• "After Me, The Jihad," Gaddafi Tried To Warn The West, But Nobody Listened

  Submitted by Dan Sanchez via TheAntiMedia.org,

  Before the French Revolution and its Reign of Terror, Louis XV predicted, “After me, the Deluge.” Before being overthrown, Libya’s secular dictator tried to warn the West of a new Reign of Terror, essentially foretelling, “After me, the Jihad.”

  This was disclosed with the recent release of phone conversations from early 2011 between Muammar Gaddafi and former British Prime Minister Tony Blair.

  The West was then gearing up to use unrest in Libya as a pretext for military intervention and regime change. Gaddafi desperately tried to convey through Blair the folly of such a war, pleading that he was trying to defend Libya from Al Qaeda, which had set up base in the country. He said:

  “They have managed to get arms and terrify people. people can’t leave their homes… It’s a jihad situation. They have arms and are terrorising people in the street.”

  Gaddafi’s warning went unheeded, and NATO, led by the U.S. and France, launched an air war that toppled Libya’s government. Later that year, Gaddafi (himself a brutal oppressor, like all heads of state) was forced out of a drainage pipe, and then beaten, sodomized, and shot in the street by a mob. His corpse was then draped over the hood of a car.

  U.S. Secretary of State Hillary Clinton, who had done more than any single person to advance the Libya War, was informed of Gaddafi’s death while on camera. Fancying herself a modern Caesar, she chortled, “We came, we saw, he died!”

  Since then, Gaddafi has been proven tragically right. As Libya descended into civil war and failed-state chaos, jihadi groups connected to Al Qaeda conquered much of the country. Libya underwent the same American “liberation” that had already befallen Afghanistan, Iraq, and Somalia — and would soon be visited on Syria and Yemen.

  Shortly after Gaddafi’s overthrow, some of the now-rampant jihadis helped the CIA run guns from Benghazi to fellow jihadis in Syria.

  Benghazi had been a rebel stronghold. The Obama administration claimed a Gaddafi-perpetrated “genocide” was imminent in that city, using that claim as the chief justification for the war. There was zero indication of such an impending atrocity. But there was ample evidence of an Al Qaeda presence in Benghazi, as Gaddafi tried to tell Blair, saying that members had “…managed to set up local stations and in Benghazi have spread the thoughts and ideas of al Qaeda.”

  After the regime change, on September 11, 2012, the jihadis turned on their U.S. allies in Benghazi, sacked the U.S. diplomatic compound, and murdered Ambassador Chris Stevens.

  Now ISIS has spread throughout Libya. Just days ago, ISIS perpetrated a truck bombing that killed dozens at a Libyan police academy in Sirte, a former Gaddafi stronghold. Indeed, Gaddafi informed Blair that jihadis had “attacked police stations” back in 2011.

  Gaddafi further warned Blair:

  “They want to control the Mediterranean and then they will attack Europe.”

  And ISIS has, indeed, been battling to take control of Libya’s main oil ports in recent weeks. The group has also long been planning to use Libya as a base from which to launch attacks on nearby southern Europe. ISIS did strike Europe recently, most famously in Paris.

  And it was not just Gaddafi personally who had been ringing such alarms to the Western powers thirsting for his blood. His intelligence officers produced reports demonstrating that heavy weapons being sent to the Libyan opposition, with NATO approval and Qatari financing, were being funneled to militants with ties to Al Qaeda. At least one of those reports was even prepared in English to facilitate its transmission to key members of Congress via U.S. intelligence.

  Yet, there was no need for the West to rely on the Libyan regime for information about the jihadi threat. Indeed, as emails recently released by the State Department reveal, Hillary Clinton’s own right-hand man had informed her before Gaddafi’s overthrow that rebels were committing war crimes, and that “…radical/terrorist groups such as the Libyan Fighting Groups and Al Qa’ida in the Islamic Maghreb (AQIM) are infiltrating the NLC and its military command.”

  As Brad Hoff reports, that same email discloses that, very early in the Libyan crisis, “British, French, and Egyptian special operations units were training Libyan militants along the Egyptian-Libyan border, as well as in Benghazi suburbs.”

  They would soon be joined by U.S. special forces and the CIA.

  The war in Libya that Hillary Clinton, U.N. Ambassador Susan Rice, and Samantha Power of the National Security Council were driving toward was so predictably a fiasco-to-come that, behind the backs of the Amazon Warriors Three, America’s top generals conspired with leftie peacenik Congressman Dennis Kucinich to try to arrange a peaceful resolution to the crisis. But the war-making diplomats triumphed over the diplomacy-making soldiers. Hillary buffaloed the brass and got her war.

  Abundant warnings of a Jihadi Deluge continued after the regime change, as well. As Nancy Youssef wrote at The Daily Beast:

  “…many celebrated Libya as a success story of limited U.S. intervention despite obvious signs there of looming instability. The British consulate in Benghazi came under an attempted assassination attack the previous summer and other nations pulled out amid rising violence. The U.S. consulate in Benghazi suffered an improvised bomb attack around the time of the strike on the British. And there were early signs of a rising jihadist presence in the eastern city. In Tripoli, Sufi shrines were destroyed. (…)

   

  “In the months leading up to the [2012 Benghazi] attack, flags belonging to a jihadist group, Ansar al Sharia, appeared in Benghazi. Ansar al Sharia members also controlled security around certain government buildings, including the hospital that would try to save Stevens.

   

  “In that ensuing power vacuum, jihadists began claiming territory, making it difficult for the moderate government to control the country. By 2013, Libya’s oil production all but stopped as the nation plunged toward civil war and a state led by two rival governments on opposite ends of the country. Efforts to create a unity government have so far faltered. Benghazi, the birthplace of the 2011 uprising, became a terrorist haven. And today, many Libyans yearn for the return of Gaddafi, however dictatorial his regime was, because of the security that came with him.”

  Conservative politicos have long strained to use Benghazi to torpedo Hillary’s bid for the presidency. But their efforts are crippled by their own fundamental agreement with Hillary’s militarism. They support the general policy of employing jihadis to overthrow secular dictators (not only in Libya, but Syria too). So they limit themselves to whining about Hillary’s security measures.

  The true Benghazi scandal indicts not just Hillary, but the entire Western power elite, whose wars have, as Gaddafi warned, flooded the world with a Jihadi Deluge and installed a postdiluvian Reign of Terror over us all.

  

  

  

  

  

• "How The Investment Grade Dominos Will Fall" – UBS Explains

  According to Citigroup’s Matt King, it is now officially too late to save junk debt, which has entered the final stage of the credit cycle, the one where defaults for high yield bonds rise with every passing month.

  

  Both what about investment grade, which according to Citi is still just ahead of the “bubble bursting phase”? Here is UBS’ credit strategist Matthew Mish with one take on what happens to IG debt over the coming 12 months.

  How The Dominos Will Fall?

  It is no secret to regular readers of our publications that we believe the credit cycle is quite advanced. As discussed in our HY outlook, we estimate that nearly $1tn of speculative-grade credits are at risk of default over the next downturn, as the stock of low-quality credit has soared. Recent contagion in US HY from energy woes has severely impacted ex-energy spreads while shutting down bond-market financing for low-quality credits. Our leading measure of non-bank liquidity has now even surpassed the weakness seen during the Eurozone crisis. These developments are a negative headwind for investment-grade corporates in 2016.

  High-grade credits are also not without blemish; the post-crisis macro paradigm of Fed quantitative easing and the investor bid for yield has greatly expanded the size of risky BBB corporates. The total IG corporate universe has grown 110% from $2.08TN in Jan 2009 to $4.35TN today; the amount of BBB debt has ballooned 181% from $0.77TN in Jan 2009 to $2.17TN today (Figure 1). Hence, nearly 63% of the increase in US IG debt has come from the growth of more risky BBB-rated securities. BBB non-financial credits now make up 41% of the total IG market, the highest level ever outside of a recession (Figure 2).

  

  Finally, leverage levels are high and climbing higher. The median IG firm’s net debt to EBITDA ratio easily surpasses that realized in 2007, and is quickly closing in on late 1990s levels (Figure 3). Combine these headwinds with market volatility and growing market illiquidity and it is no surprise to find IG credit spreads at historically wide levels (Figure 4).

  

  With that said, high-grade issuers do face tailwinds that high-yield firms do not. Our credit based recession indicator is still only signalling a 16% probability of a US recession through Q3’16. This provides some comfort that US IG spreads will remain relatively insulated from near-term weakness in high-yield. In addition, our recession probability is low precisely because high-grade firms still face historically low borrowing costs, due to low Treasury yields and a terming out of debt profiles. The recent uptick in spreads has not materially increased interest burdens for highgrade companies, unlike for junk firms. Lastly, the foreign bid for US IG paper from EUR & JPN investors is currently insatiable and should continue to support medium tenor IG corporates. The foreign bid for US HY cannot compare.

  What is our prognosis then for 2016? Investors should remain cautious about lower-quality credits and energy names that will expose them structurally to either a broader downturn in the credit cycle or lower for longer commodity prices. For us, that means investors should underweight BBB-rated securities, particularly longer-dated issuers at risk of fallen angel status (i.e. pipelines). We maintain a relative preference for lower beta US banks. Lastly, we believe that A-rated 10+ paper looks attractive, on an excess return basis (Treasury-hedged) tactically and a total return perspective structurally. Against this backdrop, we flesh out our views on the top 2016 themes likely to face high-grade investors and their implications for desired positioning next year.

   

  1) M&A will NOT be slowed by rising rates: IG issuance to hit new record

  One of the common myths perpetuated in the market today is that rising interest rates will cool off a red-hot M&A market. After all, low rates are spurring on the recent merger boom right? Not quite. In fact, one can make an argument that the presence of both significant M&A activity and low interest rates is more of an historical accident than explaining a fundamental relationship. We believe this  cycle, along with those in the past, is driven more by animal spirits and the lack of viable alternatives for CFOs who are unable to grow earnings organically. The two charts below illustrate the considerable staying power of these animal spirits.

  

  Today’s environment fits the current narrative that M&A activity is buoyed by low rates and high expected returns (proxied by the S&P 500 earnings yield). The problem is that the exact opposite occurred in the late 1990s; M&A activity surged even with high rates and low expected returns (Figure 5). An increase in highgrade yields from 2005-2007 also did not temper M&A volumes. Finally, the past two M&A cycles did not peter out until 1 year forward recession probabilities hit 50% (Figure 6). Bottom line, it takes a sufficient shock to the economy to derail an M&A cycle. A Fed rate hike cycle will not nearly be enough.

  The major implications are twofold. First, IG issuance will hit a new record in 2016 at $1.3tn, a 1% increase from 2015 levels ($1.29tn). Upside estimates of $1.45tn (+11%) are possible, particularly if episodic bouts of volatility subside more than
  expected. Last year, roughly $260bn of IG issuance (~18% of total) was due to M&A activity, and we expect similar numbers for 2016. Second, credit curves will remain historically steep; those investors positioning for a material flattening of the curve will be disappointed. Nearly 15% of all M&A activity last year was financed in the IG bond market, a high point outside of an economic downturn (Figure 7). And the majority of this debt (56% last year) is funded via long-term paper (> 9 years). This new issuance will continue to saturate a buyer base that primarily consists of US life insurers and pensions needing to hit yield bogeys that are higher than current market rates. There is not a clear catalyst in our view to flatten spread curves absent 1) a unexpected reduction in M&A activity or 2) a material increase in 30yr Treasury yields (to the mid 3% range) that increases demand from insurers and pension funds.

  

   

  2) We prefer US Banks over Non-Financials

  We express this view with some consternation as US bank spreads are not cheap and they are coming off a year where they significantly outperformed nonfinancials (1.76% total return vs. -2.84%). However, absent a broader downturn in the US economy, we still believe that US banks will continue to relatively outperform. US banks are a higher-quality segment of the IG universe and they have massively de-levered since the financial crisis, in direct contrast to their nonfin counterparts (Figure 8). Empirically, bank sector spreads also typically weaken relative to the non-financial sector when a severe economic downturn fuels increased real estate losses. One can see this clearly in Figure 9 below, where bank spreads suffered under the burden of rising real-estate NPLs in 1990 and 2008. However, banks outperformed during the early 2000s recession, when corporates faced the brunt of losses, while real estate markets exhibited strength.

  

  We are not ready to proclaim that real-estate NPLs will not be a problem during the next downturn. However, the current evidence suggests it is mainly corporate losses that are beginning to tick higher; real estate NPLs continue to fall, primarily for residential properties. An intermediate concern persists in commercial real-estate, where even though NPLs are near record lows, risks are elevated. If these begin to rise, we would expect more pressure on REIT spreads to develop.

  The increase in corporate NPLs is not solely due to energy sector woes. Banks that are less exposed to the energy sector are still displaying a modest uptick in overall C&I loans from last December (Figure 10). The increase is slight, but this is why we
  bring it up. The first increases in bank NPLs are really the only early warning indicator you get. Hence, with most weakness showing up in US corporates at this time, plus subdued probabilities of a broader US downturn, we believe a relative overweight on Fins still makes sense in 2016.

  

   

  3) We prefer A-rated credit, particularly long-duration, in 2016

  Even though overall credit curves will remain steep due to our prior discussion on M&A activity and worsening bond market liquidity, there is still room in investor portfolios to hold A-rated 10+ paper. First, we attack the credit quality question by debunking the notion that BBB spreads are trading cheap. At face value, BBB credits are trading 100bps wider than A credits, vs. an average of 67bps back to the 1990s. However, once we exclude the impact of the energy/mining sectors, BBBs are trading only 73bps wider than A’s, in-line with fair value historically. At this stage of the credit cycle, a 7bp premium on BBB credit spreads is far from an attractive risk premium (Figure 11).

  What about BBB energy? While valuations appear more attractive, we are still neutral to negative on the space. Oil forecasts continue to be marked lower. Our own UBS forecast for WTI has just been marked down by 20% out to 2017 (new 2017 target of $52). Gas pipelines in particular face significant danger as a swath of names are rated BBB- and are peering over a large gap in spreads to  high-yield status. Many BBB rated E&P spreads also appear expensive and sit tenuously near a ledge (Figure 12). However, even if oil prices bounce, it is difficult to get excited about IG energy when the backdrop of a late stage credit cycle looms. If BBB’s in general widen out relative to A’s (as we expect), the tide should take out energy names as well before too long.

  

  Tactically, we believe the prospect for near-term gains in high-grade on an excess return basis (Treasury-hedged) is reasonable, assuming no fallout in the US or Chinese economy. But instead of taking extra credit risk to boost returns, we would rather take extra spread duration in higher quality credits. A-rated 10s30s curves have just now steepened to a record high 60bps and have surprisingly converged to BBB 10s30s curves over Q4’15 (Figure 13). Much of this steepening represents significant gains in A-rated 10-year paper; 30yr A-rated spreads are still marginally tighter than October levels, holding in reasonably well during the latest selloff. However, 30yr A-rated spreads are still near historically wide levels (Figure 14).

  

  In addition, investors will NOT need to sell A-rated paper in the event that the credit cycle worsens: They will simply need to remove the underlying Treasury hedge and hold these bonds as total return instruments. This is not the case for BBB credits, where fallen angel risk is far from trivial (see next section). We strongly believe that 30yr Treasury yields have room to drop in the event of downturn, providing a significant tailwind to long-duration IG credits. This is echoed by our rates team in their 2016 outlook where risks in longer-dated Treasury yields are skewed to the downside.

  In a China hard-landing scenario that leaves the US unscathed, 30yr Treasury yields could fall to 2% as inflation expectations are reduced. At current yields of 4.6% and a duration of 13.6, returns are positive as long as 10+ A-rated spreads do not widen more than 126bps over a year. That has not happened outside of the financial crisis. In short, we would suggest going long A-rated 10+ spreads to position for moderate excess returns over the next 3-6 months. As we enter into the latter half of 2016, we would recommend removing the Treasury hedge to position for total return gains, as we expect US credit cycle issues to become more apparent.

   

  4) Fallen angels are not a 2016 story, but forward risks loom large

  In recent days, many investors have voiced concerns about the potential impact of fallen angels for global credit markets. We do not expect US fallen angels to materialize as the story of 2016, outside of the commodity sectors, as they typically ramp up during US recessions. But fallen angels are a significant issue that will surely garner more headlines down the road. And it is a fundamental reason why we want to avoid long-duration BBB-rated debt at this point in the cycle. Figure 15 below provides context for one-year fallen angel transition rates8 over time, and how the risk is significantly greater for BBB-rated credits than A-rated credits.

  

  To estimate the potential impact for 2016, we use the average one-year fallen angel probabilities from Moody’s, both from 2014 alone and the average from 1983-2014. (Implicit in this assumption is that 2016 moves us from below average risk to near average downgrade risk.) This assumption would get us $77bn of fallen angels (average of $43bn and $111bn in Figure 15) falling into a $1.05tn HY market. However, $21bn of those fallen angels would be 10+ paper splashing into a $48bn 10+ HY market. Herein lies the problem: The proliferation of longer duration BBB debt could hit a HY market that is fractions its size.

  The problem would compound later in the cycle when risks could surge. As a potential worst case scenario, we use the simple sum of probabilities from 2001- 2002 and the current debt stock as an example of what could happen during a protracted downturn. If this comes to fruition, we estimate fallen angel volumes over 2 years could spike to $413bn, with $117bn of 10+ fallen angel paper (again crashing into a 10+ HY market that is only $48bn in size). This is an ugly spectre that the high-grade markets would need to face in future years.

   

  5) In sum, what are our spread/return forecasts for IG?

  As we suggested in 20159, the sensitivity of IG spreads to HY spreads has indeed dropped sharply in recent months (Figure 16). IG spreads are only widening about 10-15 bps for each 100bps widening in HY, which is down from 25-35bps earlier in the post-crisis period (particularly when banking sector risk was still elevated). With relatively better fundamentals, more financials exposure, and the prospect for significant HY commodity related defaults, we expect IG spreads to remain resilient, though not without spread widening, before 2016 is done. Our 2016 forecast for HY spreads is currently 800-850bps. Based on the change from current spreads (763bps) and applying a beta of 0.15 (in-line with that experienced recently), IG spreads should end the year between 175-185bps. Returns will be marginally stronger than last year, though still historically weak. Excess returns (Treasury-hedged) will be between 1.5-2.2% (vs. -1.63% in 2015), aided significantly by rolling down a steep IG curve. Total returns will vary depending on your assumptions for Treasury yields. If our 2016 UBS forecasts for 10yr Treasuries yields are correct (2.5%), IG total returns would equal 1.7-3.4%. If current market expectations from the forward curve are correct (2.35%), IG total returns should fare better and range between 2.7-3.4% (vs. -0.75% in 2015).

  

  

  

  

  

  

• CNN Reassures Investors: "Don't Panic… America's Economy Is Still In Good Shape"

  Submitted by Mac Slavo via SHTFPlan.com,

  Forget for a moment that U.S. stock markets have seen their worst start to a new year since the Great Depression or that some $2.5 trillion in wealth has been evaporated in less than two weeks.

  CNN says it’s hardly the time to panic:

  Time to panic? Hardly.

   

  There are plenty of reasons to relax, especially if you are a U.S investor. Here are the top two:

   

  1. America’s economy is still in good shape.

   

  2. Staying in stocks pays off. Since World War II, investors who remained in stocks for at least 15 years made money

   

  …

   

  Right now, the U.S. economy is growing. It’s not rock star growth, but 2% to 2.5% a year is good, and the Fed is being very cautious.

   

  More importantly, businesses are still hiring. Over 2.3 million jobs were added last year (the latest data on hiring comes out Friday and it’s widely expected to show more jobs added).

  Pay no attention to the fact that last week not a single cargo ship was transporting raw materials in the South China Sea, the first time in history that it has happened. The economy is is great shape and this is not proof that global commerce has literally stopped.

  Worry not that Walmart, Macy’s and scores of other retailers had an abysmal holiday season and are now set to lay off tens of thousands of workers. Unemployment, when calculated using models that were used during the Great Depression and that were defined out of existence by the government in 1994 show that some 23% of Americans are out of work. But we don’t calculate like that anymore, so we actually have an employment rate of about 95% in America right now.

  And though the economy is officially growing at 2.5% per year based on the government’s trustworthy data, we should absolutely not look at the inflation numbers, which according to Shadow Stats are running about 4% per year. If we did, however, go totally fringe and consider inflation within the context of the economy we might notice that this purported growth is actually negative 2% if not worse.

  In fact, we’re doing so well that just 45 million of America’s population of 320 million people are on food stamps right now. By all accounts, a really good sign of not just economic growth, but more jobs and an increase in personal incomes.

  And with oil trading at under $30 per barrel, we can see nothing but blue skies going forward because, hey, we’re all paying a dollar less for gas now. We’re sure this will have no effect on the domestic real estate market in places like Texas and North Dakota. Nor will this collapse in oil prices cause debt burdened domestic oil companies to close up shop, potentially leading to a domino affect across the entirety of the U.S. economy. Nor will it have any impact on periphery businesses that service those companies, including all of those restaurants that saw below-minimum wage job growth explode last year.

  You have absolutely nothing to worry about. The notion that an economic and financial catastrophe of historic proportions is playing out right before our eyes is the fantasy of internet conspiracy fanatics.

  At this point, we encourage our readers to take no action to prepare for the coming calamity, because there is no coming calamity.

  Carry on. Everything is awesome. It really is different this time.

  

  

  

  

  

• When Omnipotence Fails: JPMorgan Warns Upside Uncompelling As Central Bank Put Wanes

  JPMorgan shifts to the dark-side…

  It would be hard for a year to start any worse than 2016 has.
   

  

  The SPX is now off >8% YTD and has slumped ~10% from the late-’15 high of ~2080.  Chinese uncertainty (although more institutional than economic at this point vs. the opposite back in Aug), evidence of slowing domestic growth (JPM took its Q4:15 GDP forecast to +0.1%), trimmed earnings estimates (~$125 was being penciled in for this year back in Q4:15 but that is now $120 and falling), full multiples, and the absence of credible monetary policy responses (all the Fed will do is nothing which isn’t particularly impressive) are all conspiring to hit stocks and smoother sentiment (also the extremely uncertain US presidential election outlook is a big underappreciated headwind).

  Prices are oversold and sentiment hasn’t been this despondent in a long time (even Aug/Sept wasn’t this palpably negative) but any bounce will not be particularly impressive and in a lot of ways that is the main problem as the upside just isn’t compelling enough to make a major stand ($120 and 16x gets the SPX only to 1920 and at this point those are “best case” scenarios).  Enormous P&L destruction coming so early in the year, following the poor performance numbers from last week, has only made sentiment more miserable.  The fact we are in the middle of a news vacuum doesn’t help as it allows single data points (such as CSX’s “things haven’t been this bad outside of a recession” comment) to color the whole market (the CQ4 earnings season is always more spread out and so investors won’t hear from the all the S&P 50 CEOs until Feb).  However, just because the SPX won’t hit new highs doesn’t mean it will collapse either and there is something to be said for the fact that the index hasn’t made any progress for 18 months.  The extremely gloomy predictions of bear markets (down ~20% from the recent ~2100 high would imply a ~1680 SPX) or 2008-like catastrophes seem overdone.
   
  Top headlines/trends/themes from the week (in order of importance)

  The big overhang is growth, not China.  Obviously the CNY/CNH volatility has harmed sentiment and contributed to financial market volatility and China’s years-long economic slowdown is having global effects.  But while China gets most of the headline blame, the more important driver behind the YTD slump in US equities is signs of economic softness.  Q4:15 GDP estimates have been bleeding lower for months and are now sub-1% for many people.  The slight miss in Dec auto sales, coupled w/the caution from AutoNation, was prob. the single most important financial market development so far in 2016 outside of China – autos have been a mainstay of US economic growth for years, prob. the shining light of the post-crisis recovery, and if it were to weaken a major pillar of support would be removed.  Meanwhile the industrial economy is suffering enormous headwinds, many of them related to the carnage in energy (two industrial-levered firms, CSX and FAST, used the “recession” word on their earnings calls this week).  The consumer ostensibly has a number of tailwinds (jobs, housing, gas, etc) but isn’t acting as a particularly strong economic driver at the moment.  The bank earnings in aggregate were solid (from a macro perspective) but investors will need to hear from more CEOs in additional industries to bolster confidence in a ~$120 EPS number for 2016 (for the SPX).  In all likelihood the US economy will continue along at the same middling pace its witnessed since the financial crisis, varying somewhat quarter-to-quarter but w/an annual growth rate that doesn’t deviate much from 1.5-2.5% (US GDP: +2.5% ’10, +1.6% ’11, +2.2% ’12, +1.5% ’13, and +2.4% ’14; the St is modeling +2.4% for both ’15 and ’16).  JPMorgan’s M Feroli cut his Q4:15 GDP estimate from +1% to +0.1% on Fri in the wake of the retail and inventory report and took Q1:16 from +2.25% to +2% but stayed at +2.25% for Q2-4

   

  It’s not 2008.  It’s not 2010 either.  The key transmission mechanism through which macro problems become systemic events is the banking system but capital levels are extremely healthy now (in contrast to 2006-2008) and thus banks aren’t at risk of being compromised.  However, that doesn’t mean the outlook for risk assets is spectacular as the country remains later in its economic and corporate recovery cycle and multiples are fuller than they’ve been. 

   

  Multiples and earnings math suggest any bounce will be a shallow one.  The key for this tape remains the same – earnings and multiples.  The ’16 SPX EPS estimate has been bleeding lower for months, falling from ~$125 late in ’15 to ~$120 earlier this week (and some are few dollars below that).  The sanguine macro commentary from bank mgmt. teams this week was nice to hear but it will take similarly positive language from other Dow Jones-caliber CEOs to bolster confidence in $120.  As earnings forecasts were trimmed, multiples also were brought lower and whereas last year people could use $125 and 17x to justify ~2100+ for the SPX, at this time 16x is considered a ceiling for the time being (which means on a $120 EPS number the SPX at 1920).

   

  China gets blamed for a lot more than it should.  China continues to undergo a massive, complicated, and unprecedented (for them) transition away from an economy focused on manufacturing and exports and towards one dependent more on consumer consumption and services.  Meanwhile, the anti-corruption campaign (which President Xi this week pledged to sustain), efforts to clamp down on pollution, and a slowing in general economic momentum all create added challenges for this transition.  The lack of specific clarity from the government about its intentions (see the vague aphorisms and platitudes from the PBOC and other gov’t institutions on a daily basis) only makes it more difficult for investors to form a confident view on China’s outlook.  The currency vicissitudes are just one small example of the undermining uncertainty emanating from China – Beijing pledges to give markets a greater say in FX markets but intervenes heavily in the offshore market to stem CNH declines; it pledges to hold the yuan “balanced and level” but aggressively fixes the CNY lower; it shifts to a new reference basket w/o providing details on the member weights; etc.  The stock market machinations (introducing new circuit breakers before quickly canceling them; coercing funds to refrain from selling; etc) are a whole other problem.  The actual growth figures have been decent of late (including this week’s trade numbers) but this has had little effect on sentiment as institutional doubts grow larger.  Despite all the skepticism though investors need to appreciate that China’s policy apparatus is still relatively immature and not necessarily as precise and deliberate as is the case in more advanced economies.

   

  Oil remains a big problem.  The oil price decline is wreaking havoc everywhere, skewing data, and sowing uncertainty.  Global oil markets remain in a structural oversupply condition, something that doesn’t show many signs of ending.  OPEC is still uncoordinated and stepped up Iranian supply is about to come to market (the nuclear sanctions could wind up getting lifted any day).  US shale producers are experiencing enormous financial pain and bankruptcies are rising but supply destruction isn’t taking place fast enough to bring global markets into balance.  While demand conditions aren’t helping, the bigger problem for crude remains massive oversupply.  Despite the unfavorable supply backdrop though, the enormous volatility with which prices are swinging daily clearly is a function much more of financial flows and not changes in underlying fundamental conditions.  The historical playbook considers falling oil a clear economic positive but that doesn’t seem to be the case today.  To start, the US is now a major global producer and as such the domestic industry accounts for a lot of employment and capital spending.  Meanwhile, the behavior of the consumer has clearly changed and the massive oil dividends are being saved, not spent.  In addition, energy-linked companies were enormous issuers of equity and esp. debt over the last several years and the value destruction incurred by a lot of this paper is having real economic effects.  Finally, inflation expectations globally are underpinned to a large degree by oil and thus break-even measures (and lately survey-based measures of inflation too) have declined.

   

  Earnings – the CQ4 reporting season is too young to draw any firm conclusions but results from the one group w/a relatively large sample-size (the banks) were (mostly) encouraging.  Investors were nervous about the banks for a few reasons but in particular concerns about a crushing increase in energy-related credit provisions have hit the group hard in the last several weeks.  While provisions did tick higher for many due to commodity-related exposure (and NPAs/non-accruals weakened too), credit quality overall was very strong (and for the large money centers and regional banks energy lending remains small as a percent of their total loan books).  The other main macro indicator, loan growth, was healthy in Q4 as well.  In tech, TSMC and INFY both were solid (esp. INFY) while INTC underwhelmed (Data Center revs fell a bit short of expectations and mgmt. was a bit more cautious on the outlook for the core INTC business).  The industrial indications still point to a very tough operation environment (both CSX and FAST talked about conditions being recession-like).

   

  The US presidential election isn’t helping stocks.  Lurking in the background is the approaching US presidential election as the collapse in Clinton’s poll numbers of late raises the prospect of a Sanders vs. Trump or Cruz contest, something that isn’t helping sentiment.

  And finally – perhaps most importantly – Western central banks attempt to mollify sentiment with dovish rhetoric but to no avail.

  The BOE liftoff expectations get pushed back.  The ECB expresses a desire to do more should conditions warrant (as per the minutes out this week).  And a variety of Fed officials pour cold water on FOMC’s own current four hike guidance (although Dudley on Friday didn’t sound too worried about the macro environment).  The evolution in CB rhetoric isn’t particularly surprising and investors weren’t all that impressed regardless – monetary policy isn’t being looked to as a savior for the tape’s current travails. 

   

  For the Fed specifically, the market never endorsed the “four hike” guidance and even before the YTD break-down in equities investors were anticipating no more than two additional moves in ’16 (and that two is quickly moving to one or zero).   The ECB could very well “do more” but prob. not for a few months (they just acted and keep in mind that decision was somewhat controversial internally). 

   

  Central bank policy overall is extremely accommodative and will stay that way for a long time but increasingly central banks are moving into the background as a driver for the tape’s narrative.

  Source: JPMorgan

  

  

  

  

  

• How Did Americans Get So Fat, In Seven Charts

  Americans are fat. They are so fat very few would even bother to click on a hyperlink in this article explaining how fat they are, so instead we will present an animated chart showing the severity of the US obesity problem over the past 30 years.

  

   

  Cartoons aside, here are the facts: today two-thirds of U.S. adults are overweight or obese. Half are afflicted with chronic conditions like diabetes or high blood pressure that can often be prevented with better diets, but aren’t and as a result debt-funded healthcare costs have exploded, and while this chronic obesity has made pharma companies richer beyond their wildest dreams, it means future US healthcare spending and welfare obligations are unsustainable.

  America didn’t get this way overnight. The average calories available to the average American increased 25 percent, to more than 2500, between 1970 and 2010, according to data from the U.S. Department of Agriculture. There was no extra meal added to the day, instead an evolution in the type of foods Americans eat led to steady growth in calories.

  Added fats and grains account for a growing share of total caloric intake. These two categories, which include oils and fats in processed foods and flour in cereals and breads, made up about 37 percent of our diet in 1970. By 2010, they were 46 percent—a larger share of the growing pie. One of the main factor: cost; the increasingly more caloric foods become progressively cheaper and more affordable. The result: more of the lower and middle classes gravitated toward it, leading to the epidemic shown above.

  Here, courtesy of Bloomberg, are seven charts showing the detail behind America’s troubling obesity trend.

  First, this is where America’s calories come from.

  

  Cheese is replacing milk.

  

  A lot more fat goes into our foods.

  

  Calories from wheat, rice, and corn have increased. This includes refined grains like white bread that provide calories but are stripped of much of the nutrients in whole grains.

  

  There are some indications that Americans are changing their diets to become healthier. For example, we’re swapping red meat for chicken.

  

  And though corn syrup boomed since the 1970s, the total amount of sweeteners we eat has declined. That’s partly because Americans are drinking less soda.

  

  These positive changes haven’t negated the overall increase in calories on our plates. More than two-thirds of U.S. adults are overweight or obese, compared to less than half in the 1970s.

  

  The government’s dietary guidelines are simple: “Almost all people in the United States could benefit from shifting choices to better support healthy eating patterns.” Right, now if only the government would also subsidize this healthy – which means more expensive – eating. We won’t hold our breath: after all the massive pharma lobby would generate far less profits for its clients if US obesity were to sharply decline as a result of someone doing the right thing.

  So until something does take place to shock the US out of its fatty momentum, here is Family Guy.

  

  

  

  

  

• The Map That Will Change The Way You See The World

  How do you view your country relative to others? Chances are if it’s based on most world maps, your view is distorted.

  As the world turns its gaze to the rich and pretty people in Davos this coming week, The World Economic Forum unleashed the following cartogram, created by Reddit user TeaDranks, that could change your entire perception of the world. Cartograms scale a region’s geographic space according to a particular attribute and in this case each square now represents 500,000 people.

  (click image for massive legible version)

  

   

  We all know that India and China have large populations, but this map emphasises their size on a global scale. Compared to conventional world maps, the two Asian powerhouses dominate. Along with several East Asian neighbours – Bangladesh, Japan, the Philippines and Indonesia – their contribution to the global population is clear.

  The size of Nigeria and Brazil compared to the rest of Africa and Latin America is equally apparent.

  The map also effectively highlights the contribution of cities and regions to total populations. For example, the greater Tokyo region accounts for a significant proportion of Japan’s overall population. Equally, Delhi, Shanghai and Mumbai all occupy areas larger than many European nations.

  At the other end of the scale, some economies which are barely visible on traditional world maps appear much larger on the cartogram. Consider the cases of Hong Kong and Taiwan, whose relatively large populations compared to their geographical sizes see them feature much more prominently.

  Conversely, some countries which are very large on conventional maps can barely be seen. Canada, Russia and Australia are much smaller in TeaDranks’ representation, which was inspired by Paul Breding’s 2005 work. Canada in particular disappears almost entirely.

  Source: WEForum.org

  

  

  

  

  

• How QE Crushes The Real Economy & Why The Secular Low In Treasury Yields Lies Ahead

  The economy was supposed to fire on all cylinders in 2015. Sufficient time had passed for the often-mentioned lags in monetary and fiscal policy to finally work their way through the system according to many pundits inside and outside the Fed. Surely the economy would be kick-started by: three rounds of quantitative easing and forward guidance; a record Federal Reserve balance sheet; and an unprecedented increase in federal debt from $9.99 trillion in 2008 to $18.63 trillion in 2015, a jump of 86%. Further, stock prices had gained sufficiently over the past several years, thus the so-called wealth effect would boost consumer spending. But the economic facts of 2015 displayed no impact from these massive government experiments.

  Excerpted from Lacy Hunt and Van Hoisington's Q4 2015 Review & Outlook…

  Since the introduction of unconventional and untested monetary policy operations like quantitative easing (QE) and forward guidance, an impressive amount of empirical evidence has emerged that casts considerable doubt on their efficacy.

  Central banks in Japan, the U.S. and Europe tried multiple rounds of QE. That none of these programs were any more successful than their predecessors also points to empirical evidenced failure.

  On QE's Utter Failure (or  Why QE Hurts More Than It Helps)

  This empirical data notwithstanding, a causal explanation of why QE and forward guidance should have had negative consequences was lacking. This void has now been addressed: Quantitative easing and zero interest rates shifted capital from the real domestic economy to financial assets at home and abroad due to four considerations:

  • First, financial assets can be short-lived, in the sense that share buybacks and other financial transactions can be curtailed easily and at any time. CEOs cannot be certain about the consequences of unwinding QE on the real economy. The resulting risk aversion translates to a preference for shorter-term commitments, such as financial assets.
  • Second, financial assets are more liquid. In a financial crisis, capital equipment and other real assets are extremely illiquid. Financial assets can be sold if survivability is at stake, and as is often said, “illiquidity can be fatal.”
  • Third, QE “in effect if not by design” reduces volatility of financial markets but not the volatility of real asset prices. Like 2007, actual macro risk may be the highest when market measures of volatility are the lowest. “Thus financial assets tend to outperform real assets because market volatility is lower than real economic volatility.”
  • Fourth, QE works by a “signaling effect” rather than by any actual policy operations. Event studies show QE is viewed positively, while the removal of QE is viewed negatively. Thus, market participants believe QE puts a floor under financial asset prices. Central bankers might not intend to be providing downside insurance to the securities markets, but that is the widely held judgment of market participants. But, “No such protection is offered for real assets, never mind the real economy.” Thus, the central bank operations boost financial asset returns relative to real asset returns and induce the shift away from real investment.

  …

   

  It is quite possible that corporate decision makers do not understand the relationships that cause QE and forward guidance to redirect resources from real investment to financial investment. It is also equally likely these executives do not understand that this process reduces economic growth, impairs productivity and hurts the rise in wage and salary income. But, does a lack of understanding of economic theory by key market participants render the causal relationships invalid?

   

  Spence and Warsh elegantly argue corporate executives do not need to know these fundamental relationships. Here is their key passage: “Market participants may not be expert on the transmission mechanism of monetary policy, but they can deduce that the central bank is trying to support financial asset prices. The signal provided by central banks might be the essential design element.” Real assets market participants simply need to know that the central bank does not offer such protection. In other words, the corporate managers merely need to realize that one asset group is protected and the other is not.

  On Monetary Policy's Endgame…

  Our assessment is that monetary policy has no viable policy options that are capable of boosting economic activity should support be needed. In fact, the options available to the central bank, at this stage, are likely to be a net negative.

   

  …

   

  The extremely high level of debt suggests that the debt is skewed to unproductive and counterproductive uses. Debt is only good if the project it finances generates a stream of income to repay principal and interest. There are two types of bad debt: (1) debt that does not generate income to repay interest and principal (Hyman Minsky, “The Financial Instability Hypothesis”); and (2) debt that pushes stock prices higher without a commensurate rise in corporate profits (Charles P. Kindleberger, Manias, Panics and Crashes).

  On Treasuries…

  With the trajectory in the nominal growth rate moving down, U.S. Treasury bond yields should work lower, thus reversing the pattern of 2015 and returning to the strong downtrend in place since 1990.

   

  …

   

  The firm dollar will remain a restraining force on economic activity and should cause the year-over-year increase in the CPI to reverse later in the year. Under such circumstances, lower, rather than higher, inflation remains the greater risk. Such conditions are ultimately consistent with an environment conducive to declining long-term U.S. Treasury bond yields. In short, we believe that the long awaited secular low in long-term Treasury bond yields remains ahead.

  Full must-read letter…

  Hoisington Q4

  

  

  

  

  

• Iran Sanctions Lifted As Nuclear Deal Implemented, US Hostages Freed

  #ImplementationDay–I thank God for this blessing & bow to the greatness of the patient nation of Iran. Congrats on this glorious victory!

  — Hassan Rouhani (@HassanRouhani) January 16, 2016

  U.S. + EU will begin lifting nuclear-related sanctions, expanding the horizon of opportunity for the Iranian people.

  — John Kerry (@JohnKerry) January 16, 2016

  Today marks the moment the #IranDeal has transitioned from ambitious promises on paper to measurable actions in practice.

  — John Kerry (@JohnKerry) January 16, 2016

  We’re getting to #ImplementationDay. Nothing serious. Diplomacy requires patience, but we all know that it sure beats the alternatives.

  — Javad Zarif (@JZarif) January 16, 2016

  Just days after two US Navy boats and ten sailors were seized at Farsi Island ahead of President Obama’s state-of-the-union address and just days before Tehran will see international sanctions lifted as part of the “historic” nuclear accord, four US hostages have been freed in a prisoner swap between Washington and Tehran.

  Among the detainees is Washington Post reporter Jason Rezaian who was famously held for spying after being convicted in a shadowy trial last year and faced up to 20 years in an Iranian prison.

  

  According to FARS, Iran also freed Marine veteran Amir Hekmati and Christian pastor Saeed Abedini, who had been held on a variety of charges.

  “All four are duel U.S.-Iranian citizens, according to the semiofficial Mehr and Fars news agencies,” WaPo notes, adding that “news of the exchange came as world leaders converged [in Vienna] on Saturday in anticipation of the end of international sanctions against Iran in exchange for significantly curtailing its nuclear program.”

  Foreign Minister Mohammad Javad Zarif was brimming with optimism when he arrived [in Vienna] earlier in the day and met with Federica Mogherini, the European Union’s foreign policy chief,” WaPo says.

  “This is a good day for the Iranian people . . . and for the world,” Zarif proclaimed. “What is going to happen today is proof . . . that major problems in the world could be tackled through dialogue, not threats, pressures and sanctions.”

  “International sanctions on Iran will be lifted on Saturday when the United Nations nuclear agency declares Tehran has complied with an agreement to scale back its nuclear program,” Reuters writes, adding that “‘implementation day’ of the nuclear deal agreed last year marks the biggest re-entry of a former pariah state onto the global economic stage since the end of the Cold War, and a turning point in the hostility between Iran and the United States that has shaped the Middle East since 1979.”

  The IAEA is reportedly set to issue a report that confirms Iran has complied with its commitments under the agreement struck last summer. That report will trigger the lifting of sanctions and the return of Iran to the world stage. A joint statement is expected later today.

  This comes as US lawmakers push for fresh sanctions on Tehran in connection with two ballistic missile tests the Iranians carried out in October and November, and just weeks after an “incident” in the Strait of Hormuz saw the IRGC conduct a live-fire rocket test within 1,500 yards of a US aircraft carrier.

  The deal has ruffled more than a few feathers in Riyadh, where the P5+1 agreement has stoked fears that America’s rapprochement with the Iranians marks a shift in US Mid-East policy that could endanger the regional balance of power at a time when relations between the Sunni and Shiite powers have deteriorated markedly. As an aside, Zarif is trolling the Saudis on Twitter as we speak:

  #ImplementationDay, it’s now time for all—especially Muslim nations—to join hands and rid the world of violent extremism. Iran is ready.

  — Javad Zarif (@JZarif) January 16, 2016

  Summing up Saturday’s proceedings in Vienna:

  

  *  *  *

  From FARS

  “Based on an approval of the Supreme National Security Council (SNSC) and the general interests of the Islamic Republic, four Iranian prisoners with dual-nationality were freed today within the framework of a prisoner swap deal,” the office of Tehran prosecutor said.

  Jason Rezaian, Amir Hekmat, Saeed Abedini and a fourth American-Iranian national who were jailed in Iran on various charges in recent years have all been released.

  According o the swap deal, the US has also freed 6 Iranian-Americans who were held for sanctions-related charges..

  A senior Iranian legislator citing an IRGC report on Rezaian’s case said in October that he has been imprisoned for his attempts to help the US Senate to advance its regime change plots in Iran.

  In late July 2014, Iran confirmed that four journalists, including Washington Post correspondent Jason Rezaian, had been arrested and were being held for questioning.

  Rezaian’s wife Yeganeh Salehi, a correspondent for the United Arab Emirates-based newspaper, the National, was also arrested at that time, but she and two others were released later.

  According to the Constitution, the Judiciary is independent from the government in Iran.

  Some reports earlier this year had spoken of a potential prisoner swap between Iran and US following the Vienna nuclear deal in July.

  

  

  

  

• President Obama's Iran Policy Explained (In 1 Cartoon)

  “Hands Up… Don’t Nuke”?

   

  

   

  Source: Investors.com

  

  

  

  

  

• Too Many "Think Tanks" Are Just Kool-Aid Fueled Group-Think

  Authored by Mark St.Cyr,

  The morning routine for many over the last few weeks suddenly has had a peculiar fly in the ointment added to the day’s ensuing narrative. First: how is it that “everything is awesome” has suddenly turned many a 401K balance into WTF status. And second: why is it when they return home the TV no-longer seems to shout how the mornings plunge in stock prices was met with a near immediate BTFD (buy the dip) rally erasing any and all previous losses with gains? Suddenly it seems things are quite different.

  Yes, indeed – they truly are.

  For the last 5+ years the above has been the dispensed conditioning reminiscent of Pavlov’s canines of not only many a next-in-rotation fund manager, but also, the next in rotation so-called “smart crowd” guest from some well named “think tank” appearing within the various outlets of not only the financial programs, but rather, throughout the main stream media in total.

  Over the last 5 years the various Fed. QE (quantitative easing) interventions into the capital markets has facilitated dumb luck trading into “genius” status, and no clue analysis into “spot on brilliant” prognostications. The real issue at hand is many believed their own press, and the current state of egg on their face would make many a Denny’s™ blush. As bad as that sounds – it gets worse.

  The other day I was viewing a program where the guest was the president of one of the well-known, prominent, “think tank” (TT) institutes. (I’m not trying to be coy in not naming, it just doesn’t matter, for its more of a cabal than any one singular.) These TT’s are where policy members whether it would be Federal Reserve officials past or present, along with lawmakers and other central bankers from across the globe will speak among themselves (or dispense advice) and ruminate about monetary policy, its effects, and so on. And yes, far, far more.

  Supposedly this is where the “thinking” gets exercised within the peer group for efficacy before, and possibly during, any implementation phase that might arise. One would think this is where a robust dialogue of differing ideas would be present. Alas, it would seem far from it. For if what I witnessed when listening to an argument as to why or, why not the current market gyrations are showing obvious warning signs that need to be heeded. The prevailing rationale and thoughts to my ear resembled more around illogical or, spurious group think, as opposed to anything resembling a tank where “great minds think alike” would gather.

  On the table front and center was the topic of China and their current stock market malaise. Also, within the conversation was a two-part topic concerning The Fed. There was the question as to whether or not the current rate hike has inflamed the current melt down we’re witnessing in Chinese markets. But also, the topic of whether or not the “Audit the Fed.” initiative recently voted on was a valid issue. Whether or not you agree or disagree with the audit bill is for you to decide. However, the issue that took me completely off-guard were the arguments made against it and the examples used. From my perspective this was a brief moment of clarity when one could get a glimpse of just how delusional or decoupled from reality these TT’s have become. Ready?

  (I had just taken a mouthful of coffee when these was delivered. So, if you might be doing something similar, may I warn you – put it down first before reading the next few sentences.)

  In response to China and whether they have a debt problem the retort was : “China doesn’t have a debt problem – they have a stock problem.”

  In response to the “audit” issue: “It’s The Fed. that has saved this economy, and just look at the $Billions it recently paid to the treasury.”

  In response to the consumer: “Consumers are doing quite well.” “Gas (prices) is a boon to retail.”

  In response to employment and the economy: “Jobs are doing great, people just aren’t spending.” “GDP is on the right track.”

  If someone wants to argue or, consider that China doesn’t have a debt problem, maybe you would like to consider purchasing some ocean front property I have in Kentucky. I’ll give you a great deal. Trust me. Or, how about the beneficial argument about how the Fed. has made payments to the Treasury? If you can argue with a straight face and no chuckling what so ever (or else the offer is null and void) how we benefit as a nation emulating a Ponzi type system of money creation and payments – I’ll discount that beach property 10%. Heck, if you can do it; make it 15%. It’ll be worth it from my perspective. Again: trust me.

  As startling as the above responses may be, what’s truly terrifying is although you or I may see the absurdity – the people “in charge” of monetary policy and more are not only of this view-point. Many are guest speakers as well as hand-picked or invited “senior fellows” that perpetuate the narrative and reasoning on why these views and responses to events are either correct or, proper while insinuating: they know best, and all you need to do listen (and/or obey.) Just don’t dare question them. That’s when things get ugly. Not for them – but for you.

  Today, with the markets in turmoil resembling the antithesis of what was touted by the so-called “smart crowd,” this is going to have a far more negative effect on the populace at large than previous iterations. For 5 of the last 7 years since the financial meltdown of ’08 many believed this crowd actually understood or, at the least “had a clue” about what has been transpiring within the global economy by the manifestations created not by just the Fed’s initial intervention into the markets. Rather, that they could control the resulting Frankenstein it created in continuing that intervention.

  During this period it could be seen by anyone willing to put down the Kool-Aid® long ago they could not. Yet. it seems at many of these “institutes” as well as gatherings of “great minds thinking alike” not only was it decided to avert their eyes and brains away from the growing monster, but it seems they decided to go full-Krugman supplying a free-flowing, open bar, endless supply of the punch to any and all takers.

  As the many who believed, as well as listened, (or worse) took advice from this cabal. This weekend is going to have many wondering: Do they open their 401K statement this month? Or, like in 2007-08 toss it to the side and hope (if not pray) that the “experts” really do know what they’re doing. Or, is it different this time?

  My feeling is: not only is it different; the one’s that understood the fragility of this house-of-cards left long ago. While the one’s that remained are in that process. And they aren’t coming back when the shouts of “stocks on sale” hit the airwaves in the coming weeks and months. Just like they didn’t this past holiday season for retailers. Sales don’t matter when the collective mindset has turned from bargain shoppers to – preserving what you’ve got. And the retail numbers are showing just that.

  However, not to be alarmed. For the people who will tell you, “The consumer is fine” will also be the ones surrounded by their compadres in a massive display of “group think” and “great mind brilliance” next week in no other place than Davos Switzerland. For why should the economy or body politic be viewed as having anything less than stories of great success and enlightenment when a party of four’s single night dining bill and subsequent bar tab will probably eclipse exponentially the average Joe’s 2 week vacation tab? That is, if the average person can still afford one to compare it to.

  Besides, do you really want to go on vacation today with all the safety concerns around the globe? Just look at what it’ll take to make these people who tell you “everything is awesome” have to contend with to enjoy theirs. This year it will take 5000 Swiss military to protect this enclave alone. I wonder what that’ll cost them.

  Actually: who cares. After all the most important item at this event will be on-tap, free-flowing, and in endless supply.

  Intellectual brainstorming resulting in pragmatic ideas as to solve the world’s economic crises and other issues you ask? No, silly…

  The Kool-Aid!

  

  

  

  

  

• With Draghi On Deck, ECB Mulls Steps To Solve "Non-Existent" Bond Scarcity Problem

  It’s nearly that time again.

  On the heels of December’s “big disappointment” wherein Mario Draghi cut the depo rate by a “measly” 10 bps and extended PSPP by an underwhelming six months, the ECB meets again next week, and this time around, expectations are low.

  Despite the fact that markets have descended into outright turmoil, the ECB “is very unlikely to change its QE dynamics or cut the deposit rate at the upcoming meeting,” Barlcays says. “The earliest QE tweak opportunity for the ECB is the March meeting, if at all.”

  So assuming Draghi doesn’t immediately push the panic button now that sub-$30 crude is virtually guaranteed to keep the Eurozone mired in deflation, we’ll write next week off when it comes to further cuts to the depot rate of a further extension/expansion of QE.

  That said, we doubt we’ve seen the end of ECB easing especially given what’s currently unfolding in markets across the globe and considering the trajectory for commodity prices. The question now is what options the ECB has considering the fact that each incremental bond purchase brings the central bank ever closer to the endgame wherein Draghi begins to bump up against the issue cap for German bunds and, depending on how long the program is ultimately extended, for Spanish and French bonds as well. That goes double in the event the ECB expands the pace of monthly purchases (i.e. if Draghi both extends and expands the program).

  Here’s a table from Barclays which outlines two hypothetical scenarios. The first assumes PSPP is extended for another six months beyond March 2017. The second assumes a €20 billion expansion in the monthly pace of purchases and no extension of the program’s duration.

  

  As you can see, in either case the ECB hits the threshold (33%) for bunds, implying that expanding and extending the program simply isn’t possible unless the EBC drops the capital key allocation.

  “We think flexibility in potentially moving away from the capital ratio has a more credible chance because it would not have to happen immediately. It will likely be pitched as: if and when we hit the 33% limit in Germany, we might look into allocating the excess in German purchases to other EGBs, still according to ECB key capital rules of the remaining issuers,” Barlcays says, adding that dropping the issue cap would risk running into the CAC problem.

  As for buying more covered bonds, SSAs and ABS, Barclays says the game is about up in those markets. “Liquidity has significantly worsened in asset classes such as covered bonds, agencies, supras and ABS since the launch of the asset purchase programme,” the bank notes. “As a result, the ECB might run out of bonds to buy or just find it difficult to place bonds in these universes in order to achieve its monthly target purchase amount (likely up to €20bn out of €60bn).”

  

  In another sign that purchase eligible assets are indeed becoming scarce, Bloomberg notes that although ECB officials “say monthly purchases of about 1 percent of the bonds outstanding haven’t constricted the market, sales of ‘off-the-run’ securities by some of the region’s biggest issuers argue to the contrary.” Here’s more:

  France’s AFT, which boosted the proportion of sales of such non-benchmark securities to 33 percent last year, the most since 2011, said reopenings of the less-traded debt help “preserve liquidity along the entire curve.” Germany plans to sell more of an off-the-run July 2044 security this year, the Finance Agency said last month.

   

  “The longer QE goes on, the more that the distortion impact can be visible, and you can tackle that through these off-the-run issuance,” said David Schnautz, a director of rates strategy at Commerzbank AG, which acts as a primary dealer in both France and Germany.

   

  Existing benchmark bonds become off the run once they’re replaced by a new similar security in sufficient size. Issuing more of the older bonds, which tend to be less frequently traded and, in today’s environment, tend to carry a higher coupon, helps expand the universe of securities available to national central banks, who carry out QE.

   

  “If you can only buy 33 percent of the benchmark bonds, you won’t hit your monthly purchase target over an extended time period,” Commerzbank’s Schnautz said.

  In other words, scarcity and liquidity are indeed problems, no matter what the Governing Council says. 

  What all of the above suggests is that if the ECB intends to both expand and extend PSPP while maintaining the issue cap and retaining the depo floor constraint, eventually Draghi will need to find more bonds to buy and he’s not going to get to where he wants to be by snapping up a few sub-sovereigns or coaxing out off-the-run issuance in dribs and drabs.

  And so, unless the ECB intends to find itself in a situation where it is forced by PSPP’s many constraints to continually disappoint the market in an environment where low commodity prices are likely to cause inflation to continually undershoot the central bank’s target, it’s just as likely as not that the ECB will move into IG corporates next and from there, it’s full-Kuroda-ahead into stocks.

  

  

  

  

  

  

• The Great Unraveling Looms – Blame The 'Austrians'?

  Submitted by Alasdair Macleod via GoldMoney.com,

  Well, well: who would have believed it. First the Bank for International Settlements comes out with a paper that links credit booms to the boom-bust business cycle, then Britain's Adam Smith Institute publishes a paper by Anthony Evans that recommends the Bank of England should ditch its powers over monetary policy and move towards free banking.

  Admittedly, the BIS paper hides its argument behind a mixture of statistical and mathematical analysis, and seems unaware of Austrian Business Cycle Theory, there being no mention of it, or even of Hayek. Is this ignorance, or a reluctance to be associated with loony free-marketeers? Not being a conspiracy theorist, I suspect ignorance.

  The Adam Smith Institute's paper is not so shy, and includes both "sound money" and "Austrian" in the title, though the first comment on the web version of the press release says talking about "Austrian" proposals is unhelpful. So prejudice against Austrian economics is still unfortunately alive and well, even though its conclusions are becoming less so. The Adam Smith Institute actually does some very good work debunking the mainstream neo-classical economics prevalent today, and is to be congratulated for publishing Evans's paper.

  The BIS paper will be the more influential of the two in policy circles, and this is not the first time the BIS has questioned the macroeconomic assumptions behind the actions of the major central banks. The BIS is regarded as the central bankers' central bank, so just as we lesser mortals look up to the Fed, ECB, BoE or BoJ in the hope they know what they are doing, they presumably take note of the BIS. One wonders if the Fed's new policy of raising interest rates was influenced by the BIS's view that zero rates are not delivering a Keynesian recovery, and might only intensify the boom-bust syndrome.

  These are straws in the wind perhaps, but surely central bankers are now beginning to suspect that conventional monetary policy is not all it's cracked up to be. For a possible alternative they could turn to the article by Anthony Evans, published by the Adam Smith Institute. Their hearts will sink, because Evans makes it clear that central banks are best as minimal operations, supplying money through open market operations (OMOs) on a punitive instead of a liberal basis. Instead of targeting inflation, Evans recommends targeting nominal GDP. Evans's approach is deliberately sound-money-light, on the basis that it is more likely to be accepted than a raw sound-money approach. But he does hold out the hope it will be an interim measure towards sound money proper: initially a Hayekian rather than a Misesian approach.

  Targeting nominal GDP is not a perfect answer. As Evans points out, changes in government spending distort it, and by targeting output, there may be less control over inflation, if control was ever the right word. However, my own researches are generally supportive of Evans's approach to managing the money supply. This is because, logically, nominal GDP, which is impossible to measure accurately by the way, is simply the total amount of money deployed in the part of the economy included in GDP. The reason this must be so is Say's law, the law of the markets, tells us that we produce to consume, and production is balanced by the sum of consumption and savings. Therefore, if new money or bank credit is introduced into the economy, it will temporarily increase both demand and supply for goods, until the spread of rising prices for the goods affected negates the impact.

  In managing the total money supply, a central bank would have to take into account fluctuations in bank credit, and adjust its own operations accordingly. No MPC, no FOMC, and no convoluted analysis of inflation prospects are required. The true Austrian approach is to welcome a corrective crisis as the most efficient and rapid way to unwind malinvestments. Nominal GDP targeting of a few per cent can be expected to soften this process without unduly discouraging it.

  While I support the concept of targeting nominal GDP, Evans's paper is necessarily complicated, written for an audience that denies Say's law. He argues his case on a modified equation of exchange, M+V = P+Y, where M is the growth rate of the money supply, V is the change in its velocity, P is the inflation rate, and Y is the growth rate of output.

  My worry is that the faintest suggestion of sound money policies will be blamed for a developing economic crisis, without being adopted at all. Within one month of the Fed raising the Fed Funds rate by a miniscule 0.25%, it seems the whole world is falling apart. The usual market cheerleaders are now on record of expecting a global crisis to develop, the signs being too obvious to ignore. Markets are over-valued relative to deteriorating economic prospects. Collapsed energy and commodity prices tell their own story. Shipping rates and the share prices of US utilities (including rails and freight) are falling. The days of blaming China for a contraction of world trade are over: the downturn is now far larger and more widespread.

  Decades of accumulated market distortions appear to be on the brink of a great unwind, most of which can be blamed on expansionary monetary policies. If so, the banking crisis of 2008 was a prelude, rather than the crisis itself. The Fed will almost certainly reduce interest rates back to zero, and reluctantly will have to consider imposing negative rates.

  The Keynesians will blame the Fed for a complete policy failure. They will argue in retrospect, as they did following the banking crisis, that the financial and economic crisis of 2016 was made immeasurably worse by the Fed raising the Fed funds rate and not pumping yet more money into the economy at such a crucial time. It's like saying alcoholics must drink more to be cured. The monetarists will simply say that the Fed got it wrong, and that monetarism was not to blame. They will both blame advocates of inflexible sound money.

  The reality is, that by implementing conventional policies on the recommendation of group-thinking macroeconomists, the central banks have dug a hole too deep to escape. Recognition of the merits of Austrian sound money theory will simply expose this reality sooner than later.

  

  

  

  

  

• Exclusive: Dallas Fed Quietly Suspends Energy Mark-To-Market On Default Contagion Fears

  Earlier this week, before first JPM and then Wells Fargo revealed that not all is well when it comes to bank energy loan exposure, a small Tulsa-based lender, BOK Financial, said that its fourth-quarter earnings would miss analysts’ expectations because its loan-loss provisions would be higher than expected as a result of a single unidentified energy-industry borrower. This is what the bank said:

  “A single borrower reported steeper than expected production declines and higher lease operating expenses, leading to an impairment on the loan. In addition, as we noted at the start of the commodities downturn in late 2014, we expected credit migration in the energy portfolio throughout the cycle and an increased risk of loss if commodity prices did not recover to a normalized level within one year. As we are now into the second year of the downturn, during the fourth quarter we continued to see credit grade migration and increased impairment in our energy portfolio. The combination of factors necessitated a higher level of provision expense.”

  Another bank, this time the far larger Regions Financial, said its fourth-quarter charge-offs jumped $18 million from the prior quarter to $78 million, largely because of problems with a single unspecified energy borrower. More than one-quarter of Regions’ energy loans were classified as “criticized” at the end of the fourth quarter.

  It didn’t stop there and and as the WSJ added, “It’s starting to spread” according to William Demchak, chief executive of PNC Financial Services Group Inc. on a conference call after the bank’s earnings were announced. Credit issues from low energy prices are affecting “anybody who was in the game as the oil boom started,” he said. PNC said charge-offs rose in the fourth quarter from the prior quarter but didn’t specify whether that was due to issues in its relatively small $2.6 billion oil-and-gas portfolio.

  Then, on Friday, U.S. Bancorp disclosed the specific level of reserves it holds against its $3.2 billion energy portfolio for the first time. “The reason we did that is that oil is under $30” said Andrew Cecere, the bank’s chief operating officer. What else will Bancorp disclose if oil drops below $20… or $10?

  It wasn’t just the small or regional banks either: as we first reported, on Thursday JPMorgan did something it hasn’t done in 22 quarter: its net loan loss reserve increased as a result of a jump in energy loss reserves. On the earnings call, Jamie Dimon said that while he is not worried about big oil companies, his bank has started to increase provisions against smaller energy firms.

  

   

  Then yesterday it was the turn of the one bank everyone had been waiting for, the one which according to many has the greatest exposure toward energy: Wells Fargo. To be sure, in order not to spook its investors, among whom most famously one Warren Buffett can be found, for Wells it was mostly “roses”, although even Wells had no choice but to set aside $831 million for bad loans in the period, almost double the amount a year ago and the largest since the first quarter of 2013.

  What was laughable is that the losses included $118 million from the bank’s oil and gas portfolio, an increase of $90 million from the third quarter. Why laughable? Because that $90 million in higher oil-and-gas loan losses was on a total of $17 billion in oil and gas loans, suggesting the bank has seen a roughly 0.5% impairment across its loan book in the past quarter.

  How could this be? Needless to say, this struck us as very suspicious because it clearly suggests that something is going on for Wells (and all of its other peer banks), to rep and warrant a pristine balance sheet, at least until a “digital” moment arrives when just like BOK Financial, banks can no longer hide the accruing losses and has to charge them off, leading to a stock price collapse.

  Which brings us to the focus of this post: earlier this week, before the start of bank earnings season, before BOK’s startling announcement, we reported we had heard of a rumor that Dallas Fed members had met with banks in Houston and explicitly “told them not to force energy bankruptcies” and to demand asset sales instead.

  Rumor Houston office of Dallas Fed met with banks, told them not to force energy bankruptcies; demand asset sales instead

  — zerohedge (@zerohedge) January 11, 2016

  We can now make it official, because moments ago we got confirmation from a second source who reports that according to an energy analyst who had recently met Houston funds to give his 1H16e update, one of his clients indicated that his firm was invited to a lunch attended by the Dallas Fed, which had previously instructed lenders to open up their entire loan books for Fed oversight; the Fed was shocked by with it had found in the non-public facing records. The lunch was also confirmed by employees at a reputable Swiss investment bank operating in Houston.

  This is what took place: the Dallas Fed met with the banks a week ago and effectively suspended mark-to-market on energy debts and as a result no impairments are being written down. Furthermore, as we reported earlier this week, the Fed indicated “under the table” that banks were to work with the energy companies on delivering without a markdown on worry that a backstop, or bail-in, was needed after reviewing loan losses which would exceed the current tier 1 capital tranches.

  In other words, the Fed has advised banks to cover up major energy-related losses.
  

   Why the reason for such unprecedented measures by the Dallas Fed? Our source notes that having run the numbers, it looks like at least 18% of some banks commercial loan book are impaired, and that’s based on just applying the 3Q marks for public debt to their syndicate sums.

  In other words, the ridiculously low increase in loss provisions by the likes of Wells and JPM suggest two things: i) the real losses are vastly higher, and ii) it is the Fed’s involvement that is pressuring banks to not disclose the true state of their energy “books.”

  Naturally, once this becomes public, the Fed risks a stampeded out of energy exposure because for the Fed to intervene in such a dramatic fashion it suggests that the US energy industry is on the verge of a subprime-like blow up.

  Putting this all together, a source who wishes to remain anonymous, adds that equity has been levitating only because energy funds are confident the syndicates will remain in size to meet net working capital deficits. Which is a big gamble considering that as we firsst showed ten days ago, over the past several weeks banks have already quietly reduced their credit facility exposure to at least 25 deeply distressed (and soon to be even deeper distressed) names.

  

   

  However, the big wildcard here is the Fed: what we do not know is whether as part of the Fed’s latest “intervention”, it has also promised to backstop bank loan losses. Keep in mind that according to Wolfe Research and many other prominent investors, as many as one-third of American oil-and-gas producers face bankruptcy and restructuring by mid-2017 unless oil rebounds dramatically from current levels.

  However, the reflexivity paradox embedded in this problem was laid out yesterday by Goldman who explained that oil could well soar from here but only if massive excess supply is first taken out of the market, aka the “inflection phase.”  In other words, for oil prices to surge, there would have to be a default wave across the US shale space, which would mean massive energy loan book losses, which may or may not mean another Fed-funded bailout of US and international banks with exposure to shale.

  What does it all mean? Here is the conclusion courtesy of our source:

  If revolvers are not being marked anymore, then it’s basically early days of subprime when mbs payback schedules started to fall behind. My question for bank eps is if you issued terms in 2013 (2012 reserves) at 110/bbl, and redetermined that revolver in 2014 ‎at 86, how can you be still in compliance with that same rating and estimate in 2016 (knowing 2015 ffo and shutins have led to mechanically 40pc ffo decreases year over year and at least 20pc rebooting of pud and pdnp to 2p via suspended or cancelled programs). At what point in next 12 months does interest payments to that syndicate start to unmask the fact that tranch is never being recovered, which I think is what pva and mhr was all about.

  Beyond just the immediate cash flow and stock price implications and fears that the situation with US energy is much more serious if it merits such an intimate involvement by the Fed, a far bigger question is why is the Fed once again in the a la carte bank bailout game, and how does it once again select which banks should mark their energy books to market (and suffer major losses), and which ones are allowed to squeeze by with fabricated marks and no impairment at all? Wasn’t the purpose behind Yellen’s rate hike to burst a bubble? Or is the Fed less than “macroprudential” when it realizes that pulling away the curtain on of the biggest bubbles it has created would result in another major financial crisis?

  The Dallas Fed, whose new president Robert Steven Kaplan previously worked at Goldman Sachs for 22 years rising to the rank of vice chairman of investment banking, has not responded to our request for a comment as of this writing.

  

  

  

  

  

• Was That The Capitulation? Not Even Close

  Is it different this time?

  "Sentiment" – musings of a madding crowd – would suggest 'yes', The Bulls just capitulated (notably more than than in the August collapse)…

  

  h/t @Not_Jim_Cramer

  "Volume" – real traded action of a crowded trade – would suggest 'no' – The Bulls haven't even started selling (no panic here, especially relative to August's collapse)…

  

  h/t @DonDraperClone

   

  Did the "most hated" bull market just became the "least panicked" bear market?

  

  

  

  

  

• Earthquake Economics – Waiting For The Inevitable "Big One"

  Submitted by MN Gordon (via Prism Economics), annotated by Acting-Man.com's Pater Tenebrarum,

  Beyond Human Capacity

  “The United States of America, right now, has the strongest, most durable economy in the world,” said President Obama, in his State of the Union address, on Tuesday night.  What performance metrics he based his assertion on is unclear.  But we’ll give him the benefit of the doubt.

   

  

   

   

  Maybe this is so…right now.  But it isn’t eternal.  For at grade, hidden in plain sight, a braid of positive and negative surface flowers indicate an economic strike-slip fault extends below.  What’s more, the economy’s foundation dangerously straddles across it.

   

  

  Actually, it probably isn’t so – the Atlanta Fed’s GDP Now measure, which has proven surprisingly accurate thus far, indicates that the US economy is hanging by a thread – and the above chart does now yet include the string of horrendous economic data released since January 8.

   

  Something must slip.  A massive vertical rupture is coming that will collapse everything within a wide-ranging proximity.  It is not a matter of if it will come.  But, rather, of when…regardless of what the President says.

  Here at the Economic Prism we have no reservations about the U.S. – or world – economy.  We see absurdities and inconsistencies.  We see instabilities perilously pyramided up, which could rapidly cascade down.  We just don’t know when.

  Comprehending and connecting the infinite nodes and relationships within an economy are beyond even the most intelligent human’s capacity.  Cause and effect chains are not always immediately observable.  Feedback loops are often circuitous and unpredictable.  What is at any given moment may not be what it appears.

   

  Not Without Consequences

  For instance, the Federal Reserve quadrupled its balance sheet following the 2008 financial crisis, yet consumer prices hardly budged.  Undeniably, the Bureau of Labor Statistics’ consumer price index is subject to gross manipulation.  We’re not endorsing the veracity of the CPI.

  We’re merely pointing out policies have been implemented that have massively increased the quantity of money, yet we can still get a hot cup of donut shop coffee for less than a buck.  Obviously, the effects of these policies have shown up in certain assets…like U.S. stocks.  That’s not to say they won’t still show up in consumer prices.  They most definitely will.

   

  

  One should perhaps not be too surprised that most prices are far from declining – even when measured by government methods that are specifically designed to play price increases down in order to lower the growth rates of so-called COLA expenses (and leaving aside the fact that the so-called “general level of prices” is a myth anyway and actually cannot be measured) – click to enlarge.

   

  The point is no one really knows when consumer prices will rapidly rise.  The potential is very real.  Like desert scrub tumbling along a highway edge, one little spark could send prices up in a bush fire.  Moreover, the longer the Fed can seemingly get away with their efforts to inflate in perpetuity, the greater the disaster that awaits us.

  In the meantime, their policies are not without consequences.  Price distortions flourish to the extent they appear normal.  Nevertheless, upon second glance, apparent incongruities greet us everywhere we look.

  The sad fact is an honest day’s work has been debased to where it’s no longer rewarded with an honest day’s pay.  At the same time the positive effects of productive labor, diligent savings, and prudent spending now take a lifetime – or more – to fully manifest.

  Conversely, the negative effects of borrowing gobs of money and taking abundant risks can masquerade as shrewd business acumen for extended bubble periods.

   

  

  Even when deflated by the government’s own flawed “inflation” measurements, real median household income is back to where it was 20 years ago already. This is definitely not a sign of economic progress. In fact, this datum is testament to how much capital has been malinvested and hence wasted due to Fed policy-inspired serial credit and asset bubbles – click to enlarge.

   

  Earthquake Economics

  During an economic boom, particularly a boom puffed up with the Fed’s cheap credit, madmen get rich.  They borrow money at an artificial discount and place big bets on rising asset prices.

  They don’t care they are placing those bets within a dangerous seismic zone.  The rewards are too great.  Eventually asset bubbles always exhaust themselves.  Price movements reverse.  They stop inflating.  They start deflating.

  Subsequently, as the bubble exhales, the risk taking beneficiaries of the expansion are exposed.  The downside, no doubt, is less pleasant than the upside.  Ask U.S. oil shale producers.  Just 18 months ago they were raking in cash hand over fist.  Lenders were tripping over themselves to extend credit for fracked wells.

  But how quickly things change.  Oil prices fell below $30 per barrel on Tuesday.  Break-even costs for many producers are double that – or more.  In other words, lenders and borrowers alike are staring the downside into the face now.

   

  

  Sitting on a powder keg: oil-related debt has experienced staggering growth – reaching a new peak at what appears to be an exceptionally inopportune juncture, to put it mildly.

   

  In fact, according to a report from AlixPartners, North American oil-and-gas producers are losing nearly $2 billion every week at current prices.  Naturally, capital could only be misdirected to this extent under errant central bank policies of mass credit creation.

  Several more slips like this one and the President’s strongest, most durable economy in the world could backslide into recession. On top of that, ‘the big one’ could rupture at any moment.

  

  

  

  

  

• Pro-China Party Falls As Taiwan Elects First Female President In "Historic" Landslide Election

  “We failed. The Nationalist Party lost the elections. We didn’t work hard enough,” Eric Chu said on Saturday before taking a long bow in front of a “thin” crowd of supporters.

  Chu stepped in to become the Nationalist Party (KMT) candidate in Taiwan’s presidential race when his predecessor was deemed too divisive. The island held two elections on Saturday, one for the presidency and one for seats in the national legislature – The Democratic Progressive Party scored resounding victories in both ballots.

  The DPP candidate and former law professor Tsai Ing-wen became the island’s first female president after claiming 56% of the vote in the biggest landslide since the island’s first democratic election twenty years ago. 

  

  Chu only managed to garner 31%.

  

  Tsai will enjoy a friendly body of lawmakers as the DPP won 68 seats in the 113-seat legislature versus 36 for the Nationalists. Previously, KMT held 64 seats and this will be DPP’s first ever majority.

  

  Taiwan has spent eight years under KMT rule and ahead of the ballot, it was readily apparent that voters were ready for a change, with Tsai maintaining a commanding lead in opinion polls:

  

  That, in turn, led Taiwan observers to predict that the legislature would likely fall to DPP as well. “If history is any indication, the KMT may lose its majority in parliament as well, given that for the two occasions when KMT lost the presidential elections (2000 and 2004), it also failed to win the majority of seats against the DPP in parliament,” Goldman wrote, in the days before the election.

  

  The vote raises the specter of conflict with China. “While Tsai has pledged to maintain ties with Beijing, the DPP’s charter supports independence,” Bloomberg notes, before ominously reminding readers that “The Chinese Communist Party passed a law allowing an attack to prevent secession in 2005, when the last DPP president, Chen Shui-bian, sought a referendum on statehood.”

  Underscoring how frosty relations (still) are, sixteen-year-old pop star Chou Tzu-yu had her activities in China suspended by her management company after waving a Taiwanese flag on a South Korean TV program. She was compelled to apologize in a televised address in order to avoid, in AP’s words, “offending nationalist sentiments on the mainland.” 

  “I’m sorry, I should have come out earlier to apologize,” she says, in a statement that sounds like it might have been beaten out of someone who shorted Chinese stocks last summer. “I didn’t come out until now because I didn’t know how to face the situation and the public.” 

  

  “There is only one China,” she adds, staring blankly into the camera before promising to behave going forward. “I am proud I am Chinese. As a Chinese person, while participating in activities abroad, my improper behavior hurt my company and netizens on both sides of the Strait. I feel deeply sorry and guilty. I decided to reflect on myself seriously and suspend all my activities in China.”

  Chou’s predicament was denounced by new President Tsai, who told reporters that “this particular incident will serve as a constant reminder to me about the importance of our country’s strength and unity.” And by “country” she probably doesn’t mean China. 

  “Although Ms. Tsai has vowed to maintain a broadly stable relationship with mainland China, she remains reticent on specific strategies and has remained ambiguous about the ‘1992 consensus’ which has supported the principle of “one China” although each side has been allowed to interpret it differently,” Goldman writes. “Her position has been that this is an option for Taiwan, but not the only one.”

  Still, analysts say Tsai likely won’t move to anger Xi – at least not immediately. 

  “As long as Tsai doesn’t provoke the other side, it’s OK,” one former newspaper distribution agent who attended Tsai’s rally told AP. “Tsai won’t provoke China for sure, but she won’t satisfy its demands,” said George Tsai, a politics professor at Chinese Cultural University in Taipei adds.

  For his part, Chu just can’t seem to figure out where things went awry. “Why has public opinion changed so much? How did our party misread public opinion? Our policy ideas, the people in our camp, the way we communicate with society — are there major problems there? Why did we fail to self-examine and lose power in the central government and lose our legislative majority?,” he asked himself during a concession speech at Kuomintang headquarters.

  The answer to all of Chu’s questions is simple. “The landslide was propelled by anxiety over stagnant wages, high home prices and dissatisfaction with President Ma Ying-jeou’s polices of rapprochement with Taiwan’s one-time civil war foes on mainland China,” Bloomberg writes, summing things up nicely before adding that “Tsai will bear the task of resuscitating an economy expected to have grown last year at its slowest pace since at least 2009.”

  

  The quandary here should be obvious: given the slowdown in mainland demand and the yuan deval, this isn’t exactly the ideal time for Taiwan to be poking China in the eye with a stick.”The election comes at a tricky time for Taiwan’s export-dependent economy, which slipped into recession in the third quarter last year,” Reuters said after the election. “China is Taiwan’s top trading partner and Taiwan’s favourite investment destination.”

  Indeed. Exports to China dropped a whopping 16.4% last month and were down nearly 20% Y/Y in November. Overall, exports fell 13.9% in December and were down 10.6% for the year. Exports to China fell 12.3% in 2015.

  

  

  As for regional security and the ongoing cold war for two chains of islands in the Pacific, AP goes on to say that “Tsai [has] reaffirmed Taiwan’s sovereignty claim over East China Sea islands also claimed by China but controlled by Japan [and] says Taiwan will work to lower tensions in the South China Sea, where it, China and four other governments share overlapping territorial claims.”

  In short then, Tsai has her hands full. She needs to satisfy her base by scaling back ties with China while keeping cross-Strait relations amicable enough to ensure that trade isn’t imperiled at a time when exports are already in free fall. Meanwhile, Taiwan is also mired in the increasingly petulant spat over a series of sparsely populated islands in the region.

  Good luck Ms. Tsai and remember, “Big Uncle” Xi is watching…

  

  

  

  

  

  

• The Deflation Monster Has Arrived

  Submitted by Chris Martenson via PeakProsperity.com,

  As we’ve been warning for quite a while (too long for my taste): the world’s grand experiment with debt has come to an end. And it’s now unraveling.

  Just in the two weeks since the start of 2016, the US equity markets are down almost 10%. Their worst start to the year in history. Many other markets across the world are suffering worse.

  If you watched stock prices today, you likely had flashbacks to the financial crisis of 2008. At one point the Dow was down over 500 points, the S&P cracked below key support at 1,900, and the price of oil dropped below $30/barrel. Scared investors are wondering:  What the heck is happening? Many are also fearfully asking: Are we re-entering another crisis?

  Sadly, we think so. While there may be a market rescue that provide some relief in the near term, looking at the next few years, we will experience this as a time of unprecedented financial market turmoil, political upheaval and social unrest. The losses will be staggering. Markets are going to crash, wealth will be transferred from the unwary to the well-connected, and life for most people will get harder as measured against the recent past.

  It’s nothing personal; it’s just math. This is simply the way things go when a prolonged series of very bad decisions have been made. Not by you or me, mind you. Most of the bad decisions that will haunt our future were made by the Federal Reserve in its ridiculous attempts to sustain the unsustainable.

  The Cost Of Bad Decisions

  In spiritual terms, it is said that everything happens for a reason. When it comes to the Fed, however, I’m afraid that a less inspiring saying applies:

  

  Yes, it’s easy to pick on the Fed now that it’s obvious that they’ve failed to bring prosperity to anyone but their inside coterie of rich friends and big client banks. But I’ve been pointing out the Fed’s grotesque failures for a very long time. Again, too long for my tastes.

  I rather pointlessly wish that the central banks of the world had been reined in by the public before the crash of 2008. However the seeds of their folly were sown long before then:

  

  (Source)

  Note the pattern in the above monthly chart of the S&P 500. A relatively minor market slump in 1994 was treated by the then Greenspan Fed with an astonishing burst of new money creation — via its ‘sweeps” program response, which effectively eliminated reserve requirements for banks .That misguided policy created the first so-called Tech Bubble, which burst in 2000.

  The next move by the Fed was to drop rates to 1%, which gave us the Housing Bubble. That was a much worse and more destructive event than the bubble that preceded it. And it burst in 2008.

  Then the Fed (under Bernanke this time) dropped rates to 0%. The rest of the world’s central banks followed in lockstep (some going even further, into negative territory, as in Europe’s case). This has led to a gigantic, interconnected set of bubbles across equities, bonds and real estate — virtually everywhere across the globe.

  So the Fed's pattern here was: fixing a small problem with a bad decision, which lead to an even larger problem addressed by an even worse decision, resulting in an even larger set of problems that are now in the process of deflating/bursting.  Three sets of increasingly bad decisions in a row.

  The amplitude and frequency of the bubbles and crashes are both increasing. As is the size and scope of the destruction.

  The Even Larger Backdrop

  The even larger backdrop to all of this is that the developed world, and recently China, have been stoking growth with debt, and have been doing so for a very long time.

  Using the US as a proxy for other countries, this is what the lunacy looks like:

  

  As practically everybody can quickly work out, increasing your debts at 2x the rate of your income eventually puts you in the poor house. As I said, it’s nothing personal; it’s just math.

  But somehow, this math escaped the Fed’s researchers and policy makers as a problem. Well, turns out it is. And it’s now knocking loudly on the world’s door. The deflation monster has arrived.

  The only possible way to rationalize such an increase in debt is to convince oneself that economic growth will come roaring back, and make it all okay. But the world is now ten years into an era of structurally weak GDP and there are no signs that high growth is coming back any time soon, if ever.

  So the entire edifice of debt-funded growth is now being called into question — at least by those who are paying attention or who aren't hopelessly blinkered by a belief system rooted in the high net energy growth paradigms of the past.

  At any rate, I started the chart in 1970 because it was in 1971 that the US broke the dollar’s linkage to gold. The rest of the world complained for a bit at the time, but politicians everywhere quickly realized that the loss of the golden tether also allowed them to spend with wild abandon and rack up huge deficits. So it was wildly popular.

  As long as everybody played along, this game of borrowing and then borrowing some more was fun. In one of the greatest circular backrubs of all time, the central banks and banking systems of the developed world all bought each other’s debt, pretending as if it all made sense somehow:

  

  (Source)

  The above charts show how hopelessly entangled the worldwide web of debt has become. Yes, it's all made possible by the delusion that somehow being owed money by an insolvent entity will endlessly prevent your own insolvency from being revealed. How much longer can that delusion last?

  All of this is really just the terminal sign of a major credit bubble — a credit era, if you will — drawing to a close.

  I will once again rely upon this quote by Ludwig Von Mises because apparently its message has not yet sunk in everywhere it should have:

  “ There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

  ~ Ludwig Von Mises

  Well, the central banks of the world could not bring themselves to voluntarily end the credit expansion – that would have taken real courage.

  So now we are facing something far worse.

  Why The Next Crisis Will Be Worse Than 2008

  I’m not just calling for another run of the mill bear market for equities, but for the unwinding of the largest and most ill-conceived credit bubble in all of history. Equities are a side story to a larger one.

  It’s global and it’s huge. This deflationary monster has no equal in all of history, so there’s not a lot of history to guide us here.

  At Peak Prosperity we favor the model that predicts ‘first the deflation, then the inflation’ or the "Ka-Poom! Theory" as Erik Janszen at iTulip described it. While it may seem that we are many years away from runaway inflation (and some are doubting it will or ever could arrive again), here’s how that will probably unfold.

  Faced with the prospect of watching the entire financial world burn to the figurative ground (if not literal in some locations), or doing something, the central banks will opt for doing something.

  Given that their efforts have not yielded the desired or necessary results, what can they realistically do that they haven't already?

  The next thing is to give money to Main Street.

  That is, give money to the people instead of the banks. Obviously puffing up bank balance sheets and income statements has only made the banks richer. Nobody else besides a very tiny and already wealthy minority has really benefited. Believe it or not, the central banks are already considering shifting the money spigot towards the public.

  You might receive a credit to your bank account courtesy of the Fed. Or you might receive a tax rebate for last year. Maybe even a tax holiday for this year, with the central bank monetizing the resulting federal deficits.

  Either way, money will be printed out of thin air and given to you. That’s what’s coming next. Possibly after a failed attempt at demanding negative interest rates from the banks. But coming it is.

  This "helicopter money" spree will juice the system one last time, stoking the flames of inflation. And while the central banks assume they can control what happens next, I think they cannot.

  Once people lose faith in their currency all bets are off. The smart people will be those who take their fresh central bank money and spend it before the next guy.

  In Part 2: Why This Next Crisis Will Be Worse Than 2008 we look at what is most likely to happen next, how bad things could potentially get, and what steps each of us can and should be taking now — in advance of the approaching rout — to position ourselves for safety (and for prosperity, too)

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

   

  

  

  

  

  

• Would You Hire It: China's "Resume" Revealed

  After the worst two-week start to US stock trading in history, bulls need some cheering up. So here, courtesy of Citi’s Brent Donnelly, is some levity: this is what China’s Curriculum Vitae would look like if it was applying for a job. It is also a great summary for those who need a simple cheat sheet of where China was, where it is, and where it is going.

  

  So would you hire it?

  

  

  

  

  

• Recession At The Gate: JPM Cuts Q4 GDP From 1.0% To 0.1%

  We already noted the cycle-low Q4 GDP forecast by the Atlanta Fed, which in a release which came out just as the crashing US equity market closed revised the last quarter GDP to just 0.6%, which delay however according to the same Atlanta Fed was due to “nothing more nefarious than technical difficulties.”

  Curiously, JPM had no problems with the 15 second exercise of plugging in raw data into the GDP “beancount” model. And, according to chief economist Michael Feroli, in the 4th quarter, the same quarter in which Yellen finally felt confident enough to declare the US economy strong enough to withstand a rate hike and a tightening cycle, US growth ground to a halt and as a result JPMorgan just cut its Q4 GDP forecast from 1.0% to 0.1%, which would suggest in 2015 US GDP grew 2.3%, down from 2.4% in 2014.

  If JPM is right, and if the US economy effectively did not grow in the fourth quarter, this would make it the worst GDP print since Q1 of 2014, and tied for the third worst quarter since 2009, which incidentally was our kneejerk assessment after yesterday’s latest round of abysmal economic data.

  Another downward revision to GDP: Yellen may have raised rates in a negative GDP quarter

  — zerohedge (@zerohedge) January 15, 2016

  The cherry on top: JPM also cut its Q1 2016 GDP forecast from 2.25% to 2.00%. Expect many more downward revisions to forward GDP in the coming weeks.

  Below is a chart of what US GDP looks like if JPM’s forecast proves to be accurate:

  

  Here is JPM explaining why “Q4 GDP growth is still positive, but barely”

  We are lowering our tracking of real annualized GDP growth in Q4 from 1.0% to 0.1%. Two reports out today contributed to this downgraded assessment. First, retail sales in December came in rather shockingly weak, which was accompanied by modest downward revisions to October and November retail sales. Second, the business inventories report for November suggest a fairly aggressive push by business to reduce the pace of stockbuilding last quarter. We now see inventories subtracting 1.2%-points from growth last quarter, offset by a disappointing but not disastrous 1.3% increase in real final sales.

   

  We are also lowering some our outlook for Q1 GDP growth from 2.25% to 2.0%. While the inventory situation should turn to being roughly neutral for growth, the quarterly arithmetic on consumer spending got a little more challenging after this morning’s retail sales figure, which implies flat real consumer spending in December. We now see real consumer spending in Q1 at 2.5%, versus 3.0% previously. We are leaving unrevised our outlook for 2.25% growth over the remaining three quarters of the year. We will discuss in a separate email the policy outlook, which in any event is currently being swayed more by the inflation data than the growth data.
   
  

  

  

  

  

  

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• The Ascendance of Sociopaths in U.S. Governance

  Submitted by Doug Casey via InternationalMan.com,

  An International Man lives and does business wherever he finds conditions most advantageous, regardless of arbitrary borders. He’s diversified globally, with passports from multiple countries, assets in several jurisdictions, and his residence in yet another. He doesn’t depend absolutely on any country and regards all of them as competitors for his capital and expertise.

  Living as an international man has always been an interesting possibility. But few Americans opted for it, since the U.S. used to reward those who settled in and put down roots. In fact, it rewarded them better than any other country in the world, so there was no pressing reason to become an international man.

  Things change, however, and being rooted like a plant – at least if you have a choice – is a suboptimal strategy if you wish to not only survive, but prosper. Throughout history, almost every place has at some point become dangerous for those who were stuck there. It may be America’s turn.

  For those who can take up the life of an international man, it’s no longer just an interesting lifestyle decision. It has become, at a minimum, an asset saver, and it could be a lifesaver. That said, I understand the hesitation you may feel about taking action; pulling up one’s roots (or at least grafting some of them to a new location) can be almost as traumatic to a man as to a vegetable.

  As any intelligent observer surveys the world’s economic and political landscape, he has to be disturbed – even dismayed and a bit frightened – by the gravity and number of problems that mark the horizon. We’re confronted by economic depression, looming financial chaos, serious currency inflation, onerous taxation, crippling regulation, a developing police state, and, worst of all, the prospect of a major war. It seems almost unbelievable that all these things could affect the U.S., which historically has been the land of the free.

  How did we get here? An argument can be made that things went bad because of miscalculation, accident, inattention, and the like. Those elements have had a role, but it is minor. Potential catastrophe across the board can’t be the result of happenstance. When things go wrong on a grand scale, it’s not just bad luck or inadvertence. It’s because of serious character flaws in one or many – or even all – of the players.

  So is there a root cause of all the problems I’ve cited? If we can find it, it may tell us how we personally can best respond to the problems.

  In this article, I’m going to argue that the U.S. government, in particular, has been overrun by the wrong kind of person. It’s a trend that’s been in motion for many years but has now reached a point of no return. In other words, a type of moral rot has become so prevalent that it’s institutional in nature. There is not going to be, therefore, any serious change in the direction in which the U.S. is headed until a genuine crisis topples the existing order. Until then, the trend will accelerate.

  The reason is that a certain class of people – sociopaths – are now fully in control of major American institutions. Their beliefs and attitudes are insinuated throughout the economic, political, intellectual, and psychological/spiritual fabric of the U.S.

  What does this mean to you, as an individual? It depends on your character. Are you the kind of person who supports “my country, right or wrong,” as did most Germans in the 1930s and 1940s? Or the kind who dodges the duty to be a helpmate to murderers? The type of passenger who goes down with the ship? Or the type who puts on his vest and looks for a lifeboat? The type of individual who supports the merchants who offer the fairest deal? Or the type who is gulled by splashy TV commercials?

  What the ascendancy of sociopaths means isn’t an academic question. Throughout history, the question has been a matter of life and death. That’s one reason America grew; every American (or any ex-colonial) has forebears who confronted the issue and decided to uproot themselves to go somewhere with better prospects. The losers were those who delayed thinking about the question until the last minute.

  I have often described myself, and those I prefer to associate with, as gamma rats. You may recall the ethologist’s characterization of the social interaction of rats as being between a few alpha rats and many beta rats, the alpha rats being dominant and the beta rats submissive. In addition, a small percentage are gamma rats that stake out prime territory and mates, like the alphas, but are not interested in dominating the betas. The people most inclined to leave for the wide world outside and seek fortune elsewhere are typically gamma personalities.

  You may be thinking that what happened in places like Nazi Germany, the Soviet Union, Mao’s China, Pol Pot’s Cambodia, and scores of other countries in recent history could not, for some reason, happen in the U.S.. Actually, there’s no reason it won’t at this point. All the institutions that made America exceptional – including a belief in capitalism, individualism, self-reliance, and the restraints of the Constitution – are now only historical artifacts.

  On the other hand, the distribution of sociopaths is completely uniform across both space and time. Per capita, there were no more evil people in Stalin’s Russia, Hitler’s Germany, Mao’s China, Amin’s Uganda, Ceausescu’s Romania, or Pol Pot’s Cambodia than there are today in the U.S. All you need is favorable conditions for them to bloom, much as mushrooms do after a rainstorm.

  Conditions for them in the U.S. are becoming quite favorable. Have you ever wondered where the 50,000 people employed by the TSA to inspect and degrade you came from? Most of them are middle-aged. Did they have jobs before they started doing something that any normal person would consider demeaning? Most did, but they were attracted to – not repelled by – a job where they wear a costume and abuse their fellow citizens all day.

  Few of them can imagine that they’re shepherding in a police state as they play their roles in security theater. (A reinforced door on the pilots’ cabin is probably all that’s actually needed, although the most effective solution would be to hold each airline responsible for its own security and for the harm done if it fails to protect passengers and third parties.) But the 50,000 newly employed are exactly the same type of people who joined the Gestapo – eager to help in the project of controlling everyone. Nobody was drafted into the Gestapo.

  What’s going on here is an instance of Pareto’s Law. That’s the 80-20 rule that tells us, for example, that 80% of your sales come from 20% of your salesmen or that 20% of the population are responsible for 80% of the crime.

  As I see it, 80% of people are basically decent; their basic instincts are to live by the Boy Scout virtues. 20% of people, however, are what you might call potential trouble sources, inclined toward doing the wrong thing when the opportunity presents itself. They might now be shoe clerks, mailmen, or waitresses – they seem perfectly benign in normal times. They play baseball on weekends and pet the family dog. However, given the chance, they will sign up for the Gestapo, the Stasi, the KGB, the TSA, Homeland Security, or whatever. Many seem well intentioned, but are likely to favor force as the solution to any problem.

  But it doesn’t end there, because 20% of that 20% are really bad actors. They are drawn to government and other positions where they can work their will on other people and, because they’re enthusiastic about government, they rise to leadership positions. They remake the culture of the organizations they run in their own image. Gradually, non-sociopaths can no longer stand being there. They leave. Soon the whole barrel is full of bad apples. That’s what’s happening today in the U.S.

  It’s a pity that Bush, when he was in office, made such a big deal of evil. He discredited the concept. He made Boobus americanus think it only existed in a distant axis, in places like North Korea, Iraq and Iran, which were and still are irrelevant backwaters and arbitrarily chosen enemies. Bush trivialized the concept of evil and made it seem banal because he was such a fool. All the while, real evil, very immediate and powerful, was growing right around him, and he lacked the awareness to see he was fertilizing it by turning the U.S. into a national security state after 9/11.

  Now, I believe, it’s out of control. The U.S. is already in a truly major depression and on the edge of financial chaos and a currency meltdown. The sociopaths in government will react by redoubling the pace toward a police state domestically and starting a major war abroad. To me, this is completely predictable. It’s what sociopaths do.

  Editor’s Note: A big part of any strategy to reduce your political risk is to place some of your savings outside the immediate reach of the thieving bureaucrats in your home country. Obtaining a foreign bank account is a convenient way to do just that.

  That way, your savings cannot be easily confiscated, frozen, or devalued at the drop of a hat or with a couple of taps on the keyboard. In the event capital controls are imposed, a foreign bank account will help ensure that you have access to your money when you need it the most.

  In short, your savings in a foreign bank will largely be safe from any madness in your home country.

  Despite what you may hear, having a foreign bank account is completely legal and is not about tax evasion or other illegal activities. It’s simply about legally diversifying your political risk by putting your liquid savings in sound, well-capitalized institutions where they’re treated best.

  We recently released a comprehensive free guide where we discuss our favorite foreign banks and jurisdictions, including, crucially, those that still accept Americans as clients and allow them to open accounts remotely for small minimums.

  New York Times best-selling author Doug Casey and his team describe how you can do it all from home. And there’s still time to get it done without extraordinary cost or effort. Click here to download the PDF now.

  

  

  

  

  

• The World’s Most Famous Case Of Hyperinflation (Part 1)

  The Great War ended on the 11th hour of November 11th, 1918, when the signed armistice came into effect.

  Though this peace would signal the end of the war, it would also help lead to a series of further destruction: this time the destruction of wealth and savings.

  The world’s most famous hyperinflation event, which took place in Germany from 1921 and 1924, was a financial calamity that led millions of people to have their savings erased.

  

  Courtesy of: The Money Project

   

  The Treaty of Versailles

  Five years after the assassination of Archduke Franz Ferdinand, the Treaty of Versailles was signed, officially ending the state of war between Germany and the Allies.

  The terms of the agreement, which were essentially forced upon Germany, made the country:

  1. Accept blame for the war
  2. Agree to pay £6.6 billion in reparations (equal to $442 billion in USD today)
  3. Forfeit territory in Europe as well as its colonies
  4. Forbid Germany to have submarines or an air force, as well as a limited army and navy
  5. Accept the Rhineland, a strategic area bordering France and other countries, to be fully demilitarized.

  “I believe that the campaign for securing out of Germany the general costs of the war was one of the most serious acts of political unwisdom for which our statesmen have ever been responsible.”
  – John Maynard Keynes, representative of the British Treasury

  Keynes believed the sums being asked of Germany in reparations were many times more than it was possible for Germany to pay. He thought that this could create large amounts of instability with the global financial system.

  The Catalysts

  1. Germany had suspended the Mark’s convertibility into gold at the beginning of war.

  This created two separate versions of the same currency:

  Goldmark: The Goldmark refers to the version on the gold standard, with 2790 Mark equal to 1 kg of pure gold. This meant: 1 USD = 4 Goldmarks, £1 = 20.43 Goldmarks

  Papiermark: The Papiermark refers to the version printed on paper. These were used to finance the war.
  In fear that Germany would run the printing presses, the Allies specified that reparations must be paid in the Goldmarks and raw materials of equivalent value.

  2. Heavy Debt

  Even before reparations, Germany was already in significant debt. The country had borrowed heavily during the war with expectations that it would be won, leaving the losers repay the loans.

  Adding together previous debts with the reparations, debt exceeded Germany’s GDP.

  3. Inability to Pay

  The burden of payments was high. The country’s economy had been damaged by the war, and the loss of Germany’s richest farmland (West Prussia) and the Saar coalfields did not help either.

  Foreign speculators began to lose confidence in Germany’s ability to pay, and started betting against the Mark.

  Foreign banks and businesses expected increasingly large amounts of German money in exchange for their own currency. It became very expensive for Germany to buy food and raw materials from other countries.

  Germany began mass printing bank notes to buy foreign currency, which was in turn used to pay reparations.

  4. Invasion of The Ruhr

  After multiple defaults on payments of coal and timber, the Reparation Commission voted to occupy Germany’s most important industrial lands (The Ruhr) to enforce the payment of reparations.

  French and Belgian troops invaded in January 1923 and began The Occupation of The Ruhr.

  German authorities promoted the spirit of passive resistance, and told workers to “do nothing” to help the invaders. In other words, The Ruhr was in a general strike, and income from one of Germany’s most important industrial areas was gone.

  On top of that, more and more banknotes had to be printed to pay striking workers.

  Hyperinflation

  Just two calendar years after the end of the war, the Papiermark was worth 10% of its original value. By the end of 1923, it took 1 trillion Papiermarks to buy a single Goldmark.

  All cash savings had lost their value, and the prudent German middleclass savers were inexplicably punished.

  Learn about the effects of German hyperinflation, how it was curtailed, and about other famous hyperinflations in Part 2 (released sometime the week of Jan 18-22, 2016).

  Source: The Money Project via VisualCapitalist.com

  

  

  

  

  

• Oil, War, & Drastic Global Change

  Submitted by Raul Ilargi Meijer via The Automatic Earth blog,

  The first thing that popped into our minds on Tuesday when WTI oil briefly broached $30 for its first $20 handle in many years, was that this should be triggering a Gawdawful amount of bets, $30 being such an obvious number. Which in turn would of necessity lead to a -brief- rise in prices.

  Apparently even that is not so easy to see, since when prices did indeed go up after, some 3% at the ‘top’, ‘analysts’ fell over each other talking up ‘bottom’, ‘rebound’ and even ‘recovery’. We’re really addicted to that recovery idea, aren’t we? Well, sorry, but this is not about recovering, it’s about covering (wagers).

  Same thing happened on Thursday after Brent hit that $20 handle, with prices up 2.5% at noon. That too, predictably, shall pass. Covering. On this early Friday morning, both WTI and Brent have resumed their fall, threatening $30 again. And those are just ‘official’ numbers, spot prices.

  If as a producer you’re really squeezed by your overproduction and your credit lines and your overflowing storage, you’ll have to settle for less. And you will. Which is going to put downward pressure on oil prices for a while to come. Inventories are more than full all over the world. With oil that was largely purchased, somewhat ironically, because prices were perceived as being low.

  Interestingly, people are finally waking up to the reality that this is a development that first started with falling demand. China. Told ya. And only afterwards did it turn into a supply issue as well, when every producer began pumping for their lives because demand was shrinking.

  All the talk about Saudi Arabia’s ‘tactics’ being aimed at strangling US frackers never sounded very bright. By November 2014, the notorious OPEC meeting, the Saudi’s, well before most others including ‘analysts’, knew to what extent demand was plunging. They had first-hand knowledge. And they had ideas, too, about where that could lead prices. Alarm bells in the desert.

  There are alarm bells ringing in many capitals, there’s not a single oil producer sitting comfy right now. And that’s why ‘official’ prices need to be taken with a bag of salt. Bloomberg puts the real price today at $26:

  The Real Price of Oil Is Far Lower Than You Realize

  While oil prices flashing across traders’ terminals are at the lowest in a decade, in real terms the collapse is even deeper. West Texas Intermediate futures, the U.S. benchmark, sank below $30 a barrel on Tuesday for the first time since 2003. Actual barrels of Saudi Arabian crude shipped to Asia are even cheaper, at $26 – the lowest since early 2002 once inflation is factored in and near levels seen before the turn of the millennium. Slumping oil prices are a critical signal that the boom in lending in China is “unwinding,” according to Adair Turner, chairman of the Institute for New Economic Thinking.

  

  Slowing investment and construction in China, the world’s biggest energy user, is “sending an enormous deflationary impetus through to the world, and that is a significant part of what’s happening in this oil-price collapse,” Turner, former chairman of the U.K. Financial Services Authority, said. The nation’s economic expansion faltered last year to the slowest pace in a quarter of a century. “You see a big destruction in the income of the oil and commodity producers,” Turner said. “That is having a major effect on their expenditure across the world.”

  Zero Hedge does one better and looks at 1998 dollars:

  The ‘Real’ Price Of Oil Is Below $17

  “You see a big destruction in the income of the oil and commodity producers,” exclaims an analyst but, as Bloomberg notes, while oil prices flashing across traders’ terminals are at the lowest in a decade, in real terms the collapse is considerably deeper. Adjusted for inflation, WTI is its lowest since 2002 and worse still Saudi Light Crude is trading at below $17 (in 1998 dollar terms) – the lowest since the 1980s… Slumping prices are a critical signal that the boom in lending in China is “unwinding,” according to Adair Turner, chairman of the Institute for New Economic Thinking.

  

  In fact, while sub-$30 per barrel oil sounds very scary, Saudi prices would be less than $17 a barrel when converted into dollar levels for 1998, the year oil sank to its lowest since the 1980s. Slowing investment and construction in China, the world’s biggest energy user, is “sending an enormous deflationary impetus through to the world, and that is a significant part of what’s happening in this oil-price collapse,” Turner, former chairman of the U.K. Financial Services Authority, said.

  But this still covers only light sweet crude. Heavier versions are already way below even those levels. Question: what does tar sands oil go for in 1998 dollars? $5 perhaps? A barrel’s worth of it fetched $8.35 in 2016 US dollars on Tuesday. And that does not stop production, because investment (sunk cost) has been spent so there’s no reason to cut, quite the contrary.

  Crude At $10 Is Already A Reality For Canadian Oil-Sands Miners

  Think oil in the $20s is bad? In Canada they’d be happy to sell it for $10. Canadian oil sands producers are feeling pain as bitumen – the thick, sticky substance at the center of the heated debate over TransCanada’s Keystone XL pipeline – hit a low of $8.35 on Tuesday, down from as much as $80 less than two years ago. Producers are all losing money at current prices, First Energy Capital’s Martin King said Tuesday at a conference in Calgary. Which doesn’t mean they’ll stop. Since most of the spending for bitumen extraction comes upfront, and thus is a sunk cost, production will continue and grow.

  

  Another interesting question is where the price of oil would be right now if the perception of low prices had not made 2015 such a banner year for filling up storage space across the globe, including huge amounts of tankers that are left floating at sea, awaiting a ‘recovery’. But that is so last year:

  Tanker Rates Tumble As Last Pillar Of Strength In Oil Market Crashes

  If there was one silver-lining in the oil complex, it was the demand for VLCCs (as huge floating storage facilities or as China scooped up ‘cheap’ oil to refill their reserves) which drove tanker rates to record highs. Now, as Bloomberg notes so eloquently, it appears the party is over! Daily rates for benchmark Saudi Arabia-Japan VLCC cargoes have crashed 53% year-to-date to $50,955 (as it appears China’s record crude imports have ceased). In fact the rate crashed 12% today for the 12th straight daily decline from over $100,000 just a month ago…

  

  China imported a record amount of crude last year as oil’s lowest annual average price in more than a decade spurred stockpiling and boosted demand from independent refiners. China’s crude imports last month was equivalent to 7.85 million barrels a day, 6% higher than the previous record of 7.4 million in April, Bloomberg calculations show.

  

  China has exploited a plunge in crude prices by easing rules to allow private refiners, known as teapots, to import crude and by boosting shipments to fill emergency stockpiles. The nation’s overseas purchases may rise to 370 million metric tons this year, surpassing estimated U.S. imports of about 363 million tons, according to Li Li, a research director with ICIS China, an industry researcher. But given the crash in tanker rates – and implicitly demand – that “boom” appears to be over.

  The consequences of all this will be felt all over the world, and for a long time to come. All of our economic systems run on oil, so many jobs are related to it, so many ‘fields’ in the economy, and no, things won’t get easier when oil is at $20 or $10, it’ll be a disaster of biblical proportions, like a swarm of locusts that leaves precious little behind. Squeeze oil and you squeeze the entire economic system. That’s what all the ‘low oil prices are great for the economy’ analysts missed (many still do).

  Entire nations will undergo drastic changes in leadership and prosperity. Norway, Canada, North Dakota, Russia. But more than that, Middle East nations that rely entirely on oil, a dependency that won’t allow for many of their rulers to remain in office. Same goes for all OPEC nations, and many non-OPEC producers.

  We can argue that a war of some kind or another can be the black swan that sets prices ‘straight’, but black swans are supposed to be the things you can’t see coming, and Middle East warfare for obvious reasons doesn’t even qualify for that definition.

  The world is full of nations and rulers that are fighting for bare survival. And things like that don’t play out on a short term basis. For that reason alone, though there are many others as well, oil prices will remain under pressure for now.

  Even a war will be hard put to turn that trend around at this point. Unless production facilities are destroyed on a large scale, war may just lead to even more production as demand keeps falling. The fact that Iran is preparing to ‘come back online’, promising an even steeper glut in world markets, is putting the Saudi’s on edge. Rumors of Libya wanting to return for a piece of the pie won’t exactly soothe emotions either.

  And when, in a few years’ time, all the production cuts due to shut wells become our new reality, and eventually they must, then no, there will still not be an oil shortage. Because the economy will be doing so much worse by then that demand will have fallen more than supply.

  Barring large scale warfare in the Middle East there is nothing that can solve the low oil price conundrum. But think about it, which Gulf nation can even afford such warfare in present times? For that matter, which nation in the world can?

  The US may try and ignite a proxy war with Russia, but that would lead to an(other) endless and unwinnable war theater. Which would carry the threat of dragging in China as well. The US and its -soon even officially- shrinking economy can’t afford that. Which of course by no means guarantees it won’t try.

  

  

  

  

  

• Why Donald Trump Is Praying For A Market Crash

  When it comes to Trump’s relentless surge in the polls, one thing is certain: the so-called “pundits”, biased from day one, were, are, and will continue to be completely wrong. But as the day approaches when Trump appears set to win the GOP presidential nomination and face off against Hillary, who should one listen to? Well, according to InvesTech’s James Stack, with a track record of 86.4%, the market may be an almost flawless arbiter of the election outcome long before November.

  Here’s why:

  Does the stock market affect or predict the election outcome?

   

  The old saying that “people vote their pocketbooks” is more accurate than the average political analyst thinks. While Wall Street typically worries about how politics might affect the market, perhaps Presidential candidates should worry about how the stock market might affect their political outcomes.

   

  Historically, the market performance in the three months leading up to a Presidential Election has displayed an uncanny ability to forecast who will win the White House… the incumbent party or the challenger. Since 1928, there have been 22 Presidential Elections. In 14 of them, the S&P 500 climbed during the three months preceding election day. The incumbent President or party won in 12 of those 14 instances. However, in 7 of the 8 elections where the S&P 500 fell over that three month period, the incumbent party lost.

   

  There are only three exceptions to this correlation: 1956, 1968, and 1980. Statistically, the market has an 86.4% success rate in forecasting the election!

   

  This relationship occurs because the stock market reflects the economic outlook in the weeks leading up to the election. A rising stock market indicates an improving economy, which means rising confidence and increases the chances of the incumbent party’s re-election. Therefore, your time might be better spent from August through October watching the stock market rather than the debates if you want to know who will be President for the next four years.

  

  Here the reflexive question emerges: does the market predict the election outcome, or does the move in the market – whether by design or by chance – predetermine the election outcome?

  Now if only Donald Trump, or his backers for whatever reasons they may have, could orchestrate a market crash…

  

  

  

  

  

• "We Live In A Time Of Piecemeal-Planning & Incremental-Interventionism"

  Submitted by Richard Emebing via EpicTimes.com,

  Wherever we turn we are confronted with politicians, political pundits, television talking heads, and editorial page commentators, all of whom offer an array of plans, programs, and projects that will solve the problems of the world – if only government is given the power and authority to remake society in the design proposed.

  Even many of those who claim to be suspicious of “big government” and the Washington beltway powers-that-be, invariably offer their own versions of plans, programs, and projects they assert are compatible with or complementary to a free society.

  The differences too often boil down simply to matters of how the proposer wants to use government to remake or modify people and society. The idea that people should or could be left alone to design, undertake and manage their own plans and interactions with others is sometimes given lip service, but never entirely advocated or proposed in practice.

  In this sense, all those participating in contemporary politics are advocates of social engineering, that is, the modifying or remaking of part or all of society according to an imposed plan or set of plans.

  The idea that such an approach to social matters is inconsistent with both individual liberty and any proper functioning of a free society is beyond the pale of political and policy discourse. We live in a time of piecemeal planning and incremental interventionism.

  The Reasonableness of Individual Planning

  It is worthwhile, perhaps, to question this “spirit of the times,” and to do so in the context of marking an anniversary. Slightly over 70 years ago, on December 17, 1945, the Austrian economist (and much later economics Nobel Prize winner), Friedrich A. Hayek, delivered a lecture at University College in Dublin, Ireland on, “Individualism: True and False.”

  At a time when socialist central planning appeared to be the “wave of the future,” Hayek argued that the true and essential foundation for any society wishing to preserve human liberty and assure economic prosperity was a rightly understood philosophy of individualism.

  At the heart of Hayek’s criticisms of what he called the “false” individualism was the idea that individual human beings could ever have the knowledge, wisdom, or ability to design or remake a society according to some “rational” plan.

  It is easy, no doubt, to fall into this error and mistaken belief. After all, we all undertake plans and design projects of action that we attempt to bring to successful fruition. The construction engineer, for instance, designs a technical blueprint for designing and building a bridge over a river or a tunnel through a mountain.

  The individual private enterpriser works out a “business plan” about what product he might produce, the start-up investment and production costs that would be entailed, and the estimated consumer demand and stream of potential future revenues that would justify incurring the costs of bringing the business into existence and operation.

  As private individuals we design, plan, and attempt to implement our own activities all the time, including going to college and earning a degree; or selecting and pursuing a particular profession, occupation or employment; or forming clubs and associations with others in society to pursue the fulfillment of any variety of “good causes” or shared hobbies and interests; or even the general life we might like to live in terms of achieving a sense of fulfillment, purpose, and happiness during our earthly sojourn.

  Not to do all of these “planful” things, and many, many others of like kind, would leave our lives in disordered chaos and uncertain instability and confusion. Who, therefore, could be against or critical of wise, reasonable and “rational” planning of the society as a whole, in which we all live and work out our lives in interaction with multitudes of others?

  Yet, that idea of the social designing and engineering of society as a whole by government and its central planners is exactly what Friedrich Hayek asked us not to assume or take for granted.

  

  Human Knowledge is Divided and Dispersed in Society

  Earlier in 1945, Hayek had published an article on, “The Use of Knowledge in Society,” in which he pointed out that a fundamental limitation on the ability to centrally plan the economic affairs of society was the inherent and inescapable division of knowledge in society.

  The division of labor through which we cooperatively associate with each other to better achieve our various goals and purposes carries with it a matching division of knowledge. The specialized types of knowledge that each of us possesses in comparison to others in society can never be fully and successfully centralized in the hands of a set of government central planners without losing much of the content and richness of the diverse qualities of that knowledge that exist in different forms in each individual’s mind.

  Hayek’s conclusion was that if all of that dispersed and decentralized knowledge that exists in the individual minds of all the members of society is to be effectively used and brought to bear for mutual improvement of the human condition, each of us must be left free to use that knowledge as we, respectively, think best and most advantageous.

  Furthermore, our various actions using our individual types and bits of unique knowledge is best integrated and coordinated through a competitively-based free pricing system generated by the unhampered interaction of market supply and demand. (See my article, “F. A. Hayek and Why Government Can’t Manage Society,” Part I and Part II.)

  Society is a Spontaneous Order, Not a Planned One

  In this later lecture on “Individualism: True and False” (which was published in Hayek’s collection of essays, Individualism and Economic Order), Hayek argued that the true individualism starts from the premise that “society” is not some ethereal entity having an existence of its own, nor the designed creation of one or a handful of minds imposing a “plan” on people that produces the social order.

  Instead, society is the cumulative and interactive outcome and result of multitudes of individual human beings making their separate individual plans that interact and generate connections and associations with other individual plans to produce the overall social order and its coordinated patterns.

  If we think of language, custom, tradition, most rules of common etiquette and interpersonal conduct, and the general moral and ethical codes that prevail in a society we surely realize, upon a little reflection, that they are the cumulative outcomes of multitudes of generations of people whose interactions brought about these social institutions without which human association and cooperation would hardly be possible.

  Once we realize this, we also understand that much of what we call “society” could not and was not designed because the forms, shapes and characteristics that it takes on could not have been anticipated or even imagined in all their detail and specificity as they emerged and evolved through historical time.

  If the evolution and institutions of society had been limited to what a group of central planners could have known and designed, our society’s development would have been confined and limited to what that handful of minds had been able to image and understand, given their own personal and limited knowledge.

  Or as Hayek expressed it:

  The “basic contention is . . . that there is no way towards understanding of social phenomena but through our understanding of individual actions directed towards other people and guided by their expected behavior . . .

   

  “It is the contention that, by tracing the combined effects of individual actions, we discover that many of the institutions on which human achievement rest have arisen and are functioning without a designing or directing mind; that, as [the eighteenth century Scottish moral philosopher] Adam Ferguson expressed it, ‘nations stumble upon establishments [institutions], which are indeed the result of human action but not the result of human design’; and that the spontaneous collaboration of free men often create things which are greater than their individual minds could ever fully comprehend.”

  Though Hayek does not include it, the next passage in Adam Ferguson’s An Essay on the History of Civil Society (1767), is most pertinent to this point:

  “It may with more reason be affirmed for communities [societies], that they admit of the greatest revolutions where no change is intended, and that the most refined politicians do not always know whither they are leading the state by their projects.”

   

  

  Market Planning versus Political Designs

  Those market experimenters and entrepreneurs of the eighteenth and early nineteenth centuries who began to invest in mass production machinery in what became known as the “factory system” never imagined that their attempts to find ways to produce more and less expensive goods for mass consumption as the means to earning their personal profits would cumulatively generate what we now call the “industrial revolution,” with the economic transformation of unimagined rising standards of human living that has come from it over the last two hundred years.

  Nor, more recently, could most, if hardly any, people have imagined the ways things would be changed and transformed in terms of everyday life through the development of computer technology. The first IBM computer occupied much of a city block in New York City. Who could have anticipated and planned for at that time that the later discovery and development of the microchip would revolutionize the world of communication and commerce in the way that has happened over the last few decades?

  Yet, one hundred years ago, an American president entered the First World War to “make the world safe for democracy” and helped to set in motion a sequence of unintended consequences that, instead, resulted in twentieth century Soviet communism, Italian fascism and German Nazism.

  And more recently, “anti-terrorist” nation building by U.S. government military intervention in Afghanistan, Iraq and Libya have helped foster, instead, the emergence of religious fanatics and cruel murderers equal to or often worse than the tyrants the interventions were designed to overturn.

  Knowledge-Using Institutions versus Great Men Politics

  What inferences were to be drawn from the view of a free society as, primarily, a “spontaneous order,” the cumulative, and often the unintended outcome, of multitudes of human interactions, the results of which could never be fully or in many instances even partially anticipated in its rich texture and form, out of which has come many of the human betterments around us?

  Hayek suggested that an important insight was to accept the fact that it was a false trail to be attempting to find wise leaders or super-human statesmen to guide society to a better future. The reality, he said, is that none have the wisdom or super-human talents and abilities to guide and direct human society.

  The fact is, people are limited in their knowledge, abilities and talents, and are too often tempted to misuse and abuse any such positions of political power to benefit themselves and their associates at the expense of others in society.

  The task, instead, Hayek said, is finding an institutional order in which the potential for such misuse and abuse is minimized and the widest latitude prevails for people to use their own unique and specialized knowledge and abilities in ways that not only benefit themselves but improve the conditions of many others in society, as well.

  Explained Hayek:

  The “chief concern was not so much with what man might occasionally achieve when he was at his best but that he should have as little opportunity as possible to do harm when he was at his worst . . .

   

  “The main merit . . . of [political] individualism . . . is that it is a system under which bad men can do least harm; it is a social system which does not depend for its functioning on our finding good men for running it, or on all men becoming better than they now are, but which makes use of men in all their given variety and complexity, sometimes good and sometimes bad, sometimes intelligent and more often stupid. [The] aim was a system under which it should be possible to grant freedom to all, instead of restricting it . . . to ‘the good and wise’ . . .

   

  “What the economists [of the eighteenth and nineteenth centuries] understood for the first time was that the market as it had grown up was an effective way of making men take part in a process more complex and extended than he could comprehend and that it was through the market that he was made to contribute ‘to ends which were no part of his purpose’ [to quote from Adam Smith] . . .

   

  “The true basis of [the individualist’s] argument is that nobody can know who knows best and that the only way by which we can find out is through a social process in which everybody is allowed to try and see what he can do.

   

  “The fundamental assumption here as elsewhere is the unlimited variety of human gifts and skills and the consequent ignorance of any single individual of most of what is known to all the members of society taken together.”

   

  

  Individual Freedom with Limited Government

  If we take Hayek’s argument to heart, we must not only doubt but strongly challenge the arrogance and hubris expressed by all those in the public policy arena who assert a presumed knowledge to know how to guide, direct, redesign, regulate and plan the society in a manner better than allowing the free interactions of multitudes of individuals within a general system of individual rights to life, liberty and honestly acquired property, with enforcement of all contracts and agreements freely and non-fraudulently entered into.

  As Hayek went on to say, this also implies a society in which individuals reap the benefits of all peaceful rewards they have earned, but also must be willing to bear the losses and disappointments when outcomes are not always to their liking.

  Thus, while such a free society rejects any and all political forms of favor, privilege and artificial status, it also operates on the basis of market-resulting inequalities of material and other outcomes under a regime of impartial and equal individual rights before the law. Either all people are treated equally before the law with resulting unequal economic outcomes, or government treats individuals unequally in the attempt to assure more equal economic results.

  Hayek ended his lecture with a question and an observation that is as relevant today as when he delivered it 70 years ago:

  “The fundamental attitude of true individualism is one of humility towards the processes by which mankind has achieved things which have not been designed or understood by any individual and are indeed greater than individual minds. The great question at this moment is whether man’s mind will be allowed to continue to grow as part of this process or whether human reason is to place itself in chains of its own making.

   

  “What individualism teaches us is that society is greater than the individual only in so far as it is free. In so far as it is controlled or directed, it is limited to the powers of the individual minds which control or direct it.”

  Which direction will the twenty-first century follow: individual free minds or politically managed minds? That is the question for all of us to answer.

  

  

  

  

• This Is The Cartoon Germany Hands Out To Sexually Frustrated Refugees

  Earlier this evening, we noted that the western German town of Bornheim has banned adult male asylum seekers from its indoor public pool after some German women complained of harassment.

  “There have been complaints of sexual harassment and chatting-up going on in this swimming pool … by groups of young men, and this has prompted some women to leave (the premises),” the town’s deputy mayor said.

  Bornheim, as it turns out, is just a stone’s throw away from Cologne where a wave of sexual assaults allegedly perpetrated by men of “Arab origin” at a New Year’s Eve festival has mushroomed into a bloc-wide scandal.

  Now, officials from across Europe are struggling to deflect criticism and devise a way to ensure that women are safe in large crowds.

  As we documented on Thursday, Switzerland has adopted an Austrian cartoon flyer for its upcoming  Lucerne carnival. The pictogram lays out various instances of accepted behavior such as kissing and praying, while making it clear that flying into a mad rage and open-hand slapping women and small children is frowned upon in polite society.

  

  Well now, in a story that combines the concern about public pools and the effort to dissuade lewd behavior with cartoons, The Local reports that “in Bavaria, swimming pools have issued leaflets with simple pictorial instructions on behaviour for migrants who may never have swum in public before.”

  Officials dreamed up the leaflets in 2013 after witnessing an increasing number of “problems” at the city’s 18 public swimming pools.

  “The ground rule of respect for women – whatever clothing they’re wearing – is unfortunately not respected by all our swimmers. That’s why there is an explicit indication about it,” a Munich city spokesman said.

  The “explicit indication” the spokesman mentions is a slightly creepy first-person view of a hand reaching out to touch the behind of an unsuspecting female swimmer:

  

  That is unacceptable, as is drowing others (#4 below), pushing women into the pool (#3 below), and leaping from the side onto a screaming blonde (#7 below).

  Here is the full cartoon which you are encouraged to review in its entirety if you are an asylum seeker that plans on swimming in Bavaria.

  

  We’d be remiss if we didn’t mention that this is the same logic employed by Cologne mayor Henriette Reker who, in the wake of the New Year’s Eve assaults, suggested that one solution to the “problem” would be to “explain to people from other cultures that the jolly and frisky attitude during our Carnival is not a sign of sexual openness.” Neither is wearing a bikini.

  We’ll close with a modified version of what we said on Thursday with regard to the Austrian pictograph: “…whether the cartoons will be successful in taming the refugees’ more base instincts, stop by a Bavarian public pool to find out.”

  

  

  

  

• "This One Is A Bag Of Dicks": America Answers Oregon Militia's Plea For "Supplies"

  Shortly after Ammon Bundy and a handful of armed militiamen “seized” a remote bird sanctuary to protest the imprisonment of a rancher and his son for setting fire to federal land, the group appealed to “patriotic” Americans to send supplies.

  Initially, Bundy said his followers were prepared to occupy the building “for years” if they had to if it meant securing the release of Dwight Hammond and his son Steven and forcing the federal government to reimagine laws around land rights. As a reminder, the group is apparently attempting to force the issue of land control back into the national consciousness with a kind of ad hoc, haphazard rekindling of the Sagebrush Rebellion.

  Shortly after Bundy suggested that the standoff could last “years”, it became apparent that the group might not have packed enough supplies.

  Before you knew it, Jon Ritzheimer – the same Jon Ritzheimer who, in a YouTube video addressed to his family, cries while clutching a small paperback copy of the Constitution on the way to explaining why it’s necessary to commandeer a tiny building in the middle of nowhere – took to Facebook to ask for “cold weather socks, snacks, energy drinks, equipment for cold weather, snow camo, gear, and anything you think will help.”

  Well as it turns out, some “sympathizers” did indeed have ideas about “what would help.”

  “The occupiers, who took over buildings at the Malheur National Wildlife Refuge on Jan. 2 in the latest conflict over the U.S. government’s control of land in the West, had been hoping for snacks, fuel and warm clothes when they provided sympathizers with a local mailing address,” Reuters notes. “Instead, as they angrily showed online, they received sex-related toys and food that would be of little use as they braced for a long standoff with federal law enforcement agents who have kept watch from a distance.”

  Yes, “food that would be of little use as they braced for a long standoff with federal agents.” Food like “a bag of penis-shaped candies,” or as Jon Ritzheimer puts it in an angry new video, “this one was really funny, a bag o’ dicks.”

  Watch below as Jon loses his cool with an American public he’s trying so desperately to “help”.

  

  

  

  

• GM/Ford Credit Risk Surges To 2 Year Highs As Fitch Raises Auto Sector Concerns

  With the feds probing Deutsche Bank's exaggerating Auto ABS demand, car dealerships suing automakers for being forced to channel-stuff, direct evidence of massive channel-stuffing with near-record inventories-to-sales, and sales now beginning to tumble after last month's weak credit growth, it is perhaps no wonder that Fitch has raised the warning flag about automotive vehicle and parts makers…

  As we demonstrated last week, the cracks are already starting to show.

  Sales slowing dramatically…

  

   

  Inventories continue to soar…

  

   

  And that has not ended well in the past…

  

   

  And now Fitch raises concerns:

  Automobiles & parts companies five-year Credit Default Swaps (CDS) have experienced notable widening recently, according to Fitch Solutions in its latest case study.

   

  CDS on automobiles & parts companies have widened 11.5% on average over the past week (22.4% over the month), underperforming the 6% widening observed for the broader consumer goods industry last week.

   

  Auto companies domiciled in North America saw the most spread widening (14% w/w, 31% m/m), followed by European autos (11% w/w, 16% m/m) and Asian issuers (3% w/w, 12% m/m).

   

  "The increase in market scrutiny over the auto sector likely stems from overall jitters relating to China's economic slowdown and the potential impact on demand for autos and parts," said Diana Allmendinger, Director, Fitch Solutions.

  In fact Ford is at its highest credit risk in over 2 years and GM getting close..

  

   

  But it's not just F and GM…

  

   

  And we detailed previously, it would appear that demand for auto loan ABS may be beginning to dry up as investment banks are forced to engineer an artificial buzz around new deals in order to keep skeptical investors from demanding sharply higher yields. 

  As a reminder, if the market for auto loan ABS stalls (so to speak), it will trigger a chain reaction all the way down to the dealers who will suddenly care about the creditworthiness of borrowers again.

  Once that happens, the US auto "miracle" will suddenly disappear in a cloud of noxious tail pipe exhaust as the one reliable "driver" of consumption in America is exposed for what it is: a castle built on subprime quicksand.

  

  

  

  

  

  

• German Town Bans Refugees From Pools

  On Thursday, we brought you an Austrian cartoon flyer that the Swiss department of Health and Social Services intends to distribute to refugees ahead of the Lucerne carnival which starts on February 4.

  The flyer features a number of pictograms depicting acceptable versus unacceptable behavior. Shaking hands, for instance, is ok, while flying into a rage and open-hand slapping young children is generally frowned upon:

  

  It’s necessary to lay out the ground rules ahead of time because as we and others have documented exhaustively over the past several weeks, Europe has been struggling to deal with a growing sex assault scandal. According to “hundreds” of reports, men of “Arab origin” formed “gangs” to assault women in Germany, Finland, and Austria on New Year’s Eve and last August, dozens of teenage girls were allegedly attacked in a similar fashion at a festival in Sweden.

  The public outcry has been long and loud. Women in Cologne massed last week in the city center in Cologne, holding signs that read “Ms Merkel where are you? What do you say? This scares us!,” among other things. The attacks have also emboldened nationalist movements across the block. Thousands of PEGIDA demonstrators poured into the streets last weekend in Germany and in Finland, a right-wing group called “The Soldiers of Odin” now patrols the streets in an effort to “assist” police in preventing crime.

  Now, we’re beginning to see the first signs of segregation as one German town has banned adult male asylum seekers from the public pool.

  “A western German town has barred adult male asylum seekers from its public indoor swimming pool after receiving complaints that some women were sexually harassed there,” Reuters reports, adding that “the deputy mayor of Bornheim, a town of 48,000 some 30 km south of Cologne, said on Friday that a difficult decision was taken to send a clear message that breaching German cultural norms was a red line that should not be crossed.”

  “There have been complaints of sexual harassment and chatting-up going on in this swimming pool … by groups of young men, and this has prompted some women to leave (the premises),” Markus Schnapka told Reuters.

  “This led to my decision that adult males from our asylum shelters may not enter the swimming pool until further notice.”

  There was no official word on how the ban would be enforced but Markus Schnapka, who heads the social affairs department in Bornheim, said the measure would remain in place until refugees “got the message” – whatever that means. Here’s the facility:

  

  Meanwhile, in Finland, employees of the Diakonissalaitos Foundation which runs the local center for asylum seekers say elderly Finnish women are preying upon young male refugees. “The older Finnish woman suspected to have bought sex alone Finland tulleelta a minor asylum seeker,” a clumsy translation of a story that ran yesterday in prominent Finnish tabloid Ilta-Sanomat reads. Here’s more:

  Deaconess Institute working with asylum seekers as a teacher Taina Cederström to strengthen the Ilta-Sanomat. Cederström continue that women were trying to buy sex from minors Helsinki railway station during the Christmas season. Women offered Cederström data show that the boys return for 20 euros. – We made ??a conclusion that there must have been a bunch of people pre-Christmas traffic. Money is purchased, Cederström says.Cederström says that two women blow to the companies he is quite sure. – Similar cases are certainly other. The Honourable Members heard enough.

   

  “One boy asked, that receive women kiss when want to”

   

  Deaconess Institute’s employees were able to track down the case, when they began to wonder where young boys find their money on tobacco, and other things.

   

  Cederström says that this is a new phenomenon. Young people at the station has been sufficient in the past. Cederström, the station is now gone for Finnish women 30-40 years of age to buy the services of minors. Cederström thinks that women are, in principle, to all appearances, smart, prosperous people. Someone feeling of superiority it has.

  So there you have it. The descent of European society into bacchanalia. Lewd “chatting up” at indoor pools in Germany and young boys sold for €20 to elderly female predators at train stations in Finland. 

  We wonder how long it will be before asylum seekers are banned from other public facilities in Germany. We also wonder if the Soldiers of Odin will intervene to keep underage boys from being sold into slavery for a pack of cigarettes. 

  

  

  

  

  

• Atlanta Fed Explains Why It Waited Until The Market Close To Reveal The Lowest Q4 GDP Estimate Yet

  As we noted earlier, the Atlanta Fed waited until the market close to reveal its most dire GDP estimate yet: a paltry 0.6%, matching the 0.6% recorded during the “harsh winter” first quarter: one could be forgiven to think that during today’s already chaotic selloff, the last thing traders and algos needed was news that US economic growth had ground to a virtual halt in the quarter in which Yellen decided to hike the interest rate.

  Moments ago the Atlanta Fed was kind enough to explain the reason behind this surprising delay for a report it usually releases before noon. The answer: “technical delays” and “nothing nefarious.”

  @zerohedge Apologies for the late-day data release. Nothing more nefarious than technical difficulties, which we believe have been resolved.

  — Atlanta Fed (@AtlantaFed) January 15, 2016

  Thanks for the explanation.

  

  

  

  

• Weekend Reading: Breaking Markets – Season II

  Submitted by Lance Roberts via RealInvestmentAdvice.com,

  Last week, I started the weekly reading list by stating:

  “This week has certainly been interesting with the Dow Jones Industrial Average having the worst start to a year…well…ever.”

  This week was not much difference as the markets continued their slide into the “worst-start-of-the-year-everer.”

  However, with the markets roughly down 7% since the beginning of this year, it certainly has seemed painful as investors have been slammed from all angles. However, as I addressed earlier this year with respect to January statistics, this is well within historical norms. To wit:

  “Furthermore, while January’s maximum positive return was just 9.2%, the maximum drawdown for the month was the lowest for all months at -6.79%.”

  

  “However, given the length of the current bull market run from 2009 to present, the risks are mounting that January will likely have consecutive negative performance years which would confirm the ongoing market topping process I discussed previously. Such an outcome would suggest a more conservative approach to investment allocations.”

  With the markets now extremely oversold on a short-term basis, it is quite likely that a bounce will occur in the days ahead. Such a bounce will likely be met by sellers wanting to reduce risk of a more substantial correction. But will they be right?

  This weekend’s reading list is a collection of articles on the current state of the market.  Is the bull still alive or is it being hunted by the bear?

  ---

  1) Death Throes Of A Bull Market by Anthony Mirhaydari via Fiscal Times

  “Fed Chair Janet Yellen will be forced to either acknowledge labor market tightening as reason to continue with the four-hike schedule for 2016 or risk her credibility, belittle job market stability and sound a warning about the risks of lower oil prices and cheap gasoline (sacrilege to regular Americans) by slowing the hiking pace after a single 0.25 percent increase last month.

   

  If she gets it wrong, things could get ugly fast.

   

  The Russell 2000 has dropped all the way back to levels last seen in October 2013 as it has dropped below its 200-week moving average for the first time since 2011.”

  

  But Also Read: It’s Too Early To Call The End Of The Bull by Andrew Bary via Barron’s

   

  2) Market Dive Explained In One Chart by Daniel Alpert via CNBC

  “But here’s the brutal bottom line: The non-energy portion of the U.S. current account deficit, relative to GDP, has ballooned by 236 percent since its low in December 2013, during which period the energy deficit fell by 57 percent.”

  

  But Also Read: The U.S. Is Teetering On Edge Of Recession by Robert Reich via TruthDig

  Opposing View: No Recession Yet by Caroline Baum via MarketWatch

   

  3) The Bear Comes Out Of Hibernation by Michael Snyder via Zero Hedge

  “According to the Bespoke Investment Group, the average stock on that index is down a staggering 26.9 percent from the peak of the market…

   

  Indeed, the Standard & Poor’s 1500 index – a broad basket of large, mid and small company stocks – shows that the average stock’s distance from its 52-week high is 26.9%, according to stats compiled by Bespoke Investment Group through Friday’s close.

   

  ‘That’s bear market territory!’ says Paul Hickey, co-founder of Bespoke Investment Group, the firm that provided USA TODAY with the gloomy price data.

  So if the average stock has fallen 26.9 percent, what kind of market are we in?

   

  To me, that is definitely bear market territory.”

  But Also Read: What Is Jeff Gundlach Predicting For 2016 by John Gittelsohn via Bloomberg

   

  4) We Are Entering “Irrational Pessimism” by David Rosenberg via Financial Post

  “’If you can keep your head when all about you are losing theirs and blaming it on you.’

   

  Thank you, Mr. Kipling. Keep saying it over and over.

   

  I have three pieces of advice to all the Nervous Nellies out there: Turn off the TV, focus on the big picture, and review your asset mix so as to use this corrective phase and radical repricing of relative asset prices as an opportunity to rebalance the portfolio.”

  But Also Read: RBS Cries “Sell Everything” by Ambrose Evans-Pritchard

  Further Read: Big Bad China by Shane Obata via THA Business

   

  5) What Is A Reveral Vs. A Correction by Simon Constable via WSJ

  “For the past 12 months the S&P 500 index of large stocks has bounced around, neither continuing the trend upward nor starting a new one downward.

   

  That “sideways” movement is making some market strategists worried that a reversal may occur in which a new downward trend starts. If such a trend does start, these strategists will want to warn investors earlier rather than later.”

  But Also Read: Smart Money Turning Bearish by Julia La Roche via Business Insider

  And: The Future Ain’t What It Used To Be by Doug Kass via Yahoo Finance

  ---

  MUST READS

  • The Last Hurrah For Job Growth by Louis Woodhill via Real Clear Markets
  • US Real Estate 25-60% Overvalued by Chris Matthews via Fortune
  • Retired Until No Other Job Available by Salil Mehta via Statistical Ideas
  • SNAFU – Situation Normal All ‘FANGed Up by Cliff Asness via AQR
  • The Payoff Pitch by Michael Liebowitz via 720 Global
  • A 40-55% Reversal Return To Norms by John Hussman via Hussman Funds
  • Predicting The Future Is Impossible by Joe Calhoun via Alhambra Partners
  • Peak Pessimism: S&P Will Fall By 75% by Tyler Durden via Zero Hedge
  • 3 Charts Every Investor Must See by Jesse Felder via The Felder Report
  • Complacent Correction Cause For Concern by Dana Lyons via Tumblr

  ---

  “Better to preserve capital on the downside rather than outperform on the upside” – William J. Lippman

  

  

  

  

  

• Atlanta Fed Waits Until The Close To Reveal 0.6% Q4 GDP Estimate

  With less than half an hour until the close, we asked the Atlanta Fed – the most accurate predictor of GDP – which was scheduled to post an update of its Q4 GDP NowCast following today’s ugly economic data, if it was was planning on releasing its latest Q4 GDP estimate before or after the close, something it usually does just before noon.

  Dear @AtlantaFed will you be updating your Q4 GDP NowCast today as your schedule says you will? https://t.co/YrUvkxf5Nl

  — zerohedge (@zerohedge) January 15, 2016

  And, at close ahead of a three day weekend, the economists in charge of the sacred GDP excel model, finally did what they were supposed to do hours later and revised Q4 GDP growth to just 0.6%, a number which some – such as Barclays – would say is too high in light of the economic drop the US economy has experienced in the past month. Note the timestamp:

  

  Here is the argument:

  The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2015 is 0.6 percent on January 15, down from 0.8 percent on January 8. The forecast for fourth quarter real consumer spending growth fell from 2.0 percent to 1.7 percent after this morning’s retail sales report from the U.S. Census Bureau and the industrial production release from the Federal Reserve.

   

  

  As a reminder 0.6% is how much the US economy “grew” by in the revised Q1 2015 quarter when the “harsh weather” was blamed for unleashing hell on US GDP. Whose fault will it be this time?

  Worse, it means that Yellen raised rates in a quarter in which the US economy may well end up contracting in nominal terms.

  Finally, perhaps the fact that the Atlanta Fed waited as long as it did, is confirmation that bad news for the economy is now bad news for stocks, at least until the Fed does fold and either cut or launch more QE.

  

  

  

  

  

• Black Friday

  Unleash hell…

  And this…

  Worst Start To A Year… Ever!

  

   

  It's ugly in 'Murica…

  

   

  Of course – it's not just US, China has collapsed this year…(Worst start to a year ever)

  

  Japan was a shitshow..

  

   

  And Europe is in a bear market having erased all of the Q€ gains… (Worst start to a year ever)

  

   

  The day in stocks…

  

  • *NASDAQ COMPOSITE INDEX SINKS 2.7% TO LOWEST IN 14 MONTHS

  • *S&P 500 FALLS 2.2% TO LOWEST LEVEL SINCE AUG. 25

  But that level was heavily defended…

  

   

   

  The week in stocks… worst 3-week drop in S&P, Dow, Trannies, Small Caps, and Nasdaq since Aug 2011

  

   

  2016 in stocks…

  

   

  Since The Fed rate-hike in stocks…

  

   

  Since The Fed across asset-classes…

  

   

  Since the end of QE3 in stocks…

  

   

  It's a bloodbath in FANGs and Biotechs…

  

   

  FANTAsy stocks are really ugly year-to-date (cap-weighted FANGs are down 12% YTD, Biotechs -17%)

  

   

  Surprise – Equity markets catch down to on balance volume…

  

   

  Financials bloodbathery fell to catch down to credit…

  

   

  On the week, credit remains the leader…

  

   

  But credit signals more pain to come… in stocks…

  

   

  Especially in the most credit-sensitive small caps…

  

   

  And VIX…

  

   

  With Energy credit risk at its highest on record…

  

  Carnage Continues, Energy Yields Set Record High

  (Bloomberg) — WTI oil has dropped to a new 12y low, falling below $30/bbl, triggering a broad sell-off across asset classes, with equities dropping 2.6%, HY ETFs falling 1.6% (lowest levels since 9/09), HYCDX slipping 1.1% and cash bonds falling across sectors led by oil companies in the Energy sector.

   

  The BofAML U.S. HY Energy index YTW set a new historical high last night closing at 17.43%, surpassing the 17.048% close on 12/5/2008 during the height of the financial crisis

   

  As of Wednesday’s close, the BofAML U.S. HY Energy index option adjusted spread to Tsys closed at +1,501, eclipsing the previous wide level seen at the height of the crisis of +1,494 on 12/5/2008

   

  Energy bonds were roiled led by Sanchez Energy which plummeted 32% intraday followed by EP Energy (-15%), Whiting Petroleum (-13%), and Oasis Petroleum (-11%)

   

  

  As Energy, Materials, and Financials lead the collapse in stocks since The Fed rate-hike…

  

   

  Treasury yields collapsed this week (with the curve flat)…

  

   

  And the USD Index gave up some of its gains to end the week up 0.3%… USDJPY dropped 0.25% on the week

  

  • *RUSSIAN RUBLE WEAKENS 2% TO 77.603 PER DOLLAR, RECORD-LOW CLOSE

  Commodities were a mess with Gold and silver best (unch to modestly lower) while copper and crude were clubbed…

  

   

  Crude closed below $30 for the first time since September 2003…

  

   

  Charts: Bloomberg

  Bonus Chart: Rate-Hike Odds have plunged…

  

  Bonus Bonus Chart: Value is collapsing and Momentum remains high post-QE3 – we suspect that will revert… (h/t @groditi)

  

  

  

  

  

• Americans This Weekend (In 1 Chart)

  (3)01k?

   

  

   

  Source: Townhall.com

  

  

  

  

  

• The US Consumer Is Drowning His Sorrows At The Bar

  Submitted by Jim Quinn via The Burning Platform blog,

  Month after month I watch as the MSM mouthpieces try to spin declining consumer spending in a positive light. They are practically out of excuses. They are befuddled, because month after month they report “awesome” job gains and can’t understand why all these gainfully employed Americans aren’t buying shit they don’t need like they used to. These faux journalists, spouting propaganda for their ruling class bosses, are willfully ignorant of the fact the job gains are in low paying part-time jobs and the fact that Obamacare and record high rents are sapping any discretionary income households would use to buy stuff.

  Despite the propaganda from the media and happy talk from the Liar-in-Chief, the country is currently in a recession and the Fed has no ammo to fake another recovery. We are going down and going down hard. When 70% of your economy is based on Americans buying shit they don’t need from China on credit cards, a dramatic slowdown in consumer spending equals recession. When sales actually fall from November to December during the holiday season, you are in recession. We’ve arrived.

  The December report was a disaster and portends horrible retailer results coming down the road. More ghost malls coming to your neighborhood. The annual results were pitiful, with the more recent months even more dreadful. So after adding 10 million jobs, according to Obama, spending declines? They must be great jobs.

  I think the results are even worse than portrayed in the results presented by the Census Bureau. Retail sales grew by only 2.2% in 2015 versus 2014. That is significantly less than the real inflation being experienced by real people, so on an inflation adjusted basis they fell. Even the 2.2% increase is artificially pumped up by the Fed induced auto debt fueled boom in car sales (or long-term rentals in reality). The 7 year 0% auto loans, subprime auto loans to deadbeats, and record levels of auto leases have created fake demand that will end in tears when the defaults skyrocket. If you remove these fake sales, then total retail sales are up a pitiful 0.9% over 2014.

   

  When you realize that two of the few strong sales categories were autos (7.5%) and furniture stores (5.8%), you can put your thinking cap on and realize the 7 year 0% financing scam is solely responsible for these sales. Reducing credit score criteria and extending loan terms always works. Right? The other relatively strong area was internet sales (6.3%). Amazon and the rest of the on-line retail segment continues to destroy the bricks and mortar retailers, but even these sales are slowing. They were up a weak 0.3% from November. Before the states started taxing internet sales and it was still a newer concept, the annual growth rates were 15% to 20%, so the 6.3% growth rate is rather unimpressive.

  

   

  And this leads me to the strongest spending segment – restaurants/bars. Sales were up 8.1% over 2014 and continued strong in December. I know this is true firsthand as my wife is a waitress at a restaurant/sports bar and business was booming in December and continues to be good in January. My thesis for this strong spending is that people are so miserable about the economy in general and the direction of the country (reflected in Trump’s support), they have decided to drink and eat, for tomorrow we die. Dining out or getting loaded at a bar takes your mind off your troubles for a few hours. It’s not a huge expenditure and you just put it on your credit card and worry about it later.

  When the mass layoffs start hitting in 2016, even this category of spending will contract. If you think the 2015 consumer spending numbers were atrocious, you haven’t seen anything yet.

  

  

  

  

  

• Here's A Chart You Won't See On CNBC

  What goes up, comes down considerably faster.

  For global stocks, Bloomberg notes, the way down ($15 trillion lost in 7 months) has been much easier than the climb up ($30 trillion added in 4 years).

  

  Source: Bloomberg

  With markets from Asia to Europe entering bear markets this month, stocks worldwide have lost more than $14 trillion, or 20 percent, in value from a record last June amid worries over global growth and deepening oil declines. The pace of the drop has been so fast that it has already unraveled about half of the rally since a low in 2011.

  And here is a bonus chart from Bank of America, which looks at the S&P on an equal weighted basis, to avoid such aberrations as the collapsing market breadth phenomenon, also known as FANG. Spot the symmetry.

  

   

  

  

  

  

  

• Bill Gross' Advice To Traders As Stocks Crash

  In a time when the S&P fluctuates with unprecedented velocity and investors need HFT-like reflexes to catch any momentum move, this may be the most practical advice to traders we have heard today.

  In an email to Bloomberg, the former (and currently in contention for the title with Jeff Gundlach) bond king Bill Gross says to “stay out of the bathroom” as stock markets enter bear territory.

  For those who ate Chipotle.coli for lunch, our condolences.

  Some more Gross courtesy of Bloomberg:

  “Markets are recognizing the limited tools they now have to prop up assets AND real economies,” Gross, who manages the $1.3 billion Janus Global Unconstrained Bond Fund, said in an e-mail.

   

  Stocks fell around the world today, with U.S. equities trading at the lowest levels since August as oil plunged below $30 a barrel. Treasuries gained as U.S. economic data did little to ease concerns that global growth is slowing.

   

  “Wealth effect constructed with paper – sometimes corrugated/strong, sometimes toilet/flimsy,” Gross said in a Tweet on Friday from the Janus Capital Group Inc. account. “Stay out of the bathroom.”

   

  Gross warned in December that markets were headed for a fall and urged urged investors to de-risk their portfolios or “look around like Wile E. Coyote wondering how far is down,” a reference to the cartoon character whose schemes to catch the bird Road Runner always backfire, often with a plunge over a cliff.

   

  In his e-mail, Gross said that zero-percent interest rates and quantitative easing created leverage that fueled a wealth effect and propped up markets in a way that now seems unsustainable.

  His conclusion: “The wealth effect is created by leverage based on QE’s and 0% rates.”

  In other words, it was all an illusion.

  

  

  

  

  

• Chipotle To Close All Stores Next Month For Meeting On How Not To Poison People

  Chipotle poisoned some folks.

  America’s love affair with “fast casual” darling Chipotle ended in a wave of severe nausea last year as a food poisoning outbreak that started in July spread to multiple states and sickened hundreds of patrons.

  Since last summer, authorities have tied Chipotle to at least six outbreaks spanning two types of bacteria (E. coli and salmonella) and one virus (the “winter vomiting bug”).

  As The Chicago Tribune recounts, the incidents “included one that started in October in Oregon and Washington and spread to seven other states, sickening more than 50 people by mid-November, [one in] December [in which] about 200 were sickened by norovirus after eating at a Chipotle in Boston, five cases of E. coli poisoning in Kansas, North Dakota and Oklahoma, five illnesses tied to one Seattle store in July, 100 illnesses [linked to] an outlet in Simi Valley, California,” and an unfortunate episode “in September [when] more than 60 fell ill in Minnesota.”

  That’s a lot of sick people and as you might image, the stock fell ill as well, dropping some 40% since the first reported cases.

  
  

  Now, the chain is set to hold a kind of ad hoc “try not to poison anyone” meeting on February 8, when all stores will close “for a few hours” so that management can “discuss some of the changes [its] making to enhance food safety, to talk about the restaurant’s role in all of that and to answer questions from employees.”

  Yes, “questions from employees”, who might ask if their jobs are on the line after same store sales collapsed 30% in December and after the company was served with a Grand Jury Subpoena in connection with an official criminal investigation being conducted by the U.S. Attorney’s Office for the Central District of California.

  They might also be concerned with the dozens of lawsuits Bill Marler, a food safety litigator in Seattle, says he’s about to file.

  Perhaps management can calm employees’ frayed nerves the same way they calmed the market: by explaining that buybacks will always cure what ails you.

  

  (the magic of the buyback as seen on January 6)

  

  

  

  

  

• The Game Of Chicken Between The Fed & The PBOC Escalates

  Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,

  There’s more than a whiff of 2008 in the air. The sources of systemic financial sector risk are different this time (they always are), but China and the global industrial/commodity complex are even larger tectonic plates than the US housing market, and their shifts are no less destructive. There’s also more than a whiff of 1938 in the air (hat tip to Ray Dalio), as we have a Fed that is apparently hell-bent on raising rates even as a Category 5 deflationary hurricane heads our way, even as the yield curve continues to flatten. 

   

  What really stinks of 2008 to me is the dismissive, condescending manner of our market Missionaries (to use the game theory lingo), who insist that the US energy and manufacturing sectors are somehow a separate animal from the US economy, who proclaim that China and its monetary policy are “well contained” and pose little risk to US markets. Unfortunately, the role and influence of Missionaries is even greater today in this policy-driven market, and profoundly misleading media Narratives reverberate everywhere. 

   

  For example, we all know that it’s the overwhelming oil “glut” that’s driving oil prices down and wreaking havoc in capital markets, right? It’s all about OPEC versus US frackers, right?

   

  Here’s a 5-year chart of the broad-weighted US dollar index (this is the index the Fed publishes, which – unlike the DXY index and its >50% Euro weighting – weights all US trading partners on a pro rata basis) versus the price of WTI crude oil. The blue line marks Yellen’s announcement of the Fed’s current tightening bias in the summer of 2014.

  

   

   

  Ummm … this nearly perfect inverse relationship is not an accident. I’m not saying that supply and demand don’t matter. Of course they do. What I’m saying is that divergent monetary policy and its reflection in currency exchange rates matter even more. Where is the greatest monetary policy divergence in the world today? Between the US and China. What currency is the largest contributor to the Fed’s broad-weighted dollar index? The yuan (21.5%). THIS is what you need to pay attention to in order to understand what’s going on with oil. THIS is why the game of Chicken between the Fed and the PBOC is so much more relevant to markets than the game of Chicken between Saudi Arabia and Texas.

   

  But wait, there’s more.

   

  My belief is that a garden variety, inventory-led recession emanating from the energy and manufacturing sectors is already here. Maybe I’m wrong about that. Maybe I spend too much time in Houston. Maybe low wage, easily fired service sector jobs are the new engine for US GDP growth, replacing the prior two engines – housing/construction 2004-2008 and energy/manufacturing 2010-2014. But I don’t see how you can look at the high yield credit market today or projections of Q4 GDP or any number of credit cycle indicators and not conclude that we are rolling into some sort of “mild” recession. 

   

  My fear is that in addition to this inventory-led recession or near-recession, we are about to be walloped by a new financial sector crisis coming out of Asia. 

   

  What do I mean? I mean that Chinese banks are not healthy. At all. I mean that China’s attempt to recapitalize heavily indebted state-owned enterprises through the equity market was an utter failure. I mean that China is going to need every penny of its $3 trillion reserves to recapitalize its banks when the day of reckoning comes. I mean that China’s dollar reserves were $4 trillion a year ago, and they’ve spent a trillion dollars already trying to manage a slow devaluation of the yuan. I mean that the flight of capital out of China (and emerging markets in general) is an overwhelming force. I mean that we could wake up any morning to read that China has devalued the yuan by 10-15%.

   

  Look … the people running Asian banks aren’t idiots. They can see where things are clearly headed, and they are going to do what smart bankers always do in these circumstances: TRUST NO ONE. I believe that there is going to be a polar vortex of a credit freeze coming out of Asia that will look a lot like 1997. Put this on top of the deflationary impact of China’s devaluation. Put this on top of an inventory-led recession or near recession in the US, together with high yield credit stress. Put this on top of massive market complacency driven by an ill-placed faith in central banks to save the day. Put this on top of a potentially realigning election in the US this November. Put this on top of a Fed that is tightening. Storm warning, indeed.

   

  So what’s to be done? As Col. Kilgore said in “Apocalypse Now”, you can either surf or you can fight. You can adopt strategies that can make money in this sort of environment (historically speaking, longer-term US Treasuries and trend-following strategies that can go short), or you can slog it out with a traditional equity-heavy portfolio.

   

  Also, as some Epsilon Theory readers may know, I co-managed a long/short hedge fund that weathered the 2008 systemic storm successfully. There were trades available then that, in slightly different form, are just as available today. For example, it may surprise anyone who’s read or seen (or lived) “The Big Short” that the credit default swap (CDS) market is even larger today than it was in 2008. I’d welcome a conversation with anyone who’d like to discuss these systemic risk trades and how they might be implemented today.

   

  

  

  

  

  

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• Dow Dumps 250Pts, Nikkei Plunges 500Pts After China Credit Concerns, Kuroda Comment

  It appears the world is ganging up on The Fed as following China's recent clear and present threat should the USD strengthen, BoJ's Kuroda warned that further QQE might threaten the bank's finances – implicitly demanding moar from Yellen because he knows he's out of bullets. Add to that the surge in China credit which merely extends the life of already zombified firms, thus spreading more deflationary stress to the world and stocks from China (SHCOMP -3%) to US (Dow -280 points from Bullard Bounce highs) are tumbling.

  China’s broadest measure of new credit surged the most since June as companies increase borrowing on the corporate bond market, underscoring a shift away from reliance on state-backed banks for funding.

  Aggregate financing rose to 1.82 trillion yuan ($276 billion) in December, according to a report from the People’s Bank of China on Friday, compared with the median forecast of 1.15 trillion yuan in a Bloomberg survey.

  

  The data shows companies are turning to alternative sources for credit given banks’ reluctance to lend. It also adds to signs the economy is stabilizing, not slumping as its falling currency and plunging stock market seem to suggest.

  "For the whole year of 2015, the biggest increment in aggregate financing came from the corporate financing via bond and stock markets," said Zhou Hao, an economist at Commerzbank AG in Singapore.  

   

  "It appears to us commercial banks have few incentives to provide loans directly to corporates, especially due to credit concerns over SMEs, but turn to capital markets to finance the corporate indirectly. This hints an ongoing structural change in China’s financing system."

  In fact, as we noted previously, the bigger than expected increase in aggregate financing shows Chinese companies taking advantage of lower (bubble) bond yields to raise funds as commercial banks have refrained from providing loans to domestic companies because of the slow economic growth outlook.

  Despite the massive supply, yields have collapsed…

  

   

  As both "strong"

  

   

  And "weak" balance sheet firms…

  

   

  …take advantage of the credit bubble. However, there is one less than silver-lining:

  Going by the official numbers, which are widely regarded as understated, bad loans rose to a seven-year high of 1.2 trillion yuan as of the end of September. In a sign of write-offs to come, policy makers are aiming for a clean-up of “zombie companies” that rely on government subsidies and bank loans to keep operating.

  While that credit impulse would normally be seen as a positive in the new normal, it appears there has been a clear shift in recognition that enabling already-zombified companies to live longer merely exacerbates the over-invested, over-produced, mal-invested deflationary spiral that is rapidly spreading across the world.

  Then Kuroda piled on, noting:

  • *KURODA: NO PLANS AT THE MOMENT TO ADD TO MONETARY EASING
  • *KURODA: JAPAN'S POTENTIAL GROWTH RATE IS AT OR BELOW 0.5%
  • *KURODA: QQE POLICY HAS A RISK FOR BOJ'S FINANCES

  Which sounds an aweful lot like a demand that The Fed step back up to the plate and "ease" the world's pain (or at least "un-tighten.")

  And crushed Japanese Stocks… (Nikkei down over 500 points from the US session close)

  

  And the result of that is an almost total reversal of all Fed's Bullard's good work during the US session. (Dow down over 250 points from Bullard's Bounce peaks)

  

   

  So for now, Bullard appears to be firing blanks and "good" news is bad news once again.

  Chinese stocks head for their longest weekly losing streak since October…

  

   

  …and still the worst start to a year ever…

  

  

  

  

  

  

• How Switzerland Hopes To Prevent Refugee Sex Attacks: With This Cartoon

  The traditionally inert, neutral and quite homogeneous nation of Switzerland is not used to having cultural integration issues, which is why it has been watching recent events across the German border (and elsewhere in Europe) with sheer terror. And in order to preempt any possible outbreaks of refugee violence against women, or in general, ahead of the Lucerne carnival starting on February 4, Switzerland is getting ready.

  According to Blick, the department of Health and Social Services will use the following Austrian cartoon flyer dubbed “Ground Rules” which will be distributed to incoming migrants ahead of the noted Swiss carnival with hopes it will make it clear what is and isn’t permitted. It lays out various instances of accepted behavior such as kissing and praying, while making it clear that punching women and children in the head is frowned upon in polite society.

   

  

   

  The flyer was modeled after a comparable one, also created in Austria last year as part of the initial wave of mass refugee influx.

   

  

   

  However, concerned that migrants would be less than inclined to read the text, the follow up was populated with “pictograms” or cartoons.

  According to Blick, distributing the flyer was a spontaneous decision that took place “after the attacks in Germany on New Year’s Eve” when Swiss authorities received a number of reactions, however they add that it was a preventive measure: “we currently have no problems.”

  Blick adds that currently in the canton of Lucerne there are about 1800 asylum seekers in three centers and nine temporary shelters.

  As for the flyer, the local government has determined to “focus on role models, and equality between men and women.” They “want to show that there is zero tolerance for sexual harassment. The motto is “If you come to us, abide by our rules.”

  A comparable flyer in Germany was found to have fanned racism with explanations such as “young girls feel harassed by demands such as asking for a cell phone number or Facebook contact, or marriage proposals” or “when nature calls we do exclusively on toilets, not in parks and gardens, and not on hedges and behind bushes.”

  Whether the cartoons will be successful in taming the refugees’ more base instincts, tune in after the Lucerne carnival has started on February 4 to find out.

  

  

  

  

• Financial Collapse Leads To War

  Submitted by Dmitry Orlov via Club Orlov blog,

  [With the new year, a sea change seems to have occurred in the financial markets: instead of “melting up,” the way they used to, they have started “melting down.” My original prediction is that this will lead to more armed conflict. Let's see if I was right.]

  Scanning the headlines in the western mainstream press, and then peering behind the one-way mirror to compare that to the actual goings-on, one can't but get the impression that America's propagandists, and all those who follow in their wake, are struggling with all their might to concoct rationales for military action of one sort or another, be it supplying weapons to the largely defunct Ukrainian military, or staging parades of US military hardware and troops in the almost completely Russian town of Narva, in Estonia, a few hundred meters away from the Russian border, or putting US “advisers” in harm's way in parts of Iraq mostly controlled by Islamic militants.

  The strenuous efforts to whip up Cold War-like hysteria in the face of an otherwise preoccupied and essentially passive Russia seems out of all proportion to the actual military threat Russia poses. (Yes, volunteers and ammo do filter into Ukraine across the Russian border, but that's about it.) Further south, the efforts to topple the government of Syria by aiding and arming Islamist radicals seem to be backfiring nicely. But that's the pattern, isn't it? What US military involvement in recent memory hasn't resulted in a fiasco? Maybe failure is not just an option, but more of a requirement?

  Let's review. Afghanistan, after the longest military campaign in US history, is being handed back to the Taliban. Iraq no longer exists as a sovereign nation, but has fractured into three pieces, one of them controlled by radical Islamists. Egypt has been democratically reformed into a military dictatorship. Libya is a defunct state in the middle of a civil war. The Ukraine will soon be in a similar state; it has been reduced to pauper status in record time—less than a year. A recent government overthrow has caused Yemen to stop being US-friendly. Closer to home, things are going so well in the US-dominated Central American countries of Guatemala, Honduras and El Salvador that they have produced a flood of refugees, all trying to get into the US in the hopes of finding any sort of sanctuary.

  Looking at this broad landscape of failure, there are two ways to interpret it. One is that the US officialdom is the most incompetent one imaginable, and can't ever get anything right. But another is that they do not succeed for a distinctly different reason: they don't succeed because results don't matter. You see, if failure were a problem, then there would be some sort of pressure coming from somewhere or other within the establishment, and that pressure to succeed might sporadically give rise to improved performance, leading to at least a few instances of success. But if in fact failure is no problem at all, and if instead there was some sort of pressure to fail, then we would see exactly what we do see.

  In fact, a point can be made that it is the limited scope of failure that is the problem. This would explain the recent saber-rattling in the direction of Russia, accusing it of imperial ambitions (Russia is not interested in territorial gains), demonizing Vladimir Putin (who is effective and popular) and behaving provocatively along Russia's various borders (leaving Russia vaguely insulted but generally unconcerned). It can be argued that all the previous victims of US foreign policy—Afghanistan, Iraq, Libya, Syria, even the Ukraine—are too small to produce failure writ large enough to satisfy America's appetite for failure. Russia, on the other hand, especially when incentivized by thinking that it is standing up to some sort of new, American-style fascism, has the ability to deliver to the US a foreign policy failure that will dwarf all the previous ones.

  Analysts have proposed a variety of explanations for America's hyperactive, oversized militarism. Here are the top three:

  1. The US government has been captured by the military-industrial complex, which demands to be financed lavishly. Rationales are created artificially to achieve that result. But there does seem to be some sort of pressure to actually make weapons and field armies, because wouldn't it be far more cost-effective to achieve full-spectrum failure simply by stealing all the money and skip building the weapons systems altogether? So something else must be going on.

   

  2. The US military posture is designed to assure Americans of their imagined “full-spectrum dominance” over the entire planet. But “full-spectrum dominance” sounds a little bit like “success,” whereas what we see is full-spectrum failure. Again, this story doesn't fit the facts.

   

  3. The US acts militarily to defend the status of the US dollar as the global reserve currency. But the US dollar is slowly but surely losing its attractiveness as a reserve currency, as witnessed by China and Russia acting as swiftly as they can to unload their US dollar reserves, and to stockpile gold instead. Numerous other nations have entered into arrangements with each other to stop using the US dollar in international trade. The fact of the matter is, it doesn't take a huge military to flush one's national currency down the toilet, so, once again, something else must be going on.

  There are many other explanations on offer as well, but none of them explain the fact that the goal of all this militarism seems to be to achieve failure.

  Perhaps a simpler explanation would suffice? How about this one:

  The US has surrendered its sovereignty to a clique of financial oligarchs. Having nobody at all to answer to, this American (and to some extent international) oligarchy has been ruining the financial condition of the country, running up staggering levels of debt, destroying savings and retirements, debasing the currency and so on. The inevitable end-game is that the Federal Reserve (along with the central banks of other “developed economies”) will end up buying up all the sovereign debt issuance with money they print for that purpose, and in the end this inevitably leads to hyperinflation and national bankruptcy. A very special set of conditions has prevented these two events from taking place thus far, but that doesn't mean that they won't, because that's what always happens, sooner or later.

   

  Now, let's suppose a financial oligarchy has seized control of the country, and, since it can't control its own appetites, is running it into the ground. Then it would make sense for it to have some sort of back-up plan for when the whole financial house of cards falls apart. Ideally, this plan would effectively put down any chance of revolt of the downtrodden masses, and allow the oligarchy to maintain security and hold onto its wealth. Peacetime is fine for as long as it can placate the populace with bread and circuses, but when a financial calamity causes the economy to crater and bread and circuses turn scarce, a handy fallback is war.

   

  Any rationale for war will do, be it terrorists foreign and domestic, Big Bad Russia, or hallucinated space aliens. Military success is unimportant, because failure is even better than success for maintaining order because it makes it possible to force through various emergency security measures. Various training runs, such as the military occupation of Boston following the staged bombings at the Boston Marathon, have already taken place. The surveillance infrastructure and the partially privatized prison-industrial complex are already in place for locking up the undesirables. A really huge failure would provide the best rationale for putting the economy on a war footing, imposing martial law, suppressing dissent, outlawing “extremist” political activity and so on.

  And so perhaps that is what we should expect. Financial collapse is already baked in, and it's only a matter of time before it happens, and precipitates commercial collapse when global supply chains stop functioning. Political collapse will be resisted, and the way it will be resisted is by starting as many wars as possible, to produce a vast backdrop of failure to serve as a rationale for all sorts of “emergency measures,” all of which will have just one aim: to suppress rebellion and to keep the oligarchy in power. Outside the US, it will look like Americans blowing things up: countries, things, innocent bystanders, even themselves (because, you know, apparently that works too). From the outside looking into America's hall of one-way mirrors, it will look like a country gone mad; but then it already looks that way. And inside the hall of one-way mirrors it will look like valiant defenders of liberty battling implacable foes around the world. Most people will remain docile and just wave their little flags.

  But I would venture to guess that at some point failure will translate into meta-failure: America will fail even at failing. I hope that there is something we can do to help this meta-failure of failure happen sooner rather than later.

  

  

  

  

  

• Stunning Drone Footage Depicts Syria's Dying Capital

  In late October, we brought you what we called “haunting” drone footage of the devastation in Syria, where five years of bloody conflict has cost the country both its population and its cultural heritage.

  “The civil war has been going on four years. What is now left of Syria?,” Die Presse asked President Bashar al-Assad in a December interview.

  “If they talk about the infrastructure, much of it is destroyed,” Assad responded.

  “Every day you can hear the shelling, even here in Damascus, quite close to us,” Die Presse continued, underscoring the extent to which the country’s crumbling capital is still under siege from rebels.

  Below, find new drone footage of the hollowed out city courtesy of RT followed by excerpts from “The Slow Death of Damascus,” as originally published in Foreign Policy.

  *  *  *

  From “The Slow Death of Damascus,” by Thanassis Cambanis

  Over the course of a recent 10-day visit, Damascus residents said they feel less embattled than they did a year ago, but the war is still an inescapable reality of everyday life. Every night, dozens of mortars still land in the city center, sending wounded and sometimes dead civilians to Damascus General Hospital. From the city’s still-busy cafés, clients can hear the thuds of outgoing government guns and the rolling explosions of the barrel bombs dropped on the rebel-held suburb of Daraya.

  Army and militia checkpoints litter the city. In some central areas, cars are stopped and searched every two blocks. Still, rebels manage to smuggle car bombs into the city center. According to residents, explosions occur every two or three weeks, but are rarely reported in the state media.

  Workplaces across the country have emptied out over the summer, as Syrians with a few thousand dollars to spare risked the trip to Europe via Turkey and a boat ride to Greece, taking advantage of a newly permissive Syrian government policy to issue passports quickly and without question.

  Employees in government offices, international aid organizations, and private Syrian corporations estimated that anywhere between 20 and 50 percent of their coworkers left the country this summer.

  “The government doesn’t care if people leave. It can’t stop them,” one middle-class Syrian, who has chosen so far to remain in Damascus, said of the exodus. “The war seems like it will go on forever. People see no future for their children. The only people who are staying are the ones who have it really good here or the ones who aren’t able to leave.”

  

  

  

  

• "I Don't Have Faith Anymore": Frustrated Chinese Shun Stocks For Safety Of Dollars, Gold

  Back in March of last year we noted, with some incredulity, that some 30% of China’s newly-minted day traders had an elementary education or less. Even more incredible, we learned that nearly 6% of the country’s new “investor” class were illiterate.

  Just days after we made that startling revelation we gave readers an idea of just how many Chinese were opening new stock trading accounts each month. In March for instance, Chinese farmers, housewives, and all manner of other amatuer traders opened enough brokerage accounts for every man woman and chile in Los Angeles.

  But it gets worse. Not only were millions of semi-literate Chinese starting to trade without being able to read let alone conduct fundamental analysis, they were buying into a market gone parabolic:

  

  Worse still, they were buying on margin – heavily:

  

  By summer, the stage was set for a truly epic meltdown on the SHCOMP and especially on the tech-heavy Shenzhen.

  Sure enough, in June, the wheels started to come off.

  As we warned when the plunge began, China was facing more than a stock market selloff. Beijing had managed to give legions of day trading Chinese the idea that stocks always went up. That encouraged many people to plow their life savings into the market on margin. When the unwind began – starting with the half dozen or so backdoor margin lending channels that helped to pump an extra CNY1.5 trillion into stocks – many Chinese were confronted with the possibility that they may lose everything.

  Take the case of Yang Cheng for instance, who, having piled his life savings (plus his relatives’ money) into the market thanks to encouragement from his broker, borrowed $1 million in margin and bet it all on one stock – a local mining company. When the trade blew up, he lost it all. “I don’t know what to do. I trusted the government too much. I won’t touch stocks again, I have ruined everyone in my family,” he lamented.

  In short, China faced the prospect that the meltdown could trigger social unrest, which partly explains why Beijing scrambled to funnel nearly CNY2 trillion propping up the market. The story of the Chinese retail investor became so ubiquitous that Western media started what at times felt like a contest to see who could capture the most amusing pictures of distraught Chinese day traders.

  

  Now, having watched their money disappear into the Beijing smog, many Chinese are bitter and say they have given up on the stock market forever.

  “Unlike Western markets where institutional investors dominate, individuals account for 80 percent of transactions on Chinese exchanges [and] nearly 100 million people have trading accounts,” Reuters wrote on Thursday. “Their enthusiasm for stocks drove China’s main indexes to record highs in the first half of 2015, but after enduring a summer bust that saw prices plunge around 40 percent, the January sell-off has been the final straw for many.”

  Many, like 22-year old Zhou Junan who says he “had planned to sell when indexes got a little bit higher,” but missed the top. “I don’t have faith in the stock market any more. I think it’s better to buy dollars,” he says, underscoring the extent to which everyday Chinese are rushing to exchange RMB for USD in the new year.

  Reuters also quotes a 48-year old bank accountant from Kunshan who recently bought 500,000 yuan ($76,000) worth of U.S. currency. The Chinese stock market is “a mess,” she says. “Dollar is far less risky.” 

  Now you’re beginning to see why the likes of ICBC are running out of physical dollars.

  But it’s not just greenbacks Chinese are turning to. They also like gold. “Except for gold, all other assets are just bubbles to me,” one 24-year-old female investor in Beijing said. “I guess I am a pessimist. If there are really some global conflicts, even dollars and bonds could not buy a meal.”

  Unfortunately it’s out of the proverbial frying pan and into the fire for many Chinese though, as it seems that the allure of high yielding assets is just too much for the uninformed masses. “A number of retail investors were also switching money out of stocks and into wealth management products (WMPs) and principal-protected funds,” Reuters adds.

  “I have bought different kinds of WMPs from banks. The majority of them are backed by bonds, which are less risky,” said a 50-year-old woman surnamed Wang, from Guangzhou, who said she lost 30 percent of her stock market investment in the summer meltdown before selling out in August.

  That, as we’ve shown, is not necessarily the case. In many cases, investors have no idea what “assets” are backing the WMPs. Additionally, investors are often unaware that the products suffer from duration mismatch, meaning that if the paper stops rolling, the music stops until the underlying assets can be liquidated. Perhaps Ms. Wang should ask some investors in Fanya Metals’ WMPs what can happen in a pinch.

  In any event, the message is clear: the disaffection with stocks in China is rampant which means every rip will be sold as the retail investors which comprise more than three quarters of the market scramble to salvage what’s left of their money. Once they’ve cashed out of equities they’ll promptly exchange their yuan for dollars as the capital flight which China so desperately needs to contain continues unabated. 

  

  

  

  

  

• Ron Paul Warns: "Watch The Petrodollar"

  Submitted by Nick Giambruno via InternationalMan.com,

  The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better. – Ron Paul

  Ron Paul is calling for the end of the petrodollar system. This system is one of the main reasons the U.S. dollar is the world’s premier reserve currency.

  Essentially, Paul is saying that understanding the petrodollar system and the forces affecting it is the best way to predict when the U.S. dollar will collapse.

  Paul and I discussed this extensively at one of the Casey Research Summits. He told me he stands by his assessment.

  

  Nick Giambruno and Ron Paul

  This is critically important. When the dollar loses its coveted status as the world’s reserve currency, the window of opportunity for Americans to protect their wealth from the U.S. government will definitively shut.

  At that point, the U.S. government will implement the same destructive measures other desperate governments have used throughout history: overt capital controls, wealth confiscation, people controls, price and wage controls, pension nationalizations, etc.

  The dollar’s demise will wipe out the wealth of a lot of people. But it will also trigger political and social consequences likely to be far more damaging than the financial fallout.

  The two key takeaways are:

  1. The U.S. dollar’s status as the premier reserve currency is tied to the petrodollar system.

  1. The sustainability of the petrodollar system relies on volatile geopolitics in the Middle East (where I lived and worked for several years).

  From Bretton Woods to the Petrodollar

  The Bretton Woods international monetary system, which the Allied powers created in 1944, turned the dollar into the world’s premier reserve currency.

  After WWII, the U.S. had by far the largest gold reserves in the world (around 706 million ounces). These large reserves – in addition to winning the war – allowed the U.S. to reconstruct the global monetary system around the dollar.

  The Bretton Woods system tied virtually every country’s currency to the U.S. dollar through a fixed exchange rate. It also tied the U.S. dollar to gold at a fixed exchange rate.

  Countries around the world stored dollars for international trade or to exchange with the U.S. government at the official rate for gold ($35 an ounce at the time).

  By the late 1960s, excessive spending on welfare and warfare, combined with the Federal Reserve monetizing the deficits, drastically increased the number of dollars in circulation relative to the gold backing them.

  Naturally, this made other countries exchange more dollars for gold at an increasing rate. This drained the U.S. gold supply. It dropped from 706 million ounces at the end of WWII to around 286 million ounces in 1971 (a figure supposedly held constant to this day).

  To stop the drain, President Nixon ended the dollar’s convertibility for gold in 1971. This ended the Bretton Woods system.

  In other words, the U.S. government defaulted on its promise to back the dollar with gold. This eliminated the main motivation for other countries to hold large U.S. dollar reserves and use the U.S. dollar for international trade.

  With the dollar no longer convertible into gold, demand for dollars by foreign nations was sure to fall, and with it, the dollar’s purchasing power.

  OPEC, a group of oil-producing countries, passed numerous resolutions after the end of Bretton Woods, stating its need to maintain the real value of its earnings. It even discussed accepting gold for oil. Ultimately, OPEC significantly increased the nominal dollar price of oil.

  For the dollar to maintain its status as the world’s reserve currency, the U.S. would have to concoct a new arrangement that gave foreign countries a compelling reason to hold and use dollars.

  The Petrodollar System

  From 1972 to 1974, the U.S. government made a series of agreements with Saudi Arabia. These agreements created the petrodollar system.

  The U.S. government chose Saudi Arabia because of its vast petroleum reserves, its dominant position in OPEC, and the (correct) perception that the Saudi royal family was corruptible.

  In essence, the petrodollar system was an agreement that the U.S. would guarantee the survival of the House of Saud. In exchange, Saudi Arabia would:

  1. Use its dominant position in OPEC to ensure that all oil transactions would happen in U.S. dollars.

  1. Invest a large amount of its dollars from oil revenue in U.S. Treasury securities and use the interest payments from those securities to pay U.S. companies to modernize the infrastructure of Saudi Arabia.

  1. Guarantee the price of oil within limits acceptable to the U.S. and prevent another oil embargo by other OPEC members.

  Oil is the world’s most traded and most strategic commodity. Needing to use dollars for oil transactions is a very compelling reason for foreign countries to keep large U.S. dollar reserves.

  For example, if Italy wants to buy oil from Kuwait, it has to purchase U.S. dollars on the foreign exchange market to pay for the oil first. This creates an artificial market for U.S. dollars that would not otherwise exist.

  The demand is artificial because the U.S. dollar is just a middleman in a transaction that has nothing to do with a U.S. product or service. Ultimately, it translates into increased purchasing power and a deeper, more liquid market for the U.S. dollar and U.S. Treasuries.

  Additionally, the U.S. has the unique privilege of not having to use foreign currency to buy imports, including oil. Instead, it gets to use its own currency, which it can print.

  It’s hard to overstate how much the petrodollar system benefits the U.S. dollar. It’s allowed the U.S. government and many Americans to live beyond their means for decades.

  What to Watch For

  The geopolitical sands of the Middle East are rapidly shifting.

  Saudi Arabia’s strategic regional position is weakening. Iran, which is notably not part of the petrodollar system, is on the rise. U.S. military interventions are failing. And the emerging BRICS countries are creating potential alternatives to U.S.-dominated economic/security arrangements. This all affects the sustainability of the petrodollar system.

  I’m watching the deteriorating relationship between the U.S. and Saudi Arabia with a particularly close eye.

  The Saudis are furious because they don’t think the U.S. is holding up its end of the petrodollar deal by more aggressively attacking their regional rivals.

  This suggests that they might not uphold their part of the deal much longer, namely selling their oil exclusively in U.S. dollars.

  The Saudis have even suggested a “major shift” is under way in their relationship with the U.S. To date, though, they haven’t matched their words with action, so it may just be a temper tantrum or a bluff.

  The Saudis need an outside protector. So far, they haven’t found any suitable replacements for the U.S. In any case, they’re using truly unprecedented language.

  This situation may reach a turning point when U.S. officials start expounding on the need to transform the monarchy in Saudi Arabia into a “democracy.” But don’t count on that happening as long as Saudi oil sells exclusively for U.S. dollars.

  Regardless, the chances that the Kingdom might implode on its own are growing.

  For the first time in decades, observers are calling into question the viability of the Saudi currency, the riyal. The Saudi central bank currently pegs the riyal at a rate of 3.75 riyals per U.S. dollar.

  The Saudi government spends a ton of money on welfare to keep its citizens sedated. Lower oil prices plus the cost of their mischief in the region are cutting deep into government revenue. So there’s less money to spend on welfare.

  There’s a serious crunch in the Saudi budget. They’ve only been able to stay afloat by draining their foreign exchange reserves. That threatens their currency peg.

  Recently, Saudi officials have begun telling the media that the currency peg is fine and there’s nothing to worry about. That’s another clue that there’s trouble. Official government denial is almost always a sign of the opposite. It’s like the old saying: “Believe nothing until it has been officially denied.”

  If there were a convenient way to short the Saudi riyal, I would do it in a heartbeat.

  Timing the Collapse

  Long before Nixon ended the Bretton Woods system in 1971, it was clear that a paradigm shift in the global monetary system was inevitable.

  Today, another paradigm shift seems inevitable. As Ron Paul explained, there’s one sure way to know when that shift is imminent:

  We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros.

  It’s very possible that, one day soon, Americans will wake up to a new reality, just as they did in 1971 when Nixon severed the dollar’s final link to gold.

  The petrodollar system has allowed the U.S. government and many U.S. citizens to live way beyond their means for decades. It also gives the U.S. unchecked geopolitical leverage. The U.S. can exclude virtually any country from the U.S. dollar-based financial system…and, by extension, from the vast majority of international trade.

  The U.S. takes this unique position for granted. But it will disappear once the dollar loses its premier status.

  This will likely be the tipping point…

  Afterward, the U.S. government will be desperate enough to implement capital controls, people controls, nationalization of retirement savings, and other forms of wealth confiscation.

  I urge you to prepare for the economic and sociopolitical fallout while you still can. Expect bigger government, less freedom, shrinking prosperity…and possibly worse.

  It’s probably not going to happen tomorrow. But it’s clear where the trend is headed.

  Once the petrodollar system kicks the bucket and the dollar loses its status as the world’s premier reserve currency, you will have few, if any, options to protect yourself.

  This is why it’s essential to act before that happens.

  The sad truth is, most people have no idea how bad things could get, let alone how to prepare…

  Yet there are straightforward steps you can start taking today to protect your savings and yourself from the financial and sociopolitical effects of the collapse of the petrodollar.

  This recently released video will show you where to begin. Click here to watch it now.

  

  

  

  

  

• Alberta Freezes Government Salaries As Canada's Oil Patch Enters Second Year Of Recession

  On Wednesday, we documented the astonishing prices beleaguered Canadians are now forced to pay for groceries thanks to the plunging loonie.

  Oil’s inexorable decline has the Canadian dollar in a veritable tailspin and because Canada imports the vast majority of its fresh food, prices on everything from cucumbers to cauliflower are on the rise, tightening the screws an already weary shoppers.

  

  Soaring food prices are but the latest slap in the face for Canadians and especially for Albertans who have been hit the hardest by 13 months of crude carnage. Resources account for a third of provincial revenue and with oil and gas investment expected to have fallen over 30% in 2015, Alberta’s economy has is expected to contract  for the foreseeable future.

  The economic malaise has had a number of nasty side effects including soaring property crime in Calgary, rising food bank usage, and sharply higher suicide rates.

  

  With the outlook for oil prices not expected to improve in the near-term, ATB now says the province faces two long years of recession. “The pain is going to be concentrated in the first half of the year. But we don’t really see any ending in sight to a downturn at least until the end of the year. So we are calling for another contraction,” ATB’s Chief Economist Todd Hirsch says in The Alberta Economic Outlook Q1 2016 report. 

  “This low price environment continues to discourage new investment and spending and has weighed down employment — not only in the oilpatch, but throughout most sectors of the province,” Hirsch continues. “This downturn is longer in duration certainly than 2009 was which was a very quick downturn but very short-lived. This one is going to linger on longer.“

  Indeed. Here are some charts from the report which underscore the magnitude of the sharp reversal in fortunes.

  

  

  It’s against this backdrop that we get the latest sign of the times in Alberta where Finance Minister Joe Ceci has just announced a two-year wage freeze for non-union government employees.

  “The move will freeze the salaries — and movement within salary grids — for roughly 7,000 senior officials, managers and other non-unionized government employees at 2015 levels until at least April 2018,” As the Calgary Herald reports. “The freeze means senior government officials, including trade representatives, board chairs and deputy ministers, won’t get a scheduled 2.5-per-cent salary hike this April put in place by the former Progressive Conservative government.”

  “This is not a decision we made lightly,” Ceci told the press. “The Alberta Public Service is made up of hard working and dedicated women and men who do valuable work each and every day in the service of Albertans. However, to maintain stability and protect jobs within the public service, we must deal with the economic realities we’re facing.”

  As The Herald goes on to note, “the NDP government posted a record $6.1 -billion deficit in its fall budget released last October and, for the first time in two decades, is set to take on more debt to pay for operational spending.”

  “During a time of massive private sector job losses, Albertans want the government to reduce spending while protecting front-line services” Wildrose Leader Brian Jean said, praising the decision.

  Right. But don’t expect jobless Albertans to be overly sympathetic to the plight of the government employees subject to the salary freeze. The senior workers affected will all still make between $110,246 and $286,977.

  Stay positive Canada…

  

  

  

  

  

  

• Shanghai Composite Opens Under 3,000 As Onshore Yuan Practically Unchanged For Fourth Day

  Having made its warning to the Fed loud and clear (“if you hike or otherwise push the USD any higher, we will crush your markets by devaluing the Yuan against everyone but mostly the USD“), the PBOC continued the fragile ceasefire between the world’s two most powerful central banks, when moments ago it kept the onshore Yuan virtually unchanged, by weakening today’s fixing by 0.03% to 6.5637. However, as can be seen on the chart below, this has barely even registered.

  

   

  The lack of any action in the onshore Yuan has been mirrored in the offshore version of the currency as well, where the CNH has likewise barely budged as shorts have learned their lesson for the time being and few, if any, are willing to risk seeing an 80% overnight margin increase once the Beijing artillery comes storming in and soaking up liquidity.

  

   

  But while China’s currenc(ies) have been a snoozefest so far, more interesting things are taking place in Hong Kong, where the dollar, which plunged yesterday the most since 2003, has rebounded in early trading, but after initially surging to 7.7746, the biggest jump since March 2015 has once again proceeded to weaken now that capital outflows are taking place through Hong Kong.

  

  We are curious to see just how the PBOC will plug this particular capital outflow gap next.

  Finally, after yesterday’s furious intervention-driven rally in Chinese stocks, moments ago the Shanghai Composite opened for trading below 3000, and as of this moment was lower by about 0.4% to 2,992, suggesting it will be yet another busy day for the PBOC which not having to worry about manipulating its currency can focus on manipulating the stock market instead.

  

  

  

  

  

  

• "Willing Idiots" & Geopolitical Instability

  Submitted by Gregory Copley via OilPrice.com,

  Nature has often been described in the verse “Little fish have smaller fish, upon their backs to bite ’em; / Smaller fish have lesser fish; / And so, ad infinitum.” We see in it the inevitable, albeit infinitely variable, hierarchy of the natural world.

  It follows, then, that regional strategic dynamics are subordinate to, often caused by, greater global trends, even though we, as humans, tend to focus on, and react to, the issues which we feel threaten or benefit us. Of course, the strength of the trends determines some of the outcomes: strong local trends may expand to resist or overwhelm weak global or trans-regional trends. But, in essence, greater is greater. And, as the Cold War saying about “quality versus quantity” went: quantity eventually has its own quality.

  So where are we today? What are the essential trends, visible now, which determine long-term outcomes?

  Periods of transition between “rising powers” and “declining powers” have been described in terms of the so-called Thucydides Trap, when fear within a static or declining power (historically, Athens) of a rising power (historically, Sparta) makes war seemingly inevitable. The phenomenon today applies not only to the China-U.S. dynamic – as has been widely remarked – but to the Middle Eastern imbalance, the “north-south” imbalance, and so on.

  Accompanying this sliding vertical scale of strategic power balance is the sliding horizontal scale of population volatility and movement, characterized by the breakdown of the Westphalian nation-state concept; by so-called globalization; urbanization and hysteria-driven migration; and the peaking and imminent troughing of global population numbers. Thus do we reach the four-dimensional chess game. And we see visible the prospect of a check-mate — from Persian shah mat: the king is dead, or helpless — in the present global game. Of course we also see, then, the prospect, or nature’s necessity, for a “new game”, a new king.

  It should not be surprising that these longer-duration mega-trends ultimately drive and dominate shorter-duration regional or mono-cultural trends, although the direct influence may not be immediately perceivable. And so we focus on immediate threats; we react, rather than see the broader, longer strategic terrain.

  Right now, much of the world concerns itself with the threat of terrorism as the specter which dominates the question of the survival of Western civilization, or is the precursor to Islam’s “End of Battles”. However, it is worth recognizing the reality that no terrorist phenomenon has ever sustained itself for any meaningful duration — or achieved strategic outcomes — in the absence support from a nation-state or wealth society.

  Does anyone, after introspection, believe that the current phenomenon of “Islamist terrorism”, including its metamorphosis into territory-holding entities such as the “Islamic State” or (briefly) Boko Haram, has not been without major state support since before even the al-Qaida movement? Does anyone believe that the leftist terrorism of the mid-Cold War period was not supported by state sponsors, ranging from the USSR and the People’s Republic of China (PRC) and their allies? Does anyone believe that the Irish terrorism of that same period was not also supported by states or societal bodies (including criminal organizations)?

  There is an entire industry in the security sphere which has as its rice-bowl the study and parsing of Islamist ideology and sectarian differences. The sectarian differences do have strategic importance, but not because of the differences themselves, or the dialectic in which each social group engages, but because — as social groups — they represent the modes of social cohesion which enable populations to exist and manage their affairs in their geographic spaces and environments. This is as much a part of the survival logic — because it creates a political hierarchy — as the terroir dictate of crop rotation.

  Now, and for the foreseeable couple of decades, the “Thucydides Trap” means that the world is not only in a period of potentially changing its power balance, or “correlation of forces”, it is in a period of dark uncertainty at very many levels, from global to regional to societal. That means, essentially, that most powers are weak, and therefore are cautious about behaving in a precipitous manner. Or they perceive that there is opportunity (or the imperative to act) because of the weakness of others.

  This, in turn, means that sovereign governments will continue, perhaps increasingly, to use proxy forces, such as terrorist groups, to achieve strategic outcomes. In some respects, the desired strategic outcome is merely to achieve paralysis or stalemate in a geopolitical arena. But in almost every instance the guiding hand of such policy is power politics, rather than ideology or theology.

  We can – and often do – spend vast amounts of our attention analyzing religious or ideological trends rather than looking at the underlying geopolitics. This is presently the case in the terrorist/insurgency jungles of the Middle East and Central Asia. The main problem is that we listen to what the operational protagonists – the “willing idiots”, as Lenin would describe them – say and believe, and insufficient time analyzing the core motives of their deep sponsors.

  Ideology and theology are carrier waves, not the message. Do they motivate “willing idiots”? Without doubt. But to deal primarily with the carrier wave aspect is to be reactive and tactical; not strategic and in control of events.

  Who prospers in this “greater Thucydides Trap”? Those who prize core geopolitical principles, including national and civilizational identities; those who preserve strategic self-sufficiency. Those who do what they must for the decades ahead, not what is comfortable for the present.

  

  

  

  

  

• "Markets Crash When They're Oversold"

  Submitted by Lance Roberts via RealInvestmentAdvice.com,

  Peddling Fiction

  On Tuesday, as I watched the President’s State of the Union Address, the President made the following statement.

  “Anyone claiming that America’s economy is in decline is peddling fiction.”

  While I certainly understand the need to put a positive spin on the current economic backdrop during your last SOTU address, there is a good bit of misstatement in that comment.

  The President is correct when he stated that the impact of technology on wage growth and jobs was not a recent development. It is, in fact, an impact that has been occurring since the 1980’s as shown in the chart below.

  

  While the big driver of the decline in economic growth since the 1980’s has been a structural change from a manufacturing based economy (high multiplier effect) to a service based one (low multiplier effect), it has been exacerbated by the increase in household debt to offset the reduction in wage growth to maintain the standard of living. This is shown clearly in the chart below.

  

  The problem for the President is that while sound-bytes of optimism certainly play well with the media, the average American is well aware of their current plight of the lack of wage growth, inability to save and rising costs of living.

  The decline of economic growth is, unfortunately, a reality and an inevitable outcome of decades of deficit spending and debt accumulation. Can it be reversed? I honestly don’t know, but Japan has been trapped in this cycle for 30-years and has yet to find a solution.

  Here’s Real Fiction – Low Oil Prices

  Over the last couple of years, economists from Wall Street, to the Federal Reserve, to the White House have repeatedly made the following statement:

  “Falling oil prices are great for the consumer as it gives them more money to spend.”

  I have written many times over the past couple of years, as oil prices fell, that such was not actually the case. To wit:

  “The argument is that lower oil prices lead to lower gasoline prices that give consumers more money to spend. The argument seems to be entirely logical since we know that roughly 80% of households in America effectively live paycheck-to-paycheck meaning they will spend, rather than save, any extra disposable income.

   

  The problem is that the economy is a ZERO-SUM game and gasoline prices are an excellent example of the mainstream fallacy of lower oil prices.

  Example:

  • Gasoline Prices Fall By $1.00 Per Gallon
  • Consumer Fills Up A 16 Gallon Tank Saving $16 (+16)
  • Gas Station Revenue Falls By $16 For The Transaction (-16)
  • End Economic Result = $0

  Now, the argument is that the $16 saved by the consumer will be spent elsewhere. This is the equivalent of ‘rearranging deck chairs on the Titanic.'”

  Increased consumer spending is a function of increases in INCOME, not SAVINGS. Consumers only have a finite amount of money to spend and whatever “savings” there may be at the pump, it gets quickly absorbed by rising costs of living – like health care.

  Most importantly, the biggest reason that falling oil prices are a drag on economic growth, as opposed to the incremental “savings” to consumers, is the decline in output by energy-related sectors. 

  Oil and gas production makes up a hefty chunk of the “mining and manufacturing” component of the employment rolls. Since 2000, when the oil price boom gained traction, Texas comprised more than 40% of all jobs in the country according to first quarter data from the Dallas Federal Reserve.

  The obvious ramification of the plunge in oil prices is eventual loss of revenue leads to cuts in production, declines in capital expenditure plans (which comprises almost 1/4th of all CapEx expenditures in the S&P 500), freezes and/or reductions in employment, and declines in revenue and profitability.

  The issue of job loss is critically important. Since the financial crisis the bulk of the jobs “created” have been in lower wage paying areas such as retail, healthcare and other service sectors of the economy. Conversely, the jobs created within the energy space are some of the highest wage paying opportunities available in engineering, technology, accounting, legal, etc. In fact, each job created in energy-related areas has had a “ripple effect” of creating 2.8 jobs elsewhere in the economy from piping to coatings, trucking and transportation, restaurants and retail.

  Simply put, lower oil and gasoline prices may have a bigger detraction on the economy than the “savings” provided to consumers.

  Why do I remind you of this basic economic reality – because it only took the Federal Reserve 18-months to figure it out. In a recent speech 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.”

  No S*^t!

  Markets Crash When Oversold

  Earlier this week, I discussed the oversold nature of the market and the likely of a “bounce” to “sell into.” 

  “With all of the alarm bells currently triggering, the initial ‘emotionally’ driven response is most likely an urge to go look at your portfolio statement and start pushing the ‘sell’ button. Don’t Do It!

   

  On a short-term basis, prices oscillate back and forth like a rubber band be pulled and let loose. Physics state that a rubber band stretched in one direction, will initially travel an equal distance in the opposite direction when released.

   

  Take a look at the chart below.”

  

  “In particular note the top and bottom portions of the chart. These two indicators measure the ‘over-bought’ and ‘over-sold’ conditions of the market. As with the rubber band example above, you will notice that when these indicators get stretched to the downside, there is an effective ‘snap back’ in fairly short order.

   

  With the markets having issued multiple sell signals, broken very important support and both technical and fundamental deterioration in progress, it is suggested that investors use these ‘snap back’ rallies to reduce equity risk in portfolios.”

  I reiterate this point because the market continued to slide on Wednesday which led to several comments about the inability of the markets to get a sellable bounce. There is an important “truism” to remember.

  “Markets crash when they’re oversold.”

  Let’s step back and take a look at the past two major bull markets and subsequent bear market declines.

  

  (Note: I am using weekly data to smooth volatility)

  The top section of the chart is a basic “overbought / oversold” indicator with extreme levels of “oversold” conditions circled. The shaded area on the main part of the chart represents 2-standard deviations of price movement above and below the short-term moving average.

  There a couple of very important things to take away from this chart. When markets begin a “bear market” cycle [which is identified by a moving average crossover (red circles) combined with a MACD sell-signal (lower part of chart)], the market remains in an oversold condition for extended periods (yellow highlighted areas.)

  More importantly, during these corrective cycles, market rallies fail to reach higher levels than the previous rally as the negative trend is reinforced. All of these conditions currently exist.

  Does this mean that the markets will go straight down 20% without a bounce? Anything is possible. However, history suggests that even during bear market cycles investors should be patient and allow rallies to occur before making adjustments to portfolio risk. More often than not, it will keep you from panic selling a short-term market bottom.

  

  

  

  

  

• The "World's Most Bearish Hedge Fund" Crushed It In 2015

  The name of $2.8 billion Horseman Capital is familiar to regular readers for two main reasons: not only has the fund, which some have called the “most bearish in the world”, generated tremendous returns ever since inception except for a 25% drop in 2009 (after returning 31% during the cataclysmic 2008), but more notably, it has been net short – and quite bearish on – stocks ever since 2012. In that period it has consistently generated low double-digit returns, a feat virtually none of its competitors have managed to replicate. In fact, its performance has put it in the top percentile of all hedge funds in recent years.

  And, according to its December letter, Horseman not only crushed it in both December and 2015, but knocked it out of the ballpark.  Here’s why:

  

  It’s hardly new to Horseman, which has been “crushing it” for four years in a row, and not surprisingly, 2015 was its best year since 2008.

  

  What is most amazing is that as noted above, Horseman has been bearish since 2012 while outperforming most hedge funds and as of this moment is net short by a whopping -68%, which could certifiably put it in the running for the title of the “world’s most bearish hedge fund.”

  

  Here is how Horseman made a killing in December:

  This month the gains came from the short portfolio, in particular from oil and oil transportation, EM financials and automobile sectors. The short exposure to real estate and the long portfolio incurred modest losses.

  What was the fund most bearish on? Pretty much everything, but a few sectors in particular:

  

  Furthermore, Horseman seems to have an unusually bearish bias toward Mexico and especially Pemex and the Mexican auto sector. Here’s why:

  In Latin America, the poor performances of the Argentinian and Brazilian economies are regularly making the headlines in the press, while the economy of Mexico tends to be perceived in better shape, less reliant on commodity prices and benefiting from being closer to the growing US economy. However, the Mexican economy is heavily reliant on the automobile and oil sectors, which respectively accounted for 21.6% and 10.6% of its exports in 2014.

   

  The country runs a 2% current account deficit and a 3.19% budget deficit. The budget deficit does not take into account the losses from its national oil company Petroleos Mexicanos (Pemex), which is used by the government as a financing vehicle to finance about 30% of its budget. The company said that in the third quarter of 2015, taxes and royalties accounted to 232% of its operating results. It reported a $9.9bn net loss, its 12th consecutive quarterly loss. As a result, for 2016, the company expects to borrow $21bn, increasing outstanding debt to more than $100bn.

   

  In November of last year, the government used an average oil price of $50 per barrel for its 2016 budget. However, since then, oil prices collapsed to $32. Including Pemex’s losses and using the Q3 quarterly results, Mexico’s budget deficit is more likely to be around 6% of GDP, a level similar to Brazil’s current official number.

   

  In the automobile sector Mexico has overtaken Japan as the second largest source of U.S. auto imports. Mexican made vehicles account for 11% of cars and trucks sold to the U.S. The Mexican Automobile Industry Association estimated that more than 70% of the cars and light trucks headed to the US in 2015. Over the past 5 years, US purchases of cars have been largely driven by a boom in auto loans, which in our opinion is about to end.

   

  The Mexican government has introduced structural reforms in the hope of encouraging new entrants to challenge monopolies. However, in our opinion, these reforms will take years to pay dividends, while in the short term the economy will have to adjust to low oil prices and a likely downturn in automobile demand. The fund maintains a short exposure to the Mexican peso versus the US dollar of approximately 25%.

  We expect the “short Mexico” trade to become quite popular in the coming weeks.

  Finally, here is the monthly essay by Russell Clark, Horseman’s CIO, which as always is a delightful read and this time has a Star Wars theme.

  Yellen Skywalker inched down the corridor. There was barely any light, but the force guided her steps. Soon she felt the presence of her father, Deflation Vader. His voice rasped out a greeting.

   

  “I have been expecting you. I can feel that the force is strong with you. Good. The Emperor has foreseen that your powers would grow, and that you would become our ally. It is time for you to join me and restore order to the universe!”

   

  “You are wrong Vader – I would never go to dark side!”

   

  “Ha ha ha – dark side – what dark side? Did Obi-Wan Ben Bernanke never tell you the true nature of the force?”

   

  “What true nature?” asks a troubled Yellen.

   

  “The force is all around us, and seeks harmony and balance. It is neither light nor dark, but cyclical. Mountains must have valleys. Light must create shadow. Action and reaction, this is all that life is. Your belief in the light side of the force, and the need for you to strenuously push it on all things, to create inflation in all things, is touching, but quite misguided.”

   

  Vader continued “Low interest rates and debt creation in particular is an object that is neither inherently inflationary nor deflationary, but only becomes a tool of the light or the dark side if it moves out of balance, or harmony. You see my jedi, debt accumulation is inflationary when taken on and deflationary when paid back. The longer you push your light side of the force, the stronger the dark side becomes! You have in fact been my greatest ally!” Vader let out a bellowing laugh.

   

  “Search your feelings Yellen, you know that I speak the truth”. Yellen knew the words Vader spoke were true. Despite monumental efforts, the light side had only generated minor inflation, even with previously unheard interest rates and even with their new monetary techniques. She thought back to the day her mentor Obi-Wan Ben Bernanke disappeared off to some far flung colony – his parting words as he passed responsibility for the light side to Yellen were cryptic – “Whatever you do, do not do anything sensible”. But Yellen knew she faced a dilemma, if she continued to fight the dark side she only made it stronger, and the ultimate move to harmony more difficult. Or should she succumb now, and hope that dark side influence would not destroy too much. In her heart, she made her decision.

   

  “You are right father, I can see that. What must I do?”

   

  “Why my child, you must do nothing, just cease to fight the dark side, and it shall restore harmony to the universe as surely as a rising tide destroys footprints in the sand. Come, let us watch”

   

  Vader and Yellen moved over to an observation window. From the view she could see the dancing constellations that made up the financial universe. Many shone as brightly as they could. Record employment, record car sales, all-time highs in the stock market. Yellen let go of the light side of the force. Almost instantaneously, the Transport star system began to darken and disappear. The high yield nebula went into super nova and slowly began to darken. And then nothing. But as Yellen watched all the bright constellations began to darken ever so slightly. And Yellen could feel a tremor from a billion traders’ hearts, as fear began to replace greed in their hearts. She wondered what she had done, as she stood next to Vader, and watched the lights go out.

  Clarke’s parting words: “Your fund remains long bonds, short equities.”

  

  

  

  

  

• The 'Real' Price Of Oil Is Below $17

  "You see a big destruction in the income of the oil and commodity producers," exclaims on analyst but, as Bloomberg notes, while oil prices flashing across traders' terminals are at the lowest in a decade, in real terms the collapse is considerably deeper. Adjusted for inflation, WTI is its lowest since 2002 and worse still Saudi Light Crude is trading at below $17 (in 1998 dollar terms) – the lowest since the 1980s…

  Slumping prices are a critical signal that the boom in lending in China is “unwinding,” according to Adair Turner, chairman of the Institute for New Economic Thinking.

  In fact, while sub-$30 per barrel oil sounds very scary, Saudi prices would be less than $17 a barrel when converted into dollar levels for 1998, the year oil sank to its lowest since the 1980s.

  

   

  Slowing investment and construction in China, the world’s biggest energy user, is “sending an enormous deflationary impetus through to the world, and that is a significant part of what’s happening in this oil-price collapse,” Turner, former chairman of the U.K. Financial Services Authority, said in an interview with Bloomberg Television.

  *  *  *

  So while prices are very low any description, never forget about inflation – The Fed won't!

  

  

  

  

  

• "It's All The Fed's Fault" Santelli Rages, They "Will Certainly Turn Us Into Japan"

  Who is to blame for all this volatility? CNBC's Rick Santelli scoffs at the growing mainstream media's recognition that The Fed is to blame for daring to raise rates – "a group of unelected officials ruining the party and taking away the punch-bowl."

  Santelli's problem is that "every time the picture of the world was not what The Fed wanted us to see, they changed the channel," and now they are cornered in their lies, "all along The Fed should have been honest about the true quality of the jobs data.. and now they are force to tell the truth about it, they risk losing all of their credibility."

  "The notion that a small group of people should control the price of money should be under review," Rick rages, warning that "if stocks are rallying because The Fed is retreating, we certainly will turn into Japan."

   

  Here is Santelli with two minutes of simple truth…

  

  

  

  

  

• Could China's Housing Bubble Bring Down The Global Economy?

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

  Who's going to buy the tens of millions of empty flats held as investments?

  I've been writing a lot about China recently because it's becoming increasingly clear that China's economy is slowing and the authority's "fixes" are not turning it around. That means the engine that pulled the global economy out of the 2009 recession has stalled.

  Many people see China's slowdown as the source of the next global recession, but few seem to realize the extreme vulnerability of China's vast housing market and the many knock-on consequences of that market grinding to a halt.

  I've just completed a comprehensive review of China's housing market, and now realize it's much worse than the consensus understands.

  The consensus view is: Sure, China's housing prices are falling modestly outside of Beijing and Shanghai, but since Chinese households buy homes with cash or large down payments, this decline won't trigger a banking crisis like America's housing bubble did in 2008.

  The problem isn't a banking crisis; it's a loss of household wealth, the reversal of the wealth effect and the decimation of local government budgets and the construction sector.

  China is uniquely dependent on housing and real estate development. This makes it uniquely vulnerable to any slowdown in construction and sales of new housing.

  

  About 15% of China's GDP is housing-related. This is extraordinarily high. In the 2003-08 housing bubble, housing's share of U.S. GDP barely cracked 5%.

  Of even greater concern, local governments in China depend on land development sales for roughly 2/3 of their revenues. (These are not fee simple sales of land, but the sale of leasehold rights, as all land in China is owned by the state.)

  There is no substitute source of revenue waiting in the wings should land sales and housing development grind to a halt. Local governments will lose 2/3 of their operating revenues, and there is no other source they can tap to replace this lost revenue.

  Since China authorized private ownership of housing in the late 1990s, homeowners in China have only experienced rising prices and thus rising household wealth–at least until very recently, when prices dipped as the government tightened lending standards and imposed some restrictions on the purchase of flats as investments.

  Though it's difficult to quantify the "wealth effect" the rapid rise in housing valuations supported, it's widely acknowledged that upper-middle class household spending has increased as a direct result of housing's wealth effect.

  Though few dare acknowledge it, prices in desirable first-tier cities urban cores are completely unaffordable to average households. Average flats in Beijing now cost 22X annual household income — roughly six times the income-price ratio that is sustainable (3 or 4 X income = affordable cost of a house).

  Far too many observers use housing prices and sales in Beijing and Shanghai–a mere 3.5% of China's population and housing stock–as the basis of entire nation's housing market. This is akin to judging America's housing market on prices and sales in Manhattan.

  So while sales are soaring in Beijing, they're falling 26% in the 2nd, 3rd and 4th tier cities.

  Though it is widely known that China's household wealth is concentrated in housing, the extent and consequences of this concentration are rarely discussed.

  Much has been made of the $3+ trillion losses households have suffered as China's stock market bubble collapsed. But given the relatively insignificant role financial assets play in household wealth, these losses are modest compared to the far larger loss of household wealth that will occur as housing deflates from bubble heights.

  Many people claim the estimated 65 million empty flats held as investments by the middle and upper classes in China will be sold to new buyers in due time. But these complacent analysts overlook the grim reality that the vast majority of urban workers make around $6,000 to $10,000 annually, and a $200,000 flat is permanently out of reach.

  They also overlook the extreme concentration of wealth that goes into every purchase of a small flat byt households that really can't afford the cost: the entire extended family's wealth is often poured into the flat, and money borrowed from friends and relatives or even loan sharks.

  The other problem few Western analysts consider is the impaired nature of much of China's housing stock. Millions of units constructed in the early 2000s were hastily built and are now degraded. Newer buildings are not maintained, either, and there is a strong cultural preference for new homes, not existing units. (The government doesn't even keep track of resales/sales of existing homes; whatever minimal data is available comes from private brokerages).

  In other words–who's going to buy the tens of millions of empty flats held as investments? What is the market value of flats nobody wants to buy or cannot afford to buy?

  China has a demographic problem as well. The generation now entering the work force is much smaller than the generation that bought two or three flats for investment. There simply aren't enough wage earners entering the home-buying years to soak up this vast and growing inventory of empty homes.

  China's stated intent is to move from a fixed-investment/export dependent economy to a consumer economy. But if we consider what happens when housing slows or even grinds to a halt, we realize the impact on incomes, wealth and consumption will be extraordinarily negative, not just for China but for every nation that sells China vehicles and other consumer goods.

  

  

  

  

  

• Hillary's Lead Disintegrates: She Is Now Doing Worse Than In 2008, As Trump Surges

  Just when Hillary Clinton thought her political fiascoes would be the worst of her ongoing troubles as she glides through the Democrat primaries, and then takes on Trump sure to find a Warren Buffett-funded victory, suddenly everything appears to have gone wrong in what is most important to the scandal-ridden former Secretary of State and presidential contender: her second – and final – campaign for president.

  According to WaPo, if one compares where Clinton is now in the Real Clear Politics polling average, the 2016 picture and the 2008 picture aren’t really all that similar; in fact suddenly the trapdoor beneath Hillary appears to have sprung open. “Nationally, she was doing much better in 2008 than she is right now, perhaps in part because the anti-Clinton vote in 2008 was still split between two people — Barack Obama and John Edwards — instead of just one. But that recent trend line, a function of two new national polls that were close after a bit of a lull, is not very good news.”

  

   

  Not surprisingly, Clinton is trailing badly in New Hampshire, which is the home turf of her main socialist opponent. In 2008,

  

   

  What little silver lining exists, is that in Iowa, Hillary is running a little better than she did in 2008, although as seen on the chart below even here her lead has plunged recently. In 2008 it wasn’t until the last week that she fell out of the lead. She eventually came in third.

  

   

  The problem remains the national race, and what’s worse, if the 2008 past is prologue and if Hillary’s lead in Iowa evaporates and she loses, it may be the end for the former first lady: back then she lost three-quarters of her lead after the caucuses although she did gain some of it back after her win in New Hampshire.

  

   

  And while these numbers can easily change, one person who is certain to capitalize on Hillary’s sudden collapse is Donald Trump, who as we showed recently has become the bookmakers’ favorite after trailing badly as recently as September, even as Trump’s republican competitors drop like flies on their own, the most recent casualty being Ben Carson whose campaign is all but over following news from CNN that Carson’s campaign finance chairman Dean Parker submitted his resignation.

  Finally, moments ago the WSJ reported that Donald Trump has opened a double-digit lead over his next-closest Republican rival, less than three weeks before the first votes of the 2016 presidential race are cast, a new Wall Street Journal/NBC News poll finds.

  A third of Republican primary voters in the nationwide survey said they favored Mr. Trump to be the GOP nominee, followed by Texas Sen. Ted Cruz at 20% support, Florida Sen. Marco Rubio at 13% and retired pediatric neurosurgeon Ben Carson at 12%.

   

  In December, Mr. Trump had led the No. 2 candidate, Mr. Cruz, by 5 percentage points. In the new poll, his lead widened to 13 points.

  And so what was considered humor by most pundits as recently as last summer is becoming an all too possible reality: president Trump?

  

  

  

  

  

  

• Bullard Bounce 2.0 – Stocks Surge By Most Since September; Bonds, Dollar Flat

  Bullard's back bitches!!!

   

  The "intervention" began overnight as The National Team stepped in to China's most tech-heavy index ChiNext for a 9.5% rally rampapalooza off the opening lows

  

   

  Then "He" spoke and the market obeyed… Dow surged 411 points off the lows – Even better than Bullard Bounce 101 (a 400 point bounce)

  

   

  Will it be deja vu all over again?

  

   

  It does not look like it – S&P Futs were ramped to VWAP then stalled, then ramped to Tuesday's cash close… then dumped…

  

   

  However, despite today's epic Bullard Bounce, Small Caps are still suffering the worst start to a year ever…

  

   

  The day started off as usual with a purge as overnight strength/stability was dumped at the open… but then Bullard Spaketh The Gospel Of StickSave and algos took over levitating with crude, then handing off to USDJPY once that ran out of steam…and then JPY handed off to VIX in the last hour…

  

   

  Today was a very good day for US equities…At the highs, things were awesome…

  • Nasdaq up 3% – best day in 5 months
  • S&P up 2.2% – best day in 4 months
  • Russell 2000 up 2.2% – best day in 3 months
  • Dow up 1.9% – best day in 5 weeks

  Before the end of day weakness…

  

   

  It seems Bullard's Bounce did nothing to reduce the size of the policy error post Fed rate-hike…

  

   

  FANTAsy stocks v-shape recovered…but dumped into the close..

  

   

  VIX decoupled through the middle of the day but then was initiated for momo in the last hour…

  

   

  Overall credit markets rallied but remain notably decoupled..

  

   

  Energy credit markets spiked 35bps wider today despite oil's rally and energy stocks' gains…

  

   

  Treasury yields trod water largely soaking up a weak auction and yesterday's huge supply from Inbev…

  

   

  The USDollar Index flip-flopped after ECB comments early ending the day almost unchanged…

  

   

  Commodities very mixed with gold and silver slammed and copper and crude ramped…

  

   

  Silver was capped atits 50DMA…

  

   

  The oil move looks a lot like an algo stop-hunt… ahead of OPEX tomorrow…

  

   

  Charts: Bloomberg

  

  

  

  

• The US Government Has An Internet Killswitch – And It's None Of Your Business

  Submitted by Derrick Broze via TheAntiMedia.org,

  On Monday the Supreme Court declined to hear a petition from the Electronic Privacy Information Center (EPIC) that sought to force the Department of Homeland Security to release details of a secret “killswitch” protocol to shut down cellphone and internet service during emergencies.

  EPIC has been fighting since 2011 to release the details of the program, which is known as Standard Operating Procedure 303. EPIC writes, “On March 9, 2006, the National Communications System (‘NCS’) approved SOP 303, however it was never released to the public. This secret document codifies a ‘shutdown and restoration process for use by commercial and private wireless networks during national crisis.’”

  EPIC continues, “In a 2006-2007 Report, the President’s National Security Telecommunications Advisory Committee (‘NSTAC’) indicated that SOP 303 would be implemented under the coordination of the National Coordinating Center (‘NCC’) of the NSTAC, while the decision to shut down service would be made by state Homeland Security Advisors or individuals at DHS. The report indicates that NCC will determine if a shutdown is necessary based on a ‘series of questions.’”

  Despite EPIC’s defeat at the hands of the Supreme Court, the four-year court battle yielded a heavily redacted copy of Standard Operating Procedure 303.

  The fight for transparency regarding SOP 303 began shortly after a Bay Area Rapid Transit (“BART”) officer in San Francisco shot and killed a homeless man named Charles Hill on July 3, 2011. The shooting sparked massive protests against BART throughout July and August 2011. During one of these protests, BART officials cut off cell phone service inside four transit stations for three hours. This kept anyone on the station platform from sending or receiving phone calls, messages, or other data.

  In July 2012, EPIC submitted a Freedom of Information Act (FOIA) request to the DHS seeking the full text of Standard Operating Procedure 303; the full text of the predetermined “series of questions” that determines if a shutdown is necessary; and any executing protocols related to the implementation of Standard Operating Procedure 303, distributed to DHS, other federal agencies, or private companies.

  After the DHS fought the FOIA releases, a district court in Washington, D.C. ruled in EPIC’s favor, but that ruling was later overturned by the court of appeals. The appeals court told EPIC the government was free to withhold details of the plan under the Freedom of Information Act because the information might “endanger” the public.  In 2015, the digital rights group asked the Supreme Court to review the ruling by the federal appeals court.

  With the Supreme Court’s refusal to address EPIC’s petition, the issue seems to have reached a dead-end. The American people are (once again) left in the dark regarding the inner-workings of another dangerous and intrusive government program. It is only through the hard work of activists and groups like EPIC that we are at least aware of the existence of this program — but knowing bits and pieces about the protocol is not enough. In order to combat such heavy-handed measures, we need to have access to the government’s own documents. Hopefully, there is already a whistleblower preparing to release these details.

  What we do with the information we do have is up to each of us as individuals. We can sit back and watch the United States further devolve into a militarized police and surveillance state — or we can spread this information, get involved locally, and create new systems outside of the current paradigm of control and exploitation.

  

  

  

  

  

• The Empty Suit's Seat

  President Obama’s “Empty Seat” appears to have raised the ire of many…

   

  

  Source: Dana Summers

   

  

  Source: Investors.com

   

  Perhaps this is why?

  

  Source: Ben Garrison
  

  

  

  

  

  

• The Machines Are Going Mad – HFT Quote-Stuffing Desperation Spikes To Record High

  It appears – for now – that the machines are losing control. Amid the chaos of the last few days in US equities, Johnny 5 and his ilk have been quote-stuffing in desperation at the highest rate in history… but it’s not working!!

   

  

  Source: @NanexLLC

  

  

  

  

  

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• Massive Explosions Rock Jakarta In Apparent Suicide Bombings; Gunfire, Casualties Reported

  Two months after the Paris explosions of November 13, it appears that terrorism has struck again, this time in Indonesia’s capital, Jakarta where moments ago, at least six bomb explosions, gunfire and casualties were reported, with at least one of the explosions taking place near the local UN office.

  ANTARA NEWS REPORTS SIX EXPLOSIONS IN CENTRAL JAKARTA

  JAKARTA POLICE SUSPECTS BOMB AT TRAFFIC POLICE POST: METRO TV

  JAKARTA POLICE, GUNMEN CONTINUES SHOOTING: METRO TV

  BREAKING: Massive explosion rocks central Jakarta, with at least 1 person dead; Gunshots heard.

  — The Associated Press (@AP) January 14, 2016

  What we hear so far. Unconfirmed reports:
  1. Multiple IEDs activated.
  2. Active shooters present.
  3. One (or more) KIA
  #JakartaBlast

  — Ruli Harahap (@ruliharahap) January 14, 2016

  #INDONESIA‘S NATIONAL POLICE SPOKESMAN SAYS CENTRAL #JAKARTA #EXPLOSIONS SUSPECTED TO HAVE BEEN CARRIED OUT BY #SUICIDE BOMBER @Reuters

  — Global Markets Forum (@ReutersGMF) January 14, 2016

  @TMCPoldaMetro Suasana TKP sesaat setelah bom meledak di sebuah kafe di Jakarta Pusat. pic.twitter.com/UbPb448X2s

  — Ramdans Muhammad (@Rockramdans) January 14, 2016

  Serious exchange of fire in downtown #Jakarta. Didn’t experience this in 3.5 years in #Pakistan

  — Jeremy Douglas (@jdouglasSEA) January 14, 2016

  Police now backing-up & security announcement to stay away from windows, & telling folks to retreat from lobby

  — Jeremy Douglas (@jdouglasSEA) January 14, 2016

  Korban ledakan bom di Sarinah, Thamrin. Apakah mereka pelakunya? pic.twitter.com/YXSxWgkz2A

  — Pujiono JS™ (@PujionoJS) January 14, 2016

  And folks in office saying think it is a #Paris type #foreignfigthers #ISIS supporters attack. Given 500 in #Syria wouldn’t be huge surprise

  — Jeremy Douglas (@jdouglasSEA) January 14, 2016

  As of this moment, the explosions appear to be yet another suicide bomber-driven terrorist attack, and we suspect it is only a matter of time before ISIS takes credit.

  The local stocks have reacted dramatically:

  

  A live feed of the event is available below:

  Livestream @KompasTV on Jakarta, #Indonesia blast: https://t.co/Ccq8194Nfn pic.twitter.com/nxnhEnak1L

  — Steve Herman (@W7VOA) January 14, 2016

  

  

  

  

  

• This Is What The Powerball Ticket Line Looked Like In Nevada

  Seven years ago, America was promised hope and change. The change never came, but at least there is still hope, and it comes in the form of a voluntary tax known as the Powerball lottery. The only problem: it happens to be everyone else’s hope too, and to even get a chance to buy a ticket, one has to wait in lines such as this one on the California-Nevada border.

  The line to buy Powerball tickets at the Nevada to California border line today is UNREAL!!!! ???? pic.twitter.com/prehiIeM3i

  — Dan Fleyshman (@DanFleyshman) January 13, 2016

  

  

  

  

• Hong Kong Dollar De-Pegging Risk Spikes As Yuan Slides, China Stocks Drop To 2-Year Lows

  Update:

  • SHANGHAI COMPOSITE INDEX FALLS 20% BELOW DECEMBER HIGH

  

   

  To 2-Year Lows…

  

   

  Offshore Yuan is being dumped again…

  

   

  And The Hong Kong Dollar is under sever pressure within its peg band…

  

   

  As De-Pegging risk expectations ramp up…

  

   

  As we detailked earlier,following last night's notable weakness in Chinese stocks (now down 15-25% year-to-date) and today's plunge in US markets, Offshore Yuan has begun to tumble lower once again ahead of today's Yuan fix. Having slapped short Yuan speculators with a dire liquidity withdrawal, it appears traders are seeing through the "over-invoicing" bullshit of last night's trade data and outflows appear to have restarted. Equities across AsiaPac are tumbling despite PBOC injecting a massive CNY160bn of liquidity (and modestly strengthening the Yuan fix), as safe-haven flows push 10Y China bonds to 2.70% – a record low.

  Chinese bonds just hit a record low yield…

  • *CHINA 10-YEAR BOND YIELD DROPS 3 BPS TO RECORD 2.70%

  

   

  Offshore Yuan is selling off again…

  

   

  And Chinese equities are a bloodbath in 2016…

  

   

  And tonight's open is not helping…

  • *MSCI ASIA PACIFIC INDEX EXTENDS LOSS TO 2.3%
  • *FTSE CHINA A50 JANUARY FUTURES FALL 1.7% IN SINGAPORE
  • *SHANGHAI COMPOSITE FALLS BELOW AUGUST CLOSING LOW

  

  But China "flu" appears to be spreading as carry trade unwinds spread to JPY…

  Japanese stocks are plunging – NKY down 700 points from its US session highs…

  

   

  To its weakest since Oct 2014…

  

   

  Get back to work Mr. Kuroda!!!

   

  Charts: Bloomberg

  

  

  

  

  

• How China Almost Ran Out Of Physical Dollars

  On Tuesday, we weren’t surprised to learn that some banks in Shanghai and Beijing were apparently running short of physical dollar bills.

  According to Ming Pao, Shanghai residents were lined up at local banks in a frantic effort to sell RMB for USD amid China’s ongoing yuan deval.

  “Some banks in China’s Beijing, Shanghai and Shenzhen ran short of dollar bills for cash withdrawal amid increasing demand for the currency,” 21st Century Business Herald added, citing a reporter’s investigation which showed that “BOC, CCB, and China Merchants Bank in the listed cities are requiring an appointment at least 2 days in advance for >$5,000 purchases.” The appointment “could take as long as 1 week at some branches,” the paper said.

  Why the panic? Because, in the simplest possible terms, no one has any idea what Beijing’s target is for the yuan.

  In fact, no one even knows if the PBoC has a target at all or if China is simply flying by the seat of its pants managing the glidepath on an ad hoc, daily basis depending on how wide the onshore/offshore spread is (a proxy for the pressure on the currency).

  One thing seems certain though: a much bigger “adjustment” will be necessary if China hopes to stabilize its economy by propping up exports. As Deutsche Bank noted last week, if global currencies continue to slide against the dollar, the yuan will need to fall if China hopes to keep its new trade-weighted RMB index from rising.

  

  As long as the deval continues in a kind of fits and starts fashion, the capital flight will continue. That is, the only way to stabilize the situation is to allow the market to decide where the yuan should trade once and for all, a painful option in the short run, but a move that would keep the country’s capital account from dying a slow death by a thousand paper cuts. As Morgan Stanley puts it, “the capital accoount [currently] dominates the current account.”

  

  
  

  Now, as the turmoil continues (temporarily “better” trade data notwithstanding), WSJ is out with an account of how China is rapidly running out of physical dollars. “At major lender Industrial & Commercial Bank of China Ltd., one banker said the number of people wanting to change yuan for dollars has increased significantly during the past three weeks—a period during which the Chinese currency has declined about 2%,” WSJ begins. “During the weekend, ICBC received an urgent notification from China’s central bank warning of a dollar shortage, he said.”

  ICBC customers are now subject to the same kind of waiting period described earlier this week by 21st Century Business Herald. The bank is now requiring a four day advance notice on FX exchanges presumably in an effort to manage the flows and ensure the cash is available.

  Chinese are only allowed to exchange $50,000 per year (although between the various “Mr. Chens” and end-arounds like the UnionPay ruse there are plenty of ways to circumvent the captial controls) and WSJ suggests the selling pressure may be particularly acute now because everyone is starting with a clean slate for 2016. “Since China’s strict capital controls limit Chinese consumers to purchasing $50,000 worth of U.S. dollars each calendar year, January is also when they can start buying again with a fresh quota,” The Journal continues, before quoting Harry Hou “who works in the financial industry in Shanghai, [where] he, his wife and parents bought their limit of $200,000 last year, and started buying dollars again through China Merchants Bank’s online service as soon as the New Year kicked in.” 

  “This year’s biggest market risk is not going to be [stocks] but the yuan. The government has let the yuan fall in the past, allowing it to weaken to 8 yuan from 5 yuan against the dollar in the 1990s,” Hou said.

  And while Chinese authorities are doing their best to control the flow by cracking down on quota abusers and asking banks to make lists of those suspected of skirting the rules, the only way to stop the bleeding is to convince the market that the deval has nearly run its course. That won’t be easy, especially with the onshore/offshore spread blowing out, persistently lower nightly fixings, and a trade-weighted RMB that’s still substantially elevated from a historical perspective.

  In fact, Chinese are so convinced that there’s more downside to come that exporters are executing a daily arb. “James Mao, who runs a Shanghai-based company that exports biochemical materials from China to the U.S., says he is asking Chinese suppliers to wait for a few days to get paid, since he thinks he can get more yuan for those dollars later,” The Journal explains. “Exporters are required to sell the foreign currency they obtain from trade to the central bank, but there are no rules on when the transaction needs to be done. So far this month, Mr. Mao says he pocketed an extra $2,000 by waiting longer to convert his dollars to yuan.”

  Remember China, if the banks run out of dollars or if you find yourself having to wait a week for your greenbacks, there’s always Bitcoin.

  And there’s always Chen.

  

  

  

  

  

  

• If You Don't Agree With Obama You Are "Peddling Fiction"

  Submitted by Simon Black via SovereignMan.com,

  If you’re not watching it purely for the entertainment value, sitting through a State of the Union speech ranks somewhere between a colonoscopy and a root canal.

  Every year I opt for the former (entertainment value, not colonoscopy).

  But because I live overseas, one of the added entertainment benefits is that I’m surrounded by foreigners who are seeing this highly ritualistic propaganda for the first time.

  The absurdity starts almost immediately.

  The Sergeant-at-Arms introduces the President of the United States, and he receives a massive, five minute standing ovation as he walks across the water to the podium.

  The applause finally dies down briefly, until, immediately after, the Speaker of the House formally introduces the President. And then the applause begins anew.

  Try explaining that to a foreigner who’s never seen it before.

  Foreigner: “Why is everyone clapping again for the President as if they weren’t just clapping for him 30 seconds ago?”

  Me: “Because that’s just the way they do it.”

  Foreigner: “But why?”

  Me: “… ummm… because they’re all trained monkeys?”

  But it is at this point that the real propaganda begins, where the President of the United States tells his fellow Americans that they are prosperous and free.

  He cited, for example, the 14 million jobs created since he took office.

  Of course he failed to mention the more than $8 trillion in debt (77% increase) that has been accumulated since he was inaugurated seven years ago.

  If the President truly wants to take credit as the job creator-in-chief, the basic math works out to be nearly $600,000 in government debt for every single job created.

  Zerohedge showed yesterday, in fact, that while debt in the US has increased 77% over the last seven years, GDP has only increased by 13%.

  Now, you’d think that for each additional dollar the US government was spending and indebting future generations, there would be at least $1 in GDP growth.

  Ideally you’d get more than $1 in GDP growth. Duh. Businesses have to do this every single day.

  If I borrow $10 million to buy and develop agricultural farmland, obviously the net effect once I’m finished should result in a property that’s worth MORE than $10 million.

  But that’s not how it works when governments spend money. It took them $3.71 of debt to buy just $1 of GDP growth.

  Yes, the overall result may show that the economy is technically bigger than it was in 2009.

  But this ratio is completely screwed up, and it is not indicative of “the strongest, most durable economy in the world.”

  In the meantime, there have never been more pages of laws, rules, and regulations ever in the history of the United States than there are today, January 13, 2016.

  Just this morning, in fact, the federal government published another 369 pages of regulations. Tomorrow there will be even more.

  Should you find yourself out of compliance with any of them, the government can summarily deprive you of your freedom, your property, and even your family.

  And it can do so administratively, without a fair and speedy trial in front of an impartial judge and a jury of your peers.

  This is not what freedom and prosperity are all about.

  President Obama is undeniably upbeat about America. And he’s right, there are a lot of amazing people doing great things in the US.

  The United States is a wonderful country. It’s clean. Modern. Reasonably safe. Standard of living is very high.

  But decades of insane regulation, government debt, and astonishingly destructive monetary policy have resulted in a society where it is now easier to consume than produce.

  Prosperity is not complicated. People figured out thousands of years ago that if you wanted to do well, you had to produce more than you consumed.

  But the American system is the exact opposite, favoring those who recklessly borrow and spend, rather than those who work hard and responsibly save.

  The President of the United States boldly accused everyone who doesn’t share his view as just making things up.

  In his words, “Anyone claiming that America’s economy is in decline is peddling fiction.”

  This is an extraordinary (and delusional) statement.

  The government’s own numbers show that they are completely insolvent, to the tune of nearly $18 trillion.

  The annual reports for the Social Security trust funds show that they are rapidly running out of money.

  The Federal Reserve’s own balance sheet shows that it is precariously undercapitalized, with net capital less than 1% of total assets.

  The Census Bureau’s data shows that the earnings for middle class Americans are stagnating.

  The Labor Department’s numbers show that the number of Americans who have dropped out of the work force hasn’t been at this level since the Carter administration.

  USDA figures show that the number of food stamp recipients is near an all-time high, simultaneously when the number of homeless children in America is at a record high.

  And all of this, at a time when trust in government is near an all-time low.

  These are all facts, not fiction.

  The only fiction is pretending that this story has a happy ending.

  

  

  

  

  

• Last Bubble Standing

  EM debt bubble… emaciated, FX Carry… crucified, Crude…crushed,  High yield bonds… burst, Chinese equities… blown, Trannies… trounced, Small Caps… slammed, Biotechs… busted, and FANGs finally FUBAR! But there is one big (very big) bubble left in the world that no one is talking about, and a rather large liquidity-busting pin beckons…

  In May 2015 we first explained exactly why China was blowing its equity market bubble. Simply put, with more "equity," companies were better able to refinance/roll (note, no interest in debt reduction or deleveraging) their record-breaking mountain of debt and avoid the systemic collapse that is utterly imminent for just a few more months/years.

  Now that the equity market bubble has burst, Chinese authorities have chased investors into another bubble.

  In October 2015, we warned of the relative risk building in the Chinese corporate bond market.

  As the rout in Chinese stocks this year erased $5 trillion of value, investors fled for safety in the nation’s red-hot corporate bond market. They may have just moved from one bubble to another.

  Into Chinese corporate bonds…

  

   

  As we detailed just two months ago, this historic bond bubble is paradoxical for the simple reason that China's credit fundamentals have never been worse, and as we further showed, as a result of the ongoing collapse in commodity prices (which today's Chinese rate and RRR-cut will have absolutely no impact on), more than half of commodity companies can't generate the cash required to even pay their interest, a number which drops to "only" a quarter when expanded to all industries.

  

   

  "The equity rout merely reflects worries about China’s economy, while a bond market crash would mean the worries have become a reality as corporate debts go unpaid," said Xia Le, the chief economist for Asia at Banco Bilbao. "A Chinese credit collapse would also likely spark a more significant selloff in emerging-market assets."

  "Global investors are looking for signs of a collapse in China, which itself could increase the chances of a crash… This game can’t go on forever."

  They will find it soon, because while China may have managed to once again kick the can on its most recent default when state-owned SinoSteel failed to pay due principal and interest last month only to get a quasi-government bailout, every incremental bail out merely forces even more cash misallocation and even more foolish "investments" into this high risk asset class as investors ignore any concerns about fundamentals, assuming instead that the government will always bail them out.

  Worse still, it is not just the most creditworthy of Chinese corporate bonds that are at record low yields. As the following shocking decoupling shows, even BBB credits are in an extreme bubble – entirely separate from the reality of their underlying business risk (as indicated by the equity market and equity vol)…

  

   

  The problem with that is that as BofA's David Cui notes today, China's bond market is the epitome of a "potential source of financial instability."

  Here is Cui:

  Our analysis shows that:

  1. the bond market is clearly not pricing default risk properly;
  2. the bond market has taken a few SME bond defaults in stride and seems to be counting on bail-outs of the few SOE bonds that are reportedly facing default risk; and
  3. leverage in the bond market is rapidly building up.

  But most importantly, Bank of America has now given a time frame in which China's bond market will blow up, resulting in far more dire consequences that the equity bubble bursting this summer.

  On the current trajectory, we doubt the market can stay stable beyond a few quarters, especially if some SOE and/or LGFV bonds indeed default.

  Finally, to answer the question on everyone's mind – here is the full list of most likely upcoming Chinese debt default cases. When the bubble bursts, these names will be the first to blow up.

  

  

   

  And now tonight we get this…

  • *CHINA DEFAULTS LIKELY TO CONTINUE TO BECOME MORE COMMON: FITCH

  Charts: Bloomberg

  

  

  

  

  

• Wednesday Humor: "This Is Why Obama Is Bullish On The Economy"

  … As he points in the right direction. Thanks for the laugh Yahoo.

  

  h/t @Estimated_0

  

  

  

  

• Minimum Wage Misunderstandings: Incompetence Or Dishonesty

  Submitted by Walter E Williams via The Burning Platform blog,

  Michael Hiltzik, a columnist and Los Angeles Times reporter, wrote an article titled “Does a minimum wage raise hurt workers? Economists say: We don’t know.” Uncertain was his conclusion from a poll conducted by the Initiative on Global Markets, at the University of Chicago’s Booth School of Business, of 42 nationally ranked economists on the question of whether raising the federal minimum wage to $15 over the next five years would reduce employment opportunities for low-wage workers.

  The Senate Budget Committee’s blog says, “Top Economists Are Backing Sen. Bernie Sanders on Establishing a $15 an Hour Minimum Wage.” It lists the names of 210 economists who call for increasing the federal minimum wage. The petition starts off, “We, the undersigned professional economists, favor an increase in the federal minimum wage to $15 an hour as of 2020.” The petition ends with this: “In short, raising the federal minimum to $15 an hour by 2020 will be an effective means of improving living standards for low-wage workers and their families and will help stabilize the economy. The costs to other groups in society will be modest and readily absorbed.”

  The people who are harmed by an increase in the minimum wage are low-skilled workers.

  Try this question to economists who argue against the unemployment effect of raising the minimum wage: Is it likely that an employer would find it in his interests to pay a worker $15 an hour when that worker has skills that enable him to produce only $5 worth of value an hour to the employer’s output? Unlike my fellow economists who might argue to the contrary, I would say that most employers would view hiring such a worker as a losing economic proposition, but they might hire him at $5 an hour. Thus, one effect of the minimum wage law is that of discrimination against the employment of low-skilled workers.

  In our society, the least skilled people are youths, who lack the skills, maturity and experience of adults.

  Black youths not only share these handicaps but have attended grossly inferior schools and live in unstable household environments. That means higher minimum wages will have the greatest unemployment effect on youths, particularly black youths.

  A minimum wage not only discriminates against low-skilled workers but also is one of the most effective tools in the arsenal of racists.

  Our nation’s first minimum wage came in the form of the Davis-Bacon Act of 1931, which sets minimum wages on federally financed or assisted construction projects. During the legislative debates, racist intents were obvious. Rep. John Cochran, D-Mo., said he had “received numerous complaints in recent months about Southern contractors employing low-paid colored mechanics getting work and bringing the employees from the South.” Rep. Miles Allgood, D-Ala., complained: “That contractor has cheap colored labor that he transports, and he puts them in cabins, and it is labor of that sort that is in competition with white labor throughout the country.” Rep. William Upshaw, D-Ga., complained of the “superabundance or large aggregation of Negro labor.”

  During South Africa’s apartheid era, the secretary of its avowedly racist Building Workers’ Union, Gert Beetge, said, “There is no job reservation left in the building industry, and in the circumstances, I support the rate for the job (minimum wage) as the second-best way of protecting our white artisans.” The South African Economic and Wage Commission of 1925 reported that “while definite exclusion of the Natives from the more remunerative fields of employment by law has not been urged upon us, the same result would follow a certain use of the powers of the Wage Board under the Wage Act of 1925, or of other wage-fixing legislation. The method would be to fix a minimum rate for an occupation or craft so high that no Native would be likely to be employed.”

  It is incompetence or dishonesty for my fellow economists to deny these two effects of minimum wages: discrimination against employment of low-skilled labor and the lowering of the cost of racial discrimination.

  

  

  

  

  

• Q4 Will Be The Worst U.S. Earnings Season Since The Third Quarter Of 2009

  Couple of things: first of all, any discussion whether the US market is in a profit (or revenue) recession must stop: the US entered a profit recession in Q3 when it posted two consecutive quarters of earnings declines. This was one quarter after the top-line of the S&P dropped for two consecutive quarters, and as of this moment the US is poised to have 4 consecutive quarters with declining revenues as of the end of 2015.

  Furthermore, as we showed on September 21, when Q4 was still expected to be a far stronger quarter than it ended up being, in the very best case, the US would go for 7 whole quarters without absolute earnings growth (and even longer without top-line growth).

  

  Then, as always happens, optimism about the current quarter was crushed as we entered the current quarter, and whereas on September 30, 2015, Q4 earnings growth was supposed to be just a fraction negative, or -0.6%, as we have crossed the quarter, the full abyss has revealed itself and according to the latest Factset consensus data as of January 8, the current Q4 EPS drop is now expected to be a whopping -5%. And just to shut up the “it’s all energy” crowd, of the 10 industries in the S&P, only 4 are now expected to post earnings growth and even their growth is rapidly sliding and could well go negative over the next few weeks.

  

   

  It gets even worse. According to Bloomberg, on a share-weighted basis, S&P 500 profits are expected to have dropped by 7.2% in 4Q, while revenues are expected to fall by 3.1% This would represent the worst U.S. earnings season since 3Q 2009, and a third straight quarter of negative profit growth. It’s no longer simply a recession: as noted above, the Q4 EPS drop follows declines of 3.1% in Q3 and 1.7% in Q2. it is… whatever comes next. 

  As Bloomberg adds, the main driving forces behind drop in U.S. earnings are the rise in the dollar index (thanks Fed) and the drop in average WTI oil prices. However, since more than half of all industries are about to see an EPS decline, one can’t blame either one or the other.

  So while we know what to expect from Q4, a better question may be what is coming next, and according to the penguin brigade, this time will be different, and the hockey stick which was expected originally to take place in Q4 2015 and then Q1 2016 has been pushed back to Q4 2016, when by some miracle, EPS is now expected to grow by just about 15%.

  

  Good luck.

  

  

  

  

  

• Correlation Or Causation: How The Fed Helped Create The Global Oil Glut (In 1 Simple Chart)

  Correlation or Causation?

   

  

  h/t DoubleLine

  Easy money by The Fed expanding their balance sheet ENABLED tight oil to be produced 'economically'…

  But the signals this sent to the market became self-fulfilling (thanks to an endless Fed put) further creating record US crude production (as the oil 'gold rush' ensued), forcing a real 'deflating' world to be 'glutted' with ever-increasing output of mal-investment-driven 'expensive' oil…

  of course until that facade of 'boom', busted and crushed the price of the over-produced by 75% (back to 'reality')

  Can you spot the moment The Fed jumped the shark?

  

   

  So the question is – If The Fed enables mal-investment booms by mandate (or ignorance), will they ever learn from the inevitable busts?

  

  

  

  

  

• Does The U.S. Have A Middle East Strategy Going Forward?

  Submitted by Gregory R. Copley via OilPrice.com,

  Senior-level sources in numerous Middle Eastern governments have privately expressed bewilderment at recent and current U.S. government strategies and policies toward the region.

  But a closer examination of U.S. policies, now almost entirely dictated by the Obama White House, shows no cohesive national goals or policies exist, but rather an ad hoc set of actions and reactions, which are largely dictated either by ideological positions, ignorance, whim, or perceived expedience.

  This is unique in U.S. history.

  In short, the consistent pattern of policies developed over the past century has now been broken up, apart from some of the physical consistencies of legacy military deployments and basing, and by some trade and weapons program commitments. Even there, military deployments have contracted substantially in the past few years, and new U.S. defense systems sales to the region have been lost to suppliers from France, Russia, the People’s Republic of China (PRC), Germany, Pakistan, and others

  In the 18 months until January 2016, the U.S. missed possibly $12- to $15-billion in sales of defense and energy systems in the Middle East, and a range of major new defense acquisitions from non-U.S. suppliers are under consideration by Middle Eastern states. At the same time, some of the U.S.’ major traditional allies in the region — Israel, Egypt, and Saudi Arabia, in particular — have felt compelled, for their own survival, to turn their back on Washington because of a perception of a divergence in values and goals.

  Most U.S. policy officials — especially in Defense — insist that U.S. commitments and strategies in the region have not changed, but the actions and policies dictated directly by the Barack Obama White House, and mirrored at Secretary of State level, have proven antithetical to most states in the greater Middle East, with the exception of Turkey and Qatar. Some regional states, such as Oman, are concerned; others, such as Ethiopia and Djibouti, are now left feeling strategically abandoned.

  The sudden withdrawal of U.S. forces from their deployment at the Ethiopian air base at Arba Minch — from where Reaper UAV sorties were conducted against al-Shabaab in Somalia — was done in September 2015 without forewarning to the Ethiopian Government in Addis Ababa, and kept secret until an Ethiopian website disclosed it in early January 2016. The U.S. had signed a series of multi-year supply agreements with Ethiopian companies to support the base in the weeks leading up to the withdrawal, a firm indication that the decision to vacate Arba Minch was sudden and hastily planned.

  The Arba Minch withdrawal coincided with growing U.S. hostility toward the Government of Djibouti — which is strategically integral to Ethiopia’s fortunes — and the very pointed siding of U.S. Secretary of State John Kerry with Saudi Arabia and the United Arab Emirates against Djibouti. This resulted in Saudi and UAE strong military commitments to Eritrea (to compensate for the loss of their Djibouti basing in the war in Yemen), another blow to Ethiopian security. But it also coincided with the visit by U.S. President Barack Obama to Addis Ababa to talk at the African Union, where he was accorded a very mixed reception based on his insistence on African states accepting his — Obama’s — stance on gay marriage, among other things.

  Significantly, although President Obama’s team was warned against such provocations in advance of his Addis and Nairobi visits, most Obama Administration officials do not understand what they have done to offend some of the nations in the region. Even Kerry’s support for Saudi Arabia and the UAE in the rift with Djibouti did not win their support for Washington, as both states feared that the U.S. now supported Iran rather than the lower Persian Gulf states. The Iranian Government, however, has been under no such illusions, even among those who supported the G5+1 treaty with Iran to end some of Iranian nuclear weapons programs in exchange for lifting economic sanctions. They, too, see U.S. support for the Saudi coalition against them in Yemen.

  The net result has been a bonanza for the PRC, and the deal by Djibouti to welcome a PRC naval base in the country was confirmed and cemented when Djibouti President Ismail Omar Guelleh met in South Africa with China’s President Xi Jinping in early December 2015. This was a strategically successful gathering of African leaders with China’s leader within weeks of the Indian summit in New Delhi with African leaders.

  The U.S. has done nothing of consequence to rebuild its position, which means that the strategic framework in the Middle East and Africa will, within a decade, be profoundly different from the beginning of the 21st Century.

  

  

  

  

  

• Tanker Rates Tumble As Last Pillar Of Strength In Oil Market Crashes

  If there was one silver-lining in the oil complex, it was the demand for VLCCs (as huge floating storage facilities or as China scooped up 'cheap' oil to refill their reserves) which drove tanker rates to record highs. Now, as Bloomberg notes so eloquently, it appears the party is over! Daily rates for benchmark Saudi Arabia-Japan VLCC cargoes have crashed 53% year-to-date to $50,955 (as it appears China's record crude imports have ceased).

  In fact the rate crashed 12% today for the 12th straight daily decline from over $100,000 just a month ago…

  

  China imported a record amount of crude last year as oil’s lowest annual average price in more than a decade spurred stockpiling and boosted demand from independent refiners.

  China's crude imports last month was equivalent to 7.85 million barrels a day, 6 percent higher than the previous record of 7.4 million in April, Bloomberg calculations show.

  

  China has exploited a plunge in crude prices by easing rules to allow private refiners, known as teapots, to import crude and by boosting shipments to fill emergency stockpiles. The nation’s overseas purchases may rise to 370 million metric tons this year, surpassing estimated U.S. imports of about 363 million tons, according to Li Li, a research director with ICIS China, an industry researcher.

  But given the crash in tanker rates – and implicitly demand – that "boom" appears to be over.

  Shipbroker analysts blame fewer January cargoes and oil companies using their own vessels for shipment as the main reasons for the dramatic decline. As Bloomberg adds,

  Oil tanker earnings boomed thanks to the very thing that drove down crude prices: an abundance of supply that made ship-fuel cheaper and shipments plentiful. This month, shipbrokers report a slump in spot cargoes from the Middle East.

   

  While they say it would be premature to suggest that has implications for the region’s output, the plunge in rates shows just how sensitive owners are to monthly fluctuations in shipments.

  The good news after all this carnage is that, even before today's plunge, collapsing tanker rates were already pushing economics for floating storage (the carry trade) closer to be proditable.

  

  

  

  

  

• In Latest Embarrassment For Obama, Iran Releases Footage Of Arrest, Apology Of 10 U.S. Sailors

  With just hours to go before Obama’s last State of the Union address, the US president suffered his latest foreign policy fiasco when around noon local time, Iran arrested 10 US sailors in a boat that has allegedly entered deep into Iranian territorial waters.

  Needless to say, there was no mention of this in Obama’s address and the scandal was quietly swept under the rug when the 9 young men and 1 woman were released earlier today, and all questions just why the soldiers were released only well after the SOTU’s conclusion (were they a hostage bargaining chip in case Obama said something out untoward last night regarding Iran) were soundly ignored.

  However, while there may have been some doubt as to Iran’s intentions yesterday, all doubt was eliminated moments ago when Iran’s state broadcaster just released photos not just of the 10 captured soldiers, which were shown earlier, but of their arrest as well as the seizure of the boat and their weapons.

  Here is the just released TV footage, courtesy of Sobhan Hassanvand:

  Fars news shows the video of capturing the US navy sailors pic.twitter.com/7kbsUe8kDR

  — Zaid Benjamin (@zaidbenjamin) January 13, 2016

  Here is a video of the US Commander apologizing (via Fox):

  Video from Iranian state television shows a US Navy sailor apologizing while being detained. https://t.co/Ymr632ThF1
  https://t.co/IlvSh46NLn

  — Fox News (@FoxNews) January 13, 2016

  And here are excerpted photos, showing US sailors being treated as common Somali pirates:
  

  

  

  

  

  

  

  

  

  

  

   

  Finally, putting Iran’s aggression in context: 

  
  

  

  

  

  

• Canadians Panic As Food Prices Soar On Collapsing Currency

  It was just yesterday when we documented the continuing slide in the loonie, which is suffering mightily in the face of oil’s inexorable decline.

  As regular readers are no doubt acutely aware, Canada is struggling through a dramatic economic adjustment, especially in Alberta, the heart of the country’s oil patch. Amid the ongoing crude carnage the province has seen soaring property crime, rising food bank usage and, sadly, elevated suicide rates, as Albertans struggle to comprehend how things up north could have gone south (so to speak) so quickly.

  The plunging loonie “can only serve to worsen the death of the ‘Canadian Dream'” we said on Tuesday.

  

  As it turns out, we were right.

  The currency’s decline is having a pronounced effect on Canadians’ grocery bills.

   As Bloomberg reminds us, Canada imports around 80% of its fresh fruits and vegetables. When the loonie slides, prices for those goods soar. “With lower-income households tending to spend a larger portion of income on food, this side effect of a soft currency brings them the most acute stress” Bloomberg continues.

  Of course with the layoffs piling up, you can expect more households to fall into the “lower-income” category where they will have to fight to afford things like $3 cucumbers, $8 cauliflower, and $15 Frosted Flakes.

  As Bloomberg notes, James Price, director of Capital Markets Products at Richardson GMP, recently joked during an interview on BloombergTV Canada that “we’re going to be paying a buck a banana pretty soon.”

  Have a look at the following tweets which underscore just how bad it is in Canada’s grocery aisles. And no, its not just Nunavut: it from coast to coast:

  

  Three bucks. For a cucumber. pic.twitter.com/xGkygxkxqB

  — Steve Ladurantaye (@sladurantaye) January 12, 2016

  If the CAD $ gets any weaker we might be able to buy groceries with shiny rocks #Canada

  — Josh Landine (@joshlandine) January 12, 2016

  @sladurantaye Heh. Had a similar reaction when I saw the price of cauliflower. Welcome to the future… pic.twitter.com/fxloxyePY3

  — Craig Saila (@saila) January 12, 2016

  The cost of Tide detergent in Nunavut: pic.twitter.com/2t2xA1EmYk

  — themsteri (@teririch) December 31, 2015

  And while some Canadians might think this is a regional phenomenon …

  

  … folks in the northern parts of the Great White North do have the most cause to cry foul:

  

  

  

  

  No “Jack Nasty” it’s not The Great Depression, but as we highlighted three weeks ago, it is Canada’s depression and it’s likely to get worse before it gets better. “Last year, fruits and veggies jumped in price between 9.1 and 10.1 per cent, according to an annual report by the Food Institute at the University of Guelph,” CBC said on Tuesday. “The study predicts these foods will continue to increase above inflation this year, by up to 4.5 per cent for some items.”

  If you thought we were being hyperbolic when we suggested that if oil prices don’t rise soon, Canadians may well eat themselves to death, consider the following from Diana Bronson, the executive director of Food Secure Canada: 

  “Lower- and middle-class people — many who can’t find a job that will pay them enough to ensure that they can afford a healthy diet for their families” — also feel the pinch of rising food prices”

   

  “The wrong kind of food is cheap, and the right kind of food is still expensive.”

  In other words, some now fear that the hardest hit parts of the country may experience a spike in obesity rates as Canadians resort to cheap, unhealthy foods. As we put it, “in Alberta it’s ‘feast or famine’ in the most literal sense of the phrase as those who can still afford to buy food will drown their sorrows in cheap lunch meat and off-brand ice cream while the most hard hit members of society are forced to tap increasingly overwhelmed food banks.” 

  And the rub is that there’s really nothing anyone can do about it.

  Were the Bank of Canada to adopt pro-cyclical measures to shore up the loonie, they would risk choking off economic growth just as the crude downturn takes a giant bite out of the economy – no food pun intended.

  

  

  

  

• Markets In Freefall: Stocks Extend Worst Ever Start To Year

  Today's business media summarized…

   

  Today's actual market summarized…

   

  Let's start with this – The market has now reduced March rate-hike odds back to pre-December rate-hike levels (at just 35%)…

  

   

  Two words – Policy… Error…

  

   

  This remains the worst start to a year… ever…

  

   

  Across the major US equity markets, it's a bloodbath…

  

  *RUSSELL 2000 CAPS 22% DROP FROM JUNE RECORD, ENTERS BEAR MARKET

   

  With the Nasdaq about to be the lasty major index to give up its post-QE3 gains…

  

   

  Year to Date – it's just as ugly…

  

   

  And since The Fed hiked rates…

  

   

  VIX term structure inverted but we are a long way from an August-like panic-bottom…

  

   

  There is at least some rationality resumiong as weak balance sheet stocks underperform strong balance sheet firms…

  

   

  With selling out of the gate and only a small bounce in the last hour, equity markets carnaged…

  

   

  FANGs entered a correction…

  

   

  And FANTAsy stocks were smashed today…

  

   

  Lots of head-scratching at how this is possible… except for anyone who pays attention to credit markets…

  

   

  As HYG plunges to its lowest close since July 2009… Today was worst day in 4 weeks

  

   

  US Energy credit risk is soaring back to near 2008 crisis highs…

  

  h/t @JavierBlas2

   

  While High yield bonds were crashing, Treasuries were aggressively bid (despite the Inbev issuance), on the verge of flash-crashing a few times after a stronmg 10Y auction…

  

   

  The USDollar Index ended the day unchanged as early strength was sold – but it remains up on the week… CAD was smashed to new 12 yeasr lows

  

   

  Gold ansd Silver rallied as Crude and Copper crumbled…

  

   

  As stocks plunged at the US open so PMs ripped…

  

   

  As if by magic, WTI's NYMEX close was adjusted very slightly higher to enable a tiny green print… but the trend was clear…

  

   

  Charts: Bloomberg

  Bonus Chart: Some food for thought…

  

  

  

  

  

• "Very Worrisome Signal For Fed Credibility" – Former Fed President Trolls Federal Reserve

  It’s one thing for a fringe website to mock the Fed (on a daily basis, for the past 7 years), with articles such as this one we posted just before noon today, showing that inflation expectations have once again imploded, less than a month after the Fed’s rate hike was supposed to signal confidence in the economy and a renormalization in inflation:

  Since The Fed hiked rates in December, the market’s inflation expectations have collapsed in yet another clear indication of “policy error.” 5Y5Y Forward inflation swaps have crashed below 2.00% for only the 3rd time in history (Lehman 2008 and September’s Fed Fold were the other two) as despite central banker promises of transitory low-flation, the money is being bet against them as the regime-shift from full-faith to no-faith in Fed support continues.

   

  

   

  However, when a former Fed president, one who was employed as recently as two weeks ago by the Minneapolis Fed, Narayana Kocherlakota, best known for being the biggest hawk to dove conversion in Fed history, and also being the one person to dare put a negative dot on the Fed’s ever amusing dot plot, suggesting it is time for negative rates does exactly the same, you know that the Fed’s credibility has already run out.

  From Kocherlakota: “Very worrisome signal for Fed credibility as 5 yr 5 yr forward breakevens plumb new lows …”

  Very worrisome signal for Fed credibility as 5 yr 5 yr forward breakevens plumb new lows … pic.twitter.com/OxavyW2cTD

  — NRKocherlakota (@kocherlakota009) January 13, 2016

  Of course, the far more worrisome signal for Fed credibility is not that inflation forwards are plunging, but that one of the Fed’s faithful has now taken to a public forum like Twitter to troll his former co-workers.

  All that it would take now is for Yellen to formally admit the Fed’s credibility is gone and to cut rates first back to zero, and then negative, with a solid dose of QE on top, admitting it was always only about the markets.

  

  

  

  

• What Geniuses Come To Believe

  Submitted by Paul Rosenberg via FreemansPerspective.com,

  It recently struck me that the people we think of as “geniuses” tend to arrive, over time, at surprisingly similar sets of conclusions.

  It further struck me that a simple list of such thoughts might be of value to my readers.

  So, here is a list pulled from my quotes file and presented without commentary. Enjoy:

  Albert Einstein

  • Unthinking respect for authority is the greatest enemy of truth.

  • Nothing will end war unless the people themselves refuse to go to war.

  • Never do anything against conscience, even if the state demands it.

  • The world is in greater peril from those who tolerate or encourage evil than from those who actually commit it.

  • Small is the number of them that see with their own eyes and feel with their own hearts.

  Rod Serling

  • The ultimate obscenity is not caring, not doing something about what you feel, not feeling.

  Arthur Schopenhauer

  • We forfeit three-fourths of ourselves in order to be like other people.

  Thomas Jefferson

  • I have sworn upon the altar of god eternal hostility against every form of tyranny over the mind of man.

  • It is error alone which needs the support of government. Truth can stand by itself.

  • I would rather be exposed to the inconveniences attending too much liberty than those attending too small a degree of it.

  Allan Bloom

  • The most successful tyranny is not the one that uses force to assure uniformity but the one that removes the awareness of other possibilities, that makes it seem inconceivable that other ways are viable, that removes the sense that there is an outside.

  John Stuart Mill

  • The only freedom which deserves the name is that of pursuing our own good in our way, so long as we do not attempt to deprive others of theirs or impede their efforts to obtain it.

  Leo Tolstoy

  • The truth is that the State is a conspiracy designed not only to exploit, but above all to corrupt its citizens… Henceforth, I shall never serve any government anywhere.

  Will Durant

  • Above all, the ruling minority sought more and more to transform its forcible mastery into a body of law which, while consolidating that mastery, would afford a welcome security and order to the people, and would recognize the rights of the “subject” sufficiently to win his acceptance of the law and his adherence to the state.

  George Bernard Shaw

  • All government is authoritarian; and the more democratic a government is the more authoritative it is; for with the people behind it, it can push authority further than any Tsar or foreign despot dare do.

  Aldous Huxley

  • So long as men worship the Caesars and Napoleons, Caesars and Napoleons will duly rise and make them miserable.

  • Liberty, as we all know, cannot flourish in a country that is permanently on a war footing, or even a near war footing. Permanent crisis justifies permanent control of everybody and everything by the agencies of central government.

  Richard Feynman

  • Theoretically, planning may be good. But nobody has ever figured out the cause of government stupidity – and until they do (and find the cure), all ideal plans will fall into quicksand.

  Buckminster Fuller

  • Dear reader, traditional human power structures and their reign of darkness are about to be rendered obsolete.

  • If you take all the machinery in the world and dump it in the ocean, within months more than half of all humanity will die and within another six months they’d almost all be gone; if you took all the politicians in the world, put them in a rocket, and sent them to the moon, everyone would get along fine.

  • We are powerfully imprisoned in these Dark Ages simply by the terms in which we have been conditioned to think.

  • Either you’re going to go along with your mind and the truth, or you’re going to yield to fear and custom and conditioned reflexes.

  Erich Fromm

  • The history of mankind up to the present time is primarily the history of idol worship, from primitive idols of clay and wood to the modern idols of the state, the leader, production and consumption – sanctified by the blessing of an idolized God.

  • Obedience to God is also the negation of submission to man.

  • [I]f one has no possibility of acting, one’s thinking kind of becomes empty and stupid.

  • Is there really as much difference as we think between the Aztec human sacrifices to their gods and the modern human sacrifices in war to the idols of nationalism and the sovereign state?

  Charlie Chaplin

  • As for politics, I’m an anarchist. I hate governments and rules and fetters. Can’t stand caged animals. People must be free.

  Carl Jung

  • For in order to turn the individual into a function of the State, his dependence on anything beside the State must be taken from him.

  Ray Bradbury

  • We bombard people with sensation. That substitutes for thinking.

  Abraham Maslow

  • I can certainly say that descriptively healthy human beings do not like to be controlled. They prefer to feel free and to be free.

  Simone Weil

  • The real sin of idolatry is always committed on behalf of something similar to the State.

  • Conscience is deceived by the social.

  • Human history is simply the history of the servitude which makes men – oppressed and oppressors alike – the plaything of the instruments of domination they themselves have manufactured, and thus reduces living humanity to being the chattel of inanimate chattels.

  • What a country calls its vital economic interests are not the things which enable its citizens to live, but the things which enable it to make war.

  

  

  

  

• The Aftermath Of US Intervention: What The "Arab Spring" Looks Like 5 Years Later

  If you needed a crash course in how not to conduct foreign policy, you need only take a cursory glance at Washington’s trials and travails in the Mid-East over the last decade.

  On the way to documenting the the carnage unfolding in Libya’s oil crescent last week we said that the country, 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.

  It’s in that context that we present the following graphic from The Economist which vividly demonstrates the fact that the Arab Spring was but a false dawn and that five years on, we still have but one democracy among a sea of autocracies and failed states.

  

  By the way, the one “democracy” success story in Tunisia is exceptionally tenuous as evidenced by November’s suicide attack in the capital.

  

  

  

  

  

• JPM's "Gandalf" Quant Is Back With A Startling Warning

  Two days ago we reported that one half of JPM’s Croatian “Duo of Doom”, namely equity strategist Dubravko Lakos-Bujas, became every BTFDer’s worst enemy when he said that the time of BTFDing is over, and a regime change has arrived one in which rallies are to be sold. To wit:

  Our view is that the risk-reward for equities has worsened materially. In contrast to the past 7 years, when we advocated using the dips as buying opportunities, we believe the regime has transitioned to one of selling any rally. Yes, stocks had a rough time most recently, and some of the tactical indicators, such as Bull-Bear at -16 which is at the bottom of its trading range, argue for a short-term respite. Clearly, equities are unlikely to keep falling in a straight line, with periodic rebounds likely. However, we believe that one should be using any bounces as selling opportunities.

   

  We fear that the incoming Q4 reporting season won’t be able to provide much reassurance for stocks. As was the case for a while now, consensus expectations have been managed aggressively into the results. The hurdle rate for Q4 S&P500 EPS has fallen from +5%yoy a few months back to -4%yoy currently. If this were to materialise, it would be the weakest quarter for EPS delivery so far in  the upcycle.

  Today, the other half of the infamous Croatian duo…

  

   

  … the legendary “Gandalf” (as dubbed first by Bloomberg) quant Marko Kolanovic, who needs no introduction on this website, and whose every prediction starting in late August turned out just as predicted…

  

  … is out with a new note which will hardly make him any more popular with the permabullish crowd, asks whether “negative  performance in 2015 and January, turmoil in China, and continuing decline in Oil prices make investors wonder if this could be the end of the nearly 7-year bull market.”

  His short answer:

  “The fact that market volatility is on the rise and the Fed is raising interest rates further increases the probability of a Bear Market. The current option-implied probability of a bear market (i.e. ~20% decline this year) is about 25%. While there is no way to predict a bear market, below we look at various scenarios, and estimate that the probability of a bear market may be nearly twice as large.“

  So according to the man whose every market forecast has been so far impeccable, the probability of a bear market: or a 20% or more drop in the S&P500 – is roughly 50%.

  Not good.

  And what will make the permabulls even angrier is his proposed allocation to avoid the bear market:

  In case an equity bear market materializes this year, investors should benefit from increasing allocation to cash or gold. Cash has zero correlation to all risky assets, while Gold has recently exhibited strong negative correlation to risky assets (e.g. -40% to equities).

  * * *

  This is what else he says:

  from Systematic Strategy Flows, Oil Prices and the Risk of an Equity Bear Market
  

  First, let’s look at relationship between Oil prices and S&P 500. Oil prices recently posted some of the fastest declines on record. Over extended periods of time, Oil and S&P 500 were positively correlated. Figure 4 shows the out/underperformance of Oil relative to the S&P 500 over the past 30 years (trailing 12M relative performance). One can see that that in each of the 10 episodes of large Oil-S&P 500 price divergences, the gap was always closed in a relatively short time period. Significant underperformance of Oil (e.g. >30%) in 8 out of 10 instances resulted in either a decline in the S&P 500 or large Oil rally. In 2 instances, namely shortly after the start of the Gulf Wars in 1991 and 2003, the decline in Oil was a result of overbought conditions immediately prior to these events. One of the largest swings in Oil-S&P 500 performance (comparable to the one over the past year) occurred during the Asia and Russia crisis of 1997/98. The current underperformance of Oil to the S&P 500 is not just one of the largest on the record, but is by far the longest one. Given that divergences of this size closed in 10 out of 10 historical instances, we believe a closing of this gap is very likely.

   

  This can occur either by the S&P 500 falling (e.g. Oil is a predictor of a recession, as in 2008), or by Oil rising (e.g. a reduction of speculative positions, reduction of supply, geopolitical escalation). In any case, we believe that a long Oil and short S&P 500 trade is likely to deliver positive performance in 2016.

   

  

  A sharp rise in Oil prices could also trigger ‘stagflation’ and lead to an equity bear market. While markets currently estimate the probability of this scenario at less than ~3% (option-implied probability of, for example, Oil doubling and the S&P 500 declining), we think the risk of that scenario is much higher. What could cause a sharp increase in Oil prices? For one, we note that current levels of OPEC production are likely not economically rational or sustainable. For example, to justify an increase in production at a time when prices have declined from $100 to $30, one would need to place triple the production level without further impacting the price.

   

  As geopolitics is likely playing a large role in the Oil price decline, we think it can equally lead to a sharp price reversal. In addition to an agreed production cut, production disruptions are an increasing risk in our view. Recent increases of tension between Saudi Arabia and Iran add to that risk. Parties to a conflict that could independently lead to such disruption include: extremist elements from Saudi Arabia or abroad (e.g. for recent attempt see here), Yemen (for recent attempt see here), Iran, and others. Moreover, high marginal cost producers may drop offline, reducing supply. A doubling of Oil prices may not be a tail event after all (e.g. a significant increase in Oil prices would also be consistent with J.P. Morgan’s current Q4 forecast).

   

  To further assess the likelihood of an equity bear market, we look at historical bull and bear S&P 500 cycles over the past 50 years. We have identified 19 such cycles that alternated in relatively regular periods of time. There were 10 bull markets, lasting on average 4.3 years and delivering ~90% average returns, and 9 bear markets lasting on average 1.1 years and resulting in an average decline of 33%. The current ~205% bull market started in 2009 and is now 6.5 years old. As such, it is one of the longest/largest bull markets. There was only one longer and larger cycle, namely from 1990 to 1998 (that coincidentally ended with the Asia/EM crisis and sharp decline in Oil prices).

   

  The length and return of a bull market is closely related to the size and length of the bear market preceding it (and vice versa). This is shown in the figures below which relate the return during a bear market (horizontal axis) and length of subsequent bull market (Figure 5), and return of the subsequent bull market (Figure 6). In that regard, the current bull market is in-line given the size of the 2008/2009 bear market. In other words, if the bull market was to end now and we are entering a bear market – it would be in-line with historical trends. While this analysis is not proof of an impending bear market, it indicates to us that the chance of entering a bear market this year is probably higher than 25% (currently implied by option markets).

   

  

   

  Finally, for the end of a bull market, one needs to have equity prices ahead of their fundamental valuations. While valuation of the overall market is not consistent with a stock market bubble, some pockets do show stretched valuation (e.g. the market capitalization of Internet/Software sectors as % of the S&P 500 is not far from tech bubble peaks).

   

  Figure 7 shows the level of the S&P 500 as well as short-term interest rates (Fed funds). Between 1990 and 2010, the Fed was adjusting short-term rates largely in synch with the price performance of the S&P 500. Historically, the Fed increased rates during market rallies and reduced them during market selloffs, in pursuing its dual mandate of maintaining price stability and maximum employment. This trend broke in 2009. As the US equity market took off, the Fed kept rates at zero and added large monetary stimulus over the next 5 years. This coincided with one of the largest and longest bull markets in US history. During this bull market, stock and bond buybacks increased in pace, with the Fed buying ~15% of government bonds outstanding, and corporates buying back about ~10% of stock outstanding, which were a driver of the increased asset prices. A clear break of the trend between Fed Funds and the S&P 500 might imply that either the S&P 500 rallied too far given the weak growth and appropriate Fed stimulus, or that the Fed underestimated the strength of the economy, in which case the stimulus would have contributed to inflating a bubble. In any case, an increase of short-term rates could be a catalyst for a correction, or even the start of a bear market.

   

  In case an equity bear market materializes this year, investors should benefit from increasing allocation to cash or gold. Cash has zero correlation to all risky assets, while Gold has recently exhibited strong negative correlation to risky assets (e.g. -40% to equities). While bonds have historically been an efficient portfolio hedge, we think that bonds are increasingly at risk of becoming positively correlated to equities (e.g. selling of EM reserves, systematic strategies de-levering, or interest rates increasing).

  

  

  

  

  

  

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• The Demise Of Dollar Hegemony: Russia Breaks Wall St's Oil-Price Monopoly

  Submitted by William Engdahl via New Eastern Outlook,

  Russia has just taken significant steps that will break the present Wall Street oil price monopoly, at least for a huge part of the world oil market. The move is part of a longer-term strategy of decoupling Russia’s economy and especially its very significant export of oil, from the US dollar, today the Achilles Heel of the Russian economy.

  Later in November the Russian Energy Ministry has announced that it will begin test-trading of a new Russian oil benchmark. While this might sound like small beer to many, it’s huge. If successful, and there is no reason why it won’t be, the Russian crude oil benchmark futures contract traded on Russian exchanges, will price oil in rubles and no longer in US dollars. It is part of a de-dollarization move that Russia, China and a growing number of other countries have quietly begun.

  The setting of an oil benchmark price is at the heart of the method used by major Wall Street banks to control world oil prices. Oil is the world’s largest commodity in dollar terms. Today, the price of Russian crude oil is referenced to what is called the Brent price. The problem is that the Brent field, along with other major North Sea oil fields is in major decline, meaning that Wall Street can use a vanishing benchmark to leverage control over vastly larger oil volumes. The other problem is that the Brent contract is controlled essentially by Wall Street and the derivatives manipulations of banks like Goldman Sachs, Morgan Stanley, JP MorganChase and Citibank.

  The ‘Petrodollar’ demise

  The sale of oil denominated in dollars is essential for the support of the US dollar. In turn, maintaining demand for dollars by world central banks for their currency reserves to back foreign trade of countries like China, Japan or Germany, is essential if the United States dollar is to remain the leading world reserve currency. That status as world’s leading reserve currency is one of two pillars of American hegemony since the end of World War II. The second pillar is world military supremacy.

  US wars financed with others’ dollars

  Because all other nations need to acquire dollars to buy imports of oil and most other commodities, a country such as Russia or China typically invests the trade surplus dollars its companies earn in the form of US government bonds or similar US government securities. The only other candidate large enough, the Euro, since the 2010 Greek crisis, is seen as more risky.

  That leading reserve role of the US dollar, since August 1971 when the dollar broke from gold-backing, has essentially allowed the US Government to run seemingly endless budget deficits without having to worry about rising interest rates, like having a permanent overdraft credit at your bank.

  That in effect has allowed Washington to create a record $18.6 trillion federal debt without major concern. Today the ratio of US government debt to GDP is 111%. In 2001 when George W. Bush took office and before trillions were spent on the Afghan and Iraq “War on Terror,” US debt to GDP was just half, or 55%. The glib expression in Washington is that “debt doesn’t matter,” as the assumption is that the world—Russia, China, Japan, India, Germany–will always buy US debt with their trade surplus dollars. The ability of Washington to hold the lead reserve currency role, a strategic priority for Washington and Wall Street, is vitally tied to how world oil prices are determined.

  In the period up until the end of the 1980’s world oil prices were determined largely by real daily supply and demand. It was the province of oil buyers and oil sellers. Then Goldman Sachs decided to buy the small Wall Street commodity brokerage, J. Aron in the 1980’s. They had their eye set on transforming how oil is traded in world markets.

  It was the advent of “paper oil,” oil traded in futures, contracts independent of delivery of physical crude, easier for the large banks to manipulate based on rumors and derivative market skullduggery, as a handful of Wall Street banks dominated oil futures trades and knew just who held what positions, a convenient insider role that is rarely mentioned in polite company. It was the beginning of transforming oil trading into a casino where Goldman Sachs, Morgan Stanley, JP MorganChase and a few other giant Wall Street banks ran the crap tables.

  In the aftermath of the 1973 rise in the price of OPEC oil by some 400% in a matter of months following the October, 1973 Yom Kippur war, the US Treasury sent a high-level emissary to Riyadh, Saudi Arabia. In 1975 US Treasury Assistant Secretary, Jack F. Bennett, was sent to Saudi Arabia to secure an agreement with the monarchy that Saudi and all OPEC oil will only be traded in US dollars, not Japanese Yen or German Marks or any other. Bennett then went to take a high job at Exxon. The Saudis got major military guarantees and equipment in return and from that point, despite major efforts of oil importing countries, oil to this day is sold on world markets in dollars and the price is set by Wall Street via control of the derivatives or futures exchanges such as Intercontinental Exchange or ICE in London, the NYMEX commodity exchange in New York, or the Dubai Mercantile Exchange which sets the benchmark for Arab crude prices. All are owned by a tight-knit group of Wall Street banks–Goldman Sachs, JP MorganChase, Citigroup and others. At the time Secretary of State Henry Kissinger reportedly stated, “If you control the oil, you control entire nations.” Oil has been at the heart of the Dollar System since 1945.

  Russian benchmark importance

  Today, prices for Russian oil exports are set according to the Brent price in as traded London and New York. With the launch of Russia’s benchmark trading, that is due to change, likely very dramatically. The new contract for Russian crude in rubles, not dollars, will trade on the St. Petersburg International Mercantile Exchange (SPIMEX).

  The Brent benchmark contract are used presently to price not only Russian crude oil. It’s used to set the price for over two-thirds of all internationally traded oil. The problem is that the North Sea production of the Brent blend is declining to the point today only 1 million barrels Brent blend production sets the price for 67% of all international oil traded. The Russian ruble contract could make a major dent in the demand for oil dollars once it is accepted.

  Russia is the world’s largest oil producer, so creation of a Russian oil benchmark independent from the dollar is significant, to put it mildly. In 2013 Russia produced 10.5 million barrels per day, slightly more than Saudi Arabia. Because natural gas is mainly used in Russia, fully 75% of their oil can be exported. Europe is by far Russia’s main oil customer, buying 3.5 million barrels a day or 80% of total Russian oil exports. The Urals Blend, a mixture of Russian oil varieties, is Russia’s main exported oil grade. The main European customers are Germany, the Netherlands and Poland. To put Russia’s benchmark move into perspective, the other large suppliers of crude oil to Europe – Saudi Arabia (890,000 bpd), Nigeria (810,000 bpd), Kazakhstan (580,000 bpd) and Libya (560,000 bpd) – lag far behind Russia. As well, domestic production of crude oil in Europe is declining quickly. Oil output from Europe fell just below 3 Mb/d in 2013, following steady declines in the North Sea which is the basis of the Brent benchmark.

  End to dollar hegemony good for US

  The Russian move to price in rubles its large oil exports to world markets, especially Western Europe, and increasingly to China and Asia via the ESPO pipeline and other routes, on the new Russian oil benchmark in the St. Petersburg International Mercantile Exchange is by no means the only move to lessen dependence of countries on the dollar for oil. Sometime early next year China, the world’s second-largest oil importer, plans to launch its own oil benchmark contract. Like the Russian, China’s benchmark will be denominated not in dollars but in Chinese Yuan. It will be traded on the Shanghai International Energy Exchange.

  Step-by-step, Russia, China and other emerging economies are taking measures to lessen their dependency on the US dollar, to “de-dollarize.” Oil is the world’s largest traded commodity and it is almost entirely priced in dollars. Were that to end, the ability of the US military industrial complex to wage wars without end would be in deep trouble.

  Perhaps that would open some doors to more peaceful ideas such as spending US taxpayer dollars on rebuilding the horrendous deterioration of basic USA economic infrastructure. The American Society of Civil Engineers in 2013 estimated $3.6 trillion of basic infrastructure investment is needed in the United States over the next five years. They report that one out of every 9 bridges in America, more than 70,000 across the country, are deficient. Almost one-third of the major roads in the US are in poor condition. Only 2 of 14 major ports on the eastern seaboard will be able to accommodate the super-sized cargo ships that will soon be coming through the newly expanded Panama Canal. There are more than 14,000 miles of high-speed rail operating around the world, but none in the United States.

  That kind of basic infrastructure spending would be a far more economically beneficial source of real jobs and real tax revenue for the United States than more of John McCain’s endless wars. Investment in infrastructure, as I have noted in previous articles, has a multiplier effect in creating new markets. Infrastructure creates economic efficiencies and tax revenues of some 11 to 1 for every one dollar invested as the economy becomes more efficient.

  A dramatic decline for the role of the dollar as world reserve currency, if coupled with a Russia-styled domestic refocus on rebuilding America’s domestic economy, rather than out-sourcing everything, could go a major way to rebalance a world gone mad with war. Paradoxically, the de-dollarization, by denying Washington the ability to finance future wars by the investment in US Treasury debt from Chinese, Russian and other foreign bond buyers, could be a valuable contribution to genuine world peace. Wouldn’t that be nice for a change?

  

  

  

  

  

• Jews Told Not To Wear The Kippa After Machete Attack At Marseille Synagogue

  Last week, Cologne mayor Henriette Reker received a raucous tongue-lashing on social media after suggesting that it is German women’s collective responsibility to prevent sexual assaults by remaining an “arm’s length” away from would-be assailants.

  Reker’s remarks came as the international media suddenly woke up to the string of sexual assaults that allegedly took place in Cologne’s city center during New Year’s Eve celebrations. The incidents purportedly involved gangs of “Arabs” harassing and groping German women during the festivities.

  Hundreds of such attacks were reported in Germany and elsewhere across the bloc and before you knew it, a scandal was born. Some say authorities have been reluctant to publicize the assaults for fear of triggering a dangerous backlash against the millions of refugees who have fled to Western Europe from the war-torn Mid-East. Indeed, it now appears Sweden knew that these types of attacks were taking place as far back as last summer but between the media and police, failed to publicize the “problem.”

  Reker’s comments – combined with her contention that Germany needs to “explain to people from other cultures that the jolly and frisky attitude during Carnival is not a sign of sexual openness” – seemed to suggest she was at least partially blaming the victims for the attacks. Even is she wasn’t, the idea that it’s incumbent upon women to change their behavior rather than incumbent upon men not to assault them is patently absurd.

  Well, German women aren’t the only ones who are being encouraged by officials to alter their “behavior” in order to avoid becoming victims because as AFP reported earlier today, Jews in Marseille are now being told not to wear the kippa in the streets.

  That piece of advice comes from Zvi Ammar, the head of the Marseille Jews in the wake of an attack on a worshipper at the Marseille synagogue on Monday.

  For those who may have missed it, Binyamin Amsalem, a teacher, was minding his own business yesterday when a teenager waving a machete and allegedly shouting “Allahu Akbar” ran at him. Amsalem defended himself with a copy of the Torah he was carrying and sustained a “light” injury:

  

  “Not wearing the kippa can save lives and nothing is more important,” Zvi Ammar told La Provence daily. “It really hurts to reach that point but I don’t want anyone to die in Marseille because they have a kippa on their head.”

  “France’s Chief Rabbi Haim Korsia urged Jews in France to continue wearing the kippa and form a ‘united front'”, Reuters notes, adding that “Roger Cukierman, head of the French Jewish organization umbrella group, said not wearing the kippa in public was “a defeatist attitude”.

  So taking this together with Reker’s advice for German women, we suppose the message here is that if you want to avoid being attacked in Europe it’s your responsibility to stay a safe distance away from anyone who looks like they might be prepared to grope you or hack at you with a machete and try your best not to look outwardly religious.

  Or perhaps, just as Reker says Europe needs to “explain” to people from other cultures that sexual assault isn’t acceptable, the bloc also needs to explain that axe murder is equally, if not more repugnant. 

  

  

  

  

  

• Guest Post: 2016 – Year Of The 'Epocalypse'

  Some thoughts on what lies ahead while President Obama jawbones… (grab a glass of wine or bottle)

  Submitted by David Haggith via The Great Recession blog,

  An economic apocalypse upon us. My 2016 economic predictions provide the full explanation as to why 2016 will be the year of the Epocalypse — a word that encompasses the roots “economic, epoch, collapse” and “apocalypse.” I needed a word big enough to describe all that is about to befall the world in 2016. When you see the towering forces that are prevailing against failing global economic architecture and the pit of debt beneath that structure, as laid out here, I think you’ll recognize that the Epocalypse is here, and it is everywhere. The Great Collapse has already begun.

  What follows are the megatrends that will increasingly gang up in the first part of 2016 to stomp the deeply flawed global economy down into its own hole of debt. The economic collapse that is already developing includes the US economy and the US stock market that is now collapsing from the external forces and internal vacuum that I’ve been writing about for a few years here.

   

  Nations deep in the hole

  Fire in the hole. Brazil is already burning and has been declared by Bank of America and others to be in a recession deeper than the Great Depression — its worst since 1901. Brazil is struggling to combat runaway inflation at the same time. That’s is an impossible combination to battle.

  It ain’t Zimbabwe yet, but it’s looking like a place where Mugabe might want to run for president. Only a couple of years ago, Brazil was a nation of rising glory — the shining light of South America, one of the brightest of emerging markets. Now, as the US starts raising interest, its problems will grow worse as its debt, in a time of deep national crisis, is made impossible to manage.

  Japan, Canada, Australia, Venezuela, Russia, Ukraine, Brazil and Greece are just some of the nations officially in recession during 2015. The planet as a whole is in recession, meaning aggregate growth in GDP of all nations, if measured in dollars, has been in reverse for more than two quarters. And the head of the International Monetary Fund predicts that global “growth” will be worse in 2016 than it was in 2015, and 2015 looked pathetic!

  Christine Lagarde, leader of the IMF, said higher interest rates on national debts owed to institutions in the US will increase vulnerability worldwide. It’s long been said that, “As goes the US economy, so goes the world;” but it is equally true to say, “As goes the global economy, so goes the US.” In other words, the US economy is so big and influential that this single economy can move the world (and almost always does); but the global economy is even bigger and, so, can and will move the US. That’s why my 2016 economic predictions state this is the year the world moves the US. There is a rapidly failing, intertwined global economies falling into their own holes of debt, and the US is certainly going to get swept down all of that. Recent interactions between China’s small stock market and the huge US stock market show the US is clearly not immune.

  The Federal Reserve’s rate increase is also generally expected to strengthen the dollar (though that is not certain as the dollar’s strength depends on other factors, t0o). If so, dollar-denominated debt in other nations gets a double whammy of higher interest and higher premiums on currency conversion to make the payments. Lagarde doesn’t see things as looking better after 2016 either due to aging demographics as baby boomers move into retirement and slow down a little. (A good time to invest in artificial hips and knees.) So, there are many reasons global economic collapse is a trend that will prevail throughout 2016.

  It’s already lining up poorly for the US. Both UBS and the Atlanta Fed have placed US GDP growth for 2016 at a likely 0.5%. Dutch Bank cut their predictions of US growth to 0.5% as well. The big boys are rapidly cutting back their expectations. While I think they are wrong because the truth will be much worse, o.5% is still a cloudy forecast for those particular institutions that are typically very conservative in their downgrades.

  These institutions have typically overestimated national growth. They started with 2016 expectations that were over 2%, which they cut back to 1.5%, which they’ve not cut back to 1% all in less time than a year. Their track record says they always overestimate. I form my 2016 economic predictions based on the many trends that will be affecting future data. Thus, you might say the Federal Reserve Bank of Atlanta is a trailing economic indicator.

  I believe that, as data for the last quarter of 2015 comes in, these institutions will be revising their projections for 2016 down even further, just as they did throughout 2015. That said, their figures are already borderline recession numbers.

  I think the US may already be in recession, given that recessions are never declared until six months after they begin (being officially defined by two successive quarters of contraction in GDP). The biggest of my 2016 economic predictions, however, is that the US experiences something far worse than what we normally thing of as a “recession.” Hence, coining the word “epocalypse” to refer to the crash that is just getting started — an economic demolition that will cause the whole world to rebuild its economic structures. This is truly epoch in the sense that it is an extinction-level event economically that will open the world to transition to a new global economy over time. The world you live in is about to change.

   

  Another basis for my 2016 economic predictions is the China Syndrome

  We are seeing it now. Even if China does not meltdown, it is certain beyond anyone’s reasonable doubt that China will slow more in 2016. Even China predicts its economy will slow more, and 2015 was already China’s slowest year in fifteen years. We already know what that slowing caused; so, it doesn’t take any brain wizardry to extrapolate what further slowing in China adds to the global problems just laid out above. Since major companies started going out of business or defaulting in 2015, more that are badly weakened from 2015 will fail to make it through 2016, and nations that have lost in selling resources will lose even more. So, the second of my 2016 economic predictions is that their times all get harder, not better.

  China’s stock market has a lot more crashing to do, as well. Consider that China has frozen its stock market in suspension for half a year now. Meanwhile, its companies are doing worse, and its economy has slowed a little more. That means the ground has moved out from under the suspended market. The economic landscape is now pretty far below where the market remains suspended. So, Beijing is stuck. If it releases the market to be free again, it will certainly crash just to make contact with reality below.

  As I finish up these predictions, the Chinese stock-market crash appears to have abated; but look deeper. Articles are already appearing that say stock prices were supported after a Chinese change in strategy by huge purchases of stock by the Chinese government. The flip side to that kind of rescue is that it simply means the free market is being re-absorbed into the Chinese colossus. Private industry is, again, being socialized.

   

  The oil pit

  Tom Kloza, founder and head of Oil Price Information Service predicted oil prices in 2015 more accurately than anyone, and his predictions for oil prices in 2016 are even more dour. So, the next major trend that my 2016 economic predictions encompasses, as a force that is changing global economics is the continued, long-term crash of oil. (Not just based on Khoza, but on many others, as well as my own sense of what has to happen in oil.)

  Kloza, to stay with the guy who did the best in 2015, predicts West Texas Intermediate will drop all the way to $32 per barrel, and it looks like he’s just about already right. Kloza predicted oil would drop to $35 in 2015, and it did. I said it would drop to $40 and not lower, which it did and held there for a couple of months (so that was a very close call), but eventually it went down further. I was overly optimistic. Kloza expects oil to go back to where it was in 2008.

  To make matters worse, Kloza expects a decoupling of oil and gasoline prices with gas starting to rise due to storage expenses. That means both the oil industry (and all of its backers and suppliers) and consumers lose. So, that’s worse than last. He doesn’t expect oil to stay down all year, however; but it will certainly deepen the wreckage in the first half of 2016.

  My own sense of it is this: With oil storage facilities full to the brim around the world and a promised glut from the Saudis to continue all of next year and Iran possibly coming back online, oil is almost certain to go down more. US companies are already being crushed at the present level. Saudi Arabia has strengthened its ability to hold its position by drastically altering its national budget and implementing new taxes to replace lost oil revenues. That says for certain they plan to be in this fight for the long haul.

  Moreover, Iranian oil is the cheapest oil to extract in the world; so, if they get back into the market, they can try to hurt the Saudis more with even lower prices and still make a profit. Iran and Saudi Arabia, two of the world’s largest oil producers are now practically at war with each other (see that trend below). The US government is determined to see its deal with Iran go through, so we can be fairly certain Iran will re-enter the oil market early this year.

  Saudi Arabia has used oil to keep its populace at peace by not taxing them. Iran will use that leverage against Saudi Arabia by dumping as much cheap oil on the market as it can pump in order to press the Saudis to raise taxes more as they lose more money, thus destabilizing the Saudi government. The Obama administration has already shown itself to be completely non-supporting of the Saudis as an old US ally and to prefer to form a new alliance with Iran. So, there is nothing to stand in Iran’s way, and Iran is dying to pump and sell oil anyway.

  To show you how rapidly the oil market is deteriorating, prices were close to $35/barrel for West Texas Intermediate crude oil when I started working on my 2016 economic predictions, and they almost touched Khoza’s $32 as I finished this up … and Iran hasn’t even entered the market yet. All of the trends in oil are worse for the global economy in 2016 than they were in 2015, and they have already been hugely devastating.

   

  US Industrial Recession also part of my 2016 economic predictions

  Two major manufacturing surveys over the past week have come in well below economists’ expectations — solidly in a manufacturing recession — with new orders also falling below expectations, offering no hope for an improvement in the near future. US manufacturing fell at its fastest pace in six years, and US factory orders have never fallen like they did in 2015 without the US going into recession. November’s reports brought the 13th month of year-on-year decline! And that, according to Zero Hedge, was with a 47% surge in defense spending — the largest defense increase since 9/11.

  The Baltic Dry Index, which tracks the cost of shipping dry goods overseas has reached an all-time low, partly because too many new ships were ordered in recent years but also because so little product is shipping as industry is sinking.

  When manufacturing falls and starts to layoff people, as it did at the end of 2015, then services to those people start to fall. A recession in the service sector, in other words, lags a recession in the manufacturing sector because it is largely a response to falling incomes and rising unemployment to where people cannot afford the services.

  Manufacturing in China and the UK has contracted significantly, as in US big-equipment manufacturers. The eurozone, however, saw manufacturing grow, probably due to the falling value of the euro causing a rise in demand for exports from that zone.

   

  Stocks in bondage

  The top-ten stocks that gave a positive average to a falling US stock market are now also declining with some of them now taking bigger hits than most other stocks. That means the last pillars of the stock market’s support are crumbling. The two biggest — the Big Ace’s, Apple and Amazon — have been pounded hard in the last couple of weeks. Sixty points for Amazon is a pretty hefty plunge. Apple, having become the most valued stock ever, is plummeting even faster.

  Apple has been in decline for roughly half a year as iPhone sales are flagging, and investors seem unwilling to be impressed by other Apple technology like the new Watch or more distant technology like whatever the heck Apple is doing with cars. Google, too, has been entering the car game by taking the driver out of the game. Given how much we text while driving, apparently we have a great desire to drive our telephones because it is now phone companies who are the innovators in the automobile industry. Apple’s iPhone production is anticipated to be cut by as much as 30%; but maybe that will be made up by the new iCar. (Don’t ask.)

  In the meantime, the top ten are descending. When you only have ten secure stocks to move to and then two of those go into retreat, index averages are bound to fall … and fall they have, triggered by China’s all-out, stock-market crash.

  The US market was also artificially inflated by cheap buybacks of company stock, which have been funded by cheap credit made widely available by the Fed’s zero-interest strategy. That stimulus scheme is now unwinding as credit costs start to rise. So, a market that remains flat, in spite of huge buybacks, now will be finding less of that support. It has to settle. One of the primary decisions makers in Fed policy, Richard Fisher, has just said he warned the Fed that the market would go wobbly when policy was reversed because, in his own words, the Fed “front-ran” the US stock market and created a huge asset bubble. He expects a 20% drop, but I think he is way conservative because he doesn’t want to think about his nightmares.

  UBS, Switzerland’s largest bank and one of the largest banks in the world, now says that it expects the S&P 500 to fall by 30% this year. UBS says we are definitely in the final stages of a bull market and adds,

  Last year’s rise in volatility was in our view just the beginning for a dramatic rise in cross-asset volatility over the next few years. (ZeroHedge)

  The Dow Jones Transportation sector has already become a bear market, and it is widely accepted in Dow theory that transportation stocks are leading indicators of the stock market’s direction as they respond more quickly to how the economy is doing overall than other stocks.

  The Russel 2000 index of smaller companies has already fallen 14% since its average is not buoyed by the top ten.

  So, one more major trend I see that will press the entire world and the US toward total economic collapse is the crash of the US stock market, which I have said is already beginning.

   

  The big bond bust

  Only the weakest fall first, as they did in the fall of 2015. The second tier of bond funds will start to fall in 2016. Companies that defaulted in 2015 did so when interest rates were the cheapest they have been in the history of the nation. So, how much more will others fall as interest rates now start rising? It’s just logical. Enough said because it is already happening, so it’s not a future scenario; it is a present scenario that will contribute to the failure of all sides of the US economy, which will add serious downward momentum to the epocalyptic collapse of the entire global economy, making this something the Fed cannot rescue.

   

  Hedge hogs head for the hills

  And not so much Beverley Hills. In crumbling markets, many take refuge in hedge funds. I don’t pretend to understand their mysterious incantations and inner machinations; but celebrated geniuses cast bets against other bets and then, I think, bet that you can’t figure out what they’re up to. The magic that is supposed to come out the other side is that, when something goes down, they go up.

  Well, a lot of somethings seem to be going down, and the hedge funds going down, too. The funds that were supposed to protect you from volatility are dying from volatility in a huge fund flush. The problem for the Hedge Hogs is that their old magic never accounted for new patterns that make no sense where governments like China buy stocks en mass, and where central banks buy their nation’s debt in really, really big chunks (like almost all of it) and where money is free or now, in some countries, you even have to pay someone to hold your money for you.

  Thus, the hogs are having a tough time of things, and many of them have put out their “going out of business sale” signs. More hedge funds boarded up their windows in 2015 than in any year on record. But, then, they haven’t been around long anyway. So, who cares? What’s a billion here and a half a billion there spread across a landscape of economic wreckage, especially when it is mostly the rich who use these things? A lot of what these funds buy is distressed debt, so what did the rich expect?

  Here’s what concerns me and why it enters my economic predictions for 2016: These funds were supposedly managed by the best and brightest … like those people who figured out how to create mortgaged-backed securities — complex organisms made of other microorganisms that most of the buyers didn’t understand at all — even the supposedly smart buyers like banks that make a lot of money.

  So, you have to wonder how smart the smart guys are and whether anyone is paying attention to anything anymore. How much junk is in the system that very few know about because of financial invertebrates? What kind of funny algorithms run the auto-trader market now, making stock trade decisions across nations in nano-seconds that no human being ever sees — decision that were designed in advance by people who read and write in ones and zeros and speak arcane languages like C++ over a cup of Java and who are married at their fingertips to names like Ruby and Perl?

  Can anyone be certain that some algorithm that is making auto-stock decisions for investors while they sleep won’t misfire now that the market is running in reverse where there are no more Fed puts? Most of the toddlers who created today’s robotrading applications never knew the real world where money wasn’t free. Will all their clients wake up some morning to find a soft-coded circuit breaker failed to trip, and the computers of the world got into a bidding war and priced all stocks down to zero?

  You think I’m kidding? A lot of supposedly smart people thought the hedge-fund managers were geniuses, yet those geniuses are being wiped out by the very volatility they were supposed to protect you from! The irony of the virologist who died from a head cold. When will some econovirus, first contrived in the desserts of Afghanistan, hit the robotraders? Will the giants be taken down by a simple virus like complex invaders were taken down in War of the Worlds — bitten by something they can’t even see?

  My point is that we’re right back where we were in 2007 where banks and other major institutions were buying things they didn’t begin to comprehend. Are the big decision makers trusting risk management to software engineers? No surprise to me. I’ve long thought the big CEOs are just good at shaking hands and smiling and drinking overpriced, designer water. Have things become too complex to even identify risk in some cases? Maybe the actual market deciders — the software engineers — are so far out of touch with the real economic world that they’ve forgotten what gravity feels like.

  Well, gravity is here, Baby! So, hold on to your lead socks as we discover how robo-traders work when markets reverse.

   

  Mideast mania

  Iran’s Supreme Leader Ayatollah Ali Khamenei has threatened Saudi Arabia with “divine revenge” over its execution of Shi’ite cleric Nimir al-Nimir. Iran’s Revolutionary Guard made similar statements, promising “harsh revenge” and the “downfall” of the House of Saud.

  Saudi Arabia and Iran — longtime arch foes — support opposite sides of the war in Syria where ISIS, al Qaeda, Russia, Iran, Assad’s government, the US, France, and Turkey are all clustered in active battle. (Ah, what a bouquet of thorns.) The execution of Nimir also complicates relations for Saudi Arabia with Iraq’s Shi’ite-led government, where Saudi Arabia just re-opened an embassy after 25 years of shutdown only to have protestors shouting for its immediate closure following the execution.

  As far as I can see, Obama’s foreign policy of abandoning US allies in the Middle East has opened the doors to extraordinary conflict. The US is involved in more wars than we were under George Bush. Afghanistan continues to haunt us, as pulling out left the job undone. We’re now back to fighting in Iraq because the power vacuum created by Bush left a mess that can’t be cleaned up as other entities stepped in, and pulling out only made it worse. These were risks Obama was warned about from the beginning, should he pull out of Afghanistan and Iraq, not surprises.

  We’re now newly involved in Syria, as if we hadn’t kicked enough hornet nests in that region. Meanwhile, conflict continues to brew between Ukraine and Russia. China is threatening to raise its guns at US planes and boats in the South China Sea. North Korea this week made its first claim to have an H-bomb with “United States” written on it. Iran has admitted to having more long-range missiles than Obama ever knew about, yet the Obama administration seems to be ditching all allies in the Middle East in order to cosy up to Iran. Right or wrong, the US is involved in all of those conflicts, and all of it looks expensive.

  Obama’s foreign policy can be described as looking somewhat like throwing a bowl of meatballs and sticky rice at a wall. I don’t understand what the plan is, but that’s not what concerns me. What concerns me is that Obama doesn’t seem able to explain what the plan is either, and that makes me think he doesn’t know what the plan is. I will admit that he has certainly brought a great deal of change to the world.

  And then we have the Palestinians and Israelis, increasingly in tension that centers on the Temple Mount where the Bible predicts the events of the great apocalypse will happen. Both sides are increasingly less willing to talk to each other. So, this could all go biblical in scale.

  We haven’t been this close to the Middle East becoming a world war since the last World War.

   

  Fed float fled

  The precise timer for my 2015 economic predictions was the Fed’s change in its zero-interest policy. What many people missed with this event now gone by is that a tiny rise in interest was not the issue. Nevertheless, it is a bigger issue than thought. When the Fed only raised its interest target by one-quarter of a percent in December, and just two weeks later the high-yield spread (junk-bond spread) had grown by 2.5%. So, one concern is how much control the Fed has over interest rates as it starts trying to raise them. Do the math in terms of what this widening spread means to companies in the oil industry that are already struggling with their high-yield bonds. They will have to pay that much more if they need to refinance bonds they already cannot pay off.

  The bigger issue to the end of the Fed’s free float is that it transported us back out of Wonderland where bad news was good news for nearly seven years. For years we’ve seen the market go up when economic news was bad. That Mad-Hatter reaction happened because bad economic news meant the Fed would prolong its stimulus, and stimulus was, by far, the biggest game in town. That dynamic ended on December 16. Now we’re back in economic reality where bad news is simply bad news. We’re rightside-up again, and our re-entry into reality happened at a time when there is more bad economic news than I can ever remember.

  The instant move back to being rightside-up is why I predicted December 2016 would be a tiny trigger that would set off the explosives that bring our already crumbling structures down.

   

  The housing hustle hangs over us

  In the face of the Fed’s first looming rate hike, mortgage applications spiked — the rush of last-minute buyers wanting to make their move before interest started climbing. Now, two weeks after the Fed’s raise, mortgage applications have fallen off by a whopping 25%. A seasonal adjustment for bank closures over the holidays, etc., actually makes the figure come out a little worse at 27%. Most of the spike was in refi. Although applications for the purchase of homes has also fallen off 15%, they remained considerably higher than a year ago.

  Housing is NOT actually one of the bases for my 2016 economic predictions. I see no reason for housing to lead our collapse into the Epocalypse. However, will be a following trend that deepens the hole the Epocalypse crashes us into. As jobs fade back and unemployment starts to grow, mortgages will start to fail and housing prices will fall again.

  The large fall of home sales in November was largely because of rising prices (as some areas of the market now reach the peak they had before the Great Recession began) and because of a short supply of homes for sale. This peaking out of the housing market is similar to what we saw in 2007 and 2008 and shows the market is highly prone to topple again, so I don’t expect it to lag long as we now move into the Epocalypse.

  The fact is that the extraordinary home prices at the housing peak in 2007 could only be supported by loose credit. They have only been supported now by loose credit and low interest now, so prices have to start moving down as interest starts moving up, or we have to loosen the terms of credit even more, as we did last time around. Either road leads home to the same collapse.

   

  Student loan crisis also part of my 2016 economic predictions

  Outstanding student loans in the United States now top a trillion dollars. That’s not so outstanding. Nearly $1.2 trillion to come closer. How are people who are barely past the point of being kids going to pay that off? While student loans won’t be the cause of the Epocalypse, they will fail at a greater rate, intensifying band and government financial stress, thereby adding to the falling weight. The Ecocalypse is an economic collapse that happens throughout the world and in all sectors of the economy. It’s total. (But it is also so huge that it will likely take more than a year before its grandeur is truly appreciated.)

   

  Auto-traders are auto-traitors

  I’m speaking here of the financiers and the manufacturers, not the buyers. Auto sales are at a record high (up 15% in 2015), and some look to that as evidence that the US economy is strong. I would say, instead, it is the exception that proves the rule. It is one more part of the problem because that accounting is all baloney, and baloney is why most of the world’s economic experts don’t see any of this coming. They believe their own baloney.

  You have to consider what factors have taken auto sales to these supposedly soaring heights. In part, it’s consumer confidence, which is is a positive tail wind for the economy; but terms of credit on automobiles have been extended out to all-time extremes, too, of seven years on a highly depreciable asset. Down payments have, as they were just before the Great Recession, been minimized, as has interest. Most of all, most of these sales are not sales at all. The industry now leases far more cars than it sells.

  You have to wonder why so many economists are blind to how significant all of that is and to what it means. So blind, in fact, that they point to auto sales as an indicator of a good economy when it is the same mess we saw in the Great Recession. Apparently economists are incapable of learning anything. So, the biggest scare here is how blind it proves the experts are who guide the economy.

  Has anyone forgotten what supported auto sales in the year before the Great Recession? Zero interest, zero down, and zero payments for a year. At the time, I was asking, “What’s their end game? Where do they go from here now that they’ve spent the year giving away one-year leases because people can return all these cars at not loss?

  What we see now is that the automotive industry has doubled down on desperation by adding to that original mess longer-term loans and particularly by moving toward leases and calling them the new auto sales. As recently as 2010 fewer than one in ten auto loans exceeded a six-years term. Now, that is the average loan length.

  It’s dumbfounding to me that people are stupid enough to site autosaves as evidence of a healthy economy when they are built on such precarious terms and are mostly not even true sales. Just as in housing, we have switched from being a nation of auto owners to auto renters. As with housing, I expect a collapse of auto sales because it is built on a rickety foundation, but it will be trailing trend because it depends on a weakening of the consumer base as the economy slides back into recession. However, it will increase the speed and depth of the economic collapse as it joins the forces of the fall.

  Auto sales may not join the parade of panic until late in the year or 2017; but expect automakers within a year of so to end up right back where they were during the worst of the Great Recession … with less hope of a bailout. Oh, my goodness, the sheer stupidity!

  But enough of the cheery news. December sales fell to their lowest in six months, and December is supposed to be a really hot month when dealers close out all their inventory. Sales missed expectations by the most since November … of 2008! And while the year as a whole was up (as measured by counting bits of baloney strung on an abacus), the last half of the year fell more than any year since November … of 2008! Does anyone remember 2008 when automakers went bankrupt-or-bailout? They’re betraying the bailouts we gave them by setting up disaster all over again.

  Sales right now are particularly declining in China where the ratio of inventory to demand hasn’t been higher since the Great Recession. Sales might have hit a top since total car debt in the US right now is 30% higher than it was at its last peak right before … 2008! It has risen from about 600 billion dollars in outstanding debt to over a trillion dollars. Does that really leave any headroom for market expansion? Are you seeing a pattern here?

  All of this debt pressing down, even if it doesn’t go into default, certainly reduces our capability to do other things. It’s quite a load to carry.

   

  Black swans

  These are the events you cannot see coming, unlike the trends above that anyone can see if they take off their rose-colored glasses and look reality straight in its glowing red eyes. So, I’m not saying any of these will happen; whereas, I am saying all of the above are as close to certain as you can ever find in a world filled with chance.

  Cyber attacks on the energy grid or on corporations like that seen against Sony last year or into government computers could happen on a game-changing scale. One such attack on an energy grid just happened in Ukraine over the holidays where a virus was deployed to disconnect substations, causing a blackout; but it was minor. It’s only importance is in showing that the vulnerability is real.

  Sandworm, the organization believed to be responsible is targeting NATO, U.S. academic institutions, and government organizations in Ukraine, Poland and Western Europe. John Hultquist, head of iSIGHT Partner’s, the cyberespionage firm that discovered the virus, said,

  It’s always been the scenario we’ve been worried about for years because it has ramifications across broad sectors…. Operators who have previously targeted American and European sensitive systems look to have actually carried out a successful attack that turned the lights out. (The Washington Post)

  Of course, he has a service to sell, and fear of cyber attacks is a good marketing strategy for cyber espionage companies. On a positive note, Ukraine’s power grid rebounded in less than a day.

  What about internal terrorism as a black swan event? Millions of immigrants are flooding across borders from nations that are steeped in war, and they are being accepted as fast as they choose to come. How is it even remotely possible to screen out terrorists when you don’t have a government you can work with that knows anything about these people? Just recently people with terrorist connections were caught coming across the Mexican border from Afghanistan and Pakistan. Are we foolish enough to believe we actually catch all of them or that terrorists are too stupid to exploit this path of easy entry?

  It’s not politically correct to even question that some of these nice people might be hell-bent on destroying Western civilization. That Xenophobic. But let’s look at Germany. They have taken in over a million immigrants from Syria in less than one year. The culture class is growing rapidly. Citizens have been raped by a few bad people that entered. I know that most of the people are not bad, but when the conveyor is running at full speed, it’s hard to pick off the bad apples. Is it worth risking another few skyscraper collapses in order to help the refugees?

  What about a return of the Grexit. For those old enough to remember Snagglepuss the Cat, will it be “Grexit, stage left, politically eleven?” I still think a breakout of rage is on the near horizon. Between all the social issues from mass-immigration being forced on the citizenry of Europe and all the economic hardship of austerity forced on Greeks by their creditors, I’m thinking peasant revolts and storming of the castles may be seen in Europe in 2016.

   

  US debt problems

  A longer-term question, which may not come to bear this year, so is not one of my 2016 economic predictions, is how long can the US refinance its debt? Reductions in oil use and the plunge in oil prices mean fewer petrol dollars are necessary, so fewer US bonds might be purchased in other countries as a way of converting currencies to dollars and holding the dollars.

  China and Russia have teamed toward turing the yuan into a global currency as part of plan to intentionally move away from buying US dollar-denominated bonds. Russia’s role has been to make it illegal for former Soviet partners to trade in oil using US dollars. Neither wish to support US hegemony in world politics, so they have strong political reasons to damage the US economically and hope to use the yuan toward that end of weakening the US.

  This is, I’m sure, partly why China has also moved toward developing its internal consumer market, rather than focusing on exports. That will make it less dependent on exports to the US. Of course, it only makes good sense for them to make that kind of shift anyway.

  With the Federal Reserve now raising interest rates, the interest on US debt could also go up. I say, could because one mitigating factor here for the US is that it is, as I’ve said in the past, the best looking horse at the glue factory; so money streaming out of all the nations of the earth could try to pour into US bonds. Likewise with money fleeing the US stock market. That caveat is the only reason I’m not sure what will happen this year in terms of the US being able to refinance its debt; but longer term, this is a towering problem that will have a serious day of reckoning. And it could be the biggest black swan of all for 2016.

  The United States’ government is running annually on deficits that are measured in parts of a trillion!

   

  Fundamental flaws in the foundation

  While all of these severe forces will batter the global economy — US economy now fully included — they are not the reason the US economy now enters the Epocalypse. They are the overwhelming trends pressuring the global economy and the US economy, but there are fundamental economic fault lines throughout the US economy that I am banking on as the basis for my predictions.

  The stock markets of the entire world have positioned themselves for years now on the premise that central banks could prevail in getting us out of the Great Recession by printing copious amounts of money and piling debt on debt. I am certain beyond the slightest doubt — and have been since the very beginning of the Great Recession — that you cannot bail yourself out of a debt-caused recession by quadrupling down on debt! It’s insane. Nor can you repair bubbles by inflating them into balloons!

  Since the beginning of the Federal fantasy, I’ve said that the only thing we have done is push the debt further forward until it will become an immovable mountain of debt. We have taken deflated assets and re-inflated them to levels where only ludicrous terms of credit can finance them.

  My running analogy has been that of snowplows, pushing the snow straight ahead, instead of angling their blades to shove it off the side of the road. The general slowing of the entire global economy that you see right now is the sound of all the snowplows grinding to a stop as the mountain of snow finally becomes to big to push.

  We have built all of our markets on debt because that is how central banks created money. Stocks, bonds, houses, automobiles, etc. are all really mountains of debt, not stored assets. And I believe this is the year the grand scheme comes down (though it may take longer than a year to fully unfold, given the sheer scale of the collapse).

  Creating greater debt to solve something we knew was a debt problem in 2008 has been the wrong solution from the beginning. I’ve said all along that it would go forward for quite a long time because you can do a lot of partying when you are not paying for it; and governments have a lot of capacity. That’s why, over all the years of writing this blog, I have not predicted such a big collapse as being imminent (already happening, in fact, but unseen by most) as I am now. It is now the immovable mountain, built up so high above us, that it is going to avalanche down on us.

  So, it is not just that the free money has been invested in stocks and bonds, but that the entire market is positioned on top of a delusion. Once the delusion of recovery begins to break up, the market has enormous repositioning to do in order to line itself up with reality. Now that we are leaving Wonderland where bad news is just bad news, the cracks in the bad structure will show up quickly.

  Banks have continued to be freewheeling throughout this so-called recovery, playing the same games that created the Great Recession. Both the government and the Fed wanted to keep the old dinosaur economy alive because neither has the creativity to envision another way to grow an economy. The Federal Reserve is based on economic expansion through debt because its method of creating new money is through banks issuing loans that give out money that didn’t exist before the loan was made. Both the government and the Federal reserve believe expanding the money supply is what we need to do to goose the economy.

  Currently banks appear to be backed with stronger reserves than they had before the Great Recession, so investors, the media, the public in general and the government and Fed all believe they are in stronger shape. BUT, as stocks crash and bonds go bust, those reserves will evaporate.

   

  What will be the recovery plan?

  The full degree to which the Epocalypse develops will depend on how soon and how strongly the government and the Fed intervene now that things are beginning to fall.

  Bear in mind, though, that few economists or stock analysts are predicting a recession in 2016. Therefore, there is a very good chance of having one. Why, after all, would you listen to the people who predicted a rising market in 2007? (I’m sure glad I took my own advice back then.) By the same token, the Fed gives all appearances of believing in its recovery, so it will be slow to intervene C.ogress clearly can’t work together long enough to come up with a solution and also believes in the Fed’s recovery. The Obama Administration will just look to the same experts it turned to who came out of the Bush Administration.

  How much of the full depth of this collapse you see will depend on how soon intervention happens and what the intervention is; but my snapshot of government’s ability to see what is coming, its creativity and its ability to work together indicates that response will come too slow and too late. They certainly will respond before things get as bad as I’m saying they will if they fall to their full potential, but will they respond before the momentum is more than they can arrest?

  The lack even a hint toward ideas that follow any different course does not give much hope that government or central banks, when they propose a solution, will propose a good one. My prediction is that all of this leads to the presentation of a global solution for a global problem. What stop-gaps governments will take as they try to develop a global solution, I don’t know.

  The economic expansion is in its seventh year, and that is about as long as they usually run. If anyone wants to believe this one can endure longer, they can go right ahead. I’m more than glad to let them make the big, easy money that they think is out there. I’ve already taken shelter because I don’t want to try to squeeze outside the door alongside the rushing masses. As a result, I sleep easy. My money isn’t making any money, but I sleep easy.

  

  

  

  

  

• China Trade Balance Surges As Exports Surprise To The Upside

  Mission Accomplished? It’s a modern monetary miracle – China’s trade surplus surged to CNY382bn (from 434bn), dramaticlaly higher than the expected drop to 338bn thanks to better than expected data for imports and exports. Imports dropped 4.0% (less than the 7.9% drop expected) and the smallest decline since December 2014 but it was exports that “proved” China’s policymakers are large and in charge. For the first time since February 2015, China exports rose year-over-year (by 2.3%) dramatically better than the 4.1% plunge expected.

  Everything is awesome again!!

  

  So – no need for more policy support… despite earlier comments from officials of export policy support?

  Offshore Yuan is rallying modestly on this news…

  

   

  Now we look forward to all of China’s trading partners report how their exports also rose this month (leaving some magical off-Earth entity making up the “difference”).

  And finally – not wanting to pour cold water on the celebrations, we note that it is crucial to understand this is the extremely seasonal period leading up to Chinese New Year and is most likely an outlier… but for now, everything is awesome.

  

  

  

  

  

• President Obama's Final State Of The Union Address – Live Feed

  As President Obama prepares to unleash his final State Of The Union speech, The White House has conveniently focused attention on the following six "success stories": The Economy (record low number of men in workforce), The Climate (too hot for retail, too cold for construction), Foreign Policy (bwuahahaha), Health Care (record number of Americans cutting back to afford medical costs), and Social Progress (record high racial tensions, police state, surveillance state,  and record low trust in government). But apart from that, Americans have The Kardashians, iGadgets, record levels of syphillis, and, of course, a record surge in national debt during any President's "reign."

   

  Mission Accomplished President Obama…

  

   

  For the hard of hearing and propaganda-impaired – here is a quick summary of President Obama's 'tenure'

  

   

  The decline and fall of American Exceptionalism in one simple SOTU Speech reading level chart…

  Take the under #SOTU pic.twitter.com/7TqXdMNwdQ

  — Not Jim Cramer (@Not_Jim_Cramer) January 12, 2016

  Most crucially – how exactly will President Obama claim a "victory" of a deal with Iran – safeguarding the world from their nuclear threat – when they are holding 2 vessels and 10 navy crewmen "hostage"?

  The full speech can be read here but why bother: here is the abbreviated word cloud:

  

  Live Feed (President Obama is due to speak at 9pmET)

   

  If it's too much to bear, here is the ubiquitous drinking game…

  

   

  As DebateDrinking.com explains, when you hear a word on your selected list of drink words – take a drink*! We recommend something domestic – we are drinking for America after all.

  *We define a drink as a gulp of beer or sip of wine or liquor. Know your limits and please drink responsibly.

  And here is the live score on this drinking game…

   

  Finally, this…

  

  

  

  

  

• China Is The New Japan After All: Here's How To Trade It

  In an odd coincidence, just as we were preparing an article showing how China is becoming increasingly more like Japan and hot to trade this convergence, we happened to glance at the slide that Jeff Gundlach was talking about at that exact same moment during his afternoon presentation, and lo and behold, the “new bond king” was discussing why, among the reasons why “China may not bounce back”, is that China is increasingly becoming a Japanese demographic doppelganger…

  

  … in a slide that was sourced from, of all places, Zero Hedge.

  So with that reflexive quandary out of the way, we go to the latest presentation by BofA’s Michael Harnett, who among the 6 key investment themes and trades for 2016″ lays out the “Black Dragon” as one of the key ones, and one whose core thesis is that “China, like Japan in the early-1990s, has entered a secular period of significantly slower economic growth, compounded greatly by debt deflation; like Japan in the 1990s, Chinese asset prices, currency, banks (Chart 5) and capital flows will periodically cause severe disruptions to global financial markets, even if China does not itself cause a global recession.”

  In other words, China is Japan, and not just demographically but financially as well.

  This is what else Hartnett said:

  China has de-pegged its currency from the US dollar: history is replete with illustrations of how major FX regime changes cause cross-asset volatility: Britain’s departure from the gold standard (1931), collapse of Bretton Woods system (1971-3), UK ending ERM membership (1992), Asia crisis (1997-8), the Euro (2000-). 

   

  Why

   

  China = Japan: China, like Japan in the early-1990s, has entered a secular period of significantly slower economic growth, compounded greatly by debt deflation; like Japan in the 1990s, Chinese asset prices, currency, banks (Chart 5) and capital flows will periodically cause severe disruptions to global financial markets, even if China does not itself cause a global recession.

   

  Chinese devaluation: a cyclical collapse in export growth, extreme FX devaluations in recent years in Japan, Europe and across Emerging Markets, and capital flight, are all causing an accelerated devaluation of the Chinese yuan; BofAML forecast CNY6.9 and CNH7.0 by 2016 year-end; we see downside risk to these forecasts (n.b. PBoC has spent $200bn in reserves in past two months and yet the extent of private capital outflows means CNY has still fallen).

   

  The great EM devaluation: until there is two-way risk in RMB, there is one-way risk in oil, commodities and EM; once Chinese exports begin to react positively to the cheaper currency, we think a bid is likely to return to Chinese and EM assets; until then, China asset prices are a threat to global asset prices (n.b. Chinese corporate bonds are at multi-year highs despite a credit crunch).

  

   

  Ok, fine, China is the new Japan. How does one trade it?

  Here are Hartnett’s 5 proposed trades:

  • Long 6-month forward USD/CNH: for exposure to Chinese devaluation.
  • Long 3-month USD vs basket of KRW, TWD, MYR: for exposure to Chinese devaluation.
  • Long India 10-year bond: BofAML Asia strategists argue that weak commodity prices are positive for India; macro backdrop is still favorable for India bonds, inflation outlook benign, and they expect further monetary easing by the RBI (entry: 7.737%).
  • Short M2JP0EXE index: European exporters with EM exposure have sold-off sharply; Japanese exporters have yet to sell-off sharply (Chart 6).

  

  • Buy KOSPI forward volatility (KOSPI2 Jun-16/Jun-17 forward vol agreement): BofAML derivatives team recommends owning volatility via KOSPI; cheapest globally, high downside beta to global markets; favorable technicals in 2016; good hedge against HSCEI/China downside and/or global recession.

  Then again, perhaps it is a good thing Hartnett said to short the CNH today and not yesterday; if anyone had shorted the currency yesterday when it was soaring hundreds of pips wider only to hit parity hours later, their trading career would be over right about now.

  

  

  

  

  

• Some Chinese Banks Run Out Of Physical Dollars As PBOC Holds Yuan Fix Flat For 4th Day

  Having apparently taken the day off from selling US Treasuries and buying Offshore Yuan (following yesterday's "murderous" short-squeeze"), completing a 40 handle round trip in the "stable" currency year-to-date, PBOC decided to hold Yuan flat for the 4th day but make a statement that they would "give policy support to exports" – in other words devalue more. The unintended consequence of their decision to withdraw liquidity and crush shorts in offshore Yuan is more problematic as it has reportedly left Chinese banks short of dollars at their ATMs (and are delaying withdrawals). Meanwhile, another of China's favorite outlets for capital outflows – Bitcoin – just got stomped.

   

  "Stability" – apart from in money-markets and offshore Yuan…

  

   

  As Offshore Yuan roundtrips 40 handles…

  

  So a free-floating curreny as blessed by The IMF will only be allowed to move as The PBOC decides (as opposed to those nasty carry trade speculators):

  • *YUAN EXCHANGE RATE SHOULD BE DETERMINED BY ONSHORE MKT: DAILY
  • *PBOC NEEDS TO LEAD FOREX MARKET EXPECTATION: DAILY COMMENTARY
  • *CHINA SHOULD CONTROL YUAN SUPPLY IN OFFSHORE MARKET: INFO DAILY

  But then this…

  • *CHINA LIKELY TO GIVE POLICY SUPPORT TO EXPORTS THIS YR: DAILY

  Which rougly translated means – pile on into shorts and we are going to devalue until exports pick up.

  Of course the whole world is waiting for China trade data tonight.

  However, it seems someone just stomped on Bitcoin – one of the Chinese favored outlets for capital flows – to show tthat the 'transitory' capital controls can't be worked around

  

  On heavy volume.

  By way of a reminder, this is what was said last night…

  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."

  Sure enough: *SOME BANKS IN BEIJING, SHANGHAI RUN SHORT OF DOLLAR BILLS: 21ST

  Some banks in China’s Beijing, Shanghai and Shenzhen ran short of dollar bills for cash withdrawal amid increasing demand for the currency, 21st Century Business Herald reports, citing reporter’s investigation.

   

  BOC, CCB, China Merchants Bank in these cities require appointment at least 2 days in advance for >$5,000 purchases; appointment could take as long as 1 week at some branches.

  So in their haste to withhold liquidity and spank the spceculators, The PBOC may have just started their very own domestic bank run…

  Coming just 2 days after lines began to form at currency exchanges (as Chinese want Dollars for their Yuan),

  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.

  We are sure Ms. Lagarde is produly standing by her decision to allow this "free" currency to be part of the SDR basket.

  But then again – this is what "frozen liquidty" really looks like in China…

   

  Charts: Bloomberg

  

  

  

  

  

• CHaNGe THiS!

  

  

  

  

  

• How Corrupt Is The US: An Extraordinary Example

  Eric Zuesse, originally posted at strategic-culture.org

  How Corrupt The U.S. Is: An Extraordinary Example

  Incarceration rates don’t necessarily correlate with corruption, but they do reflect the extent to which a given nation’s government is (by means of its laws and its enforcement of those laws) at war against its own population; and, so, technically speaking, it’s supposed to reflect the prevalence of law-breaking within that nation. After all, by definition, people are presumed to be in prison for law-breaking, irrespective of whether the given nation’s laws are just – and, if they’re not just, then this fact reflects even more strongly that the nation itself is corrupt. So, a high incarceration-rate does strongly tend to go along with a nation’s being highly corrupt, in more than merely a technical sense.

  Out of the world’s 223 countries, the US has the world’s second-highest incarceration rate: 698 per 100,000, just behind #1 Seychelles, with 799 per 100,000. Seychelles doesn’t even have as many as 100,000 people (but only 90,024 – as many people as are in the city of Temple Texas). By contrast, the US has 322,369,319; so, the US is surely the global leader in imprisonment. And, furthermore, #3, St. Kitts and Nevis, with an incarceration-rate of 607 per 100,000, has only 54,961 people (as many people as are in the city of Columbus Indiana). The only other country that might actually be close to the US in imprisoning its own people is North Korea, which could even beat out the US there, but wouldn’t likely beat tiny Seychelles: North Korea is estimated to have «600-800 people incarcerated per 100,000», and a total population of 24,895,000.

  Thus, for imprisonments, the US really does have no close second: it’s the unquestionable global market-leader, for prisons and prisoners.

  

  And this gets us to the market-leader for prisons within America itself, and to the stunning corruption that stands behind it.

  So, here’s that extraordinary example, and the story behind its corruption, which will provide a close-up view of America’s general corruption, from the top (including the government itself) on down:

  In order to protect the profits of privately run prisons in the US (where «Sixty-two percent of detention beds are administered by private prison corporations», meaning that most US prisoners are being ‘served’ by for-profit corporations in for-profit-run prisons), the US Federal Government is refusing to honor Freedom Of Information Act (FOIA) requests by the Center for Constitutional Rights (CCR), which is trying to find out why people are being imprisoned as illegal immigrants who ought not to be. Wrongly-imprisoned people are a device by which private prison-operating companies keep their prison-beds occupied and thus drawing income from the US government, just like a high occupancy-rate is essential for a hotelier’s profitability. But –unlike in the hotel trade – this coercive bed-occupancy produces more than mere profits; it produces also distressed families, of those individuals who are yanked and unjustifiably imprisoned, families suffering needlessly.

  It turns out that federal laws, passed mainly by the Republicans, but also with votes from corrupt Democrats, require (in H.R.3547) the US government to pay for «a level of not less than 34,000 detention beds» for ‘illegal immigrants.’ (You can see that requirement being cited by the Republican interrogator of an Obama Administration official, Department of Homeland Security, at 1:03:00- in this video, where the Obama official is being criticized for not locking up enough people to meet the law’s requirements.) (Republicans and other conservatives love to punish people, irrespective of justice. To be concerned about justice, as the CCR is, is to be ‘soft on crime’, as Republicans view it. Instead of justice, Republicans seek revenge; thus, for example, Republicans overwhelmingly support torture against ‘terrorist’ suspects; Democrats overwhelmingly oppose it. Torture greatly reduces the trustworthiness of a suspect’s statements, but it always serves as a vent for revenge, even when the suspect actually had nothing to do with terrorism; so, Republicans strongly approve of torture. Similarly, the most-conservative Muslims approve of beheading ‘infidels’. Conservatives everywhere, and in every faith, support harsh punishments; and the US is a conservative country; so, sentences are long, and the conditions are harsh.)

  However, the Obama Administration itself, even as it locks up, on some days, just shy of the legally mandated minimum of 34,000 accused ‘illegal immigrants’ (which shortfall is here drawing the ire of that congressional Republican in the video), is also actively blocking CCR from access to the information about how the government and private corporations set rates for immigration detention beds and facilities. CCR argues that private profits are being given higher priority by the Administration than is the welfare of the public; and, thus, that the General Welfare Clause of the US Constitution is being violated here.

  The Obama Administration says that it won’t release the information, because to do so would «harm corporations competitively».

  CCR claims, and the Obama Administration is opposing their accusation, that «there is essentially no competitive market in government contracts that could be harmed by the release of information, that there should be nothing proprietary about the terms of a government contract, and that the public has a right to understand how Congress funds immigration detention and how that funding is influenced».

  The Obama Administration is arguing that if this same cost-information were being requested concerning any of the 38% of government-run prisons, then the FOIA request would be complied with, but that contracting-out or privatizing that function has freed the government of any such obligation.

  However, CCR is concerned specifically about that profit-motive here – that the revolving door between government service and the private sector might itself be a key part of the explanation for the government’s requiring that at least 34,000 people will be in prison for, or awaiting trial on charges of, ‘illegal immigration’. CCR contends that the only reason why people should be imprisoned in America is that they’ve actually broken laws for which the correct punishment is a prison term. But the position of the US government is contrary: if the beneficiary of someone’s imprisonment is a private corporation, the public shouldn’t necessarily be allowed to know what’s going on, nor why. And, so, that’s the issue here. Does a private corporation’s privacy-right exceed the public’s right-to-know? The government says yes; CCR says no. CCR argues that to privatize is not to immunize: the government has the same obligations to the public, regardless of how it has chosen to carry out its obligations. The Obama Administration argues that a private corporation is private, protected from the public’s scrutiny – and that the corporation’s only obligations are to the government, not to the public; thus, no such FOIA requests will be honored.

  Here’s what’s not in dispute about the case: the man who, in the first Obama Administration, was the head of the US Department of Homeland Security’s Office of Immigration and Customs Enforcement’s Office of Enforcement and Removal Operations, David Venturella, is now the top sales official at GEO Group, which is «the world’s leading provider of correctional detention, and residential treatment services around the globe» – and that’s also the first thing GEO says about itself, on its own «Who We Are» page. And Mr Venturella is now being cited by the Obama Administration as an ‘expert’ in order to deny CCA’s FOIA request.

  As a GEO official, Venturella claims in his 22 December 2015 declaration in the court-case, that, «the winning proposal in almost every Federal procurement competition is awarded to the lowest priced bidder», and that, «the disclosure of GEO’s proprietary bed-day rates and staffing plans would result in substantial competitive financial harm to GEO». He claims that, «Even with access to their larger competitors’ staffing plans, the smaller private companies do not have access to the capital needed to compete to win a large facility». In other words, he pretends that GEO is one of «the smaller private companies». But then he goes on to say (just in case a reader might happen to consider GEO not to be one of «the smaller private companies»): «The second stage would be acrimonious competition between the larger organizations, public and private, that will very likely lead to their withdrawal from the detention market as well, thereby leaving ICE [Immigration and Customs Enforcement] with no viable detention service providers». Venturella assumes here that ICE cannot itself own and operate its prisons. (He doesn’t say why; he merely assumes that it’s the case – perhaps that everything should be privatized, and must be privatized, so ICE shouldn’t run its own prisons.)

  So, that (false) argument is the reason why injustices to defendants in the US immigration system must continue, Venturella, the salesman for GEO (his title is «Senior Vice President»), is here arguing.

  Essentially, the Obama Administration is joining with GEO arguing that the profitability of private prison companies is more important than any injustices that might happen to be caused by Congress’s establishment of an arbitrary fixed and stable minimum number of prisoners every day – and, since the head of the top prison-company is saying that profits would be threatened by adhering to FOIA in this particular matter, the Freedom of Information Act request in this case must be denied.

  The basic argument, in other words, is that privatization is more important than the US Constitution and its General Welfare Clause.

  How close are these contractors to the government?

  Here are five of the seven members of the Board of Directors of GEO:

  One is «Former Director, Federal Bureau of Prisons».

  Another is «Former Under Secretary United States Air Force».

  Another is «Executive Director, National League of Cities».

  Another is «Chairman and CEO of ElectedFace Inc»., which «will connect people to their elected officials in every political district».

  Another is George C Zoley, the company’s Founder and CEO, who is also «America’s Highest Paid ‘Corrections Officer.’»

  In fact, «GEO Group’s revenue in 2012 exceeded $1.4 billion and CMD [Center for Media and Democracy] estimates that 86% of this money came out of the pockets of taxpayers. CMD’s investigation of GEO Group unearthed how the company’s cost-cutting strategies lead to a vicious cycle where lower wages and benefits for workers, high employee turnover, insufficient training, and under-staffing results in poor oversight and mistreatment of detained persons, increased violence, and riots». (If so, then that would add to the misery that’s produced by the improper imprisonments.)

  «According to Nasdaq, major investors in GEO Group include: Vanguard, BlackRock, Scopia Capital (a hedge fund run by Jeremy Mindich and Matt Sirovich) Barclays Global Investors, Bank of New York Mellon, and more. George Zoley, CEO of GEO, is a major stockholder with over 500,000 shares. For more on investors, see Ray Downs, ‘Who’s Getting Rich Off the Prison-Industrial Complex?’ Vice, June 2013».

  Privatization is very profitable. But not for everybody. Only for the well-connected. For everybody else, it’s just more poor and abused workers, and unjustly imprisoned people. But virtually all Republicans, and also the Obama Administration and other corrupt Democrats (and Obama will get his enrichment after he leaves office), think that privatization is necessary – even more necessary than is adherence to the US Constitution, or than a justly ruled nation, and prosperous public.

  This type of government fits with America’s extraordinarily high incarceration rate.

  But a few US officials do whatever they can to reduce the country’s corruption. For example, the «Immigration Detention Bed Quota Timeline» shows that, in September 2015, US Senator Bernie Sanders (who probably is the US federal government’s leading campaigner against corruption) «introduces the Justice is Not for Sale Act of 2015, which seeks to end the bed quota among other criminal justice and immigration detention reforms. The bill is the first effort in the US Senate to eliminate the bed quota. In addition, Reps. Raúl Grijalva (D-AZ), Keith Ellison (D-MN), and Bobby Rush (D-IL) introduce the bill in the US House of Representatives».

  Those are the most progressive members of the US Congress. Arrayed against them are the billions of dollars in political propaganda that cause the number of such progressives to be extremely few in the US government. For that bill to pass in Congress, practically all conservatives would first have to become replaced by progressives, and by other supposed non-conservatives (called ‘liberals’), in Congress. Sanders says that it would require «a political revolution», and he’s correct on that. But that’s the least likely type of «revolution» the US is likely to have. Perhaps Sanders knows this but doesn’t want to shock people, who are too indoctrinated to be able to accept the uncomfortably ugly truth, that things might already be too far gone for that type of «revolution» to be sufficient (even if it were feasible).

  

  

  

  

  

• The International War On Cash

  Submitted by Jeff Thomas via InterntionalMan.com,

  Back in 2008, I began warning of increasing capital controls that we would see in the future, as a component in the decline of Western economies (Western in the broad sense, including Japan, Australia, etc.)

  Along the way, it occurred to me that, at some point, governments might collectively attempt to eliminate paper currency in favour of an electronic currency – transferred from party to party solely through licensed banks. Sound farfetched? Well, maybe, but what if the U.S. and EU agreed on an overall plan, then suggested it to other governments? On the face of it, this smacks of conspiracy theory, yet certainly, all governments would benefit from this control and would be likely to get on board. In fact, it might prove to be the only way out of their present economic problems.

  So, how would it play out? Here’s roughly how I saw Phase I:

  • Link the free movement of cash to terrorism (Create a consciousness that any movement of large sums suggests criminal activity.);
  • Establish upper limits on the amount of money that can be moved without reporting to some government investigatory agency;
  • Periodically lower those limits;
  • Accustom people to making all purchases, however small or large, through a bank card;
  • Create a consciousness that the mere possession of cash is suspect, since it’s no longer “necessary”.

  When I first wrote on the subject, there was considerable criticism as to the possibility that such a programme would ever be attempted, let alone succeed. And, granted, it was so Orwellian that it was understandably seen as a crackpot idea. But since that time, the programme has been developing extremely rapidly. In the last six months alone, it has become so visible that it has even garnered a name – “the War on Cash”.

  References in the media have been made that terrorist groups fund their attacks with cash. Dozens of countries have placed limits on the maximum amount of money that can be moved without reporting. Some, notably France, have already begun lowering their limits. Banks in some countries, notably Sweden, are already treating all cash transactions as suspicious. The previously theoretical Phase I is now well under way.

  This issue has expanded more quickly than I’d anticipated. Clearly, the governments that are forcing it into being are running out of time. There can only be one reason why they’d rush a programme that normally would be given more time for people to accept, and that’s that they see a crash coming before they can get Phase II of the programme underway.

  Although most anyone who’s paying attention recognises that Phase I is in motion, Phase II (as I perceive it) is not yet on the radar, but I believe it will be soon. Phase II will be the second wave of measures and they will be more draconian than Phase I:

  • Create a definitive false flag event that demonstrates how physical cash is the primary means of funding evil acts in the world;
  • Declare a date on which paper currency will become illegal (Until that date, it can be deposited into a bank. After that date, it becomes criminal to possess it.);
  • Once all cash has been deposited in banks, increase negative interest rates;
  • Confiscation of deposits can then be implemented, as desired, by banks (Confiscation of deposits is already legal in Canada, the U.S., and the EU.);
  • Confiscate contents of selected safe deposit boxes;
  • End “voluntary” taxation. All taxation will, in future, be by direct debit;
  • Declare money to be the property of the State that issued it. (The people are allowed to trade in it, but it is not truly theirs. The State therefore can freeze or confiscate the funds in any account, if any crime is “suspected”.).

  In recent months, I’ve warned repeatedly that, since confiscations of deposits will take place, we must assume that banks will additionally raid safe deposit boxes, as stated in the above list. Some banks, beginning with JPMorgan Chase, have placed limits on what forms of wealth can be placed in safe deposit boxes. Since then, Greece has taken this one step further. In future, Greek citizens will be required to declare cash exceeding €15,000, jewellery and precious stones valued at over €30,000 and declare the location of the safe deposit box in which they’re stored.

  The declaration is fraught with difficulties for the depositor, as he bears the obligation to accurately appraise each item. Should authorities disagree with the appraisal of, say, Grandma’s diamond brooch, the depositor would be suspect and may face confiscation.

  State Wealth Control

  Once Phase II is completed, state wealth control will exist. And, again, this prediction will seem at first glance to be Orwellian – a mere fiction. But then, less than a year ago, the War on Cash was regarded by only a few as being even within the realm of possibility, let alone right around the corner. And so it is with Phase II. Now that Phase I is in motion, it’s accepted as an unsettling reality, but Phase II is the obvious sequel.

  If you have cash in a bank, you think of it as your own. This is not the case. It’s wealth that you’ve loaned to the bank. In the future, the bank (with governmental approval) will have the power to decide if and when they will return all, or a part, of that cash to you. They will set the rules as to how that decision will be arrived at and those rules will be changed periodically. Since those rules will be arrived at by the banks (without need for your consent), the outcome will most certainly not be in your favour.

  Those who read this statement might react in one of three ways:

  • “This can’t be happening.”
  • “Okay, it’s happening, but there’s nothing I can do about it. It’s global.”
  • “There must be something I can do to keep from being robbed.”

  The first group will be the largest. They will freeze up, do little or nothing, and become victims.

  The second group may complain and even struggle a bit against these developments, but won’t prepare sufficiently and, ultimately, will also become victims.

  The third group will seek alternatives, and here’s where the light appears at the end of the tunnel. Yes, this effort will be international, but it won’t be fully global. There will be those jurisdictions that, traditionally, have not been willing to fall into line with the world’s foremost powers. They will not wish to go off the same cliff as the others and will take a different tack. They will be the recipients of those people who seek to escape the collapsing system. But, more than ever before, time is limited; the window is clearly closing.

  Escape from Confiscation

  The solution is surprisingly simple, although it will take work and dedication:

  • If you’re a resident of any jurisdiction that’s presently going down this road, move your money to a jurisdiction that has a consistent history for stable government, low (or no) direct taxation, and minimal interference or regulation over wealth;
  • Convert your wealth into those forms of assets that are hardest for rapacious governments to confiscate (foreign-held precious metals and real estate);
  • Create an exit plan for your own physical escape, should it become necessary.

  Editor’s Note: The War on Cash and negative interest rates are radical and insane measures. They are a sign of desperation.

  They are also huge threats to your financial security. Central planners are playing with fire and inviting a currency catastrophe.

  Most people have no idea what really happens when a currency collapses, let alone how to prepare…

  How will you protect your savings in the event of a currency crisis? This just-released video will show you exactly how. Click here to watch it now.

  

  

  

  

  

• Former UK Cop Says Jihadists Are Hiding In Refugee "Jungle" Camp

  Behold!

  France has figured out what to do with all of the empty shipping containers the world no longer needs now that global trade has ground to a halt.

  

  

  

  That’s the “new and improved” refugee camp in Calais where authorities are, to quote Reuters, seeking “to bring some order to the so-called ‘jungle’ camp in sand dunes near the port.”

  As you can see from the above, the encampment was previously made up of shoddy tents and the conditions are deplorable. Variously described as “squalid” and “unsanitary” the “jungle” (that’s actually the camp’s nickname) is home to some 4,000 asylum seekers hoping to reach the UK. Now, the idea is to pack the migrants into the shipping containers.

  “The metal boxes are equipped with bunk beds, heaters and windows, but lack water or sanitary facilities,” Reuters writes, adding that the 1,500 or so refugees who live in the containers will have access to toilets and showers “at an existing facility now reserved for women and children.”

  And while that sounds infinitely better than hanging out in a tent on the ground with no heat, some fear the new facilities are a ruse. The shipping container village is surrounded by a fence with access controlled by handprint technology.”Some of [the refugees] said they were suspicious of this set-up,” Reuters notes, before quoting 25-year-old Abdullah from Iraq, who says “he and his friend Saad plan to stay in their tents despite freezing winter temperatures and frequent rainstorms that turn the sand to mud.”

  “Once you are in there (shelter), they will not let you go out,” he said. Perhaps they’re afraid France plans to load the shipping containers onto a boat bound for Syria.

  In any event, the push to improve Calais comes as at least one former British police terror chief says the camp is being used by jihadists who are “hiding in plain sight.” 

  “During a visit to inspect the area Kevin Hurley said he was concerned the camp was ‘completely un-policed’,” BBC reports. Here’s more:

  Mr Hurley, the former lead on counter-terrorism at the City of London Police and current police and crime commissioner for Surrey, spent several hours in the camp with BBC London’s Inside Out team.

   

  He said he was worried the camp was “a potential hiding space” and that people there could be being exploited by organised criminals.

   

  “If I were a returning jihadi, I would smuggle myself in amongst this group; you would easily get lost,” he said.

   

  Speaking to migrants at the camp, Mr Hurley was told that there were dangerous people staying in the “jungle”.

   

  One migrant said there were people at the camp who were “working for way of Daesh”, although they were not part of the jihadist group.

   

  However, the founder of Care4Calais, a UK charity set up to help migrants staying in the camp, dismissed the claims as “the most ridiculous thing I have ever heard”.

   

  Clare Moseley said: “You would have to be the world’s stupidest terrorist to try and enter Britain as a refugee, because when you come as a refugee you are subject to detailed background checks.”

  Perhaps, but Hurley’s contention is the safer bet. That is, if you say there are terrorists camped out at Calais and no attacks ever occur, no one is going to blame you for being cautious.

  On the other hand, if you call the notion that there are jihadists in the camp “the most ridiculous thing you’ve ever heard,” and an attack is later perpetrated by someone with ties to Calais, well then the public isn’t going to be very sympathetic.

  Below, find an interactive video from BBC that gives you a 360 look at “the jungle” along with a Banksy mural painted at the camp which reminds the world that Steve Jobs was the son of a Syrian refugee.

  

  

  

  

  

  

• Sorry Warren Buffett: Things Just Went From Bad To Worse For U.S. Railroads

  Back in November 2009, knowing he had both the inside track and the final decision on US energy policy under his crony president Obama, Warren Buffett acquired the 77% of the Burlington Northern (aka BNSF) Railroad he did not own for one simple reason: realizing he could pressure the “progressive president” Obama to curb all pipeline progress, confirmed recently with the terminal failure of TransCanada’s Keystone XL pipeline, Buffett would be ahead of everyone by controlling one of the key actors among “the New US Petroleum Pipelines.” The “pipelines” in question were shown in the following chart from our March 2013 post.

  

   

  And while Buffett’s strategy worked great for many years, certainly as long as oil was rising and above $100, over the past year, things went downhill fast. Nowhere, was this more visible than in a one year chart of transports, which have crashed over the past several months entering their first bear market since 2008 in late December.

  

   

  While all transportation components contributed to this plunge, rails were the biggest culprit. To be sure slumping railroad traffic was something we have covered extensively in the past year – together with ocean freight, together with trucks – and most recently covered it on January 3 in “What Rail Traffic Tells Us About The U.S. Economy.” The short answer: bad things.

  But while we were quite concerned about the implications of plunging railroad traffic, others ignored it, claiming as they always do, that “it is only coal, or only oil, or only [insert commodity related factor]”.

  However, a Bank of America report issued on January 6 revealed that the decline in rails was much more widespread than just “it’s only X.” This is what BofA’s Ken Hoexter said in a report titled “Carloads flashing a warning signal; lower 4Q estimates again“

  Longest and deepest carload decline since 2009

   

  We believe rail data may be signaling a warning for the broader economy. Carloads have declined more than 5% in each of the past 11 weeks on a year-over-year basis. While one-off volume declines occur occasionally, they are generally followed by a recovery shortly thereafter. The current period of substantial and sustained weakness, including last week’s -10.1% decline, has not occurred since 2009. In looking at carload data going back nearly 30 years, similar periods of weakness have occurred in only five other instances since 1985: (1) the majority of 1988, (2) the first half of 1991, (3) several weeks in early 1996, (4) late 2000 and early 2001, and (5) late 2008 and the majority of 2009. We exclude the period in 1996 from our analysis, as we consider it anomalous given that it overlapped with harsh winter conditions and was limited to January and early February of that year. Of the remaining instances, all either overlapped with a recession, or preceded a recession by a few quarters. The current period starting in October and continuing through the present has been accompanied by weak ISM results, with the purchasing managers index recently falling to 48.2 in December from 48.6 in November (a reading below 50 suggests contraction), and our proprietary BofAML Truck Shipper Indicator recently falling to its lowest level since 2012.

  Here is a rather troubling finding from BofA: the manufacturing recession has spilled over from purely the industrial sector and into “other, more consumer-oriented segments.” In other words, the service recession is imminent.

  Weakness no longer limited to industrials or coal

   

  For much of 2015, it was easy to dismiss weakness in carloads as being concentrated in industrial segments, and reflective of a secular shift away from coal. More recently, the softness has spread to other, more consumer-oriented segments. Intermodal carloads, which were up +1.0% and +3.6% in 1Q15 and 2Q15, respectively, posted a tepid +0.9% gain in 3Q15 and were down -1.7% in 4Q15. This follows the broader trend in 2015 of carloads accelerating to the downside through the year. Until recently, the difficult comparison year of 2014 was another reason to be dismissive of the decline percentages. Despite soft year-over-year results, absolute carloads remained above the 2010-2013 levels through the first 3 quarters of 2015. However, in 4Q15, volume is at its lowest level since 2010. BofAML Multi-Industrials analyst Andrew Obin recently noted that industrial weakness has not always been coupled with severe GDP declines, despite the high correlation between the two (86% correlation coefficient). However, as non-industrial segments post declining carload volumes, we are increasingly concerned with the breadth of the weakness.

   

  

  All of the above is very bad news for the US economy of which railroad traffic is just one of the proxies, but isn’t necessarily bad for Warren Buffett’s major gamble on the “new pipelines.”

  This is.

  According to a report in the FT, “the amount of oil hauled on US railways has declined steeply in the past year as refineries swallow more foreign supplies in the face of falling domestic crude output.”

  From a peak in January 2015 to last October, movements of crude by rail declined more than a fifth, the latest data from the US energy department show. Genscape, a research group, said rail deliveries to US Atlantic coast terminals continued to drop to the end of the year and the spot market for crude delivered by rail from North Dakota’s Bakken region “is at a near standstill”.

   

  Once seen as a 19th century relic, moving crude oil by train re-emerged as a hot technology five years ago as surging output from long-neglected shale oil regions overwhelmed pipeline capacity. Investors from oil companies to Wall Street banks clamoured for tank cars, while fiery accidents prompted federal regulators to impose more stringent standards on rolling stock.

  And Buffett was there to provide the needed cars, for a generous fee of course, while doing everything in his power (it’s a lot) to delay implementations of stringent, or even any standards, on “rolling stock.” Here are some highlights of the outcome:

  • Dramatic Explosion Footage: Warren Buffett-Owned Oil Freight Train Derails, Bursts Into Flames
  • Massive Fire Rages After Another Buffett-Owned Oiltrain Derails In North Dakota, Town Evacuated
  • One Day After Obama Kills Keystone XL Pipeline Another Buffett-Owned Oil Tanker Train Derails In Wisconsin
  • Fire Burns After Another Oil Freight Train Derails, This Time In Canada
  • Train Carrying Toxic Gas Derails In Tennessee, Catches Fire; Thousands Evacuated

  And so on. However, the following brief blurb in the FT article reveals that the time to pay the Piper has finally arrived.

  Tank cars, once feverishly ordered during the US shale boom, are sitting on sidings. Lessors are obtaining car rents 20-30 per cent below early 2015 — “if you’re lucky enough to keep your car in service”, said James Husband of RailSolutions, a consultancy.

  This means that the rail industry is about to be slammed with a dramatic repricing, one which is only the start and the longer oil prices remain at these depressed levels, the lower the rents will drop (think Baltic Dry but on land), until soon most rails will lose money on every trip and will follow the shale companies into a race to the bottom, where “they make up for its with volume.” After all, those billions in debt interest payments won’t pay themselves, meaning doughnuts for equity holders like folksy uncle Warren.

  Then again, we are confident that in the end, the Avuncular Octogenarian of Omaha will find a way to avoid being on the receiving end of yet another bad decision, courtesy of two things: this…

  

  … and this.

  

  

  

  

  

  

• Iran Seizes 2 US Navy Boats, Crewmen For "Illegally Entering Iranian Waters"

  Update: Iran plans to return the crewmen to a ship from the USS Truman carrier strike group on Wednesday.

  JUST IN: Plans are in place for Iran to return U.S. sailors to U.S. Navy Wed. morning, gulf time, US defense official says – Reuters

  — CNBC Now (@CNBCnow) January 13, 2016

  JUST IN: #Iran to return detained #US sailors to a ship from USS Truman carrier strike group: US defence official

  — The Straits Times (@STcom) January 13, 2016

  So we suppose we can just call the sailors “State of the Union hostages”. The rationale for waiting until tomorrow (i.e. until after Obama’s speech): it’s safer to carry out the exchange in daylight, according to an unnamed US official.

  In short, the Ayatollah has just pulled off one epic publicity stunt. 

  *  *  *

  Tensions were already running high between Tehran and Washington in the wake of Iran’s move to test-fire a next generation surface-to-surface ballistic missile with the range to hit Israel. 

   

  And then the IRGC conducted a live-fire rocket test within 1,500 yards of a US aircraft carrier in the Strait of Hormuz. 

  Now, in a further escalation, Iran has reportedly seized two US Navy ships. 

  • 2 U.S. NAVY BOATS IN IRANIAN CUSTODY, PENTAGON SAYS: AP
  • RHODES SAYS U.S. WORKING ON RETURN OF CREW
  • RHODES SAYS U.S. WORKING TO RESOLV

  But nobody panic, because Iran has promised to return the crew “promptly” and as CNN adds, according to Iran the sailors are safe:

  .@PressSec: “We have received assurances from the Iranians that our sailors are safe” https://t.co/GV9hdWZy3P https://t.co/1ioOtqYVH4

  — CNN (@CNN) January 12, 2016

  That appears to contradict a statement from Fars which says the US has “repeated” calls for the crew’s release.

  AP writes that the Pentagon says it briefly lost contact with two small Navy craft in the Persian Gulf on Tuesday but has received assurances from Iran that the crew and vessels will be returned safely and promptly.

  Pentagon says these photos show examples of the type of craft involved in Iran incident pic.twitter.com/47ClLilOZK

  — Oliver Darcy (@oliverdarcy) January 12, 2016

  “Riverine command boats or RCBs, are actually Swedish CB-90s and are a type of fast attack craft,” WaPo notes, adding that “in a number of pictures released by the U.S. Navy, the boats are outfitted with a number of light, medium and heavy weapons including .50 caliber heavy machine guns and GAU-19 miniguns.”

  

  “RCB’s can carry contingents of infantry and special operation forces and are often crewed by sailors in Riverine squadrons, known by some as River Rats,” WaPo continues. “The riverine force came of age in the Vietnam War in what was then known as the Brown Water Navy. In the 1960s and early 1970s boats such as Patrol Boat, River (from ‘Apocalypse Now’ fame) and Swift Boats were the River Rats vessels of choice.”

  

  Pentagon spokesman Peter Cook tells The Associated Press that the boats were moving between Kuwait and Bahrain when the US lost contact with them.

  Cook says, “We have been in contact with Iran and have received assurances that the crew and the vessels will be returned promptly.”

  The crews, which total 10 Navy sailors, are being held at Farsi Island, a highly restricted island between Bahrain and Kuwait, where Iran has a naval base. US officials are saying it is unclear how the crew members ended up in Iranian waters, though Secretary of State John Kerry has kept phone contact with Iranian officials in Tehran, urging for a release. A senior official told NBC News the Iranians understand a mistake was made and have agreed to a release to come in hours.

  According to AP, an anonymous senior official says Kerry “personally engaged with” Iranian Foreign Minister Javad Zarif to work out a solution almost immediately upon hearing of the development around 12:30 pm EST.

  Josh Earnest, the White House spokesperson, said the sailors will be released “promptly” and ” allowed to continue their journey.”

  The international incident comes on the day President Obama will give his final State of the Union speech of his tenure. Obama’s political opponents are capitalizing on the timing, especially since the International Spectator, citing Iran Revolutionary Guard, reports that “seized US sailors will not be released tonight or before State of the Union address.”

  Senator Tom Cotton (R-Arkansas) told CNN, “senior members of Barack Obama’s administration are apologizing for Iran seizing two US Navy vessels and holding 10 sailors hostage. The White House tonight is a hot bed of cold feet.”

  Presidential candidates Dr. Ben Carson and Jeb Bush have taken to Twitter to criticize Obama’s reaction. Bush called for “no more bargaining” and an immediate return home for the sailors, whereas Carson took a shot at Obama’s “preparing to talk about his so called ‘accomplishments'” in reference to tonight’s national address.

  If our sailors aren’t coming home yet, they need to be now. No more bargaining. Obama’s humiliatingly weak Iran policy is exposed again.

  — Jeb Bush (@JebBush) January 12, 2016

  BREAKING: While POTUS is preparing to talk about his so called “accomplishments”, 10 of our American sailors are being held by #Iran.

  — Dr. Ben Carson (@RealBenCarson) January 12, 2016

  This marks the second time in as many weeks that the President’s “soft” policy on Iran has come under fire. Following the abovementioned rocket incident GOP lawmakers called for fresh sanctions on Tehran in connection with two ballistic missile launches in October and November. The White House was apparently prepared to announce a new set of measures aimed at around a dozen individuals and companies but at the last minute, the administration backed out. Obama’s cold feet came after President Rouhani ordered the defense ministry to accelerate the country’s ballistic missile program in the event new sanctions were put in place.

  Meanwhile, according to Iran’s version of today’s events, Fars News agency says US sailors picked up by Revolutionary Guard Corps, from hardline camp who are opposed to the nuclear deal. Fars adds that the sailors were detained for illegally and “intentionally” entering Iranian waters even though they knew the area well. Tehran also contends the US ships were having “technical difficulties.” 

  Fars News says IRGC detained 10 US military personnel in 2 boats for illegally entering Iranian waters in Gulf https://t.co/daqeCflOrM

  — Borzou Daragahi (@borzou) January 12, 2016

  Fars says US sailors know area, carrying GPS, intentionally entered Iran’s territorial waters

  — Sobhan Hassanvand (@Hassanvand) January 12, 2016

  Fars: Both US boats “illegally” entered 2 km into Iranian waters, and IRGC confirms this info on their GPS record. https://t.co/V266Fsx42h

  — FDD’s Iran Project (@FDD_Iran) January 12, 2016

  Just in: Iran’s Fars news agency says 10 US sailors held include one woman

  — Jim Sciutto (@jimsciutto) January 12, 2016

  #Iran Questions:
  – Kuwait to Bahrain is 300 nautical miles. Why were US sailors traveling by small boats? Joy ride? https://t.co/xmRCY6Or36

  — Tarek Fatah (@TarekFatah) January 13, 2016

  And here is the full Fars statement, google translated:

  According to defense Fars News Agency, Iranian Revolutionary Guards 10 US military with two boats illegally entered Iranian waters in the Persian Gulf had been detained.

   

  According to the information received by the Fars news agency every American boat is equipped with 3 machine guns caliber 50 (one in front and two on the sides of the float).

   

  The two vessels illegally entered and patrolled about 2 km deep inside Iranian waters, and the information recorded on their GPS device and is now in the hands of Iranian Revolutionary Guards.

   

  The military said among the arrested were 9 men and one woman. They carried heavy weapons in their vessels.

   

  US officials repeated calls for the release of prisoners will continue with Tehran.

  So, they are prisoners, and unlike the White House tried to spin it, guests of honor?

  Ironically, earlier we asked:

  Is Iran going to wait until the end of the SOTU address before returning the 10 sailors?

  — zerohedge (@zerohedge) January 12, 2016

  We now have the answer: 

  BREAKING: Iranian Revolutionary Guards official says seized US sailors will not be released tonight or before State of the Union address.

  — The Int’l Spectator (@intlspectator) January 12, 2016

  

  

  

  

• What Bernie And The Donald Portend

  Submitted by Patrick Buchanan via Buchanan.org,

  Three weeks out from the Iowa caucuses, and clarity emerges.

  Hillary Clinton, the likely Democratic nominee, is in trouble.

  Polls show her slightly ahead of socialist Bernie Sanders in Iowa, but narrowly behind in New Hampshire. And the weekend brought new revelations about yet more classified and secret documents sent over her private email server when she was secretary of state.

  Between now and November, she will be traversing a minefield, with detonations to be decided upon by FBI investigators who may not cherish Clinton and might like to appear in the history books.

  Clinton’s charge about Donald Trump’s alleged “penchant for sexism” brought a counterstrike – her being the “enabler” of Bill Clinton’s long career as a sexual predator – that rendered her mute.

  But with Hillary Clinton having raised the subject, it is almost certain to be reintroduced in the fall, if she is the nominee.

  Then there is the newly recognized reality that Clinton, who ran a terrific comeback race against Barack Obama in 2008, is not the candidate she was. Nor is Bill the imposing surrogate he once was.

  Both are eight years older, and show it. “Low energy” nails it.

  Lastly, Hillary Clinton now has a record to defend as secretary of state, a four-year term in which it is hard to see, looking back, a success.

  Moreover, a defeat by Sanders in Iowa or New Hampshire could prove unraveling, with the press herd tapping out early obits.

  New Hampshire has consequences.

  A Granite State defeat by Sen. Estes Kefauver ended Harry Truman’s bid for re-election in 1952. Lyndon Johnson’s narrow write-in victory over Sen. Eugene McCarthy, 49-42, brought Bobby Kennedy into the race – and LBJ’s withdrawal two weeks later.

  George H. W. Bush’s unimpressive New Hampshire win in 1992 brought Ross Perot in as a third-party candidate two days later, and Bob Dole’s loss in 1996 portended defeat in the general election.

  But if a cloud is forming over the Clinton campaign, the sun continues to shine on The Donald.

  Last July, in a column, “Could Trump Win?” this writer argued that if Trump held his then 20 percent share, he would make the final four and almost surely be in the finals in the GOP nomination race.

  Now, in every national and state poll save Iowa, Trump runs first with more than 30 percent, sometimes touching 40. And, save in New Hampshire, Sen. Ted Cruz runs second to Trump.

  What does the surge for socialist Sanders and the Republican base’s backing of the outsiders Trump and Cruz and collective recoil from the Republican establishment candidates tell us?

  “The times they are a changing,” sang Bob Dylan in 1964.

  Dylan was right about the social, cultural and moral revolution that would hit with Category 5 force when the boomers arrived on campuses that same year.

  A concomitant conservative revolution would dethrone the GOP establishment of Govs. Nelson Rockefeller, George Romney and William Scranton in 1964, and nominate Barry Goldwater.

  Will the Clintons ever be held accountable? Help make sure they are by supporting the Hillary Clinton Investigative Justice Project, an effort targeting the racketeering enterprise known as the Clinton Family Foundation

  Something like that is afoot again. Only, this time, the GOP has a far better shot of capturing the White House than in 1964 or, indeed, than it appeared to have at this point in 1980, The Year of Reagan.

  In June 1964, Goldwater, about to be nominated, was 59 points behind LBJ, 77-18, in the Gallup Poll. On Sept. 1, he was still 36 points behind, 65-29. In mid-October, Barry was still 36 points behind, when some of us concluded that Mr. Conservative just might not make it.

  Yet, in January and February of 1980, Ronald Reagan, during the Iowa Caucuses and New Hampshire Primary, never got closer than 25 points behind President Jimmy Carter, who led Reagan, on March 1, 58-33. Yet, that November, 1980, Reagan won a 44-state landslide.

  Today, according to a new Fox Poll, Trump would beat Clinton by 3 points in the general election, if held now. Another poll shows Trump pulling 20 percent of the Democratic vote.

  What this suggests is that nominating Trump is by no means a guarantee of GOP defeat. But beyond politics, what do the successes of Sanders, Trump and Cruz portend?

  Well, Sanders and Trump both opposed the war in Iraq that the Bush Republicans and Clinton Democrats supported.

  Both Sanders and Trump oppose NAFTA and MFN for China and the free-trade deals that Clinton Democrats and Bush Republicans backed, which have cost us thousands of lost factories, millions of lost jobs and four decades of lost wage increases for Middle America.

  Trump has taken the toughest line on the invasion across the U.S.-Mexican border and against Muslim refugees entering unvetted.

  Immigration, securing the border, fair trade – Trump’s issues are the issues of 2016.

  If a Trump-Clinton race came down to the Keystone State of Pennsylvania, and Trump was for backing our men in blue, gun rights, securing America’s borders, no more NAFTAs and a foreign policy that defends America first, who would you bet on?

  

  

  

  

  

• Meanwhile In Chicago, 120 People Shot In First 10 Days Of 2016

  Even as Obama takes his anti-gun crusade to new highs with every passing week, having recently started dispensing executive orders, the president conveniently continues to ignore the state of affairs in his native Chicago – a city in which guns are banned – yet where the shooting epidemic has never been worse, and is truly emblematic of the “gun problem” America has.

  Judging by the most recent developments, Obama will have nothing to say about Chicago gun violence either during tonight’s state of the union address, or ever for that matter, because recent developments are downright disastrous.

  

   

  According to the Chicago Tribune, following the seven people shot to death and 30 more wounded during the latest weekend, the total number of shootings in the windy city has risen to 120 in just over a week into the new year, according to police.

  The fatal shootings included two teens killed by a store clerk during a robbery in the Gresham neighborhood on the South Side, and one of three people shot at a party four blocks from Mayor Rahm Emanuel’s home.

  As the Tribune tabulates as of Monday morning, at least 19 people have been killed in gun violence and at least 101 more have been wounded. This is three times higher than compared to the same period one year ago: in the first 10 days of 2015, “only” nine people were killed and another 31 wounded.

  Chicago police spokesman Anthony Guglielmi released a statement blaming most of the violence on “chronic gang conflicts.”

  “Every year Chicago Police recover more illegal guns than officers in any other city, and as more and more illegal guns continue to find their way into our neighborhoods.” 

  So the problem is smuggling of illegal guns, got it. What is the proposed solution?

  “So it is clear we need stronger state and federal gun laws,” Guglielmi said in the statement.

  Because those who illegally procure guns will follow gun purchasing laws, and the only thing preventing them from doing so is not enough laws? One can almost see why Chicago’s gun problem is getting worse by the day.

  The statement continues:

  “So far this year, the majority of the gun violence we’ve seen are a result of chronic gang conflicts driven in part by social media commentary and petty disputes among rival factions. Despite an overall lack of cooperation from gang members, detectives are working aggressively and making optimistic progress in several cases.”

  At least 2,986 people were shot in Chicago in 2015. Many more will be shot – by illegally obtained weapons in a city with unprecedented gun control – in 2016.

  For an interactive summary of the “hot spots” in Chicago, click on the map below.

  

  

  

  

  

  

• Here's Why Automaker Stocks Are Falling (Despite The Media's Exuberance)

  How can it be that automaker stock prices are tumbling given that auto sales (if one listens to CNBC) are surging, that (if one listens to the CEOs) everything is awesome for automakers, and (if one listens to Phil LeBeau) there is no bubble in auto credit? The answer is simple… (you just don't want to admit it)

   

  Two words – channel-stuffing!

  

   

  In fact, as IceFarm Capital's Michael Green details, the credit-fueled over-productiuon has historically been disastrous for the global auto sector…

  

   

  So once again – a mal-investment boom has pulled forward demand (from who knows where) and signalled entirely incorrect production expectations to executives who can only see 1 quarter ahead and the amount of buybacks they must do in order to maintain their own personal wealth.

  

  

  

  

  

• 93% Of American Counties Haven't Recovered From The Recession

  Supposedly, the Fed’s decision to hike rates last month conveyed something about the strength of the US economy. “I think the economy is on the road to recovery,” diminutive Chairwoman Yellen told the the Economic Club of Washington two weeks before liftoff.  “We’re doing well,” she added, for good measure.

  Now first, the idea that we’re “on the road” to recovery is a bit disconcerting in and of itself. After all, it’s not as if the crisis happened last year. We’re talking about recovering from something that happened eight long years ago. If we’re not there yet, one would be forgiven for suggesting that we’re not ever going to get there.

  Second, to the extent the “data” do show something that to the untrained eye might be mistaken for a robust recovery, you have to remember that the statistics can be made to show whatever a bunch of central planners want them to show.

  Take December’s “blockbuster” jobs report for instance. How, you might ask, is it possible that the US can add 292,000 jobs while average hourly wages decline? Simple: the hiring was a veritable minimum wage deluge as well-paying jobs barely budged while temp help soared by 34,400 and waiter and bartenders added another 36,900 to the country’s growing army of Food and Bev workers which now numbers a record 11.3 million. 

  And then there was what we called “the most troubling aspect” of the latest NFP report: the number of multiple job holders soared by 324,000 to 7.738 million, the highest since August 2008. Meanwhile, a record number of retired Americans worked part-time in December which means the elderly are either bored or broke – you guess which.

  So that’s the “robust” labor market. When it comes to GDP it’s all about the cost of socialized medicine as quarter after quarter, all of the “growth” comes from soaring healthcare spending. And then there is of course the infamous “residual seasonality”, a truly ridiculous bit of statistical Tomfoolery that effectively allows the BEA to simply adjust away all of the bad stuff on the way to publishing sanitized, “double adjusted” data.

  But even as the macro picture is hopelessly obscured by the mischievous tinkering of bureaucrats, the county-level data reveals the dismal truth: according to a new study by the National Association of Counties, 93% of America’s counties have not yet recovered from the recession.

  “Overall, the county economies recovered on all four indicators by 2015 still represent only 7 percent of all county economies,” the organization writes. “In contrast, almost 16 percent of county economies had not recovered on any indicator by 2015, mostly in the South and Midwest. States such as Florida, Georgia, Illinois and Mississippi have more than a third of their county economies still reeling from the latest downturn across all economic indicators.” 

  

  Note where the “good” counties are. As you can see from the map, the counties that have recovered on 3-4 of the indicators NAC measured are predominantly in the modwest and Texas. How long, one might fairly ask, will that last in the face of a prolonged slump in crude prices? 

  It wasn’t all bad news, and Emilia Istrate, the association’s director of research and outreach will fill you in on the rest of the details in the video below, but the bottom line, to quote Istrate is this: “[This] tells you why many Americans don’t feel the good economic numbers they see on TV.”

  

  

  

  

  

• WTI Slides After API Reports Massive Build In Gasoline & Distillate Inventories

  With the seasonally drawdown-prone December completed, we begin seasonally build-prone January with expectations for a 2mm barrel build. However, according to API, both total and Cushing inventory levels tumbled (-3.9mm and 300k respectively). Great news – so why is crude tumbling? Simple – massive builds in end-products again with Gasoline up a massive 7mm barrels and Distillates up 3.6mm barrels. Having ramped off sub-$30 levels aftwr NYMEX closed, and lifted by the Iran-US news, WTI is sliding back rapidly.

  The largest 2-week Gasoline invenrtiory build ever…

  

   

  And so while algos saw the inventrory draw headlines, real traders know what record-breaking builds in end-product means…

  

   

  December saw a very flat inventory overall (despite being a seasonally extreme period for drawdowns into year-end tax planning)…

  

   

  Judging from history, as Bloomberg notes, it should resume as soon as the festive season is over: Stocks have built by 3.2 million barrels on average in January since 1921.

  

  

  

  

  

• You Know Negative Interest Rates Are Bad When…

  Submitted by Simon Black via SovereignMan.com,

  Switzerland is famous for being punctual.

  The trains. The buses. The meticulously crafted, hand polished luxury watches.

  The Swiss are so culturally punctual that they even tend to pay their taxes well in advance of the filing deadline.

  So it was quite a shock to hear this morning that the Swiss canton of Zug is asking its citizens to delay paying their taxes for as long as possible.

  Why? Negative interest rates.

  The cantonal government doesn’t want to take in a pile of cash, only to end up paying the bank interest on all the tax revenue.

  Interest rates in Switzerland are among the lowest in the world; the official policy rate set by the Swiss National Bank is MINUS 0.75%.

  Initially these negative interest rates only apply to banks; minus 0.75% is a wholesale rate pertaining to transactions among banks, and deposits they hold with the central bank.

  But banks aren’t exactly charities.

  So if a bank is paying interest to hold funds with the central bank, eventually they’re going to pass that cost on to the consumer. Even if that consumer is the government.

  According to the Financial Times, the cantonal government of Zug estimates that they will save $2.5 million in negative interest rate charges by delaying tax receipts.

  Just consider the magnitude of this decision: the monetary system has become so screwed up that a local government doesn’t want its citizens to pay taxes early.

  In fairness, it’s not just Switzerland. All across Europe, interest rates are negative.

  In the Euro zone, the main policy rate is only slightly ‘less negative’ at minus 0.3%.

  And many of the bonds issued by European governments also yield negative rates.

  In other words, you have to pay money for the privilege of loaning a bankrupt government your money.

  In Germany, bond yields are negative all the way out to five years. It’s insane.

  Clearly any rational individual is much better off simply holding physical cash, rather than keeping substantial funds in a savings account.

  Cash doesn’t pay any interest. But it doesn’t cost any either.

  It’s pretty sad statement when the 0% you earn from holding physical cash is considered ‘high yield’.

  Of course, governments know this. They realize that no rational person is going to want to keep money in a bank, especially as negative interest rates cascade into consumer banking.

  And that’s a huge reason why there’s such a push to outlaw cash.

  If even a small percentage of depositors decided to close their bank accounts and withdraw all their savings in cash, the banking system would collapse.

  There simply isn’t enough physical cash in the system.

  Plus most banks are so highly leveraged, and they lack the liquidity to honor any meaningful amount of withdrawal requests.

  This is one of the fundamental dangers of negative interest rates.

  Central bankers, in an absurd, desperate attempt to generate inflation, are accomplishing nothing more than destroying the banking system.

  And even when it doesn’t work– even when the numbers prove that their ridiculous goal of increasing inflation isn’t working– they just keep trying the same thing over and over again, making interest rates even MORE negative.

  It’s madness.

  These people have broken the concept of money.

  Money is one of the most important social technologies in the history of the world, almost as important as language.

  Money is supposed to mean something. It is supposed to be the metric by which we measure economic value.

  But they’ve destroyed that. And it’s so obvious now.

  But cutting the price of money (interest rates) so far into negative territory, money has become so worthless that even a government doesn’t want it.

  And in doing so they have created the most absurd problems imaginable.

  It’s pretty clear that this is not a risk free environment.

  And as my colleague Tim Price pointed out yesterday, there is no single solution to protect yourself from the consequences of this madness.

  We discussed last week that holding physical cash is a great option to hedge short-term risks in the banking system.

  (In Switzerland, the highest denomination is the 1,000 Swiss franc note. In Europe, it’s 500 euros. In the US and Canada, it’s $100.)

  But with so many politicians and idiotic economists calling for a ban on cash, plus all the greater risks with fiat currency, physical cash is only part of the answer.

  Clearly precious metals make sense as part of a long-term, balanced approach.

  But owning gold requires a steely-eyed, willful ignorance of the daily fluctuations in its paper price.

  You can’t own gold and fret about it falling $20 in a single day, or 10% in a year.

  Gold is simultaneously a form of money… as well as an insurance policy.

  Trading fiat currency for gold, only hoping to trade the gold back for more fiat currency at a later date, pretty much defeats that purpose.

  But even gold is not a single solution.

  It may also make sense to own shares of a productive business– ideally one that’s recession-proof, has minimal debt, and is managed by competent people of integrity.

  There are plenty of other options out there, and this short list is by no means exhaustive.

  But the larger point is to start thinking in this direction. Look at the obvious risks and determine what makes sense for your situation.

  Most people will unfortunately succumb to the default option– doing nothing and assuming that it’s all going to be OK because the smart guys in government will figure it out.

  But this is pretty dangerous thinking.

  You won’t be worse off for taking sensible steps to protect yourself from undeniable risks.

  But should any serious consequences ever arise from this financial madness, they’ll happen very quickly, and it will be too late to do anything about it.

  And at that time, looking back, it will all seem so obvious.

  * * *

  In fact, the concept of negative rates has become so ubiquitous that BNP Strategist Reiko Tokukatsu has written a book "Negative Rates" which has stunningly become a bestseller in Japan on their failed experience with negative interest rates and directly challenges the economic playbooks adopted by central bankers around the developed world. As Bloomberg reports,

  The book, ranked the top among finance books since it went on sale on Dec. 10, says bond yields lower than inflation pass the debt burden to future generations and impoverish their lives, while keeping zombie companies alive, contradicting the Bank of Japan’s goal of reviving economic growth. The main beneficiary of the monetary easing is the government, which sees interest costs drop and a devaluation of its debt pile.

   

  Tokukatsu is among skeptics of bond-buying stimulus including U.S. hedge fund manager David Einhorn, who said in 2012 that lower rates would cause people to hoard savings rather than consume as their investment returns drop while the cost of commodities surges. The BOJ and monetary authorities across Europe are betting that interest rates below zero will reduce borrowing costs for companies and households, driving demand for loans as well as encouraging investment in higher-yielding assets.

   

  “Textbooks say negative rates are risk free but they are camouflaging the reality that contradicts the theory,” Tokukatsu said in an interview in Tokyo Jan. 6.

   

  “It’s nonsense to strengthen a policy where risk and return don’t match,” said Hidenori Suezawa, an analyst at SMBC Nikko Securities Inc. in Tokyo. “Despite the easing, the 2 percent target wasn’t reached in two years. It raises questions about the necessity of strengthening a policy that carries side effects without results or extending it for three or five more years.”

   

  Japan’s “declining working population and increasing number of pensioners are keeping demand down and helping keep inflation rates low,” said Comely. “QE is not going to deal with that structural issue.”

   

  “The time is right for the BOJ to end quantitative and qualitative easing and taper,” said Tokukatsu at BNP Paribas. “The inflation rate isn’t negative so it isn’t deflation. The 2 percent target is too high but 1 percent is achievable.”

   

  “Monetary easing has lasted too long,” Tokukatsu said. “Japan should lower targets appropriate for a mature economy with a falling potential growth rate.”

  Simply put, Tokukatsu concludes:  “It’s beneficial for the government but it’s financial repression for the people.”

  

  

  

  

  

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• 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)…