unknown: grassroots activism that strives to reform the government locally and trickles up.

  Unfortunately, such a solution requires activism, engagement, vigilance, sacrifice, individualism, community-building, nullification and a communal willingness to reject the federal government’s handouts and, when needed, respond with what Martin Luther King Jr. referred to as “militant nonviolent resistance.”

  That means forgoing Monday night football in order to actively voice your concerns at city council meetings, turning off the television and spending an hour reading your local newspaper (if you still have one that reports local news) from front to back, showing your displeasure by picketing in front of government offices, risking your reputation by speaking up and disagreeing with the majority when necessary, refusing to meekly accept whatever the government dictates, reminding government officials—including law enforcement—that they work for you, and working together with your neighbors to present a united front against an overreaching government.

  Unfortunately, we now live in a ubiquitous Orwellian society with all the trappings of Huxley’s A Brave New World. We have become a society of watchers rather than activists who are distracted by even the clumsiest government attempts at sleight-of-hand.

  There are too many Americans who are reasonably content with the status quo and too few Americans willing to tolerate the discomfort of a smaller, more manageable government and a way of life that is less convenient, less entertaining, and less comfortable.

  It well may be that Huxley was right, and that the final revolution is behind us. Certainly, most Americans seem to have learned to love their prison walls and take comfort in a dictatorship without tears.

  

  

  

  

  

• In "Very Unusual" Move, Avenue Capital's Junk Bond Fund Stops Reporting Asset Levels

  A month after we first noted the major redemptions at Avenue Capital Group's credit fund (note this is a different fund from Third Avenue), and just one trading day after CEO Marc Lasry strolled arrogantly on to CNBC and told the public that "I don't think it's a time to panic, I think it's actually a time where you've got opportunities out there," Morningstar reports the Avenue Credit Strategies Fund has failed to report asset levels since about mid-December.

  As we noted first in mid-December…

  What is just as surprising is that among its investments, Lasry does have a mutual fund, in fact two of them – the Avenue Credit Strategies Funds, an open- and close-ended fund, which as we first showed last Friday using the following Morningstar table, are not only among the worst performers year to date, but have tumbled by a whopping 9% in the past three months.

   

  

   

   

  Fast forward to last night when according to Reuters, Avenue's founder, billionaire Marc Lasry, was forced on Monday to back the junk bond mutual fund hemorrhaging assets at his Avenue Capital Group "as jittery investors exit high-yield bonds amid a market rout."As a result, the size of the fund has been cut by more than half, sliding from $2 billion to just $884 million according to Lipper, roughly the same size where Third Avenue's own high yield fund was when it announced it would liquidate and gate investors.

   

  Despite his defensive posture, Lasry hardly sounded too enthusiastic about the pace of outflows: "I think overall redemptions at some point are going to slow down across the market," Lasry said. "I'm not sure if that will be tomorrow or next week, but people are going to start putting money back into the market at some point."

  And then just last Friday, CEO Lasry ventures on to CNBC to calm the panic and claim all is well as his fund was imploding…

  …despite recent worries, Lasry struck a cautiously optimistic tone on the U.S. economy.

   

   

  "I don't think we're going into a recession, I think it's whether we're growing at 1 or 2 percent," he said. "So the fact that you've got lower GDP, that's fine, but at the end of the day the U.S. economy is doing fine."

   

  In fact, the hedge fund manager said, there are good openings for discerning investors.

   

  "I don't think it's a time to panic, I think it's actually a time where you've got opportunities out there. Invest in solid companies and you'll end up doing pretty well," Lasry said.

   

  The expert investor said he sees "a ton of opportunities" in the energy sector — but not in equities. Instead he said his firm is buying debt that sees a coupon of about 12 percent "while you're getting paid to wait."

   

  He projected that, in the next two to five years, "you're either going to get paid off, or you'll end up owning these companies" as debt is converted into equity.

  We were not the only one to notice Lasry's hypocrisy…

  So Lasry – a big HY mutual fund holder – sees no big problem in HY market… Surprise!

  — Tim Backshall (@credittrader) January 8, 2016

   

  And now, as Reuters reports, in what is clear evidence of a run on his fund,

  A junk bond fund run by billionaire Marc Lasry's Avenue Capital Management, which has experienced heavy investment losses and investor withdrawals, has stopped voluntarily reporting daily asset figures to the mutual fund industry's top two tracking firms.

   

  Research chiefs for Morningstar and Lipper said on Monday they had not received daily asset under management figures from the Avenue Credit Strategies Fund since about mid-December. The fund is not required to report the figures, but not doing so is "very unusual," said Jeff Tjornehoj, head of Americas research for Lipper, a Thomson Reuters unit.

   

  People familiar with the situation said outflows from the Avenue Capital fund had become a distraction after an unrelated junk bond fund in early December imploded. Junk bond investors already were on edge, pulling $3.6 billion from high-yield funds in November, according to Morningstar data.

   

  The Avenue Credit Strategies Fund has lost about 40 percent of its $1.2 billion in assets since the end of October. The fund currently has about $650 million to $700 million in assets, with about 15 percent in cash holdings and less than 5 percent in illiquid investments, according to people familiar with the situation. Avenue Capital was not immediately available to comment.

  And so another one bites the dust and the forced expulsion of assets into an already illqiuid market continues (unless, like Third Avenue, the SEC grants them exemption from providing liquidity to their clients – the moms-and-pops of America – who were forced by Fed repression into these risky assets, only to eat the losses on the way out)

  The only question is whether Lasry, who is a close personal friend of the Clintons – recall Chelsea Clinton launched her "career' by working as an "analyst" at the very same Avenue Capital in the mid-2000s – and who was slated to become US ambassador to France until his ties to a shady poker ring were exposed in 2013, will use his executive privilege and request special treatment by the former, and soon future, first family. 

  

  If so, that will be the first case of a hedge fund bailout by the presidential family in history, and will make the political farce that are US capital markets even more comical.

  

  

  

  

  

• Record Numbers Of Retired Americans Are Working Part-Time Jobs

  Every other aspect of the US economy may be going to hell in a handbasket, with an acute manufacturing recession starting to spill over into the services sector, but at least the US jobs number is “stellar”, right?

  Wrong.

  We showed one way how the BLS fudges the number higher, when we reported on Friday that of the surge in December jobholders, a whopping 324,000 of these new “jobs” were by multiple jobholders, as in 1 person = 2 (or more) jobs, effectively cutting the job gain in half (or worse). Worse, the total number of jobholders surged to 7.738 million, just shy of an all time high, and the highest since August 2008.

  

   

  And then there is this.

  According to a Bloomberg report, a record number Americans who are retired (or are collecting Social Security) worked part-time last month.

  In December, a record 2.6 million workers had either reached full retirement or restricted themselves to work-weeks of 34 hours or less due to Social Security income limitations. Individuals can collect Social Security and work with no limit on earnings once they reach full retirement age. However, if they receive Social Security before full retirement age they will lose some of their benefit if they exceed the annual earnings limit. For 2016, this cap is $15,720. The penalty is a $1 deduction in Social Security for every $2 earned above the limit.

  

   

  What is most disturbing, is that this is the “data” the Fed uses to justify to the world that its decision to hike rates was the right one. Meanwhile, anyone who is not an economist will take on look at the above charts and realize why 7 years ino the “recovery” there has been no wage growth, and why the Fed is shooting itself both in the leg and in the head by hiking at this point.

  

  

  

  

  

• "Neo-Nazis" Attack German Muslim Businesses As Ghost Of 1939 Beckons

  On Saturday, some 1,700 people turned out for a PEGIDA rally in Cologne, where demonstrators protested Chancellor Angela Merkel’s open-door migrant policy in the wake of the sexual assaults that occurred on New Year’s Eve in the city center.

  Ultimately, riot police were called in to disperse the crowds who held signs calling for the expulsion of “Rapefugees” and the ouster of Merkel.

  Subsequently, reports indicated that gangs of “bikers, hooligans, and bouncers” used Facebook to coordinate a migrant “manhunt” that led directly to attacks on a group of Pakistanis in Cologne.

  All of this points to the rapid disintegration of German society in the face of a refugee influx that numbers some 3,000 new asylum seekers per day.

  On Monday, the backlash against Mid-East refugees continued as thousands gathered in Leipzig to protest for and against the city’s local PEGIDA chapter. Here’s Deutsche Welle:

  LEGIDA members took to the streets on Monday to commemorate the first anniversary of the founding of their chapter, as well as to protest against the recent New Year’s Eve sexual assaults in Cologne.

   

  “We are the people” “Resistance!” and “Deport them!” chanted the sign and flag-toting LEGIDA crowd. “Refugees not welcome!” read one sign, showing a silhouette of three men armed with knives pursuing a woman, while another declared “Islam = terror”.

   

  In another area of the city, riots broke out when around hundreds of soccer “hooligans” started rioting in the district of Connewitz. The neighborhood is considered to be the stronghold of the leftist scene in Leipzig.

   

  Rioters allegedly set of pyrotechnics and threw rocks at display windows.

   

  In a tweet following the riot, police reported: “We have arrested around 250 people from the ‘right-wing clientele’ after the riots. The situation is under control.”

  Lutz Bachmann – who nearly Plaxico’d his own cause last year by posting a picture of himself dressed as Hitler on Facebook – reportedly attended the rally. “Well over 2,000 anti-Muslim LEGIDA protestors took to the streets, their ranks swelled by anger over the Cologne attacks,” Reuters writes. “They yelled ‘Merkel needs to go!’ and one carried a sign featuring Merkel wearing a hijab and the words: ‘Merkel, take your Muslims with you and get lost'”. Here are some images from the chaos:

  As #Legida marched, tens of ‘Neo-Nazi football hooligans’ went on a rampage in #Connewitz, #Leipzig. pic.twitter.com/VT0yaVZT4M

  — Harry Fear (@harryfear) January 11, 2016

  Police say around 30 Neo-Nazis were encircled, identified and arrested. Businesses inc. a Kebab shop were targeted. pic.twitter.com/xngdGpRJyI

  — Harry Fear (@harryfear) January 11, 2016

  VIDEO: Inside of kebab shop attacked in Neo-Nazi trail of destruction in #Connewitz. Looks like a drone has struck. pic.twitter.com/hoGb8uU7HM

  — Harry Fear (@harryfear) January 11, 2016

  

  

  

  As Deutsche Welle goes on to note, “anti-LEGIDA protesters formed a ‘chain of lights’ which stretched for 3.5 kilometers (2.2 miles) around the city center [where] ip to 2,800 people took part in the protest against the xenophobic group.”

  “We have to take to the streets so long as people continue to make racist arguments,” Leipzig’s Mayor Burkhard Jung said.

  So once again we see that German society is splintered and the nationalist, right-wing PEGIDA movement is gathering strength. As surreal as it may sound, it now appears that there is a very real chance that Berlin’s open-door migrant policy may actually be the spark that reignites the Reich in Germany. 

  That means that for Merkel, there’s much more at stake here than the political reputation of Europe’s most important politican. The clock is ticking. Dear Iron Chancellor: save your country before 1939 rears its ugly head.

  

  

  

  

  

• "Unprecedented Demand" – US Mint Sells Nearly As Much Gold On First Day Of 2016 As All Of January 2015

  While Chinese residents were lining up in front of banks and currency exchange kiosks, desperate to convert as many of their Yuan into dollars as the government will permit, Americans were likewise busy exchanging their own paper currency, so greatly in demand in China, into gold and silver.

  As Reuters reports, American Eagle silver coin sales jumped on Monday after the U.S. Mint said it set the first weekly allocation of 2016 at 4 million ounces, roughly four times the amount rationed in the last five months of 2015, after a surge in demand. It will not be enough.

  According to the Mint, more than half of the week’s allocation of silver sold on Monday, the first day of 2016 sales, a sign that demand entering 2016 is literally off the charts.

  Putting the silver demand in context, the 2.76 million ounces of silver bullion coins sold today is exactly half of the 5.53 million ounces that sold in all of January 2015.

  

  Needless to say, if the demand from the first day of the month continues through the end of January, the first month of 2016 will set an all time record in silver sales.

  And gold.

  First-day sales of American Eagle gold bullion coins was also unprecedented, with the 60,000 ounces sold equal to roughly 75% of the 81,000 that sold in the entire month of January 2015.

  

  As reported previously, the mint ran out of American Eagle silver coins in July because of a “significant” increase in demand as spot silver prices fell to a six-year low. Inventory was replenished in August and sales resumed. But the coins were on weekly allocations of roughly 1 million ounces for the rest of the year because of low supplies.

  This dramatic surge in demand, we noted out at the time, was a shock and a paradox to equity investors and momentum stock chasers, who seek to dump an asset the cheaper it gets, contrary to what has happened with physical metals for the 4th year in a row. It is amazing that at least some investors still act according to the fundamental laws of supply and demand.

  It wasn’t just the US: the unexpected surge in demand put the global silver-coin market in an unprecedented supply squeeze, forcing other mints around the world to ration sales, while U.S. buyers had to look abroad for supplies.

  Should the epic demand for precious metals from the first day of sales persist, we are confident that the Mint will run out of gold and silver within a few days.

  

  

  

  

  

• "Fasten Your Seatbelts" – UBS Warns Of "Record Spikes In Volatility" If This Level Breaks

  Having warned earlier in the week of the potential for a significant crash in US equities and the appeal of owning gold, UBS goes one further in their recent report warning of "record spikes" in volatility should the following levels break…

  Generally, the late September bottom in equities has an absolutely pivotal character for a lot of markets. In Europe, the September low represents the 2009 bull trend. In the Russell-2000 or the MSCI World, it is the neckline of a huge head & shoulder formation and in the S&P-500 it is an obvious double bottom, which would be negated as well as breaking the 32-month moving average.

  

  Analytically, this moving average has a very good track record in signaling whether the US market is still in a bull market or not. Even the 1987 crash was just a pullback and mean reversion to this moving average, whereas in 2001 and 2008 the break of the 32-month average was confirmation that a real bear market had started.

  So regardless of when we get this signal, a break of the late September low at 1867 in the S&P-500 would be the ultimate confirmation that the US market is also in a real bear market and in this case we would recommend to fasten your seatbelts.

  

  If we look into the macro world we are obviously living in a world of extremes. We have record debt in the Emerging Market complex, in Europe, in Japan and in the US; with margin debt in the US at record levels, M&A hitting record levels, record ETF holdings in corporate bonds, record auto loans in the US, and the list continues.

  We would be surprised that in this highly leveraged world, in combination with a structural decline in market liquidity, a 7-year cycle decline would just be mild. We think it’s actually just the other way around and in this context we see last year’s rise in volatility as just the start of a period with exceptionally high volatility where we wouldn’t be surprised to see record spikes in volatility over the next 12 to 17 months. So another key call we have for the next 12 to 15 months is to be long volatility.

   

  

  Particularly with regards to the ongoing bear market in high yields, we think that volatility in equities is too low and this will be one of the key charts for 2016. 

  Last year we argued that we generally see all these divergences as a leading indicator for an important top in global equities. 12 months later we are in the next phase of the global rolling over process, where we see more and more markets having already fallen into a bear market, and where on the other hand we can clearly say that without a new momentum impulse coming from the fundamental world the air for the remaining outperformer markets will get increasingly thin.

  Source: UBS

  

  

  

  

  

• Chicago Schools In "Dramatic Trouble": "They're Looking At A Disaster," Illinois Governor Warns

  Back in September, we noted that Chicago’s schools are in trouble. Deep trouble.

  Amid Illinois’ intractable budget crisis, the city’s public school system opened with a budget shortfall of nearly a half billion dollars.

  Borrowing and trimming the proverbial fat helped close some of the $1.1 billion hole but once the board reached the point where “further cuts would reach deep into the classroom” (to quote system chief Forrest Claypool), the schools asked Springfield to make up the difference which amounts to $480 million.

  The Chicago Public School (CPS) system has nearly 400,000 students and more than 20,000 teachers. Around 1,400 jobs were eliminated in an effort to save money and more layoffs may be just around the corner if Springfield – which is mired in budget gridlock – doesn’t step in.

  One problem is the CPS pension liability. As WSJ noted four months ago, “the district’s pension costs have more than doubled in recent years after the board took a partial ‘holiday’ for three years from paying the amount needed to put the retirement system on a path to long-term solvency.”

  “It is like the board is a desperate gambler at the end of their run,” remarked Jesse Sharkey, vice president of the Chicago Teachers Union.

  Governor Bruce Rauner wants nothing to do with bailing this “desperate” bunch of “gamblers” out. “Let’s be clear Chicago Public Schools are in dramatic trouble,” he said last week. “They’re looking at a disaster somewhere in the next nine months in the Chicago public schools.” As Bloomberg reminds us, “CPS is the only state district that pays for its teachers pensions.”

  Rauner went on to predict that Springfield would be blamed if (or perhaps “when” is the better word) disaster finally strikes: “For them to say ‘hey you owe it to us, it’s Springfield’s fault, pick up our pension liability and let us kick the can in the rest of our pension liability, no, no, not happening.”

  “No, no, no,” and that means it’s back to the bond market for CPS, where investors are set to punish the board for their abysmal financial predicament.

  As Bloomberg goes on to note, the system’s GO debt is trading near its lowest levels since September and the Chicago Tribune’s editorial board isn’t happy about it. “While Springfield yawns, CPS borrows money it shouldn’t, at rates that it (read: that taxpayers) can’t afford,” the Tribune lamented, in a piece written late last week. “The cost of that borrowing now is nosebleed steep: CPS recently agreed to shell out 10 times the interest rate that a healthy district would typically pay its lenders. Ten. Times.”

  

  Here’s more:

  But CPS won’t stop. The district plans to sell as much as $1.2 billion of debt later this month. The rate CPS pays again will be punishing.

   

  Punishing, that is, to nearly 400,000 school children. Every dollar CPS spends on debt service cannot be spent on classrooms, teachers, books — education.

   

  That is, every dollar that pays back this astonishing level of borrowing, for years on end, won’t go to teaching kids.

   

  The ephemeral Springfield bailout? Prospects for that are as grim as ever.

   

  Gov. Bruce Rauner says he will help CPS if Democrats in the legislature grant some of his demands for political and government reforms that public employees unions oppose.

   

  In the last week, a frustrated Emanuel has accused Rauner of using Chicago schoolchildren as pawns “in a political game in Springfield to get an agenda done that people don’t agree with.”

   

  Chicagoans have heard this accusation from Democratic politicians for months now. But Rauner (you, unlike Madigan and Cullerton, may recall that he won the 2014 election for governor of Illinois) evidently won’t be bullied or bought off. The Democrats in Springfield and, yes, Chicago will have to deal with his demands. They will have to compromise. To the extent any pol uses those children as pawns, everyone in this tragicomedy uses them as pawns. None more, none less.

   

  CPS officials said Friday that layoff notices for central office staffers should start going out by mid-January.

   

  CPS bonds are rated as junk. More downgrades seem likely. Even higher interest rates loom.

   

  Claypool told us last month that he expects “at some point” lenders would stop lending to CPS. “You build such a deep amount of cash debt that you can’t ever pay it back.”

  Right. Which means a taxpayer bailout here is inevitable whether it’s through an outright cash injection from Springfield, higher taxes, or both. As a reminder, Chicagoans are already the most-taxed residents in Illinois.

  

  “Politicians in City Hall arrogantly assume that Chicagoans will stomach more and more tax hikes,” Illinois Policy writes. “The expectation of higher property taxes to bail out the city’s other pension funds and the nearly bankrupt state of Chicago Public Schools will only make out-migration worse.”

  In other words, Springfield doesn’t want to help (and even if they did, the budget boondoggle would probably constrain Rauner’s ability to help) and taxpayers in Chicago are already grossly overburdened. Meanwhile, CPS is on the brink of being priced out of the bond market.

  With no viable options, the base case is now that described by Chicago Democrat John Cullerton last year: the system will lose 3,000 teachers and will be forced to shorten the academic year. 

  

  

  

  

  

• Rand Paul Rages "The Fed Is Crippling America"

  Authored by Senator Rand Paul and Mark Spitznagel, originally posted at Time.com,

  The country deserves to understand the extent of its balance sheet

  On Jan. 12, Congress is scheduled to vote on the “Audit the Fed” legislation (H.R. 24/S. 264), which, if passed, would bring to an end to the Federal Reserve’s unchecked—and even arguably unconstitutional—power in the financial markets and the economy.

  We aren’t the first to be wary of the powers of central banks. Founding Father Thomas Jefferson viewed the powers of central banks as being contrary to the protections of the Constitution. As Jefferson wrote:

  “I sincerely believe that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”

  In a similar vein, the great Austrian economist Ludwig von Mises also recognized that limiting government power in the realm of money was a matter of liberty, not merely economics. Mises explained that

  “the idea of sound money … was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.”

  How far we have come as a country that these words from Jefferson and Mises sound so foreign today. Perhaps we have all been blinded by the credit and equity bubbles that surround us. But what better wake-up call to rally support for legislation that would shine a bright light on the government institution that today has created these bubbles, subsidizes small subsets of the population (thus amplifying wealth inequality), and enables endless government debt?

  The Fed was intended to be an apolitical body, a concession to placate the naysayers. But today, the Fed isn’t even shy about entering the political fray: witness Federal Reserve Chair Janet Yellen’s income inequality speech riddled with Democratic talking points during the 2014 elections.

  The Fed is, indeed, a political, oligarchic force, and a key part of what looks and functions like a banking cartel. During the 2007-08 financial crisis, the Fed’s true nature was clear to anyone paying attention. As the Treasury began bailing out the investment banks from the consequences of their profligate risk-taking (and in some cases fraudulent schemes), the Fed moved in tandem, further purchasing the underwater assets of these institutions, as well as actually paying interest to the commercial banks (hemorrhaging from risky loans) for reserves they kept parked at the Fed.

  To be sure, Fed officials came up with opaque jargon to describe such operations, but the stark reality is that the Fed was treating risky assets as good collateral, and in the fall of 2008 began literally paying banks to not make loans to their customers.

  Even today, the recent policy announcement has doubled the rate of this massive implicit taxpayer subsidy to the banks – what they call “interest on reserves.” In the textbook rate-hike case, the Fed sells off assets (or slows the rate of purchases) in order to reduce the supply of reserves. Then, the equilibrium price of borrowing reserves (i.e., fed funds rate) rises. In contrast, now and for the foreseeable future, as indicated by the Fed’s guidance statements, the Fed is raising rates by increasing interest on reserves.

  As of Dec. 17, the Fed is paying 50 basis points on both required and excess reserves. So the Fed, itself, is increasing how much it will pay to “borrow” reserves from the commercial banks. Given the estimated $2.6 trillion in excess reserves, at 50 basis points that means the Fed will be paying commercial banks some $13 billion in annual income. Right now, the Fed is paying the same on required and excess reserves, though that in principle could differ.

  As the Fed keeps raising interest rates through this same mechanism, the amount paid to commercial banks will only mushroom. You can forgive analysts for not discussing this; it was not even mentioned in the Fed’s Dec. 16 announcement.

  As the Fed pays commercial bankers more in interest payments, there is dollar-for-dollar less for the Treasury; in other words, for a given level of federal expenditures, the deficit is that much higher. Therefore, the U.S. taxpayer is subsidizing commercial banks to not make loans to their customers—or rather bribing them to charge their customers higher interest rates on loans. And, the U.S. taxpayer is going deeper into debt to provide this bank subsidy.

  This is but one aspect of the farce that is today’s Fed policy. In addition, we actually don’t know the full extent of or the precise recipients of the Fed’s asset purchases and bailouts as its balance sheet exploded from about $900 billion in August 2008 to almost $4.5 trillion today.

  Now, the Fed has painted itself into a corner. It can’t sell off its bloated balance sheet for fear of crashing the mortgage-backed securities market—and, indirectly, real estate—and it can’t sell off its treasury holdings because that would push up treasury yields and increase the servicing cost of U.S. debt. This is partly the reason the Fed has chosen to raise rates by paying bankers more.

  If treasury yields rise, then the market value of existing treasury securities goes down. The Fed currently holds about $2.5 trillion (all maturities) of treasuries. At the same time, the Fed’s capital is at most $67 billion or so. Given that the Fed is levered to the hilt, if treasury yields go up too much, Fed is bankrupt in an accounting sense.

  Most dangerous of all, global credit and equity markets have been manipulated by central bank policies to levels that are unsustainable and highly crash-prone.

  Clearly, the country needs to understand fully the extent of the Fed’s balance sheet: what it holds and from whom it was acquired, as well as all of the Fed’s other activities and conceivably even more dangerous shenanigans afoot.

  We can’t really know what we don’t know until we look. We owe it to the “swindled futurity” of the next generation to take a long, hard look through a full and independent audit of the Fed.

  

  

  

  

  

• The Cost Of China's "Neutron Bomb" Exploding: $7.7 Trillion And Higher

  On Friday we presented Kyle Bass’ latest interview in which the Texas hedge fund manager explained the reasoning why he thought shorting the Yuan is the “greatest investment opportunity right now.” The crux behind the argument was well-known to Zero Hedge readers, namely China’s peaking credit cycle driven by soaring bad, or non-performing, loans which have so far been swept away, but which courtesy of a $35 trillion financial system are nothing short of a “neutron bomb“, as we first dubbed the embedded risk, waiting to go off. Here is Bass:

  What I think the narrative will swing to by the end of this year if not sooner, is the real issue in China is not simply that profits have peaked. The real issue is the size of their banking system. Do you remember the reason the European countries ended up falling like dominoes during the European crisis was their banking systems became many multiples of their GDP and therefore many, many multiples of their central government revenue. In China, in dollar terms their banking system is almost $35 trillion against a GDP of $10 and their banking system has grown 400% in 8 years with non-performing loans being nonexistent. So what we are going to see next is a credit cycle, and in a credit cycle you see some losses, but if China’s banking system loses 10%, you are going to see them lose $3.5 trillion.

  Today, months after we first covered the breadth of this most disturbing for Chinese bulls topic, the FT caught up with this critical, for China’s financial system, issue and reports that “the downturn in China’s fortunes — particularly across its heartland heavy industry — is already hitting the banks. Annual non-performing loan rates have been doubling annually since 2012. China Merchants Bank, China Everbright and ICBC are seen as among the most troubled.”

  That’s based on official data, which is grotesquely low and completely fabricated. The true NPLs data is well-hidden by everyone from the lowliest bank teller to the Politburo in Beijing, who all know that merely the recognition of the problem would be sufficient to spark if not a full-blown panic then certainly accelerate capital outflows form the nation to an unstoppable degree, especially if the latest estimate which we presented last November from Fitch’s Charlene Chu, of 21% in non-performing loans, is accurate.

  Back to the FT which notes that “China bulls point to the still low level of NPLs — barely 1 per cent at the big lenders, and 1.8 per cent at mid-tier banks this year, according to analyst forecasts. As a gauge, NPLs in Greece have risen to between 30 and 40 per cent amid that country’s crisis” but then adds that “China experts at independent research house Autonomous suggest investors are underestimating a spiralling problem. Across the board, loan losses will rise by $845bn this year, Autonomous predicts. That, they think, will be enough to shrink profits by 6 per cent at big banks.”

  Actually if Fitch is right, the problem is in the trillions, but let’s assume a more modest figure. Here is what the FT says next:

  Some policymakers are privately worried about yet another underestimated issue — whether loan losses, when they materialise, will be recoverable. In western banking markets, so-called loss given default rates can typically range between 30 and 70 per cent. In China, where property accounts for the bulk of collateral used to back loans, LGDs may be far higher. Even if inflated property values do not collapse, collateral values may prove far too optimistic. In China’s nascent property ownership culture, the land on which developments are built is typically state-owned, limiting recovery values.

  Considering that one of the biggest scandals in China in 2014 was the realization (as many had warned previously) that millions of tons of commodities were rehypothecated countless times, and thus “pledged” as collateral to numerous counterparties, and that as a result these same counterparties were unable to make sense of who owns what at one of China’s largest ports, Qingdao, it is probably quite safe to assume that LGDs in China are if not 100% (or more, which is impossible in theoretical terms but in practice is quite possibe, as another curious side effect of unlimited collateral rehypothecation), then as close to it as possible.

  So putting all that together, and using a conservative estimate for NPLs, orders of magnitude below the 21% proposed by Fitch, what is the FT’s estimate of China’s “conservative case” neutron bomb going off in financial terms? Just about $7.7 trillion.

  Investors in China’s banks may well recognise that the lenders cannot be compared with institutions that operate along western lines and will expect hazier disclosures and readier state interference. They are also likely to think that China will not allow its banks to fail. But if analysts, like those at Autonomous are to be believed, China’s banks could require up to $7.7tn of new capital and funding over the next three years. State bailouts could send the government debt to GDP ratio spiralling from 22 per cent to 122 per cent. That kind of shock would be a challenge for any country, even one of China’s vast might.

  Again, this is the conservative NPL case. Now assume 21% NPLs.

  

  

  

  

  

• Meet Manifa (And Other Giant Oil Projects) That Will Add To The Global Oil Glut

  Via GEFIRA,

  World oil consumption is more than 90 million barrels a day. Between 2009 and 2014 oil was traded for about 110 dollars a barrel; now oil is changing hands for 32 dollars a barrel. Roughly a 7-billion-dollar cash flow a day is vanishing from the global market.

  Norway’s sovereign wealth fund that has accumulated a stake of 4.5 billion dollars in Apple over the past years, will turn from an Apple buyer into an Apple seller.

  The China Development Bank (a Chinese policy bank) has poured nearly 50 billion dollars into Venezuela in return for oil, with the country now collapsing under the Chinese debt, having no other choice but to drill for more oil.

  These are just some of the challenges the world is facing in 2016 as oil prices are heading towards 20 dollars a barrel.

  Speculators and manipulators were able to manipulate the oil price to more than 120 dollars a barrel,  with the production cost being roughly between 20 and 80 dollars. With a huge profit margin the world was digging for more and more liquid gold.

  *  *  *

  Kashagan: The $50 Billion Oil Development That Doesn’t Work

  Shell, Total S.A., Exxon Mobil and China National Petroleum Corporation are now stuck with a 50-billion-worth project in the Caspian Sea, called Kashagan. The project is full of problems and delays, but is expected to add 300.000 barrels of oil a day to the global oil glut the coming year.

  The field is developed by the international consortium under the North Caspian Sea Production Sharing Agreement. The Agreement is made up of 7 companies consisting of Eni (16.81%), Royal Dutch Shell (16.81%), Total S.A. (16.81%), ExxonMobil (16.81%), KazMunayGas (16.81%), China National Petroleum Corporation (8.4%), Inpex (7.56%). The initial production is expected to be 90,000 barrels per day (14,000 m3/d). It should reach a production rate of 370,000 barrels per day (59,000 m3/d) Source Wikipedia

   

  Prelude

  2016 will also be the inauguration of Shells Prelude, the world’s first floating liquefied natural gas platform as well as the largest offshore facility ever constructed. We expect the media to give limited coverage to its inauguration.

   

  Prelude FLNG is the world’s first floating liquefied natural gas platform as well as the largest offshore facility ever constructed. Prelude FLNG was approved for funding by Shell in 2011. Analyst estimates in 2013 for the cost of the vessel were between US$10.8 to 12.6 billion. Pressures from an increase in the long-term production capabilities of North American gas fields and increasing Russian export capabilities may reduce the actual profitability of the venture from what was anticipated in 2011. Source Wikipedia

   

  Manifa

  While the media attention was directed to the shale oil boom in the US, the Saudis created a giant offshore oil project called Manifa. With one single project Manifa added 1 million barrels a day to the world oil glut. Manifa will expand its capacity the coming year, adding a further 500 million barrels a day to world markets.

   

  The project is part of the development of the Saudi oilfields, which are expected to see an increase in production to over 12.5 million barrels a day from 11 million barrels a day. The first phase of the project began production in April 2013. The field produced 500,000bpd by July 2013. It will produce 900,000bpd of crude oil once fully completed by the end of 2014. Additionally, there will also be production of 90 million standard cubic feet per day of sour gas, 65,000bpd of gas condensate, and water. Source Offshore Technology

  There are plans to extend the project with a further 500 barrels a day capacity.

  *  *  *

  ZH: With global storage levels at their limit, these massive projects (and their sunk-cost desperation for cash-flow) will add already extreme pressure an over-supplied market in which, as Morgan Stanley notes, "oil has no intrinsic value."

  

  

  

  

  

  

• Why The Powerball Jackpot Is Nothing But Another Tax On America's Poor

  Now that the Powerball Jackpot has just hit a record $1.4 billion, people, mostly those in the lower and middle classes, are coming out in droves and buying lottery tickets with hopes of striking it rich.

  

  After all, with $1.4 billion one can even afford enough shares of Apple stock to become a bigger holder than the Swiss National Bank (alterantively, one can buy a whole lot of VXX).

  

  Naturally, we wish the lucky winner all the (non-diluted) best. There is, however, a small problem here when one steps back from the trees. As ConvergEx’ Nicholas Colas previously explained, “Lotteries essentially target and encourage lower-income individuals into a cycle that directly prevents them from improving their financial status and leverages their desire to escape poverty.  Yes, that’s a bit harsh, and yes, people have the right to make their own decisions.  Even bad ones…  Also, many people tend to significantly overestimate the odds of winning because we tend to assess the likelihood of an event occurring based on how frequently we hear about it happening.  The technical name for this is the Availability Heuristic, which means the more we hear about big winners in the press, the less uncommon a big payday begins to seem.” Call it that, or call it what one wishes, the end result is that the lottery is nothing but society’s perfectly efficient way of, to use a term from the vernacular, keeping the poor man down while dangling hopes and dreams of escaping into the world of the loathsome and oh so very detested “1% ers”. Alas, the probability of the latter happening to “you” is virtually non-existant.

  Full explanation from Convergex’ Nick Colas on how and why Americans are lining up in lines around the block to… pay more taxes.

  What Seems To Be Is Always Better than Nothing

  Summary: American adults spent an average of $251 on lottery tickets.  With a return of 53 cents on the dollar, this means the average person threw away $118 on unsuccessful lotto tickets – not a great investment.  So why are we spending so much?  Well, lotteries are a fun, cheap opportunity to daydream about the possibility of becoming an overnight millionaire (or in this case billionaire), but on the flip side people tend to overestimate the odds of winning.  Lower-income demographics spend a much greater portion of their annual earnings on lottery tickets than do wealthier ones. 

  Since lotteries are state-run, that effectively means that the less affluent pay more in taxes (albeit by choice) than broadly appreciated.  And even winning the lottery doesn’t guarantee financial success.  More than 5% of lottery winners declare bankruptcy within 5 years of taking home the jackpot.  Despite their drawbacks, though, lotteries are no doubt here for the long haul – in states that have lotteries, an average of 11% of their total revenues come from lottery ticket sales, and the number is even as high as 36% in 2 states (West Virginia and Michigan).
   
  Consider the following credit-card-advertisement style sequence of statistics:

  • Lottery ticket sales in the US in 2010:  $59 billion
  • Average spending per person:  $191
  • Average spending per adult:  $251
  • Chance at hitting the jackpot:  (Apparently) priceless.

  I have never bought a lottery ticket and honestly don’t even know how.  And as far as I’m aware, I don’t know anyone who spends north of 200 bucks a year playing the lotto.  The only lottery my friends play is the NYC marathon lottery, where they’re gambling for maybe a 1 in 13 chance to fork over $255 for the privilege of slugging out 26 miles through the city’s streets.  Not quite hitting the jackpot in most people’s minds. 
   
  But someone, somewhere is buying all those tickets.  In Massachusetts, where the lottery is more popular than in any other state, people spend an average of $634 a year on Mega Millions, Powerball and the like.  Delaware comes in at number 2 with $504 spent per person, while Rhode Island ($469), West Virginia ($388) and New York ($357) round out the top 5.  North Dakota brings up the rear with per capita lottery spending of $34.  You can see the full list in the table following the text. 
   
  It’s difficult to pinpoint exactly who is investing so much money in a product that provides poor returns, but numerous studies show that lower-income people spend a much greater proportion of their earnings on lotteries than do wealthier people.  One figure suggests that households making less than $13,000 a year spend a full 9 percent of their income on lotteries.  This of course makes no sense – poor people should be the least willing to waste their hard-earned cash on games with such terrible odds of winning. (http://www.dailyfinance.com/2010/05/31/poor-people-spend-9-of-income-on-…).
   
  Why bother?  Well, one answer is obvious enough and applies to just about everyone who plays.  For a buck (now $2 for Powerball) we have a cheap opportunity to daydream what could happen if we suddenly won millions of dollars.  But lotteries return 53 cents to the dollar.  So why are poor people irrationally buying tickets when the probability of winning is so slim?  One study by a team of Carnegie Mellon University behavioral economists (Haisley, Mostafa and Loewenstein) suggests it isn’t being poor but rather feeling poor that compels people to purchase lotto tickets.
   
  By influencing participants’ perceptions of their relative wealth, the researchers found that people who felt poor bought almost two times as many lottery tickets as those who were made to feel more affluent.  Here’s how they did it:

  • Participants were asked to complete a survey that included an item on annual income.  One group was asked to provide its income on a scale that began at “less than $100,000” and went up from there in increments of $100,000.  It was designed so that most respondents would be in the lowest category and therefore feel poor. 
  • The other group, made to feel subjectively wealthier, was asked to report income on a scale that began with “less than $10,000” and increased in $10,000 increments.  Therefore most participants were in a middle or upper tier.
  • All participants were paid $5 for participating in the survey and given the chance to buy up to 5 $1 scratch-off lottery tickets.  The group who felt wealthier bought 0.67 tickets on average, compared with 1.27 tickets for the group who felt poor.

  Lotteries essentially target and encourage lower-income individuals into a cycle that directly prevents them from improving their financial status and leverages their desire to escape poverty.  Yes, that’s a bit harsh, and yes, people have the right to make their own decisions.  Even bad ones…  Also, many people tend to significantly overestimate the odds of winning because we tend to assess the likelihood of an event occurring based on how frequently we hear about it happening.  The technical name for this is the Availability Heuristic, which means the more we hear about big winners in the press, the less uncommon a big payday begins to seem.   
   
  Not that hitting the jackpot is guaranteed to substantially improve the winner’s life.  Economists at the University of Kentucky, University of Pittsburgh and Vanderbilt University collected data from 35,000 lottery winners of up to $150,000 in Florida’s Fantasy 5 lottery from 1993 to 2002.  Their findings are as follows:

  • More than 1,900 winners declared bankruptcy within 5 years, implying that 1% of Florida lottery players (both winners and losers) go bankrupt in any given year, which is about twice the rate for the broader population.
  • “Big” lottery winners, those awarded between $50,000 and $150,000 were half as likely as smaller winners to go bankrupt within 2 years of their win, however equally likely to go bankrupt 3 to 5 years after.
  • 5.5% of lottery winners declared bankruptcy within 5 years of bringing home the jackpot.
  • The average award for the big winners was $65,000 – more than enough to pay off the $49,000 in unsecured debt of the most financially distressed winners.

  Lottery players tend to have below-average incomes, so they are probably less accustomed to budgeting when they receive a windfall.  There’s also a psychological term called Mental Accounting that explains how people might treat their winnings less cautiously than money they’ve worked for.  Money has come into their possession through luck, which similar to bonus payments, often induces an urge to purchase unnecessary items.
   
  But whether you think state lotteries are awful or great, there’s another word for them: essential.  In both West Virginia and Michigan, for example, lottery sales accounted for 36% of total state revenues in fiscal year 2010, and on average state with lotteries take in 11% of total revenues in the form of lotto ticket sales.  We’ve included the full list in a table following the text.  There are still 7 states that don’t have their own lottery systems, so the national average would be lower. 
   
  A couple of closing thoughts on what this all means:

  • Don’t make investment decisions when you are feeling poor.  The study we cited earlier clearly shows that you are likely to buy more “lottery tickets” (think of that as a metaphor for any long shot investment) when you feel less affluent than those around you.
  • Lower income individuals likely pay more in “Taxes” than most economic commentators realize.  Assuming that the 80/20 rule applies to lottery participation, the bulk of that $59 billion in annual receipts likely comes from 20-25 million less affluent households.  That would be about $47 billion from this demographic, or roughly $2,400 per household.  Yes, I get the notion that this money is handed over in the hope of a payoff.  An ill-advised and mathematically unlikely hope, as it turns out.  But does that mean it doesn’t count as a societal contribution?
  • Maybe the U.S. needs a national lottery.  Yes, these games don’t necessarily encourage the best financial planning among the less affluent.  But there is no denying that playing the lottery is entirely voluntary.  There are probably some anti-gaming factions in government who wouldn’t like this approach, to be sure.  But there’s also no doubt that the Federal budget could use the money.  And, hey, you never know…

  

  

  

  

  

  

• The (Uncensored) 2016 State Of The Union

  Submitted by Lance Roberts via RealInvestmentAdvice.com,

  Tomorrow night, the President Obama will deliver his final annual “State Of The Union” address. Just recently, the President gave a preview of his upcoming speech from the White House.

  While Obama promises to frame his speech around the “things we need to do over the years to come,” he will use his bully pulpit to focus on his record of achievements (especially those related to the environment and trade) and push for further restrictions on gun ownership.

  With the 2016 Presidential Election fast approaching, this is one of the final chances the White House will have to give a boost to the Democratic voters following the beating they took in the 2012 mid-term elections. The message sent then, even by traditionally Democratic states which elected conservative representatives, was of a broad loss of faith in “hope and change.”

  For the Democratic party, it is imperative to regain those votes. It is from this priority that the President will paint a decisively positive economic picture during his upcoming speech. He hopes that by pointing to a falling unemployment rates, economic growth and higher confidence levels; it will give voters a sense of confidence in the President’s accomplishments.

  The question is whether the majority of the voting public will agree with the President’s message?

  Before the President takes to the podium with his bullish optimism, he might want to consider the following charts.

  ---

  Government Debt

  Since 2009, Government debt has surged by $7.75 Trillion and by the end of the next budget cycle will approach $20 Trillion in total. The problem is that during the current Presidential term, real economic growth has risen by just $2.08 Trillion. However, even this number is inaccurate as the current government debt levels do not include other liabilities of the government such as social security and other social welfare programs.

  

  The following chart quantifies it a bit better when you look at cumulative increases in debt and real, inflation adjusted, GDP.

  

  Yes, the economy is growing, however, that growth has come at a huge cost of a debt burden that will be amplified if borrowing costs rise with increases in interest rates. Furthermore, considering that President Obama admonished the previous administration’s increase in debt, the explosion in the amount of debt required to generate economic growth (currently $3.71) is unsustainable longer term.

   

  Employment

  The President will address the recent employment report and point to a 5.0% unemployment rate as evidence that the economy “is back.” While the current Bureau of Labor Statistics employment reports do currently show the unemployment rate at 5.0%, that number is obfuscated by the more than 93 million workers that are currently not counted as part of the labor force.

  As I have discussed many times previously, when it comes to economic strength it is full-time labor that leads to household formation and higher consumption.

  Furthermore, the rate of employment must be faster than the rate of population growth, otherwise, you are just treading water. The chart below shows the amount of full-time labor as a ratio of the working age population.

  

  Currently, 49.23% of the population is employed full-time which is a rate lower than when the President entered office. Furthermore, as noted above, the employment ratios are deceiving when you realize that the population has grown faster than employment leaving a rising number of individuals no longer counted as part of the labor force.

  

  

  Importantly, when the employment-to-population ratio or the labor-force participation rate is discussed, the plunging levels in these ratios are often dismissed simply as a function of the “baby boomers” heading into retirement. However, if we factor out those individuals by only looking at the employee-to-population ratio of 16-54 aged individuals as a percent of that age group the picture fails to improve.

  

  While the unemployment rate has certainly plunged to just 5.0%, one would be hard pressed to find 95.0% of the population that “wants to work,” actually working.

  Personal Incomes

  The annual rate of change in personal incomes has been on a decline since the turn of the century.  This is a function of both the structural shift in employment (higher productivity = less employment and lower wage growth) and the drive to increase corporate profitability in the midst of weaker consumption.

  The chart below shows the disparity between corporate profits and employment and wages.

  

  While corporate profitability has surged since the financial crisis, those profits have come at the expense of employees. Since 2009, wages for “non-supervisory employees,” which is roughly 80% of the current workforce has been on a steady decline.

  

  The problem with this, of course, is that the real cost of living continues to rise.

  Government Assistance

  Of course, the issue of declining incomes and rising “income inequality” is really best shown by the level of social benefits as a percentage of disposable incomes today. Today, roughly 1-in-3 households receive some form of government assistance.

  

  It is here that the President will be most challenged in presenting his “economic” story. While he will point to rising asset prices, improved headline employment numbers and economic growth as reasons to be “optimistic,” with almost 80% of the country living roughly paycheck-to-paycheck it will be a hard argument to win.

  Housing

  When it comes to the economy, it is home ownership that is the reflection of economic well-being. Since 2009, the government has poured trillions of taxpayer dollars into the housing market to try and increase activity. The effect of those injections has been marginal to say the least.

  

  However, as I stated above, it is ultimately household formation that leads to higher levels of consumption and stronger economic growth. The current recovery, as shown by the chart below, was NOT driven by individuals buying homes to live in, but rather speculators buying homes, primarily for cash, and turning them into rentals. With homeownership currently near its lowest levels since the early 1980’s, it does not suggest a resurgent economy is in the making.

  

  Economic Prosperity

  However, it is the economic prosperity of an individual that truly determines how they will vote at the polls. A recent Fed Reserve survey of consumer finances shows the real disconnect between Wall Street and Main Street economics.

  

  With net worth, incomes, financial assets and business equity ownership at levels substantially below where they were when the President took office, it is not surprising that the Administration is focused on trying to justify their record.

  While the data, as reported by government agencies, has been massaged, tweaked, and recalibrated to provide more optimistic output, it is hard to fudge the economic standards by which the majority of the country lives with. Like a game of “Civilization,” the recent mid-term elections sent a pretty clear message that the “serfs” are not happy in the “kingdom.”

  Defining The State Of The Union

  While the President will do his best to put a positive spin on the current economic environment, and the success of his policies, when he gives his “State of the Union” address, it would be worth remembering whom he is actually addressing.

  It is also worth considering that much of this is likely the reason that Donald Trump is surging in Conservative polling.

  As with all things – it is the lens from which you view the world that defines what you see. For Wall Street, things could not be better. For Main Street, most everything could be better. The President has a lot of “convincing” to do if he expects to change voter’s attitudes between now and the 2016 Presidential election.

  

  

  

  

  

• What Makes The World Go Around (In 2 Uncomfortably Truthful Charts)

  It’s not the economy (or fundamentals), stupid – It’s The Fed!

   

  So we had a rate-hike, and…surprise – markets puked

  

  Source: NorthmanTrader.com

  
  

  Still think anything other than The Fed matters?

  The S&P 500 has just caught back down almost perfectly to The Fed’s balance-sheet-implied level…

  

   

  With 2016 rate-hike odds collapsing, how long before rate-cut odds start to soar? Or will The Fed do the ultimate to destroy credibility – hike rates (strong growth) at the same time as QE4 (support bonds at the long-end… what a joke)?

  Bonus Chart: What did you think would happen?

  

  Source: @Not_Jim_Cramer

  

  

  

  

  

• The China Syndrome: The Coming Global Financial Meltdown

  Submitted by Charles Hugh-Smith via OfTwoMinds blog,

  All the phantom wealth piled up in China's boost phase is now melting down, and the China Syndrome will trigger a meltdown in global phantom assets.

  
  The 1979 film The China Syndrome took its name from the darkly humorous notion that a nuclear reactor meltdown in the U.S. would burn straight through the Earth to China.
  (wikipedia: The China Syndrome)

  In today's world, the financial meltdown in China has burned straight through the global financial system to the U.S. financial markets. The mainstream financial media is delighted to promote the many links between the U.S. and Chinese economies when the two economies are feeding each other's expansion in a tightly coupled virtuous cycle.

  But once China's slowdown starts impacting the American economy, the mainstream financial media trundles out the usual pundit suspects to declare that the U.S. and Chinese economies are decoupled, so a meltdown in China will have little impact on America–and vice versa.

  The rationalizations for this decoupling are many–and specious. Exports are actually only 10% of China's economy, we're assured, so any slowdown in China will be modest and of little relevance to the U.S. economy.

  Various experts also assure us that China's vast stash of foreign reserves and U.S. Treasuries will enable it to quickly smooth over any spot of bother in its currency (RMB/yuan) resulting from capital flight out of China.

  None of these rationalizations change the fact that China is integral to the global financial markets, and so its slowdown and capital flight are toppling carry trade and other risk-off financial dominoes.

  China is tightly coupled to the U.S. and global economies via capital flows and supply/demand. It's important to understand that demand drives profits on the margins: of ten sales, the first nine sales just cover production and overhead costs; only the last sale generates substantial profits.

  China has provided marginal demand in everything from iron to oil to machine tools. Now that China's demand is faltering, global demand is weakening and profits are collapsing because China provided the critical marginal demand that fueled immense profits.

  This decline in marginal demand is crushing commodity-based economies and triggering recessions as profits, sales and wages all decline.

  The tidal wave of cash flooding out of China has provided marginal demand for high-priced real estate in Europe and the U.S. From London flats to Chateaux in France to single family homes in Vancouver B.C. and Southern California, trillions of yuan have escaped China and flowed into pricey real estate, pushing prices into the stratosphere.

  Now that trillions of yuan of phantom wealth are disappearing in China, those immense capital flows into Western assets are drying up. A staggering percentage of China's household wealth is tied up in illiquid and overvalued real estate. The wealth that is yet to be lost as China's markets transmit the reality that the fuel of financialization has been consumed and the resulting losses will be in the trillions of dollars, not yuan.

  The fundamental context is that China's economy has traced out an S-Curve–as have previous fast-developing nations such as Japan and South Korea.

  The S-Curve can be likened to a rocket's trajectory: first, there's an ignition phase, as the fuel of financialization and untapped productive capacity is ignited.

  The boost phase may last for several decades as credit-fueled production and consumption expand:

  In the boost phase, investors and leaders can do no wrong. The high growth rate of credit and production overwhelms all other factors, as the virtuous cycle of expanding profits and production increases wages which then support further expansion of credit and consumption which then supports more production, and so on.

  But then the fuel of financialization is consumed, and the previously fast-growing economy coasts on momentum. Depending on how much leverage, corruption and wealth has piled up in the boost phase, this phase may last a few years. This is the top of the S-Curve.

  As the economy weakens, the momentum is to the downside. Everything that worked in the boost phase–every investor and leader was a genius and could do no wrong–reverses: nothing works any more. Investors lose every bet and leaders' efforts to reverse the decline are ham-handed failures.

  This decline is inevitable in fast-expanding economies that play fast and loose with credit/debt and leverage. All the phantom wealth piled up in China's boost phase is now melting down, and the China Syndrome will trigger a meltdown in global phantom assets.

  

  

  

  

  

• "Panic Is Building" BofA Admits; Asks "How Bad Could This Get?"

  Just one month ago, Bank of America’s equity strategist Savita Subramanian told Barrons to stay the course and to expect a 2,200 year end target on the S&P based on a year end 125 EPS forecast and an implied 17.6x forward multiple. Incidentally her 2015 year end S&P500 forecast was an identical 2,200.

  It appears that much has changed with the market’s “fundamentals” in the month that followed, because in a note released earlier today, the same Savita, when commenting on the “Worst start ever” to a new year by equity markets, is far less concerned with market upside as she is with analyzing the worst case scenarios.

  Here is her take on “How bad could this get?“

  The risk of a full-blown bear market remains low without a recession, which our economists continue to see as unlikely. The S&P identifies 13 bear markets since 1928, of which 10 have coincided with US recessions. The exceptions were 1961, 1966 and 1987, which (precisely because they did not occur alongside recessions) were relatively short-lived, followed by swift recoveries. In fact, the average 12-month returns from these peaks was -12%, suggesting we would only be a few percentage lower by spring. We advise against panic-selling, and still believe that we have yet to see the highs for this cycle. Our signal checklist (page 2) provides a framework for how the S&P 500 looks today relative to prior market peaks.

   

  

  While Savita forgets to mention that in none of the prior historical occasions was the Fed “half-pregnant” with a $4.5 trillion balance sheet at a time of tightening conditions, she does correctly note that the current environment is hardly a “supportive backdrop for profits.” Specifically she notes that the weak stock market performance comes in the context of:

  • slowing US and global economic growth (US 4Q GDP tracking 1%)
  • collapsing commodity prices (oil prices averaged -42% y/y in 4Q)
  • renewed fears about China (Shanghai Composite -38% since last June)
  • heightened geopolitical tensions (Middle East, North Korea, etc.)
  • the first transition to Fed policy tightening in a decade.

  Her conclusion is that “these factors have created a difficult backdrop for corporate profitability, and we forecast 4Q EPS growth of -1% y/y (consensus: -4%).”

  Actually, according to Factset, Q4 EPS consensus has now tumbled to -5.3% and dropping by about 1% every 2 or so weeks. More on that in a later post.

  So is BofA’s conclusion to ignore JPM’s “sell any rally” call and BTFD? Not anymore, although while BofA does admit that “panic is building” (suggesting this “sets the stage for a rally”), it also says there is one key ingredient missing: growth.

  Near-term caution is warranted, but don’t panic sell

   

  In our framework, there are three key drivers of stock returns: valuation, sentiment and growth. But in the near term, sentiment and growth matter most. Panic is building, most likely setting the stage for a rally, but the missing ingredient here is growth. With analysts cutting estimates at an accelerating rate, increasing China risks and no apparent floor for oil prices, we remain cautious on our near term outlook for stocks.

  But not cautious enough to change the year end target of 2,200?

  

  

  

  

  

• In Latest Escalation, Oregon Militia Tears Down Government Fence, Demands Freedom For Ranchers

  Last week, Ammon Bundy met Harney County Sheriff David Ward on the side of Lava Bed Road near Highway 78.

  

  Ward was attempting to negotiate a peaceful end to the protracted standoff that began two Saturdays ago when Bundy and a handful of armed militiamen “seized” a remote bird sanctuary in Oregon.

  Bundy and his followers decided to occupy the federal building as a show of solidarity with Dwight Hammond and his son Steven who were sent back to jail last week in connection with fires they set back in 2001 and 2006.

  Bundy’s militia – who now call themselves the “Citizens for Constitutional Freedom” – say they are standing up for state’s rights in a kind of ad hoc, haphazard rekindling of the Sagebrush Rebellion.

  Following the meeting with Ward, Bundy said he felt like the group’s demands were being ignored. The Sheriff agreed. “I don’t feel like they think they’re getting enough attention yet,” Ward remarked.

  Subsequently, armed members of the Pacific Patriots Network showed up at the refuge before being asked to leave by Bundy. That visit prompted a meeting between the group and the FBI.

  Now, in the latest escalation, Bundy is tearing down a government fence and replacing it with a gate in a move the group says will give local ranchers access to federal land. Here’s the incredibly dramatic footage:

  Happening now: Bundy breaking down fence on refuge pic.twitter.com/MH6wSoSfoR

  — Wanda Moore (@WandaKTVZ) January 11, 2016

  Earlier today, Bundy insisted that the men will not be leaving the federal building until the Hammonds are set free.

  At daily presser, Bundy focuses on the Hammonds and talks about the cattle fence they plan to take down. https://t.co/zbB6E9yEpr

  — Amanda Peacher (@amandapeacher) January 11, 2016

  So, there you have it. The first federal property has been destroyed and Bundy has doubled down on the Hammond freedom demands. 

  Perhaps this latest publicity stunt will prompt authorities to end the 10-day siege although we imagine Bundy will soon be forced to do something a bit more dramatic if he wants to recapture the interest of an American public whose attention span is two days at best.

  

  

  

  

  

• Despite TurmOIL Stocks Stage Furious Last-Hour Comeback

  The Fed's apparent new communication policy (as the rest of the world's markets and policy-makers try to force its hand)…

   

  This has never happened before (even with the panic buying)… The S&P 500 is down 6.5% year-to-date – that is officially the worst start to a year ever…

  

   

  The gaping truth of The Fed policy error is now being exposed in tumbling rate-hike odds… March odds down to 36.8% (from over 55% a week ago)

  

   

  As Bonds & Bullion dramatically outperform stocks post-FOMC…

  

  *  *  *

  On the day, it was ridiculous – here are futures to show the swings…

  

   

  And in cash – the panic-buying melt-up faded into the very last few minutes…

  

   

  Dow screams 200 points higher in minutes… just because…

  

   

  All Yen all the time… (as stocks decoupled from oil)

  

   

  It appears Stocks (algos) were playing catch up to the China-selling-based higher Treasury yields…

  

  NOTE: This could have been a disaster for Risk-Parity funds (Bonds and Stocks down hard) – beware the "bullishness" of China selling Treasuries

   

  Before the epic melt-up buying panic, The Nasdaq is down 8 days in a row – has not had one green day in 2016 – this is the longest losing streak since May 2012…

  

   

  Credit wasn't buying the ramp…

  

   

  Plenty of momentum stocks have been crushed in recent days but Gunmakers appear to be suffering as The Obama administration admits its done all it can…

  

   

  Financial stocks have collapsed (the worst start to a year ever for XLF) – just as we said they would – to their less exuberant credit market levels…

  

   

  Most worrying is the spike in the TED Spread – a topic we have been warning about for 2 months – and its implications of systemic risk concerns….

  

   

  As Citi and Goldman are seeing their credit risk surge the most…

  

   

  Treasury yields rose on the day – as China selling to support Yuan trumped any safety bid from carry unwinds…

  

   

  FX markets were very active overnight in Asia and even the majors were swinging violkently as The USD Index rose 0.4% on the day… CAD plunged to new lows as crude tumbled…

  

   

  With Offshore Yuan surging by the most on record…

  

   

  With the CNH-CNY almost inverted…

  

   

   

  Commodites were all lower as Yuan and USD rallied (but crude and copper were worst)

  

   

  With WTI Crude collapsing to a $30 handle – its lowest in 12 years following weak China data and MS report…

  

   

  And Copper crushed back under $2 as hopes for further China stimulus are rebuked…

  

   

  Charts: Bloomberg

  Bonus Chart: Oddly causative correlation of the day… (why oil dumped, and Yuan pumped)…

  

  

  

  

  

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• Silver Flash in the Pan, Report 10 Jan, 2016

  by Keith Weiner

   

  No doubt, many people were excited on Thursday to see a spike in the silver price. The big news almost seemed like it would be a spike in the silver price. We were not quite so exuberant, tweeting (follow us on Twitter @Monetary_Metals):

  “What happened to silver supply and demand fundamentals this morning?!”

  We expected it to be a teaser for today’s Report. However, the silver market took back the entire price move, and more, in about 13 hours. Here is a close-up, showing Thursday morning (Arizona time) through Friday around noon.

                The Silver Price Spike
  
  

  On a light note, last week we encouraged readers not to necessarily expect a price move just because we make or reiterate a price call. Our headline even mentioned Murphy’s Law. So it is of course that the price of gold jumped +$43 this week.

  The price of silver gained only 9 cents, so the gold-silver ratio moved up sharply to over 79. Another call we have been making is for a rising ratio.

  So what did happen in silver fundamentals on Thursday? Or indeed the whole week for both metals? Read on for the only true look at the supply and demand of gold and silver…

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

                The Prices of Gold and Silver
  
  

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

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

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

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

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

  The Ratio of the Gold Price to the Silver Price
  
  

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

  Here is the gold graph.

                The Gold Basis and Cobasis and the Dollar Price
  
  

  The tracking between the red and green lines is uncanny! Red is our scarcity indicator. Green is the price of the dollar in gold (which is the inverse of the price of gold in dollars). So what does this mean?

  It means the more that the dollar goes down (i.e. the price of gold goes up), the less scarce gold becomes in the market. Higher prices are discouraging buyers and encouraging sellers. And by buyers and sellers here, we mean of metal.

  This is normal, though not especially a sign of an imminent skyrocketing of the gold price.

  Our calculated fundamental price of gold is up about ten bucks this week. In other words, it’s stable even in the face of a significant price move. Also normal (assuming it’s a reasonable indicator). The fundamental is over $150 above the market.

  Now let’s look at silver.

  The Silver Basis and Cobasis and the Dollar Price
  
  

  It should be immediately apparent that conditions in the silver are different. Despite a strong dollar (i.e. low price of silver, measured in dollars) silver became a bit less scarce.

  We don’t show a close-up of the silver basis and cobasis around the move on Thu-Fri. But we can just say that the price move was accompanied by the opposite cobasis move. It was speculators trying to front-run the market, and ending up only front-running themselves.

  The fundamental price for silver fell again this week, though by less than a dime. We consider silver to be within the margin of error from its fair price at the moment.

  This means the fundamental price of the gold-silver ratio went up again. We will look at this in more depth, in our Outlook 2016. Stay tuned!

   

  © 2016 Monetary Metals

  

  

  

  

• "Neoconned"

  Authored by Paul Craig Roberts,

  The Proof Is In: The US Government Is The Most Complete Criminal Organization In Human History

  Unique among the countries on earth, the US government insists that its laws and dictates take precedence over the sovereignty of nations. Washington asserts the power of US courts over foreign nationals and claims extra-territorial jurisdiction of US courts over foreign activities of which Washington or American interest groups disapprove. Perhaps the worst results of Washington’s disregard for the sovereignty of countries is the power Washington has exercised over foreign nationals solely on the basis of terrorism charges devoid of any evidence.

  Consider a few examples…

  Washington first forced the Swiss government to violate its own banking laws. Then Washington forced Switzerland to repeal its bank secrecy laws. Allegedly, Switzerland is a democracy, but the country’s laws are determined in Washington by people not elected by the Swiss to represent them.

   

  Consider the “soccer scandal” that Washington concocted, apparently for the purpose of embarrassing Russia. The soccer organization’s home is Switzerland, but this did not stop Washington from sending FBI agents into Switzerland to arrest Swiss citizens. Try to imagine Switzerland sending Swiss federal agents into the US to arrest Americans.

   

  Consider the $9 billion fine that Washington imposed on a French bank for failure to fully comply with Washington’s sanctions against Iran. This assertion of Washington’s control over a foreign financial institution is even more audaciously illegal in view of the fact that the sanctions Washington imposed on Iran and requires other sovereign countries to obey are themselves strictly illegal. Indeed, in this case we have a case of triple illegality as the sanctions were imposed on the basis of concocted and fabricated charges that were lies.

   

  Or consider that Washington asserted its authority over the contract between a French shipbuilder and the Russian government and forced the French company to violate a contract at the expense of billions of dollars to the French company and a large number of jobs to the French economy. This was a part of Washington teaching the Russians a lesson for not following Washington’s orders in Crimea.

  Try to imagine a world in which every country asserted the extra-territoriality of its law. The planet would be in permanent chaos with world GDP expended in legal and military battles.

  Neoconned Washington claims that as History chose America to exercise its hegemony over the world, no other law is relevant. Only Washington’s will counts. Law itself is not even needed as Washington often substitutes orders for laws as when Richard Armitage, Deputy Secretary of State (an unelected position) told the President of Pakistan to do as he is told or “we will bomb you into the stone age.” 

  Try to imagine the Presidents of Russia or China giving such an order to a sovereign nation.

  In fact, Washington did bomb large areas of Pakistan, murdering thousands of women, children, and village elders. Washington’s justification was the assertion of the extra-territoriality of US military actions in other countries with which Washington is not at war.

  As horrendous as all of this is, the worst of Washington’s crimes against other peoples is when Washington kidnaps citizens of other countries and renditions them to Guantanamo in Cuba or to secret dungeons in criminal states such as Egypt and Poland to be held and tortured in violation both of US law and international law. These egregious crimes prove beyond any doubt that the US government is the worst criminal enterprise that has ever existed on Earth.

  When the criminal neoconservative George W. Bush regime launched its illegal invasion of Afghanistan, the criminal regime in Washington desperately needed “terrorists” in order to provide a justification for an illegal invasion that constitutes a war crime under international law. However, there were not any terrorists. So Washington dropped leaflets over warlord territories offering thousands in dollars in bounty money for “terrorists.” The warlords responded to the opportunity and captured every unprotected person and sold them to the Americans for the bounty.

  The only evidence that the “terrorists” were terrorists is that the innocent people were sold to the Americans by warlords as “terrorists.”

  Yesterday Fayez Mohammed Ahmed Al-Kandari was released after 14 years of torture by “freedom and democracy America.” The United States military officer, Col. Barry Wingard, who represented Al-Kandari said that “there simply is no evidence other than he is a Muslim in Afghanistan at the wrong time, other than double and triple hearsay statements, something I have never seen as justification for incarceration.” Much less, said Col. Wingard, was there cause for a litany of multi-year torture in an effort to force a confession to the alleged offenses.

  Do not expect the Western prostitute media to report these facts to you. To find out, you must go to RT or to Stephen Lendman.

  The presstitute Western media are part of Washington’s criminal operation.

  

  

  

  

  

• Here Comes The Yuantervention

  Somebody had to do something…

   

  Offshore Yuan ripped 14 handles stronger after early weakness on PBOC’s “stable” fix…

  

   

  And Chinese stocks lifted elegantly back to unchanged to prove its not fundamentals…

  

   

  Just “psychological panic.”

  Panic at paying 64x valuations perhaps?

   

  

  

  

  

  

  

• Noble Group's "Margin Call" Part II: The Enron Moment

  “Our balance sheet – the strongest in recent history – represents a significant advantage as we continue to identify high value growth opportunities across the products and geographies we operate in. Maintaining our investment grade rating with the international rating agencies is a vital part of this strategy.”

        – Noble Group 2014 Annual Report, p. 27

        * * * * *

  “Moody’s Investors Service has downgraded Noble Group Limited’s senior unsecured bond ratings to Ba1 from Baa3 and the provisional rating on its senior unsecured MTN program to (P)Ba1 from (P)Baa3.”

        – Moody’s, December 29, 2015

        * * * * *

  “Noble Group Downgraded To ‘BB+’ On Weakened Liquidity; Notes Lowered To ‘BB’; Ratings Still On CreditWatch Negative”

       – Standard & Poors, January 7, 2016

   

  Noble’s “Margin Call” Part II – The Enron Moment

  By Simon Jacques

  The story of Noble is worth writing a book, mostly of how not to run your business. 

  If they are in this mess, it is a in large part because the management was comprised predominantly of traders who were predisposed to defending their books.

  Noble has been desperately trying to revive their image by hiring former Goldman, JP. Morgan, Trafigura executives etc. By doing so they were looking for a form of credibility collateral.

  It didn’t work well for the new employees as they rapidly found out that they inherited from the liabiliaties of one decade of Noble’s poor decision making of the hard-core asset guys like William J. Randall and ex-Goldman Sach banker Yusuf Alireza.

  In the part II of this analysis we will review the gap between the liquidity headroom and the debt maturity profile of the trader and explain how Noble Group will have its Enron moment.

  The fatal mistake that Noble Group did was to deliberately mislead the market about their financial performance using accounting devices.

  During last November, Noble Group’s chief financial officer Robert van der Zalm has stepped down from his position after taking a leave of absence for “health reasons”.

  Two months later,  Moody’s downgraded Noble Group.

  In a very awaited decision, Standard & Poor’s has finally lowered Noble Group’s to junk, placing Asia’s largest commodity trader on watch for further possible as the rating agency remains skeptical about the liquidity headroom of the trader.

  

  According to Noble Group, on September 30th 2015, the company had  $15.5bn banking facilities and $1.669B in RMI (ready marketable inventories).

  • $11.1bn of these $15.5bn banking facilities is uncommitted and are contingent on ability of maintaining investment-grade rating in the future.
  • Noble claims to have $900M of cash and 1.669B$ in RMI (ready and marketable inventories).
  • Their 1.669B$ in RMI have claims on related- party notes that are under collateralized by their commodity merchant activity and therefore should be excluded from their liquidity headroom.
  • Noble Group currently uses $3.4B of borrowing facilities that are uncommitted.

  Noble Group is left with only 1B$ of unutilized committed borrowing facilities and $900M of cash ready available to meet $2.966B of debt scheduled in the next 12 months.

  

  

  Source: Noble Group MD&A Q-3 2015

  Moreover, Noble Group counts on the completion of the Noble Agri stake divesture to reap $750M, a transaction which may not be completed by February 2016.

  Adding the 1B$ of unused uncommitted borrowing facilities plus the $750M of Noble Agri and the $900M of cash that Noble claims to have, Noble is still short by $316M.

  With the S&P downgrade, the total collateral margin call on Noble Group could be as much as $3.4B, banking facilities that are uncommitted and contingent on the ability of maintaining their investment-grade rating.

  Noble will have its Enron Moment.

  Enron’s bankruptcy occurred on November 2001 and was triggered by S&P’s downgrade of its debt below investment grade, activating a call provision in some loan indentures with principal amounts totaling $4 billion, cash and liquidity that suddenly Enron didn’t have.

  After the quick sale of Noble Agri, Noble’s core business remains its coal & energy – two very depressed commodities for the foreseeable future, and with no cash-flows to pay its debt and a sudden tightening of the credit, the trader is a cancer patient on the forward curve.

  

  

  

  

  

• Germany Erupts Into Chaos As Protesters Declare "Rapefugees Not Welcome"

  Anger over a wave of sexual assaults that occurred across the EU on New Year’s Eve reached a boiling point in Germany on Saturday when some 1,700 people attended a rally organized by the anti-Muslim PEGIDA movement.

  PEGIDA, which nearly fizzled early last year, gained in popularity as hundreds of thousands of Mid-East asylum seekers responded to Angela Merkel’s open-door refugee policy by flooding across Germany’s borders. Initially, many Germans met the the migrants with hugs and gifts, but as the months wore on, sentiment gradually soured and attendance at PEGIDA rallies once again spiked with as many as 20,000 people showing up for an October demonstration.

  Seeking to capitalize off the assaults that were allegedly perpetrated by groups of marauding Arab refugees in Cologne, PEGIDA took to the streets this weekend and predictably, clashes with riot police ensued.

  “Demonstrators, some of whom bore tattoos with far-right symbols such as a skull in a German soldier’s helmet, had chanted ‘Merkel must go’ and ‘this is the march of the national resistance’”, Reuters writes. Another banner read: “Rapefugees not welcome.”

  

  Ultimately, police rolled out the water cannons to disperse the crowd, which authorities say was at least partially comprised of “known hooligans” – whatever that means.

  Some protesters hurled firecrackers and bottles at officers and in a testament to just how divided the country has become, dozens of counter demonstrators massed to protest the PEGIDA protest. Here’s a short clip which depicts the chaos:

  The rallies came as Merkel signaled the German government may soon move to deport offenders. “The right to asylum can be lost if someone is convicted, on probation or jailed,” Merkel said following a meeting of the CDU’s top brass. “Merkel’s remarks on Saturday were in stark contrast to her earlier optimism about the influx to Germany, which has taken in far more migrants than any other European country,” Reuters remarked.

  As we wrote on Saturday, “how TIME’s person of the year responds may ultimately determine how the world remembers one of the most indelible and revered politicians in European history.”

  Indeed, some among the crowd openly called for the Iron Chancellor’s head (figuratively speaking). “Merkel has become a danger to our country. Merkel must go,” a speaker told the crowd which, as Reuters goes on to note, “loudly echoed the call, expressing their anger at Germany’s 1.1-million-strong migrant influx last year.” 

  “These women who fell victim will have to live with it for a long time. I feel like my freedom has been robbed,” one mother of four said.

  The anger was just as palpable on the opposite side as many Germans see PEGIDA’s growing support as a dangerous blast from the country’s troubled past. Some 1,300 leftist demonstrators from the counter-protest shouted “Nazis raus!” (Nazis out!), while holding signs that read “There is nothing right about Nazi propaganda,” and “Fascism is not an opinion, it is a crime”.

  “We are there to tell them to shut up. It is unacceptable for PEGIDA to exploit this horrible sexual violence perpetrated here on New Year’s day and to spread their racist nonsense,” one counter-protester said.

  Meanwhile, in an eerie twist of fate, the seven decade ban on publication of Mein Kampf expired this month in Germany. Although anyone is now techinically free to publish Hitler’s manifesto, the definitive edition will be a 2,000 page annotated volume published by the Institute for Contemporary History in Munich. 

  

  Ronald Lauder, president of the World Jewish Congress, says it “‘would be best to leave ‘Mein Kampf’ where it belongs: the poison cabinet of history.'” “‘Unlike other works that truly deserve to be republished as annotated editions, ‘Mein Kampf’ does not,'” he adds. ICH director Andreas Wirsching said the following of the new edition in an interview with Deutsche Welle:

  Our edition is particularly aimed at historical researchers. It can’t be denied that Hitler’s “Mein Kampf” is certainly an important historical document. The book is a source for information on his life, his thinking and most importantly, the history of National Socialism as a whole, and therefore it’s meant for research purposes.

   

  But I’m certain that with this edition’s styling, we will reach an even wider audience due to the great interest in this topic. The commentaries are in part brief academic annotations, and we have added a detailed index to easily access the content. Public interest in this topic is so vast, and so we hope that maybe a few non-experts will also take a look at our edition.

  While we can’t say for sure whether the buyers are “non-experts,” some people are indeed “taking a look.” As The Daily Mail reports, the new edition “was an instant sellout when it hit bookstores in Germany for the first time since the Second World War.” Like a unicorn tech IPO, the launch was oversubscribed as there were nearly four times as many orders as available copies. “More than 15,000 advance orders were placed, despite the initial print of 4,000 copies,” The Mail continues, adding that “one copy [was] even put up for resale on Amazon.de for €9,999.99.

  And so, it would appear that PEGIDA leader Lutz Bachmann was indeed correct last year when he posted the following picture of himself on Facebook with the caption “He’s back.”

  

  

  

  

  

  

• Oregon Standoff: Isolated Event Or Sign Of Things To Come?

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

  The nation's attention turned to Oregon this week when a group calling itself Citizens for Constitutional Freedom seized control of part of a federal wildlife refuge. The citizens were protesting the harsh sentences given to members of the Hammond ranching family. The Hammonds were accused of allowing fires set on their property to spread onto federal land.

  The Hammonds were prosecuted under a federal terrorism statute. This may seem odd, but many prosecutors are stretching the definition of terrorism in order to, as was the case here, apply the mandatory minimum sentences or otherwise violate defendants’ constitutional rights. The first judge to hear the case refused to grant the government’s sentencing request, saying his conscience was shocked by the thought of applying the mandatory minimums to the Hammonds. Fortunately for the government, it was able to appeal the decision to judges whose consciences were not shocked by draconian sentences.

  Sadly, but not surprisingly, some progressives who normally support civil liberties have called for the government to use deadly force to end the occupation at the refuge. These progressives are the mirror image of conservatives who (properly) attack gun control and the PATRIOT Act as tyrannical, yet support the use of police-state tactics against unpopular groups such as Muslims.

  Even some libertarians have joined the attacks on the ranchers. These libertarians say ranchers like the Hammonds are “corporate welfare queens” because they graze their cattle on federal lands. However, since the federal government is the largest landholder in many western states, the ranchers may not have other viable alternatives. As the Oregon standoff shows, ranchers hardly have the same type of cozy relationship with the government that is enjoyed by true corporate welfare queens like military contractors and big banks. Many ranchers actually want control of federally-held land returned to the states or sold to private owners.

  Situations like the one in Oregon could become commonplace as the continued failure of Keynesian economics and militaristic foreign policy is used to justify expanding government power. These new power grabs will increase the threats to our personal and economic security. The resulting chaos will cause many more Americans to resist government policies, with some even turning to violence, while the burden of government regulations and taxes will lead to a growing black market. The government will respond by becoming even more authoritarian, which will lead to further unrest.

  Fortunately, we still have time to reverse course. The Internet makes it easier than ever to spark the ideas of liberty and grow the liberty movement. Spreading the truth and making sure we can care for ourselves and our families in the event of an economic collapse must be our priorities.

  We must help more progressives understand that allowing the government to run the economy not only leads to authoritarianism, it impoverishes the lower classes and enriches the elites. We must also show conservatives that militarism abroad inevitably leads to tyranny at home. We also need to continue exposing how the Federal Reserve feeds the welfare-warfare state while increasing economic instability and income inequality. This week’s Senate vote on Audit the Fed is important to our efforts to help the American people learn the full truth about our monetary system.

  One thing my years in Washington taught me is that most politicians are followers, not leaders. Therefore we should not waste time and resources trying to educate politicians. Politicians will not support individual liberty and limited government unless and until they are forced to do so by the people.

  

  

  

  

  

• Fed's Williams: "We Got It Wrong"

  In late 2014 and early 2015, we tried to warn anyone who cared to listen time and time and time again that crashing crude prices are unambiguously bad for the economy and the market, contrary to what every Keynesian hack, tenured economist, Larry Kudlow and, naturally, central banker repeated – like a broken – record day after day: that the glorious benefits of the “gas savings tax cut” would unveil themselves any minute now, and unleash a new golden ago economic prosperity and push the US economy into 3%+ growth.

  Indeed, it was less than a year ago, on January 30 2015, when St. Louis Fed president Jim Bullard told Bloomberg TV that the oil price drop is unambiguously positive for the US.

  It wasn’t, and the predicted spending surge never happened. 

  However, while that outcome was not surprising at all, what we were shocked by is that on Friday, following a speech to the California Bankers Association in Santa Barbara, during the subsequent Q&A, San Fran Fed president John Williams actually admitted the truth.

  The Fed got it wrong when it predicted a drop in oil prices would be a big boon for the economy. It turned out the world had changed; the US has a lot of jobs connected to the oil industry.

  And there you have it: these are the people micromanaging not only the S&P500 but the US, and thus, the global economy – by implication they have to be the smartest people not only in the room, but in the world. As it turns out, they are about as clueless as it gets because the single biggest alleged positive driver of the US economy, as defined by the Fed, ended up being the single biggest drag to the economy, as a “doom and gloomish conspiracy blog” repeatedly said, and as the Fed subsequently admitted.

  At this point we would have been the first to give Williams, and the Fed, props for admitting what in retrospect amounts to an epic mistake, and perhaps cheer a Fed which has changed its mind as the facts changed… and then we listened a little further into the interview only to find that not only has the Fed not learned anything at all, but is now openly lying to justify its mistake. To wit:

  I would argue that we are seeing [the benefits of lower oil]. We are seeing them where we would expect to see them: consumer spending has been growing faster than you would otherwise expect.

  Actually John, no, you are not seeing consumer spending growing faster at all; you are seeing consumer spending collapse as a cursory 5 second check at your very own St. Louis Fed chart depository will reveal:

  

  But the absolute cherry on top proving once and for all just how clueless the Fed remains despite its alleged epiphany, was Wiliams “conclusion” that consumers will finally change their behavior because having expected the gas drop to be temporary, now that gas prices have been low for “over a year” when responding to surveys, US consumers now expect oil to remain here, and as a result will splurge. So what Williams is saying is… short every energy company and prepare for mass defaults because oil will not rebound contrary to what the equity market is discounting.

  We can’t wait for Williams to explain in January 2017 how he was wrong – again – that a tsunami of energy defaults would be “unambiguously good” for the US economy.

  Full audio recording below.

  

  

  

  

  

• The EU Bail-In Directive: Dark Clouds Are Gathering

  Submitted by Pater Tenebrarum via Acting-Man.com,

  Portugal’s Rickety Banking System

  After the unseemly bankruptcy of the Espirito Santo Group and the associated bank, then Portugal’s second biggest (likely a result of not praying enough, see: “Big Portuguese Bank Gets Into Trouble” and “Fears Over Banco Espirito Santo Escalate” for the gory details), Portugal’s state-run deposit insurance fund basically ran out of money.

  It turns out that Europe’s new Bank Recovery and Resolution Directive (BRRD for short) came just in time for Portugal. At the end of 2015, another Portuguese bank bit the dust, the country’s seventh largest lender by assets, Banif. Portugal’s government once again decided to bail the bank out, but with strings attached. Subordinated bondholders and shareholders were essentially wiped out, which is as it should be.

   

  

  Banif SA, weekly. Although this is hard to see on this linear chart, the stock rose by 40% today, to €0.002. Shareholders are allegedly planning to throw a wild party in Lisbon over the weekend (we were unable to confirm this rumor) – click to enlarge.

  Senior bondholders and depositors were spared however, with Portugal’s overburdened taxpayers once again footing the bill. According to the FT:

  Portugal has agreed a €2.2bn state rescue for Banco International do Funchal (Banif), splitting the Madeira-based lender into “good” and “bad” banks and selling its healthy assets to Spain’s Santander for €150m in the country’s second bank bailout in less than 18 months.

   

  António Costa, Portugal’s new socialist prime minister, said the bailout would involve “a high cost for taxpayers” but had the advantage of being “a definitive solution”. Branches would open normally on Monday, he said. The rescue, which “bails in” shareholders and subordinated creditors, follows the €4.9bn bailout in August last year of Banco Espírito Santo, once Portugal’s largest listed bank, whose healthy assets, split off into Novo Banco, remain unsold.

   

  In a statement late on Sunday night, the Bank of Portugal said the rescue of Banif would involve “total public support” estimated at €2.25bn to cover “future contingencies”, of which €1.76bn would come directly from the state and €489m from a bank resolution fund, to which all banks contribute. The bailout protects depositors and senior creditors and ensures that Banif’s operations, transferred to Santander Totta, the Spanish group’s Portuguese subsidiary, will continue to “function normally”, the central bank said.

   

  Shareholders and subordinated creditors would be left in Banif, retaining “a very restricted group of assets” that are to be liquidated, the Bank of Portugal said. “Problematic assets” would be transferred to a special asset management vehicle. The rescue partly mirrors the 2014 bailout of BES, which was split into “good” and “bad” banks after its profits were hit by exposure to the heavily indebted Espírito Santo family business empire.

   

  Banif is Portugal’s seventh largest lender with total assets valued at €12.8bn in June, equivalent to about 7 per cent of Portugal’s gross domestic product, and deposits totalling €6.3bn. The bank is the dominant lender in the Portuguese islands of Madeira and the Azores, where it accounts for more than 30 per cent of total deposits.”

  (emphasis added)

  Since no deposits were wiped out as a result of the bail-out, Portugal’s money supply won’t be affected. However, Banif’s downfall is a reminder that Portugal’s banking system remains quite rickety. We dimly remember someone saying that the bail-out of BES would be the last such problem. Evidently it wasn’t.

  Still, there is nothing overly unusual here – the socialist prime minister decided that it would be better to spare senior bondholders and depositors and let taxpayers eat the losses, but at least it was decided to bail someone in. However, what happened next was a lot less benign.

  Governments Trying to Subvert the Law

  The first euro area government that has tried to subvert the law governing the relations between creditors and borrowers was that of Austria. It was recently ignominiously stopped from doing so by the country’s Constitutional Court, which declared the so-called “Hypo Alpe Adria Special Law” unconstitutional.

  What the government tried to do in this case was to stiff certain classes of creditors in spite of the fact that their bonds had been guaranteed by the now essentially insolvent province of Carinthia. As one can easily imagine, this decision didn’t go down well with the affected creditors and they sued the government. Austria’s Constitutional Court rightly concluded that the government had attempted to subvert essential legal principles and repealed the law in its entirety.

  Specifically, the court cited in its ruling that reversing the guarantees to bondholders was in conflict with the constitution, that the law represented an unacceptable breach of property rights and that it treated creditors holding guarantees unfairly by dividing them into different classes, in spite of the fact that they should be treated pari passu.

  As deeply embarrassing as this ruling was for Austria’s government, the attendant sighs of relief of bondholders could be heard across Europe. By desperately trying to avert a bankruptcy of the province of Carinthia (an event for which no legal provisions exist!), the government had created a huge question mark over government debt guarantees all over Europe. If one government could get away with suspending them by legislative fiat, couldn’t all of them expected to do so if push came to shove?

   

  

  The fancy HQ of the former Hypo Alpe Adria Group (now known as “Heta Asset Resolution”, which isn’t merely a “bad bank” but easily the “worst bank” ever) in Klagenfurt, Carinthia.

  As a first test of the BRRD, the HAA special law turned out to be a costly failure. The cost cannot simply be measured in terms of the additional amounts the country’s taxpayers are now forced to fork over – the real cost is hidden, and comes in the form of lost trust. As the FT noted at the time:

  “Germany’s VOeB association of public banks said that the law would have led to incalculable costs by undermining investor confidence in Austria. The country now faced “the considerable task of winning back the lost trust of national and international investors — which could be regarded as a Herculean task”, said Liane Buchholz, the VOeB’s managing director.”

  Giving it Another Try in Portugal

  But we know governments. We have already seen the lengths to which assorted Greek governments and the government of Argentina have gone in recent years to stiff their creditors. More recently, Ukraine got in on the act as well. So given the fact that the banking system, governments and central banks are engaged in a complex three-card Monte designed to fund welfare/warfare statism by issuing mountains of unsound and unpayable debt that “backs” an equally fast growing mountain of irredeemable “money”, we knew it would only be a question of time before someone tried to pull the same stunt again.

  Who better suited for this task than Portugal’s new socialist government? Remember the bailout of BES and the creation of a “good bank” and a “bad bank”? Take a gander at the following chart from Bloomberg:

   

  

  Five senior BES bonds that had hitherto been assigned to the “good bank” are reassigned overnight, without warning, to the “bad bank”. Bondholders lost 80% of their money between the evening of December 29 and the morning of December 30 – click to enlarge.

  As Bloomberg notes, this is “setting a dangerous precedent” – indeed, it is not much different from the precedent almost set by Austria’s government. Here is the problem in a nutshell: the government, or rather the ECB, suddenly “discovered” – and this shouldn’t really surprise anyone – that the financial hole that has been torn into BES is actually gaping a lot wider than had been hitherto assumed. According to Bloomberg, this caused Portugal’s government to opt for instant expropriation – a new year’s surprise present for BES bondholders, so to speak:

  “If you owned any of those five bonds on Tuesday, you were owed money by Novo Banco, the good bank. On Wednesday, you were told that your bonds had been transferred to BES, the bad bank. The Portuguese central bank selected five of Novo Banco’s 52 senior bonds, worth about 1.95 billion euros ($2.1 billion), and reassigned them — thus backfilling a 1.4 billion-euro hole in the “good” bank’s balance sheet that had been revealed in November by the European Central Bank’s stress tests of the institution.”

  The core problem with this decision should be glaringly obvious: once again, the government is arbitrarily picking winners and losers. Senior bondholders are no longer treated pari passu – certain types of bonds suddenly seem to confer different property rights than others – in spite of the fact that all these bonds are part of the class of “senior bank bonds”.

  There is in principle absolutely nothing wrong with bailing in bondholders – in fact, this is precisely the way to go. However, the essential principle that creditors holding instruments of the same seniority have to be treated equally is something the bond markets of the whole world are relying on. Without this principle, what point is there in creating different levels of seniority, which are attended by different levels of risk and hence involve different costs and rewards?

  One wonders of course on what grounds precisely these five bond issues were selected and not any of the others. That’s simple, actually – as Bloomberg explains:

  “It seems likely that Portugal’s choice of bonds wasn’t completely arbitrary; the documentation for the selected securities says they are governed by Portuguese law, rather than U.K. or U.S. law.” 

  In short, the government already knows it would lose its case in London and New York courts – because, naturally, the bondholders are preparing to sue. So it has picked bonds the covenants of which are governed by Portuguese law, in the hope that the courts in Lisbon will be sympathetic to acts of selective expropriation by the Portuguese government.

  As Bloomberg remarks, the consequences of this decision are nigh incalculable – and bank bondholders across Europe are likely to once again hold their collective breath:

  “Portugal isn’t the only country refurbishing its banking industry. Germany’s savings banks will need to bolster their capital in the coming months under the new EU rules, and the fourfold increase in bad loans held by Italy’s banks since 2008 means the central bank there has some housecleaning of its own to do. Consolidation — in the form of forced intermingling of stronger and weaker banks — is likely in both countries. Investors who own debt issued by German or Italian banks will no doubt reflect carefully on what just happened in Portugal.”  

  (emphasis added)

  If we were holding any of these bonds, we’d shoot first and ask questions later. Surely if ever there was a time to get out of Dodge, this is it.

  Conclusion

  In principle, the BRRD, or “bail-in directive” as it is also known, is quite a good idea. The fact that lending money to fractionally reserved banks or even merely depositing it with them, involves risks needed to be firmly reestablished. One simply cannot expect that banks and their creditors will be bailed out by taxpayers at every opportunity. Besides, the admission that there are risks in banking that have hitherto been glossed over or have even been lied about was long overdue. However, Europe’s governments are now likely to find out that the current monetary system with its fractionally reserved banks is actually incompatible with this admission, so to speak.

  By arbitrarily meting out unequal treatment to similar classes of creditors, they are unwittingly hastening this process of recognition. In that sense, we actually welcome the Portuguese government’s attempt to stiff certain BES bondholders (although we still regard the case as such as plainly illegal and contemptible). It will now become even more difficult to keep assorted banking zombies on artificial life support. A lot of unsound credit is likely to be liquidated faster than had been expected to date. Artificial credit expansion is going to become even harder to implement. Unfortunately none of this is going to keep governments from trying to confiscate as much wealth as possible in a doomed attempt to keep the unworkable system of “third way” socialist regulatory statism going.

  In this context, we want to leave you with a few quotes by Ludwig von Mises, which go to the heart of matter and some of which we are convinced will once again turn out to be prophetic – especially the ones that proclaim that the so-called “mixed economy” is just as certain to fail as the communist economies were. (from: Bureaucracy, The Anti-Capitalistic Mentality, Human Action, Planned Chaos and Planning for Freedom).

   

  

  “Sorry boys and girls, you will have to choose. You can either have capitalism, freedom, prosperity and personal responsibility,or you can have socialism, tyranny, poverty and ‘security’. You cannot have both.”

  “The Welfare State is merely a method for transforming the market economy step by step into socialism.”

  “An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.”

  “The issue is always the same: the government or the market. There is no third solution.”

  “Capitalism and socialism are two distinct patterns of social organization. Private control of the means of production and public control are contradictory notions and not merely contrary notions. There is no such thing as a mixed economy, a system that would stand midway between capitalism and socialism.”

  “Contrary to a popular fallacy there is no middle way, no third system possible as a pattern of a permanent social order. The citizens must choose between capitalism and socialism.”

  (emphasis added)

  Amen.

  

  

  

  

  

• Shared Sacrifice? 1 In 3 Americans Slash Staples Spending To 'Afford' Obamacare

  Health insurers are in panic mode as the Obama administration, ever eager maximize coverage optics for Obamacare, has, as The NY Times reports, allowed large numbers of people to sign up for insurance after the deadlines in the last two years, destabilizing insurance markets and driving up premiums. This surge in costs, from unintended consequences, has left 1 in 5 Americans with health insurance is having problems paying medical bills; and, as a new poll finds, more than one in three Americans, or 35 percent, said they were unable to pay for basic necessities such as food, heat, and housing because of medical bill problems…

  Among people with health insurance, one in five (20%) working-age Americans report having problems paying medical bills in the past year that often cause serious financial challenges and changes in employment and lifestyle, finds a comprehensive new Kaiser Family Foundation/New York Times survey. As expected, the situation is even worse among people who are uninsured: half (53%) face problems with medical bills, bringing the overall total to 26 percent.

   

  While insurance can protect people from problem medical bills, the survey suggests that those with employer coverage or other insurance suffer similar consequences as the uninsured once such problems occur. Among those facing problems with medical bills, almost identical shares of the insured (44%) and uninsured (45%) say the bills had a major impact on their families.

   

  People with insurance who face problem medical bills also report a wide range of consequences and sacrifices during the past year as a result, including delaying vacations or major household purchases (77%), spending less on food, clothing and basic household items (75%), using up most or all their savings (63%), taking an extra job or working more hours (42%), increasing their credit card debt (38%), borrowing money from family or friends (37%), changing their living situation (14%), and seeking the aid of a charity (11%). These shares generally are as large as or larger than the shares among uninsured people with problem medical bills.

   

  

   

  Overall, 62 percent of those who had medical bill problems say the bills were incurred by someone who had health coverage at the time (most often through an employer). Of those who were insured when the bills were incurred, three-quarters  (75%) say that the amount they had to pay for their insurance copays, deductibles, or coinsurance was more than they could afford.

  And it is not about to get better any time soon, as The NY Times reports, it appears the liberal-leaning establishment will never learn the real "unintended consequences" of tinkering central-planning…

  The administration has created more than 30 “special enrollment” categories and sent emails to millions of Americans last year urging them to see if they might be able to sign up after the annual open enrollment deadline. But, insurers and state officials said, the federal government did little to verify whether late arrivals were eligible.

   

  That has allowed people to wait until they become ill or need medical services to sign up, driving up costs broadly, insurers have told federal health officials.

   

  “Individuals enrolled through special enrollment periods are utilizing up to 55 percent more services than their open enrollment counterparts” who sign up in the regular period, the Blue Cross and Blue Shield Association, whose local member companies operate in every state, told the administration.

  Of course, Enroll America, a nonprofit group with close ties to the Obama administration, said the government “should not tighten eligibility or verification standards in ways that could place an undue burden on consumers.”

  Because – "it's fair…" – though The Iron Lady had it right…

  

  

  

  

  

  

• MacroStrategy Explains Why Most Stocks Have Already "Crossed The Rubicon"

  As we have reported on numerous prior occasions, the biggest marginal buyer of stocks in both 2014 and 2015 (and forecast to remain in 2016), are corporations themselves, using debt-funded buybacks to push their stocks to record highs, allowing the smart money to sell in record amounts.

  

   

  But what happens when companies are so levered that they can’t possibly afford to issue any more debt, virtually all of which has been used to repurchase stocks, as we have shown before…

  

  … especially in a time when yields on Investment Grade bonds are rising courtesy of the first Fed rate hike in nearly a decade, and when cash flows are sliding faster with every passing year?

  For another version of the answer we have provided many times before, we go to MacroStrategy’s Julien Garran, who informs us that as credit & returns deteriorate, an increasing number of stocks are crossing the “Rubicon.” By Rubicon he means the “cut-off point where corporates can no longer justify gearing up to do buybacks. In 2013, 60% of my sample could justify buybacks. Since then, US corporates have raised debt by US$1.1trn and bought back US$1.1trn of stock. But now, with debt levels & costs up, and returns down, only 35% make the grade.” That, in his view is also the key to the narrowing breadth in the market. His conclusion: breadth is now set to narrow to the point where the whole market turns down in 2016.

  Some more details on Crossing the Rubicon:

  Why does breadth decline? In my view, corporates’ ability to gear-up and buy-back stock is critical to the story.

   

  From the start of 2014, US corporates covered their entire capex budgets from internal funds. They then raised US$1.1trn of debt to do US$1.1trn of corporate buybacks (Data from the Fed’s Z1 report & Factset).

   

  The combination of rising debt, deteriorating returns and a rising cost of debt means that, increasingly, corporate’s debt levels  threaten their credit ratings, or their marginal cost of debt deteriorates relative to their cashflow yields. Both threaten their ability to gear up to buy back stock. And both threaten the value of their equity.

   

  As more companies cross the Rubicon out of the buyback zone, the bid for their equity shrivels. The key to trading the topping process is to sell the sectors which will see their margin cost of debt rise above the free cashflow from new business. Clearly the extractive industries, the utilities, and several industrial and retail companies have already crossed the line. I think that the leveraged buyout firms in the US are likely the next to go, as their cost of funding continues to blow out.

   

  To show the process, I have taken 50 S&P companies from 10 sectors (excluding financials). I’ve put them in a matrix with net debt/EBITDA on the horizontal axis and the free cashflow yield less the cost of debt on the vertical axis. The zone to the left and above the red line show the prime opportunities for gearing up for buybacks. That’s because free cashflow yields are well above the current marginal cost of debt, and net debt to EBITDA is contained. The zone to the right & below the red line shows stocks that will struggle to gear up for buybacks – either because their cost of debt is up to or above their free-cashflow yields, or because the net debt to EBITDA is too high.

   

  For the 2013 financial year, 60% of stocks in my sample were in good shape to gear-up for buybacks.

  

   

  By the end of 2015, just 35% of the sample were in good shape to do buybacks.

  

   

  I estimate that the liquidity shortfall will expand further in 2016, to US$750bn. Against that backdrop, I expect more pressure on credit, returns & growth, more corporates will cross the Rubicon. And as that continues I expect that buyback activity will fade further, and the net bid for equities will likely evaporate.

  

  The conclusion:

  My recommendations are; Short US indices, long the US$, long gold & gold equities & short the leveraged buyout sector in the US.

  So is 2016 the year it all falls apart? Stay tuned for the follow up comments from Garran because if he is right, the answer is a resounding yes.

  

  

  

  

  

• This Is What Gold Does In A Currency Crisis, China Edition

  Submitted by John Rubino via DollarCollapse.com,

  As China’s leaders figure out that pegging the yuan to the dollar while quintupling their debt in five years was a colossal mistake, they are, apparently, concluding that the only way out is a sudden, sharp currency devaluation. As Reuters reports...

  China's central bank is under increasing pressure from policy advisers to let the yuan currency fall quickly and sharply, by as much as 10-15 percent, as its recent gradual softening is thought to be doing more harm than good.

   

  The People's Bank of China (PBOC) has spent billions of dollars buying yuan over recent months to defend the exchange rate, but has failed to stabilize market sentiment. The currency has steadily lost another 2.6 percent against the U.S. dollar even after the bank sprung a surprise devaluation of nearly 2 percent in August.

   

  That gradual, managed depreciation makes the yuan a one-way bet for investors who see the currency weaken even as the central bank intervenes to prop it up.

   

  Policy insiders are now calling for a quick and sharp yuan depreciation, backed by tighter capital controls to curb speculation and the flight of money out of the country.

   

  "We should let the yuan have a considerable depreciation, but we should have a bottom line; it cannot create a big impact on the economy and the financial system, and big panic in the capital market," an influential government economist told Reuters, suggesting the yuan be allowed to depreciate by 10-15 percent over an unspecified timeframe.

   

  Letting the yuan fall sharply and quickly could help cushion many of China's debt-laden companies as the government pursues far-reaching structural reforms. Beijing is keen to restructure industry through "supply side" reform, especially reducing industrial over-capacity, but fears the corporate sector is too weak to handle that.

  [ZH:However, one needs to ask whether that is the goal for China… after all – Exports have been rising with a stronger Yuan?

  

  Or maybe it is as we previously noted – policy…

  Finally, the real purpose of the PBOC's exercise in FX management today was, just like in August, to fire a warning shot at the Fed's rate-hiking plans. Only this time the warning shot is far, far louder.

   

  In September the Fed postponed its rate hike as a result of China's devaluation. Will it do the same again next week? Because if China is about to unleash a 15% deval of the CNY against the entire world, expect a flood of Chinese FX reserves as the PBOC tries to control the glidepath of its currency, and avoid an all out collapse driven by soaring capital outflows.

  In other words, we are now right back where we were in mid-August, just before the bottom fell out of the market.]

  "The biggest risk in China is not really the economy," said Qian Wang, senior Asia economist for Vanguard Investments Hong Kong. "The real risk is, number one; the policy uncertainty, and number two; the currency. China is walking on eggshells."

  *  *  *

  Chinese citizens, meanwhile, are anxiously awaiting tomorrow’s market open while mentally repeating the same three lines:

  • Sure am glad I bought that gold last year.
  • Wish I’d bought more gold last year.
  • Wonder what I’ll have to pay for gold next week…

  Here’s what that looks like in graphical form:

  

   

  If China does spring a 15% devaluation on the already-wound-too-tight leveraged speculating community, the impact should be, well, amusing for sure, but otherwise a little hard to predict. About the only thing that can be said with near-certainty is that the above chart will have to be updated with much higher left and right axes.

  

  

  

  

  

• China Contagion Spills Over To Hong Kong Banks As HIBOR Explodes To Record High, Stocks Tumble

  Chinese stocks are trading at the lows of the day after Overnight HIBOR rates (Hong Kong's interbank borrowing rate) exploded a stunning 939bps to a record high 13.4%. It is clear that banks are utterly desperate for liquidity and/or are extremely concerned about one another's counterparty risk. This has dragged HSCEI down 5% (to its lowest since Oct 2011).

  Something just snapped…

  

   

  Evidently the pressure between On- and Off-shore Yuan was too much for banks to bear…

  

   

  Smashing Hang Seng China Enterprise Index down 5% to its lowest since October 2011

  

   

  Chinese Default/Devaluation risk just jumpe dback above 120bps (highest since August collapse)

  As we explained earlier, as Asian markets opened (ahead of the Yuan fix), they were in turmoil with FX markets crashing (JPY rallying as carry trades unwound), equity markets tumbling (Dow, Nikkei, and China A50), commodity carnage (crude and copper carnage) as Gold and bonds were bid. With offshore Yuan sliding ahead of the fix (and Onshore Yuan 3 handles cheap to Friday's fix), CFETS RMB Index dropping below 100 for the first time, and following Friday's 'token' stability, The PBOC decided to hold Yuan Fix practically unchanged for the second day. USDJPY and equity markets jumped on the news, then quickly faded.

   

  We have seen this "stability" before…

  

   

  Asian stocks collapse to lowest since October 2011…

  

   

  Chinese media is pushing rumors of rate cuts and urging people that they do not need USD (despite the lines we noted earlier) demanding theyhave more patience… (via People's Daily)

  More patience is needed for the Chinese economy which is in a transition period, as it transfers from old to new economic growth drivers while also facing a backdrop of a slowing global economy, the People's Daily reports citing academics. It would be too opinionated to judge that the Chinese economy would suffer a hard landing based on short-term fluctuations as many factors have had an impact on the yuan's recent depreciation and the stock market's falls.

   

  "The fundamentals of many economic crises is the psychological panic problem, and we need to take good care of the market and foster new drivers; conclusions on the Chinese economy can't be made in a rush based on the short-term or partial changes," said Zhang Tiegang, professor at the Central University of Finance and Economics.

  Yeah – all psychological.

  Offshore Yuan was tumbling before the Fix…

  

   

  As were Chinese stocks:

  • *FTSE CHINA A50 JANUARY FUTURES SLIDE 3%

  Of course, The Keynesian have a solution for all this…

  • *STIGLITZ: RECENT CHINA MARKET VOLATILITY ISN'T CATACLYSMIC
  • *STIGLITZ: CHINA NEEDS DEMAND BOOST TO AVOID DEEPER DOWNTURN

  It's that simple eh?!

  The reaction to PBOC "stability" is not good:

  • *MSCI ASIA PACIFIC EX-JAPAN INDEX DROPS 1.7%, EXTENDING LOSS
  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 1.7% TO 3,131.85

  And Dow futures jumped 80 point and then dumped 100…

  

   

  Chinese stocks are tumbling…

  

   

  And ChiNext is now down over 21% YTD…

  

   

  *  *  *

  As we detailed earlier, markets were turmoiling into the China Fix…

  China ripples may be turning into tsunamis. As FX markets creep open, something serious must have snapped. The South African Rand just crashed 10% – the biggest single-day drop since Lehman – to new record lows. At the same time, carry trades are being unwound en masse, smashing USDJPY down to 116.75 (strongest Yen in a year). Somebody do something!!!

   

  The South African Rand crashed 10% to a record low against the USD of 17.9169. This 10% collapse is the largest on record outside of the immediate post-Lehman move…

  

   

  Don't forget – As goes the South African Rand, so goes The World?

  

   

  Korean Won plunges to its lowest since July 2010…

  

   

  And Yen is surging…

  

   

  Smashing Nikkei futures down over 500 points from Japan's close….

  

   

  As USDJPY tumbles so US Equity markets are slumping…

  

   

  And crude is carnaging…

  

   

  Copper flash-crashed at the open and is now retesting…

  

   

  It appears people were expecting some Chinese intervention over the weekend… and so far have been disappointed.

  For now, Gold is bid as a safe haven…

  

   

  Charts: Bloomberg

  

  

  

  

  

• PRePare YouRSeLVeS…

  

  

  

  

  

• The Other (More Worrisome) "H" Bomb

  Presented with no comment…

   

  

   

  Source: Townhall.com

  

  

  

  

  

• The Biggest (And Possibly Most Terrifying) Company You've Never Heard Of

  Submitted by AnonWatcher via TheAntiMedia.org,

  Serco. Chances are you’ve never heard of the company. If you have heard of the company, chances are you misunderstand the shear enormity of the global company and their contracts.

  From transport to air traffic control, getting your license in Canada, to running all 7 immigration detention centers in Australia, private prisons in the UK, military base presence, running nuclear arsenals, and running all state schools in Bradford, Serco, somewhere, has played a part in moving, educating, or detaining people.

  

  New contracts awarded to Serco include a Saudi Railway Company, further air traffic control in the US and also IT support services for various European agencies. You can read more on their future projects below.

   

  Serco HY15 Results SEA 11 August 2015

   

   

  A Very Brief History

  Serco’s history began in 1929 as a UK subsidiary, RCA Services Limited to support the cinema industry.

  In the 1960s the company made a leap into military contracts to maintain the UK Air Force base Ballistic Missile Early Warning System. From there, the company continues to grow.

  Now trading as Serco Group, 2015 trading as of August 11 2015, maintained a revenue of £3.5 billion, and an underlying trading profit of £90 million. The data was presented at JPMorgan in London.

  In 2013 Serco was considered a potential risk, and became a representation of the dangers of outsourcing. The U.K. government developed contingency plans in case Serco went bankrupt. When the concerns came to light, Serco faced bans (along with G4S, another outsourcing contractor) from further bidding on new U.K. government work for six months. It wasn’t until Rupert Soames OBE – Sir Winston Churchill’s grandson – took on the job as Serco’s Chief Executive in 2014, that Serco turned a new corner of profit growth.

  Serco Today

  

  Serco today is one of the biggest global companies to exist. They have contracts with:

  Alliant – the vehicle for IT services across the Federal IT market;

   

  National Security Personnel System (NSPS) – For “(NSPS) training and facilitating services throughout the Department of Defense (DoD) and agencies that needs NSPS training and implementation services;”

   

  Seaport – The NAVSEA SEAPORT Multiple Award contract focuses on “engineering, technical, and programmatic support services for the Warfare Centers.” This is inclusive of Homeland Security and Force Protection, Strategic Weapons Systems, and multiple warfare systems.

   

  CIP-SP3 Services and Solutions (Cost $20 Billion, expiration date 2022) – biomedical-related IT services with the National Institutes of Health (NIH) with the main objective focused on Biomedical Research and Health Sciences extending to information systems throughout the federal government. Also implementation in several key areas of Biomedical Sciences including legislation and critical infrastructure protection.

  The few contracts listed above are among the vast array of transport, detention center and private prison contracts.

  Serco, the biggest company you’ve never heard of:

  

  

  

  

  

• Meanwhile In Shanghai Residents Form Lines To Sell Yuan, Buy Dollars

  On Thursday, as the world was focusing on the collapsing Chinese exchange rate, we noted that in a more troubling development, in December Chinese FX reserves declined by a record $108 billion, bringing the total drop for 2015 to over half a trillion, and the cumulative decline since Chinese reserves starting dropping in mid-2014 to just shy of $1 trillion.

  

   

  But why if China has been so keen on devaluing its currency – at least since the formal start of the devaluation on August 11 – was it selling so many USD-denominated assets? The answer: because if the PBOC did not step in and halt the decline (by liquidating reserves) the drop would have been even greater, suggesting that the capital outflow from China is orders of magnitude worse than either Beijing, or Chinese analysts would like to admit.

  One thing is certain: there is much more depreciation to go. As we reminded readers yesterday, one month ago we predicted at least another 15% in CNY devaluation, something Bloomberg agreed with over the weekend. And as China devalues more, it will face even more outflows: at least $670 billion which will drastically cut the country’s pile of FX reserves at the worst possible time – just as China’s banks are forced to begin recognizing the huge pile of non-performing loans as a result of a tsunami of pent up corporate defaults mostly in the commodity sector.

  All that assume a continuation of the smooth devaluation seen since the August 11 shocker.

  As SocGen points in a note today, “press reports at the end of last week suggested that senior policy advisors would like to see a sharp one-off depreciation of the CNY. The theory is that once such a move had been accomplished, the domestic capital outflows, that are putting additional pressure on China’s financial system and draining the FX reserve, would stop. The same policy advisors, however, recognise the dangers of such a strategy. First, domestic savers may not believe a “one-and-done” strategy, risking further capital outflows. Second, China’s political standing in the G20 group could well suffer as a result, which is important point to the current administration. Finally, the potential disruption to financial stability outside China, and with the risk of an Asian currency war, would ultimately feedback negatively to China.

  The first point is one we broadly mocked back in August when one after another PBOC speaker swore that the devaluation is over. We were correct in pointing out that it had only just begun.As such it is logical why the local population no longer believes a single word uttered by officials.

  Which brings us to another key point by SocGen:

  While China is willing to spend some of its FX reserves to manage the pace of currency depreciation, we believe that the authorities would step in with further capital controls should this be deemed necessary rather than risk an accelerated run down of reserves. Already last week saw some further tightening of the existing rules; Chinese citizens are still allowed to convert $50,000 annually (resetting on January 1), but a maximum daily limit of $5,000 has now been set unless an in-person appointment is made, in which case the cap is $10,000 and with a maximum of three meetings permitted per week. The irony is that expectations of further tightening of capital controls could add to outflow pressure.

  Bingo.

  Because as Ming Pao, the most influential Chinese newspaper in Hong Kong, reports that Shanghai residents are lining up at local banks to sell Yuan for Dollars over fears of even more Yuan devaluation.

  Ming Pao: Shanghai residents are queuing at local banks to sell #RMB for #USD amid fears about more RMB depreciation pic.twitter.com/WbjMUU6WEE

  — George Chen (@george_chen) January 10, 2016

  The good news: there may be lines, but they aren’t long. Which is good: the last time we say long lines was in December 2014 when the ruble imploded and the local population was rushing to exchange their rapidly devaluing pieces of paper into dollars or hard assets.

  

  

   

  More on the current sentiment on the ground in China, google translated from Ming Pao, according to which to avoid long lines forming, China Merchants Bank is urging people to seek personal appointments or be limited in how much they can convert:

  China Merchants Bank yesterday to purchase foreign exchange business can be seen in public not long lines, but bank employees significantly increased the number refers to the earlier exchange, cash dollar now the best appointments, but she said that did not change in swap lines. Mainland exchange regulations limit $ 50,000 per day for a year, to be exchanged for cash the same day, the maximum limit of $ 10,000.

   

  

  Not helping matters was a comment by Chen Xuebin, Professor in the Institute for financial studies at Fudan University, in which he said that based on past experience, the currency devaluation may cause a short-term panic effect. The silver lining: during last year’s 6% depreciation, there were no bank runs, so he is not too worried this time either.

  This time may be different, as SocGen points out:

  To our minds, the most significant change on China since the equity market first crashed last summer is the perception that the Chinese administration holds much less control over the economy and financial system than what was previously perceived. Part of this is the natural consequence of reform, and not least in the financial sector. Less than apt communication and somewhat confusing policy initiatives have unhelpful, to say the least. This does not mean, however, that the administration is without control.

  That is certainly the case, and over the next several weeks and months we will find out just how much, or little, control China’s administration still has left.

  

  

  

  

  

• ISIS Attacks On Libyan Oil Facilities Visible from Space

  Submitted by Charles Kennedy of OilPrice.com

  ISIS militants in Libya continue to attack key oil infrastructure in the country.

  The two large oil export terminals at Es Sider and Ras Lanuf came under ISIS attacks on January 4-6. Some oil storage tanks exploded after suffering damage from machine gun fire.

  NASA just published some shocking photos that clearly show the smoke plumes from the oil storage tanks are visible by satellite. The smoke blew east and northeast, blanketing Libya’s Mediterranean Coast. News reports suggest that at least five oil storage tanks are burning, each thought to have the capacity to hold 420,000 to 460,000 barrels of oil. Four of them are located at Es Sider and one at Ras Lanuf.

  A spokesperson for the National Oil Company in Libya said that seven storage tanks were burning.

  The attacks came as the oil company issued a “cry for help” on its website, calling on the Libyan people “of this homeland to hurry to rescue what is left from our resources before it is too late.”

  Libya’s rival governing factions have taken steps to patch up their differences, signing a UN-backed power-sharing agreement in December. The attacks from ISIS threaten to inflict lasting damage on the heart of Libya’s economy: its oil infrastructure.

  Take a look at the stunning NASA images below: 

  

  

  

  *  *  *

  For the full backstory on ISIS and Libya’s oil infrastructure, see here

  

  

  

  

  

• It Begins: FXCM Doubles Yuan Margins, Warns Of Market "Disruption And Highly Illiquid Conditions"

  The last time FX brokers, still hurting from the Swiss National Bank’s revaluation shocker from last January which forced brand names such as FXCM to seek an urgent bailout, scramble to hike margins was in late June just ahead of the Greek “event risk” weekend, when  numerous brokers either hiked margins on EUR positions or went to “close only” mode due to “uncertainty surrounding the Greek debt negotiations… that could lead to high volatility on the market.”

  So, barely one week into the new year, one which has seen the stock market suffer its worst ever first week of trading, some FX brokers are not taking chances, and in the aftermath of the aggressive plunge in the Yuan (one we warned about a month ago), have decided to minimize client stop-out risk by hiking margins.

  Case in point, here is FXCM with a just released warning about upcoming “highly illiquid conditions” leading to a doubling in Yuan margins:

  Dear Client,

   

  We believe there is a chance of disruption and highly illiquid conditions in the forex market during the coming weeks (and/or months). Please be aware that market gaps tend to occur over the weekend – that is, currencies trade at prices considerably distant from previous levels.

   

  *IMPORTANT UPDATE*  

   

  Margin requirements will double on the USD/CNH pair after market close on January 15, 2016. See a Complete List of New Margin Requirements

   

  Please review your account to ensure that you have enough available margin to support any new positions. You may deposit additional funds at www.myfxcm.com or close positions as needed.

  Follows the traditional disclaime which FXCM itself probably should have taken to heart one year ago when after the SNB’s de-pegging the firm suffered tremendous losses:

  Remember that forex trading can result in losses that could exceed your deposited funds and therefore may not be suitable for everyone, so please ensure that you fully understand the high level of risk involved.

  The paradox here is that pre-emptive, if correct, warnings such as this one, tend to quickly become self-fulfilling prophecies as other brokers immediately follow suit and likewise increase margin requirements, which helps mitigate total loss potential but just as quickly soaks up liquidity from the market, leading to an even more fragmented market, prone to sudden, and quite dramatic moves.

  The full list of FXCM margin increases is shown below; expect every other FX brokerage to promptly jump on the bandwagon.
  

  

  

  

  

  

• If The High-Yield Bond Market Is "Fixed", Explain This…?

  Remember a week ago when every TV anchor, pundit, asset-gatherer, and commission-taker stormed onto mainstream media and proclaimed the credit market collapse "fixed" because prices had 'stabilized' over the holiday period "proving that 3rd Avenue was a one off" and this dip was a buying opportunity? Yeah, well that was all complete crap… as Investment-Grade cost of funding hits a 3-year high, HY bond spreads blew out to cycle wides, 'triple-hooks' soared to their worst levels in almost 7 years, and credit protection costs rose by the most in years.

  "Stabilized" (during the Christmas break) was the new "everything is awesome"… but now…

  High Yield Bond ETFs are dumping…

  

   

  The cost of high-yield credit protection is soaring…

  

   

  Equity prices are starting to catch down to that reality…

  

   

  As is the cost of equity risk protection (VIX following August's "wait what" reality-wake-up call path)…

  

   

  And that means trouble for the only pillar of non-economic stock buying left… Investment-Grade credit risk just hit 3-year highs crushing the economics of any debt-funded shareholder-friendly activities…

  

   

  And finally, where it all started – CCC 'triple-hooks' credit spreads have re-spiked to cycle wides…

  

   

  But apart from that – yeah, credit is "fixed."

  

  

  

  

  

Digest powered by RSS Digest

• China Goes Full Keynesian-tard: Demolishes Never-Used Just-Built Skyscraper

  "Growth" meet "mal-investment boom-bust" In a perfect example of the smoke-and-mirror-ness of China's credit-fueled expansion, a 27-storey high-rise building which was completed on November 15th 2015 was just demolished, "having been left unused for too long."

  

  As China People's Daily reports,

  Directional blasting demolition of a high-rise building was completed successfully at 7 a.m. on November 15, 2015 in Xi'an, in northwestern China's Shaanxi province.

   

  

   

  The building was 118 meters high (27 floors) with a total construction area of over 37000 square meters.

   

  

   

  Having been left unused for too long, the building could not be brought back into use so local government decided to demolish it.

   

  

   

  It is reported to be the highest building that has ever been demolished in China.

  *  *  *

  The silver-lining – now workers can clean up the mess, dig a bigger hole… and fill that in – all in the name of Keynesian "growth."

  

  

  

  

  

• Saturday Humor: Kim Jong-Un Watches North Korean Submarine Launch Missile

  With North and South Korea “on the brink of war” following Pyongyang’s “successful” H-bomb test and the resumption of anti-Kim propaganda broadcasts across the DMZ, the young Supreme Leader is keen on demonstrating his country’s military prowess.

  Below, find a video which purports to show a fedora-donning Kim watching a North Korean submarine launch a missile. To truly appreciate why this may be the most epic 28-second clip ever recorded, make sure to watch it with the sound turned up.

  By the way, Friday was Kim’s birthday.

  

  

  

  

  

  

• How The Feds Got All That Western Land (and Why It's A Problem)

  Submitted by Ryan McMaken via The Mises Institute,

  Government owned and subsidized lands in the American West have been a source of conflict among competing interest groups since the 19th century. Since the very beginning of white settlement, lands have been used by the federal government as part of a political scheme to subsidize and reward certain groups while punishing others. 

  The current standoff between ranchers and federal officials in Oregon is simply the latest chapter in a long contentious and sometimes bloody history of groups competing for control over government-owned lands in the West, and by ensuring that lands continue to be allocated by political means rather than through the market, government ownership of lands simply perpetuates conflict in the region. 

  The Origins of Government Ownership in the West 

  Why is it that so much land is controlled by the federal government in Western states in contrast to the rest of the county? 

  The troubles initially began with the Louisiana Purchase which established the federal government as the direct administrator of immense amounts of non-state land. However, the ideological justification for permanent federal ownership really began to gain influence by the late 19th century as many Americans, including influential economists of the time, began to adopt ideologies that saw centralized government as necessary for regulating the economy. We see these ideological leanings in the creation of the Interstate Commerce Commission in 1887 which was initially created to regulate the railroads. Over time, the ICC became the inspiration for a host of other federal regulatory agencies that began to appear by the early 20th century. 

  As with the railroads, land in the west began to be seen as a "public resource" that required federal regulation as well. 

  But ideology was just one factor. The widespread nature of federal lands can also be attributed to mere administrative, historical, and geographic accidents that led to an expansion of federal land ownership well beyond what anyone had expected. 

  First of all was the fact of Indian settlement on Western lands. It may strike many as hard to believe, but the treatment of the Indian tribes west of the Mississippi was actually more restrained than it had been in Eastern states. 

  In earlier generations, for example, Indian settlements were completely destroyed with all the inhabitants killed or forcibly removed to locations west of the Mississippi. In other words, the tribes of the east were more completely decimated than were many tribes further West. 

  Much of this is due to the fact that whites populated the West more slowly and in smaller numbers than in, say, the Great Lakes area, but some of it is also due to the fact that the tribes often received better treatment from federal troops than they did from the ad hoc local militias they encountered in the Eastern states. 

  This is why Kit Carson saw his U.S. Army work in forcing Indians onto reservations as a "humanitarian" mission. Based on experiences in the east (and in early West Coast settlements), Carson surmised that the Indian tribes of the west would be completely destroyed if left to the "mercy" of locally based militias.   

  Over time — and contrary to past efforts of this sort — the removal of the tribes to reservations came to be dominated by the federal government. With this came what were effectively federally owned reservations. Legally, the reservations were sovereign lands guaranteed by the law of treaties. But the reality of US military domination meant the lands were really federal lands. 

  The Overrated Homestead Act 

  At the same time the federal government was moving the tribes onto reservations, it was attempting to encourage settlement by whites on those same lands. This was important to the federal government for  military reasons. It was important to the federal government that whites with an allegiance to the US settle the lands instead of, say, Canadians or Mexicans, and it was important toward making sure that the Indians did not attempt to re-settle the land. 

  The Homestead program was also a clever welfare scheme that provided nearly-free land to new settlers who were paying nowhere near what the cost of acquiring the land had actually been. The taxpayers back East had already covered much of the immense cost of Indian removal and infrastructure construction. The new homesteaders paid but a small fraction of this cost. But from the federal government's perspective, it was worth it since the cheap land meant pro-American settlers were keeping others out. 

  The homestead act is often romanticized and praised by free-market types, but it should not be. The Homestead program was, ultimately, a federal land redistribution scheme, and it worked about as well as anyone skeptical of federal competence might expect. It also further expanded the role of the federal government.

  Homesteading, as defined by federal law, worked relatively well in places like eastern Kansas or in the eastern Dakotas where it still rained enough to allow for crops without irrigation. 

  Further west — west of the 100th meridian — things were much drier, and the small acreage plots dictated by the Homestead Act made very little sense. Not surprisingly, Congress had written laws without bothering to check to see if they made any sense in light of geographic realities. 

  With so little water out west, and with fragile ecosystems that could not support anywhere near the agricultural population density that the Homestead Act envisioned, conflicts quickly arose over resources. Devastating boom-bust cycles like the Great Dakota Boom took shape in which new settlers flooded new lands only to find that they could not make a living on such small plots and with so little water. The lands were later abandoned. 

  In the wake of these new realities came rampant fraud in which large wealthy interests bent or broke the law to acquire large swaths of land that had been intended for small-scale settlement. Water rights became frequent bones of contention, and all the while, federal intervention became the tool of competing special interests who used federal power to gain lands and water rights for themselves. 

  The Spread of "Public" Lands 

  As it became clear that it was impossible to impose the eastern settlement model on the west, politicians and activists continued to cling to the idea that land ownership should still consist of only small parcels, even when such a plan made no sense at all in arid lands with sparse grass. 

  As a Plan B, the feds began to encourage the use of "open range" and the idea of public lands in which large numbers of small landowners would share water and grazing resources. 

  Eventually, neither the government nor the settlers wanted these lands to be privatized. Each interest group — homesteaders, ranchers, and water owners — wanted the lands to continue to be public since each group assumed it would be able to use its own political power to gain de facto use and control of the lands.

  Thus, today, we are living with the results of this system throughout the west. Federally-owned lands continue because interest groups would rather battle for control of the lands through political means than allow the lands to be privatized and pass outside the control of special interests. Meanwhile, the public in general tolerates this state of affairs because so many view markets as damaging to both the environment and ordinary citizens. For all its faults, they reason, federal ownership of the land must be less bad that private or even local-government ownership. 

  Eastern Oregon as Microcosm 

  In the current controversy over public lands in eastern Oregon, we're witnessing just another conflict between interest groups over how federal lands should be used, and the history of land politics in eastern Oregon tends to mirror the West overall. 

  In eastern Oregon as elsewhere, an important step in giving the Federal government a larger role in the local economy was in turning reservation lands into "public" lands for use by whites. 

  William N. Grigg has recently explored how conflicts between ranchers and Piute Indians in eastern Oregon led to demands by the ranchers for a larger federal role in the area. And, when the Piute Indians were finally forced out of Oregon, this paved the way for more federal control over lands in the region as what were once Indian lands became federally managed "public lands."

  But the drive among interest groups to control federal lands extends well beyond conflicts with Indians. Throughout the West  in the late 19th century, cattle ranchers were engaged in regular feuds with sheep herders and farmers over who could use and control federal lands. Oregon was no different. 

  In her book Forest Dreams, Forest Nightmares, Nancy Langston looks at how conflict among competing groups vying for control of the land in eastern Oregon led to ranchers calling for more federal involvement. Following the expulsion of the Piutes, the public lands quickly began to be overgrazed both on old Indian lands and in other public lands as well. 

  According to Langston, "law and custom specified that the range was supposed to be open to all, and not the exclusive property of the wealthy. Grass in the mountains was free and belonged to those who got their first: the Enclosures Act of 1873 stated to t no one could legally fence public domain."

  As is typical with any "commons," the resources in public lands were immediately strained to the point of making the land unusable. This then led to violence as each group attempted to exclude all other groups from the land. Langston explains: 

  Tensions finally spilled over into cattle and sheep wars throughout eastern oregon. In Union county, cattle owners formed a group called the Sheep Shooters Association. They ran advertisements in the La Grande Gazette identifying certain cattle ranges where sheepherders were advised not to cross recognizable boundaries … they also announced they would be placing lethal saltpeter mixed with stock salt in certain hotly contested range areas. Jon Skovline wrote that "Andy Sullivan, who ran horses on the flats below the Campbell Brothers, homestead burned out several night corrals built by itinerant sheep owners along what is now called Burnt Corral Creek. It is very likely that Sullivan also burned the accompanying tented camps of the herders. Lew McCarty was shot by unknown assailants." Thousands of sheep were also killed in grant county where feelings were strongest because summer range was in shortest supply.

  Meanwhile, homesteaders attempted to drive away cattle ranchers when they "fenced the creek bottoms to cut off the water supply from the large stockmen…Bitter feuds resulted." 

  Violent fueds between sheep herders and cattle ranchers continued for years until, by 1903, Langston writes, " local sheepmen as well as cattlemen were ready for regulation, even though [the sheepmen] feared the government would rule in favor of cattle over sheep … Ranchers were ready for an end to the disputes and  increasingly welcomed government intervention." 

  The "Sheep Wars," as they are known today, were hardly unique to eastern Oregon, nor were the range wars between homesteading farmers and cattle ranchers.

  For the most part, the cattle ranchers, through more effective use of fear and intimidation, won these political conflicts, and throughout the first half of the 20th century, the "Cattlemen's Associations" dominated state legislatures and the land use bureaucracies that regulated land use throughout the West. They've even passed laws making it illegal to criticize cattle ranchers. 

  In a familiar story of regulatory capture in which the regulated interest group actually controls the regulators, the cattle industry has long shaped debate over the use of public lands for grazing purposes. 

  Since the 1960s, however, the cattlemen have been increasingly eclipsed by other interests including environmentalists and urban residents looking for expanded access to water. The EPA has assumed an expanding role in managing federal lands and neighboring areas, and with it comes greater regulation on ranchers and on land use in general. Environmentalists are relishing their relatively newfound power, and ranchers don't like it when they're unable to exercise the same amount of influence to which they have been historically accustomed.

  It is this new ideological and political conflict that is fueling today's battles between federal land agencies and ranchers. 

  However, it should be remembered that, generally speaking, ranchers who use federal lands have never been opposed to the existence of federal lands. After all, federal subsidization of water projects and federal control of watersheds has furnished ranchers with cheap water for years, at the expense of taxpayers and urban dwellers. In dry and high-altitude areas especially, cattle are reliant on alfalfa crops and on other non-forage feed, which means their need for water is immense. 

  Why We Need Decentralization Now 

  If we wish to defuse national conflicts over land use, the only answer is to decentralize the land itself. It should be no concern of people in Washington, DC — 3,000 miles away  — as to how a handful of ranchers want to use a tiny corner of land in rural Oregon. Similarly, taxpayers in, say, Ohio (a net taxpayer state) should not be paying to mitigate the effects of overgrazing by ranchers in Oregon, or to build their water projects. 

  There are, of course, many legal and constitutional obstacles to decentralizing land ownership, but the political obstacles are numerous as well. For example, many ranchers oppose ending federal ownership of grazing lands because it would likely mean an increase in grazing fees. 

  Moreover, federal rules mean ranchers can often maintain their federal leases indefinitely without having to worry about prices ever being driven up by competitors. 

  Were grazing lands to be taken over by states or localities — or privatized — ranchers would have to compete with other ranchers, outdoor-recreation proprietors, and conservationist billionaires on the open market. Ranchers may quickly find that their formerly cozy grazing arrangements are now unaffordable. For many ranchers, a federal bird in hand is still better than two private-sector birds in the bush. 

  At the same time, environmentalists want perpetual federal control because they are convinced that any decentralization or privatization would mean that lands will be taken over by rapacious ranchers and miners. 

  But would they?  

  It is not at all clear that markets or local governments would prefer that land be used for agricultural purposes as opposed to other purposes. For example, were Rocky Mountain National Park to become a locally-controlled park or state park, there is, realistically speaking, zero chance that it would be handed over to ranchers or miners. The park is far too valuable to the local economy as part of the recreation and tourism industries. To turn the park into  range land would devastate the economies of the local communities, many of which contain wealthy and influential voters. 

  But, say that the park were broken up into parcels and sold to a  number of private owners. (We're in the realm of pure fantasy at this point.) It would make little sense to use the land for mining or ranching even in this case. Given the infrastructure in place and the relative closeness to a major metropolitan area, the lands in and around the Park are likely far more lucrative for recreational purposes than for mining or ranching. 

  So, when we ask the question of "if it's privatized/decentralized, won't those people take over the land?"  The answer is: "It depends." 

  Yes, some remote or otherwise unattractive areas will lend themselves to ranching and strip mining, and some areas (especially those less remote from where people live) will lend themselves to being preserved as parks and recreational facilities. The lands in the American west are incredibly diverse and different areas will be ideal for different purposes. 

  And, in an age of growing eco-tourism and outdoor recreation, there's a lot more to the west than ranching and mining. 

  But let us never forget that were it not for federal infrastructure such as dams, military bases, and federal highways, the West would have far fewer people and much less development than it does today. As has been demonstrated by numerous scholars of the West — especially Gerald Nash in his economic history of the West, The Federal Landscape — the development of the West has been largely dependent on federal spending — and we're talking about spending far above and beyond the initial federal efforts that cleared out the original inhabitants and laid down the first intercontinental railroad. The modern West as we know it today is a result of immense federal spending done during the Depression and the Cold War. 

  Likewise, it has been the federal government that has created the billion-dollar mega-dams, dumped plutonium into the ground, and failed miserably at fire suppression. The footprint of the federal government is everywhere in the west, and it could very well be that in a world with a smaller federal government, the West would look very different indeed. 

  The Democracy of the Marketplace 

  Ultimately, however, its the democracy of the marketplace that is best suited to determine how lands should be used in the west. 

  The perennial conflicts in the West over land seizures by environmentalists, regulatory battles, micromanagement, and overgrazing all illustrate how much of a failure the federal land ownership scheme has been. 

  With control over such immense resources, the far away federal government does not respond to local needs or local demand, but to national interest groups. 

  If we truly wish to democratize the use of land in the west, we would privatize it, or at the very least make it responsive to local populations instead of national interests. It is the marketplace, and not politics, that truly reflects the desires and needs of the people who wish to use lands and reward or punish those who own it. 

  In his book Bureaucracy, Ludwig von Mises long ago explained how it is the consumers who decide how economic inputs (such as land) are to be used:

  The real bosses, in the capitalist system of market economy, are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality. Their attitudes result either in profit or in loss for the enterpriser. They make poor men rich and rich men poor. They are no easy bosses. They are full of whims and fancies, changeable and unpredictable. They do not care a whit for past merit. As soon as something is offered to them that they like better or that is cheaper, they desert their old purveyors. With them nothing counts more than their own satisfaction. They bother neither about the vested interests of capitalists nor about the fate of the workers who lose their jobs if as consumers they no longer buy what they used to buy. 

  In the absence of bailouts, subsidies, and government protections, only those who use the land in a way that benefits others will be rewarded accordingly, at the expense of their competitors. 

  What will land use in the West look like for the next 100 years? Will it be just another century of unaccountable federal bureaucrats picking winners and losers? Or will the democracy of the marketplace be permitted and thus allow the people who use the land and depend upon it to have a say? 

   

  

  

  

  

  

• Visualizing The Most Valuable Substances By Weight

  While gold is undoubtedly one of the most traded substances on earth, it also happens to be one of the most valuable substances by weight. Although prices fluctuate, one gram of gold will cost you on average around $35. This got us thinking about how much other primarily naturally occurring substances out there cost.

  This new infographic, via ValueWalk, explores how much you would pay for a gram of everything from saffron, widely recognised as the world’s most expensive spice, to platinum and rhodium. While the market for these goods can’t match the sizeable gold market, whose depth and liquidity is unparalleled, the trading prices of these substances can widely surpass that of gold; though like gold, the prices of these substances are subject to fluctuations.

  

  BullionVault.com's infographic below shows just how much a gram of Iranian Beluga caviar would set you back, and how much you should expect to pay for the radioactive chemical plutonium.

  

  click on image for huge legible version.

  

  

  

  

  

• The Looming Recession & The Muted Delight Of Janet Yellen's Epic Failure

  Submitted by MN Gordon via EconomicPrism.com,

  One week down.  Fifty-one more to go.  No doubt, this has been a wild start to the New Year.  We expect many more to follow.

  For example, on Monday, Chinese investors overloaded the Shanghai Stock Exchange.  An abundance of traders hit the sell button in unison and nearly shorted out the sell side circuit.  By early afternoon the breakers had tripped to prevent a full market meltdown.  Here are the particulars, as reported by Bloomberg…

  “The worst-ever start to a year for Chinese shares triggered a trading halt in more than $7 trillion of equities, futures and options, putting the nation’s new market circuit breakers to the test on their first day.

   

  “Trading was halted at about 1:34 p.m. local time on Monday after the CSI 300 Index dropped 7 percent.  An earlier 15-minute suspension at the 5 percent level failed to stop the retreat, with shares extending losses as soon as the market re-opened.”

  Data showing Chinese manufacturing contracted for a fifth straight month was cited as having prompting the mass selloff.   Yet then, wouldn’t you know it, on Thursday Chinese traders fried the system again.  Circuit breakers were triggered for the second time this week.  Trading was again halted for the rest of the day.

  Reality and the Fed’s Portrayal of Reality

  Here in the U.S. stocks tripped over themselves all week too.  From market open on Monday to close on Thursday, the DOW dropped 891 points.  By our back of the napkin calculation that comes out to a loss of over 5 percent.  Like in China, U.S. manufacturing data reported on Monday may – or may not – have had something to do with it.

  “The U.S. economy’s manufacturing sector contracted further in December, according to an industry report released on Monday,” reported CNBC.  “The Institute for Supply Management (ISM) said its index of national factory activity fell to 48.2 from 48.6 the month before.”  An ISM reading below 50 indicates contraction.

  However, it wasn’t just manufacturing that started off 2016 with a bad report.  According to the Department of Commerce, construction spending during November 2015 dropped 0.4 percent.  This amounted to the biggest drop in construction spending since June 2014.

  Then, on Wednesday, the Commerce Department reported that both U.S. imports and exports ran aground.  Specifically, exports fell 0.9 percent and imports fell 1.7 percent.   What to make of it?

  The popular theme for the economy portrayed by the Fed is that economic activity is expanding and that the economy is sound.  San Francisco Fed President John Williams thinks the economy currently has strong fundamentals and a really strong trajectory.  He anticipated there being three to five rate hikes this year.  Williams also forecasts 2.25 percent growth.

  His counterpart, Cleveland Fed President Lorretta Mester, expects the U.S. economy will grow by 2.5 to 2.75 percent.  She also thinks we’re in “very good shape” because of “very aggressive monetary policy actions” that were taken.

  The Muted Delight of the Forthcoming Recession

  Perhaps weak manufacturing, construction, and trade data are mere outliers.  Maybe the Fed can see beyond the fog to clearly capture the big picture.  Or maybe the Fed has lost its marbles.  Their outlook doesn’t jive with that of the regular working stiff.  Nor does it mesh with the outlook of Deutsche Bank economists.

  "Deutsche Bank economists on Tuesday reduced their forecast on U.S. economic growth in the fourth quarter of 2015 and first quarter of 2016 due to recent disappointing data on trade, construction spending and manufacturing activity.

   

  They said in a research note they pared their view on domestic gross product in the last three months of last year by 1 percentage point to 0.5 percent, which they added "still might be too high in light of what could be much larger inventory liquidation than what we have assumed."

  Obviously, GDP can’t go much below 0.5 percent before it goes negative.  Hence, if 0.5 percent is too high, there’s a chance the U.S. economy is close to, or already in recession.

  Of course, we won’t know for sure until after the fact.  Technically speaking, a recession requires two consecutive quarters of negative economic growth.  Thus the economy must be in recession for at least six months before it can be formally declared a recession.

  One of the many delights in life is watching a public figure step up to the plate, pound their chest, let out a bellow, and fail spectacularly.  In this regard, we may be witnessing an epic fail by Fed Chair Janet Yellen.  For she may be hiking rates at the very moment the economy’s entering recession.

  Unfortunately, in this instance, the delight is muted by the destruction being heaved upon the broad populace.

  

  

  

  

  

• Texas Governor Calls For Constitutional Convention To "Wrest Power" From Obama

  When it comes to Texas’ relationship with the Federal government, the word “rocky” comes to mind. And nobody embodies said rockiness better than Texas governor Greg Abbott, who recently made headlines after announcing that irrelevant of D.C.’s demands, Texas would refuse to accept any Syrian refugees.

  This followed his announcement earlier this summer 2015 when fears over nebulous Federal intentions with operation “Jade Helm” were running high, that “to address concerns that Texas citizens and to ensure that Texas communities remain safe, secure, and informed about military procedures occurring in their vicinity, I am directing the state guard to monitor Operation Jade Helm 15.”

  Prior to this, Abbott was again in the news back in June when he signed a bill into law that would allow Texas to build a gold and silver bullion depository, which would allow Texas to repatriate $1 billion worth of bullion from the New York Fed to the new facility once completed.

  In short: the Federal government and the state of Texas have been on collision course of many months, one which culminated on Friday when Abbott called for a Constitutional Convention of states, spearheaded by Texas, and which would amend the U.S. Constitution to wrest power from a federal government “run amok.”

  To achieve that, Abbott proposed nine amendments to “restore the Rule of Law and return the Constitution to its intended purpose.”

  

  “If we are going to fight for, protect and hand on to the next generation, the freedom that [President] Reagan spoke of … then we have to take the lead to restore the rule of law in America,” Abbott said, cited by the Dallas News, during a speech at the Texas Public Policy Foundation’s Policy Orientation that drew raucous applause from the conservative audience. He said he will ask lawmakers to pass a bill authorizing Texas to join other states calling for a Convention of States.

  According to the Hill, Abbott said that “the increasingly frequent departures from Constitutional principles are destroying the Rule of Law foundation on which this country was built,” said Abbott in a statement. We are succumbing to the caprice of man that our Founders fought to escape. The cure to these problems will not come from Washington D.C. Instead, the states must lead the way.”

  Along with the speech, Abbott released a nearly 70-page plan – part American civics lesson, part anti-Obama diatribe – detailing nine proposed constitutional amendments that he said “would unravel the federal government’s decades-long power grab and restore authority over economic regulation and other matters to the states.”

  “The irony for our generation is that the threat to our Republic doesn’t come just from foreign enemies, it comes, in part, from our very own leaders,” Abbott said in a speech that took aim at President Obama, Congress and the judicial branch.

  Abbott’s nine proposed amendments are:

  • Prohibit congress from regulating activity that occurs wholly within one state.
  • Require Congress to balance its budget.
  • Prohibit administrative agencies from creating federal law.
  • Prohibit administrative agencies from pre-empting state law.
  • Allow a two-thirds majority of the states to override a U.S. Supreme Court decision.
  • Require a seven-justice super-majority vote for U.S. Supreme Court decisions that invalidate a democratically enacted law
  • Restore the balance of power between the federal and state governments by limiting the former to the powers expressly delegated to it in the Constitution.
  • Give state officials the power to sue in federal court when federal officials overstep their bounds.
  • Allow a two-thirds majority of the states to override a federal law or regulation.

  For those unfamiliar, a Constitutional Convention is one of two ways that the U.S. Constitution can be amended, and it’s described in Article V. One way is that Congress can propose amendments approved by two-thirds of the members of both chambers. The other method allows two-thirds of the state legislatures to call for a convention to propose amendments. Republicans backing the idea are confident that because they control state government in a majority of states, their ideas would prevail.

  In both cases, the amendments become effective only if ratified by three-fourths of the states. Indicatively, of the 27 times the Constitution has been amended, none was generated by a constitutional convention.

  Abbott is not the first to propose a convention: the idea has been gaining traction among some among conservative Republicans, comes just as the GOP presidential candidates begin to make forays into Texas ahead of the March primary election. The state, with 155 delegates up for grabs, will certainly be a key player in the party’s nominating process.

  Earlier this week presidential contender Marco Rubio published a piece in USA Today endorsing the idea of a convention to amend the Constitution and restore limited government. In April, 27 active petitions had been filed with Congress seeking a convention to amend the constitution to require that Congress adopt a balanced budget.

  Congress would be forced to act once 34 states joined the effort. So far, Cruz hasn’t endorsed the idea.

  A convention, Abbott wrote, would force the federal government to “take the Constitution seriously again… The only true downside comes from doing nothing and allowing the federal government to continue ignoring the very document that created it,” Abbott wrote.

  To be sure many conservatives agree with Abbott’s posture that the only way to limit the powers of the Federal government is to resuscitate state power .

  Of course, whereas Republicans are seeking to limit the role and power of government, Democrats demand just the opposite, and were quick to denounce Abbott’s plan Friday, saying the governor has misplaced priorities.

  “America added 292,000 new jobs in December. But under Abbott, Texas fell to sixth in job creation, remains the uninsured capitol of the nation, wages and incomes remain far too low for hardworking families, our neighborhood schools are still underfunded, and college education is slipping out of reach,” Texas Democratic Party Deputy Executive Director Manny Garcia said in a statement. “Texas families deserve serious solutions, not Tea Party nonsense.”

  What Manny Garcia did not add is that while oil was above $100, Texas was the state that had generated the most jobs under the Obama administration, and if it hadn’t been for the Kerry-Saudi Arabia secret meetings which put into play the collapse in the price of oil, meant to cripple Russia but crushing US shale instead, Texas would continue to create record numbers of jobs.

  However, since this is high politics, facts be damned, and the American Civil Liberties Union of Texas issued a statement with similar sentiment. “Governor Abbott, as Texans, we prefer the Framers’ plan. Don’t mess with the Constitution,” said Terri Burke, executive director of the ACLU of Texas.

  A small but vocal Republican minority has also opined against the idea of a constitutional convention: last year, House legislators filed measures calling for such a convention. Texas senator Craig Estes unleashed a screed against the proposal when it came before the Senate State Affairs Committee in May. He compared the idea to “a petulant teenager who’s lost a few basketball games and plans to burn down the gymnasium.”

  “The constitution has served us well for over 200 years. The problem is not the constitution,” Estes said, adding that the solution is to elect more conservative lawmakers. “Slap a bumper sticker for Ted Cruz on your car and get after it and knock yourself out.”

  Estes went on to promise a filibuster if the measure came to the Senate floor.

  Whether Abbott’s proposal will gain steam and ultimately succeed is unknown, but it is virtually certain that the more the Obama administration governs via executive orders and other means to bypass the Legislative and short circuit the US government, the more powerful the grass-roots response at the state level will be, until eventually there is enough anger at the dysfunctional U.S. government at the 34 required states to do precisely as the Texan wants… that, or Trump is voted into the Oval Office as a protest against everything that is broken with the current political status quo.

  

  

  

  

  

• Clinton Email Hints that Oil an Gold Were Behind Regime Change In Libya

  On New Year’s Eve, 3,000 emails from Hillary Clinton’s private email server were released.

  One of them confirms – an email dated April 2, 2011 to Clinton from her close confidante Sidney Blumenthal – that:

  Qaddafi’s government holds 143 tons of gold, and a similar amount in silver.

   

  ***

   

  This gold was accumulated prior to the current rebellion and was intended to be used to establish a pan-African currency based on the Libyan golden Dinar. This plan was designed to provide the Francophone African Countries with an alternative to the French. franc (CFA).

   

  (Source Comment [This is in the original declassified email, and is not a comment added by us]: According to knowledgeable individuals this quantity of gold and silver is valued at more than $7 billion. French intelligence officers discovered this plan shortly after the current rebellion began, and this was one of the factors that influenced President Nicolas Sarkozy’s decision to commit France to the attack on Libya. According to these individuals Sarkozy’s plans are driven by the following issues:

   

  1. A desire to gain a greater share of Libya oil production,
  2. Increase French influence in North Africa,
  3. Improve his internal political situation in France,
  4. Provide the French military with an opportunity to reassert its position in the world,
  5. Address the concern of his advisors over Qaddafi’s long term plans to supplant France as the dominant power in Francophone Africa)

  This may confirm what some of us have been saying for years.

  The REAL Reason Sunni Governments Like Saudi Arabia Are At War Against the Shias

  While the Sunnis and Shias have been competing for more than a thousand years, they have largely co-existed peacefully until recently.

  Why are they involved in an open war across multiple countries now?

  Much of modern geopolitics is driven by hydrocarbons … i.e. oil and gas.

  Is this true of the Sunnis-Shia war?

  Yes, the U.S. and its allies are backing the Sunnis against the Shias … in order to wage war for oil.

  And it turns out that the lion’s share of oil in the Middle East happens to be located in Shia countries … and in the Shia-minority sections of Sunni-majority countries.

  Specifically, as Jon Schwartz reports this week at the Intercept:

  Much of the conflict can be explained by a fascinating map created by M.R. Izady, a cartographer and adjunct master professor at the U.S. Air Force Special Operations School/Joint Special Operations University in Florida.

   

  What the map shows is that, due to a peculiar correlation of religious history and anaerobic decomposition of plankton, almost all the Persian Gulf’s fossil fuels are located underneath Shiites. This is true even in Sunni Saudi Arabia, where the major oil fields are in the Eastern Province, which has a majority Shiite population.

   

  As a result, one of the Saudi royal family’s deepest fears is that one day Saudi Shiites will secede, with their oil, and ally with Shiite Iran.

   

  This fear has only grown since the 2003 U.S. invasion of Iraq overturned Saddam Hussein’s minority Sunni regime, and empowered the pro-Iranian Shiite majority. Nimr himself said in 2009 that Saudi Shiites would call for secession if the Saudi government didn’t improve its treatment of them.

  

  The map shows religious populations in the Middle East and proven developed oil and gas reserves. Click to view the full map of the wider region. The dark green areas are predominantly Shiite; light green predominantly Sunni; and purple predominantly Wahhabi/Salafi, a branch of Sunnis. The black and red areas represent oil and gas deposits, respectively.

   

  Source: Dr. Michael Izady at Columbia University, Gulf2000, New York

  As Izady’s map so strikingly demonstrates, essentially all of the Saudi oil wealth is located in a small sliver of its territory whose occupants are predominantly Shiite. (Nimr, for instance, lived in Awamiyya, in the heart of the Saudi oil region just northwest of Bahrain.) If this section of eastern Saudi Arabia were to break away, the Saudi royals would just be some broke 80-year-olds with nothing left but a lot of beard dye and Viagra prescriptions.

   

  Nimr’s execution can be partly explained by the Saudis’ desperation to stamp out any sign of independent thinking among the country’s Shiites.

   

  The same tension explains why Saudi Arabia helped Bahrain, an oil-rich, majority-Shiite country ruled by a Sunni monarchy, crush its version of the Arab Spring in 2011.

   

  Similar calculations were behind George H.W. Bush’s decision to stand by while Saddam Hussein used chemical weapons in 1991 to put down an insurrection by Iraqi Shiites at the end of the Gulf War. As New York Times columnist Thomas Friedman explained at the time, Saddam had “held Iraq together, much to the satisfaction of the American allies Turkey and Saudi Arabia.”

  So the Sunni Gulf monarchies in Saudi Arabia, Bahrain, Oman, the United Arab Emirates, Qatar and Kuwait are single-mindedly going after Iran and the Shia world – because the Shias are sitting on the oil and gas resources – and doing everything they can to start a Sunni-Shia war across the entire MENA area (Middle East and North Africa) in order to “justify” a resource grab.

  

  

  

  

• Gold In 2016: "Economic Power Is Shifting"

  Submitted by Alasdair Macleod via GoldMoney.com,

  Advance signs of a global slump in economic activity emerged in 2015.

  Furthermore, the dollar's strength, coupled with widening credit spreads confirms a global tendency for dollar-denominated debt to contract. These developments typically precede an economic and financial crisis that could manifest itself in 2016, partially confirmed by the disappointing performance of equity markets. If so, demand for physical gold can be expected to escalate rapidly as a financial crisis unfolds.

  Introduction

  Gold has now been in a bear market since September 2011. Major central banks in the advanced economies have implemented policies that have covertly suppressed the gold price, while they have overtly inflated asset prices. This has led to valuation extremes in all asset markets, including gold, that would never be seen in free markets backed with sound money. We can be certain that today's unprecedented build-up of price distortions will be corrected eventually by market forces, probably in the coming months. The commencement of a crisis has already been evidenced by the collapse in energy and industrial-commodity prices, causing major problems for nations and international companies with US dollar obligations and suddenly finding they lack the revenue to service them. The scale of commodity-related losses is not generally understood, but cannot be ignored for much longer.

  The rapid expansion of central bank balance sheets since the Lehman crisis is the ultimate phase of a process that can be traced back to at least the 1980s. Starting in London, US and European banks at that time took control of securities markets. Since then, they have increasingly directed bank credit at the expansion of those securities markets, principally through the development of over-the-counter (OTC) derivatives, but also by dominating bond and equity markets, and regulated derivatives.

  The expansion of bank credit aimed towards financial activities has had the triple effect of inflating financial assets, suppressing commodity prices below where they would otherwise be, and enhancing international demand for the US dollar as the main pricing currency. The result has been an unprecedented peace-time expansion of global debt, while confidence in the reserve currency has been maintained. However, there are indications that this period of expansion is now at an end. According to the Bank for International Settlements' statistical releases, the gross value of bank-held derivatives has been contracting since 2013. Notional amounts of outstanding OTC contracts peaked at end-2013 at $711 trillion, and by June 2015 had declined to $553 trillion.

  This is an important point, because an unseen bubble at the heart of the financial system is deflating with unknown consequences. When bubbles deflate, and here we are talking about one in the hundreds of trillions, bad debts are usually exposed. Even though much of the reduction in outstanding OTC derivatives is due to consolidation of positions following the Frank Dodd Act, much of it is not.

  When free markets reassert themselves, and they always do, the disruption promises to be substantial. We appear to be in the early stages of this event.

  Dollar and European dangers

  As noted above, the rising value of the dollar measured against commodities is a major problem. In the short-term the dollar is extremely over-bought against record levels of commodity short positions. Most notable is the dollar price of oil, with West Texas Intermediate having fallen from $105 in June 2013 to $32 today. While much of the fall can be attributed to lower demand from a slowing global economy, some of it is undoubtedly due to the strength of the dollar itself. Bad and potential bad debts, many commodity-related and denominated in dollars, are a global issue, and the US banks are trying to control their international loan exposure. Consequently, international borrowers with dollar-denominated debt are being forced to sell down local currencies to buy dollars in order to cover their dollar obligations. The problem has been aggravated further by speculators bidding up the dollar against these distressed buyers.

  The dollar's overvaluation is also supported by the belief that the US economy is healthy and performing relatively well. With official unemployment down to 5%, demand for domestic credit, while patchy, is basically sound and growing at a moderate pace. However, nominal GDP growth is entirely due to monetary stimulus being not yet offset by lagging price inflation, and is not the well-founded economic recovery generally supposed. But for dollar bulls, the apparent strength of the US economy is another reason to believe the dollar will remain strong, given the prospect of a rising interest rate trend. There are considerable dangers to this bullish view for the dollar, not least the degree to which it is already discounted in current prices.

  A second global problem is the financial and economic condition of the Eurozone. 2015 saw the Greek crisis deferred, but for 2016 we have the prospect of trouble from Spain and Portugal, with government debt as a percentage of GDP estimated at 100% and 130% respectively. In the Spanish general election in December an anti-austerity combination of the left-wing Podemas and PSOE political parties won 159 seats against the ruling party's 123. Negotiations are now underway, but it looks like an anti-austerity coalition will form the next government. Greece was difficult enough, but Spain is many times greater in terms of its economic impact and the amount of government debt involved. Also, Portugal, whose economy is about the same size as that of Greece, had its general election in October, and the ruling party lost its overall majority, suggesting that anti-austerity pressures will increase in Lisbon as well. And Greece has not gone away.

  Greece in 2015 was the warm-up act for what's ahead in the Eurozone. Meanwhile, €3 trillion of government bonds in Europe now trade with negative yields, an unprecedented situation, which illustrates how overvalued European government bonds in general have become, particularly when taking into account the parlous condition of some major governments' finances. The Eurozone banks are also financially precarious, having an average Tier 1 capital ratio to tangible assets of 5.1%, dropping to 4.1% when off-balance sheet items are included. Furthermore, the netting off of credit default swaps permitted under new Basel Committee rules has allowed the banks to conceal their true loan risk. The combination of European banks gaming the system, average core balance sheet leverage (including off-balance sheet obligations) of 24:1, and their balance sheets laden with wildly overvalued government bonds, has the makings of a crisis in search of a trigger.

  A European banking crisis could escalate very rapidly if and when it starts, and would be an event beyond the direct control of an alarmingly undercapitalised ECB. The initial effect might be to drive the dollar higher in the foreign exchanges, particularly against the euro, and instigate a further markdown of commodity prices, as markets try to discount the economic implications of a systemic problem in the Eurozone. If an event such as this occurs, it would be impossible to limit it to a single geographical area. The major central banks would be forced into a coordinated rescue programme, involving a major expansion of all their balance sheets, on top of the post-Lehman crisis expansion.

  Once initial uncertainties are out of the way, the prospect of escalating systemic risk should be very positive for gold, which is the only certain hedge against these events. To determine the potential for the gold price, its current value should be assessed by looking at the long-run inflation of fiat dollars relative to the increase of above-ground gold stocks, and adjusting the dollar price of gold accordingly.

  FMQ and gold

  The fiat money quantity represents the total fiat money that has been produced by the US banking system. It includes fiat currency not in circulation, being mainly bank reserves sitting on the Fed's balance sheet. The chart below shows the monthly accumulation of US dollar FMQ since 1959.

  

  Following the Lehman crisis, the dollar-price of gold fell initially before recovering and gaining all-time highs in September 2011. With the benefit of hindsight, we can surmise that the immediate effect of the Lehman crisis was to trigger a flight into the dollar, before it became evident that the Fed's actions aimed at stabilising the financial sector were succeeding at the expense of monetary inflation. This also provides an explanation as to why, in order to maintain confidence in the dollar, the gold price had to be subsequently suppressed. Judging by all the circumstantial evidence following the Cyprus crisis, the most notable suppression exercise was in April 2013, and close study of market actions and volumes reveals that other less dramatic price suppressions have from time to time also taken place.

  Given this experience, it would be wrong to rule out another attempt by the western central banks to suppress the price of gold in the event of a crisis. However, it is becoming clear that they can only suppress the price through the paper markets, given the relative scarcity of physical bullion in western central bank vaults, and the reluctance of individual central banks to compromise their bullion holdings any further. These short-term uncertainties cannot be quantified, but we can have a clear idea as to gold's current true value, expressed in US dollars. This is the subject of our next chart.

  

  The chart shows the price of gold deflated by both the increase in FMQ over the years and by the expansion of above-ground gold stocks, since the price was fixed at $35 in 1934 by President Roosevelt. Adjusted by these two factors, gold at end-December 2015 was priced at the equivalent of $3.25 in 1934 dollars, less than 10% of the 1934 price. The only occasion the adjusted price has been lower was in 1971, just months before the Nixon shock, when the Bretton Woods system finally collapsed. The adjusted price stood at $3.13 in March that year.

  The next chart shows the same price adjustments applied to the gold price, this time from August 2008, when the Lehman crisis broke and the nominal gold price was $918.

  

  The adjusted price, reflecting the expansion of both the FMQ and above-ground gold stocks, now stands at $402, a decline of 56% in real terms since Lehman.

  On value considerations, we can therefore conclude the following:
  • Gold is cheaper than it has ever been against the world's reserve currency, with the single exception of the time when it was so under-priced that the US Government was forced to scrap its peg at $35 and abandon the Bretton Woods Agreement.
  • Compared with the situation at the time of the Lehman crisis, gold is significantly cheaper today, which is wholly at odds with the continuing systemic risk to fiat currencies from undercapitalised banks, unprepared for the prospect of markets normalising.

  Many contemporary financial analysts would argue that gold is not relevant to these issues, because gold is no longer money. This line of reasoning ignores the fact that ordinary people in the west do not get this message and are accumulating gold coins and small bullion bars at increasing rates. And more importantly, economic power is shifting from countries where this Keynesian view is prevalent to countries where it is not. The next section looks at the geostrategic implications of the shift in the ownership and pricing of gold from west to east.

  China, India and the rest of Asia

  China and India, together with all the other countries in mainland Asia, have been draining the west's vaults of above-ground gold stocks for far longer than most people in western capital markets realise. China first delegated the management of gold policy to the Peoples Bank by regulations adopted in 1983, in a move that followed the post-Mao reforms of 1979/82. The intention behind these regulations was for the state to acquire substantial amounts of gold, to develop gold mining, and to control all processing and refining activities. At that time the west was doing its best to suppress gold in order to enhance the credibility of paper currencies, by releasing large quantities of vaulted bullion through leasing and outright sales. This is why the timing is important: it was an opportunity for China, with its one-billion plus population in the throes of rapid economic reform, to diversify growing foreign currency surpluses, in the same way as the Arab nations did earlier and contemporaneously between 1973-1990 following the oil price boom.

  When China set up the Shanghai Gold Exchange in 2002 and encouraged its private sector to accumulate gold, the state had obviously acquired enough bullion for its own strategic purposes. We cannot know how much the state has actually accumulated, or indeed to what extent the gold she has mined has been taken into state ownership since, but the amount is likely to be very substantial. We do know that gross deliveries into public hands since 2002, satisfied mainly by imports from western vaults, exceed 11,000 tonnes to date. It is therefore quite possible that China and its citizens now have more gold than all the other central banks put together, given that some official gold is currently leased by western central banks and some has been secretly sold to suppress the price.

  The monthly statements about China's gold reserve additions are therefore meaningless. However, Russia is now accumulating official reserves as well, and the Indian state is trying to acquire her citizen's gold by stealth, having been frozen out of the market through lack of supply. The bulk of Asia is, or will be, bound together through the Shanghai Cooperation Organisation, an economic partnership dominated by China and Russia, encompassing more than half the world's population, and which accepts physical gold as the ultimate form of money. And what clearly emerged in 2015 is that the dominant trade currency in this bloc will unquestionably be the Chinese yuan, the currency of the country that has now cornered the world's physical gold market.

  The future for the world's money is rapidly developing, as will become increasingly apparent in 2016. The era of dollar supremacy is coming to an end, no doubt hastened by the Fed's ultimately destructive monetary policies. The threat to the dollar's primacy is also a threat to the other great paper currencies: the euro, the yen and sterling. Whether or not these fail before, with or after the dollar, is only a matter for timing. China must have foreseen this possible outcome, otherwise she would not have embarked on a policy of accumulating gold as long ago as 1983, invested substantial resources into gold mining and refining, actively encouraged her citizens to own it, and is today promoting use of her currency for global trade and the pricing of gold.

  Western market observers seem to be unaware of how advanced China's currency policy is today. Instead, they expect a full-blown credit crisis, the result of the credit expansion of recent years being undermined by a rapidly slowing economy. Furthermore, they argue that Chinese labour costs have increased and require a much lower yuan exchange rate to become competitive again. Based on western-style macroeconomic analysis, they naturally conclude that China will require a substantial currency devaluation to contain these problems.

  While it is a mistake to gloss over the considerable economic difficulties, this analysis is flawed on two counts. Firstly, the state owns the banks, so a credit crisis stops with the debtors. And secondly, under the thirteenth five-year plan, China is embarking on a redirection of economic resources from being the cheap manufacturer for the rest of the world to serving its growing middle class and developing trans-Asian infrastructure. China's unemployment rate is estimated to be about 5%, so workers employed on current production lines will need to be redeployed, if the state's economic strategy is to progress. A substantial devaluation is therefore counterproductive, though the central bank does move the yuan's peg against the dollar from time to time.

  The purpose behind China's accumulation of gold can only be to eventually make the yuan a reliable store of value. China will need to see a higher gold price in yuan, probably at a time dictated by external events, which she will patiently await. This is why, having developed the Shanghai Gold Exchange into the world's most important physical gold market, China plans to price gold in yuan, with the objective that the yuan-gold peg will eventually supersede yuan-dollar peg.

  We will surely end 2016 with a wider appreciation that the dollar is no longer king, and that the future for money lies in Asia, the yuan, and gold.

  Conclusion

  In the near-term, paper gold is extremely oversold, reflecting the expression of western establishment sentiment in the paper markets. Futures and forward markets are short of paper gold to an extraordinary degree. Whether or not this leaves open the possibility of further falls in the dollar price of gold in the next few months is a moot point. More importantly, on longer-term considerations, gold has not been this undervalued since the events leading to the collapse of the Bretton Woods agreement. If current events lead to a systemic crisis in western capital markets in 2016, which given the global slump in economic activity looks increasingly likely, a further expansion of central bank balance sheets on top of the post-Lehman expansion seems certain. If this happens, it is unlikely the purchasing power of the dollar and the other major currencies will remain at current levels. And if the dollar loses purchasing-power, price inflation will rise along with nominal interest rates, and a wider debt liquidation in western capital markets becomes a real possibility.

  China and her SCO partners have taken steps to be protected from this outcome and have cornered the gold market. A wise person should take note and think seriously about the implications.

  Enjoy 2016.

  

  

  

  

  

• Caught On Tape: Iran Conducts Live-Fire Rocket Drill Next To US Carrier

  Late last month, amid heightened tensions between Washington and Tehran, Iran conducted a live-fire exercise in the Strait of Hormuz in close proximity to the USS Harry Truman, one of Ash Carter’s fleet of aircraft carriers.

  The US called the incident a “provocation” as the rockets landed a mere 1,500 yards from two US ships.

  “Firing weapons so close to passing coalition ships and commercial traffic within an internationally recognized maritime traffic lane is unsafe, unprofessional, and inconsistent with international maritime law,” US CentCom said, in a statement.

  The brazen move infuriated US lawmakers opposed to the Iran nuclear accord. John McCain for instance, accused The White House of “turning a blind eye to Iranian saber rattling for fear Iran will walk away from the nuclear deal.”

  The maritime mishap came amid (loud) calls for fresh sanctions against Tehran in connection with Iran’s test of a next gen surface-to-surface ballistic missile (the Emad).

  On Saturday, the US released footage of the Iranian rocket drill in a conveniently-timed move that coincides with a historic spat between Tehran and Washington’s allies in Riyadh. The video is below.

  

  

  

  

  

• What The Charts Say: "US Stocks Are In Riskiest Position In Seven Years"

  Via John Murphy,

  MAJOR STOCK INDEXES ENTER CORRECTION TERRITORY… After suffering the worst start to a new year in history, the U.S. stock market has entered correction territory which is defined by a drop of 10% from its old high. The charts pretty much speak for themselves. All three major stock indexes fell to three month lows in heavy trading. The next downside target is the two lows formed in August and late September.

  

  What the indexes do from there will determine whether the current downturn is just a correction or something more serious. Unfortunately, some portions of the market have already broken those support levels.

  SMALL AND MIDCAPS BREAK SUPPORT… Relative weakness in small and midsize stocks gave early warnings in December that the yearend rally was mainly a large cap affair and too narrow to continue. That situation has gotten a lot worse since then. Charts 4 and 5 show the Russell 2000 Small Cap and the S&P 400 Mid Cap indexes falling below their 2015 lows. That puts them at the lowest level since October 2014.
   

  

  That's another important test for them and the rest of the market.  

  TRANSPORTS ENTER BEAR MARKET TERRITORY… Chart 6 shows the Dow Jones Transportation Average falling to the lowest level in two years. It has lost -25% from its late 2014 high which puts it into bear market territory. What's surprising is that the transports haven't gotten any help from plunging energy prices. That may carry bad news for Dow Theorists who link the direction of the transports with the Dow Industrials.

  

  It may carry good news for the Dow Utilities, however, which are showing more resilience. Chart 7 shows the Dow Utilities holding up a lot better than everything else.

  

  It was the only market sector to register a gain during the week. Its relative strength line (top of chart) is rising as well. Since utilities are considered bond proxies, their relative strength large reflects the recent rotation out of stocks and into bonds.

  BOND/STOCK RATIO FAVORS BONDS… As usually happens when stocks fall, bond prices are rising. That's especially true of longer-dated Treasury bonds. The green line in Chart 8 is a ratio of the 7-10 Year Treasury Bond ishares divided by the S&P 500 SPDRs. The ratio spiked last August when stocks tumbled.

  

  The ratio has spiked again to the highest level in three months. Bond prices are also benefitting from the deflationary impact from falling commodity prices. Two other assets attracting safe haven buying are gold and the Japanese yen. Some measures of foreign stocks (both developed and emerging) have already fallen to 52-week lows. That doesn't bode well for U.S. stocks which are now in the riskiest position since the bull market started seven years ago.

  

  

  

  

  

• Explaining American Men's 'Electile' Dysfunction In 1 Serious Chart

  Did we just cross “the tipping point” for faith in the American dream?

   

  

   

  Having fallen consistently from almost 90% particpation in the labor force in 1948 to just 68.5% in 2015, it appears that crossing below the 70% participation rate has pushed American men to their limit of faith in career politicians.

  

  

  

  

  

• Newsflash From The December 'Jobs' Report – The US Economy Is Dead In The Water

  Submitted by David Stockman via Contra Corner blog,

  Here’s a newsflash that CNBC didn’t mention. According to the BLS, the US economy generated a miniscule 11,000 jobs in the month of December.

  Yet notwithstanding the fact that almost nobody works outside any more, the BLS fiction writers added 281,000 to their headline number to cover the “seasonal adjustment.” This is done on the apparent truism that December is generally colder than November and that workers get holiday vacations.

  Of course, this December was much warmer, not colder, than average.  And that’s not the only deviation from normal seasonal trends.

  The Christmas selling season this year, for example, was absolutely not comparable to the ghosts of Christmas past. Bricks and mortar retail is in turmoil and in secular decline due to Amazon and its e-commerce ilk, and this trend is accelerating by the year.

  So too, energy and export based sectors have been thrown for a loop in the last few months by a surging dollar and collapsing commodity prices. Likewise, construction activity has been so weak in this cycle—-and for the good reason that both commercial and residential stock is vastly overbuilt owing to two decades of cheap credit—–that its not remotely comparable to historic patterns.

  Never mind. The BLS always adds the same big dollop of jobs to the December establishment survey come hell or high water. In fact, the seasonal adjustment has averaged 320,000 for the last 12 years!

  For crying out loud, folks, every December is different—–and not just because of the vagaries of the weather. Capitalism is about incessant change and reallocation of economic activity and resources. And now the globalized ebbs and flows of economic activity have only accentuated the rate and intensity of these adjustments.

  Yet the statistical wizards at the BLS think they can approximate a seasonal adjustment factor for December that at +/- 300k amounts to just 0.2% of the currently reported 144.2 million establishment survey jobs, and an even smaller fraction of the potential adult work force which is at least 165 million.

  But that’s a pretentious stab in the dark. The December seasonal adjustment (SA) could just as easily be 0.3% of the job base or 0.1%, depending upon the specific point in the business cycle and structural trends roiling the economy.

  Indeed, these brackets alone would vary the headline SA number by 150k to 450k. The fact that the seasonal adjustment factor for December has oscillated tightly around 300,000 for the last 12 years proves only one thing—–namely, that the bureaucrats at the BLS have chosen to invent the same guesstimate year after year; its not science, its political fiction.

  The fact is, the seasonal adjustment factors are about the closest thing there is to pure noise among all the dubious “incoming” data that the Fed and Wall Street obsess over.

  Here’s a better take on the matter. We are now in the 78th month since the June 2009 recession bottom, and are reaching the point where this so-called business cycle expansion is getting very long in the tooth by all historical standards.

  

  Historical Length of Recoveries

  So what happened to the non-seasonally adjusted (NSA) job count in December at similar points late in the course of prior cycles? Well, in December 1999 about 140,000 jobs were added and in December 2007 there was a NSA gain of 212,000. This time we got the magnificent sum of 11,000, and by the way, last year was only 6,000.

  The real news flash in the December “jobs” report, therefore, is that even by the lights of the BLS’ rickety, archaic and virtually worthless establishment survey, the domestic economy is dead in the water. We are not on the verge of “escape velocity”, as our foolish monetary politburo keeps insisting; the US economy is actually knocking on the door of recession.

  And that’s why the retail sheep have been led to the slaughter once again in the Wall Street casino. The cats who run it have embraced the nonfarm payroll report as the primo macroeconomic indicator because they know that it drastically lags the real drivers of main street activity and has an abysmal record of forecasting turns in the macroeconomic cycle.

  Stated differently, these fictional monthly SA jobs numbers are extremely useful to the Wall Street sell side. They keep the rubes hitting the “buy” button until the fast money can slowly dump its holdings and get out of Dodge; or even pivot and reload to the short side.

  That’s right. We are not talking tin foil hats here. It is plain as day that the BLS’ seasonal adjustments are a completely stupid waste of time. During the winter season especially, it might as well just use a random numbers generator.

  Indeed, here’s what the Steve Liesman’s of the world never tell you—–undoubtedly because they don’t know. Fully two-thirds or 200,000 of the 300,000 December seasonal adjustment is in the construction sector!

  So the whole December SA is essentially a weather proxy designed to adjust a survey taken during the middle week of the first month of winter. Could weather fluctuations impact the number of construction workers on the job by a mere 2% (150,000) around the week of December 15?

  Well, yes it could. And that means we really don’t know whether 292,000 “jobs” were created in December or whether it was only 142,000.

  Once again, loose the SA noise in the construction sector job count.  This category alone accounted for 45,000 of the headline gain, but that was owing to the fact that the 6.538 million figure reported for the construction category was flattered by a 196,000 seasonal adjustment.

  Instead, look at the non-seasonally adjusted (NSA) number compared to the same point in the cycle from prior history. Thus, at the December 2006 peak the number of construction jobs was 7.585 million, meaning we are still down by 1.1 million jobs or 15% from the prior cycle high.

  And in December 2000, there were actually 6.7 million construction jobs. That is, we have not yet returned to the cyclically comparable level that prevailed at the turn of the century.

  In short, the December jobs report was not evidence of a “strong” economy. It was just another emission from the government’s SA noise factory that obscures the actual state of the main street economy.

  So here’s the real truth. Construction jobs are breadwinner jobs. The average annualized pay rate for the category is $57,000, but the US economy is not actually generating new construction jobs any longer.

  What’s happening is that the BLS is simply reporting “born again” jobs and thereby enabling the Keynesian chorus to claim “progress” and “strength”, and for its Wall Street section to blather about “blow-out numbers”. Indeed, the latter has embraced the Keynesian model lock, stock and barrel precisely because its so useful in the stock peddling business.

  The Keynesian model is about deltas, not levels. For reasons we will amplify below that’s almost always misleading in the context of monetary central planning and the bubble finance cycles that flow from it.

  In fact, the only valid measure of economic strength and the main stream economy’s capacity to support sustainable profit growth and higher stock prices is the change in levels over time at cyclically comparable points.

  That gets us to the larger story embedded in the above observations about the construction sector jobs series. Namely, just as there have been no trend gains in the level of construction jobs since the turn of the century, the same is true of the much wider swath of what we have called “breadwinner jobs”.

  These jobs in construction, energy and minerals, manufacturing, FIRE, the white collar professions, business management, information technology and trade/distribution account for 50% of all nonfarm payroll slots, pay upwards of $50,000 per year on average and account for more than 66% of total wage and salary disbursements.

  Yet the December 2015 number of breadwinner jobs was still 1.1 million jobs below that posted for the first month of this century!

  

  Needless to say, that’s not “strength”. It’s actually a profound indictment of the archaic convention embedded in the monthly employment report that counts job slots, not the variable gigs and hours on which employment in the contemporary US economy is actually based.

  Indeed, all the Jobs Friday hoopla is based on your grandfather’s BLS survey, which arose at a time when everyone punched the clock at the Ford factory 40-50 hours per week, including overtime. By contrast, now the greeters and cash register operators at Wal-Mart are computer-scheduled in 15 minute increments.

  Since average pay for the bartenders and waiters category is less than $20,000 on an annualized basis owing to an average of 26 hours per week and $13/hour pay rates, you need 2.5 of these gigs to get the equivalent of one breadwinner job. Yet on Jobs Friday its all one job, one vote.

  So what is actually happening beneath the surface is a great swap out. The very highest productivity jobs in goods production are disappearing on a trend basis; the monthly deltas reported so breathlessly on bubble vision actually embody purely “born again” employment slots that represent the partial recovery of jobs lost during each crash of the Fed’s serial financial bubbles.

  But the cyclically adjusted trend is down, not up. It represents economic weakness and reduced capacity to generate productivity, income and profits, not strength.

  In fact, not withstanding the “blow-out” December numbers, the US economy still has 11% fewer jobs in goods production—-mining, energy, manufacturing and construction—–than it did at the December 2007 cyclical peak, and 21% fewer than at the turn of the century.

  

  By contrast, what is being swapped in are what we have called Part-Time Economy jobs, where there have been modest cyclically comparable gains in job levels during the past 15 years. Needless to say, however, the average annualized pay rate in this category is less than $20,000.

  

  But even these trend level gains are heavily concentrated in the lowest quality quadrant. That is, in what we have called the “Bread and Circuses Economy”—–bartenders, waiters, bellhops, maids, parking attendants, hot dog vendors and the like.

  The fact is, this category accounts for full 70%, or 1.8 million, of the 2.59 million gain in Part Time Economy jobs since the pre-recession peak in December 2007.

  

  Another factor obscured by the BLS’ archaic job slot counting convention is the root wealth and productivity contribution of the job count at any point in time. Generally, private sector jobs financed by consumers add to wealth and productivity at varying degrees, depending on the sector.

  By contrast, taxpayer financed jobs—–directly through government outlays or indirectly through heavy tax subsidies and preferences—–do not add to wealth, and, not to put too fine a point on it, may well subtract from it. And that gets us to the HES Complex (health, education and social services).

  This is the fastest growing job category since the turn of the century, yet it now depends upon more than $2 trillion per year of Medicare, Medicaid and other government health spending—–plus another $250 billion or so of tax expenditures for employer health plans and tax credits for education.

  

  Yes, it can be argued that a some part of the current 32.6 million jobs in the HES Complex add to long-run productivity via education and health status improvement of the working age population. But that point does not get you too far if you recognize the abject and worsening failure of public education in the US and the gross inefficiency of our third-party payment dominated health care system.

  Far more relevant is this fact. For the entirety of this century there has been only a 3.7%  net gain in even the gross number of job slots in the US economy outside of the HES Complex, and that measurement includes the Part Time Economy and its Bread and Circuses subset.

  Stated differently, on a trend level basis, the US economy has only generated 21,000 jobs per month over the last 15 years that were not funded by the public fisc, and therefore indirectly by the $10 trillion gain in public sector debts since the turn of the century.

  

  So whatever is embedded in the BLS payroll count, don’t call it recovery, strength or progress. Instead, call it a propaganda cloud that serves the interests of Wall Street and the monetary central planners, alike.

  Here’s the thing. You can not sell stock if you tell customers that a recession is coming and earnings are going to be heading sharply in a southerly direction. So Wall Street never does.

  By the spring of 2008, for example, after the subprime mortgage implosion was already well underway, Countrywide Financial had already failed, AIG was hitting the rocks, Bear Stearns was gone, and housing sales and starts were sliding rapidly from their towering peaks, the Wall Street consensus ex-items hockey stick still pointed to S&P earnings of $115 per share.

  As it happened, the actual result was $15 per share. And the homegamers who stayed in the market on that assurance were treated, instead, to a bloodbath in which they lost trillions in the 401k and brokerage accounts.

  Likewise, the monetary central planners at the Fed and their economist cheerleaders have never forecast a recession. That’s because they embrace the cardinal Keynesian Error, which holds that private capitalism is inherently unstable and prone to extreme cyclical swings—-even a tendency toward depressionary black holes.

  So they assume that their policy tools and maneuvers are not only doing gods work of keeping private capitalism on the straight and narrow. Indeed, the arrogant and foolish professor from Princeton, Ben Bernanke, called it The Great Moderation in March 2004 just as the greatest bubble and bust in modern history was working up a head of steam.

  Notwithstanding the thumping repudiation of that conceit which occurred during the great financial crisis and recession, the predicate remains that this time is different. To wit, the monetary central planners now have it right and will steer the US economy deftly to the nirvana of permanent Full Employment, world without end.

  

  

  

  

  

• Global Central Banks Are Facing a Crisis Larger Than 2008… And With Little to No Fire Power Left!

  There is talk of another 2008 hitting the markets.

   

  However, what’s coming will not be another 2008. It will be worse than 2008.

   

  There are several reasons for this.

   

  Firstly, today, there is over $20 trillion more debt in the financial system than there was in 2008. If 2008 was a debt bubble that needed to burst; today the bubble is even larger.

   

  Secondly, Central Bankers have already employed both ZIRP and NIRP for years. In 2008, we had only just begun to experience ZIRP in the West and NIRP was still considered a “nuclear option” that bordered on insanity.

   

  Today both ZIRP and NIRP are commonplace. Indeed, the EU has cut rates into NIRP three times in the last 18 months. The world has watched as these actions have barely resulted in an uptick in the EU’s inflation.

   

  

   

  Central Bankers have also employed Quantitative Easing, another “nuclear option” that had yet to be unleashed back in 2008 (the Fed launched the first QE program in December 2008).

   

  To date, global Central Banks have printed over $14 trillion in new money to buy bonds via QE. Even banking systems in which the legality of QE was questionable, such as the EU, have launched QE programs that are €1 trillion or larger.

   

  These programs have been massive in scope. In Japan, a single QE program equal to 25% of GDP was launched in April 2013. Japanese GDP growth barely moved higher before once again rolling over.  Even an expansion of this already incredible monetary policy in October 2014 failed to ignite significant growth for Japan’s economy.

   

  

   

  Finally, today, Central Bank balance sheets are already bloated to the point of being larger than even some of the larger countries’ economies.

   

  The Fed’s balance sheet is over $4.5 trillion, larger than the economy of Germany and just smaller than the economy of Japan. The ECB’s balance sheet is €2.7 trillion, larger than the economies of France or Brazil.  The Bank of Japan’s balance sheet is over $3 trillion, larger than the economy of the UK.

   

  And on and on.

   

  With Central Bank balance sheets so massive already, the marginal effect of more expansion, (even via massive new QE programs) will be much less than it was in 2008. In 2008, Central Bank balance sheets had ample room to grow. Today, investors have already seen what a 200% or 300% expansion of a Central Bank’s balance sheet can buy.

   

  In short, Central Banks are in far worse shape than they were in 2008 to deal with another crisis. And that’s too bad, because the coming crisis will be significantly larger than that of 2008 (again there is over $20 trillion MORE debt in the system than there was then).

   

  Smart investors are preparing now.

   

  We just published a 21-page investment report titled Stock Market Crash Survival Guide.

   

  In it, we outline precisely how the crash will unfold as well as which investments will perform best during a stock market crash.

   

  We are giving away just 1,000 copies for FREE to the public.

   

  To pick up yours, swing by:

  https://www.phoenixcapitalmarketing.com/stockmarketcrash.html

   

  Best Regards

   

  Graham Summers

  Chief Market Strategist

  Phoenix Capital Research

   

   

   

   

   

   

  

  

  

  

• Angry Bond Insurers Sue Puerto Rico Over "Clawback" Boondoggle

  On December 1, Puerto Rico governor Alejandro Garcia Padilla was staring down a $354 million debt payment he couldn’t make.

  If the commonwealth defaulted on the GO portion, a cascade of messy litigation would follow and the island’s reputation with creditors would suffer irreparable harm.

  That afternoon, on the heels of a visit to Capitol Hill where the governor attempted to explain to Congress why Puerto Rico should be allowed to take advantage of bankruptcy laws, the island made the payment, avoiding default.

  Padilla “found” the money by using what we called an “absurd” revenue clawback mechanism.

  Essentially, Puerto Rico diverted money earmarked for non-GO creditors and used it to pay the island’s GO bonds. As you can imagine, the bond insurers for the debt involved in the clawback were not happy. Ambac, for instance, called the clawback “illegal” and claimed that Padilla actually began siphoning funds well before the December 1 payment, a charge the governor denied.

  On January 1, Puerto Rico defaulted on some $36 million in Prifa bonds.

  Now, Ambac, along with  Assured Guaranty, are suing. “Insurance companies that guarantee Puerto Rico municipal debt filed a lawsuit challenging the commonwealth’s decision to divert revenue designated for some bonds to pay other creditors,” Bloomberg reports, adding that the monolines “said the clawback of revenue pledged to bond issues violates the U.S. Constitution by interfering with debt-holders’ contractual rights.” Here’s more:

  The suit filed in U.S. District Court in Puerto Rico seeks to have the clawback declared unlawful and asks the court to issue an injunction against implementation, according to a statement.

   

  “The commonwealth has committed itself to a ‘scorched earth’ strategy of blaming its fiscal and structural problems on lenders, Congress and others, in an effort to deflect responsibility and obtain retroactive application of bankruptcy laws,” Nader Tavakoli, chief executive officer of Ambac, said in the statement late Thursday.

   

  
  

   

  The insurers are the first to sue over the diversion. They claim a clawback can only be implemented if the commonwealth’s funds are insufficient to cover general-obligation debt service. Puerto Rico estimates approximately $9 billion of available resources in the fiscal year ending June 30, 2016, which vastly exceeds debt service on the public debt of approximately $1.85 billion, according to Ambac.

  So, while bondholders may have little in the way of recourse, the monolines are taking this lying down and that means a protracted battle among stakeholders for limited cash is about to ensue. “The lawsuit is an opening salvo in what could be a long and expensive court fight over Puerto Rico’s efforts to restructure its debt,” Reuters wrote on Friday. “They also said Puerto Rico is wrongfully using clawbacks to fund government services, and is diverting bondholders’ collateral in violation of the Takings and Due Process clauses of the U.S. constitution.”

  In other words, the insurers don’t think Padilla should have the option of choosing to provide public services over paying creditors. We predicted as much back in Novermber when we said the following:

  Ultimately, the decision will be between paying bondholders and ensuring that the government can continue to provide public services, and just as Greece prioritized pensions over IMF payments last summer, Padilla isn’t likely to sacrifice the public interest at the altar of the island’s creditors.

  The lawsuit comes just weeks after MBIA and Assured Guaranty struck a deal with the commonwealth to restructure $8.2 billion in PREPA debt.

  That agreement marked the largest ever muni restructuring and raised questions as to Padilla’s contention that bankruptcy is the only way for the island to efficiently get out of trouble. Padilla contends that restructuring the rest of Puerto Rico’s debt will be far more difficult. “The vast number of creditors with differing interests across all issuing entities would result in negotiations that are lengthy, costly and chaotic. Access to legal, broad restructuring authority would allow us to undertake these in an orderly manner,” he said last month.

  

  PREPA isn’t subject to the clawback, but the Prifa default has Assured Guaranty on edge. “These actions stand in contrast to the consensual agreement that we and other creditors recently reached with Puerto Rico’s electric utility, Prepa,” Dominic Frederico, Assured Guaranty’s president and chief executive officer, said in a statement Thursday.

  As you can see, this is about to get very messy, very quickly and the angrier the monolines get, the more difficult it will be for the island to restructure its obligations (recall that it was the insurers who held up the PREPA deal).

  

  But don’t worry, the holiday bonuses aren’t in jeopardy – yet.

  *  *  *

  Full Ambac statement

  Ambac Financial Group, Inc. (Nasdaq:AMBC) (“Ambac”), a holding company whose subsidiaries, including Ambac Assurance Corporation (“Ambac Assurance”), provide financial guarantees and other financial services, today announced that Ambac Assurance has filed a lawsuit to protect its rights against the illegal clawback of certain revenue by the Commonwealth of Puerto Rico.  The Complaint for Declaratory and Injunctive Relief was filed in U.S. District Court, District of Puerto Rico, with co-plaintiffs Assured Guaranty Corp. and Assured Guaranty Municipal Corp.

  In December 2015, the Commonwealth of Puerto Rico announced that it would clawback revenues pledged to other bonds to fund obligations to its general obligation (“GO”) bonds.  Although the Commonwealth of Puerto Rico, under its constitution, has the right to clawback certain revenues to service its GO bond payments, that right is subject to important preconditions.  One key precondition is that the revenues can only be clawed back if no other revenues or moneys are available to pay the GO bond payments. For fiscal year 2016, the Commonwealth forecasts approximately $9.0 billion of available resources, which vastly exceeds debt service on the public debt of approximately $1.85 billion.

  The targeted clawback revenues include those of Puerto Rico Highways and Transportation Authority (“HTA”), the Puerto Rico Convention Center District Authority (“PRCCDA”) and the Puerto Rico Infrastructure Financing Authority (“PRIFA”).  The implementation of the clawback contributed to the government’s default on January 1, 2016 on $36 million of interest on PRIFA bonds, and will eventually cause a default on HTA and PRCCDA bonds. Ambac Assurance satisfied its obligation to make timely payment on approximately $10 million of claims related to PRIFA bonds it insures.

  Commenting on today’s announcement, Nader Tavakoli, President and Chief Executive Officer of Ambac said, “Over the last several months, we have attempted to engage the Commonwealth in consensual conversations toward finding amicable solutions for their asserted liquidity issues, only to be rebuffed.  Instead the Commonwealth has committed itself to a ‘scorched earth’ strategy of blaming its fiscal and structural problems on lenders, Congressand others, in an effort to deflect responsibility and obtain retroactive application of bankruptcy laws.  Serious issues have been raised by the Governor himself as to whether the Commonwealth historically misrepresented its financial condition to fool the very lenders it now seeks to punish.”

  Mr. Tavakoli continued, “Most recently, the Commonwealth unlawfully diverted tax revenues collected by the U.S. government, which are collected for the specific purpose of supporting PRIFA bonds, in order to finance the government’s general accounts.  We remain hopeful that the Commonwealth will abandon these illegal tactics, and turn instead toward good faith negotiations aimed at solutions instead of confrontation.  While we are optimistic that the government of Puerto Rico will begin to act responsibly, at this time we have no choice but to protect our stakeholders through judicial recourse.”

  *  *  *

  

  

  

  

  

  

• The Bankers' India Gold Grab: An Update

  Submitted by Jeff Nielsen via SprottMoney.com,

  In previous commentaries , readers were warned that Western bankers were once again targeting the gold market of India with more of their fiendish plans. This time, they convinced (bribed?) India’s new, corrupt government – the Modi regime – into orchestrating a scheme to steal the gold from its own people.

  The nexus of this scam was what was announced as “the gold deposit scheme.” Even the Conspirators themselves were unable to come up with a name to make this naked fraud sound legitimate. The fraud itself is simple, indeed utterly simplistic.

  Indians “deposit” their gold into the clutches of their thieving government and are paid (paper) “interest” on those deposits. The fact that this was a naked fraud was immediately apparent. As the bankers tell us all the time, “gold generates no income.” How could India’s government pay the interest on the gold coins/bars/jewelry sitting in its vault supposedly held in trust for its depositors?

  There was no immediate answer to that question, because there could be no (legitimate) answer to the question. Indeed, in legitimate bullion storage arrangements, depositors pay a fee to have their bullion safely stored for them, because while the gold generates no income, the costs of storing such gold are significantly greater than zero.

  Finally, reluctantly, the Conspirators made explicit what was already totally obvious:

  The deposited gold will be auctioned off from time to time to meet domestic demand for jewellery and coins. [emphasis mine]

  The scam was now completely exposed.

  a) Indians “deposit” their gold.

  b) Indians receive (paper) “interest” on their gold while their deposited gold is sold off.

  c) Indians end up with the paper interest – and no gold.

   

  d) India’s jewellers and coin-makers then sell the gold they purchased at these auctions back to the same Chumps who originally deposited that gold.

  In the eyes of Western bankers, it was the perfect “scheme” – hence their label for the plan. In the eyes of any sane, rational, human being, it was/is the most naked, clumsy fraud that one could possibly imagine. But the corporate media assured us there was considerable enthusiasm amongst India’s population for this scam.

  With enormous media and government fanfare, the “scheme” was officially launched at the beginning of November. However, these same media and government mouthpieces were much, much quieter a couple of weeks later when they released details on the initial response to this obvious fraud.

  A gold deposit scheme launched amid fanfare by Indian Prime Minister Narendra Modi two weeks ago has so far attracted only 400 grammes, an industry official said on Thursday, out of a national hoard estimated at 20,000 tonnes.

  For those readers still less-than-comfortable with the metric system, let’s convert these numbers to the Imperial system of measurement. In two weeks, out of a population of more than one billion people, holding an estimated 40 million pounds of gold, the Conspirators only managed to net roughly one pound of gold from their intended victims.

  Expressing these results in percentage terms, the Conspirators managed to steal less than 0.000002% of India’s privately held gold. At that rate, it would take India’s government (and the bankers) more than one million years to steal all of India’s gold.

  The thieves were not daunted, at least not publicly. The media offered assorted excuses for the “slow” initial response to the scam. India’s government immediately added new inducements for the scam and pledged a “high-level meeting” to plot even more changes.

  Last week, the government announced several steps to make the scheme more attractive for consumers, including measures such as eliminating capital gains and income taxes on the interest earned. The meeting on Tuesday is expected to focus on incentives for banks.

  “Capital gains and income taxes”? Indians are having their gold stolen from them. They receive paper interest equal to a fraction of the value of that gold in return. And the media/government liars have the audacity to call this interest a “gain” or “income”? How magnanimous of India’s government to announce that it wouldn’t tax those “profits.”

  With these new inducements in place, the Conspirators sat back and waited for the gold to start flowing into their vaults. Two weeks later, we got our next update :

  The scheme has only attracted about one kilogramme [two pounds] in a month, prompting the government to nudge temples through banks to hand over their treasures …

  First we get news that the thieves managed to net another, whole pound of gold during the second half of the month, and were still on-pace to steal all of India’s gold in 1,000,000+ years. Then the language (and imagery) descends to surreal comedy.

  We’re now told that India’s government sees “temple gold” as its best/easiest target for stealing. But then we’re told that India’s government isn’t going to approach the temples directly, despite its boasts of what a “great opportunity” the gold-deposit scam represented. Instead, we’re told that India’s government plans on sending in bankers to “nudge” the temples to “hand over their treasures.” Why?

  Once upon a time, those individuals who could liberate the most wealth from institutions in the least amount of time were known as “bank robbers.” But those days are ancient history. This is the 21 ^st century, or as the corporate media likes to call it, all the time, “the New Normal.”

  In the New Normal , the world’s premier wealth liberators are no longer bank robbers but rather bank er robbers. These wealth liberators of the 21 ^st century make the bank robbers of the 19 ^th and 20^th century appear as nothing but rank amateurs.

  Observe. First a banker (and bank) is given custody of (someone else’s) financial assets in order to “manage” those assets. Then, a blink of an eye later, the bank/banker proudly proclaims that the bank now owns those assets. The bankers call this method of wealth liberation “a bail-in.”

  However, in this case, India’s new government was not calling upon its friends, the bankers, to engage in any direct wealth liberation. Rather, they were being sent in to engage in persuasion. Presumably the “bankers” assigned to that task had names like Butch and Knuckles, and instead of carrying briefcases, they were brandishing “implements of persuasion.”

  A mere three days after India’s government sent in the bankers, the following announcement appeared:

  Mumbai’s Siddhivinayak temple to deposit 40 kg of gold in monetization scheme

  Here’s what is interesting about that announcement. First of all, the bankers had already invested many years of time and effort looking for some means to “gather” some of the thousands of tonnes of gold held by India’s temples – and failed. Meanwhile, just three days earlier, we had been told the following.

  But Mumbai’s Shree Siddhivinayak temple, which is devoted to the Hindu elephant god Ganesha, said it remained unconvinced about the benefits.

  What could have been said to (or done to) the leaders of this temple in order to get them to suddenly reverse themselves after years of resisting all efforts by the bankers to “gather” their gold? Only Butch and Knuckles can answer that question – but they probably won’t.

  The strategy in strong-arming at least one of India’s temples out of a small portion of its gold is obvious. “Look!” hiss the bankers, “Your religious leaders are giving us their gold. That means that it must be a good idea.” Including the 40 kg of gold liberated from the Shree Siddhivinayak temple, this brings the total haul in the gold-deposit scam to 41 kg to date. Put in different terms, the total amount stolen has now risen from 0.000002% of the gold of India’s people all the way to 0.00008%.

  Will the scheme by the One Bank and India’s government to steal some/most/all of the 20,000 tonnes of privately held gold in India be successful? If so, Butch and Knuckles will have to engage in a lot more persuading.

  

  

  

  

  

• It Begins: FXCM Doubles Yuan Margins, Warns Of Market "Disruption And Highly Illiquid Conditions"

  The last time FX brokers, still hurting from the Swiss National Bank’s revaluation shocker from last January which forced brand names such as FXCM to seek an urgent bailout, scramble to hike margins was in late June just ahead of the Greek “event risk” weekend, when  numerous brokers either hiked margins on EUR positions or went to “close only” mode due to “uncertainty surrounding the Greek debt negotiations… that could lead to high volatility on the market.”

  So, barely one week into the new year, one which has seen the stock market suffer its worst ever first week of trading, some FX brokers are not taking chances, and in the aftermath of the aggressive plunge in the Yuan (one we warned about a month ago), have decided to minimize client stop-out risk by hiking margins.

  Case in point, here is FXCM with a just released warning about upcoming “highly illiquid conditions” leading to a doubling in Yuan margins:

  Dear Client,

   

  We believe there is a chance of disruption and highly illiquid conditions in the forex market during the coming weeks (and/or months). Please be aware that market gaps tend to occur over the weekend – that is, currencies trade at prices considerably distant from previous levels.

   

  *IMPORTANT UPDATE*  

   

  Margin requirements will double on the USD/CNH pair after market close on January 15, 2016. See a Complete List of New Margin Requirements

   

  Please review your account to ensure that you have enough available margin to support any new positions. You may deposit additional funds at www.myfxcm.com or close positions as needed.

  Follows the traditional disclaime which FXCM itself probably should have taken to heart one year ago when after the SNB’s de-pegging the firm suffered tremendous losses:

  Remember that forex trading can result in losses that could exceed your deposited funds and therefore may not be suitable for everyone, so please ensure that you fully understand the high level of risk involved.

  The paradox here is that pre-emptive, if correct, warnings such as this one, tend to quickly become self-fulfilling prophecies as other brokers immediately follow suit and likewise increase margin requirements, which helps mitigate total loss potential but just as quickly soaks up liquidity from the market, leading to an even more fragmented market, prone to sudden, and quite dramatic moves.

  The full list of FXCM margin increases is shown below; expect every other FX brokerage to promptly jump on the bandwagon.
  

  

  

  

  

  

• One Map That Explains The Dangerous Saudi-Iranian Conflict

  Submitted by Jon Schwartz via The Intercept,

  The Kingdom of Saudi Arabia executed Shiite Muslim cleric Nimr al-Nimr on Saturday. Hours later, Iranian protestors set fire to the Saudi embassy in Tehran. On Sunday, the Saudi government, which considers itself the guardian of Sunni Islam, cut diplomatic ties with Iran, which is a Shiite Muslim theocracy.

  To explain what’s going on, the New York Times provided a primer on the difference between Sunni and Shiite Islam, informing us that “a schism emerged after the death of the Prophet Muhammad in 632” — i.e., 1,383 years ago.

  But to the degree that the current crisis has anything to do with religion, it’s much less about whether Abu Bakr or Ali was Muhammad’s rightful successor and much more about who’s going to control something more concrete right now: oil.

  In fact, much of the conflict can be explained by a fascinating map created by M.R. Izady, a cartographer and adjunct master professor at the U.S. Air Force Special Operations School/Joint Special Operations University in Florida.

  What the map shows is that, due to a peculiar correlation of religious history and anaerobic decomposition of plankton, almost all the Persian Gulf’s fossil fuels are located underneath Shiites. This is true even in Sunni Saudi Arabia, where the major oil fields are in the Eastern Province, which has a majority Shiite population.

  As a result, one of the Saudi royal family’s deepest fears is that one day Saudi Shiites will secede, with their oil, and ally with Shiite Iran.

  This fear has only grown since the 2003 U.S. invasion of Iraq overturned Saddam Hussein’s minority Sunni regime, and empowered the pro-Iranian Shiite majority. Nimr himself said in 2009 that Saudi Shiites would call for secession if the Saudi government didn’t improve its treatment of them.

  

  The map shows religious populations in the Middle East and proven developed oil and gas reserves. Click to view the full map of the wider region. The dark green areas are predominantly Shiite; light green predominantly Sunni; and purple predominantly Wahhabi/Salafi, a branch of Sunnis. The black and red areas represent oil and gas deposits, respectively.

  Source: Dr. Michael Izady at Columbia University, Gulf2000, New York

  As Izady’s map so strikingly demonstrates, essentially all of the Saudi oil wealth is located in a small sliver of its territory whose occupants are predominantly Shiite. (Nimr, for instance, lived in Awamiyya, in the heart of the Saudi oil region just northwest of Bahrain.) If this section of eastern Saudi Arabia were to break away, the Saudi royals would just be some broke 80-year-olds with nothing left but a lot of beard dye and Viagra prescriptions.

  Nimr’s execution can be partly explained by the Saudis’ desperation to stamp out any sign of independent thinking among the country’s Shiites.

  The same tension explains why Saudi Arabia helped Bahrain, an oil-rich, majority-Shiite country ruled by a Sunni monarchy, crush its version of the Arab Spring in 2011.

  Similar calculations were behind George H.W. Bush’s decision to stand by while Saddam Hussein used chemical weapons in 1991 to put down an insurrection by Iraqi Shiites at the end of the Gulf War. As New York Times columnist Thomas Friedman explained at the time, Saddam had “held Iraq together, much to the satisfaction of the American allies Turkey and Saudi Arabia.”

  Of course, it’s too simple to say that everything happening between Saudis and Iranians can be traced back to oil. Disdain and even hate for Shiites seem to be part of the DNA of Saudi Arabia’s peculiarly sectarian and belligerent version of Islam. In 1802, 136 years before oil was discovered in Saudi Arabia, the ideological predecessors to the modern Saudi state sacked Karbala, a city now in present-day Iraq and holy to Shiites. The attackers massacred thousands and plundered the tomb of Husayn ibn Ali, one of the most important figures in Shiite Islam.

  Without fossil fuels, however, this sectarianism toward Shiites would likely be less intense today. And it would definitely be less well-financed. Winston Churchill once described Iran’s oil – which the U.K. was busy stealing at the time — as “a prize from fairyland far beyond our brightest hopes.”

  Churchill was right, but didn’t realize that this was the kind of fairytale whose treasures carry a terrible curse.

  

  

  

  

  

• North, South Korea "At The Brink Of War" As Loudspeaker Dispute Spirals Out Of Control (Again)

  Back in August, the Korean Peninsula nearly plunged back into war when Kim Jong-Un reached his limit with the anti-North propaganda being blasted across the DMZ by loudspeakers installed by the South.

  For those who missed it, or for anyone in need of a refresher, here’s our account of what happened:

  North Korea’s Kim Jong-un – the world’s sabre rattler par excellence – doesn’t like to stray too far from the spotlight when it comes to global conflict, which is why we weren’t terribly surprised when, a few days ago, the pariah state threatened to invade the US mainland and use “weapons unknown to the world.”

   

  Of course a lot of what goes on inside the country is “unknown to the world”, much as the world is largely “unknown” to North Koreans and that’s just fine with Kim, whose regime depends on a combination of propaganda and censorship to keep the populace transfixed in a perpetual state of hypnotic hero worship. Of course the West and its allies – and now even China – have a tendency to dismiss Kim’s threats as the ravings of a delusional child, which is why occasionally, Pyongyang will actually fire a missile into the ocean or execute a member of the military top brass with an anti-aircraft gun just to remind everyone that the regime isn’t totally bluffing.

   

  Given Pyongyang’s propensity for lobbing bombastic threats that, were they to emanate from virtually any other government on the planet would be met with a sharp rebuke, it’s something of a miracle that sour relations between Kim and US ally South Korea haven’t already produced an armed conflict. That may be about to change because as Bloomberg reports, the “maiming” of two South Korean soldiers along the DMZ and subsequent “blaring of propaganda through loudspeakers” by the South culminated in the exchange of artillery fire, marking the worst escalation between the two countries in five years.

  In short, the South blamed the North for planting mines that injured soldiers and in response, persisted in the broadcasting of propaganda. Subsequently, The North threatened to “blow up” the speakers and eventually took a pot shot at one. Next came the artillery exchange and shortly thereafter, Kim declared a state of war. 

  Tensions eventually eased in what Kim hailed as a kind of diplomatic victory for Pyongyang.

  

  Fast forward four months and the North was busy conducting its fourth nuclear test. As we documented on Wednesday, Pyongyang “successfully” tested what it swears was an H-bomb on Tuesday, drawing universal condemnation from virtually every country on the planet. The North needs an H-bomb, Pyongyang explained, because the US “is a gang of cruel robbers.”

  

  Well, in the wake of the nuke test, the South resumed its propaganda broadcasts across the DMZ. The loudspeakers were fired back up on Friday just a day after reports indicated that South Korea is in talks with the US for the deployment of strategic weapons to the Peninsula. The broadcasts “are likely to infuriate” Kim, Reuters wrote.

  Sure enough, the North now says the resumption of the broadcasts (which Pyongyang considers to be an “act of war”) have brought the two countries to “the brink of war.” Here’s AP with the absurd details:

  North Korea warned of war as South Korea on Saturday continued blasting anti-Pyongyang propaganda across the rivals’ tense border in retaliation for the North’s purported fourth nuclear test.

   

  North Korean propaganda is filled with threats of violence, but the country is also extremely sensitive to criticism of its authoritarian leadership, which Seoul resumed in its cross-border broadcasts on Friday for the first time in nearly five months. Pyongyang says the broadcasts are tantamount to an act of war. When South Korea briefly resumed propaganda broadcasts in August after an 11-year break, Seoul says the two Koreas exchanged artillery fire.

   

  Speaking to a massive crowd at Pyongyang’s Kim Il Sung Square, a top ruling party official said the broadcasts, along with talks between Washington and Seoul on the possibility of deploying in the South advanced U.S. warplanes capable of delivering nuclear bombs, have pushed the Korean Peninsula “toward the brink of war.”

   

  Pyongyang’s rivals are “jealous” of the North’s successful hydrogen bomb test, Workers’ Party Secretary Kim Ki Nam said in comments broadcast on state TV late Friday.

   

  South Korean troops, near about 10 sites where loudspeakers started blaring propaganda Friday, were on the highest alert, but have yet to detect any unusual movement from the North Korean military along the border, an official from Seoul’s Defense Ministry, who refused to be named, citing office rules, said Saturday.

   

  The South’s Yonhap news agency said Seoul had deployed missiles, artillery and other weapons systems near the border to swiftly deal with any possible North Korean provocation, but the ministry did not confirm the reports.

   

  Officials say broadcasts from the South’s loudspeakers can travel about 10 kilometers (6 miles) during the day and 24 kilometers (15 miles) at night. That reaches many of the huge force of North Korean soldiers stationed near the border and also residents in border towns such as Kaesong, where the Koreas jointly operate an industrial park that has been a valuable cash source for the impoverished North.

   

  Seoul also planned to use mobile speakers to broadcast from a small South Korean island just a few kilometers (miles) away from North Korean shores.

   

  While the South’s broadcasts also include news and pop music, much of the programming challenges North Korea’s government more directly.

   

  “We hope that our fellow Koreans in the North will be able to live in (a) society that doesn’t invade individual lives as soon as possible,” a female presenter said in parts of the broadcast that officials revealed to South Korean media. “Countries run by dictatorships even try to control human instincts.”

  And here’s an image which purports to depict two South Korean soldiers fine tuning the speakers:

  

  Although we’re quite sure the humor inherent in the above isn’t lost on readers, we’d be remiss not to highlight the fact that this is just about the most irksome thing someone could do to a man like Kim.

  The Supreme Leader is desperate to defend the legitimacy of his government and to preserve the legacy of his father and grandfather. That means keeping the public in a perpetual state of awe and conveying an air of divine authority, unshakable will, and absolute power. The fact that the South sets up loudspeakers on his border and blasts a mishmash of South Korean pop music and anti-Pyongyang agitprop loud enough to be heard 15 miles away is just about the most irritating slap in the face imaginable for the young leader. 

  Adding insult to injury: Friday was Kim’s birthday.

  But just because Kim likely knows he can’t realistically challenge the South militarily without provoking big brother in Washington doesn’t mean an “accident” across the DMZ couldn’t inadvertently bring the two countries to blows. And all over some speakers…

  

  

  

  

  

  

• Americans' Positive Perception Of NRA Soars As Obama Escalates Gun-Control Agenda

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  When pollsters asked people three decades ago how they felt about the National Rifle Association, 27% said they strongly supported the gun lobby. By last month, that share had grown 38%, an 11-point increase. Meanwhile, the share that didn’t side with the NRA declined.

   

  By an 8-point, registered voters in the Journal/NBC survey last month said they were more concerned that the government would go too far in restricting gun rights than that it fail to do enough to regulate access to firearms. When adults were asked the same question in 1995, the greater fear was that access to firearms was too widespread.

   

  In July polling, the Journal/NBC survey found that 43% of the public had a positive image of the NRA and 32% a negative one—a more favorable view than the public held of the Supreme Court or either political party. By a 15-point margin, political independents, also viewed the NRA more positively than negatively.

   

  – From the Wall Street Journal article: Rising Support for NRA Stymies Obama

  Love guns or hate guns, one thing is becoming perfectly clear. The American public’s perception of guns and the NRA is moving in the exact opposite direction of Barack Obama’s message and agenda.

  To hear Obama speak, you’d think the NRA is simply using boatloads of money and propaganda to thwart the impassioned gun control desires of the American public. In reality, nothing could be further from the truth. First, let’s take a look at some powerful charts from the Wall Street Journal.

   

  

  As you can clearly see, the numbers regarding NRA support have virtually flipped over the past thirty years. This is also consistent with a recent ABC News poll which showed for the first time that a majority of American are against an assault weapons ban. From the post, A Majority of Americans Oppose “Assault Weapons Ban” – Highest Number on Record:

  A majority of Americans oppose banning assault weapons for the first time in more than 20 years of ABC News/Washington Post polls, with the public expressing vast doubt that the authorities can prevent “lone wolf” terrorist attacks and a substantial sense that armed citizens can help.

   

  Indeed, while the division is a close one, Americans by 47-42 percent think that encouraging more people to carry guns legally is a better response to terrorism than enacting stricter gun control laws. Divisions across groups are vast, underscoring the nation’s gulf on gun issues.

  Now here’s another chart from the same Wall Street Journal article, which is even more compelling.

  

  Although Democrats hate the NRA (the same group that supports Hillary for President despite admitting she’s untrustworthy), Independents show strong support. Why is this important? Because according to a recent Gallup poll, a record 43% of Americans identify as Independents.

  From Gallup:

  PRINCETON, N.J. — An average 43% of Americans identified politically as independents in 2014, establishing a new high in Gallup telephone poll trends back to 1988. In terms of national identification with the two major parties, Democrats continued to hold a modest edge over Republicans, 30% to 26%.

   

  Since 2008, the percentage of political independents — those who identify as such before their leanings to the two major parties are taken into account — has steadily climbed from 35% to the current 43%, exceeding 40% each of the last four years. Prior to 2011, the high in independent identification was 39% in 1995 and 1999.

   

  The recent rise in political independence has come at the expense of both parties, but more among Democrats than among Republicans. Over the last six years, Democratic identification has fallen from 36% — the highest in the last 25 years — to 30%. Meanwhile, Republican identification is down from 28% in 2008 to 26% last year.

  Now here’s the chart. There’s a well defined bull market in Independent-identifying Americans:

  

  Finally, let’s end this post with some excerpts from the Wall Street Journal article from which the previously highlighted charts were pulled:

  When pollsters asked people three decades ago how they felt about the National Rifle Association, 27% said they strongly supported the gun lobby. By last month, that share had grown 38%, an 11-point increase. Meanwhile, the share that didn’t side with the NRA declined.

   

  That is just one measure of the challenge that has forced President Barack Obama to sidestep Congress and put in place new gun regulations through executive action. Mr. Obama knows through hard experience that lawmakers have little appetite for passing tougher gun laws. Polling shows that skepticism is rooted among the broader public, as well.

  So there you go. King Obama sees political trends he doesn’t like, knows that Congress can’t do anything about it because the public doesn’t want it to, so he does it by himself by executive decree.

  As I noted on Twitter the other day:

  Yeah, then this will flip once Trump is elected, and Obama supporters will suddenly discover the Constitution: pic.twitter.com/O6x0U8cA0B

  — Michael Krieger (@LibertyBlitz) January 6, 2016

  Now back to the WSJ:

   

  By an 8-point, registered voters in the Journal/NBC survey last month said they were more concerned that the government would go too far in restricting gun rights than that it fail to do enough to regulate access to firearms. When adults were asked the same question in 1995, the greater fear was that access to firearms was too widespread. 

   

  But as Mr. Obama seeks any small patch of common ground, one of the most powerful forces he must deal with is skepticism of any new laws—even the widely backed expansion of background checks. A majority in Gallup polling said background checks would have little or no effect in reducing mass shootings. And a majority believed the country would be safer if more people carried concealed weapons—a finding in tune with the NRA’s contention that “the only thing that stops a bad guy with a gun is a good guy with a gun.’’

   

  While support for the NRA skews Republican, it is not exclusively Republican. Some 41% of political independents rate themselves as highly supportive of the gun lobby, more than twice the share that doesn’t support the group, December’s Wall Street Journal/NBC News survey found.

   

  In July polling, the Journal/NBC survey found that 43% of the public had a positive image of the NRA and 32% a negative one—a more favorable view than the public held of the Supreme Court or either political party. By a 15-point margin, political independents, also viewed the NRA more positively than negatively.

   

  “The gun lobby may be holding Congress hostage right now, but they cannot hold America hostage,’’ Mr. Obama said in announcing his new gun regulations. But in going up against the NRA, he is working against a force that is not only powerful but popular among many in the country.

  Substitute “the American public” for “the gun lobby,” and you’ll find out what’s really irking King Barry.

  

  

  

  

  

Digest powered by RSS Digest

• Taiwan Election: How a DPP Win Would Tick Off China

   

  By EconMatters

  Taiwan will elect a new president and parliament on January 16. The current President Ma Ying-jeou, from the Nationalist party (Kuomintang, KMT, led by Chiang kai-shek before his demise in 1975), will complete his second term in May. During the eight years President Ma has been in power, he has focused on improving relations with China, and achieved the most cordial terms since the end of the Chinese civil war in 1949. But since Ma cannot run again after serving the maximum of two terms, there are three fresh presidential candidates ducking it out in Taiwan.

  Candidate #1: Tsai Ing-wen, the Chairperson of the Democratic Progressive Party (DPP)

  

   

  Tsai has a master’s degree from Cornell Law, and a PhD in Law from the London School of Economics. So far, she was top of the last opinion poll at 45.2% last Tuesday before a polling blackout begins ahead of the Jan. 16 elections. Tsai previously served as DPP chair from 2008 to 2012 and is no stranger to a presidential campaign. She was the DPP’s presidential candidate in 2012 before losing to Ma Ying-jeou.

  Read – Taiwan: The Democratic China

   

  Candidate #2: Eric Chu from the Nationalist party (KMT)

   

  

   

  Chu is the chairman of KMT and the current mayor of New Taipei with a master’s degree in Fiance and a PhD in Accounting from New York University. Chu declared his candidacy very late (in October, about 3 month before the election) to replace Hung Hsiu-chu at the last minute.

  This unusual debacle came as the KMT party miscalculated thinking it would be better off with a female candidate to run against the more popular female candidate Tsai Ing-wen from the Democratic Progressive Party (DPP). Unfortunately, Hung Hsiu-chu does not have the support base like Tsai and had been unpopular with voters, trailing badly in opinion polls. This last minute switch of candidate looks bad for the KMT party but also increases the odds of a complete loss in the presidential and general election.

   

  Read: Obama Put Taiwan on ISIS Radar

  
  

  Candidate #3: James Soong from the People’s First Party (PFP)

   

  

   

  Soong has a Phd in political science from Georgetown University and is the founder and chairman of the PFP, part of the the KMT-led Pan-Blue Coalition. Soong was a KMT senior official before he left the party to run as an independent in the 2000 presidential election. Many has blamed Soong’s departure splitting the votes supporting KMT which resulted in KMT’s defeat in the 2000 election. He ran again in 2004 as Vice President to Lien Chan. The pair lost narrowly to the Chen Shui-bian from DPP seeking a second term. Now 73, Soong is at it again dividing the KMT’s support and sympathetic base. Not that it makes much of a difference as both KMT candidates fell miserably in the poll behind the DPP’s Tsai.

   

  Read: Natural Gas Signals Oil Bottom

   

  DPP’s Scandalous Legacy 

  The liberal DPP had its shot at running Taiwan. Chen Shui-bian, the party’s former Chairman, won both the 2000 and 2004 presidential elections. During his two terms, the popularity of Chen and DPP sharply dropped due to alleged corruption within his administration. Chen was later convicted, along with his wife, on two bribery charges and was sentenced to 19 years in Taipei Prison. Tsai Ing-wen, the DPP current presidential candidate, is one of the very few highly educated DPP members and has been credited with picking up the pieces restoring DPP’s credibility and image after Chen’s scandal.

  DPP & Taiwan’s Legislative Violence

  DPP has a tendency of resorting to violence and many times exhibited traits of a mob group. Taiwan has mostly DPP to thank for the headlines and Youtube gone viral on “legislative violence” over the past decade. Below is the infamous picture back in 2006 when the then ruling party DPP deputy Wang Shu-hui chewed up a proposal to halt voting on opening direct transport links with Mainland China. Here is how Reuters describes the aftermath:

  Wang later spat out the document and tore it up after opposition lawmakers failed to get her to cough it up by pulling her hair. During the melee, another DPP woman legislator, Chuang Ho-tzu, spat at an opposition colleague.

  Taiwan rulling party DPP deputy chews up a porposal to halt voting in Parliarment in 2006

   

  “Violence Is Normal in a Democratic Society”

  Tsai Ing-wen was dubbed by Time magazine cover as the one that could “lead the Only Chinese democracy”. However, during a lecture at Harvard University in 2011, when asked about why DPP seems to use violence as a tool to gain political power, Tsai’s reply won a round of applause and laughter when she said “Your definition of violence in a democratic society, that seems to be normal when you speak louder.” (Youtube here, English starts at 0:49).

  I don’t think I need to waste more writing on how DPP has gone above and beyond simply “speaking louder”, and Tsai of all people knows it, which I think is why she dodged and made light of the question. That actually makes me queasy as she seems to endorse handling conflicts in a country bumpking style.

  DPP’s liberal view has gained a grassroot massive support base in the youth, farming and working class, which is evidenced by Tsai’s overwhelming lead in the poll. Nevertheless, political views aside, judging from DPP’s conflict resolution skill, I personally has much reservation about how DPP could bring more progress and achieve true democracy as many seem to believe.

   

  Read: 90 Years of Communist China

   

  Status Quo with China?

  DPP has long held the position of pro-independence regarding Taiwan’s status and wanted to sever all ties (historic, cultural, economic, etc.) with Mainland China. But this time around, DPP and Tsai is signaling a more pragmatic approach. “We want to maintain the status quo. We want to maintain the current democratic way of life,” says Joseph Wu, Tsai’s No. 2 and the DPP secretary.

  Based on DPP’s history, I have serious doubt DPP would be contend with “status quo” regarding the cross-Taiwan-Strait relationship with China achieved by the KMT and Ma Ying-jeou.

  Will DPP Cross China’s Bottom Line?

  Even though Taiwan has its own military, foreign diplomacy and government services, Mainland China sees it as nothing more than a renegade province, and has threatened many times to overtake the island by force. China’s stance has softened quite a bit in recent years partly due to President Ma’s effort; however, an independent Taiwan remains the final “bottom line” not to be trifled with.  

   

  Taiwan president Ma Ying-jeou (left) and China’s president Xi Jinping (right) shaking hands on Nov. 7, 2015 in Singapore

   

  Between the KMT and DPP, China would rather deal with the KMT. Leaders in China actually have as much to lose as the KMT with an unprecedented win by the liberal DPP. To show support to the KMT and also send a message to DPP, president Xi Jinping of China met with president Ma Ying-jeou of Taiwan in Singapore in November, 2015 (aka 2015 Xi-Ma Meeting, although Taiwan calls it Ma-Xi Meeting). This is the first time the leaders of China and Taiwan met in more than six decades, and Singapore was chosen as a neutral ground.

   

  Bad Economy Keeps Idle Hands Busy

  China has its own economic problems and authorities recently had to make a move to stablize currency, buy share, suspend circuit-breaker. Meanwhile, Taiwan’s export-oriented economy is currently in recession sharing the pain from China marred by near-zero growth, stagnant wages and rising prices. There’s also the looming threat of an energy shortage, low domestic investment and overdependence on China, according to a new report by the the US-China Economic and Security Review Commission.

  Tsai is now regarded as a virtual shoe-in to win in the 2016 presidential election while DPP is expected to sweep the majority in the parliarment as well. This suggests Taiwan could revert back to a one-party political system with its own social and economic implications.

  Needless to say, things will also get ever more complicated and tricky between China and Taiwan. The sucess of both administrations depends on how their economic policies could turn things around for the Chinese people in Mainland China and Taiwan. So perhaps neither would have much time and energy to make good on their previous political rhetoric.

  

  

  

  

• Chinese Immigrant Turned Citizen Defies Obama Gun Grab: "I Will Never Be A Slave Again"

  Submitted by Mac Slavo via SHTFPlan.com,

  

   

  President Obama knows that the American people have not embraced his radical, leftist gun control agenda.

  That’s why he took to the stage at a town hall spectacle hosted by CNN’s Anderson Cooper in attempt to defend his unconstitutional executive actions for stealth gun control, and try to convince Americans once and for all that he is not enacting some kind of gun grabbing conspiracy.

  But his “common sense” policies – made law under the force of executive order – and his crocodile tears for exploited victims of gun violence are not going to shift pubic opinion.

  There is clearly a line in the sand, and a bold Chinese immigrant, who became an American citizen by choice, is the latest to remind the government what it shall not infringe.

  Lily Tang Williams happens to be the state chair of the Colorado Libertarian Party and has made a splash with her January 5th Facebook post, which has now received thousands of comments and shares. Williams vows to defy all government attempts at disarmament, citing the authoritarian abuses of China, her native country.

  She declares, “I will always stand with my AR, no matter what my President signs with his pen.”

  Lily Tang Williams posted this on her Facebook account with the above picture of her holding a rifle against the backdrop of an American flag:

  If you believe more gun control by your government is going to save lives, you are being naïve. The champion of all the mass killings in this world is always a tyrannical government.

   

  Where I came from, China had killed thousands of the students by its own government during the massacre of Tian An Men square in 1989. I surely wish my fellow Chinese citizens back then had guns like this one I am holding in the picture.

   

  I am a Chinese immigrant and an American citizen by choice. I once was a slave before and I will never be one again.

   

  I will always stand with my AR, no matter what my President signs with his pen.

   

  #stopguncontrol #tyranny #tiananmenmassacre #lily4liberty

  Posted by Lily4Liberty on Tuesday, January 5, 2016

   

  Chinese immigrant on recent Obama's gun control move: "I once was a slave before and I will never be one again" pic.twitter.com/c6GYokIjQI

  — Wisconsin 4 Guns (@Wisconsin4Guns) January 7, 2016

  Live free, or die standing on your feet.

  Lily Tang Williams has actually lived as a slave under an oppressive government, and like other immigrants who came to the U.S. fleeing such conditions, she is appalled at seeing the same pattern come home to America.

  But it isn’t over yet.

  By the look of determination in this freedom fighters’ eyes, the resistance won’t soon die, and government will still face an intense fight if it intends to completely eradicate freedom.

  Despite decades of indoctrination and mass media propaganda, millions and millions of Americans are still aware of what this country was founded upon, and what principles it stands for.

  And. They. Will. Never. Give. Up. Their. Guns. Period.

  

  

  

  

  

• The Death Of The Canadian Oil Dream, A Firsthand Account

  We’ve spent quite a bit of time over the past 12 months documenting the trainwreck that is Alberta’s economy.

  Most recently, we brought you “This Is Canada’s Depression: Surging Crime, Soaring Suicides, Overwhelmed Food Banks” and “For Canadian Repo Men, Business Has Never Been Better“, but you can review the story in its entirety by revisiting the following posts:

  • Canada Crude Contagion: Calgary home Prices Drop Most In 2 Years
  • “Canada’s Biggest Oil Casualty To Date: Calgary’s Nexen Shutters Oil Trading Desk”
  • “The Canadian Housing Bubble Has Begun To Burst”
  • “Canada’s Oil Patch Confidence Crashes”
  • “Canada Mauled by Oil Bust, Job Losses Pile Up – Housing Bubble, Banks at Risk”
  • “The Stage Is Set For A Massive Housing Market Correction in Canada’s Oilpatch”

  In short, Alberta is at the center of Canada’s oil patch and has suffered mightily in the wake of crude’s seemingly inexorable decline.

  Going into last year, Alberta expected its economy to grow at a nearly 3% clip. That forecast was reduced to 0.6% in March and further to -0.6% in the latest fiscal update. Oil and gas investment has fallen by a third while rig activity has been cut in half.

  The fallout is dramatic. Food bank usage in Alberta is up sharply and so, unfortunately, is property crime in places like Calgary where vacancy rates in the downtown area are at their highest levels since 2010. Suicide rates are on the rise as well while the outlook for unemployment continues to darken with each passing month of “lower for longer” oil prices.

  Below, find excerpts from an excellent account of the malaise penned by Jason ‎Markusoff who writes about Alberta, lives in Calgary, and has spent 12 years reporting for the city’s largest newspapers.

  *  *  *

  From “The Death Of The Alberta Dream,” by Jason Markusoff as originally published at Macleans

  Late last year, Brandon MacKay listed his Kawasaki dirt bike for sale on Kijiji, the online classifieds site. It was the only treat the 25-year-old had given himself in three years living in Fort McMurray. The rest he’d spent on supporting and visiting his wife and kids in Pictou County, N.S. But in crafting the ad for the bike—$4,400 or best offer—MacKay did what any sales agent would advise against: he revealed his desperation to sell. “I lost my job and am in need of money for my wife and kids for Christmas.”

  

  Energy companies are preparing for a grim 2016. Analysts predict budgets will get slashed further, and that more energy firms may have to cut staff, having already laid off thousands. Ongoing oil sands construction projects will continue to wind down with little to replace them, hitting both the residential and commercial real estate sectors hard. For instance, in nearly one-sixth of all the office space in downtown Calgary, the fluorescent lights now shine on empty cubicles, and it’s forecast to get worse. Reports of the symptoms pop up almost daily: more insolvencies, more business for moving trucks and repo crews, even a noticeable uptick in suicides. The Calgary Stampede itself has been forced to lay off staff, as its offseason event bookings dried up. In November, the Alberta unemployment rate came within one-tenth of a percentage point of the national average, the closest it’s been since 1989. Those trend lines are expected to cross over next year, making it more clear to Canadian job-seekers that the Alberta dream is in decline.

  The rest of the country isn’t immune from those ominous grinding sounds coming from Canada’s longtime economic engine. Canadian GDP dipped into recession territory in the first half of 2015 on the oil shock, and though the country managed a rebound in the third quarter, Alberta’s troubles—as well as slumps in other oil-rich provinces like Saskatchewan and Newfoundland—have left a gaping wound. The energy sector had long driven Canada’s trade surplus, papering over weakness elsewhere while soaking up large numbers of unemployed and underemployed people from regions like the Maritimes and hard-hit southwestern Ontario.

  But even average growth seems a ways off, as troubles keep filtering through the province. In Alberta’s southeast, Medicine Hat drew international acclaim in the spring of 2015 after it became the first city in Canada to eliminate homelessness, having pursued an ambitious five-year agenda to put people into subsidized housing within 10 days of them landing in emergency shelters. After so much progress, Medicine Hat’s Salvation Army shelter is back to averaging 17 clients a night, up about one-third since 2014—too many to promptly find them all affordable housing. Local demand for donated clothing and household items also rose by more than a quarter over the last year, says manager Murray Jaster. But donations slumped too, and he had to reduce staff.

  To Jaster’s point, there is much his province used to have that now seems gone. Most noticeable is Alberta’s eroding status as the Promised Land for so many Canadians from other parts of the country. Over the last decade, net interprovincial migration by 18- to 44-year-olds, the key working demographic, swelled Alberta’s population by 200,000, according to a report by a rather envious Business Council of British Columbia. (That province netted fewer than 40,000 over that stretch, while all other provinces were net losers.) The momentum has shifted. While 1,200 more Canadians still moved to the province than left it during the third quarter of 2015, that was the smallest gain since 2010—when the province was recovering from the 2009 oil price collapse—and less than half the average of the last 50 years.

  “Seeing that there’s no real light at the end of the tunnel right now, more [companies] are turning to job cuts,” says Wendy Giuffre, the president of Wendy Ellen, a human resources consultancy. “It seems that there’s another wave right now. I think people were kind of hopeful things were going to pick up sooner, but it’s not looking too promising.”

  Statistics Canada’s payroll survey shows Alberta shed 63,500 jobs over the year leading up to October. That doesn’t account for lost potential—the Canadian Association of Petroleum Producers estimates 40,000 jobs that were expected to be created never materialized.

  It’s no secret that Alberta’s economy is closely linked to the peaks and craters of oil prices—nominal GDP (not adjusted for inflation) swings in tandem with crude prices. It’s why Fort McMurray is like a wounded beast these days. MacKay’s neighbour got laid off this fall. “I watched the bank come and take his truck,” he recalls—it was that or not feed the kids. Home prices in November were 20 per cent below last year’s average, with even townhouses and duplexes losing $100,000 in value. According to reports, a number of people who used to regularly donate to the city’s food bank have become clients.

  What happens in the oil fields directly affects one of Canada’s largest business cores. Elevator trips to Beaver’s small ninth-floor Calgary office have gotten lonelier. Nearly one-third of the office space in the 32-storey highrise is listed for lease or sublease. The asking rate to rent downtown Calgary’s “Class A” office space is down nearly 42 per cent from last year, the result of “a complete lack of demand,” according to a report by real estate advisers Jones Lang Lasalle. 

  The hollowing out of Calgary offices has decimated the corporate lunch crowd. Regulars who would come to Jalapeno’s Mexican Grill three times a week now visit once, or not at all, owner Doug Hernandez says. “We’re not making any money; we’re just floating right now,” he says. “The problem would be when I’m not wearing my lifejacket anymore. Then I’d drown.” 

  Much more in the full article here

  

  

  

  

  

• Raoul Pal Explains What Indicators He Looks At To Decide If The Next Crisis Has Arrived

  Two months ago, RealVision’s Raoul Pal brought our readers an interview excerpt with “The Fourth Turning” author Neil Howe in which the author and current head of Saeculum Research explained “what keeps him up at night.”

  Today, we bring our readers another RealVision excerpt of a reflexive “interview” in which Pal himself is in the hot seat, and is challenged by Ken Monahan to lay out the market shifts he expects in 2016. In the full interview Raoul goes into detail on the indicators he will be watching throughout 2016 that will suggest that a liquidity crisis is imminent. He emphasizes that if this scenario occurs, most people are in investments that “they should absolutely not be in.”

  One such metric closely followed by Pal is the ISM. This is what he says:

  The ISM to me is the global guide to the business cycle. I think that [with the ISM below 50] we have a 65% chance or probability of a recession. We’ve seen that the cycle peaked back in 2011. It troughs at some point. The cycle always does this. We look back at the probabilities. We have a reasonable chance of a recession. Again, I don’t deal in certainties. It’s not like it’s definitely going to happen.

   

  … the probability is now that we crossed 50, that over due course, the business cycle will continue lower, and therefore we should see the ISM coming through 47 which is the recession level – maybe much lower than that depending on the severity of the recession. So that would mean that the year on year rate of change of the S&P would be negative.

   

  … if I’m right and the ISM, for example, gets down to 47, 45 then you’d start to see the year on year rate of change on the S&P at -10%

  A way of visualizing Pal’s point comes courtesy of BofA, which shows that once the ISM drops below 45, it virtually always results in a recession, with just two false positives: in 1951 and 1968.

  

  And then there is another indicator which Pal watches, one which we have been warning about since early 2014 when it first started to slide because it is the most important leading indicator into any global recession, namely trade – for the simple reason that while central banks can print  asset prices, “they can’t print trade.”

  The ISM is my basic framework, you then need to further increase the probability of success of what you’re trying to do. So what you look at, for example, is all the other economic indicators around what’s happening in the global economy. For example, if I look at exports – global exports. Global exports around the world are the second lowest levels since 1958. There’s something going on that the world is slowing down. Some of it is dollar translation effect. And the other is volume loss. So there’s something going on that wasn’t going on in 2012.

  Yes, something is indeed going on, and after years of ignoring it because it was masked by the “wealth effect” of central bank manipulation, the markets are starting to realize it. Pal then touches on all the other deteriorating economic data points we have covered over the past year.

  Then we look at other things like freight shipments. We look at retail sales. We look at industrial production. Once you start putting all the data series together many of them are at levels – durable goods – that are only seen in recessions.

  Correct, and yet the question is: why does Janet Yellen ignore it and continue to push on with the “recovery” narrative, because ultimately is all about the “narrative” to boost confidence:

  Its the Fed’s job to say things are good because it’s about expectations management. Whether we like it or not it’s a behavioral economics world and I’m realizing that more and more that you need to look at how behavior and incentive schemes are done. Soshe has to say that. She’s not going to say, “Oh, my God, the economy is looking terrible” until she has to because then you flip around the expectations.

  Of course, with every passing day, the moment when Yellen will say the “economic is looking terrible” draws closer, and with it brings not only a return to ZIRP, and then NIRP, but also presents the question: will the Fed do another round of QE, or will it finally proceed to what Bernane said back in 2002 was the endgame all along: helicopter money. Or non-helicopter money is on the latter.

  There is more in the Raoul Pal interview excerpt can be watched below, and much more in the full hour-long interview. Furthermore, Raoul Pal has again given Zero Hedge readers an exclusive weekly trial so both the full Howe, and all the other fascinating interviews in RealVision’s database can be watched in their entirety. To do so, please click here and use the “zerohedge” trial code.

  

  

  

  

  

• "Death To Saudi Arabia": Thousands Of Iranians Pour Into The Streets In Anti-Saudi Protests

  It’s now been nearly a week since Saudi Arabia set the Muslim world on fire (both figuratively and literally) by executing prominent Shiite cleric Nimr al-Nimr.

  The Sheikh was a leading figure in the 2011 anti-government protests staged in the kingdom’s Eastern Province and when the House of Saud moved to silence a dissident voice once in for all last Saturday, demonstrators poured into the streets from Bahrain to Pakistan to decry the execution.

  For the Saudis, Nimr is a “terrorist,” but for the Shiite community he has now become a symbol of the oppression embodied by the Sunni Gulf monarchies. For those interested in a bit of background, here are some excerpts from The Atlantic:

  The State Department cable added Nimr was gaining popularity among young people. His stature grew in spring 2009, after Shia pilgrims clashed with security forces in Medina over access to holy sites; Nimr denounced the security forces, but then was forced to go into hiding to avoid arrest. By January 2010, the State Department reported in another cable that Nimr had returned home and was living under something like house arrest. The diplomat, who wrote that cable, judged that Nimr had overestimated his sway, gone too big, and as a result had lost his influence. A neighbor said that the government “chose not to pursue him further out of concern they would elevate his status.”

   

  The government changed its ignore-them-and-they’ll-go-away stance on Shia rabble-rousers once the Arab Spring began. In Bahrain, Shia protests threatened the stability of the regime, and the Sunni regimes of Saudi Arabia and the United Arab Emirates sent troops to help quell uprisings. But protests also spread from Bahrain into the kingdom. Nimr preached forcefully against the regime, and was rare in speaking up both in favor of the domestic protests and those in Bahrain.

   

  In another 2011 speech, Nimr said, “From the day I was born and to this day, I’ve never felt safe or secure in this country. We are not loyal to other countries or authorities, nor are we loyal to this country. What is this country? The regime that oppresses me? The regime that steals my money, sheds my blood, and violates my honor?”

   

  That was all too much for the regime, and in 2012 it moved to arrest him. But during his apprehension, police claimed they came under fire. Nimr was shot in the leg. He was charged with sedition and various terrorism-related crimes.

  In the six days since his death, Saudi Arabia and its allies have been busy cutting all ties (both diplomatic and commercial) with Iran. “Enough is enough”, was the message from Riyadh after protesters firebombed the Saudi embassy in Tehran last Saturday.

  Now, with tensions running higher than ever, the feud threatens to derail a fragile peace “process” in Syria on the way to plunging the region into an all-out sectarian shooting war.

  Each side accuses the other of being a state sponsor of terror and each side blames the other for fomenting sectarian discord. Needless to say, it’s difficult to look past the fact that Saudi Arabia’s promotion of Wahhabism is almost unquestionably to blame for the rise of extremist elements throughout the Islamic World. At the very least, Riyadh’s contention that Iran promotes sectarian strife is an egregious case of the pot calling the kettle black.

  In any event, Iranians are in no mood to forgive and forget. “Iranians held mass protests on Friday across the Islamic Republic, angered by Saudi Arabia’s execution of a Shiite cleric that has enflamed regional tensions between the Mideast rivals,” AP reports, adding that “after Friday prayers in Tehran, thousands of worshippers joined the rally, carrying pictures of al-Nimr and chanting “Death to Al Saud,” referencing the kingdom’s royal family.” They also chanted “down with the US” and “death to Israel.”

  Below, find the visuals which underscore the fact that the sense of outrage is palpable – to say the least.

  

  

  

  

  

  

  

  

  

  

  

  

• Why Is North Korea Our Problem?

  Submitted by Patrick Buchanan via Buchanan.org,

  For Xi Jinping, it has been a rough week.

  Panicked flight from China’s currency twice caused a plunge of 7 percent in her stock market, forcing a suspension of trading.

  Kim Jong Un, the megalomaniac who runs North Korea, ignored Xi’s warning and set off a fourth nuclear bomb. While probably not a hydrogen bomb as claimed, it was the largest blast ever in Korea.

  And if Pyongyang continues building and testing nuclear bombs, Beijing is going to wake up one day and find that its neighbors, South Korea and Japan, have also acquired nuclear weapons as deterrents to North Korea.

  And should Japan and South Korea do so, Taiwan, Vietnam and Manila, all bullied by Beijing, may also be in the market for nukes.

  Hence, if Beijing refuses to cooperate to de-nuclearize North Korea, she could find herself, a decade hence, surrounded by nuclear weapons states, from Russia to India and from Pakistan to Japan.

  Still, this testing of a bomb by North Korea, coupled with the bellicosity of Kim Jong Un, should cause us to take a hard look at our own war guarantees to Asia that date back to John Foster Dulles.

  At the end of the Korean War in July 1953, South Korea was devastated, unable to defend herself without the U.S. Navy and Air Force and scores of thousands of U.S. troops.

  So, America negotiated a mutual security treaty.

  But today, South Korea has 50 million people, twice that of the North, the world’s 13th largest economy, 40 times the size of North Korea’s, and access to the most modern U.S. weapons.

  In 2015, Seoul ran a trade surplus of almost $30 billion with the United States, a sum almost equal to North Korea’s entire GDP.

  Why, then, are 25,000 U.S. troops still in South Korea?

  Why are they in the DMZ, ensuring that Americans are among the first to die in any Second Korean War?

  Given the proximity of the huge North Korean Army, with its thousands of missiles and artillery pieces, only 35 miles from Seoul, any invasion would have to be met almost immediately with U.S.-fired atomic weapons.

  But with North Korea possessing a nuclear arsenal estimated at 8 to 12 weapons and growing, a question arises: Why should the U.S. engage in a nuclear exchange with North Korea, over South Korea?

  Why should a treaty that dates back 60 years commit us, in perpetuity, to back South Korea in a war from the first shot with Pyongyang, when that war could swiftly escalate to nuclear?

  How does this comport with U.S. national interests?

  In 1877, Lord Salisbury, commenting on Great Britain’s stance on the Eastern Question, noted that “the commonest error in politics is sticking to the carcass of dead policies.”

  Is this not true today of America’s Asian alliances?

  North Korea’s tests of atomic weapons and development of land-based and submarine-launched missiles should cause us to reconsider strategic commitments that date back to the 1950s.

  President Nixon, ahead of his time, understood this.

  As he began the drawdown of U.S. forces in Vietnam in 1969, he declared in Guam that while America would meet her treaty obligations, henceforth, Asian nations should provide the ground troops to defend themselves. Gen. MacArthur had told President Kennedy, before Vietnam, not to put U.S. foot soldiers onto the Asian mainland.

  Now that we have entered a post-post Cold War era, where many Asian nations possess the actual or potential military power to defend themselves, something like a new Nixon Doctrine is worth considering.

  Take all of the major territorial quarrels between China and its neighbors — the dispute with India over Aksai Chin and Arunachal Pradesh, the dispute with Japan over the Senkaku Islands, with Vietnam over the Paracels, with the Philippines over the Spratlys.

  In none of these quarrels and conflicts does there seem to be any vital U.S. national interest so imperiled that we should risk a clash with a nuclear power like Beijing.

  Once, there was a time when Hitler, Stalin, Mussolini and Tojo ruled almost all of Eurasia. And another time when a monolithic Sino-Soviet Communist bloc ruled from the Elbe to the Pacific.

  As those times are long gone, is it not time for an exhaustive review of the alliances we have entered into and the war guarantees we have issued, to fight for nations and interests other than our own?

  Under NATO, we are committed to go to war against a nuclear-armed Russia on behalf of 27 nations, including tiny Estonia.

  One understood the necessity to defend West Germany and keep the Red Army on the other side of the Elbe, but when did Estonia’s independence become so critical to U.S. security that we would fight a nuclear-armed Russia rather than lose it?

  Indeed, how many of the dozens of U.S. war guarantees we have outstanding would we honor by going to war if they were called?

  

  

  

  

  

• China's Largest Bank Is Mystery Buyer Of Massive 1,500 Ton Gold Vault In London

  Back in June 2013, when Deutsche Bank opened a gold vault in Singapore which could hold up to 200 metric tons, the German bank was euphoric about the prospects for storing physical gold: “Gold has traditionally been stored in London, Zurich and New York, but there is a serious shift in dynamics going on as the global financial crisis continues to evolve,” Mark Smallwood, Deutsche Asset & Wealth Management’s head of wealth planning in the Asia-Pacific region, told The Wall Street Journal.

  This is what the outside, and inside, of the state of the art Singapore vault looked like:

  

  

  

   

  Mark was correct and thanks to the ongoing decline in gold prices, Chinese and Indian demand for the metal, the physical metal that is, not its various paper manifestations, has risen to record levels. Alas, one thing Mark did not know is that in early 2014, a German regulator would reveal that “precious metals manipulation was worse than the Libor scandal” and as a result the largest German bank (and largest bank in the world by notional derivative exposure) – which has been probed and found guilty for rigging virtually every market, including gold – would quietly liquidate its entire physical precious metals trading group.

  Which meant that Deutsche Bank’s Singapore gold vaul, was about to be sold.

  But while the sale of DB’s Singapore gold vault was to be expected with China’s ravenous apetite for warehousing physical gold around the Pacific Rim, what may have escape popular attention is that Deutsche Bank’s even more massive, and even newer, gold vault in London was also “on the block” as of December 2014 when we reported that Deutsche Bank is “open to offers for its London-based gold vault following the closure of its physical precious metals business.” As Reuters noted: “If the right offer came along, then the bank would sell the London vault,” one source close to the situation said. 

  Most curiously, the bank’s London gold vault only became operational in June of 2014, more than two years after launching the project. It can store some 1,500 tonnes of gold and was built and managed by British security services company G4S.

  As Reuters further noted, with other banks withdrawing from the commodities business to cut costs and reduce their regulatory burden, it might be difficult for Deutsche Bank to find buyers amongst its nearest peers. However, one possible buyer is general LBMA-member, Chinese bank ICBC, which we said at the end of 2014, was trying to build a presence in London.

  In any case, the list of potential buyers for DB’s brand new vault lease remained a mystery, and perhaps our revelation of the exact location of this vault, something potential buyers tend not to appreciate especially when said vault will house up to 1,500 tons of gold, or over $50 billion worth of “inventory”, may have dissuaded some. As a reminder, the “secret” location of the Deutsche Bank vault, which as revealed in the G4S building application, is located in the Park Royal complex, and specifically at the 291 Abbey Road, London NW10 7SA location.

  As it turns out, one persistent buyer failed to be dissuaded.

  According to Reuters, as was rumored one year ago, China’s largest bank – and in fact the world’s largest bank – by assets, ICBC Standard Bank, is buying the lease on Deutsche Bank’s London gold and silver vault, enlarging its footprint in the city’s bullion market, four industry sources close to the companies told Reuters.

  China’s ICBC, which took a controlling stake in Standard Bank’s London-based Global Markets business last year, has also applied to become a clearing member of the London gold and silver over-the-counter business.

  From Reuters:

  The Chinese and South African lender is aiming to fill the gap left by Western banks, which are retreating from commodities to cut costs and reduce regulatory burden. “They (ICBC Standard Bank) have taken on the lease for the vault,” the first source said.

   

  Currently, five banks – JP Morgan, HSBC, Bank of Nova Scotia, Barclays and UBS – settle daily bullion transactions between dealers, amounting to more than $5 trillion worth of metal each year in the London over-the-counter market.

   

  These banks are shareholders of the London Precious Metals Clearing (LPMCL) company. They will decide whether to accept or reject ICBC Standard Bank’s application within the next few months. The LPMCL declined to comment.

   

  “They are applying for clearing membership at the moment, but that’s still subject to a vote, which has not taken place yet,” the source said.

  Should the vote go in its favor, ICBC will be ready with what may be one of the largest gold vaults in London, if not the world, to park local gold which will then be promptly shipped over to the mainland to be dealt with as seen fit. Unless, of course, the vault is there for the reverse migration: to house quietly escaping Chinese gold as part of the local oligarchy’s attempts to circumvent China’s capital controls, a task so far accomplished relatively painless with bitcoin.

  Only time will tell.

  What is perhaps most surprising is how cheaply ICBC acquired the massive gold vault: “The figure that was initially talked about may have been around $4 million, but it’s way lower now,” a second source said, without disclosing the figure paid for the vault.

  So what does “way less” than $4 million buy you nowadays? Here is the answer, courtesy of Google Maps:

  

  

  

  

  

   

  Finally, for those curious, here is precisely where the brand new gold vault of the world’s biggest bank will be located.

  

  

  

  

  

• Americans Can't Wait To Get Out Of These Five States

  A low cost of living, no sales tax, and beautiful scenery (oh, naked bike rides, more strip clubs per capita than any other US city, and legalized weed) means Oregon is the "top moving destination" for Americans for the third year running, according to United Van Lines, with 69% of moves inbound. But, which states are Americans leaving in droves?

  Americans continue to pack up and head West and South, according to new data from United Van Lines.

  Oregon is the most popular moving destination of 2015 with 69 percent of moves to and from the state being inbound. The state has continued to climb the ranks, increasing inbound migration by 10 percent over the past six years. New to the 2015 top inbound list is another Pacific West state, Washington, which came in at No. 10 with 56 percent inbound moves.

  Moving In – The top inbound states of 2015 were:

  1. Oregon
  2. South Carolina
  3. Vermont
  4. Idaho
  5. North Carolina
  6. Florida
  7. Nevada
  8. District of Columbia
  9. Texas
  10. Washington

  The Northeast continues to experience a moving deficit with New Jersey (67 percent outbound) and New York (65 percent) making the list of top outbound states for the fourth consecutive year. Two other states in the region — Connecticut (63 percent) and Massachusetts (57 percent) — also joined the top outbound list this year. The exception to this trend is Vermont (62 percent inbound), which moved up two spots on the list of top inbound states to No. 3.

  Moving Out – The top outbound states for 2015 were:

  1. New Jersey
  2. New York
  3. Illinois
  4. Connecticut
  5. Ohio
  6. Kansas
  7. Massachusetts
  8. West Virginia
  9. Mississippi
  10. Maryland

  Simply put, Americans are moving from heavily-regulated, bureaucratic, high cost-of-living states to more affordable states.

  This year's data from United Van Lines…

  

   

  And the interactive version from the last 39 years…

   

  Finally, as The Daily Signal concludes,

  Moving patterns show how important cost of living is to American families.

   

  With perfect weather and a booming, high-tech economy, California ought to be the #1 destination. Instead, more moving trucks are leaving the state than entering.

  

  

  

  

  

• Market Massacre: Worst Ever First Week Of Trading

  What better analogy than this…

   

  This was the worst first week of the year for US equities… ever!

  Dow… (even worse than 2008)

  

   

  S&P…

  

   

  Europe was a disaster…

  

   

  And epic for China…

  

   

  And while only Trannies are in a bear market (down 20%) in the US, these 7 developed world markets are already there…(h/t SocGen's Andrew Laphthorne)

  

   

  *  *  *

  So let's look at the week in stocks…

  It was all looking so awesome last night…

  

   

  Futures show the swings better (with China weakness as an early week driver and US as late-week driver)…

  

   

  Small Caps and Trannies are down around 7% this week, S&P best but still down over 5% (and down 6 of the last 7 days)

  

  • S&P down 5.3% – worst week since Black Monday
  • Dow Industrials down 5.6% – worst week since Black Monday
  • Small Caps down 6.9% – worst week since Nov 2011 – Russell 2000 lowest close since since Oct 2014
  • Dow Transports down 7.1% – worst week since Sept 2011 – lowest close since Nov 2013

  The Dow is down 1400 points in a week (from 17,660 to 16,250)

  

   

  Utes managed to end the week unchanged but Homebuilders collapsed… Financials and Materials were next worst…

  

  • Financials down 6.6% – worst week since May 2012
  • Materials down 7.4% – worst week since Sept 2011
  • Homebuilders down 8.6% – worst since Aug 2011

  VIX broke back above 25… (VIX up 60% in 2 weeks – biggest jump since Black Monday)

  

   

  What did Janet do? Post Fed rate-hike – S&P down 6.5%, Gold up 3%, 30Y Bonds up 1.6%

  

   

   

  Stocks are about half-way there…

  

   

  Since the end of QE3, Trannies are down 20% and only Nasdaq is holding any gains…

  

   

  The FANTAsy stocks are all red since the end of 2015 (with TSLA and AMZN worst)…

  

   

  Energy Stocks finally woke up to reality in the credit underlying commodity…

  

   

  US financials have started to plunge back to credit/yield curve reality…

  

   

  With MS and GS back below Tangible Book Value for first time in 2 years…

  

   

   

   

  Away from stocks…

   

  Treasury Yields tumbled, closing at their low yields of the year with the belly of the curve outperforming… 10Y yields dropped 14bps this week – the biggest drop in 3 months.

  

   

  FX markets were volatile but by the end The Dollar Index closed unchanged (against the majors)…

  

   

  But the USDollar surged 1.5% against Asian FX – its best week in 5 months… (Asian FX is its weakest since April 2009 against the USD)

  

   

  But AUDJPY – probably the world's most-levered carry trades – collapsed 6.7% this week!! It's worst week since May 2010…

  

   

  Commodities were very mixed this week…

  

   

  Gold rallied 4% this week – its best 'first week of the year' since 2008… (best week in 5 months) – breaking 2 key technical levels…

  

   

  Crude down 5 days in a row touching a $32 handle at the lows… biggest weekly drop since Nov 2014

  

  In Summary – Sell The Dips!

  See you all Sunday night!

  Charts: Bloomberg

  Bonus Chart: Investors seeking safety are greatly rotating from Triple AAA stocks to Gold stocks (h/t SocGen's Andrew Laphthorne)

  

   

  

  

  

  

• Islamic Radicalism: A Consequence Of Petro-Imperialism

  Submitted by Nauman Sadiq

  Islamic radicalism, a consequence of Petro-imperialism:

  In its July 2013 report [1] the European Parliament identified the Wahhabi-Salafi roots of global terrorism, but the report conveniently absolved the Western powers of their culpability and chose to overlook the role played by the Western powers in nurturing Islamic extremism and jihadism during the Cold War against the erstwhile Soviet Union. The pivotal role played by the Wahhabi-Salafi ideology in radicalizing Muslims all over the world is an established fact as mentioned in the EU report; this Wahhabi-Salafi ideology is generously sponsored by Saudi Arabia and the Gulf-based Arab petro-monarchies since the 1973 oil embargo when the price of oil quadrupled and the contribution of the Arab sheikhs towards the “spiritual well-being” of the Muslims all over the world magnified proportionally; however, the Arab despots are in turn propped up by the Western powers since the Cold War; thus syllogistically speaking, the root cause of Islamic radicalism is the neocolonial powers’ manipulation of the socio-political life of the Arabs specifically and the Muslims generally in order to appropriate their energy resources in the context of an energy-starved industrialized world. This is the principal thesis of this write-up which I will discuss in detail in the following paragraphs.

  Prologue:

  Peaceful or not, Islam is only a religion just like any other cosmopolitan religion whether it’s Christianity, Buddhism or Hinduism. Instead of taking an ‘essentialist’ approach, which lays emphasis on ‘essences,’ we need to look at the evolution of social phenomena in its proper historical context. For instance: to assert that human beings are evil by ‘nature’ is an essentialist approach; it overlooks the role played by ‘nurture’ in grooming human beings. Human beings are only ‘intelligent’ by nature, but they are neither good nor evil by nature; whatever they are, whether good or evil, is the outcome of their nurture or upbringing. Similarly, to pronounce that Islam is a retrogressive or violent religion is an ‘essentialist’ approach; it overlooks how Islam and the Quranic verses are interpreted by its followers depending on the subject’s socio-cultural context. For example: the Western expat Muslims who are brought up in the West and who have imbibed the Western values would interpret a Quranic verse in a liberal fashion; an urban middle class Muslim of the Muslim-majority countries would interpret the same verse rather conservatively; and a rural-tribal Muslim who has been indoctrinated by the radical clerics would find meanings in it which could be extreme. It is all about culture rather than religion or scriptures per se.

  Moreover, I said that Islam is only a religion just like any other religion. But certain reductive neo-liberals blame the religion, as an institution and ideology for all that is wrong with the world. I have not read much history since I am only a humble student of international politics; that’s why I don’t know what the Crusades and the Spanish Inquisition were all about? Although, I have a gut feeling that those were also political conflicts which are presented to us in a religious garb. However, I am certain that all the conflicts of the 20th and 21st centuries were either nationalist (tribal) conflicts; or they had economics and power as their goals. Examples: First and Second World Wars; Korea and Vietnam wars; Afghanistan and Iraq wars; and Libya and Syria wars.

  When the neo-liberals commit the fallacy of blaming religion as a root factor in the contemporary national and international politics, I am not sure which ancient global order they conjure up in their minds, the Holy Roman Empire perhaps? Religion may have been a paramount factor in the ancient times, if at all, but the contemporary politics is all about economics and power: the Western corporations rule the world and politics and diplomacy is all about protecting the trade and energy interests of the Corporate Empire. Thus, the root of all evil in the contemporary politics is capitalism, not religion, which has been reduced to a secondary role and at times to complete irrelevance especially in the liberal and secular Western societies.

  More to the point, when the neo-liberals blame religion for all that is wrong with the world, they are actually engaging in a peculiar kind of juvenile thinking: a child mistakenly assumes that the world can only be seen from his eyes; and that all the people think exactly like he does. He does not understands that the outlooks and worldviews and the preferences and priorities of the people could be very different depending on their upbringing, circumstances and stations in life. You are not supposed to put yourself in another person’s shoes because sizes vary; you are supposed to put that other person in his own shoes, keeping in view his upbringing and mindset and then prescribe a viable future course of action for his individual and social well-being.

  As we know that politics is a collective exercise for creating an ideal social matrix in which individuals and their families can live peacefully and happily, and in which they can maximally actualize their innate potentials. The first priority of the liberals, especially the privileged liberal elite of the developing countries, seems to be to create a liberal society in the developing countries in which they and their families can feel at home. I don’t have anything against a liberal society, especially if looked at from a feminist, inclusive and egalitarian angle, but the ground reality of the developing world is very different from the reality of the developed world. The first and foremost preference of the developing world isn’t social liberalization; it is reducing poverty, ensuring equitable distribution of wealth and economic growth. Liberal ethos and values, important as they are, can wait; our first preference ought to be to create a fair and egalitarian social and economic order on a national and international level, only then can our interests and priorities converge on a single and common goal.

  If the liberals are willing to compromise on the foremost goal of equitable distribution of wealth, then the heavens won’t fall if they could show a little flexibility and maturity on the subject of the enforcement of liberal values too, which affects them on a personal level, more than anything. The socialist liberals of ‘60s and ‘70s at least made sense when they promoted liberalism along with the promise of radical redistribution of wealth. But the neo-liberals of 21st century are a breed apart who shrug off abject poverty and gross inequality of wealth in the developing nations as a secondary preference and espouse liberal values as their first and foremost priority.

  The mainspring of Islamic extremism:

  If we look at the evolution of Islamic religion and culture throughout the 20th and 21st centuries, it hasn’t been natural. Some deleterious mutations have occurred somewhere which have negatively impacted the Islamic societies all over the world. Social selection (or social conditioning) plays the same role in the social sciences which the natural selection plays in the biological sciences: it selects the traits, norms and values which are most beneficial to the host culture. Seen from this angle, social diversity is a desirable quality for social progress; because when diverse customs and value-systems compete with each other, the culture retains the beneficial customs and values and discards the deleterious traditions and habits. A decentralized and unorganized religion, like Sufi Islam, engenders diverse strains of beliefs and thoughts which compete with one another in gaining social acceptance and currency. A heavily centralized and tightly organized religion, on the other hand, depends more on authority and dogma than value and utility. A centralized religion is also more ossified and less adaptive to change compared to a decentralized religion.

  The Shia Muslims have their Imams and Marjahs (religious authorities) but it is generally assumed about the Sunni Islam that it discourages the authority of the clergy. In this sense, Sunni Islam is closer to Protestantism theoretically, because it promotes an individual and personal interpretation of scriptures and religion. It might be true about the educated Sunni Muslims but on a popular level of the masses of the Third World Islamic countries, the House of Saud plays the same role in Islam that the Pope plays in Catholicism. By virtue of their physical possession of the holy places of Islam – Mecca and Medina – they are the de facto Caliphs of Islam. The title of the Saudi King, Khadim-ul-Haramain-al-Shareefain (Servant of the House of God), makes him the vice-regent of God on Earth. And the title of the Caliph of Islam is not limited to a nation-state, he wields enormous influence throughout the Commonwealth of Islam: that is, the Muslim Ummah.

  Islam is regarded as the fastest growing religion of the 20th and 21st centuries. There are two factors responsible for this atavistic phenomena of Islamic resurgence: firstly, unlike Christianity which is more idealistic, Islam is a more practical religion, it does not demands from its followers to give up worldly pleasures but only to regulate them; and secondly, Islam as a religion and ideology has the world’s richest financiers. After the 1973 collective Arab oil embargo against the West, the price of oil quadrupled; the Arabs petro-sheikhs now have so much money that they don’t know where to spend it? This is the reason why we see an exponential growth in Islamic charities and madrassahs all over the world and especially in the Islamic world. Although the Arab sheikhs of the oil-rich Saudi Arabia, Qatar, Kuwait and some emirates of UAE generally sponsor the Wahhabi-Salafi brand of Islam but the difference between the numerous sects of Sunni Islam is more nominal than substantive. The charities and madrassahs belonging to all the Sunni sects get generous funding from the Gulf states as well as the private Gulf-based donors.

  After sufficiently bringing home the fact that Islam as a religion isn’t different from other cosmopolitan religions in regard to any intrinsic feature and that the only factor which differentiates Islam from other mainstream religions is the abundant energy resources in the Muslim-majority countries of the Persian Gulf and the Middle East and North Africa (MENA) region; and the effect of those resources and the global players’ manipulation of the socio-political life of the inhabitants of those regions to exploit their resources culminated in the emergence of the phenomena of Petro-Islamic extremism and violent Takfiri-Jihadism, our next task is to examine the symbiotic relationship between the illegitimate Gulf rulers and the neo-colonial powers.

  The global neocolonial political and economic order:

  Before we get to the crux of the matter, however, let us first cursorily discuss that why is it impossible to bring about a major fundamental change: political, social or economic, on a national level under the existing international political and economic dispensation? As we know that the Western so-called liberal-democracies could be liberal, however, they are anything but democracies; in fact, the right term for the Western system of government is plutocratic oligarchies. They are ruled by the super-rich corporations whose wealth is measured in hundreds of billions of dollars, far more than the total GDPs of many developing nations; and the status of those multinational corporations as dominant players in their national and international politics gets an official imprimatur when the Western governments endorse the Congressional lobbying practice of the so-called ‘special interest’ groups, which is a euphemism for ‘business interests.’

  Moreover, since the Western governments are nothing but the mouthpieces of their business interests on the international political and economic forums, therefore, any national or international entity which hinders or opposes the agenda of the aforesaid business interests is either coerced into accepting their demands or gets sidelined. In 2013 the Manmohan Singh’s government of India had certain objections to further opening up to the Western businesses; the Business Roundtable which is an informal congregation of major US businesses and which together holds a net wealth of $6 trillion (6000 billion) held a meeting with the representatives of the Indian government and made them an offer which they couldn’t refuse. The developing economies, like India, are always hungry for the Foreign Direct Investment (FDI) to grow further, and that investment comes mostly from the Western corporations.

  When the Business Roundtables or the Paris-based International Chamber of Commerce (ICC) form pressure groups and engage in ‘collective bargaining’ activities, the nascent and fragile developing economies don’t have a choice but to toe their line. State ‘sovereignty’ that the sovereign nation-states are at liberty to pursue an independent policy, especially an economic and trade policy, is a myth. Just like the ruling elites of the developing countries who have a stranglehold and a monopoly over domestic politics; similarly the neo-colonial powers and their multinational corporations control the international politics and the global economic order. Any state who dares to transgress becomes an international pariah like Castro’s Cuba, Mugabe’s Zimbabwe or North Korea; and more recently Iran, which had been cut off from the global economic system, because of its supposed nuclear aspirations. Good for Iran that it has one of the largest oil and gas resources, otherwise it would have been insolvent by now; such is the power of global financial system especially the banking sector, and the significance of petro-dollar because the global oil transactions are pegged in the US dollars all over the world, and all the major oil bourses are also located in the Western world.

  There is an essential precondition in the European Union’s charter of union according to which the under-developed countries of Europe who joined the EU allowed free movement of goods (free trade) only on the reciprocal precondition that the developed countries would allow the free movement of labor. What’s obvious in this condition is the fact that the free trade only benefits the countries which have a strong manufacturing base, and the free movement of workers only favors the under-developed countries where labor is cheap. Now when the international financial institutions, like the IMF and WTO, promote free trade by exhorting the developing countries all over the world to reduce tariffs and subsidies without the reciprocal free movement of labor, whose interests do such institutions try to protect? Obviously, such global financial institutions espouse the interests of their biggest donors by shares, i.e. the developed countries.
   
  Some market fundamentalists who irrationally believe in the laissez-faire capitalism try to justify this unfair practice by positing Schumpeter’s theory of ‘creative destruction’ that the free trade between unequal trade partners leads to the destruction of the host country’s existing economic order and a subsequent reconfiguration gives birth to a better economic order. Whenever one comes up with gross absurdities such as these, they should always make it contingent on the principle of reciprocity: that is, if free trade is beneficial for the nascent industrial base of the underdeveloped countries, then the free movement of labor is equally beneficial for the labor force of the developed countries. The policy-makers of the developing countries must not fall prey to such deceptive reasoning, instead they must devise a policy which suits their national interest. But the trouble is that the governments of the Third world are dependent on the global loan sharks, such as IMF and World Bank, that’s why they cannot adopt an independent economic and trade policy.
   
  From the end of the Second World War to the beginning of the 21st century the neo-colonial powers have brazenly exploited the Third world’s resources and labor, but after China’s accession to the World Trade Organization in 2001 things changed a little. Behind the “Iron Curtain” of international isolation, China successfully built its manufacturing base by imparting vocational and technical education to its disciplined workforce and by building an industrial and transport infrastructure. It didn’t allow any imports until 2001, but after entering the WTO it opened up its import-export policy on a reciprocal basis; and since the labor in China is much cheaper than its Western counterparts, therefore, it now has a comparative advantage over Western bloc which China has exploited in its national interest.
   
  Asking the neo-colonial powers to act in the interests of the developing world is incredibly naïve. It’s like asking the factory-owners to act in the interest of their factory-workers on altruistic grounds. This is not the way forward, the factory-workers must strengthen their own labor unions and claim what’s rightfully theirs. The developing countries must form regional blocs and settle things among themselves. If a country takes interest in the affairs of its regional neighbor; like if India takes interest in the affairs of Pakistan, or if Pakistan is wary of the happenings in Afghanistan and Iran, their concerns are understandable. But what “vital strategic interests” does the US has in the Middle East where 35,000 of its troops are currently stationed, ten thousand kilometers away from its geographical borders? ‘Humanitarian imperialism’ is merely a charade, it’s the trade and energy-interests of the corporate empire which are ‘vitally’ important to the neo-colonial powers.

  Cold War and the birth of Islamic Jihad:

  The Western powers’ collusion and conflicted relationship with the Islamic jihadists (aka moderate rebels) in Syria isn’t the only instance of its kind. The Western powers always leave such pernicious relationships deliberately ambiguous in order to fill the gaps in their self-serving diplomacy and also for the sake of “plausible deniability.” Throughout the late ‘70s and ‘80s during the Cold War, they used the jihadists as proxies in their war against the Soviets. The Cold War was a war between the Global Capitalist bloc and the Global Communist bloc for global domination. The Communists used their proxies the Viet Congs to liberate Vietnam from the imperialist hegemony. The Global Capitalist bloc had no answer to the cleverly executed asymmetric warfare.

  Moreover, the Communist bloc had a moral advantage over the Capitalist bloc: that is, the mass appeal of the egalitarian and revolutionary Marxist and Maoist ideologies. Using their: “Working men and women of all the countries, unite!” rhetoric, the Communists could have instigated an uprising anywhere in the world; but how could the Capitalists retaliate, through “the trickle-down economics” and “the American way of life” rhetoric? The Western policy-makers faced quite a dilemma, but then their Machiavellian strategists, capitalizing on the regional grassroots religious sentiment, came up with an equally robust antidote: that is, the Islamic Jihad.

  During the Soviet-Afghan conflict from 1979 to 1988 between the Global Capitalist bloc and the Global Communist alliance, Saudi Arabia and the Gulf Arab petro-monarchies took the side of the former; because the USSR and the Central Asian states produce more energy and consume less of it; thus they are net exporters of energy; while the Global Capitalist bloc is a net importer of energy. It suits the economic interests of the Gulf Cooperation Council (GCC) countries to maintain and strengthen a supplier-consumer relationship with the Capitalist bloc. Now the BRICS are equally hungry for the Middle Eastern energy but it’s a recent development; during the Cold War an alliance with the Western countries suited the economic interests of the Gulf Arab petro-monarchies. Hence, the Communists were pronounced as Kafirs (infidels) and the Western capitalist bloc as Ahl-e-Kitaab (People of the Book) by the Salafi preachers of the Gulf Arab states.

  All the celebrity terrorists, whose names we now hear in the mainstream media every day, were the products of the Soviet-Afghan war: like Osama bin Laden, Ayman al Zawahiri, the Haqqanis, the Taliban, the Hekmatyars etc. But that war wasn’t limited only to Afghanistan; the NATO-GCC alliance of the Cold War had funded, trained and armed the Islamic Jihadists all over the Middle East region; we hear the names of Jihadists operating in the regions as far afield as Uzbekistan and North Caucasus. In his 1998 interview [2], the National Security Adviser to President Carter, Zbigniew Brzezinski, had confessed that the President signed the directive for secret aid to the Afghan Mujahideen in July 1979 while the Soviet Army invaded Afghanistan in December 1979. Here is a poignant excerpt from his interview:

  Question: “And neither do you regret having supported the Islamic Jihadis, having given arms and advice to future terrorists?”

  Brzezinski: “What is most important to the history of the world? The Taliban or the collapse of the Soviet empire? Some stirred-up Moslems or the liberation of Central Europe and the end of the cold war?”

  Despite the crass insensitivity, you got to give credit to Zbigniew Brzezinski that at least he had the guts to speak the unembellished truth. The hypocritical Western policy makers of today, on the other hand, say one thing in public and do the opposite on the ground. However, keep in mind that the aforementioned interview was recorded in 1998. After the WTC tragedy in 2001, no Western policy-maker can now dare to be as blunt and honest as Brzezinski.

  The Anglo-Wahhabi alliance:

  All the recent wars and conflicts aside, the unholy alliance between the Anglo-Americans and the Wahhabi-Salafis of the Gulf petro-monarchies, which I call “the Anglo-Wahhabi alliance,” is much older. The British stirred up uprising in Arabia by instigating the Sharifs of Mecca to rebel against the Ottoman rule during the First World War. After the Ottoman Empire collapsed, the British Empire backed King Abdul Aziz (Ibn-e-Saud) in his struggle against the Sharifs of Mecca; because the latter were demanding too much of a price for their loyalty: that is, the unification of the whole of Arabia under their suzerainty. King Abdul Aziz defeated the Sharifs and united his dominions into the Kingdom of Saudi Arabia in 1932 with the support of the British. However, by then the tide of British Imperialism was subsiding and the Americans inherited the former possessions and the rights and liabilities of the British Empire.

  At the end of the Second World War on 14 February 1945, President Franklin D. Roosevelt held a historic meeting with King Abdul Aziz at Great Bitter Lake in the Suez canal onboard USS Quincy, and laid the foundations of an enduring Anglo-Wahhabi friendship which persists to this day; despite many ebbs and flows and some testing times especially in the wake of 9/11 tragedy when 15 out of 19 hijackers of the 9/11 plot turned out to be Saudi citizens. During the course of that momentous Great Bitter Lake meeting, among other things, it was decided to set up the United States Military Training Mission (USMTM) to Saudi Arabia to “train, advise and assist” the Saudi Arabian Armed Forces.

  Aside from USMTM, the US-based Vinnell Corporation, which is a private military company based in the US and a subsidiary of the Northrop Grumman, used over a thousand Vietnam war veterans to train and equip the 125,000 strong Saudi Arabian National Guards (SANG) which is not under the authority of the Saudi Ministry of Defense and which acts as the Praetorian Guards of the House of Saud. The relationship which existed between the Arab American Oil Company (ARAMCO) and the House of Saud is no secret. Moreover, the Critical Infrastructure Protection Force, whose strength is numbered in tens of thousands, is also being trained and equipped by the US to guard the critical Saudi oil infrastructure along its eastern Persian Gulf coast where 90% Saudi oil reserves are located. Furthermore, the US has numerous air bases and missile defense systems currently operating in the Persian Gulf states and also a naval base in Bahrain where the Fifth Fleet of the US Navy is based.

  The point that I am trying to make is that left to their own resources, the Persian Gulf’s petro-monarchies lack the manpower, the military technology and the moral authority to rule over the forcefully suppressed and disenfranchised Arab masses, not only the Arab masses but also the South Asian and African immigrants of the Gulf Arab states. One-third of Saudi Arabian population is comprised of immigrants; similarly, more than 75% of UAE’s population is also comprised of immigrants from Pakistan, Bangladesh, India and Sri Lanka; and all the other Gulf monarchies also have a similar proportion of the immigrants from the developing countries; moreover, unlike the immigrants in the Western countries who hold the citizenship status, the Gulf’s immigrants have lived there for decades and sometimes for generations, and they are still regarded as unentitled foreigners.

  Petroimperialism and the Western energy interests:

  A legitimate question arises in the mind of a curious reader , however, that why do the Western powers support the Gulf’s petro-monarchies, knowing fully well that they are the ones responsible for nurturing the Takfiri-Jihadi ideology all over the Islamic world; does that not runs counter to their professed goal of eliminating Islamic extremism and terrorism? When you ask this question, you get two very different and contradictory responses depending on who you are talking to. If you ask this question from a Western policy-maker or a diplomat that why do you support the Gulf’s despots? He replies that it’s because we have vital strategic interests in the Middle East and North Africa region; by which he means abundant oil and natural gas reserves and also the fact that the Arab Sheikhs have made substantial investments in the Western economies at a time of global recession and the outsourcing of most of manufacturing to China. Thus, the Western policy-makers’ defense is predicated on self-interest, i.e. the Western national interests.

  When you ask the same question, however, from the constituents of the Western liberalism that what is the Western policy in the Middle East region? The constituents’ response is quite the opposite, they don’t think that the Western powers control the Middle East, or the global politics and economics in general, for their trade and energy interests; they believe that the motives of the Western powers are more altruistic than selfish. The constituents of the Western liberalism mistakenly believe in the counterfactual concepts of humanitarian and liberal interventionism and the responsibility to protect.

  Coming back to the question, why do the Western powers prop up the Middle Eastern dictators knowing fully well that they are the ones responsible for nurturing Islamic jihadism and is it possible that in some future point in time they will withdraw their support? It is highly unlikely at least in the foreseeable future. The Western powers have become so dependent on the Arab petro-dollars that they would rather fight the Arab tyrants’ wars for them against their regional rivals. Presently, there are two regional powers vying for dominance in the Middle East: Saudi Arabia and Iran. The Syrian civil war is basically a Sunni Jihad against the Shi’a Resistance axis. The Shi’a alliance is comprised of Iran and Syria, the latter is ruled by an Alawi (Shi’a) regime, even though the majority of Syria’s population is Sunni Muslims and the Alawites constitute only 12% of the population. Lebanon-based Hezbollah (which is also Shi’a) is an integral part of the Shi’a Resistance axis. And recently the Nouri al Maliki and Haider al Abadi administrations in Iraq, which also has a Shi’a majority, have formed a tenuous alliance with Iran.

  Moreover, Saudi Arabia has long-standing grievances against Iran’s meddling in the Middle Eastern affairs, especially the latter’s support to the Palestinian cause, the Houthis in Yemen, the Bahraini Shi’as and more importantly the significant and restive Shi’a minority in the Eastern Province of Saudi Arabia where 90% of Saudi oil reserves are located along the Persian Gulf’s coast. On top of that Saudi Arabia also has grievances against the US for toppling the Sunni Saddam regime in Iraq in 2003 which had formed a bulwark against the Khomeini influence in the Middle East because of Saddam’s military prowess. Furthermore, in the wake of political movements for enfranchisement during the Arab Spring of 2011, Saudi Arabia took advantage of the opportunity and militarized the peaceful and democratic protests in Syria with the help of its Sunni allies: the Gulf monarchies of Qatar, UAE, Kuwait and Jordan and Turkey (all Sunnis) against the Shi’a regime of Bashar al Assad.

  However, why did the Western powers preferred to join this Sunni alliance against the Shi’a Resistance axis? It’s because the Assad regime has a history of hostility towards the West; it had also formed a close working relationship with the erstwhile Soviet Union and it still hosts a Russian naval facility at Tartus; and its proxy in Lebanon, Hezbollah, has emerged over the years as the single biggest threat to the Israel’s regional security. On the other hand, all the aforementioned Sunni states have always been the steadfast allies of the Western powers along with Israel; don’t get misled by the public posturing, all the aforementioned Sunni states along with the Western support are in the same boat in the Syrian civil war as Israel.

  Hypothetically speaking, had the Western powers not joined the ignoble Syrian Jihad which has claimed 250,000 lives so far and made millions of Syrians refugees, what could have been an appropriate course of action to force the Gulf monarchies, Turkey and Jordan, not to engage in fomenting trouble in Syria? This is a question of will, if there is will there are always numerous ways to deal with the problem. However, after what has happened in Afghanistan, Iraq, Libya and Syria only a naïve neoliberal will prescribe a Western military intervention anywhere in the world. But if military intervention is off the table, is there a viable alternative to enforce justice and to force the states to follow moral principles in international politics? Yes there is.

  The crippling “third party” economic sanctions on Iran in the last few years may not have accomplished much, but those sanctions have brought to the fore the enormous power which the Western financial institutions and the petro-dollar as a global reserve currency wields over the global financial system. We must bear in mind that the Iranian nuclear negotiations were as much about Iran’s nuclear program as they were about its ballistic missile program, which is a much bigger “conventional threat” to the Gulf’s petro-monarchies just across the Persian Gulf. Despite the sanctions being unfair, Iran felt the heat so much that it remained engaged in the negotiations throughout the last few years, and finally the issue was amicably settled in the form of the Iran nuclear deal in April 2015. However, such was the crippling effect of those “third party” sanctions on the Iranian economy that had it not been for Iran’s enormous oil and gas reserves, and some Russian, Chinese and Turkish help in illicitly buying Iranian oil, it could have defaulted due to those sanctions.

  All I am trying to suggest is, that there are ways to arm-twist the Gulf’s petro-monarchies to implement democratic reforms and to refrain from sponsoring the Takfiri-Jihadist terror groups all over the Islamic world, provided that we have just and upright international arbiters. However, there is a caveat: Iran is only a single oil-rich state which has 160 billion barrels of proven crude oil reserves and around 4 million barrels per day (mbpd) production. On the other hand, the Persian Gulf’s petro-monarchies are actually three oil-rich states: Saudi Arabia with its 265 billion barrels of proven reserves and 10 mbpd of daily crude oil production; and UAE and Kuwait with 200 billion barrels (100 billion barrels each) of proven reserves and 6 mbpd of daily crude oil production; together their share amounts to 465 billion barrels, almost one-third of the world’s 1477 billion barrels of total proven crude oil reserves; and if we add Qatar to the equation, which isn’t oil-rich, as such, but has substantial natural gas reserves, it must take a morally very very upright arbiter to sanction all of them.

  Therefore, though sanctioning the Gulf petro-monarchies sounds like a good idea on paper, but bear in mind that the relationship between the Gulf’s petro-monarchies and the industrialized world is that of a consumer-supplier relationship: the Gulf Arab states are the suppliers of energy and the industrialized world is its consumer, therefore, the Western powers cannot sanction their energy-suppliers and largest investors, if anything, the Gulf’s petro-monarchies have in the past “sanctioned” the Western powers by imposing an oil embargo in 1973 after the Arab-Israel war. The 1973 Arab oil embargo against the West had lasted only for a short span of six months but it had such a profound effect on the psyche and the subsequent strategy of the Western powers that after the embargo the price of crude oil in the international market quadrupled; the US imposed a ban on the export of indigenously produced crude oil outside the US’ borders which is still in place; and the US started keeping a strategic oil reserve amounting to two months of fuel supply for its total energy needs for the military purposes that includes jet fuel for its aircrafts and petrol and diesel for the armored personnel carriers, battle tanks and naval vessels.

  Recently, some very upbeat rumors about “the Shale Revolution” [3] have been circulating the mainstream media. However, the Shale revolution is primarily a natural gas revolution: it has increased the ‘probable-recoverable’ resources of natural gas by 30%. The ‘shale oil’ on the other hand, refers to two very different kinds of energy resource: one, the solid kerogen, though substantial resources of kerogen have been found in the US’ Green River formations, but the cost of extracting liquid crude from solid kerogen is so high that it is economically unviable for at least another 100 years; two, the tight oil which is blocked by the shale, it is a viable energy resource, but the reserves are so limited, around 4 billion barrels in Texas and North Dakota, that it will run out in a few years.

  Although, the Canadian oil sands and the Venezuelan heavy crude are environmentally polluting energy resources but economically they are viable sources of crude oil. More than the size of the oil reserves, however, it is also about the per barrel extraction cost, which determines the profits for the multinational oil companies and in that regard the Persian Gulf’s crude oil is the most profitable. Moreover, regarding the US’ supposed energy independence after the so-called “Shale Revolution,” the US produced 11 million barrels per day (bpd) of crude oil in the first quarter of 2014; that is, more than Saudi Arabia and Russia’s output, each of which produces around 10 million bpd, but the US still imported 7.5 million bpd during the same period of time; that is, more than the oil imports of France and Britain put together. More than the total volume of oil production, the volume which an oil-producing country exports determines its place in the “hierarchy of petroleum” and the Gulf’s petro-monarchies constitute the top tier of that pyramid.

  Conclusion:

  It is generally believed that political Islam is the precursor of Islamic extremism and Jihadism, however, there are two distinct and separate types of political Islam: the despotic political Islam of the Gulf variety and the democratic political Islam of the Turkish and the Muslim Brotherhood variety. The latter Islamist organization never ruled over Egypt except for a brief year long stint, it would be unwise to draw any conclusions from such a brief period of time in history. The Turkish variety of political Islam, the oft-quoted ‘Turkish model,’ however, is worth emulating all over the Islamic world. I do understand that political Islam in all its forms and manifestations is an anathema to the liberals, but it is the ground reality of the Islamic world. The liberal dictatorships no matter how benevolent they may be, had never worked in the past, and they will meet the same fate in the future.

  The mainspring of Islamic extremism and militancy isn’t the moderate and democratic political Islam, because why would people turn to violence when they can exercise their right to choose their rulers? The mainspring of Islamic militancy is the despotic and militant political Islam of the Gulf variety. The Western powers are fully aware of this fact, then why do they choose to support the same forces that have nurtured jihadism and terrorism when their ostensible and professed goal is to eliminate Islamic extremism and militancy? It is because it has been a firm policy-principle of the Western powers to promote ‘stability’ in the Middle East rather than representative democracy. They are fully cognizant of the ground reality that the mainstream Muslim sentiment is firmly against any Western military presence and interference in the Middle East region. Additionally, the Western policy-makers also prefer to deal with small groups of Middle Eastern ‘strongmen’ rather than cultivating a complex and uncertain relationship on a popular level, certainly a myopic approach which is the hallmark of the so-called ‘pragmatic’ politicians and strategists.

  Sources and links:

  [1] European parliament identifies Wahhabi and Salafi roots of global terrorism:
  http://www.dawn.com/news/1029713

  [2] How Jimmy Carter and I started the Mujahideen? Zbigniew Brzezinski:
  http://www.counterpunch.org/1998/01/15/how-jimmy-carter-and-i-started-the-mujahideen/

  [3] Difference between shale oil and tight oil:
  http://www.theoildrum.com/node/9753

  About the author:

  Nauman Sadiq is an Islamabad-based attorney, blogger and geopolitical analyst who has a particular interest in the politics of Af-Pak and MENA regions, energy wars and Petro-imperialism.

  

  

  

  

  

• Cultural Marxism Explained In 7 Minutes

  Submitted by Joseph Salerno via The Mises Institute,

  This is an excellent short video explaining the source and nature of Cultural Marxist movements like political correctness, modern feminism, pansexualism, multiculturalism, "whiteness studies," etc. 

   

  For an in-depth critique of the thinkers whose writings shaped Cultural Marxism, see Fools, Frauds and Firebrands:  Thinkers of the New Left by the eminent British philosopher Roger Scruton.  Scruton brilliantly exposes the pretensions, obscurities, and inanities of Sartre, Foucault, Galbraith, Marcuse, Lukacs, Habermas, Adorno, Rawls, Dworkin and others of their ilk.

  The book is not just a philosophical tract but a work in critical political economy and contains one of the most penetrating discussions of the Marxist labor theory of value that I have ever read.

  

  

  

  

  

• Stunning Photos From China's Creepiest Modern Ghost Town

  Welcome to the most ironically-named city in China. A would-be utopia, rapidly constructed for a population of one million (that failed to materialize), the futuristic city of Ordos, which takes its name from ordo, the Mongolian word for crowd and the root for the English word 'horde', has been almost totally abandoned. The stunning landscape left behind in the following images is both disturbing and confirming of China's epic mal-investment boom…

  Via Artnet News

  The images, taken by Shanghai-based photographer Raphael Olivier and shared at Creative Boom, depict a strange modern ghost town. The city, in the Inner Mongolia region, was constructed under the old "if you build it, they will come" motto, but the teeming masses have never made their way to Ordos.

  

  Raphael Olivier, Ordos, Inner Mongolia.
  Photo: Raphael Olivier.

  The city includes dormant schools, sports complexes, hospitals, convention centers, and other major facilities, all completed between 2005 and 2010. The Chinese building boom has seen many new cities become overnight metropolises, but Ordos City failed to replicate that success.

  "The city is now a surreal landscape of empty streets, decaying monuments, abandoned buildings and half-finished housing projects," writes Olivier. "It is more than anywhere the symbol of the Chinese Dream with all its challenges and contradictions, an Orwellian vision of a bright future caught up by a less flamboyant reality."

  

  Raphael Olivier, Ordos, Inner Mongolia, the Ordos Museum.
  Photo: Raphael Olivier.

  The city's most fantastical structures include the Ordos Museum, designed by China's MAD Archictects, which resembles a tiled metal blob overlooking the Gobi Desert.

  Like the rest of the city, the museum was apparently built without much forethought: "As for the gallery spaces, we didn't know what kind of exhibitions they would hold, so they are designed to be flexible," the architecture firm told ArchDaily.

  

  Raphael Olivier, Ordos, Inner Mongolia.
  Photo: Raphael Olivier.

  "This plaza is now a favorite amongst the locals who gather their families and friends to explore, play or lounge in the pleasant landscape," wrote de zeen magazine upon Ordos's completion in 2011, in a rather premature judgment.

  Based on reports from intrepid photojournalists and travelers, including the Bohemian Blog, the city's residents (reportedly just 20,000 souls, or two percent of the total capacity) largely consist of construction crews, maintenance workers, and random employees.

  See more of Olivier's photos of Ordos below:

  

  Raphael Olivier, Ordos, Inner Mongolia.
  Photo: Raphael Olivier.

  

  Raphael Olivier, Ordos, Inner Mongolia.
  Photo: Raphael Olivier.

  

  Raphael Olivier, Ordos, Inner Mongolia.
  Photo: Raphael Olivier.

  

  Raphael Olivier, Ordos, Inner Mongolia.
  Photo: Raphael Olivier.

  

  Raphael Olivier, Ordos, Inner Mongolia.
  Photo: Raphael Olivier.

  

  Raphael Olivier, Ordos, Inner Mongolia.
  Photo: Raphael Olivier.

  

  Raphael Olivier, Ordos, Inner Mongolia.
  Photo: Raphael Olivier.

  

  Raphael Olivier, Ordos, Inner Mongolia.
  Photo: Raphael Olivier.

  

  Raphael Olivier, Ordos, Inner Mongolia.
  Photo: Raphael Olivier.

  

  Raphael Olivier, Ordos, Inner Mongolia.
  Photo: Raphael Olivier.

  

  Raphael Olivier, Ordos, Inner Mongolia.
  Photo: Raphael Olivier.

  

  Raphael Olivier, Ordos, Inner Mongolia.
  Photo: Raphael Olivier.

  

  Raphael Olivier, Ordos, Inner Mongolia.
  Photo: Raphael Olivier.

  

  Raphael Olivier, Ordos, Inner Mongolia.
  Photo: Raphael Olivier.

  

  Raphael Olivier, Ordos, Inner Mongolia, the Ordos mosque.
  Photo: Raphael Olivier.

   

  We have nothing to add… except one chart…

   

  

   

  This is what happens when the central planners get drunk on their own hopium-laced Kool-Aid.

   

  Images: Artnet News

  

  

  

  

  

• 2016 Theme #5: The Systemic Failure of High Finance

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

  This week I am addressing themes I see playing out in 2016.

  • 2016 Theme #1: The Loss Of Great Power Leverage

  • 2016 Theme #2: The Hollow Shell Of Democracy

  • 2016 Theme #3: The Rise Of Independent (Non-State) Crypto-Currencies

  • 2016 Theme #4: The End-Game Of Debt-Fueled "Growth"

  A number of systemic, structural forces are intersecting in 2016. One is the failure of high finance to fix the global economy's systemic problems.

  The operative conceit of the past 7 years has been that high finance can fix whatever's broken in the world's economies. According to this narrative, all the world needed to boost "growth," employment and profits was lower interest rates, more liquidity, reverse repos and some other fancy financial footwork.

  Once all this high finance generated more borrowing by debt-serfs, property developers, students, corporations buying back their shares and financiers skimming billions from asset bubbles, systemic problems would be dissolved or mitigated.

  Cheap credit, asset bubbles and immense profiteering by financiers would heal all wounds and make everything better for everyone, even those at the bottom layer of the economy.

  Unfortunately, this isn't true. High finance and cheap credit have intensified structural problems such as rising inequality, not resolved them.

  The implicit promise of the neoliberal project is that liberalizing private-sector markets and credit will magically grease the processes of growth and widespread prosperity.

  When economies have the right systems in place–decentralized, somewhat free markets, an entrepreneurial spirit, many unmet needs, idle productive capacity and a credit-starved real economy–freeing up static markets and credit can unleash the productive capacity of the bottom level of the economy.

  But in economies dominated by state/private monopolies and cartels, neoliberalism simply funnels the profits of financialization to the few at the expense of the many, and at the cost of heightened instability and insecurity.

  Making more credit available for student loans didn't fix America's broken higher education system–it only tightened the grip of the higher education cartel and turned another generation of students into debt-serfs.

  Loosening mortgage standards and lowering interest rates didn't turn America into an "ownership society"–it turned it into a boom-and-bust speculative society with many more losers than winners in the neoliberal/high finance speculative casino.

  The essence of neoliberal high finance is the vast majority of gamers in the casino lose security and wealth, while the House (the state and the banks) skim the resulting profits. Main Street has found its security stripped away (sorry, Bucko, no yield on savings now; you have to belly up and place a high-risk bet at a gaming table to keep what you had before) in exchange for the potential of outsized profits.

  But alas, the games are rigged; the financiers have first access to the Federal Reserve's nearly free money, and insiders profit from stock buybacks and other financial gaming that generates monumental profits but zero goods and services.

  If debt had grown in parallel with GDP and inflation, total credit market debt in the U.S. would be around $20+ trillion rather than $59 trillion. The difference is speculative excess, manifested in asset bubbles and staggering amounts of debt.

  The casino's losers get the debt, the winners skim the profits.

  

  The only possible output of this system is rising income and wealth inequality:

  

  Cheap credit doesn't reverse the elimination of jobs via automation–it accelerates that process by making capital machinery and software cheaper than labor and labor overhead.

  Cheap credit and high finance don't fix what's broken in our democracy–they have greased the skids to what we have now–"democracy" for the highest bidder by giving financiers and corporations the means to stripmine productive assets and use the gargantuan profits to buy political favors.

  High finance isn't the cure–it's the disease.

  *  *  *

  My book on the emerging economy is now available as a audiobook: Get a Job, Build a Real Career and Defy a Bewildering Economy (Audible.com).

  My new book is #7 in Amazon's Kindle ebooks > Business & Money > International Economics: A Radically Beneficial World: Automation, Technology and Creating Jobs for All. The Kindle edition is $$9.95 and the print edition is currently discounted to $21.60.

   

  

  

  

  

  

• This Is The $3.5 Trillion "Neutron Bomb" That Keeps Kyle Bass Up At Night

  Earlier today, CNBC invited Kyle Bass, the man who correctly predicted and profited from the subprime collapse, to discuss what he thought was the biggest threat to the global financial system.

  Here is the highlight of what he said:

  What I think the narrative will swing to by the end of this year if not sooner, is the real issue in China is not simply that profits have peaked. The real issue is the size of their banking system. Do you remember the reason the European countries ended up falling like dominoes during the European crisis was their banking systems became many multiples of their GDP and therefore many, many multiples of their central government revenue. In China, in dollar terms their banking system is almost $35 trillion against a GDP of $10 and their banking system has grown 400% in 8 years with non-performing loans being nonexistent. So what we are going to see next is a credit cycle, and in a credit cycle you see some losses, but if China’s banking system loses 10%, you are going to see them lose $3.5 trillion. 

  He then puts this number in the context of China’s “massive” foreign reserves:

  What’s the magic number in their FX reserve pile today? When you look at banking system assets divided by their foreign exchange reserves, China is 7x, it’s one of the worst in the world. I think people are mypoically focused on a giant number of reserves, of $3 trillion or thereabouts, and no one is really paying attention to the size of the system and what’s about to happen.

  Actually that’s not true: we first pointed this out more than 2 years ago, when we showed “How China’s Stunning $15 Trillion In New Liquidity Blew Bernanke’s QE Out Of The Water.”

  

   

  A few weeks later we followed up with another stunning chart showing “How In Five Short Years, China Humiliated The World’s Central Banks.” However, we do agree fully with Bass that virtually nobody else is paying attention to this epic question of scale, especially as it relates to another topic we have been covering for the past two years: China’s soaring, and dramatically underreported non-performing loans.

  More on that in a second, but first a quick reminder that as we also reported over the weekend, for Kyle Bass, “The Greatest Investment Opportunity Right Now” is to short the Chinese currency: a trade which just in the past week has generated tremendous returns (using the embedded FX leverage), and which we are confident will continue to be very profitable, especially since as we first said in August, days before China’s devaluation, the only thing that could save China’s economy from an even harder landing, is to rapidly devalue their currency. China did just that, and has been doing that ever since.

  Earlier today, even Goldman – with a huge delay – finally came to see things correctly, when it said that:

  “We are adjusting our USDCNY forecast weaker, to 7.00 on a 12-month horizon (our twelve-month forecast was 6.60 previously) and 7.30 by end-2017 (from 6.80 previously). Though markets have been moving quickly, and today’s lower USDCNY fixing suggests the possibility that policymakers may want to stabilize expectations for the CNY, this puts us back on the weak side of market pricing over a twelve-month horizon, consistent with our view that 2016 will be a year of continued “bumpy deceleration” and significant policy easing in the Chinese economy, and that the potential for greater CNY depreciation remains a large source of uncertainty.”

  So going back to Kyle Bass’ thesis, it a relatively simple one: China has been avoiding a credit, or non-performing loan cycle, and fabricating the data, but the time has run out.

  “China many years ago attached its currency to the dollar: they hitched their wagon to our star very smartly because back then our goal was to depreciate our dollar through inflation. So we issued debt to the rest of the world to depreciate the dollar. And so now the real problem is China has hitched their wagon to our star, and their currency has effectively appreciated about 60% versus the rest of the world since 2005 and it’s killing them… China’s effective exchange rate moving up versus the rest of the world made their goods and services a little bit more expensive each year and now that labor arbitrage is gone. And if that labor arbitrage is gone, and the banking system has expanded 400% in 7 years without a nonperforming loan cycle, my view is we are going to see a non-performing loan cycle.”

  So what exactly is this non-performing loan cycle that Kyle Bass is referring to, and where does he get a $3 trillion potential loan loss – a quantum step in admission of economic failure which we first dubbed China’s neutron bomb” in October 2015 – number?

  Luckily, we explained all of this two months ago when we showed how “China’s Banking Sector Is Sitting On A $3 Trillion Neutron Bomb.” For those who missed it, here is the explanation behind what could be the best trade of the next 12-18 months (the best trade of 2015 incidentally was to be long Glencore CDS, as we suggested in 2014) according to Kyle Bass:

  * * *

  We’ve long contended that official data on bad loans at Chinese banks is even less reliable than NBS GDP prints. Indeed, the lengths Beijing goes to in order to obscure the extent to which banks’ balance sheets are in peril is truly something to behold and much like the deficient deflator math which may be causing the country to habitually overstate GDP growth, it’s not even clear that China could report the real numbers if it wanted to. 

  We took an in-depth look at the problem in “How China’s Banks Hide Trillions In Credit Risk: Full Frontal”, and we’ve revisited the issue on a number of occasions noting in August that according to a transcript of an internal meeting of the China Banking Regulatory Commission, bad loans jumped CNY322.2 billion in H1 to CNY1.8 trillion, a 36% increase. Of course that’s just the tip of the iceberg. In other words, that comes from a government agency and although the scope of the increase sounds serious, it still translates into an NPL ratio of just 1.82%. Here’s a look at the “official” numbers (note that when one includes doubtful accounts, the ratio jumps to somewhere in the neighborhood of 3-4%):

  

  Source: Fitch

  There are any number of reasons why those figures don’t even come close to approximating reality. For instance, there’s Beijing’s habit of compelling banks to roll over bad loans, and then there’s China’s massive (and by “massive” we mean CNY17 trillion) wealth management product industry which, when coupled with some creative accounting, allows Chinese banks to hold some 40% of credit risk off balance sheet.

  

  Well as time goes on, and as market participants scrutinize the data coming out of the world’s second most important economy, quite a few analysts are beginning to take a closer look at the NPL data for Chinese banks. Indeed, if Beijing continues to move toward “allowing” defaults to occur (even at SOEs) and if China’s transition from smokestack economy to a consumption and services-driven model continues to put pressure on borrowers from the manufacturing sector, the situation is likely to deteriorate quickly. If you needed evidence of just how precarious things truly are, look no further than a recent report from Macquarie which showed that a quarter of Chinese firms with debt are currently unable to cover their annual interest expense (as you might imagine, it’s even worse for commodities firms). 

  

  Just two weeks after we highighted the Macquarie report, we took a look at research conducted by Hong-Kong based CLSA. Unsurprisingly, it turns out that Chinese banks’ bad debts ratio could be as high 8.1%, a whopping 6 times higher than the official 1.5% NPL level reported by China’s banking regulator. 

  

  We called that revelation China’s “neutron bomb” but it turns out we may have jumped the gun. According to Hong Kong-based “Autonomous Research”, the real figure may be closer to 21% when one takes into account the aforementioned shadow banking sector. Here’s more from Bloomberg:

  Corporate investigator Violet Ho never put a lot of faith in the bad loan numbers reported by China’s banks.

  Crisscrossing provinces from Shandong to Xinjiang, she’s seen too much — from the shell game of moving assets between affiliated companies to disguise the true state of their finances to cover-ups by bankers loath to admit that loans they made won’t be recovered.

   

  The amount of bad debt piling up in China is at the center of a debate about whether the country will continue as a locomotive of global growth or sink into decades of stagnation like Japan after its credit bubble burst. Bank of China Ltd. reported on Thursday its biggest quarterly bad-loan provisions since going public in 2006.

   

  Charlene Chu, who made her name at Fitch Ratings making bearish assessments of the risks from China’s credit explosion since 2008, is among those crunching the numbers.

   

  While corporate investigator Ho relies on her observations from hitting the road, Chu and her colleagues at

  Autonomous Research in Hong Kong take a top-down approach. They estimate how much money is being wasted after the nation began getting smaller and smaller economic returns on its credit from 2008. Their assessment is informed by data from economies such as Japan that have gone though similar debt explosions.

   

  While traditional bank loans are not Chu’s prime focus — she looks at the wider picture, including shadow banking — she says her work suggests that nonperforming loans may be at 20 percent to 21 percent, or even higher.

   

  

   

  “A financial crisis is by no means preordained, but if losses don’t manifest in financial sector losses, they will do so via slowing growth and deflation, as they did in Japan,” said Chu. “China is confronting a massive debt problem, the scale of which the world has never seen.”

  As a reminder, here’s a look at the scope of the “problem” Chu is describing:

  

   

  And here’s a bit more on special mention loans and the ubiquitous practice of “evergreening”:

  Slicing and dicing the official loan numbers, Christine Kuo, a senior vice president of Moody’s Investors Service in Hong Kong, focuses on trends in debts overdue for 90 days, rather than those classified as “nonperforming.” Another tactic some analysts use is to add nonperforming debt to “special mention” loans, those that are overdue but not yet classified as impaired, yielding a rate of 5.1 percent.

   

  Banks’ bad-loan numbers are capped by “evergreening,” the practise of rolling over debt that isn’t repaid on time, according to experts including Keith Pogson, a Hong Kong-based senior partner at Ernst & Young LLP. Pogson was involved in restructuring debt at Chinese banks in 1998, when their NPL ratios were as high as 25 percent.

  So let’s just be clear: if 8% is a “neutron bomb”, a 21% NPL ratio in China is the asteroid that killed the dinosaurs. Here’s why: 

  

   

  If one very conservatively assumes that loans are about half of the total asset base (realistically 60-70%), and applies an 20% NPL to this number instead of the official 1.5% NPL estimate, the capital shortfall is a staggering $3 trillion. 

  That, as we suggested three weeks ago, may help to explain why round after round of liquidity injections (via RRR cuts, LTROs, and various short- and medium-term financing ops) haven’t done much to boost the credit impulse. In short, banks may be quietly soaking up the funds not to lend them out, but to plug a giant, $3 trillion, solvency shortfall. 

  In the end, we would actually venture to suggest that the real figure is probably far higher than 20%. There’s no way to get a read on how the country’s vast shadow banking complex plays into this but when you look at the numbers, it’s almost inconceivable to imagine that banks aren’t staring down sour loans at least on the order of a couple of trillion. 

  To the PBoC we say, “good luck plugging that gap” and to the rest of the world we say “beware, the engine of global growth and trade may be facing a pile of bad loans the size of Germany’s GDP.”

  We close with the following from Kroll’s senior managing director in Hong Kong Violet Ho (quoted above):

  “A credit report for a Chinese company is not worth the paper it’s written on.”

  

  

  

  

  

• Doctors Urge California Residents "Leave Now…While You Can" As Gas Leak Fears Grow

  Submitted by Claire Bernish via TheAntiMedia.org,

  California Governor Jerry Brown finally declared a state of emergency on Wednesday, concerning the ongoing, currently unstoppable methane gas leak spewing from Aliso Canyon that has created a nightmare for residents of Porter Ranch.

  “I will tell you, this goes well beyond Porter Ranch. We’ve had complaints from as far as Chatsworth, Northridge, and Granada Hills,” emphasized Los Angeles City Councilman Mitchell Englander during a Porter Ranch town hall meeting on December 28. “Apparently this plume of toxic chemicals and whatever it might be, doesn’t know zip codes […] This is the equivalent of the BP oil spill on land, in a populated community.”

  Aliso Canyon sits less than two and a half miles from Porter Ranch and less than 30 miles from the city of Los Angeles — the second most populous city in the United States — whose outlying total statistical area includes nearly 18 million residents, as of 2013.

  Brown has been widely criticized for lack of decisive action on the leak, which is erupting from its underground storage area with all the force “of a volcano.” Under Wednesday’s declaration, “all state agencies will utilize state personnel, equipment, and facilities to ensure a continuous and thorough state response to this incident.”

  Porter Ranch residents have been evacuating the area for some time, though SoCalGas’ rather maladroit handling of the relocation procedure has been a nightmare — and the cause for a mounting number of lawsuits, including one from the L.A. city attorney’s office.

  Los Angeles City Attorney Mike Feuer filed a civil lawsuit last month concerning the massive methane leak’s impact on area residents’ health and damage to the environment — which alleged failure by SoCalGas to prevent the leak and further exacerbation of “the effects of that failure by allowing acute odor and health problems faced by the community to persist for more than a month, to say nothing about the indefinite time it will persist into the future.”

  Pediatrician Dr. Richard Kang gave an ominous warning during the Porter Ranch meeting, saying, “Unfortunately, the only real way to get away from the symptoms is… you have to relocate — you have to get away from the environment.” Health complaints include severe headaches, nosebleeds, respiratory issues including increasing cases of asthma, and a number of other issues.

  SoCalGas, in the meantime, stated they were “providing air filters for people’s homes,” but though “the odor added to the leaking gas can cause symptoms for some, the gas is not toxic and county health officials have said the leak does not pose a long-term health risk.”

  But, as the Los Angeles Daily News reported on December 25, “Los Angeles County health officials said prolonged exposure to trace chemicals, some of which are known carcinogens, can cause long-term health effects.” Nevertheless, they also “cautioned that levels examined so far here are not believed to be associated with long-term health problems.”

  “The gas company says, ‘This is just the smell you’re reacting to, it’s just temporary, it’s not a problem, it’s not serious’ — these people aren’t stupid,” said attorney Rex Paris. “How could somebody possibly say that? We have children whose noses are bleeding every day, we have people who suffer from chronic headaches [and] are nauseous every, single day. How does that not become a serious issue? Why are they saying something nobody here believes? […] They’re trying to convince everybody that it’s all in our heads. It’s a trick.”

  In fact, as Erin Brockovich pointed out, “no one really knows the long-term side effects of benzene and radon, the carcinogens that are commonly found in natural gas.”

  Additionally, area house pets seem particularly vulnerable — possibly acting the part of unwitting canaries — as veterinarian Dr. David Smith described in the town hall meeting. Noting he has seen dozens of sickened animals, Smith said, “I’ve seen dogs, cats, birds, pocket pets… the primary symptoms I’ve seen are gastrointestinal vomiting […]These are not things you should be inhaling.” He added, “We have seen dermatological issues as well, some very unusual bacterial infections in dogs,” including one case in which a dog had such an infection on its face, and “the client developed almost the exact same kind of symptoms soon after that […] their physician thinks it’s related [to exposure from the gas leak] and so I tend to think these correlations are real.”

  Though the declaration of emergency states “the Division of Oil, Gas, and Geothermal Resources shall continue its prohibition against Southern California Gas Company injecting any gas into the Aliso Canyon Storage Facility,” it does not make that moratorium dependent on stoppage of the leak; rather, only “until a comprehensive review, utilizing independent experts […] is completed.”

  Physician Dr. Brooks Michaels, addressing the town hall meeting, gave the sternest advice to those still in the area surrounding the unprecedented leak:

  “If you have a chance to leave, if you’re able to leave… if you have a chance to relocate, do it now. I’m telling you, it’s really critical.”

  Understandably, Brown’s state of emergency seems almost too little, too late for many.

  You can watch the Porter Ranch town hall meeting here:

  

  

  

  

  

• Weekend Reading: Breaking Markets

  Submitted by Lance Roberts via RealInvestmentAdvice.com,

  

  This week has certainly been interesting with the Dow Jones Industrial Average having the worst start to a year…well…ever. Even more interesting is the culprit was primarily the collapse of financial markets in China.

  Why is that interesting? Because it is exactly the issue that I wrote about during the summer of 2015:

  “And this last week, we saw what happens when things go ‘inevitably wrong.’

   

  The perils of margin debt should not be readily dismissed. For a real time example of financial market leverage and consequences, one needs to look no further than the Shangai Index in China. That market is in a complete collapse as plunging prices are forcing investors to sell shares. While the Chinese government has injected liquidity, suspended trading in almost half of the listed equities and encouraged pension funds to buy securities, these actions have done little to stem the decline as investors ‘panic sell’ in a rush to safety. That collapse, if history is any guide, is likely not done as shown in the chart below.”

  

  “Also, notice the correlation between peaks in the Shanghai Index and the S&P 500.

   

  While no single indicator should be relied upon as a measure to manage a portfolio, it should be well understood by now that leverage is a ‘double-edged sword.’ While rising leverage provides the additional liquidity to drive stock prices higher on the way up, it also cuts deeply as prices fall.”

  This weekend’s reading list is a collection of analysis as to the potential impact of China. Is history set to repeat itself? And, most importantly as discussed in yesterday’s post, investors may have witnessed the “ringing of the bell” for the end of the bull market that begin in 2009. While it is too early to know for certain, things are getting much more interesting. It is time to start paying attention to the risks.

  ---

  1) Debt Signals Problems For Markets by Lisa Abramowicz via Bloomberg

  “Thanks in large part to a circuit-breaking selloff in China, stocks are already digging a hole at the start of the new year. Savvy traders know to avoid making big decisions based on a day or two of equity market histrionics, lest they look like chickens with their heads chopped off rather than skilled prognosticators. They rely on more dependable barometers to determine the longer-term direction, and what they see right now could be a big cause for concern.

   

  One of the best current indicators is dollar-denominated investment-grade debt, which has been tracking U.S. stocks much more closely than high-yield bonds. High-grade bonds remained fairly steady throughout 2015’s market roller coaster, even as stocks bounced around in a rather fruitless attempt to find direction and riskier corporate debt suffered some of its biggest declines on record.”

  But Also Read: China’s Market Won’t Be Halted Anymore by Myles Udland via Business Insider

   

  2) Markets Aren’t Cooperating With Fed Rate Hike by Jeffrey Snider via Alhambra Partners

  “When the FOMC voted on December 16 to raise rates, they did so with reservations, some expressed publicly, that maybe they didn’t really have the ability to do it. There is a reason that we refer to money markets in the plural, since there are, as the “s” at the end indicates, more than one. At one point in financial history, they all worked very well together, though the manner in which that harmony developed appears entirely lost on policymakers. They just assumed and continued to do so; they still do today, though with much less certainty attached.

   

  In the little more than two weeks since the FOMC’s move, money markets have not behaved.”

  But Also Read: Federal Reserve Is Giant Weapon With No Ammo Left by Myles Udland via Business Insider

  Opposing View: Fed’s Lacker Suggest 4-More Hikes In 2016 by Jason Lange via Reuters

   

  3) 5 Facts About The Market Sell-Off by Mohamed El-Erian via Bloomberg

  “Here are the five things to know about the implications of the sell-off for 2016 and beyond:

  1. Geopolitics

  2. Risk Taking

  3. Liquidity – Fed vs. Everyone Else

  4. Global Economy

  5. Future Policy Decisions”

  But Also Read: Brace For A Rare Recession In Profits by Matt Egan via CNN Money

  ---

  VIEWS & OPINIONS ON THE CORRECTION

  • Market Bears Fire Short Across The Bow by Michael Ashbaugh via MarketWatch
  • Soros: It’s The 2008 Crisis All Over Again by Matt Clinch via CNBC.
  • Is The Market Set To Fall? by Simon Maierhofer via MarketWatch
  • Investors See 2016 & Aren’t Impressed by IBD Editorials via Investors.com
  • Why Global Economic Disaster Is Unlikely by Martin Wolf via Financial Times
  • Market Rout Is A Warning; Charts Flash Red by Michael Kahn via Barron’s
  • The Absurdity Of Finding A Reason For Market Drop by Michael Gayed via MarketWatch
  • It’s A Xanax World by Bill Gross via Janus Funds
  • BREAKING, The Bull Market by Dana Lyons via Tumblr
  • Stocks Could Crash By 50% by Henry Blodget via Business Insider
  • The Bubble Implosion Can’t Be Fixed by Bob Janjuah via ZeroHedge

  ---

  MUST READS

  • Market Observations For 2016 by Rob Arnott & Jason Hsu via PIMCO
  • US Economic Growth Looking Frail by Josh Mitchell via WSJ
  • The Coming Problem Of Millennials by Kasia Klimasinska via Bloomberg
  • Behind The Rise In Workforce Dropouts by Aimee Picchi via CBS MoneyWatch
  • The Next Big Short: The Third Crest by John Hussman via Hussman Funds
  • Safe On The Sidelines: 475 Days & Counting by David Stockman via Contra Corner
  • Self Defeating Monetary Policy by Michael Lebowitz via 720 Global
  • So, Who Will Save The Global Economy Now by Jeff Spross via The Week
  • Greatest Investor Alive Says Do Just One Thing by Jesse Felder via The Felder Report
  • Somethings Wrong! Sell! Sell! by Doug Kass via Tumblr

  ---

  “Some people are never too old to find new ways to lose money.” – Anon

  

  

  

  

  

• 2016's "How To Make A Fortune" Cookie

  Anyone for Chinese?

   

  

   

  Source: Townhall.com

  

  

  

  

  

• "The Entire Risk Paradigm Is Shifting" – Stocks Join Global 'Reality' Adjustments

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  The focus on China as if their problems were only Chinese is highly misplaced, though you can understand the appeal of the excuse. This sentiment was expressed over and over today (just as it was in August):

  Do we all live in China now? Investors could be excused for thinking that, given that arcane indicators such as a Chinese manufacturing index and the value of the Chinese yuan are inducing nauseating drops in the U.S. stock market. And the surprise halt to trading in the latest Chinese session, a mere 30 minutes after markets opened, has thrown U.S. and European markets into a tailspin.

   

  Last we checked, however, the Dow Jones and S&P 500 indexes were composed of U.S. companies that might do some business in China, but still earn the vast majority of their revenue elsewhere. And elsewhere, economic fundamentals are looking way better than the gloomy start to this year’s trading would suggest.

  This is one of those forest and trees moments that get caught up on the surface of anachronistic thinking. Even if all that were true, the fact that China is an export economy having trouble finding any sustained and sufficient demand for its industrial capacity is a direct reflection upon global “demand”; which still includes the same business climate that US companies derive their revenue and earnings from.

  But it never really is so much about business today as it is risks for business tomorrow. In raw terms, if Chinese firms and its economy can so struggle in this environment it stands to reason to at least contemplate why that might be – and how that might directly reflect on domestic considerations. Further, as noted earlier, risk perceptions have changed as the FOMC is no longer given blanket faith to declare whatever sky color they wish. Stocks really haven’t had much success, overall, in a year and a half; a pause that itself should register as complimentary to the Chinese struggles.

  The S&P 500 is down just over 7 percent from its May high, but the average stock in the larger S&P 1500 was down 24 percent from its high as of yesterday’s close, according to new research from Bespoke Investment Group. A bear market is defined as a decline of 20 percent or more, meaning the average stock has already reached that threshold.

  As Bespoke points out, the pain in stocks is not just energy-related shares. Small caps are among the hardest hit (the S&P 600 small cap is down an astounding 28% from its high!) as well as consumer discretionary stocks; the very sorts of economically-sensitive issues that should be leading the market if this was just China as China. Instead, they suggest China is, again, finding difficulty in no small part because of intensifying US struggles. That much has been obvious from trade figures which declare in no uncertain terms the great and ongoing lack of US “demand.”

  From that visible contradiction, the entire risk paradigm is shifting more so than it already has. Commodities and “money” more broadly are winning the argument, so to speak, having declared long ago greater downside risks. Now that those are becoming rapidly the actual baseline, even for stocks, what is taking place in China is the connected realignment of monetary condition in that frightening direction. Stocks are finding more downside volatility because stock investors are being forced to recognize in truly comprehensive fashion that there is an actual and sizable downside.

  

  This is increasingly taking on the proportions of a global reset. As such, the “dollar” stands right in the middle of it as both messenger and agent. You cannot separate China from the whole as China isn’t really the problem but rather the most visible symptom of it. If there were a full recovery as the FOMC claims in moving against the possibility of overheating, financial firms would be at the front of that greedily taking up the mantle of raw financial opportunity. They did so in times past, usually in direct relation to the QE’s – and were only burned for their trouble. There is no recovery opportunity, which is why they have been retreating in “money” in really precipitous fashion.

  It is the very mechanism of discounting. The fact that stocks may also be participating is a very important indication of how much that has penetrated into broad and systemic perceptions. China matters, but not so much just for China. The US may look lackluster (to some, a narrowing minority) by comparison to the direction of China’s economy, but that really doesn’t tell us as much about tomorrow as is repeatedly claimed. A chronically ill economy is highly susceptible not to catching fire and taking off, but rather to converging with all the very real disasters already spreading globally – the risk that money markets are increasingly discounting and carrying out. Financial markets are obviously more and more worried that memories of lackluster will be all that there was of the QE-driven cycle.

  

  

  

  

  

• Auto Sales Are About To Choke: Increase In Non-Revolving Credit Is Smallest In 4 Years

  Moments ago, the Fed released the latest, November, consumer credit data: it was not good. Rising by just $13.95 trillion, it was a big miss to the $18.5 trillion expected, and below the $15.6 billion downward revised increase in October. In fact, three months after the historic surge in September to the highest print in the revised series, total consumer credit has tumbled to the lowest since January.

  

   

  But the big problem was not in the total data, but in one of the two key component data sets.

  Recall that a few days ago we noted something very disturbing for US auto makers: for all the hoopla around the auto sales number, US domestic car sales had actually dropped to a 6 month low, missing estimates by the most since 2008.

  

   

  What was just as disturbing was that “plans to buy an auto” had tumbled the most since January of 2013.

  

   

  Lacking the most recent credit data, we did not know what may have caused this dramatic slowdown in auto purchasing, and intentions. Now that we have the data, we also have the answer, because while revolving consumer credit rose at a respectable pace of $5.7 billion in November, it was that all important “other” series, non-revolving credit – the source of funds for student and auto loans – where there was a dramatic slowdown.

  As the chart below shows, after rising by $15.5 billion in the month before, and a near-record $22 billion in September, the November increase in nonrevolving credit was a paltry $8.3 billion – this was the smallest monthly increase in this most important for US car makers data, since February of 2012!

  

   

  Suddenly both the slowdown in December car sales, and the collapse in buying intentions makes all the sense in the world: US consumer may have just had their fill of auto-related loans, and without these to fund future purchases, even on the most relaxed terms in auto loan history, the pace of current and future purchases will collapse.

  And, as we showed earlier today, this collapse in auto loan issuance could not have come at a worse possible time: the chart below shows that the motor vehicle inventory-to-sale ratio is now the highest since August 2008:

  

   

  As we said this morning, “the channel-stuffed “see how well we are doing” smoke and mirrors of credit-fueled malinvestment has hit a wall and yet the automakers – afraid to signal any chink in that armor – kept producing.”

  And now we know why nobody was buying: suddenly the car loan issuance pipeline has been shut half way.

  The conclusion: unless there is a surge in non-revolving debt in December and the coming months, the cheap debt-funded US auto renaissance is officially over. As for the follow up question, whether this was caused by a revulsion toward more debt, then the rate hike in 2015 which was immediate passed through to borrowers, will make sure that what is currently a half-shut credit pipeline, will slam shut in the coming months and choke the only sector in the US manufacturing economy that was still relatively vibrant.

  

  

  

  

  

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• Internal War Is Now On The Horizon For America

  Submitted by Brandon Smith via Alt-Market.com,

  If internationalists were to get their way fully with the world and future historians write their analysis from a globalist perspective of the defunct American nation, they will probably say simply that our collapse was brought about by our own incompetence – that we were our own worst enemy. Yes, they would treat America as a cliché. They will of course leave out the destructive influences and engineered disasters of elitists, that would just complicate the narrative.

  My hope is that we do not prove these future historians correct, and that they won’t have an opportunity to exist. My work has always been designed to help ensure that resistance thrives, but also that it is pursued in the most intelligent manner possible.

  As I write this, China’s stock market has crashed 7% and was shut down by Chinese authorities who are once again initiating outright intervention to stem the tide. U.S. markets are quickly tracking lower. Oil is plummeting.

  Relations between Saudi Arabia and Iran have turned ugly, with Iranian protesters overtaking the Saudi embassy and both sides vowing vengeance. Many Americans won’t care much about this because they think it has nothing to do with them. They don’t realize that Saudi Arabia has already publicly suggested a depeg from the U.S. dollar, effectively ending the decades-long relationship between the greenback and oil. The Iranian event and U.S. ties to both nations only make the fall of the dollar’s petro-status more likely in the near term.  With the U.S. in the middle, "taking a side" will be a demand.  I believe the U.S. government will NOT take a side, and this will elicit a furious response from Saudi Arabia (a currency depeg).

  The Obama Administration has just made introductory announcements on new gun control measures through executive order.  These announcements were rather light on details and heavy on crocodile tears.  Their vagueness is clearly deliberate.  Psychological evaluations, redefining who is a lawful firearms dealer, "expanding" background checks; all of these measures could be interpreted broadly to mean almost anything.  We will probably know more in the coming weeks.

  And in Oregon over the weekend, Ammon Bundy and friends lured hundreds of protesters under false pretenses using the Hammond family tragedy as a vehicle to then initiate a takeover of federal buildings that have no strategic or symbolic value, boxing themselves into a static position and proclaiming themselves to be the “tip of the spear” in the fight against corrupt government. In the meantime, anyone who questions the validity of this idea or the logic behind the “plan” is immediately labeled a coward and “keyboard warrior” by their supporters.  Emotionally manipulative arguments abound because there are no tactically rational arguments to be made, which tells me that the plan was doomed before it was implemented.

  As I wrote in my article “Oregon standoff a terrible plan that we might be stuck with,” some people (not many but some) in the liberty movement are desperately clamoring for a fight; and they don’t care if the circumstances are intelligently executed or idiotically executed. They only care if it kicks off.

  I openly supported and aided the efforts at Bundy Ranch because the ranchers were defending their home from clear federal aggression. The Feds were direct invaders in that scenario. In Oregon, protesters are being perceived as the invaders, not the defenders — and all launched in the name of the Hammond family, who asked them NOT to artificially create a standoff. The two scenarios are polar opposites, and Oregon will end in a very different fashion.

  I would just like to note that the Founding Fathers were smart enough to avoid deliberately trapping themselves in static positions on land that had no strategic or symbolic importance while inviting the British to "come and get them".  Again, there are right ways and wrong ways to fight tyranny.  Simply being willing to fight is not enough.

  Now, if Americans are going to create standoff situations that could result in civil war they should do it over draconian gun control measures such as the use of classified government watch lists as grounds for denial of 2nd Amendment rights, rather than using a family who did not want armed support to begin with as a means to an end.

  Keep in mind that watch lists are entirely arbitrary. There is no due process involved whatsoever, meaning you or I could walk into a gun store one day only to have our 4473 form denied because some bureaucrat in an office in D.C. decided we said something he doesn’t like and belong on a naughty list.  The changing of gun dealer laws could be used to erase gun shows and private sales of firearms as well.

  A standoff scenario based on these issues would be a much more practical concept than what is taking place in Oregon.

  As our situation in this country becomes more precarious, there are going to be far more flashpoints than anyone will be able to keep track of. It is inevitable that a fight between corrupt elements of the U.S. government and regular people will erupt. I and other analysts have been warning people about this for years. I have been educating people on their preparedness options and tactical resources. I have been promoting community preparedness teams in my work with Oath Keepers and helping to organize such teams in my own part of the country. I even designed the first working thermal evasion suit available to civilians to give people half a chance against advanced weaponry.  I have no illusions that a peaceful solution exists.  I know that there is no such solution at this point in the game.  But when the fighting starts, I also know that those who navigate the storm intelligently rather than allowing their emotions to get the best of them are more likely to survive and succeed.

  I cannot say how quickly a crisis will develop. But, I can outline some of the many pitfalls you are going to come across as this storm rises.

  False Leadership And Irrational Leadership

  You are going to stumble across numerous gung ho activists and even politicians who will claim they have the one and only solution, that they are the real “tip of the spear.” First, if you feel compelled to seek out leaders on the mere basis that they have offered to lead you, then you need to do some soul searching. Become your own leader first. And then, if you meet someone with an excellent plan and a principled motive, give him the time of day, but don’t jump blindly into any situation.

  If his plan seems poorly thought out, don’t follow him. If his agenda revolves around his own ego and a desire for personal glory, don’t follow him. If he focuses completely on the Obama administration and ignores the complicity of Republican leadership, don’t follow him. If all he talks about are the evils of the federal government but he ignores the puppet strings that lead to international banks and globalist organizations, don’t follow him. If he refuses to allow his initiatives to be questioned or discussed in a reasonable way, do not follow him. If he acts as if his ideas are sacrosanct and questions your “patriotism” when you do not immediately jump on the bandwagon, do not follow him.  Remember, it is the job of this leadership to CONVINCE YOU of the legitimacy of their plan if they are seeking your support.  The burden of evidence is on them.  It is not your job to support them blindly just because you want to avoid being called a "sunshine patriot".

  To summarize, if you are going to follow someone, know him well first, and make sure his planning is solid.

  Hotheads And Imbeciles

  I’ve found that there are two very frustrating extremes within the liberty movement: the people who embrace pacifism and who refuse to even consider the possibility of a violent conflict and self-defense, and the people who have delusions of being the next George Washington and are ready to dive headlong into any violent confrontation without thinking because they want to cement their own legacy. Neither of these groups seems to be able to treat each event as unique: some events requiring a diplomatic approach and some of them requiring the violence of action.

  The pacifists are annoying, but they mostly hurt themselves in their lack of preparedness and a warrior’s mindset. The hotheads are the real problem. If you are only looking for a fight, then one will certainly find you; but any moron can trigger a standoff with the Feds. The point is to be able to make a move that matters in the long run. Hotheads cannot think beyond themselves and their immediate needs. They are like mosquitoes mindlessly hunting for blood. Strategic planning is impossible for them and they will destroy allies in the process of their pursuits.

  I hate to say it, but there is a distinct possibility that our current generation of freedom advocates and freedom fighters may not live to see the future we are working toward. That better world built on liberty, individualism and voluntary community is something our children will thrive in, not us. If you are not fighting with a long term strategy in mind, then you have missed the entire point.

  Factions And Tribes

  Humans in crisis events tend to become more tribal in their associations in order to survive, and this is not necessarily a bad thing. I would rather live in a tribal world than under centralized corrupt government or global government any day. That said, if a “tribe” or faction does not respect the rights of the individual or uses unprovoked violence to achieve its goals, then it is no better than any other tyranny. Never trade safety for tyranny, regardless of the difficulties ahead.

  The upside is tyrants of small tribes are easier to deal with than tyrants of large nations. They are no more bulletproof than anyone else, and they don’t have the resources to prevent reprisal if they hurt the wrong people.

  Expect that families, neighborhoods, towns, churches, gangs and activist groups will rally around each other as a way to provide security. If you do not already have friends and family on board with your way of thinking, you will be isolated, making survival far more difficult if a breakdown does occur.

  Governments Will Not Disappear

  I can think of very few scenarios in history in which a crisis or collapse immediately facilitated the fall of the government in power. Rather, the government usually morphs into something else, something more dangerous. In fact, crisis is often the prime excuse used by corrupt officials to rationalize greater controls on the population. This in turn acts as a catalyst for more rebellion, which in turn acts as a vindication of the government’s tyranny.

  Does this mean people should not rebel against tyranny? No, it means that we have to fight smart and retain the moral high ground at all times. We must act in a way that exposes the true nature of corrupt government, rather than giving them more ammunition to shoot us down with in the public eye. Above all, if we fight we must fight TO WIN.  This means not deliberately searching for an Alamo.  Martyrs are ultimately useless in this kind of war because if we lose, no one will remember them anyway. Glory seekers and self-proclaimed prophets will only lead people to disaster.

  Develop a tactical mindset because the future will require tactical minds. Maintain your principles no matter the threats ahead. Retain your humanity. But also, when the fight begins, fight with the intention of victory. Choose your ground wisely.

  

  

  

  

  

• Martin Shkreli Secures Bail With $45 Million E*Trade Account, Demands Respect From Wu-Tang Clan

  “I bought the most expensive album in the history of mankind and fucking RZA is talking shit behind my back and online in plain sight. If I hand you $2 million, fucking show me some respect.”

  That’s a quote from the incomparable Martin Shkreli who is upset with the Wu-Tang Clan from whom he purchased a one-of-a-kind double disc for $2 million last year.

  

  RZA, the group’s frontman if not its most famous member, found himself in a bit of an awkward scenario when news of the sale hit the wires.

  When the deal was done, Shkreli had not yet become a household name. In other words, it wasn’t apparent to RZA that the soon-to-be proud owner of the one and only copy of “Once Upon A Time In Shaolin” would soon become public enemy number one in America on the way to being arrested for fraud.

  “I met him, we had a brief lunch, and he did mention his love of hip-hop,” RZA said in the interview with Bloomberg. “I didn’t get a chance to read him.”

  In the wake of the Daraprim fiasco which saw Shkreli raise the price of a drug he acquired from $13.50 to $750 a pill, Wu-Tang decided to donate “a significant portion” of the proceeds to charity. 

  Even as RZA isn’t particularly enamored with Shkreli’s drug pricing practices, the producer says he doesn’t regret doing the deal. “He bought it, he can do what he wants,” RZA told Bloomberg TV’s John Heilemann.”The beautiful thing about art, from my standpoint, is that it has no discrimination. What we’ve done is historical, and you can’t remove that.”

  No, you can’t, and neither can you “remove” the bad taste Shkreli’s Daraprim price hike left in America’s mouth which is why when it came time to set bail, no one was in a forgiving mood. The price of (temporary) freedom for America’s “most hated man”: $5 million.

  Unfortunately, the bail bondsman didn’t accept Wu-Tang albums as collateral and so, Shkreli put up his E*Trade account instead. The account’s value is said to be $45 million. 

  “Martin Shkreli put up his $45 million E*Trade account to secure $5 million bail after federal authorities arrested him on fraud charges last month,” Bloomberg reports. “Shkreli was ordered to disclose how that bond is secured and prosecutors filed papers Thursday stating Shkreli has a brokerage account worth eight figures,” NY Daily News adds. “E*Trade has been ordered to notify prosecutors if the balance of the brokerage account dips below $5 million — which would jeopardize the bail bond and Shkreli’s freedom.”

  We wonder if Martin, like the E*Trade-ing Joe Campbell whose short position in KBIO blew up when Shkreli acquired more than half of the float back in November, will start a GoFundMe page in the event his collapsing holdings leave him a few million short on the bail bond.

  *  *  *

  RZA talks Shkreli and Trump with Bloomberg Business

  

  

  

  

  

• 2016: Oil Limits & The End Of The Debt Supercycle

  Submitted by Gail Tverberg via Our Finite World blog,

  What is ahead for 2016? Most people don’t realize how tightly the following are linked:

  1. Growth in debt
  2. Growth in the economy
  3. Growth in cheap-to-extract energy supplies
  4. Inflation in the cost of producing commodities
  5. Growth in asset prices, such as the price of shares of stock and of farmland
  6. Growth in wages of non-elite workers
  7. Population growth

  It looks to me as though this linkage is about to cause a very substantial disruption to the economy, as oil limits, as well as other energy limits, cause a rapid shift from the benevolent version of the economic supercycle to the portion of the economic supercycle reflecting contraction. Many people have talked about Peak Oil, the Limits to Growth, and the Debt Supercycle without realizing that the underlying problem is really the same–the fact the we are reaching the limits of a finite world.

  There are actually a number of different kinds of limits to a finite world, all leading toward the rising cost of commodity production. I will discuss these in more detail later. In the past, the contraction phase of the supercycle seems to have been caused primarily by too high population relative to resources. This time, depleting fossil fuels–particularly oil–plays a major role. Other limits contributing to the end of the current debt supercycle include rising pollution and depletion of resources other than fossil fuels.

  The problem of reaching limits in a finite world manifests itself in an unexpected way: slowing wage growth for non-elite workers. Lower wages mean that these workers become less able to afford the output of the system. These problems first lead to commodity oversupply and very low commodity prices. Eventually these problems lead to falling asset prices and widespread debt defaults. These problems are the opposite of what many expect, namely oil shortages and high prices. This strange situation exists because the economy is a networked system. Feedback loops in a networked system don’t necessarily work in the way people expect.

  I expect that the particular problem we are likely to reach in 2016 is limits to oil storage. This may happen at different times for crude oil and the various types of refined products. As storage fills, prices can be expected to drop to a very low level–less than $10 per barrel for crude oil, and correspondingly low prices for the various types of oil products, such as gasoline, diesel, and asphalt. We can then expect to face a problem with debt defaults, failing banks, and failing governments (especially of oil exporters).

  The idea of a bounce back to new higher oil prices seems exceedingly unlikely, in part because of the huge overhang of supply in storage, which owners will want to sell, keeping supply high for a long time. Furthermore, the underlying cause of the problem is the failure of wages of non-elite workers to rise rapidly enough to keep up with the rising cost of commodity production, particularly oil production. Because of falling inflation-adjusted wages, non-elite workers are becoming increasingly unable to afford the output of the economic system. As non-elite workers cut back on their purchases of goods, the economy tends to contract rather than expand. Efficiencies of scale are lost, and debt becomes increasingly difficult to repay with interest.  The whole system tends to collapse.

  How the Economic Growth Supercycle Works, in an Ideal Situation

  In an ideal situation, growth in debt tends to stimulate the economy. The availability of debt makes the purchase of high-priced goods such as factories, homes, cars, and trucks more affordable. All of these high-priced goods require the use of commodities, including energy products and metals. Thus, growing debt tends to add to the demand for commodities, and helps keep their prices higher than the cost of production, making it profitable to produce these commodities. The availability of profits encourages the extraction of an ever-greater quantity of energy supplies and other commodities.

  The growing quantity of energy supplies made possible by this profitability can be used to leverage human labor to an ever-greater extent, so that workers become increasingly productive. For example, energy supplies help build roads, trucks, and machines used in factories, making workers more productive. As a result, wages tend to rise, reflecting the greater productivity of workers in the context of these new investments. Businesses find that demand for their goods and services grows because of the growing wages of workers, and governments find that they can collect increasing tax revenue. The arrangement of repaying debt with interest tends to work well in this situation. GDP grows sufficiently rapidly that the ratio of debt to GDP stays relatively flat.

  Over time, the cost of commodity production tends to rise for several reasons:

  1. Population tends to grow over time, so the quantity of agricultural land available per person tends to fall. Higher-priced techniques (such as irrigation, better seeds, fertilizer, pesticides, herbicides) are required to increase production per acre. Similarly, rising population gives rise to a need to produce fresh water using increasingly high-priced techniques, such as desalination.
  2. Businesses tend to extract the least expensive fuels such as oil, coal, natural gas, and uranium first. They later move on to more expensive to extract fuels, when the less-expensive fuels are depleted. For example, Figure 1 shows the sharp increase in the cost of oil extraction that took place about 1999.
     
     

     Figure 1. Figure by Steve Kopits of Westwood Douglas showing the trend in per-barrel capital expenditures for oil exploration and production. CAGR is “Compound Annual Growth Rate.”

  3. Pollution tends to become an increasing problem because the least polluting commodity sources are used first. When mitigations such as substituting renewables for fossil fuels are used, they tend to be more expensive than the products they are replacing. The leads to the higher cost of final products.
  4. Overuse of resources other than fuels becomes a problem, leading to problems such as the higher cost of producing metals, deforestation, depleted fish stocks, and eroded topsoil. Some workarounds are available, but these tend to add costs as well.

  As long as the cost of commodity production is rising only slowly, its increasing cost is benevolent. This increase in cost adds to inflation in the price of goods and helps inflate away prior debt, so that debt is easier to pay. It also leads to asset inflation, making the use of debt seem to be a worthwhile approach to finance future economic growth, including the growth of energy supplies. The whole system seems to work as an economic growth pump, with the rising wages of non-elite workers pushing the growth pump along.

  The Big “Oops” Comes when the Price of Commodities Starts Rising Faster than Wages of Non-Elite Workers

  Clearly the wages of non-elite workers need to be rising faster than commodity prices in order to push the economic growth pump along. The economic pump effect is lost when the wages of non-elite workers start falling, relative to the price of commodities. This tends to happen when the cost of commodity production begins rising rapidly, as it did for oil after 1999 (Figure 1).

  The loss of the economic pump effect occurs because the rising cost of oil (or electricity, or food, or other energy products) forces workers to cut back on discretionary expenditures. This is what happened in the 2003 to 2008 period as oil prices spiked and other energy prices rose sharply. (See my article Oil Supply Limits and the Continuing Financial Crisis.) Non-elite workers found it increasingly difficult to afford expensive products such as homes, cars, and washing machines. Housing prices dropped. Debt growth slowed, leading to a sharp drop in oil prices and other commodity prices.

  

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

  It was somewhat possible to “fix” low oil prices through the use of Quantitative Easing (QE) and the growth of debt at very low interest rates, after 2008. In fact, these very low interest rates are what encouraged the very rapid growth in the production of US crude oil, natural gas liquids, and biofuels.

  Now, debt is reaching limits. Both the US and China have (in a sense) “taken their foot off the economic debt accelerator.” It doesn’t seem to make sense to encourage more use of debt, because recent very low interest rates have encouraged unwise investments. In China, more factories and homes have been built than the market can absorb. In the US, oil “liquids” production rose faster than it could be absorbed by the world market when prices were over $100 per barrel. This led to the big price drop. If it were possible to produce the additional oil for a very low price, say $20 per barrel, the world economy could probably absorb it. Such a low selling price doesn’t really “work” because of the high cost of production.

  Debt is important because it can help an economy grow, as long as the total amount of debt does not become unmanageable. Thus, for a time, growing debt can offset the adverse impact of the rising cost of energy products. We know that oil prices began to rise sharply in the 1970s, and in fact other energy prices rose as well.

  

  Figure 3. Historical World Energy Price in 2014$, from BP Statistical Review of World History 2015.

  Looking at debt growth, we find that it rose rapidly, starting about the time oil prices started spiking. Former Director of the Office of Management and Budget, David Stockman, talks about “The Distastrous 40-Year Debt Supercycle,” which he believes is now ending.

  

  Figure 4. Worldwide average inflation-adjusted annual growth rates in debt and GDP, for selected time periods. See post on debt for explanation of methodology.

  In recent years, we have been reaching a situation where commodity prices have been rising faster than the wages of non-elite workers. Jobs that are available tend to be low-paid service jobs. Young people find it necessary to stay in school longer. They also find it necessary to delay marriage and postpone buying a car and home. All of these issues contribute to the falling wages of non-elite workers. Some of these individuals are, in fact, getting zero wages, because they are in school longer. Individuals who retire or voluntarily leave the work force further add to the problem of wages no longer rising sufficiently to afford the output of the system.

  The US government has recently decided to raise interest rates. This further reduces the buying power of non-elite workers. We have a situation where the “economic growth pump,” created through the use of a rising quantity of cheap energy products plus rising debt, is disappearing. While homes, cars, and vacation travel are available, an increasing share of the population cannot afford them. This tends to lead to a situation where commodity prices fall below the cost of production for a wide range of types of commodities, making the production of commodities unprofitable. In such a situation, a person expects companies to cut back on production. Many defaults may occur.

  China has acted as a major growth pump for the world for the last 15 years, since it joined the World Trade Organization in 2001. China’s growth is now slowing, and can be expected to slow further. Its growth was financed by a huge increase in debt. Paying back this debt is likely to be a problem.

  

  Figure 5. Author’s illustration of problem we are now encountering.

  Thus, we seem to be coming to the contraction portion of the debt supercycle. This is frightening, because if debt is contracting, asset prices (such as stock prices and the price of land) are likely to fall. Banks are likely to fail, unless they can transfer their problems to others–owners of the bank or even those with bank deposits. Governments will be affected as well, because it will become more expensive to borrow money, and because it becomes more difficult to obtain revenue through taxation. Many governments may fail as well for that reason.

  The U. S. Oil Storage Problem

  Oil prices began falling in the middle of 2014, so we might expect oil storage problems to start about that time, but this is not exactly the case. Supplies of US crude oil in storage didn’t start rising until about the end of 2014.

  

  Figure 6. US crude oil in storage, excluding Strategic Petroleum Reserve, based on EIA data.

  Once crude oil supplies started rising rapidly, they increased by about 90 million barrels between December 2014 and April 2015. After April 2015, supplies dipped again, suggesting that there is some seasonality to the growing crude oil supply. The most “dangerous” time for rapidly rising amounts added to storage would seem to be between December 31 and April 30. According to the EIA, maximum crude oil storage is 551 million barrels of crude oil (considering all storage facilities). Adding another 90 million barrels of oil (similar to the run-up between Dec. 2014 and April 2015) would put the total over the 551 million barrel crude oil capacity.

  Cushing, Oklahoma, is the largest storage area for crude oil. According to the EIA, maximum working storage for the facility is 73 million barrels. Oil storage at Cushing since oil prices started declining is shown in Figure 7.

  

  Figure 7. Quantity of crude oil stored at Cushing between June 27, 2014, and June 1, 2016, based on EIA data.

  Clearly the same kind of run up in oil storage that occurred between December and April one year ago cannot all be stored at Cushing, if maximum working capacity is only 73 million barrels, and the amount currently in storage is 64 million barrels.

  Another way of storing oil is as finished products. Here, the run-up in storage began earlier (starting in mid-2014) and stabilized at about 65 million barrels per day above the prior year, by January 2015.  Clearly, if companies can do some pre-planning, they would prefer not to refine products for which there is little market. They would rather store unneeded oil as crude, rather than as refined products.

  

  Figure 8. Total Oil Products in Storage, based on EIA data.

  EIA indicates that the total capacity for oil products is 1,549 million barrels. Thus, in theory, the amount of oil products stored can be increased by as much as 700 million barrels, assuming that the products needing to be stored and the locations where storage are available match up exactly. In practice, the amount of additional storage available is probably quite a bit less than 700 million barrels because of mismatch problems.

  In theory, if companies can be persuaded to refine more products than they can sell, the amount of products that can be stored can rise significantly. Even in this case, the amount of storage is not unlimited. Even if the full 700 million barrels of storage for crude oil products is available, this corresponds to less than one million barrels a day for two years, or two million barrels a day for one year. Thus, products storage could easily be filled as well, if demand remains low.

  At this point, we don’t have the mismatch between oil production and consumption fixed. In fact, both Iraq and Iran would like to increase their production, adding to the production/consumption mismatch. China’s economy seems to be stalling, keeping its oil consumption from rising as quickly as in the past, and further adding to the supply/demand mismatch problem. Figure 9 shows an approximation to our mismatch problem. As far as I can tell, the problem is still getting worse, not better.

  

  Figure 9. Total liquids oil production and consumption, based on a combination of BP and EIA data.

  There has been a lot of talk about the United States reducing its production, but the impact so far has been small, based on data from EIA’s International Energy Statistics and its December 2015 Monthly Energy Review.

  

  Figure 10. US quarterly oil liquids production data, based on EIA’s International Energy Statistics and Monthly Energy Review.

  Based on information through November from EIA’s Monthly Energy Review, total liquids production for the US for the year 2015 will be over 800,000 barrels per day higher than it was for 2014. This increase is likely greater than the increase in production by either Saudi Arabia or Iraq. Perhaps in 2016, oil production of the US will start decreasing, but so far, increases in biofuels and natural gas liquids are partly offsetting recent reductions in crude oil production. Also, even when companies are forced into bankruptcy, oil production does not necessarily stop because of the potential value of the oil to new owners.

  Figure 11 shows that very high stocks of oil were a problem, way back in the 1920s. There were other similarities to today’s problems as well, including a deflating debt bubble and low commodity prices. Thus, we should not be too surprised by high oil stocks now, when oil prices are low.

  

  Figure 11. US ending stock of crude oil, excluding the strategic petroleum reserve. Figure by EIA.

  Many people overlook the problems today because the US economy tends to be doing better than that of the rest of the world. The oil storage problem is really a world problem, however, reflecting a combination of low demand growth (caused by low wage growth and lack of debt growth, as the world economy hits limits) continuing supply growth (related to very low interest rates making all kinds of investment appear profitable and new production from Iraq and, in the near future, Iran). Storage on ships is increasingly being filled up and storage in Western Europe is 97% filled. Thus, the US is quite likely to see a growing need for oil storage in the year ahead, partly because there are few other places to put the oil, and partly because the gap between supply and demand has not yet been fixed.

  What is Ahead for 2016?

  1. Problems with a slowing world economy are likely to become more pronounced, as China’s growth problems continue, and as other commodity-producing countries such as Brazil, South Africa, and Australia experience recession. There may be rapid shifts in currencies, as countries attempt to devalue their currencies, to try to gain an advantage in world markets. Saudi Arabia may decide to devalue its currency, to get more benefit from the oil it sells.
  2. Oil storage seems likely to become a problem sometime in 2016. In fact, if the run-up in oil supply is heavily front-ended to the December to April period, similar to what happened a year ago, lack of crude oil storage space could become a problem within the next three months. Oil prices could fall to $10 or below. We know that for natural gas and electricity, prices often fall below zero when the ability of the system to absorb more supply disappears. It is not clear the oil prices can fall below zero, but they can certainly fall very low. Even if we can somehow manage to escape the problem of running out of crude oil storage capacity in 2016, we could encounter storage problems of some type in 2017 or 2018.
  3. Falling oil prices are likely to cause numerous problems. One is debt defaults, both for oil companies and for companies making products used by the oil industry. Another is layoffs in the oil industry. Another problem is negative inflation rates, making debt harder to repay. Still another issue is falling asset prices, such as stock prices and prices of land used to produce commodities. Part of the reason for the fall in price has to do with the falling price of the commodities produced. Also, sovereign wealth funds will need to sell securities, to have money to keep their economies going. The sale of these securities will put downward pressure on stock and bond prices.
  4. Debt defaults are likely to cause major problems in 2016. As noted in the introduction, we seem to be approaching the unwinding of a debt supercycle. We can expect one company after another to fail because of low commodity prices. The problems of these failing companies can be expected to spread to the economy as a whole. Failing companies will lay off workers, reducing the quantity of wages available to buy goods made with commodities. Debt will not be fully repaid, causing problems for banks, insurance companies, and pension funds. Even electricity companies may be affected, if their suppliers go bankrupt and their customers become less able to pay their bills.
  5. Governments of some oil exporters may collapse or be overthrown, if prices fall to a low level. The resulting disruption of oil exports may be welcomed, if storage is becoming an increased problem.
  6. It is not clear that the complete unwind will take place in 2016, but a major piece of this unwind could take place in 2016, especially if crude oil storage fills up, pushing oil prices to less than $10 per barrel.
  7. Whether or not oil storage fills up, oil prices are likely to remain very low, as the result of rising supply, barely rising demand, and no one willing to take steps to try to fix the problem. Everyone seems to think that someone else (Saudi Arabia?) can or should fix the problem. In fact, the problem is too large for Saudi Arabia to fix. The United States could in theory fix the current oil supply problem by taxing its own oil production at a confiscatory tax rate, but this seems exceedingly unlikely. Closing existing oil production before it is forced to close would guarantee future dependency on oil imports. A more likely approach would be to tax imported oil, to keep the amount imported down to a manageable level. This approach would likely cause the ire of oil exporters.
  8. The many problems of 2016 (including rapid moves in currencies, falling commodity prices, and loan defaults) are likely to cause large payouts of derivatives, potentially leading to the bankruptcies of financial institutions, as they did in 2008. To prevent such bankruptcies, most governments plan to move as much of the losses related to derivatives and debt defaults to private parties as possible. It is possible that this approach will lead to depositors losing what appear to be insured bank deposits. At first, any such losses will likely be limited to amounts in excess of FDIC insurance limits. As the crisis spreads, losses could spread to other deposits. Deposits of employers may be affected as well, leading to difficulty in paying employees.
  9. All in all, 2016 looks likely to be a much worse year than 2008 from a financial perspective. The problems will look similar to those that might have happened in 2008, but didn’t thanks to government intervention. This time, governments appear to be mostly out of approaches to fix the problems.
  10. Two years ago, I put together the chart shown as Figure 12. It shows the production of all energy products declining rapidly after 2015. I see no reason why this forecast should be changed. Once the debt supercycle starts its contraction phase, we can expect a major reduction in both the demand and supply of all kinds of energy products.

  

  Figure 12. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

  Conclusion

  We are certainly entering a worrying period. We have not really understood how the economy works, so we have tended to assume we could fix one or another part of the problem. The underlying problem seems to be a problem of physics. The economy is a dissipative structure, a type of self-organizing system that forms in thermodynamically open systems. As such, it requires energy to grow. Ultimately, diminishing returns with respect to human labor–what some of us would call falling inflation-adjusted wages of non-elite workers–tends to bring economies down. Thus all economies have finite lifetimes, just as humans, animals, plants, and hurricanes do. We are in the unfortunate position of observing the end of our economy’s lifetime.

  Most energy research to date has focused on the Second Law of Thermodynamics. While this is a contributing problem, this is really not the proximate cause of the impending collapse. The Second Law of Thermodynamics operates in thermodynamically closed systems, which is not precisely the issue here.

  We know that historically collapses have tended to take many years. This collapse may take place more rapidly because today’s economy is dependent on international supply chains, electricity, and liquid fuels–things that previous economies were not dependent on.

  

  

  

  

  

• "The Jihadists Will Attack Europe": Leaked Phone Call Shows Gaddafi Warned Tony Blair Of Terror Attacks

  On Wednesday, we took a close look at the battle for Libya’s oil.

  Libya, much like Syria, is a case study in why the West would be better off not intervening in the affairs of sovereign states on the way to bringing about regime change. “Toppling dictators” sounds good in principle, but at the end of the day, it’s nearly impossible to predict what will emerge from the power vacuums the US creates when Washington destabilizes governments.

  Post-Baathist Iraq is rife with sectarian discord, a post-Assad Syria would likely be an even bloodier free-for-all than it already is, and post-Gaddafi Libya is a failed state with two governments each claiming legitimacy. These types of environments are exploitable by extremists eager to capitalize on the chaos by seizing resources and, ultimately, power.

  Just today for instance, nearly 50 people were killed in Libya when a truck bomb hit a police training center where recruits were holding a morning meeting. “Mayor Miftah Hamadi said the truck bomb detonated as around 400 recruits were gathering in the early morning at the police center in Zliten, a coastal town between the capital Tripoli and the port of Misrata,” Reuters reports, adding that “the Zliten blast was the worst since an attack in February last year when three car bombs hit the eastern city of Qubbah, killing 40 people in what officials described as a revenge attack for Egyptian air strikes on Islamist militant targets.”

  “It was horrific, the explosion was so loud it was heard from miles away,” Hamadi told Reuters by phone. “All the victims were young, and all about to start their lives.”

  

  The blast was the deadliest since Gaddafi’s ouster and comes as militants loyal to Ibrahim Jadhran battle ISIS for control of key oil fields and ports. Islamic State’s presence in Libya has grown and the group may be looking to supplement oil income lost to Russian airstrikes in Syria with sales of Libyan crude.

  Who could have seen all of this – including the Paris attacks – coming, you ask? Well, Muammar Gaddafi for one.

  According to The Telegraph, Gaddafi warned Tony Blair that jihadists would one day attack Europe in the event his government fell. “Gaddafi’s dire prediction was made in two desperate telephone calls with Mr Blair on February 25, 2011 – as civil war was engulfing Libya,” The Telegraph writes. “In the first call at 11:15am, Gaddafi said: “They [jihadists] want to control the Mediterranean and then they will attack Europe.” Here’s more:

  In a second call made a little over four hours later, Gaddafi told Mr Blair: “I will have to arm the people and get ready for a fight. Libyan people will die, damage will be on the Med, Europe and the whole world. These armed groups are using the situation [in Libya] as a justification – and we shall fight them.”

   

  

   

  Mr Blair had made two calls to Gaddafi to try to negotiate the dictator’s departure from Tripoli as civil war engulfed the nation. Three weeks later, a Nato-led coaltion that included Britain, began bombing raids that led to the overthrow of Gaddafi. The dictator was finally deposed in August and murdered by a mob in October.

   

  

   

  This is what Gaddafi got for his trouble:

  So much for this:

  

  You’ll recall that Bashar al-Assad also warned Europe that destabilizing governments was a recipe for disaster. “We said, don’t take what is happening in Syria lightly,” Assad said, in the wake of the Paris attacks.

  “Unfortunately, European officials did not listen,” he added.

  

  

  

  

  

• Russell Napier Explains How The Decline Of The Yuan Destroys Belief In Central Banking

  From Russell Napier of ERI-C

  It’s Not a Pet, It’s a Falcon: How the decline of the RMB destroys belief in central banking and a successful reflation

  Turning and turning in the widening gyre
  The falcon cannot hear the falconer;
  Things fall apart; the centre cannot hold;

        – The Second Coming- W.B. Yeats

  First catch your falcon, as the formidable Mrs Beeton might have said if she was in need of a method of catching her main course (see Mrs Beeton’s Book of Household Management 1861- ‘Recipe for Jugged Hare’).

  Having caught your wild falcon, you can now begin the training process. You are attempting to impose your will upon a creature that, in its wild state, catches, kills and devours other birds. This is creative destruction in its rawest form as those acts of savagery provide the fuel to keep our falcon flying. Taming such wild forces is not easy, whether they be birds of prey or the desires, wishes, greed and fear of millions of people determining prices through their supply and also their demand.

  Let’s get some advice from the field of falconry for our central bankers, and the other handmaidens of state control, as they seek to impose their wishes on the will and acts of millions-

  ‘Falconry is a great sport, but there is a lot of time involved. You will want to have enough time to train your bird. If you don’t have the time, or the willingness, then you might as well not do it at all. If you are one of those people who is not patient, falconry may not be for you. You should not take up falconry if you want the falcon as a pet, or something to show off. Falcons can’t just be put in the closet when you are done with them. It takes time and commitment, but the reward in the end is worth it.’

  (Source: WikiHow- How to Train Your Falcon)

  A ‘great sport’ indeed, given the alternative sports open to government officials! Well, they have demonstrated that they have the time and they seem to have been born with the willingness, or at least picked it up pretty early in life. Patience just comes with the territory when you work for the government— there really isn’t much of an alternative. However, they do seem to have a problem when it comes to realizing that there is not much point in turning this wild thing, that exists to efficiently convert its kill into energy and life, into a pet ‘in the closet’.

  The attempt to train the wild forces of supply and demand by the authorities has really ramped up since 2009. Just four trading days into 2016 the widening of the gyre makes it very obvious that they have failed to create a pet to do their bidding. The wild forces of supply and demand have sought to deliver deflation, at least since 2008, but the falconer has demanded the lift-off of inflation. In the first four trading days of January 2016 it has become even clearer that gravity wins and this bird will not fly.

  Throughout 2015, in four quarterly reports for subscribers, this analyst explained that, no matter where you and might stand, this lever of nominal interest rates is simply insufficient to pivot the world into inflation. Those reports focused on what you should buy given that failure. The rest of this Fortnightly looks at the investment consequences of this failure and what investors should do when ‘the centre cannot hold’.

  The key failure of control is in China because that failure will overwhelm other seeming successes. In 2012 this analyst labelled one chart “the most important chart in the world”. It was a chart of China’s foreign exchange reserves. It showed how they were declining and The Solid Ground postulated that this would produce a decline in real economic activity in China and higher real interest rates in the developed world. The result of these two forces would be deflation, despite the amount of wind puffed below the wings of the global economy in the form of QE.

  Of course, no sooner had this report been issued than China’s grand falconer got to work by borrowing hundreds of billions of USD through its so-called commercial banking system! The alchemical process through which this mandated capital inflow supported the exchange rate while permitting money creation in China stabilized the global economy- for a while.

  However, by 2014 it was ever more difficult to borrow more money than the people of China were desperate to export and the market began to win. Since then foreign reserves have been falling and the grand falconer has tried to support the exchange rate while simultaneously easing monetary policy to boost economic growth. I’m no falconer but isn’t this akin to trying to get a bird to fly while tying back its wings?

  Some investors, well paid to believe six impossible things before breakfast, did not question the ability of the grand Chinese falconer to fly a falcon with tethered wings.

  They changed their minds briefly as the bird plummeted earthwards in August 2015 but still the belief in the ability to reflate the economy and simultaneously support an overvalued exchange rate continued. In January 2016 this particular falcon, let’s call it the people’s falcon, was more ‘falling with attitude’ than flying.

  This bird does not fly and if this bird does not fly the centre does not hold. A major devaluation of the RMB is just beginning and the faith in all the falconers will wane as deflation comes to the world almost seven years after the falconers first fanned the winds of QE supposed to levitate everything.

  The failure to inflate is the failure to destroy debts to the benefit of equity. Investors should be underweight equity. Of course, the decline in corporate cash-flows, associated with deflation, is bad for interest cover and the price of corporate bonds. Some emerging markets (subscribers see Why Deflation Means Default 1Q 2015) will fail to repay their heavy foreign currency debt burdens. This is dreadful news for those running open-ended funds crammed full of illiquid credit instruments- some have closed and more will follow. The Solid Ground pointed out in 4Q last year that the US$34trn open-ended fund business is simply unfit for purpose in a world of waning liquidity. While this dreadful combination leads to a credit crunch that starts in the bond market it must inevitably also impact negatively upon banking systems. Banks, already de facto utilities for the financing of government, are very vulnerable to attack from thousands of bright kids in the fintech industry. Add to their structural demise the risk of credit quality issues and the growing fear of bail-ins by their bond holders (as subscribers know BRRD will be a huge Eurozone story in 2016) and this could get very messy.

  If doctors swear each year to ‘first do no harm’, investors should begin 2016 by reciting ‘first own no banks’.

  Investors who buy the bonds of governments that ultimately control the money-creation process should have an almost zero risk of not receiving their payments of principal and interest. These certain and fixed payments will grow in purchasing power during a deflation and thus their price will be bid up. This analyst remains sceptical as to whether this description of a fiat currency system applies to all those countries currently in the Eurozone.

  ‘Whatever it takes’ may ultimately be constitutionally impossible and the ECB may not be prepared to print sufficient Euros to ensure that every government of the Eurozone makes all payment of principal and interest. If that reality dawns then yield spreads widen in the Eurozone and ultimately your interest and principal may not be repaid in Euros.

  For those investors who have to be in equities, North Asia is the only game in town. They, in the form of China, Japan and probably also South Korea, will win the currency wars. Their success in winning this game triggers the scale of deflation that generates the global credit crunch that is virtually inevitable as deflation takes hold. These jurisdictions may be somewhat alien to sound capital allocation, but they keep that capital humming at high rates of capacity, via devaluations, while more market-orientated systems see their assets under-utilized. This analyst prefers Japan (subscribers see Caught in a Trap 2Q 2015) where some shift to more efficient capital allocation is under way, but even the structurally anaemic corporate capital of China is likely to be bid up as the RMB declines in response to further and further economic stimulus- increasingly possible as the exchange rate is allowed to find its own level. This analyst has never invested in a Chinese equity as he is not sure that Chinese management know what equity is but bright stockpickers can find management in China that does. Hedging all North Asian currency exposure is essential.

  If you had not noticed, 2016 has begun with gold and the USD rising simultaneously. This is different and important. This is very positive for gold and very bad for the world.

  The rise of both together may signal that we have just entered that period when this inert non-yielding substance is preferred to those assets that promise a yield but where the scale of future payments is subject to considerable doubt. Also positive for gold, the advent of deflation, following the failure of the easy reflationary solutions promised by non-elected central bankers, will enfranchise aggressive acts of reflation by our elected representatives. When the tough get going then the going will really get tough- at least if you’re an owner of capital.

  Any political fiat, when monetary fiat fails, will be tantamount, in some way or other, to an attempt to directly control the allocation of capital/savings. History shows that this commences a giant game of hide-and-seek, and while gold may shine brightly it is also moved freely in briefcases and is easily hidden. Paper assets are easily tracked, discovered, conscripted and ultimately denuded in value. For gold to rise while the USD also rises signals that investors are beginning to see through the terrible burden on the price of the shiny stuff from ever-rising real rates of interest extant since 2011. Real rates have further to rise but a few more days of a strong USD and a strong gold price means gold has probably entered a bull market that should last for decades rather than years; its value boosted initially by its ability to avoid conscription, but underpinned by the authorities’ mass mobilization of resources to ultimately generate inflation.

  From 2009-2015 investors were well paid, at least in the developed world, to believe the most impossible of the six things before breakfast: that central bankers can subvert the desires, wishes, greed and fear of millions of people who set prices every day through their actions.

  You now have two choices: keep believing the most impossible thing, or accept that the wild force that establishes market prices has not been tamed. It’s not a pet, it’s a falcon and ‘The falcon cannot hear the falconer’. The ‘people’s falcon’ may be the first to enter ‘a widening gyre’ but it won’t be the only wild force that refuses to be tamed in 2016.

  

  

  

  

  

• Here We Go Again: Chinese Stocks Plunge, Give Up Early Gains Despite Yuan Fix Unchanged

  Update: *SHANGHAI COMPOSITE INDEX FALLS 2.04%(AFTER BEING UP 3.2%)

  

   

  And CSI Futures are tumbling…

  

   

  Not a pretty week…

  

   

  Shifting notavkly from the opening color that we detailed earlier..

  With all eyes on Chinese FX and equity markets, following the worst start to a year for US (and Chinese) stocks in history, PBOC decided (after 7 straight days of devaluation and 7% devaluation since August) to halt the run and increase Yuan fix by a paltry 0.01% to 6.5636 (notably below yesterday's 6.5939 CNY close). Offshore Yuan is strengthening and US equity markets are jumping. Chinese equity markets (now theoretically unhampered by their circuit-breaker panic switch) are far less impressed.

   

  PBOC fixes the Yuan a tiny bit stronger…

  

   

  Offshore Yuan roller-coastered through the US session as Reuters headlines sparked selling pressure after some Treasury-selling/Yuan-tervention…but is rallying on the not bad news…

  

   

  Onshore-Offshore spread has tumbled to 900pips from over 1500…

  

   

  Asian stocks are set for their worst week since 2011 with some notable names in big trouble:

  • *NOBLE GROUP TUMBLES 10%, EXTENDING LOSS, AFTER S&P DOWNGRADE

  While China ETFs trading in US markets signal notable weakness to come for an-"limited" Chinese stock market…

  

   

  Chinese stocks look set for a positive open:

  • *CHINA SHANGHAI COMPOSITE SET TO OPEN UP 2.2% TO 3,194.63
  • *CHINA'S CSI 300 INDEX SET TO OPEN UP 2.4% TO 3,371.87
  • *FTSE CHINA A50 INDEX RISES 2.17%

  And Dow Futures love it… for now…

  

   

  Some context:

  

   

  So no news is good news for now…

  Charts: Bloomberg

  

  

  

  

  

• Natural Gas Prices Signaling Oil Bottom for Investors

  By EconMatters

  

    

  Natural Gas Prices Bottomed

   

  Everyone is trying to figure when the oil markets will bottom. Well lost in all the crazy action in markets globally is the nice resurgence off the bottom for natural gas prices. Natural Gas prices have essentially gone from $1.68 per MMBtu to $2.40 per MMBtu rather rapidly in the midst of a mild winter so far. The reason is that all those rig reductions are starting to affect the production of the commodity, less natural gas is coming to market relative to expectations.

  

   

   

  

    

  The Lag Effect

   

  

   

  The lag effect in all those rig declines is starting to show up in the natural gas production numbers, and although the cut in oil rigs hasn`t shown up yet in oil production in a meaningful way, it is just around the corner over the next three months by my calculation. We should start to experience some meaningful U.S. Oil Production cuts by late March and early April which will solidify the fact that the oil market had long sense bottomed in January of this year.

   

  Rigs
  	Fri, January 01, 2016	Change from
  		last week	last year
  Oil rigs	536	-0.37%	-63.83%
  Natural gas rigs	162	0.00%	-50.61%
  Miscellaneous	0	0.00%	-100.00%

   

   

   

  Rig numbers by type
  	Fri, January 01, 2016	Change from
  		last week	last year
  Vertical	89	3.49%	-70.33%
  Horizontal	549	-0.90%	-58.91%
  Directional	60	0.00%	-65.71%
  Source: Baker Hughes Inc.

   

   

   

  Working gas in underground storage
  	Stocks billion cubic feet (bcf)
  Region	2016-01-01	2015-12-25	change
  East	857	876	-19
  Midwest	983	1,025	-42
  Mountain	185	195	-10
  Pacific	381	382	-1
  South Central	1,347	1,340	7
  Total	3,643	3,756	-113
  Source: U.S. Energy Information Administration

   

   

   

  Market Investment

   

  

   

  By the time everyone realizes that the oil market has bottomed it is too late to make the real good, easy money off the bottom, just like in natural gas prices. You have to be willing to step in and take the risk that prices haven`t bottomed. You basically are getting paid to buy when everyone else is selling the market, in essence, blood in the streets is the market analogy. We accurately called the bottom in natural gas prices, we will see how close we are in the oil markets. But we know that any investment right now in the oil market where one can stay in the trade, and not be liquidated for any reason, i.e., bankruptcy risk in insolvent company – is going to make money over a two year time frame. Moreover, the reward will far and above exceed the risk involved, and the performance of said trade will greatly outperform the overall market returns of most other asset alternatives.

  © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle

  

  

  

  

• It's Official: Bitcoin Was The Top Performing Currency Of 2015

  For most investors, the major story of 2015 was the expectation and eventual fulfillment of a rate hike, signalling the start of tightening monetary policy in the United States. This policy is divergent to those of other major central banks, and this has translated into considerable strength and momentum for the U.S. dollar.

  Using the benchmark of the U.S. Dollar Index, a comparison against a basket of major currencies, the dollar gained 8.3% throughout the year.

  Despite this strength, the best performing currency in 2015 was not the dollar. In fact, the top currency of 2015 is likely to be considered the furthest thing from the greenback.

  Bitcoin, a digital and decentralized cryptocurrency, staged a late comeback in 2015 to overtake the dollar by a whopping 35% by the end of the year.

  

  Courtesy of: The Money Project

   

  Bitcoin is no stranger to extremes. During the year it came into the mainstream in 2013, Bitcoin gained 5,429% to easily surpass all other currencies in gains. However, the following year it would become a dog, losing -56% of its value to become the world’s worst performing currency in 2014.

  The second best performing major currency, relative to the USD, was the Israeli shekel. It gained 0.3% throughout the year, and the Japanese yen (0%) and Swiss franc (0%) were close behind, finishing on par with how they started the year.

  The world’s worst performing currencies are from countries that were battered by commodities or geopolitical strife.

  Ukraine’s hryvnia fell -33.8% in the aftermath of Crimea. Brazil’s real (-30.5%), the Canadian dollar (-15.9%), Russian ruble (-20.8%), and South African rand (-26.7%) all lost significant value in the purging of global commodities. Gold finished the year down -10%, and silver at -11%.

  And as China devaluation accelerates, Bitcoin has been surging since the start of the year…

  

  

  

  

  

  

• What China Has To Look Forward To When It Opens In A Few Hours

  It’s all up to China tonight, and if early ETF indications are correct, today’s US equity bloodbath is about to spill over right back into Chinese markets again, only this time without the benefit of circuit breakers making it an early close for local traders if they manage to push the market down 7% in 29 minutes.

  Moments ago, on Bloomberg TV, Bill Gross said China’s stock markets are likely to drop 5-6% on Friday: “Based upon the ETF in the United States, China is predicted to be down 5 percent or 6 percent…but China is an artificial market.  All global markets are artificially based and to the extent that we have a catharsis, I think, depends upon central banks basically giving up in terms of what they do.  I don’t think that’s going to happen.”

  Gross is referring to the following ETF:

  

   

  Indeed, it appears that the US is far more bearish on what will happen in China tonight relative to the local futures market:

  

  Incidentally, when asked whether the market turmoil will cause Chair Yellen to say the rate hike is done, Gross said: “I don’t think she’ll say that. They’ve been on this track of raising interest rates for so long that she’s not going to come out with one or done. She may come out there — someone may come out – Fischer perhaps – will come out and acknowledge the fact that global markets and that global financial conditions are an important consideration in terms of future policy. But I don’t think they’re going to divulge that they are not raising interest rates for times as Stan Fischer said a few days ago.”

  In other words, central banks to the rescue. Meanwhile…

  Angry clients besiege Chinese brokerages

  Back in China, which has had non-functioning markets on two of the past four days, should the market rout persist, the already angry local “traders”, most of whom are undereducated and margined to the hilt, will likely snap.

  

  According to Bloomberg, after yesterday’s farce, angry clients besieged a brokerage as China’s market crashed and was halted.

  “We cannot go home. We are dealing with a flood of angry phone calls from clients complaining about the market plunge and the circuit-breaker system,” says Wei Wei, an analyst at Huaxi Securities Co. in Shanghai. Wei added that “we are also feeling at a loss and confused today as we didn’t quite figure out what was going on.”

  

  Wei also says that Huaxi management “has asked us to placate clients and guide them to cut holdings rationally if they do margin trading.”

  Sorry, but when clients have not only lost a year’s worth of income in minutes but on top of that can’t liquidate the remainder, no amount of placating will work.
  

  Wei then explained what even the Chinese regulator realized after the first few days of experimenting with the new circuit breaker: “the circuit-breaker mechanism actually fuels declines and that goes against the regulator’s goal of stabilizing the market.” It remains to be seen if removing the circuit breaker, a device by definition meant to stabilize markets, will lead to calmer markets. Maybe for the first few minutes, but then all bets are off.

  

  “The new rule on major shareholders’ stock sales isn’t going to work to prevent the market from falling. It’s restricting sales and the CSRC cannot do things like banning them from selling forever. It’ll be a tough day again tomorrow.“

  The circuit breaker has been removed, but we feel it will be just as tough tomorrow, or rather, when China opens in a few hours.

  In the US, traders are “too old for this”

  It’s not just Chinese traders. According to another Bloomberg report, US traders “can’t afford to sleep” during what is becoming a nightly rout, starting just around 8:30pm Eastern. 

  With China’s stock market in disarray, American investors are finding out just how long their day can last — before they even get to work.

  “This morning when I rolled over in my bed at 4 a.m. to check the markets and saw what happened in China and in U.S. futures I thought, ‘Oh, here we go,’” said Howard Ward, who oversees $42.7 billion as the chief investment officer of growth equities at Gamco Investors Inc. “I’m getting too old for this.”

  It’s a cowboy market

  “If it’s somebody who really doesn’t know a lot about China, this is kind of scary. They say, ‘Oh my god, their market can drop 7 percent,’” said Nick Sargen, who helps manage $46.2 billion as chief economist and senior investment adviser for Fort Washington Investment Advisors Inc. “The reason I can be more calm about it is that I follow that market, I can say, listen it’s a cowboy market.”

  Bloomberg concludes by saying that “night owls have been rewarded for at least a year as China’s influence moved action in U.S. stocks to hours when exchanges were closed. In 2015, shares in the S&P 500 swung more during off hours than their small-cap brethren for the first time in at least 15 years.” 

  So far this year, the only privilege night owls have had is to watch as China loses control of its market on half the trading days so far.

  * * *

  So what happens tonight? Keep an eye on the Yuan fixing around 8 pm: if the USDCNY sees another substantial jump (i.e., Yuan decline) from last night’s 5 year low rate of 6.5646, this could suggest further turbulence and as all self-fulfilling prophecies go, unleash another pukefest which not even the circuit breaker adjustment will fix. It will also mean that unless the Chinese plunge protection team aka the “National Team” throws everything it has at the stock market, the Shanghai Composite could fall first 5%, then 7%, and then not stop but simply keep falling until someone finally does step in.

  In short: it will all be about a central bank rescue again.

  But for now either go load up on coffee, or take a nap. It will be a long night.

  

  

  

  

  

• "We Came, We Saw, He Died" – Revisiting The Incredible Disaster That Is Libya

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  In retrospect, Obama’s intervention in Libya was an abject failure, judged even by its own standards. Libya has not only failed to evolve into a democracy; it has devolved into a failed state. Violent deaths and other human rights abuses have increased severalfold. Rather than helping the United States combat terrorism, as Qaddafi did during his last decade in power, Libya now serves as a safe haven for militias affiliated with both al Qaeda and the Islamic State of Iraq and al-Sham (ISIS). The Libya intervention has harmed other U.S. interests as well: undermining nuclear nonproliferation, chilling Russian cooperation at the UN, and fueling Syria’s civil war.?

   

  As bad as Libya’s human rights situation was under Qaddafi, it has gotten worse since NATO ousted him. Immediately after taking power, the rebels perpetrated scores of reprisal killings, in addition to torturing, beating, and arbitrarily detaining thousands of suspected Qaddafi supporters. The rebels also expelled 30,000 mostly black residents from the town of Tawergha and burned or looted their homes and shops, on the grounds that some of them supposedly had been mercenaries. Six months after the war, Human Rights Watch declared that the abuses “appear to be so widespread and systematic that they may amount to crimes against humanity.”?

   

  As a consequence of such pervasive violence, the UN estimates that roughly 400,000 Libyans have fled their homes, a quarter of whom have left the country altogether. ?

   

  – From the post: The Forgotten War – Understanding the Incredible Debacle Left Behind by NATO in Libya

  Shortly after the NATO-led war which ousted Libyan leader Muammar el-Qaddafi, then Secretary of State Hillary Clinton ebulliently boasted with a characteristic sociopathic giddiness, the following on network television:

  Indeed, from Iraq to Libya, and indeed across the entire planet, the U.S. government has an uncanny ability to take an already bad geopolitical situation and turn it into a complete and total chaotic humanitarian disaster. It’d be one thing if the woman in the above video clip had been disgraced and forced into exile in Chappaqua, but the disturbing reality is she will most likely be promoted to the next President of these United States.

  In order to fully appreciate what a clueless homicidal maniac she is, let’s reexamine the unmitigated nightmare that is Libya. A nightmare that Clinton and her interviewer laughed uncontrollably about creating.

  From Reuters:

  At least 47 people were killed on Thursday when Libya’s worst bomb attack since the fall of Muammar Gaddafi hit a police training center as hundreds of recruits gathered for a morning meeting.

   

  No group immediately claimed the attack in the town of Zliten, but suicide blasts and car bombings have increased in Libya as Islamist militants have taken advantage of the North African country’s chaos to expand their presence.

   

  Since a NATO-backed revolt ousted Gaddafi, Libya has slipped deeper into turmoil with two rival governments and a range of armed factions locked in a struggle for control of the OPEC state and its oil wealth.

   

  In the chaos, Islamic State militants have grown in strength, taking over the city of Sirte and launching attacks on oilfields. Islamic State fighters this week attacked two major oil export terminals.

   

  Western powers are pushing Libya’s factions to back a U.N.-brokered national unity government to join forces against Islamic State militants, but the agreement faces major resistance from several factions on the ground.

   

  For more than a year, an armed faction called Libya Dawn has controlled Tripoli, setting up its own self-declared government, reinstating the former parliament and forcing the recognized government to operate in the east of the country.

   

  Western officials say forming a united government would be the first step in Libya seeking international help to fight against Islamic State, including training for a new army and possible air strikes against militant targets.

  But hey…

  

  Finally, if you want to understand just how long the war against Syria has been in the works (before ISIS became a huge problem), let’s revisit the following 2011 tweet by “Crazy” John McCain:

  Qaddafi on his way out, Bashar al Assad is next.

  — John McCain (@SenJohnMcCain) August 21, 2011

  And you wonder why the world is in the state it’s in…

  For related articles, see:

  The Forgotten War – Understanding the Incredible Debacle Left Behind by NATO in Libya

  Tunisian Terror Attack Suspects Trained in U.S. “Liberated” Libya

  Incredible Tweets from John McCain on Libya and Syria from 2009 and 2011

  How the Clinton Foundation Paid Sidney Blumenthal $10K per Month as He Gave Horrible Libya Advice to the State Dept.

  

  

  

  

  

• Bloodbath

  You know it's bad when…

  THERE IT IS 7pm ET pic.twitter.com/ufjczF1cYY

  — Ivan the K™ ? (@IvanTheK) January 7, 2016

  But, but, but… Fed… FANGs… Decoupled… Services… Netflix… Unicorns… Cramer…

   

  The day started badly (as China devaluation stress crushed carry trades and sucked liquidity out of the world, slamming USDJPY, US stocks, bond yields, credit, crude, and copper lower)…no late-day rally today!

  

   

  *CANADA STOCKS ENTER BEAR MARKET AFTER 20% DROP FROM SEPT. 2014

  

   

  All that hope as China lifted its circuit-breaker rule and crude briefly rallied… but stocks carnaged back to overnight lows late in the day… Another bounce into the European close then SELL MORTIMER SELL into NYMEX close

  

   

  Since the start of December, it's ugly…

  

   

  The NASDAQ is rapidly losing its post-QE3-End gains…

  

   

  "Policy Error" Much?

  

   

  "No Brainer" is down 28% from its highs…*APPLE CLOSES AT $96.45; FIRST CLOSE BELOW $100 SINCE OCT. 2014

  

   

  FANTAsy stocks tumbled deep into the red for the year (yes even NFLX!!) Facebook, Amazon, Netflix, Tesla, and Alphabet… all red…

  

   

  Financials caught down to credit…But just keep talking up NIM and their "no brainer"-ness

  

   

  VIX pushed above 25…

  

   

  VIX term structure inverted…

  

   

  Credit suggests more to come..

  

   

  Stocks are "getting there"…

  

   

  Catching down to breadth…

  

   

  Away from the excitement of stocks…

  Treasury yields tumbled further (some selling pressure as CNH defense suggested China selling)…

  

   

  The USD Index tumbled back into the red for the week as JPY strength continued…

  

   

  USDJPY closes at 11 month lows…

  

   

  Commodities split between growth and safety as PMs rallied and crude, copper crumbled…

  

   

  as Gold and Silver Surged…

  

   

  Charts: Bloomberg

  Bonus Chart: What did you think would happen?

  @federalreserve what did yoiu think would happen? pic.twitter.com/psI62Uszcr

  — Not Jim Cramer (@Not_Jim_Cramer) January 7, 2016

  

  

  

  

• Slovak PM Closes The Door To Refugees: "We Don't Want What Happened In Germany To Happen Here"

  Earlier today, Slovak Prime Minister Robert Fico formally stood up to the Brussels supergovernment juggernaut and said his government will not allow Muslims to create “a compact community,” adding that integrating refugees is impossible.

  Slovakia has a tiny Muslim community of several thousand.

  Fico’s government filed a legal challenge last month to a mandatory plan by the European Union to distribute migrants among members of the bloc.

  Fico said Thursday his government sees what he calls a “clear link” between the waves of refugees and the Paris attacks and the sexual assaults and robberies during the New Year’s Eve festivities in Germany.

  He says: “We don’t want what happened in Germany to happen here.”

  Fico says “the idea of multicultural Europe has failed” and that “the migrants cannot be integrated, it’s simply impossible.”

  * * *

  After the past week’s events in Cologne, we wonder if there is anyone left in Germany who disagrees.

  

  

  

  

  

• Why The U.S. Can't Be Called A "Swing Producer"

  Submitted by Arthur Berman via OilPrice.com,

  Daniel Yergin and other experts say that U.S. tight oil is the swing oil producer of the world.

  They are wrong. It is preposterous to say that the world’s largest oil importer is also its swing producer.

  There are two types of oil producers in the world: those who have the will and the means to affect market prices, and those who react to them. In other words, the swing producer and everyone else.

  A swing producer must meet the following criteria:

  • A swing producer must be a net exporter of oil.
  • A swing producer must have enough daily production, spare capacity and reserves to influence market prices by balancing supply and demand through increasing or decreasing output.
  • A swing producer must be able to act authoritatively and quickly to increase or decrease output.
  • In the real world, a swing producer is a euphemism for a cartel. No single producer has enough oil leverage to balance the market and influence prices by itself. That includes Saudi Arabia, Russia, and the United States, the top 3 producers in the world. Obviously, it also includes U.S. tight oil.
  • A swing producer must have low production costs and have the financial reserves to withstand reduced cash flow when restricting or increasing supply is necessary to balance the market.

  So, let’s go down the list for OPEC and U.S. tight oil.

  OPEC’s net exports for 2014 were 23 million barrels per day (mmbpd) (Figure 1). U.S. net exports were -7 mmbpd. In other words, the U.S. is a net importer of crude oil. A net importer of oil cannot be a swing producer.

  

  Figure 1. OPEC and U.S. 2014 net crude oil exports.
  Source: OPEC & Labyrinth Consulting Services, Inc.

  (Click image to enlarge)

  This will not be substantially changed by the repeal of the crude oil export ban because U.S. consumption of crude oil (16.3mmbpd) exceeds domestic production (9.2 mmbpd) by 7.1 mmbpd. If exports of tight oil increase, imports will have to increase by an equal amount to meet demand.

  That should be enough to end the discussion about whether U.S. tight oil is a swing producer but I will finish going through the list.

  OPEC exists because none of its members alone meet the criteria needed to balance the market and affect prices. OPEC produces 31.4 mmbpd of the crude oil + condensate (47 percent of world production). It has approximately 1.5 million barrels per day (mmbpd) of spare capacity, and it has 72 percent (1220 billion barrels of oil) of the world’s proven reserves (Figure 2). The members of the cartel represent countries whose leaders have the authority to cut or increase oil production at will. Saudi Arabia alone has about $660 billion in cash reserves. Its production costs are less than $10 per barrel.

  

  Figure 2. Comparison of OPEC and U.S. tight oil production, spare capacity and reserves.

  Source: EIA, Drilling Info & Labyrinth Consulting Services, Inc.

  (Click image to enlarge)

  U.S. tight oil accounts for less than 5 percent of the world’s production of crude oil + condensate (3.7 mmbpd). It has approximately 0.23 mmbpd of spare capacity and less than 1 percent of the world’s proven reserves (13 billion barrels of oil). U.S. tight oil producers do not and cannot act together. Tight oil producers spend twice as much money as they make, and have up to 5 times more debt than annual revenue. Its production costs are $65-$70 per barrel.

  U.S. tight oil is on life-support at $35 per barrel oil prices.

  OPEC is a swing producer. U.S. tight oil is not.

  Truth vs. Confirmation Bias

  In April 2015, Yergin told CNBC, “What does it mean when you say the U.S. is the new swing producer? It’s much easier to swing down than swing up.”

  What he meant was that over-production of U.S. tight oil helped cause the global price of oil to collapse in 2014, to swing down. It had nothing to do with really being the swing producer.

  That was a few days before CERA Week, the pricey annual love-fest that Yergin’s company IHS throws in Houston for the oil and gas industry to feel good about itself. It was a clever-sounding trailer to publicize the $7,000-per-ticket event.

  Later, in June 2015, Yergin told the Wall Street Journal that “now the U.S. is a swing producer, albeit an inadvertent swing producer as it didn’t set out to take that role.”

  A swing producer cannot be inadvertent. A swing producer deliberately increases or decreases its production to balance the market, whether for short-term price advantage, or for demand stimulation and long-term price advantage and market-share.

  Either Yergin doesn’t understand what a swing producer is or his swing-producer comments were manipulative and meant to support some agenda.

  Many Americans want to believe that the U.S. is nearly energy independent and a major geopolitical force in the world because of oil and gas production from shale. They would like to stick America’s thumb in OPEC’s eye.

  Yergin said the U.S. was the new swing producer. What was heard was that America had made OPEC impotent. It was repeated enough by the press and other supposed experts that its truth was confirmed because people want to believe it–even though it is untrue.

  Confirmation bias is the tendency to find support for our preconceptions. It may make us feel good but it is a poor basis for decisions. Investors beware.

  

  

  

  

  

• For Commodities, This Is The Next Great Depression

  While the “sell in 1973, and go away” plan had worked out for some in the commodity space, the destruction of the last decade has only one historical comparison… the middle of The Great Depression.

  The 10-year rolling annualized return for commodities is -5.1% – the lowest since 1938…

  

   

  During the same period Stocks are up 7.3% annualized, Bonds 6.6%, and Cash unchanged. Dip-buying opportunity? Maybe.

  UBS thinks so: Tactically we can see a bounce in Q1 before the capitulation starts

  Tactically, in September 2015, we actually expected a more significant oversold bounce in commodities from last year’s late September risk bottom into ideally early Q2 2016 before we anticipated more weakness into later 2016. So far, the bounce failed since particularly in the energy complex we saw further weakness into December and the metals have been actually just trading sideways. Nonetheless, according to our Q1 US dollar pullback call, we still see the chance for another rebound attempt in commodities into later Q1, and if so the move can be significant (short covering). Such a rebound would however not change our underlying cyclical roadmap for commodities, and this means that any rebound in Q1 should be limited in price and time before we expect another and potential final capitulation wave to start into H2 2016, where we expect the CCI index to minimum test its 2008 low at 350 to worst case 320.

  Commodities… on the way into a multi-year buying opportunity

  All in all we are sticking to our last year’s projection and strategy call that commodities are on the way into an important H2 2016/early2017 cyclical bottom. What is missing in our view is the final act in this first bear market. With our expectation to see a final US dollar overshooting into H2 2016, we obviously also see the risk of a final undershooting and capitulation in commodities and related themes into later 2016. Crude oil, and as long as we do not see a break of the 2014 bear trend, we see minimum a test of its 2008 low at around $32 to worst case undershoot to $28 before starting a significant recovery cycle into 2017. For copper we are still more cautious since so far the bear cycle was still relatively mild versus other commodities. In this context, and after a Q1 rebound, we see copper as one of the candidates where we could see a bigger undershooting towards 1.70 to worst case see a test of the 2008 bottom at around 1.20.

   

  On the macro side, another breakdown in commodity prices in later 2016 would very likely trigger a significant spike in cross-asset volatility. It would suggest minimum the speculation about selective defaults in the commodity area and a potential meltdown scenario in high yields, which would very likely filter through into Emerging Market debt. So on the one hand such a scenario would suggest another deflationary impulse on the macro side.

   

  However, with expecting crude oil and other commodities moving into a major cycle bottom (even if a basing process would take a longer time into 2017), and taking into account the historically low basis of commodity prices as well as the base effect in inflation, a 2016/2017 deflationary impulse could be the final deflationary impulse before starting a bigger comeback of inflation towards the end of the decade.

   

  So although tactically, we cannot rule out a volatile basing process in commodities into 2017, at the end of the day we see commodities from a late 2016/early 2017 bottom starting a multi-year bear market rally into the end of the decade before resuming its underlying secular bear into the first half of the next decade. For investors, this would open a time window of 2 to 3 years, where we can see a very significant and sharp bull cycle in commodity prices, and this scenario would obviously also have far reaching consequences for Emerging Markets, where we should see a big comeback starting.

  But stocks and bonds are not exactly doing great either…

  

  

  

  

  

  

• Perth Mint Silver Coins Sales Surge 56%, Gold Sales Drop 16% In 2015

  Perth Mint Silver Coins Sales Surge 56%, Gold Sales Drop 16% In 2015

  The Perth Mint’s annual silver coins sales surged 56%, while gold sales fell 16% in 2015, as silver stackers continued to accumulate silver coins and bars and the new silver nugget or kangaroo coin (1 oz and 5 oz) saw very high levels of demand.

  

  The Perth Mint’s gold sales rose in December from the prior month, but annual sales slid by nearly a fifth in 2015. Gold sales in December rose to 40,096 ounces from 31,664 ounces in November, the mint said on its website on Wednesday as reported by Reuters.

  While gold sales  rose in December from the prior month, but annual gold sales slid by nearly a fifth in 2015. Sales slid 16 percent for the year, after dropping by a third in 2014.

   

  
  Note: Sales figures in ounces. Gold sales include coins and minted bars. Silver figures include only coins as the mint does not issue silver minted bars.

  The Perth Mint’s silver sales in December eased to 1.08 million ounces from 1.15 million ounces in the previous month.

  For the year, they surged about 56 percent to 11.8 million ounces. The mint sold a record 3.5 million ounces of silver in September alone on strong demand after the launch of the new silver coins and as prices fell to multi-year lows.

  Bullion buyers continue to accumulate and see silver at $14 per ounce as great value vis a vis gold ($1,100 per ounce), stocks and many other investments.

  Follow GoldCore on Twitter, Facebook, LinkedIn

  

  

  

  

• Perfect Storm!?

  Submitted by John Rubino via DollarCollapse.com,

  One of the (many) fascinating things about this latest global financial crisis is that there’s no single catalyst. Unlike 2008 when the carnage could be traced back to US subprime housing, or 2000 when tech stocks crashed and pulled down everything else, this time around a whole bunch of seemingly-unrelated things are unraveling all at once.

  China’s mal-investment binge is crashing global commodities, an overvalued dollar is crushing emerging markets (most recently forcing China to devalue), the pan-Islamic war has suddenly gone from simmer to boil, grossly-overvalued equities pretty much everywhere are getting a long-overdue correction, developed-world political systems are being upended as voters lose faith in mainstream parties to deal with inequality, corporate power, entitlements, immigration, really pretty much everything. For one amusing/amazing example of the latter problem, consider Germany’s response to the mobs of men that suddenly materialized and began molesting women: Cologne mayor slammed after telling German women to keep would-be rapists at arm’s length.

  Why do causes matter at times like this? Because where previous crises were “solved” with a relatively simple dose of hyper-easy money, it’s not clear that today’s diverse array of emerging threats can be addressed in the same way. Interest rates, for instance, were high by current standards at the beginning of past crises, which gave central banks plenty of leeway to comfort the afflicted with big rate cut announcements. Today rates are near zero in most places and negative in many. Cutting from here would be an experiment to put it mildly, with myriad possible unintended consequences including a flight to cash that empties banks of deposits and a destabilizing spike in wealth inequality as negative interest rates support asset prices for the already-rich while driving down incomes for savers and retirees.

  And with debt now $57 trillion higher worldwide than in 2008, it’s not at all clear that another borrowing binge will be greeted with enthusiasm by the world’s bond markets, currency traders or entrepreneurs. Here’s that now-famous chart from McKinsey:

  

  Easier money will have no effect on the supply/demand imbalance in the oil market, which is still growing. The likely result: Sharply lower prices in the year ahead, leading to a wave of defaults for trillions of dollars of energy-related junk bonds and derivatives.

  As for stock prices, in the previous two crises equities plunged almost overnight to levels that made buying reasonable for the remaining smart money. Today, virtually every major equity index remains high by historical standards, so the necessary crash is still to come — and will add to global turmoil as it unfolds.

  The upshot? It really is different this time, in a very bad way. And this fact is just now dawning on millions of leveraged speculators, mutual fund and pension fund managers, individual investors and central bank managers. Right this minute virtually all of them are staring at screens, scrolling over to the sell button, hesitating, pulling up Bloomberg screens showing how much they’ve lost in the past few days, calling analysts who last year convinced them to load up on Apple and Facebook, getting no answer, going back to Bloomberg and then fondling the sell button some more. Think of it as financial collapse OCD.

  What happens next? At some point — today or next week or next month, but probably pretty soon — the dam will break. Everyone will hit “sell” at the same time and find out that those liquid markets they’d come to see as normal have disappeared and yesterday’s prices are meaningless fantasy. The exits will slam shut and — as in China last night where the markets closed a quarter-hour into the trading session — the whole world will be stuck with the positions they created back when markets were liquid and central banks were omnipotent and government bonds were risk-free and Amazon was going to $2,000.

  And one thought will appear in all those minds: Why didn’t I load up on gold when I had the chance?

  

  

  

  

  

• Pizza And Assault Rifles: Inside The Occupied Oregon Wildlife Refuge

  When last we checked in on Ammon Bundy and his band of “patriots”, Harney County Sheriff David Ward was getting fed up with the group’s occupation of the Malheur National Wildlife Refuge.

  “It is time for you to leave our community, go home to your families, and end this peacefully,” Ward said on Tuesday.

  But Ammon Bundy and the handful of armed militiamen holed up at the remote, snowy federal outpost have no such plans. The “Citizens for Constitutional Freedom” (as they now call themselves) are in it for the long haul and have pledged, at various times since “seizing” the office last Saturday, to remain in the building “for years.”

  

  While it’s not entirely clear what Bundy wants, the group’s professed goal is to “”restore the rights to people so they can use the land and resources.” Here’s a bit of helpful color from Terry Andersen, the William A. Dunn Distinguished Senior Fellow at the Property and Environment Research Center and the John and Jean DeNault Senior Fellow at the Hoover Institution (from a New York Times op-ed):

  Their goal harkens back the “Sagebrush Rebellion” of the 1970s, though their tactics are more draconian. Then the rebels called for more local control of federal lands, if not outright transfer of title to those lands to the states, and such solutions are still worth considering.

   

  The impetus for the Oregon occupation is the imprisonment of a father and son for setting fire to federal lands to control invasive species moving to private lands and to help prevent wildfires, a huge land management problem in the West.

   

  Living in the mountains south of Bozeman, Mont., I feel their pain because every summer I fight spotted knapweed, an invasive plant spread from my national forest neighbors, and I fear that wildfire will spread from the unmanaged federal land.

   

  The second cause is “multiple conflicts over multiple uses.” At the time of the Sagebrush Rebellion the list of multiple uses that federal land agencies were to manage was huge. It is growing exponentially.

   

  Western ranchers, loggers, farmers and, yes, even government bureaucrats with their feet on the ground could provide the stewardship sought by the rebels in Oregon. Now that armed confrontation has brought attention to their cause, we need to consider policies that will devolve management to lower levels of government and get the incentives right for encouraging environmental and fiscal responsibility

  And here’s a bit more from Salon:

  The Bundys have been up in arms about where their cattle can and can’t roam, and their father, Cliven, owes more than $1 million in grazing fees. And the Hammonds are being punished for setting fire to public land. If you live in some other part of the country—in, say, a bustling East Coast city—what do ranching restrictions and arson have to do with you? The short answer: The land use regulations that the occupiers of the Malheur Refuge are fighting go far beyond where cattle can roam. How we use our land determines what comes out of it in the form of extracted resources, which then affects so much else, from what kind of air we breathe to how many earthquakes we experience–not to mention our changing climate. It would not be a stretch to say that caring about land use means caring about the fate of our planet.

   

  In his “Wilderness Letter,” Wallace Stegner wrote that we need to preserve wilderness “even if we never once in ten years set foot in it.” Wild lands, according to Stegner, are important “simply as an idea.” But land use is about much more than what land we preserve as wilderness, or even what land we set aside for recreation and enjoyment. While wilderness is indeed valuable, there is plenty of non-wilderness public land whose fate matters just as much.

   

  The Sagebrush Rebels argue that this federal land should’ve belonged to the states to begin with, according to a clause under the Doctrine of the Equality of States, which says new states enter the union “on an equal footing with the original States in all respects whatever.” Several Western states were required to disclaim their sovereignty over unappropriated lands when they became states, and the Sagebrush Rebels have never gotten over it. This is why they continue to demand the “return” of federal land to the states—though that would necessitate the land once having belonged to the states, and it never really did.

  Ok, so Bundy, like his father, has become something of a folk hero among states’ rights advocates and he’s essentially hijacked the Hammond brush fire case and transformed it into a justification for the armed occupation of a federal building. 

  Of course it’s probably occurred to Bundy – if not to every member of the Citizens for Constitutional Freedom – that the US government couldn’t legislate its way out of a wet paper bag let alone fruitfully revisit a grand debate on land use and state’s rights. That is, Washington is mired in partisan bickering that’s created the worst Congressional gridlock in recent memory which means that even if someone cared to address Bundy’s concerns, they couldn’t. 

  But Bundy is apparently ready to wait around in the woods until something happens. “There is a time to go home. We recognize that. We don’t feel it’s quite time yet,” he said on Wednesday. “We feel like we need to make sure that the Hammonds are out of prison, or well on their way. We need to make sure that there is some teeth in these land transfers, and also that those who have committed crimes … those are exposed as well.”

  In the meantime, Reuters got an inside look at life inside occupied bird sanctuary. Here are some excerpts from their account:

  The doorknob rattled. Two of the men occupying a federal biologist’s office in a stand-off over land rights hopped from their chairs and swung rifles toward the locked door.

   

  There was no knock – the established procedure for gaining entry to the nerve center of the siege mounted by brothers Ammon and Ryan Bundy at this eastern Oregon nature center.

   

  The Bundys’ body guard stood in silent alert but heard no voices from the snowy darkness outside.

   

  “Should we approach the door or not?” Ryan asked, creeping toward a window.

   

  On Tuesday, for the first time, they allowed two reporters to join them inside their refuge for a night marked by long discussions and moments of hair-trigger tension.

   

  As the two Reuters’ reporters arrived just after nightfall, the occupiers were moving into a state of high alert. The groups’ head of security, a man known as Buddha, had been out of touch since driving off-site hours earlier. Amid efforts to locate him, the Bundys talked at length about what had brought them into this wilderness–and what it would take for them to leave.

   

  “When we can say, ‘OK, now we can go home,’ would be when the people of Harney County are secure enough and confident enough that they can continue to manage their own land and their own rights and resources without our aid, ” Ryan Bundy said. “And we intend to turn this facility into a facility that will aid that process.”

   

  The brothers have taken over the cozy and cluttered office of Linda Sue Beck, a biologist and civil servant they have come to view as a symbol the federal government. They said they would allow Beck to come to gather her personal belongings. But they don’t want her to return to work.

   

  “She’s not here working for the people,” declared Ryan Bundy, the more outspoken of the brothers. “She’s not benefitting America. She’s part of what’s destroying America.”

  Yes, Linda is “part of what’s destroying America.” Behold, the face of government oppression:

  

  And while we doubt that Linda will be stopping by to “gather her personal belongings,” Bundy says the group is expecting visitors soon. On Tuesday Bundy said that based on information he received from an unnamed source, the FBI has obtained five arrest warrants, and is “gathering their equipment and their goons” at a local high school. “They were planning on coming in and raiding the refuge,” he added. 

  As Reuters goes on to note, there are times when the group questions themselves. “When is it enough to put yourself and other people’s lives on the line? Is it justified? Maybe in the end we’ll look at each other and say, ‘What are we doing?’” 

  Yes, “maybe.” But until then, many of the men suggest that if push comes to shove, they’re prepared to die for Bundy and his cause. On that note, we’ll close with a quote from Wes Kjar, a 31-year-old oil rig worker who’s convinced the FBI is set to storm the building:

  “I’m not saying I want to die. I want to surrender. But I want to surrender on the right terms.”

   

  

  

  

  

  

  

  

  

  

   

   

  The full clip is below:

  

  

  

  

• Aliso Canyon's Historic Gas Leak Puts Sempra Energy In "Uncharted Regulatory Territory"

  Sempra Energy may be entering uncharted regulatory and technical territory with the massive and uncontained Aliso Canyon gas leak, according to Bloomberg Intelligence, as the company and its regulators simply cannot find historical leaks of this magnitude. Sempra’s Southern California Gas Co. is drilling a relief well but has warned that capping the well could take two months which has prompted massive evacuations in the area, the instigation of a no-fly zone, and now Governor Brown's declaration of a state of emergency to protect residents.

  Governor Brown's statement (excerpted here):

  Given the prolonged and continuing duration of the Aliso Canyon gas leak and at the request of residents and local officials, Governor Edmund G. Brown Jr. today issued a proclamation that declares the situation an emergency and details the administration's ongoing efforts to help stop the leak. The order also directs further action to protect public health and safety, ensure accountability and strengthen oversight of gas storage facilities.

   

  Earlier this week, Governor Brown met with Porter Ranch residents and toured the Aliso Canyon Natural Gas Storage Facility, including the site of the leak and one of the relief wells.

   

  Today's proclamation builds on months of regulatory and oversight actions from seven state agencies mobilized to protect public health, oversee Southern California Gas Company's actions to stop the leak, track methane emissions, ensure worker safety, safeguard energy reliability and address any other problems stemming from the leak.

  Sempra’s Southern California Gas Co. is drilling a relief well that it expects will stop the gas from escaping from the well located in the Aliso Canyon storage facility, the fourth-largest underground field in the U.S. The utility has said capping the well could take two months.

  Through Dec. 31, Sempra has spent about $50 million on addressing the leak and environmental and community impacts, including the temporary relocation of residents, according to a regulatory filing Thursday. Sempra also said it has made seven unsuccessful attempts to plug the leak by pumping fluids down the well shaft and that it may face fines and penalties as a result of the incident.

  However, as TheAntiMedia.org's Dave Smith reports, scientists and engineers are finding it difficult to contain the largest natural gas leak ever recorded – since late October, an estimated 73,000 tons of methane, a highly flammable gas 25 times more potent as a greenhouse gas than carbon dioxide, has escaped from an energy facility in Aliso Canyon, California; and there is no immediate end in sight.

  According to Anne Silva, spokesperson for the Southern California Gas Company or SoCalGas the company that owns the facility, since the base of the well sits 8,000 feet underground, efforts to stop the flow of gas by pumping fluids directly down the well have not yet been successful. Therefore, the company is now constructing a relief well that will connect to the leaking well.

  

   

  In a letter to the community affected by the leak, which came after Governor Brown directed DOGGR and CPUC to launch investigations into the cause of the leak and whether any violations have taken place, CEO Dennis Arriola said:

  “We are making good progress on drilling a relief well to stop the leak and are on schedule to complete it by late-February to late-March. The relief well will intercept the leaking well at more than 8,000 feet below ground and the operation is continuing around the clock, 24 hours, 7 days a week. As of December 19, we have drilled about 3,300 feet and are in our second of five phases of the drilling process. Once the relief well intercepts the leaking well, we will pump fluids and cement into the bottom of the well to stop the flow of gas and permanently seal it.”

  The Environmental Defense Fund recently released footage of the leak that shows climate-damaging methane gases escaping from a massive natural gas leak at a storage facility in California’s Aliso Canyon, with the San Fernando Valley pictured in the background. The giant methane plumes were made visible by a specialized infrared camera operated by an Earthworks ITC-certified thermographer.

  “What you can’t see is easy to ignore. That’s why communities that suffer from pollution from oil and gas development are often dismissed by industry and regulators. Making invisible pollution visible shows the world what people in Porter Ranch have been living with every day for months,”conservation organization Earthworks spokesman Alan Septoff said.

  California officials have confirmed the rupture is venting gas at a rate of up to 110,000 pounds per hour – more than 150 million pounds of methane has been poured into the atmosphere so far; officials fear pollutants released in the accident could have long-term consequences far beyond the region. The counter below estimates in real time just how much pollution is being emitted from the environmental disaster.

  The 20-year warming impact is said to exceed that of all the state’s oil refineries combined, or of burning 300 million gallons of gasoline. The EDF states:

  Methane – the main component of natural gas – is a powerful short-term climate forcer, with over 80 times the warming power of carbon dioxide in the first 20 years after it is released. Methane is estimated to be leaking out of the Aliso Canyon site at a rate of about 62 million standard cubic feet, per day. That’s the same short-term greenhouse gas impact as the emissions from 7 million cars.

  Tim O’Connor, the California climate director for the Environment Defense Fund, told Mashable the leak is dumping the equivalent of eight or nine coal plants worth of methane into the atmosphere. He told The Washington Post, “It’s one of the biggest leaks we’ve ever seen reported. It is coming out with force, in incredible volumes. And it is absolutely uncontained.”

   

  NO FLY ZONE now issued around the methane leak zone in Los Angeles, California. https://t.co/dMjCyqYewY via @YouTube

  — Lil' Joe (@craigdh) December 20, 2015

   

  The Los Angeles Unified School District has agreed to relocate nearly 1,900 students from schools near the leak, citing disruption from absenteeism and several visits to the health office. SoCalGas has placed 2,258 families in temporary housing, while 111 others staying with family or friends are being compensated. More than 3,000 others are in the process of being relocated.

  *  *  *

  So far, 25 complaints, many of which seek class action status, compensatory and punitive damages and attorneys’ fees, have been filed, Sempra said. State and local authorities are investigating.

  “Our focus remains on quickly and safely stopping the leak and minimizing the impact to our neighbors in Porter Ranch,” Dennis Arriola, president and chief executive officer of Southern California Gas, said in an e-mailed statement.

  This week Brown met with Porter Ranch residents and toured the Aliso Canyon facility on the north rim of the San Fernando Valley. His office said the emergency regulations would include daily inspections of gas storage well heads and regular testing of safety equipment.

  Brown’s emergency order "will bring the additional resources and focus we need — to get people back into their homes, restore confidence in the safety of this community, and begin rebuilding quality of life in the neighborhoods affected by the gas leak,” Los Angeles Mayor Eric Garcetti said in a statement. Garcetti said he asked Brown to make the declaration.

  Brown also directed the California Public Utilities Commission, which regulates Sempra’s Southern California Gas, to ensure that the company covers costs related to the leak while protecting customers. The utility is paying to temporarily relocate residents.

  

  

  

  

  

• This Is The Dow's Worst Start To The Year… Ever

  What did the Fed do?!

   

  

   

  Worst. Ever! Sounds like a great buying opportunity, right?